NFTs and the Decentralized Renaissance - Part I
In which we explore the hype behind NFTs, what it means for the creator economy, and why the rise of communities of Maecenas could be the beginning of a decentralized Renaissance
✨ Hi, I’m Sara Tortoli and this is the September edition of The Plunge Club, a monthly newsletter dedicated to product management, tech culture, and crypto.
If you are not a subscriber yet, then take the Plunge and join the Club:
Dear Plunger,
as you might have noticed, I have changed the tagline of the newsletter into “product management, tech culture, and crypto”, to reflect my increased interest in these areas. While I will still continue sharing my experiences and lessons learned as a product manager, moving forward I will dedicate officially part of this newsletter to emerging technologies and to crypto, exploring the impact on business, culture, and society.
🛑 Important: as usual, this article is not in any form or shape financial advice. Always do your own research. A good place to start, it’s from the resources I used to prepare for this article. You can find the link with all the references at the end. 🛑
JPEGs that are worth millions
As a reader of this newsletter, by now it should come as no surprise my fascination with crypto and blockchain technology and the impact it can have on our society. In previous issues, I have written about Bitcoin, Ethereum (two times) and covered the world of DApps. There is one aspect however of the crypto world that has left me perplexed for a long time now, and that is the NFTs space.
I think partly this is because I associated NFTs with all those collectibles of dubious aesthetic relevance. Zombies, punks, penguins, lions, llamas, pugs, everything has been turned into a cartoonized digital image. This is hard to digest for someone like me who grew up in Italy, in a small town near Florence, which is known to be the birthplace of the Renaissance. As a result, I have a very biased sense of aesthetics and (many) strong opinions when it comes to arts.
Because for years I walked around every day surrounded by the beauty crafted by Leonardo, Michelangelo, Giotto & co., you can probably see why I had a hard time figuring out how a Crypto Punk, a pixeled jpeg, could be sold for millions (11.7$ million to be exact). As it turns out, many other readers shared the same perplexity. This is why I decided to educate myself and investigate what is the hype behind NFT.
When I first started a couple of months ago, I intended to write a lighter and shorter article compared to my usual long-form posts. After all, what is there to say about overpriced JPEGs? What I did not foresee is that this would turn out to be another rabbit hole and that NFTs are much more complex than they would appear at first glance. As I documented my researches and wrote about my experiments in this space (including some notable failures), it became clear that instead of writing a shorter post, I had on my hands another long one. This is why I ended up splitting this article in two (again, I know).
In this issue, we will investigate what are NFTs and why some are now worth millions of dollars, focusing on both technology and sociological aspects. We will also explore what NFTs mean for the creator economy and why communities are now the new Maecenas, heralding perhaps a new decentralized Reinassance for creators.
In Part II, coming out in October, we will continue where we left off and explore how to buy and sell NFTs, and what are some of the criteria to consider when picking one. I will also share some of my personal experiences and failures in this world and will deep dive more into the community aspect.
A brand new asset class
NFT stands for “non-fungible token”, and it’s a unique digital asset issued on a blockchain. To simplify, non-fungible is a fancier synonym of non-replaceable, as you cannot swap an NFT for exactly the same NFT because of its unique nature. This is the opposite of fungible tokens, which are items that are perfectly replaceable with one another. For example, Bitcoin or a pack of cereal are fungible assets, the Monalisa is non-fungible.
As you know from the intro, I failed to see the real potential of NFTs because I used to think of NFTs as only (ugly) digital art expressions, as this is the most popular use case yet.
In reality, NFTs are smart contracts that represent ownership of unique items in the digital world.
Put it in another way, even though NFTs are more commonly associated with digital arts, they can be and are already so much more: you can tokenize blogs, tweets, music, domain names. Even the deed of your house can be turned into an NFT and “uploaded” to the blockchain as proof of ownership, saving you the money of any notary expenses. On principle, you could tokenize everything.
You could turn any document, image, or audio into an NFT. This process is known as minting, and what actually means is that you are creating a smart contract with your original file, that specifies forever a set of immutable characteristics and certify their origins.
This makes NFTs a revolutionary asset that goes well beyond transacting images online. When Ethereum introduced the concept of a general-purpose blockchain, with the ability to create smart contracts to regulate pretty much everything that you could think of under the sun, it opened the door to the concept of digital representation of ownership for all sorts of items. It started by tokenizing finance and monetary systems, what we refer to as fungible tokens. Since then, we have discovered that blockchain is perfectly suited to represent and certify ownership of unique (non-fungible) assets.
The ownership of such assets is inherently proven without the need to be sanctioned by any authority. It becomes part of the blockchain and is visible on the public ledger. This means that if you own an NFT, you have complete ownership over it and that it cannot be taken away from you (unless you hand over the private keys of your wallet, please never do that).
The Web 3.0 version of seashells
Even though I had a better understanding of NFTs and their potential when it comes to technology, I still didn’t have an answer as to why a pixeled jpeg could be worth millions. A jpeg can after all be replicated an infinite amount of times and that makes it not scarce by definition. So I turned my attention from technology to history and sociology. Through these lenses, NFTs are no stranger than other asset classes to which humans have recognized superior value throughout human history, for whatever reason.
