NFTs, a $600M Crypto Heist and DAO Music Festivals

Off The Blocks, Vol 129, Wednesday, August 11, 2021

At Proteum, we connect the dots on things that matter in an increasingly interconnected world with a focus on interconnected devices, fintech applications, and emerging fan experiences for sports and entertainment. My work, in particular, focuses on creating ecosystems for decentralized tech adoption. Feel free to share this around or sign up HERE.

The NFTization of Sports and Entertainment

Live sports and entertainment events have faced the brunt of impact as fan attendance at venues around the world abruptly collapsed last year. The demand for in stadium entertainment experiences has not yet recovered to pre-pandemic levels, but there are encouraging signs that the 2021 season will not be all awash. While no live audience was allowed for the Tokyo Olympics, Major League Baseball (MLB) attendance in the US, for example, is already tracking at about 85% of the 2019 season.

As ticket sales swooned and physical experiences were hard to come by, sports promoters, leagues, teams, fans and enthusiasts dabbled in virtual ones in a big way. Entrepreneurs took notice and gave rise to what I call the NFTization of the world of sports and entertainment. This is fascinating and also a major shift away from the fan experiences that we were all accustomed to from what seems like an ancient world now.

As a fan there was not much to choose from previously - they went to the game/event, made a beeline through security, showed their tickets, and went in and savored overpriced beverages and hot dogs. It was and still continues to be a very mechanical one-way experience. From a venue perspective, a stadium or arena is a Smart City in itself, with at scale deployment for a wide range of technology - 5G, infrastructure, safety, hospitality, payments etc. Yet, a better fan experience simply meant putting up oversized screens for zoomed in action and statistics, peppy music, and making it impossible for fans to leave without buying merchandise. Everything that is “data driven”, while weeding out throughput inefficiencies and maintaining security, is ultimately designed to sell directly or capture the audience attention and sell indirectly.

The idea of real time interactive 2-way engagement is rather unheard. On an average, more than 500,000 fans attend an NFL game at a stadium. Yet, barely a few of them get any chance to interact with their favorite athletes and teams or forge a personal connection with them at the event itself. Even if you had a Personal Seat License (PSL) or were lucky enough to have a club seat or the skybox, the chances of having a 2-way experience with your favorite starts is remote. This lack of interaction is compounded in the off-season, when there are no real means to stay connected directly with the athletes or teams.

The impact of Covid essentially meant a longer off-season for fans. Therefore it is not surprising that virtual and digital experiences started to gain attention in a bottoms up manner, with decentralized technology at its core. What started as a bunch of geeks creating, breeding, and trading digital cats has turned into a multi billion dollar industry in the form of NFTs. It has even drawn forth participation from Tom Brady, who recently launched his own NFT platform, Autograph, and has enlisted big names such as Tiger Woods, Naomi Osaka etc.

Non-fungible tokens (NFTs) represent ownership of digital assets, typically some sort of digital content, that can then be traded in a marketplace for cryptocurrency or fiat. They seem rather benign until one cuts through the noise and starts to see the dawn of an extremely powerful means of creating tight knit communities that inherently provide innovative and engaging ways for athletes and teams to get closer to their fans. Yes, this is a commercial exercise, but one driven by fans and supported by an incentive structure that allows athletes and teams to create an ecosystem that intrinsically values social interactivity.

The realm of possibilities with NFTs is endless. Top Shot literally invented a new category in selling unique “moments” in captured during NBA games, such as a LeBron James dunk against the Houston Rockets at Staples Center. The NFT was bought for $387K in April 2021. Going one step further, teams could offer interactive content as an NFT, where fans who hold certain NFTs can provide feedback on plays - for example, recommending substitutions in real time. Another layer could be for users to unlock exclusive content, but possession of a token guarantees extreme personalization of the exclusive content. Another possibility is an NFT used as collectible ticket stub, for example, these stubs could be more valuable as collectibles if a record was shattered at the game. One can even mint NFTs with no digital assets, but holders may be entitled to a personal experience such as a dinner with their favorite player(s).

It is easier to appraise physical assets, but it gets harder in the case of pure digital assets. Physical assets can be classified based on long standing directives - it is (relatively) easy to figure out something is a painting, sculpture, or a real estate deed etc. Financial models exist to compare and value them to other similar assets. It is also easy to recognize an original asset, or a limited edition of assets vs a copy of it. Valuations for digital assets are highly subjective today. Just in 2021, CryptoPunk NFTs have been sold in the range of $1.3 - $7.7M. With seemingly not much difference in the characteristics of these NFTs, traditional valuation models do not fit this space.

Unlike physical assets, digital assets pose another dilemma - it is almost impossible to distinguish between an original and a copy. Digital assets can be reproduced multiple times without any material consequences to the asset or the media file itself. This brings up an interesting problem - how to avoid “double spend” of the underlying digital asset? There are no mechanisms in place to ensure that a digital asset minted as an NFT is not transferred to more than one wallet address.

This is further complicated by the fact that merely purchasing an NFT does not imply that the underlying asset has also been purchased, or if any rights to the underlying digital asset has changed hands with the trade. The transfer of rights an obligations to the asset are handled contractually between the buyer and seller. For example, the Top Shot NFTs provide the buyers of the tokens with limited license to use, copy and display the underlying asset itself, for personal purposes only. It is not even a “sale” in the traditional sense and users may be “buying” much less value than they think they paid for.

