--:-- Host (Sonal): Hi, everyone. Welcome to the a16z podcast. I'm Sonal. We have some special new episodes coming for you soon in our new season. But given all the activity and interest recently in crypto and Web3, as well as holidays and upcoming art events, we are rerunning our episode all about NFTs from nine months ago, back in March, in case you missed it.
--:-- You can also find a curated list of resources to learn all about NFTs at future.com slash nftcanon. That list and this episode has something for everyone, from artists and creators and other builders to big companies and institutions, or just anyone seeking to understand or even just explain to others NFTs.
--:-- If you're also interested in DAOs, which we touch on briefly in this episode, we just recently published a list of readings all about DAOs. It's for anyone seeking to understand, build, and otherwise get involved with these decentralized autonomous organizations, which represent the future of community coordination, work, and much more. So we've curated resources for people at different levels of interest from dipping one's toes into going deep. You can find that at future.com slash DAO. That's D-A-O canon. Again, that's future.com slash DAO canon and future.com slash NFT canon.
--:-- And now onto this episode, we cut through all the noise around NFTs to share what precisely NFTs are, as well as the underlying crypto big picture before we dig into specifically what forms they take. Then we cover common myths and misconceptions, from confusing overlaps with other concepts, to tackling commentary like "it's just a JPEG," or that "it's just hype," to addressing the question of energy use. Also covering briefly how NFTs work, providing a quick overview of the players and ecosystem, and throughout, discussing various applications too.
--:-- My expert guests are Jesse Weldon, now of Variant Fund, and formerly co-founder of Media Chain Labs, which was acquired by Spotify, and Linda Shea, now of Scalar Capital, and formerly an early product manager at Coinbase. Both are good friends of a16z crypto. As a reminder, none of the following should be taken as investment advice. For more important information, please see a16z.com slash disclosures.
--:-- So let's just start with a quick set of definitions. What is an NFT?
--:-- Jesse Weldon: So NFT stands for non-fungible token, which is just a term used to describe a unique digital asset whose ownership is tracked on a blockchain. This can be a really broad set of assets from digital goods like virtual land and artwork to a claim on physical assets like real estate or clothing items.
--:-- Host (Sonal): What I heard you say there is not just digital because it can cover something physical as well that you can essentially represent as NFTs.
--:-- Jesse Weldon: Yeah, it's a really, really broad space. It's exciting to see NFT art really take off, but this covers a lot of different industries as well. So I like to focus on the digital side of things a little more and a metaphor that I would offer as a definition is NFTs are a way to make digital files ownable. Instead of a financial asset, you can now own a digital media asset on the internet. And that's why the file metaphor is apt. You can now own a JPEG, own an MP3. And what you're essentially doing when you create an NFT, it's sort of like metaphorically uploading that file to the blockchain such that anyone can track its provenance and attribution.
--:-- Host (Sonal): So Dixon described this in a recent blog post, very simply put as NFTs are blockchain-based records that uniquely represent pieces of media, or in your words, Jesse, a file.
--:-- Linda Xie: One more word to focus on is the "fungible" in the "non-fungible token," which is that you can represent these items uniquely. I just want to really emphasize, because again, when you think of a dollar that's fungible, or even a single Bitcoin arguably is fungible, it's something fungible, it's interchangeable, replaceable. It doesn't matter what dollar I have as long as I have a dollar. But in this case, something is non-fungible means it's super unique. And we can go into what that means in a moment.
--:-- Host (Sonal): But before we do, let's talk now about the underlying crypto aspect of NFTs, not the specific crypto protocols, but maybe more broadly, what are the properties of crypto? Because we don't want to make this conversation about crypto per se, but about how crypto enables NFTs. When you think about the physical world, sometimes it involves a notary, like a third party bank. It involves someone in the art world, like provenance tracking through certificates. This ability to own and track a digital file without a third-party player intermediary is key.
--:-- Jesse Weldon: That's right. You depend on the bank to maintain the ledger or the title to a property that you buy. There's some property registry that the state or the city maintains. So you're always dependent on a third party to track the attribution of ownership, how the title changes hands, how the bank statements get updated. And Bitcoin changed the game because it enabled this public decentralized ledger where no one party is in control. And yet each individual owner of a Bitcoin is able to verify their ownership using cryptography. As a result, you don't have to depend on a single third party to verify ownership.
--:-- Host (Sonal): Yeah. Middlemen are tracking ownership for people of all these different assets and they're taking fees for the service. They're preventing some people from using the platform.
--:-- Linda Xie: And what's really powerful with crypto is you have all these open protocols that you can kind of plug into each other. And so when you have NFTs, you can plug them into decentralized systems and be able to trade these NFTs with anyone in the world and have that be instantaneous. You can also imagine plugging into using your NFT as collateral. So let's say you have video game items that are worth a lot of money. You can actually imagine taking a loan out from them. And so NFTs on the blockchain allow anyone to permissionlessly own, issue, trade them.
--:-- Host (Sonal): And the other property of being able to track provenance, which has essentially a built-in secondary market to it, which is this idea that not only do you track the provenance, but you can actually track the financial benefits that accrue as a result of that built-in secondary market. This is particularly true in cases of digital artworks, etc.
--:-- Jesse Weldon: Yeah, the secondary resale of an asset can be programmatically constructed such that anytime the NFT changes hands, a portion of the resale value goes back to the original creator.
--:-- Host (Sonal): And by when you say programmatically, automatically, that is a distinct property of crypto, specifically smart contracts, that you can do that type of programmability of a contract.
--:-- Jesse Weldon: Yeah, it can be totally automated, totally transparent. Contrast that with royalties in the music industry, which is like a completely opaque system with many layers of middlemen that are each taking a cut, right? It's a wildly more efficient architecture. That's uniquely made possible by blockchains and smart contracts.
