Mike Winkelmann is a graphic designer and artist.1 He is better known as Beeple. He has been an innovator, using technologies like Virtual Reality (VR) and Augmented Reality (AR) for his artwork. Beeple has also been a go-to person for many celebrities. Just some examples include Nicki Minaj, Eminem, Justin Bieber, One Direction, and Katy Perry.
In 2020, Beeple started to explore non-fungible tokens (NFTs). This a technology, which is based on blockchain, that allows people to own digital items.
He started to create digital art with NFTs, and they were fetching thousands of dollars. But all this would pale in comparison to his digital collage of political cartoons and video game images, called “Everydays: The First 5,000 Days.”
He put this up for auction at Christie’s and the bidding was intense (there were 353 bids). The winner would pay a hefty $69.3 million for the NFT. It was the third most paid for any living artist, behind Jeff Koons and David Hockney.2
No doubt, the auction caused a stir – and it was a catalyst for enormous growth in the NFT market. It was also one of the first Web3 consumer applications that became mainstream.
But of course, there are others as well. Web3 gaming and social networks have seen lots of traction as well.
In this chapter, we’ll see how these markets are developing and the opportunities for entrepreneurs.
How Do NFTs Work?
Until the creation of NFTs, it was not possible to own digital items. After all, a person could just copy and paste it, right? Definitely. It’s why content industries, such as for music have struggled in the digital world.
But NFTs would be a game changer. By using the blockchain, it was possible to provide a unique token for the digital item.
The first NFT came out in 2017. A studio, called Larva Labs, developed digital characters called CryptoPunks.3 The company essentially made it possible to trade them, such as you would with a traditional collectible.
NFTs are generally built on the Ethereum blockchain and use the ERC-721 protocol. This allows for storing various details. All this is transparent to the public. And an NFT can be virtually for anything.
As should be no surprise, there can be some confusion with NFTs. Keep in mind that it does not convey any copyrights. They still belong to whoever owns the physical item. For example, there may be an NFT for the Mona Lisa. But this does not mean you own the original painting.
Quentin Tarantino, the scriptwriter of the iconic film “Pulp Fiction,” attempted to create NFTs for seven exclusive scenes.4 But the studio that produced the film, Miramax, filed a lawsuit to prevent this. It’s far from clear what the outcome will be. But the case could prove critical in setting forth the rights for NFTs.
Next, an NFT is not a cryptocurrency. The main reason is that a cryptocurrency is fungible. For example, a Bitcoin is no different from another one. You can easily exchange them. A non-fungible token, however, is nontransferable. None are alike. Although, you can use a cryptocurrency to acquire an NFT.
NFTs and cryptocurrencies rely on the same underlying blockchain technology. NFT marketplaces may also require people to purchase NFTs with a cryptocurrency. However, cryptocurrencies and NFTs are created and used for different purposes.
Note that the NFT market has posted a staggering growth. In 2021, the spending came to $17.6 billion, up by about 21,000%.5
NFT investors made roughly $5.4 billion in profits.
There are 2.2 million wallets for NFT transactions.
More than 470 wallets have over $1 million in NFTS.
By far, the most popular category was for collectibles. But there was also strong growth with gaming and the Metaverse.
However, by 2022, the NFT market would look much different. The growth rates plummeted as the crypto market came under tremendous pressure. Yet the levels of activity were still much higher than a few years earlier.
While many NFTs are stored on the Ethereum network, there are certainly alternatives. Some of the more notable ones include Flow and Tezos.
Examples of NFTs
The music streaming industry has become a massive global business. For example, Spotify has 180 million paid subscribers and 406 million monthly active users (MAUs).6 The service is available in 183 markets.
Despite this, the rewards for the musicians is far from attractive. Consider that Spotify has eight million musicians on its platform and only about 14,000 make $50,000 or more per year.7 In other words, many of them cannot make a living from this channel.
But this is where NFTs can make a difference. It is a way for musicians – or any creators – to better monetize their art. They can often keep more than 95% of the revenues.
True, if creators do not use a platform like Spotify, they will not have the enormous scale. But in the Web3 world, you do not need large numbers. Rather, it’s more about catering to your avid fans. They will likely be willing to spend more money, such as through the use of NFTs. This can also be an effective way for the creators to build even stronger connections with their fans.
Take the example of the band, Kings of Leon. In early 2021, they released their new album as an NFT. It was the first time that this had been done.
The band provided three types of tokens.8 They provided different perks, whether VIP seats, exclusive art, and so on.
The band raised over $2 million from its NFT offering.9 About $500,000 was a donation to Live Nation’s Crew Nation, which helped music crews during the COVID-19 pandemic.
This is not to imply that it is easy to make money from NFTs. It’s not. The fact is that you will still need to rely on marketing, say with a following on Instagram, Facebook, or Twitter. These are still very effective channels for super fans.
Just take a look at the interesting case with Brandon Sanderson, a top fantasy writer of series like “Mistborn.” In 2022, he set up a Kickstarter campaign. It had different tiers for his readers that included access to four upcoming novels, and monthly subscription boxes.