For established and valuable physical or digital assets, NFTs can be helpful in creating fractionalized ownership of the assets, a much desirable investment opportunity. With the prices of certain NFTs skyrocketing, it is almost inevitable that we will see fractional ownership tokens being created for them. This is also where regulatory compliance muddies the water and extra care needs to be taken to structure not only the smart contracts, but also the marketing behind them. SEC Commissioner Hester Peirce recently opined that when creating fractional ownership for NFTs:

“you better be careful you’re not creating something that’s an investment product, that is a security.” 

Despite the early challenges, these are issues that can be solved with good understanding of the technology, business model and the regulatory component governing the sales. NFTs in their infinite avatars have the potential to become a regular feature of fan engagement around the world and it has not escaped hte attention of major sports franchisees across various sports.

“We see NFTs and digitization of our business as a mainstay to engage our fans around the world.”

- Brandon Schneider, Chief Revenue Officer, Golden State Warriors

News From The World This Week

  1. Hacked: Cross-Chain DeFi Site Poly Network Hacked; Hundreds of Millions Potentially Lost: Cross-chain decentralized finance (DeFi) platform Poly Network was attacked on Tuesday, with the alleged hacker draining roughly $600 million in crypto. Poly Network, a protocol launched by the founder of Chinese blockchain project Neo, operates on the Binance Smart Chain, Ethereum and Polygon blockchains. Tuesday’s attack struck each chain consecutively, with the Poly team identifying three addresses where stolen assets were transferred. At the time that Poly tweeted news of the attack, the three addresses collectively held more than $600 million in different cryptocurrencies, including USDC, wrapped bitcoin, wrapped ether and shiba inu (SHIB), blockchain scanning platforms show. … Link

  2. CBDC: Jamaica’s Central Bank Mints Country’s First Batch of CBDCs: The Bank of Jamaica minted the island nation’s first batch of central bank digital currencies (CBDC) on Monday. A total of J$230 million, or roughly US$1.5 million, will be issued to deposit-taking institutions and authorized payment service providers as part of the CBDC pilot program that ends in December. The bank had originally planned to begin its pilot program in May but was delayed for unspecified reasons. Jamaica has been working on developing a CBDC since early 2020. The central bank has been working with Ireland-based technology firm eCurrency Mint on the project. … Link

  3. Investment: A16z Leads $111M Token Sale for Helium’s HNT: Helium’s ascent is being rewarded with a $111 million token sale led by venture capital firm Andreessen Horowitz (a16z). Ribbit Capital, 10T Holdings, Alameda Research and Multicoin Capital also invested, the company said Tuesday. The decentralized telecommunications network now has over 100,000 hotspots, a16z said in a blog post announcing the investment. The network uses LoRaWAN technology to connect devices (think scooters, e-bikes or environmental sensors) to the internet. Helium is one of the few “real-world” Web 3 projects tapping token-powered incentives to fuel growth. …Link

  4. Regulatory: BitMEX Settles Civil Charges With CFTC, FinCEN for $100 Million: The cryptocurrency exchange BitMEX has reached a $100 million settlement with the Commodity Futures Trading Commission and Financial Crimes Enforcement Network, according to a statement from the company. This past fall, BitMEX was charged with intentionally evading U.S. regulations. Like most other popular crypto exchanges, BitMEX has its headquarters overseas; regulators alleged that the company allowed U.S. traders to use its platform without fully complying with anti-money laundering and know-your-customer requirements. In failing to collect certain identifying information about its customers, BitMEX violated the Bank Secrecy Act, according to the CFTC. The criminal case against Arthur Hayes and other top BitMEX executives remains ongoing. …Link

  5. US Legislation: Crypto & The Infrastructure Bill — Fact Sheet: Many in the crypto community, including a16z, have been advocating for an infrastructure bill that encourages innovation. One thing this debate has suffered from is disagreement on the facts related to crypto systems. We’re sharing some facts to help educate more people about this nascent but growing technology. The key issue is the definition of “brokers” in the tax code. Under the tax code, brokers are generally required to collect detailed information on their customers, enabling them to issue 1099 tax returns. The new infrastructure bill, in an attempt to give the IRS broad authority to require the reporting of information on cryptocurrency transactions, broadens the definition of broker to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The debate that has played out over the past two weeks concerns this definition, with the Wyden-Lummis-Toomey amendment making it explicit that validators and software developers are not “brokers.” … Link

The Final Word | Sun, Sand, and NFT Tickets: Here Come DAO Music Festivals

Atop a sun-drenched platform, above sparkling water and under an open sky, 5,000 music lovers will soon come together for Croatia’s Circus Maximus music festival. In the stunning surroundings of Zrce Beach, on the island of Pag, they’ll feast on 360-degree-views of the Adriatic Sea to a soundtrack of electronic beats. But this year, while the festival still features a stellar cast, it’s a party with a difference—one that Circus Maximus organizers hope will pave the way toward a decentralized future of "putting partying back in the hands of the people," and widespread adoption of a new ticketing process to make that possible.

Two emerging technologies, decentralized autonomous organizations (DAOs) and non-fungible tokens (NFTs) are at the heart of what the festival organizers say will be a "party renaissance"—and they hope other festivals will follow in their wake. … Read More