Lessons on Cult Building From Bored Apes
On how BAYC is building a subculture worth billions.
I am stepping aside from the spotlight on financial markets to look at how crypto is changing culture and its after-effects today. Non-fungible tokens (NFTs) have been the talk of the town for a few months now. Unlike 2017’s crypto-rally, it is safe to say that they are here to stay this time around. There are several reasons for this. First, the newfound crypto-wealth from the recent rally was looking for new places to be parked in. Second, NFTs are a digital-first, blockchain-based asset purchased, traded and moved as quickly as tokens. The last quarter also had the media covering practically anything NFT related with great enthusiasm. The spotlight in turn, got more retail investors interested in these instruments. Unlike tokens like ETH, BTC or DOT - an NFT is a far more relatable asset as the mental model of the average person can relate it to art from the traditional realm. Lastly, the infrastructure layer for building and deploying NFTs has become a lot better in the past three quarters. Ventures like Rally, Open-sea and SoRare have “democratised’ NFTs by making them usable for individuals that don’t code generally..
Two more reasons contributed to the current "Summer of NFTs" we are in. The fact that Ethereum's on-chain transaction fees are at a fraction of what they historically are due to declining interest in DeFi yield clubbed with relatively flat digital asset prices. In other words - the time had come for NFTs to take off in a meaningful, substantial way. Softbank's latest investment in Sorare at a valuation of $5 billion is a likely testament to the same. A pseudonymous community has silently been establishing itself in the NFT space away from the spotlight and headlines. It is interesting because it sheds light on how the internet itself is evolving. Before we begin, consider the chart from Nansen.ai below looking at the NFTs with the highest activity in the past 24 hours. Bored Ape-related projects have conducted almost $3 million worth of transactions in the past 24 hours alone in terms of trade volume. BYAC related NFTs capture both #1 and #3 for NFTs with the highest volume in terms of ETH
Sorry for the bad pun. I could not resist. Before we go any further, it is essential to note what is driving this interest. First, the NFTs issued by Bored Apes Yacht Club (BAYC from here on) has a supply limit of just 10,000. These arbitrary limits are somewhat similar to the limitations set on sneaker releases. Second, the NFTs themselves represent different ape-like figures with unique styling angles to them. The rarity of these styling aspects feeds into the pricing of the NFT. Third, each ape representing NFT gives an individual access to a community of like-minded people. Individuals purchase these NFTs for access to community-based projects. One of them is a shared graffiti board that updates every 15 minutes. Finally, BAYC ties IP rights to the ape's specifics to the token itself - which means an individual can lease it out or charge a third party for using their intellectual property in a publication. Every ape issued by BAYC cost only about $200 (0.08 ETH) initially, but as of today, the "cheapest" ape will cost you north of $10,000. Several factors feed into this.
In my opinion, BAYC's NFTs are what is called a Veblen good in conventional economic terms. For easier reference - here is how it is defined.
"A Veblen good is a type of luxury good for which the demand for a good increase as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve."
A different way to think of it is - the more accessible the asset is, the less valuable it becomes. This economic thinking is why prestigious universities have capped seats, although the technology to scale student intake substantially exists today. A similar dynamic can be seen with limited-edition vehicles that have a limited supply. Their price is linked to their scarcity. A quick analysis on Etherscan would reveal that only ~4873 wallets hold a BAYC NFT in their wallet today. While the theoretical cap for BAYC community members is at ~10,000, less than 5000 people in the entire digital asset space even have access to it to begin with. But does scarcity alone drive price?
There are also a few other angles at play.
1. The Identity Argument
A rational case is to be made that BAYC NFT owners are power-users within crypto, and giving them access to other NFTs or digital assets can drive value towards a project. It will likely be the case that individuals buy up large numbers of BAYC NFTs to receive free airdrops. The team itself had issued more NFTs representing dogs to those owning their first drop. These are now trading at a minimum of $6000. ( I will be thinking of how absurd that last statement was on a flight very soon). My point is that individuals that own BAYC NFTs have a reason to continue holding them as they signal a specific skill-set and access. This is somewhat similar to owning the first 1000 Bitcoins that were mined or, in conventional terms - a degree from a reputed institution.
Note: I understand all Ethereum and Bitcoin is traded at the same price, but would you pay extra for a Bitcoin with a direct linkage to Satoshi Nakamoto?
2. Lower Velocity Of The Asset
In my opinion, NFTs are likely to rise rapidly in price and hold the price floor as fewer people are looking to exit them at any given time. Community-related NFTs will behave different as individuals don't see them as a tradeable asset. The intent of buying them is not to sell immediately. This hypothesis is supported by the somewhat flat frequency of transactions the NFTs hold today. One parallel to draw here is that a digital asset like ETH or Bitcoin is like currency in the real world. NFTs that give access to communities trade more in similarity to real estate. This can work in the opposite direction too. Suppose an event bringing disrepute to an NFT related community spreads substantially. In that case, the average cost of the NFTs in the network will decline rapidly as there won't be much buy-side liquidity.
For a more detailed explanation of how Bored Apes Yacht Club works, I suggest watching the video below.
