NBA Top Shot: A Deep Dive into NFT Technology and its Business Model
If you Google “NBA Top Shot” you will find the slogan “Own… the NBA’s best moments”.[1] This tagline may seem farfetched, but a tech company called Dapper Labs (“Dapper”) has partnered with the National Basketball Association (“NBA”) to sell “Moments”, that are essentially NBA short video clips, to fans.[2] Accessible via the internet, the Moments are unique Non-Fungible Tokens (“NFTs”) that are written into code on a blockchain.[3] This technology allows a fan to literally own, and even sell, the “Moment”.[4]
Top Shot Technology: NFTs and Blockchain Networks
Dapper’s business is to sell, and provide a market for, the transaction of NFTs, including the digital Top Shot Moments NFTs via blockchain.[5] Coders use blockchain technology to create NFT assets in the digital space that represent physical assets.[6] NFTs are blocks of encrypted data that can represent anything from title to property to a video of a kitten.[7] NFTs have three major identifying characteristics: they are nonfungible, ownership is verified through blockchain, and are transactable on the blockchain.[8]
Non-fungibility means that NFTs are unique assets – they are not interchangeable with one another.[9] In comparison, Bitcoin is a cryptocurrency with features similar to money, which is fungible.[10] If there is reason to prefer one bitcoin (as currency) over another bitcoin, these qualities vanish and Bitcoin (on the whole) can’t be used as currency.[11] Unlike Bitcoin, Dapper creates Top Shot NFTs and imprints each with a unique serial number that is recorded on a blockchain and cannot be changed.[12] The value of each Moment is driven by the fact that no two Moments could be exactly the same given its unique serial number.[13]
Blockchain technology allows for simple and secure verification of NFT ownership.[14] Blockchain is a distributed ledger that stores data.[15] Users build blocks on the network that contain digital certificates (data) with features that, once approved by network users, cannot be changed.[16] Moments, like other NFTs, are cryptographic tokens, a digital units of value with unique serial numbers built and stored on the blockchain.[17] The blockchain network overall is comprised of many contributors, each with their own record of the data on the ledger.[18] Contributors also have assets on the blockchain – so they are incentivized to track and confirm ownership and secure the network so that their assets remain secure and retain their value.[19]
Contributors also play an essential role by verifying the execution of transactions on the network.[20] Users confirm only legitimate transactions ensuring that all tokens built on the blockchain are accounted for and held by the true owner.[21] No centralized authority is required to confirm ownership of assets on the network.[22] Thus, Top Shot users benefit from the use of blockchain tech because they can prove ownership and transact very quickly and at low costs.[23]
Transacting NFTs is essential for Dapper’s business, so finding the right blockchain network for the particular transactions is essential.[24] Dapper’s history with a prior blockchain venture, CryptoKitties, led the company to run Top Shots on its current blockchain network it is on, FLOW.[25]. CryptoKitties involved selling kitten video game NFTs, which were funded by $39 million in venture capital investments.[26] CryptoKitties launched on the Ethereum blockchain with such significant demand that the sale crashed the Ethereum Blockchain servers.[27] Ethereum had two features that made it incompatible with Dapper’s NFTs – a proof-of-work consensus mechanism and sharding.[28]
The Ethereum blockchain uses a “proof-of-work” verification mechanism to secure its network.[29] On the Ethereum network, multiple users controlled nodes must verify all aspects of a single transaction.[30] Users expend massive amounts of time and energy to secure the blockchain.[31] Proof-of-work is proven and secure, but does not scale well to efficiently process large transactions.[32] Dapper needs efficient transactions to meet massive demand for their data intensive NFT products.[33]
Ethereum was on the verge of using sharding methods, which break the blockchain into smaller pieces, to increase speeds when Dapper began Top Shot on Flow.[34] Sharding, however, hinders effective use of smart contact transactions on the Etherum blockchain, where a contract for the transaction is encoded into the NFT itself.[35] Due to impending sharding and proof-of-work, Ethereum was insufficient to launch Dapper’s NFT’s. [36]Dapper needed a different solution before they launched the Top Shot product.[37]
To effectively transact their NFTs, Dapper created its own blockchain network, FLOW, in 2020. FLOW coins (or tokens) enable coders to participate in, build the network, and experiment with their own NFTs.[38]
