Borsalino Test #5: The next stock exchange: creators, fans & the power of non-fungible tokens

Readers,

We’re living in a remarkable era of online creation and vibrant fanbases. Creators are turning into legitimate brands and actual enterprises. What if the stocks in your portfolio were your favorite creators, instead of companies? Sounds unlikely? We are already seeing this shift, if you look closer at the crypto world.

As always, you can read my essays here. Alright, onto the essay.

Michele

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The next stock exchange: creators, fans & the power of non-fungible tokens

“Uncomfortable Chair” - top NFT-based artwork from Foundation.

“I'm not a businessman, I'm a business, man!” - Jay Z

Four creators have now made $10M+ on Teachable. ‘Ninja’, the most famous Twitch streamer, earns between $400k - $800k a month. Cohort-based courses are also picking up momentum. The top-earning writer on Substack earns more than $500,000 a year. These trends reflect a broader movement of “Enterprization" of individuals. It is often referred to as "Passion economy" or "Creators' economy".

The past decade of consumer tech has sowed the seeds of many gig economy platforms of the likes of Uber and Airbnb. They allow anyone to monetize undifferentiated assets, like couriers’ time or vehicles. To be clear, this isn’t going anywhere, especially during and after this pandemic. The creators' economy instead is building the opportunity to capitalize on differentiated talents. This has huge implications for entrepreneurship and what we’ll think of as a “job” in the future.

Now, what if your favorite creators were your portfolio stocks? What if these creators could get their fans to fund their work? Creators produce content first and then get paid for it - that's the established paradigm. I can’t help but wonder if there’s a way to flip this model on its head. The intersection of patronage and profit is already fertile ground for experiments.

Financing, distribution and social validation

Emerging creators lack upfront financing. People need money to create things. The vast majority of creators take on incredible amounts of risk (e.g., opportunity for income smoothing, no access to health insurance, ...). Some start young and perfect their craft for a while. If it works, they stick to it. If not, well...too bad. For creators with an established audience (e.g., a sizable Twitter following, in the tens of thousands, ...) it could take a year to reach critical mass and make a living off of true fans (e.g., see Lenny Rachitsky’s case). This process would take longer for the long tail of middle-of-the-pack creators. Many creators would enjoy a more structured way to finance their dreams upfront.

Top creators want to grow their audience. Top creators actually don't need financing that much. Everything is about distribution for them. How much does it cost for Charli D’Amelio, the most popular Western TikTok star, to create a video? Next to nothing. What all creators need is an engaged fanbase or community. Creators could sell a piece of themselves to their early fans. That would prove "skin in the game", and engage communities. Fame is a self-reinforcing phenomenon with clear network effect implications. Yet today, there's no way for creators to leverage an early fanbase as a distribution channel.

Early fans want validation. For most fans, there is a strong social validation element in being part of a creator's community. It's almost like a flex: “I was the first person to be a fan” or “I’m the biggest fan”. Say you get a new badge or sticker when you donate more than $500 to your favorite creator. Or after you complete an online course. That would signal you are a super fan. It's a similar mechanism to Twitch's donations today. The social side of fan bases exist because people crave validation. I dedicate at least a fourth of my online time to creators. I am part of several Slack communities (e.g, RadReads) and read dozens of Substack newsletters. Today, this trait of my online identity goes entirely unnoticed by social media.

Equity ownership > subscriptions. There is reflexive value in communities around people or ideas. The more people manifest interest in something, the higher the value of the thing. Part of the value is social signaling. Part of it is creating a common cultural touchstone. Reflexive value is dynamic, not static. Scale breeds further scale, alongside improved community engagement. Today, most paid content is monetized through subscriptions. Subscriptions translate into equally-sized, cadenced cash outlays from fans. This model has no intrinsic reflexive value. What if the quality of content produced dilutes over time? What happens when members of a community 10x? Subscriptions are imperfect monetization models that do not capture the value fan-creator relationships. The creator’s economy calls for dynamic pricing, instead of flat, recurring revenues.

The opportunity for non fungible tokens (NFTs)

Creator-issued collectibles. The first iteration of the concept of equity ownership in creators would look like a toy. As the crypto world fusses over Bitcoin, another digital asset has gained traction. Exciting use cases for non‑fungible tokens (NFTs) are cropping up all the time. NFTs are unique digital items such as collectibles, artworks, badges and stickers.

NFTs' actual ownership is blockchain-managed and they command some serious cash. They are unique, rare and indivisible digital assets. Non-fungible tokens contain permanent metadata - like a certificate of authenticity for a rare painting. Also, developers have the power to limit the number of rare NFTs, making them scarce and desirable. Finally, NFTs cannot be split into smaller denominations - you can only trade them as a whole.

NFTs offer a flexible method of recognising achievements and symbolize the fan-creator relationship. Here a few use cases we will likely see in the future.

