After a year of glory, NFT is in turmoil

The NFT field can be said to be the most lively place in the Crypto circle today. From celebrities promoting products to major brands listing NFT as a new battlefield for brand promotion, more and more people are beginning to understand the vigorous vitality of NFT and start collecting their first NFT. According to statistics, the current number of OpenSea users is as high as 1.24 million, soaring 40 times in one year. In January 2022, OpenSea's monthly transaction volume reached 4.9 billion US dollars.

This is a fertile soil, and countless builders hope to achieve something here; and the frequent wealth effect has become the biggest billboard of NFT, attracting countless profit-seekers.

Pursuing profit is a normal thing. Everyone likes to accumulate and grow personal wealth, but excessive pursuit of profit will endanger the healthy development of this industry. BlockBeats wrote this article to summarize the four major chaos in the NFT field in recent days, and deeply analyze the harm these behaviors will bring to the development of the industry. I hope that investors and project parties can learn from it.

Endless new projects, endless blankets

On February 10, Twitter user @NFTethics posted a Rug Pull warning about the popular project "Squiggles" and uploaded a 57-page PDF document to explain the risks in the Squiggles NFT project. The document mentioned that the project team had previously operated more than 5 NFT fraud projects, all of which created a false prosperity by purchasing fans, lottery events, purchasing advertising space, etc., and while strictly controlling the number of whitelists issued, team members hyped up the whitelist price internally and externally, and immediately transferred all the income after the project was publicly sold.

Similarly, @NFTethics also exposed the recently highly anticipated NFT project "Cereal Club NFT (Cereal)". It is understood that the project was discovered because careful users found that it used the same code contract as another Rug Pull project HolyCowsNFT, and also found a common founder in two NFT projects that should have nothing to do with each other. And through the outliers in the data crossover, it was discovered that this team had previously launched multiple Rug Pull projects named MonaLisa, Baby Ape Club, Crypto Wolf Club, etc. Because of @NFTethic's exposure, the Squiggles project owner arbitrarily manipulated the market in order to defraud more income, and was removed from OpenSea for suspected fraud.

There are many NFT projects that use the same method as Squiggles and Cereal to "mass produce" and defraud funds, but in this era of data, only data can deceive most NFT players. With hundreds of thousands of Twitter followers and tens of thousands of reposts for each tweet, it is difficult not to attract the attention of NFT players and other project parties. In addition, the project party constantly reassures community members by "showing off their wealth", and the community is in a state of involution for the whitelist.

This assembly-line promotion model can attract traffic that can reach the level of top projects, or even exceed them. However, there are many projects in the current NFT market, and the launch of many projects has attracted funds that should have circulated in the secondary market. Many project parties have invested huge efforts in operating in the secondary market, but the income generated by the launch in the primary market is far less than that. This has also led these project parties to choose Rug Pull.

Currently, most NFT projects have three revenue channels, namely primary market revenue, secondary market royalty revenue, and NFT derivative revenue.

Primary market revenue refers to the revenue obtained through pre-sales and public sales. For example, if a headshot project with a total of 10,000 NFTs is publicly sold at a price of 0.05, the total revenue of the project party is about 500 ETH. This part of revenue also accounts for the largest proportion of revenue.

The royalty income in the secondary market is much less. When NFT projects are circulated in the secondary market, royalty income will be generated, and the royalty ratio generally ranges from 5% to 10%. Taking 5% as an example, if you want to achieve the income of 500 ETH from the public sale, the total transaction volume must reach at least 10,000 ETH. Most projects today find it difficult to achieve this level.

Finally, there is the income from NFT derivatives, which requires NFT projects to launch derivative NFT products and generate income based on their existing high popularity. For example, after BAYC airdropped potions (equivalent to airdropping a mutant monkey to the holder), it sold the remaining 10,000 mutant monkeys in the form of a Dutch auction.

Compared with the income from the primary market, the secondary market and derivatives are full of uncertainty. The project owner must maintain the community's enthusiasm, keep the floor price steadily rising, and deliver the roadmap. However, with the popularity of Cereal Club NFT, even if all are sold out at the lowest price through the Dutch auction, the project owner can at least get $11 million. The secondary market income from community building is just a drop in the bucket compared to this.

With @NFTethics taking the lead, more and more NFT players have joined the fight against "assembly line" NFT projects. The Bitcoin Express, a well-known crypto community YouTuber, also summarized in the video "4 Major NFT Red Flags To Avoid" how to use the information released by NFT project parties to help investors effectively avoid being deceived in the NFT market.

Web2’s national meme pack, Web3’s mess

After the domestic emoji package Lengtu released its own NFT avatar, another domestic emoji package IP Ali also announced its entry into the NFT field and released its own NFT avatar series. However, compared with Lengtu, Ali's operation fully proves that it is not yet ready to enter the Web3 era.

