The Future of NFTs

a16z General Partner Chris Dixon and Stanford Professor Dan Boneh explain why NFTs matter and how they are shifting power away from platforms and centralized services toward creators and users. This video was recorded during a16z's NFT Summit, a conference featuring the best NFT builders and thinkers discussing the latest trends in NFTs, co-hosted with the Stanford Center for Blockchain Research. Find all the talks from the NFT Summit here: https://bit.ly/NFTsummit Check out a16z Crypto Startup School here: https://bit.ly/a16zCSS

• 0:15Speaker 2

  I would like to invite Chris Dixon and Dan Bonet on stage to kick off our discussion on the new digital ownership economy.

• 0:22Speaker 0

  Thanks, Ariana. Thanks, Ariana. Hello, everyone.

• 0:26Speaker 2

  Awesome. Thank you guys for joining. Great. So I think in terms of the best place for us to start, it would be helpful to get a very high level overview of what NFTs are, why they're the hottest topic in crypto. So Chris, I'll start it off with you. What is an NFT? Can you define it for us?

• 0:46Speaker 1

  Yeah, I mean, so an NFT is a digital object that a user can actually own. And so until NFTs, you could have objects in, you know, something like a video game, let's say, like Fortnite, or maybe in a sort of a social network, you'd have a profile or some other thing you kind of feel like you own, or maybe like a Twitter handle or something. But the reality is you don't really own it in the old model of the web, right? You're using a service and you're sort of at their whim, and maybe the service goes away or they change the rules, or who knows what they do. With NFTs, you actually own it. So if you buy an NFT, I own this NFT behind me. It's an artist uh as part, I think it's I actually don't know how to say sparse. Um I only read it. Um the uh and and it's an NFT, it's a you know digital artist who created that on foundation. Um and that's my NFT.

• 1:31Speaker 1

  I can I can put it by my Zoom background. I can you know do other kinds of things with it. And I think increasingly what we'll see is we'll see more and more services that let you do cool things with them. So maybe you take your crypto punk into a game, or you take you know, a piece of art into uh into the central land, or you do an I I think uh another way to think about it is we're sort of re-architecting, hopefully, if this if this all works for re-architecting the web to be uh user and object kind of first, and then the applications created around it, as opposed to what the web's been so far, which is applications first, and sort of the owners of the applications, like the corporate the companies behind them, and then the users and the objects kind of second secondary to that. Um so that's one idea. And another way to look at it just briefly is also from the creator perspective.

• 2:19Speaker 1

  So if you're a musician or artist until now, you you were um, you know, the ways you would make money on the internet were mostly mediated through large platforms, through social networks that have algorithmic feeds that have ads, you know, through large services that like Spotify and things that you know do, you know, kind of that take the bulk of the revenues for themselves or for labels and the sort of, you know, for the most part, if you talk to, for example, musicians, they're they're uh at least pre-pandemic making a lot of their money offline because that's in the offline world, they can sell merchandise and things, whereas online is sort of beholden to these very large centralized services. Um, for the creators, what NFT lets NFTs often do is have business models that are much more like the offline models, where they can actually sell things directly to their fans.

• 3:05Speaker 1

  And a relatively small set of um uh of kind of super enthusiastic fans can provide a great business model for a lot of these creators. Um and that that I think we're only at the early phases of it, but I think you know, if this trends can continues and this kind of ecosystem continues to get built out, we could see some really uh uh kind of dramatically improved business models and economics for creative people, um, which in turn could unlock, you know, I think a new wave of kind of creativity on the internet. Um, you know, we'll dive into all these things. It's very it's a nuanced uh large topic, but I think at a high level, to me at least, this is why it's important.

• 3:43Speaker 2

  Dan, from your perspective, you know, I'm curious to get a sense for why you think NFTs, which are not necessarily a brand new idea, have sort of exploded into mainstream consciousness um in recent months. Do you have any idea of of why that might be happening now?

