The world's most recognizable consumer intellectual property (IP) brands are incredibly valuable. Pokemon has grossed over $77 billion in lifetime revenue, while Winnie the Pooh, Mickey Mouse, Star Wars and Anpanman have all crossed the $50 billion figure.

Despite this, 5,000 different toy companies, 6,000 American film studios, and at least 3,500 video game development businesses compete annually against these recognizable IP brands. Consequently, these up-and-coming traditional IPs face extremely high barriers to entry in all aspects including initial production costs, length of bootstrapping, content distribution, and team expertise.

It takes 5-6+ years, 100+ employees, and $80+ million to build an AAA video game.

It takes millions of dollars and up to several years to produce a 12-episode anime series.

It takes an average of $50-$100 million to create a high-quality movie.

Over the last half-decade, we’ve observed a proliferation of NFT PFP projects that have amassed significant social and financial attention. First it was Punks, who only minted out after an article conveyed its emerging properties, and then BAYC, who garnered attention during the bull market in part due to influencers. A rush of recognizable projects followed.

Initially, most of these projects started out as 10K PFP collections that were “altcoins with pictures”. They acted as a unifying point for those looking to speculate on provenance or short-term financial upside.

However, as projects sought to differentiate themselves especially during 2021 and 2022, some began to exhibit properties of consumer IP brands by building products and experiences. Dookey Dash created one of the largest esports prizes ever, Pudgy Penguins announced expansion into toys, and many NFT projects have delivered comic books.

The NFT bull run generated substantial financial value for holders, either through airdrops ($APE) or price appreciation (Doodles & Moonbirds). However, many attempts to establish product-market fit during the current bear market, as the financial value of NFTs and airdrops dwindled, have proven unsuccessful. Even the most well-funded crypto-native projects have failed to meet the high expectations of NFT holders. Recent all-time-low sentiment towards these collections highlights the challenges brands are facing in delivering valuable utility beyond financial speculation.

Despite this, we believe that crypto-native IP has revolutionized the way that projects can produce, distribute, and expand on IP, all within a permissionless and transparent ecosystem that enables consumer empowerment. In the near future, our thesis is that NFTs will emerge as the most adopted origin content medium for budding IP brands, which could naturally translate to the creation of some of the most valuable IPs of the future.

1. The process to launch a bottoms-up global IP brand from Day 0 becomes faster and cheaper than ever before due to the inherent digital properties of NFTs. The result is increased initial focus on community building, leading to quicker feedback loops on IP direction. NFT IP also creates a more diverse and accessible creator ecosystem.

2. NFT IP’s unique building blocks allow holders to monetize their IP seamlessly and enables entirely new marketplace structures that promote co-creation. Typical beneficiaries of IP distribution are now shifting from centralized companies to holders, community members, and creators, which increases creativity, collaboration, and distribution output.

In the crypto world, a storyteller and artist are able to team up and build a project’s lore, community, and distribution from Day 0 with very little upfront investment. Deploying an NFT collection can cost under $1,000 depending on the chain and be released in days, in part due to the widely available and cost-efficient minting tools such as Zora, Manifold, Fair and OpenSea. This contrasts the current top-down IP bootstrapping costs which can reach the tens of millions, and the extended launch timelines such as the 5-year effort to get Superman into a national comic, Walt Disney’s bankruptcy due to reliance on film distributors, and Pokemon’s 6-year game development timeline due to initial studio skepticism. NFT IP allows for an equal opportunity to Indie artists and independent teams to participate and flourish in IP creation who otherwise would not be able to compete in the web2 IP ecosystem.

