Tokenizing Art: The Birth of the Yield Bearing JPEG
*Disclaimer: this is not financial advice and should not be viewed as recommendations to buy or sell any asset, this is purely educational and the information below is solely my opinion, please do your own research and develop your own conviction*
If you asked me in 2018 if I would buy a digital picture for thousands of dollars, I would’ve called you crazy and said hell no. And if you brought up the idea of that picture yielding me bananas, milk, honey and cheeth, I would think you were a crazy person that needed to put down the weed.
But here we are, at the crossroads of a major paradigm shift, and a disruptive look into the psyche of a generation that grew up submerged in digital worlds before the idea of digital worlds were even a thing.
So we need to discuss whether or not there is actually value that can be assigned to these yield bearing JPEGs, and if there is sustainability to their emissions and utility. Tokenomics play an incredibly important role here, and the fact that we are so early to this concept could lead to the majority of these NFTs losing their value completely as holders turn into sellers and developers turn into abandoners.
The risks of being too early to this idea, and roadmaps potentially never being fulfilled, are ones we are taking as we view this as a potentially disruptive opportunity to create income from art. The volatility and high risk of failure is the cost of business that a lot of us have accepted for the chance to create life changing wealth from owning JPEGs.
There are no guarantees this will work, but there are things we can look into and try to utilize for our own benefit moving forward.
So let’s get right into it, start name dropping some projects, determine the feasibility of the value assigned to them and whether or not their tokenomics and roadmap warrant the current meteoric rise of NFTs.
The Psychology of the JPEGer
In my last article about NFTs, I touched on this idea of a yield bearing NFT as something to look for when evaluating PFP projects. Unlike traditional art, PFPs are a representation of your digital identity and therefore carry a gamified aura around them. It is this fun, almost meme-like nature that draws us in, attracts newcomers visually, and develops an affinity that leads to brand recognition and community growth.
Beyond that affinity, however, comes the need for an actual network to exist in order for a digital economy to take form. How that network is created comes down to the quality of artwork— it’s unique, vibrant nature—the roadmap—it’s feasibility and long term sustainable goals—and history of execution from the founders. If a project doesn’t have founders who are doxxed or possess a history of involvement in the crypto, art or business space, it doesn’t mean the project is an automatic red flag, but one should question and consider the level of consistency that would be present during periods of unbearable bear market behavior.
For most people, the idea of a yield bearing picture sounds like hocum—nonsense—a complete impossibility. But the reality is, we are seeing a new paradigm shift in value, mimetic desires and culture.
As a result of the Federal Reserve printing 40% of the total USD supply since March 2020, people do not assign value to a dollar the same way that they used to. Chicken wings went from costing a quarter a wing at bars on Monday nights to now $4+ a pound. Supply chains have been destroyed, labor has been decimated, and people don’t care about things the way they used to.
People want to own assets that will appreciate in value while making them happy and leaving them with a feeling of fulfillment after spending years at the mercy of rich, elite bankers who took advantage of their economic desires and left them indebted in a state of working class hell. This is why we have seen so much attention focused on the GameStop and AMC short squeezes, along with the dog coin runs in crypto.
This is where PFP NFTs come into play.
Unless you’re an ape who doesn’t care about anything besides making money, a PFP project is something you’re buying because of an intimate connection to something in your life. Whether it’s the nostalgia element, the appreciation for art, color, composition, or just cool shit, you’re buying a PFP because it’s a reflection of your identity and it makes you happy to look at it. This is why we see everyone who buys an NFT making it their profile picture on social media, or the background of their smart watch or phone. It’s the part of us that we have developed for the digital world that we want to consistently look at and smile.
And what better way to take the thing we like looking at, the thing that makes us smile, than to use it as a tool to stick it to the higher ups who try to control us. By tokenizing that picture and turning it into an income generating asset, you are causing heads to roll, forcing suits to look down at you as if you were a dumb, prepubescent moron who was left alone with mom’s credit card.
The amount of resistance that I’ve received from suits who think I’m an idiot here reinforces my beliefs that we’re on the verge of a major paradigm shift that is disruptive enough to change the world and the way value is created and consumed forever.
