Fractionalizing NFTs

Mark Lurie:

Welcome to WTF Crypto, where we peel back the layers of the onion of the crypto universe to understand what's really going on and how it affects you and your portfolio. I'm your host, Mark Lurie of Shipyard Software, and as a caveat, nothing in this podcast is legal or investing advice. Today we're talking about fractionalizing NFTs with Andy of Tessera, formerly known as Fractional. Welcome, Andy. Thank you so much for joining us.

Andy:

Hey. Thanks for having me, excited to be here.

Mark Lurie:

Now you told me over 140 artists have sold $100,000 or more of NFTs. I mean, that's an amazing number.

Andy:

You're actually off by an order of magnitude. It's a hundred ...

Mark Lurie:

Oh, I am?

Andy:

It's 1,040.

Mark Lurie:

Wow. 1,040 artists have sold over $100,000 worth of NFTs. Okay. That is a lot. I mean, it is the new medium of our time in the same way that photography was the new medium of the early 20th century, so it's very exciting. And it's also important because traders don't just want to trade projects and tokens. They also want to trade NFTs and collect NFTs. But in the traditional art market, the most reliable returns come from blue chip artists, but those are so expensive that only the wealthiest collectors tend to be able to buy in. And in crypto it seems like maybe the same dynamic is emerging. For example, the fluoron crypto punks is really ... it's large. I mean, it's got to be six figures. Does that sound right?

Andy:

Yeah. Last I checked, a couple days ago, I think it was about 140,000 or so.

Mark Lurie:

Okay, so that's a high buy in. And one potential solutions is fractionalizing NFTs so that every day traders can get exposure to an asset that would otherwise have a prohibited buy in. And so I think it's really important to understand how that works for everyday traders and users throughout the crypto ecosystem. That's what we're going to start digging into today. I'd love to start just by understanding what makes you such a credible expert and guide on this subject?

Andy:

Yeah. Well, I guess I appreciate you saying I'm an expert and guide, I'll take it, but I've been in the crypto space for a long time. I've been writing smart contracts for the last five years or so, spent a long time at MakerDAO making dye and everything that goes along with that. It was a fun time, very, very different from the NFT space in a lot of ways. And once I left Maker during the Defy summer craziness, I got really, really obsessed with NFTs. I've always enjoyed sneakers and other collectibles and stuff and so it was cool to see that get mapped to career interests outside of my personal interests.

Andy:

And so from there it was experimenting with a bunch of different things. And what more interesting mechanism stuff you can do with NFTs, and found myself really falling really interested and curious about collective ownership and fractionalization and some of the fun challenges that come along with that and been spending the last just under two years, really just spending most of my time thinking about how to do this and in a way that's efficient and really maximizing or using all the power of smart contracts and stuff like that.

Mark Lurie:

Makes sense. So you're a sneaker collector. That's a big category.

Andy:

Yeah. Yeah. Before I was writing smart contracts, I was writing bots to get Supreme drops and Nike drops and all that stuff back in a past life.

Mark Lurie:

Nice. Nice, great. And so the project you're working on now, fractionalizes NFTs. So can you tell us a little bit about that and how it actually works?

Andy:

At a high level, the way that it works is you take an NFC and basically make a smart contract call to a factory and say, Hey, I have this NFT and I want to put it into a vault. And then that vault is going to give back a bunch of tokens and those are also NFTs. And so those will have metadata showing what NFT they represent, what they are, different things like that. And then all of those obviously can freely move around, trade, whatever. And then from there, the other major part of that is how do you eventually reclaim the NFT that is inside of this fault, and how do you get it back out? And generally that's going to be done through selling the NFT that's inside of the vault. And that can either be through a bid where someone comes to the platform and says, Hey, I want to buy this for 100 Ethereum or through all of the token holders saying, Hey, we want to sell this NFT on an exchange for 100 Ethereum and then listing it there, seeing if someone will come and buy it.

Mark Lurie:

Okay. Got it. So let me repeat that back to you just so I make sure I understand it. So you take an NFT, let's say it's a punk and you put it in a vault and then you issue shares of it, which are NFTs themselves, not ERC-20s.

