NFTs and Digital Property Rights

NFTs are a much bigger deal than we realize

November 15, 2021Michael Nadeau
NFTs and Digital Property Rights

Hello readers,

This week we’re covering NFTs. I can’t stop thinking about NFTs. I’m convinced we’re poised to unleash a period of explosive creativity and open markets like we’ve never seen before. NFTs could be a big part of the story.

In this report, we’ll break down why I believe this to be true.

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You’re looking at #5731 from the now-famous “Bored Ape Yacht Club.” Interested in acquiring the original? You can have it for 29.56 ETH ($135,656.16).

The idea that a digital piece of art, anchored to a blockchain, can fetch six figures, (and sometimes 7 and 8 figures) is driving the average Jane and Joe to the edge of a conniption.

Who is buying these things?? Why does a JPEG have value??

And what in God’s green earth is going on here??

This is the reaction from the average person when they see headlines around NFTs these days. People are apoplectic. Their speechless. And they just don’t get it.

It’s understandable. And it’s also a representation of the surface-level *noise* in crypto.

This report will focus on the deeper *signal.* NFTs are a bubble today. But we also need to ask ourselves what NFTs actually represent so that we can map this innovation into the real world and into the future.

The answer: NFTs represent digital property rights.

This is profound. But it’s difficult to fully grasp what this concept means for a digital economy. We just know that it could be a really big idea.

Evolution of the Web

Web 1.0 (1990-2005)

The first iteration of the web represents web 1.0, or the “read-only” web. In the early days, users of the web could search for information and read it. But there was very little in the way of user interaction and content generation from the average Joe. Web 1.0 was open - anyone could buy a domain and build a website/blog. We just hadn’t expanded this idea so that anyone could easily “write” to the internet. That came via web 2.0.

Web 2.0 (2005-today)

Web 2.0 introduced the idea of read-write for users. This is when we saw social media websites start to pop up. Users could spin up an account on Facebook and immediately begin “writing” to the internet. You didn’t have to buy a domain and build your own site anymore. This allowed for more access, and massive network effects to form via Facebook, Twitter, YouTube, Instagram, etc.

The problem with web 2.0 is that all of these large networks are *closed.* These are walled-off data networks where the users do not control their content, their followers, or the IP created on these networks. The networks own it. If you own a domain/website - you own that. But if you own a Twitter, YouTube, FB, LinkedIn account - the platform owns it. You cannot take your account and your followers anywhere else. And if the platform decides they don’t like you anymore, they can ban you.

This closed-data architecture of Web 2.0 won out due the ease of use it afforded to end users as well as limitations in terms of the protocols of the internet at the time.

The impacts of these closed data networks are profound for the creators of content.

For example, musicians have no control over their work once it is on the internet. They have zero property rights. Middlemen (like Spotify) control distribution.

Per Spotify’s website (incredible that they advertise this), they have over 8 million creators with 13,400 currently generating an income of over $50,000. That is less than 2 basis points or less than two-hundredths of 1% of the creators on the platform earning a livable wage.

Something is really wrong here. And it’s not just Spotify sitting between the artist and the end consumer. Spotify pays the rights holders - not the artists directly. These are the record labels, distributors, aggregators, and collecting societies. Artists are downstream of these guys and gals.

Because these content creators cannot control their creations (which is just digital data), they rely on a maze of intermediaries and rent-seekers to get their work to the end-user. And due to this archaic structure, the artists end up keeping a very small portion of the value that they create.

A few more examples of how the closed data architecture of Web 2.0 impacts creators:
  • Apple takes 30% of all revenue from app designers for listing on the App Store

  • YouTube takes 50% of all revenues generated by their content creators

  • Salesforce takes 15% of all revenue generated by independent apps on their AppExchange

  • Twitter pays $0 to their content creators

  • Facebook pays $0 to their content creators

  • Instagram pays $0 to their content creators

  • LinkedIn pays $0 to their content creators

  • Uber and Lyft drivers earn a barely livable wage since they cannot work directly with their customers

In all of these cases, the users and content creators on these networks are creating real economic value. They drive the eyeballs to these networks. They are the network. But all of the economic value is captured disproportionately by the centralized networks and equity holders.

The reason for this is the fact that these creators do not have *digital property rights* over what they are creating. Web 3.0 changes this. 

Web 3.0 (Today - ?)

Web 3.0 (enabled by blockchains) allows for read, write, property rights, decentralization, and open permissionless information networks.

With Web 3.0, we introduce an internet owned by its users and builders, orchestrated with tokens as the incentive and bootstrapping mechanism.

We have finally discovered the native asset class of information networks. They are called tokens. We’ve been mismatching the Delaware C-Corp with networks all this time, creating endless strife and inequality.

Now we have a way to fix this.

Web 3.0 cannot be controlled by large companies. Why? The data is open. Anyone can access it. No walled gardens. And the data is much more secure than what these big companies can provide. Why? Cryptography. And decentralization. There is no single point of attack in the Web 3.0 world.

Furthermore, users and creators control their data. We can think of this as each of us having a private slot at the post office, except our private slot is on the internet now. We can open our slot and give permissioned access to others when needed, and then close it off again.

Meanwhile, the users and contributors on the platform in a Web 3.0 infrastructure actually own the network. This may sound grandiose and utopian, but this is exactly what blockchains enable.

Ever wonder why there is essentially zero marketing expense in crypto? Because these networks are owned by the users. They all have skin in the game. Which produces this organic marketing effort. Everyone wants to talk about the benefits and features of the things they own, right? In Web 3.0 we are also economically incented to do so.

All of this is enabled by digital property rights via blockchain technology.

NFTs are an expression of this.