In an article written by Eugene Wei in 2019 that explains how social media can gain traction, titled “Status as a Service” (link is in the resources), he opens with two fundamental principles on human nature. According to Wei, humans are “status-seeking monkeys, looking for the most efficient path to maximizing social capital”.
This statement, as unflattering as it is, it’s hard to disprove. Since the dawn of civilization, humanity has coveted to possess rare and unique items to set themselves apart from the masses and escape anonymity. From collecting seashells to gold, and cards of your favorites baseball players, humanity has strived to attach superior value to items that have per se no real utility.
With regards to certain assets, we are under a spell, a collective illusion of value that only lasts until the fictional belief is shared among enough people to sustain it.
NFTs are just the digital Web 3.0 version of what seashells were for our forefathers. They are part of a millennial long trend, a natural evolution of our tastes and culture made possible by a brand new technology.
Arthur Hayes describes cryptos’ arts as “flex goods”. He defines flex goods as being:
Intrinsically worthless items, or that have a much cheaper substitute that achieves the same function.
Confer membership in an exclusive community.
Have limited quantity, making them scarce.
NFTs tickle all those boxes:
They are per se worthless and you can produce for yourself a free version of most NFTs out there
They do give access to an exclusive community (more on this below)
They come in limited quantities.
In fact, even though a jpeg can be replicated ad infinitum, the ownership is cryptographically proven and cannot be duplicated. Actually, the more people attempt to copy the jpeg, the more the value is likely to increase (but please note that displaying an NFT that you don’t own, is not only easy to prove, it is also considered poor taste).
Why do people buy NFTs?
As “status-seeking monkeys”, NFTs are the digital equivalent of a Hermes handbag, a way of proclaiming one status and wealth in a world that is increasingly digitalized and getting closer to the Metaverse. Covid did accelerate NFTs adoption and rise to a “proclaiming status” asset class. After all, Hermes handbags are useless if you have to stay confined at home with no one to see them, an NFT however, especially a collectible one, can be used as a digital avatar. If you have a Twitter account, it might have not escaped your notice how the feeds have turned into a cartoonized zoo, as more and more people start to use NFTs as their profile picture. This phenomenon has already a name and is known as PFP (profile picture) mania.
Status-claiming is not the only reason why people buy NFTs. NFTs in fact are highly speculative assets, because of how easy and incredibly fast is buying and selling them. This is due to the fact that they use the blockchain and crypto to execute transactions.
In the physical world, selling a non-fungible asset like a painting involves a lot of hurdles. For example, it might mean traveling to the auction location, contacting the bank for the authorization of the transaction, and arranging for transport and security in case you win the auction. Furthermore, the payment transfer can take days. With NFTs, you can buy an item worth millions with a peer-to-peer transfer, from the wallet of the buyer to the one of the seller, in seconds. You don’t have to ask your bank for permission or arrange for transport. All you need is to choose your network and the crypto wallet and coin that is compatible with it.
There is a third reason why people buy NFTs, and that is one of the aspects that I found more fascinating. Some buy NFTs to become part of an exclusive community and to support the creators they believe in.
In fact, it’s when we look at NFTs through the lenses of creators that magic really happens.
The Decentralized Reinassence of the creator economy
For creators, NFTs herald a real decentralized Reinassance, made possible by the technological innovation of the blockchain.
In traditional Web 2.0, platforms are able to capture the majority of the value when it comes to sharing content online.
For example, if you want to start a YouTube channel and publish your video to start living off your content, you need to reach at least 1,000 subscribers and have 4,000 valid public watch hours. The monetization comes through Adsense (putting ads on your video) and not through your actual content, which is signed away for free the minute you accept terms and conditions, in exchange for access to the platform. Even when you show the ads on your video, you only get 68% of the revenue.
What happens under the hood in Web 2.0 is that when you share a piece of content into a social platform, you are actually copy-pasting your content to a server owned by a company. In this process, you are signing their terms of service that transfer the ownership of your content and allows the platform to monetize it as they see fit. Maybe you get a piece of the profits, maybe you don’t. Whatever the case, the platform makes this call, deciding how much you will earn and when you can perceive monetary compensation for your work. As it owns the content, it also decides how your content is consumed.
Things work the opposite way in Web 3.0. If you upload a file in the blockchain, this file is immediately available for everyone because the blockchain acts as a universal library. Because the content is not owned in a centralized manner and it is verifiable at all times, the artist retains full control and is able to capture the majority of the value. The platform can claim only a marginal fee, for example, for every NFTs sold on their marketplace, Opensea can claim 2.5%.
Furthermore, creators have the total freedom to decide how their content is consumed (like for example it happens in Dapps such as Audius) and can continue to perceive monetary compensation every time their asset is used or sold by others through the blockchain.
Since NFTs creators are put in charge and are able to capture the majority of the value, there are high incentives for more and more people to become creators, signaling what could be the beginning of a decentralized Reinassence.
