NFTs: Beyond JPEGs

Session 3

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April 5, 2022

Web3 Speaker Series

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Today’s Agenda

1. Content session (4:10-4:30)
2. NFTs Interactive Session (4:30-4:55)
3. Break (4:55-5:00)
4. Guest Panel (5:00-6:00)
1. Roneil Rumburg, Co-Founder and CEO @ Audius
2. Dani Loftus, Founder @ This Outfit Does Not Exist

Class Overview

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Slido

Participants can use the Q&A function to suggest speaker questions and to vote at

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slido.com with code #423528

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Attendance link is in Slido (“Live Polls” section)

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NFTs in context

Objectives

Provide a gentle introduction to NFTs and serve as launching point for further exploration and speaker questions

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After the session, you should be able to explain:

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1. What NFTs are

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2. What NFTs represent

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3. Risks and opportunities for NFTs

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What the hell is an NFT

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What is the best definition for an NFT (“Non-Fungible Token”):

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1. A tradeable form of digital artwork or a unique digital item held on a blockchain. Art on the blockchain.

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• A piece of blockchain-based code pointing to media located elsewhere that only the owner can unlock

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• A new blockchain-based tool that enables anyone to monetize digital content, enabling private ownership but public access

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• A scam where the value of an NFT is whatever you want it to be, driven by speculative fervor

What the hell is an NFT

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What is the best definition for an NFT (“Non-Fungible Token”):

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• A tradeable form of digital artwork or a unique digital item held on a blockchain. Art on the blockchain.

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• A piece of blockchain-based code pointing to media located elsewhere that only the owner can unlock

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• A new blockchain-based tool that enables anyone to monetize digital content, enabling private ownership but public access

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• A scam where the value of an NFT is whatever you want it to be, driven by speculative fervor

NFTs = only scams and speculation?

NFT technology may attract scammy individuals but isn’t inherently a scam

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Speculation is a key part of the long-run adoption cycle. Can happen in waves.

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Within speculative phase, boom-bust sub-cycles attract capital -> incentivizes investments in infrastructure

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Source: Carlota Perez.

Fungible vs. Non-Fungible

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Source: CoinsToUse.

Can’t I just copy the same photo or screenshot it?

Yes, but the ownership value is tied to the authentic, original file!

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Aesthetic value: Like difference between print vs. original of physical art

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Source: Pastel Network.

Is digital media valuable?

Yes: because a niche fanatical community always exists

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Source: Ownest.

Bored Ape

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Source: WhiteRabbit1111.

What becomes possible when you have an objective, immutable, tradeable, unique, decentralized record of ownership

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for any physical or digital asset?

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Coalescence of community values (and $ value) in exchangeable, securitized form: the community has its own unique token.

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Inherent Value = social status, identity, belonging. Need new NFT term?

What the hell is an NFT

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NFTs can record the ownership “certificates” for any physical or digital object or media:

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1. Digital toilet paper
2. Digital perfume
3. A digital collectible
4. An digital item in a video game
5. A photo or video of you
6. A tweet or a GIF
7. A Tennis player’s physical arm for advertising
8. A cryptokitty
9. An NBA Top Shot moment
10. A unique Nike sneaker in a fashion line

TLDR

• Media can be copied and reproduced, but it is provably a copy; authentic original remains special

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• Buy NFTs = get special perks/benefits.

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• The NFT project leaders continue to provide exclusive content (or any value) to community, as well as member-member value and network effects kick in.

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When you own an NFT, you may be an:

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• Investor
• Member of a social club
• Brand shareholder
• Member of loyalty program

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All at once

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Building blocks to NFTs

1. Programmable money enabled by blockchains + smart contracts (ERC-20 = fungible standard)

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• Programmable digital objects enabled by ERC-721 / ERC-1155 - compliant smart contracts = non-fungible standard. ERC-2981 coming for royalties?

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• Siloed ownership records (held or owned by companies) -> Public ownership records (on a blockchain) = digital property rights

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• Digital goods can be provably scarce, rare, and limited in supply -> enables new revenue models (royalty payments from secondary sales, etc.) + community participation in value creation

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Programmable money enabled by smart contracts

Tokens + Smart Contracts = Programmable Money, native to a blockchain

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Source: Finematics, PennyMachine.biz.

Where are NFTs stored? Code-level view

Storage Options (media)

1. Centralized Cloud: AWS, Azure, OpenSea, imgur, etc.

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• On-chain: Directly On the relevant blockchain

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• Decentralized storage: IPFS

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No perfect solution!

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404: not found…

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IP Matters in NFTs…but what about Open Source?

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Source: ArtNews.

NFT Use Cases

• Access: Membership cards / tickets (event/merch/discount)

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• Ticketing: restaurants, sports events, concerts

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• Academic credentials: Diplomas

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Essentially, anywhere that DRM (digital rights management) is currently inefficient or community management/perks are organic or scarcity is present

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Source: 101blockchains.

NFT Use Cases

Web3 Use Cases

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• Entirely new communities spanning digital and physical world -> active ecosystem building

Corporate Use Cases

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• In the context of legacy companies, for benefit of pre-existing product or service

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Source: 101blockchains, WSJ.

Guiding Principles for sound NFT Projects

1. Make real use of novel NFT tech and value prop
• Secondary Sale Royalties feature
• Club membership and loyalty programs where ongoing benefit-stream flows to users

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• Leverage organic community of users
• Users reflexively inform the value of the NFT
• Long-term, committed fanbases; not forcing NFTs on preexisting community

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• Teams must build and leverage reputation to gain user trust
• Frequent community calls…not minting additional, etc.

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• Accessible on-ramps
• Dapper Labs enables fiat/credit cards, don’t have to use crypto

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• Endure price swings and correlation with crypto markets
• Community members must not all be speculative traders

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Source: HBR.