Well, it was a huge success. In all, Sanderson raised $41.7 million.10
It definitely highlighted the power of crowdfunding. But it also showed the importance of traditional publishers like Tor. Let’s face it, this helped Sanderson build up a loyal following – which he developed since he started publishing his works in 2003.
Buying and Creating NFTs
Buying an NFT can be cumbersome. And this is one of the drawbacks of the market. Although, the process will inevitably get better.
The first step in buying an NFT is getting the right token for the transaction. Often this is ether. You can get this from a crypto exchange like Coinbase.
OpenSea
NBA Top Shot
CrytpoPunks
Rarible
Foundation
Binance NFT
Nifty Gateway
Mintable
You will search around the marketplace. When you find an NFT that you like, you will then make a purchase. There may also be an auction for it. Regardless, the NFT will be in your wallet, and you can sell it in the future, such as on a marketplace.
OK then, so how do you create an NFT? Of course, you will need to specify an item that it will represent. Again, this can be just about anything. But the item should be something that you have a right to. If not, you could be violating the copyright laws and you may potentially be liable for damages.
You will then select the type of blockchain. Usually, this is Ethereum. Next, you will need to set up your digital wallet and then buy cryptocurrency. You will then select the NFT marketplace and make the connection to your wallet. You will upload the digital file, such as a GIF, PNG, or MP3.
Fixed price
A timed auction
Unlimited auction. This means you can end it when you want
If you have an auction, you will set a minimum price as well as the royalty levels (this is for subsequent sales on secondary markets). However, the fees can be significant, such as with the gas for Ethereum. It’s actually common to lose money on NFT sales because of this.
The Value of NFTs
As is the case with cryptocurrencies, it’s difficult to value NFTs. It’s generally a subjective process.
Rarity: Scarcity can create value. It certainly helps that NFTs are unique. But of course, this is little help if there is not much interest in the digital item. This is why it’s typical that a valuable NFT – especially when it comes to art and entertainment – is something that is exclusive or different. This was definitely the case with Beeple.
Utility: This is usually for digital items that are not art. Basically, utility means that you can do something with the NFT. An example would be one that allows you to get into a concert (although, such as NFT may have limited value because there will likely be a time limit). Another case is where you can use it as a way to make purchases in a game or the Metaverse.
Tangibility: This is when the NFT has a connection to the physical world. An example is real estate. A token can represent fractional ownership. This can help with recordkeeping and reducing the potential for fraud.
Provenance: This is a history of who has owned the NFT. This can provide insight on the value of the item. After all, the prior owners may have a good track record with NFTs.
Liquidity: Looking at the blockchain, has the NFT seen continued interest from buyers? What has been the demand for similar digital items?
Social Proof: This describes where a celebrity is backing the NFT. True, this is not guaranteed to create value. But it is still a very important factor to consider.
Interoperability: This means you can use the NFT for other platforms. For example, you could buy NFTs on one game, but use it for another one.
Problems for NFTs
Sina Estavi is the CEO of Bridge Oracle, which is a blockchain company based in Malaysia. In 2021, he agreed to pay $2.9 million for the NFT from Jack Dorsey (he donated the money to charity). It was for the first tweet on Twitter, which was “just setting up my twttr.”
The purchase caused a stir – and helped to propel even more interest in the NFT market.
But unfortunately, things did not turn out too well for Estavi. Within less than a year, he put up the NFT for bid – and there was tepid interest. The bids did not even exceed $14,000.11
Such an outcome is not unusual. The reality is that the NFT market is highly volatile – even more so than cryptocurrencies.
If anything, the values are often subject to speculation. There is also the impact of fads.
It’s true that you can still make lots of money from NFTs, but you probably need to take a shorter-term focus. Success may be more like day trading.
Adoption: As seen earlier in this chapter, the process for buying and creating NFTs is far from intuitive. But if the market is to become more mainstream, there must be significant improvement. There will essentially need to be one-click transactions like Amazon.
Rug Pulls: This is where a Web3 developer abandons a project and takes the money. There can be little recourse for those who have been defrauded.
Whitelisting: This is where a select group of people are invited to participate in a project. Then when it is launched to the public, they will derive significant gains. This is similar to the “pump and dump” of penny stocks. According to research from Chainalysis, whitelisted users made 75% gains, while the general users got only 20%.12 Unfortunately, this is a common practice, and it can be difficult to do anything about it.
Wash Trading: A user is both the seller and buyer for a transaction. This is possible because you can easily create two wallets and not provide any identifying information. With wash trading, this can cause artificial volume in an NFT, which may attract interest.
Copyright Violations: It’s not difficult for someone to create an NFT from someone else’s intellectual property. This not only defrauds the real owner but also the user who makes the purchase.
New Go-to-Market Strategies
In 2010, Kevin Systrom and Mike Krieger created an app called Burbn. It allowed users to check-in to locations and post messages and photos. But there was a problem: It got little traction. The application was clunky – which was common for the early days of iOS apps – and had little utility.