Andy:

Yes. [inaudible 00:05:25] ERC-1155s.

Mark Lurie:

Okay. And what is an ERC-1155?

Andy:

So there's [inaudible 00:05:35].

Mark Lurie:

There's an NFT as in ERC-712, right? And an ERC-20 is a token like Link or RabbitCoin or just this general token standard. So what is yours?

Andy:

So 1155s have existed for a while. They were made originally by Engine a long time ago, basically for in-game assets was their first thing they made them for, but essentially they are NFTs that can also have more than one supply of the individual token. So it's almost like a contract that is both 721 and ERC-20 in a lot of ways. So you could have token ID-0 that has 100 token supply. Token ID-1 has a 500 token supply and each one of those would have the exact same metadata and all that. So it's really allows for a registry of semi-fungible NFTs.

Mark Lurie:

I see. Interesting. And just out of curiosity, why use that instead of ERC- 20 tokens, which would just be 1,000 shares of one NFT?

Andy:

Yeah, well, because really something that we care about a lot and that we think is really important is being able to meet art collectors and the people who really care about the things that they're buying, where they are, and they want to see the NFTs that they're buying. They don't want to just see a token balance in a wallet. And I think it's a really important part of the emotional collecting experience to ... if you buy 1% of a crypto punk, you want to see NFTs in your wallet that represent that 1% of a crypto as opposed to ERC-20 tokens. I think it's a pretty meaningful, emotional and psychological difference and just at the cause of why people want to be doing it.

Mark Lurie:

Yeah. I mean, that makes a lot of sense because ultimately the value of NFTs in the first place is a psychological thing, right? Collecting is so deep in our psychology, it's pre-consciousness, right? Like crows and ravens collect shiny objects, and we did since the beginning of pre-history. So it makes sense actually, that there would ... it's important to have that framed the right way.

Andy:

Yeah, when we originally launched our first version as Fractional, they were ERC-20 tokens and it was pretty consistent feedback that we got from people and users on the platform that they wish that they were NFTs, because that's how they interact with the medium in general. And so if they want to show it off in a gallery or hanging on their wall, it just feels weird that that's not really an option.

Mark Lurie:

Makes sense. And so in their NFT wallet, they actually see the image of the whole thing.

Andy:

Yeah, and have a little ... they almost think of them additions to a certain extent where you say this is one out of a thousand or something. And so there'll be small watermarks to make it clear that this is not the original NFT, but at the same time, allow people to have a nice consumptive experience of the stuff that they own.

Mark Lurie:

Okay. Got it. Okay. So let's sit back as a moment and just understand why this exists and what's going on today, and then we can pull out. So why do NFTs in your opinion need to be fractionalized at all?

Andy:

Yeah. And like you're saying, I think collecting and a lot of the stuff goes back to much more primitive parts of society. But in general, there's always going to be really rare things I think that people deem valuable. And previously, prior to NFTs, it is a significantly more complex system to make it so that a bunch of people can all own something together. When you think about a house or a piece of artwork, a traditional piece of artwork, you need a lot more rules and regulations around that to ensure that everyone actually does say own 10% of a painting, but there's a lot of demand for those types of things. You see Masterworks is a huge example of that in the art world, where they have tons of paintings that all exist, that people are able to buy into. I think in general, what ...

Mark Lurie:

Actually just to flag that, so Masterworks is an offline company. They actually will buy blue chip art pieces let's say worth in the millions. They'll put into art storage center. They'll then allow people, credit investors, I believe, to basically buy a percentage of that. They're basically buying into an art fund, maybe even a single object art fund. And that's essentially not blockchain crypto related at all, but that's how that works in a traditional art business. And I think they had a billion plus valuation or something like that, so presumably [inaudible 00:10:29]

Andy:

I think so. Yeah. I think sometime last year.

Mark Lurie:

You never know what that really means, but presumably some people are doing it.

