Digital goods: a primer

Yes it is a confusing landscape out there and the hype surrounding NFTs has been getting louder. Now certainly is the right time for brands, artists and organisations to consider how they might like to test the waters, but the learning curve is steep and can be somewhat overwhelming. 

 You’ve come to the right place, however. This article will take you from a cold start to humming along nicely. Admittedly, it is rather a long read, but we have broken it up into handy chunks. You don’t need to consume the whole thing in one go, though admittedly, you will probably come back to it a few times. (Which would make us very happy 🙂  )

But is this not just one great quagmire of foolishness and crime?

You have seen examples of profile pictures on Twitter and elsewhere, featuring curiously deformed characters, cute cartoon animals or pixelated caricatures with spiky hair and strange eyes. The most visible examples of NFTs have been touted by popular television hosts and their celebrity guests. Given that those NFTs have been changing hands for a pretty penny, and without any additional context or insights, you would be forgiven for wondering if NFTs are not a pyramid scheme where, very soon, the chumps will be left holding valueless jpgs for which they had paid a fortune.

That interpretation, of NFTs being a Ponzi setup selling jpgs, comes from taking a very narrow view, however. Yes, apes, punks and others have been changing hands for eye-popping amounts and yes, there has been theft and fraud in this space (and it’s no reflection on the creators of the apes and punks!) To the first point, a gold rush is normal where remarkable values are reached quickly in an asset class hitherto unknown or undiscovered. To the second, alas a degree crookedness is to be expected wherever there is a gold rush. Human nature and so on…

 

All that, however, is the beginning of the story and not its end. It has served to bring attention to the underlying technology and its potential. Yes, NFTs can, and have been, used to sell counterfeit items or present devious schemes to defraud people of their hard-earned cash. We would have been grateful for less crookedness and less ugliness, but human nature is not something we can design out of any system… Thieves will thieve, fraudsters will lie and cheat, and all of them deserve close attention from the nearest magistrate. The rest of us are getting on with building stuff that is useful, valuable, interesting and, we hope, beautiful, and that is what we are going to concentrate on for this article.

What are NFTs and how do they work?

NFTs, in fact all tokens in this context, are pieces of software – strips of computer code designed to perform the actions for which they have been programmed. Yes, just like any other piece of software, from a photo editing package to a word processor. Luckily, however, they usually take up a lot less space than either of those as they are quite small. 

Of interest to us here are tokens that are “non-fungible”. That term comes from the world of finance. Fungibility is a key property of, say, bars of precious metal or hundred-dollar bills. It means they are deemed to have identical value and are, therefore, exchangeable. You can swap any 1-ounce bar of 24 carat gold for any other, and any bill of a currency for any other corresponding bill (counterfeits excepted, of course). In crypto, Bitcoin is fungible because you wouldn’t care if you had this Bitcoin in your wallet or that one. Non-fungible is the opposite of that – each non-fungible token has some property that makes it unlike all others. They are, to all intents and purposes, unique, and that uniqueness can stem from one particular feature or aspect of the token or a whole lot of them.

 

Ah, that other word “wallet” is also somewhat confusing. In this context, for the time being, all you need to know that a token wallet is another piece of software where you keep the keys to where your tokens (NFTs, crypto, etc.) are kept on the blockchain. In this sense, the blockchain is like a long corridor of safes, one or more of which are yours and your wallet is, well, a wallet with keys to those safes. Lose your wallet and you will not be able to access your tokens. The wallet may live on your computer, on some other computer, on your phone – as a software wallet, or in what can look like a specially formatted USB stick – which would be external hardware, making that a hardware wallet. More on all that later.

Media hype's something else, though, eh?

To a degree, the most successful NFT projects so far have been classic marketing: “put up a door somewhere, tell everyone there’s something cool behind it, watch them line up” – and hype is how you sell those things. Owning a particular NFT has became simply a status badge in that world, as well as a way to open doors to closed communities and show to those on the outside “I’m in”. In turn, all this activity has been under intense media scrutiny, resulting in rivers of words being written on the subject. And that is where things start to turn cloudy.

