In recent conversations, I have been surprised by the polarity of the disconnect amongst individuals I respect in our collective evaluation of the market opportunity enabled by web3, as it pertains to gaming, art, and the creator economy. I would therefore like to distill my thoughts, to instigate a grounded discussion on the space, with three overarching objectives:
(i) to steer the conversation away from whether NFTs are a bubble;
(ii) to focus instead on why web3 matters for creatives; and
(iii) to identify potential areas worthy of further time and focus.
My first observation: it is hard to have a grounded discussion on the space. The biggest mistake I see is a singular focus on price, to the exclusion of all the real reasons this wave matters. Most comparisons are to the 2017 ICO boom, like this tweet from Charlie Lee:
I see a lot of parallels between 2021's NFTs with 2017's ICOs and 2013's altcoins: - easy to create new ones with no barriers - simple to understand & explain - brings tons of new people into crypto - high prices & pumps create hype/FOMO - few will hold & have value, most won't.
The concern is understandable. For decades, retail has gotten the short end of the stick, suffering loss rates of over 90% on particularly aggressive financial structures like CFDs and binary options. Retail psychology is famously driven by herd mentality and FOMO. As David Perell has written:
Mimetic conflict emerges when two people desire the same, scarce resource. Like lions in a cage, we mirror our enemies, fight because of our sameness, and ascend status hierarchies instead of providing value for society. Only by observing others do we learn how and what to desire. Our Mimetic nature is simultaneously our biggest strength and biggest weakness. When it goes right, imitation is a shortcut to learning. But when it spirals out of control, Mimetic imitation leads to envy, violence, and bitter, ever-escalating violence.
When seasoned investors look at retail investing in anything, they see episodes like GameStop and think, “here we go again…”. Observation transforms into judgment, and “smart money” closes to further debate. Yet, I believe applying an investment lens to all sources of retail demand is a serious miscalculation. As Packy McCormick astutely observed:
When professional investors look at GameStop, they see a company trading at a price unjustified by its fundamentals. When retail investors do the same, they see the symbol of a social movement, part investment, part status symbol and part entertainment derived from “sticking it to the man”.
For financial assets like stocks and bonds that boil down to discounted cash flows (DCF), I do not personally subscribe to the “belief is everything” refrain. Fundamentals always matter, and gravity and reality always prevail, eventually. While herd behavior generates short term noise and excitement, I cannot see why retail should have any long-term sustainable edge against smart money. What is interesting about non-financial assets, though, is that they are a different beast entirely. Historically, this category has been dominated by art, real estate, commodities, and collectibles. In the space of just a few years, it has already become so much more.
My overarching thesis is that we are at the early stages of a multi-decade super-cycle of retail empowerment driven by the fact that “consumption, culture and community” are now tradeable assets. Consumption is no longer ephemeral, but persistent. No longer private, but communal. No longer limitless, but scarce. Consumption is, for the first time, collectable.
We know that consumption value exists by looking at existing spend in large consumer markets (including gaming, collectibles, film, music, etc.). For example, according to Sensor Tower in 2020, $22.75b was spent across mobile gaming genres that include persistent cosmetics. Financial ROI: -100%. So what happens when consumers get all that same engagement value, plus ownership, provenance, scarcity, status, and a financial return (or at least, anything less than a total loss)? The effects are not additive and linear, they are multiplicative and exponential. It should be no wonder to that NBA Top Shot has sold over $300m of digital collectibles, when top grossing gaming titles generate over $1b per year.
When I think about how to measure consumption value, I start by asking two questions: (1) What does the asset provide by way of patronage, status, access, exclusivity or utility within the community in which it is recognized? (2) Is that community likely to be around for the long term, such that “squad wealth” can be created from sustained engagement? From these questions, it is possible to form an investment view based on the likely trajectory of these trends over a sustained period.
This framework may be a bit too amorphous for traditional investors and collectors, who have cash flows, comparables, and heritage to form a valuation opinion on. When existing models no longer work, the default refrain is predictable: “bubble”. My view is more nuanced. I believe consumption value is the dark matter of the modern world: that it is difficult to measure does not mean that it does not exist. We may not have all the answers, but we had better keep searching. This cycle will not be about inventing new figments of “value” in our collective imagination. It will be about which of us take our blinders off and see what is already there, right in front of us, today.