Andy:

Yeah, definitely. And I think what's really fun and exciting about it in the NFT space is you can do it at so such a deeper level where, because it's all smart contracts and all programmable, it's not a handshake agreement. It's not that you have to go to some third party and create some legal framework for how this works. You can literally just put the NFT inside of a smart contract and say, these are now the tokens that have governance over the smart contract. And so it actually is a way better system for exactly those same types of desires.

Andy:

And I think it creates some really interesting incentives around creating community and finding like-minded people who all want to own the same things as you. And like you were saying earlier, the price of some of these really blue chip NFTs have gotten to a point where if someone comes into crypto and they want to buy something and start collecting, it's very, very hard to even know where to go, because either you have to just collect random things that you don't know who the creators are, there's no real market for them, or you have to have a lot of money to be able to come in and start collecting blue chip stuff.

Mark Lurie:

Okay, makes sense. And why are people coming in to do this today? Do you think it's because they are speculating on the future growth? Do you think it's because they a really just want to collect the piece? What are the various reasons that people come in and how does that play into the types of pieces that tend to be fractionalized? Is it blue chip art or is it often not blue chip art?

Andy:

Yeah, really the stuff that gets fractionalized has really varied and we've seen a few different buckets of things that people have shown interest in. I would say one has been almost using the art as bootstrapping a larger community or DAO or something like that. We've seen a few instances of that. One was the Doge NFT that was put onto Fractional back. This was a long time ago at this point and it's bootstrapped an entire new DAO based on a token called Dog. And they have people who work for the DAO now. And it's really turned into a whole beast of its own really outside of our ecosystem, which is really cool and a very cool application.

Andy:

And we've seen that a couple other times. This one called FreeRossDAO, where they bought Ross Holbrook's Genesis NFT, but in that fundraise to buy it, they raised more than enough money. And now the token is essentially a governance token over that treasury of funds. And they're trying to do what they can to free Ross Holbrook. And so that's been a really interesting use case that we didn't totally expect to be honest, but we have seen a lot of pooling together funds to buy NFTs. That's really become a really big use case that we've seen.

Andy:

One of the coolest ones, and we've seen this a few times as well, has been for charitable donations, someone, Nadya from the artist Pussy Riot and alongside some other people for the Ukraine sold a Ukrainian flag on, I think it was on Zora, and there was I think in total, maybe almost eight million were raised to donate to Ukraine. And now that Ukrainian flag NFT is on our protocol, which is just a very cool use case to see. That doesn't really fit into any particular other bucket of things, but it's very cool.

Andy:

And then alongside that, we've seen a lot of people who are just really excited to buy stuff that they previously couldn't. I remember when we first launched ... we had some pretty cool Fidenzas and a full collection of art blocks and stuff. And we got a lot of messages from people saying I could never afford to buy a Fidenza, but I love them. And I think they're really cool and I'm excited about what the future has for art blocks. And so now I have the opportunity too, and that was what was really exciting for a lot of people.

Mark Lurie:

Interesting. Okay. So it seems like there's three things. One is people who are pooling money to buy an expensive NFT, presumably for appreciation. A second is collectors who are buying what's essentially an addition of a larger piece, so they can credibly feel like they own it and they do. But it's not technically the original, but it gets them a lot of the emotional way there. And then three, for these almost non art purposes, it's access or membership or support of some community or charitable donation. That makes a lot of sense and goes to the power of NFTs as an artistic medium, because it opens up a lot of dimensions you can do with it beyond just it being the art itself. Do you have an opinion yourself on the types of NFTs that are a best fit to be fractionalized?

Andy:

Yeah, I think so. And again, it's probably not just like there's one size fits all, but I think the biggest thing is that different types of NFTs probably need different types of collective ownership experiences. The way that people want to own a crypto punk together is probably significantly different than the way that they want to own in game asset NFT together, or a nouns NFT because of the governance applications. Or even a charitable donation thing or the Doge NFT where they really have these unique instances.

Andy:

And so I think, especially with scaling Ethereum's current prices and all of that, it doesn't make a ton of sense to throw stuff onto the protocol that's super cheap or not even super cheap, just even middling tier things. We don't generally see a ton of demand and excitement around something that's worth a thousand bucks or sometimes even 10,000 bucks, because generally people who are in the space and collecting NFTs probably have that kind of disposable income anyways currently. And so there's just not going to be that level of demand right now to do that, but I would imagine that would change over time slowly. We're not really there yet.

