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WYODC Weekly #44: NFTs Pt. 2

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Warning: Reading time: ~10 minutes (Long article ahead… but this will blow your mind) 

Hi all, 

I hope you’ve enjoyed the last issue where I shared “Why you should start learning about NFTs”. 

In this issue I wanna give you a summary of the most pivotal article which got me into the NFT rabbit hole.

It’s an article written by Ben Yu, a Harvard Dropout and Thiel Fellow (Member of the Thiel Fellowship – Notable members include people like Vitalik Buterin (Founder of Ethereum) and Dylan Field (CEO of Figma).

He shares why he feels NFTs will be the generational innovation and why you should get on board before it’s too late. 

The original article is 30,000 words long (Which is a super long read I get it). 

And that’s why I’m gonna summarize it into simple, digestible bullet points here so you can enjoy it:

This article is perfect if you’re a complete NFT newbie (or even a Crypto newbie) as Ben will share the context from scratch.

It has 4 parts:

Part 1:  Ben shares why he’s virtually the last person in the world who would become sold on NFTs.

Part 2: Ben shares the technical and conceptual fundamentals behind NFTs and why they have value and addresses the predominant criticisms people have against NFTs

Ben Yu’s NFT journey: 

  • Bought a Cryptopunk for $400,000 last year. Today, he has spent more than $1 million on NFTs.
  • Ben has quit his job together with his wife to fully devote themselves to build tools and resources for the NFT eco-system. 
  • Ben made $400,000 from investing $10,000 into Bitcoin and Ethereum in 2017. Today his earnings from Crypto are estimated to be ~$7 million. 
  • Ben wrote a post on Cryptocurrency in 2017. It went viral from a single Facebook post. 

Part 1: Ben on Art NFTs 

  • Ben sees certain art pieces exploding in insane value. He bought an NFT of a frog for $2,000 but it’s now worth at least $46,000 a few weeks later after purchase.
  • Ben was able to buy some of these art pieces by reputable artists at a steal. Because the world hasn’t woken up to NFTs at that point of writing. 
  • While Ben was dismissive of Art NFTs, he was convinced that NFTs make sense in gaming. This technology would create digital assets in games and thus, digital ownership. 
  • In the gaming space, there’s an increasing shift from a physical ecosystem to a digital ecosystem. E.g. Magic the Gathering to Pokemon Trading cards to Hearthstone. 
  • If you’re looking at physical trading cards, these cards had tangible value made manifest by their inherent scarcity. Certain cards were highly valuable for winning the game, and thus commanded premiums on secondary markets, and users could trade cards freely between one another and create an effective economy for cards.
  • When Hearthstone came out, Ben felt deeply unfair that in the digital card game, users would pay hundreds of millions of dollars for cards but get absolutely nothing of tangible value in return. 
  • Ben’s thesis is in the current digital state, you don’t really own the things you have. The company owns it (in this case, Hearthstone). Hence, NFTs will become a gamechanger because they can create a form of ownership where you can sell, lease or lend your asset to someone else. NFTs will provide digital scarcity that no one can violate.

Ben On “NFTs are worthless because you can right-click them:

  • The market has not respected digital artists because everyone can literally right-click and save their creations. Because of this, nobody is willing to pay a premium for digital art because there’s no way to own it. 
  • In fact, before the creation of NFTs, digital artists were paid even less than physical artists because everyone could right-click and save their work. 
  • Due to the fact that people couldn’t really own digital art back then, they couldn’t understand the value of digital art. 
    • Yet, this doesn’t mean digital art is less valuable than physical art. Today, there are plenty of art pieces that are created with computer algorithms or AI neural networks. 
  • That said, Ben feels that the NFT market today is in a bubble and plenty of NFTs which are overhyped will go down to zero. That said, it’s still a generational innovation.
  • Ben feels that the internet once faced similar skepticism when it was in its infancy. Many people once dismissed the internet as a passing fad during the dot-com bubble where many tech companies were overvalued.

Ben on Skepticism:

  • Ben gave the example of how a Newsweek article written in 1995 once shared that the internet won’t change the world. The author predicted that the internet will not replace bookstores, newspapers and in-person education. Today, the person is wrong. 
  • Historically, people have been skeptical of almost every invention when it was first launched – aeroplanes, cars, computers, calculators. 
  • When cars were first invented, a “brain specialist” predicted that drivers would go insane because our brains are not capable of enduring high speeds.
  • Ben’s thesis is… we should question every tinge of skepticism we feel because almost every invention in history faces skepticism when it was first introduced to the world.

Part 2: Why NFTs have value:

First, let’s talk about what NFTs are and what is the technology that underpins them.

NFT is an acronym for non-fungible token, which essentially means an asset that’s unique, rather than an asset that’s identical to many other assets.

