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Does the NFT correction foreshadow a nascent comeback?

The market for non-fungible tokens soared, then slumped. That doesn’t worry Spores Network’s Duc Luu, who’s betting on brands to fuel its future growth.

As the cryptocurrency market regains momentum, the market for non-fungible tokens (NFTs) is languishing after a solid start to the  year, with sales falling by more than 30% in March — a second consecutive month of decline. 

Duc Luu, executive chairman of Spores Network, a GameFi (play-to-earn) and metaverse publisher, incubator and launch pad, sees recent bearishness in the NFT market as a natural correction in the emerging sector.

“In reality, the digital economy is still very trader-heavy, instead of consumer-heavy, and we’re beginning to move towards consumer-heavy trading volume. So when you have any kind of too-large run-ups, the traders will just re-evaluate from a technical analysis perspective and take money off the table,” Luu told Forkast.News in a video interview. “However, behind the scenes, you’re seeing companies like ourselves, you’re seeing venture capital, that usually puts in equity rather than token investment, are doing deals left and right.”

Despite the recent slump in trading volumes, the NFT sector is still expanding. As big brands such as Coca-Cola and Gucci are drawn to the NFT space by its sheer popularity, the next stage of the sector’s development will require such companies to embrace Web 3.0 technology.

“The next phase is companies who are … saying, ‘Wait a minute, this is actually a market for us. This is a revenue-driving market for us.’ And it’s no longer a bubble, but it’s a revenue line,” said Luu. “And now you’re starting to see that, with Nike’s acquisition of (NFT studio) RTFKT, for example. Probably they’re worried that, ‘Wait a minute, we’re focused on the physical world. We’re focused on athletics, and how do we keep that audience exercising on your headset?,’ for example.”

The border between NFTs and physical assets is already becoming blurred. In January, Spores Network announced the launch of Republique, a virtual space in which physical products, art pieces and NFTs can be curated and traded together in a Web 3.0 environment. 

“We can take great artists in the physical world, bring them to the digital world and try to offer a digital good. Or we can take native digital artists and also bring their work up into very much of a gallery space,” said Luu.

Republique is just phase one of Spores Network’s metaverse ambitions, and it’s now seeking to build a bridge between the virtual and physical worlds.

“It’s like … you have a Nike store within this particular city, municipality … Well, if you want to buy that shoe in that store, you can go to that exact address or you can go to the metaverse version of that exact address, browse, click, buy, and then it’ll get Amazoned or Ubered directly to your house. That’s the retail experience,” he said.

Watch Luu’s full interview with Forkast Editor-in-Chief Angie Lau to learn more about recent moves in the NFT market, how the GameFi economy works, and who owns NFTs after they are minted.

Highlights

  • The NFT bear market: “We’re definitely in a mini bear market, a correcting market. But that flux is not as scary as a 5% drop on Nasdaq, per se … With this new, emerging digital economy, you’ll have speculative run-ups. And you had that probably in late Q4. It’s speculative run-ups that led you to the number that you presented of trading volume and (NFT trading platform) OpenSea, because in reality, the digital economy is still very trader-heavy, instead of consumer-heavy, and we’re beginning to move towards consumer-heavy trading volume. So when you have any kind of too-large run-ups, the traders will just re-evaluate from a technical analysis perspective and take money off the table.”
  • Behind the prices: “The big volume in January — that was a bit more of an arbitrage, because you had the drop in Ethereum. So because of the currency play there between Ethereum, USDT and the actual NFT, you’d have a big month of trading in January. But then with Ethereum continuing to go down with the rest of the top crypto tokens, then you see the income side start to kick in, and now you’re seeing a pretty significant drop in volume. However, behind the scenes, you’re seeing companies like ourselves, you’re seeing venture capital, that usually puts in equity rather than token investment, are doing deals left and right.”
  • GameFi as a casino: “You have your casual player who sits at the casino and is happy to lose money for a good time, and that’s pretty much your freemium guys. Then you have your play-to-earn. Actually, those are your prop players who are paid by the casino as a marketing fee to sit there to create action. And then your whales sit in the middle, pay-to-win. And maybe in poker it’s pay-to-you, pay-to-lose. Is it because there are whales? But that distinction of those three classes of players needs to exist. Otherwise, if you only add the play-to-earn, then you only have the demand side and you have no supply side.”
  • The geography of GameFi: “In the West, where the average gamer is a middle-class person who is happy to play, to pay a little bit monthly, to have that leisurely experience. They’re actually very, very angry at GameFi, which is a very commercial approach, play-to-earn, or pay-to-win, etc. … If you look at our Asian players, we’re already used to paying transactional fees just to play monthly or to pay the whales — Asian whales who pay as much as US$10,000 a month to get the best bells and whistles on whatever mobile casual game that’s hot at the moment.”
  • Who owns NFTs?: “The language and licensing is starting to incorporate NFTs, anyways. When we’re talking to Hollywood studios, we’re talking to music publishers, they’re all in their new contracts, integrating just digital assets as a whole and then saying that they own those rights and then parsing them out by contract as they would in the physical world … CryptoPunks … now, does all that affect the market of the delisted goods? Yes and no. Coin collectors love collecting a bad coin — the Lincoln penny, whatever … And it could be a US$1 million penny just because of that minting error. So don’t we just have a digital minting error? So, sorry, but you’ve released it. So it has some intrinsic value because it’s supply and demand. Again, you can’t stop that unless you actually physically destroy it, which neither the U.S. mint — nor, I think (blockchain game company) Dapper Labs — wants to do or can do.”