But Systrom and Kreiger noticed something interesting. Burbn users really liked the photo sharing feature. So the founders just focused on this and created Instagram.13 It also had the ability to edit the photos. Although, perhaps the most important feature was that it only took three clicks to post a photo.
Within a month, Instagram got over one million users.14 There was also no advertising or marketing. The growth was purely word-of-mouth.
Within two years, the founders sold Instagram to Facebook for $1 billion.
This is certainly another iconic Silicon Valley story. But this was also a very rare success. For the most part, startups usually need significant marketing. This is where a large part of the venture capital goes.
Then with Web3, might things be different? Will there be less need for venture capital?
Perhaps so. The reason is that Web3’s focus on tokens can act as a financing mechanism. It can also be an effective way to attract users. Hey, who doesn’t want to get paid, right?
But with Web3, the typical evolution of a startup is usually different. You can start without a product. Instead, you will set forth the idea for one and then you will get the feedback from the community that owns tokens. This helps to provide for the product-market fit.
But to make this happen, there will need to be a compelling vision. What will encourage people to come on board and make a bet on your venture? What problems are you looking to solve?
By answering these questions, you will have a better chance of creating a strong community. They will also have better direction on providing the feedback to improve on the vision.
Developer Grants: This is a way to encourage coders to come on board the project. The grant could be in the form of tokens or traditional money. Regardless, there is usually a need for some type of incentive to get interest. For example, Compound set up a developer grant program from March 12 to September 12, 2022, and funded it with 5,000 of its own tokens, COMP.15 According to the website: “With no carrot with which to motivate community members to propose changes, the protocol isn’t able to innovate as quickly as it should be innovating in a dynamic and competitive market.” The program is not just for development of new features. It also provides for code audits, and bounties for finding bugs.
Memes: These can help create viral growth in the user base. Although, creating memes is no easy feat. The founders may also not be the best ones to do this. Instead, this is really for those with a marketing background. It also helps to have a large following on traditional social media channels. And something else to keep in mind: The impact of memes tends to be temporary. In other words, the creation of them is likely something to be ongoing.
Airdrops: This is when a Web3 project gives away tokens. It’s also possible to airdrop NFTs. Often, this is to encourage people to sign up for a project. But it also can be used for testing the project’s technology. A famous example of an NFT airdrop is the Bored Ape Yacht Club. The project created a new collection, called the Mutant Ape Yacht Club. There was an airdrop that gave all existing users the ability to create 10,000 apes, which were referred to as “mutants.” There was also another 10,000 available for new users. This was a fun reward for existing users. But it was also an effective way to bring new ones.
Social Identity of Web3
In the Web3 world, it’s common for users to have their own avatars. They can also serve as profile pictures for social media. They are often old-school, retrograde pixelated visuals, such as of punks or bored apes. For example, Jay-Z and Snoop Dogg have these on their Twitter and Instagram accounts.
The concept behind Web3 profile photos is that they should not be polished. Rather, what’s important is the engagement with the community.
Keep in mind that many of the profiles are NFTs. By doing this, they can become a next-generation version of a resume. Since the NFTs are on a blockchain, a user can get a public view of the activities of the users.
The Web3 Social Network
By the end of 2021, Facebook’s user base reached 2.82 billion users, up 8% on a year-over-year basis.16 At the time, there were close to eight billion people in the world.
Facebook has definitely done a great job in monetizing this. The 2021 revenues were a massive $117.9 billion, and the profits came to $39.3 billion.
But for those people who contributed content to Facebook, how much did it pay out? Basically, very little. The reason is that much of the company’s revenues come from advertising.
There is nothing wrong with this. Many people enjoy Facebook. It’s not about making a buck.
Yet for Web3 entrepreneurs, they are looking to upend Facebook’s model. And the blockchain means that users will have more control over their data and have the opportunity to earn tokens.
The Web3 social network is likely to look very different from a traditional platform. First of all, the interface may use open-source tools, such as for the chat. Or it could be based on a proprietary system like Discord.
Next, a Web3 social network is likely to be much smaller than a Twitter, Snap, or Facebook. The reason is that there will be a focus on a particular community. Part of the reason for this is there will likely be a DAO involved. For this, there will be a specific purpose. If not, it could be difficult to attract the right people to make the social network engaging.
Now a key advantage of a Web3 social network is the portability. If you want to leave, you will not be giving up your social graph and content. It belongs to you, as it is on the blockchain, and you maintain the data through your ownership of the hash. You can then transfer this to another platform.
By contrast, a traditional social network is a walled garden. When you leave, you cannot transfer your users or content. It still belongs to the social network, unless you delete the account or turn it off.
This has been a huge source of power for social networks. It’s why that – when there are violations of privacy or other major problems – there is often little impact on the user numbers. The users are essentially locked in.