Communities reject NFTs when they are inorganic

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Source: The Guardian, Associated Press.

Increasing diversity in collection types

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Source: Cryptoslam.io.

Still the wild west…highly rec you read Molly White

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Source: Blockworks, Molly White.

NFT sales are still a relatively small segment of Web3

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Source: The Block, Nonfungible.com, VisualCapital.

Total Defi TVL: $212B

Total Crypto: $2T+

Equities, bonds, derivatives, RE: $636T

Total 2021 NFT volume: $18B - $25B

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(why is this apples-oranges,though?)

NFT value stack

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Source: Messari.

NFT marketplace platforms have proliferated

• Why can’t DEXes exist as easily for NFTs?

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• NFTs = naturally more centralized due to nature of a “creator”

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• Are centralized marketplaces a problem for NFTs?
• Storage?
• Royalties interoperability?
• Increase quality of issuers?

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Source: Dappradar.

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Source: The Block.

Downsides & Risks

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• Storage is issue & presents longevity risk: No guaranteed way for NFT to last forever

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• Centralized NFT platforms reduce interoperability: Royalties features lost if leave platform

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• IP and Copyright Issues: Nike, Miramax and Quentin Tarantino, Hermes, Lil Yachty as well as HitPiece fiasco

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• Are NFTs securities in eyes of SEC?: Art/collectibles vs. investment contracts?

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• Speculative fervor & wild west hacks: 2021 explosion alienated some people, rug pulls…but brings in capital required for critical infrastructure

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• Do communities want NFTs?: Some communities have accepted, others have rejected

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Do NFTs create more problems than they solve?

NFT Takeaways

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1. NFTs boil down to the creation of unique, scarce, digital objects that represent ownership over media and where the underlying media is stored elsewhere

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• Digital media is inherently valuable: there is great diversity in what can be an NFT (physical objects, collections), driven by social / community endowed value

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• Has yet to overcome speculative dynamics - or is speculation a feature, not a bug?

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• Inherently more centralizing forces - is this an issue? (Ronin hack)

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• Some benefits more theoretical than in reality (persistent royalties, storage issues)

Do societal benefits exceed societal costs?

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Class Demo

In-Class Demo

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NFT Basics

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What are common NFT behaviors for individuals?

1. Buying: Purchasing a previously minted NFT with digital assets.

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Out of scope for this class

• Minting
• Selling
• Fractionalizing
• Collateralizing

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What is minting a NFT?

Minting is publishing your token on the blockchain.

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This makes it available for transaction.

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You can use your own media or purchase another person’s artist’s as part of a collection drop.

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Avg. cost to mint on:

• Solana: $95 ($0.12 gas)
• Ethereum: ~$300 ($100 gas)

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NFT Best Practices

1. All wallet best practices apply (e.g., never share your seed phrase).

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• Check whether NFT projects have been audited. Like all fungible tokens, NFTs are subject to smart contract risk.

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• Understand why you are buying- NFT pricing is particularly difficult, which makes speculation high risk / high reward.

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• Confirm that the seller actually owns the NFT in question.

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• Stay current with latest regulatory oversight and its impacts on you

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In-Class Demo

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Activity Overview

1. Magic Eden Overview

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• NFT Best Practices Review

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• User Behavior 1: Connect wallet to NFT marketplace

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• User Behavior 2: Look around an purchase an NFT (optional)

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• Wrap-Up

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What is Magic Eden?

Magic Eden is the largest NFT marketplace on the Solana ecosystem.

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Like most Solana protocols, it touts faster and cheaper transactions.

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Key Facts:

• Native token: SOL
• Charges a 2% tx fee
• 96% mkt share
• 2.5x daily tx vs. OS
• $97 AOV (OS: $1,599)
• NFT-gated DAO access

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NFT Best Practices

• All wallet best practices apply (e.g., never share your seed phrase).

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• Check whether NFT projects have been audited. Like all fungible tokens, NFTs are subject to smart contract risk.

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• Understand why you are buying- NFT pricing is particularly difficult, which makes speculation high risk / high reward.

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• Confirm that the seller actually owns the NFT in question.

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• Stay current with latest regulatory oversight and its impacts on you

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User Behavior 1: Connect wallet to Magic Eden

1. Confirm you have Phantom wallet extension / app available.

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• Navigate to Magic Eden.

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• Click “Connect Wallet” and follow instructions.
1. You can disconnect and re-connect at any time.

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User Behavior 2: Purchase an NFT

1. Review your SOL balance in Phantom Wallet.

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• Navigate to “Collections.”

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• Poke around and see the floor price of NFTs you like.

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• Review information (e.g., attributes, contract, history).

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• Confirm you have sufficient SOL to purchase or place a bid.

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• Review transaction and approve.

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• View NFT in Phantom wallet.

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Wrap-Up

Common ways new technologies can be misunderstood:

1. “It’s just a toy.” → Clay Christensen’s disruptive technology theory

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• “It’s too expensive.” → Now, but how about in the future?

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• “It doesn’t solve a problem.” → Unlocking new capabilities

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Some opinions:

1. I challenge you to think about things in regular life that we take for granted as being valuable.
2. “Value” is what the market is willing to pay. Humans have been known to pay for esoteric utility (e.g., status, identity, belonging).

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Here’s where we probably are

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What this implies:

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1. Likely market correction
2. Capital influx brings about critical infrastructure
3. Critical infrastructure likely brings about more valuable crypto-native applications
4. The cycle continues

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Speaker Guest Panel

Web3 Speaker Series

Session 3: NFTs Beyond JPEGs

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Roneil Rumburg

Co-Founder and CEO

Audius

Dani Loftus

Founder

This Outfit Does Not Exist