Quick Take

• PFP is the most developed type of NFT.

• Community is crucial for the success of PFP

• Currently, PFP projects are gradually reaching their limit.

• The problem of taking advantage of IP, generating sustainable revenue, and expanding the community are problems that need to be solved by PFP projects.

What exactly is PFP?

PFP is a type of NFT that allows users to use it as their profile pictures. PFPs, while not limited to a specific standard, are frequently represented in the form of a particular character.

The cryptocurrency market promotes decentralization, in which users are not required to reveal their identities but can freely participate in on-chain activities. However, when participating, users still need something to represent themselves. PFP is the best solution for that issue. The current NFT market with the most market capitalization, trading volume, and liquidity is PFP.

What makes PFP success?

A collection of NFT PFP includes many images with a similar concept. People who own PFP will form a community. A PFP project must generate more demand (who wants to own NFTs) than supply (the number of NFTs issued). So the community is the key to a PFP project's success.

Meeting members' needs becomes a critical factor. As a result, we can use Maslow's hierarchy of needs to explain why a PFP project is successful.

If we consider the first two basic layers, physiological and safety needs, are met by default. The following steps demonstrate the user's subsequent behavior after purchasing NFT:

Step 1: Expanding at level 4 (Need for Achievement)
When a new NFT collection is released, users' focus is mainly on the 4th floor. Users are drawn to and want to own characters that reflect themselves. This desire is multiplied when it comes to characters that can express themselves, and have beautiful rare traits,...
That is why top PFP collections have a wide range of art styles. There are pixel graphics, cartoons, anime-style collections, and so on. People's tastes in art differ, and each group is unique. The top PFP collections slide different cuts of the PFP pie.

It's no coincidence that the prices of NFTs in the same collection vary widely. Many people are willing to pay a high price for an NFT rather than buy the cheapest NFT. To them, having the right NFT is far better than having a low-cost NFT because this is what represents them in crypto.

Step 2: Increasing role of layer 3 (Social needs)
During the initial period, demand for layer 4 occasionally exceeds demand for layer 3. At the time, users prefer to own the most appropriate NFT rather than join the community of people who own NFT in that collection.

However, the nature of PFP is just a picture, and the number of PFP projects is enormous. If the project lacks a good moat, the user's interest will wane, and they will leave. Layer 3 in Maslow's hierarchy of needs becomes increasingly important. Having an NFT PFP allows the user to participate in a community. Although there are thousands of new projects are launched daily, the top PFP is still keeping their positions.

Step 3: Targeting layer 5 (Need to maximize potential)

A community can only grow if it has strong and contributing members. The project that creates the best conditions for members to make value will have an advantage in the long run. Intellectual property (IP) rights are one of the most important competitive edges of a PFP.

Each country has different definitions of intellectual property rights, but in theory, intellectual property provides users with the following:

• Right to reproduce the work;

• Right to create derivative works based on that work

• Right to distribute copies of the work

• Right to perform the work

• Right to publicly display the work

• With sound recordings, the right to perform the work publicly via digital audio transmission

The value of PFP is not just about an image and community but also about the potential value that they may produce.

However, the topic of intellectual property is controversial. From the perspective of NFT holders, they want to truly own the NFT rather than just a jpeg image. From a project standpoint, most still want more control so that the brand is not diluted and can serve to maximize future benefits.

There have been lawsuits filed as a result of differences in user rights when purchasing NFT, such as:

• SpiceDAO spent around $3 million to acquire the unpublished script for the film Dune, mistaking it that will grant them a copyright. SpiceDAO then attempted to sell an animated series to a streaming service - link

• Hermes sues an artist for selling NFT collections using the brand's image - Link.

• Nike sued StockX for selling unlicensed Nike-branded NFTs. - Link

IP opens new opportunities to add value to PFP. Still, new challenges arise regarding benefits and how to balance the needs of users and projects.

We will examine some of the most successful NFT PFP today using Maslow's tower to determine why such collections can be successful.

Case studies

Bored Ape Yacht Club (BAYC)
Bored Ape Yacht Club (BAYC) is a collection of 10,000 monkeys made by Yuga Labs. BAYC represents people who “ape” in the crypto market and get wealthy. Once rich, the monkeys get bored, hence the collection's name, Bored Ape Yacht Club.