As a result, social networks have significant power, such as changing policies. If Twitter no longer wants something on its platform, it can simply prohibit it. Or if it wants to charge the fees, it can do so.
This is also the case with large online marketplaces. Just look at iOS. If you want to publish an app on the platform, you need to go through a review process. If you fail, it could be a big setback for an entrepreneur.
Then there are the fees. Apple generally charges 30% on the revenues generated from apps. All in all, this can make it difficult for entrepreneurs to make money. This is even the case for the largest tech companies. Note that game maker Epic is suing Apple over its Appstore policies.
Web3 social networks are still in the nascent stages. There has yet to be one that has been a breakout. But this will certainly change – and probably soon.
APPICS: The founder is Uma Hagenguth, who is based in Switzerland. She started her first business at age 16, with a focus on marketing and web design.17 As for crypto, she got started with this in 2013. Her idea for APPICS is to create a rewards-based social network with a sleek interface. Users can earn tokens by creating content that generates certain numbers of likes and comments.18 Thus, the incentives are based on engagement. APPICS is built on the Telos blockchain. The app is available on iOS and Google Play.
Aave: This is another startup in Switzerland. The founder, Stani Kulechov, launched it in 2017.19 He started it while as a law student in Helsinki. The company is one of the early developers of a DeFi cryptocurrency (based on the Ethereum network). But Aave is also moving into the social media space. The project is called the Lens Protocol and is based on the Polygon blockchain.20 This allows for the creation of a user profile that is an NFT, which contains all the social media content. The user can decide how to monetize this. Interestingly enough, Aave is exploring the idea of turning profiles into DAOs.
Yup: This is a Web3 platform that allows people to curate content from platforms like OpenSea, Twitter, YouTube, and Mirror. Yup pays its users based on engagement. In early 2022, the company raised $3.5 million from Distributed Global.21
Web3 Gaming
An early success story in Web3 is gaming. The category is often called GameFi or crypto gaming.
According to a report from DappRadar x BGA Games, the growth in the market was a sizzling 2,000% for the first quarter of 2022.22 About 52% of all blockchain activity was due to gaming. There were about 1.22 million wallets.
Venture funding has accelerated. In the first quarter of 2022, the investments came to about $2.5 billion23 and the estimate is that it could be $10 billion for the year.
A notable deal was for Animoca Brands, which is a startup based in Melbourne, Australia. The company raised $359 million at a pre-money valuation of over $5 billion.24 The lead investor was Liberty City Ventures.
Animoca Brands has developed various centralized and decentralized games. They are also for mobile, game consoles, PCs, and web. The company has been a pioneer of using blockchain for in-game rewards and monetization.
The traction in Web3 gaming should not be surprising. Many gamers are already familiar with blockchain and crypto. Besides, the gaming industry has been an early adopter of allowing the purchase of virtual items.
In the years ahead, gaming will likely be how a large number of people will initially participate in Web3. This will accelerate as it gets easier to onboard users.
Yet the traditional game industry has had challenges with microtransactions. Simply put, it has been difficult to make this affordable with the legacy financial services infrastructure.
But blockchain and crypto should change this. It will allow for a more efficient approach. There will also be a benefit for gamers to control their tokens. This can mean that they can spend it elsewhere. This makes it more compelling for gamers to participate.
There are emerging gaming marketplaces like Tegro. They are focused on providing a way for gamers to buy and sell their virtual items.
By comparison, with a traditional game, there is the risk of losing virtual assets. The reason is that there is a central authority that essentially owns everything. When a game shuts down, the gamers will likely lose their holdings. It’s happened with titles like Minecraft Earth and Harry Potter Wizards Unite.
Another interesting aspect of Web3 gaming is the community involvement. By setting up a DAO, it’s possible for the users to decide on the rules and evolution of the game. This can further add to the engagement and fun. However, for the game developer, it’s important to not get too carried away. If there is too much decision-making, this can bog down the game. There needs to be a balance.
An interesting aspect of Web3 community is the notion of exclusivity. For example, you can show that you were one of the original players of a game. And in the community, this could certainly confer some status.
There is also the opportunity for Web3 games to create lasting brands. They can evolve with the help of the users as well. All this may ultimately mean that Web3 games will lead to next-generation entertainment companies, which could ultimately rival traditional studies like Marvel.
For a Web3 gaming startup, the initial offering may not even begin as a game. It could be a blog, a collection of NFTs, or a content site. This would have an interesting story line that gains interest from users. From this, a startup can then put together a game around it. All along, the community will be a part of the world-building process.
But there are certain factors that will not change when it comes to Web3 gaming. After all, a game needs to be standout. The reality is that the market will get quickly saturated and it will be more difficult to rise above the noise. This means there will be a need for more resources to be invested in the games – but also a good amount of creativity, which is something that is not easy to pull off.
Another issue is that the gaming industry is subject to fads. A hot game can quickly go very cold. It’s very rare for there to be one that lasts for a few years. But with the crypto mechanics, this is something that is necessary. It is what builds real value.