People like to fit in and be part of the crowd—they like the idea of having confirmation bias and seeing others with the same perspective. It’s in their nature to want to share their pain, anger, happiness, joy, etc. with other humans as an attempt to revert back to an emotionless stasis where they can continue functioning like rational humans again. This has drawn people to the idea that now is their chance to fight back against the oppressive machines and take ownership of their economic future.
This has led to people cycling into crypto and NFTs in search of opportunities to create wealth in markets that aren’t manipulated by regulators and political insiders looking to line their pockets with as much money as possible.
From here we saw the world of DeFi emerge, with people allowed to be the bankers and market makers that took advantage of their free will, giving them the ability to stick it to the institutions by emptying their savings accounts into yield generating protocols that not only beat the rate of inflation, but destroyed the compounded annual growth rate of the stock market.
It was only fitting that from this point in time on we saw the rise in NFTs, which led to the ultimate form of mimetic desires taking over logic and reason for the traditional economic world.
But, unlike in the world of DeFi, the world of NFTs lacked any real utility beyond ownership of art, which left a lot to be desired. This is where we started to see the paradigms shift once more, after the CyberKongz decided to introduce their BANANAs token and utilize it as a unit of measure to power the Kongz network by incubating two sub groups of children that have held thousands of dollars in value.
For the first time ever, we now saw a digital economy developed through the tokenization of a digital image. Users who held a Genesis Kongz were able to earn bananas and through their accumulation could spend them, like a real world asset, to create new assets that held real world value inside and outside of their digital networks.
The idea of humans spending money on digital assets that they cannot carry with them or physically possess may seem foreign, but there has long been a precedent that rationalizes this type of behavior. Whether it was buying skins in Fortnite, pokeballs in Pokemon Go, or just basic microtransactions in NBA 2k or MLB the Show that increase the abilities and performance of the digital renditions of yourself, humans have had zero problems with spending money on goods they could not hold or interact with beyond the screen or controller under their fingertips.
The ability to now scale up this desire for digital ownership and use it as a way to create real life value financially has shown the disruptive nature of virtual worlds—ending the dependency of a single fiat currency that dominates our entire lives. For hundreds of years people could only earn dollars and be paid in dollars for their assets and labor. Now, through the emergence of crypto, DeFi and NFTs, we are seeing a shift in value creation that is changing the perspective people have for wealth creation. People can now leverage their happiness to own a product that represents themselves and use it to create income that they either redistribute within the NFTs economy, or swap for an asset of larger importance to them, like Ethereum.
When we factor in the effects of mimetic desires, we see people rushing into the world of NFTs to replicate the success of their friends and feel the satisfaction that comes from confirmation bias and watching car crashes play out.
The idea of a JPEG creating value and providing income to its holders may seem far fetched and unsustainable, but it's the biggest criticism of the arbitrary nature of fiat currencies which can have their supply manipulated while at the mercy of elite bankers and politicians who recklessly make choices that affect billions of people worldwide.
This doesn't mean all yield bearing NFTs will be successful and become strong digital currencies that create long lasting value, but there are some metrics that are worth noting and learning about which display the inherent nature of this new paradigm shift that is capturing zoomers and millennials worldwide.
The JPEG Standard
While fiat currencies are backed by weak ponzinomics and the threat of violence from oppressive military forces, tokens like VOLT and FISH are backed by digital art with a utility that enables them to act as a currency that powers the networks that they exist in.
Some JPEGs have better tokenomics than others, which means that although the token technically poses no monetary value, the ones with better tokenomics than others have more utility and therefore more demand and are more likely to enter price discovery on the secondary market which in theory should drive up the price of the underlying NFT.
The most popular yield bearing NFT project are the Genesis Kongz, they provided the blueprint that many projects have worked with and built off of, but since we have already discussed them on a few other occasions, it’s time to dig a little deeper to find other opportunities that are more affordable with better payback periods.
Although the Cool Cats haven’t released any specific details about their token’s emissions rate and a clear roadmap of their utility, the team has leaked some ideas that can give us an early look into what the value could be long term for holders.
The Cats are planning on releasing a game that will incorporate the creatures you will be able to incubate if you’re a Cat owner. Right now, all we know is that owners will get an egg and some MILK and be able to use those groceries to power the network.
