Since last year’s scandalous meltdown in the crypto industry (FTX etc), the focus for financial institutions has shifted to asset tokenization and related blockchain infrastructure. In other words, away from the manias of NFTs of ugly monkey pictures to grownup, if somewhat duller, stuff.
But it may be premature to write off crypto’s wilder side. Yat Siu, a Hong Kong entrepreneur and founder of Animoca Brands, says NFTs, DeFi and metaverse-related speculative activities are making a comeback – and with more relevance to real-world activities.
He presents some data points to make his point. Some of those stats look like carefully picked cherries, and a lot of stats in this space are unreliable. But they are sizeable figures.
His broad argument is that the parts of the blockchain world that generate the most creative ideas are still bubbling away. They cannot be entirely separated from what licensed financial institutions wish to do. And governments in Asia promoting ‘responsible’ tokenization schemes must reckon with crypto’s creative side.
Living up to the hype
“Audience numbers are still small, but it’s still millions of people in The Sandbox,” Yat Siu told DigFin, referring to an online gaming platform with its own marketplace for non-fungible tokens (NFTs), that is part of Animoca’s investment portfolio.
In 2022, NFT marketplaces such as OpenSea and Blur saw a total of $24 billion in transactions.
Yat Siu argues this activity is living up to the hype of Web3, the notion that blockchain-based internet models enable individuals and businesses to monetize their data and intellectual property – as opposed to the big internet platforms of Web2 such as Meta or Amazon, which own all the content their users generate.
For example, the number of users creating tradeable assets (including ugly monkey pictures, but other things too) get 90 percent of value transacted. Depending on how the underlying smart contracts are written, they can continue to enjoy royalties even when the token representing their value is traded on secondary markets.
He compares that $24 billion to several hundred NFT minters to the $7 billion he says Spotify distributed to musicians in 2022. “The NTF value flow is much better,” he said.
DigFin couldn’t confirm that $7 billion payout by Spotify. But the company says it paid more than 1,000 artists more than $1 million, and another 57,000 around $10,000 last year.
Spotify has the typical winner-take-all model of internet businesses. It has 205 million paying subscribers. It says it pays out 70% of those revenues to artists, but a large amount of that goes to payments to music publishing companies, which own the rights to songs. The majority of individual artists make negligible amounts from streaming their songs on Spotify, even if they are getting tens of thousands of downloads.
Metaverse v. Spotify: fair comparison?
The analogy isn’t apples-to-apples, though. There is clearly a speculative element to most NFTs. They are created with the intention to flip. Songs are created to attract an audience and accrue royalties.
There is also a question about what that $24 billion figure represents. The trading figures on NFT marketplaces are boom and bust. For example, Yat Siu says momentum is building, citing global NFT sales of $4.7 billion in the first quarter of 2023.
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That figure is from CoinTelegraph, a crypto news and data site. The majority of the Q1 volumes came in a week-long spike of Donald Trump trading card NFTs that enjoyed a pump in the wake of a New York grand jury inditing the former president. The price rose from 0.46ETH ($835 at the time) to 0.6 ETH ($1,090).
But today those NFTs are worth 0.12ETH ($227).
Trades on OpenSea reflect a similar volatility: on December 14, the last high, it recorded 186,000 transactions valued at $6.1 million, but activity has steadily fallen. On July 11, OpenSea saw only 18,000 transactions valued at $2.5 million.
That’s still real money being traded, but it’s mostly pump-and-dump activity – not the behavior of an asset class, but of a gambling site. And those numbers don’t address the high but unquantifiable amount of wash trading that takes place – especially on rival marketplace Blur, which now has greater volumes than OpenSea but is known as the place for whales to trade.
Is it just early…still?
The comparison with Spotify also overlooks the fundamental ease of using a Web2 platform versus the fiddly nature of NFTs, DeFi and the metaverse, which for starters require a crypto wallet. This could mean that once the user-experience gets smoothed out, the sky’s the limit. But these protocols have been around for years – what if the wonkiness is a feature, not a bug, of Web3?
Yat Siu rejects this argument. He says adoption is not because of the finicky bits of crypto wallets. “The challenge of adoption is financial literacy and what it means to own assets.” Most people visiting The Sandbox don’t convert into Web3 users who monetize their own data and output. “Having assets in your wallet isn’t the same thing as knowing what to do with those assets.”