The Ali community is very lively, but liveliness does not mean prosperity. Due to the high public awareness of the original IP, the whitelist of Ali NFT was also very popular at the beginning, and the over-the-counter transaction price was as high as $1,000. However, due to the design of the whitelist mechanism and team decision-making problems, a large number of chat robots and studios were tirelessly brushing levels in the chat area. The names of community members were changed to ALI, and the avatars were changed to Ali. They were uniform, but there was no cohesion at all.

During the pre-sale period, the community reported that Ali had various loopholes, including even the most basic spelling errors. Some people even said that Ali, which was going to sell products on Web3, was using "Web1.5" technology.

Speaking of copyright issues, the Ahri NFT is an NFT authorized for sale by the original Ali IP party. That is to say, this NFT is not actually an official product sold by Ali, but is only authorized to a certain issuer to produce and sell NFTs, just like Marvel can authorize multiple trendy toy companies to produce and sell figures. Perhaps in the future, the original Ali IP party will authorize a new issuer to resell a set of NFTs, but in the era of Web3, will there still be fans who will pay for this kind of Web2 behavior?

As of press time, the official Ali has deleted the Weibo that was posted to promote this version of Ali NFT. Ali NFT also canceled the public sale and temporarily issued 1,000 additional whitelists.

The most scarce resource in the Web3 era is attention, so IPs that have their own traffic in the Web2 era will have a natural advantage in selling NFTs in the Web3 era. This is why many celebrities, trendy brands, and even emoticon production teams outside the circle choose to sell their own NFTs.

Compared with native IPs, the only advantage of non-circle IPs is that they have their own traffic. As for how to convert traffic into communities and how to develop with the communities, non-circle IPs and native IPs are actually on the same starting line. However, many non-circle IPs still use traditional eyes to look at the environment after entering the Web3 world, trying to apply the Web2 methodology to Web3, which is obviously not feasible.

In the Web3 era, brands are no longer just IPs, but also the communities behind them. Communities and brands are no longer dependent on each other, but are truly integrated. It is very easy for IPs that already have a certain fan base to make a quick buck by selling NFTs. However, whether they consider the community and care about their community determines whether the quick bucks they make are using their own traffic to monetize or damaging their own reputation.

One of the charms of Web3 is that native brands and communities are mutually dependent. This accompanying growth may not allow brands to grow rapidly in a short period of time, and currently no Web3 brand can be compared with the giant brands of Web2. However, "Skin In The Game" will make the bond between brands and communities more indestructible.

You must abide by the rules of the field you enter. In the Web2 circle, selling goods to fans may be regarded as "giving benefits" or "selling small souvenirs", but in the Web3 world, it represents a responsibility. The community is willing to pay money to support the brand, and the brand must work hard to create value for the entire community. From accumulating value first and then slowly consuming it, to continuously creating value with the community, Web3 has brought unprecedented changes to the life cycle of the brand. Every big brand that attempts to enter Web3 should face this and put away the arrogance from Web2.

The emerging “level 1.5 market” and the overhyped “whitelist”

"Tasty Bones" is undoubtedly the most popular NFT project in the past two months. Both the overall style and promotional materials can be described as exquisite, and the whitelist of Tasty Bones is "hard to come by."

The project's whitelist uses the Mint Pass mechanism, and players who obtain the whitelist can trade freely in the secondary market. As players' enthusiasm for Tasty Bones continues to rise, the price of Mint Pass has also risen to 4ETH. Just when everyone was expecting Tasty Bones to become the next "blue chip" project, the price of the blind box was surprising. As of press time, the floor price was only less than 1ETH. Although it has increased dozens of times compared to the issue price, it has already "broken" for most people who bought Mint Pass in the secondary market.

Faced with the high whitelist price, ordinary community members can hardly resist the temptation. Players, who originally served as the main purchasing power in the secondary market, choose to purchase MintPass in advance for safety reasons. This excessive overdraft makes the existence of the whitelist completely a bargaining chip for project parties to hype, and the whitelist mechanism has become worthless.

The whitelist mechanism was originally established to screen out "family members" who are willing to contribute to the community and grow with the community, but now it has become a stable, low-cost arbitrage tool. With a large number of NFT projects on sale today, people do not have time to participate in the construction of every community, and the whitelist of most projects is almost zero cost. You only need to "work hard" to win a whitelist. You can choose to sell it over the counter, or you can choose to buy NFTs in the primary market at a very low cost and arbitrage in the secondary market.

This is a severe test for the project owners and the community.

BlockBeats previously published an article titled "In order to buy an NFT, I learned English and painting" describing the current status of the whitelist acquisition mechanism that has long deviated from its original intention. In fact, whether it is the chat level, the number of invitations, secondary creations, etc., the instincts can well screen out the members who love the community the most, but where there is a wealth effect, there will be speculators, not to mention that participation is zero cost.

