Invest Like the Best with Patrick O'Shaughnessy - Jesse Walden - A Primer on NFTs - [Invest Like the Best, EP. 218]

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Starting point is 00:01:59 I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests. are solely their own opinions and do not reflect the opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for

Starting point is 00:02:41 investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Jesse Walden, the founder of Variant, an early stage venture firm focused on crypto networks and platforms building the ownership economy. With all the hype surrounding NFTs and given Jesse's background in the music industry and his focus on the creator and ownership economy, he's the perfect person to teach us about the future of NFTs. We discuss the basics of one of the NFT is, what new creative paradigms they may unlock, and where we are in the NFT hype cycle. This episode is the first in what will likely become its own show that we are calling primers. Our goal for primers is to bring investors and operators

Starting point is 00:03:23 from a zero to a seven understanding of a topic, concept, or industry. The goal here is for the education around these topics to be fast and entertaining. I hope you enjoy this to discuss. discussion with Jesse Weldon and hopefully the first of many primers to come. Our mission with these episodes is to provide access to the best ideas and people in business and investing. We will soon be significantly expanding the scope of this effort. To make it possible, at Colossus, we're expanding the team in hiring two critical early roles. The first position will be our lead mobile software developer. This person will lead the development of our mobile applications, which will change how people learn together. The second position will be our lead

Starting point is 00:04:02 designer. Because the existing team lacks UX and UI design experience, this person will have a blank slate to creatively design new applications from the ground up. To learn more about both roles, visit join colossus.com forward slash careers. Now, on to the show. So Jesse, I think just the level set, it's probably appropriate to begin with just a simple explanation or definition of an NFT from your standpoint. And then we're going to jump a little bit backwards in time to your origins in the music industry to help the audience understand this interesting new concept? I think a really simple way to define NFTs are as a file or a file type that lives on the blockchain. You have MP3s, you have JPEGs. These are files that live on your phone or your

Starting point is 00:04:47 computer. NFTs are a new file type, a digital media file that lives on the blockchain. And that's technically not correct, but it's a good metaphor for what we're describing. The idea is when you upload a file to the blockchain, it becomes a token that can't be meddled with, just like Bitcoin is a digital token that is provably yours independent of any third party. So in a nutshell, NFTs make it possible to own a piece of digital media in the same way that you are able to own a digital currency like Bitcoin. Maybe click one step deeper on the fungible piece of NFT.

Starting point is 00:05:27 So if I think about Bitcoin, I guess it's not perfectly fungible because you could trace each individual Bitcoin back through time. But one is sort of like another, right? It's worth the same amount. There's not a difference between one versus the other. NFTs is quite different than that. Just draw that distinction one click further and how a JPEG is so different. A pixel is worth a thousand words. What I mean by that is one pixel differentiator in a JPEG makes that image unique from any other.

Starting point is 00:05:53 Dollar bills in your wallet are fungible for one another. but an image, a video or song, these are sort of like unique ideas that can come to be represented as unique tokens. So what we're talking about is taking unique digital things and making them individually ownable on the internet for the first time without any third party. Fungible tokens benefit from blockchains because the technical properties of blockchains enforce their scarcity, the fixed supply of Bitcoin. Well, with NFTs, you can reduce that fixed supply to one of one. A lot of the attention in NFTs has been around visual art, whether it's an artist like Beeple or NBA Top Shot or something that you can see on your screen and now is scarce. That can't be replicated, at least in the meaningful sense, for the first time.

Starting point is 00:06:40 But I actually think a really interesting area for you and I to draw the line here is around music. You started your career in and around music, worked at Spotify for a time. I just think this is a great way to understand digital media. maybe begin by just describing the importance of your background in music, what it taught you about when there's a song. Let's just take a unit of a song. Lady Gaga creates a song or something. What the value chain looks like for a song and who owns the rights to that thing, who profits from it, why music is sort of a fun way to explain what this might all unlock.

Starting point is 00:07:14 I think before we get into all the complexities of music royalties, I'll first offer up just a bit of context is how I came to be involved in the music industry in the first place. And that was through piracy. Like a lot of teenagers in the early 2000s, I was, of course, downloading music, but I was also part of a much smaller cohort of people who were uploading a lot of the files that everyone else was downloading. And through that came face to face with the way media was going to come to propagate on the internet before YouTube existed, before Spotify existed.