Words have power. You can use a word processor to write a love sonnet, or a death threat; a kidnap ransom demand or a recipe for baking sourdough. Much of the media attention has, understandably, focused on “look at those jpgs going for the price of mansions!” Luckily, a number of intelligent, thoughtful writers have taken a more considered, long-term perspective of what has been going on because in order to see the potential of the technology we need to take a broader view than one presented in sensationalist clickbait articles spouting breathless, and ultimately clueless, column inches.

What are NFTs for?

As everything we are talking about here happens within the digital realm, a key opportunity brought about by tokens, in our case NFTs, is their ability to have anything digital attached in the form of a media file. If you can see it on your screen or interact with it on your phone, you can attach it to an NFT. Importantly, however, you can also build into the NFT functionality which ties it to objects or events in the real world. And that is where the really exciting stuff starts to happen because you are starting to engage and involve fans and audiences in ways that were impossible or at least impractical until not very long ago. Artists, brands and organisations will see substantial uptick in audience engagement if they set up their NFT releases in creative ways, appropriate to their respective markets.

For example, an important distinction to get is that NFTs are not just a new way to sell photos but a new way to connect with people who are interested in photos. Major difference. Yes you can purchase a photograph, or some other piece of visual art, as an NFT. Many have been. What is more exciting, however, is the next step which not only offers direct value within the NFT as a piece of art but also gives a utility function that is valuable to its holder and, in a broader context, to every holder of an NFT from that particular artist.

 

Imagine a photographer decides to release a limited edition portfolio of photographs with NFTs associated with those photographs. An important function of the NFTs might be to serve as certificates of authenticity of sorts – if the NFT of the corresponding image resides within your wallet, you are deemed to be its rightful owner. Then the real fun begins. The photographer can build a community of lovers of their art. NFT holders could be invited to a live event with the artists or given an opportunity to preview the next portfolio. Yes of course, people get invited to show openings all the time already. That relies, however, on keeping databases of clients updated and an ongoing administrative effort associated with that. With NFTs all that needs to happen is an airdrop, a promotional release, of another token – carrying within it the details of admission.

 

We have a separate series of articles on the go, about various use cases in the arts, as well as in sports and entertainment. Do come back regularly and check them out for more in-depth looks at what might be possible in each of those fields.

 

 

Some consumer brands have been quick off the mark in embracing the concept of NFTs in ways that largely mirror their loyalty programmes or incentive packages which they have always used. That is great but we think it is literally just scratching the surface. Every branding director on Earth dreams of being able to pronounce that he or she has built a community of passionate customers or users around their brand. Some have managed to tick that off their bucket list of successes (Apple, Nike, Oakley and so on.) For most it is a goal yet to be achieved. Since a group of people with similar characteristics (fans of Brand X, say) turns spontaneously into a community if given the tools and an opportunity, we believe that properly executed NFT programmes can be very effectively used to provide those tools and opportunities.

For organisations such as sports promotion bodies the immediate uses – for which we have built platform solutions, incidentally – come in the form of proof of attendance at events, fan club membership levels, Before you ask, NFC cards do not offer anywhere near this level of flexibility, plus carry the additional cost and risks associated with delivery (postage) and use. The cost of delivering 500,000 NFC cards to a legion of fans who have watched a live stream of a match or a fight night would be staggering, and that is before the cost of producing those. Then, if you wanted to treat your fans to another collectible at the match next month, you would be up for exactly the same level of expense. With NFTs programmatic flexibility is endless and there is no delivery cost. 

 

In all of the above cases, potential uses for NFTs are only being discovered and defined. Major artists, big brands and global organisations have been experimenting with different types of NFTs, offering different kinds of engagement and usefulness. Our guess is, we will see incredible inventiveness across this entire field over the coming years as larger numbers of people get involved, both on the producer side and the consumer end of the spectrum.

So what about tying together the real and the virtual?

The ability to connect the physical and the digital is a fundamental feature of NFTs, and brands and organisations have been experimenting with the concept in different ways – whether connecting the “actual” physical object to an NFT or a representation of it.

NBA TopShot is the most visible example, with fans collecting NFTs representing individual players and key plays – buy the NFT and you get a picture or a video as a digital collectible. There are, of course, many other ways in which to pursue those connections.

