Alpaca NFT Field Study

Non-Fungible Token (NFT)
Field Study

alpaca.vc 2021
Key Objectives
Insights
Break down industry landscape
by areas of interest, identify
startups and trends, and
develop a framework for
diligence of future opportunities
Deal Flow
Find compelling solutions that
are positioned to win in certain
subsegments or verticals. Profile
startups and create a
framework through which to
evaluate future investments
Incubation
Understand current solution
coverage across customer sub-
segments. Identify white space
and opportunities to better
serve specific customers or use
cases
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alpaca.vc 2021
NFTs Represent a Paradigm Shift
What are NFTs?
• Non-Fungible Tokens (NFTs) are digital assets with unique, identifying metadata that is stored on blockchains, typically (but not
exclusively) the Ethereum blockchain
• Because they are created and stored (“minted”) on digital ledgers (blockchains), NFTs are traceable, authenticable, and scarce,
which unlocks various interesting use cases that previously weren’t feasible
• Fungible items, like the US dollar, can be freely exchanged between holders of USD without differences in the underlying asset
value
• The fungible asset’s value does not derive from uniqueness; all USD can be equally used to make purchases, and each dollar
is worth the same, no matter which specific dollar is being used at purchase
• Non-fungible items are necessarily differentiated and unique; a non-fungible item like the Mona Lisa can’t be easily substituted
for a Rembrandt painting
• While the media attention has centered on NFTs as digital art specifically, NFTs can conceivably be any unique digital asset—in-
game items, virtual land, collectibles, virtual avatars, music, and more
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alpaca.vc 2021
NFTs Represent a Paradigm Shift
Why Complete a Field Study on NFTs?
• We believe that NFTs represent the next wave of the worldwide transition from analog to digital
• COVID-19 accelerated the worldwide transition to digital
• The current wave of speculation and media hype in the digital art space will likely lead (or has already led) to a bubble pop
• However, the next wave of NFTs will enable a variety of venture-backed projects within the different buckets
• NFTs unlock previously impossible (or incredibly difficult) use cases:
• Democratization of creators through perpetual secondary royalties, DTC monetization, and removal of traditional
intermediaries (via the smart contracts that NFTs interact with)
• Virtual worlds with real economies where users can trade in-world assets with monetary value to other users, and even
between other virtual worlds
• A new asset class that can be used within the crypto world for traditional financial mechanisms (collateral, fractionalization,
indices, etc.)
• Our questions:
• Do we find this to be an investable space?
• How can we become well-positioned to have an advantage investing in the space?
• Can we identify areas of particular interest and future focus?
• Can we identify areas of clear next steps?
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Trends Driving Industry Forward
Cryptowealth Looking for
New Cryptoassets to
Deploy Capital into
• Bull run in cryptocurrencies has
created crypto-native wealth
• Many new crypto-millionaires
have the technical know-how,
genuine interest, and practical
ability to deploy capital into
new crypto applications
• DAOs (Decentralized
Autonomous Organizations),
initial token sales, and other
community-funding
mechanisms have made it
easier to participate in project
upside (with minimal illiquidity
premiums)
Broader Creator
Economy Shifts
• Leverage for creators has
increased, the barriers to
entrepreneurship have
decreased, and discovery for
audiences has improved
• Popularization of creator
monetization platforms like
Substack, Twitch, Stir, Patreon,
Etsy, etc.
COVID-19 Acceleration of
Virtual Interaction
• Remote work necessitating
new use cases of virtual
interactions (Metaverses,
virtual land, VR/AR worlds)
• Interest in games and virtual
worlds with social features and
user ownership of in-game/in-
world assets (skins, weapons,
virtual real estate, economies)
Technology
Improvements
• Digital ledger technology
(blockchain) is less than 15
years old → Industry consensus
is that development and
experimentation is still early
• Crypto wallets have become
easier to use (better UI/UX,
mobile apps)
• Improvements in smart
contract standards (ERC-721,
ERC-1155, potentially EIP-1559)
• Growth of NFT marketplaces
enabling easy issuance, sales,
and overall consumer adoption
• Layer-2 solutions enabling
lower transaction fees and
higher throughput on popular
blockchains
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Conversations with Industry Participants
Current
immaturity
of sector
Complexity of
industry dynamics
& rate of change
The
democratization
of the creator
economy
Speculative
bubble &
comparisons to
2017
“The virtual world that wins is going to be whichever has the
minimum friction for other platforms.”
“Creators are trying to figure out exactly how to use this, but there's still more
unlocks that need to happen. We’re still in a discovery phase.”
“Speculation is almost always the first play. Then there's utility. Right now, it's all about
speculation - we haven't scratched the surface of deploying utility.”
“When you buy an NFT, you're not buying a thing, you're buying a
relationship with a creator.”
“We're thinking about this as 'how do we find new ways for consumers to interact with our IP' - a
way to enhance fandom and drive deeper relationships with our audience.”
“The gaming audience has been built for this, with gamification and free-to-play
business models. It makes sense that gaming audiences would be attracted to
NFTs.”
