Analysis: Dapper Lab’s NBA Top Shot tops $100 million blockchain collectible sales
2 weeks ago
In early October, blockchain startup Dapper Labs opened its NBA Top Shot collectibles app to consumers worldwide. Less than five months later, cumulative sales have topped $123 million for the blockchain collectibles, including $59 million from 67,000 users within the last week. Less than $6 million was bought through direct purchases of digital basketball collectibles, with the balance traded through the secondary marketplace. We estimate that Dapper’s revenues from this are $12 to $13 million.
Update: Five days after this article was published the cumulative transaction figure was $228 million, with $149 million in the last seven days.
NBA Top Shot targets several types of consumers through a single app interface, including traditional card collectors, memorabilia traders, cryptocurrency enthusiasts, fantasy sports players, and even the sports betting crowd. It’s one of the highest-profile dApps to target mainstream rather than purely cryptocurrency audiences. That’s a fascinating challenge. A key reason for aiming at this broad audience is because the collectibles market is small, as we show later.
But what is NBA Top Shot? It sells packs of Moments — often five of them — which are video clips of basketball plays with animations. Much like physical cards, users won’t know what’s in the pack before they open it. Each Moment has a nonfungible token (NFT), which is unique to that specific Moment. With an NFT when a Moment is traded, its authenticity can be proven. And without the need to send physical memorabilia, the transfer is very quick. The NFT token standard was first created by Dapper Labs through its success with the CryptoKitties app back in 2017.
It seems nonfungible tokens are the third major application to break through on public blockchains after cryptocurrencies and decentralized finance (DeFi). And possibly the first mainstream one.
With Bitcoin passing a trillion in market capitalization and frothy markets everywhere, Dapper got its timing right. Ten days ago, The Block reported that Dapper was raising $250 million at a $2 billion valuation with Coatue Management as lead investor, although no announcement has been made as yet. Before that, the company raised more than $51 million for itself and the Flow blockchain, including from Warner Music and Samsung.
So far, the game is a huge success in terms of trading. But the app, which claims to still be in beta, suffers frequent downtime, and there have been many loud complaints about slow money withdrawals. From the start, NBA Top Shot has aimed to go beyond the cryptocurrency audience. This might mean a future where a large number of mainstream sports fans become token pumpers.
The pricing of the direct sales of the Top Shot packs range from $9 to $230 dollars and currently, 25,000 units of each pack are released with a total of around 400,000 packs issued so far. The quantities were smaller in the 2,000–3,000 range for earlier packs and sometimes less, making these rarer. Many packs are selling out within hours, creating urgency and FOMO.
The marketplace features seven re-sale listings of Moments with valuations of $100,000 or more. Although these are asking prices, there have been a small number of sales at this level. However, there are many thousands of listings at just $2 for a single Moment. It depends on the clip, the player, whether it has a low serial number, and its rarity. If a player has an exceptional run of games, their card values are likely to rise.
There’s also some gamification with rewards — free Moments — for collecting sets, which encourages activity.
Money is made in several ways. Dapper Labs earns money from the direct sales of the collectible packs, which involves minting the nonfungible tokens. Our estimate is they’ve raked in under $6 million in this way to date.
They also earn 5% on all secondary market sales. So another $6 million so far. In the art world, nonfungible tokens are seen as a way for artists to earn money as their reputation grows. So while the artist receives the full amount of the initial sale, they will also take a cut of future re-sales. Here, that concept has been ported to these collectibles.
And the Flow blockchain will earn small fees on every transaction — similar to Ethereum gas fees but cheaper — although Dapper is absorbing those fees for now. Flow aims to be a decentralized blockchain and is separate to Dapper but was founded by the Canadian startup. Big names such as Deutsche Telekom’s T-Systems and Samsung SDS host some of the nodes.
There is scope for other revenue streams. As a result of its mainstream focus, there are two ways to pay NBA Top Shot, by debit or credit card or with certain cryptocurrencies or the stablecoins USDC and DAI.
Credit card purchases are charged the ‘industry standard’ 5%, except that standard is closer to three percent. The money received by Dapper Labs is actually the stablecoin USDC, so there will be some Ethereum transaction fees, but we’d be very surprised if the transactions aren’t batched. So it might earn some revenue here. If it earns a 2% margin and half of the users pay by card, this could be another $1 million-plus in revenue so far. Although we suspect many of the high rollers will pay with cryptocurrency.
There’s already a significant ecosystem popping up around both NBA Top Shot and the Flow blockchain. An example of another potential revenue stream is if a third-party fantasy game that uses Top Shot Moments wants to be featured on the NBA Top Shot website. Or Dapper might launch its own fantasy game.
And while on the topic of the ecosystem, if you search for NBA Top Shot on Youtube there are thousands of videos, including people launching Youtube channels dedicated to the game. The Discord group is also very active, so it scores well on engagement.
In 2017, Dapper’s Cryptokitties also had a high level of engagement that fell away over time. The difference here is the sports angle has a higher probability of encouraging enduring engagement beyond the initial novelty.
