TL;DR:

• Digital collectibles as NFTs signal affiliation and status online, driven by younger digital-first consumers and immersive internet spaces.

• Physical goods are already used for signaling; digital goods will follow with blockchain technology.

• Most NFT projects failed due to poor showcasing opportunities and lack of effective platforms.

• Successful digital status objects require large, context-aware platforms for acquisition and showcasing to create an attention flywheel.

• Examples like Roblox and Fortnite show that cohesive digital environments are key, even without true ownership of digital objects.

A core part of the thesis for digital collectibles as NFTs during the 2021-22 cycle was the idea of culturally important signifiers. As people spend more time online, our demand for digital objects that they can signal affiliation and status with. This trend would be further amplified by two tailwinds:

• Younger, digital-first consumers aging up.

• The fidelity of the internet increasing (immersive spaces)

We already use goods and products as signalling mechanisms in the real world, and it’s not far fetched to think that we will adopt this online. Especially now that we have the supporting technology (property rights enabled by blockchains).

Still, it would be an understatement to state that the above thesis didn’t fully play out last cycle. Most NFT projects flamed out, most legacy brands abandoned or significantly scaled down their onchain efforts.

Was the initial thesis wrong? No. I’m fully convinced the thesis will play out. The problem is that we’ve only solved the first half of the equation.

From Acquisition to Signalling

A digital object (NFT) requires two components to serve its purpose as a status/social signalling device:

• A way for users to acquire said object

• A way for users to showcase it

Historically, onchain products and environments have been notoriously janky and complicated. This is improving every single day. For the purpose of this train of thought we can still say that there were and still are avenues for people to acquire NFTs.

The problem lies in the second part of this model. You’ve bought the NFT, what now?

Everyone got fired up about NFTs and bought them, but we did not have any obvious places to go to showcase these newly acquired assets. People used them as avatars on Twitter/X, with the platform briefly introducing a feature to use actual, verifiable NFTs as your profile picture, but beyond that, there weren’t much going on.

An optimal showcasing surface for a digital status object is a sum of two parts:

• Surface area: Big enough distribution

• Context: That the people that sees the signalling object also understands its function/value

When consumers can interact with a cohesive experience that connects the acquisition activity and the showcasing activity, it also creates an attention flywheel. This flywheel then retains and compounds attention, benefiting the underlying asset and its holders.

The lack of ample showcasing areas, town squares, prevented NFTs from getting that flywheel started. This leads to attention drift and a slow spiral. While this dynamic is not the sole reason the NFT market cratered, it’s clear that it played a part.

Cohesive Experiences

The reason I’m convinced the thesis is correct is because it’s already playing out. It’s just not happening on crypto rails. Here’s a graph of it:

(Source)

This is the quarterly revenue of Roblox, currently on a $3.2B annual run rate. The majority of this revenue comes from consumers buying the in-game currency, “Robux”, which they then use to buy digital objects for character customization.

Epic Games (Fortnite) is likely crossing the $6B mark this year. The company generates revenue from other avenues like royalties from other devs using its game engine, but a significant portion of this revenue comes form in-game skins and assets.

The digital objects in Roblox and Fortnite are not NFTs. The users don’t actually own these assets, can’t move them off platform etc. Yet, it doesn’t matter to them. This signals that the cohesiveness of the experience is more important than the concept of true ownership. At least for now.

Digital status objects needs town squares where consumers can showcase their belongings. A signal object holds no value if there are no one to pick up on the signal (and understand it).

Ecosystems like Farcaster and Lens, enabling users to move onchain with a single identity shows the early innings of town squares. Nifty Island is another example.

I’m currently keeping my eye on the Telegram/TON ecosystem. Telegram’s got 900M active users and is currently onboarding them to onchain experiences via it’s TON blockchain. This is a great foundation to build cohesive experiences, and I wouldn’t not be surprised if a rekindling of the NFT profile picture craze were to play out in this ecosystem.

Until next time.