Keanu Reeves broke out laughing during an interview when asked if he knew about Matrix Resurrection NFTs and the long digital lines of potential buyers crashing the site. The interviewer referred to the demand for tokens that have “digital scarcity,” to which Reeves added, “and can be easily reproduced!”
Many of us shake our heads at some of the surreal, virtual aspects of the digital economy, especially where value is not obvious. We're here to address that, demystify NFTs, Web 3.0, and the metaverse, and explain why they are essential for investors or anyone else to understand.
Despite Keanu's chuckle, NFTs are not reproducible. NFT stands for non‐fungible token, which are digital assets that are provably unique at the code level: only one ever exists. NFTs allow you to buy and sell ownership of unique digital items and keep track of who currently owns them using the blockchain. Bitcoin, and most general crypto assets, are fungible, which means that they can be exchanged and have equal value. Dollars are fungible. Brand‐new pencils are fungible. Anything that can be traded for another thing of the same type that has the same properties and value is fungible. With Bitcoin, each coin is the same and contains the same uses. Every bitcoin is the same as every other, just like a dollar in your wallet is the same as any other dollar. By contrast, NFTs are not interchangeable. No NFT can be reproduced. It's a new data structure that will have a profound impact on us.
There has been an incredible amount of hype around NFTs and the art world. Mike Winkelmann, aka “Beeple,” set the record with the sale of his NFT “The First 5000 Days” for a jaw‐dropping $69 million. While not at that level, one‐of‐a‐kind issuances and CryptoPunks, one of the first NFT collections, have NFTs that have garnered thousands each. This is a big reason for the hype wheel. Individuals have spent fortunes to acquire these unique treasures (see Figure 5.1) but, let's face it, just because it's provably unique does not mean that it's the Mona Lisa.
NFTs are a significant aspect of Web 3.0 and the metaverse because NFTs are digital assets that users can own through blockchain technologies. NFTs have certain benefits that other digital transactions do not, which can be summed up in two main parts. First, because NFT transactions are recorded on the blockchain, they gain all of the blockchain's benefits. Second, each NFT is provably unique, and you can own and buy and sell it. This distinction seems a little confusing, so we'll unpack that further.
If you buy a digital piece of art, in general, you receive a copy of the original file. It's not unique, won't accrue value, and you can't resell it. You may have the right to use it in certain places (privately or commercially), but you don't truly own the digital artwork the same way you would a painting in your home; however, buying an NFT of artwork is pretty much the same as owning a physical piece of art. Using blockchain tech, each NFT is unique at the code level, so we can tell the difference between the two files even if they look the same. Unlike PDFs or JPEGs, which you can't resell after purchase, you can buy and sell NFTs as much as you like because of their uniqueness. Sure, you can make a copy of an image easily on a computer, but that's not the same thing, just like a photo of the Mona Lisa is not the same as the original. Provable uniqueness matters, and now it exists in the digital world.
This goes further. Because we can use blockchain transactions to track the history and the creator of NFTs, we can do more with them than with physical assets. For example, anybody who creates an NFT can apply a royalty rate to their digital asset and from then on, any time someone buys or sells the NFT, the original creator would make royalties.
A growing number of influencers and buyers in the fine art world see the promise of NFTs. Willscape Management owner and founder Olivia Kwok Decani – an art investor, consultant, and influencer who created an art fund for a private bank in Switzerland – penned a powerful opinion piece for World Art News pointing out the value of NFTs for museums and galleries:
Before NFTs, digital art was often duplicated, making it almost impossible to separate an original file from a copy. Through the use of NFT and Blockchain technologies, digital artworks can now be identified, authenticated, safely stored on and offline. Distinguishing them from duplicates is easy and convenient. This allows artists to earn money from their digitized artworks by selling original or limited copies.
NFTs are also now starting to be used in traditional (physical) art. St Petersburg's State Hermitage Museum have created NFTs from some of their artworks – including the likes of Vincent Van Gogh and Claude Monet. … Art that doesn't exist in a physical form can now be bought, sold, and collected, opening up many opportunities for artists, collectors, and investors. There are also great benefits to physical art from NFTs.
