NFTs Aren’t the Reward

Continuing some thinking about value accrual in web3 from earlier this week (link) 

NFTs aren’t the reward. They’re a filter to decide who gets future rewards. 

For a company, the equity entitles you to future profits. For an NFT project, holding the genesis collection entitles you to nothing, other than the fact that project teams tend to reward genesis holders as much as possible. 

The “profits” or cash flows, in NFT world are airdrops, tokens, and minting opportunities. 

You hold BAYC, you get MAYC. You hold RTFKT, you get MNLTH. 

Rewards like that are the pay day. They provide a return on your asset and grant you the option of liquidity. If no one believes in the project, they will all dump the airdrop, tanking the price. If many believe in the project, they will hold the airdrop, and the price will stay high. Most holders don’t desperately need to be liquid in their investment since they’re already holding an NFT worth tens of thousands of dollars, but the option to get more liquid is a nice reward. 

This is where Doodles misstepped with Space Doodles. They aimed to do a “non dilutive” airdrop where people could simply wrap their Doodle and turn it into a Space Doodle. But dilution is not the enemy. Illiquidity is the enemy.

Over the long term, it’s easier to stay in a project with a 5 eth floor that generates a few eth in tokens every year, than it is to stay in a 8 eth floor project. The project generating tokens allows you to dump them and get more liquid. Again, if everyone does this, the token becomes worthless, so the teams need to execute on something that makes the tokens worth holding. 

Similarly, holding a 5 eth floor project that generates a few eth in airdropped value each year is probably a better place to be than holding an 8 eth floor project. The option to sell pieces, without exiting the ecosystem is valuable. 

But, things start to get pyramid-y. If you buy for promise of future airdrop, what gives said airdrop its value? New liquidity has to enter that ecosystem. The team has to continue to deliver. The total market cap of all assets has to continue to grow in order for the airdrops to remain value additive. 

In the short term, airdrops are cash flow. In the long run, this model is hard to sustain unless the projects can continue to grow. Few will be able to keep the momentum going, but those that do will create immense value for their holders. 

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