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I - Mixtape

In the early 1990s, as a teenager, I was a regular at the local record store of my small hometown in Germany. I had a decent collection of vinyl and CDs, and regularly blew my monthly budget on yet another punk rock record.

And after school I made mixtapes. Rewritable CDs were still a few years away, and while Sony had launched its MiniDisc player with a recording function, that wasn’t part of my “tech stack” yet. But my stereo system included a tape deck, so I spent hours recording song after song on a 60- or 90-min cassette until the flow was right and every song transition worked.

Some of my mixtapes were really good. One in particular got a lot of recognition from my friends. I think I had called the mix “Punk Rock Nights,” and indeed it became the soundtrack of many late summer nights, down at Lake Constance, boombox on max volume.

It must have been during one of those nights that my cassette got a stain on it from a drink we called “Korea” (cola mixed with red wine, and I will not elaborate on this any further, ever). The tape still worked, but the sticker on it was ruined.

Over time, I made copies of this mixtape for all my friends. At least ten copies or so in total.

My own cassette disappeared in one of the many moving boxes of my life, until I suddenly found it again out of the blue a few years ago. It still had that ugly stain. I don’t own a tape deck anymore, so couldn’t check whether the cassette still played, but I sent a photo to some of my old friends—the original “Punk Rock Nights” had reappeared, as the stain on the sticker proved beyond a doubt. And while music has become like water, and most of the songs from back then are now part of our Spotify playlists, this original mixtape felt like a treasure.

Which brings us straight to NFTs.

II - NFTs

Like the stain on my mixtape, NFTs, or Non-Fungible Tokens, provide unmistakable proof that uniquely identifies a specific piece of media (pictures, videos, gifs, text, games, or just code) and its owner, with the validated information recorded as a digital certificate into a blockchain. The effect is simple but profound: While any digital asset can be replicated and shared as an exact copy in an unlimited way, an NFT defines one or 100 or whatever amount of these theoretically unlimited copies as distinct. They are, as the name explicitly states, non-fungible, which means that unlike Bitcoin, an NFT “authenticates a specific item that cannot be reproduced, as this Wealthsimple explainer puts it: “Which means it’s not very useful as common currency, but it is very useful for making sure something is real and one-of-a-kind because the transaction history is on the open ledger on the blockchain.”

NFTs, as a representation of digital assets, become tradeable; they can be sold and bought, and any transaction is again recorded into a blockchain, so that authenticity and ownership can always be proven.

Vint Cerf, one of the “fathers of the Internet,” once remarked that the web has no “authentication layer.” It does now!

And things that are real and one-of-a-kind usually hold value and can, for example, be collected.

NFTs have been around for a while, but just in the past few weeks, have turned into a mainstream news phenomenon.

The latest list of notorious NFTs includes:

• The Nyan Cat meme that sold for more than $580,000

• A video clip of LeBron James dunking a basketball that sold for over $200,000

• Twitter founder Jack Dorsey’s first tweet

• Digital flowers

• A song about NFTs by Elon Musk (before he changed his mind)

• Digital art made by Grimes, Musk’s partner, and sold to the tune of $6 million

Most strikingly, an old-school institution set a new record in this new economy: the auction house Christie’s sold the NFT of a digital art piece—essentially, a massive .jpg that you can find easily on the internet—by the artist Beeple for $69 million, making “Everydays: The First 5,000 Days” the most expensive digital art piece and the third-most expensive work by a living artist ever sold at auction.

Here’s what’s worth noting: buying the NFT does not grant the owner actual possession. The .jpg remains with the artist and so do the copyrights; in fact, the .jpg can still easily be replicated across the internet. What the NFT grants is merely the status of ownership.

As the writer William Poundstone comments, “An NFT is the right to say ‘I own an NFT!’ and not be lying.”

Bloomberg’s Leonid Bershidsky frames NFTs as “a geeky implementation of bragging rights,” but isn’t this the same phenomenon we know from traditional art collection? What’s the point of owning a Picasso if you’re not exhibiting it?

A former auctioneer at Christie’s, Charles Allsopp, thinks it makes “no sense” to buy NFTs: “The idea of buying something which isn’t there is just strange.”

Turns out it does make sense—and it’s not even a new concept in the art world.

Sixty-three years ago Yves Klein (best known for his monochrome paintings), created his famous artwork, Zones of Immaterial Pictorial Sensibility—containers for artifacts that contained nothing. Klein put the Zones on sale for the most material of currencies: pure gold. And people did buy. In return they received a token (for owning nothing). Klein took his radical idea even further, but that’s a whole other story.

Klein’s “immaterial art” was the precursor to today’s NFTs because it established the concept of collectability as being separate from physical artifact and artistic value. This distinction is important if you want to understand the dynamics of NFTs.