Emissions will be based on the different tier your cat is categorized in. If you own a Cool 1 you’ll earn the lowest amount of MILK with Classy and Wild 2 earning the most. If you think cats are cool, this is something you should keep in mind when searching the floor for opportunities.
This potential tiered earning issuance can be annoying at the base layer for cat holders, but it does help the overall value of the erc20 token by creating an incentive to hold the coins you earn on the lower end of the spectrum and actually go out and buy more MILK on the secondary to get as much done economically as possible before the top tiers start saturating the NFT market with the emissions they get.
Since not much has been released, we can only speculate on the potential digital economy here. What we do know is that the team is planning to incorporate pet supplies which cost between 1000 and 3000 coins to purchase. However, since they’ve mentioned gold and MILK, it’s possible that the MILK is the base layer that leads to some gold coins being created at a higher inflation with lesser real world economic utility.
Everything remains to be seen with the cats, but what I like here is the fact that we’re seeing incentives created that encourage people to go out and buy more MILK on the secondary market in order to maximize their potential use cases in as little time as possible due to their emissions’ tiered ranking system. Good tokenomics don’t just reward people for holding, but encourage them to buy more tokens if they want to use the network and do things quicker than their issuance schedule allows.
[Adding an addendum here: The Cool Cats just announced in their town hall today that cat owners will be able to rent out their Cool Pets to people so they can participate in quests and earn gold. The proceeds will be split amongst the owner and renter. This should lead to another layer of utility being built for the MILK token.]
When it comes to these digital economies, we want whatever the utility is to be much more costly than the daily emissions. Ideally, you want holders to have to wait 30-60 days to save up their token rewards before having enough money generated to use the network. By making things more expensive, and using time to your benefit economically, it draws people to the secondary market where supply and demand metrics can take over and create value for the entire project.
One of the projects in particular that meets this criteria that I like and am an owner of is Bears Deluxe. At the moment, devs are working on upgrading the contract to improve composability and make everything in the roadmap possible, but there are plans for the migration to the Honey farm to begin on November 17, barring any delays.
So what is the Honey farm?
This is Phase 2 of the Bears roadmap will be adding utility and yield to the underlying NFT, and creating a network and digital economy for holders to traverse. While Phase 1 focused primarily on the Alpha Channel in Discord, which is their own rendition of the prestigious alpha channel that the Kongz are known for, Phase 2 elevates the optionality of the project and starts to bring it into a more gamified light. This doesn’t mean that Phase 1 is worthless to holders, in fact, the Alpha Channel has major implications for traders and investors looking for a competitive advantage, while also encouraging holders to sweep the floor to reach the minimums needed to get exclusive access to the private honey hideouts (at least five bears are needed) and the gold club deluxe (at least ten bears are needed).
In Phase 2, we will see the introduction of the HONEY token, and the creation of Honey Hives and the ability to mint Bees.
This is where things get interesting and an economy starts to form.
Bears generate one HONEY per day. In order to create a Honey Hive, Bears will need to spend 69 HONEY, which means it would take 69 days in order to get this done from a staking perspective. Once a Hive is created, Bears will have the ability to mint 3 Bees which will yield .13 HONEY a day per Bee. This means, in theory, a Bee should always be worth 13% of the value of a Bear if you have to mint each Bee individually, or 39% of the value of a Bear if you’re expected to batch mint the three bees at once.
Since the act of creating hives leads to the creation of bees which leads to the creation of more HONEY for Bears holders, it means we have a potential economic flywheel that is beginning to spin here that can lead to some amazing tailwinds fundamentally.
HONEY of course has no real world monetary value, BUT, due to its limited issuance and the expenses associated with creating hives and minting Bees, users who want to frontrun their peers may be willing to go out on the secondary market to buy HONEY from others and pay a premium price to do so. This in theory, could drive up the price of the token as demand for its utility outweighs the supply created each day.
