Headlines often kill off nascent industries during bear markets. According to journalists, Bitcoin has died over 450 times.

The hype cycle is a common pattern, and cynical headlines capture the disillusionment that follows periods of inflated expectations.

Lately, everyone has an opinion about NFTs. They are the future of everything. They are a sham. And everything in between. What’s going on here?

[h/t to a surprise SlimeSunday drop for the header photo]

Culture Markets

One definition of culture is “the way of life of a society.” Fashion, art, and entertainment are pillars of society’s way of life. They are also major global markets. Culture is big business.

There are at least ten fashion brands worth over $10b including Nike and Louis Vuitton at $30b+ each. By some estimates, the global fashion industry is a $2 trillion market including an $80b+ global sneaker market. Hermes sales are up 24% in Q3 as tech stocks are falling faster than a tungsten cube dropped from a 45m tower.

Every year over 5 million people visit each of the world’s top museums and spend over $50b on art and antiques. People spent $20b+ at the box office last year (down about 50% from 2019). The global video streaming market was $59b in 2021 and music industry revenue hit $26 billion, the highest since the 90s. Gamers spent more than $50 billion on digital-only video games and nearly $100 billion more on in-game goods, outfits, and extra lives.

The Metaverse

The metaverse means different things to different people. In a 2021 metaverse piece, David Hoffman from Bankless shared a table playfully updating some tech jargon.

Jokes aside, there is no escaping that we spend an increasing amount of time and money online in our personal and professional lives. The metaverse is part of modern culture.

But what is the metaverse exactly?

The sum of all virtual worlds, augmented reality, and the internet is a decent starting point. Then we can drill down and establish a layered metaverse taxonomy.

An outer layer might include anything someone does online using a digital identity. Twitter, Zoom, Discord, and Reddit (even AOL chat rooms back in the day) are examples of rudimentary metaverses where attention is directed into the digital realm — and several of these platforms already embraced NFTs.

The next layer — where I suspect most people consider the metaverse boundary — includes online gaming platforms such as Roblox, Fortnite, and World of Warcraft. It also includes web3 native open metaverses such as Sandbox, Oncyber, Decentraland, and Wilder World, but these are in various stages of development and have a fraction the engagement as the aforementioned online gaming platforms.

We already acknowledged digital gaming is a massive market, bigger than the music, video streaming, and movie industries combined. As far back as Q4 2018, Reed Hastings said “we compete with (and lose to) Fortnite more than HBO.” And Fortnite is just one of several major gaming products competing with Netflix for time and attention.

According to Matthew Ball, by January 2022 Roblox was averaging more than 4 billion hours of usage per month compared to 13 billion hours for Netflix. So it’s no surprise gaming, perhaps as a proxy for the metaverse, is a priority on the Netflix (and other FANG company) roadmaps:

• Netflix launches support for mobile games (Feb 2021)

• Netflix launches Stranger Things world in Roblox (June 2021)

• Netflix acquires three gaming studios (May 2022)

• Less than 2M of its 221M subscribers play Netflix games per day (August 2022)

The deepest layer is the Ready Player One, Snow Crash, and Matrix visions of the metaverse, ie. fully immersive virtual and augmented realities.

Wherever you think the metaverse boundary lies*, we can probably agree, it is an expanding presence in our lives.

*If you are interested to explore a more technical and comprehensive definition of the metaverse, check out Matthew Ball’s essays

Property Rights for Digital Assets

It was a big problem for the music industry when digital music files could be easily copied as mp3s. Now imagine what would happen to an economy if a currency could be easily copied, or in crypto speak, the double spend problem. The Bitcoin protocol solves this by maintaining an immutable record of ownership to prevent one person from spending the same Bitcoin multiple times, a major breakthrough.

Non-fungible tokens (NFTs) are another form of digital property that rely on blockchains to certify authenticity and ownership. However, unlike Bitcoin and other fungible tokens, NFTs have identifiers and metadata making them provably unique and thus not interchangeable.

These and other important properties enable NFTs to level up the creator economy and represent digital assets such as art, avatars, and other in-game items.