III - Content creators and IP holders

Intellectual property scholar Tonya M. Evans argues that “technology threatened the music industry, letting anyone make a perfect digital copy of the original, and now maybe this is the technology that can cure that.”

This is the promise NFT holds for all artists and creators.

Not only can creators sell their artwork or music as NFT one-offs, but NFTs can be set up in such a way that the creator receives royalties every time the NFT is traded or sold.

This is why everybody and their mother now seems to ride this trend and offer NFTs on some of the emerging marketplaces like Raribles or OpenSea—from football players to toilet paper brands to TikTok stars to the magazine Quartz, to us here at the House of Beautiful Business (more on that later).

NFTs and NFT marketplaces give content creators and holders of specific intellectual property new ways to monetize their work. One route is the trading cards principle. The NBA launched Top Shot in October 2020, offering officially licensed digital collectibles to basketball fans all over the world with a striking value proposition: “Own the best moments of NBA history.” These “ownable moments” are NFTs of short game clips that fans can collect and sell. NBA Top Shot claims that the sales volume has already exceeded $400 million.

NFTs will change gaming, too. In a recent auction of digital cards used in Ethereum-based fantasy football game Sorare, the card of Kylian Mbappe, the forward of 2020 Champions League finalist Paris Saint-Germain FC, sold for $65,000.

It seems obvious that this is headed toward becoming a powerful marketplace where fans combine their passion with the hope to make a profit—and many will follow this blueprint to monetize their content and IP rights.

The music industry is diving into the market as well. Earlier this month, Kings of Leon became the first band to release a new album as an NFT. Over the course of two weeks, fans could buy a regular edition of the album or a special edition, guaranteeing the owner four front-row seats to one show of every Kings Of Leon headline tour for life. After the two-week sales period (which ended on Friday), all of the remaining unsold NFTs were deleted forever—and no more will be made.

But NFTs might also benefit lesser-known artists. Investment and markets analyst Susannah Streeter believes NFTs can be viewed “as a way of bringing value back to artists after streaming models have nibbled away at revenues.” A surge of artists and content creators is now watching tutorials on how to “mint” NFTs and putting them up on NFT marketplaces to get their work properly remunerated and connect in deeper ways with their fans and customers.

House resident Anand Giridharadas, for example, just launched a collection of secret manuscript outtakes, never-used artwork etc. related to his bestselling book Winners Take All to experiment with how NFTs can apply to the literary world.

Another example: A husband-and-wife duo released Chubbies, a collection of animated pixel gifs set up like a trading card game. It is still in presale mode, but the first owners are already reselling their “chubbies” on OpenSea, the largest marketplace for all kinds of NFTs (the platform is often described as “the eBay of crypto goods”).

The barrier to enter this new market is low, which makes it attractive for anybody with decent digital media skills. Moreover, the NFT concept holds a strong commercial promise for any content creator, as NFTs can be set up with a royalty model that channels a percentage of any subsequent sale of the NFT in secondary markets back into the NFT creator’s pockets.

IV - Investors

NFTs give an asset three valuable characteristics: authenticity, scarcity, and permanence—all characteristics of a solid investment.

Yet many investors expect prices for NFTs in general to drop after this hype phase. Analyst Susannah Streeter believes that when the craze subsides, NFT speculators could find their NFT assets to be worth zero.

But as collectibles, the right NFT projects seem primed to grow in popularity as an alternative investment class. At a time when traditional asset classes like bonds still provide little to no return, and many people fear inflation and the burst of stock market bubbles, alternative asset classes in general become more attractive to investors. Riding this wave, Sfermion is the world’s first investment firm focused on NFTs and associated assets.

Secondly, with a whole new generation of digital natives entering the investment market, in a world of infinite copying and reposting, investing in the scarcity of digital media assets might not feel like such an unusual thing in the very near future. When NFTs are the vehicle for in-game purchases like unique skins or avatars, it’s conceivable that gamer moms and dads will start to hand down special avatars to their children.

Also, think ahead to the metaverse to come. NFT-based Virtual Real Estate is becoming a real (and highly speculative) investment opportunity, fueled by the promises of virtual and mixed reality. In Decentraland or SuperWorld you can buy, curate, develop, and sell plots of land. In these Second-Life-on-steroids worlds, every plot of virtual real estate is a distinct NFT, waiting to be owned.

This all begs the question: What about all of this might actually make for more beautiful business?

But first...

V - The not-so-beautiful: NFT’s carbon footprint

The possibilities for new funding models are exciting, but let’s not forget about one rather enormous problem with NFTs—or crypto-secured assets in general: their massive carbon footprint. Blockchain processes are extraordinarily energy intensive. NFTs are generally created on Ethereum-powered blockchains that use the Proof-of-Work (PoW) algorithm to execute “smart contracts”—custom code generated entirely by machines.

