The rise of consumer cryptocurrency

The rise of consumer cryptocurrency

An image created shows a symbol of the cryptocurrency Ethereum next to non-fungible tokens (NFTs) from the Yuga Labs 'Bored Ape Yacht Club' collection displayed on its website. REUTERS
An image created shows a symbol of the cryptocurrency Ethereum next to non-fungible tokens (NFTs) from the Yuga Labs 'Bored Ape Yacht Club' collection displayed on its website. REUTERS

Since its inception with the launch of Bitcoin in 2008, blockchain technology has gone through numerous cycles of public attention. Over time, growing interest and investment in the best-known cryptocurrencies has led to greater acceptance, as highlighted by the US Securities and Exchange Commission's approval of a spot Bitcoin ETF (exchange-traded fund) in January. While blockchains and their associated "crypto" assets have yet to be adopted by a truly broad base of consumers, that is starting to change, owing to a shift in how these technologies are being used.

Contrary to what mainstream media coverage often suggests, for many people, the value of these innovations lies not so much in cryptocurrencies as in blockchain-based digital goods such as virtual sneakers, gaming assets, and membership passes -- all managed by way of non-fungible tokens. As we explain in our new book, The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create, NFTs -- often misunderstood and even derided -- are a general and flexible solution for establishing and tracking ownership across all manner of digital assets. (We both personally hold NFTs and other digital assets and advise companies with interests in this sector.)

NFTs are already being used in a wide range of contexts -- from course credentials to coffee rewards -- and they are poised to reshape the management of everything from concert tickets to health-care data. Since these are business contexts that affect consumers' everyday experiences, NFTs may start to drive widespread consumer adoption on a scale that previous crypto applications have not.

The Early Years

A big reason for crypto's lack of mainstream adoption has been its inaccessibility. These are early days, and many crypto applications still require users to interface near the technological rails that run the system. There are few protections against user error or having one's account compromised, and the necessary technical knowledge makes everything difficult to navigate. But lest we forget, the early internet also was not user-friendly.

Much of the existing crypto infrastructure also lacks the capacity to manage transactions at a global scale, resulting in high transaction costs that frequently fall on the user. Years of regulatory uncertainty have not helped. Both in the United States and globally, there has been a general lack of clarity about which types of digital-asset transactions are permitted, how those assets are assessed for tax purposes, and whether that treatment may change in the future.

But market immaturity and mismatches between available applications have also been significant challenges. As with any novel, general-purpose technology, many early crypto applications were poorly conceived, unsustainable as businesses, or -- in some cases -- entirely fraudulent.

On top of that, much of the media and regulatory attention has focused on financial and monetary applications. In fact, crypto is hard to use as a medium of exchange until there is broad adoption. Meanwhile, because some early adopters were interested in crypto as a potential investment, financialisation bled over into other applications. When domain addresses were introduced on the Ethereum blockchain, for example, the result was a massive speculative market in what amounted to URL-squatting (when someone registers an address in hopes of later reselling it at a premium), which was supercharged by highly liquid crypto trading.

In short, the parallels to the early internet are manifold: the early crypto market has faced technical barriers that limit adoption, early experiments that didn't always make the best use of the technology, and significant speculation. But, as with the internet, we are witnessing a shift toward better designed, more productive applications as the technology matures. To understand the new-generation applications, it helps to examine more precisely what blockchains are good for.

What Blockchain Can Do for You

Blockchains are massive global ledgers that use decentralised cryptographic protocols to record information in a way that is publicly verifiable, secure, and immutable. Today's blockchains can run complex software that makes it possible to define, allocate, and track ownership, on a public ledger, of all manner of digital assets -- from units of account (cryptocurrency) to domain addresses, user profiles, and even music tracks and web games. Individual accounts on blockchain-based systems, often referred to as digital wallets, give users direct ownership of whatever is recorded as "theirs" in the ledger. The owner of a given digital asset holds a unique key with which to verify herself as the owner and control which applications interact with her assets (and in what ways).

This is very different from most of the web and social-media experiences that we are accustomed to. Instead of a user having an account on a specific site like Facebook or Amazon -- where that user's data, profile, and other information are stored and controlled by the platform -- blockchains allow users to retain complete control over their own account and associated data.

Moreover, users can connect that account to whatever platform they want and switch seamlessly between platforms. By contrast, although you can quit Facebook if you don't like its policies, you cannot take your content, audience, and reputation with you.

NFTs are digital records that can be held in an individual digital wallet. They act similarly to property deeds. By associating an NFT with another asset -- for instance, a piece of digital art, an item in a game, or even a physical asset like a book or a piece of clothing -- it becomes easy to define and identify ownership in the digital realm. Some NFTs are transferable and can be bought and sold just like physical goods. Others are non-transferable and tied to a specific account, just like a driver's licence or diploma.

Perhaps the simplest case for NFTs is in contexts where ownership is otherwise difficult to verify, such as with digital event tickets. In this case, NFTs provide a far better solution than the existing technology. A well-known market failure in this area stems from the difficulty of identifying whether a ticket (say, to a Taylor Swift concert) has been resold to multiple people at once on the secondary market -- hardly an unimaginable scenario. When a ticket is just a QR code in an email, there's no way to verify whether a prospective seller has "sold" it to multiple people, or even used it themselves.

NFTs address this by making each ticket a unique digital asset, which only one person -- or more precisely, one digital wallet -- can own at a time. Once a seller has transferred a ticket NFT to a buyer, the buyer has direct control of it and can verify that she is now the unique owner. Moreover, blockchain software can integrate the ticket transfer and exchange of payment into a single transaction, thus executing a secure transaction without the need for a third-party intermediary.

