The surprising power of NFTs to capture and grow communities
What’s the value of family?
What's the value of friends?
What's the value of a community of 10,000 pseudonymous crypto-pilled strangers on a Discord server?
Well, it's not quite priceless but it's rapidly approaching.
The floor price (i.e. minimum buy-in) of CryptoPunks as of this writing is 120ETH - or $410,234.41USD. And that’s the least impressive number this project has to show for.
$200M in monthly sales gives this project a $2.4B forward-looking run rate. It begs the question… how high will these prices go?
Well, you’ve heard the saying. If you have to ask...
Decentralized communities forming around NFT collections is one of crypto’s latest use cases, and it is POPPING off. Absolute hockey stick. It’s worth analogizing because this is more than a few steps beyond our notion of collectible art. Imagine if da Vinci painted 10,000 unique Mona Lisa's and auctioned them off publicly. Now imagine if each recipient of a Mona Lisa was so moved by their piece that they banded together, maintained daily communications, and strategized over ways to increase the cultural and economic impact of their community together. Ya.
It's a lot to process, and the trend is so fresh that it’s currently quite difficult to distinguish which projects are inflated by hype and which are destined to become timeless cultural primitives.
But we can sure as hell try.
This article is mostly concerned with distinguishing between two types of NFT collections:
Collectibles: These NFTs fall in line with our notion of traditional art. They represent ownership over pieces of cultural significance or aesthetic value. For examples, look no further than Art Blocks on Ethereum and Infinity Labs on Solana.
Photo-for-Proof Projects: These are a limited set of anthropomorphized NFTs. These NFTs tend to mint as characters with combinations of traits that occur with different rarities. Post-launch, markets decide which traits and trait combinations they value. Examples of PFP communities include Bored Ape Yacht Club, Cool Cats, and Grim Syndicate. You’ve probably even seen some PFP avatars as the Twitter profile of some fairly noticeable names.
Note: The term ‘PFP’ has two internet-native meanings: the first is ‘profile picture’ and the second is ‘photo for proof’. Both work incredibly well for this application.
There are two other collections types that I want to call out for the sake of completeness. Let me know if you think I missed any:
Gaming Assets: NFTs that act as right-to-play assets for games like Axie Infinity. You can't play unless your wallet holds some minimum requirement of NFTs.
The Birth of a Dynasty
What is so damn interesting about PFP projects is how foundationally their value is tied to community. PFPs begin with a long marketing period on social media, slowly building energy towards a dramatic launch: the MINT (when NFTs are assigned on-chain ownership). Now let me tell you, taking place in the initial mint is ELECTRIC. There you sit, the community’s Discord server primed on your largest monitor. Every non-essential browser tab is closed to maximize available bandwidth. Passwords are checked, double-checked, and saved to your clipboard for emergency pasting as emojis fly across your screen in a display of color that puts Vegas to shame. Reverse-chronologic words of encouragement stream heavenward through your browser.
"This is going to MOON!!! 🚀🚀🚀 "
"🤑I'm buying 10!!!🤑"
"Take my moneeeeeey 💸"
Normally, such words would be reassuring given your current state of anxiety. But can you really trust these mysterious internet people? They are adversarial economic agents driven by a profit motive - each plagued by the same pivotal question: is this collection fated to boom or bust? You make a move to check the time, but before your cursor can pixelate its way across the screen, a link is dropped in the chat. The emojis go still.
You clear your cache and take a deep breath. It's time to mint.
Cultural Batteries and Terminal Points
The initial sale is a climactic exchange of cultural energy into monetary value. A satanic swap of hype-for-money. The fact that this exchange is possible at all is nothing short of one of the internet’s great marvels. Hype and attention are today's most perishable goods, and PFP launches are practically hype incarnate. This minting process is a way for PFPs to translate the belief they’ve generated within their community into a harder asset. On the buy-side, supporters of the project trade in their hard assets for a share of the narrative and future potential of the project.
