Web3 and Non-Fungible Tokens Signal New Era of Direct-to-Consumer

To understand where the market may be going, a hyper-brief primer on these technologies may be in order for some. The next incarnation of the web -- Web3 -- will enable a future in which people (and machines) can interact with data and counterparties through an underlying layer of peer-to-peer networks, without any third parties being involved. But it’s more than the absence of third parties; the key to Web3 is that it is completely decentralized. Centralization means control by a single party. For example, US dollars are controlled by a central authority, the U.S. Government, while bitcoins are decentralized and not controlled by anyone. Similarly, the Internet is decentralized, and anyone can host a website (although key infrastructure remains under the control of a small few).

Non-fungible token, or NFT, refers to a special type of record in the blockchain. Because every token has a unique number, they can be used to uniquely identify a digital item. When I buy a bitcoin, I’m buying a piece of data. We all know that data is infinitely copyable, so how do I retain the value that I invested in that cryptocurrency? The principles underlying NFT ensure that my bitcoin is unique and cannot be replicated. It also ensures permanent scarcity and value.

A blockchain is a digital record of transactions. The name comes from its structure, where collections of transaction records, aka “blocks,” are linked together to form a public ledger open for anyone to review and audit. Blockchains allow groups of people with no formal affiliation to exchange data and funds in a trustworthy and secure way.

The Ethereum blockchain is an evolution of blockchain technology that enables entirely new use cases through the creation of Smart contracts. Smart contracts allow Ethereum users to define and run automated processes on the Blockchain, almost as though it were a community-owned computer. The implications are head-spinning. Smart contracts allow developers to establish that the digital thing they create, whatever it may be, hasn’t existed before.

These are heady concepts many really smart people claim are going to change the world but in what ways? And when?

To find out, we listened in on a conversation between Phillip Jackson and Justin Kaufman.

Phillip: You and I have had some great conversations about specific applications of blockchain, and there’s no doubt it can power some cool things. It’s hard to say, at this point in time, where this will be going.

Obviously, we have some real-world applications of the concept, one of which made headlines a few weeks back Christie’s auction a piece of digital art, “Everydays - The First 5000 Days” by digital artist, Beeple, and it sold for $69 million. 

It was the first purely digital work of art ever offered by a major auction house. The NFT was issued in partnership with MakersPlace, according to Christie’s Tweet announcing the auction. 

I find this sale significant because it shows that we now have marketplaces where people can purchase, sell or trade digital collectibles outside of a centralized platform. Will we see NFTs power a more direct-to-consumer model, where artists or other makers can transact outside of a centralized marketplace? Perhaps, but what’s interesting is that the NFT marketplace isn’t built with a tech stack or platform that we would all know and recognize. Instead, runs on a decentralized platform powered by really niche, custom software. This tells me that we're at the start of a new software cycle or movement that might result in new standards and platforms that power implementations of this in the future. 

Justin. Well said, Phillip. A few things to highlight, right now. Crypto is effectively a speculative vehicle. When people buy bitcoin, they have an expectation that it will increase in value in the future. There’s a self-reinforcing system in which we burn power to create a sense of scarcity in the digital realm. This, in turn, drives more speculation and a higher value for the currency. 

Ethereum extends the use of blockchain technology beyond mere speculation. To me, the Christie’s sale speaks to the fact that there are enthusiasts who believe there is a future in these smart contracts and they’re investing in them to draw attention to this potential.

There are a lot of directions these marketplaces can go, but I see two big issues. First, the tokens are non-fungible, but so are the marketplaces. You can't take a token from one marketplace and use it in another. Essentially, it's like naming a star or selling the Brooklyn Bridge. You can claim to own them, but so what? The other issue is that it’s all about provenance. NFTs, like you said, are a statement of provenance, but it’s not directly representative of the underlying asset. For things in which there is a central authority, like a copyright, this could be really powerful. I can imagine a tie-in with public policy and legislation where copyright is a token, and we can use it to manage rights. But the reason it would work is that there's only one marketplace with which to register these copyrights -- the US government.

To transition successfully into a broader, more mature software platform, we’ll need to see some standards that people can trust, like a bill of provenance that’s recognized by key authorities in the space. This could be a government, private companies, or even an online community.

I think we can learn a lot from other federated solutions, like identity. In the physical world, identity often requires an authority like a notary to assert that signers of documents are who they say they are. That notary seal imparts trust that this unique person was involved in the transaction. We don’t have an equivalent for NFTs that ensure the data being described is original and unique. At present, we can say “this is the only instance of this digital asset,” according to this certificate, but what does that actually mean? What are the real-world rules, regulations, and implications of owning that certificate? Can we prove there is nobody else laying claim to the same data?

I don’t want to belittle the achievement. For the first time we can negotiate ownership and uniqueness online, and that’s a significant technological feat. We just haven't fully understood the societal implications.

Phillip: Let’s put collectibles, NFTs and marketplaces aside for a minute. What I find notable about this moment in time is the application of the technology itself. It reminds me of when Snapchat Lenses and Pokémon Go were introduced to the consumer. These products allowed them to experience augmented reality for the first time, and to see what gamifying the next level of technology interaction with the real world feels like. Those were powerful introductions because they proliferated the application of that technology, which in turn created hardware advancements and tool kits that made it easier for creators to roll these things quickly. Look at the Snapchat creator marketplace; you no longer need insane 3D software to create this kind of stuff. The stack gets taller and more extracted and suddenly we have consumer level adoption of an entire class of technology. 