On Pseudonymous Signalling
Most individuals assume community linked NFTs are only about trading. In reality, the play is about creating multiple, pseudonymous identities that can signal specific attributes in the digital realm. Doing this consistently can help users in various ways. Currently, it plays out in the form of airdrops. When I work with founders to design their token economy, we routinely think of offering individuals that have been proactive in the governance of other networks to have their buy-in for the new project. This can be spammy and dilutive to the network being launched in many instances. However, if the targetting is done right - it helps generate buy-in from power users. Users of these highly demanded NFTs can generate "yield" or a secondary source of income by simply holding them and selling airdropped assets. Applicants to specific crypto-related jobs routinely offer their Degen Score as a way of showing their credentials. In many cases, the signal value of these scores is higher than a traditional certificate from an educational institute because it uses on-chain, verifiable data that shows an individual was able to access particular opportunities or displayed a certain kind of behavior.
However, pseudonymous identities on their own don't mean much. Individuals already use fake identities on social media networks today. But they are not held by themselves in the sense that a fake Instagram handle can be deleted at will by moderators at Instagram. More importantly, they do not have any commercial value. Through keeping an artificial cap on the number of NFTs that are distributed, teams like the ones behind Bored Apes Yacht Club are financialising access. According to Dune Analytics data, less than ~1000 people claimed these NFTs when they were first issued. This means the secondary market for these assets likely saw substantial demand as individuals began buying these NFTs through platforms like Open sea. I claim this because, as mentioned above, over 4900 wallets have these NFTs today. Why would they do that? The premium they paid on the open market is the cost of signaling involvement in a community they did not join before it being discovered by the mainstream. This is somehow a mixed bag though. On one end, a form of reputation being purchasable in the free market can make it a flawed identity system. (You could claim that is how universities function too). On the other, the economic value tied to these NFTs is what makes them substantially desirable in the first place. There is a lot to think about in terms of ethics and economic design here, and these are still early days. ( Write to me if you have been thinking of it too)
Operating Systems For Cult Building
What intrigued me about the Bored Apes Yacht club is the fact that it started as a 'random blockchain project". However, it now has individuals tying their real-life identities and meetings in different cities for it. The speed at which a community can spin up and have individuals connect their true sense of self to it has increased. Think of it. Historically, you had to run a tribe, religion or state to be a 'source" of identity. The internet reduced that drastically by creating micro-niches that align on basis of political, dietary or geo-specific views. These micro-communities were still based on matters that have existed for decades. NFTs are changing behavior by allowing pseudonymous individuals on the web to create a culture out of thin air in a matter of months. The Illuminati of the 21st century will likely use blockchain-based authentication instead of having elaborate rituals. Okay, maybe I went a bit too far ahead with the business proposition. But here is what it is - the ability to kickstart a movement in a fraction of the time it historically took and have individuals align their identities with it.
Last year A16z had released a post shedding light on how 100 true, high-paying fans can sustain a creator's career. I believe projects like BYAC is shifting the dynamic from creator <> audience interactions to stakeholder ownership. When a thousand people are vested in the success of a community, they represent and engage better with it. When their identity is linked to owning an asset that gives them access to a community, they tend not to sell it. This scarcity clubbed with stakeholder activism will be at the crux of what creates strong NFT based communities. That said, if you think you can drop 1000 random NFTs tomorrow and build a community around it, you are likely mistaken. Communities take strong signalling from early adopters, heavy engagement during the early days and culture building. The NFT is only the financial representation of all the invaluable work that goes into curating, moderating and enabling people involved with it. Much like we had a sea of random animal-related tokens, then absurd art parading as NFTs - we will have community-related NFTs creating a small micro-bubble. It will be a while before we entirely figure out which communities are great investments. For now, maybe the best path to take is not to see which NFT can give you the highest return but rather to ponder which communities are worth paying for access to. That said, I am (fairly) convinced that we are heading into a decade where learning how to design, analyse and improvise micro-economies will increasingly becoming relevant. The story of economies is one that increasingly fractionalises over time. We started with nation-states, then had digital-first micro-economies (like Uber) and are now trending to even smaller ones that can be created, deployed and changed at will. I should likely dig into that in another piece.. For now, in case you want to discuss the rapid financialisation of communities, hop into this Telegram here.
P.s - I am in the process of setting up a Pallet.xyz. If you are a founder with jobs looking to have it listed - drop me a text on @joel_john on Telegram or respond to this e-mail.
1. I hold no direct exposure to BYAC as of writing this but have exposure to the broader NFT ecosystem.
2. None of this is financial advice.
3. Please, please don't buy NFTs thinking you can flip them for a quick profit.
Startup Spotlight - Bitscrunch
When I first started work on this piece, I was curious to vet if BYAC really did have on-chain activity. I reached out to Bitscrunch - to see if I can have data on the project. Fortunately for me they have indexed millions of transactions on practically the entirety of the NFT ecosystem and were able to give me a ready dashboard like the one above in a matter of hours. From there, I could have a holistic view of what is going on in BYAC's ecosystem. If you are building anything NFT related and need information - make sure you reach out to Vijay from Bitscrunch.
P.s - This is not sponsored. I just had this slot I wanted to use for good so here we go. If you are building something in the seed to growth stages and want it shared - drop me an email.