The Financialization of NFTs

We are about to experience a convergence of NFTs with DeFi, forming a new capital market for content and brands. Join us this week on Clubhouse where we explore these concepts with special guests Sean Neville, Co-Founder of Circle and Jake Brukhman, Foudner & CEO of CoinFund.

Listen to this episode to learn more about the financialization of NFTs.

Jeremy: Hey, folks, welcome. We're just waiting for Jake to join us, and Sean to join us in a little bit as well. Thanks for coming in. Hey, Jake, how you doing?

Jake: Hey, Jeremy, how are you?

Jeremy: I'm really good. How are you?

Jake: I'm good as well. Thanks for setting this up.

Jeremy: Yes, absolutely. For everyone here, this is part of The Money Movement Club on Clubhouse. Money Movement is moving from being a video podcast to being something that we really try and do here as a club on Clubhouse, and great to have a lot of awesome people in here. We're doing this talk show format, and really, really excited to have another conversation with you, Jake. Obviously, the meta-theme here is this financialization of NFTs. I think we're going to talk more broadly also with Sean who's Circle co-founder, who's going to join here in a little bit.

I think these bigger themes of monetization that are happening with NFTs it's essentially a very, very significant radical new form of monetization for content and items and other things on the internet. We want to touch on the interaction across all of those. First, Jake, you actually got me excited about doing this episode and having this come conversation with something that you recently published. There were obviously some great tweets, but sitting behind it, you wrote something that really had to do with really discovering price discovery and NFTs are this new category of value.

There's so many different ways that people are trying to figure out how do you establish value on these. Is it this purely speculative medium? How do we think about this more broadly if NFTs scale out to be millions or even hundreds of millions or billions of NFTs? How do you create price discovery and efficiency around that? There's so many different dimensions to this that we want to talk about. Maybe just to kick things off, Jake, just for everyone's benefit here, just talk a little bit about the high-level concepts that you have around financialization of NFTs. If people need some fundamental definitions, we can get into those as well.

Jake: Awesome. Thanks, Jeremy. I just wanted to say that the last Clubhouse you ran with me on NFTs, that was super insightful and great questions. I'm super happy to be back here with you on this topic, which is now going a little bit, maybe one layer deeper into this whole thing. The high level is that the thesis that I put forward is that I think we should design NFTs as basically property rights to digital content.

If you read the first piece which is all digital content is going on-chain, that's what it's basically saying. There is a little bit of a disconnect with what is actually out there in the market in terms of implementation and that view because we haven't worked in terms of service into NFT issuance yet, but it will happen. Actually, I'm talking with a number of groups who are interested in marrying the legal side and the token side.

There's a lot of precedent in blockchain. Anyway, we could go on and on about that. The high level is, the thesis is that NFTs are a new financial asset class. Last time we spoke about the fact that that is very exciting because that particular set of assets like IP that exist in real-world has historically and traditionally been quite illiquid. In turning them into digital assets like NFTs we're actually taking them public in a way, and that is a big event.

Jeremy: You use this phrase liquid intellectual property, which I love. Intellectual property means so many things in this world, obviously. Obviously, a lot of people may or may not remember Esther Dyson's seminal work in the early days in the internet where the mantra was information wants to be free. I think a lot of the ethos of the internet really from that point and it leads to open publishing platforms. Even one might even say net neutrality and broader concepts for this open medium are anchored in, historically, the idea that information wants to be free and the internet fundamentally wants information to be free, and everything should just be out in the public domain.

I think for many people they've struggled with that and what that means if intellectual property essentially-- Does that destroy intellectual properties, is the other side of that. What does it mean to have intellectual property on the internet? We actually haven't had a way to-- In a systemic way have intellectual property on the internet. At least we have open-source, which is a very, very specific form of intellectual property and creative commons. These all reflect this ethos of information wants to be free.

Now we're seeing that the creative people, and that spans so many things, are realizing actually my creative work has value. How can I actually marry that value to the internet in a new way? This idea of liquid IP I think is really, really powerful. To maybe connect the dots to that earlier conversation we had and some of the writing you've already done just for everyone who's in attendance here, just a reminder. The kinds of things that are going to become NFTs that we don't imagine as intellectual property that can be liquid on the internet today. Maybe rattle off the-- I think you had a tweetstorm with 30 things, but whatever it would be interesting for people to hear.

Jake: Right. Yes. To recap a little bit and thanks, Jeremy. We predominantly think about NFTs as digital art collectibles and in-game assets today. We're starting to see a little bit of music being issued as NFTs. We're starting to see some generative art and algorithms and a little bit of writing that's mirror. If you think about the long tail of digital content that could be tokenized, it's really very, very long. It includes stock photos. It includes 3D models. It includes metaverse assets.

It includes plugins into photoshop, domain names. We could probably go on and on and on. We didn't even mention streaming video and audio, and the usual things that live on centralized platforms today. Art is a $2 to $3 trillion market today. God knows how big it's going to be after it's tokenized. I think if you sum up the long tail of the more boring assets, let's say, like fonts, icons, all of that stuff, design assets. I think altogether those things on decentralized marketplaces is a bigger market than art.

Jeremy: Yes, absolutely. I think we have essentially moments. Things like Top Shot are demonstrating you're able to take the expression of something that's amazing that happens in the world and turn that into liquid IP. When you think about the amount of content that gets created of that type associated with things that people have an emotional value attached to or would be interested in possession in some way. It's pretty mind-blowing. Maybe it's billions of entities over time easily.