Thanks to the introduction of NFTs, art museums and galleries now have the ability to earn additional revenue from their artworks. Real paintings can now stay securely in the same places while generating extra income from the sale of their one‐of‐a‐kind or limited edition NFT copies. Art museums keep the originals for the public to enjoy, while their NFTs are sold Worldwide! A win‐win.1
We are going to see more auctions such as RtisitiQ's selling of digital NFT versions of the Indian artist Raja Ravi Varma's The Coquette and Reclining Nair Lady, two paintings considered to be national treasures and not allowed to be taken out of India, but of which authentic digital editions can now be created.
The Rembrandt Heritage Foundation honored the passing of world‐renowned Rembrandt expert Professor Dr. Ernst van de Wetering by auctioning off Rembrandt's masterpiece The Night Watch in 8,000 digital pieces (NFTs). This is a whole new provenance for art, and the art world is the first practical use of NFTs – but this is only the beginning.
Up until this point we've been discussing art, as that is the most widespread use of NFTs as of this writing; however, an NFT is not an NFT because it is art; an NFT is an NFT because it's provably unique, one of a kind, and not reproducible. This means it can represent anything, from a mortgage, a title to a home or car, a ticket to a concert, health records, digital goods, birth certificates, to other unique items. Suppose we had a home title NFT properly implemented so that a court would recognize it. In that case, we would no longer need mortgage title insurance. The provenance or ownership history of the home could be proved because NFTs blockchain entries are immutable. This is just one of the many use cases we will have.
As another current and non‐art example, megabrand Starbucks in 2022 launched its Odyssey experience, which offers members the ability to earn and buy digital collectible stamps (NFTs) that will unlock “access to new, immersive coffee experiences.” Starbucks Odyssey will be “a new experience powered by Web 3.0 technology that will offer Starbucks Rewards members and partners (employees) in the United States the opportunity to earn and purchase digital collectible assets. …”
Starbucks is one of the first companies to integrate NFTs with an industry‐leading loyalty program at scale while creating a digital community that will enable new ways for Starbucks to engage with its members and its partners. Once logged in, members can engage in Starbucks Odyssey “journeys,” a series of activities, such as playing interactive games or taking on fun challenges to deepen their knowledge of coffee and Starbucks. Members will be rewarded for completing journeys with a digital collectible “journey stamp” (NFT).
YouTube announced that it would allow creators to monetize YouTube Shorts using NFTs. CEO Susan Wojcicki said, “We see creators selling their videos and memes as NFTs. We're a platform that distributes content and monetization. If NFTs are an important part of that equation, then we think we should be there.”
Nike, famed for its scouts and “cool hunters” who spot youth obsessions–trends before they reach the big mall on the highway, acquired RTFKT Studios, a decentralized corporation of crypto creators, calling it “a leading brand that leverages cutting edge innovation to deliver next generation collectibles that merge culture and gaming.” RTFKT collaborated with teenage artist FEWOCiOUS to sell real sneakers paired with virtual ones, selling some 600 pairs/NFTs in just six minutes, netting over $3.1 million at the time, Richard Lawler reported in The Verge.
These are just a few examples of how big brands are integrating NFTs today, but this is just the beginning. NFTs will play a key role in the metaverse, virtual words in which we can participate as digital representations of ourselves. If that sounds a little esoteric, then read on and let's explore this together.
Conversations about the metaverse are everywhere but we think the term probably thrown around a lot without any real understanding of what it is or, more importantly, what it can be. The metaverse has been conceptualized for many years, and we've heard many definitions, from “the 3D Internet” (that's not a complete definition) to “digital reality” (words that don't really convey completely). Many of the fundamental elements we've been discussing come together to form the metaverse, including blockchain technology, virtual reality (VR), augmented reality (AR), artificial intelligence (AI), smart contracts, NFTs, and crypto assets, among others.