This is beginning to sound a lot like a seed round, which in itself is a hint that we are ripe for comparison. PFP communities haven't been around long enough for us to know what their 'terminal point' is. We take for granted that traditional businesses have a well recognized final state; to become profitable. And if done well, a business will become sustainably profitable.
A simple way to think of a profitable business is as a money-making machine (literally). Money goes in one end, some magic process occurs, and even more money pops out the other side. Now this magic process is constrained by certain parameters; like the cost to acquire customers, resources, and to pay employees. The volatility of these parameters is what makes the path to profitability highly uncertain.
PFP communities don't yet have a defined terminal point, but we can imagine that any community wants to become sustainably relevant. Why is this a good guess? Because the worst outcome for a PFP community is to become irrelevant. Just like how the worst outcome for a business is to become bankrupt.
Just as profitability is all about cash flows, relevance is all about culture. Relevance is mind share and prestige. It's an intangible store of energy that ebbs, flows, and transforms society. A PFP community takes its first tangible form post-mint, with a value roughly equivalent to the store of culture and community defined by on-chain ownership. In this way, PFP projects are CULTURAL BATTERIES that can be injected or discharged with social relevance.
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The Power of Relevance
Bored Ape Yacht Club is valuable because of its captured culture. Scrolling through their Twitter feed will show community members proudly wearing BAYC merch, riffing on BAYC inspired art, and even getting BAYC tattoos!
Now unlike companies, PFPs have the added challenge of maintaining the continued interest of their community members. Without any believers, their community is doomed to irrelevance. Traditional companies learned long ago that this is a hard problem, so they narrowed their incentives to simply the monetary motive: paying employees in cash, and sometimes ownership of future cash flow (i.e. stock). This sleight of hand is done so well that it changes the nature of a company's believers to only caring about cash flows as well; we refer to them as investors.
Whereas companies view their 'magic process' as acquiring resources to create more monetary value, PFPs view their 'magic process' as creating more cultural value. Their top concerns are not cutting costs and capturing market share, but creating a meaningful experience for their members and capturing mindshare. In fact, through the lens of royalties (a fee on all secondary sales that transfer into a community wallet), PFPs are actually a mechanism for turning culture INTO cash flow.
No technology is better-suited to monetize, productize, and incentivize community growth.
A Delicate Balance
Due to their novelty, we also are uncertain about the long-term success rate of PFPs. There are dozens of PFPs launching every day with increasing artistic quality and incentive innovations. Wanderers, a space-themed NFT collection, is incentivizing ownership with the promise of airdropping new planets NFTs to the existing community.
Other PFPs discuss distributing a portion of royalties from secondary sales across token-holders. This is basically a shareholder dividend.
Now PFPs could go the way of companies and align member incentives with cash flows- but here's the rub. Prospective PFP members are looking for a far more dimensional experience than your average employee. They want to meet new people, engage in exciting conversations, and grow personally/professionally in the blockchain ecosystem.
From my quick assessment, I’ve identified four distinct incentives that drive membership for tokenized communities. Broadly speaking, members want:
To be part of a tight-knit, culturally relevant community (the social motive)
To learn, grow and have an impact in the world (the meaning motive)
To transfer value IRL (the economic motive)
To have fun (the joy motive)
What is fascinating is that this more dimensional framework for cultural incentives shows that traditional companies are just one type of community; the kind that optimizes for the economic motive.
The communities that go the distance will be ones that channel their funds and culture into initiatives that speak to these motives. Communities will have the opportunity to position and counter-position themselves in line with any combination of incentives. Features like community dividends will speak to economic agents, while investments in additional drops and world-building will speak to joy- and social-seeking agents.
In the future, we’ll likely see new communities that optimize across the full spectrum of incentives, building virtual town squares that increase social interaction purpose, and joy in people’s lives.
What a beautiful and exciting world to live in.
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With gratitude, ✌️