Starting point is 00:07:47 There were these top sites, FTPs. servers that were sort of limited in terms of who could access. And on those top sites, you had every piece of media, well, every album, every video game, TV show, movie, et cetera. And it was very clear that this was the future of all media. It was that it was just going to all be available. So this was early 2000s. What happened shortly thereafter was we got platforms, social media platforms like YouTube and Facebook and Instagram and so on, came along. And they solved this critical problem that piracy had, which was piracy did not have any mechanism for the participants, the people creating the files and distributing them to communicate with one another in the FTP protocol or in

Starting point is 00:08:29 the BitTorrent protocol. That was all sort of happening ad hoc. And what these social media platforms came along and did is they bundled the ability to distribute media, post a photo to Facebook, post a video to YouTube, with an identity, which is your profile and the ability to communicate with fans and build an audience. What then happened, of course, is those platforms came to sort of dominate the relationship that creators have with their audiences. Oftentimes, those platforms were at odds with the legacy distributors of media, and there's a whole saga there where the music industry is suing all these platforms. Spotify is the one who got it through. All that to say that the platforms today dominate that relationship. And NFTs, I think,

Starting point is 00:09:11 are this new way of distributing media that inverts that relationship that gives the creators and their audiences, the means to correspond and transact directly with one another. So now, getting back to your question on what are the implications for music? Well, it's interesting because music is probably the most complicated type of media when it comes to rights management. In music, there's rights to the song, a recording, and then a song can be recorded by 10 different artists. So separately, there's also the rights to the underlying composition. Those are the publishing. Those are the publishing. rights. So you have recording rights and publishing rights, and each of these rights have different rules and different countries and different organizational bodies that administer those royalties,

Starting point is 00:09:56 and it's just this complicated mess. It's such a mess, in fact, that a platform like Spotify, which is global, often doesn't know who to pay royalties to for songs on their platform, because the information is just not available. It's siloed in all these databases that are maintained nationally in different countries. It's been this major problem for artists to monetize directly because of the complexity of these various copyrights. Artists have had to depend on third parties, whether that's the royalty administration bodies or the platforms that distribute their music or both to get the money that's due to them. NFTs just kind of explode this whole model because now it's very easy for a creator

Starting point is 00:10:36 to go on Twitter and say, hey, here's my crypto address and I'm publishing my work as an NFT. And suddenly the whole world can see, hey, that's their thing. And I can buy it directly from them. And we just saw Jack do that with a tweet. Jack was like, here's my original tweet, and here it is as an NFT, and anyone can bid on it. That's an example of how all the complexity of rights management and music just kind of gets exploded by NFTs. I want to make sure, play this back to you a little bit and make sure I understand. I really thought about the interesting angle that what the platforms did was bundle the identity of the creator with their creations, and by doing that, have a legitimate direct path to their audience.

Starting point is 00:11:16 build this relationship directly with your audience, and it's clear that you produced X, Y, or Z. But that in that relationship, the platform itself is still capturing an enormous amount of the value, if not the vast majority of the value. I think YouTube pays out a ton of money each year, but also makes a lot of money each year, right? It sounds like what you're saying is that the NFT represents an opportunity for media creators, for artists, we'll call them generally speaking, to keep a higher percent of the value that they are creating. Is that fair? I think that's the bottom line of it. Again, it's dependent on the idea that the creator, their identity and their media can be discovered and interacted with independent of any

Starting point is 00:12:00 third party platform in the same way your Bitcoin is yours without having to depend on any third party to verify that. Let's take an example of a piece of media where the artist or the creator is being paid in proportion to the number of times that media is consumed. So simply speaking, like on YouTube, if you've got a billion views of a video, you're going to get paid more than a million views or something like this. For the most part, that's a cut of ad revenue that's generated against that underlying piece of media. What does that look like in the NFT world? So I could sell a song. If I'm Lady Gaga, perhaps I sell that song for the collector that wants to own the official original copy of it for a ton of money. How am I in the same way?

Starting point is 00:12:45 going to be tied to the popularity of my creation in the same way that the platform's enabled. You sort of have to suspend your disbelief and sort of break with the ad-based model of Web 2 in order to understand how this might come to pass in Web 3 or crypto. So most platforms are ad-driven monetization, and there are certainly economies of scale there, right? Like you want to be on YouTube because they have the most advertisers and the most eyeballs and you can make the most money there. NFTs enable you to monetize directly with your superfans. Someone who really wants to patronize your work can do so and pay a ton of money to you directly and probably more money than you might ever make, even with a billion views or listens on Spotify.

Starting point is 00:13:30 That's the day one incentive for creators to try out this new marketplace. But you have to remember these assets, these NFTs are permissionlessly programmable. So because they live on the blockchain, anyone can build an experience that you can bring your NFT to. For anyone who's familiar with Bitcoin or any other cryptocurrency, this should be familiar because if you have Bitcoin in a wallet you control, you can take your Bitcoin and bring it to Coinbase or you can bring it to Binance or you can bring it to any other exchange. The same is true of an NFT.

