Status Monkeys

Analyzing NFTs as Social Networks Using the Status-as-a-Service Framework

Aug 9

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Hi friends 👋 ,

Happy Monday!

On Saturday, Puja and I went to our first out-of-town wedding since COVID (Congrats, Coop and Liz!). We spent a lot of time in the car driving to Richmond and back, which gave me a lot of time to think up wild ideas.

Let’s get to it.

Status Monkeys

The DEAD followed me across Twitter all weekend. Not in a Haley Joel Osment way or anything, it’s just that this one avatar kept popping up everywhere:

For the uninitiated: that green guy is a CryptoPunk. CryptoPunks are 24 x 24 pixel art NFTs, of which there are, and will only ever be, 10,000. CryptoPunks, created by Larva Labs in June 2017, are OG NFTs. As new NFT projects pop up hourly, CryptoPunks are scarce and valuable by nature of their age.

So as NFT values have soared over the past couple of weeks, CryptoPunks have led the charge. The most expensive Punk sold for 4.2k ETH in March. Today it’s worth $7.57 million USD. If you want to buy your very own Punk right now, the cheapest on offer will cost you 51.85 ETH. That’s the “floor price.” You’ll get a more common Punk at that price. To buy a rare Punk, an Ape, Alien, or Zombie, like the one seen above, you’re going to have to fork over a whole lot more ETH.

A few other things to know about CryptoPunks:

Owning a Punk is a status symbol, like owning a Ferrari or an expensive handbag.
Punk owners often use the image of their Punk as their profile picture (PFP).
Displaying a Punk that you don’t own as your profile picture is frowned upon.

This weekend, hundreds of people changed their profile picture to that one single Zombie Punk, which sold for 1,201.725 ETH ($3.75 million) at auction on Friday. No one frowned upon so many people displaying the Punk, wearing a deconstructed party hat emoji, because they all owned it.

For Friday’s auction, 478 people joined forces on PartyBid, a new product created by Anish Agnihotri and the PartyDAO crew that lets people form teams to bid on NFTs, to pool their resources and go after the multi-million dollar Punk against rich whales. They called themselves the Party of the Living Dead. And they won.

PartyBid makes NFTs more social, with a literal party upfront and the opportunity for hundreds of people to buy, own, and manage expensive NFTs together in the back. Its social nature is obvious from its website, which feels as if Figma and Masterworks had a baby, with cursors and comments flying around the site in real-time. As Friday’s auction went on, hundreds of people, represented by moving cursors and emojis, visibly zoomed around the site. It’s hard to describe in words; you can see it in the image above, and you should check it out by visiting yourself.

Like a Zombie, NFTs were supposed to be dead. What’s going on?

I have a theory.

On Thursday night, I went on Sriram Krishnan and Aarthi Ramamurthy’s Good Time Show on Clubhouse to discuss the *Metaverse* with Gabby Dizon (YieldGuild), 3LAU, Donnie Dinch (Bitski), Jarrodd Dicker (The Chernin Group), Jon Lai (a16z), and Jesse Walden (Variant).

Not Boring readers will be very familiar with the Metaverse at this point. We’ve been talking about it for months and months. I’m guilty of tying anything that could conceivably be tied to the Metaverse to the Metaverse.

Over the past few weeks, the Metaverse has gone mainstream. Matthew Ball published his 9-part series. Satya Nadella talked about the enterprise Metaverse (sounds fun!). Zuck and Co have said “metaverse” a million times over the past couple weeks. Ben Thompson wrote a piece on the Metaverse.

NFTs will clearly play a role in the Metaverse. When everything is digital, proving that you own something and being able to bring it with you across the internet will be key. But this isn’t a Metaverse piece. It’s a social network piece.

At one point in the Good Time Show conversation, Jarrod Dicker brought up the importance of community and status in web3 and it triggered a high kid thought: NFTs tick a lot of the boxes of a successful social network from Eugene Wei’s Status-as-a-Service.

Before the full Metaverse arrives, there’s already something happening that’s bigger than jpegs. NFTs are starting to feel a lot like a new kind of social network that sits above other social networks and communities -- something of a Superverse -- and there’s no better framework to evaluate a social network than the one Wei put forth in Status-as-a-Service (StaaS).

Status-as-a-Service

(If you’ve read and internalized Status-as-a-Service, you can skip this section.)

Eugene Wei, a former product leader at Amazon, Hulu, Flipboard, and Oculus, is one of the best tech essayists on the internet. Practically everything he writes becomes canon, and Status-as-a-Service, which he wrote in February 2019, might be his greatest contribution.

