NFTs and the Promise of Web 3

I could either watch it happen, or be part of it.
he blockchain is one of the foundational elements of web3, and as per my original view of the blockchain, many probably don’t quite get it yet. And it’s not exactly due to the lack of information, but most likely due to the lack of imagination - the trap I fell into at the start.

The first time I encountered the term blockchainat an event, I had brushed it off as a hippie buzzword. The 10th time I encountered it as part of a pitch, I started laughing and mentally replaced the word blockchain with database. It took me a while to realize that I was wrong, so very wrong.

As a startup founder, a crucial element I value is intellectual curiosity and consider it a competitive advantage. However, at the time I failed to understand the implications of blockchain, and I will try to pay it forward in this intro to NFTs. As Elon Musk said:

Throughout history, people have repeatedly assumed that we as humans have reached our maximum capacity for technological advancement and that there couldn’t possibly be more changes - and we have been continuously proven wrong. In 1923, Walt Disney thought he missed the rising animation trend, yet his name is now synonymous with animation many years later. Even now in 2021, we have yet to realize the full capabilities of the web as it is still extremely young, and we are still at the very beginning. The most fascinating and disruptive work in technology is being done by rebuilding aspects of the underlying structure of the internet, and it is quite normal that pessimists looking backwards miss this shift. It’s true that the vocabulary around web3, blockchain, and NFTs is extremely idealistic, and with all the new lingo it does feel cult-like rather than a new technology. Probably one of many reasons why many don’t take it seriously.

Perhaps it’s prudent to take a step back and ask what is blockchain? Think of it as a shared, distributed, and open database. Just like any technology, it could work for some cases and be useless for others. Technically, a blockchain is a virtual computer that runs on top of networks built out of physical computers, but with newer properties and powers that trump prior models of computers. People with my initial mindset look at a blockchain and see a slow database.

Today I look at the blockchain as programmable internet that stores shared data and logic securely. The most popular programmable blockchain is Ethereum. And by being programmable, it becomes as interesting as an app store because it opens up opportunities for entrepreneurship to strive towards, with nameless projects being built on top of it.

The blockchain is one of the foundational elements of web3, and as per my original view of the blockchain, many probably don’t quite get it yet. And it’s not exactly due to the lack of information, but most likely due to the lack of imagination - the trap I fell into at the start.

Let’s take a step back to 1991 when the original iteration of the internet was invented, known as web1. With web1, people were limited to viewing content in a passive manner, akin to magazines with hyperlinks to jump through pages. Web2, on the other hand, started in 1999 with the current iteration of the internet that emphasizes dynamic, user-generated content that was easy to use and hosted a virtual community. Web3, whose rendition started in 2020, is the next iteration of the internet built on top of blockchains such as Bitcoin, Ethereum, Solana, and others. It is an internet owned by users and creators where tokens rule. Consider tokens as “community points”, the more tokens you have the more ownership and decision-making abilities you have in the community. These tokens are carried around in your e-wallet. One of the keys to web3 is to re-imagine the audience as co-creators, not just consumers. The other crucial element is to realize that web2 is meant to peacefully coexist with web3, and not everything has to move away from it.

Web3 differs from Web2 in a very particular aspect - it is built for interoperability, instead of silo products. As an example, imagine being able to pull aspects of Facebook, fuse them together with other elements of Amazon, and introduce a Tiktok feature above a certain Anghami product, all this implemented by co-creators. This feature is referred to as Composability and is a hallmark of web3. Chris Dixon defined it as the “ability to mix and match software components like lego bricks.” It is the exact promise of open-source software applied to new web economics.

One clear case of web3 is NFTs which will help us understand the business model needed to begin building a new economy where value accrues from the people who create the value. Non-fungible tokens (NFTs) is a term used to refer to a unique digital asset whose ownership is tracked on a blockchain. Consider NFTs as a bridge between web3 and the virtual economy, where blockchains are the title registries for everything of value.