FLOW uses “proof-of-stake” verification that better fits Dapper’s needs.[39] Under a proof-of-stake regime, developers stake FLOW tokens together to participate.[40] Validation tasks occur in four network nodes that separate out data storage and computational needs.[41] Users work separately on consensus, verification, execution, and collection across the notes.[42] This allows for efficient low cost, large data transactions.[43] FLOW’s most important features are that it is conducive to interactive experiences, and it is capable of generating a lot of cash from transacting digital assets.[44] Dapper uses FLOW to facilitate its Top Shot Moment transactions.[45] As the owner of the Flow technology, Dapper has significant control over their NFT products and contributes strongly to their business model.[46]
Top Shot’s Business Model
Dapper has partnered with the NBA and the National Basketball Player’s Association (“NBPA”), which licenses NBA video content to Dapper, to mint the Top Shot Moments NFTs with licensed NBA content.[47] With this content, Dapper profits in two ways.[48] First, Dapper’s minting and selling NFTs directly as a retailer allows the company to keep its profits after giving a portion to the NBA and NBPA.[49] Second, Dapper maintains a secondary exchange “Marketplace”, where users can sell their NFTs in a secondary marketplace for a 5% transaction fee.[50] There is no alternative place to sell these NFTs, they exist in a “closed garden”.[51] Dapper is the supplier of the NFTs and facilitates trades on the secondary market, which sometime occur at a frantic pace.[52] Dapper and its partners have made a lot of money from this primary/secondary market business model.[53]
In the primary market, Dapper’s retail sales restrict supply.[54] Dapper sells Moments as a retailer in scheduled pack releases.[55] Users have to wait in a queue for the right to purchase a pack.[56] The company offers three types of packs: common, rare, and legendary.[57] Common packs are the least expensive, costing $9 while legendary packs cost $999.[58] The common pack contains common Moments which have been minted at least 10,000 times with no maximum.[59] Top Shot guarantees that legendary Moments have, at most, been produced 499 times, but as little as 50, making them more scarce.[60] Sales are disproportionate to the amount of willing purchasers.[61] For instance, a multi-pack release on February 26, 2021 had 200,000 customers queued for a total of a few thousand packs.[62] Many users want Moments, few are issued, creating scarcity and trade value.[63]
On the Marketplace, there is extreme price volatility, creating opportunities to profit.[64] For example, created by a huge price boom in late February, is a Donovan Mitchell Moment, which went from trading at $70 to $1,000.[65] Dapper Labs CEO, Roham Gharegozlou, said that most secondary trades are for less than 50 dollars.[66] But there are examples of individual NFTs selling at astonishing prices, like a Lebron James dunk Moment that sold for over $200,000.[67]
Fueled by the retail and secondary market, Top Shot has been profitable and built a large customer base.[68] Top Shot began selling Moments to the public in October 2020.[69] In March 2021, over 100,000 users owned at least one Moment and 2.3 million trades had been executed.[70] In April 2022, the FLOW blockchain network underlying the entire Dapper operation was valued at 7.5 billion dollars.[71] By May 2021, Top Shot had registered $700 million in sales with over one million users under one year from launch.[72] Crypto Slam, a Top Shot valuation tracker, values the market cap for all Top Shot assets at around $7.07 million and recorded $1.6 million in sales volume in just one day.[73] Dapper intends to grow this business by making new deals with other sports leagues, such as the NFL, who recently licensed its rights in exchange for equity in Dapper[74]
There are a few other third-party beneficiaries of the success of NFT sales in general and Dapper’s Top Shot business. The art community has benefitted from the explosion of this market because they can design NFTs that sell at high prices.[75] For example, FEWOCiOUS, a digital artist, used to sell his work for $90 at most, but now sells works at auction for $80,000.[76] An important aspect of NFTs that benefit artists and developers, like Dapper, is that they can sell NFTs without transferring their intellectual property rights.[77] An issuer of NFTs can selectively transfer only those rights they want to transfer, such as by using smart contracts to govern the transactions.[78] For instance, they can ensure they get paid for subsequent transfers of their art or even donate percentages of transactions directly to charity.
Top Shot has also attracted traders looking to profit from price appreciation and volatility. For a period, prices were shooting up, making “investors” significant amounts of money.[79] One investor spent $2,000 on Top Shot packs.[80] That investment grew to $27,000.[81] In five days, the $27,000 grew to $130,000.[82] Volatility enhances this. As an example, when a retro-pack was released in February, trade volume increased 440% from around $800,000 to $4.5 million.[83] Some of the trading activity has been spurred by low interest rates that make bonds, money market funds and CDs less profitable.[84] Also, sports fans gravitate to Top Shot NFTs because NFT transactions are faster than playing card trades that require third party arbiters to ascertain authenticity of the card.[85] Top Shot has been highly profitable for Dapper, and has impacted third parties, such as customers and NFT designers.
Footnotes
