Crypto and NFTs Go Mainstream
Participation in cryptocurrencies and NFTs in the last two years have accelerated and hit the mainstream. Coinbase's trading volume Grew 8.5x in 2021, with 89 million verified users. Nearly half of crypto owners first purchased their crypto in 2021. Trading in NFTs hit $17.6 billion last year, a 21,000% increase from 2020′s total of $82 million. Fortune 500s and large orgs such as McDonalds, Disney, and the NBA are actively marketing and selling NFTs. Within the first week of Howard Schultz’s return to Starbucks, he mentions Starbucks getting into the NFT business. What gives? How did brands go from burgers, cartoons, sports, Frappuccinos and more to….NFTs? While there’s lots of friction for the average consumer to purchase, and a dizzying number of cryptocurrencies, protocols and NFT to choose from, mainstream attention to the space is happening.
As a fund that invests in consumer social, social commerce, gaming, interactive and digital experiences, we’re seeing web3 permeating into consumer tech. Given our vantage point, we are increasingly asked “what’s driving this transition?”… here is our (initial) take :
Inflation, Personal Finance, and Generational Wealth- Recent events and economic uncertainty spiked consumers' interest in financial wellbeing, attribution and financial inclusion. The transition to work from home gave consumers more time to make extra money on the side, manifesting into an increase in side hustles and overall interest in investing. We saw a spike in general consumer interest in the stock market, and in crypto. Now that consumers are feeling the effects of inflation, there is more pressure to find extra sources of income, preserve wealth, and participate in the “new” internet, or web3. Big tech created a new generation of wealth, and while speculative, cryptocurrencies, DeFi and NFTs offer consumers a chance to participate in the next growth frontier.
Nostalgia and Collecting - 2020 was rough for everyone and consumers seeked comfort in escapism of the past. Collecting and indulging in escapism provides joy in hard times. Questlove wrote about this recently in a guest opinion essay in the New York TImes, Questlove: Collecting Is an Act of Devotion, and Creation. Nostalgia is an essential psychological function and has accelerated during the pandemic as consumers spent more time at home indulging in hobbies like collecting physical items (such as cards, stamps, sneakers, toys) and now digital items (NFTs and cryptocurrencies). Many brands are commercializing nostalgia via NFTs (see Mattel Hot Wheels, CNN selling old clips, Starbucks heritage NFTs) as consumers shift towards digital ownership.
Shift Towards Digital Ownership and the Meaning of Ownership - We are living in an era of digital ownership. Who has bought a physical DVD, or CD in the last two years? As the shift to digital ownership continues, the definition and meaning of ownership is changing in an increasingly digital world. The web3 ownership model is similar to the open source software model, where users, and developers own a portion of the product they use. Creators and artists can use blockchain technology and smart contracts to record and verify the true ownership of artworks, and have built in royalty structures (such as royalties still being paid to artists from secondary transactions from NFTs). Even though NFT art is digital, fans are contributing and supporting artists while feeling like they own something, due to an NFT’s verified and limited nature. In gaming, consumers buy in-game assets for several motivations such as utility, exclusivity, and social status. Weapons, skins, avatars, currencies and accessories provide both utility and social status in gaming environments.
User Value Capture - P2P Networks and Interoperability - Web3 presents the potential of a new market structure for inclusion. Peer to peer services are not new. Limewire and Napster were file sharing P2P networks where users heavily shared music content (which led to copyright infringement). Now, content is typically accessed for “free” with ad supported models, or paid via subscription. User generated content proved to be valuable to social media platforms like Instagram and Pinterest, but creators don’t capture the economic benefits the platforms do. The promise of web3 shifts some of the value captured from middlemen SaaS or marketplace companies to participants in and owners of blockchain protocols or other on-chain assets. In theory, this ownership model means web3 companies offer the potential of creators and buyers transacting with transparency on division of profits, authenticity of assets and parties. In the emerging play-to earn-games category, gamers now can see their in-game items generate financial gain.
Web3 proponents believe that what users create or own on one platform should have utility and/or derive value in other platforms, or be interoperable. Interoperability is complicated though as every social media platform, game, or any digital environment has its own unique audience, user experience, and reasons why people use them. In game assets typically can’t be used in other games. Creators on platforms like Patreon can’t just easily port users to a competitor.
While the space is still crowded and driven with hype, speculation, and roadmaps that may never pan out, we are excited about the new companies emerging where users and builders can feel they are getting their fair share of value created while balancing that profit sharing with companies that enable new generations coming into the workforce, and where consumers can earn from what they love to do. We look forward to companies that are creating a new internet and consumer experience with an ownership layer, where people can trade information, data, assets and more with ease and trust, as will enable new business and structures we have yet to imagine.
