<aside> 💡 TL;DR Blockchain tech enables a new ownership model: now users of protocols can become owners of it. And thus align incentives to make the protocol better
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Blockchain, Ethereum, and Crypto Tokens
Before we dive into NFTs, let's first get onto the same page by talking about what are blockchains, why Ethereum is getting popular, and why everyone in crypto hopes Bitcoin goes to shit.
The blockchain
The key property for blockchain is that it's decentralized and immutable. This means that there is no single data center that stores the block chain and whatever transactions will stay in history in eternity. Think of blockchains as a database where every WRITE operation is recorded and cannot be undone.
Ethereum and Smart contracts
Ethereum is getting popular because Ethereum is not just a list of blocks. It's a virtual machine that supports code on top of it. These code are made of smart contracts that essentially trigger function calls when certain conditions are met. It is this smart contracts that allowed various decentralized applications (mostly finance) to arise on top of ETH.
Crypto Tokens
Tokens are what you can issue on a blockchain. These are effectively currency you need to use to perform operations on that said blockchain. For example, when you use apps built on top of the Ethereum network, you need ETH to make transactions.
Incentive structures for crypto protocols
The most interesting aspect of crypto currencies is that they achieve incentive alignment between the protocol and the users: to make it better. Crypto tokens doubles up as an asset: tokens have value in itself. Developers are incentivized as they receive large sum of tokens at launch. Users are incentivized to contribute to better the protocol since they hold the token in order to use the protocol, and the more people who use it, the more valuable their token as an asset.
<aside> 💡 TL;DR In the current state, minting NFT is a way for cryptowhales to cash in their clout. There are theoretical benefits of NFTs that are overshadowed (unobserved) by speculation
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Non-Fungible Tokens
Bitcoin is a Fungible token, because you don't particularly care about which bitcoin you own. just how many you have. Two coins are interchangeable. But there is another category of tokens where you can make each unique. That's the essence of NFTs: there is only one of a kind.
The ultimate cashout
Opensea had transacted ~6 billion dollars in 2021. A pretty large number right? But the harsh reality is that most NFT projects goes to 0 in value. Here's an example of failed NFT launched by the TIME magazine. Initial launch people are paying 3ETH (~10000$) to buy them. now they're worth 0.5ETH and eventually will worth nothing.
So which projects survive? Projects launched by cryptogigachads who are into crypto back in 2015 before it was cool. They either own cryptopunks or BAYCs and have already made their millions during the 2019-2020 appreciation of crypto assets like ETH and Bitcoin. They launch their NFT projects, minting themselves a fat stack of tokens supply. Once launched, the price is driven up through hype and they dump their NFT assets and pocket all the proceedings.
The reason why people buy into their NFT launch is largely because they are effectively celebrities that got the bet right. Low conviction speculators and traders look at them to find signals to see which projects are hot because they were the leaders of this NFT movement. Simply put, the NFT market is currently all driven by profit seeking traders/NFT flippers that wants to make that 4000% gain through getting in on an NFT project.
Some theoretical benefits of NFTs
Granted there are a lot of theoretical benefits of NFT when it comes to creator economy. It's a new way for creators to monetize their most passionate fans! Emergence of NFTs have effectively spread the value chain to the sides: the creator and the user. Here's an image that captures this well. And the purchaser gets 3 things in return:
However, we are not observing this at all in the current NFT market because of all the hype, the prohibitively expensive transaction costs, and the dogshit UX. Could this be the new Patreon of the future? A few question remains:
An interesting thought experiment
A fun thought experiment. What would it look like if everything in crypto is 2 order of magnitude less (100x smaller/cheaper)?
On one hand low conviction traders will be gone since there are not as much alpha, but on the other hand, regular people could participate in the fun now that transaction cost goes down (right now I have to pay 150$ in transaction cost to buy a domain name for $50)
<aside> 💡 TL;DR Social tokens for creators help disintermediate platforms and offer a different monetization strategy.
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As I said, NFTs could be impactful for creator economy. But there is one other instrument that I believe will benefit creators: Social tokens
Unlike a lot of crypto currencies that are backed by underlying protocols, social tokens are backed by a person or a brand. Here are a few interesting examples: