{"id":15063,"date":"2021-11-10T09:16:00","date_gmt":"2021-11-10T14:16:00","guid":{"rendered":"https:\/\/i5i.ca\/?p=15063"},"modified":"2021-12-26T10:50:32","modified_gmt":"2021-12-26T15:50:32","slug":"hbr-nft-2","status":"publish","type":"post","link":"https:\/\/i5i.ca\/i5i_ca\/hbr-nft-2\/","title":{"rendered":"How NFTs Create Value"},"content":{"rendered":"\n

by Steve Kaczynski and Scott Duke Kominers, Harvard Business Review, November 10, 2021, Harvard Business School Publishing<\/a><\/p>\n\n\n\n

Illustration by Vinnie Hager<\/p>\n\n\n\n

How much could a cluster of pixels possibly be worth? More pointedly, why is it worth anything at all? The explosion of NFTs and their accompanying marketplaces have left many baffled, incredulous, and deeply skeptical. But while NFTs may be fetching eye-popping, eyebrow-raising valuations, there is a logic to how \u2014 and when \u2014 they create value. By creating a system of verifiable digital ownership NFTs fundamentally changed the market for digital assets, creating the possibility for new types of transactions. Amidst a flood of new ventures, however, it can be hard to tell which are creating value and which are just riding the hype. The companies that have been most successful on this new frontier have a few things in common: They make meaningful use of the NFT technology itself, leverage a community of users, generate confidence that they can continue executing on the project to maintain ongoing community engagement, offer accessible \u201con-ramps\u201d for new users, and are able to weather crypto market swings.<\/pre>\n\n\n\n
In March 2021, a work of art called Everydays: The First 5000 Days<\/a><\/em> sold for $69 million at Christie\u2019s Auction House. It\u2019s not out of the ordinary to see eight-figure art sales, but this one received a lot of attention because the piece was sold as a non-fungible token (NFT) \u2013 an electronic record corresponding to an image that lives entirely in the digital world.<\/p>\n\n\n\n
Put differently: Someone paid almost $70 million for a picture on the internet.<\/p>\n\n\n\n
Since then, NFTs have started to permeate pop culture in various ways. They\u2019ve been spoofed by Saturday Night Live<\/em><\/a> and embraced by high-profile celebrities like rapper Snoop Dogg<\/a> and NBA superstar Stephen Curry<\/a>. There are now hundreds of millions of dollars of NFT sales each<\/a> week<\/a>  through public marketplaces like Foundation, OpenSea, and Nifty Gateway, as well as custom-built applications like NBA Top Shot and VeVe.<\/p>\n\n\n\n
Yet at the same time many people wonder how tokens on the internet could be worth money at all \u2014 especially when many of them just represent \u201cownership\u201d of an online image or animation that you could, in principle, download a copy of for free<\/a>.<\/p>\n\n\n\n
It\u2019s easy to see why NFTs inspire both excitement and deep skepticism: They\u2019re a completely novel asset class, and we don\u2019t see new asset classes appear that often. But what drives the value of an asset that\u2019s really just a digital token people can pass around? To appreciate NFTs properly, we first have to think through what they actually are and the types of market opportunities they enable. And once we unlock that, we can understand how to build businesses around them.<\/p>\n\n\n\n
NFTs as a Tool for Market Design<\/h2>\n\n\n\n
NFTs have fundamentally changed the market for digital assets. Historically there was no way to separate the \u201cowner\u201d of a digital artwork from someone who just saved a copy to their desktop. Markets can\u2019t operate without clear property rights<\/a>: Before someone can buy a good, it has to be clear who has the right to sell it, and once someone does buy, you need to be able to transfer ownership from the seller to the buyer. NFTs solve this problem by giving parties something they can agree represents ownership. In doing so, they make it possible to build markets around new types of transactions<\/a> \u2014 buying and selling products that could never be sold before, or enabling transactions to happen in innovative ways that are more efficient and valuable.<\/p>\n\n\n\n
As the name \u201cnon-fungible token\u201d suggests, each NFT is a unique, one-of-a-kind digital item. They\u2019re stored on public-facing digital ledgers called blockchains<\/a>, which means it\u2019s possible to prove who owns a given NFT at any moment in time and trace the history of prior ownership. Moreover, it\u2019s easy to transfer NFTs from one person to another \u2014 just as a bank might move money across accounts \u2014 and it\u2019s very hard to counterfeit them. Because NFT ownership is easy to certify and transfer, we can use them to create markets in a variety of different goods.<\/p>\n\n\n\n
But NFTs don\u2019t just provide a kind of digital \u201cdeed.\u201d Because blockchains are programmable<\/a>, it\u2019s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things \u2014 or let their owners do things \u2014 in both digital spaces and the physical world.<\/p>\n\n\n\n
In this sense, NFTs can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts \u2014 as well as serving as digital keys to online spaces where holders can engage with each other. Moreover, because the blockchain is public, it\u2019s even possible to send additional products directly to anyone who owns a given token. All of this gives NFT holders value over and above simple ownership \u2014 and provides creators with a vector to build a highly engaged community around their brands.<\/p>\n\n\n\n
It\u2019s not uncommon to see creators organize in-person meetups for their NFT holders, as many did<\/a> at the recent NFT NYC<\/a> conference. In other cases, having a specific NFT in your online wallet might be necessary in order to gain access to an online game, chat room, or merchandise store<\/a>. And creator teams sometimes grant additional tokens to their NFT holders in ways that expand the product ecosystem: owners of a particular goat NFT<\/a>, for example, were recently able to claim a free baby goat NFT<\/a> that gives benefits beyond the original token<\/a>; holders of a particular bear NFT<\/a>, meanwhile, just received honey<\/a>.<\/p>\n\n\n\n