Andy:

And so generally what we've seen is the really high end blue chip stuff has had a lot of people who are just collectors and super excited to get in and participate in a market and buy NFTs that they previously couldn't. And then the other thing I think is really the stuff that has a little bit more vision to it, where it's like the Doge or FreeRossDAO where they are fractionalizing an NFT and doing that, but there is something else going on where it's a group of people all online, creating some new community and finding like-minded people who can all gather behind some cause that's more than just whatever the NFT is that's inside of vault.

Mark Lurie:

Okay, makes sense. And once you have these NFTs, I mean, they are more easily tradeable, right? Because the additions are not really unique. So how do you find spreads and market depth compare for these fractional NFTs versus for the NFTs themselves? And how do you create a market? Do you have an automated market maker on your site or on the blockchain that you've developed and deployed, which makes a market for these?

Andy:

No, actually, not really. So in our version one fractional, since they were mostly ERC-20 tokens, we integrated 0x API onto the platform and would just find markets that existed. Generally, they were not the most liquid tokens because I think there's a general misconception that just fractionalizing an NFT into a bunch of smaller pieces means it's going to be more liquid, but I'd say that is generally not going to be the case in a lot of ways. And a lot of that goes to just one. The total value of all of these tokens is really not that high. So it's not like you can go into Uniswap and buy half the NFT with very little slippage. The slippage would be crazy. And so for the most part, what we've seen is smaller pools and actually a lot of peer to peer trading even, and they generally are not moving that much.

Andy:

And then there's definitely exceptions to that. Some of the really, really large stuff obviously has more volume and you see more volume of purchasers around the time of the vault selling the NFT. If someone comes in and places a bid, it becomes much more clear that there's something going on and you can see more people coming and participating at any given time. But then for our newer versions where all the fractions are NFTs themselves, what we're really seeing is more so peer to peer stuff. That's what NFT owners know and that's what they like. And so they want to trade on an experience that feels like OpenSea, that feels LooksRare or Gem or Genie. They aren't really as interested in AMM type models or things like that.

Mark Lurie:

Makes sense. Okay, got it. And just out of curiosity, so a vault can actually trigger selling the underlying NFT. Is that then a majority vote of the holders?

Andy:

Yeah. So there are two different ways that the sale happens. One is with listing the NFT on an exchange, and so a good example of that is with the punk. Punks basically only trade on the punks marketplace. That's 99% of all punk's liquidity is on that marketplace. And so what makes the most sense to us is that if a bunch of people all collectively own a punk together, they should be able to list it for sale on that marketplace. And obviously that comes with a lot of governance risk because it's a cheaper thing and much more reasonable to 51% attack, something like that.

Andy:

And so we use a bit of a different system that we call optimistic listing, where basically I could come and say, I own 10 out of 100 punk tokens. I could come to the vault and say, I want to list our punk for sale for 100 Ethereum, and I'm going to put up my 10 tokens at a 100 Ethereum valuation. And then everyone will have a rejection period where users can come and say, this is too cheap, I don't think this is fair, and they can buy that user's tokens. And so if they don't buy all their tokens during that rejection period, then the punk gets listed on the underlying exchange, in this case, the punk's marketplace. And then at any given point, if either the original proposer withdraws their tokens or a user comes and buys all of them, then the punk is de-listed. And so it's this autonomous way for users to agree or disagree to list the underlying [inaudible 00:21:39] NFT. And then the alternative is a bid.

Mark Lurie:

It's like a writer first refusal with the drag along essentially.

Andy:

Yeah. You could say that.

Mark Lurie:

Okay, interesting. That's clever and how other things like that have been dealt with in the past, in the offline world. So it makes sense that you would have those parallels, and if they worked there, they would work here.

