Hype brings its own risk, #5/50
What we can learn from fine wine, the MekaVerse reveal, and our need for judges
Château Margaux, one of the oldest and most celebrated French wine makers, was faced with an unlikely problem: it had too much good wine.
This is unusual as wine production varies from year to year, as does the sun, temperatures, and rainfall. And it is especially unusual for French Bordeaux wines, long-considered the benchmark against all other Cabinet Sauvignons are measured.
Why would having too much good wine ever be a problem?
In 1855, the last Emperor of France, Napoleon III, hosted the World’s Fair in Paris. He needed a way to both showcase France’s wines while ensuring visitors did not overpay. After all, when the wine is still in the bottle, a buyer really can’t tell a good one from a bad one.
Paris Universelle Exposition 1855
Napoleon asked the wine dealers of the day to sort it out. The merchants rated all producers of each region and organized their wines into levels, assigning a premium to the Premiere Cru (first growths) and less so the the second place, continuing all the way to the fifth place. Thus, a five-tier classification system was born that is still used to this day.
Margaux emerged as a first wine, commanding respect and a premium value in the market that lasts until today. (Famous alcoholic Edgar Allen Poe even included the wine in a short story, hiding a corpse in a would-be case of Grand Cru Margaux.)
To maintain this first wine position, Margaux tightly controlled its quality, ensuring only the best of its grapes made it to the “first wine.”
The best was considered the top third of what the estate could produce. However, as wine production techniques steadily improved, French wine houses began to produce “second wines” from the next best third, considered lesser quality than their Grand Cru and available at a lower price.
Usually the rest was sold off to other producers as a base for red blends or generic labels.
In 2009, Margaux was faced with what to do with a surprise of great wine from its bottom third. Historically, Margaux had relied upon insiders to sell their wines, providing contracts to the same French wine merchants who thought up the classification system (négociants). These dealers could be given the third wine easily to sell.
However, Margaux’s limited production had constrained its supply for years. With a new wine ripe, they could satisfy a growing class of status-seeking elite, especially in rising Asian markets where French wines were highly prized, but difficult to find.
There was no doubt this “third wine” would still retain the Margaux name and be an initial success.
The big problem was how to introduce the new wine to the market and what Margaux wanted to achieve:
Maximize short term profits?
Build a tighter relationship with long-standing enthusiasts?
Use the third, cheaper wine to convert new buyers in the market?
Frens.
Doesn’t this sound like NFTs right now?
The MekaWorst
I want to show you the project that set the NFT world on fire recently, MekaVerse. 250,000 people signed up for their Discord server to mint 8,888 unique NFTs.
Each NFT cost 0.2 ETH to mint, providing about $6m to the project at drop, and the reveal was scheduled for a week after minting.
In that week post-minting, the price of a single Meka NFT increased from 3 ETH (~$10k) to 5 ETH to 7.8 ETH (~$30k).
Here’s an example of the teaser art:
The Meka art was rendered differently from a number of other project, requiring more complex graphics owing to its 3-D generation.
Disappointingly to many, the reveal didn’t happen on schedule:
WHAT HAPPEND TONIGHT? We launched the 3D render supply on 3 rendering server farms with 4x RTX 3090 on online computer. Everything was going well and we thought we would finish on time! We discovered that 10 Meka of the Supply had several identical features. Because of this, we had to change our code.
When a new profile project is completed like this, there’s a considerable amount of randomness and this randomness determines the rarity of an asset.
8,888 individual items were created by multiplying and combining traits. “Several identical features” turned out to be an understatement because when the reveal did happen, the results were quite underwhelming to the community.
Like wine still in a bottle, you might not be able to tell these two Mekas apart:
Spot the difference between the two?
One has a green accent and the other has a black helmet accent.
While it’s not unheard of for a reveal to be delayed a few days from drop, it is very unusual to wait over a week for a drop of this notoriety. Clearly the speculation of what the reveal “might be” drove prices up; unfortunately, disappointment drove the prices right back down.
As of October 16th, the floor (cheapest) Meka is just under 2.5 ETH, a price correction of -68%
Did the project founders lose 68% of their investment?
No. Not at all.
Since the speculation was so great, 37k ETH of Meka NFTs were traded, most of it during the run up to the reveal.
With a 2.5% royalty on each trade, the Meka project pocketed another $3.6m in royalties, or about $10m in total.
The Problem of Hype
In the end, Chateau Margaux bottled its third wine, Margaux de Château Margaux, selling it mostly in restaurants and pricing it about $150/bottle or 10% of the price of its 1st wine.
A lower price point allowed an enthusiast to try it, when she might otherwise be priced out; selling mostly to restaurants allowed the status seeker to enjoy the wine in public, able to buy a bottle to impress his dinner companions.
It was a success because Chateau Margaux had a 250+ year old brand behind it. People believed that a third wine, with the Margaux name, would still be good wine.
Are NFTs like fine wine or something you drink and forget about?
This is the curious case of MekaVerse: by delaying a reveal that would not/could not live up to the hype, they extended the runway of project income, and every extra day gave the project another $750k in income.
Napeleon III got one thing right with Bordeaux wines, he made sure that quality rose to the top. The biggest NFT projects are still struggling with ongoing relevance, especially since the majority of them are less than 6 months old.
Notably, projects have tried:
Airdrops: sending holders new NFTs as a thank you (or in TimePiece’s case, an apology)
Sibling mints: creating derivative works and giving holders rights to mint (CryptoDads generating CryptoMoms)
Rewards: delivering back a percentage of income to NFT holders (Lazy Lion’s ROAR awards)
Games: give-aways, lotteries, or other schemes to entice buyers to hold their NFTs for at least a specific time
These strategies are meant to reduce the total number of sellers in the market, creating positive short-term price pressure.
But projects can’t keep gifting, minting, rewarding, and gaming your communities into staying put.
There’s always another MekaCool project coming around the corner to motivate holders to sell and take a gamble on a new project.
In Praise of Judges
In 1855, a group of well-informed merchants who understood quality, made judgements on wine that still matter today. Weirdly, there’s a good bit of evidence they got it right as their decisions have stood the test of time.
They established their rating system by considering generations of production. If you’ve ever purchased wine at a store because of its rating, you’ve benefited from this system. We long to know how good something is before we buy it.
For NFTs, the only signal we have is market interest, namely the size of Discord or Twitter followers. But bad actors can inflate these numbers easily.
Today, a great launch and a terrible project look exactly the same at first as they both have tremendous hype.
As we’ve discussed, we’re still so much in the beginning of this NFT experiment. This week, Coinbase announced its own NFT marketplace with two million users on its waitlist, presumably to buy NFTs for the first time.
This influx of new people and money are going to create more chaos, not less.
If we look through history, judges always conferred value on art, wine, music, sport, and business. They surely didn’t always get it right, but I don’t see any other way for the NFT space to absorb so many new people without massive risks to the system.
There has to be a system to separate quality and let it rise to the top. Market forces are not sufficient.
There are no blue chip NFTs yet, regardless of what you might hear.
They are still the new wine.
We have no idea how they’ll age.
Next time (for sure):
How NFTs are like stocks
Pump and dump NFT scandals
The coming waves of NFT thefts
How to protect yourself from bad actors
Tweet of the Moment
As always, I have so much more to tell you,
Paul
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References:
Interesting comparison to the Vine story.
Mekaverse is a really interesting project. This would be my first NFT after CryptoKitty from 2017. Unfortunately, I didn't win the raffle, but it was an exciting week.