As artists turn to platforms like SuperRare and NiftyGateway to sell their work as NFTs, the vast majority may have no idea how much CO2 they’re inadvertently producing.

According to Memo Akten, one in five artists selling on SuperRare have a carbon footprint larger than 10 tons of CO2. “That is equivalent to 12 transatlantic flights, or an EU resident’s total electric power consumption for 5 years,” he points out. Akten argues that NFT marketplaces need to be transparent about the ecological impact of transactions: “Providing even ball-park figures, or simple advice regarding ecological impact should be compulsory,” he writes.

In a post on its website, Bitcoin.com argues that it’s not all bad. It says a large percentage of crypto miners are actually using renewable energy sources to power their processes. According to a University of Cambridge Centre for Alternative Finance report, that number is 39 percent. Not bad, but there’s still that 61 percent who are banking off fossil fuels in places where coal is cheap, like in China, which Deutsche Welle says is home to more than 65 percent of Bitcoin miners. Genesis Mining, one of the world’s biggest cloud mining companies, is apparently looking to expand operations to geothermal-powered countries like Iceland.

Moving away from fossil fuels is always a good idea, but do NFTs and other crypto assets really need to use so much energy? IEEE Spectrum puts it like this:

“In PoW, all participants race to cryptographically secure transactions and add them to the blockchain’s globally distributed ledger. It’s a winner-takes-all contest, rewarded with newly minted crypto coins. So the more computational firepower you have, the better your chances to profit.”

Researchers at the Federal Polytechnic School of Lausanne in Switzerland, led by computer scientist Rachid Guerraoui, say current blockchain algorithms are “overkill.” If the goal is to prevent “double spending,” or maintaining a tokens’ uniqueness, simpler algorithms can handle it.

Proof-of-Stake (PoS) is one such algorithm. Ethereum is in the process of converting its blockchain PoW validation systems to PoS, said to be a more energy-efficient process. Instead of validating transactions through competitive means, PoS uses random sampling. By eliminating competitive processes, significant energy can be saved, according to the Ethereum website.

“Moving to PoS will cut the energy consumed per Ethereum transaction more than a hundredfold,” Ethereum co-founder Vitalik Buterin told IEEE Spectrum. “The PoW part is the one that’s consuming these huge amounts of electricity. The blockchain transactions themselves are not super computationally intensive. It’s just verifying digital signatures. It’s not some kind of heavy 3D-matrix map or machine learning on gigabytes of data,” he says.

House Resident and venture capitalist Albert Wenger, a partner with Union Square Ventures, who runs a $162M climate tech fund, puts it all into perspective:

“I believe strongly that it would be a huge mistake to shut down a fundamental innovation that has the potential to decentralize power because we are temporarily concerned about its electricity consumption. Instead, we need to eliminate fossil fuel subsidies, pass a carbon tax, and decarbonize our grid aggressively.”

VI - The not-so-beautiful: market economy on steroids

Another issue that’s not been solved is that NFTs are giving rise to new forms of copyright infringement and theft. Opportunists are selling NFTs and claiming to be the original creator when in fact they’re not. An even bigger issue according to this article on Decrypt is the possible “emergence of competing blockchain services, each of which promise that they provide the authoritative record that a given NFT is unique.”

There is also the issue of immutability. What happens when Jack Dorsey deletes the first-ever tweet he sold as a NFT? It is important to remember that most NFTs don’t really permanently live on a blockchain. The content and metadata that an NFT represents are stored separately from the NFT smart contract itself.

The creator @neitherconfirm literally pulled the rug out from under his NFTs and replaced a collection of artworks with rugs. He then tweeted: “All discussions about the value of NFTs are meaningless as long as the token is not inseparable from the artwork itself.”

Plus, some argue that quantum computing might ultimately decrypt Blockchain encryptions, which would be a fatal blow to the entire crypto economy.

Or that the entire preoccupation is a distraction from more pressing concerns and the needs of marginalized populations. (UNESCO, for instance, reports that there are “still 773 million illiterate adults around the world, most of whom are women.”)

There are other, more philosophical concerns. Art critic Sebastian Smee boils it down to “high-roller groupthink...and the seemingly unstoppable human urge to commodify everything.” That special relationship you have to singular artwork—to a unique, authentic experience—is now being tokenized, formalized, commodified. One can see this as the economy appreciating immaterial and invisible assets, but one can also view it as the total depreciation of beautiful, romantic experiences that are by design subjective, ephemeral, and elusive. They are precious precisely because they occur outside the market. Do I want my stained mixtape to be traded? Isn’t it much more precious as a memory?

