over 2 years ago • 14 mins
This is the transcript of an audio interview with Andrew Steinwold. Tap the 🎧 button above to listen to the podcast.
Interest in non-fungible tokens (NFTs) has gone through the roof this year. This once obscure corner of the crypto market is growing fast as people pay millions for images of flying cats or punks smoking pipes.
But investing in these digital collectibles can be intimidating to say the least: everything you don't understand about art combined with everything you don't understand about computers.
So to guide us through the world of NFT investing, we’re very pleased to be joined by Andrew Steinwold, an avid NFT collector, an early investor in the NFT marketplaces OpenSea and SuperRare, and founder of Sfermion, an asset management firm focused on NFTs.
Andrew spoke to another Andrew – our very own Andrew Rummer – and began by explaining what exactly an NFT is, and how they relate to the rest of the crypto ecosystem.
Andrew Steinwold: A non-fungible token is just a unique digital item, or unique digital asset. And, really, how they relate is that bitcoin and cryptocurrencies, those are fungible assets – meaning that they're totally interchangeable. So it doesn't matter if I have your bitcoin, you have my bitcoin: they're completely the same. But with an NFT, those items are totally unique.
Andrew Rummer: So what’s the motivation in creating these NFTs? I hear lots of fans of NFTs saying this is part of the next evolution of the internet. If that's the case, what's wrong with the current internet? And how are NFTs solving those problems?
Andrew Steinwold: It's really that it's introducing ownership into the internet or property rights into the internet. And so the current setup of the internet today is very – for lack of a better term – Communist in nature. There's one entity that controls everything and all the time, money, and effort that you put into your digital life does not actually add up too much. So if I spend all day on Facebook, I'm adding value to Facebook. I'm actually not getting value for myself. With NFTs, and crypto more broadly, what we're doing is we're basically allowing users to generate value for themselves native to the internet. So let's pretend there was a blockchain-based version of Facebook. And let's pretend that you use that platform to actually get paid some token in return for doing some activity on that platform, or maybe get rewarded natively for being the most active user or something. And so, really, it's all about flipping the current paradigm of the internet from value extractive of users to value additive.
You can spend $20 on a Fortnite skin, but you're not allowed to resell that skin. And you can't take that skin anywhere with you. It kind of has to stay put within that environment. And what we're heading towards is a world where property rights and Capitalism is enabled. And that's going to really add massive, massive value to the internet in ways that are kind of hard to fathom today. But what we're seeing firstly is – just for a Fortnite example – you'd be able to buy your Fortnite skin for 20 bucks, and then you can go sell that for maybe $25, if it increases in value, or maybe it lost value, so you're selling it for $10. But the fact remains that you actually own that good, and you're able to do whatever you want with it. And that's what's really important here.
Andrew Rummer: I struggle with this idea of inserting Capitalism and scarcity into the digital world. Because, for me, one of the key selling points of the digital world is the infinite scalability at zero marginal cost. So what’s the motivation for introducing scarcity into the digital ecosystem?
Andrew Steinwold: This is getting almost kind of psychological here. So what we're doing is we introduce the ability to create scarce goods in an environment that previously had unlimited scarcity into it. And that is super interesting. And some basic examples are property titles. So I bought a condo. And, in theory – hopefully – I'm the only person that's on the title of that condo. And there shouldn't be any duplicates of that, right? It’s on paper at like the Chicago title office or whatever, right? It's stored there, and everyone can see it. But what would be really cool and more efficient, instead of me driving down to the Chicago title office, sending like 100 pages of documents, handwritten? It'd be way better if you could transfer an NFT to me that said, “Andrew now owns this address,” right? That is one example of why you want scarcity.
On like a video game front, so more of a playful use case, you want scarcity because I'm the first person to defeat this boss in this video game and it drops like that one-of-one ultimate rare powerful sword or whatever. Then I want to make sure that I truly do own a one-of-one rare and powerful sword and I can do whatever I want with it. That’s super appealing. And also will probably have a lot of value to it, if that game is popular.
