Dear subscribers,

Early this year, NFT was hyped as a tool for creators to raise money and earn royalties. Since then, we’ve seen NFT sales decline by 90%. Due to this decline, many NFT creators faced an existential crisis with mint prices and royalties dropping to nearly 0.

Nat is the CEO of Highlight (a no-code web3 toolkit) and ex-GM at DoorDash and Square. In the interview below, we cover:

1. Why Nat left Doordash to start an NFT company

2. NFT business models and how viable they are for creators

3. What’s next for NFTs in 2023

I love talking to Nat because he’s deep into NFTs but also has a no-bullshit take on the industry. Let’s dive in.

Nat’s journey from general manager to founder

You were a general manager at Doordash leading a large org. Why did you leave that behind to jump into NFTs?

I’m passionate about technology’s ability to help creators make a living. 

Today’s tech platforms rely too much on ads and optimize too much for scale. Despite the ups and downs, I still believe in the ability of NFTs to let creators make a living from their super fans.  Benefits that NFTs provide include:

1. Selling a digital asset that can exist forever

2. Generating royalties from secondary sales

3. Unlocking exclusive benefits for holders

We started Highlight to give creators a more accessible way to build and manage NFT experiences for their fans. It’s been an exciting and challenging journey.

What are some key lessons that you learned on this journey?

1. Focus on real use cases. Beyond the speculation, NFTs are already helping many creators make a living. An example is generative art, a field that has existed for 50 years but only became financially viable for artists with NFTs. With the surge in AI art, I believe that NFTs will also be key for proving provenance (e.g., who created this) and ownership. 

2. Be careful how you incentivize growth. We launched our first product in May with an NFT collection. Thousands of these NFTs were claimed and flipped on the secondary market by speculators, who also ruined the vibe of our Discord community.

3. Everything is still experimental. Our first product (a no-code platform for NFT communities) was too focused on a single use case and didn’t seem to have a path to monetization. Now we’re seeing growth with simpler tools that help creators experiment more with NFTs.

4. Abstraction has its limits. NFTs are hard for people to understand and use (e.g., wallets, gas fees). Brands are removing this friction by creating “web 2.5” experiences that just require an email and credit card. While this makes onboarding easier, it’s not clear to me if these experiences are as meaningful. If an NFT drops into a wallet that you didn’t create yourself – does it really matter? 

NFT business models: The long winding path of mints and royalties

Let’s talk about NFT business models for creators. The typical revenue streams are: 1) Mint NFTs to get initial funding and 2) Earn money from secondary royalties. Do you think this model is sustainable? 

For 99% of cases, the answer is currently no. 

Even top projects (e.g. Bored Ape Yacht Club) are seeing this revenue dry up in the bear market. I don’t think NFTs have found a sustainable business model yet.

Can you talk about the journey that NFT royalties have been on?

NFT royalties help creators make recurring income whenever their work is re-sold in the secondary market. Unfortunately, these royalties:

1. Aren’t automatically enforced on-chain: There's nothing in most NFT code that can force someone to pay them.

2. Don’t have full legal standing: There’s nothing that binds marketplaces to collect royalties on the creator’s behalf.

As a result, royalties have been on a wild ride this year:

1. August: New NFT marketplaces like X2Y2 and SudoAMM started cutting royalty payments to artists to gain market share.

2. October: Large NFT marketplaces like Magic Eden and LooksRare decide to make royalties optional. LooksRare instead gives creators 0.5% of trading fees.

3. November: After much debate, OpenSea and MagicEden are starting to support a new standard that restricts NFT sales only to marketplaces that enforce royalties. This appears to be gaining traction.

OpenSea @opensea

8/ Our number one goal is to incentivize a shift in the industry back towards respecting creator fees universally — so that on-chain enforcement tools can become an option for some, but not a requirement for all.

6:00 PM ∙ Dec 8, 2022

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If mints and royalties aren’t sustainable for most projects, how can creators run a business using NFTs? Should they supplement with traditional channels?

I think it varies a lot by the creator. 

For some creators, NFTs have opened up a whole new way to monetize. For example, thousands of generative artists (artists who code) and independent musicians haven’t had close to the success with web2 models as with web3.