• 4:01Speaker 0

  Yeah, absolutely. Um first of all, Ariana, thanks for uh hosting this event. This is uh a wonderful, wonderful opportunity. Your idea,

• 4:07Speaker 2

  Dan. We're we're thrilled you have the idea and directly be hosting with you. So

• 4:11Speaker 0

  yeah, and actually, maybe just before I answer your question, I wanted to uh give a quick shout out uh for uh for our research center. If anybody's interested in research questions, feel free to uh uh reach out. And there's also a blockchain club if folks are interested in reaching out to uh to students. So this is uh uh you know a great opportunity to learn about NFTs. Uh just before I get to your question, Ariana, I also wanted to mention the A16Z NFT Canon, which is a wonderful collection of resources, uh Canon with a double in a wonderful collection of resources to learn about NFTs, uh, which I think is kind of the goal of of today's events. If people want to read more about uh what the NFT space is like and what it's about, that's a wonderful uh collection of resources. So you're asking, so what's exciting about that?

• 4:58Speaker 0

  Like why is it happening now? Um maybe I can maybe I can first say that um I'm kind of excited about about it because it's a wonderful application from blockchain technology. So, you know, I'm a cryptographer. I'm I'm into technology, technological ideas and technology in general. Um, and so far, blockchains have primarily been used in the world of finance, right? Because um blockchains are sort of used in environments where there's no single trusted party. You want to decentralize trust and financial applications are a really good fit for that. Um and you know, we've kind of been looking for more areas where blockchains can be can be applied. And you know, there are nascent efforts in like file storage and gaming, which maybe we'll talk about later. But all of a sudden, NFTs kind of exploded and they're like a perfect application for blockchains.

• 5:45Speaker 0

  Interestingly, the reason they're such a good fit and blockchains are such a good fit for NFTs is because of the permanence of the blockchain, right? Something you put on a blockchain today will stay on it forever. So I think the the Bitcoin and Ethereum blockchains are going to be with humanity now forever, you know, in the year 3000, you know, the era of uh Futurama, we're still going to be looking at the Ethereum and Bitcoin blockchains. Maybe they won't be called that, you know, maybe instead of ETH2, we'll be onto ETH 15. Uh, but the data on that we put on them today will still be available even in the year 3000. And I think that's really important to understand. When you buy an NFT today, that NFT is yours forever until you give it away, until you sell it or give it away. So if you don't sell it and you keep it yourself to yourself, even in the year 3000, it's still going to be yours or your descendants.

• 6:36Speaker 0

  Um, and that that permanence, I think is really uh really uh plays a critical role in why blockchains are such a good fit uh fit for NFTs. I think we'll get into that a bit uh a bit more later as well. I think it's also very important to understand exactly what it is actually that you're buying when you're buying an NFT. And again, this is something that I'd like to discuss, and we will discuss that uh a little bit uh a little bit later. So anyhow, I think the the ideas for digital assets is that's like you said, Ariana, the idea for digital assets is not something new that's been around for a while. In fact, it's interesting, even in 1993, Halfinney wrote a blog post, believe it or not, in 1993, wrote a bloke brought wrote a blog post about uh crypto trading cards, right? Uh except this was uh ahead of his time.

• 7:22Speaker 0

  Um, and uh the technology just wasn't there. The tools weren't there, uh the ecosystem wasn't there. And what's happened over the last couple of years is basically everything came together. This NFTs didn't happen overnight. Yeah, it took a long time for the blockchain community to mature for the technology to mature. It took a long time for the tools to develop. Um, and then you know, even if you look at the at the core uh mechanism of what is an NFT, the ERC 721 standard, even that dates back to 2018. It took even, you know, that had to be that had to be standardized as well. And so it took a confluence of events to come together, and all of a sudden NFTs are now um very well supported by blockchains. And that's why we're seeing such a big such a big explosion. So we can talk a little bit. I hope we can later we can talk a little bit about um why it's such a good idea to put an NFT on a blockchain.

• 8:12Speaker 0

  Uh, but maybe I'll stop now and uh sure, sure.