Creator Economy 2.0

The creator economy was a major beneficiary of the web2 era. Social media enabled content creators to expand and engage fan communities while newer platforms such as Patreon and Substack helped creators nurture and monetize super fans:

• 200k creators collectively earning $100M+ per month from 7m+ patrons on Patreon in 2021

• 500k paying subscribers and top 10 authors collectively earn $20m per year on Substack

Web3 enables creators to benefit from disintermediation in new ways. In the fine art market, galleries and auction houses command as much as 50% of primary sales, and artists earn nothing on secondary sales.

Web3 infrastructure such as the Manifold studio enables artists to be more independent, bypass galleries, and sell directly to collectors. Unlike the traditional art market where Banksy didn’t see a dime of the $60M Banksy print sales at auction houses in 2021, royalties on NFT secondary sales can be automatically enforced by smart contracts and marketplaces.

Galaxy estimates over $1.8 billion worth of NFT secondary sale royalties have been paid on the Ethereum network including almost $150 million to Yuga Labs for its Bored Ape, Mutant Ape, and Otherside land collections.

Art

Mainstream media coverage introduced many people to NFTs when Beeple sold Everydays for $69M at Christie’s in March 2021.

Frothy valuations alone don’t validate a new trend. Skeptics point to tulips, comic books, and beanie babies when they dismiss NFTs as a passing fad. However, they miss the point that in addition to the other benefits acknowledged earlier such as disintermediation and royalties, tokenized digital assets open the door for digital art as an investment grade fine art medium.

Since blockchains provide an immutable record of ownership, NFTs protect digital art from authentication challenges faced by the traditional art market and piracy issues that plagued the music industry after its digital transformation.

That said, just minting digital art as an NFT doesn’t make it fine art. While Beeple was part of the first wave of digital artists to crossover into NFTs, he had already built a following as an originator of the “everyday” movement in 3D graphics with over 2M IG followers and another 700k on twitter. He was also a sought-after designer for concert visuals (eminem, katy perry, …) and corporate clients (apple, nike, adobe, …).

So it’s a combination of the unique properties of NFTs plus a track record and reputation as an elite digital artist which enabled Beeple to cross over into the fine art world alongside the old masters at Christie’s, Sotheby’s, and other global auction houses. Now he’s building a 50k square foot digital art exhibition space in Charleston, SC that will double as a studio and public museum.

Meanwhile, Refik Anadol (AI data paintings), Raf Grassetti (digital sculpture), Fvckrender (luxury dreamscapes), Nick Kuder (generative art), Praystation (generative animation), Tyler Hobbs (on chain generative art), Cath Simard (composite photography), Reuben Wu (aeroglyphs), Gmunk (infrared photography), and Pak (dynamic NFTs) are other examples of elite digital artists who crossed over to the fine art world because of NFTs.

Avatars as Identities

Identity is a form of self expression. Celebrities and entertainers showcase how much time and money goes into shaping an identity, a big reason fashion is a $2+ trillion dollar industry and Balenciaga can charge $600 for a t-shirt that costs less than $10 to make.

If you spend any time on social media, you may have experienced this firsthand as you, or people you know, spend hours curating a feed of photos, videos, and other content aligned with an identity.

It’s become common on twitter and other social media sites for people and brands to use an avatar as a profile picture instead of a photo or logo. Jay-Z and Alexandre Arnault — who know a thing or two about popular culture, fashion, and identity — both have crypto punk profile pictures (PFPs) on twitter. Planes, the fashion brand owned by Jay-Z’s record label Roc Nation, uses an Aku project avatar as its PFP and recently dropped a limited edition Aku x Planes crown to wallets holding an avatar with a branded Planes trait.

Celebrities such as Snoop Dogg, Eminem, Jimmy Fallon, Steph Curry, and others embraced avatars from the Bored Ape Yacht Club by Yuga Labs, while Odell Beckham Jr recently announced he is joining Lebron James at RTFKT (owned by Nike) by switching his affiliation from punks to clones.

PFPs are even more important for pseudonymous influencers and entrepreneurs, such as Punk 6529, whose online identity is entirely based on its PFP, and Richerd, founder of Manifold, who turned down a $9M offer for his cryptopunk which became a priceless signature of his personal brand.