Even successful gaming companies can languish. An example of this is Zynga. In 2012, the company had a high-profile IPO, with the stock price at $10. But the business would come under pressure. Zynga then went on to spend billions on acquisitions, but this really did not move the needle. In early 2022, Zynga sold out to Take-Two Interactive.25 What did investors get? Well, it was $9.86 per share.
With Web3, it’s critical to understand economics. An entrepreneur may even want to bring on board an economist! Why so? The reason is that a Web3 game will be a true economic system, with supply and demand for tokens. However, if this is not structured properly, the game could easily fall apart. In some cases, it may look more like a Ponzi scheme or multi-level marketing ploy. This is where the benefits for the early users start to dwindle because new members are not being brought into the ecosystem. When this happens, the users may want to leave because the value of their tokens will have depreciated significantly.
What’s more, the economics of a Web3 game can mean that it can cost thousands of dollars to play. Of course, this may not be possible for many users. To deal with this, there are guilds that pool resources to allow for the playing of the game. Another option is to have a trial period.
A popular business model for Web3 is play-to-earn. The innovator of this approach is Sky Mavis, which is based in Vietnam. The company is the developer of the Axie Infinity game.
Here’s how it works: The players breed the characters, which are referred to as Axies. They can then engage in fights and adventures. But there is also an economy. The players, for example, can acquire land, create potions, and so on. To handle these transactions, the games allow for the trading of NFTs – which represent ownership in the virtual items – and ether. The Axie Infinity native token is AXS.
The transactions in the marketplace have reached $3.6 billion and the highest price paid for an Axie was for $820,000.26 There are 2.8 million daily active players.
Some of the most popular play-to-earn games include Splinterlands, Alien Worlds, and Decentralized.
Andreessen Horowitz is an investor in Sky Mavis. In a blog post, the authors noted: “What Axie Infinity has unlocked is the ability to play the games you love, have fun, but also participate in the financial upside of the community. This is an incredibly powerful idea: it means that games are no longer pure entertainment, but cross over into the realm of work. Axie Infinity is transforming communities around the world and replacing traditional forms of employment, changing people’s lives as players of the game help each other succeed.”27
Another business model for Web3 games is play-to-own. This is similar to play-to-earn, as both approaches involve providing incentives with crypto and tokens.
So, what’s the difference? It’s more about degree. With play-to-earn, this usually has higher financial rewards. It’s actually possible for some people to make a living with the game.
A play-to-own game, on the other hand, is more about the fun and engagement. Making money is rather a nice bonus.
A popular play-to-own game is Crypto Raiders. It’s about dungeon crawling, in which the players can use crypto to buy characters, mobs, missions, and so on. The platform is built on the Polygon blockchain.
In March 2022, Crypto Raiders raised $6 million. The lead investors included DeFiance Capital and Delphi Digital.
Crypto Raiders CEO and cofounder, Nicholas Kneuper, noted: “We built Crypto Raiders with the RPG games we played growing up in mind. Those games are the perfect use case to bring together gaming and the blockchain.”28
Finally, there is the move-to-earn model. It’s focused on the physical world and promotes wellness. How so? Take a look at the top operator in the market: STEPN. To play this game, you purchase NFTs, which are based on the Solana blockchain. Then you track your movements with the GPS on your smartphone. By doing this, you get in-app token rewards. The bottom line: This is a way to promote more healthy living.
In 2022, STEPN announced a $5 million seed funding.29 The lead investors included Sequoia Capital India and Folius Ventures.
Brands and NFTs
Because of privacy regulations, it is getting tougher for companies to use digital platforms to connect with their customers. Consider the use of cookies. These allow for the tracking of user behavior. It has also made it possible to use retargeting of ads. But cookies are on their way out. Google’s Chrome will sunset them in 2023. The same goes for Firefox and Safari.
Or look at the new privacy requirements from Apple. For iOS apps, they require that users opt-in for tracking. And as should be no surprise, this has had an adverse impact on online marketing efforts. Facebook noted that it will reduce 2022 sales by more than $10 billion.30
In light of this, advertisers are looking for alternatives. Interestingly enough, NFTs may be a big help. This is done by using existing or new content. This can then include incentives, perks, and discounts.
In fact, this strategy can allow a company to have more control over its online domain. Let’s face it, when relying on platforms like Facebook, YouTube, TikTok, or Twitter, there is the possible adverse impact of a change in an algorithm. This could reduce the impact of the advertising or could mean that the advertiser will need to pay more.
Yet there needs to be caution. When it comes to the Web3 world, the users usually do not want blatant marketing pitches. They instead prefer engaging content, and immersive experiences that enhance a company’s product or service. This may also include providing assistance for a cause, such as by donating funds to a nonprofit.
For the 95th anniversary of the Macy’s Thanksgiving Day Parade, the company auctioned ten NFTs.31 They each had a parade balloon from prior events. The proceeds from the auction went to the Make-A-Wish Foundation. The company also gave away 9,500 NFTs to people who signed up.
