How NFT Culture Stifles Innovation (And The Boring Business Fundamental That Fixes It)
0xD785
July 20th, 2022

Haters often demur that NFT projects aren’t real businesses, that they’re all short-term hype and they’ll all disappear in a few years. And I hate the fact that they may be right.

Most NFT projects ignore business fundamentals like a disappointing Tinder date’s text messages. There are many examples, but this essay explores a specific one: Customer lifecycles. It doesn’t sound sexy, but the lack of consideration for them stifles innovation and keeps NFT culture from becoming the driver of innovation it wants to be.

One Man’s Rug is Another Man’s Failure

On May 9th, 2022, the celebrated Azuki founder Zagabond fell from grace and became NFT Twitter’s villain.

In an article titled „A Builder’s Journey“ (clearly referencing the „Hero’s Journey“), he detailed his ascent:

Zagabond ventured into web3 as an unknown, anonymous founder. Under the name „Philip the Intern“, he launched CryptoPhunks—the 10,000 CryptoPunks, but horizontally flipped. Larva Labs had OpenSea take down the collection, which sparked a debate. Instead of backing down, Zagabond wrote a manifesto and minted it as an NFT. The ensuing debate about NFT art, culture and more was big, but the conversation went the way of every Twitter trend: It fizzled out and made way for the next topic.

Zagabond wasn’t done, though. After launching a „tendies“ collection which never sold out, CryptoZunks soon followed. And so did Zunk Pets. The collection was a success. But it, too, lost the market’s attention—and lost Zagabond’s right after.

But a few setbacks are nothing to a founder as ambitious as him! This time around, he’d do it right. Him and his co-founders put all the chips on the table. They quit their jobs, worked hard on the collection and—determined to claim a spot among the blue chip NFT projects, launched Azuki.

This time, it worked. The anime-themed collection skyrocketed up the charts, reached a floor price of dozens of ETH and spawned a whole anime-themed meta.

After this underdog story, Zagabond shares his values (innovation over convention) and shares lessons he learned (the road to success is unpaved) and finishes off with what almost reads like an incantation:

„We rise together.

We build together.

We grow together.“

Zagabond probably wanted to court attention by sharing his lessons and inspiring other founders. And he did get attention—when the piece turned him into web3’s worst villain for a day.

The thousands of holders of Tendies, Zunks and Phunks who spent hundreds, even thousands of dollars on these NFTs weren’t happy about him succeeding on the project they hadn’t bought.

Twitter was furious, calling Zagabond a rugger and predicting Azuki would eventually be rugged. That day was Zagabond’s fall from grace. His reputation is permanently tarnished—and Azuki’s floor price permanently dipped by two thirds.

Ouch. As a neutral observer, it’s easy to see both sides:

  • As a hungry, young entrepreneur who finally „made it“, you’d probably also be proud. You persevered through failure and won out in the end.
  • If you had spent hundreds or thousands on NFTs because you believed in the project’s long-term future, you’d be furious if the founders vanished.

Who’s right? Who’s wrong? It’s hard to answer that question because the NFT community isn’t asking a simple, yet important question: When is an NFT project over?

When we answer it, we create better outcomes for both founders and buyers—and improve the culture of NFTs.

„When is an NFT project over?“ sounds simple enough, but it has a few layers:

  • When can a founder gracefully exit a project without changing their name or having an angry mob chase them down?
  • What is the customer lifecycle of an NFT project? e.g. when does the project founder want holders to sell the NFT?

But let’s start with the fundamentals—why does it matter? And how will it improve our culture?

The Denial of NFT Death

Everyone knows that 90+% of startups fail. And with NFT projects being startups built on a speculative technology, we should expect that percentage to be even higher.

When a startup fails, a small circle of 1-50 people loses money–the founders, family & friends (if they invested) and a few VCs (if the company got that far).

It’s also quite clear when a startup has failed. If you’re not bringing in enough money to sustain your operations, you can’t pay your bills—you fail. Once you can’t feed yourself anymore, you shut down the servers, halt production and put your domain on sale. Your startup is gone in every practical sense. And when you eventually dissolve the company, your failure is government-certified.