Transcript

Angie Lau: You’d be hard pressed to find something that’s gone more mainstream than NFTs in the last year. From a couple of hundred million in sales in 2020, the market for non-fungible tokens, or NFTs, catapulted to US$18.5 billion in 2021. And this is just the beginning. From Gucci to Louis Vuitton, Spider-Man to Batman, there’s no escaping the craze for NFTs, and we’re here to uncover it all.

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. That’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

Well, today we’re in conversation with Duc Luu. He’s executive chairman of Spores Network, a GameFi (play-to-earn) and metaverse publisher, incubator and launch pad right from his home base in Vietnam. And thanks for joining us, Duc.

Duc Luu: Thank you for having me.

Lau: I love the fact that this space has really accelerated. But for the people who are in the space, including yourself, and certainly from this part of the world, in Asia, and you there being in Vietnam, what are the opportunities that you see in the NFT market that kind of explain the craze that we see currently?

Luu: Okay, so I think when you look at the NFT market, it goes back to the original thesis that Spores had, which was that we had come out of blockchain infrastructure and what it could do. And then we moved into, as you kind of hinted, in 2020, 2019, the rise of DeFi (decentralized finance) and looking at decentralized banking and financing as an opportunity. So you have the infrastructure, then you have the financing. So it becomes very natural, and it’s really where we came into the throw, which was around 2020, 2021, with the rise of NFTs, which are digital goods. 

You’ve banked, you’ve financed, you have a lot of liquidity, or you’ve made a lot of money. Now you have to buy digital goods, disposable goods, either in the physical world, or, more likely what we’re seeing now is the digital world. So that opportunity space is incredibly large because, frankly, how many banks exist in the real world today, through consolidation and such? There are actually not many banks as a proportion of how many stores, how many brands you see in the physical world. So we’re at the very, very beginning of digital goods, digital brands, and it’s incredibly exciting from where I sit.

Lau: I totally agree with you. And this year has been very interesting to observe the state of the NFT market. After a solid start to the year, OpenSea lost over 67% of its trading volume. LooksRare’s 30-day trading volume also fell by 84%. What do you see behind the significant fall in NFT trading volume? Is this a natural correction? What are investors reacting to? 

Luu: First of all, I’d say that this ebb and flow is natural, and let’s call it an emerging market. This is exactly what this is — that this digital market is an emerging market. The moment you have demand dry up in the digital world, then supply just sits there. And so I think these data that you’re seeing, the percentages that you’re quoting, sound scary. Well, they are. We’re definitely in a mini bear market, a correcting market. But that flux is not as scary as a 5% drop on Nasdaq, per se. That’s the first thing. 

So the second issue is, yes, with this new, emerging digital economy, you’ll have speculative run-ups. And you had that probably in late Q4. It’s speculative run-ups that led you to the number that you presented of trading volume and OpenSea, because in reality, the digital economy is still very trader-heavy, instead of consumer-heavy, and we’re beginning to move towards consumer-heavy trading volume. So when you have any kind of too-large run-ups, the traders will just re-evaluate from a technical analysis perspective and take money off the table.