--:-- Linda Xie: The blockchain is really good at tracking the history of things. So now if you send me one Bitcoin, everyone can see that you have one less and I have one more. And the history of that transaction is forever enshrined on the blockchain. The same is true of non-fungible tokens in that when they're incepted or minted, they're signed by the creator using their cryptographic keys, which now enables anyone to see, okay, this file was signed by this creator or this person. That message is constructed in the same way any other cryptocurrency transaction is constructed. Thereafter, that NFT lives on the blockchain alongside all other transactions and everyone can see it. And so if that NFT changes hands and say, Linda buys my NFT, everyone can see I transferred ownership to Linda. And as a result, we start to build this very rich history of the interactions people have with media on the internet.
--:-- Whereas today, think about an image you see on Instagram. You could screenshot that, crop it, and then paste it on another platform. Say like repaste it on Facebook. And as soon as you do that, you break its entire history, its entire provenance. You no longer know who made it, what it's about, where it originated. And with this new sort of architecture, we can now have a Z access into the entire history of any piece of media on the internet. And through that channel, that information flows, value can also flow.
--:-- Jesse Weldon: Concretely for artists, this means an artist today who may have created a work 20 years ago, and that work completely appreciates in value, but the last owner is the only one who benefits from that. If the programmatic arrangement is that that artist continues to get value, they can always get paid on this built-in secondary market. Like if it later becomes millions of dollars versus $500 for a painting, then you're getting money back each time it is sold, which is not possible before.
--:-- Host (Sonal): And I think important to note, that's just one of the possible arrangements that can exist when the rules around monetizing creativity can be expressed as code by any developer and any creator on the internet.
--:-- Linda Xie: The ownership history is really important. The ownership history is something that is really uniquely accessible on the blockchain because everyone can see and therefore some items might be more meaningful to certain people. Let's say like Magic the Gathering has a tournament where this deck of cards actually won this tournament. You might want to buy these set of cards because they're historical and the winner of these games actually used this deck to play. From the art perspective, just imagine your favorite musician or creator owning a piece of art. And now that ownership is just tracked on the blockchain, that piece of art might become more valuable to you because of who's owned it in the past.
--:-- We also have a lot of projects that are working on fractionalizing NFT art. So splitting up these NFTs into multiple pieces and these individual pieces are also tracked on the blockchain and you can trade them through decentralized exchanges. So it's really powerful when you can plug these NFTs into all these different crypto protocols because in a traditional system, these middlemen aren't plugging themselves into all these other companies and middlemen. You can kind of freely do whatever you want with these NFTs, which I think is a really big difference.
--:-- Jesse Weldon: Yeah, I think it's important to contrast the way NFTs work to the way the traditional web works. So with social media today, when you share a file or share a piece of media, you upload the file to the platform. And what's actually happening under the hood is you're copy-pasting ownership of the file to the platform. What I mean is that somewhere along the way, you signed a terms of service that allows for the platform to monetize that piece of content as they see fit. And maybe they give you a cut of the revenue, maybe not. But the platform gets to make that call. And they also get to make the call on how that content is consumed. And there's not a whole lot of innovation going on there because any developer who plugs in to try to innovate has been shut down in the past.
--:-- Now, contrast that to NFTs. And I'm going to run with this metaphor of uploading a file to the blockchain.
--:-- Host (Sonal): Keep going. I love someone who owns a metaphor. Do it.
--:-- Jesse Weldon: Okay, so with this metaphor, if you're uploading files to the blockchain and then those files become NFTs and they behave in the way that other crypto assets behave, that means that they're permissionlessly accessible to anyone anywhere with an internet connection. The implications are that any third-party developer can then innovate on the way that media is consumed, like how the audience sees it, how people can interact with it or program it. So one way to think about what's happening with NFTs is we're building this universal open media library on top of which any developer can build the next Spotify or build the next Instagram or build the next Facebook. And when there's a lot more competition, there's going to be a lot of benefit to consumers and likely to creators as well. Because as Linda mentioned, all of this can happen without the traditional middleman taking a cut of the value that's flowing between the creators and consumers.
--:-- Host (Sonal): That's great. Let's get a little specific though. Let's actually talk about the forms NFTs are taking specifically. I think this is a great place to help tease apart what's hype, what's real, as is the premise of this show. And so far, I'm actually having a hard time. And I have someone who's been covering this space. I mean, Bitcoin since very early on, Ethereum since very early on, NFTs since very early on. And I am honestly confused myself. So maybe you guys can just help break it down.
--:-- Just to quickly recap, Jesse, you're saying any media file. Linda's saying any good, digital or physical, that leaves pretty much anything. So specific examples include things like art. It can be in games, in music. There are audio NFTs. This has been really interesting to me lately. There are blog posts. Like I see people on our friend Dennis's site talking about making NFTs of blog posts. Brian Flynn wrote about token-gated newsletters. And another interesting example recently, it was self-proclaimed first, but likely true. Someone wrote about how they created the first ever tokenized crowdfunded equity research report. Can you guys just quickly help tease apart what is and isn't an NFT? It seems like everything is.
--:-- Linda Xie: I really think that anything in the world can be an NFT, as in anyone creates something that is unique that can be owned. The problem with physical goods is that you do have to have someone custody it. So there is a process behind that of having to make sure that you can audit that in the real world and maybe multiple people own it and it can't be moved just by one person. So there are pieces to that. But otherwise, I find it to be an extremely broad category.
--:-- We've seen really cool things come about where we've had the token-gated newsletters, which you mentioned, basically needing to have a certain number of tokens in order to access this newsletter. And people are doing token permission chats where these tokens are required to enter the chat room and start talking. So you know everyone has a level of skin in the game. You have to own a certain amount of tokens in order to enter these groups. It proves that you have some sort of ownership into this community that can be adjusted over time. The idea is that even one day that there could be DAOs formed where token holders can vote on how many tokens are required to enter this newsletter or chat group or something. And that piece, it's kind of tangential to NFTs. I don't necessarily think that social tokens themselves are NFTs because sometimes people are creating these tokens that they've minted like a million of them. But if the creator of this group is issuing individual badges or unique items within that, then that can be an NFT.
--:-- Host (Sonal): Can you say more on what you mean by social tokens?