Although some project owners currently choose to build communities and select actively participating members through methods such as decryption and singing, there are always people who can find solutions for each form. For decryption, some people sell answers, and for singing, some people find substitutes to sing for them. They obtain the whitelist that may bring huge profits at a lower cost, while the community can only continue to face difficult problems.

Conscientious project owners will try every means to send the whitelist to members who are truly willing to participate in community building, while some project owners completely use the incentive mechanism of the whitelist as a tool to hype up the popularity. Many project owners open an over-the-counter whitelist or officially sell the whitelist in order to raise the cost of the floor price before the sale, perhaps to create anxiety about the whitelist before the project is sold and attract attention. Little do they know that this is the project owner overdrawing his "value" in advance.

As mentioned above, through various marketing methods such as hunger marketing and whitelist acquisition mechanisms, one can make their Twitter data look good and their Discord appear extremely lively. This false prosperity will make many people mistakenly believe that the project has great potential, but in fact it may just be a mess.

Perhaps we should all reflect on this. Although the starting point of the whitelist model is good, from the current situation, the whitelist cannot fulfill its mission well. So how to motivate loyal community members is a topic that all practitioners need to rethink.

Twitter Space All Night: Where Did All the Whitelists Go?

Last week, the biggest hot topic in the NFT circle was the dispute over Club721.

On February 12, the largest Chinese NFT community Club721 was involved in a dispute among various communities due to the internal administrator's corruption of the whitelist and the loose management of the team leader. That night, the two parties held their own opinions and exposed each other on Twitter Space for 7 hours, with more than 1,000 people listening online at the same time, which once caused the Twitter Space server to crash. One party accused the other party of corruption of the whitelist, and the other party accused the other party of not giving the due incentives. After that night, more inside stories about the founders of Club721 and Open Dao continued to ferment.

This is another dispute caused by the whitelist, which just reflects the difficulties faced by distributed corporate structures and DAO organizations: governance model and incentive model.

Since the COVID-19 pandemic spread around the world, more and more enterprises and companies have begun to adopt distributed offices with looser governance. DAO has always been considered by Web3 residents as a new organizational structure that can replace the traditional corporate system, and has also attracted the attention of top investment institutions such as a16z. However, both of them are also facing difficulties.

The first challenge is management and governance.

Currently, the most common governance method used by DAO organizations is voting, and most voting weights are assigned according to the number of tokens or NFTs held. This simple and crude method does not take into account the experience and expertise of each DAO member, and the results of such voting are likely to be in the wrong direction or extremely inefficient. There was once a case in which an investment DAO lost all its principal because all speculative decisions were decided by voting of community members.

The reason why DAO organizations like FWB can succeed is that they do not have a clear and concrete purpose. They are more like a community, and most of the activities they hold are not related to efficiency, so they can lay a solid foundation and gradually grow. There is a reason why people have adopted a centralized company system for many years, but it is out of consideration for improving efficiency. In the Web2 world, many companies also adopt a management method that is as flat as possible to achieve "semi-decentralization"; in the Web3 era, DAO also needs to find a more suitable governance model to better balance decentralization and efficiency.

Although distributed companies can formulate a set of strict rules and regulations, the relatively loose management model will still leave loopholes. Gaps in internal control links will lead to frequent problems such as embezzlement and corruption, and no one can detect them.

Another focus of this storm is the issue of incentives.

The company system should be handled in a company way, with salaries set and paid out as agreed; while if it is a DAO, an incentive plan that everyone can be satisfied with needs to be formulated. The formulation of the incentive mechanism will first encounter the obstacles of the above-mentioned governance mechanism issues. It is difficult to efficiently formulate a plan that satisfies all parties, and there will also be efficiency issues during implementation.

Whether it is a company or a DAO, incentives are fuel and a guarantee for employees and DAO members to continue to contribute. The management structure of distributed and DAO is loose. If long-term contributions are not rewarded, people will be unwilling to continue contributing, or the loopholes in internal control will be dug bigger and bigger. It is not difficult to know which money can be made, but it is difficult to know which money cannot be made. In the face of huge profit temptations and loose internal review mechanisms, who can guarantee to stick to the original intention?

NFT is a brand new fertile land. As practitioners, we all have the obligation to maintain its environment and allow it to develop sustainably. We should face up to the problems encountered on the development path and solve various chaos one by one, and jointly protect the industry to move forward in the right direction.

According to the document "Risk Warning on Preventing Illegal Fund Raising in the Name of "Virtual Currency" and "Blockchain"" issued by the China Banking and Insurance Regulatory Commission and other five departments in August 2018, the general public is requested to view blockchain rationally, not blindly believe in the exaggerated promises, establish correct monetary concepts and investment ideas, and effectively enhance risk awareness; any clues of illegal and criminal activities discovered can be actively reported to the relevant departments.