The Rising Popularity of Non-Fungible Tokens (NFTs)

Non-fungible tokens, or NFTs, have existed for approximately two years. However, these unique digital assets, residing on blockchains like Ethereum, are experiencing a surge in popularity, particularly as collectibles. This includes digital artwork, animated creations, NBA highlights, and virtual furnishings.

A Rapid Increase in Sales Volume

The growth in NFT sales has been remarkably swift. According to Cointelegraph, $9 million worth of NFT items were sold to buyers during the latter half of the previous year. In contrast, a single 24-hour period earlier this week saw $60 million in digital goods change hands.

Factors Driving the Trend

Recent media coverage has likely contributed to the increased interest. A detailed article in the New York Times, alongside a profile of digital artist Beeple in Esquire, have brought NFTs to a wider audience. Beeple, whose real name is Mike Winkelmann, is a Wisconsin-based artist who has created a digital drawing each day for the past 13 years, and his work began to gain significant traction in December.

Notably, Beeple’s artwork is now being offered through Christie’s, marking the auction house’s first sale of exclusively digital art.

Insights from David Pakman of Venrock

To gain a deeper understanding of the NFT market and its rapid expansion, we spoke with David Pakman, a former internet entrepreneur and venture firm partner at Venrock. Pakman began tracking Bitcoin shortly after joining Venrock a dozen years ago, and even engaged in cryptocurrency mining from his Bay Area home starting in 2015.

He quickly recognized the potential of NFTs, successfully persuading Venrock to lead a $15 million Series A funding round for Dapper Labs, a startup initially focused on CryptoKitties – limited-edition digital cats that could be purchased and bred using cryptocurrency.

Dapper Labs and the NBA

Pakman anticipated that Dapper Labs’ offerings would expand significantly. This prediction has materialized with a recent partnership with the NBA to sell collectible highlight clips. This collaboration has generated substantial interest, reportedly leading Dapper Labs to seek $250 million in new funding at a post-money valuation of $2 billion. While Pakman refrained from confirming this figure, he shared his insights in a conversation edited for brevity and clarity.

Understanding the Appeal of NFTs

Why the Current Enthusiasm?

TC: David, can you explain in simple terms why there’s so much excitement surrounding NFTs right now?

DP: A significant portion of the population, around 40%, enjoys collecting items – baseball cards, shoes, artwork, wine, and more. This behavior is rooted in various psychological factors. Some collectors aim to complete sets, others seek investment opportunities, and some desire heirlooms to pass down through generations.

However, collecting was traditionally limited to the physical world because digital collectibles were easily duplicated. The blockchain technology introduced a solution by enabling the creation of immutable digital collectibles, with a verifiable record of ownership that cannot be easily copied. While screenshots are possible, they don’t confer ownership or the ability to trade or sell the item.

I believed that crypto-based collectibles had the potential to become mainstream and attract a broader audience to the world of cryptocurrency – and that’s precisely what we’re witnessing today.

Displaying Digital Collections

TC: You mentioned several motivations for collecting, but status is another key factor. How can collectors showcase their digital assets online?

DP: You’re right to point out the importance of status. However, I’d argue that displaying collections is actually easier in the digital realm. Showing off a car collection requires visitors to a physical garage, limiting the audience. Online platforms allow for broader visibility.

For example, NBA Top Shot provides a dedicated space for users to showcase their moments. An upcoming app will further enhance this capability, allowing collectors to share their holdings on social networks and easily demonstrate the size and value of their collections.

The Rapid Growth of NBA Top Shot

TC: Dapper Labs launched its video moments in October, resembling a Pokémon pack experience where buyers receive a guaranteed “good” item but don’t know its specific content. Yet, nearly half of its sales have occurred in the past week. Why?

DP: Currently, around 30,000 to 40,000 people are actively using the platform, and it’s growing at a rate of 50% to 100% daily. This growth has been entirely organic. The game is still in beta, and we haven’t implemented any extensive marketing campaigns.

We’re prioritizing bug fixes and improvements before actively promoting the platform. However, several NBA players have expressed enthusiasm for their own moments on social media, potentially fueling interest. Furthermore, a significant portion of the user base – approximately 65% – is new to cryptocurrency, suggesting that crypto collectibles are indeed attracting mainstream users.

Dapper Labs’ Business Model

How Dapper Labs Generates Revenue

DP: We earn 5% of secondary sales and 100% minus transaction costs on primary sales. We also have a revenue-sharing arrangement with the NBA, which receives a portion of the proceeds.

The NBA’s Revenue Structure

TC: Does the NBA have a guaranteed minimum payment each year, with additional earnings based on a percentage of sales?

DP: The specific economic terms of our agreements with the NBA and the Players Association haven’t been publicly disclosed. However, the NBA owns the intellectual property, and the teams and players share in the economic benefits, which is appropriate given their role in creating the content.

Importantly, a substantial portion – 95% – of the appreciation in value goes to the owner of the moment. This is similar to the dynamics of baseball cards, but now IP owners can benefit from the ongoing economic activity surrounding their intellectual property, which is appealing to organizations like the NBA and Disney.

This opportunity extends beyond major IP holders to individual creators, musicians, and digital artists who can create limited-edition digital art and receive a percentage of future sales.

Pricing Dynamics in NBA Top Shot

TC: Prices for the same limited-edition clip in NBA Top Shot vary significantly. Why?

DP: There are two primary reasons. Firstly, scarcity plays a role, with lower-numbered items commanding higher prices. For example, if a particular LeBron moment has 500 copies, the first copy will likely be more valuable than the 399th. This is a common phenomenon in limited-edition collectibles.

Secondly, increasing demand has driven up prices over time. As more people seek to participate, they are willing to pay more for these moments.

Addressing Security Concerns

TC: The fact that 20% of the world’s Bitcoin is inaccessible due to lost passwords raises concerns about the security of digital items stored in digital wallets. Is this a risk with NFTs?

DP: This is a complex issue, but Dapper Labs has designed its system to mitigate this risk. We’ve implemented password recovery processes for users storing their moments in Dapper’s wallet.

Users also have the option to transfer their moments to other accounts, where they may be responsible for their own password recovery.

The Complexity of Self-Custody

TC: Why is this a complex topic?

DP: Some believe that centralized account storage, while convenient, raises trust concerns. They worry that a company could potentially de-platform users or disable their accounts. In the crypto world, there’s a strong emphasis on ensuring that users retain full control over their assets.

Dapper Labs supports the long-term goal of allowing users to take their moments anywhere they choose. However, currently, our customers don’t have to worry about losing access to their moments due to a lost password.

For further insights, including Dapper Labs’ decision to build its own blockchain and David Pakman’s views on the potential for a U.S. digital dollar, listen to our complete conversation here.