1. Online courses: NFTs issued at completion of online courses. E.g., 'Building a Second Brain' by Tiago Forte could have its own collection of NFT badges for each cohort

2. Cohort-based programs: NFTs to confirm participation to an online program. E.g., each cohort of On Deck fellows could get their own badge

3. Newsletter subscriptions: exclusive, limited edition NFTs for early fans. E.g., a Substack writer could release an NFT for its first 100 subscribers, then for its first 1,000...10,000...

4. Voting rights: creators could issue NFTs with "voting rights" to a selected group of super fans. They could then express preferences on the desired content of the next YouTube video

5. Online communities: NFTs issued to a subset of community members to reward their active engagement

In this scenario, creators would be the sole party allowed to create their own NFTs. The initial purpose of this model would not be to trade and speculate amongst fanbases. Creator-issued collectibles would allow creators establish a direct relationship with fans.

Simplicity and fun. Collecting digital art, in-game assets (e.g., swords, garments...), and tradable cards is very easy and fun. It also does not involve any financial construct. Users see their entire interaction with the interface as a fun game. They earn emotional reward from the ownership of a unique object. NFTs address the same pattern that makes people collect paintings and vases. A visual representation with an immutable record of ownership is psychologically appealing.

Scarcity and investment attractiveness. Pricing of scarce items is a zero-sum game. People choose the objects they believe will be in demand by others and thus expect growth in price. When you can't measure performance, networks drive success. Emerging artists produce a limited number of works to signal scarcity. This promotes price growth. The extrinsic value of an NFT stems from psychological and social dynamics of the fan-creator relationship. And grows with them.

Social validation. NFTs will define fans' identity as content consumers. They would help narrate articulate stories about tastes and preferences. Fans will store NFT-based badges, stickers and art in personal galleries or wallets. Handovers and trades would be time tracked, reflecting the longevity of fan-creator relationships. Fans will enjoy the social validation from discovering creators early in their journey.

Autonomous fanbases. Crypto unlocks the potential for a community to have autonomy from the platform. Each individual creator could have some existing leaderboard tied to an existing platform. With NFTs, creators could bootstrap their community off of that ranking. A community can uproot itself from its platform and create its own 'digital nation'. It’s a way for creators to shift power from current platforms and own their communities. This will also foster cross-community discoverability and growth. Early fans of a Substack writer could discover online courses by peeking at their peers' gallery of collectibles.

Content tokenization. Crypto could change the dynamics between communities and creators. It could claim back the idea of the stock market to benefit creators and fans directly. When a creator releases their new work, each piece would tokenized into an NFT. As more fans engage with each content piece, the corresponding NFT would rise in value. Developers can NFTs can to wire a cut of each handover to artists. This would allow originators to capitalize on the hype they create. You could also redeem tokens in exchange of merchandise or experiences. Think dinner with your favorite creator, or picking the next game they are going to play on Twitch.

A necessary first step. Early use cases should not have any kind financial flavour. Hardcore tokenization of somebody’s income stream requires a high level of trust. People are comfortable messing around with art, badges and stickers use cases. Collectibles are a mental crutch to get people familiar with digital ownership. That's Stage 1 of the transition towards owning an economic stake in a creator’s work.

I like big TAMs (Total Addressable Market) and I cannot lie

Potentially very large. The market size for crypto-native creative content tokens is hard to estimate. It barely exists today. Analytical forecastings always fail when applied to markets that don’t yet exist. It is impossible to predict how disruptive these products will be. A notable example of how wrong forecasts for disruptive innovations can be is Uber. Its original pitch deck forecasted a best-case scenario of $1B annual revenue. At the moment I am writing this, Uber’s market cap exceeds $70B.

With that said:

We are in the early days of NFTs. In early July 2020, the total sales of nonfungible tokens hit $100 million. Sales of NFTs during the past month at the moment I am writing amount to $8.5B. And this is just the start. The leading cryptocurrencies started their rally to yearly highs. We would soon see a nice hockey-stick in the NFT space as well.

Creators’ market size: a bottom-up analysis

Here’s a bottom-up that adds up to 50 million creators.

Professional Individual Creators (~2M+) – Making content full-time:

• YouTube: of the 31M channels on YouTube, ~1M creators have over 10K subscribers (source)

• Instagram: of the 1B accounts on Instagram, ~500K have over 100k followers and are considered active influencers (source)

• Twitch: of the 3M streamers on Twitch, ~300K have either Partner or Affiliate status (source)

• Others: including musicians, podcasters, writers, illustrators, etc total ~200K (source)

Amateur Individual Creators (~46.7M) – Monetizing content creation part-time:

• YouTube: of the 31M channels on YouTube, ~12M have between 100-10K subscribers (source)

• Instagram: of the 1bn accounts on Instagram, ~30M have between 50-100K followers (source)

• Twitch: of the 3M streamers on Twitch, ~2.7M are non Partner or Affiliates (source)

• Others: including musicians, podcasters, writers, illustrators, account for a total of ~2M (source)

Creators’ market size: a top-down estimate.

