NFTs Are Basically ICOs With Pictures… With A Twist
Non-Fungible Tokens, or NFTs for short, have taken the online world by storm. I have also bought a few (and will take the opportunity to feature them below).
However, the recent spate of Bored Ape Yacht Club (BAYC) lookalikes have turned the main NFT markets into another ICO fundraiser. They are now basically ICOs with pictures.
Why?
There are many parallels. But first, let’s talk about the actual NFT concept and how it can help actual artists monetise their work.
How NFTs are supposed to work
NFTs landed in the public consciousness in a big way, thanks to MetaKovan and his US$69 million purchase of Beeple’s “The First 5,000 days” NFT.
Now, that is the ideal way to use an NFT. After all, it is in the name: “Non-Fungible”. It is supposed to track a unique item on the blockchain and this typically is best used when there is only one such unique item.
This works best in the digital realm because it is too easy to copy a digital piece of work — it is all pixels. Other than the proof of purchase, there would be no way to track this digitally and seamlessly across the internet. However, with an NFT, you can trace the owner of the actual item based on the wallet addresses and/or smart contract used to generate the item.
Physical art, of course, is easier to track but there have been forgery scandals in the past. NFTs solves this exact problem by providing an auditable, tamper-resistant (not 100% but close enough), and public trail to trace the ownership and provenance of such art.
This then removes the biggest barrier to such digital art — even if I were to screenshot it, it is easy to uncover that I do not own the original, and no one would want to pay me for a mere copy (that they can just screenshot themselves).
However, most of the current NFT projects are no longer non-fungible in the real sense of the word, only technically.
They are NFTs in the letter of the code, but not the spirit of the code, if I were to paraphrase the legal lingo. Instead of actually representing a unique piece of work, they start to behave more like Initial Coin Offerings (ICOs).
For those that are unfamiliar with ICOs, here is a quick recap.
Initial Coin Offerings (ICOs)
Back in 2017/2018 when the HYPE WAS REAL, people were FOMO-ing into crypto and buying up everything that was issued on a blockchain. Some folks saw this as a golden opportunity to raise some capital for their business idea.
So, they launched ICOs.
ICOs differ in size and shape. Regulators around the world were concerned because certain tokens were structured in a way that they would have been considered ‘securities’ in the traditional sense of the word, except that they were issued on a blockchain.
For instance, they would give the owner things like:
i. Voting rights
ii. A share of the profit (via payouts or ownership of the cash flow)
iii. Interest
Those things all smell like securities, and if they had not used the blockchain to issue it, they would have all been caught by the respective country’s securities laws (in Singapore, that would be the Securities and Futures Act).
Hence, what people started to do was to issue ‘utility’ tokens. Utility tokens, as the name suggests, only provide utility to the service that the issuer was intending to build.
It’s similar to pre-paying for concert tickets, and the organiser will use the funds and (hopefully) organise the concert. Meanwhile, if the concert is hyped up enough, people can ‘flip’ the concert tickets for a profit on the secondary market. If the concert doesn’t materialise, then all the tickets will become scrap paper since there is no more utility.
It’s like a Kickstarter on steroids.
So — the new generation of NFTs took this to the next level.
The Bored Ape Yacht Club (BAYC)
BAYC was the one that captured the public’s attention the fastest. There were other crazy projects like CryptoPunks and EtherRock, but those were literally collectibles and had no intention to try to raise money to build something for the owners of the token.
BAYC changed things.
Unlike Beeple, who would only create 1 NFT, they created 10,000 programmatically generated NFTs of apes, giving it a gambling feel as some traits on the apes are rarer than others (e.g. gold skin vs. the default skin). So, while they were using NFTs to track the ownership of the project, each additional NFT for an ape just adds a layer of complexity and novelty compared to the ICOs, which issued fungible tokens.
Additionally, they operated similar to Kickstarter campaign, where they had a roadmap where they would commit to certain milestones if a fixed percentage of their NFTs sold out, unlike actual artists who would create a unique piece of art, just because.
So, while BAYC may not have been the first to operate using this modus operandi, they were the first to land in the public consciousness in a big way because a basketball player (Stephen Curry) and some celebrities (the Chainsmokers) bought one each and made it their profile pictures on Twitter, kickstarting the FOMO stampede into them.
In essence, BAYC raised an ICO with a utility token, just that each utility token is tied to a picture, not just a ticker symbol.
Of course, all the other NFT projects that followed this M.O. are basically doing the same thing — intending to raise money using a token to fund their roadmap, just that their token is a utility token tied to a picture.
“But wait!” You say. “What about actual gamification NFTs like Axie Infinity?”
Well, I’m glad you asked, because the Axie NFTs are basically the same as issuing an in-game currency, just with a picture. Just because you “own” the NFT doesn’t make it more valuable.
Instead, it destroys value because it adds an additional layer of gas fees that you (as the end user) need to pay to play the game.
Why? Let’s explore.