Starting point is 00:14:05 Once it's in your wallet, you can bring it to any third party application. And so developers can build all kinds of new, exciting experiences to attract you to come and bring your stuff there. What I think we might start to see that might resemble royalty or ad-based revenues that you have in Web 2 is that you might see applications that pay some portion of the revenue that they're generating back to the NFT holder for the reuse of that asset in the context that they're building. Today, that doesn't exist by and large, but I think that's where we may be heading. And what's cool, is all of these like new revenue streams or new royalty flows can be sort of programmatically

Starting point is 00:14:46 administered in a transparent way. Compare that to the way copyright is administered for music today where it's very opaque and goes through 10 different middlemen. Now all of that is transparent and automated. And as a result, hopefully the creators and IP owners will be able to retain more of the value. It's a really neat idea. And I'd love to dream of an example just to make sure I understand. So what would be the motivation of a consumer? So let's say there's some cool app that gets built and it's an experience that's built. And an NFT owned by somebody else is part of that experience. From the consumer standpoint, let's say it's a song or something visual, whatever it might be, doesn't really matter. What is the incentive to pay more to see the quote unquote

Starting point is 00:15:29 original version of that thing versus just a normal copy? Like I don't really care if I'm listening that the original song I like. I just want to hear the song I like. Talk me through that piece of this because that's still not clicking for me. It's important to note that owning the original may not be for everyone. Like you said, you're totally fine just listening to the song. But somewhere out there, there's a super fan who really wants to own the original, like the sort of infamous story of Martin Schrelli buying the one-of-one Wutang album for a million dollars. That's one example. There's also the example of art in museums. Anyone can go to the museum and see, the painting for free or you can look at a postcard of the painting or look it up in an art book,

Starting point is 00:16:11 but someone wants to own the original painting. It's true that physical work is desirable because you can put it up on your wall or whatever, but soon we're going to see experiences that allow you to showcase your collection anywhere on the internet where you get attribution for being the owner. So that little placard in the museum that shows here's the painting title, here's the owner, that's contributed by so-and-so. That's going to be everywhere on the internet. So there's social status involved in being the owner of a popular idea, a popular image video or song. And I would argue that the value of an NFT is in fact directly correlated with the number of times the image, the video, the song has been shared. So the more viral it is, the more value there

Starting point is 00:16:55 is in owning the original. And to date, I think empirically, that's what's driven the markets for NFTs to grow so quickly. A platform for our marketplace for selling NFTs is sold Nyan Cat, which is a famous original internet meme for $600,000 because that idea is so viral, it's such an important part of the internet consciousness. Someone wanted to be the owner of the canonical instance of it. Maybe a way of thinking about this is just that right now I could be the biggest fan ever of a certain recording artist. And my payment, quote unquote, to them is kind of limited.

Starting point is 00:17:32 Like I'm paying them the same per stream as anybody else is. And maybe I go to a concert or two, so I pay them a bit more. But it's potentially orders of magnitude more. It's very hard for that to be a thing. So what you're saying is for artists, what this does is unlock the demand for them or their creation in a way that just hasn't been possible before. That's right. Yeah. And I sometimes refer to this idea as patronage plus.

Starting point is 00:17:58 So on the internet today, you can be a patron. of a creator using something like Patreon or substack where you're paying a subscription to support their work. In a sense, you're renting access to whatever they put behind that paywall. What NFTs do is they allow for the content that the creator is making to be open to anyone, but allow for patrons who really want to support their work to do so. And this is the plus part of patronage plus. does it with the benefit of potentially profiting in the future.

Starting point is 00:18:32 Because when you buy an NFT, you actually own some digital property that can be transferred. You can't do that with your subscription to Substack or Patreon. But when you buy an NFT, you're buying digital property. Even if you don't plan to resell, there's this vague idea that maybe in the future someone else will want to buy this. Maybe the creator becomes more popular. I have one of their early works. So this plus is an incentive to become a patron in the first place. So I think a lot of the incentive to participate in NFT marketplaces is the idea that, one, you can support the creators whose work you admire.