For our purposes let's consider the metaverse to be an immersive digital world that will allow us to conduct ourselves just as we do in the physical world. We can possess objects, talk to people, read, write, play, work, travel – the list goes on and on. Importantly, this world will allow us to do things that we cannot do in the physical world. Some are pure fun, such as being able to fly or teleport, while others are more practical, such as having face‐to‐face conversations with people halfway across the world as if they were in our living room with us.
Up until recently we've had to rely on our imaginations, books, movies, and games to give us a sense of what it would be like to operate in an extraphysical capacity. The metaverse, however, will allow us to truly experience a digital world firsthand, through our own senses. In this world you are represented by an avatar, a digital version of yourself. Avatars can be created to look just like you or nothing like you, but they are the digital representation of you, with which you will experience the new frontier.
There have been many films that have represented their versions of what this could be like. In our opinion, one of the best, current representations of what the metaverse could be is seen in Steven Spielberg's 2018 film Ready Player One. If you haven't seen it, we recommend it. While you may take or leave the storyline, it clearly shows how we may all one day be jacked into a digital reality and it explores the differences and nuances that it may bring. We'd also add a 2022 Amazon Prime series called The Peripheral. In this series, VR and AR collide with quantum physics, where a headset user can link their haptics device directly into their brain, much like how we hear Elon Musk envisions his startup Neuralink. What's interesting about this series' spin on the metaverse is how a player can learn how to play a first‐person shooter game, gain those muscle memory skills, and then use an AR headset to make the real world look and feel more like a game – so much so that they can apply their game‐playing skill acquired in a VR game directly into the real world with an AR system. Just as Star Trek visions are now reality, we see Ready Player One and The Peripheral as some of the best examples of visualizing what accessing the metaverse could really be like.
Consider that NFTs can also play a role in identity, and we may no longer have logins. Instead, an ID‐NFT may authenticate your digital identity, store your data, and allow you to complete transactions in the same space. On top of that, creators can use this much like a resume or portfolio. The immutability of the blockchain will cement and make the authorship of a creator's work transparent. Pirate copies and reshares without credit will be much harder to accomplish.
Technology is tilting the playing field to the advantage of creatives. Imagine communities such as the Amazon Direct Publishing Community, where self‐published authors support and share tips and strategies, but each writer has more control and more profit. These are the kinds of decentralized collaborative communities being nurtured by the metaverse.
“Digital artists like Arc are drawn to the technology's ability to confer uniqueness, permanence, and proof of provenance,” wrote reporter Terry Nguyen in Vox. “Artists and musicians have historically relied on middlemen – auction houses, galleries, and streaming platforms – to sell or host their work. In some cases, they don't earn royalties from future sales. With NFTs, artists can ensure that they receive a predetermined share of royalties (usually 10%) from sales on the secondary market.”
In the metaverse via a pair of VR goggles (at least for now), we can visit friends, tour buildings, and even conduct business. Facebook, the social media platform with almost three billion users worldwide, became so convinced of this new world that they changed their name from Facebook to Meta. (As an aside, this resulted in the famed acronym FAANG (Facebook, Amazon, Apple, Netflix, Google) changing to MANGA, the word for Japanese comic books, which somehow seems appropriate when considering the digital world that is the metaverse.
Meta, while it was still Facebook, purchased Oculus VR tech in 2014 (for $2 billion) and subsequently evolved the product and brought it to market. I can remember in the middle of the pandemic donning a headset and meeting friends and family in the VR world Altspace. It certainly wasn't like in the movies but, honestly, it was way better than I expected. The user base is still very small when compared to traditional social networks such as Facebook (see Figure 5.2), but we think it's easy to see its potential and it makes sense that Meta is making this move. The metaverse stands to be the evolution of the social network.
Facebook isn't the only one, however, as the conglomerate market cap of the current Web 2.0 metaverse economy is estimated to be nearly 15 trillion dollars, according to findings by Statista, Bloomberg, MSIV, and Roundhill Investments (see Figure 5.3).