Andy:

Yeah, and it's an interesting challenge because I think a lot of the collectors on our platform, they have a desire to see vaults act a lot like DAOs, at least the really outspoken people do. They want to be able to vote on how to sell it, where to sell it and trying to make it clear people, listen, these are not incredibly expensive DAOs to 51% attack. There have to be more specific and explicit mechanisms of how do you actually take actions. Otherwise, it just won't be safe. And so that's been a fun design space to build in

Mark Lurie:

Super interesting. Okay, great. So there's a couple more questions I have just to make sure I understand the lay of the land today. The first is regulatory. And NFT is not a security, it's a collectible, right? Arguably if you fractionalize it, it could be argued that that fraction is security and then that could implicate securities regulations. So how do you think about that and what are the arguments in the community for and against that type of treatment?

Andy:

Yeah, obviously, and it's very much so a lot of unknowns as is 99% of crypto up until this point. But up until now though what we've done to really try to position ourselves as best as possible is one, we've spent a lot of money on lawyers and legal fees who know a lot more about this than I do. Yeah. But then alongside that, I think the biggest thing is really trying to one, make everything fully decentralized, non-custodial. There's no real reliance on any third party or any group of people, any individual person to have any of this work, which I think is crucial to anything in crypto, but same with this. We take it very seriously. And then the other thing is really just trying to make sure that ... I'm trying to think about the right way to phrase it, but essentially that what we're making is really no different than any other DAO that exists. They're just really small.

Andy:

And it's a DAO that owns one thing as opposed to a DAO that has a treasury of tokens or owns a protocol. And really based on a lot of the feedback we've gotten and the way that we've structured things, we feel really confident that that is the case, assuming you do things correctly. And there's a lot of other ways that you could do it that would I think be a lot more in the regulatory gray area. But to us, each of these is a small DAO that has a set of rules of what it can and can't do. And if a DAO that owns an NFT is a security, then most DAOs that own anything are a security. And so just trying to position ourselves as best as possible with what little guidance we've gotten so far.

Mark Lurie:

Makes sense. Okay. Got it. I mean, I think this all makes sense, right? Masterworks, right, is a security and they have accredited investors because of that. Right? And the definition of a security is the how we test, which is I'm going to butcher this a little bit, but are you buying something with the expectation of profits based on the work of someone else? Right? And so if you are buying a fractional piece of a NFT, well, in the case of Masterworks, it's probably a security because someone else is doing the work of storing it and also deciding whether to sell it and when. Whereas in your case, people buying these are not buying them with the expectation that any specific person is going to be storing them or managing that fund or deciding whether to sell. It's all done decentralized by smart contracts and so it fails how we test. And to me, that actually makes really intuitive sense. I mean, I'm no lawyer, but intuitively that feels right.

Andy:

Yeah. And I think a lot of it is just most people when they learn about what we're doing, they ask who custodies the NFTs, and we say, no one does and they're shocked. And so I think a lot of it is just education and explain to people, how does this actually work? What are the mechanisms that we're building? Because I think most people think that what Tessera does is you send us NFTs, we send you tokens. And then when you want to sell, you send us an email and ask us to sell it. I don't know, it's funny.

Mark Lurie:

Makes sense. Out of curiosity, so Tessera is your new brand, formally Fractional.

Andy:

Yeah.

Mark Lurie:

Why that name?

Andy:

Yeah, it took us a long time to get here, but we're really excited about it. I think for the most part, there were a couple things. One, the name Fractional being so on the nose with everything that's happening, it was really nice at the start because when we said our name, you generally knew what we were doing, but it also led to a lot of confusion for people. People would call us Fractal, Fractionalized, Fractional art, fractional.art. Our name was just Fractional. And as much as we tried, we couldn't get people to say the right name and that was just very frustrating after a while.

Andy:

And then alongside that, we really, really want people to be buying and collecting things that they love on our platform and in conversations with a lot of the more serious artists and creators who we want to work with and do stuff. I think there was a certain level of talking about things as being fractional, where it just sounded more like a Defy project or something that was interested in something different than what artists wanted from feedback that we had gotten.