Good for Business

These uses explain why NFTs have grown so popular as a means of defining and exchanging ownership of digital images and other media files. Before NFTs, these markets were especially difficult to establish, because sharing a copy of a media file with a prospective buyer was often tantamount to giving it away. (That is why image databases have historically posted only low-resolution or watermarked files, and why online music marketplaces often allow only short previews of a given song.) Looking ahead, it is easy to see how the same uses will extend to digital trading cards, in-game items, and even library books.

Non-transferable NFTs, meanwhile, allow for secure digital credentialing without the need of a third party. A "digital diploma" NFT certifying completion of a course or academic programme could be freely read and verified by any platform to which the holder connects his digital wallet. (For example, LinkedIn could seamlessly verify whether you really did complete an "exec ed" programme at Harvard Business School.)

Similarly, NFTs can implement cross-platform subscriptions or memberships. Instead of needing an account with a given publication, simply holding a subscription NFT in your digital wallet could unlock access. Moreover, NFTs can be used to give people direct control of personal data such as health-care records, allowing patients to transfer their data seamlessly to new providers without all the hassle this currently entails.

And, of course, in a world where concern about AI fakes and impersonation is growing, there is a lot of value in being able to create interoperable, platform-agnostic, securely verifiable identity records that a person can use to prove they are who they say they are. These sorts of "proof of personhood" NFTs leverage offline identity verification to produce an on-chain digital asset that can be used to certify identity in contexts such as personal finance, e-commerce, and social media.

Finally, in all these cases -- at least with public blockchains -- it is easy for digital-asset owners and third parties to create value on top of NFTs beyond simple ownership. These functional utilities range widely in character and scope, from enforcing access to private chat rooms to offering free merchandise and even shared intellectual-property rights. An event sponsor could leverage ticket NFTs as the digital keys to an online fan community. Or a publication like The Economist could give free access to anyone holding a Project Syndicate subscription NFT without needing to interact with PS's own database.

All of this makes NFTs an ideal technology for fostering consumer engagement. Unlike previous incarnations of digital goods, NFTs are truly owned by their holders, and we know that a greater sense of ownership can enhance brand attachment. If you truly own a valuable item in a popular video game, for example, you will have an incentive to help that game continue and attract new players. At the same time, NFTs' interoperability makes them easy to showcase and use as part of one's online identity throughout the digital domain.

Blockchain Branding

Here, the decentralised value creation that NFTs enable also can help. NFTs publicly surface a brand's fans and connect them to one another within a mutually reinforcing network. By building community among an initial group of holders, NFT brands cultivate superfans who share their enthusiasm online and draw in others. We are seeing the makings of a new, powerful model of digital brand-building.

New and established brands alike are using this strategy. NFT-native brands like the Bored Ape Yacht Club, Pudgy Penguins, and VeeFriends started with NFT collections and leveraged their communities of early adopters -- that is, their NFT holders -- as they offered products to a broader consumer market. Similarly, established companies like Nike, Porsche, The Hundreds, and even Time magazine have released NFT collections that encourage their fans and followers to express enthusiasm for their respective brands online.

For example, members of Starbucks's Odyssey NFT reward programme (where one of us serves as community lead) can collect NFTs representing the classic Starbucks siren and the popular pumpkin spice latte. Many then display these digital assets online. Because of the way the underlying software works, nearly any NFT can take on this role. An NFT that starts as just a ticket to a baseball game or ballet performance can become an anchor for a rewards programme, unlocking a community of shared interest and giving high-value customers unique and valuable perks (like time on the field or an opportunity to meet their favourite prima ballerina).

Of course, NFTs are open to the same kind of speculative financialisation that we have seen elsewhere in the crypto market. But the most compelling business uses will centre on ubiquitous consumer applications. Even in the context of digital collectibles -- which will likely remain a key use -- NFTs are likely to become far more broadly accessible, and more focused on identity and community formation than on financial value. For example, we expect to see collectible NFT stamps for national parks, pop concerts, and maybe even for airport security dogs. (Yes, K9 units have trading cards. Ask for one the next time you travel!)

From Novel to Natural

Unlike with cryptocurrency, for which some people don't see a reason to own the asset unless they are interested in conducting crypto transactions, consumers will see direct value in these types of NFT uses. Someone might receive her first NFT in the context of an ordinary ticket or coffee purchase, or when she completes an online course. As this happens more frequently, people will enter the blockchain ecosystem, establishing digital wallets and then connecting to more third-party applications.

Because a single digital wallet can be used flexibly across many different platforms, there will be a positive feedback loop whereby consumers who adopt crypto in this way can also more easily acquire and use other types of digital assets. As consumers become acclimated to owning their own digital assets and using them flexibly across the internet, they may even start to demand the same experience from other brands and web platforms.

Thus, even the simplest consumer NFT uses have the potential to become a major driver of crypto adoption, linking fans to the brands and ideas they love, and driving businesses to create more opportunities for them to do so.  ©2024 Project Syndicate

Steve Kaczynski is a Web3 entrepreneur, consultant, and commentator and the co-author of 'The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create' (Portfolio, 2024). Scott Duke Kominers, is a faculty affiliate of the Harvard Department of Economics, Co-Principal Investigator of the Harvard Crypto, Fintech, and Web3 Lab, and a research partner at a16z crypto. He is the co-author of 'The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create' (Portfolio, 2024).

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