The piece makes Not Boring seem short. It comes in at a whopping 19,825 words. If you haven’t read it, I highly recommend that you do so, but for now, I’ll summarize a few of the main points that are relevant to this piece.

Wei begins with two principles:

People are status-seeking monkeys
People seek out the most efficient path to maximizing social capital

Even though those are uncontroversial statements, Wei argues that we don’t analyze social networks through the dimension of status or social capital. Money is easier -- there are numbers, and what gets measured gets analyzed -- but, he says (emphasis mine):

Social capital is, in many ways, a leading indicator of financial capital, and so its nature bears greater scrutiny. Not only is it good investment or business practice, but analyzing social capital dynamics can help to explain all sorts of online behavior that would otherwise seem irrational.

Less than 1,000 words into his piece and two full years before NFT mania, Wei unknowingly laid the groundwork for analyzing what’s happening. NFTs blur the lines between social and financial capital, and as the media has been quick to point out, buying jpegs for thousands or millions of dollars seems irrational.

The mistake that those who dismiss NFTs make is the same that Wei argued people were making in analyzing social networks: missing the importance of social capital. Traditionally, people have used Metcalfe’s Law to explain the network effects powering social networks: “The value of a telecommunications network is proportional to the square of the number of connected users of the system (n^2).” The more users a social network has, according to Metcalfe’s Law, the more valuable it is to every new user.

The problem was, Metcalfe’s Law didn’t perfectly explain what was happening in the real world. Metcalfe’s Law alone would predict that whichever network got big first would continue to build up an increasingly insurmountable lead by being the most valuable to each new user. But Facebook took down MySpace, and Instagram and Snapchat stole younger users’ attention from Facebook. People’s preferences aren’t captured so cleanly.

It wasn’t that network effects and Metcalfe’s Law were wrong, it was just that they didn’t capture the reasons that someone might use a social network beyond pure utility, so Wei proposed a new framework for analyzing social networks’ strength that added social capital to the mix.

Wei evaluates social networks’ strength on three axes: Social Capital, Entertainment, and Utility. In the essay, he focused on Social Capital and Utility.

Utility is relatively easy to understand. If you can find the answer to your question on Quora or easily reach an old high school friend whose number you lost on Facebook, those products are providing you utility.

Social capital, on the other hand, is harder to define and relies on the creation of a “successful status game.” To help explain why some new social networks succeed and others fail, he used a metaphor: crypto.

He said that new social networks are analogous to Initial Coin Offerings (ICOs) in four ways:

Each new social network issues a new form of social capital, a token.
You must show proof of work to earn the token.
Over time it becomes harder and harder to mine new tokens on each social network, creating built-in scarcity.
Many people, especially older folks, scoff at both social networks and cryptocurrencies.

It’s a really good metaphor. Take Bitcoin and Twitter.

Bitcoin issues bitcoin (BTC). Twitter “issues” followers.
Miners receive BTC for securing the network. Twitter users receive followers for tweeting witty, amusing, or mind-expanding things in under 140/280 characters.
It costs more to mine BTC now than it did earlier, and will continue to get harder until all 21 million BTC are mined. In the early days of Twitter, you could get followers by tweeting what you were eating for lunch; today, people have resorted to long threads.
This one is self-explanatory.

Neither Bitcoin nor Twitter existed fifteen years ago. Both are dominant forces today. They bootstrapped from nothing to something by rewarding early adopters, incentivizing them to do work for the network, and making it increasingly challenging to mine new tokens.

All four points are important to understand, but the most useful is the idea of proof of work in status games. If everyone who signed up for Twitter got one million followers just for signing up, there wouldn’t be any social capital in having one million followers. The fact that high follower counts are scarce makes them valuable, and the proof of work requirement enables scarcity.

Leaving Entertainment out of the equation, Wei talks about five arcs that social networks can follow, four of which are trade-offs between social capital and utility over time:

First Utility, Then Social Capital. “Come for the tool, stay for the network.” Instagram first attracted users with an easy photo editing tool and became a photo-based network on top of which people have built huge followings and businesses.
First Social Capital, Then Utility. Wei highlights Foursquare, Wikipedia, Quora, and Reddit as products that used the promise of social capital to get people to do free work that then becomes a utility for the masses.
Utility, But Not Social Capital. Messaging apps are incredibly useful for communicating with people you know, but don’t really help users build up social capital.
Social Capital, But Little Utility. Wei puts Facebook in this category, mentioning that many of his friends just stopped using Facebook with no impact on their life (This describes me too, as I suspect it describes many of you).

