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This is the 5th essay in a 5-part series on funding models for the creator economy
The early 2000s were a heady time for people still hanging out on the internet. Sure, the dot com bubble had crashed, but that just meant the speculators and suits were gone and it was back to building. It seemed like anyone could build anything.
I came of age during this period, the final innings of Web 1.0. My two distinct memories of 5th grade are watching the Twin Towers fall on TV and building my first website on GeoCities. I spent most of middle school lurking on Digg, Reddit, and some Science Olympiad message boards. The internet was a weird place and I was a tremendous dork. I felt right at home.
By the time I got to high school, something had changed. There was a new website called Facebook, people started checking it on their iPhones, and anyone not using Google was a technological neophyte. Over the next decade, tech became Big Tech. These companies defined Web 2.0 by building monetization wrappers on the original protocols of the internet:
While these platforms have created tremendous consumer surplus, they've also created centralization. And that leads to monoculture. Like the 1950s, today's big tech platforms are decidedly not weird. They are beholden to advertisers and regulators and armies of employees. Google changed their position on being evil. The free speech wing of the free speech party banned the President of the United States from tweeting.
But the internet is getting weird again. Decentralized Web 3.0 technologies, undermined gatekeeping institutions, broad internet literacy, and the magnetic force of memes are ushering in a new era. The web is returning to its roots of permissionless, open, unpredictable exploration. The Great Weirding is here, and it has its eyes set on reshaping finance.
When you open up everything to everyone, a sort of Darwinian process kicks in. It explores all possible evolutionary idea paths and amplifies the stories that resonate with people. The weirdest corners of the internet become the seeds of mainstream culture.
Think about the recent shenanigans of the stonk market. A rowdy band of internet scoundrels short-squeezed hedge funds by buying Gamestop stock. Were they buying $GME because they believed in the underlying business? Out of a sense of childhood nostalgia? As an anti-Wall Street statement? A speculative investment? Or just for the lulz?
Yes, yes, yes, and yes. The internet turns information consumers into producers and producers into consumers. It creates tight feedback loops between the two, leading to the rapid development and proliferation of memes. If you can turn it into a potent meme, you can turn it into an investment decision:
But the phenomenon of $GME played out on the landscape of the legacy financial systems of the stock market. As a result, it couldn't handle the weirdness and shut down. What will this weirding of finance look like in the context of Web 3.0?
Paul Ford claimed that the fundamental question of the web is:
"Why wasn't I consulted?"
The Web 3.0 answer to this question is that you get to vote on everything. And you vote not just with comments or likes, but with money. This creates skin in the game, where your vote carries the weight of a bet. And by being an early supporter of a successful product, service, movement, meme, or community, you get financially rewarded. People are voting financially on the future they want to be built.
Early crowdfunding platforms like Kickstarter and Patreon started to revive Kevin Kelley's vision of 1,000 True Fans, where a small number of people could create meaningful income for up-and-coming independent online creators. But ultimately you were buying a product, you were a consumer.
In 2017, people started crowdfunding ICOs (initial coin offerings) by creating and selling a cryptocurrency tied to a project or company. Consumers became investors, sharing in the upside of successful projects. It's crypto, so there was an exciting bubble that inevitably popped. Now the SEC has a website where you can see all of the people they are criminally charging with digital asset fraud.
But this genie wasn't going back in the bottle. The SEC recently released new regulations for crowdfunding that opened the doors for regular people to invest up to $5M directly in companies. Republic is the early leader in this space, where companies can sell equity along with traditional Kickstarter-style perks. The new regulations went into effect this week and Gumroad became the first company to raise $5M via equity crowdfunding:
It's not a coincidence that a creator economy platform was the first to pull this off. Equity crowdfunding will let creators turn fans into investors and investors into fans. But it still involves selling ownership of your company, which can have some of the downsides covered in Avoiding the venture trap.
Web 3.0 is just starting to provide new models to address this concern. John Palmer paved the way by crowdfunding one of the first online essays using something called an $ESSAY token. It gave him an upfront payment to write an essay, but it also created a speculative financial asset for the essay's backers:
And that brings us to the topic of the month, NFTs (non-fungible tokens). Others have written much better introductions to NFTs, so check them out if you need a primer.
NFTs are essentially a way for creators to crowdfund the ownership of atomic units of work. They feel like someone took all of the other funding models and put them in a blender. NFTs can be:
A way for creators to directly monetize their work
A collectible for die-hard fans
A speculative vehicle for investors
A representation of underlying physical assets
A statement, conversation, or performance
An abstraction that turns the distinction between types of financing on its head
To commemorate the Great Weirding of the American Dream, I made my first meme. And I minted it as an NFT. I don't make the rules for writing about this topic, I just follow them. It features the 1950s-era piece of American Dream advertising from the first essay in this series, repurposed for 2021:
If you were to buy this NFT right now, are you a customer of mine? Are you investing in my art? Am I just engaging in performance art to make a point?