Jake: Yes. I guess to take it a step further, so if we accept that thesis that we're dealing with a new financial asset class. That then if we step back for a second and look at digital assets in blockchain we basically have this bifurcation into fungibles and non-fungibles, and historically fungibles are very liquid and the criticism of non-fungibles has been that they are very illiquid. To challenge that first assumption a little bit, I mean, if you go back three or four years it was actually quite challenging to get a token to be liquid.

For most founders, that looked like getting listed on a centralized exchange, that process usually spans months and sometimes years. It sometimes involved multimillion-dollar payments to exchanges that wanted that compensation for listing, especially at times like the 2017 ICO boom. Liquidity wasn't that easy to obtain for tokens. Now, one it ended up happening is that the market recognized this and created centralized exchanges, and the centralized exchanges today serve $2 billion of daily volume.

Together with liquidity mining programs they have brought down the time to liquidity of an ERC 20 token to zero, to basically a day or a week or something like that. In that progress, we're seeing essentially mechanism design being applied to the liquidity problem for fungibles. The really funny thing about that market is that at $2 billion a day, we are still less than one and a half percent of general crypto daily volume.

Jeremy: Right, it's tiny.

Jake: It's tiny and yet it's serving the entire long tail of the DeFi tokens, of the centralized stuff and the esoteric stuff. It points to taking a much bigger chunk of that market. Now, when we go to the non-fungibles asset class, then the criticism has been, "Well, these are very illiquid assets. They're dangerous. These marketplaces that they're on aren't doing a good job with liquidity. What my second article goes into in that article that you pointed out, Jeremy, that's called Appraisal Games and the Industry Liquidity Problem, it's just pointing out that for nonfungible, it is merely a mechanism design problem as well, to solve the liquidity problem. It's just that it requires different mechanisms than fungibles.

So let me pause there. Does that make sense?

Jeremy: It makes sense. I want to, just for people here, trace this through to a real-world example of-- Obviously, the classes of NFTs that people are focused on today are things like crypto art, there's other forms of native digital content, there's these creative expressions, there's moments, there's in-game items. Maybe just talk about what's the problem that someone who wants to buy one of these and is trying to figure out like, "What should I pay for it?" Then someone who has one and potentially says, "I think this is valuable, and is there a way for me to generate other financial value from the asset that I hold?" Which is what people do with stocks that they own or houses that they own or other-- Stocks and houses are non-fungible tokens too. They're non-fungibles in terms of what in fact they are. Maybe just, again, connect to a couple of real-world examples here that people can connect to.

Jake: Well, I think the really disruptive example and as you pointed out there's two sides of this. There's the supply side. I'm the creator. I'm creating NFTs and there's the demand side, I'm the buyer of NFTs, the investor, the collector, or whatever it may be. I think the really disruptive use case is when you can say, "Listen, a creator has created a work of art and they can deposit this work of art into a smart contract, and without a counterparty, they can withdraw liquidity. That's--

Jeremy: It's incredibly powerful, right?

Jake: That is incredibly powerful. It's disruptive. It's not just powerful, it's disruptive, because we often think of art in a traditional sense as being very expensive, and this will surely bring down some of the price points of art. On the one hand, it creates this mechanism--

Jeremy: Hey, Sean. Just welcoming Sean. Hey, welcome.

Jake: So on the one hand, it creates this completely incredible ability to turn creative content into cash. On the other hand, it brings down the price point of those assets over time. On the demand side, you mentioned maybe we want just to understand pricing better. Like we want to know as investors how much should we pay for NFTs and also we want exposure in ways that are hard to get today. I get this question seven times from folks looking at the NFT space, how do we participate? As an investor, it's quite hard to go NFT by NFT and try to predict what's going to be big later, who's a talented artist, what's going to sell later, and what's going to be a big brand. What investors probably want are some index fund exposure vehicles.

That's now becoming possible with things like fractionalization, with funds on chains that hold NFTs, and things like that. We're not creating vehicles where investors can easily invest into the space and the space can benefit from that capital. That's another important aspect of the financialization of this.

Jeremy: There's a lot of pieces here. There's price discovery, there's fractionalization, there's the ability to essentially borrow against assets that I have. A lot is here. I want to welcome Sean into the conversation and I know Sean is going to bring a different lens here. Sean, as many of you know is co-founder of a Circle, and we've been talking a lot about NFTs lately. The theme, maybe I could have you comment on, Sean, is this concept of this new model of monetization for creators and creatives, and what does that look like for creators and creatives.

We'll connect the dots here because they are ultimately related because you are creating these markets for creativity that are quite different. Maybe I just ladder it over you here, Sean, and hear some of your high-level thoughts. You're muted.

Sean: Hello.

Jeremy: All right. I'll text Sean, and see if he can unmute. All right. Well, we'll come back in a second on that and come back to you, Jake. So maybe we could take some of those actual use cases. Sean--

Sean: That's right. Too many microphones running at the same time. Sorry about that.

Jeremy: No problem. Did you hear my--

Sean: Yes, sure. I'm sorry I came in late here and I heard the tail end of what Jake was saying. I think it's worth returning to how you look at this as an investor as well because it's increasingly tricky and there are emerging tools and mechanisms that are pretty interesting, but it's a lot to make sense of. On the creator side of things, that's an area that I've been looking at pretty closely and I guess represents a little bit of a personal light bulb moment for me that I had a few months ago on this which is related to this concept of actually owning a piece of digital content as opposed to subscribing to, or following, or somehow acquiring access to a gateway into the content.

