a16z partner Dixon: Why NFTs provide creators with a better way to generate income

This article is sourced from a16z crypto, authored by the firm's partner Chris Dixon, and was first published by Mars Finance, translated by Zou Zhengdong.

Kevin Kelly predicted in his classic 2008 article "1,000 True Fans" that the internet would change the economics of creative work: to be a successful creator, you don't need millions of XX.

You don't need millions of dollars, millions of users, millions of guests, or millions of fans. As a craftsman, photographer, musician, designer, writer, animator, app maker, entrepreneur, or inventor, you only need 1,000 true fans.

A true fan is defined as someone who will buy anything you produce. These true fans will drive 200 miles to see you perform; they will buy your hardcover books, paperbacks, and audiobooks; they will purchase your next sculpture before it is officially released; they will pay for the "best" DVD version of your free YouTube channel; they will come to your chef's table once a month.

Kelly's vision is that the internet is the ultimate intermediary, enabling 21st-century inclusivity. Creators, no matter how small they seem, can now find their true fans, who express their enthusiasm through direct financial support.

But the internet has taken a detour. Centralized social platforms have become the primary means for creators and fans to connect. These platforms have leveraged this power to become new intermediaries—placing ads and algorithmic recommendations between creators and users while keeping most of the revenue for themselves.

The good news is that the internet is returning to Kelly's vision. For example, many top writers on Substack earn far more than their salaried jobs. The low intermediary fees combined with the economic benefits of passionate fans are astounding. On Substack, 1,000 newsletter subscribers paying $10 a month can net an author over $100,000 a year.

Cryptocurrency, particularly NFTs (non-fungible tokens), can accelerate the trend of creators earning directly from fans. Social platforms will continue to help build audiences (though these may also be replaced by superior decentralized alternatives), but creators can increasingly leverage other methods, including NFTs and crypto economies, to earn money.

NFTs are uniquely represented media fragments based on blockchain records. Media can be any digital format, including art, video, music, gifs, games, text, memes, and code.

NFTs contain highly credible documentation about their historical origins and can have code attached to accomplish almost anything a programmer dreams of (a popular feature is ensuring that original creators receive royalties from secondary sales). The security technology of NFTs is the same as that which allows Bitcoin to be owned by hundreds of millions globally and represents thousands of billions in value.

Due to high sales volumes, NFTs have recently received a lot of attention. In the past 30 days, NFT sales exceeded $300 million:

Cryptocurrency has a history of cyclical fluctuations, and NFTs are likely to have their own ups and downs.

There are three important reasons why NFTs fundamentally provide creators with a better economic income model. The first, as mentioned above, is the elimination of rent-seeking intermediaries.

The logic of blockchain is that once you purchase an NFT, you have complete control over it, just like when you buy a book or sneakers in the real world. NFT platforms and marketplaces exist and will continue to exist, but their fees will be limited because blockchain-based ownership shifts power back to creators and users—you can shop around and earn fees in the marketplace.

(Note that reducing intermediary fees can have a multiplicative effect on disposable income. For example, if your income is $100,000 and your expenses are $80,000, then removing a 50% tax rate increases your disposable income from $20,000 to $120,000, a sixfold increase.)

The second way NFTs change economics is by enabling granular price tiering. In an ad-based model, revenue generation is more or less uniform regardless of the level of fan enthusiasm. Like Substack, NFTs allow creators to "skim the cream" by offering higher-priced special items to their most passionate users. However, NFTs go further than non-crypto products because they can easily be divided into a series of price tiers.

The prices of NBA Top Shot cards range from $100,000 to a few dollars. Bitcoin enthusiast? Buy as much as you want, down to 8 decimal places, depending on your level of enthusiasm. The granularity of crypto allows creators to capture a larger area under the demand curve.

The third and most important way NFTs change the creator economy is by allowing users to become owners, thereby bringing customer acquisition costs close to zero. Open any tech S-1 filing, and you'll see enormous user/customer acquisition costs, often flowing to online advertising or sales personnel.

In contrast, the total market capitalization of cryptocurrency has surpassed $1 trillion with almost no marketing expenditure. Bitcoin and Ethereum have no organizational support, let alone marketing budgets, yet they are used, owned, and loved by millions.

The highest-grossing NFT project to date, NBA Top Shot, generated $200 million in total sales in just the past month, with very little spent on marketing. Its ability to grow so efficiently is because users feel like owners—they have skin in the game. This is true peer-to-peer marketing, driven by community, passion, and ownership.

NFTs are still in their early stages and will continue to evolve. Their utility will increase with the digital experiences built around them, including marketplaces, social networks, showcases, games, and virtual worlds. Other consumer-facing crypto products are also likely to emerge in conjunction with NFTs. Modern video games like Fortnite contain complex economies that mix fungible tokens like V-bucks with virtual goods like NFTs/skins.

One day, every internet community may have its own micro-economy, including NFTs and fungible tokens that users can use, own, and collect.

The essay "1,000 True Fans" is built on the original idealism of the internet: users and creators connected globally, unbound by intermediaries, sharing creative and economic advantages.

Existing social media platforms lock creators into a bundle, deviating from this vision. Accordingly, there are two ways to challenge them: accept users or accept money. Cryptocurrency and NFTs provide us with a new way. Let's make it happen.