NFTs on games like Axie Infinity
The argument for play-to-earn (P2E) is that it “democratizes” the game since the players will own the NFT, and not the game developer. While it is a compelling argument, it actually just introduces a layer of fees that a player must pay while giving them the illusion of choice, but ultimately, your fate still relies on the game developer.
Let’s first recap how a game like Axie works. Warning: lots of gamer lingo ahead.
You need a minimum of 3 Axies to play, and the Axies are NFTs that can be bought and sold on the Axie marketplace. Each Axie has some unique traits (e.g. a “plant with fiery bottom skill”) and randomised stats. Some classes are better tanks, some DPS, some control / debuffers, etc.
Since each Axie is an NFT, you can “own” the Axie because it is reflected in your wallet. In this case, you actually need to create a special Ronin wallet and transfer ETH from your traditional wallets (e.g. MetaMask or a cold wallet) to your Ronin wallet first (and pay gas fees), before then using the ETH in your Ronin wallet to buy Axies (they usually wrap the ETH, so it is WETH).
You also earn SLP by playing the game. SLP is the token that Axie Infinity uses to “breed” more Axies. With enough SLP and Axies, you can generate more Axies (each an NFT) which can then be added to your team or sold.
Does the mere fact that you own the Axies in your NFT wallet mean that you are no longer at the mercy of the game developer?
Let’s contrast this with a more traditional game, like World of Warcraft (WoW). I know it is against their Terms of Service (ToS) to sell WoW gold for fiat, but I also know there are huge markets for this, so let’s just assume that, for all intents and purposes, you can.
So let’s just say the boss drops the items needed to craft “Truefaith Vestments”, one of the best Priest robes in WoW classic. I can then sell them for lots of WoW gold, which I can then spend to acquire more items for my class, or sell them in the black market for fiat.
Does it matter that the items to craft Truefaith Vestments belong to Blizzard and not me?
For instance, let’s say Sky Mavis (the game developer of Axie) decides to nerf the plant tank with the fiery bottom skill. Its market value will drop because it is no longer part of the “meta” build, and if you were unfortunate enough to own some before the patch was released, you would have lost a lot of ETH since now it is considered a “floor” Axie (i.e. the cheapest of the lot because no one wants them).
Similarly, if Blizzard nerfs Truefaith Vestments in a patch (say, by creating an item that is easier to obtain and gives better buffs), the items that I looted to craft Truefaith Vestments would drop in value.
In the above scenario, it doesn’t actually matter whether I “own” the item as an NFT in a wallet, or whether the game developer owns it but it is tagged to my account (via sitting in my in-game inventory). Just because I can transfer it around doesn’t negate the fact that I am still at the mercy of the game developers.
Why?
Because the item has no value outside of the game ecosystem.
It doesn’t matter then that an Axie is an NFT. If my particular Axie gets nerfed, no one playing Axie will want to buy it. No one not playing Axie would want to buy it either, just like how a non-WoW player would not want WoW items (e.g. a Diablo 2 player would not want a WoW item). Your only hope would be to sell it at floor price and hope that a new player buys it, if they want the cheapest way in.
Thus, the concept is the same. The item only has value within the game ecosystem, regardless of whether it is an NFT or not.
NFTs like Axie Infinity are thus just another fancy ICO skin. The same effect could have been achieved (at a lower cost to the player, too) if they just issued a utility token (SLP2 perhaps) that could only be used to buy Axies which are then tied to the unique identifier e.g. wallet address of the player, then all transactions could be made within the Axie game itself, at a lower overall cost.
Well, why are people still issuing NFTs then?
One word: Royalties.
Recurring Royalty Revenue
Recurring royalty revenue is most likely the primary driver of why people would rather launch an NFT project than an ICO.
As part of the NFT smart contract, the owner can code in a recurring royalty that he/she will earn, every time the NFT is traded. Typically, this ranges from 2.5% — 10% of the dollar value of the sale. For instance, if the royalty rate is 5% and someone sells the NFT for 1 ETH, the owner will get 0.05 ETH. This doesn’t include the markup that the marketplace will collect (e.g., OpenSea collects 2.5% as a fee as well).
This is one key feature of NFTs that trump ICOs. When the ICO is launched, the creator has no incentive to keep the token price high because he/she already has the money. Instead, it is the exchanges that make the money when the tokens are traded.
That’s why there were so many scams and fake projects back in the day.
Granted, there are also many rugpulls in the NFT space today, but at least the legit projects have a reason to continue to promote their roadmap — if the floor price of their NFT is high, they will get more recurring royalty revenue for trades.
Thus, even though the NFTs now resemble ICOs with pictures, the M.O. for fundraising has shifted to this because of the royalties. This trend is unlikely to reverse because… Why would any creator want to give up a potential revenue stream?
All we can do as retail buyers is to exercise caveat emptor… And hope that some celebrity picks up the NFT project that we buy into. After all, if we assume that the fate of the majority of the NFT projects will follow the ICOs, that means that the majority will fail to deliver on their roadmaps.
If that happens, at least you have the pictures (compared to a worthless token). I hope you like the art.
420.69 ETH floor is not a meme.