One word to focus on is the term “fungible” in the non-fungible token, and how it represents NFTs uniquely. One Saudi Riyal is fungible because it’s interchangeable, it doesn’t matter what Riyal I have, as long as I have oneRiyal. But in this case, something that is “non-fungible” means it’s completely unique. NFTs have this property as a byproduct of being an asset on a blockchain. NFTs treat each item they represent as scarce and authentic. NFT assets range from digital goods, such as digital art that exists within the virtual world, to claims on physical assets such as clothing items or real estate. My forward-looking definition is that an NFT is used to gatekeep access to projects that unlock a community.

One critical aspect is that the token is backed by a social contract between its creator and the surrounding community. Moreover, by being on the blockchain, the token ownership (not the actual NFT) becomes programmable, verifiable, composable, secured, and transferable - these are properties that unlock entirely new use cases that entrepreneurs will build upon.

NFTs started by addressing several basic human desires akin to the collectible craze - I especially recall the pokemon card collector craze a few years back. We all have a natural tendency to collect things we find beautiful or relevant, like art, paintings, or sculptures. We want to define ourselves through a unique and meaningful identity. One common aspect that got many skeptical about NFTs is the swings in value. As Aaron Levie of Box sums it up: “The NFT price explosion had distracted me from the broader value that's emerging around the blockchain. Clearly, an open, immutable database that no one controls but any app can talk to and build upon -with monetization built-in on day one- is quite powerful.”

For this reason, exactly, we have to realize that NFTs arefuture-facing, not backward-looking. Therefore, we have to stop trying to attach old world concepts to them. They're forging a new economy with new rules, not unlike the early web days when people were mostly skeptical of eCommerce working online, or why people would document their life in picture feeds, or get vocal about counting the number of likes on a 140 character sentence.

Because they are built on the blockchain, NFTs are attached to contracts that enable continuous value for creators. This is in contrast to work where the last owner benefits from the accrued value, such as a painting. However, an NFT contains a programmatic arrangement that provides value to the original creator every time it gets sold. Applying that to web2, imagine anytime someone gets value from the content you created online - be it a blog post, youtube video, a tweet, a picture, or an mp3 - you actually receive a piece of that value. This is the primary value of NFTs to creators, the removal of rent-seeking intermediaries. From Instagram to The New York Times, the possibilities are endless. Consider that musicians keep under 20% of revenue due to middlemen leakage of value in the web2 world, while having a dedicated fanbase. Shouldn’t this be up for disruption? Another key example is Capture, a blockchain app where your photos are registered on the chain so that if used online, the original holder gets remunerated.

An NFT does not have any intrinsic value and might end up being exactly like a web2 artifact if not nurtured properly. In fact, NFTs gain value when displayed, used, and promoted within vibrant and growing communities, otherwise they lose their value. NFTs solve a problem for creators when they become focal points for communities that gather to celebrate virtual worlds. A key example is Decentraland, where you purchase, outfit, and sell land within a virtual world.

Even today in 2021, people still post valuable content that is freely exchanged with followers such as likes, retweets, and view counts - in contrast to the promise of NFTs that would provide a viable alternative to creators to work & earn continuous revenue from that are not ad-based views. I’m unsure how an unbiased view of NFTs would assume that they are nothing but the start of a seismic shift to the internet as we know it.

To drive this forward, an actual, real-value NFT can draw upon a smart blockchain-based contract to allow a song token to provide continuous royalty streams, a web3 token to grant land titles, or even an item token to have in-game powers.

Another way NFTs change creator economics is price tiering. Compare this to ad-based models where revenue is generated uniformly regardless of the deep fanbase that is engaging with the ad. A top fan and a newbie are served just an ad on Youtube, and can’t get more engagement with the artist. With NFTs, creators no longer need 3rd parties and can serve different granular tiers to provide access and ownership as never before. Compare that to the ability to access a community and be in the first row, or last row, depending on how dedicated you are.