And so, returning to Charlie Lee’s tweet, the analogy to 2017 obfuscates more than it illuminates. ICOs were primarily financial assets, means to some promised ends around future network utility. NFTs and digital collectibles are primarily non-financial assets, ends in and of themselves. Stripped to its core, the former is driven predominantly by extrinsic motivations (cash flows), and the latter predominantly by intrinsic motivations (consumption value). My own opinion is that there is plenty of TAM to expand into given the reflexivity of supply/demand for outstanding creative work, especially for top-tier artists and for collections with strong heritage and community. But if the prospect for quick gain disappears, people may lose money and creatives may miss out, but what’s left will be a core comprising so much more than just dashed hope and expectation. Here’s why.
Web3 will have a meaningful, lasting impact on creative culture.
Mason Nystrom writes, “Web3 is about rearchitecting the existing services and products of the Internet so that they benefit people rather than entities.” If what web3 has enabled is for consumption to become collectible, the implications for gaming, art, and the creator economy broadly are profound:
Cutting out the Middleman (McCormick)
o “The movement is really about doing one of the most capitalist things there is: cutting out the middleman. It means that instead of value accruing to the Aggregators, there can be a more direct connection between suppliers and consumers.”
o Creatives can sell their works to a global pool of buyers and collect royalties every time their works are resold.
o “NFTs are a better model because they combine the social and utilitarian benefits of patronage with the possibility of turning a profit or realizing compounding utility. On the web today, consumers rent access to most goods and services, including the creators they patronize. A key tenet of new Ownership Economy platforms is the incentive alignment that comes from having skin in the game. With regard to supporting creators, I've called this “Patronage+” where the “plus” is the possibility of earning value alongside the creators you support. This is a strong, under-explored incentive to become a patron in the first place—and I think it may drive more engaging and rewarding demand in markets for creative work.”
o “A shared understanding and a common gathering point for creatives and developers who want to creatively represent digital scarcity, for any use case now.”
A Better Form of Art (Belsky)
o Provenance based in transaction records, not fables
o Transparent scarcity
o Portability and liquidity
o Meritocracy and opportunity
o Share of secondary sales
o New forms of multi-media mashups
o Metaverse-native formats
Self-Sovereign Foundations (Kicks)
o “A plausible path towards an ultimate long term open framework where everyone’s in control of their own presence, free of gatekeeping.” (Sweeney, quoting Kicks’s article)
o “It’s about attaching each user’s data and money directly to them (Self-Sovereign Identity), creating a public record that they own what they own (blockchain), and letting them take it with them, and profit from it, wherever they go on the web (Interoperability).” (McCormick)
Distributed Open Markets (L’Atelier)
o “Most of the marketplaces in the Virtual Economy are owned by a gaming publisher that sets the rules of the virtual world, oversees its economy and facilitates the creation of virtual assets…. As the ultimate owner of everything created on the platform, the publisher typically does not permit the external sale or transfer of those assets beyond the gaming environment.”
o “Distributed open markets are typically based on decentralised infrastructure and are not owned by any single entity. They allow the creation of unique virtual assets that only exist in a virtual space. These assets are created, bought, licensed, rented and sold in decentralised markets.”
Creator Cooperatives (Kesonpat)
o “It feels like we're entering the next evolutionary phase of online communities, where you and others are not just members of the same chat room talking about a shared interest, but are stakeholders of the community itself, in a system with baked-in incentives to reward you for the value you put in. The community is able to evolve a product alongside the creators.”
Biq Squad Energy (Hart, Shorin, Lotti)
o “Squads can extend themselves horizontally by inventing new aesthetics, organizational forms, and creative products that become the template for others. When squad vibes transmit they take on a life of their own. While the material value of these patterns may be limited, the significance of memeing a new bottom-up economic model into existence cannot be understated.”