The last point I would say is that the big volume in January — that was a bit more of an arbitrage, because you had the drop in Ethereum. So because of the currency play there between Ethereum, USDT and the actual NFT, you’d have a big month of trading in January. But then with Ethereum continuing to go down with the rest of the top crypto tokens, then you see the income side start to kick in, and now you’re seeing a pretty significant drop in volume. However, behind the scenes, you’re seeing companies like ourselves, you’re seeing venture capital, that usually puts in equity rather than token investment, are doing deals left and right. 

Lau: But to ignore the part that you’re talking about, that you participate in, with the venture capital, still investing in this space quite strongly, in fact, and banking on a return from the mini bear environment that we’re existing in right now to potentially a rebound, that’s the long-term vision for this space. Why do you see this growth for this space? What do you think this industry, in terms of NFTs, needs to see in terms of a strong rebound that will generate more buyer interest. What will it take?

Luu: What will it take? Well, it’s the arrival of brands, who are very much embedded in Web 2.0, making a conscious decision to move into Web 3.0 for several reasons. 

The first reason is a pure marketing play — a pure branding play, as it were. ‘Okay, well, this is a new sparkly toy, so let’s go ahead and bring a product into that sparkly toy world.’ Now we’ve got to do an NFT of McDonald’s, for example. So that will be the first group of corporates doing that. Then the next phase is companies who are then saying, ‘Wait a minute, this is actually a market for us. This is a revenue-driving market for us.’ And it’s no longer a bubble, but it’s a revenue line. And now you’re starting to see that, with Nike’s acquisition of (NFT studio) RTFKT, for example. Probably they’re worried that, ‘Wait a minute, we’re focused on the physical world. We’re focused on athletics, and how do we keep that audience exercising on your headset?,’ for example.

The third group that we’re seeing now announced in the last couple of weeks — and I know another couple of deals that have not been announced yet — but the actual Web 2.0 infrastructure guys, (consumer electronics maker) HTC, for example, announced something, Microsoft through Minecraft, for example, making a move.

So that group will come next. Again, one, revenue-generating, two, really re-securing their moat. They had a moat in Web 2.0. They’re going to accept that parts of their moats now need to be decentralized so that their audience pool doesn’t walk away. That’s happening. 

One industry that I think is at odds right now with this is the game industry. We — as we said — are a publisher launch pad and incubator in GameFi, and there are GameFis split completely down the middle right now. There are people in the gaming industry that either completely love it and say, ‘You know what, we’ve got to move this in this direction.’ And then there’s the other group that completely hates it. Because it says, ‘Oh, no, it’s going to destroy this beautiful moat that we have.’

A friend of mine within the gaming space — I asked him about this, and I said, ‘What’s the big deal? Why is there a split in your field?’ And he said, ‘Actually, very interesting Duc, is that the split is actually along geographic lines.’ In other words, in the West, where the average gamer is a middle-class person who is happy to play, to pay a little bit monthly, to have that leisurely experience. They’re actually very, very angry at GameFi, which is a very commercial approach, play-to-earn, or pay-to-win, etc. But he said, ‘Actually in our demographic, if you look at our Asian players, we’re already used to paying transactional fees just to play monthly or to pay the whales — Asian whales who pay as much as US$10,000 a month to get the best bells and whistles on whatever mobile casual game that’s hot at the moment. 

Lau: Talking about the opportunities that you saw in the space, I really wanted to pick up on that point. Duc, you said that there’s a geographical distinction. So who’s leading the way in terms of the innovation that we’re seeing in Web 3.0 and the metaverse right now?

Luu: The West, particularly the U.S., has always been far more willing to be innovative, and — more importantly — finance innovation. It’s the classic answer that — actually I don’t know the exact stat — something like 30%, 40% of startup founders are actually of Asian descent, even immigrants in America. And you ask yourselves, ‘Wait a minute, why didn’t they succeed in India or China, or Vietnam, for that matter?’ And the reason is that there isn’t a culture of financing innovation, especially at the infrastructure or at the true free-thinking level. Asia is taking a lead — guys like Animoca. Some Korean firms in the GameFi space are pushing quite far. 

In things that … we’re comfortable with, we’re obviously dominant. Asia is dominant in game consumption. There’s no question that you’d want the Chinese market, you’d want the Asian market when you’re playing games. So it’s not surprising that GameFi innovation could come out of Asia.