It's not a ticket to view and experience. It's not a subscription to access written content or to stream it, it's the ability to own a digital thing and that concept of ownership. Then also secondarily provenance and the history or "legitimacy" of a piece of content is just something that is not impossible with any kind of digital goods. I think it changes things for creators as there are a ton of high-profile experiments in that space right now that are happening.

I think it transforms things for content creators who are also consumers of other content and that's fans, it's followers, it's audiences. My particular area of interest is audiences that consist of other content creators, whether they're streamers, gamers, digital artists, musicians, whatever, and the convergence of ownership with finance and how all these things fit together. That's the area that I've been thinking of and what this-- There's lots of examples.

The difficult thing about talking about content and trying to explain it to others, a lot of the examples can seem a little bit trivial. The underlying expression of the origination and the ownership is powerful but doesn't necessarily resonate with just everyone. I can give a simple example, I can walk into a museum and take a picture of the Mona Lisa, and I can digitally distribute that anywhere online. I can put it anywhere I want, I can hang it in my house but everyone knows I don't actually own the Mona Lisa, I can't legitimately sell it. Unless I'm particularly clever, I can't really sell it.

Not everybody would want to have that sense of ownership in the first place, so it doesn't necessarily resonate with them. For those who do face value in the concept of ownership and the things you can do with ownership and pulling things into collateral, but also participating in upside future revenue streams attached to ownership and provenance is just something that is just new in this space.

Jeremy: Yes, totally. I guess when we talk about financialization this is fundamentally a new way to monetize creativity which is powerful. You can imagine, and Jake was talking about this at the start, which is, people who have tried to create liquidity for fungibles, that historically had a problem and now, decentralized exchange and liquidity pools, and automated market makers, and other things are making that easier to bootstrap liquidity on things. With NFTs, you can imagine a world where effectively people are issuing fungible tokens to finance the creation of non-fungible tokens.

Then Kickstarter and then you get the non-fungible token, it's like a pre-order, and you're then participating in ownership, but then there's obviously down the line the other forms of financialization that can happen once it exists as property in this digital realm. It's [chuckles] a lot of interesting connection points there. Jake, maybe just to connect back to you on taking some of those simple examples, and then maybe bringing them to life. Yes, go ahead.

Jake: Maybe just to go back to the thesis of the article, which really deals with if NFTs are a new financial asset class, then we're going to need financial provenance and services for that asset class. What does that look like? What does that start with? I think what that starts with is this problem of liquidity. Then that problem has seemed historically very hard and I guess the main question that the piece tries to address is, "Well, how do we solve that problem? What are the actual mechanisms available to create an NFT liquidity?"

We see a few mechanisms in the market today. Like, the basic way of creating a pricing for an NFT is to sell it on a marketplace like OpenSea or Rarible, or something similar. That's great, but what we see is that if you restrict yourself to only pricing NFTs this way, it's hard. You need a really critical mass of buyers and sellers that historically hasn't been there. You don't get a ton of sales, they're going up, but there's a long tail of assets that never sold. You don't know what their prices might be.

The other way is auctions. As a matter of fact, if you look at the on-chain data, you will find that something like 80 to 90% of people who transact the existing marketplace is super rare. Today, we'll prefer the auction format. Auctions are probably preferred by creators because they tend to be exuberant, they maximize the return that the creators make, and they also end up creating a price. What makes a great mechanism for creating liquidity?

I argue that what makes a great mechanism is capital efficiency. What does that mean? Well, if I'm selling an NFT worth a million dollars, and someone buys that NFT for a million dollars, that means that for every dollar of valuation that we created, a $1 had to change hands. If you bring that into the auction context, it means for every dollar of valuation that is created, one or more people bid on that and so potentially more than $1 had to change hands and even be locked into the auction mechanism for a while in order to create that valuation.

The question is, do we have mechanisms that are more efficient than that where I can price something at a million dollars, but in doing so, I don't spend a million dollars, I maybe spend $100? The answer is, yes, there's a bunch of different mechanisms. The most obvious one is, we'll create a machine learning algorithm that goes around and machine learns all of the traits of CryptoKitties and all of the properties of CryptoPunks and then compares that to how they sold on the market and then creates a model that can automatically price these collectibles.

Then the cost of that mechanism is the cost of creating and maintaining the model, which is really a fixed cost. And then the valuations that can create are infinite. The efficiency goes up, the capital efficiency goes up over time gets amortized over that cost. That's a great approach and I think a few people are doing that in the space. The problem with that approach is, it seems like it would probably work quite well for really objectively valued things like collectibles, but it would probably not work that well for really subjectively valued things like arts.

There's another mechanism, which is fractionalization. This is also an example of a mechanism that can value something at $100 million, but only a few dollars need to change hands in order to create the evaluation. That's because the NFT becomes sharded into a number of tokens. Only a few tokens have to change hands to imply a valuation. Fractionalization is a really capital-efficient mechanism for pricing NFTs, but it's also like really heavy machinery. If you think about all the objects that we have counted as belonging to the NFT asset class, we're talking about trillions of objects, and some of those objects cost $5.

It's probably not that capital efficient at the end of the day to create a token supply for every one of those trillion objects and a community around it. Fractionalization also comes with a bunch of complexity, in terms of mutual ownership of the things. For example, no one really talks about what happens if you take 51% of the tokens of the fractionalized asset and burn them, does that mean that the asset is now worth zero because you can't move it and you can't vote on it anymore?

