The mystery of capital in web3
When you look at what is happening with NFTs, it seems absolutely crazy. Why are people paying millions of dollars to buy digital monkeys?
First things first. There is undoubtedly a significant amount of FOMO (Fear Of Missing Out) driving the NFT speculation. And yet, there is something fundamentally transformative that NFTs, DeFi & DAOs are driving. It is hard to understand where the value stops & where the bubble starts. You need to see behind the surface to see what is really going on.
At the heart of the transformation is Web3 expanding the application of property rights to the digital world. Web3 re-defines what we consider assets, how we convert them into capital and how wealth is created. The promise of Web3 is to unlock capital in assets other than physical assets from human capital to social capital & brand capital.
In 2001, the Peruvian economist Hernando de Soto published his classic book: The Mystery of Capital showing how property rights are the key to overcoming poverty. His key observation was that “assets” (like real estate) in the developed economies lead a parallel life as capital outside the physical world. The key innovation that enables this is the formal property system which begins to process assets into capital by recording the ownership of an asset into a ledger and then embodying it in a title. Since each title is unique and not-interchangeable with another title, we say that it is Non-Fungible. Since the title is a token of ownership, the property title was perhaps the earliest Non-Fungible Token (NFT).
The importance of the property title (as a NFT) is that as a token of ownership, it can be put up as "collateral" for a loan. The property owner can now access capital for starting a business. This is what gives assets a parallel life as capital outside the physical world.
The property rights created for physical assets, the title deed and the processes to use such deeds as a collateral took decades to evolve. But their impact was transformational. Economies which did this, unlocked the potential energy in their assets creating engines of growth.
The biggest impact of Web3 is the ability to extend the process of creating any asset into capital - virtually on demand. It is trivially easy to create a trusted ledger of ownership of any asset using Blockchain and embodying it in a title as a NFT. This NFT can then be used as a put up as "collateral" for a loan. In Web3, the loan is facilitated by digital escrows (smart contracts) which are programmed to lock the NFTs as collaterals, release cryptocurrency based loans and vice versa. This is one of the innovations of DeFi (Decentralized Finance) - so called since there is no bank or financial institution intermediating the collateral-loan process.
This is the real Aha! Moment. What Web3 is fundamentally about is the ability to create economies on demand by converting any asset into capital.
Cultural and Social Capital as NFTs
In April 2021, images of bored apes went on sale as NFTs. The ownership and sale of these Bored Apes was registered on a Blockchain making them a matter of public record. Initially priced at about $200 each, the sale of these images has generated over $1Billion dollar in sales.
At first, this sounds crazy! Why are people paying thousands of dollars to buy images of monkeys? Supporters argue that the images of the bored ape are only a small fraction of the value; what is in fact being bought is the membership of an exclusive club - the Bored Ape Yacht Club (BAYC). Owners of a Bored Ape NFT are granted access to a private online club, exclusive in-person events, and intellectual property rights for the image.
Take another example. The National Basketball Association launched Digital Playing Cards on a platform called NBA Top Shots. as NFTs. Each digital playing card combined a clip from an NBA game enhanced with digital artwork. In 2021 alone, these cards had more than 1.1 million registered users who traded some $800 million in NFTs. The collectible component is just one aspect of the NFT, which also includes opportunities to show off collections, earn new tokens by completing in-app challenges, and a challenge feature in which players can use their team to play one-on-one games using the collective skills of the NBA stars a user has collected.
Both BAYC & nbatopshot are examples of the digitization of cultural & social capital. A way for fans to own a part of history as well as display and brag about their membership in exclusive communities. In an age where Twitter following and Discord membership numbers are currency, belonging to a private club where celebrities & influencers are members. Part of the reason fans buy such NFTs is to belong to such exclusive communities. Before NFTs came about, you simply couldn’t visibly and verifiably prove that you were part of a certain community. NFTs make this possible.
Intellectual Capital as NFTs
Recently, a web-series named Stoner Cats launched 10,000 NFTs. The web series is backed by Hollywood stars Mila Kunis & Ashton Kutcher. The value proposition for NFT holders is simple: only Stoner Cats NFT holders get to watch the episodes of this web series.
A Stoner Cats NFT gets you access to watch exclusive content from the Stoner Cats animation team in perpetuity. If the project hits certain milestones, producers will develop new shows through this model. The Stoner Cat NFTs will act as lifetime passes that unlock all future content released.