Does the distinction really matter?
NFTs had a big mainstream moment when they rocked the art world last week with a $69 million sale of digital artwork. We now seem to be entering the phase of the cycle where CNN gets in on the action and tries to explain what's happening to people. We seem to be in somewhere between the Third and Fifth Crypto Bubble, depending on how you count them:
I don't use the word bubble derogatorily. At this point, I consider bubbles as more of a feature than a bug of the crypto economy. They tend to create big periods of excitement and advancement in the core ideas of decentralized currencies, companies, communities, and creators.
If you ignore the noise and squint a little, crypto bubbles are good times to glimpse the future. After the bubble inevitably pops, it leaves crypto with a "new normal" and seeds for the next wave. For example, the first whiff of the NFT mania currently sweeping the internet came back in 2017, during the last major crypto bubble. Most of the last bubble was focused on meteoric rises in the value of bitcoin and ether. But there was a short-lived side show called CryptoKitties, which was the first NFT on the ERC-721 protocol. People were buying and selling and breeding cute little cats like this in late 2017:
https://www.cryptokitties.co/kitty/2019
And then most people sort of forgot about the whole thing until now. So what seeds are being planted this cycle that will pop back up in the future?
The whole point of weirdness is that it's surprising, uncertain. It's hard to predict where it goes next. But there are a few experiments happening in the corners of the current crypto bubble that I find particularly interesting:
Some crypto tokens are being used as keys to online spaces. An early pioneer in this space is the Friends with Benefits community—you have to hold the $FWB token in order to access their community discord.
In other cases, creators are minting social tokens for their fans, which can then be used as a sort of internal currency within the fan's community. Roll, an early leader in this space, just passed through the crypto right of passage of being hacked.
For more on social tokens, check out this great discussion from the Means of Creation podcast/clubhouse, which explores where social tokens could go in the future.
DAOs are a governance structure that is controlled by software rules instead of human decision-makers. They have been around since the earliest days of blockchain-based smart contracts.
The first DAO was set up in the early days of Ethereum, promptly hacked, and caused a crisis that led to a hard-fork in the Ethereum blockchain. But despite this inauspicious beginning, you should never underestimate new ways of coordinating groups of people.
Companies, cooperatives, and markets have all changed the world by finding ways to overcome collective action problems. Organizations like MolochDAO are now navigating the game theory challenges required to unlock a new way coordinating people and resources to make investments in the future.
Also known as DeFi, this is an umbrella term for the re-creation of financial products and services on blockchains. Some of the most interesting use-cases include:
Loans based on smart contracts
Stablecoins tethered to existing currencies
Prediction markets as an alternative to polls
Composable building blocks for complex financial products
One particularly weird example is $WHALE, a cryptocurrency backed by a vault of NFTs. Owning the $WHALE coin allows you to fractionally invest in a basket of rare digital art and collectibles:
That $69 million piece of digital art was bought by a pseudonymous internet character called MetaKovan. He dropped in on the popular Good Time show on Clubhouse last week to explain his purchase and how he thinks about the future of NFTs. The part that jumped out to me was that he revealed himself to be a major investor in virtual land inside metaverses. Stuff like this, a chunk of undeveloped virtual property inside The Sandbox metaverse:
I didn't really grok this until I read Packy McCormick's excellent piece on the topic, *The Value Chain of the Open Metaverse. *He makes the case that virtual objects (already a multi-billion dollar revenue source within the gaming industry) are a perfect fit for NFTs because they allow for interoperability between metaverses:
To us olds, and I’m including myself here, it seems crazy that people are willing to spend large sums of money on outfits for their video game avatars. In 2018, over $1 billion of Fortnite’s $2.4 billion in revenue came from the sale of skins (outfits) or emotes (dance moves). In 2019, League of Legends generated $1.5 billion in revenue from skins.
The watershed moment for the Metaverse will occur when there's an event that takes place simultaneously across multiple AAA platforms, where players can walk from one to the other as the same avatar, wearing the same skin. Imagine buying an NFT skin from Prada, wearing it to a concert in Fortnite, and then popping into a different version of the same concert in Roblox maintaining the same identity.
Well, I started off with the simple goal of cataloging funding models for online creators and somehow we've ended up talking about decentralized metaverses. Five essays and over 5,000 words later, the only thing that's clear to me is that this is the beginning of a Cambrian explosion of the creator economy and the financial structures that will fund it.
I have no idea how these things are going to recombine and evolve. But I feel confident that it's going to result in the creator economy equivalent of some weird tentacled sea creatures. And I believe now more than ever that the 2020s are going to be an incredible time to build products, services, communities, and content independently online.
See you in the metaverse.
[originally published Mar 17, 2021]
Jonathan Hillis