For the 40th anniversary of McDonald’s McRib, the company gave away a limited-edition NFT.32 To get this, people had to follow @McDonalds on Twitter and retweet the Sweepstakes Invitation.
Mattel launched the Hot Wheels NFT Garage. This involved a series of 40 new NFTs for the iconic toy cars.33 There was also a promotion to win limited-edition die-cast vehicles.
As a validation of this market, look at Nike. In late 2021, the company agreed to acquire RTFKT, an NFT studio for creating crypto collectibles. This startup was the partner of CloneX, which was involved in the creation of a highly successful NFT called CryptoSlam. It generated over $65 million in transactions.34
In the press release for the deal, Nike CEO John Donahoe said: “This acquisition is another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture.”35
OK then, as for the rest of the chapter, we’ll take a look at some of the interesting other startups in the NFT space.
Novel
Roger Beaman is a software engineer who has worked at Goldman Sachs and Shutterstock.36 In 2021, he co-founded Novel. The goal was to make it easier for companies to create, buy, and sell NFTs. It would be similiar to using a platform like Shopify. Beaman would go on to raise $6 million for his startup.37
His experiences at Shutterstock and Goldman Sachs turned out to be quite helpful. “They mapped to the NFT/Web3 world more directly than you might think,” said Beaman. “At Shutterstock, I worked on an in-browser image editor and pushed what was possible for in-browser experiences, which fed directly into the advanced tools we have to help creatives make NFTs with Novel. At Goldman, I worked on architecting a marketplace for complex financial products, and it was thinking this way that helped me map the market for NFTs and the role it made sense for Novel to play in it.”38
The inspiration for Novel came when Beaman and his cofounders – Brian Sugar and Anna Merzi – began to see the impact of escalating ad acquisition costs for ecommerce. “We asked ourselves, is there a more sustainable, community-driven way to build a brand?” he said. “That’s where NFTs fit into the marketer's playbook. Many brands have a latent community waiting to be activated. Web3 brings a brand closer to its customers and brings those customers closer to each other.”
There was a problem, though. Many of the brands simply did not have the technical know-how for creating and managing NFTs. Thus, Beaman set forth to leverage no-code.
This means using easy-to-fill-out forms and drag-and-drop operations. There are no technical skills required or a deep background with cryptocurrencies and blockchain systems.
Step 1 – Creation: The Novel Generator creates the artwork, sets the rarity, and establishes the royalty rates. The system then generates the underlying code for the smart contract.
Step 2 – Sell: With the press of a few buttons, you can place your NFTs on the Shopify platform. Then customers can make purchases with a debit or credit card. There is no need for a crypto wallet.
Step 3 – Minting: After the purchase, there is the creation for the token mint. Novel also covers all the gas fees for customers.
“We were inspired to create a platform that could democratize the relation-building components of Web3 by removing many barriers to entry, such as the need to understand crypto and blockchain technology,” said Beaman.
Novel is not just a technology either. The company also provides assistance with strategy. This is certainly very important given that many brands still lack much of an understanding of NFTs.
The pricing is based on a $99 monthly subscription for the software. Novel then takes a 10% fee for NFT sales and 1% to 2% for transactions on secondary marketplaces.39
As for Beaman’s advice for entrepreneurs: “There is a ton of noise in the space and it’s easy to get lost in that. To successfully build in the space, you need to cut through that and find your own truth. That’s true in business generally, but it’s especially true here. The keen insights at the heart of your business will likely sound pretty different from the present hype and media coverage of the space.”
Fractal
Justin Kan is a pioneer of Internet video. While in his early 20s in 2007, he used a webcam – which was attached to his head – to broadcast his life, which he hosted on Justin.tv. This ignited the trend of “lifecasting.”40
Kan did this for about eight months. And yes, it resulted in lots of publicity, which helped boost the traffic to Justin.tv.
Yet Kan saw there was a big business opportunity with this. He helped turn Justin.tv into a hub for video. He would then go on to help found Twitch. It helped to start another big trend – that is, the live streaming of video game play. This would ultimately lead to the birth of the eSports industry. Then in 2014, Twitch sold to Amazon for $970 million.41 At the time, the platform had over 55 million users.
Keep in mind that Kan is not done with trying to find the next-big business. And he believes it has to do with NFTs. To this end, he cofounded Fractal in 2021. It’s a marketplace for users to buy NFTs directly from game companies and is based on the Solana blockchain. Kan has raised $35 million for the venture.42
A key part of Fractal is Launchpad. This is a service that helps game companies sell their NFT collections.
But not just anyone can sell on the Fractal marketplace. There is extensive vetting, which helps to promote more quality and security (the company accepts only about 5% of submissions). Kan believes that the future of NFTs will require curation.
Some of the games on Fractal include Yaku (racing), House (real-time strategy), and Tiny Colony (a multi-mode game). All games on the marketplace have sold out their NFT collections.
