The Breakdown - What’s Next for NFTs?

Episode Date: January 28, 2023

On this edition of the “Weekly Recap,” NLW looks at a number of stories from the non-fungible token (NFT) industry this week that suggest where the industry might be headed, including Doodles’ acquisition of an animation studio and Porsche’s contentious entrance into the space.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: Yaroslav Kushta/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDest. What's going on, guys? It is Saturday, January 28th, and that means it's time for the weekly recap. Before we dive in, however, one quick note. There are two ways to listen to The Breakdown. You can hear us on the Coin Desk Podcast Network, which comes out every afternoon, and also features other great coin desk shows,

or you can listen on the breakdown-only feed, which comes out a few hours later. Wherever you listen, if you are enjoying the show, I would so appreciate it if you would take the time to leave a rating or a review. It makes a huge difference for new people discovering the show. All right, guys, Saturday, weekly recap time, and today we're actually going to do a bit of an NFT Newsday.

While, of course, we are in a broad-based bear market right now, NFTs are experiencing something even different than that. For all intents and purposes, is this is the first bear market they've really gone through, unless you want to consider CryptoKitties the breakout. But I think for most people, as we conceptualize the NFT space now, it was something that was a phenomenon of the last bull run. Bear markets have an incredibly important function

for these new subcategories of crypto, because they help determine, one, who wants to stick around and keep building in that space, and two, based on that, what really matters about it to that community. Today, we're exploring what's next for NFTs, and we're looking at two possible answers based on news from this week. The first has to do with the idea of NFT communities expanding into other forms of entertainment. Earlier this week, NFT Collection Doodles announced that they had acquired Emmy-nominated animation

studio Golden Wolf. The two companies had previously worked together on the announcement of Doodles 2 at NFT NYC last year. Golden Wolf has worked with companies from Nike to Facebook to Gatorade to Disney to PlayStation and Adidas. As part of the announcement, Doodle's Twitter account tweeted, this marks a brand new chapter for Doodles as we continue to expand the franchise. Narrative storytelling, world building, and character development will be at the center of everything we do. Doodles founder Jordan Castro also tweeted about the acquisition.

We've always wanted to break out of Web3's bubble and reach billions. Golden Wolf's world-class team has done just that, excited billions with animation. Expect storytelling without constraints and AI animation generation R&D soon. We're buying, not selling. As per the deal, Golden Wolf will continue to operate independently, though, in close collaboration with Doodles. The Golden Wolf founder and CEO, Inge Erlinson, has joined Doodles as chief content officer focusing on running studio operations while building out the next wave of the Doodles brand. Animator Denny Bright writes, Doodles acquiring an animation studio like Golden Wolf is insane, like you

don't understand how big that is insane. So what exactly does this mean? One of the things that's been clear for some time is that many of these NFT collections saw their trillions. trajectory as effectively pre-selling character IP that would find its way into other mediums. In some ways, NFTs would look like alternate shared ownership of IP. Basically, they allow the audience to become a pseudo-owner and have more active participation in a creative project. We've seen versions of this with collections like the Bored Apes, who launched their other side metaverse.

And now with this acquisition, Doodles looks a bit like a media company moving from idea phase to execution phase. Of course, in so doing, they're also blurring the lines of what a media company really is and how it gets distributed. I think almost regardless of what happens, it will be an interesting experiment to see if you really can go from this sort of character IP in the form of NFT collections to a broader storytelling universe. Now, later in the week, Doodles made another announcement that had a slightly less positive reaction. The news was that they had shifted off of Ethereum and moved onto flow, which is the blockchain that underlies the top shots and CryptoKitties platform. As part of the announcement, they wrote, So why did we choose Flow for Doodles 2?

We're able to create a frictionless on-chain app that lets mainstream fans customize their doodle without limits. Frictionless conversion is critical for mainstream success of Doodles 2. Newcomers can, one, create a wallet by signing into Gmail, and two, buy wearables with their credit card in just a few clicks. It's how TopShot got 400,000 people to buy their first NFTs. OnChane scalability is a requirement for Doodles 2. Everything you see is on chain.