Starting point is 00:19:09 And that's no different from Web 2. But there's a much stronger incentive to do so because you actually own something and you can benefit potentially from the resale of that ownership value. It's really fascinating. And it makes me think of this idea. I think the term you used is programmable media. just an entirely new concept, kind of like programmable money or value is one of the original blockchain concepts. But it made me think of this idea that so intrigued me, which was, let's say it's a visual artist that sells a painting. Part of the programming of that NFT could be

Starting point is 00:19:40 that when the painting changes hands in the future, the artist always gets some cut of the transaction. So even though they've given up their thing, maybe it becomes hyper-valuble, the artist themselves could potentially, in a programmatic way, be attached to the success or the popularity of that thing. Can you talk through that concept and whether or not you find that to be key or interesting? Today, that exists on a lot of NFT marketplaces where you can programmatically specify a royalty rate that goes back to the artist or even back to the original collector in any resale event that happens in the future. And again, because this is all specified as code, it's a realty. administered automatically by the blockchain on which the NFT lives. Those are royalty streams that are flowing consistently back to whomever they're due. That's a fundamentally new thing where in the legacy

Starting point is 00:20:32 media world, you're very much dependent on all these third parties to collect your royalties for you, and they all take a cut. So the artist is left with whatever fraction of the day. I think that's one early example of these assets taking on programmable utility for the creator, for the collector. But you're going to see all kinds of new interesting ideas that people will program into these assets. One very popular idea in the world of defy or decentralized finance is that every application, every marketplace, whether it's exchanging tokens or borrowing and lending cryptocurrencies, these are open, permissionless marketplaces that anyone can build on top of. And this concept will be familiar to anyone who is around in early Web 2,

Starting point is 00:21:18 where you had developers building on top of the Twitter API or building on top of the Facebook API. Those were platforms which had a lot of users and if you wanted to get users for your app, you'd go and build on top of them. But of course, as those companies need to monetize, they shut off those APIs. In crypto and in DeFi,

Starting point is 00:21:35 you can build on top of any marketplace without fear of it getting shut down because these applications live on the blockchain. And as a result, we've seen what has come to be known as money Legos or developers stacking these building blocks on top of each other. And as a result, innovation compounding really, really quickly. The same is going to happen with NFTs. So if Defi applications are money logos, and I think NFTs are like media legos, where royalties are one new application you can

Starting point is 00:22:06 build on top of them. But another might be the ability to display your paintings or display your NFTs in a virtual world that some third-party developer built. This is all going to move very quickly because any developer can permissionlessly remix these assets and bring them into new contexts. Can we do just like a quick sidebar on the actual technical thing that is going on here? So we haven't said Ethereum yet. We haven't said the place where this is actually happening. You've mentioned some of the benefits, especially permissionless building. We haven't mentioned any of the limitations, file size or some of these things.

Starting point is 00:22:40 So just walk us through like the literal technical thing that is happening here. how is an NFT quote unquote minted what does that mean where does it live why is it secure etc earlier i said nfti is like a file that you upload to the blockchain now is an important opportunity to say that's not actually what's going on what's actually happening in most cases is you're taking what's called a hash of your file a hash is a fingerprint of the file and that hash is just a string of 24 characters or so and that's what lives on the blockchain so that's a very small piece of data. It's quite expensive to put data on chain. That hash then points to the file somewhere else. Where is that? Well, it could live in a decentralized storage network like

Starting point is 00:23:27 RWeave. It's a blockchain specifically built for file storage where you can look up the file based on its hash. The NFT on the blockchain is a pointer to the actual file, which can live elsewhere. It can be replicated infinitely. A good way to think about what's technically happening is you're creating a unique ID on the blockchain. And by and large, this has been happening on Ethereum, the Ethereum blockchain. And that unique ID is what is being bought sold, traded. The unique ID is the token.

Starting point is 00:23:58 And that unique ID has certain metadata hooked to it. The metadata could include who made it, what it's about. You can put anything in there. A good example of this is the first block in the Bitcoin blockchain. Satoshi puts some metadata in. which was the headline, a chancellor on the brink of bailout for banks, that's metadata in the first Bitcoin block. Similarly, you can put arbitrary metadata into the blockchain and associate it with this unique ID that is the file that you're uploading.

Starting point is 00:24:29 Apologies for veering into the technical here, but I just think it's interesting and important. In the same way that with Bitcoin, if you can demonstrate with your private key, I assume in this case, that you own the public hash that is then pointed to the art. you could sort of take the original art and confirm it somehow. How do you confirm that is it the same way that it would work in Bitcoin and proof of work? Yeah, exactly right. When you make a transaction in Bitcoin or Ethereum or any of their cryptocurrency, what you're actually doing is you're signing a message with your keys.

