NFTs and the Decentralized Renaissance - Part II
In which we explore what are the criteria to evaluate NFTs, what is the utility of holding an "overpriced jpeg", including some mind-bending examples, and what the future could hold for this space
✨ Hi, I’m Sara Tortoli and this is the October edition of The Plunge Club, a monthly newsletter dedicated to product management, tech culture, and crypto.
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Dear Plunger,
This is the second and final installment (for now) of my exploration of the NFTs space.
Part I explained what are NFTs and why they might be something else than just overpriced jpeg. We focused on both technological and sociological aspects of NFTs. In particular, we explored the impact on the creator economy and why communities are now the new Maecenas, heralding perhaps a new decentralized Reinassance for creators.
In Part II, we will continue where we left off and explore what are some of the criteria to consider when picking an NFT and we will deep dive more into the utility aspect.
🛑 Important: 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. 🛑
Of experiments and lessons learned
When I write about something, I write about things that I have experienced firsthand. Writing about NFTs is no exception to the rule. This means not only doing my researches but also getting my hands dirty. I bought NFTs on Opensea, the most popular marketplace at the time of writing, I tried to be an active member of multiple communities on Discord, and to vet and mint new projects.
In the process, I made some good investments but also incurred in losses. Before I started investing in NFTs, I spent hours researching, so that when I finally did it for the first time, I thought I was ready. Turns out, I wasn’t and my first investment is currently at a loss at current market value.
Where did I go wrong? For all my readings, the problem is, this space is incredibly complex. If you think crypto moves fast with its ups and downs, NFTs move at the speed of light. 1 month in NFTs = 1 year. On top of that, the market is overcrowded. New projects pop up every hour, so it’s difficult to assess which one will 10X from the ones that will go to zero.
Although my pride and wallet suffered from it, this first loss served me well. I learned some valuable lessons that helped me do much better in my buying strategy. This article is the collection that combines both the research I made and the lessons I learned through direct exposure, compiled in a guide to help you select and vet the right project before buying. It contains some mind-bending examples of what current projects are doing. Finally, we will take a look at the current market and what could be the future for NFTs.
Type of NFTs
As we saw in part I, NFTs are virtual contracts that attest ownership of a digital asset. NFTs can be anything from gaming to music, tweets, blog posts, virtual lands, and domain names.
When it comes to digital art, NFTs attest ownership of a particular piece. Broadly speaking, digital art NFTs can be divided into 3 broad categories:
Collectibles: also known as profile picture (PFP) NFTs, they are commonly used as profile avatars on social media like Twitter. PFPs are similar to collections’ cards, like football or pokemon cards. Each collectible is unique but shares common characteristics remixed together with other items in the collection. The rarest the characteristics, the higher the value. The first example of PFP has been the Crypto Punks in 2017.
Generative NFTs: at the intersection between art and code, in this type of NFTs the creators write an algorithm that generates the art. The creation happens on minting day. One of the most well-known examples of generative arts is Fidenza and more recently Loot, a series of randomly generated words turned into NFTs that represent attributes that could be used in gaming.
Artistic NFTs: closer to the traditional concept of art, artistic NFTs are human-generated unique items, sometimes single pieces or part of a very limited collection. The value is very much driven by the popularity of the artist itself. The most popular example is Beeple who to date detains the record of the highest sold NFT, with 69$ million.
DYOR: a checklist for selecting NFTs
Before approaching the NFT market, the first thing to do is to set a budget, a maximum amount that you are willing to spend for an NFT. This budget should correspond to an amount of money that you are comfortable losing. Depending on this initial amount, you might go after the more established and high-priced NFTs, so-called blue-chips NFTs. Examples of blue-chips are Bored Ape Yacht Clubs, Cool Cats, and Cyber Kongz.
If instead you have limited funds, you have to do a higher degree of research to find projects that have a floor price within your budget.
Once you have set your budget, no matter if you are looking for these undervalued gems or for a blue-chip, the following checklist will help you to evaluate the potential of a project.
Traction: a quick way to assess the traction behind a project is by checking the Twitter and Discord channel. The number of followers does not really count, as followers can be bought. What matters is the actual interaction on each post on Twitter and how active is the community on Discord. Another good indicator of NFTs traction is the % of owners vs. total supply. The higher the supply and the lower the number of owners, the higher the chances of a price crash if one or more owners decide to “dump the bag”.