--:-- Linda Xie: Yeah, social tokens are just a really broad category of tokens that are issued by individuals or communities. So sometimes other terms are used like personal token, community token, creator token, but social tokens kind of the term that encompasses all of it. And there are just a bunch of different experiments happening in the space. So we've seen people tokenize their time. So one of these tokens equals one hour of their time and that becomes freely traded. We've also seen someone like RAC, who is a Grammy award recording artist, tokenize his social token. And his token holders get access to this private Discord group. And then they receive all these additional benefits. And he retroactively distributed to his supporters. So this is a way that creators can interact with and reward their early supporters. So it's a really broad category and it can really be anything associated with the individual or community.
--:-- Host (Sonal): And how are social tokens similar and adjacent to NFTs? And then when is it not NFTs? Can you help distinguish there just to help the understanding of what is and isn't an NFT?
--:-- Linda Xie: Yeah, sometimes social tokens can be NFTs in that a creator is issuing some unique piece of artwork directly to their fans. But in a lot of cases, social tokens can also just be fungible tokens. So like RAC token, they're all fungible. So you can basically hold a certain level of them and that can always be traded and bought back. And it doesn't really matter which RAC token you're purchasing. So those are more adjacent. And I think the reason why social tokens and NFTs get lumped together a lot of times is just because it enables the creator economy, enables creators to engage with their fans directly. And so these are often tied pretty closely together.
--:-- Host (Sonal): Right. But basically the bottom line is, if it is fungible, it's not an NFT. And of course, if it's non-fungible, hence non-fungible token, then it is an NFT.
--:-- Jesse Weldon: Yeah. I think the line between fungible and non-fungible tokens is blurry for a reason. And that's because the interplay between the two is enormous. You can take a non-fungible token and turn it into fungible tokens by fractionalizing it. And then you can make those fungible tokens, which represent a piece of the original NFT. You can make those into a social token. So there's this token called B20, which is a fungible token. And it represents a claim on some of Beeple's NFTs, which an investor bought and essentially fractionalized ownership to. And now that that B20 token exists, it can be programmed into all sorts of other values. So in addition to owning a piece of a Beeple, you can imagine some third party spinning up, say, a Discord server and saying, you need a B20 token to come in here and hang out. That's an example where it started with a non-fungible token, Beeple created it. Then a collector bought Beeple's non-fungible token, fractionalized it into a fungible ERC20 token. That's the B20 token. And third-party developers can remix and add new experiences. Linda touched on all this, but the interplay between the two is important to note that you can easily take a non-fungible token and fractionalize it into fungible tokens that then can become these social or community tokens. And so that's a fun design space to explore.
--:-- Host (Sonal): I mean, we're talking so far about kind of digital versions of what already happens in the real world, being able to do things in different ways. But if you think about what's not possible right now in the real world, the idea of fractional ownership is super important and goes through the things that crypto can uniquely do. Because right now, if you want to fractionally own an artwork, I mean, I guess there are some very kludgy websites where you could go and kind of combine resources with somebody, but guess what? You can't really split a physical artwork. So it kind of reminds me of that story. I don't know, it was like a Bible story about like splitting the baby, like who's a real mother. But the point is, you can enable fractional ownership.
--:-- I still am stunned at this idea with Top Shots that you can essentially buy and own a moment, a favorite hit moment in a physical sports game. And by the way, Linda, I've been meaning to text you about this, but I've been addicted to watching "Crash Landing on You," the K-drama. Honestly, when I think of all these amazing moments in a show like that, I know this sounds nutty, but what if people could bid and own moments in their favorite TV shows as if it's theirs? Even if millions of people can watch it. Like the idea that you can own it and it's part of your identity is so freaking awesome. That's what I love about crypto. So you can have these concepts that you never really would have thought about otherwise, about being able to own moments in media and people's lives. Imagine YouTube creators streaming what's happening to their life and being able to own really exciting moments of it. I mean, there's so much possibility there. It's really exciting to see people become so creative with NFTs and what you can own.
--:-- On that note, let's actually switch to talking about what's overblown or not and tackle some common myths and misconceptions. Everything from energy to whether it's a hype cycle. And of course, we'll keep talking about the applications, but let's first dig more deeply into what it means to own something digital. Start with this common phrase: "It's just a JPEG." How would you guys address that comment? Like, oh my God, someone spent $69 million for just a JPEG? I mean, Jesse, you're saying it's a file. Guess what? On the internet, files are pretty worthless and infinitely replicable.
--:-- Jesse Weldon: I would say that the number of times a file has been reproduced on the internet is directly correlated to the value of that file's NFT. Meaning the more times a piece of media gets shared online, the more social value it has. To make this concrete, it's helpful to think about a very well-known piece of traditional art like the Mona Lisa, where the Mona Lisa has been reproduced probably a zillion times. It's on every t-shirt, every postcard sold at the Louvre. You can see it anywhere on the internet, yet there's one Mona Lisa in the Louvre Museum. And ownership of that piece of artwork is incredibly coveted, incredibly valuable.
--:-- Host (Sonal): I have to admit, I'm getting a little tired of the Mona Lisa analogy, but it is a useful one. The key point, what I really heard you say, which is so counterintuitive, is that something is more valuable the more that it is replicated. And in fact, it just makes me think of how in general, as the world of the web became more about abundance versus scarcity, the long tail is that you can have infinite choice on the web. It is really fascinating how people have been when they went past the limits of the blockbuster shelves in the physical goods world. It's interesting that Netflix would do things like binge seasons and drops that kind of created this digital scarcity, like a limited edition effect, like this thing is going to be on for three months and then it disappears. So it's another analogy of this interesting relationship between something not being necessarily rare or scarce, and in fact, even infinitely replicable in the case of files and JPEGs. But you can enforce this digital owning or even a piece of it if you want to go into the fractional ownership bit. And that is incredibly unique.
--:-- Linda Xie: That's the idea. You're not owning to try to be the only person who can access a given JPEG or piece of media. Rather, you want to own the piece of media that everyone else sees. Memes travel the internet at a rapid clip. They get shared infinitely. You can now own a piece of internet history or the most viral meme. And I think very soon we'll see that these owners are credited socially on platforms where that work is distributed.
--:-- We're seeing that play out with CryptoPunks, which is just one of the earliest NFT projects. And we saw two CryptoPunks sold for $7.5 million each. One of the sellers being Dylan Fields, who's the CEO and co-founder of Figma. And what's really interesting about this is, yes, anyone can just copy this image.
