The History and Challenges of Non-Fungible Tokens (NFTs) and Running a Micro VC

The History and Challenges of Non-Fungible Tokens (NFTs) and Running a Micro VC

In recent years, non-fungible tokens (NFTs) have gained significant attention and popularity in the cryptocurrency space. NFTs are unique digital assets that are indivisible and cannot be exchanged on a like-for-like basis. They have revolutionized the way we think about digital ownership and have opened up new opportunities for artists, creators, and investors.

The concept of NFTs can be traced back to the launch of CryptoKitties in October 2017. Created by Vancouver-based company Axiom Zen, CryptoKitties introduced the idea of unique digital collectibles on the Ethereum blockchain. While ERC20 tokens were commonly used on Ethereum for various functions, they were not ideal for creating one-of-a-kind tokens. As a result, the ERC721 standard was invented specifically for NFTs.

An interesting precursor to NFTs can be found in the concept of Colored Coins. These were bitcoins that were part of the "Genesis transaction" and were distinguishable from regular bitcoin transactions. While not widely recognized as NFTs, Colored Coins can be seen as the earliest example of unique and identifiable digital assets.

Another significant project in the early days of NFTs was Cryptopunks. Created by John Watkinson and Matt Hall, Cryptopunks introduced unique characters generated on the Ethereum blockchain. Unlike CryptoKitties, Cryptopunks did not strictly follow the ERC721 standard as it had not been invented at the time. Instead, they can be described as a hybrid of ERC721 and ERC20.

The ERC721 standard was purpose-built to track ownership and movements of individual tokens on the Ethereum blockchain. This allows the chain to recognize and differentiate non-fungible tokens from each other. The success of CryptoKitties and the subsequent establishment of Dapper Labs, the company behind CryptoKitties, attracted significant investment from top investors such as a16z and Google Ventures. This showcased the potential and power of NFTs in the digital world.

While NFTs have gained popularity and attention, running a micro VC can be a challenging endeavor. It is important to understand that most VC funds, similar to startups, are failures. Statistics suggest that only one in ten VCs will achieve 1x returns or more. Therefore, it is crucial to thoroughly research and consult with existing micro VCs before deciding to start your own fund.

Financial stability is another crucial factor to consider when running a micro VC. Even with a fund size of $10 million, most of that money needs to be used for investing, not for personal livelihood or other expenses. The yearly budget for running a micro VC with a $10 million fund can be as low as $200,000. This means that the fund manager's salary may be significantly lower than what they could earn in other professions.

Furthermore, bootstrapping a micro VC is challenging. The fund manager often receives little to no salary and is restricted from making money outside of their work. Additionally, fund managers are expected to invest a portion of their own capital into the fund, typically around 1-5% of the fund size. This commitment further adds to the financial risk and uncertainty.

The average time it takes for a microfund manager to raise a fund is approximately two years. Regulations from the Securities and Exchange Commission (SEC) limit the number of accredited investors that can be accepted into a fund to 99. This restricts the ability to accept small investments from friends and gradually build momentum.

It is important to note that the early-stage fundraising landscape is not necessarily a meritocracy. The success of raising funds often depends on factors such as appearance and communication skills. However, there is a growing desire for the future of funding to be more focused on the speed of execution rather than superficial qualities.

In conclusion, the history of NFTs showcases the evolution of unique digital assets on the Ethereum blockchain. The success of projects like CryptoKitties and Cryptopunks has demonstrated the potential of NFTs and attracted significant investment. However, running a micro VC comes with its own set of challenges. Thorough research, financial stability, and understanding the fundraising landscape are crucial for success in this field.

Actionable Advice:

1. Research and consult with existing micro VCs before starting your own fund. Learn from their experiences and insights.
2. Ensure financial stability before diving into the world of micro VC. Understand the budget constraints and potential sacrifices in personal livelihood.
3. Focus on execution and building a strong track record. While the fundraising landscape may not be entirely fair, the ability to deliver results efficiently can set you apart from the competition.