Starting point is 00:25:01 And you're saying, I approve this message. Please process it. And you send that message off to the blockchain. And that message then gets put into a block. And now, you know, you have one less Bitcoin and I have one more. And that transaction can be attributed back to you because your signatures on it, your cryptographic signature. The same is true of an NFT. When you mint an NFT, you're signing a message that says, here's my file, here's the hash of the file.

Starting point is 00:25:27 It's mine. I'm signing it with my key. And that lives on the blockchain for anyone else to see. So it's very much like painters signing their work in the corner. You can verify it's theirs by looking up their signature and comparing if it's authentic. That can now all be done sort of programmatically with. cryptographic keys. So of course, that mandates that you know the creator's public address. So what you see happening often is as creators mint on these platforms, they say, this is my

Starting point is 00:25:54 public key. You can verify that the work is truly mine and authentic. How do you think this will be for those that are the super fans or the super patrons even, we'll call them, that are going to be the ones delivering the most direct value from, we'll call it the audience to the creator? where will the creators all themselves aggregate? One of the beautiful things about all the big platforms out there is that I can be pretty confident. Like if I'm interested in someone, they're probably on Twitter or they're probably on one of these places.

Starting point is 00:26:23 What will be the equivalent here for discovery and how much will that then just be history repeating that the aggregator somehow ends up extracting a lot of the value? It's a little too early to call, but I'll offer some thoughts. So first off is it's important to come back to this idea I touched on earlier where Web 2 social platforms, they bundle your identity with your media and the distribution. NFT is undo that bundle. So now the media lives on the blockchain and any developer can build an interface to that media on top. A good analogy or a good way to think about it is the blockchain is becoming this universal media library,

Starting point is 00:27:01 on top of which developers are building all kinds of new applications and services. So there are marketplaces like OpenC, for example, looks at the blockchain, and aggregates all the media and puts it up for sale, eBay style, and you can bid on any piece of media on the internet. And then separate, there's other marketplaces that are more focused on primary issuance like foundation. That's where artists come to mint their work and put it into the library. And there's also marketplace functionality to buy and sell there as well. But I think this idea of there being this universal media library means that developers can build on top of this universal media library and by default, the creators are there. What

Starting point is 00:27:39 that means is that we're going to see a lot more experimentation around the types of social media experiences that we can play with. Right now, Twitter is the only company that can play with the feed of content that we see on Twitter and likewise for Facebook and Instagram. When you unbundle the content from the platform, anyone can sort of experiment with new ways to organize that information and new ways to present it, new ways for us to consume it. This question, where are the creators going to be? they're going to be everywhere. I think the better question is where are the consumer is going to be. And I think what the answer may be that it's going to be a lot more fragmented. There's going to be a lot more competition for consumer eyeballs and ultimately more competition for consumers is a really good thing for the internet.

Starting point is 00:28:23 This might just promote fragmentation and focus on niches. So someone's a huge NBA fan, top shots plus the 10 other media NFTs that exist in that general space, someone could just build a really interesting consumer experience on top of all of those things and deliver just something that could never be delivered on Twitter or something like that. That's right. One other thing I'll add to this is in the Web 2 world, I think there's a lot of things that haven't been built because VCs wouldn't fund them because it's like, well, hey, if you're going to compete with Twitter, you're going to get crushed and we're not going to fund that.

Starting point is 00:28:57 One other interesting property of crypto, that's sort of adjacent to what's happening with NFTs, is the ability to pool value very easily, right? Like you can send value in the same way you send an email. What you're going to see is people funding the experiments or the experiences that they want around the media that they own. There's going to be, I think, a very long tail of consumer media applications built on top of this universal media library of NFTs because the funding for them to exist will come from the people who want them to exist. as opposed to having to come from VCs. And critical to note, these may be very long tail

Starting point is 00:29:36 and they may not be huge businesses, but they don't need to be so long as the people using them or members or patrons are happy to fund the operations at cost. If half of this is true, you have to think it's one of these friction-reducing unlocks that tends to create an explosion of behavior, I'll call it. What this sounds like is sort of the ultimate scenario, potentially, for creators, for artists.