--:-- Host (Sonal): He himself, sorry to interrupt you, he himself could copy his image because he had it as his profile photo for a while and he had to like, he didn't have to, but he chose to take it off his Twitter profile, which I thought was so funny, but keep going.
--:-- Linda Xie: Yeah, exactly. So anyone can copy this, but if you actually look at the CryptoPunk NFT itself, you'll see who owned this. And the fact that somebody had owned this so early on, it's almost become the status symbol where people want to demonstrate that they can prove their ownership really early on in this space. And so that ownership history also really matters. Being able to discover an artist or creator really early on and being one of the first supporters and having that tracked on the blockchain. Future times when that is sold, you can prove that you were this early adopter and that is very valuable to people.
--:-- Jesse Weldon: There's a great analogy I heard to extend what you said even further. But basically, if you think of the placard next to an artwork like at MoMA or some famous museum, it tells a description of what the art is, the materials, the date, the artist, if it's not someone anonymous, and then it says at the very bottom, sometimes in very small letters, who owns it or who it's lent by, someone on this collection, so-and-so. And not everyone pays attention to that because most people just care about the art. And then some people actually care about who owns it. But now you're doing that exact same thing, but on the internet where the whole world can see it, not just like going physically to MoMA and seeing it, or even to use my analogy, Mona Lisa, and seeing it in the Louvre. It's like, not only can you have that kind of insider notion of the ownership, but you can make it more outsider facing by letting everyone see it. That is pretty powerful.
--:-- Linda Xie: Yeah, and developers are going to lean into that because all that data about who owns it, where it came from, what its history online is, that's just an API call away. And right now, again, it's very difficult for developers to find all that information on Web2 platforms because the history of media is not tracked architecturally in the way that blockchains track it. So it's like 100 times easier for developers to surface that information. And that's why I think you'll see that little placard in the museum. You'll see the digital equivalent of that on all social surfaces in the near future.
--:-- Host (Sonal): Did you guys see Matt Levine on Twitter? He said this line that NFTs are "a new form of tradable ostentation rather than a new form of tradable ownership." Did you guys have any reactions to that?
--:-- Jesse Weldon: I mean, ostentation is one of the reasons people might collect NFTs, but it's not just the speculative value or being ostentatious about being the owner. Increasingly over time, I think owners of NFTs will start to realize more and more sort of compounding utility as developers build new spaces for you to bring your digital property. For example, today, you can buy a piece of digital art as an NFT, and you can bring it into a virtual world like CryptoVoxels or Decentraland and display it there. And that's a very early example of a third-party developer who has nothing to do with the creator of that NFT being able to build a new virtual experience. That's just the tip of the iceberg. Any third-party developer can then build on top of CryptoVoxels because it too is open source and permissionless. And so what you start to see is this sort of Lego block approach to building new experiences where developers can build more with less and innovation compounds much more quickly. And so that statement undervalues the possible utilitarian nature of being an owner.
--:-- Linda Xie: Yeah, I don't really agree with that statement because I think it dismisses a lot of these cases. And if we even talk about the more traditional stuff like NFTs representing tickets or financial assets or real estate, these are just more efficient ways of transferring and without having as many paperwork and middlemen involved. And so this is a net benefit to society versus people trying to display their wealth.
--:-- Host (Sonal): I'm so glad I asked you guys because again, the premise of the show is to tease apart what's hype, what's real. And it is interesting that someone whose work I deeply respect has an interesting observation and to hear you guys push back on that. What do you make of the comparisons that people are making to the ICO boom? What would your response be to that? ICO boom being initial coin offerings playing off the term for IPO, obviously initial public offering. But in that case, it was more risky, people argued, because an ICO was before the thing even existed. Like at least in an IPO, the company exists. By the way, our friend Nick Tomano made the simple observation that an NFT is a concrete product, a digital good, not a promise about the future, which I thought was a good argument.
--:-- Linda Xie: Yeah, I like that. Any thoughts on what's hype, what's real on, oh no, we're in another ICO boom? It's like tokens all over again. It just reminds me a lot of 2017 when a lot of people came into the space and the word ICO was thrown out a lot and there was definitely a lot of hype around that. But through that process, a lot of really incredible projects came out of crypto. And a lot of people who joined the space ended up staying because they saw that it was a lot more than just get rich quick. And there were communities and really unique ways of creating value in this world. So, yes, there are a lot of people that have come into the space, want to just make some money off of it. But there are a lot of really creative people that have joined the space that are going to stick around and experiment with what's happening and really build some things that we have just never seen before. And it is nice that this time it's artists who have just worked so hard and are getting rewarded for this type of work. Someone like Beeple, who has been working on this craft for so many years, this is something that people are valuing.
--:-- Host (Sonal): I mean, on Beeple specifically, his work was digital from the beginning anyway, but he's essentially creating, and this goes back to the definition, this kind of one-of-a-kindness because it is an NFT. It is unique and trackable that way. I do love that. But there's no question there's a hype cycle going on where at that moment, whatever the Gartner curve or whatever framework you want to use. There's always a trough of disillusionment phase. I guess I just need a little bit more to understand, okay, yes, this is very exciting. But right now in this moment in time, how do we assess that it's working or not working?
--:-- Jesse Weldon: I think the question you're getting at is what is valuable?
--:-- Jesse Weldon: Which NFTs are valuable? And the answer to that question is kind of like answering the question, what is art? My answer to that would be whatever the beholder thinks is art. Similarly, whatever the market thinks is valuable is a valuable NFT. That's why you're seeing such wide-ranging experiments in what can be transacted as NFTs, from blog posts to digital art. There are a lot of niche groups that want to own an item that's culturally relevant to them for various reasons, whether it's for speculation, the idea that they might be able to resell it in the future, or because they just want their name on this digital placard next to the item to say, "I supported this creator." So there are a lot of different reasons people might value NFTs, and there are a lot of different subcultures and value systems that comprise this market. That's why it's expanding in all directions.