Through a leaner initial IP bootstrapping process, brands are able to focus more early efforts on lore building and storytelling. NFT IP projects uniquely benefit from powerful feedback loops that shape their direction and community sentiment due to two main reasons: teams perform more community-building repetitions and iterations by reducing the time spent on product building, and community members are more incentivized to provide input and capture attention from the rest of the market due to ownership and upside. 9GAG, a traditional web company, who satisfied requests to decrease royalties, and Pudgy Penguins and Azuki, who work closely with holders to source alignment and create vision alignment, all focus on community engagement. Other instances of community strength include MAGIC’s marketplace hack a year ago which led to overwhelming community efforts including whitehat hacking and scammer pursuits, and Axie Infinity’s focus on scholar empowerment, leading to the largest UGC machine in crypto.

We believe that when consumers are given ownership of their assets within a cooperative and mutually beneficial environment, they are motivated to evangelize the IP because it becomes a place for holders to feel valued, ultimately leading to deep loyalty, commitment, and incentive to promote.

Once the initial IP is distributed and a community is formed, teams can assess product market fit before extending the IP any further. If the IP completely fails to stick, teams can wind down projects in an ethical manner and the result is a negligible amount of time and money spent compared to sinking millions into a product flop. Teams can then pivot to new IPs using previous learnings, similar to how Dragon Ball’s author produced several experimental one-shot mangas that partly inspired the wildly successful Dragon Ball. Crypto-native IP enables more opportunities for success while minimizing the costs of risk and time, leading to more output and faster product market fit.

In the case that the IP persistently resonates with the community, the project can then expand into product verticals that increase in cost over time. This type of bottoms-up IP bootstrapping playbook is the exact one used previously by the modern day IP giants, who first distributed IP on simple mediums, built a community of fanatics, and then leveraged it to create increasingly costly products over multiple decades:

Animation: The Golden Age of American Animation began in 1928 after Mickey Mouse debuted in a film called Steamboat Willie, which had an original budget of $4,986 (~$88,000 in today’s dollars) and took 4.5 months to produce. Shortly after, the Mickey Mouse Club, a community-focused weekly gathering event, grew to 1 million members by 1932. Mickey Mouse went on to appear in comics in 1930, in color films in 1935, and in many video games in the 1990s. In the late 2000s, 40% of Disney’s deca-billion-dollar consumer product revenues came from Mickey merchandise.

Comics: In the 1930s to mid 1950s, the Golden Age of Comic Books birthed several character IPs such as Superman, Batman, and Captain America. The Superman IP only cost an artist’s drawing time to create, and was acquired for only $130 by DC Comics in 1938. A strong community of fans emerged through cheap comic books and fan clubs such as Superman of America. Superman, Inc produced its first toy a year later, aired thousands of radio shows in the 1940s, and released its first video game in 1979. Superman IP earned $634 million in licensed merchandise sales in 2018 alone.

Manga: In the 1980s, notable IP in the East began appearing through manga, such as Yu-gi-oh and Dragon Ball. Manga content production was cheap and fast, as the Dragon Ball author only spent two days before his submission deadlines to create entire segments. Dragon Ball launched its anime in 1986, two years after the manga's debut. A video game was released in the United States in 1997. The franchise has generated at least $7.7 billion in merchandise sales since it first started in 1989. Manga has always been powered by communities, and this is proven today by the popularity of online forums such as Anime-Planet, and in-person anime meetup groups worldwide, each with thousands of members.

We have also noticed that IP bootstrapping costs for the most successful content has oscillated over time, as the 1950s and 1960s produced top-down IP hits such as Star Wars and Mission Impossible, and the 2000s and 2010s other top-down IP including Avatar, Frozen, and Despicable Me. These respective periods allowed top-down IP brands to be product-first, community-later. During the aforementioned animated film, comics, and manga era, it was community first, product-later, whereby new monetization streams were added over multiple decades.

By dropping initial IP launch costs to almost zero, crypto re-introduces the previously-proven viability of bottoms-up IP brands while further disrupting the traditional unit economic costs of creating and distributing intellectual property. The ability to quickly launch a NFT collection lowers the risk of significant failure and allows for a more efficient, diverse, and competitive market that pushes the most exciting IPs to prominence through community-first and incentive-aligned initiatives.