Andy:

And yeah, while obviously there are Masterworks in these things that are doing things that are incredibly financial in a sector that is tangential to what we're doing, it's really not what our primary goal is. And so that was just a bit limiting there as well. And Tessera really, it's a very random word that most people probably have never heard of, but the definition of it really fits exactly what we're trying to do. And so, one of those things is that Tessera is a tile in a mosaic artwork. And the other meaning that I believe is Italian, is it means an identity pass or a ticket to an event or some way that you identify yourself.

Andy:

And so to us, what we're creating and what we're trying to build is a protocol and a platform and an ecosystem where you can buy pieces of artwork that you love, that you identify with, that can get you into a new community of people who you connect with or find some like-minded people of interest, or maybe have an NFT that gets you into a party or something. Who knows?

Mark Lurie:

Knows makes sense. That's a great name change. It's hard when you're starting a company, you always have this struggle between a name that describes what you do so people know what you do, and a name that is flexible and can be used for anything you could potentially become. Right?

Andy:

Yeah.

Mark Lurie:

And the thing early on, it's almost always better to just have something that describes what you do, because no one even knows what you are. Later on, it becomes constraining and always what you started out with becomes something bigger and different. And so it makes sense that you need to change to a more generalized name. It sounds like a great pick. I like the name.

Andy:

Yeah. Thank you. I think we had experimented with a lot of stuff. A very early on name that we were thinking about actually was Mosaic, which is actually how I found the word. I was just on a related word search thing and found it. I was like, oh, this is a title [inaudible 00:29:52]

Mark Lurie:

I spend a lot of time on thesaurus.com.

Andy:

Yeah. My mine was ... it's relatedwords.org.

Mark Lurie:

Oh.

Andy:

It's an amazing site. It's really, really bare bones, but it's really fun. Honestly, it's fun to do regardless. You just type in a random word and it just spits out 100 related words to it.

Mark Lurie:

.io?

Andy:

I think it's .org. Let me see.

Mark Lurie:

.org. Okay, awesome.

Andy:

Yeah, [inaudible 00:30:13] relatedwords.com.

Mark Lurie:

This is like the ninja words of thesaurus.

Andy:

Yeah, it's a fun one, but I spent so many hours on there.

Mark Lurie:

Oh, wow. That's great. Oh, yeah. I like it. Okay. Great tip. Awesome. Okay. So the other thing I've always struggled with, and for those listening, I spent about 10 years in the art market doing an online marketplace for high end collectibles, not blockchain related and then early on a two protocol. And two things that keep coming up I've found in business ideas and innovations in the art market. There's one misconception, which is that art market is this huge market because headline numbers are very big, right, tens, hundred billion dollars. But the reality is that the super majority of that is for very, very expensive blue chip items. And the art market for smaller stuff is actually pretty small. And so that misconception, I think, throws a lot of people off.

Mark Lurie:

The second and I think more relevant here is that there is a constant desire to bring more transparency to the art market, to make it more accessible to more people. And fractionalization is something that seems to come up a lot because that's one way of making it accessible to other people and bringing more transparency. And one thing that I noticed in the traditional art market is that opacity, which is the opposite of transparency, right, is not necessarily a bug of art and collectibles. It actually is sometimes a feature, right? A piece that is transparent and it's sale history and transparent, et cetera, might actually trade for less than a piece that doesn't have trade history and isn't transparent and isn't accessible. And so I wonder how you think of that in the context of fractionizing NFTs. Is this actually helpful for the value or does it actually hurt the value because now more people can essentially access it?

Andy:

Yeah. I get this question a lot about basically, is there some specialness for punks or something if the floor is really high and it's hard to own at all. And generally my responses, I think in cases like this, the ability for a bunch of people to all own something together is value additive, in my opinion. And when I think about what is valuable for crypto punks in the long term, it's probably that the most people in the world possible are excited and happy about crypto punks. To me, one of the best ways to do that is to allow as many people as possible to be a part of it.

Andy:

So while I can see where that line of thinking would go, I think that a big part of web three and a lot of NFT stuff in general is trying to relatively figure out how do you think about things that are free to consume, but valuable to own. And I think that this collective ownership or fractionalization doesn't really change that mental model of thinking in a lot of ways. It's just another piece of the puzzle. But the same thing can be said of anyone can right-click-save an NFT, so why is the original one valuable? And I think that this fits into the same discussion.