Thus owning an NFT effectively makes you an investor, a member of a club, a brand shareholder, and a participant in a loyalty program all at once. At the same time, NFTs\u2019 programmability supports new business and profit models \u2014 for example, NFTs have enabled a new type of royalty<\/a> contract<\/a>, whereby each time a work is resold, a share of the transaction goes back to the original creator.<\/p>\n\n\n\n
This all means that NFT-based markets can emerge and gain traction quickly, especially relative to other crypto products. This is both because the NFTs themselves have standalone value \u2014 you might buy an art<\/a> NFT<\/a> simply because you like it<\/a> \u2014 and because NFTs just need to establish value among a community of potential owners (which can be relatively small), whereas cryptocurrencies need wide acceptance<\/a> in order to become useful as a store of value and\/or medium of exchange.<\/p>\n\n\n\n
The Advent of NFT Ecosystems<\/h2>\n\n\n\n
As marketplaces have sprung up around NFTs, creators have taken advantage of their possibilities in different ways.<\/p>\n\n\n\n
The best-known examples are the digital art market, described above, and digital collectables platforms, such as Dapper Labs\u2019s NBA Top Shot<\/a>, which enables users to collect and exchange NFTs of exciting plays from basketball games \u2014 videos called \u201cmoments,\u201d which are effectively digital trading cards<\/a>. Top Shot has been building in gamified challenges and other reasons to own the cards beyond just their pure collectible value, even teasing that moment holders may eventually receive real-world benefits from the NBA.<\/p>\n\n\n\n
But what\u2019s emerged more recently is a model of active ecosystem-building around NFT-native properties \u2014 leading to novel organizations developed entirely within the NFT space. These products start with an NFT series, but project forward a roadmap under which holders of the NFT gain access to an expanding array of products, activities, and experiences. Revenue from initial and subsequent NFT sales is fed back into the brand, supporting increasingly ambitious projects \u2014 which in turn drive up the value of the NFTs themselves.<\/p>\n\n\n\n
The Bored Ape Yacht Club<\/a>, for example, comprises a series of NFT ape images conferring membership in an online community. The project started with a series of private chat rooms and a graffiti board, and has grown to include high-end merchandise, social events, and even an actual yacht party<\/a>. SupDucks<\/a> and the Gutter Cat Gang<\/a> similarly began building communities around NFT image series and associated online spaces; the former has bridged into a boardwalk-themed metaverse game<\/a>, and the latter has focused on real-world benefits like extravagant in-person events<\/a>.<\/p>\n\n\n\n
People often take on membership in these collectives as part of their personal identity \u2014 even using their favorite NFT image as their public profile picture<\/a> on social media. Each NFT community has different personalities and purposes, and there are so many by now that almost everyone can find a group they can call their own. In this way, NFT ownership provides an immediate shared text that people can use to connect with each other.<\/p>\n\n\n\n
And moreover, in many of these communities, ownership also conveys partial or full commercial rights<\/a> \u2014 or even some degree of governance in how the community is run \u2014 which means people members can build properties on top of their NFTs that grow the value of the overall brand. Crucially, this creates a channel by which engaged fandom can feed back into the brand itself: \u201cJenkins the Valet<\/a>\u201d is a Bored Ape member-created project that has effectively become its own sub-brand. Individual SupDucks members have created art and character identities around their NFTs that have been absorbed<\/a> into<\/a> the SupDucks metaverse. And community-created fan projects have built<\/a> out<\/a> parts of the Gutter Cat Gang story arc.<\/p>\n\n\n\n
All of these benefits make owning the associated NFTs more valuable \u2014 and almost paradoxically, this increase in the value of ownership comes in a form that helps separate the value of ownership from the purely financial opportunity of reselling.<\/p>\n\n\n\n
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From left: SupDuck #6484, Bored Ape #9976, and Gutter Cat #234;
NFT images used with permission from Kominers and Kaczynski, who are the NFT holders; HBR Staff\/Getty Images<\/em><\/figcaption><\/figure><\/div>\n\n\n\n
Building on this phenomenon, a few well-known brands have recently introduced NFT series that serve to identify, reinforce, and expand their existing communities of brand enthusiasts. The popular streetwear brand The Hundreds<\/a>, for example, has built an NFT project<\/a> around their mascot the \u201cAdam Bomb,\u201d and directly rewards their community of NFT holders with improved access to the brand through connection with the founders and early access to new product releases.<\/p>\n\n\n\n
Many emerging NFT applications, meanwhile, are seeking to more explicitly blend online NFT ownership with offline use cases. A few restaurants, for example, have started using<\/a> NFTs for reservations. And the ticketing industry has a major opportunity<\/a> here: By issuing tickets as NFTs, venues can give a variety of benefits to purchasers, creating more of an incentive to buy, as well as providing the venues an opportunity to collect royalties on secondary sales.<\/p>\n\n\n\n
Other companies are exploring how NFTs could be used in establishing and recording people\u2019s identity and reputation online. MIT recently started offering blockchain-based digital diplomas<\/a>, which are effectively non-transferable NFTs. Meanwhile, both established players like Facebook (now Meta<\/a>) and new ventures like POAP<\/a> and koodos<\/a> are providing ways for individuals to create and share NFTs around activities, affinities, and interests.<\/p>\n\n\n\n
How These Businesses Can Succeed<\/h2>\n\n\n\n
Like all other businesses, each NFT project has to respond to a real market need. But there are unique challenges to building in the NFT space:<\/p>\n\n\n\n
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