Developing sustained valuable products for emotional consumption is a challenge because the financial aspect of NFT IP has always been at the forefront for holders. This causes a few main challenges:

• NFT IP projects essentially inherit the drawback aspects of publicly traded corporations, which includes lofty expectations from Day 0

• Projects are unable to truly assess product-market-fit due to the distraction of holder financial incentives

For most NFT projects in the space today, the main consumers are the holders themselves. These holders tend to put a lot of [financial] eggs in one basket, are focused on short-term financial returns, and are constantly benchmarking against the success of other projects. Managing expectations is the biggest challenge that any project faces today, especially because each holder is buying the NFT at different prices and on various timelines, and might not have the patience of waiting 10 years to witness the realized vision of a project. Mickey Mouse, Pokémon, and Dragon Ball have been built over many decades. Moreover, projects handle the burden of balancing promises and deliveries on their roadmaps, all while not being able to choose their holders. Recently, several blue-chip projects have struggled to address these challenges, leading to increased selling activity and decreased morale among holders. However, much like how DeFi 2.0 token designs emerged to better align holders, we imagine that the next wave of NFT IP brands will leverage new mechanisms to better cater to long-term holders, or at least create environments that control expectations. Tangible ideas include launching soulbound-tokens that become transferable over time, pushing upside payouts towards the later stages of a project, “token-bound accounts”, and inflation mechanisms that reward long-term alignment. Intangible elements are communication-based, whereby founders are transparent with the upfront future value of a particular asset.

As teams bootstrap successful communities and positive sentiment, the challenge then pivots to finding actual product market fit. There are many data points as to why many product launches have failed:

• NFT holders are simply not interested in the products, such as comic books and toys

• NFT holders are unwilling to pay for merchandise and events, because they expect it to be free or they do not think the price is worth the utility

This current reality for most NFT projects leads to two main options; build products that holders are actually interested in, or cater to an entirely new audience who might have differing product preferences. Before expanding into new products, teams should clearly understand which products will cater to which crowd, and why certain crowds are targeted in the first place. If the product experience is focused on the NFT holders and/or potential holders, listening for feedback from community members is key in understanding whether the product is actually desirable. If it is more so focused on the mass public, creating minimum-viable products, understanding historical consumer patterns, and testing directly with the relevant audiences is vital.

As more projects go through full brand cycles, NFT IP brands will be able to adapt and learn from the mistakes of other projects by studying their successes and failures. By understanding what works and what does not, NFT projects can better navigate the challenges of managing holder expectations, finding product-market fit, and building sustainable brands. This includes listening to feedback from their communities, conducting market research to understand consumer preferences, and being transparent about their vision and roadmap.

In the traditional realm, IP initiatives and extensions are controlled by a central entity who must act bureaucratically to maximize profits and control limited resources, which leads to a constrained amount of product outputs. In contrast, crypto-native IP introduces the primitive of open-source, transferable, and token-based commercial rights, whereby any holder of a single NFT PFP asset has the opportunity to contribute to a vibrant ecosystem that is no longer limited by resources or talent. Some concrete examples of new token-based license frameworks are highlighted in this piece. There are already many examples of ways crypto-native IP has been uniquely extended, distributed, and monetized, and this natural shift is pulling energy and talent away from web2.

Through open licensing agreements, we believe that this enables:

• cross-brand and platform collaboration that lead to brand new on-chain marketplace models, which attracts both permissionless contributors and consumers

• Bottoms up IP creation via NFT holders and community members that are empowered to create self-guided content and product creation

As a result, three new types of exchange platforms are born: IP marketplaces, creator marketplaces, and product marketplaces.