This model of creators monetizing their content directly with end consumers is an interesting challenge to the current subscription model of OTTs and the linear broadcast model of cable television. This Direct-to-Consumer (D2C) model from creators to fans also enables the ability to create niche economies for fans with branded merchandise, exclusive experiences etc.
This phenomenon of monetizing intellectual property as NFTs is very quickly expanding into other media & entertainment domains. Concert and music festival attendees are using NFTs to validate their identification and tickets. While artists profit from direct communication with fans and attracting new audiences, listeners benefit from a quality experience. Fans are often rewarded with historical vinyl record features to give a sense of exclusivity.
These are great examples of NFT applications since the ultimate value an NFT can give a holder should be experience and not financial value. That is, the experience of being in a like-minded community, participating in interesting experiences and receiving real-world products that are aligned with the brand.
Human Capital as NFTs: In Jan 2022, American rap artist NAS, launched NFTs and offered them for sale to his fans. NFT holders would receive a share of royalties generated from music created by NAS.
Fans who bought these NFT also became investors. The financial interests of these “fanvestors” are aligned with NAS success and they would do whatever they can to make NAS succeed. For NAS, not only was he able to generate revenue from these NFT sales but also create a loyal fan base of supporters - fanvestors are likely to be the most outspoken supporters & promoters of NAS on social media. And since NFT ownership is public information, for the biggest fans of NAS, it is also a way to display their loyalty and develop a deeper emotional engagement with him.
This is a good example of how human capital can be converted to a digital asset which can be owned, sold & bought digitally creating a new economy.
When people invest in such NFTs, they are literally investing in the expected future value of the works they own. Or to look at it in another way, they’re investing in the careers of the authors who created those works. They’re essentially buying a fractional interest in that author’s career, represented by an NFT of one of that author’s works. This is great for authors because it means they get paid upfront, whether or not the works they create turn out to be successful. Copyright only ever rewards successful authors
Virtual Assets as NFTs
In December 2021, Nike announced the acquisition of RTFKT Studios—a digital design studio specializing in the creation of digital sneakers. Nike has started selling digital sneakers that people can buy for their digital avatars. This is a great example of a brand extending its product portfolio to sell digital assets in the metaverse.
Expect everything from cars and bikes to fashion brands to launch products in the metaverse as it matures. Also, since the only universal way to record ownership in the digital world will be NFTs, expect them to be the backbone of commerce in the metaverse.
Real World Assets as NFTs: In October 2021, Glenfiddich sold a series of fifteen limited edition 48-year-old collections of whisky bottles as NFTs. What does that mean? Consumers could buy an NFT that serves as the authentication token for the liquor bottle stored with Glenfiddich until redeemed. The NFT holder can either redeem or trade the NFT.
But why launch a traditionally physical product as an NFT?
The big idea is that the NFT works as a digital token representing the physical product. By offering the token for sale, while continuing to hold the bottle as-a-service, Glenfiddich is effectively offering Aging-as-a-Service. Some products get better with age, and NFTs are a great way to pass on the value to brand connoisseurs and create a long term relationship with them.
There is another reason for representing physical assets as NFTs: Provenance. The ability to record, track and verify the data about the environmental footprint of a product is going to become a key differentiator. With customers becoming more discerning about the environmental impact of what they consume and ESG compliance becoming mandatory, the ability of NFTs to capture data about a product across the supply chain will soon be industry-standard in supply chains for ethical sourcing of goods and tracking carbon offset.
Across various applications and use cases of NFTs, we see a consistent theme. The ability of NFTs to represent digital assets which can be verified, bought, sold and collateralised digitally. In less than a decade, expect every physical and digital asset to be represented as an NFT that can be bought and sold in real time across the world. Just like capital can flow seamlessly across international boundaries today, Web3 will allow any asset to be traded in real time across the world.
Assets like intellectual property, human potential and social influence can now be converted into capital. The importance of these asset titles (as a NFT) is that as a token of ownership, it can be put up as "collateral" for a loan. The property owner can now access capital. This is what gives assets a parallel life as capital.
The global nature of the digital economy that Web3 is creating will break down international boundaries for commerce creating new efficiencies, unlocking capital tied up in assets and creating new winners and losers.