No one talks about how to un-fractionalize the fractionalized assets, it seems to be a one-way street unless you take extraordinary efforts to design, the governance system to undo that. You still have a edge condition where maybe you won't be able to. When I think about fractionalization, I think about that makes sense in a context where like CryptoPunks, where the assets are really valuable and it makes a ton of sense for 20,000 people to own them at the same time. That mechanism doesn't work well for things that are $5 in the long term. Does that make sense?

Jeremy: Yes, it does. I think for a lot of folks, some of this feels like there's these intensely speculative markets for icon creators, and how do you game that and how do you price that and this intense speculation kind of thing and when people think of derivatives and how we're going to have derivatives for price discovery on icon creation. I think for a lot of people they have a hard time relating to that. Part of me what I'm interested in drawing out here, and I'd love Sean's take on this as well is, how do we get out of the, "Oh, yes, there's all these really cool icon things and crypto art things, and really stepping back and saying, what are going to be NFTs?

What are going to be mainstream NFTs that the average person is going to have, that are going to be in the world, in a year, or two years, and then how these fundamental financial mechanisms that are going to improve the process of discovering, finding, owning, and participating in those markets. For a lot of folks, I think they struggle with, I hear what you're saying about machine-learning on CryptoPunks icons, but that isn't very relatable to what this looks like at scale when we're all talking about the number of digital content objects that might move into this realm.

Sean: Yes, for sure. That brings me to the next mechanism that I talk about, which is creating pricing through oracles, and in particular, I talk about Upshot. I think I saw Nick Emmons, who is the CEO of Upshot in the room, so hey Nick, if you're there. The idea that Upshot is a really interesting protocol, which is an on-chain question/answer protocol, which incentivizes the people who answer the questions to answer the questions honestly. The really interesting application of such a protocol in the NFT space is basically asking the protocol, what do you think this NFT is worth, and finding in the on-chain way a educated consensus around the price.

It doesn't have to be the exact prediction of the price, it doesn't have to be the price at which the creator necessarily sells the work, but it is kind of an estimate of what the market would value it at, and it's coming from the estimation of, essentially, experts who are incentivized to do a little bit of work to figure out what that price would be, so they might compare like Vepo and another creator, and note that Vepo sold work for millions of dollars, and that might impact that final estimate.

Now, when we have the on-chain oracle pricing, what essentially we can then do is, we can tokenize it and sell it now, and that basically creates liquidity for the long tail of NFT. When I think about capital-efficient price discovery mechanisms, I think machine learning will have a little bit of a place. I think the really high-value, publicly-owned stuff like CryptoPunks will be likely fractionalized in TSC-20s, and that would make sense. I think the long tail of assets in NFT space that are very cheap and don't warrant a full token supply, can be priced through oracles, and those oracles can create essentially some kind of average pricing at which you could always liquidate this portfolio.

Then there might be other mechanisms like we've been seeing essentially bonding curves applied to NFTs, I think EulerBeats was an example of that, there's a few others. The advantage of that mechanism is that the creators can kind of control the rate of appreciation of that bonding curve, but it remains to be seen if that's going be a widely used mechanism. I'm super bullish on fractionalization and oracle pricing for the majority of cases.

Jeremy: Sean, just asking you, as someone who's thinking about this really from the creator's perspective, and communities of creators, and people who are not focused on trying to design a spectrum of items, but who are really just focused on monetizing creativity, and what that looks like? How do you think about things like price discovery factionalization, and appraisal models, oraclelized appraisal models, things like that, in relation to what someone who really is just trying to do is, find a new model of monetization?

Sean: I think there's sort of peer prediction oracle models, which is super interesting, and there can be multiple variations of that, so I think that's relevant. From a creator perspective, or even from a creator/consumer investor perspective, my instinct is just that, this whole ecosystem is just going to be way too big to make it effective to pick individual assets, at least as a general, unless you know something very deeply about a particular community, or about a particular creator. Pursuing other options is just going to be necessary as this grows, because this whole thing is, the internet and this particular technology has just been so effective at taking formally liquid assets, and then suddenly making them enormously liquid, and Sam Lesson wrote a little bit about this recently.

There's a number of different ways to go into [inaudible 00:35:58] but still, some of the most obvious problems are just in how you interact with this. Creators are able to take advantage of platforms like Twitch and others to circumvent the Spotify-like models. They no longer need several million monthly streams, 30 seconds or more, as a musician, to make a living, they could have an audience of very loyal followers that number in the hundreds and make a living.

They need to churn out an enormous amount of content to do that, but they cut out a lot of middlemen. Cutting out middlemen just means that the creators end up taking more of those business functions themselves, it doesn't mean that the business functions ceases to exist. So things like packaging, marketing, community interaction, all that falls on the creator.

When it comes to digitizing ownership of experiences, whether it's a limited concert, 100 pieces of ownership of a concert, that is a bootleg concert that can be subsequently traded or some other kind of piece of art. The tooling around how that works, and what that feels like from a creator perspective and from a follower perspective, assembling essentially, a portfolio of creative objects that hopefully generate dividends, which is kind of what happens when you're a follower accumulating these experiences.

The tools and the experiences, and what the products really look like is just not there yet, it's sort of a group of plugins, multiple chain options, different open market places, a few white label branded experiences as well. There are a lot of great early experiments happening, but from a creator perspective, that toolset that acknowledges I am running a business as a solo creator and I have a direct interaction with my fans and audience, and I need the tools to make all of that work effectively, that tool piece isn't there. Whether you do that as investment in an NFT infrastructure, or just tools and other parts of the ecosystem, that's another in the area I think that will get flushed out over these coming months.