Phase 3 adds another economic layer to the mix which can, in theory, take the utility for the HONEY token and skyrocket its demand if there is enough network adoption. Starting in Q1 of 2022, barring any setbacks, we are expected to see the release of VX Bears, similar to VX Kongz, that will be used to peruse the Club Deluxe sandbox that is in development. This now takes the NFT from a static JPEG that happens to earn yield and turns it into a living entity within an exclusive metaverse. Holders will be able to mint these VX Bears for an undisclosed amount of Honey, and each VX Bear will be needed to engage with the Hungry Bear levels for their P2E game that is expected to be in development at some point in 2022. Adding VX Bears, requiring holders to mint them using HONEY and enabling a gaming mechanism that has play to earn features assigned to it adds two other economic layers to the mix, which takes this project from a dumb pixelized picture into a potential income generating money maker for its holders.
All of this has to come to fruition of course, a lot can go wrong, and in theory developers could abandon the project and rug pull their holders, but the team is well vetted by the Kongz community and has been actively working throughout this time and frequently present in the Bears Deluxe Discord. If they execute, we could be looking at a mini-Kongz like project here that has the potential to be worth 10 ETH due to its economic implications and potentially elite tokenomics.
The Kongz have their hands everywhere it seems, and another one of the projects their community loves and has spawned is Anonymice, which is one of the first fully onchain NFTs to offer yield through the CHEETH token.
The tokenomics behind CHEETH is what draws me to this project, despite not owning any of their NFTs and not having plans to own any in the near future. Holders of Anonymice need to stake their NFTs in order to earn 1 CHEETH a day.
As always, 1 CHEETH = 1 CHEETH but some of the value we see generated here comes from the demand on the secondary market which is the direct result of the low emissions and high costs to breed and speed up incubation.
In order to breed your mice, holders need to own two Anonymice and pay 50 CHEETH to lock them up in the breeding contract. The interesting thing that really maximizes token holder value, however, comes from the time lock mechanism that is in place when breeding.
Holders who are looking to breed are required to have the parents and babies locked up for seven days each (50,000 blocks). If holders want to expedite this process to maximize their investment opportunities, they can do so by paying 25 CHEETH to unlock the parents and another 25 CHEETH to unlock the babies so both can be bred and fully operational within one day, as opposed to seven. This allows holders to quickly get as many mice onchain as they want without having to deal with the 50,000 block requirement.
By building this economy around the fact that only 1 CHEETH per mouse is created each day, and holders are limited to only having 10 mice in their staking wallet, and breeding costs 50 CHEETH + 7 days unless another 50 CHEETH is spent to cut the time down to one day, we are seeing a flywheel develop that incentivizes users, specifically new buyers, to go out on the secondary market to get as much CHEETH as they could possibly need in order to be the hyperactive participants that they want to be within the network. This does wonders for the token’s value and removes any potential inflationary events that can drain the swamp, destroy token value and as a result destroy the value of the underlying NFT.
In essence, it’s the complete opposite of the StackedToads drama that affected many holders over the past few weeks.
StackedToads quickly went from being an incredibly sought after project to a swamp of dead money that no one wanted to associate with. The project relied on a cool, gamified idea that holders should buy three toads to stack them and create yield that they would earn from staking their stacks of toads. This was actually a pretty brilliant move because it forced people to buy three toads at once to earn yield, which in part drove up the price of the NFT dude to the forced demand and scarcity that was taking place.
But their downfall quickly came as a result of poor tokenomics and weak smart contract security.
The Toads saw themselves rise from less than an ETH all the way up to 4+ ETH at one point before seeing a massive topping pattern that backtracked all the way to zero and culminated in its staking contract being exploited and their funds being drained.
The main reason for their failure, and what needs to be learned from them, is the combination of high issuance, stakers were earning 50 STACK tokens a day and low utility, there wasn’t much use for the STACK tokens and any use wasn’t expensive enough to offset the insane inflation levels.
As a result of this, the token value fluctuated, making the underlying NFT very attractive, therefore bottoming out and making the NFT unattractive.
The key to making yield bearing NFTs work comes down entirely to issuance + utility. If an economy cannot be created where the token’s issuance is manageable and needs to be used, with the token burned upon usage to manage supply, the value of the token and as a result the NFT becomes unsustainable and not likely to have long lasting support from buyers.
This is what draws me to projects like the Bears Deluxe, Anonymice and SupDucks. I own a Duck for a couple of reasons. First off, the art is vibrant, eye-catching and enjoyable. It draws people into the project by grabbing their attention and creating a lifestyle/streetwear brand that reflects the culture of the 90s and the swagger of the 2020s. Secondly, the founder has an illustrious career at his back, having spent time in the industry with Dapper Labs and Zynga, and being familiar with the different aspects of the crypto and gaming spaces.
