How the Vancouver-based NFT company Dapper Labs launched NBA Top Shot – and pioneered a new multibillion-dollar business model
Dieter Shirley is something of a legend among cryptocurrency fanatics, in part for his technical achievements—he helped establish the non-fungible token (NFT) protocol on the Ethereum blockchain—but also thanks to his signature goatee, which sprouts from the very bottom of his otherwise clean-shaven, cherubic face.
The chief technological officer of the Vancouver-based Dapper Labs, Shirley conceived some of the key defining features of CryptoKitties, an online craze where players use the cryptocurrency Ether (ETH) to buy, breed, collect and sell cartoon cats. Thanks to Shirley’s ingenuity and hidden algorithms, the cats, when mated, might spawn offspring with rare—and potentially valuable—attributes such as bat wings, antlers or Viking helmets.
Since the game launched in 2017, more than 1.9 million kitties have been “born” to players, generating more than US$40 million in sales both from initial direct purchases from Dapper Labs and by owners reselling their kitties on secondary markets. In 2018, one cotton-candy-coloured kitty named Dragon was born with a rare, spiky tail; it sold for the equivalent of about US$172,000. Today, the current owner is asking the equivalent of US$1.8 million.
Max-o-Matic/The Globe and Mail
Shirley’s innovation created not only a menagerie of one-of-a-kind digital felines, but also an easy way for beginners to engage with the baffling world of blockchain technology. Each kitten is a non-fungible token, an impossible-to-replicate digital file made possible by blockchain technology. But users don’t really need to understand that—all they need to know is that the kittens are cute, cuddly and potentially highly valuable. Indeed, CryptoKitties purposely uses a fusion of gaming and collectibles to bring aspects of the blockchain technology, like NFTs, into the mainstream. Roham Gharegozlou, the CEO of Dapper Labs, is “the man who wants to make NFTs fun,” according to Fortune.
Gharegozlou founded the company just three years ago, spinning it out of Axiom Zen, the “venture studio” that he created in 2013 to nurture startups. CryptoKitties began, in fact, as an Axiom Zen endeavour, but it quickly became clear that an entire company could be built around making the blockchain accessible to all. “Blockchain is the biggest thing to happen to the internet since the iPhone,” states Dapper Labs’ mission statement. “But for this technology to realize its real-world potential, it needs to, y’know, be used.”
After the kittens’ success, Dapper Labs launched NBA Top Shot in October 2020, partnering with the professional basketball league to produce the equivalent of digital trading cards. Those, too, have proven highly lucrative, with sales estimated near US$750 million.
In the past year, some of the savviest investors in tech—plus “half of Hollywood,” as TechCrunch put it—poured gobs of capital into the company. In March, Coatue Management led a US$305-million funding round that involved multiple high-profile venture capitalists along with more than 30 professional athletes and celebrities, including Michael Jordan, Kevin Durant, Kyle Lowry, Will Smith and Ashton Kutcher. It was quickly followed by another US$250 million in September. The company now has a multibillion-dollar valuation—all from selling digital baubles. Interest in NFTs is growing, with everyone from Mark Zuckerberg to Canadian indie rockers now eyeing ways to sell you pixels to call your own. What Dapper Labs has done with impressive speed—and constant proselytizing—is adapt the human craving for ownership into a virtual world.
Dapper Labs didn’t invent non-fungible tokens. The first collectible NFTs available to the public were CryptoPunks, a collection limited to 10,000 simple, highly pixelated images of different punky cartoon characters. Originally released for free by Larva Labs, an American company started by Canadian software developers Matt Hall and John Watkinson, the pieces of artwork soared in price as a cool historical artifact of the internet. The most expensive one ever sold, #3100, a blue alien punk, went for the equivalent of US$7.5 million last March. The cheapest one available in early fall cost the equivalent of US$386,911.
Until very recently, it would be unthinkable to charge that much for a piece of digital art—regardless of its quality or its creator. Anyone could copy and display it with the click of a mouse. But the invention of NFTs has brought the notion of scarcity to the digital world. That has suddenly increased the perceived value of intangible objects—artwork, GIFs, cartoon characters, a video clip of a sports highlight—which could otherwise be copied. Think of an NFT as indelibly imprinting a digital work with the creator’s encrypted signature, stored on the blockchain as part of an immutable digital ledger. It’s a certificate of authenticity to prove it is one-of-a-kind (or at least part of a limited edition) and usually includes a licence to use, display or sell the underlying asset it’s associated with. Via blockchain technology, anyone can verify a virtual object’s authenticity and track its provenance.