IP Marketplaces

The license-friendly crypto-native IP ecosystem creates favorable conditions that pave the way for new IP marketplace models to emerge. Storyverse is an IP marketplace that enables IP holders to delegate their rights to a talent pool of writers and artists that create animated shorts. Any revenue that is generated from selling the content is re-distributed back to both the creators and the IP holders, enabling a new type of reward accrual mechanism that has not previously existed. Meme Machine, a project created by the Sappy Seals team, allows anybody to seamlessly create memes and distribute them to earn rewards using existing IP. The composability of memes across specific NFTs and collections enables new revenue opportunities and collaborations. For example, if a Sappy Seal holder creates a meme that becomes used by the Pudgy Penguins, the former achieved greater reach and compensation due to engagement from a new type of customer that would not have existed in web2 as crypto IP is open and composable.

Other examples of novel IP marketplace models that enable NFTs with baked in re-distributions include:

• Toys and collectibles: IP holders license to companies who make physical items

• Photography and still art: Creating, editing, and blending images leveraging existing IP

• Video creation and editing: Similar to photography, except working with video

• Gaming and immersive experiences: Delegating IP to be used within virtual worlds

• 3D assets: Producers create the bridge between IP holders and interoperability within various virtual worlds

The emergence of these new IP marketplaces enable a more efficient and transparent ecosystem for IP holder, creator, and contributor participation. Streamlined collaboration and increased interoperability offer new avenues for value creation that were previously unattainable due to corporate silos and misaligned incentives.

Creator Marketplaces

IP marketplaces such as Storyverse, and CC0-esque projects such as Nouns present net new opportunities for supply-side creators, and as a result natural curation dynamics for each product can lead to increased participation from an open ecosystem of contributors. This type of congregation mimics creator marketplaces, whereby participants can build products on their own or in groups, and are competing to be the best submission. Nouns Prop House is public infrastructure that allows for anybody to submit, create proposals and garner submissions, whereby contributors have a chance to earn a prize and ultimately support a specific end-product. LilNouns allowed any artist to submit an advertisement to be used in the Nouns comic, and Rug Radio gave open grants to execute on ideas that would benefit their ecosystem. Traditional corporations are only able to tap from internal talent or selected partnerships, which often contain heavy constraints and inefficient processes. A writer for Storyverse mentioned to 1kx that famous traditional publishing houses give very little time to each writer because they have very few editors. Her experience in producing web3 digital stories is much more collaborative and feedback-loop driven, simply because there are more people to engage with. IP brands that source contributions from the wider community benefit from an increased amount of product ideas and high-quality outputs due to a limitless creator network structure, coordination effects, and competition dynamics.

Product Marketplaces

The supply-side of IP creation does not only occur through the aforementioned IP and creator marketplaces, but through self-driven curation by direct IP holders and community members. The result is more brand-specific product offerings. Through Bored Ape Yacht Club’s commercial licensing agreement, Bored and Hungry, a well-rated burger joint in California, was born. The restaurant not only acts as a customer acquisition channel for the Ape IP, but empowers this specific Ape holder to create a sustainable income stream as a part-owner of the brand. Nouns is another beneficiary of permissionless creation – Big Shot Toy Shop sells Noggles, skate boards, clothing, and much more. Both Yuga Labs and Nouns DAO, the core groups of these brands, have not directly prioritized these aforementioned products, which demonstrates how empowering holders can lead to product breadth and novelty. In contrast, traditional IP brands frequently have out-of-stock items or fail to produce highly desired products due to limited resources.

License-friendly IP brands are essentially highly-scalable product marketplaces that enable the supply-side to build any offering that translates value and caters to wide sets of consumer wants, ultimately increasing the target addressable markets and chances of retention.

In summation, all three marketplace structures facilitate a more equitable place for supply-side creators to be. Instead of being forced to accept predatory wage agreements that include no upside, creators can own and monetize their works directly from consumers. Our thesis is that much like digital artists flocked to NFTs due to earning potential, the same will happen for all kinds of creators looking to bolster their earnings and reach while leveraging crypto-native IP.