Starting point is 00:30:03 With that in mind, I'm really curious to hear your thoughts on some of the most interesting things that you've seen very early on. Like, I feel like probably three months ago, no one had heard of NFTs, almost nobody. Now, a really truly incredible pace. Everyone's aware of these things all at once, kind of like crypto in 2017 or something. So I'd just love to hear what experiments or versions of this

Starting point is 00:30:25 have your attention most. Are you just thinking, like, wow, is that creative or interesting use of this technology? There's so much happening. And so let me preface first by saying, we're definitely in a hype cycle for NFTs, right? This is classic Carlo de Perez technology financial hype cycles where the markets for these things have exploded really fast and there's going to be a correction. That said, the technology and the utility of this technology is very real and developers are going to keep developing it regardless of what the markets do. I'll start with that. And in terms of interesting experiments, there's just been an explosion on them. We, at very

Starting point is 00:31:00 funder investors in a platform called Mirror, which is a community-owned blogging platform. So think of like medium or substack, but where the users actually own the platform. And what they've done is they've enabled writers to tokenize their essays as NFTs. There's a twist, which is they've then enabled writers to crowdfund ownership of their essay as an NFT. So in effect, say you want to see an investigative journalist piece done on some esoteric topic that nobody's covering in the mainstream media, you can now crowd fund get people from all of the world to send some crypto into mirror, put a bounty out to get

Starting point is 00:31:36 the journalist to write the piece, and in return for your patronage of making that work happen, you get a share of the NFT that represents that piece. And again, what is the value in owning an essay? Well, imagine Mark Andreessen, it's time to build this canonical essay. Someone might want to be the proud owner of that artifact of history. That's kind of interesting experiment where you're marrying crowdfunding to NFT ownership. And I think that concept will be generalized. It'll go beyond just essays, but potentially all kinds of media on the internet can be crowdfunded and where the crowd funders actually own a stake in the success of the work that's produced on the back of it. So again, it's like Kickstarter, Patreon, but with this plus being you actually own a piece of what you

Starting point is 00:32:21 help to create. Then outside of the world of art and essays, there's collectibles, right? There's Topshop, which is doing $200 million in volume in the last. 30 days. And that's just taking basketball cards. I used to be a collector as a kid, so it totally resonates with me and making them digital. And by doing so, making them a whole lot more engaging and interactive. And again, like, because there's tons of experiences getting built around them, people building fantasy leagues around the assets people are collecting. So that's another category. And there's also more crypto-native versions of these collectibles. Instead of the NBA, there's stuff like Cryptopunks, which are actually the first. Back in 2017, they were the first crypto collectible.

Starting point is 00:33:03 These are little avatars, which are limited in series, and there's different types. Some are more valuable than others. There's crypto zombies. But essentially, the behavior is you want to own a piece of the set of this limited edition collectible. So Beanie Babies, but Digital Age. So here's another one. I talked to an artist manager, Fremont from the music, is they just did a big drop on Nifty Gateway, which is where a lot of the high value artwork is selling. But they recognize the fact that on Nifty Gateway, where work is selling for hundreds of thousands of dollars, not all their fans can participate. What they did is they decided to mint a series of works. They sold some of the series, and they took the others, and they fractionalized ownership of them. So they took a non-fungible one-of-one

Starting point is 00:33:50 and turned it into fungible tokens. This is known in the finance world of securitization. And then they gave the fractional ownership to the fans for free, just gave it away and said, hey, now you own a piece of this work, which is interesting because it's a strong loyalty or alignment incentive, and you now feel like you're part of the club. Another version of the same idea is people taking the list of NFT owners, which is publicly accessible on the blockchain, and saying, hey, if you own one of my NFTs, you can join a private group chat with me. So access to the creator is another sort of interesting experiment. There's just so much happening. And all of this is moving in a lightning clip. It's really hard for me to keep up, even though I'm knee deep in it. What about, I'm going to

Starting point is 00:34:31 call the category culture assets. I just think it's like an interesting way to put an umbrella over all essays, art, music, et cetera. What about culture assets which are physical? The Mona Lisa 1980-something fancy French wine, valuable physical things which are created by artists, let's call it. Is there a role for this technology mapping onto the physical world, do you think? In the full span of time, absolutely. I don't think that's going to happen anytime soon. Reason being, you know, the physical world has endpoints that are not connected to the blockchain. Sure, you can tokenize a physical painting and say, hey, this token represents that physical painting.

Starting point is 00:35:15 And I can buy that token from you. But how do I know with certainty that I am now the true owner of that painting? There's still some connection to the physical world that has to be worked out. And now you're in the world of lawyers and traditional legal contracts. There's this kind of dissonance between smart contracts and the idea that you can enforce rules as code. You can express ownership as code. There's dissonance between that and the way rules are enforced in the physical world, which is through the legacy legal system. In the full span of time, I think the legacy legal system will come to interoperate with smart contracts on the blockchain. But right now, that friction means the digital native world is just going to move out of 10x faster pace than the physical world. How do you think we'll see, I'll call it legacy brands, start to experiment here? So I was always fascinated by the artists in Fortnite that hosted concerts, Travis Scott or whomever else, are using this new place or new platform to meet their fans and do something valuable. And I'm thinking here about luxury brands,