Eventually, using VR and AR technology, the metaverse will feel to many as realistic as the physical world. Using blockchain technology, you'll be able to own property and start companies just like in the physical world. Creators can hold events and meet fans around the world as electropop superstar Grimes did in Decentraland, a metaverse virtual reality where users can buy virtual property (in the form of an NFT plot of land). In late 2021, some major companies, including Samsung, Adidas, and Miller Lite, bought virtual properties, and additional artists like Grimes performed concerts on the platform.
Similarly, in 2019 Marshmello held a concert in Fortnite, a battle royale video game that drew 10 million fans, making it Epic Games' largest event. But what caught our attention was Axie Infinity, a video game that allows players to earn a living by playing the game. This is because the game is based on NFTs and has an in‐game economy based on Ethereum.
In Axie Infinity, players collect and mint NFTs of digital pets called “Axies.” Axies can be bred, used to battle each other, and traded on a marketplace using cryptocurrency. “Bosses” loan Axies to players, who grind the game in exchange for a wage.
These types of play‐to‐earn games have existed on the periphery for a while now. Still, projects like Axie Infinity demonstrate that the opportunity for more mainstream adoption– and for humans to explore engaging and remunerative activities – has arrived. As seen in Figure 5.4, in a 2021 survey of global Internet users, people ranked overcoming obstacles that they were prevented from doing in real life as the biggest benefit of the metaverse. They ranked enhancing imagination and creativity second, and identified the importance of the metaverse for upskilling, education, and exploring new career opportunities.
There are already many ways that people are considering using the metaverse, as illustrated in Figure 5.4, and this market will grow exponentially in the coming years. Citi's 2022 “Metaverse and Money” research report estimates that the metaverse economy could be in the range of $8 trillion to $13 trillion by 2030, with the creator economy driving larger‐scale adoptions by fans.2
We'll take this back to reality now and close this section out with a conversation about Web 3.0. Web 3.0 is a buzzword that is often heard and even more often misunderstood. We'll start by saying that Web 3.0 is a moniker to attempt to describe the next evolution of the World Wide Web. Roughly speaking, “Web1” was the early Internet and mostly consisted of static websites. This period was from the early 1990s through about 2004. This was a period primarily of consumer engagement. The Web evolved into what we can call the “Web2” period, which began around 2004 and continues today. We might consider the Web2 period as the period of big business consolidation and, importantly, one in which consumers simply gave up their data freely to conglomerates in the service of convenience.
Let's consider Amazon, Meta (Facebook), and Google, just to start. Amazon is basically the place to go online if you want to buy something. As a by‐product of this, Amazon knows a whole lot about your buying habits – something that would not necessarily be possible if you went to smaller storefronts that didn't talk to each other. Similarly, Meta knows your friends, your hobbies, your political interests, your favorite animal, and, well, far too much about you. Google does as well, primarily from searching, but also consider that for those who use Google cloud, all of your data is in their hands. This data, anonymized or not, can be used to create powerful profiles of who you are, your interests, and can even be used to predict behavior. We give this information up for convenience and, for the most part, since Facebook and Google are ostensibly “free,” why not? Well, Warren Buffett has been known to say, “If you've been playing poker for half an hour and you don't know who the patsy is, you're the patsy.” Similarly, if we're not paying for the service, then we, indeed, are the product.
The price we pay for this convenience is freedom. Our digital footprints are managed and monitored by a few, and this information can be used for the benefit of the corporation, and not necessarily for our own best interests. It can be crunched, processed, and utilized specifically to drive corporate profits, often with little consideration of our own personal needs.
Here's where this gets really troublesome. I listened to an excellent podcast some years ago that had Dr. Pippa Malmgren speak on this topic of big data, and her example stuck with me. Let's say a couple is going to get a divorce. To compound it, one of the partners, we'll call her Jane, is pregnant. We would argue this is private information (and, indeed, it is). Let's say, however, that Jane wants to get a home loan or some kind of credit. The credit company, however, through the use of AI and big data crunching, noticed many online searches about “divorce,” as well as “baby”, “birth,” and “crib.” This data then gets cross‐referenced with a recent Amazon purchase of an actual crib and other baby furniture and it confirms that there was a subscription purchased to an online legal service specializing in divorce. The AI may come up with the conclusion that our heroine, Jane, is indeed about to have a baby and is indeed about to become divorced.