And going into art. So digital art was a phenomenon before NFTs but it didn't really take off in any major wage because, again, like you could copy/paste, copy/paste. But with NFTs you can copy/paste the image, but it's almost like a fake. So you can buy a real Gucci handbag, right? Or you can buy a fake Gucci handbag. The fake one, they're hard to identify just by looking at them on the surface. But if you really really inspect it, you can identify pretty quickly – if you know a lot about Gucci handbags – you can identify that okay, this is a fake one and the real one’s over here. Same thing with digit digital art where, yeah, I can copy/paste the image and put it on a token and slap it on OpenSea or some other NFT marketplace. But if you just click “inspect blockchain” – which every NFT has – you right away you can tell, okay, this is fake. This is not made by the real artist, therefore it is of less value. And so I think that there's a lot of really interesting dynamics that come from introducing scarcity to the internet. And a lot of them we don't even know about. I'm sure in like six months from now there's gonna be some new use case that I haven't even thought about.
Andrew Rummer: The other word that keeps coming up, whenever you delve into this whole space is the “metaverse”. So what is the metaverse? And is Facebook not the metaverse? Is Roblox or Fortnite not the metaverse? How does the metaverse distinguish itself from those kinds of digital ecosystems and how do NFTs come into the picture?
Andrew Steinwold: Metaverse is a very broad term and different people have different definitions. I try to keep it super high level and quite simple. I just say that the metaverse is a virtual environment that people will live, work, and play in. And I think that in order to have a true metaverse, you need to have rights. I don't want to live, work, and play in a virtual environment that is owned by Facebook. I mean, no offence to anyone who loves Facebook, but I don't trust them to not do things that might be nefarious. Also all the time, money, and effort you spend in the Facebook metaverse is really adding value to Facebook instead of adding value to yourself. And so I want to move out of the Communist Facebook metaverse and – you know, jump over the Berlin Wall if you will – and go into the Capitalistic, open metaverse. And that's what the “open metaverse” is usually referring to. It's bad we have to even refer to it as that because I think we can just call it the metaverse and the Facebook metaverse is not even a real thing. But, anyways, the open metaverse is really a metaverse that utilizes distributed ledger technology or blockchain-based technology in ways that give users true rights. So that could be the right to earn, the right to own, the right to exit whenever you want. I think that that's very important. And that's the future that we're building towards, and we're investing in. Because I don't want to be in a world where there's just one quote unquote metaverse – like a fake metaverse – and it's controlled by Facebook. That's kind of like IOI and Ready Player One, that kind of evil corporation.
Andrew Rummer: Talking practically now, how do people listening go about investing in an NFT if they want to take the plunge?
Andrew Steinwold: So, in my opinion, if you want to invest in this space, it's great to have a true love for that item or asset or world or whatever, before making the leap. Because if I buy a piece of art, and the art drops in value, I hope I like that art right because hopefully I'm buying a piece of art because I truly like it. Or if I buy you know this digital sword for this game. If that sword drops in value, hopefully I still utilize that sword in that game – because I need to kill this boss or whatever, right? So I would caution people from just jumping in and looking at it from a pure monetary angle. I would think that you want to get attachment and actually truly enjoy what you're doing first before doing that.
But, that being said, we do manage a fund that's fully focused on the space. So we do have our own investment methodologies per sector. And I think that there's a lot of different ways you can generate return in the space. And so breaking down a few of them, the gaming market, the value driver in the gaming market is really about the asset’s utility. So if my sword does 10 damage, and your sword does 100 damage, in theory, your sword should be more valuable.
Virtual lands or virtual worlds, the value drivers are really about location, content, parameters. Location is, like, are you in the middle of nowhere? Or are you in kind of the center of the map with all the activity? The content is, is it a very simple kind of building on there? Or is it some amazing beautiful skyscraper? The parameters are really the key like zoning laws, what is the height, width, length that you're allowed to actually build on this piece of land?
And then if you go into looking at art, I think with art the value drivers are all about the artist’s reputation or brand. So if I, Andrew, the NFT guy, make a Banksy piece, no one cares. Maybe I'll sell it for 100 bucks. If Banksy, the world famous artist, makes the exact same piece of art, it'll sell for a million dollars. So, for me, I think it's really reliant on the artist's reputation or brand.