The show follows several Ethereum users as they enter the market, discover life-changing opportunities, and "ape in." As a result, they became wealthy, and many became financially independent and no longer desired to make money.

With that story, we can see that from the beginning BAYC target audience is sharks and whales.

With such a compelling story and high quality, BAYC's mint price is only 0.08 ETH (less than $200 at the time of mint). This attracts many people to mint, and as a result, more and more people know about Bored Apes (including sharks and whales). They see themselves and purchase BAYC.

>> The fourth level of Maslow's hierarchy of needs has started, and everyone now wants to own a BAYC NFT.

The community is the most crucial factor in Yuga Labs' success. Yuga Labs understands this and has created many real-life events, accessories, and even comic series for BAYC. This created an active community in which owners want to flex their NFTs. This has a significant network impact and propels Yuga Labs' initiatives forward.

>> Resources are focused on layer 3, the community is the most important factor for BAYC to survive and thrive.

And when the community is strong, they start to add more value. Yuga Labs takes an open approach to intellectual property rights for BAYC. Aside from not being permitted to use the BAYC trademark, NFT BAYC owners are free to use their own NFT images in various ways without fear of being sued by Yuga Labs or third parties.

We may notice the picture of BAYC on various things such as accessories, music videos, and eateries. Furthermore, the fact that numerous prominent actors are adopting BAYC's image raises the project's brand value and improves the value of BAYC's IP.

Azuki
Azuki is a 10,000 NFT collection in the anime style that launched on January 12, 2022. Azuki's elegant and unusual look drew the attention of NFT collectors worldwide, quickly becoming one of the market's most valuable collectibles.

Azuki's growth strategy is similar to BAYC (Bored Ape Yacht Club), but unlike collections that try to follow and feature images of monkeys or other animals, Azuki has carefully examined the market.

Azuki focuses on Asian clients rather than the European market, where most Ape holders are. From the name Azuki, which means "red bean" in Japanese, to the Anime-style graphics have made Azuki stand out.

In addition, the Azuki team really focuses on user experience and game theory components. The ERC721A method, which allows the minting of multiple NFTs with only the same gas as minting one and the subsequent picture exposure, has contributed to the project transaction volume.

>> Maslow Tower's layer 4

Azuki is also concerned about the community. Members who own NFT Azuki are proud to talk about the garden (a chat room and a space for members to communicate and exchange ideas that are accessible only to NFT holders). Azuki also has an amazing offline event, gifts for the community.

>> Maslow Tower's layer 3

Azuki holders, like BAYC, have absolute rights to utilize the NFT own, both commercially and non-commercially. This has inspired Azuki owners to develop a variety of creative items such as anime t-shirts, and artwork,..... However, the author believes Azuki's present IP value can be significantly bigger.

>> Layer 5 of Maslow's Tower is gradually taking shape.

CryptoPunks
CryptoPunks is a collection of 10,000 NFTs designed in an 8-bit pixel aesthetic. CryptoPunks was one of the world's earliest well-known NFTs, inspiring numerous artists and even pushing the creation of the ERC-721 token standard.

Unlike other collections, CryptoPunks value line on its historicity. CryptoPunks existed before the development of the NFT's ERC-721 standard. Larva Labs had to tweak the ERC-20 code to produce multiple tokens. That innovation spurred the creation of the subsequent ERC-721 standard.

While CryptoPunks may not seem visually appealing, they are still attractive to NFT collectors because they represent a pioneering, revolutionary, and historical endeavor. The average selling price of Punks exceeds $500,000 during 2021-2022. CryptoPunk#5822, in particular, was sold for 8,000 ETH, or approximately $23.7 million at the time of sale.

Although many people continue to use CryptoPunks as a PFP, the CryptoPunks community is quite large. But with that nature, CryptoPunks should be viewed as a mix between PFP and Collectibles. Top PFPs are frequently traded, but with CryptoPunks, they are rarely listed.

Larva Labs did not attach intellectual property rights to NFT CryptoPunks. This might be a nice move to help CryptoPunk retain its value as a "historical artifact."