The Ducks are a cool project that possess a token that holders automatically receive without having to stake or do anything at all, aside from claiming their tokens of course. Holders receive 10 VOLT a day which can be used to purchase upgrades for KingFrogs to fuse three together and create a ThiccBoi which is needed in order to animate a Duck and create the opportunity to speak with a Jungle Duck God.
That was a trippy sentence to write, but yeah, we’re in the metaverse now, so why the hell not.
The upgrades range from 500-5,000 VOLT and since there are three upgrades that are needed to create a ThiccBoi, we’re seeing some economic incentive here to burn the VOLT token upon purchase. In addition, animated Frogs get the opportunity to receive special airdrops, which adds another economic layer to this mix that appeals to those who may not be able to afford three Frogs or even a Duck.
Looking at the roadmap this far, it’s easy to see some utility developing here that creates an opportunity for income that can be deployed within the SupDucks economy. In the future we will probably see more use cases being added which would only further develop the VOLT token and give it more value therefore giving more value to the underlying NFTs in its network.
There are other projects that are building networks and economies in similar ways, like Peaceful Groupies for instance, but to write about all of them would be an endless journey and leave me with little room to write about anything else.
While I do own a Groupies NFT and am looking forward to their roadmap and plans for utility, I’m going to move on here and pivot to another type of PFP NFT economy which has been very interesting and could be potentially rewarding for holders.
Derivative DAOs
A concept that quickly exploded and has gained a lot of attention and traction over the past few weeks is this idea of derivative DAOs.
Out of nowhere we saw a bunch of DAOs like Mutant Cats pop up by minting NFTs and using the money from the mint, and the royalties from sales, to fund their treasury and buy up blue chip NFTs that are then fractionalized with a token issued to stakers of the original derivative NFTs.
The first real successful version of this idea was the Mutant Cats DAO which has evolved now into a project that is gamifying NFTs and bringing DeFi and art together through their treasury.
Mutant Cats started as a derivative DAO for Cool Cats. Their early purchases were 10 cats that were locked up on Frational.Art and used to generate the FISH token for users who staked their Mutant Cats. Holders generate 10 FISH a day which is used to power the Mutant DAO which has now expanded into offering Mutant Gorillas that can be staked to earn SERUM which can be further used to expand the utility of the entire Mutant ecosystem.
What makes this DAO the leader in particular is its execution in building up a strong treasury with consistent secondary sales, and the ability to efficiently market their brand through wise purchases of blue chip NFTs like Mutant Apes, Genesis CyberKongz and a plethora of other digital assets that hold tremendous value in the NFT community. There’s also been claims that the Mutants DAO has gamified their treasury by using it to stake OHM and create further yield.
This idea of buying blue chips and spinning out a token through fractionalization is one that has become popular, but is also a potential value trap for people with mimetic desires and a lack of liquidity. Speculators who would like to own a Kong, Cat or Ape, but cannot afford one, find themselves drawn to derivative projects like this with hopes of benefitting from the association with the blue chip NFT and seeing their derivative project tracking the blue chip’s price.
In theory, this could work as a rising tide lifts all ships, but if there isn’t a network of utility and a digital economy created, it doesn’t really matter what the derivative DAO owns since it isn’t utilizing its funds or assets in a way that creates value for holders.
The reality is, buying blue chip NFTs should be viewed solely as a marketing gimmick and a way to backstop the value of the underlying erc20 token. The purchase and fractionalization of blue chip NFTs brings eyes to the project. Eyes to the project encourage sales. Sales lead to more royalties. More royalties lead to more purchases of blue chip NFTs. And more blue chip NFTs lead to a stronger treasury asset wise. But the best way to make this work sufficiently and for the long haul is if an economy is created around the original NFT and there is enough demand that captures eyes beyond the marketing gimmick.
Projects like ZombieToadz bought CrypToadz but failed to catch on as a strong derivative DAO because of the lack of network effects and economy. The same issues plagued StackedToadz with no one caring or being excited about MiceOnToadz. This is what makes Mutant Cats attractive. Somehow, so far, they have found a way to start spinning the flywheel in their favor, evolving from a marketing ploy and into an actual network that has the potential to continue growing and therefore spinning up more opportunities to back its tokens with prestigious digital assets.