On the collectibles side, this is where it gets quite esoteric. But collectibles, in my opinion – and this is all, you know, my opinion – collectibles, the value driver is all about narrative. And so if you're going to invest in, let's say, a baseball card, and you know that this baseball card is a one-of-one, so right there for rarity, one-of-one is very compelling. And maybe it's, let's say, Sammy Sosa – who was a very good player and had a lot of home runs – and, you know, very famous. So that's also a great sign as well. And maybe the people that created this card, created it back in 1990. So it's very old. So it has a kind of history to it. And maybe someone famous owned it. So there's also that added factor. So really, it's all these pieces of the story that build out this narrative. And that narrative is what drives the value of collectibles. And that's kind of controversial to say in some aspects, but that's really how we approach it with our firm.
Andrew Rummer: So I want to get more specific now. How many NFTs do you own?
Andrew Steinwold: So myself, personally, probably around 40. As a firm, we own a little over a thousand.
Andrew Rummer: And what's the most you've ever paid for one of these NFTs?
Andrew Steinwold: So myself, personally, probably $10,000. As a firm, probably $100,000.
Andrew Rummer: And then what does one actually do with a collection of NFTs once you've bought them?
Andrew Steinwold: So, broadly, there's two types of NFTs. There's two rough categories. I know I said that there's all these different types, but they can segment into two broad buckets. Number one are “functional” NFTs. These assets are used in certain games or platforms. Like, for example, there'll be a piece of virtual land. You can actually build on that asset, or it'll be a sword in a game. So that has some properties like damage and agility or whatnot. And then the other side of the market is “non-functional” assets. This is “what you see is what you get”. And you can think of it like art or collectibles. So you buy them because you truly love them and they're exciting to you on some kind of personal level.
And going back to the functional side of assets, these assets can potentially generate yield. For example, there's this game called Axie Infinity, which you can think of like a Pokemon game. You can battle your Axies and you can earn a token for that. And then you can actually sell that token for ether. And you can sell you ether for whatever fiat currency that you're in. So in that sense, you can actually pay the rent by playing this video game. So that's very appealing. So what we do with them is: the non-functionals are in cold storage, and then the functional assets we're actually utilizing them in certain instances to generate yield.
Andrew Rummer: At the moment, most of these NFT projects are being built on the Ethereum network. Why is that? And is that going to continue forever?
Andrew Steinwold: The first NFTs launched on Ethereum, so that's why most of the activity is on Ethereum today. That being said, you know, we're seeing a lot of activity on Flow, which is Dapper Labs’s blockchain that is actually meant for NFTs. We're seeing a lot of NFT activity on Solana. We're seeing Tezos expand. We're seeing all these different chains really starting to implement NFTs, which I think is great for the overall ecosystem. We want to get more people in and get them exposed to this whole concept of the metaverse and everything like that. So overall, it’s a very positive sign. What that is doing, though, is causing a lot of fragmentation in the market – which is annoying from a user standpoint, because you say, “Oh, man, I bought this NFT on Tezos and I want to bring it into this virtual world on Ethereum”. I can't really do that. Right now, people are building bridges to allow that kind of functionality, but it's going to take some time.
Andrew Rummer: So what are the most exciting new NFT projects that you see coming down the track?
Andrew Steinwold: So we're investors and everything from NFT data platforms to NFT marketplaces to individual games. We're investors in all sorts of different things in the space. So we obviously get excited about the infrastructure. That's kind of boring. You know, it's the stuff that's necessary, that's needed to really propel this asset class or this kind of market to the next level. That's really exciting for us.
We're also really excited about the kind of social or experiential components around entities because, again, these assets are not pure monetary assets, these are assets that have embedded emotion in them. They have, you know, social status in them. There's all these non-monetary reasons that make these assets attractive to a lot of people. And what we're thinking is, okay, how do people experience their NFTs on a deeper level? Instead of just thinking about them on a purely financial basis.
So some things we're looking at are like, what does the social media of NFTs look like? Or what does the Roblox of NFTs look and feel like? And we think that that's really necessary for this market to continue to evolve. Because if it's a pure financial market, that's not that exciting to us: it's just where we're repeating the same steps that we did in crypto and the traditional financial industry. What we like to have is actually a truly thriving economy, where people are buying a digital car to go with your digital house or buying the coolest new outfit to wear on your avatar. That, for us, is much more appealing.
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