Is beauty (or value) in the eye of the beholder? Or is this simply systemic insanity?

VII - The beautiful

And yet, despite all these concerns, the potential for NFTs to make business more beautiful is significant.

Here are nine reasons why:

1. Power to the artists: Not only can artists sell their artwork or music as one-off NFTs, NFTs can also be set up so that the creator receives royalties every time the NFT is traded or sold. Alex Wilhelm argues in a TechCrunch podcast that NFTs can be “opportunities for the creators and originators of culture to finally participate in the rewards of the platforms of that culture—that host that culture.”
   
   
2. An effective fundraising tool: While cat memes are being sold and digital roses doled out, NFTs could conceivably fund, well, anything. You could buy a digital elephant to fund wildlife conservation.
   
   
3. A boon for community: The driving force behind the emerging NFT economy is community. If there’s no community around an NFT, there is no value, as no one will assign value to it. In other words: businesses that nurture and value community are primed to leverage and benefit from NFTs. The community doesn’t even need to be very large. Almost 15 years ago, Kevin Kelly introduced the concept of 1000 true fans as the basis for any creator to be commercially successful. NFTs as a direct monetization and royalties-collecting instrument make this concept even more true.
   
   
4. A powerful new marketing vehicle: NFTs can turn a community member into an owner and give them a chance to have skin in the game. This comes with considerable benefits for any business: it will lower your marketing costs and increase loyalty, incentivize word-of-mouth, and drive peer-to-peer marketing.
   
   
5. A threat to the oligopolist power of platforms: Who doesn’t benefit from a potential rise of NFTs in the first place? Companies with not-so-beautiful business models, like the ad-based and data-selling model of Facebook.
   
   
6. The return of aura: If you think of beautiful business less as what you specifically do, but more HOW you do it, NFTs symbolize this in a unique way: all the value sits in the metadata, not in the asset itself. It’s interesting to consider that the metadata of a company—from the culture to different forms of social, emotional, and market intelligence, to reputation—has the same value as the actual product or service. It goes back to Klein’s concept of “immaterial art.” Business is biased towards the visible. But NFTs are appreciating the invisible, the meta, the aura. It is therefore not surprising that luxury brands are jumping on the bandwagon. “Luxury is the business of building identity,” says Ian Rogers, the former chief digital officer of luxury giant LVMH: “You don’t buy a luxury handbag because of its incredible utility. You buy it because the brand has built culture, and that culture is something you want to be a part of.”
   
   
7. Feelings: DJ and producer 3LAU (aka Justin Blau) argues that NFTs are ultimately about feelings: “When you think about the ability to own anything at all, whether it’s real art or a sports car, there’s a certain emotional value people get out of that ownership that isn’t associated with the cost of producing that item. What NFTs do in the digital world is to create emotional value surrounding ownership of a digital asset.” One can bemoan that emotions are traded, but of course that has always been the case. NFTs just make it more obvious now. It is an opportunity for us to examine what we ascribe emotional value to and why.
   
   
8. Ideas and intentions: While NFTs will not allow you to protect your ideas or intention, they will help with the attribution, and why shouldn’t ideas or intentions turn into collectibles that grant their creator monetary value, beyond and outside of the litigable system? It may help create a track record of reputation that comes in handy for other trading (or hiring), or could serve as the foundation of smart contracts with yourself that initiate and guide your own personal or professional transformation, while allowing others to participate (and potentially receive monetary rewards from it).
   
   
9. Exclusive and inclusive: NFTs allow for a digital good to be inclusive and exclusive at the same time: the Beeple artwork, for example, can be replicated infinitely, with everyone having access to it online, however, the one original file simply holds more value. It sounds absurd, but NFTs make it possible. Inclusivity meets exclusivity—one can’t think of a better definition of beautiful business
   

NFTs might still be an idea in its early stages, but the utility of NFTs will only increase as more and more digital experiences are built around them. It’s not too great a stretch to think that at some point, every larger social network and community on the internet might have its own micro-economy in which users can use, own, and trade NFTs.

So given all this potential, we had to of course create an NFT ourselves on OpenSea: the artwork containing all visuals we designed for our recent The Great Wave festival (see image below). In many ways, it’s another kind of mixtape that I am really proud of and delighted to share with you today.

If you enjoyed The Great Wave as much as we did, you might have an emotional attachment to this work. Maybe there will be more NFTs of House work in the future, so this might also serve as a starting point for a House collection. And who knows, maybe at some point it might be even worth leaving it as an inheritance for your loved ones.

PS. To compensate for the not-so-beautiful carbon footprint of our NFT, we’re offsetting the CO2 caused by our blockchain transaction

—Till Grusche with Celeste Gottfried, Megan Hustad, Monika Jiang, Marizanne Knoesen, and Tim Leberecht