Interoperability

Interoperability is an exciting feature of an open metaverse. What’s the point of owning a rare CloneX avatar with Murakami drip if you can’t use it everywhere?! Or as Robby Yung, CEO of Animoca Brands, explained at a recent web summit, “There is no metaverse without Web3, because you need to have that transaction layer so that you have interoperability between content and you can bring it from place to place.”

Web3 products facilitate interoperability by requiring users to connect a crypto wallet, such as metamask, to verify their identity when creating an account. Contents of a connected wallet, ie. the user’s digital property, enable Web3 products to tailor the user experience for example by limiting access to (or token-gating) special features.

So unlike most web2 products where anyone can use the image file of a CloneX avatar as a profile picture, a web3 game such as Sandbox, can verify ownership of a particular CloneX NFT in a connected wallet prior to letting someone use the corresponding voxel avatar to play a new game on an exclusive parcel of land.

Sebastien Borget, the co-founder and chief operating officer of The Sandbox, described an advanced form of interoperability during an interview with Cointelegraph, “Users will want to bring more than just the visual appearance of their avatar from one virtual world to another. They will also want to carry their online reputation, progression and achievements with them.”

While the combination of web3 products, crypto wallets, and NFTs enable Sebastien’s vision of an open metaverse accessed by a persistent digital identity, some technical and legal headwinds to interoperability remain.

Technical Headwinds

The digital asset represented by an NFT, such as avatars, digital fashion, and other cosmetic in-game items (eg. weapon skins), may require different 3D file formats for different web3 products. For example, each CloneX avatar is accompanied by eight different file types and this list is expected to grow over time as the project and technology standards evolve. Ready Player Me is one company tackling the technical challenges of avatar interoperability.

Legal Headwinds

NFTs are a polarizing topic in the gaming industry. Steam is one of the largest game distribution platforms in the world supporting over 30k games and 130M monthly active users. Valve, Steam’s parent company banned blockchain games in October of 2021.

There is considerable regulatory uncertainty looming over the crypto industry, not just games, so Valve’s initial position was not surprising. Many established financial institutions on Wall Street have taken a similar wait-and-see posture.

However, as noted in an open letter to Valve co-authored by 28 blockchain based games booted from its platform, blockchains and web3 token-based technology “can positively enhance the user experience of games, and create new economic opportunities for users and creators.”

Tim Sweeney, CEO of Epic Games, responded to Valve’s blockchain ban by welcoming games that incorporate cryptocurrency and blockchain based assets provided they follow the relevant laws, disclose their terms, and are age-rated by an appropriate group. Epic recently listed Blankos Block Party, the first Web3 based game on the Epic Games Store.

Provenance for In-Game Items

Sony recently filed a patent for tracking unique in-game digital assets using NFTs and noted, “in traditional video games, there is no way to differentiate a specific instance of an in-game item that a famous player of the video game used to win a famous tournament from any other instance of the in-game item.”

Sports memorabilia is a $25B+ market where collectors are willing to pay a considerable premium for items worn by stars during iconic moments. For example, a collection of eight game-worn Jordans fetched over $900K at Christie’s in 2020.

eSports is a $1B+ industry. 40k+ people attended PGL Antwerp Major 2022, the largest indoor eSports event ever, and over 5 million people streamed the 2022 League of Legends world championship online.

How much do you think a super fan might be willing to pay for an interoperable avatar or weapon skin used to win a major eSports tourney? Oh and unlike game worn sneakers, an iconic digital avatar never wears out so won’t depreciate with continued use.

Avatars as Intellectual Property

The Marvel Cinematic Universe (MCU) is the most successful film franchise in the history of Hollywood. Acquired by Disney for $4B in 2009, Forbes estimates the Marvel empire is now worth more than $50B. Pokemon is another global media empire. It started as a card game in 1996 and grew into a top 5 global licensor with $8.5B retail sales by 2021 across its entertainment portfolio of games, animation, and merchandise.

