Come for the NFT, stay for the Collectible

“NFTs have literally taken over my entire mind and soul. I’m obsessed. It’s all I think about.”

Paris Hilton, crypto expert

For those of you who need a primer on Non-Fungible Tokens (or NFTs), click here for a good overview from the Verge.

In Q1 2021, NonFungible.com reported that a record $2 billion worth of NFTs were sold, the first time that over a billion dollars of NFTs have ever transacted in one quarter. That number represented an eye popping 134 times year-over-year growth, and 22 times quarter-over-quarter growth.

Those are certainly impressive stats about the rising demand for NFTs. But they become even more impressive when you consider that sales of 3 of the 5 largest NFT marketplaces (NBA Top Shot, Nifty, Rarible) weren’t even included in NonFungible’s analysis. And neither were off chain sales (i.e. transactions not conducted on the Ethereum Blockchain) which would have added the single largest NFT transaction ever: Mike “Beeple” Winkelmann’s $69 million NFT art sale.

Even with a handicap, the meteoric rise of NFTs in 2021 has been staggering.

Weekly NFT sales by segment in Q1 according to NonFungible

Some examples of this onslaught of NFT transactions:

  • Indie filmmaking icon Kevin Smith auctioning his latest movie “Killroy was Here”
  • Grammy winning rock band Kings of Leon selling their latest music album “When You See Yourself” for more than $2M
  • Time Magazine selling 4 magazine covers for $500k
  • New York Times selling a single newspaper article for $560k

The irony is that prior to the introduction of the blockchain creating this frenzy of demand for owning digital goods, people didn’t want to own digital goods. For over a decade now, creators have been lamenting how the rise of digital formats destroyed consumer media. People stopped buying movies, albums, magazines, and newspapers in digital form. But suddenly those same people are not only buying movies, albums, magazines, and newspapers in digital form, but spending astronomical sums to do so.

All because of 3 characters. N. F. T.

Or maybe not.

Collecting ones and zeros

“The impulse to collect is human.”

Smithsonian

There are entire fields of psychology devoted to understanding the human need to collect, which we’ve been doing for thousands of years ever since humans developed a sedentary lifestyle. Sometimes people collect for nostalgia to reconnect with past emotions. Other times it’s for investment returns, or ego and pride, or competition and the thrill of the chase. Regardless of why, collecting is ubiquitous. Currently, upwards of 40% of all Americans maintain a collection of some sort. And then Covid-19 happened.

The pandemic has provided a huge acceleration to the entire collectibles market. Pawn shops, thrift stores, estate sales, and antique businesses all reported record sales last year as collectors found comfort and joy and a sense of normalcy in their collections. The record sales of collectibles have continued in 2021 as the year started off with the most expensive baseball card transaction ever recorded when a 1952 Topps Mickey Mantle card was purchased for $5.2 million in January. In February, eBay published their first ever State of Trading Cards report where they shared that card sales were up 142% in 2020, with baseball cards actually bringing up the rear in sales growth at “only” 73%. All the other major sports grew several multiples faster than baseball cards, as well as sales of Pokemon cards, which grew an impressive 574% year-over-year.

eBay State of Trading Cards report

The human behavior of collecting, thousands of years in the making, has never been more powerful than it is now. And it’s only natural for it to cross over into digital online collectibles, which is where NFTs come into play. NFTs have been credited for unleashing a tidal wave of the human urge to collect upon digital goods. According to a recent survey, 86% of NFT collectors were already hobbyist collectors.

But the truth is people have been collecting a variety of digital goods for years now, and in volumes that dwarf even the recent spike of NFT sales. According to DappRadar, about 800,000 people have ever purchased an NFT totaling 7 million lifetime transactions. Yet take this other digital item that has been purchased by tens of millions of people more than 350 million times: domain names.

Domain names and NFTs share a lot in common. They are both collected by users, guaranteed to be unique, with ownership publicly tracked and stored in a decentralized manner. But domain name collecting is simply a much bigger, more lucrative trade than NFTs. One domain name company alone, GoDaddy, has served more than 25 times as many customers as the entire NFT industry. And if you are impressed with Beeple’s $69 million NFT sale, consider that the domain name Business.com sold in 2007 for a whopping $345 million.

Growth in domain name sales

Maybe that’s not a fair comparison given domain names have inherent business value that goes beyond collecting. Then how about this example instead: game skins, the clothing, costumes, and other cosmetic items that gamers use to customize the appearance of their in-game characters. Buying game skins is a pure act of collecting, and one far more popular than NFTs. The skins market is estimated at $40 billion annually, or 400% larger than the current NFT market. One game alone, Fortnite, sells over $400 million worth of skins each month, which by itself is already about half of all NFT transactions.

Fortnite game skins

None of this is to say that NFTs are not important because they clearly are. Even if they aren’t setting all-time record consumer purchases of digital collectibles, NFTs have created all-time consumer interest and press coverage. Millions of people around the world are looking at digital collectibles differently, with different expectations and motivations than they used to have, because of NFTs. That’s an unequivocal benefit.

But how NFTs created that benefit is different than you might think.

It’s all in the (implementation) details

“And that’s something that I think people are really yearning for online, is having some sense of ownership over their sort of digital self.”