He likens this to the early days of online brokers such as E*Trade. “The whole world wasn’t buying stocks. It was gradual.”
This is a version of the argument that many people in blockchain have argued: that it is still early days. But is it still? The first NFT was minted and sold in 2014, nearly ten years ago.
E*Trade Securities was launched in 1991, offering trading services via early web browsers such as AmericaOnLine; by 1994 it was earning $11 million in revenues. It enjoyed fast and sustainable growth in accounts and turnover in the earliest days of the internet, before the concept of ‘going viral’ existed. From the outset, users of online brokers knew what to do with the assets in their account.
As big as a country
To gauge how NFTs are doing, that $24 billion needs to be compared to something else.
Yat Siu calculates total economic activity in the metaverse to have reached $30 billion in 2022. That is based on his estimate combining activity on The Sandbox, metaverse-related token volumes, and NFT sales.
“That’s the GDP equivalent to Cyprus or Iceland,” Yat Siu said. (Both have GDPs of about $28 billion.)
Of that $30 billion, nearly $15 billion represents money locked in 180,000 DAOs, or decentralized autonomous organizations, which Yat Siu likens to the foreign reserves of national treasuries.
That’s an impressive way to think of the size of the Web3 economy. On the other hand, is Iceland the right comparison, or should it be compared to Web2 platforms?
Maybe. Spotify’s market capitalization is $31 billion, so the metaverse is now the size of Spotify. But it has a ways to go: Meta’s a $765 billion company and Amazon’s $1.3 billion. Apple is about $3 trillion. Can the world of decentralized economics get that big?
If it remains mostly about speculation, number-go-up collectibles, and wash trading, then probably not. A report by Galaxy in May found the global NFT market has been shrinking. The money locked in DAOs has been stagnant: Yat Siu takes delight in saying DAOs have $14 billion in total locked value (pledged). But the number was $15 billion in 2021. DAO size has stagnated despite the speculative boom.
Real-world: the TinyTap example
But if DAOs aren’t bigger, they might be getting better. A few real-world use cases are now evident with Web3 models. Yat Siu pointed to TinyTap, an education platform that Animoca Brands acquired last year.
TinyTap, founded in 2016 in Israel, helps users create their own educational lessons and games. Its creators can sell their products in the form of NFTs. Buyers, such as educational publishers, can adapt the content and make it into a bigger business, if they choose, but the smart contracts ensure the original creators get paid royalties and a slice of future transactions.
In November 2022, the company announced its first batch of six NFTs raised ETH139 (about $228,000) – representing courses created by six teachers. This could be, say, a PowerPoint presentation for teachers that integrates videos and so on. The teachers received 50 percent of the auction sale plus a 10 percent ongoing share of any revenues generated by their courses if they help with the marketing.
That came out to $18,500 per teacher. That’s the equivalent of what a secondary school teacher in Brazil takes home each year. Even in the US, the average teacher is paid only $66,000. And a successful course can create a long-term royalty stream.
When Yat Siu compares the metaverse numbers to Web2 platforms or electronic financial businesses, the argument doesn’t look that great. Earlier attempts to make crypto look useful, like play-to-earn was prone to scams and the usual pump-and-dump predations.
But link Web3 to real-world businesses that don’t depend on number-go-up ponzinomics, and the story starts to change.
“The teacher and the new owner become partners in an education asset that generates a yield,” he said. “Netflix has 8 million families subscribing to its educational content. That’s Web2. In Web3, content as NFTs is sold to others who can market that content and enhance the revenue. Say you market a course to a Japanese audience, you can triple the revenue. The sale of the NFT includes the IP and contractual rights, all in one.”
While TinyTap feels a long way from crypto’s wild side, it is from the murky depths that ideas like this got started. Tokenizing assets for a more efficient Wall Street is great, and there’s plenty of hypey nonsense in the rest of crypto. (Ugly ape pics are not an asset class, sorry.) But no one trying to tokenize a fund or a real-estate project would have come up with something like TinyTap. For finance professionals focused on regulated digital assets, it pays to keep an eye on the crazy stuff.