But in reality, Larva Labs sold the rights to use the NFT CryptoPunks image to UTA (United Talent Agency) and the IPs for both CryptoPunks and Meebits (Larva Labs' second project) for Yuga Labs. So we can see that Larva Labs is primarily interested in making the most of its NFT project. Now that the IP has been transferred to Yuga Labs, users who own CryptoPunks NFT will have the same rights as those who own BAYC NFT.

Reviews and Predictions

About IP
PFP is a legitimate and widely accepted demand in crypto. The key factor of a PFP project is the community. To create a community, the projects must meet the members' needs (Maslow tower). Every day, new NFT projects emerge, but top PFPs can still keep their positions. This demonstrates the community's strength and the significant value individuals can bring to the project.

Top PFP is focusing on developing strong layer 5. However, each project approaches IP challenges uniquely. This strategy may impact the members' contributions and the future value of the PFP project. This is also an essential factor to consider for PFP investors.

Top PFP IP

• Free for commercial and non-commercial uses (brand IP not included): CryptoPunks, BAYC, Azuki, CloneX, Meebits, Cool Cats, World of Woman

• CCO (anyone can use any NFT in the collection): Moonbirds

• Some special cases are: Doodles limit the amount of revenue generated by derivative works by $100K.

The community is the key success of PFP. Projects that limit the value created by the community will limit their potential. Rather than restricting PFP projects should support users to make the most out of the intellectual property.

What’s coming next ?

The problem with PFPs is that they are restricted by the number of community members, which limits the value created by them. BAYC's parent company, Yuga Labs, recognizes this and continuously expands its world. Yuga Labs ecosystem now has:

• BAYC (Bored Ape Yacht Club).

• MAYC (Mutant Ape Yacht Club).

• BAKC (Bored Ape Kennel Club).

• CryptoPunks.

• Meebits According to a leaked document, Yuga Labs is likely to launch a new collection called Mecha Apes - Link

The problem is that CryptoPunks, Meebits, BAYC,...are all separate from each other. The current challenge for Yuga Labs is determining how to transform many small countries into cities and contribute to a great nation. That is why the Metaverse Otherside project was created.

We will learn more about Metaverse and the applications of NFT in Metaverse in another post. However, we can see Yuga Labs' goal is to create a world, where the community of the most prominent NFT PFPs can join and create a dream universe.

Other top PFP projects also take steps to overcome the current community barrier. As an example:

• Doodles announce the development of Metaverse.

• Azuki will fractionalize BoBu NFT, who owns that NFT piece will have access to The Garden.

In the future, there will be several attempts to broaden the community of PFP projects. The approach that attracts more users will have the advantage of expanding and creating more value.

The revenue issue
Right now royalties, ( the commissions that the seller must share back to the project every time someone purchases the NFT), are the primary source of revenue for PFP projects. The royalty fee is calculated and applied differently for each project (5%, 7.5%, and even 10%, etc.) and is an important factor when investing in an NFT.

That’s why we can see follow volume to view NFT income. In 2021, royalties from projects like BAYC, Azuki, and Doodles…. are worth millions of dollars. However, given the current market conditions, we can see that the transaction volume of NFT projects has decreased significantly.

To make PFP develop sustainably, royalty must be replaced with another reliable source of revenue. The following are some business models that projects can establish using the PFP:

• Licensing of IP / artwork to small & big brands: Uniqlo T-shirts with PFP pictures

• Creating new product lines: Doodles, BAYC coffee

• Sale of digital collectibles that have some utility: akin to skins for Fornite/League of Legends.

• Content & Media production house

• Subscription services

PFP projects already have an enormous potential fan, and consumer base. Projects understand how to capitalize on this will have a significant edge.

However, PFP must remember that the community is the most critical aspect of their success. Major NFT projects raise large sums of money regularly, such as:

• BAYC raised $450 million at a $4 billion valuation, more than $285 million through the Otherside NFT issue, and expects to raise more than $50 million in the future by minting Mecha Ape.

• Doodles raised $54 million at a $704 million value.

• Azuki raised $30 million at a $400 million valuation.

This raises the issue of whether the team is becoming greedy and losing sight of the community. Will PFP projects become VCs' playgrounds?

Conclusion

PFP is the most developed type of NFT.. PFP projects are currently reaching their limit. PFP must tackle the difficulties of leveraging intellectual property, producing sustainable revenue, and extending the community.

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