--:-- Jesse Weldon: The buzz is not necessarily a bad thing. One of the things that came up a lot in the early days of NFTs, starting with CryptoKitties, was the scaling problem. Ethereum was not ready for that level of excitement yet. It pushed a lot of solutions into thinking about scaling. Some of the hype cycle in 2017 actually led to good infrastructure improvements and the installation of things we needed.
--:-- Host (Sonal): It definitely makes me think that MediaChain was just a bit too early, actually. I remember even before you guys founded MediaChain, always having this problem in the creator world of having to track libraries of digital assets. It was very difficult to find out because the information was not coupled with the JPEG itself. Forget even who owns it and who to pay. You don't even know who made it. This is true of memes, everything on the internet, which is about remix culture and extensibility and composing things and combining them.
--:-- Jesse Weldon: A lot of the ideas being realized today around NFTs are ideas we were exploring back then. There were two critical things missing from the ecosystem at that time. One was the ability to easily create a token. That's uniquely enabled by smart contracts and smart contract platforms like Ethereum and Flow. The other thing that was missing was markets for these digital assets. We now live in a world where roughly 10% of Americans own cryptocurrency. The idea that digital assets have value is a prerequisite for digital media assets like NFTs having value. To Linda's point earlier, the 2017 market was a prerequisite for the NFT market today. The markets had to come first. They're volatile and they drive speculative frenzies, but they also drive infrastructure and mental models that stick.
--:-- Host (Sonal): That's a perfect segue to the next thing I wanted to talk to you guys about, which is the broader taxonomy of the players and the ecosystem that's already emerging around all this. Before we do, let's quickly talk about how they work to help make it concrete. Step one, two, three to minting an NFT, trading it, doing whatever.
--:-- Linda Xie: Step one would just be deciding to put your work as a representation on the blockchain. Minting involves interacting with the smart contract and submitting that. There are different marketplaces that try to make that really easy for you. Some will have a button you click to mint. You can select different attributes like the name of the piece of artwork and the royalties involved for secondary sales. A lot of these will make it super easy to go through that process. I think the hardest part is actually getting set up with a wallet and onboarding yourself into accepting cryptocurrency. But there are marketplaces now that make it accessible. Some marketplaces might have you go through an onboarding process with due diligence on the artist to make sure it's real artwork and not copied. Others are just like, "Hey, anyone can mint this." It's quite a spectrum right now.
--:-- Host (Sonal): That's great. But I got to set up my MetaMask and what does that even mean? Can you guys explain the wallet part too? Because one theoretically does not necessarily have to actually interact with cryptocurrencies directly. If you guys could break down that bit quickly.
--:-- Jesse Weldon: Sure, I can take a step at that. The concept of a crypto wallet boils down to what's called the public and private key pair. You have a public address on the blockchain where your assets are associated. So Sonal has a public address, and you can tweet that out and say, "Hey, I'm Sonal. Here's my public address. Here's all my stuff." Your Bitcoin can be at that address. On Ethereum, you'd have a different address, and all your stuff on the Ethereum blockchain would be associated with your public key. Then there's the private key. The private key is what unlocks the transfer of assets in your wallet. You need the private key to unlock stuff at your public address. That's the concept of a crypto wallet.
--:-- Jesse Weldon: MetaMask is the most popular wallet for Ethereum. It's a browser extension you can install on any popular browser. It sets you up with a public address for the Ethereum blockchain and a private address. What's critical to note is that cryptographic key pair doesn't belong to MetaMask. It belongs to you. MetaMask never sees the key pair. They don't have any of the information. It's yours. That comes with a lot of responsibility because if you lose your private key, you lose all your stuff. It's kind of like cash in your wallet. That's why it's called a wallet, even though it's a bit of a misnomer because you can only do so many things with your physical wallet. I think the reason the name stuck is that your cryptographic wallet behaves like a physical wallet in that if you lose it, all your cash is gone.
--:-- Host (Sonal): Okay, so now continuing the process. We understand how the wallets work, the browser extension for the wallet. Some platforms can let you literally create, sorry, mint an NFT because you can create the artwork in any form you like or whatever the object is or digital asset or file. Now, what happens after you mint it? What's the next thing that happens?
--:-- Linda Xie: You can put a name on it. You can specify program terms, what kind of royalties. Different systems may have different options. Some of them take 10% themselves. Others you can program in as this increases in value. I've seen people do creative stuff like the artwork reveals itself the further you go along the bonding curve. They're doing creative stuff with the art itself interacting. It's not just a static piece of art that happens to be going through this chain.
--:-- Linda Xie: After minting, you can do different things depending on what you want to do with your NFT. Once you mint on these marketplaces, you can list it and share the link with other people to have them bid on it. You can set a price, have people bid, and accept different bids. Or you could just create it for yourself. Let's say you want to make a world in virtual land and display your artwork in a virtual art gallery. There are all kinds of different things you can do with it if you think this piece is really valuable. I've seen people talk about swapping NFTs, different artists swapping with each other. I've also seen people put up their NFT as collateral and get a loan for it. You can really do whatever you want with it.
--:-- Linda Xie: The most common basic thing I've seen is people selling their artwork and someone purchasing it, then maybe storing it on their virtual land or having it displayed on their profile. There's a social element to it. People talk about it a lot like, "Hey, I just purchased this piece of art," and they'll talk about it on Twitter. There's an app that aggregates purchases from all these different marketplaces and displays it almost like an Instagram feed. You can have a social element to who's purchasing what, who owns what, and have people form communities around it.
--:-- Host (Sonal): I've often wondered if there will be a Pinterest for NFTs where even if you're not the owner, you can kind of collect it. One of the things I use Pinterest for is aspirational stuff I would never buy. Having Pinterest boards is a way for me to collect it in a different way. I wonder if that would happen, and if people would create fees for doing that as well. I don't know if you guys have seen that yet.
--:-- Linda Xie: I could see something like that happening. Also, the fractionalization aspect to it, you can cut it up into really tiny pieces. Maybe people can own just a tiny element of this piece as you're looking through your Pinterest board.
--:-- Host (Sonal): What you guys just described as all these different steps, there's a whole ecosystem of players that have now emerged and are continuing to emerge. We've already named a few: sites for showcasing an online collection, displays like online galleries, curated galleries, marketplaces, other tools for managing details. How would you break down the taxonomy? Give me a map and the terrain.