Jeremy: Yes. There's a huge amount to build, obviously, on those fronts. I want to maybe just turn this one other direction and get both of your thoughts on this, which is, as we started out at the top here, most of the time when we're talking about NFTs, we're talking about as noted, this sort of liquid intellectual property that can exist as digital content items that are on the internet, on blockchains, et cetera. Obviously, the concept of a non-fungible token extends well outside of purely digital objects and into physical objects, and also into even access to say, underlying royalty streams, underlying yield from someone who's producing something.

I'm just curious to hear your thoughts on the crossover between the physical world and NFTs, and it very much relates to the financialization of NFTs, because if you can build these really, really robust long-tail capital market functions for NFTs at the digital content item level, you also obviously are really fundamentally building the same underlying market infrastructure for NFTs that have to do with physical objects as well as even concepts like there's a landowner in a country that wants to sell NFTs that are essentially profits from the yield of the land as it were, just in a really, really simple example. That's a form of non-fungible token.

Those types of financial assets that also are going to need to participate in long-term capital markets, they're also going to need to have these various forms of price discovery. People are going to want to have index allocators and other things to be able to have those as part of their quote-unquote portfolio. I'd love to hear your thoughts on that crossover that's outside of the purely created and digital form NFTs.

Jake: Happy to go or, Sean, if you want to hop in.

Sean: No, go for it. I'll hop in a second.

Jake: Yes. Well thanks, Jeremy. I think you covered it the high level which is that, yes, you're absolutely right. The infrastructure that is being built out for NFTs is an abstract asset, can then very well be applied to real estate or car ownership or any number of physical tokenizations of real-world goods.

Jake: Why are we not seeing that? Well, I just think that the digital side of things is a lower-hanging fruit.

Jeremy: Sure.

Jake: There's also a very interestingly compatible space with blockchain because I always think of digital art as being quite ethereal and never sure where the artwork actually is. Is it in your email? Is it on Twitter? All those seem to be reproductions of digital works but not actually the work itself. When you put that on a blockchain, you create that certificate of authenticity or even the localization of that work in the sense of like you found it. Okay, it lives on the blockchain, that's the handle to it. I can take that handle and transfer it to someone else and [unintelligible 00:42:27].

Jeremy: Right. The demarcation of property and provenance and these fundamental things, if it's entirely digital and entirely digital property ownership model, that's as you said it's low-hanging fruit, it's easier to get to. It actually ties to a lot of these billions of different digital content objects that are out there today, and so there's a clear mapping there. One could argue that there's far more digital content items than physical things in the world, but there's an awful lot of physical things in the world that people value.

Jake: Oh, yes. I was just seeing at the morning meeting in [unintelligible 00:43:08] this morning, I'm like, "Everyone is obsessed with NFTs right now and DeFi, but if you want to start the contrarian crypto fund of this particular moment, you should start the security token real estate crypto fund because that's the thing that nobody's thinking about that's coming next which is essentially the tokenization and NFTization of physical goods."

Jeremy: Well, and obviously equity itself-- People could say, "Well, there's these fungible tokens and then there's fungible tokens that are scarce that are out there, governance tokens, et cetera. Equity is a form of non-fungible token. You have X1000 shares or X million shares, and they represent a profit-sharing contract in the form of dividends and voting, and the like. That is just a financialization of the work output of a collection of labor.

The interesting question for me is, "When do we start seeing more NFTs that are equity-like, that are not themselves equity? They're not actually-- There's not a Delaware LLC necessarily although with open law and things like that, you're seeing this mapping that's there.

NFTs as things that people can own and participate in, just like you'd say like a fractionalized piece of crypto art is something that you can have ownership in, and it may grow in value, it doesn't quite produce cash flows but its property and equity are both really big forms of NFTs. I mean basically, if you count up the equity in the world and count up the property in the world and the financialization of property, I don't know how many gazillions of trillions of dollars that is but it's a lot.

Jake: Totally agree. Yes, I don't want to necessarily go to the extent that you just, we could see absolutely everything as an NFT. If you want to do it as a thought exercise, but when it comes to things like real-world items, where there's some barriers whether geophysical or regulatory or whatever to actual transfer of the item, the way that I've thought of it in the past is relating this is just is another version of storage.

I mean, if you have an NFT, there are some metadata references to media or other items that are sitting in an AWS S3 bucket or they're in IPFS or they're stored not necessarily on a chain, they're stored elsewhere. The physical thing is its storage bucket is some plot on earth. There's a storage issue there. The question around equity though is a tricky one.

I know you and I have said a few times that would be cool if when we started circle, we could have just figured out how to have it been a fully tokenized autonomous organization. Back in 2013, that was really not a thing that was possible. I understand where you're going with that. For me, I like the idea of not stepping into all the regulatory hassle of securities and sticking with content because there hasn't been enough solved in that area yet for me.

Jeremy: For sure. I mean content is the lifeblood of the internet in many, many ways. It's lots of other things too but inverting the monetization model on that and creating financialization of that are profound and those are also like these multi $100 billion huge opportunities that actually we're opening up new outlets there.

We have a little bit of time here and so I thought I'd invite people to ask questions. Anyone who has a question, you can raise your hand and we'll try and get you through. Angie, thanks for joining us. We'd love to hear your question.