That’s why many successful tech founders have a failed startup (or a few) on their resume before they made it big. This doesn’t harm founder reputation, it’s par for the course. VC firms don’t write scathing blog posts about founders who lost their money. That’s not because startup founders are all ethical, it’s because VCs know they’re taking a low-percentage bet.

This kind of culture is good—failure creates innovation. Startup ecosystems are antifragile. They produce monstrous successes not despite failure, but because of it.

The success of Silicon Valley is in part because risk-taking is encouraged and failure is seen as a stepping stone that helps everyone learn. Its culture around failure is an essential ingredient to its success—and web3 should learn from it.

As Nassim Taleb says in Antifragile:

“In order to progress, modern society should be treating ruined entrepreneurs in the same way we honor dead soldiers, perhaps not with as much honor, but using exactly the same logic (the entrepreneur is still alive, though perhaps morally broken and socially stigmatized, particularly if he lives in Japan). For there is no such thing as a failed soldier, dead or alive (unless he acted in a cowardly manner)—likewise, there is no such thing as a failed entrepreneur or failed scientific researcher, any more than there is a successful babbler, philosophaster, commentator, consultant, lobbyist, or business school professor who does not take personal risks. (Sorry.)”

Zagabond echoed this sentiment in his post:

Builders must learn from each experience, coming back to the drawing board with something innovative and significant each time.

Why wasn’t he treated like a pioneer who moved the space forward?

  1. Most NFT projects have thousands of holders. The amount of stakeholders is orders of magnitude larger than with VC-funded startups.
  2. Almost no NFT buyers are professional investors who are aware of the real risk of trading JPEGs. Worse, they often treat buying an NFT as an investment when it should be treated like a collectible.
  3. You can’t shut down NFTs like a software or physical product. Once the token is in people’s wallets, it’s there.

In summary: As an NFT founder, you have a large group of people who expect you to deliver an increase in market prices. You have no good way to exit the project because you can’t shut down your product.

So when the founder can’t feed themselves anymore, it’s much harder to say „I’m done“ and do something else. This ironic response to Zagabond encapsulates it quite well:

https://twitter.com/trente/status/1523803732936654848

But if we want to build an uplifting culture of innovation, founders need to be able to fail without being shamed, ostracized and mistrusted.

That’s not to say Zagabond did the right thing (or the wrong thing, I have no opinion on the matter). But if failure keeps getting punished so harshly by Twitter mobs, founders will abstain from the NFT space because they feel like they’re either stuck with their project forever or need to endure endless abuse.

This is unsustainable. Especially in a time where it’s harder to build, we need more and better founders to take risks. Now that the market is less exuberant, we’re also seeing fewer unrealistic expectations from holders. But even though it’s a misguided assumption that NFTs go up when the team builds, people’s short-term greed won’t change.

That’s why we’ll explore 3 ways to improve the NFT market and its culture with better customer lifecycles.

On Customer Lifecycles and NFTs

If you’re reading this article, you probably understand this concept, but let’s get on the same page:

A customer lifecycle describes the intended journey a buyer takes with your company/products. This documents the process from the first time someone hears about you to them becoming a customer and eventually them ceasing to be a customer.

That last part is important. To think about when you want someone to stop being your customer. No customer relationship lasts forever. Yet nobody in the NFT space seems to think about it (with one notable exception, which we’ll get to).

How to Design Customer Lifecycles

Some products have a built-in lifecycle: Pampers doesn’t expect you to keep buying their products once your baby can go to the bathroom themselves.

But others have to design it more consciously. The best example is a freelance designer. If you want to make $10k per month, you can:

  • Sell 10 logos per month at $1k
  • Have 2 retainer engagements at $5k each
  • Sell 4 branding kits for $2.5k each

You get the same outcome with each option. There’s no better or worse here—it’s just a choice you need to make. And it’s a choice about the customer relationship—when it begins and when it ends.

NFT holders generally expect the relationship to last as long as they hold the token. In other words, forever. And if that expectation is violated, you get called a rugger and have to endure Twitter abuse for the rest of your career.