Mike “Beeple” Winkelmann, Artist

On October 29th, 2007, the online video service Hulu.com first debuted to the world. My team and I built the product that launched that day, but there were so many key factors beyond the lines of code of the website that made that moment possible including the unique partnership between Fox and NBC, the financial support from Providence Equity Partners, and the visionary leadership of Peter Chernin, Jeff Zuckerberg, Jason Kilar, and others. But there was also an important enabler that like NFTs, also came in the form of 3 characters: VP6.

VP6 was a video codec developed by On2 Technologies that Adobe licensed in 2005 to power their Flash video player. Before that marriage, watching videos online was a clunky experience of installing plugins, downloading codecs, buffering files, and squinting at postage sized pictures. Remember Windows Media Player or Real Player anyone? But VP6 came to the rescue by providing a powerful combination of high quality and simple licensing that allowed Adobe to turn Flash into the dominant video player that media websites from YouTube to MySpace to Hulu all used, and ushered in the age of streaming video.

Example error message when trying to watch videos online using Windows Media Player

VP6 was one of the things that made Hulu possible. Its importance can’t be understated. But at the same time, not once did it directly matter to a customer. No one chose to watch or not watch Hulu because of what codec we used. Customers didn’t know or care about VP6. They only cared that they could watch quality videos reliably, regardless of how it happened. They cared about the benefits VP6 enabled, not the codec itself. VP6 was simply an implementation detail.

Similarly, with NFTs it’s not the token, the blockchain, or the technology that’s important, but the benefits that it all enables. And that benefit is the powerful innate human behavior of collecting. People collect digital items, not NFTs. The NFT is the implementation detail.

NFTs provide a decentralized standard for verifiable ownership of a digital asset. Information about the owner of the NFT is included within the NFT itself and publicly visible for all to see. By being stored on the blockchain, there’s a common, agreed upon process by which NFTs can be transferred from one person to another. And no one entity governs or controls that process. NFTs bring the promise of decentralized ownership, where individuals control the source of truth over who owns the digital good.

This is more resilient than having any one company be the source of truth for ownership of a digital good, or what I’ll refer to as fiat ownership. In the earlier example of game skins, the gaming company (ex. Epic for Fortnite skins) records the item ownership, controls how ownership is made visible to others, and sets the rules for how ownership can be transferred. Even though customers purchased game skins, Epic controls ownership of all their digital goods by fiat. But with NFTs, the buyers are in control of ownership.

Except that isn’t really how the implementation has worked in practice.

Take Dapper, the creator of NBA Top Shot, which is the largest, most popular, and most valuable NFT marketplace today. NBA Top Shot digital basketball collectibles are indeed NFTs, which ostensibly enables decentralized ownership. But in reality, Dapper’s implementation resembles fiat ownership. Dapper stores each NBA Top Shot on their own proprietary Flow blockchain, which is a permissioned blockchain. That means Dapper controls how people access Flow, which in turn means they define the rules for NBA Top Shot ownership. Even after you’ve purchased an NBA Top Shot NFT, Dapper gets to decide how you can view your purchase, when you can sell it, and even how you can sell it. Ownership of NBA Top Shot NFTs is not actually decentralized. Dapper is in control as the fiat owner.

Examples of limitations that Dapper sets for buying and transferring NBA Top Shots

Even though they are NFTs, NBA Top Shots are more similar to game skins than they are different. Like game skins, they are both fiat ownership models and both could have been implemented with a traditional database and not a blockchain-backed digital token. The use of an NFT hasn’t provided any of the user capabilities of decentralized ownership for an NBA Top Shot collector. But then again, that collector doesn’t seem to need those capabilities to collect because they are perfectly happy to do so (as evidenced by all the NBA Top Shots purchased) with Dapper as the fiat.

And the reality is that’s probably the case for almost all NFTs. The majority of NFT buyers have no interaction with the blockchain. They aren’t querying Ethereum to view the transaction or the contract. They are simply trusting wherever they purchased their digital collectible to be the source of ownership truth. They are trusting others to act as the fiat owner. Like with game skins, ownership could be stored in a database and no buyer would notice the difference.

So while the blockchain is still the implementation detail, it may currently be an unnecessary detail.

Stay for the collectible

“Come for the tool, stay for the network.”

Chris Dixon, Investor

For most NFT owners, the use of the blockchain may not be making digital collectibles more unique, more secure, or more durable than other digital collectibles because of where they purchased the NFT and how they are interacting with it. But there’s clearly something NFTs are making more of: they are making more collectibles even more collectible.

Even if much of the NFT ownership is in practice similar to traditional digital fiat ownership, the interest and enthusiasm for NFTs is very different. Paris Hilton, Tom Brady, Mark Cuban, Snoop Dogg, and other celebrities aren’t promoting their collection of domain names or making game skins, but they are creating and promoting their works as NFTs. For so many collectibles, interest and perception is what drives value. The more a collectible is discussed and admired, the more valuable it becomes. So perhaps the biggest benefit of NFTs is the attention and awareness they are bringing to digital collectibles and their creators, which may ultimately persuade millions of people to start collecting something new in the near future.

To paraphrase Chris Dixon: “Come for the NFT, stay for the Collectible”.

Leading Commerce Incubations at $FB. Was co-founder at Packagd (acq.), GP at Kleiner Perkins, and writing messy code at Hulu, Flipboard, Erly (acq.), and $MSFT.