Numerous projects have tried to execute on this philosophy, projects like CryptoZombiez and Halloween Bears, but they’ve failed to gain any real support beyond the initial wave of excitement and speculation.
HeadDAO on the other hand seems to be following in a similar path as the Mutant Cats, with big purchases being made, but it remains to be seen how much they can grow their brand and create real, long lasting network effects.
When it comes to looking for yield bearing NFTs, it’s easy to be attracted to these derivative DAOs considering that they capitalize on mimetic desires and hype to create success early on, but if they lack the principles laid out in the JPEG Standard, they aren’t likely to really carry forward any long lasting success, especially as their treasury finds themselves in possession of cultural artifacts that can quickly drop in popularity or suddenly become illiquid in a terrifying bear market if developer activity dries up.
Users are best off looking to own the blue chips outright when affordable, and when desiring a derivatives project, focusing solely on the ones with large treasuries and ambitious roadmaps that are transparently being worked. It’s important to spend time in the Discords interacting with everyone involved and clearly following the activity of the DAO’s wallet to see how the treasury’s money is being used.
At some point, I expect these DAOs to actually evolve and turn into little mini NFT centric hedge funds that accumulate pieces of history and distribute fractionalized ownership rights to its citizens, but it will only work if there is a reason for an erc20’s existence that extends beyond governance.
Value needs to be created for holders and the easiest way to generate value is through composability. Devs need to build on top of their JPEGs by building on top of the purchases they have made. If this can be done, in combination with the continued rise of mimetic desires, derivative DAOs in theory could find themselves being worth anywhere from 30-50% of the value of the blue chip NFTs they are backed by.
Pixel Pilled
When it comes to NFTs, we find ourselves in the midst of an industry that is so nascent and undeveloped that every little thing we come across is a new frontier and a deeper journey into the unknown.
But for some reason, we find ourselves diving deeper and deeper into this mire, with no hope of ever getting out, and instead, acknowledging that our journey revolves around us falling madly in love with what is ahead of us.
NFTs aren’t for everyone, there are severe risks here. There is no precedent and there are no guarantees that JPEGs like Punks and Apes would be worth 30-100+ ETH forever.
What we do know, however, is that life is shifting, paradigms are changing, and the world we knew is constantly being disrupted by computer code and mimetic desires transcending logic and reason, destroying everything we knew, and everything our parents’ generation stood for.
It’s easy for people to look at JPEGs and automatically assume they are stupid, valueless and incredibly pointless, but the reality remains, value is derived from composability and mimetic desires. When we see the ability to build on top of something, and we see a cultural phenomenon grab hold and grip people into the need to fit in and be a part of the new IT crowd, we see a new form of value being created.
For most people, they look at these NFTs as just a picture that doesn’t hold a deeper meaning, but the facts are, the best projects are evolving past the image in our avatars. NFTs are just logos for the apps of our future. The developers that are enabling the ability to click the JPEG and launch a network and economy behind it that we can engage with and build off of will be the most successful businesses in this industry. The ones that ignore composability and fail to maintain cultural significance, artistic integrity and prestige will fall to the wayside and be forgotten the same way as the fads of the 90s.
Many of us have been pixel pilled, drawn into this world of PFPs and the future that lies ahead of us. As long as we are invested in projects with active developer teams that remain present and continue to build during the deepest depths of the worst potential bear market, we will see disruption, innovation and life changing paradigm shifts that create wealth for us all.
There are no guarantees that any of this happens, none of this is financial advice by any means, but it's hard to not be pixel pilled and find yourself incredibly bullish and excited for what the world has in store for us, especially when we see the ability and potential to create income from JPEGs and use that income to power networks and stimulate digital economies.
To some the metaverse lies ahead, to me, we’re already living in it, and we are watching ourselves evolve from the web 1 of the metaverse into the web 2 version brought forward by the introduction of NFTs and the many amazing things being created each day.
Disruption is here, new opportunities are here, and it is up to us the holders, artists and developers to continue building and never looking back at the world we are trying so desperately to leave behind.