Porsche has dipped its toes (expensive tyres?) in the water, netting 30+ Ether for charity from the sale of a drawing (as both an NFT and original art) by its exterior design chief and while we’re on the subject of cars, Lloyds Auctions is releasing muscle car NFTs including the Aussie classic Holden Torana A9X (vroom!) though you don’t get a Torana with the NFT, it pains us to say. Australian Open sold championship points as an NFT accompanied by the physical tennis ball (in an attractive, handcrafted case, apparently.)

When mass adoption?

We are now at the threshold of retail level adoption. Access to NFTs is being simplified and ways to interact with them are coming into your living room. Two touchpoints that needed to be smoothed out before we could see mass adoption have been figured out. This means, we will see normal people taking up the technology in large numbers, like they have the cellphone or the internet.


The first touchpoint is “how do I buy these things?” So far, this has meant dealing with all of the intrinsic “delights” of a crypto wallet. If you have one, it has probably meant you’re a nerd and you find it actually less of a pain. For “crypto civilians” this has a major barrier to entry. Making the purchasing process simple and, ideally, dovetailed into their existing financial arrangements, would certainly entice “normal” people into the arena. (Yes, of course, one needs a wallet. The barrier to entry is the level of anxiety in setting one up.) Well, OpenSea, the largest NFT marketplace out there has announced that it will be accepting Visa, MasterCard, AmEx and Apple Pay. It won’t be long till all NFT creators and market places will accept payment in fiat currencies as a matter of course.

The second is “what do I do with it?” Yes, you can put the picture up as your social media mug, assuming the NFT you’ve bought is of the profile picture kind. But that functionality is not going to get millions of people excited, and getting millions of people excited about NFTs is the generally accepted definition of “mass adoption.” (Plus, profile pictures are, really, merely scratching the surface of what NFTs can be used for.)

If your NFT happens to be of the Aussie Open-winning backwards lob by Djokovic (OK, maybe not Djokovic this year) then in all honesty, displaying it to your pals on a phone screen is not going to have quite the intended show-off value but Samsung has already announced that a number of its 2022 smart TVs will have NFT functionality built in and other manufacturers are no doubt working on their solutions right now. Suddenly throwing your NFT up on the TV screen in the living room is not just viable but easy.

Where to begin?

Nothing happens without a great idea. That much is obvious to every brand director and every artist. You are therefore perfectly placed to explore and exploit the exciting world of NFTs for two very simple reasons: you are already full of great ideas and NFTs, before anything else you may have heard, are enablers of ideas. Any ideas. As we have seen, in addition to some cool ideas brilliantly executed, the NFT space has been littered with thousands of knock-offs and terrible me-toos. Yes, imitation is not just the sincerest form of flattery but also a reliable indicator of success potential (just ask any Hollywood executive) but if you are going to imitate the successful projects, you need to aim for high quality execution.

We can say with confidence that concept development is a key stage. Every hour you invest in thinking about how an NFT issue might benefit your fans, audience, readers or collectors will pay you back many times over.

NFTs’ single most important quality, as far as we see it, is an ability to connect the real world with the digital one in order to provide some kind of value to people involved. We are posting regular articles about building value in various verticals and varying fields of endeavour.

One last thing about wallets and blockchains:

So, the wallet holds your “keys” to the files which are your individual NFTs, while the NFTs themselves live on the blockchain, distributed across many computers out on the network. They are safe there, and their survivability is ensured but they cannot be altered or even accessed without the keys which reside in your wallet, so in order to do anything with them, you need to be in possession of the wallet.

“But what about people sending me stuff, like crypto or other NFTs?” we hear you ask. Indeed, they can. The wallet functions like a postbox – anyone who knows your wallet address can send you something, through mechanisms such as buying stuff on an exchange or sending stuff as “airdrops” or promotional give-aways. Associated with your “safe” the key lets the person send tokes to that location. Only you, the key holder, can access what is inside the box, however.

Just to make it interesting, there are important differences between the two types of wallets (custodial and non-custodial) so the question of wallets really requires a deep dive all of its own. That is coming up soon!