CryptoKitties was the first NFT “killer app,” demonstrating that, as public acceptance of the non-fungible concept grows, tokenizing digital objects could be monetized on a wide scale. The game fostered a massive eruption of other collectible NFT products—from stunning digital art to goofy Sneaky Vampires and even clips of stand-up comedy bits—which people can buy and sell on hyperactive online auction sites such as OpenSea and Nifty Gateway.
After CryptoKitties’ success, says Shirley, “it wasn’t that hard to get business conversations going.” Dapper Labs had pioneered a new business model on the internet, creating an NFT cash cow. Everybody wanted in. “What was hard,” Shirley says, “was finding a good partner.” Some talks with major corporations—he declines to say which—”were like, ‘Oh man, these guys are making millions of dollars. On their cats! Imagine what we could do with that!’”
Max-o-matic/The Globe and Mail
But the NBA was different, says Shirley, noting it was Caty Tedman, Dapper Labs’s head of partnerships, who led the pitch to the league and its players’ association. Tedman previously served as director of social media analytics and strategy at the National Football League. Before that, she managed social media for the National Hockey League.
In its negotiations with the NBA and its players, says Shirley, it was clear they “wanted to create a new kind of engagement for fans that was digitally native. That was music to our ears. We are absolutely convinced that NFTs are a new kind of asset that reflects peoples’ desires to own things.”
Dapper Labs wasn’t the only NFT company that the National Basketball Players Association explored partnerships with. “What got us excited about Dapper Labs,” an NBPA spokesman wrote in an email, “is that they were the only ones at the time to have a track record of success, with CryptoKitties. They were creating their own platform so that the consumer experience would be frictionless, whereby they only needed to use a credit card to experience blockchain technology, and they also had some unique product ideas that were unlike the other proposals we were evaluating.”
With Top Shot, basketball fans can buy and resell the contents of packs of digital NFT trading cards. The cards exist only on an owner’s phone or computer. They vary in rarity, and each pack contains various “moments”—short video clips—of individual NBA players making memorable plays. The NBA sells new “drops” of Top Shot packs directly from its dedicated website, with plenty of explainer blogs and FAQs for the NFT-confused. (In August, Dapper Labs added the Women’s National Basketball Association to its roster.)
There are four tiers of packs; the least expensive and most widely available tier is called Common, which cost US$9 and make up 96.6% of all moments issued. For some moments, a limited-edition run of 40,000 NFTs are released; for others, only 4,000 might exist. Those rarer images usually fetch more on the secondary trading markets.
At the other end of the scale are the infrequently dropped Legendary packs, costing US$230. With these, buyers might receive a highlight clip that’s only been issued 49 times as an NFT. On the secondary trading market, some of these moments are worth a fortune. A LeBron James dunk—one of 49 released in June 2020 during Top Shot’s beta phase—was bought in February 2021 by a group of investors on the secondary market for a record US$208,000 in what Gharegozlou called an “iconic buy.”
More than 1.1 million people so far have registered an account with Top Shot. To date, according to Cryptoslam, an NFT data-tracking firm, sales have exceeded US$764 million when both direct sales from the NBA and secondary sales on its auctioning site are considered. And thanks to a feature built into Dapper Labs’ blockchain technology, the company will perpetually split a 5% royalty with both the league and its player associations every time an owner makes a subsequent sale of his or her moments.
More than US$2 billion was spent on NFTs in the first quarter of 2021, representing a 2,100% increase over the previous quarter, according to nonfungible.com, which tracks the industry. But buying NFTs with cryptocurrencies can confuse the average consumer, who is likely unaccustomed to such things as “gas,” the fee on blockchain networks needed to validate and complete any transaction. That fee fluctuates hourly and can be expensive depending on how quickly someone wants to complete a sale or purchase, or how “congested” the blockchain might be. Gharegozlou, who has more than 66,000 followers on Twitter, recently retweeted a complaint on another Twitter account that it would cost him US$348 in gas fees just to purchase an NFT going for US$82 on the Ethereum platform.