--:-- Jesse Weldon: There are vertical marketplaces, right? Marketplaces for curated art or for certain types of collectibles. Then there are horizontal marketplaces like OpenSea, which is more of a search box for all NFTs. The reason they can do that is all these NFTs live on the blockchain. It's completely open. They can query the blockchain and aggregate all of them. You can find literally pretty much every NFT on a horizontal marketplace like OpenSea. That's great because not everybody knows how to interface with crypto. This is like the way the web itself evolved.
--:-- Host (Sonal): Right, and each of these kinds of marketplaces, both vertical and horizontal, more often than not allow creators to mint on the platform. Simple way to think about it: there's both supply and demand, and you can either get it in the vertical form, which is specialized, or horizontal, which is sort of everything.
--:-- Jesse Weldon: One really interesting phenomenon happening on the demand side of the market is you're starting to see these really interesting collector organizations sprout up. Crypto makes it really easy to send value, as easy as sending an email. As a result, people are pooling value in interesting ways to participate in this market. One really cool experiment is this thing called Flamingo DAO. DAO stands for Decentralized Autonomous Organization. The core idea is you can pool resources with anyone with a crypto wallet, send money into this smart contract that acts like a bank account. That bank account can go and buy NFTs. The group can buy NFTs. That looks like something like a fund, or you could call it a gallery that's acquiring work. By being in that collection, the creator is gaining distribution to the audience of collectors and investors who pooled resources in the first place. That's another really interesting phenomenon that's uniquely crypto enabled. I think we're going to see a lot more of that.
--:-- Host (Sonal): I do too. I love that because one of my favorite things in the creator economy in general is the way collectives can emerge both ephemerally and permanently. I have a whole tweet storm about this, but I think it's super powerful to think about what happens when you unlock that kind of coordination. Keep going.
--:-- Linda Xie: I mentioned vertical and horizontal marketplaces. There are also adjacent media platforms. We touched on Denis's Project Mirror, which is a blogging platform where anyone can mint their blog post as an NFT.
--:-- Host (Sonal): The question, why would you want to mint a blog post or an essay as an NFT? Yes, thank you for answering that.
--:-- Jesse Weldon: If you're an investigative journalist, there aren't a lot of great tools for you to monetize as an independent right now. Subscription can be less conducive to long-form journalism. What's cool about Mirror is, similarly to the prior idea of people pooling money, it allows for a writer's audience to pool resources in the form of a crowdfund. "Hey, I want to see this investigative report written. Here's the money to do it." As a participant in that crowdfund, you don't just become a patron of the creator or the writer. You become an owner, a fractional owner of the NFT that they produce when they publish that blog post.
--:-- Jesse Weldon: You can analyze the psychology of one of these backers, but I think it boils down to two things. There's the idea of patronage, being a patron of this creator and helping them get the work done. But there's also this vague notion that in the future, if this piece becomes very valuable, you'll be on the cap table of the post. Elon Musk published this famous blog post, "The Secret Master Plan of Tesla." Just recently, we saw Jack, the founder of Twitter, sell his first tweet ever as an NFT for millions of dollars. You can see this idea going a lot further where new big ideas enter the world as blog posts, and people crowdfund those big ideas that they want to see happen in the world and become part owners in the blog post that becomes the canonical representation of that idea.
--:-- Host (Sonal): I saw Dylan Field post a thread a couple of days ago that I thought was wonderful, talking about some of the extensions of ideas around NFTs. He described "proof of fandom." We have lingo in the crypto world of proof of stake, proof of work. It was neat to have this idea of proof of fandom. It ties back to this idea of monetizing moments as well. In this case, you're talking about ways for creators to have their fans. One thing we've talked about a lot on this podcast, I did a podcast with Kevin Kelly about how you can actually invert the model of payments where it's not a creator selling, but buyers and fans monetizing their attention. The idea of that is super interesting because you can imagine fans and collectives buying and owning these things. Dylan even went so far as to point out "community as art" in that example, which I thought was super interesting.
--:-- Linda Xie: That's an area I'm really excited to see. I haven't really seen too many people working on this yet, but the idea of having so many DAO members being able to vote on how this artwork looks and have it be collective artwork. I was in a DAO called Faint Fame. We would vote on different parameters of the design of clothing items. Then this DAO would manufacture them and ship them to people who purchased them. You had this group of people deciding what the design looks like. You can imagine that anyone can join these DAOs. It could even be anonymous people from all over the world. You can collectively create or invest in things together, which is really exciting to me.
--:-- Host (Sonal): Connie Chan, our partner, has also talked about influencer monetization. She talks about what happens in China with live streaming and how a lot of fans will ask their audience, "Should I wear this today? Should I do that?" Some of it can veer on dystopian in some models, but in many ways, it's also incredibly empowering that you can choose to monetize the things you want to and have models for doing it. Right now it's the platforms that take all the money. What you just described is that you could essentially do the exact same thing, but in this sense, you're creating not just artworks, but you're actually creating collaborative decisions around a person's wardrobe or a fashion line or however they want to develop products, even physical products based off of that. I think that's super fun and interesting too.
--:-- Jesse Weldon: Just one last thing to add there along the lines of proof of fandom is this idea I've been calling "patronage plus." On Web2, it's very easy to become a patron of an artist or creator whose work you admire by subscribing to them on Substack or paying a subscription on Patreon. That gives you access to their work and allows you to be a financial supporter of the work itself. NFTs allow you to do the same thing. In some cases, the NFT can give you access to a Discord or a newsletter, and we touched on that. But the "plus" part of patronage plus is what's new and uniquely enabled by digital ownership. That is the possibility of being able to profit in the future from the resale of that ownership to someone else, maybe as the creator's profile raises or the demand for their work grows. I think that "plus" is really key because it creates a very strong incentive to become a patron in the first place. Patronage plus may end up growing the market way bigger than patronage that we saw on Web2.
