In his essay “1000 True Fans,” Kevin Kelly predicted that the internet would transform the economics of creative activities:
To be a successful creator you don’t need millions. You don’t need millions of dollars or millions of customers, millions of clients or millions of fans. To make a living as a craftsperson, photographer, musician, designer, author, animator, app maker, entrepreneur, or inventor you need only thousands of true fans.
A true fan is defined as a fan that will buy anything you produce. These diehard fans will drive 200 miles to see you sing; they will buy the hardback and paperback and audible versions of your book; they will purchase your next figurine sight unseen; they will pay for the “best-of” DVD version of your free YouTube channel; they will come to your chef’s table once a month.
But the internet took a detour. Centralised platforms became the dominant way for creators and fans to connect. The platforms used this power to become the new intermediaries - inserting ads and recommendations between creators and users while keeping most of the revenue for themselves.
Crypto, and specifically NFTs (non-fungible tokens), can accelerate the trend of creators monetising directly with their fans. Social platforms will continue to be useful for building audiences, although these too will be replaced with superior decentralised alternatives.
However, the only problem with NFTs is that beyond the surface level idea, no one knows what they are or how they actually work. It's time to shine a little light on them, how they work, and how not to get scammed.
What is an NFT?
Everyone knows the analogy of NFTs being collectables. Unfortunately this analogy is woefully inadequate at best, and actively malicious at worst.
NFTs as an umbrella term just means that each digital token on the network is unique. Each token contains a small bit of data that is unique to the token in question. That's it. They’re just little data containers being shipped around the blockchain between addresses.
Now, NFTs on specifically Ethereum (ETH) have a few data points that are unique to why anyone cares about them:
NFTs have their creators address saved as part of the NFT. Likewise, the current owner of the NFT is public information as well.
A royalty percentage can be programmed into the token. When the NFT token is traded at any time, between any two addresses for ETH or another currency, the royalty cut of that 'sale' will be redirected to the creators’ ETH address.
It's important to understand one more aspect of NFTs. They are very, very small. It's absurdly expensive to store real data on a blockchain, even something as small as a 64x64 jpg. Most NFTs are only going to have a few bytes of data stored in them. For example, a serial number or URL.
In short, an NFT is basically a unique scrap of paper with a serial number, password, or web address on it.
What NFTs are NOT
They are not digital media. They do not store digital media on the blockchain. If you buy an NFT for some image or song, what you're really getting is a Token with a URL hosted on some random web server.
NFTs do not prevent copying, alteration, deletion, or any other actions regarding any digital or physical thing they link to.
NFTs do not inherently confer ownership over any assets they link to. NFTs are just unique tradable 'scraps' with a small amount of information scribbled on it.
There are three important reasons why NFTs offer fundamentally better economics for creators.
Removing rent seeking intermediaries.
Once you purchase an NFT it is yours to fully control, just like when you buy a book in the real world. There will continue to be platforms and marketplaces but they will be constrained in what they can change or charge because the ownership of assets shifts power back to the creator and users.
Granular price tiering.
In traditional models, revenue is generated more or less uniformly regardless of the consumers enthusiasm level. Crypto products can easily be sliced and diced into a descending series of price tiers capturing a much larger area under the demand curve based on consumers’ enthusiasm level.
Skin in the game.
NFTs change creator economics by making users owners. Customer acquisition costs are reduced to nearly zero. Crypto has grown to over a trillion dollars in aggregate market cap with almost no marketing spend. It's been able to grow so efficiently because users are owners - they have skin in the game. It's true peer-to-peer marketing, fuelled by community, excitement, and ownership.
How not to get scammed
Buying an NFT for 'ownership' of a thing when the seller doesn't own the thing to start with.
Buying an NFT for 'ownership' of a thing and getting non-exclusive rights, meaning the author can continue to mint infinite more NFTs of exactly the same thing.
Buying a 'collectible' NFT and the collectible site, host, or system goes under.
Buying an NFT for 'investment', only for that investment to have an exorbitant (50-100%) royalty fee. Meaning most of the proceeds of your investment go to the creator, instead of you, when you resell the NFT.
Buying an NFT and having the url host of the digital media go down, or the host changes the url so your NFT no longer shows what you bought.
Some other use cases
Cases where a website, app, or game can interact with the NFTs directly to show you your unique content, as proof of ownership of that content, although enforced by the host. (NBA TopShot, CryptoKitties, Decentraland)
They make a good 'proof of attendance' or historical proof type tokens, which you could be given for attending a concert, getting your covid vaccine as a proof. (POAP - The Proof of Attendance Protocol)
Similar to #2, NFTs are perfect for digital ticket sales. They can't directly be copied and even if they're sold on a secondary market, the original creator will get a cut of it. (NFT.kred) However, there are ways to still 'game' this.
They're great for money laundering. If you're buying some nonsense collectable picture of a cat on the internet, it's impossible to say you 'overpaid'. Here's a Nyan Cat NFT that sold for $600k, opening the door to the Meme Economy.
Hedge against deep fake disinformation - we may need to use cryptographic signatures to prove origin or authenticity of a piece of content.
And remember, these are not just collectors’ items, they are programmable assets that any developer can remix. As developers build new contexts for NFTs to live, there will be compounding demand from creators to have their work included in this emerging metaverse and for collectors to flex their ownership rights.
This thesis builds on the original ideals of the internet: users and creators globally connected, unconstrained by intermediaries, sharing ideas and economic upside.