• 8:15Speaker 2

  No, so many exciting ideas to unpack. I think we'll we'll definitely circle back to a few of those. Um Chris, I guess from your perspective, you know, uh NFTs allow for programmable ownership. It's one of their more exciting features. Um, for example, it's possible to add a fee on transfer for a secondary sale of an NFT that returns part of the purchase price to the NFT's original creator. So I'm curious from your perspective, what are some programmable ownership structures that you find particularly exciting?

• 8:45Speaker 1

  You mentioned one, which is I think a really exciting idea, the idea that um uh a creator, you know, will participate in the economics, not just on the initial sale, but in the follow-on sales, right? Which would be, I think a big uh uh, you know, kind of improvement for a lot of creator economics. Um you can imagine, and that's just we're at the very beginning of that. Um, and by the way, I'll throw out some ideas here, but I, you know, as with all technology, I expect all the best ideas will be created by entrepreneurs and as

• 9:09Speaker 0

  opposed to

• 9:10Speaker 1

  um people like me put pontificating about the future. But um, I think you know, gaming is another really interesting area where like today, if you have a virtual good, you you own it in the game and it has certain properties, and maybe you know, the gun shoots faster, or you know, you have a magical sword or something with like additional abilities. Um, but you could imagine all of that kind of uh functionality being coded in into the object itself as opposed to into the game, and therefore um is portable across experiences, right? Um and I think that's very important. You know, if you haven't listened to it, I uh Tim Sweeney, you know, the founder of Epic, which makes Fortnite, among other things, has this incredible podcast where he talks about all the things you need for a real metaverse. Um, and a metaverse where you know, as he defines it, people can really earn incomes. This is very important. Like this is where it goes beyond kind of just having fun, right?

• 9:56Speaker 1

  You're talking about people actually like making an income. And if you're going to have an experience where people are making incomes digitally in a metaverse like experience, um, they need to be able to you know sell things of value that are just not just sort of you know cosmetic things that look a certain way, but actually have certain functionality, right? And so that's one of the really cool things about NFTs to me is that you can embed kind of both the noun and the verb, right? The noun is the thing and the verb is the action. And one action we've just begun to explore one action is idea of like sharing revenue over time, but it's software, like people will come up with all sorts of other interesting verbs, right? We're just beginning. Think about how fungible tokens have evolved over time, right? We started with Bitcoin, we had Ethereum, it was programmable, then we had staking and we had governance, and we have all this other like imagine there's you know a crypto punk Senate hearing, you know, like the crypto punk, the 10,000 get together and they have a you know, they they have a governance system and like you already have like cool experiments happening, you know, when they have experiences built around them and new you know, airdrops that are based on that.

• 10:58Speaker 1

  It's like so. I think we're just so early and it's and it's exciting, like just I just excited to see like what all the creative entrepreneurs come up with. Um but I think one of the lessons we've seen it in crypto already in the functional side, if you think about you know what's happening in DeFi as an example, is when you give smart people all over the world, uh, you know, a semi-Turing complete programming platform, they come up with all sorts of amazing stuff that you know I I would never dreamed of, at least, right? Uh, I mean, think about AMMs. I remember having debates years ago about how you do order book based DEXs, and then you know, uh Hayden and Uniswap folks and a bunch of other people come up with this new idea of you know new architecture. It's just you know, who would have thought I wouldn't have thought of it? Like it's amazing what happened. So that's I think just I think we're just scratching the surface of the programmability of NFTs.

• 11:44Speaker 2

  Yeah,

• 11:45Speaker 1

  so people do.

• 11:46Speaker 2

  No, I I agree. I mean, I think that's why we have the best job in the world personally. Um so uh Chris, to kind of loop back to what you mentioned on um on the universe of DeFi and Uniswap and AMMs and all of that. I think there's an interesting um, you know, obviously DeFi and NFTs are two of the areas that really taken off in the last year in particular in crypto. And one of the characteristics of DeFi that has contributed to its rapid growth is this idea of composability. So when every piece is permissionless, you can take advantage of um arbitrage opportunities or connect various pieces of the stack in ways that are much more open than what you would see in the traditional financial system. So NFTs also have some of these elements of composability.