American internet creators earned a baseline of $6.8 billion on the nine platforms in 2017. That number rose by ~$1B a year, every year (or 10-15% year-over-year). Those earnings increased faster for the creators on Instagram, Twitch, Tumblr and YouTube.

From collectibles marketplaces to social money (not exhaustive)

Rarible enables users to create a tradable digital collectible. The platform enables user-generated artwork with proof of provenance. It also facilitates the sale and terms of sale on their marketplace, and at near zero costs. Since its launch (Nov 2019), almost 40 thousand artworks have been created on Rarible. That translated into a total transacted value of almost $10M.

Foundation's idea is: you can tokenize creative products of any kind. The platform lets you buy, sell or redeem a token. The result is a liquid marketplace from day one. Both the creator and their fans can take advantage of being early in the marketplace. Or from secondary market appreciation. It’s one interesting experiment where owning the token signals being early to the market. There’s also an obvious financial layer on top of it.

Roll is a blockchain infrastructure for social money. "Social money" is lingo for branded tokens. They allow users to own, control and coordinate the value created across platforms. After signing up to the Roll platform, you get assigned 2M units of social money. Roll lets anyone create their personalized branded social money. More importantly, it provides pathways to encapsulate value via existing networks. Each issuer has their own unique network, which has its own unique social value. This value is captured by the currency issuer and their network, and not a third-party or platform.

SuperRare is a social network for art creators and collectors, backed by blockchain. On the SuperRare platform, artists create a piece of art and tokenize it. Once the NFT is on SuperRare, it can be bought, sold, or even held as a long term investment. Artists can either put their creation up for an auction-style bidding process or sell it for a set price. Once the NFT is sold to a buyer, it can then be resold at any price on a variety of NFT trading platforms.

Terra Virtua is a digital collectible ecosystem. It aims to create “a deeper sensory experience” with VR/AR taking digital collectibles. It is a similar concept to the Pokémon Go integration of AR gaming with the real world. (Pokemon Go accrued more than 550 million installs in its first 80 days from launch!). Whilst some digital collectibles are game-related, most digital collectibles are simply static images. The company has created the Terra Virtua Fancave - a personal 3D environment. User would gather there to display their collectibles there.

Enjin is a gaming community platform which now has over 20 million users. Enjin’s co-founder and CTO, developed ERC-1155, a new standard for video game tokens. With ERC-1155, a single smart contract can govern an infinite number of tokens. So a ERC-1155 contract could contain a wide variety of game items, from weapons to health potions. The Enjin token already powers over 1 billion digital assets. Enjin’s tokenized objects support developers with in-game monetization.

More, quirkier experiments: from socks to securitized humans

Uniswap is a crypto company that ran an experiment for fun. They created a bunch of physical socks (“Unisocks”) and tokenized them. The crypto tokens are redeemable for the socks and trade on the open crypto market. The socks were launched at $14. At the moment I am writing this, they’re now trading for $3,000 each. So far only 30% of the tokens have been redeemed for the physical socks. There’s been about $130,000 in trading volume on 500 pairs of Unisocks. So about 70% of the volume is speculation vs people “actually buying” the socks. And half the trades are people trading fractional pairs of socks!

KnownOrigin is an artist-driven platform. It makes it easy for creators to authenticate, showcase and sell artwork. In 2018, they had 330+ artists on the platform, over 4000 editions and more than 12,000 digital artworks sold.

Dapp Boi is among the first few people that I'm aware of to tokenize themselves. His tokens were redeemable for an hour of his time. And you could speculate on the future value of his time as a designer. So you can redeem the token for his time or you could just hold it as a sign of “I was there first”. If he becomes this famous designer, you could cash in on that later.

Mike Merrill. Outside of crypto there are other experiments that have been run. Mike Merrill, literally securitized himself so shareholders can vote on life decisions.

Spencer Dinwiddie, the star of the Brooklyn Nets, issued a bond based on his future NBA earnings. That's similar to the David Bowie Bonds. It's a very explicit financialization of a person.

The initial pitch for StockX was that you were never even going to get your physical shoes. The original thesis was: “I know the new Yeezys are coming out, I know they’re going to go up in price, just let me buy shares in it.”

Reddit is fascinating because they're a large existing platform trying to tokenize. MOON is a community token for the r/Cryptocurrency subreddit. Technically it has a market cap of over $2.88 septillion (that’s 24 zeroes) in September 2020. This astounding number is obviously just a market quirk. Most of this value remains unrealized. If more subreddit contributors decide to convert their holdings, MOON will fall massively.

Acknowledgements: thank you Li, Jesse, Bryant, Aaron for turning on your flashlights as I went down this rabbit hole.