  • An example of a fungible token would be US Dollar or Bitcoin. Every dollar is identical to another dollar. Similarly, every bitcoin would be identical to another bitcoin. 
  • An example of a non-fungible token would be a piece of artwork like Mona Lisa or your dog. There are many paintings in the world, but there’s just one Mona Lisa. There are a lot of dogs in this world, but there’s only one dog you own and you won’t trade him or her with anyone else. 
  • In essence, an NFT is just a digital representation of this intrinsic concept of uniqueness, in which we’re already familiar in this physical world.
  • Because NFTs are based on blockchain technology, it is globally public, permanent, transparent and easily verifiable. It is not possible to “forge” an NFT because only the single NFT certified by a digital signature from the original creator, can be appropriately designated as the “original” copy. 
  • In short, NFT technology provides trusted and permanent certification of the authenticity and originality and uniqueness of digital assets. This allows these assets to at least retain value along the same premises as physical assets. 
  • NFTs are brands. Azuki, Adam Bomb Squad and Bored Ape Yacht Club. These are all brands. They have diverse personalities and different values. In the physical world, we all know brands – the Mona Lisa is a brand, LV is a brand and Tesla is also a brand. People are willing to pay absurd amounts of money for an LV bag or Tesla car. 
  • Brands can act as status symbols. Because of this, luxury goods are often fraught with counterfeits. However, NFTs cannot be faked as they can be easily verified by anyone in the world on demand, unlike with physical goods where you need an appraiser to verify their authenticity. 
  • NFTs can also act as a “Membership Card”. These brands can offer exclusive doors of membership when you own them. E.g. If you own a Bored Ape Yacht Club, you can be in the same Discord channel with Neymar, Jimmy Fallon or Stephen Curry. 
  • The NFTs of the best brands will become Veblen goods in which demand increases as price increases. People would inherently want to buy it to flex their wealth and status. E.g. Like a Ferrari or Lamborghini.

Ben on his Cryptopunk’s purchase:

  • Ben is bullish on Cryptopunks and he feels that one day they can be worth tens of millions or more. 
  • Here’s Ben’s thesis on why he’s bullish on Cryptopunks:
    • CryptoPunks are broadly known as the first PFP (Profile Pic) NFTs to ever be created on the Ethereum blockchain. 
    • So far, CryptoPunks is surprisingly resilient to fluctuations in the NFT market. It can still retain its value even though the NFT bubble pops. 
    • Ben interviews Dylan Field, Co-Founder of Figma, he made headlines for selling a very rare Cryptopunk for $7.5 million. 
      • However, Dylan wasn’t lucky. He didn’t buy Cryptopunk by accident. Like Ben, Dylan was a Thiel Fellow and he built Figma, a startup worth $10 billion at the age of 29 (so he’s obviously a pretty smart guy).  
      • Dylan first got exposed to the Crypto world because he was staying in the house with Juan Benet, the creator of Filecoin. 
      • Dylan started to pay attention to Cryptopunks as he thought that the whole project was genius. He was a big believer in Ethereum and Cryptopunks was the first PFP NFT on the Ethereum blockchain. He read the Smart Contract and was attracted to the simple, yet elegant code. He bought his first Cryptopunk for $100. 
      • Dylan discovered that there were tons of people on the Cryptopunks discord channel discussing rarities and the different aesthetical values of punks. A community was slowly forming and he was paying attention. 
      • Because Dylan liked the project and community, he bought a few more Cryptopunks from 2017-2018. 
      • One big thing that fascinated Dylan was how NFTs (Cryptopunks in this case) were able to create and grow a community out of nowhere. 
      • Subsequently, Dylan spent 12 Eth ($15,000) on a very rare Cryptopunk (1 out of the 9 aliens in the Cryptopunk series). There were 10,000 different punks and only 9 were aliens. 
      • He was willing to spend so much on the Cryptopunk alien because he thought: “This is the digital Mona Lisa.” CryptoPunk is the first project. And of all the CryptoPunks, this is clearly, to me, the best CryptoPunk. And everyone will want it when people want CryptoPunks.”
      • Dylan ended up selling that Cryptopunk for $7.5 million. 
        • He finally has a realization that the community is probably more important than the art itself. Dylan really likes the market, conversations and interaction in the Cryptopunk community. 
      • Dylan also shares the profound emotional attachment that exists in NFTs which is not seen in other asset classes. 
        • It’s much easier for people to be emotionally attached to a cultural artifact or asset (Like art) than traditional assets like stocks, properties and brands. 
      • Caveat: Dylan feels that it’s difficult for most people to understand on an emotional level, why any art piece, or any NFT you own, can be so compelling or profound to you until you yourself have a similar experience. 
      • It’s hard to truly understand the appeal until you buy an NFT yourself — but once you walk that journey and you do understand, you’ll never go back. Otherwise, it’s easy to brush NFTs off as a bubble or a scam. 

In this 20-tweet series, Perugia, the buyer who paid $7.5 million for Dylan’s Mona Lisa explains why he’s willing to pay such a high price for that punk. He also indirectly explains the concept of a positional good.

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  • If Perugia’s post was too abstract, you just need to understand 5 points:
    • Perugia feels that the Crypto space will eventually be produced and joined by the wealthiest people on earth. He feels that the most valued assets in the world will be digital assets. 
    • Wealthy people don’t mind paying the market price or a premium for luxuries with the money they’ve earned. (That’s the whole basis of positional goods). It’s like buying a yacht or a Ferrari. 
    • Cryptopunks was the first NFT to really gain traction (like Bitcoin which was the first Crypto). A floor punk is 2,100 times scarcer than Bitcoin. 
    • Time in the market beats timing the market. Perugia is bullish on the long-term outlook of Crypto and NFT space and hence, he’s willing to fork out good money for a very rare Cryptopunk. 
    • In the NFT space, there are varying levels of scarcity in a collection. Cryptopunks is a historical NFT, that explains its high value. However, even within the Cryptopunk collection, there are certain NFTs that are scarcer than others (Like the Aliens Punks or punks with Bandana). The rarer series will command a premium. 

I get it… this issue is super looong! The reason why I decided not to write a shorter condensed form of the key points is because I wanted you to understand the content (along with the context).

And it’s impossible for you to understand the context if I remove the stories – Like the sharing from Dylan Field and Perugia. 

I hope this opens up your mind and gives you a comprehensive understanding of what NFTs are. 

Cheers,

Zach

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