Mark Lurie:

Makes sense. Interesting. Do you have any views on why this practice is not more widespread in the traditional art market? I mean, Masterworks aside.

Andy:

I think that it's just really hard to do. To me, this is really something that it just makes so much more sense as a crypto native feature because you can actually own the stuff and you can actually programmatically do this. You don't have to spin up an LLC and do all of that just to allow people to all own something together and so I think that's a big part of it. And we've seen some other traditional companies also pop up who are doing this, Rally Rd is a good example. They do a lot of sports memorabilia and collectables and race cars and stuff, and people do like it and do it. But I've talked with people on their team and it is a process from the point of saying, okay, here's the Mickey Mantle baseball card we want to put on our site to actually putting that card on their site. There's a lot of steps they have to do. Whereas when it's all NFTs in a smart contract, you send one transaction and it's all done.

Mark Lurie:

Cool. Yeah. I mean, makes sense. That's a perfect example of a use case for blockchain and smart contracts and for DAOs incidentally.

Andy:

Yeah.

Mark Lurie:

Right? Yeah. It's interesting. You get a lot of people who their approach to use cases in crypto is, well, why can't you do this the normal way? Right? And then if it's possible to do it the normal way, they'll often just dismiss the use case, which is a really strange thing, right? Because there's multiple ways to solve almost every problem in the world, right? And so it's this, no, because instead of yes, if mindset. Right? And here you can actually say, you could do it the normal way, but it is so much more complex and complicated and expensive and time consuming that for practical purposes, it is 10X easier to do it this way on the blockchain. And that's a perfectly fine reason for a use case. It's a great example.

Andy:

Yeah. No, totally, and it's interesting too. It becomes a lot more challenging if the NFTs represent real world assets and all of that. Then you get into a whole other can of worms that we have up until now wanted to stay far away from.

Mark Lurie:

Yeah. Well, I'm going to open that can of worms some day.

Andy:

I'm sure it'll come eventually. Let's do it.

Mark Lurie:

Yeah. All right. Well, one more question before we get into that is how do you think the artists react to this? Did they think it's good or bad for provenance? Are they happy or sad that there's this permissionless minting of many additions around a single unique piece they've created?

Andy:

It really depends, in my experience. We've talked to artists who love it and think it's sick and think it's an awesome way to build community and are all for it. We've talked to artists who say, obviously I'm not going to stop you, but it's not for me. I just want to make artwork and anything else people do with it is up to their discretion. It really, really varies. And I think it always will, but for the most part, I would say people like it. Every once in a while, someone will say, it's not for me or I don't really like [inaudible 00:37:34] No one's every really said I'm upset.

Mark Lurie:

Is there a personality trait or an approach or style of artists that you think is more correlated with one response and reaction than the other?

Andy:

I think generally I say more so it's easy to say profile picture projects and collectibles are pretty cool with it. They're like, oh, it's sick, more composability on top of the stuff we built. Awesome. It's generally from people who I would say are more traditional artists, but even then I think it really depends. So I'd say kind of but [inaudible 00:38:14] I've spoken to a bunch of the highest selling artists and most of them are like, yes, this is interesting. Or at least just like, yeah, it's cool, but I don't really care about it. I think a lot of it just comes down to how artists think about their own work and how they want to present themselves in the way that they talk about the stuff that they do, which I totally get. I think everyone has their own way that they want to create their own narrative around their work and who they are and what they're making. And so I've never had anyone message us and be like F you, man. I can't believe that my NFT's on your protocol.

Mark Lurie:

Yeah.

Andy:

The most I've ever had is just like, it's not my favorite. I don't care about it or don't want to share it.

Mark Lurie:

It's interesting and I think it's probable that most of the creators in crypto are inherently more open-minded and open about this. I mean, they're here, but traditional artists, and in particular the gallerists, are very protective over when they let NFTs sell and where they're shown, because they're trying to build this provenance record in order to build a track record for an artist's career over time. And so they're very protective about that stuff. And it's interesting to me that that's not really the case here, but I guess people like that probably wouldn't be doing NFTs and crypto in the first place because it's inherently uncontrollable once you put it out.