NFTs are fairly new and expected to evolve with utility increasing as digital experiences are being built around them - think marketplaces, social networks, games, and virtual worlds. This is much closer to modern video games that use fungible tokens, such as Fortnite V-Bucks and virtual goods such as skins.

NFTs have received a lot of attention lately because of the high volume of sales and the crypto market’s history of boom and bust. It is most likely that NFTs will also have their own fluctuations as well. A common challenge is that NFTs, like any new concept, will gain skeptics actively trying to abuse consumers that haven’t fully comprehended the new value. An NFT can’t be right-clicked and saved because the digital asset is set on the blockchain, along with the code & contract attached to it. An NFT is as strong as the social contract with the creator and the backing of the community around it. Just think that the more you share the image of an NFT, the more you grow the community and hence the intrinsic value of the actual blockchain of the NFTs.

Another current problem of NFTs is that most transactions are happening over the Ethereum blockchain, and for Ethereum to run, it uses a concept called gas fees to pay for operating costs - you can refer to it as infrastructure taxes or toll for using the blockchain. However, ETH has soaring gas fees because of the nature of its infrastructure, and as a result low-cost NFT adoption can't survive on the Ethereum blockchain with these prices. Nevertheless, despite a slew of new blockchains such as Solana, Algorand & Cardano, ETH is still far from being dethroned at this point. Currently, over 80% of all NFTs are on Ethereum. The light at the end of the tunnel is that more developers are building on Solana than ever before, but it’s clear that there is still more work to be done so that web3 is convincing for skeptics.

The people and brands who are relevant in this new world will feel very different to what you know. Successful NFT communities (CryptoPunks, Bored Apes, etc.) are all native to the crypto world and very few culturally big ones in the real world are successfully making the shift. And this is exactly why it’s a huge opportunity, and a hard concept to grasp all at once. In fact, when people currently buy into NFTs, they aren’t exactly buying into the reality of the project today, but they are investing into the possibility that it will be much, much bigger in the future. This matters because a well developed real-world value, let’s consider Michael Jackson or Madonna’s legacy, has a hard time being valuable in the NFT world because despite being a huge brand, it is extremely hard to consider that it would grow 100 times larger in the coming years.

Planning for future growth in ‘relevance’ becomes far more superior than 'scarcity'. A good NFT-drop from an artist will have greater value in the future, and this is exactly why composability is key. A key example was the Loot project that built an ecosystem around NFTs. This is the exact definition of exponential forces that make NFTs an indicator of rapid future growth.

Web3 is the promise of a collectively owned future instead of a corporate future driven by FAANG (Facebook, Amazon, Apple, Netflix, Google). NFTs are just one of many tools of collective ownership that enable consumers to recombine and assemble work to create incredibly complex systems that offer a reward with substantial value.

How does this all relate to our region you might be asking. In VC terms, how big is the total addressable market of NFTs? To date, it’s still very small worldwide in terms of active users: 1M active wallets but - and behold - 11 Trillion USD in trading value. One main reason is that onboarding onto web3 and NFTs with wallets and fiat money is still broken, just like the early iterations of the original web1 - which was decentralized - when there was no AWS, Google, or Azure cloud to deploy upon. In fact, web3 doesn’t depend on the same cloud centralization we got used to in web2. Building on this, there were no massive gatekeepers to provide identity like Google or Facebook, or app stores like Apple and Google Play, and fans were coding HTML pages on metal servers. This wasn’t that long ago, and this created the web we’re now used to.

Comparatively, web3’s potential is already massive. For that, let’s refer to the thesis of the thousand true fans. Removing the middleman leakage mentioned earlier, and by using NFTs as access to their fanbase unconstrained by intermediaries, how many true fans would you need to create sustainable revenue? While web2 offered a vision of locking creators into a platform to connect to users and generate revenue, NFTs grant new ways of providing access, building communities, and creating money. The future is bright for creators and entrepreneurs.

What are you going to build? And are you going to participate in this defining new era?


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