This creates 2 problems:

  1. Holders expect the founder to keep going even when the project has lost their interest or can’t support them.
  2. If secondary royalties are part of the monetization strategy, you can’t rely on your holders’ whims for cash flow.

By now, I hope you’re convinced it’s worth spending time on defining your customer lifecycle—and paying attention to how it ends.

But how do you do that? Let’s start with the only example I’ve seen in the web3 industry: Proof.

How Proof got the customer lifecycle right

Proof Collective is Kevin Rose’s membership community. Holding their NFT gives you access to a private Discord, exclusive mints and deep analysis on artists and NFT projects.

It’s one of the most successful NFT projects of all time, reaching a floor price of 110+ ETH. It’s the most successful membership NFT.

But there’s a catch: It’s only valid for 3 years. After that, the utility expires and the attached image will change from the membership card to a piece of art by a well-known artist.

While an expiring membership seems counter to the web3 narrative, this is a great move for 2 reasons:

  1. It ensures cash flow. If the membership was forever, the team would have to provide the utility forever, even if no money comes in from resales or follow-up projects.
  2. It gives the team a way out. Had the project been a dismal failure, they could’ve provided the utility for 3 years and exited gracefully.

It’s not like the team around Kevin Rose came up with an intricate customer lifecycle. They simply limited the time you reap the benefits from holding your NFT.

So while we’re at it, let’s explore a few more ways how you can consciously design your customer lifecycle.

Clear limits

This is the most obvious. It’s what Proof did. Simply limit how long the NFT provides the utility you promised. Or limit how many times you get to take advantage of a certain thing. There’s all sorts of arbitrary limits you can set.

Build a Project People Should Exit

At its extreme, a utility NFT project is an awfully bad business. If your only income sources are

a) the initial sale and

b) secondary royalties

…and you then build the project and the community to perfection, nobody ever sells—and your cash flow is zero.

This is especially true for utility and membership NFTs. If you want to issue NFTs that grant access to your startup’s software and perfect product—why would anyone sell?

They won’t. Unless you give them a reason to.

How to Bake Selling Into Your Product

Build a product/community intended to be a part of someone’s life only temporarily.

For example, you could design your token-gated software for small teams only. That way, it serves startups, but incentivizes selling the NFT and switching providers once they grow.

(You can combine tactics here and impose a 5 people limit on your software here)

Software isn’t the only field this works in. Accelerators, incubators, education programs, etc. are all designed to release their customers. Some stick around longer than others, but these are never meant to be permanent memberships. So if you’re building a community-driven NFT project, you can bake a natural lifecycle into the project.

If you want to earn somewhat predictable secondary royalties, You’ll have to do the same.

Clear Failure Conditions

As mentioned before, projects can simply fail. But unless you know when your project has failed, your customers won’t know either. And as in any good relationship, managing expectations is key.

It might be a good idea to create clear expectations with your holders and establish what conditions would make you quit the project (or hand it to the community). There’s no virtue in working yourself to death for a project you don’t believe in anymore.

Many artists do a good job managing expectations by clarifying that there’s no roadmap, utility or price target—that you should only buy their art to own it as, well art.

Bigger projects need to manage expectations too. And when they do, founders have more freedom to build what they want to build–because they know they get a do-over.

Wrapping up: Carefully Design Your Customer Relationships

As we’ve seen in this article, you might ruin your reputation if you quit an NFT project that attracted the wrong people by setting the wrong expectations. And if you don’t quit? You’ll be stuck working on something that’s not working.

The answer to that isn’t hoping people will get wise to how NFTs really work. They won’t. Instead, you need to carefully design your customer lifecycle.

You can do this a few ways:

  • Impose limits: Limit access after a certain amount of time/uses.
  • Start with the product: Create utility that has clear exit/entry points and makes people sell organically.
  • Clarify when the project has officially failed and what you’ll do when it has done so.

I hope this article was useful and has helped you avoid falling out with your community.

Did you learn something in this article? Please retweet this to share it with others :)

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