The fifth category, the “holy grail,” is Both Social Capital and Utility Simultaneously. To find an example, Wei goes to China’s WeChat, which combines a Facebook-like Moments feed (social capital) with a whole lot of utility, about which I wrote:

People use WeChat to message friends, shop, read the news, play games, pay for things in physical stores… pretty much anything you can do on your phone, you can do on WeChat.

WeChat created a killer combo of social capital and utility from the get-go, which hasn’t really been replicated in the West.

Even for social networks that get it right, though, Wei points out that there are two forms of asymptotes that limit growth or lead to downright collapse.

Social Asymptote #1 is Proof of Work itself. Not everyone in the world can do what it takes to gain social capital on any given social network, which creates an upper limit. I’m fascinated by TikTok, but I’ve never made a TikTok, because I’m not a great dancer and I’m just not willing to put in the work to get good at whatever the TikTok algorithm requires. TikTok is still growing absurdly fast, but if even I, who loves social networks, won’t use it, there’s a ceiling somewhere.

Social Asymptote #2 is Social Capital Inflation and Deflation.

On the inflation side, when a social network gets too successful, and there are too many people using it, the company behind it inevitably needs to introduce an algorithmic feed to handle all of the noise. Wei argues that Facebook introducing an algorithmic feed was always likely because the only scarce resource in an abundant digital world is users’ attention, so it’s necessary to deliver the things they’re most likely to engage with. It makes sense, but it was a tough break for any of the companies that relied on Facebook for a connection with their audience.

On the deflation side, social networks can get less cool as more people join. The canonical example here is what happened to Facebook when parents started joining: all the young people left for Instagram and Snapchat. Once the cool kids start leaving, the slightly less cool kids follow, then the next group, then the next, and since more of the less cool group (parents, in this case) keep joining, the cool proportion gets worse fast.

“At that point,” Wei cautions, “that product or service better have moved as far out as possible on the utility axis or the velocity of churn can cause a nose bleed.”

That’s the meat of the argument:

Social networks need to be analyzed based on more than their network effects.
There are three axes for analyses: Social Capital, Utility, and Entertainment.
New social networks are like ICOs, particularly because successful ones will use an appropriately difficult proof of work to create scarcity and status.
There are many paths social networks follow, but the best is to have high social capital and utility from the start.
There are two asymptotes that even successful social networks might hit: the proof of work ceiling and social capital inflation/deflation.
Networks that start with high social capital need to figure out how to build utility before they hit those asymptotes to survive and thrive.

Wei spends the rest of the piece giving examples and adding richness to the thesiss. Again, you should read it, but for our purposes, there are few particularly valuable tidbits that I’ll highlight:

Social capital can be used as temporary energy. “You can think of social capital accumulation incentives like these as ways to transform the potential energy of status into whatever form of kinetic energy your venture needs.”
New proof of work can lengthen the status game. Why social networks need to add new forms of proof of work to lengthen the half-life of status games, and what they can learn from gaming companies. “Casino games in Vegas pay real money to set an attractive floor on the ROI of playing. Some MMORPGs offer other benefits to players, like a sense of community, which last longer than the pure skill challenge of playing the game.”
Social capital turns into financial capital, and vice versa. “These trades allow us to assign a tangible value to social capital the way one might understand the value of an intangible asset like leveled-up World of Warcraft characters when they are sold on the open market…”
Lack of social graph portability is frustrating for users. This one is particularly germane, and highlights a main difference between traditional social networks and NFTs, so I’ll pull a big quote here:

The restrictions on porting graphs is a positive from the perspective of the incumbent social networks, but from a user point-of-view, it's frustrating. Given the difficulty of grappling with social networks given the consumer welfare standard for antitrust, an option for curbing the power of massive network effects businesses is to require that users be allowed to take their graph with them to other networks (as many have suggested). This would blunt the power of social networks along the social capital axis and force them to compete more on utility and entertainment axes.

What if you could get the benefits of a social network in a more portable, decentralized package? It’s time to turn it over to NFTs.

To learn what’s been happening with NFTs over the past couple of months, and how NFTs are a lot like a social network based on the framework in Status-as-a-Service…

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Thanks to Dan and Puja for editing!

Disclosure: I am an idiot and don’t own the NFTs discussed today, except one Axie.

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