Magic Eden
In 2021, Sidney Zhang, Jack Lu, Zhuoxun Yin, and Zhuojie Zhou cofounded Magic Eden. They all had deep roots in the tech world, with stints at companies like Uber Eats, Facebook AI, FTX, and Coinbase. A big attraction for the venture was the Solana blockchain. When Lu was at FTX, he had firsthand experience with this technology.
10+ million unique monthly visitors
4,000+ collections
100,000+ wallet connections
$1 billion in secondary trading volume
The company has raised $27 million in venture capital.
OpenSea
Software engineer Devin Finzer cofounded Claimdog in 2015. It was a service that could find if a business owed you money. A year later, he would sell the company to Credit Karma. While there, Finzer learned about blockchain technology and saw it as fertile ground for his next startup.
His idea was WifiCoin. It allowed for the use of tokens to share wireless routers. Finzer got backing for this venture from Y Combinator. However, in a few months, he pivoted the business. Because of the popularity of CryptoKitties, he saw there was a bigger opportunity to create a marketplace for NFTs. So was born OpenSea.
While the company would grow, it was not until 2021 that there was an inflection point. As a result, Finzer had little difficulties raising substantial amounts of money from elite venture capital firms. By early 2022, he raised $300 million at a whopping $13.3 billion valuation.44 The lead investors included Paradigm and Coatue Management.
With such strong backing, OpenSea has been able to recruit top-notch talent. The company was able to hire Brian Roberts, the former chief financial officer at Lyft, and Shiva Rajaraman, the previous vice president of commerce for Meta.
At the time of the funding, OpenSea generated over $2.4 billion in transaction volume for the month. This was up over 600X on a year-over-year basis.45
According to a blog post from Finzer: “We’re focused on lowering the barriers to entry for NFTs by introducing features and simplified flows that abstract away the complexity of the blockchain. We’re also accelerating our multi-chain support and prioritizing improvements to help people discover, manage, and showcase their NFTs with better tools, analytics, and presentation.”46
Rarible
Alex Salnikov received a bachelor's degree in computer science and a master's degree in data science. This was a good background for his career in crypto. He went on to start various companies in the space. One he was able to sell.
His latest venture is Rarible, where he serves as the head of product. He also operates as a nomad. That is, he does not have a permanent residence. Instead, he lives primarily in Airbnbs in various parts of the world.
He cofounded Rarible in the summer of 2019. “We kept running into three types of people,” he said. “One thought that crypto was too complex. The other believed there was no need for the technology and that they just needed a credit and debit card. Then there were those who were the diehard believers.”47
For Alex, he saw an opportunity. He thought the timing was right to build a crypto marketplace for those who considered the technology too difficult.
At the time, the wallets were getting easier. “But there was not a lot of fun you could have with crypto,” Alex said. “This is why we focused on NFTs.”
His team was able to build a platform that made it easy for users to create and sell NFTs. “It just took a couple clicks for users,” said Alex.
There was also the creation of an API. This made it possible for anyone to create their own Web3 marketplace.
The target market was crypto art. To build a following, Alex and his team bootstrapped the user base, such as by reaching out to communities on Twitter.
The strategy worked and Rarible started to grow. Yet the market would quickly shift. Users were becoming more interested in profile NFTs. “We had to change the direction of the company,” said Alex. “But this is an advantage of a startup.”
In building a successful Web3 firm, he believes that the founding team needs to be crypto native. This means that they must have a deep understanding of the technology, such as by reading the key whitepapers. If the interest about Web3 is mostly about being part of the next-big thing, then he thinks this will not work. “You need to believe in the core principles of Web3, like decentralization,” said Alex. “This must be a part of your DNA.”
In 2021, Rarible announced its Series A round. The company raised $14.2 million from Venrock Capital, CoinFund, and 01 Advisors.48 At the time, the company had reached $150 million in sales.
Pastel Network
Anthony Georgiades and Jeff Emmanuel cofounded Pastel Network in 2018. They believed that the NFT market was poised to take off. However, they saw inherent problems. The NFT platforms were reliant primarily on existing Layer1 blockchains that were not built for the particular needs of NFTs.
With the Pastel Network, the founders created an application-specific Layer-1 blockchain. It reduced the high transaction fees, improved the security and lowered the inefficiencies. There were also features added to provide for counterfeit protection, authenticity, and permanent storage.
“From digital collectibles to media to documents to applications, users and developers are able to certify asset rareness and truly store data forever,” said Georgiades. “Lightweight protocols delivered by interoperable open APIs such as Sense and Cascade can be easily integrated across existing networks. A wide range of Web3 applications can be built directly on the Pastel Network, enabling developers to enjoy the scalable registration features, storage processes, and security of the broader ecosystem.”49
In terms of the security infrastructure, it is a multilayer technology protocol for the consensus mechanism. All network nodes use Proof-of-Work (PoW) while Pastel’s decentralized network of SuperNodes currently use an innovative form of Proof-of-Stake (PoS).