Human Behavior around NFTs is History Repeating Itself

One of the things I find super interesting about NFTs is the perception around them by the average market participant. We can observe a lot of similarities to the early days of the web.

The early applications of Web 1.0 were basically blogs, newspapers, magazines.

We just took something really basic like a newspaper and moved it from the analog world to the digital world.

This did not seem spectacular in any way, shape, or form at the time. It didn’t fulfill the hype surrounding the internet. Why? Cell phones were not prevalent. And we certainly did not have the internet on our cell phones. We also had no idea that we would soon be building huge social networks and communities in the coming years. We couldn’t foresee an explosion of SaaS and e-commerce companies birthed by the same tech, creating massive value and productivity.

So, it was easy for a naysayer skeptic to look at the early Web and write it off.

We can observe this same behavior in the market today regarding crypto and NFTs.

At the end of the day, humans just happen to be really bad at imagining how various technologies can map into the future. There will always be many more dominoes to fall that we cannot see today. These dominoes will enable new and exciting use cases that are impossible for us to visualize today.

Therefore, when the average person looks at an NFT and dismisses it as a “useless and worthless JPEG” we have to take it with a grain of salt. This knee-jerk reaction is totally predictable and understandable. But these folks clearly have not thought through the power of digital property rights.

Don’t be one of these people. Rather, stay open-minded, humble, and curious. Being an ignorant, arrogant, skeptic is no way to go through life.

Use Cases & Industries

Digital property rights allow creators to control access to and ownership of the things they create.

Artists: Can create digital art (or upload non-digital art, creating a digital twin), anchor it to a blockchain, and create an NFT. The NFT will have the provenance of where that art came from, validating its originality. This piece of art could then be fractionalized by the buyer if desired. And if it was re-sold, this would kick off a smart contract which would automatically kick out a payment to the original creator. No middleman or trust is required for this execution.

We should anticipate digital art having significant value in the metaverse, where digital museums and cities are already underway.

Musicians: Same idea. Produce your music and then create a video or stream of it. Anchor that data to a blockchain. Create an NFT. Again the provenance of the data will show where it came from. And musicians can sell directly to their fans, cutting out layer upon layer of middlemen extracting fees while added little value.

OpenSea and Nifty Gateway are two platforms that are being used by artists and musicians today.

If you’re interested, you can explore some of the music NFT’s on OpenSea. 

Writers/Content Creators/Podcasters: Again, it’s all about pinning the digital data created by these folks to a blockchain. This creates digital scarcity and property rights. The digital asset is then commutable/exchangeable. We can also create permissioned access. Instead of going through book publishers, social media channels, and platforms like Spotify, content creators can work directly with their fans/end-users.

Community/Social Tokens: Socios is the first mover here. 24 NBA teams have already joined Socios as well as the New England Patriots and a number of leading European soccer franchises including AC Milan, Arsenal, Barcelona, etc.

The idea here is that these teams can work directly with their fans by issuing NFTs that have some sort of exclusive/premium benefits. For example, they can offer free food and drinks via the NFT and any fans holding the NFT would be able to use it for free concessions at the game. Or maybe they allow holders of the Fan Token to vote on a new uniform or create some other governance rights/interactions with their fans. Or maybe they offer some other promotion or benefit through the Fan Token NFT - like first dibs on playoff tickets or the like.

This creates a better, and more direct relationship between sports franchises and their fans, and ultimately more loyalty on both sides.

We should anticipate this concept spreading out much further than just professional sports teams. We could see a company like Amazon issue an NFT for their Prime users. This would allow Amazon to periodically issue some additional benefits to their best customers.

We could see companies like Disney follow in their footsteps.

This is a really big idea that could ultimately strip out a lot of the unnecessary middlemen sitting between fans/brands and their end users/customers.

If you’re interested in exploring further, Socios is the owner of the Chilliz token, which you can find on most major crypto exchanges (not financial advice).

Real Estate/Debt/Private Equity: an NFT can be created with basically anything that has a stream of revenue or coupon/interest payments. For example, a lease could be tokenized. This could then be split/fractionalized with investors buying into that stream of passive income. The lease payments would be kicked out to investors in the digitized lease instrument via smart contracts - automatically and with no trust needed.

Commercial Real Estate assets themselves are being tokenized.

We even already had an NBA player tokenize his future stream of income so that he could raise capital upfront for various business ideas. His future stream of income from the NBA then is paid out to his investors (the holders of the NFT) with interest.

Collectibles and Consumer Goods: Things like cartoons, baseball cards, stamps, dolls and toys, comic books, action figures, etc. NFTs are being made out of these things. Why? Because people like to collect stuff. And the world continues to move to digital. It’s that simple.

We should anticipate a future where you buy a pair of shoes on Nike’s website and they’ll send you the physical pair, and also the NFT. Why? You will likely have a digital closet (for the metaverse) and a physical closet. Think this sounds crazy? Nike is already moving in this direction.

Gaming: This is a big one. Every major gaming company is moving to incorporate NFTs right now. And the gaming industry is massive - $180bn revenues per year. This is almost twice the size of the global film industry and more than 2x the size of all North American sports combined.

Gaming models today are free to play with users paying for upgrading skills, dressing up avatars, buying weapons, enhanced animations, etc. The problem is that today, users do not actually own those add-ons. The platform does. Users are essentially paying to rent them. Not to own them. In the future (and today on Axie Infinity), these in-game purchases will be NFTs. Users will actually own them and be able to take them with them to other games. They will be able to trade them. They will be able to sell them. This will ultimately change the gaming experience and create gaming economies within these gaming networks. Users will be able to monetize their in-game skills and assets. 

In conclusion, digital property rights represent the next iteration of the internet. NFTs are an expression of this.

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