Lau: But more broadly in the region, we’re seeing gaming — it’s still one of the most exciting use cases for NFTs right now, as we see it. A popular play-to-earn game — let’s talk about Axie Infinity here — it became the first NFT series to cross the US$4 billion mark in historic sales at the end of February. How did Axie’s NFT sales volume become almost double the value of CryptoPunks? This is the NFT that also took to the market like hotcakes. What does this say about the relationship between NFTs and gaming?

Duc Luu: Wow. You’re going to toss me a hard question now. Okay, fine.

Lau: You’re the expert. Yeah, yeah.

Luu: No worries. Essentially, I would say that CryptoPunks, given their average value, their average ticket size — now you’re getting into the six, seven, eight figures easily per CryptoPunk. So you’ll see record highs on singular Cryptopunks, but you’ll probably see a slower velocity in volume compared to Axie Infinity and what, therefore, I would call the play-to-earn market. I assume that CryptoPunks are traded by maybe 10,000 people at any given time, maximum. More likely, if you want to look at the dispersion, it might be really only 500 traders at any given time. That creates the volume that you’re seeing. Whereas Axie is maybe several hundred thousand to a million players. So I think it’s not the correct comparison, frankly, to compare CryptoPunks to Axie. Yeah, it’s two different markets.

Lau: It’s actually really great distinction, because for a lot of people who are joining the space and learning about it, they’re taking a look at NFTs as a holistic, singular entity. And, to your point, it’s not. There’s different demographics, different behavior sets, different taste, level, different financial realities, quite frankly, which speaks to the demographic and geographical distinction. You said yourself you’re looking for the next big thing. You’re looking for the future of GameFi. What is it? 

Duc Luu: Sure. So on our venture cap side, we have a couple of macro thoughts on this right now. The first macro thought is what is play-to-earn and where it sits on the spectrum that begins with freemium. And somewhere in the middle is pay-to-win. And at the end of that is play-to-earn. And actually, as I parallel this to the professional poker world, which I was very familiar with in the past, you have your casual player who sits at the casino and is happy to lose money for a good time, and that’s pretty much your freemium guys. Then you have your play-to-earn. Actually, those are your prop players who are paid by the casino as a marketing fee to sit there to create action. And then your whales sit in the middle, pay-to-win. And maybe in poker it’s pay-to-you, pay-to-lose. Is it because there are whales? But that distinction of those three classes of players needs to exist. Otherwise, if you only add the play-to-earn, then you only have the demand side and you have no supply side.

And in the professional poker world, the way they solved that was you had other income streams that could infuse that poker community. You had sponsorship, you had tournament, which was like bad players around the world who are going to dump money into a tournament, which then flows directly into the daily cash tables where the real money is being extracted, for example. So for me, that’s the easiest correlation. Play-to-earn cannot exist by itself, because it’s only demand driven. It needs supply. 

And so what we’re looking at in the studios that we’re acquiring or building from scratch is to add the supply side, which would be definitely adding freemium, definitely bridging Web 2.0 into Web 3.0. All of the games that we incubate have to be available on other platforms, not just Web 3.0 platforms — IOS, Android … There’s actually technological back-end differences that you have to reconcile in between this space shift. But in essence, you want them all to be playing together, ideally. And even in Web 2.0, take a game, there are farmers — it’s a nasty little underbelly of the Web 2.0 gaming economy — there are farmers who farm on World of Warcraft, and all that money sits in that little ecosystem. It’s because it’s a closed system. It’s a centralized closed system in Web 2.0. Now, GameFi just blows that up and says, ‘No, no, no, you can actually bring/take that money and bring it to fiat or sell it on a marketplace and exchange it for another game to another whale who wants to pay to win.’ Nothing wrong with that.

Lau: Well, I want to ask you more about how you feel about the metaverse and all the opportunities there … So we live in the real world. And increasingly we’re hearing about the metaverse, the digital space, the virtual space in which this growth is exploding, Duc. And speaking of the metaverse, back in January, Spores Network announced the launch of Republique. This is a museum, retail space and sculpture park in the real world that you had intended on becoming the go-to destination for NFTs in the curated space. Tell us about this hybrid experience. Real-world metaverse. What is Republique? What is this vision that you have for this space?