Team: the second element to consider is the team behind the project. Teams can be physical or community-based (DAO). Furthermore teams can be anonymous or not. If the team is known, then there is a much lower chance that they will abandon the project, or worst, end up being a scam. A separate argument needs to be made for artistic NFTs. In this case, artists are like brands, name matters. Buying a piece of art from a respected artist is like buying a Hermes handbag. When you invest in an unknown artist, you’re betting that they will somehow breakthrough. You act like a modern Maecenas, taking the role of a sort of venture capitalist, betting that the artist will become relevant. In the NFT space, where one month equals one year, relevance can be gained in a very short time. Bored Ape Yacht Club launched only in March of this year and has already a become brand.
Aesthetic: aesthetic is a fickle thing to judge as it changes over time. It retains an element of subjectivity, and it’s tied to trends. Also one cannot look at a PFP collection with the same criteria you would look at a painting from Monet. In fact, NFTs and PFP in particular take a more scientific approach to judging looks.
Rather than looking at pleasing the eye, a good criterion to judge NFT art, and especially PFP, is by the number of unique traits vs the total number of the collection. This is simple math: the more limited the collection is in number and the higher the number of traits, the higher the chances that NFTs will be rarer. Conversely, when an NFT collection has a high number and not enough unique traits to mix and match in the generation process, a lot of the pieces in the collection will end up looking similar. The more traits an NFTs has in common, the lower the value. How rare are the traits of an NFT can be checked under properties on Opensea or on rarity.tools.
Return on Investment (ROI): the ROI of a project depends on a few factors. Besides market conditions and marketing hype generated around it, the future appreciation of a project depends on the roadmap. A roadmap depicts the future development of a project. How active will be the project in the future? Does the team have a clear vision? The more utility the project plans to deliver, the more the project is likely to survive and that the community will hodl rather than sell, driving up the price. I will say more about the utility of projects in the following section.
Community: we dived deeper in part I on the community aspect, as I described the rise of communities of Maecenas that fund artists and projects. The more numerous and active the community is, the higher the chances of the project succeeding. Elements to look for in a community are: does the community promote the brand on social media, create a network effect, and free marketing campaigns? Is there any famous person who has bought into the project that further gives resonance to it? Is the majority of the community in for the long run or for a quick flip?
Communities of NFTs projects mostly hang out on Twitter and on Discord. It is one of the most fascinating and fun aspects of buying NFTs, a core part of the entire experience. Furthermore, by looking at what admins and people post on Discord, you might find out things that are not advertised on the website or that get added there much later.The “first of its kind”: historically, projects that are the first of their kind in proposing something novel have done very well and appreciated over time. From the type of utility generated to technological innovation, or being the first to launch in a new blockchain, these projects tend to set the bar for those that follow.
Hosting: NFTs can be stored on-chain or off-chain. Beware of projects stored off-chain, as the benefit of NFTs is that you can prove their ownership. Do that, a project needs to be stored on-chain, otherwise the ownership is not recorded by the blockchain, and your NFT can be tampered with, stolen, or modified.
The Battle of NFTs: generating utility
NFTs communities battle and compete with each other to come up with new ways to create utilities for their holders and to become the next blue cheap in the market. In other words, they are competing to make their Maecenas happy and to maximize their ROI to prevent their project from going to zero. Historically, the main forms of utilities have been free airdrops, where holders of a particular project get access to a free (minus gas) collection by the same artist, and access to exclusive (physical) merch and real-life event
But as I said in the beginning, one month in this space equals one year. If free-airdrops and merch were the novelty back in March when BYAC pioneered it, in the last couple of months we have seen many fascinating experiments popping up. Holders of a project in fact quickly started giving for granted that there will be a new airdrop and some sort of community-exclusive access involved. The team behind the different projects needed to come up with new ideas to keep their Maecenas happy and vested.
This is where things start to get interesting and complicated at the same time, as many projects experimented and morphed both in terms of governance and of utility generated. Successful experiments ended up quickly being copied by other projects (the beauty of being based on open source code), until this becomes the new normal and new experiments start to pop up.
On the governance aspect, many teams are now turning the ownership of their projects to the community itself by setting up a DAO. DAO stands for Decentralized Autonomous Organisation and it’s a form of community governance where usually 1 item equals 1 vote. Community members of a DAO vote on how the project should evolve in the future. Decisions of the DAO are executed automatically through smart contracts. While this concept is not new in crypto, it only recently started in the NFT space.
On the utility side, we have seen NFTs projects getting closer and closer to the world of DeFi. Cyber Kongz was the first project to pioneer this and many have followed since then.
Cyber Kongz created a token associated with their NFTs called $Banana. This might seem like a joke, but this is where things start to border the incredible.