The raise of Communities Maecenas
During the Renaissance, princes across Europe competed to further the arts and financed artists to produce the most stunning pieces, as a way to prove their own grandeur. This phenomenon was known as Maecenatism. In Web 3.0 communities have replaced nobles and princes and become modern Maecenas, furthering and financing artists and creators to leave off their passion.
In the Web 3.0 world, communities of strangers can pull together resources to bid collectively for an NFT that they would not be able to afford otherwise on their own. Tools such as PartyDao, introduce the concept of fractionalized ownership of exclusive, non-fungible items.
Could you imagine owning a piece of the Monalisa, together with 2000 complete strangers that you have never met, living everywhere in the world? This new emerging phenomenon is already a reality in the NFTs world.
This partly explains why before launching NFT projects attempt to “ recruit” as many Maecenas as they possibly can by amassing followers on Twitter and on Discord. The latter is the main channel where the community gets to hang out, chat and exchange ideas. The more followers a project gathers before launch, the higher the chances that those followers will become their Maecenas, and that the entire collection will be sold during the minting process.
If the NFT project is good and the team behind it is strong with a clear roadmap, they often get to keep the majority of their initial Maecenas and attract new ones. Like artists in the Reinassance had to keep their princes happy and make sure to be aligned with their interests, so today modern creators have to keep their Maecenas satisfied and surprised them at all times, to prevent them from selling at a price that would undervalue the project.
In exchange for investing and for the free marketing on Twitter, in fact, these modern Maecenas gain access to exclusive content, free airdrops of new NFTs projects, merchandising, and real-life events and meet-ups that are only open to NFT holders.
Communities on Discords however are not new, and neither is supporting creators by buying their product. Web 2.0 does this already pretty well, Substack is an example of such type of patronage and Patreon has built an entire business around creative support.
Contrary to patronage in Web 2.0 however, members of the community, get to financially benefit too as the artist/project rises to fame. This is because the blockchain acts as a universal media library that is programmable with baked-in monetary policy. The more advanced NFT projects have now started to experiment and to allow community members to earn passive income with their NFTs, through things like staking or pension funds. So for example, by holdling an NFT in your wallet, you could earn free ETH, the same as you would by staking or borrowing your coins.
In part II, we will get into greater details on NFTs communities and on how to evaluate promising projects through concrete examples.
Conclusion to Part I
NFTs are much more than weird collectibles of animals cards and gifs: they are a brand new asset class, an invention made possible by the creation of Bitcoin and Ethereum.
While they are highly speculative and perhaps overpriced assets, NFTs introduce new concepts that can be extended to other asset classes, such as that of proven ownership without intermediaries and that of fractionalized ownership.
Perhaps the most tantalizing aspect is what NFTs mean for the creator economy, with some artists able to live off their passion and becoming rich and communities members that are able to reap the rewards alongside them, as investors of their arts.
I believe that this is just the beginning. We are still very early in this space, with only a minority of crypto holders taking part in this space. As crypto grows and adoption increases and more people get accustomed to buy and trade with crypto in their everyday life, so will increase the percentage of investors in NFTs. With more countries discussing the possibility to adopt Bitcoin as legal tender like El Salvador, this future might not be that far.
When we shift from early adopter to mass adoption, than indeed we might be able to see a new decentralized Reinassance coming alive.
👉 📚 All materials and references I used for this article can be found here
The “Now” section
🎧 What I am listening: another episode of the A16 podcast, this time dedicated of course to NFT. It’s a super interesting 20 mins conversation with Devin Finzer, CEO and co-founder of NFT marketplace OpenSea, who talks about the use cases of NFT of today and of tomorrow and of the "tokenization of everything".
📚 What I am reading: Homo Deus by Yuval Noah Harari. I am a huge fan of Harari's first book Sapiens, which I read in a matter of days. This one took me longer than expected. While I thought it started with a bang, it tends to lag behind in the middle part, and take up steam towards the end again. Nevertheless, it is an impressive read about the (possible) future of our society, and the NFT trends very much fall into his analysis: when all of the basics’ needs are met, humans turn their attention and desire to things that do not have necessary intrinsic value, to set themselves apart from the masses.
The core idea behind Homo Deus is that for the first time in history, more people die from eating too much than from eating too little; more people die from old age than from infectious diseases; and more people commit suicide than are killed by soldiers, terrorists and criminals combined. Having mustered for the most part famine, illness and war, men are turning their attention to elevate themselves from Sapiens to Deus (gods), by increasingly focusing our attention on achieving a sustained state of happiness, defeat death and become god-like.
🥁 What I am doing: on September 1st, I officially joined Backbone, a Series A startup, as Head of Product, driving the product to fulfill our mission to redefine the way visuals are produced and helping creators live off their passion. This first month has been an incredible ride, I’m still wrapping my mind around all the things that are going on and the topics I started to cover, from product strategy to hiring and organizing teams as we grow. I will share and write more about this in the upcoming months, in the meantime if you want to experience firsthand what I am talking about we have several open positions between Berlin, Geneva, and Prague.
🧐 Question I am asking myself:
If I was my best friend, what would I tell myself?