Angie: Yes, thank you so much. It's so funny I had a call today with a-- I could come at this the NFC market from our video game perspective, and I've been really excited about NFTs basically since they started. I had a real estate investor today call me and asked, "Why hasn't this taken off? We all read those articles in The New York Times about how downtown properties were going to be fractionalized and sold and traded for Brooklyn."

What you said, Jake, makes so much sense and I just don't know the answer to that. I mean there's a game called Upland that I've been playing where you can actually buy properties in New York City and all over the country. Some of these buildings are trading at $200,000, $100,000 in the game, but we haven't seen it in real life and I just don't know if we're just not there yet but I love all your thoughts.

Jeremy: Well, we can all probably blame Jay Clayton for that not actually happening and hopefully a more creative inspired and technically competent head of the SEC will lead the way here. I think literally we didn't even have a legal basis at the SEC to do this stuff until the end of December of last year. I think there actually now is a legal basis for people who are involved in this securities in a sense to have fully digital renditions that can be on blockchains, the SEC cleared that or to some degree.

I'm actually cautiously optimistic that this year we're going to start seeing a lot more activity there, and that will grow over time. There's certainly our regulators in other markets that have been more progressive. Certainly here in the United States, there was basically a giant block on anything under the supervision of Jay Clayton. That's just my quick take on that.

Jake: Hey, Angie, great to see you. Thanks for your question. Yes, I totally agree, Jeremy. I think part of it is just the regulatory compliance piece, but I would say also the following. I'm super excited about the real estate use case and I'm not particularly biased whether it happens through security tokens or some other mechanism, but I'll tell you this, I sat down at a platform which tokenized REITs like last year, and realize that as a crypto investor, I'm totally unequipped to evaluate our REIT investments. A REIT investor is totally unequipped to evaluate whether the blockchain technology that they're offering is as good or trustworthy.

I do see that there's a bit of product-market mismatch going on there too and it sort of depends on what use cases you want to put the technology toward.

Angie: I was just going to say these guys were very successful REIT investors. That's so funny because they had no idea some of the things that I was talking about with respect to art and gaming non-fungible tokens but they could definitely see it-- Sorry, I have a puppy here. They can definitely see it in REIT so that's really interesting.

Jeremy: It is. [unintelligible 00:50:56], I hope to have your pronunciation right. Welcome, and we'd love to hear your question, too.

Speaker 5: Thanks for this discussion. I'm coming from a really remedial place so let me just ask you kind of like a basic question. Let's say I created a piece of like a photo that used a lot of everything. How do we generate the NFT out of it [unintelligible 00:51:20] into a marketplace? Then there's a whole bunch of people buying just a little piece of it, or is it just one person that owns it and can they make money off of it once they own it? Or how is it different than copyright? I'm still trying to get my head around exactly what we're doing?

Jeremy: Yes, Sean or Jake, you guys want to take a crack at that?

Jake: Totally. Yes. Oh, go ahead, Sean.

Sean: Yes. Go ahead. I'm probably going to say exactly the same thing.

Jake: To create the NFT, you're probably want to head over to some kind of platform that issues NFTs. There's a few of them that are open to anyone and everyone, the one that I'm partial to is That's our investment at CoinFund, I'm super excited about what they're doing. Then to fractionalize such an NFT once you have it, you can use something like [unintelligible 00:52:14] or in some cases, you can use, which is funds for classes of such collectibles. There might be other tools that are functionally similar to those I said.

Jeremy: Yes, just looking at this as it is today, these are early examples. I remember back in the early days of the Internet, the number of E-commerce marketplaces if you had a product you want to sell, obviously, it's things like eBay took off and then Amazon Marketplace and others, but there are tons of those. We're in 1996, 1997 of these NFT marketplaces, obviously, there's billions of people on the internet now, and this is the technology that is really valuable. I think it'll grow at a fast rate.

Speaker 5: How do they give them the copyright?

Jake: Yes. If you're a platform that you're tokenizing on supports, and most of them today do not, just to be clear, but I imagined in shorter will be supporting the idea that as a creator, you choose which property rights you confer to the buyer and so that might look like if TOS, or Terms of Service, at time of tokenization. Today, I would say like probably default copyright laws apply.

Sean: Yes, there are some services that they're experimenting with like splitting up, say, in music sync rights. Again, other kinds of licensing, songwriter rights, how do you deal with all that, but for the most part, it's pretty rudimentary. Like Jeremy and Jake said that the marketplace experiences are also pretty nascent in case like OpenSea. They look almost like an early eBay, although some are a little more specialized. There's the valuable stuff, which is doing the Genesis tweets that have been getting a lot of attention lately.

Some of the marketplaces are, I guess, a little more specialized. For the most part, it looks pretty nascent. If you go to things like, Base, or something like that, there's a whole bunch of them. I'm not recommending one or the other but there are a bunch out there and you can see how you might mint some of your own content and they all have slightly different treatment of things like REITs but they're ultimately pretty rudimentary and then ways of getting them into a marketplace.

The easiest thing to do is actually just to go do it and experiment with it and not necessarily go into it as an investor or the thinking that you're going to generate a lot of money but just as an experiment to see how it works. I'd say overall for most content creators and consumers, which are by and large, the same people, and some of these audiences, it's a pretty awful experience because it's so early, but obviously, that presents pretty exciting opportunities. Then there's also the gaming side, which is, I would say a little bit more mature just because of the history of how this stuff came together.

Jeremy: Yes. Just open it up to Sardar, thanks for joining. We'd love to hear your questions or your thoughts?