Play to Earn (Callon-Butler)
o “Play to earn” offers new income streams for players (especially meaningful in emerging markets), around which decentralized guilds can form.
Social Tokens (Kim)
o Nearly all the "passion economy" startups are stuck in the mindset of, "how do we help creators monetize engagement", when they should be asking, "what if we reframed the creator-collective relationship entirely?" Social tokens are the foundational incentive layer for creators and curators to distribute value to their communities as they grow.
The upshot is this: if you are spending all your energy debating whether that latest trends are a bubble, that’s time not spent discussing what web3 has enabled. Don’t miss the forest for the trees, and remember how early we are in this cycle, as poignantly depicted in this graphic from Maple Leaf Capital:
Things I think I think
Investor interest in opportunities at the intersection of web3 and the creative space has exploded in recent months. I have never felt it more important to narrow time and focus on the teams (i) that are intent on “being different”, not just “being the best” or “beating the competition” and (ii) for which we have some credible edge given our experience and capabilities.
Below, I sketch out some of the themes that are top of mind, but by no means is this an exhaustive list. It’s rather an invitation for comment and debate, in the hope of opening up an interesting rabbit hole or two from all the creative minds operating in this space.
1. Whereas for the longest time the digital was secondary to the physical, the physical has now become secondary to the digital, as natively digital representations achieve critical mass of status, access and exchange.
2. Investors will seek curated access to top-tier NFTs, as the paradox of choice overwhelms. The best opportunities for NFT beta will be the leading “social tokens” (e.g., $WHALE, $B20), which embed a large affinity and engagement premium to “book value” of vault holdings.
3. It will become increasingly necessary for creatives to take a long-term view on community to conduct successful NFT sales. Those who embed clever collection games into their works will stand out, as the audience takes an active role in shaping the emergent metagame.
4. The non-fungible is quickly becoming fungible, as the financial stack around digital art and virtual goods matures: defi will drive solutions for fractional ownership (e.g., NFTX), broad-based indices, price discovery, best execution and lending.
5. Mainstream game developers are slowly coming around to the idea that blockchain is interesting, particularly for collection games. But actual adoption is likely to be modest (e.g., selling NFTs as redeemable in-game skins), and financial success likely limited.
6. The more interesting opportunity lies with “community owned games” – where enterprise value is not monopolized by equity holders of a studio but funneled entirely to holders of the community token. It will be very difficult for existing game studios to morph into community-owned ones – for the same reason that Epic can’t just dissolve and “convert” into v-bucks. Regulatory challenges abound (securities laws, KYC/AML).
7. Despite the challenges, a few blockchain games and virtual worlds are likely to be astoundingly successful, multi-billion dollar companies, and will attract an increasingly fervent player base who, once they’re in, never go back to playing traditional games. Blockchain gaming TAM will become large enough to support an ecosystem of venture-backable companies, even in the absence of “mainstream adoption”.
8. Equity will become increasingly disfavored relative to tokens, as the compounding benefits of community co-creation and incentivization increasingly outweigh the drawbacks of building a blockchain-based game.
9. Yet, traditional VC funds will be poorly equipped to participate in the next generation of community-owned games, as they require token investments and staking and liquidity mining to earn network rewards over time.
10. The single biggest risk in operating in this space is linear thinking and anchoring bias, leading to a persistent underestimation of the TAM acceleration happening across huge existing markets from global composability and turbocharged incentives.
Where does this leave me? With a particular interest in the following categories:
- Fintech/defi stack for NFTs and virtual goods
- Security-based NFTs for royalty sharing
- Social token tools/infra/liquidity solutions for creators
- AAA community owned games
- Creator platforms leveraging on-chain royalties
- DAO-governed artistic and gaming collectives
- Platforms for programmable and generative art, music and games
- Social Networking for web3: the “Instagram for NFTs”
- Land acquisition in virtual spaces
- Digital fashion and physical/digital crossovers
If you are a founder in this space, I would love to hear your story – please feel free to reach out at firstname.lastname@example.org, and ping me in the RNG Discord (https://discord.gg/rnglife), where you’ll get the opportunity to meet an amazing creative community operating on the frontiers of web3.