Unsurprisingly, with all the recent publicity, Dapper has received approaches from many other sports franchises. In Europe, blockchain sports collectibles aren’t quite such a novelty. When it comes to soccer, there are several competitors, ranging from Socios, which is very token trading focused, to Sorare, which emphasizes fantasy games and Fantastec, which is closer to a digital collectible. They all have deals with major soccer franchises.
On January 14, a well-known fantasy sports personality, Jonathan Bales, tweeted about NBA Top Shot and his acquisition of a $35,000 Moment. This may have been the trigger for the spike in activity. Despite the headline success, NBA Top Shot has experienced some serious issues during the last month.
Dapper states the site is still in beta. Hence occasional downtime can be expected. However, from the beginning, it has emphasized it is targeting mainstream users, and its handling of money has not met the standards one would associate with an organization like the NBA. Specifically, when a user sells a Moment they can later cash out and receive the money. Except many people have experienced delays of more than a month and are rather unhappy.
The problem is while most of these people used credit cards to buy, they can’t receive the withdrawal on their credit card. The cash-out options are only U.S. bank accounts or the USDC stablecoin. And in order to process the bank account payments, customers have to go through know your customer (KYC) processes. Dapper simply hasn’t had enough staff to handle the processes. Given the mismatch between deposit and withdrawal methods, this may be a bottleneck that could have been foreseen.
There are also a few complaints because of wire transfer costs of $25.
Even fans of the Dapper team have highlighted that being in beta is no excuse. “You’ve got Tyler Herro pumping this stuff on Twitter. You’ve got ads running on Youtube. If people show up and it breaks you can’t be like ‘hey you should have know it was a beta’”, said @lgdoucet on Youtube.
Juggling different audiences
One of the fascinating aspects of NBA Top Shot is the very different audiences it’s appealing to. You have kids and others who are attracted just as fans, although Dapper terms say users need to be 18+. There are the more serious memorabilia collectors and cryptocurrency traders who see this as a combination of their interest in the sport and trading. And there’s the fantasy game players and the gamblers.
Dapper seems to be actively targeting gamblers. CEO Roham Gharegozlou has given multiple interviews to the sports betting site Action Network.
And there could be good reasons behind that related to market sizes. It’s been estimated that the sports memorabilia market is around $5.4 billion in the U.S., of which a pretty small proportion is cards. That said, there are numerous reports of significant card trading growth during the pandemic, from eBay and the New York Times. But that’s still growth of a relatively small market.
Meanwhile, the fantasy sports market is pegged at $7.2 billion in North America, significantly larger than collectible cards and online. And sports betting is still larger, estimated at $77 billion globally, both online and offline (Source: Flutter annual report).
Around the world, regulators have grappled with the issue of whether to classify cryptocurrencies as securities or commodities. Nonfungible sports tokens could additionally attract gaming regulators. As sports betting is becoming legalized in some U.S. states, the fantasy sports industry body FSGA is keen to differentiate fantasy sports from gaming.
“Fantasy sports contests are not gambling under the laws in the vast majority of states. They are considered games of skill. The FSGA is going to work hard to maintain that distinction so that fantasy sports contests don’t get lumped in with sports betting,” it says. But at the same time, the organization’s name was recently changed to the Fantasy Sports & Gaming Association, and the markets it covers now include “sports betting, eSports, and non-sports skill contests.”
Once you start mixing fantasy sports with nonfungible tokens some of those legal lines might become rather blurry.
An evolution in how people enjoy sports
On the one hand, the NBA Top Shot game is capable of mixing these different audiences and potentially enhancing enjoyment.
But there are also some visible tensions. For example, headlines about NFTs selling for more than $100,000 could make people think they can’t afford to play. Hence every time Gharegozlou is interviewed, he emphasizes the huge number of low-cost packs and Moments.
Stories of significant amounts of money being made in the marketplace will inevitably attract people who fear missing out and might end up losing money. That leads on to potential additional ethical issues, especially with children. Although Dapper’s terms require players to be 18 or over, one can imagine parents signing up for their kids. After all, this is the next generation of sports cards.
In the last decade or more, social networks have significantly influenced societal norms. Could NFTs have an impact as well?
To put that in context, consider the typical group of kids in a playground who collect sports cards. Usually, a pretty small proportion of them are the wheeler-dealers that arrange a lot of the card swaps, with the rest comparatively passive.
Will games like this encourage far more to focus on the financial aspect of collecting? Could it promote gambling behavior? There’s a significant amount of pumping and shilling of Top Shot Moments in social media, with several Reddit members already complaining about it. Is that behavior society wants more of?
The big surprise is Dapper claims that it’s not encouraging investors. From its terms: “User represents below that they are not purchasing NFTs for investment purposes nor as a conduit to obtaining other Assets, therefore a freeze on the Hosted Wallet shall not be the basis of a claim by User for economic or other losses.”
The concern over not being held liable for economic loss is understandable. But as the operator of a marketplace where it takes a five percent cut, it’s a bit hard to shy away from money-making being a major feature.