The business model involves a modest transaction fee. There is a small amount that is burnt. This means it is taken out of the supply to serve as a way to avoid inflation of the tokens.
There are no licensing fees for integration partners. This has been critical in spreading the technology.
Regarding advice for Web3 entrepreneurs, Georgiades says: “First and foremost, entrepreneurs need to come into the space with a long-term outlook and objective. Technology, product development, and user adoption can take years to pan out. It is easy to get caught up in short-term excitement. However, it is important to stay prudent and patient when building new technologies and companies. With that in mind, entrepreneurs should really develop a good understanding of the basics - such as what is a blockchain or private key, how smart contracts work, and what does Web3 really entail? From there, you can start to gain a better knowledge of the various players in the ecosystem, where they all fit into the larger picture of Web3, and where innovation can be maximized.”
He also believes that entrepreneurs need to make security a high priority. And this must start from day one. “Web3 isn’t an inherently dangerous or risky space, but it is still in its early days and malicious users are taking advantage of that to scam and hack projects and consumers,” said Georgiades. “One of the biggest ways to maximize security is prioritizing infrastructure and decentralization. A majority of failures come from overly centralized networks, managed by a small group of stakeholders, which are more susceptible to attacks. To avoid central points of failure, it’s important to adequately distribute participants involved in reaching consensus and performing network operations. Nodes should also be distributed across a diverse range of users and entities, again, to avoid a single entity holding too many nodes, and thus too much control.”
Rally
Rob Petrozzo says that he cofounded Rally because of missed opportunities. For him, it was about being a fan of basketball superstar, Michael Jordan.
While as a teenager, he knew which sneakers he wore in specific games, which cars he drove to the arena, and just about every stat. “Even at a young age, I could have told you something as obvious as ‘Michael Jordan's rookie card is going to be worth 6 figures one day,’” he said.50
But for Petrozzo, he did not have the access to collectibles or the resources to make a purchase.
So this is where Rally comes in. Launched in 2016, it is a fast-growing marketplace where you can buy and sell equity shares in ultra-rare assets, including NFTs. It’s similar to how you would use an app like Robinhood to buy stocks. “At Rally, we wanted to solve that for every person who can see around the corners and would sooner invest in these items that they truly care about and obsess about, but don’t know where to start,” said Petrozzo. “To be able to turn that nostalgia or turn those aspirations into equity, and to allow people to do it at whatever price they're comfortable with is fulfilling that promise to the 10 year old me that said ‘I’m going to have that one day.’”
Before starting the company, he had a successful career as a digital designer. He worked with clients across industries like music, publishing, and biotechnology. This experience was crucial in creating an engaging marketplace.
True, OpenSea is the clear dominant player in secondary transactions for NFTs. But Petrozzo realized there were other attractive categories to target.
“We’ve been able to give access to the most expensive and most recognized NFTs without having to onboard investors into an entirely new and often intimidating payment process,” he said. “That’s allowed us to take projects like Bored Ape Yacht Club and CryptoPunks, and run IPOs at around $10 per share, often putting more investors in single NFTs than there are total owners of all the NFTs in that particular project. Our first CryptoPunk NFT Initial Offering sold out incredibly quickly, and was purchased by nearly 4,000 unique investors. At that point, there were only around 3,800 total unique owners of all 10,000 CryptoPunks.”
His advice to Web3 entrepreneurs is simple. Interestingly enough, it’s similar to the iconic Nike motto: Just start the business.
“The Web3 space is the true embodiment of creating a minimum viable product and building within the community as it grows,” said Petrozzo. “Perfection is the enemy, and the stories around many of the biggest projects are still being written. If you can find a way to bring anything unique to the masses or build for an underserved audience, there’s never been more access to the frameworks available in Web3. Build, release, and iterate based on the feedback of the community you’re serving.”
In late 2021, Rally announced a funding round of $15 million.51 The lead investor was Wheelhouse. In all, the company has raised over $65 million.
Conclusion
In this chapter, we covered the various approaches to consumer Web3 applications. First, we looked at NFTs. They are a way to represent ownership in digital assets.
A key benefit is that the creator of NFTs can get a higher percentage of the revenues. It can also allow for building stronger connections with users.
But the values of NFTs are often subjective and volatile. There are also risks with hacking and fraud. Although, companies are investing in ways to mitigate these problems.
Despite all this, NFTs are likely to continue to be popular. The good news is that there has been more progress to deal with the problems.
NFTs are also likely to be the key for the emergence of Web3-style social networks and gaming platforms. They will be a visually interesting way to own digital items and make transactions. They will also allow users to move NFTs to other platforms, which should provide more value.
For Web3 games, they have been one of the early success stories. But then again, the industry has been a leader in transacting in digital items and deploying innovative business models. Web3 gaming is also likely to be the gateway for new users to participate in crypto.
Brands are also looking at NFTs and Web3 to connect with their customers. This can be an effective way to deal with the issues of privacy regulations.
In the next chapter, we’ll take a look at DeFi or decentralized finance.