• 12:33Speaker 2

  So I'm curious how both of you actually see um, you know, composability within NFTs and whether we've only scratched the surface of that, or what your view is on how that piece will evolve. Maybe Dan, do you want to kick away? Sure,

• 12:47Speaker 0

  yeah, I could I can start. So, really, kind of what you're asking is uh what do you do within an NFT once you own it? Yeah,

• 12:52Speaker 2

  sure.

• 12:53Speaker 0

  Um, and so I mean the the obvious things to do, of course, is you can hold it, you can display it uh to to other people, or you can sell it. Those are kind of the obvious things to do. But the amazing thing is once you have an NFT, you can actually do other things with it. So for example, you might think about um building an entire DFI ecosystem around NFTs, and we see that actually emerging. So, for example, if you own an NFT, you can borrow against that NFT as collateral. Basically, you can mortgage your NFT, and already we're seeing some uh companies doing that. Um, you can lend out your NFT maybe for a month, and then maybe you collect interest on whoever borrows your NFT for that period. You can imagine uh a world of uh you know NFT derivatives, NFT index funds, right? People could take a bunch of NFTs that are very popular, build a basket and and call and make an index fund out of that.

• 13:43Speaker 0

  And we're seeing all that happening, right? There are companies who are literally doing that right now, right? So that's I think what you're referring to when you say composability of NFTs, you don't just hold the NFT, you can basically use it uh as as an asset and then just treat it as an asset and trade with it. So the way that's actually done is in principle, you can take an NFT, which is a uh a non-fungible token and you can wrap it inside of an ERC20, which is actually fungible, and once it's wrapped in an ERC20, you can actually start using it in traditional, uh traditional DFI. So that's that's pretty interesting. And I think we're going to be seeing things like fractional ownership of NFTs. Again, there are people who are already doing this. We're gonna see uh enhancements to NFT. So you can buy an NFT, and then there could be an aftermarket for enhancing it, like this image that you have, your background image Ariana.

• 14:36Speaker 0

  You can imagine an artist actually looks at this background image and says, wow, this is really cool, but why don't we add these little uh widgets to it? And that could be like a composable uh NFT that you know, the the the uh aftermarket for add-on is itself uh is itself an NFT. Um, and so the the possibilities are are endless. I mean, we're gonna be we're gonna be seeing these NFTs uh is effectively used as digital assets and you know, being used as traditional, uh, you know, being uh uh traded and expanded and extended as traditional assets are uh and it's really only just the beginning now.

• 15:11Speaker 2

  Yeah, I I think that makes total sense. And I'm I'm personally super excited to see kind of what entrepreneurs build in this category because I think you know it's very much day one in in this uh in this realm. Um we're getting tons of audience questions, which I'm very excited about. So maybe I'll transition and start uh sending over a few of those. Um all right, let's see. How does the immutability of the ledger survive if quantum ever achieves its potential? Maybe I'll

• 15:39Speaker 1

  get the this is a this is a softball for Dan here. So that'll

• 15:42Speaker 0

  be I know I was I was gonna

• 15:44Speaker 2

  laugh it over to Dan. Yeah, thank you. Thank you,

• 15:46Speaker 0

  Ariana. Yeah, so that's a that's a great as a cryptographer. That's a great question to be to be asking. Thank you for asking that. Um, so the the whole point of a blockchain is permanence, right? So if quantum computers are ever built, yes, they will be able to affect the signature algorithm that's used for securing assets on blockchains today, but not to worry, uh, we have other signature algorithms that are actually quantum resistant. So even if you have a quantum computer, those algorithms, those signature algorithms are gonna remain secure. So all that would happen is you know, as we get closer to actually seeing the quantum computers are on the horizon, uh, what will happen is we'll just tradition transition from the signatures that we use today to signatures that are quantum resistant, and then those will remain secure even in the year 3000.