Starting point is 00:36:25 Gucci or Chanel or something like this. How do you think we'll see the old world players start to experiment with testing these waters? And have we seen that yet? I was reading a headline this morning that Taco Bell minted a series of NFT collectibles. To be honest, I don't know the details beyond that headline, but they're definitely experimenting. We know that digital goods, not NFTs, but just digital goods generally are multi-billion dollar marketplace in virtual worlds like Fortnite, Robox, and others. And there are legacy brands playing there where, for example, you have fashion designers creating skins that you can put on your Fortnite character and so on. I think what we'll start to see, I think these brands will recognize if you give

Starting point is 00:37:10 your customers true digital ownership where they can own digital assets in the same way they own a Gucci purse or a Gucci outfit that can be resold, that there will be actually much more consumption that takes place because property rights are the foundation for a functioning market economy, right? We haven't had that in the Web 2 world. Your items that you buy in Fortnite can be taken away from you at any time. You can't take them with you outside of Fortnite and bring them somewhere else. Once these are to start to realize, hey, I bought this item, now I can bring it With me, I can reuse it somewhere else. I can wear it to any game that I want to be in or any virtual world. They're going to start to see a lot more value in digital items.

Starting point is 00:37:49 And so the market will expand. That's the functioning market economy growing. So I think brands will lean into that because they realize they can make more money. And I would zoom out to go beyond brands and just say, I think the reason NFTs are inevitable and will become the sort of court of entry for all internet media is because everyone involved can make more money. The creators issuing the assets can make more money. because it comes directly to them, the patrons who are buying the assets or the customers buying the assets can make more money by reselling or they can realize more value through all the programmable utility that gets built around their assets.

Starting point is 00:38:24 And then developers who are building for prior to developers building for creators or building for consumers can step into the flow of this growing market economy. So everyone involved makes more money and that's what drives this whole thing forward. I want to make sure I understand exactly what you mean by port. entry. Can you just describe specifically what that means in this context? We will get to a point where every photo you take on your iPhone enters the world as an NFT. Every piece of media that's created will be registered on the blockchain to you as the creator. And that gives you an option on it becoming socially valuable and as a result, financially valuable

Starting point is 00:39:02 in the future. That's what I mean is right now we have files on our phone, files on our computer. In the future, all files will be incepted on the blockchain. as NFTs. I understand now. So if I post a photo on Twitter and post the same photo somewhere somewhere, rather than that order of operations, I would originate it somewhere canonical as an NFT. And then I would just use that in all the other apps. Yeah. What I would say is it's probably even more likely that Twitter and all social media platforms just integrate this functionality natively. So you don't have to think about where you're minting as a separate action from posting is just the default. And how does this all fit into your concept of the ownership economy? It seems like NFTs is a really

Starting point is 00:39:44 important piece of this kind of vision for the future. Can you just outline what you mean by the ownership economy? Sure. So the ownership economy is this broader thesis that the next generation of internet platforms are going to be built, operated, and owned by their users. This idea is what's at the core of the success of Bitcoin and Ethereum to date, both of which are multi-billion dollar, networks where there is no company. There's just independent users all over the world, many of whom were developers and technologists who in the early days built the network, operated it, ran the mining rigs, and as a result, earned an ownership stake in the network for doing so, which was their incentive to build it and operate in the first place. And that same economic model is now starting to sort of

Starting point is 00:40:30 cross the chasm from developers and technologists to consumers. And NFTs are a really good example of this, where now creators and collectors or their fans are realizing, hey, I can own a piece of the internet value that I create. I can capture that value directly by selling to my audience. And you're starting to see the same idea of ownership as a keystone of new product experiences manifest in a number of other verticals as well. So I touched on defy earlier. Defy art, there's a bunch of marketplaces. Uniswap is a good example of an exchange that's very similar to Coinbase, but the business model is take a fee on transactions, just like Coinbase, but what's different about Uniswap is what's done with that fee. Instead of it going to shareholders,

Starting point is 00:41:18 the fee is distributed directly to the users who put liquidity into the marketplace and bootstrap the network effects of the platform, which again is a very strong incentive for users to join and help grow the platform. The ownership economy thesis is that platforms that are built, operated, owned by their users can grow to be much bigger, much faster than their institutionally owned counterparts. And this is uniquely unlocked by the fact that crypto tokens enable us to distribute the value of ownership in the same way we distribute information, which is instantly to anyone anywhere in the world. So that's what's happening with NFTs and it's what's happening at the very foundation of the internet products and services we use every day.