--:-- Host (Sonal): What's so amazing about that is the golden age of art. Many argue, like in the Renaissance era in Italy with the Medici family, that patronage in the first place is what unlocked that. What you're describing is a more democratized form of patronage. The "plus" is a way to have this knock-on effect over time, which is really investing and democratizing in a way that is accessible to everybody. Because it's not just the rich Renaissance families that can do the funding of the arts.
--:-- Jesse Weldon: Yeah, it mixes patronage with capitalism.
--:-- Linda Xie: There's a DAO called Yield Guild Games that I've been participating in and active in. There have been people in the Philippines who have been earning a living wage playing. Like Jesse talked about, you have these DAOs being able to own NFTs. They're a DAO of gamers from all over the world participating in blockchain games. There's one really popular game called Axie Infinity. You have these Pokemon-like creatures that battle each other. Each of these are NFTs. You can battle and earn currency in this game. Sometimes these Pokemon creatures might be too expensive because they're so valuable. What we've seen in this DAO is players within the DAO leasing out NFTs to other players. It's a really cool collective of people being able to join this group of gamers.
--:-- Linda Xie: One thing they're doing right now is this DAO is investing in virtual land in the games they're playing because they're experts in these games themselves. They're actually developing the land in these games as if in a physical world of developing real estate and making it better. The idea is that they're going to be owning tons and tons of virtual land.
--:-- Host (Sonal): One quick thing. Again, the DAO is a decentralized autonomous organization. People have often talked about crypto economies over time enabling these sorts of organizations because the history of the firm is very much entrenched in a physical world, not a digital world. But why do these things have to exist as a DAO? What's the point of that? I'm asking because I want to know why a DAO specifically.
--:-- Linda Xie: I don't think everything has to be a DAO. There are plenty of times where a company makes a lot more sense. But what's really interesting about DAOs is there's a lot more transparency. The funds managed by the DAO are completely transparent. Anyone can view where funds are being moved to and from. Anyone can view the balance at any point in time. As you can imagine, with a traditional company, you don't have access to the balance sheet at all periods of time. They're just released on a quarterly or annual basis. DAOs even the playing field and create more transparency. There are lower barriers to entry in a lot of cases. You don't even have to reveal your identity. It would be really hard to join a company where no one knows who you actually are. That fits very closely with the ethos of crypto, of a global, open nature.
--:-- Jesse Weldon: And by the way, to be very clear, we don't mean identity as in anonymous because you're pseudonymous technically. People can actually trace who you are without actually knowing who you are.
--:-- Host (Sonal): So now I'm going to help you guys break down even more misconceptions for me. We talked about "just a JPEG." What's so unique about a JPEG? But there are actually a lot more misconceptions, especially given recent buzz. All this commentary about the energy, the minting using all this energy. This is obviously an artifact of people thinking in terms of Bitcoin, which can be energy intensive. Can you help clarify the energy question when it comes to NFTs?
--:-- Linda Xie: I think there are a lot of misconceptions around that. Proof of work does require energy, but not every blockchain is proof of work. Proof of work involves physical miners actually verifying that these transactions happened. It's really energy intensive because you have to prove that you're expending some sort of work to produce this output. In Ethereum's case, they're migrating from proof of work to proof of stake, which is the equivalent of virtual mining. Rather than spending $1,000 on mining equipment, you're taking that $1,000 and locking it up into the system and being randomly selected to verify based on the capital you put in. It's the virtual aspect of mining, and you don't have to have the physical ones expending energy. Increasingly, we're also having more movement towards layer two, protocols built on top of Ethereum, because people want to be less energy intensive when it comes to verifying ownership on a blockchain. I think there's going to be less of that narrative going forward.
--:-- Jesse Weldon: Even proof of work mining gets more of a bad rap than it deserves. It's certainly true that it consumes a lot of energy. However, a lot of the miners doing proof of work locate in areas where there is latent capacity. Renewable sources of energy that are untapped, like hydropower, there's excess demand, so it goes into mining. For example, there are natural gas emissions from oil fields. That gas is otherwise just going into the atmosphere, but instead can be burned to produce proof of work proofs and earn Bitcoin. I'm not defending this practice, but I'm noting that a lot of these emissions are either latent or a large part of the energy mix of proof of work mining is from renewables. That's part of the conversation that's under-discussed.
--:-- Host (Sonal): I'm so glad you brought it up because the whole point of the show, again, is to give the nuance that may or may not exist out there.
--:-- Jesse Weldon: I also think a lot of the noise about the energy consumption of NFTs really fails to take into account the relative measure of energy consumption more broadly. If you think about something like Art Basel, there are a lot of very rich collectors who fly private to Art Basel every year to collect work. I don't know what the emissions of all those private jets is, but I would expect it's a lot of CO2. Getting into the game of quantifying the specific emissions of an artist's work is a very complex topic that's underappreciated in 140 or 280 characters on Twitter. When you say, "Oh, this NFT caused X amount of CO2 emissions," well, what about all the free ports? What about all the private jets flying to Basel every year? It's a very nuanced topic. I don't think it's fair to creators for just using these new tools, which are becoming more and more efficient, to shut it down on the basis of this very headline-grabbing relative value measure.
--:-- Host (Sonal): That's fantastic. By the way, I have been to Art Basel Miami, not the one in Switzerland, in 2006. I did not fly in a private jet. I was a grad student. I did not have that much money. But yes, I agree with you that it would be a very slippery slope.
--:-- Linda Xie: I also saw a tweet by Andrew Steinwald saying that actually these digital arts are really environmentally friendly in that you're not buying all these physical supplies like cotton for canvases, wood for easels, and oil. Then you have all these shipping costs of moving this artwork to other people. There are always going to be aspects to anything that's created that you can analyze and look at what is not environmentally friendly about it.
--:-- Host (Sonal): You're absolutely right. In fact, one of my absolute favorite artists, I bought a painting from her. I went to her show in New Orleans. I flew. She shipped the art to me afterward. It was such a process trying to bring it here. The shipping, just even the materials to pack it, all of it was intense and very complicated. In fact, I had to hire someone to help me open the crate because it's screwed in with wood. It was not even possible. There's energy used to take the thing out of the box. So I agree with you. It's a very tricky game to start comparing on that front.