The category defining NFT projects of this era will create durable brands based on intellectual property that appeals to a global audience. The Bored Ape Yacht Club was one of the first NFT projects to give its collectors commercial rights. The pitch deck BAYC used to raise $450M at a $4B valuation highlights the missing thing from most metaverse projects is “a story to care about and participate in.” Otherside is the open metaverse BAYC is developing, and its launch marked the BAYC ecosystem entering story mode.

RTFKT and Aku are two other projects developing story-based IP for multiple verticals such as film, TV, and games.

RTFKT, which has a strong track record, recently announced Clone X Story Mode and Project Animus. While they haven’t revealed many details (secrecy is very on brand), it’s obvious that story is a high priority for the founding team and Pokémon had a major influence on them.

Developing story that will appeal to and inspire a mainstream audience has been a north star for the Aku team from the beginning. Aku is a character Micah Johnson created after hearing a young boy ask “Can astronauts be black?” They’ve since been featured on the cover of Time magazine’s metaverse issue, partnered with some of the most relevant brands in tech, media, and culture, and were featured alongside some household names as the only non-Disney owned IP at the 2022 D23 Expo, Disney’s annual ultimate fan symposium.

It might sound crazy that an NFT project could become the next Pokemon or Marvel. But you know what else sounded crazy twenty years ago, Netflix competing against Blockbuster when they were a similar size as Pokémon, earning $6 billion per year with 60k employees and 9k stores.

The UE5 Wild Card

This market is still in its infancy, and blockchains aren’t the only new technology on the scene. Unreal Engine from Epic Games is the second most widely used game engine and Unreal Engine 5 (UE5) is its first major upgrade in 8 years.

In addition to hyper-intricate 3D detail, facial realism, and large-scale world building, UE5 enables media companies to repurpose digital assets based on proprietary IP for multiple verticals.

For example, Lucasfilm used Unreal Engine to make The Mandalorian. Now, according to Kim Libreri the CTO at Epic Games, Disney can develop a Mandalorian video game using the same inventory of digital assets.

Interestingly, UE5 is free to use and Epic Games only starts taking a 5% share of gross revenue after a project’s first $1M. This makes it a gateway for many creators … including NFT projects.

Yuga Labs is aligned with Improbable, a British metaverse scaling solution which supports Unreal Engine. RTFKT and Aku are both also prioritizing UE5 on their roadmaps.

This means any digital assets RTFKT creates for Project Animus or that Micah Johnson and the team supporting him — which includes Kiri Hart and Stephen Feder who you might know from their work on Star Wars at Lucasfilm — create to bring Aku to the silver screen can also be used for games and animated shorts based on the community-owned intellectual property from each project’s NFTs.

What’s Next?

There is no denying we are in the deep bowels of a bear market. But the pendulum will swing back again, and the next cycle probably won’t look like the last.

If you squint, you might be able to see a future where a few web3 projects make it onto this list of top Global Brand Licensing Companies, either by acquisition or as independent companies after years of organic growth.

Plus we have only scratched the surface of the addressable market for NFTs and trust minimized applications. Punk6529, a pseudonymous leader in the NFT community, defines NFTs as a standards-based, interoperable technology for direct internet-native ownership of intangible assets. He developed an adoption pathway for NFTs which foresees an evolution from NFTs used primarily for natively digital, intangible assets to a future where they are also used for token-backed physical, tangible assets once regulatory bridges are in place.

Chainlink envisions a similar future with an addressable market for trust minimized applications in the hundreds of trillions of dollars (though not all trust minimized applications will require NFTs).

The Greek philosopher Heraclitus once said, ”The one constant in life is change.” Microsoft is the only company that appeared on a global top 10 list in both 2000 and 2022.

Dapper Labs, the same company that launched CryptoKitties in 2017 reinvented itself this cycle with NBA Top Shot. Many artists and NFT projects are still growing engaged communities, developing intellectual property that will appeal to a mainstream audience, and assembling strong teams that are busy building behind the scenes.

Expect the best web3 projects, maybe some of the ones mentioned in this piece, to build durable brands and reemerge during the next cycle partnering with (and challenging) established players in major global culture markets.

wgmi.