Dapper Labs hopes to solve these problems with Flow, its own open-source blockchain platform designed to make it easier to onboard crypto-naive consumers to games and other online applications. The company claims the gas fees on its platform are cheaper than Ethereum, and that Flow is more scalable since it can handle far more transactions per second. It’s also “mainstream ready” because credit card payments, instead of cryptocurrencies, can be used. That’s made Flow more attractive to the developers of so-called “decentralized apps,” or DApps.
DApps run on peer-to-peer networks, side-stepping central servers controlled by big tech companies like Apple or Google, meaning they tend to be more community driven. Most DApps currently are online games. But the proliferation of DApps could upend various sectors, including insurance, finance and real estate industry, letting consumers save costs by skirting traditional brokers, bankers and realtors. Chainyard, a DApp that has partnered with IBM, helps companies verify the identity, sustainability and integrity of potential suppliers. TRACEDonate is a DApp that lets charitable organizations and individual donors track how recipients use donated funds.
But Gharegozlou’s company is in a race against growing competition in the very NFT space he helped pioneer. The Topps Co. started packaging baseball cards with its Bazooka bubble gum back in 1952. Earlier this year, Topps started selling officially licensed MLB trading cards as NFTs. And it has since expanded its digital merchandise. Topps’ latest drop is based on a Godzilla comic book.
Musicians also see an opportunity to leverage the technology. The band Kings of Leon released an album in NFT form—the digital equivalent of a limited-edition vinyl record. Meanwhile, Raine Maida, lead singer of the Canadian alt-rock band Our Lady Peace, recently joined a blockchain company called S!NG as chief product officer. S!NG enables bands and other artists to release music, writings, art, and even their evolving blueprints and scribbled ideas for their work as ongoing, time-stamped NFTs using an app that runs on Ethereum. In one way, those NFTs, aside from being a sellable product, can also serve as a means of protecting intellectual property from theft or copyright disputes.
Maida and his band released 500 copies of their latest album, Spiritual Machines 2, as an NFT in November, with the album available through streaming services like Spotify two months later. While Maida says NFTs present a new way for musicians to protect their IP, they’re also a powerful community building tool for artists. “When I was playing in clubs, we would put out a clipboard and try to get people’s email addresses. Why? So I could talk to you directly.” That’s more difficult in the streaming age.
NFTs can create a more intimate connection between creators and fans, says Maida. With his new album, fans who buy it on S!NG get individualized album covers generated by an algorithm, which themselves could become collectibles. And though the album will be available on streaming services barely two months after the NFT release, those who “own” NFT versions of Spiritual Machines 2, rather than “renting” them from Spotify or Apple Music, may discover they have hidden bonuses such as free concert tickets.
With so much activity surrounding NFTs, Dapper Labs is eager to extend beyond basketball to other sports—and more. The same day it announced its latest US$250 million raise, it revealed it had formed a partnership with La Liga, the top Spanish soccer league. On Sept. 29, Tedman also announced Dapper Labs had partnered with the NFL and its players association to produce digital trading; Dapper Labs will soon also offer digital collectibles for the Ultimate Fighting Championship.
But Gharegozlou wants to take tokenization beyond sports leagues to entertainment. To that end, Dapper Labs is currently beta-testing Seussibles!, licensed NFT collectibles featuring Dr. Seuss characters such as the Grinch and the Cat in the Hat. There’s also a partnership with Genies, an avatar tech company. Celebrities like Cardi B, Rihanna, Jennifer Lopez and Justin Bieber have swarmed to Genies to create their own NFT avatars as alter-egos they use to interact with fans and sell them additional products. Last February, using Genies, Canadian singer Shawn Mendes sold fans NFT mementos of his life, including a virtual copy of his guitar and a vest, on OpenSea. But Dapper Labs is now developing a “Genies Marketplace” on Flow, hoping to grab more of the market from its competitors.
The NFT market is both manic and fickle. One moment, simple, pixelated CryptoPunk portraits are all the rage. The next, it’s another NFT newbie such as the Bored Ape Yacht Club. BAYC, as fans abbreviate it, consists of 10,000 digital portraits of long-faced, lackadaisical-looking apes sporting everything from raggedy sleeveless T-shirts to sailor uniforms. The current floor price for one is about US$137,500.