--:-- Host (Sonal): Okay. This idea of permissionless. You use that phrase a lot. If I were a regulator and heard that, I would freak out and be like, "Permissionless? That means all kinds of bad behavior and actors." How would you address the concerns about things being permissionless? Even this idea that you can't even recover your key if it's lost. There's not someone holding that for you.
--:-- Jesse Weldon: We can define it in the same way cash is permissionless. Again, the wallet analogy is useful. If you lose your wallet, chances are you lose your cash and it's gone. Similarly, in the cash economy, you can buy all kinds of goods. They can be illegal goods or perfectly normal goods. Cash is used for both things. The same is true of cryptocurrencies. I think the same is true of NFTs. There are going to be bad actors. There are going to be people infringing on other people's IP. The legal system is going to have to step in and address those issues. However, the benefits far outweigh any negative or nefarious uses of the technology in that any developer can build new experiences around the way we consume media. When you contrast today where only the developers who work at Facebook or only the developers who work at Twitter can experiment and innovate on the information that we see on those platforms, I think we're in a much healthier state if every developer in the world is free to innovate in an open way without having to ask permission of these big platforms.
--:-- Host (Sonal): Right. That's what you mean by permissionless. And by the way, it's worth noting all those examples you cited, copyright infringement, IP, etc. That's pretty prevalent in the physical world. And you don't often always have recourse unless you're Getty and doing this ridiculous royalty and provenance tracking. We're talking about you actually have the solution baked into the very problem in the system here.
--:-- Jesse Weldon: In one sense, you could argue that blockchains actually make the job of forensics a lot easier because all the information is publicly accessible and available to anyone.
--:-- Host (Sonal): Our partner, Katie Hahn, would obviously argue for that argument. At the DOJ, that's literally what she did. It's all about finding the right balance where the bad actors can be addressed. Meanwhile, the good actors are free to innovate.
--:-- Host (Sonal): Okay. Last thing. Can you guys give me some just super quick practical considerations for startups or industry? I'd love to particularly hit mindsets. It doesn't have to even be advice for people who are consumers, people who are creators, and even institutional players.
--:-- Linda Xie: I find that just having conversations and plugging yourself into communities and building in public is always really great to do in the crypto space. The space is still really early on and people are all trying to figure everything out. No one is a complete expert on what's happening in NFTs. Everyone's very open to talking and collaborating. Never be afraid of asking questions, joining different communities on Discord or Twitter or wherever they're chatting.
--:-- Host (Sonal): Big corporates and the big institutional banks and big DeFi players, like banking and traditional players, they're not the types that go into a Discord and try things out or have the mindsets you outlined. Any thoughts there for that group?
--:-- Linda Xie: Traditional institutions can consider how NFTs can make things more efficient for themselves. Having these financial assets that everyone has to keep track of might be really inefficient or costly. NFTs will enable this to just be a lot smoother of a process for them. Maybe it's worth looking into research. It doesn't have to be digital art that they're turning into NFTs. It could also be unique financial assets that they have to manage themselves.
--:-- Jesse Weldon: Big corporates and others participate in the markets for creative work through various channels. A lot of companies work with creators and influencers on marketing and distribution. NFTs offer a new channel for both of those things.
--:-- Jesse Weldon: I also think that coming to be an owner of a creator influencer's work will be another way to sort of gain their attention and potentially gain distribution through the lens of marketing. And that's kind of an interesting idea.
--:-- Host (Sonal): One of the ones that I find very compelling is a new definition of employees in a modern era where employees can be creators while working for a company and kind of get more ownership of their ideas. Because traditionally, it's like a very binary model. There's not like a middle ground. And I wonder if that's going to evolve through NFTs within companies and even extending outside the borders of companies, like in the classic open innovation model.
--:-- Jesse Weldon: I think you're touching on a really big idea. I would describe that as the ownership economy, where in Silicon Valley, employees at startups get equity in the startup to align their incentives with the success of the company. And that model has worked really well for attracting the best talent to come and work at startups. But it's not been accessible to everyone, right? And as a result, the talent pool is not as big as it could be.
--:-- Jesse Weldon: Crypto kind of changes the game in that now it's possible to send ownership value, whether an NFT or ownership of the Bitcoin network, which you can now send that anywhere in the world instantly. And as a result, you can make anyone an owner on the internet. So I think this is a really profound idea where it's going to change the way that people come to work and that they won't have to go and become a full-time employee to earn some ownership value for the value that they contribute to the platform or service that they're building or consuming.
--:-- Host (Sonal): Which reminds me, of course, of that famous Bill Joy quote that we all love, which is that the smartest people in the world won't ever all work for you. So if you're going to embrace open innovation, open source, or extend your talent pool, that is a great way to give those employees quote ownership, even if it's fractional ownership, which is great.
--:-- Linda Xie: Yeah. And NFTs make it accessible to everyone, not just technologists, but consumers and creators as well.
--:-- Host (Sonal): Awesome, you guys. So on this show, even though this is a 3X Explainer episode, I asked people to kind of give me a quick, short, what's your bottom line on this whole theme? Give it to me.
--:-- Jesse Weldon: I have a media background, so I love to fixate on a future where literally every piece of media is incepted as an NFT. I've used this term a few times in the discussion, but I think what we're building here is this universal library of media that's programmable and where value flow is baked into the technology itself. And that's just going to lead to a renaissance in online creativity where the creators of the work are remunerated more fairly than they have been in the sort of web 2 era.
--:-- Linda Xie: Yeah, there's a lot of really exciting stuff happening in the NFT art space and we have so many creative people coming in and it's going to make crypto overall much better. But NFTs are also applicable to many industries where you track ownership and currently have a middleman taking fees for that service. So I expect there to be NFTs in all kinds of different industries like gaming and finance and healthcare and all kinds of other areas.
--:-- Host (Sonal): It's an inevitable story of technology that you give people tools and things will happen. So it'll be interesting to see what happens when we unlock that human ingenuity. You guys, thank you so much for joining this week's episode, this 3X Explainer episode of 16 Minutes. Thank you so much, Linda and Jesse.
--:-- Linda Xie: Thanks for having us.
--:-- Jesse Weldon: Thank you.