Sardar: Yes. Thank you, Sean, Jeremy, and Jake. Great conversations. I want to just talk about the real estate applications of it. Jake, you mentioned that-- Let's just preface this with assuming all regulations will eventually be solved about this, what do you see as some of the features in DeFi, for example, liquidity mining or the applications of some bonding curves to entice early adopters, what if that is applied to, for example, real estate projects like a neighborhood development project where a specific asset is being built on a corner and local stakeholders that live around their neighbors are able to all commit their liquidity, give their liquidity, provide their liquidity towards this project?

Then it gets built and as they're providing the liquidity, all those same stakeholders are earning equity tokens or governance tokens in the Neighborhood Development Fund, so to speak.

We have a property down in Downtown Memphis. I've been in this for just three, four years. I've been trying to talk to some attorneys here in Memphis, and they're all looking at us like we're crazy. I know this is possible, at least from a technical perspective, but realty is doing some amazing things just from a fractionalization of equity. I just see so much being built on top of that in the real world, just basically applying the DeFi locally, so local DeFi.

Jeremy: There's a lot of possibility there and I think, as we were kind of talking about earlier, I think up until really recently, the kind of legal questions of how do you take something that is what would be considered a security in the United States and tokenize it and offer it on these infrastructures. That's been really difficult to do for a host of reasons, but I feel like things are starting to open up and then a lot of what is happening with NFT's and DeFi can start to get applied to that kind of property.

Jake or Sean, do you have other thoughts on this?

Jake: I think you guys covered it quite well and that's a real use case. Once the sort of REITs get figured out and the regulatory gets figured out, I see the primary applications as being better crowdfunding and co-ownership of real estate, which is really exciting but also like a ton of efficiency in terms of buying and selling your house and also building a portfolio of real estate like go along Manhattan and short Brooklyn, a lot of those things will be much easier using digital assets.

Jeremy: Cautiously optimistic that we're going to see some of those things opening up. I know we've seen digital securities projects start to really get on the radar at Circle and people using stable coins with digital securities. I think we're seeing more of those come down the pipe so cautiously optimistic.

Archan, thanks for joining, we'd love to hear your thoughts or question.

Lord Vader: Hi, this is Lord Vader, creator of this empire. I would like to ask this question anonymously. Do you think characters like me with a voice like mine, and a face like mine--

Sean: Verifying the sort of proof of provenance and origination and obviously there's a lot of fakes copies and things, they're out there in the marketplace. It kind of stretches to the previous conversation, which is if you have a technical system that's capable of enforcing logic among parties that don't trust each other in the form of smart contracts or so-called smart contracts, then how long will it take before courts recognize those same contracts, as opposed to just contracts written in English? That's still one of the fundamental problems that we need solved.

Jeremy: Yes.

Lord Vader: Thank you, Sean. Jeremy and Jake.

Jeremy: You're very welcome.

Sean: Thank you.

Jeremy: Thanks for coming up. Sasa.

Sasa: Hi. I have a low-level practical question. I think one of you, I can't remember which one it was, talked about comparing NFT ownership to what we do now where we get a subscription to a platform to have access to content. I'm wondering, what does it actually look like, the NFT scenario? Are we talking about some front end that you can only access if you're a partial owner of some NFT? What does this look like practically? Let's say an NFT for a song or something.

Jeremy: Sean, you want to take that?

Sean: Yes. I think there can be a lot of different product experiences that are created around it. Some of the early experiments that I've seen have been almost like a Patreon-like model where Patreon today, I can follow artists, musicians, whoever they care about. With some subscription fee, I can get access to additional content. The early experiments I've seen have been along those lines, where instead of a UI that allows me to pay a subscription fee, there's a UI that grants me access to content data based on my ownership of the actual NFTs that show the owner of this content.

Other experiments are essentially like placeholders for future content so that I buy a piece of a concert that hasn't heard yet. I put my money in to be one of the 10,000 people who are able to access this live stream concert or something or album release for whatever it is. It's a placeholder for future content that I'm able to access before others are. Those are some of the experiments around this. What the product experience looks like for us as a consumer, does it look like a Twitch or TikTok or YouTube or Patreon? What does it look like as a content creator and how does it tie into the fact that I, as a content creator, need to run a business?

I have Square, what does it look like from a tooling perspective? Then the underlying infrastructure between those two things, where things really persisted, how does this cross chains, all this infrastructure stuff that I, as a creator, or consumer don't really want to have to think about that needs to function. We need those things addressed as well, that a piece of experiences just as well.

Jeremy: Just to emphasize too, part of the fundamental concept of NFTs is the portability and the interoperability. That's the foundational concept that the blockchain gives us and the internet. Ultimately, if these are just siloed and stuck inside of private walled gardens, you're not really doing anything to actually create ownership. The ownership does need to persist. These persist outside of where you may have acquired it. There's tremendous opportunities for innovation in the consumer layer at the infrastructure layer when we think about what banking of the future looks like, banking the future.

Whether it be for companies or consumers, how you store your digital objects, which have value in the same way that other forms of property have value and securely do that, not worry about it. Those are lots of problems that still need to be solved. Ultimately, if we can't have that portability so that these things can exist and be priced in markets outside of just the place you've got it, we're missing the boat. It's a great question.

Maybe the last question, we'll turn it over to Jim. Thanks for joining us and thanks for the question, Sasa.