the wearables art, the attributes, the doodle, and its customization. Mainstream users will endlessly customize their doodles and trade wearables without transaction fees. The programming language makes doodles 2 customization meaningful on-chain. Customization adds or removes wearables in your doodles possession. This means doodle is actually wearing its wearables on chain. So what they're really doing here is two things. One, they're laying out a template for what they believe is the next step

of what they want doodles owners to be able to do with their avatars, i.e. this sort of customization that is meaningful on-chain. And two, they're saying flow is a better blockchain for those goals. However, a lot of NFT Twitter was not impressed. Web3 Love and NFT collector writes, Flow is where popular NFT collections go to infinitely dilute their holders and die, like Crypto Kitties and NBA Topshot. DC investor writes Flow LMAO. They could have used a mutable X or anything else. Flow is where assets go to die. Now, Doodles Founder Poopie says doodles or doodles and mainstream users don't give a shit about the tech inside. I love the immutable team. We went through high-level D2 architecture together. We'll consider IMX for future

products. But for this use case, flow wins out. DC investor hits back, though, saying mainstream accessibility is great, but liquidity modes, which throttle broad, speculative interest are not great for NFTs. If you don't need liquidity, then don't use a blockchain or blockchain-like platform. Topshot cited as an example, but it's an obvious cautionary tale, too. Now, some others are less Twitter judgy and more thoughtful. Cyrus Unisey, the former head of risk at MakerDAO says, as an eth-maxi, I am disappointed by this. But every L2 builder needs to read this thread and figure out what type of onboarding and user experience they need to provide if they want to scale to the masses. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web 3, happening April 26 through 28th in Austin, Texas.

Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, and more. Use code Breakdown to get 15% off your paths. Visit consensus.com or check the link in the show notes. So if one of the possible answers to what's next for NFTs are these sorts of new IP expansions, Another answer is brand content. This week we saw examples that the community was fairly stoked on and also not so stoked on.

Dot swoosh Nike's NFT platform is inviting users to design their own digital wearables, as per an announcement from the Global Shoe brand on Wednesday. Community members can participate in a contest called Your Force One, where contestants can build a visual storyboard on Instagram showcasing their footwear design. Four winners will be chosen to receive a $5,000 prize, as well as an opportunity to work with Nike designers to create their own one-of-one digital sneakers. The four designs will form part of a signature collection that will be released in the near future. Nike said in its press release, at Dot Swoosh, we'd like to expand the definition of

what a creator can be. That's why this Dot Swush Studio contest prioritizes creative storytelling over creative skills. Now, Nike is no stranger to Web3. Prior to launching Dot Swoosh in November, Nike acquired Digital Fashion House artifact to collaborate on Metaverse Wearable products. Going even farther back to 2020, Nike had dabbled in the enterprise blockchain trend, testing blockchain-linked RFID sensors in their supply chain monitoring process. By and large, people think this is a pretty cool initiative, although some still see it as an intermediate step. Punk 6529 writes, the reason NFTs are so disconcerting to some is that we are not used to seeing raw intangibles trade. Usually IP is embedded in a tangible product,

i.e. Nike swoosh, much wow, but you have to buy or sell a t-shirt or a shoe to access it. Now, others discuss the financial viability of these things for brands. Crypto data firm Flipside writes, We get it, it's cringe when big corpse get into NFTs, but Nike NFTs generated over a billion dollars in original sales volume alone. Still, the bigger conversation was most definitely around Porsche. At the beginning of the week, they released a series of 7,500 NFTs. The collection was quickly panned by NFT Twitter for being much too large,

containing only identical images of a white Porsche, and being sold at the mean value of 0.911Eth, around $1,420, which was viewed as above what the market would bear. While the mint was ongoing, aftermarket sales struggled with the price floor persistently added discount to the min price. This led commentators to declare the collection of failure and criticize Porsche for their poorly executed Web3 strategy. Debbie Soon, the chief growth officer at Hugg Studios, says, Web2 company looking to enter Web3? How to avoid doing an NFT launch like Porsche? Price and size supply appropriately. Introduce your Web2 fans to Web3. Don't just onboard Web3 Degens to your brand. Take more than two months to actually build a

community, and communicate. Seifer, the founder at GM Dow, says yet another Web2 brand makes a half-ass attempt at an NFT project and fails miserably. Brand equity is meaningless if you don't know your audience. What could have been a campaign to position Porsche as a forward-thinking tech company ultimately makes them look cheap and inept? Naked collector says it seems like Web2 brands have learned nothing over the past year. Porsche's mint slash NFT strategy seems like a 2021-sort-sighted cash grab.

Trading volumes of Web2 collections decline dramatically, almost a zero volume, after minting without exception. There's a reason for that. Professor M actually wrote a whole thread about this, saying today Porsche minted their first NFT collection. The reception has been tepid at best. Here's some thoughts on how brands should not approach this space. One, do not create an NFT because it is a trendy thing to do. Not being clear in how you intend on bringing value to the space is a clear sign you may not be ready to tackle Web 3. Instead, make explicit how your NFT mint is aligned with your brand and its future. Two, do not enter the space without building the proper bridges first.

The NFT space is highly relational at this point. You must speak to the right audience. Being a big brand does not mean you will make it big in Web3. Instead, collaborate with established Web3 brands. Three, do not enter the space with a corporate approach. The Web3 space is fun, wacky, experimental. Unless you can convert your existing clients, embrace that you must speak to a new audience of risk takers and trendsetters.