• 16:35Speaker 0

  Yeah. So your assets will be uh will be safe in yours um uh forever. So the again, the point is your asset is tied to a crypto key, and no one can steal your asset unless they have your crypto key or you give them permission. That's kind of the basic property of what's happening here, yeah.

• 16:52Speaker 2

  Perfect. Just to be just Dan's

• 16:55Speaker 1

  being too modest here, because he's he's the pioneer of a lot of quantum resistant cryptography, but the the key, the key point, right, Dan is it's sort of a Moore's law for cubits, so you can kind of see ahead of time uh when quantum computers will get there, and more most importantly, there already are as you your own team has developed quantum resistant crypto cryptographic uh signatures uh methods, signatures. So I don't know, just let's let's dispel there's there's lots of FUD in crypto. That's one type of FUD we should dispel that concern around quantum.

• 17:25Speaker 2

  I know that's why I brought that question out of the pile just to make sure everyone else has the same page about it. Um great. So um moving on to the next one. Um how important is true decentralized permanent storage for NFTs? So um this question asker mentioned are weave, um, some of the other solutions. So, you know, when do we think we'll get there and how important is that for NFTs?

• 17:53Speaker 1

  Yeah, that's a great question. So that's another that's another uh if you go to the sort of viral Twitter FUD threads, that's another one line of attack that the

• 18:00Speaker 0

  people use, but which

• 18:02Speaker 1

  of course is is you know, like it's early. Um, and a lot of people who have been in the space you know, expect everything to get so popular so quickly. And so there needs to be some more thought around standards to make sure that you know there's sort of uh there's sort of uniform, I believe there needs to be kind of uniform processes around this, but this is all solvable problems so the metadata can be stored, should I think ideally was stored on a decentralized storage platform, um, which are essentially blockchains that are optimized for that use case, and that could be file coin or R weave or you know, a bunch of others, those blockchains exist, they're live. I think it's really just a coordination question of like setting the right standards. Um, and I think we should do that so that we don't have you know, we the community should do that. Um, so we don't have uh, you know, people that unhappy people at some point who don't feel you know don't have their data stored properly.

• 18:49Speaker 0

  And generally, I mean decentralization is pretty critical to the permanence of the blockchain. If it was if this think for a minute, what would happen if the if the blockchain was was centralized, fully centralized, that would mean that when the company that manages the blockchain goes out of business, all those assets could disappear, right? I mean, that's the issue with centralization. You're dependent, you're beholden to this one.

• 19:10Speaker 1

  Yeah, they it could disappear or they could change the rules, right? They could or change the take rate or do you know some other thing that that lessens the ownership of the user, right? Yeah,

• 19:20Speaker 0

  so these are yeah, decentralization is is really critical for the longevity uh and the permanence of the blockchain. That's the only way we know how to achieve it.

• 19:30Speaker 2

  That makes sense. I will um I will kind of interlude with a quick small question. Um, somebody asked if we could define an AMM for them. Yeah.

• 19:42Speaker 1

  That's a little, I sorry, maybe I shouldn't have gone into T Fi on the NFT summary. Maybe expand the

• 19:50Speaker 0

  acronym.

• 19:50Speaker 1

  Maybe we'll maybe we'll follow up with like a link to it's an automated market maker. We'll call up the link for those interested. Uh, just so we don't kind of go off topic, but that we'll make sure it follows.

• 20:00Speaker 2

  Great. Awesome. Let's see. Question for all speakers. How much have you personally spent on NFT? Is it tens, hundreds, or thousands? I've spent thousands. I'll start.

• 20:17Speaker 1

  I'm an avid. I'm pretty avid. The only constraint for me, right? We have a we're a regulated entity, so I have to get to go through jump through very soup to do that. But I think we're going to get that ironed out.

• 20:41Speaker 1

  I would call myself an avid enthusiast collector.

• 20:45Speaker 0

  Great. We can also come back to that and ask ask the other speakers what they what they think.

• 20:50Speaker 2

  Yeah, do a more comprehensive poll. Yeah, exactly. Get a good sense. Awesome.