When Top Shot first came out this past February, it was the hottest NFT around, its daily secondary sales volume peaking, though briefly, at US$45.7 million. In September, daily sales had dwindled to just over US$600,000, but are picking up again with the NBA 2021-22 season newly underway.
Yet, might the current NFT fad collapse like so many others, dating back to Dutch tulip mania in 1637? In his book Speculation: A Cultural History from Aristotle to AI, published this past June, Gayle Rogers, a professor of English at the University of Pittsburgh, examined the human propensity for betting on the future value of things, whether dot-com stocks or flowers. “We simply don’t know if they’ll just be a fleeting mania,” says Rogers. “Not until it’s done. Pokémon cards are back now. People who bought them 20 years ago are now cashing in for hundreds of thousands of dollars. Were they making smart investments 20 years ago? Or were they jumping on a craze and acting maniacally?”
Still, for those who grew up in a pre-digital world, he says, the idea of conferring value on digital objects that can be so easily copied “seems oxymoronic.” Yet, he acknowledges, the NFT crowd “operates on a different logic.”
There’s plenty of anecdotal evidence that a good chunk of NFT buyers are speculators looking for quick profit. But James Kacsur, a devotee who streams independent content on Twitch about Top Shot using the handle Jimbo_M2G, maintains that for most collectors, it goes far deeper than that. “Top Shot probably saved my life.”
The University of Michigan student, studying for a career as a physician assistant, fell into a depression in the summer of 2020 after a stint working in a brain injury behavioural unit. Patients threw everything from microwaves to knives at him before he quit. Afterward, returning to school, he struggled with his mental health.
Last February, his brother, who’d just heard about Top Shot, told him to stop everything he was doing and go “invest in one of your favourite things in the world—basketball.”
Kacsur admits Top Shot has addictive qualities for him and he’s likely spent too much money on moments. But the support of his 1,100 followers in the Top Shot community pulled him out of his depression. In a Twitter exchange, he says “the main obstacle in the NFT world is accessibility.” The popular marketplaces for other kinds of NFTs, including OpenSea and Rarible, operate on the Ethereum network and “can be a big learning curve for new users,” he wrote. “Dapper Labs has made it a point to make their NFT experience as seamless as possible.”
But even if individual products prove to be flavours of the month, Dapper Labs is betting the underlying technology will become increasingly relevant in our digital world. Back in 2018, Gharegozlou delivered a TEDx talk in Vienna, offering a strange vision of a coming world. He talked about the “metaverse,” a virtual reality where humans exist as avatars. Using augmented reality devices such as Facebook’s Oculus VR headsets, we can slip inside and zip easily around a growing digital landscape. Given Mark Zuckerberg’s announcement this fall that Facebook would rebrand its parent company as Meta—with a focus on building products for this virtual world—Gharegozlou’s talk now seems prescient.
At its heart, Dapper Labs solves one small problem of living in the metaverse. How do you claim something as uniquely yours if everything is made of easily replicated bits of data? “Ownership is deeply human,” Gharegozlou told his Vienna audience. And while it might seem ludicrous to spend hundreds of thousands of dollars on a piece of digital artwork, does it make any less sense than splurging on a Rolex or an oil painting? As Gharegozlou put it in an interview with This Week in Startups last April, “It just happens to be that these are digital things rather than physical things. Which for entire generations of people at this point feels even more natural than having piles of things.”
For Gharegozlou and his investors, Dapper Labs and its products hold the promise of harnessing the blockchain to dominate this realm. In a recent press release, Coatue chairman Dan Rose said, “We think Dapper Labs is a leader in the space at the infrastructure level with Flow blockchain and in the application layer with NBA Top Shot.”
But for that to become a reality, regular consumers first need to get comfortable with NFTs, cryptocurrency and the blockchain. Dapper Labs is easing us all into this new world, says Dieter Shirley, the man who enabled a million digital kittens to spawn. “When we have something like blockchain, we aren’t going to teach people about it with blog posts and explainer videos,” he says. “They need to actually get their hands into it.”
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