For social media creators, newsletter writers, and other “web2 creators” - I’d say ad and subscription models work a lot better right now. I think creators like yourself should rely on these tools as their bread and butter, and possibly experiment with NFTs as a supplemental revenue stream. Ideas include:

1. Providing exclusive benefits that confer social clout

2. Creating art related to your work

3. Running experiments that reward engagement 

Lastly, it’s important to reconsider how your work as a creator will translate to web3. It’s likely that the same playbook that works in web2 won’t work in web3. For example, Tim Ferriss recently launched an NFT project called Cockpunch that’s fun, weird, and experimental, which makes sense for the space. 

What are your thoughts about “blue chip” NFT projects that then go raise VC money? Who are the true owners of the project?

The role of VC in web3 has been criticized, but the reality is that VCs can uniquely fund risky bets that sometimes lead to major innovations.

The question of ownership is important though. When a VC takes a stake in an underlying company that produced an NFT project, they stand to hold equity (or tokens) that are backed by legal contracts and grant them enforceable ownership. There is tension with narratives around “community ownership” in NFTs, in the sense that VC terms of ownership are much more rigorously defined and enforceable versus someone who just bought the project’s NFT on OpenSea. 

There are lots of theories about how value will accrue to these projects and NFT owners but the reality is that owning an NFT doesn’t grant the same type of legal rights currently. However, business models are still being discovered. VC equity ownership comes with a large degree of risk – perhaps even more than the “blue chip” NFTs themselves, which can be sold at any time.

Future of NFTs

Many bad events happened in crypto this year (e.g., Luna, Celsius, FTX). Unfortunately, I think this also impacted people’s perception of NFTs. How do you think creators should think about NFTs at this point?

I think the promise that NFTs can help you build a direct relationship with your audience is still there. Here are a few facts:

1. Despite the market slump, creators earned over $1 billion from royalties this year on OpenSea alone.

2. This $1B number is roughly what Meta and TikTok have committed to paying creators over approximately the same period! Platforms like Patreon and Snapchat have generated far less. And most of these web2 platforms are issuing grants to help retain creators which isn’t sustainable. 

So it’s important to recognize that NFTs are already a major source of revenue for creators even as we work out the kinks.

Looking toward 2023, how do you think the NFT market will evolve?

I jumped into this space because I want to build a future where creators have more earning potential, control over their work, and connection with their fans. Despite all the FUD, I strongly believe this is a real movement.

Some of the areas I’m watching closely:

1. Web3 social products: spending time on apps like Lens and Farcaster that provide a richer experience than web2 social (e.g., you can see who in your network is acquiring different NFTs). 

2. Art NFTs: This is continuing to become more popular every month despite the bear market. Artists like Tyler Hobbs (his QQL project generated $17M in primary sales) and platforms like Art Blocks are good examples.

3. Music NFTs: Still needs experimentation but I’m bullish we’ll see lots of use cases for musicians to use NFTs down the road (e.g., crowdfunding, VIP experiences, fan engagement). 

4. Physical to digital NFTs: For example, the use case around proving the authenticity of luxury items is gaining traction.

Do you think mainstream adoption of NFTs will come in 2023?

It’s hard to predict timing.

That being said, the world’s largest brands (e.g., Starbucks, Nike, Instagram) are running big NFT experiments in 2023. 

These experiments all use low-cost blockchains like Polygon and abstract away crypto stuff like wallets, gas fees, and even the term NFT. Reducing this friction should help millions more people own NFTs for the first time. 

For mainstream adoption to stick, however, I think we’ll need to see 10x better consumer experiences that are only possible with NFTs.

Let’s use Starbucks as an example. They could’ve built in-app badges without NFTs. But only through NFTs can these badges:

1. Easily unlock exclusive content and discounts on other platforms and brands like Instagram or Nike. Having these companies work together will make the interoperability of the blockchain more obvious to people.

2. Be bought and sold for real money. For example, if Starbucks gives me a month of free coffee for being a loyal customer and I can sell that to someone else in the world without asking Starbucks, we’ll start to see real excitement. 

How will Highlight play a role in this?

We’re most excited about web3 native creators – artists, musicians, and community builders – that have already gone through the paradigm shift mentioned above.

But what we found is the creator tools are lacking for millions more to enter this space. Creating an interesting new NFT project today typically requires weeks of hands-on help from developers. 

Meanwhile in web2, creators of all types can access every type of tool, often for free. There are few technical barriers to entry, which means creators can focus on creating great content. 

Highlight’s mission is to empower creative people and their communities to thrive together by unlocking the power of NFTs through no-code tooling. We hope to lower the barrier to entry for the next 1M+ creators that want to build and create in web3. 

Thanks so much, Nat!