Here's the problem: What happens if this information is then used to conclude that Jane is a higher credit risk, may have additional financial burdens, and then, ultimately, this conclusion is used by the lending company to deny Jane's loan? What if it's used by a potential employer and factors her into not getting a job because she might be taking maternity leave and it was concluded that, as a new mother, she would not be able to function as productively, as she would be distracted? This may seem far‐fetched, but this kind of social profiling happens more and more every day.
The impact of this is already being seen in China, where a “Social Credit” system launched in 2014 ranks every person on “trustworthiness” and, in turn, may put them on a blacklist.3 Blacklisted individuals may be denied travel by plane or train, the ability to vote, attend certain schools, or rent vehicles, or even deny the ability get fast Internet. All of this is, of course, in the name of creating a more “trustworthy” system, but it's really just big data being crunched to force social compliance according to the desires of a central party. All of this is possible because of the vast amounts of data given freely to centralized entities who then share that data for profit.
Web 3.0, a term coined by Gavin Wood in 2014, proposes the opposite of this system. Instead, it's a World Wide Web that is built incorporating blockchain technologies and is, in essence, decentralized, with all of the advantages therein.
One of the best ways to consider Web 3.0 is as a decentralized Internet, where all parties get to interact but where data is owned and shared at the individual level, peer to peer. We need only to look to artists for an example of how this could play out. Right now, plenty of entrepreneurs – artists, writers, musicians, and content creators, among many others – make a living using various digital platforms. The rise of Web 3.0 can make this infinitely easier to do. Cryptocurrencies, blockchains, smart contracts, and NFTs will provide these entrepreneurs with the tools they need for security, privacy, independence, and stability. In the music industry, for example, not only do artists battle with music labels over rights, but they also face piracy. Musicians currently might only see payments of less than $0.05 per stream on platforms like Spotify, Amazon Music, and YouTube Music, but if they issue an NFT for their music then every time someone plays that song the artist can automatically get paid without relying on a middleman. What's more, unearthing new revenue streams is a real possibility with Web 3.0, and companies are cropping up that aim to aid creators.
In Web 3.0 no central conglomerate has all the data, and no central conglomerate approves transactions. Instead, peers interact, creating trusted transactions with the agreement of other peers in the community. As a quick reminder, this is exactly how blockchains are designed to work. We learned earlier that when Sally sends a bitcoin to John, this transaction is observed by a computer in the Bitcoin network (a miner). Once a majority of the miners agree that the transaction is legitimate, the transaction is confirmed and written permanently on a new block, of which all miners have a copy. No central bank, central authority, game, business, or agency has to approve this and, importantly, no central bank, authority, game, business, or agency gets paid to ensure that transactions occur. Everyone who uses the Bitcoin blockchain can control their own coin and where it resides, and if it is in a wallet to which only you have the keys, no one can take that bitcoin without your consent.
Consider then, that Web 3.0 is the extension of this, not just for the exchange of money, but for the exchange of all data. This ushers us into the realm of sovereign data, which is data that each user owns and controls. We're early in this concept right now and we'll explore what the future of sovereign data might look like in Chapter 24; however, for now just consider what the world would look like if you controlled your data, you decided whom to share it with, and then how much to share. This would turn the world on its head and shift power away from the Googles of the world and back into the hands of the autonomous individual.
Overall, Web 3.0 is amping up to be the next hub of the creator economy. The reaction to data misusage is strong, and controversial revenue streams are pushing creatives to jump ship from legacy platforms and notice the benefits of Web 3.0. The legacy Internet forces creators to create content that accumulates social engagement, but with costs. In contrast, Web 3.0 will arm creators to produce content they can own and monetize. With it, the future of the creator economy is looking ever brighter.
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