I think it’s really notable that in order to interact with an NFT marketplace, you simply need a DeFi wallet. Of course, the process of obtaining one is incredibly fragmented and painful. The consumer needs to learn a lot of tech speak and jargon, but it’s not holding them back.

Like AR and Snapchat filters, we’ve seen incredible product advancements to make this easier, like when Dapper Labs implemented a wallet that works with the NBA’s Top Shot NFT. I think the concept of a wallet that powers a marketplace experience is something consumers will come to understand. 

Over the next five years, consumers will begin to ask why they need passwords at a bunch of sites that keep getting hacked and force them to manage them in a third-party app. The next evolution of that, from a consumer’s perspective is, why do I need to store my payment information at all these sites as well? Somebody will solve the decentralized finance wallet application for both authentication and access to payment solutions.

Again, this is notable because once consumers understand that DeFi wallets are easier, better and safer, they'll expect every brand to support them. What do you think?

Justin: We already have those wallet models in place from platform vendors like Apple and Google Pay. There are companies, like Stellar, building what they hope will be new default payment platforms. 

Every platform is trying to leapfrog the rest to become that default wallet. I don’t blame them; the winner will see huge returns. To me that raises a serious question: who stands to benefit from the adoption of a decentralized wallet standard and what are these companies’ incentives to move in that direction?  

Unless the demand for DeFi wallets is driven by consumers or regulation, what is impelling us to adopt a community-owned standard?

I read a story about an enthusiast who wanted to sell an NFT of their meme website, not to make money, they just wanted to see how it worked. They invested $140 in fees to bundle their art, process it on the blockchain, and have it listed. They made $200, so technically they came out ahead, but then they couldn't figure out how to get the money back out into fiat currency.

That’s a tough issue, and it’s the reason why we're seeing a surge in demand to sell assets but not a lot of buyers. The high valuations for pieces of art are impressive, but they tend to stay within the community of cryptocurrency enthusiasts.

Phillip: I agree, but it’s a problem that’s not limited to cryptocurrency. We see the same thing in fiat currency, like money that’s stored in Venmo, or PayPal. My kids have a lot of money in Roblox currency. So, wallet fragmentation exists in the real world, and that problem hasn’t been solved. What will happen in Web3?

My next question is, what are the leading indicators of technology adoption or product-market fit? 

One of the leading indicators we’re beginning to see is the emergence of a platform mentality that will allow us to launch more of these marketplaces, and the introduction of user-friendly tools that will allow, say, any artist to sell directly to a buyer. This gives me pause, and reason to say, okay, this is a thing.

These capabilities aren’t built purely on speculation; people must want the capability. The traditional ecommerce platforms aren’t going to power the direct-to-consumer marketplaces of Ethereum-powered products. Something new needs to emerge, and I think we’re at an inflection point in the evolution of the technology we currently deploy on the traditional web that will ultimately power the future of digital products, whatever they are.

Justin: That’s a good starting point for the next question: where's the plateau of productivity? When we look at the hype cycle, what is the boring thing that financial institutions and consumers will use NFTs for in the next 10 years? If we meet our expectations, whatever it is will be valuable, and it will be something that no other software or financial solution can provide. I don’t know what that thing is off hand, but I think the government will demand a huge say in it. 

To begin with, the cryptocurrency on which the smart contracts are based may be perceived as an existential threat to national sovereignty for some countries. I know that sounds hyperbolic, but if a country can't control its money supply, it loses a lot of power.

This brings me back to my concern about registries: we can have a decentralized place to register ownership of an asset, but how does that translate into real world implications? You can settle it in court, as many other ownership issues are settled. But if those digital asset laws are defined in the US, then we essentially have a central authority and central registry of how those assets are manipulated and respected in real life. And that means that the decentralized component is lost, and we’re mired in questions of international law and multiple registries. What has technology solved?

Phillip: I get that. But let’s assume those questions will be worked out and engage in some speculation here. Let’s say we get to a time where keeping hard currency in the bank is less than ideal. How does an employer attract top talent? Is it an attraction if that corporation keeps part of its balance sheet in bitcoin?

It won’t take long for an employee to ask, how am I supposed to spend this? And that leads to the next layer of, how do I, as a consumer, actually spend this value that I have, that is theoretically appreciating? This is where the consumer’s expectation starts to push the rest of the industry to provide solutions that enable them to use it in everyday commerce. I'd love a reaction there.

Justin: Isn’t that already happening?

Phillip: Yes, Carolina Panthers offensive lineman Russell Okung received half of his salary in bitcoin.

Justin: And Tesla invested $1.5 billion in bitcoin and announced plans to accept it as payment. At some point, will most of the growth in the value of the company be due to the increasing value of their crypto holdings? If you're an employee, will your investments in the employee stock purchase plans really be an investment in crypto? Will it lead to a scenario where people buy stock in Tesla for the bitcoin and not the underlying fundamentals?

Phillip: That’s interesting. Any last words?

Justin: I have a different take on where this is all going. I don't think that NFTs or crypto is the story here. I think the story is about digital scarcity, owning digital assets and proving authenticity and ownership.

We're moving from SaaS where we trust everything to the cloud, to a place where people can have one of something, and that something is digital, and it can be very powerful. It’s still nascent, but we will get to the point where people recognize they can own digital assets that belong only to them, including their data or even identity, it’s going to be a really big deal, once we figure out what that looks like. 

Phillip: What’s exciting is that there are new platforms to be built to service it all. Which means that everything we’ve built to date will steadily be rethought, and rebuilt, for a new world. The next twenty years are going to be the most exciting era for ecommerce yet. There’s lots of work to do!