Starting point is 00:42:03 So we all need to go back and study Jack Bogle and Vanguard again, because he had this right very early on. Effectively, the company was owned by its investors that created a very specific kind of outcome that's very, very different from any other asset management firm. That's totally right. I think the analog here are cooperatives and mutuals. There have been tons of challenges with each of them

Starting point is 00:42:24 and very few major success stories. Visa is another one that's little known, started as a sort of member-owned cooperative. But yeah, the benefit of smart contracts is you can now scale these things up without the cumbersome overhead of having to coordinate a zillion members in a legacy institution like a van berg. What about NFTs have we not covered that you think is important for people to understand?

Starting point is 00:42:47 I do want to come back to the hype cycle thing because it is going to end soon. And by the time this episode airs, who knows where it will be, I think there's going to be a market correction and there's going to be a lot of people saying, I told you those NFTs were stupid. Who wants to own a digital asset when I can just copy paste the original? So I think really important to stress the idea that we've seen market cycles in crypto a number of times now. After big run-up in price, there's always a correction and there's always naysayers you come out of the woodwork saying, I told you that was dumb. But what you see if you stay in the space long enough is that the technology just gets better and better and better. There's sort of a Moore's law going on with crypto technology, and that goes for NFTs too.

Starting point is 00:43:27 These market cycles are good in that they drive sticky fundamentals. developers keep getting into the space. The technology keeps getting better. And the result is more experiences, more competition for consumers. I guess just reiterating the idea here that while we're in the thick of a bull run for NFTs and there will be a correction, this technology is here to stay. And I think it's going to happen fairly quickly because the incentives for people to participate are there and directly economic.

Starting point is 00:43:56 Glad you pointed out in that way, like you look at some of these things and I think a lot of crypto, people love to speculate and they love to. to trade. When frictions to do those things are very low, you see a lot of activity and hype cycles, like what we've seen. And there's a reason I haven't talked at all in this conversation about investing returns or anything like that associated with these things, but rather just the deeper, fundamental, interesting features that they bring to bear. I'd love to close with a trio of questions on NFTs as something we're going to do at the end of a lot of these. The first being a lesson for investors, a lesson for builders, and then a resource to go read more.

Starting point is 00:44:31 you're an investor. How does this make you change your view of the world and where you might find return, et cetera? A lesson for investors is we are entering a paradigm shift where everyone is an investor. You used to have to be a public market expert to really have an edge on the stock market. Now, everyday people using social media platforms can have an edge and investing because they're closest to what's going to go viral and where the value is on social media. So everyone is becoming an investor thanks to crypto where, again, you can, now send value and transact value in the same way you transact or send emails. Everyone is going to become an investor. NFTs are demonstrating that. Wall Street Betts is demonstrating it outside of

Starting point is 00:45:11 crypto. And this technology is just going to accelerate it. And how about for builders out there? So you've mentioned developers a number of times they're a key part of this ecosystem for sure. Crypto broadly speaking, software broadly speaking, NFTs specifically, what do you think the one big lesson here is for builders out there? The one I'll take away is NFTs are not a new idea for anyone who's been in the space for a hot minute since 2017 or back when I started Media Chain, my company in 2014, the same ideas were being explored then. I think the lesson here is stick with it because this stuff can happen in the flash of a pan and suddenly the whole world knows and cares about NFTs. If you were there from the get go and stuck with it, you're seeing a lot

Starting point is 00:45:53 of the benefits of that. If someone out there is super interested in this topic and they want to listen, read, watch, learn more, is there a resource that you think is especially beneficial to go straight from this conversation to continue learning? There are a number of NFT thought pieces out there. There have been thousands of them written over the last couple of weeks. I'll shamelessly call out one that I wrote, which is titled NFTs Make the Internet Ownable, and it's all about why CryptoMedia is becoming the, quote, port of entry for all Internet media. I think Chris Dixon also wrote a really great post, a primer on NFTs, where he goes into

Starting point is 00:46:26 some of the details of the market dynamics and where that might go. And then there's another really good primer by Linda Shea, which is also published on Mirror, the decentralized blogging platform I mentioned earlier. And that gives a sort of detailed view of a lot of the different categories of NFTs that are out there right now. Awesome. Well, Jesse, this has been incredibly informative. I'm leaving the conversation with models for thinking about this that are much more clear than I came in with, which was the goal. I really appreciate your time. Thanks for breaking down NFTs with us. Thanks so much for having me. It was fun. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes,

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Invest Like the Best with Patrick O'Shaughnessy - Jesse Walden - A Primer on NFTs - [Invest Like the Best, EP. 218]

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