$Bananas have a fixed supply associated with it. Holders have to stake their NFTs to get $Bananas in return, thereby taking out Cyber Kongz from the secondary market, causing a supply shock and the price to skyrocket. Stakers get a yield of 10 $BANANA per day, for the next ten years.
At the time of writing, 1 Banana equals 50$, so at the current market price, every day by staking a Kongz you earn 500$/day and 15.000$ a month. Yes, you read it right, mind-blowing.
Besides generating passive income, you can either exchange your $Bananas for ETH or you can burn a $Bananas to make your Kongz rarer or to breed it and generate Baby CyberKongz with different traits and rarities.
If you’re thinking about purchasing a Cyber Kongz immediately now, please note that the only type of Kongz that gives you access to the 10$Banana/day are from the Genesis collection, which has a floor price of 120ETH at the time of this writing.
And this is just one example. Other projects like Mutant Cats have pioneered other forms of staking and of backing their utility token. In essence, they have created a DAO where they take the money made through royalties earned from the secondary market and use them to buy blue-chips NFTs. These NFTs are kept in the DAO treasury and their value is fractionalized through the creation of a token called $Fish, which gets distributed to the holders who stake their Mutant Cats. Like with the Kongz example, $Fish generates passive incomes or can be burned to upgrade your NFTs.
Are NFTs the new Tulips?
In 1637, the price of tulips bulbs skyrocketed in the Netherlands. People started to believe that the tulip bulbs had an incredible value, pumping the price to crazy highs until it all came crashing down. Historians agree that that was the first speculative bubble in history. So are NFTs the new tulips?
I believe that the answer is simultaneously yes and no.
Indeed the market is hugely inflated by the number of new projects popping up every day and yes probably over 90% of them will go to zero. Furthermore, this blend of NFTs-meets-DeFi is bound to attract the attention of regulators, and these types of projects might be deemed security assets.
Even more dangerous than regulation that is notoriously slow to catch up, these projects and their tokens can quickly go to zero on their own much faster, unless they come up with new ways to generate utility. If the majority of the holders start to unstake at the same time because they get bored and the project doesn’t innovate fast enough, the secondary market will be flooded and the price of the token and the collection will go to zero. This excellent tweet by Wil explains very well the dynamics and risk of the tokenomics behind these NFTs projects.
It is also interesting to note that there is an inverse relationship between crypto and NFTs. Whenever the crypto market runs, the NFT space starts to shrink and projects see their floor price dump, as holders want to convert NFTs into liquidity. The opposite however is also true. When the crypto market is in a downward trend, NFTs pick up. After all, where else are crypto holders able to spend their coins given that you cannot pay in the real-life economy with them? Furthermore, currently there is no taxation associated with purchasing NFTs, no VAT or taxes to report (yet).
While the market is indeed highly speculative and oversaturated, on the other hand, I believe that this is just the beginning for NFTs, and that we are in the early adopter stage.
The announcements that Coinbase is about to launch an NFT marketplace, and that Twitter is implementing a verification system to be able to display your NFTs, will help in bringing NFTs to the masses and will make buying and holding easier.
The rebranding of Facebook in Meta and the upcoming push to the metaverse, while it gives me Black Mirror vibes, also will fast track the NFTs adoption, as you will be able to display the NFTs you own in the metaverse.
As it stands, the future in the NFTs space looks like a story of which only the preface has been written.
👉 📚 All materials and references I used for this article can be found here
The “Now” section
🎧 What I am listening: geneticist David Sinclair talking on the Lex Friedman podcast about longevity, what is aging and why we age, and why we live our lives running from the thought of death. According to Sinclair’s view, to tackle longevity we first need to bring medicine out of the “dark age” and truly embrace a data-driven approach that is based on personalized data through health tracking devices.
“Picture a future where you’re monitored constantly so you wouldn’t have a heart attack, you’d know that was coming.”
I have been a fan of biohacking even before being a crypto enthusiast, and working in tech I am always astonished at the way medicine, such a key field for the entire human species, feels left behind compared to the revolutions that are occurring in other sectors.
📚 What I am reading: a novel by V.E. Schwab called Vicious. It is the story of two anti-heroes, Eli and Viktor, that start out as close friends until things spiral out of control because of rivalry, madness, and the quest for power.
🥁 What I am doing: after completing my onboarding at Backbone, I am now building the product strategy and I am focused on hiring Product Managers and Product Designers to help us in our mission.
🧐 Question I am asking myself:
How will society change as the metaverse gains adoption?