Jim: Hey, thanks guys. It's a great conversation. I was talking earlier to Zach Burks at founder Mintable. One of the things we're talking about is within NFTs someone who also was in the discussion was saying if you tokenize an NFT and create fractional shares, you're getting into securities law and that by definition made it to security. I didn't think that was necessarily true. I was going to use the example you guys about a short, broken, long Manhattan type of thing. If I were to convert the Empire State Building, let's say into fractional share ownership, to me, that's a security and it requires central control and future monitoring and things.

If I take my LeBron NBA Top Shots card and I were to fractionalize that to 100 things and 100 people just happen to own it, but there's nobody who has to do anything to me, that would not necessarily be a security. I don't know if you guys had a view on that. Then also about just NFTs in general, it seems like everybody's just dumping a bunch of crap into a label that says NFT. Someone asked me earlier about taking their music portfolio and making NFT. I said, "Look, if it's on iTunes, it's good the way it is now. Just stamping NFT doesn't mean anything."

I was wondering if you guys had a view on what constitutes value in an NFT of like Jack Dorsey on Twitter saying, "Hey, here's my Twitter for 2.5 million." That to me is a moment in time there's value to that, versus just taking a music portfolio that already exist and calling it an NFT.

Jeremy: This gets to some of the fundamental thesis that Jake was writing about and starts with, which is how do you establish value and how do you achieve price discovery? Because there are going to be this incredible long tail of people providing these and, obviously, the current price discovery mechanisms and the marketplaces and everything else, leave a lot to be desired. Maybe there was a lot embedded in that question, Jim. I'll turn it over to Jake and Sean, as well.

Jake: On the question about securities, that is a question that should be directed to legal folks, I'm not a lawyer. I don't know if Jeremy or Sean, you guys have any experience in that space. I would say just as a layman's analysis, and again, don't take this as legal advice of any sort. I suspect the fractionalization probably wouldn't ideally be a security. I think if you apply the Howey Test, you might fail the common enterprise prong or you might fail the efforts of others prong. Again, probably up to the courts in that one.

I'm not sure I fully got the second part of the question, Jim. Do you mind just restating it?

Jim: The other one was just on what constitutes value in an NFT versus people just dumping things with an NFT label. I was giving you an example of a musician who said, "Look, I'm on iTunes right now but I'd like to have an NFT because they're hot." To me, that doesn't mean anything.

Jake: Yes, that's a good point. I was watching the Kings of Leon NFT tokenization the other day and they probably had a bit of a design space of what they could do with an NFT. What they chose to do was saying, "Having this NFT is denoting ownership in the album, the music files." That to me could be an interesting case, but it's probably a lot weaker at least conceptually from saying everyone who buys this NFT is entitled to part of the revenue stream of all the album sales." That is a much more disruptive structure, in my opinion, because then it aligns all these people to essentially promote the album and benefit from their promotion.

It's really a much stronger alignment of incentives.

Jeremy: Jake, I agree with you but then you're getting into the security issue, which is what the other part of what I said and that's exactly the complexity you get into.

Jake: I feel like we should solve and explore these problems conceptually first, and then when we get to implementation, that's when we need to worry about jurisdictional securities laws and also the securities laws apply to United States and blockchain as a global technology. There are many jurisdictions where such schemes will be possible.

Jeremy: Clearly, we're in a world where just the velocity of experimentation, innovation around this is incredible and is global and just these things do persist and exist around the world. Things will be certainly raised and challenged legally. I feel like the experimentation is absolutely worth it. This is just a space where securities laws are just frankly, incredibly outdated. They never contemplated these things and will have to catch up. The answer isn't just a slam existing 1933, 1940 securities laws on this. It's really to ultimately, as I've said, many times publicly in the past, we need a new definition of what a digital asset is, and what the interactions of it are. That should be a policy goal for the United States. That should be a policy goal for everyone.

Jake: I was just going to add that's absolutely right. Jeremy and I was going to add that when these experiments are performed, they create the basis for in the examples of how to make adjustments to those laws. They're very necessary experiments. Even if they're performed outside of the United States.

Jeremy: Yes, absolutely. Listen, we're at a little bit over nine o'clock--

Sean: Just one thing real quick here, I'll just say on the second part of the question. I wanted it all try to go into how we test stuff, but just on the content question. I think there's going to be a lot of crap, honestly that is out there and that's okay. That's also true in a lot of other marketplaces, music and otherwise. The experiments are helpful to weed through the crap but ultimately work on product experiences even if they may infringe on tested waters with things that these securities issues, they need to happen. Even things like Bits and Subs and Twitch have run a file of discussions around what really are these Bits that are in custom emoji that are being sent to streamers.

The experiments and product experiences will continue to iterate, a lot of the content will look like crap and the best stuff will rise to the top, but also splinter into meaningful communities that don't have to be based on millions and millions of devotees to one specific gatekeeper, but can be much more evenly distributed than we've seen in the past.

Jeremy: Yes, totally. Awesome. Sean and Jake, this is a really fun conversation. Everyone who joined us tonight this evening, the morning, whatever it is for you, thanks for you joining here in the Money Movement Club, and with this session. Jake and Sean, I look forward to keeping the conversations going and thanks again for coming out tonight.

Jake: Awesome. Thanks, Jeremy for having me and guys, keep up the great work educating about NFTs.

Jeremy: Absolutely. We got a lot more coming. Awesome.

Sean: Thanks. All right.

Jeremy: Good to meet you, guys.

Sean: Thank you.

Jeremy: Yes. Bye-bye.


[01:12:55] [END OF AUDIO]

Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Sean Neville
Co-Founder, Circle
Jake Brukhman
Founder & CEO, CoinFund

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