Luu: It’s actually phase one of what we’re trying to put together. We do believe that digital art and NFTs again exist on range. Either you have the physical good that you sell, you can digitize that physical good and you sell that, or you can make the 100% digital good itself and offer that. So Republique was our first answer to that. We can take great artists in the physical world, bring them to the digital world and try to offer a digital good. Or we can take native digital artists and also bring their work up into very much of a gallery space, a retail space/museum for those that want to have a curated and a showpiece type of thing. 

So, I call it phase one because what we’re now moving into is phase two, tentatively called ‘Spores-verse.’ We’re actually working with municipalities and very famous architectural monuments and centers and real estate developers and saying, ‘Why don’t you do a digital twin right in the metaverse?’ We’ve signed deals to do exactly that, to take a famous retail space, a famous real estate space and say, ‘You know what, let’s take this space and let’s reimagine it in the metaverse and then look at all the points of interaction, points of sale, that could exist in that and integrate it.

Lau: It’s a fascinating combination of what people want to experience virtually, and then also, if given the opportunity, of course, once the world rights itself, have that same opportunity to experience it in the real world.

Luu: It’s like if you have a Nike store there. Remember, in retail, it’s very regional. Not every shoe is everywhere. So you have a Nike store within this particular city, municipality, that we’re doing. Well, if you want to buy that shoe in that store, you can go to that exact address or you can go to the metaverse version of that exact address, browse, click, buy, and then it’ll get Amazoned or Ubered directly to your house. That’s the retail experience. One of the projects, one of the deals that we’ve put together, is there’s a performing art space. And then we’re going to literally have a full concert in that space that will be captured 3D and shown both live and rebroadcast, and you can buy a ticket to the actual show. Go there, watch it, or you can buy a ticket sitting in your own home. Republique and our NFT marketplace will be simply the distribution platform at the end of that buyer journey.

Lau: And amidst all of this is still this legality question. And I want to talk about … CryptoPunks is, of course, the world’s biggest-selling NFT collection. It’s at the center of the attention of NFT space right now due to their copyright legal dispute. One of the collections has been replaced with version two due to a bug. Owners of the first-version CryptoPunks filed a counter DMCA (Digital Millennium Copyright Act claim) to overturn the delisting of their tokens. It’s a huge legal mess. This is almost tainting the value of how people perceive digital assets. And so as you invest more into the space, and as we see this more and more, how do you regard the true legality of copyright? Who owns what? If I own something in the real world, if I don’t claim it in the metaverse, do I lay claim to the digital version of that? 

Luu: So I’m not a lawyer, so don’t quote me on this, but generally, I think that any latent rights you have should find themselves in Web 3.0. I think right now you have some gray areas that we need to start to figure out. The language and licensing is starting to incorporate NFTs, anyways. When we’re talking to Hollywood studios, we’re talking to music publishers, they’re all in their new contracts, integrating just digital assets as a whole and then saying that they own those rights and then parsing them out by contract as they would in the physical world. So, I think, yes, there are a lot of gray areas, but I think those gray areas are starting to get solved or going through litigation to find a solution. 

Then, for example, I think we’ve talked about before the CryptoPunks scenario. I mean, when the owner itself says they’re delisted, then they’re delisted now, and they’re no longer correct. CryptoPunks … now, does all that affect the market of the delisted goods? Yes and no. Coin collectors love collecting a bad coin — the Lincoln penny, whatever, with the reverse, dates, blah, blah, blah. They love that stuff. And it could be a US$1 million penny just because of that minting error. So don’t we just have a digital minting error? So, sorry, but you’ve released it. So it has some intrinsic value because it’s supply and demand. Again, you can’t stop that unless you actually physically destroy it, which neither the U.S. mint — nor, I think Dapper Labs — wants to do or can do.

Lau: This is what’s really just so fascinating about this space. We’re really just at the inception of what is possible, and it’s only to our imagination where this goes.

There’s just so much going on in this space. And it’s changing by the second, and you’re right there on top of it. Duc, thank you so much for sharing just the blow-by-blow, minute-by-minute, second-by-second changes in our NFT GameFi metaverse universe, and sharing it with our audience. Really appreciate you.

Luu: Thank you for having me again.

Lau: And thank you, everyone, for joining us on Word on the Block. It was great to have you with us. I’m Angie Lau, Editor-in-Chief of Forkast. Until the next time.

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