The Elephant in the Room

Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.

[Introducing a Guest Post from one of Mint Media’s earliest and most loyal community members, who has a knack for conceptualizing and sharing polarizing, yet insightful takes on the NFT industry – Cali.]

Hello friends, it's been a while. Let's not prevaricate and jump directly into the crux of the matter - There's an elephant in the room within the world of NFTs.

I've never been one to buy into doom porn, my thesis being that usually, a lot must go horribly wrong for bearish scenarios to play out. Even when shit goes horribly wrong, it takes people a while to figure it out, and often they don't care. Also, humans tend to figure shit out just right before things go horribly wrong; that's just human nature. There are many examples of this throughout the history of humanity. I think, in a nutshell, that's why markets tend to go up much more than they tend to go down.

In the past few months, the talk of the town has been Blur lending and the doomsday scenarios it creates or how Blur ruined NFTs. On the lending point, I saw people say similar things about leverage on meme coins for years. Yes, there were leverage wipes, but for the most part, it has been a nothing burger. I tend to think history with rhyme when it comes to blur lending. On the second point – greater liquidity is not horrible. We can spend all day discussing how Blur is manipulating markets, playing on human greed, and incentivizing the wrong things. All of this brings me to why I'm writing this – setting aside these two points I just discussed, Blur still may destroy the NFT market. Let's dive into it…

Working in this industry gives me a unique point of view I don't think retail always has. One of the most common misconceptions is that positive vibes, memes, and good times will take whatever project they're invested in, into the stratosphere. While all those things are undoubtedly important, retail must remember that these projects are, for better or worse, businesses. And what do companies need to operate? Money and people. I would now ask you a simple question – how are these businesses making money? The answer to that question usually goes, "Well, they collected a bunch at mint, so they have that money." My friends, while that's great in theory, the reality is that most of these projects hired extensive staff, spent aggressively in a period of high growth, and burned most of that money, believing that royalties would sustain their burn. By all means, yes, these projects should not have predicated their entire business model off secondary royalties, but that's easy to say in hindsight.

Let’s run through a simple exercise here and take you on a time machine back to 2021 from the point of view of a founder:

January 2021: Your project, MonkeyCowboys, just minted and raised 10 million American US Dollars on a bunch of speculative promises. You're ecstatic, through the roof, and your project is DEFINITELY the future. ETH is going up forever, and you need to hire quickly to compete with the 100 other projects minted today. So, you swiftly hire the best talent money can buy and pay them generously. After all, this is a bull market, and you need to compete. So, you hire 10 entry-level employees at $100K each, 5 senior-level staff at $200K each, and of course, you need to pay yourself and the three other founders in the C Suite $300K each – after all – you are the bosses and geniuses behind this brain trust. And just like that – $2.1 million gone. So, after a month, that $10m mint is down to $7.9m (and let’s not forget about eventual taxes owed on the $10M in the first place).

Now let’s fast forward to Jan 2022…

Things have slowed down a bit in the market, and it's hard to land that licensing deal you thought you were destined to secure. That's fine; we've earned a cool million from the secondary markets, allowing us to continue building, justifying our salaries. We're still down another million to $6.9m, even with the secondaries. We had to hire some lawyers, advisors, and developers and pay taxes on cashing out the ETH, bringing us down another $2m to $4.9m. Still, hey, that's the game we have to play. When the market recovers, we'll still have our royalties and can continue to buidl.

Fast forward to Jan 2023

Jan 2023: Well, everything collapsed. We burned another $3m and are down to $1.9m. We fired most of the team because our only source of income (royalties) is seemingly gone. We can't raise from VC because they want nothing to do with crypto rn, and beyond that, we haven't accomplished anything meaningful, whether that be building our game, landing a licensing deal, or making worthwhile IP out of our NFTs. We've fired most of the team since we can't afford them anymore. We are saving the rest of the treasury for a potential legal battle because we don't even know if this is legal anymore. We certainly didn't deliver on our promises to the community, opening us up for legal issues. Beyond that, we only made $100.00 on secondary since Blur cut royalties. We'll keep peddling the community on with some hopium until we can't pay the mods anymore. Then we'll disappear and prepare for a legal battle.

Alright let’s come back to present day. I’m here to tell you that scenario is playing out many times over in most projects. Don’t believe me?? Check out some data from Defi Llama that will show the current state of affairs here: https://defillama.com/nfts/earnings

Simply put, no royalties have fucked over the only income source 99.9% of these projects had. Sure, a few raised VC, and a few were able to build cool games, land licensing deals, or mint some derivatives for more cash. However, I'm not exaggerating when I say 99.9% of these projects could not do that.

I know many of you are sitting and reading this thinking, well, royalties should never have been the center of a business model, and projects should've never relied on them. And that's a fair argument to make, but I would retort that by saying the argument is, unfortunately, irrelevant.

Sure, we can all play captain hindsight, proclaiming that the building the foundation of a business atop secondary royalties is absurd, and it likely is. But it ignores the reality that A) that's why most founders entered this space, and B) most founders were operating with the mindset that secondary royalties are a sustainable profit source. By the way, beyond that, no royalties remove almost all incentives for new market entrants. This means that what we have is what we have, and idk about you all, but that doesn't sound like a great reality to me. Further, you don't have to look very hard at that data to see the stark reality that even the top 10 projects aren't making any money right now. This is a problem, whether we like it or not. Sure, a few have successfully avoided this problem. But my next question is, what happens to the rest? I'm not sure, but it's likely zero and shifts the entire space as we know it. My bet is that the market will be forced to concentrate into just a handful of projects. I don't know how this will play out for retail, but it will likely drastically shift how this market looks quicker than many think. Just a reminder, on average, 90% of startups fail generally. We're a few years into this thing now, and I hate to break it to you, but those stats refer to actual businesses with “sustainable revenue plans”, and where their business isn't typically rugged overnight. Something to think about.

In summation, the elephant in the room is that the core business model – the founding novel promise of NFTs – has disappeared in many ways. Whether or not secondary royalties should have ever been a relied-upon business model is irrelevant, as many founders believed it was. A tradfi example would be Silicon Valley Banks' barbell strategy; they drank the Kool-aid and perished because of it. This may be a necessary shift in the market from NFT's being a feature and not a product, which will push us to broader adoption, but that's an argument for another time. Also, I would like to note that I’m aware of the fact I may be the only person on CT with this view. Either way, this should be discussed much more than it currently is. So thanks for listening to me, and let's talk about it.

Respectfully,

Cali