Andy:

Yeah. I think to be an NFT artist, you have to accept that everything you make is on this significantly more global and liquid market than the traditional art market. And at any point, your collector can list it for sale on a plethora of different exchanges. And so you have to give up that part of control. I'm sure it's weird. I think they just have to find different ways to control their narrative, whether it's when they originally released the art or different things like that, as opposed to more so the secondary movement and how the art flows from different hands and what galleries it's sold in and stuff.

Andy:

I think you have to accept that maybe isn't the way that you can control the narrative of the art that you make. Or make sure you get the right collectors in place, who you can have conversations with and explain what you want to do. I think a great example of that is Justin Aversano of Twin Flames. I think he's done a really great job of finding people who he knows are going to be lifelong collectors or are really huge fans or friends and trying to make sure that he can get them pieces when someone wants one. And he's been very, very intentional about that in a lot of ways. But even then sometimes you do that for someone and then it goes up 10X and they say, you know what? I'm going to sell it.

Mark Lurie:

Yeah.

Andy:

He can't stop them.

Mark Lurie:

Yeah. Yeah. The four Ds are death, divorce, debt and displacement, which is the overwhelming reason that items that are collected are eventually sold, whether the collector intends to or not because people need money sometimes. So at least one of them comes for everyone at some point, death, if not the others.

Andy:

Yeah.

Mark Lurie:

Okay. So now I'll open this can of words. How do you think this changes once assets come in the blockchain that are either real world assets or cash flowing assets and are brought on chain, right? Art, sure, you can fractionalize it. What if it's a mortgage? What if it's a boat or a house or a silo of corn? Do you think that your technology is going to be applicable to that?

Andy:

Yeah. So it's a great question. I get it a lot, not surprisingly. The really boring answer is I don't think anyone really knows. I think the to me main open question there is really what are the regulatory frameworks around bringing these things to be on chain to where whoever owns this NFT actually owns the deed to this house or actually owns the corn silo? Those are open ended questions that I certainly do not have the answer to, and I don't think very many people do, if anyone. And so to me, that's the first step that we have to get to before we can really start thinking about how do we make those assets fractionalized or really anything, lending of them [inaudible 00:42:43] or anything.

Andy:

This is something we thought about a lot at MakerDAO around real world assets, and it's been a really challenging thing there even after I've been gone for a few years. You probably have to have a white list of people who can buy this house because you have to have KYC'd to prove that you're a U.S. person. And so what does that mean? And there's a lot of challenges there that we just don't have access to yet. And so what I would say is I think at a high level, the way that I've thought about this is the mechanisms and what we're building I think probably stand for a real world asset that's on the blockchain or a cash flowing whatever it is versus a picture of a monkey, but probably there are small tweaks and things we have to change.

Andy:

And there's probably other new functionality and modules and add-ons that we would want to have in order to accommodate that. I could very quickly see a version of this, a version of our protocol, where you throw a NFT that represents the right to live inside of a house. And then it turns into a timeshare for the house where everyone who owns one of the governance NFTs for this house NFT gets access for a week of the year or whatever. And it sounds silly, but it's cool. But there's a lot of other stuff that would have to go into that outside of the technological side.

Mark Lurie:

I mean, timeshares are a thing, clearly.

Andy:

Yeah.

Mark Lurie:

Yeah. Got it. Well, we're almost at time, Andy, thank you so much for joining us. Is there any other thoughts you'd like to share with the audience? And can you give them a little shill for your product and also how they can follow you?

Andy:

Yeah. No, thanks for having me. I feel like we really covered a lot of what we've been doing, so I don't have too much else to mention there. But if you're excited about owning NFTs and buying NFTs with your friends and all that fun stuff, definitely check out tessera.co, or our Twitter, which is Tessera. Or you can follow me on Twitter, Andy8052, and I'm sure I will have tweeted about it relatively recently at any given time.

Mark Lurie:

Great. Well, thank you again so much for joining us.

Andy:

Thank you.

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