Instead, manifest passion, innovation, and excitement. 4. Do not price your product without considering the state of the market, your track record, and the expectations that will follow. If this is your first project, why would buyers trust that the price reflects forthcoming value? Instead, build. If you're a big brand, invest. Five, do not be vague about your commitment. Many have come and gone, especially when their entry did not go as planned. What assurances are you making to the holders of your digital collectible? Instead, be specific about the value that you will bring to your holders. I have a lot more I could say about how brand should not approach NFTs.

There may be exceptions that break through without learning how the space is developing, but data doesn't lie. The wallets that are active now are the ones most likely to buy your NFT. Work with them. So this all happened on the first day, but on Tuesday, Porsche said it would halt the mint with their Twitter account saying, our holders have spoken. We're going to cut our supply and stop the mint to move forward with creating the best experience for an exclusive community.

On the announcement, aftermarket prices surged above the min price, and some traders noticed that the mint was still open. Once it had finally closed, a total of 2,363 tokens had been created. At the time of recording, the floor price is 2.23-Eth, and the total volume is 2147Eth. On Wednesday, Porsche clarified their intentions further. They explained in a Twitter thread that the NFTs that originally appeared to be a plain white car will have additional utility over time, including four different customization phases beginning next month, which will end up ensuring that each NFT is unique, a community vote for the coolest customs. design, which will result in Porsche creating that car in real life, and, quote, money can't buy

Porsche experiences. A spokesman for Porsche told CoinDesk that its NFTs are, quote, meant to be a long-term investment, and that we see a lot of interest in the mint from art lovers and Porsche enthusiasts. Many customers from the Web3 community have obviously held back because direct resale seemed unprofitable due to the customization of the NFT. The size of the community is not decisive for us. What is crucial is that we can offer the community the most exclusive in individual events and utilities possible. Now, after that first sort of initial wave of criticism, the conversation about it changed over the course of the week as it seemed like Porsche was listening. But on top of that, there were some who noticed that there might have been other legal reasons that it happened as it did.

Chris Millar tweets, big brands like Porsche and Nike don't take uncalculated legal risks. The view that all NFTs are securities is being tested in real time by some big hitters. Indeed, one reason to not release a roadmap pre-launch is to make it harder for your NFTs to pass the Howie test. In other words, if they had said, we're going to do all of these utility things that will accrue extra value to the token pre-launch, to some, it might have looked like a securities offering. Announcing it post-sale makes that a lot more difficult to argue because it's not Porsche making the sales, it's secondary market sellers. Anyway, it was an interesting moment in the context of this sort of brands moving into

NFT thing. Speaking of which, on Wednesday, Moonblock released the State of Brand NFT 2020 report. Here are some of the highlights from their thread. quote, despite the bare market, NFT activations remain stable throughout the second half of 2022. In total, we registered 160 brands launching 240 collections last year. Of course, maturity and level of execution still vary, and the industry is still learning. We are still very early. We see footprints in almost every industry vertical in the fashion industry has clearly

the strongest adoption so far. Events like the New York Fashion Week were a strong driver for brands to launch first activations and keep up with the competition. While 2021 was the year of digital collectibles and PFPs, the space has evolved. We see key themes of last year's use cases, especially in the fields of one, digital goods slash redeemables, two loyalty and membership programs, and three, token-gated content. Most brands still decided for the Ethereum chain 45% to launch their project, and with the switch to proof of stake, environmental concerns are finally addressed.

However, we see Polygon becoming more and more the brand chain as well as niche-specific chains like Flow. Revenue is often not the primary motive and small compared to the core business. With small exceptions, Nike X artifact, revenue is mainly driven by primary sales rather than royalty revenue. Revenue leaders with 2022 launched NFTs were Nike at 20 million, followed by Tiffany at 12 million. Anyways, it's a super interesting report and shows that this is more than just a couple brands here and there. And on that note, to the extent that big companies getting in the game is a part of what's next for NFTs, an absolute whale is reportedly getting ready to enter the space. On Thursday, Blockworks reported that Amazon is launching a digital assets enterprise with an

NFT initiative expected to be announced this spring. They quote four sources with knowledge, and here's what was revealed. Apparently, there is a focus on blockchain-based gaming and related NFT applications. One source said that an example was getting Amazon customers to play crypto games and claim-free NFTs, and finally, they believe that there will be an April announcement. Obviously, Amazon entering this space, especially if they do it in a big way, would be a huge deal for everyone in the NFT and larger crypto industry as well. Anyways, guys, a lot of interesting stuff happening over in bare market NFT world.

I know many of you are not as interested in that area, but I do think that it's going to be around for a while, and there's a lot that's worth exploring or at least trying to understand. However, for now, I appreciate you listening as always. I hope you're having a great weekend, and until tomorrow, be safe and take care of each other. Peace.