We believe that eventually, the availability of IP building blocks will become so vast that it will become disadvantageous to work with web2 parties that have slow bureaucratic processes, limited resources, and unaligned overarching goals.

There are a few main challenges related to newfound IP building blocks:

• There is usually no clear set of brand goals, thus there might be a lack of focus around product curation and reputation management

• Lack of ownership incentives leads to poor execution

The biggest challenge related to IP building blocks is incentivizing or guiding permissionless creators to make the right product for the right consumer, depending on the brand’s mission. Mickey Mouse caters towards kids, sports cards are attractive to athletes, and video games fulfill a desire for immersive experiences. There’s a hidden message as to why some Nouns say the brand “was showcased in a Super Bowl ad”, instead of “attracted millions in merchandise revenue FROM being in a Super Bowl ad”. Centralized players have less distribution paths in total, but are very focused on who they target, and why, therefore their outreach is extremely efficient. Nouns, which lies on the complete opposite side of the spectrum, allows anyone or group to expand on their IP, “so the objectives of the DAO are ultimately a venn diagram of the objectives of its ‘permissionless’ members”, which has led to many failed proposals that in hindsight should not have been passed in the first place. Moreover, “Given that reasons for membership are constantly evolving, the DAOs overall objectives will evolve too." The absence of well-defined goals can often result in a lack of concentration and focus, which are common precursors to achieving success in branding. To address these issues, NFT IP DAOs need to set up the right organizational structures to ensure that these qualities are met. One framework to explore is the OBRA model, which helps solve issues around resource misallocation, misaligned incentives and goals, lack of data-driven decision making, and lack of oversight.

Another reason why traditional brands succeed is because large stakeholders are incentivized with upside to execute like entrepreneurs. In contrast, we talked to one company that delivered a product for a Nouns proposal who mentioned that critical feedback sessions between them and Nouns [the client] “were more relaxed, less intense, and exactly four times less frequent than traditional brands”, hinting that there was less of a north-star end-product. Moreover, one proposal creator told us a Nouns fork did not “give the simple promotional merchandise resources necessary that competing traditional brands typically provide in ambassador partnerships” which decreases the visibility and value of the partnership for the Nouns fork. Unfortunately, nobody in either of these situations took ownership of the actions necessary to proactively improve product outcomes, partly because there are no ownership incentives to go the extra mile. Most referrers get a small bounty for a proposal, and supply-side product creators are given a one-time, lump-sum payment. Addressing the lack of financial incentives in NFT projects can be as simple as creating vested upside packages for those who meaningfully expand the brand, similar to how startups offer long-dated options or warrants to their employees. It is essential to provide substantial financial benefits to foster a focus on quality over quantity and promote critical output.

In order for decentralized IP brands to thrive, projects need to leverage the larger community’s efforts without sacrificing the typical qualities that make brands successful: constant iteration, critical evaluation of product feedback loops, targeted user profiles, and establishment of sales channels. The encouraging aspect is that NFT IP DAOs are still in their nascent phase, and there is room for improvement to make them more efficient and durable with time.

Building a multi-billion dollar IP consumer brand no longer requires an initial 8-figure war-chest. Teams who can create cohesion between holders, communicate consistently with valued holders, and deliver utility are en route to compete with Pokémon and Disney.

At 1kx, we are enthusiastic about building with visionary IP brands and powerful infrastructure who view NFTs as a revolutionary content medium. Please reach out if you are interested to chat more!

Thank you to pet3rpan, Accel XR, and Dmitriy Berenzon for the extensive edits on this piece. Shoutout to Luca Netz, Jameson Mah, Ben Roy, and Isaac for the feedback and conversations on this topic.

Disclaimer: 1kx and/or its members may have exposure to assets that were mentioned in this piece. Both 1kx, and the author of this piece, are not financial advisors. This piece and its content should not be construed as investment advice.