Most early participants in the ecosystem
have focused on quick monetization
Technology is developing quickly, but still
many problems to solve – lacking in
interoperability, throughput/transaction fees
of underlying blockchains, liquidity
Development of new platforms and
technologies is happening incredibly
fast; difficult to stay on top of trends
Not every creator has been able to
benefit from the recent NFT boom;
concentration at the top
But potential future applications of
NFTs create a whole new dimension
for creators to take ownership of
their work
High level of speculation attracts a
wave of low-quality projects
Value will likely be found investing in
projects built post-bubble pop
(similar to ICO boom)
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Major Participants
Creators - The catalyst for the early NFT ecosystem’s development
• Beeple, Fewocious, and Pak are some of the most well-known NFT creators
• Democratization across the creator landscape opens access to lesser-known creators
Developers - Support the ecosystem by helping projects interface with technically-challenging crypto infrastructure
• Many crypto projects provide Software Development Kits, open APIs, and significant documentation to help developers build new applications on top of the
existing project
VCs - Play a pivotal role in funding the development of early crypto projects
• Many NFT projects aim for fully decentralized community ownership, but VCs fill a key funding gap role at the earliest stages
• Some of the most active venture firms in the NFT space include a16z, Union Square Ventures, Digital Currency Group, and corporate venture groups like
Coinbase Ventures
Consumers - Interest from consumers is the endgame for the success of the NFT ecosystem
Influencers & Early Adopters - Key to getting community-dependent projects (digital art, collectibles, games, metaverses) off the ground
• Early adopters paved the way for the success of projects including CryptoPunks, Bored Ape Yacht Club, Zed.Run
Decentralized Autonomous Organizations (DAOs) - Transparent organizations with a shared mission; coordinate via a set of rules enforced on a blockchain
• Think of a traditional company, incorporated on a blockchain, with the company’s governing rules embedded into immutable smart contracts
• Several DAOs (such as TheLAO) invest in crypto projects as a quasi-venture fund; others (such as PleasrDAO) buy and hold NFTs as a group
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VC Funding Pulse
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NFT Considerations
Considerations Facts
Environmental Impact • Blockchains expend energy through their consensus mechanisms
• When NFTs are minted and transacted, the blockchains verify transactions in their consensus mechanisms
• The NFTs themselves aren’t the energy expense, and currently, NFT minting is a small percent of blockchain transactions
• Ethereum is currently preparing for a high-profile transition to a Proof-of-Stake consensus that should decrease ETH energy
consumption significantly
• Refer to this link to learn more about the environmental impact
Data Hosting • Ownership of an NFT means ownership of the underlying metadata that represents the specific NFT
• There are concerns about where the metadata is hosted and the centralization issues associated with hosting on a specific
company’s servers
・Can read more about hosting NFT metadata here and here
Legal • Worries of crypto regulation and claims of copyright infringement have already concerned NFT market participants
• Online marketplaces like OpenSea have terms of services to address the potential for infringement, and will take down work in
response to formal infringement claims
・SEC Guidance – Safe Harbor Proposal
・The Howey Test – NFTs; is it Art (or a Security)?
・Intellectual Property – Implications of NFTs
Know Your Customer (KYC) / Anti
Money Laundering (AML)
• Money laundering could potentially be a bigger issue in digital art than it already is in physical art
・How NFTs encourage money laundering
• The Financial Action Task Force’s draft guidance on categorizing DeFi and NFT operators
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Buckets
• We bucketed the broad landscape of NFT projects into ten, high-level buckets; companies and projects in these buckets encompass the marketplaces,
protocols, infrastructure, and related applications necessary to enable the next wave of NFTs
• Given the Cambrian explosion of new projects, overall immaturity of the industry, and acceleration of new developments, several buckets have significant
overlap, and many companies can plausibly fit into 1-2 buckets; These buckets are intended to help us determine areas of interest and potential whitespace
Bucket Description
Marketplaces Platforms primarily focused on enabling the trading of various types of NFTs
Note: Many companies within other buckets offer secondary marketplaces of their own NFTs; those companies are not included in
this bucket
Crypto Art & Artists Tokenized art on a blockchain, and the creators of tokenized art
Collectibles Little-to-no utility assets, tokenized on a blockchain
Note: While collectibles are arguably a segment of digital art, collectibles are generally released as a series of similar collectibles with
individual features or traits amongst the series
Consumer Products & Services Products and services that facilitate the pre- and post-purchase NFT experience for consumers
Creator Tools Platforms and tools enabling creators to create and distribute within the NFT world
Note; doesn't include marketplaces
Games Puzzle, strategy, RPG, and card games centered around in-game NFT assets
Note: With so much overlap, games could plausibly be considered a subset of metaverses
Metaverses Virtual ecosystems with real economies, property (virtual land), games, and social interaction
Note: some games can be metaverses, but not all metaverses have games
NFT Finance The financialization of NFTs; tools that enable NFTs to act as a balance sheet asset
Infrastructure For our context, this bucket can be broadly defined as any solution that enables the other buckets to exist as crypto-native
Other Utility Broad buckets to encompass all NFTs with underlying utility that don’t fit into other buckets
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NFT Bucket:
Marketplaces
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NFT Bucket: Marketplaces
Description
Definition • Platforms primarily focused on enabling the trading of various types of NFTs on one platform
・Some marketplaces offer open minting to anyone, while others only allow curated, invite-only minting
・Many of the companies within the other buckets enable secondary marketplaces of in-platform assets directly on their platforms;
those companies are not included in this bucket
• Marketplaces help users search listings, match and verify parties, facilitate transactions, and promote creators
Tailwinds • Rise in demand for collectibles (digital and real-world)
• Media buzz from major digital art sales, like Beeple's $69M sale
• Cryptowealth looking for places to deploy crypto capital after long crypto bull run
• Consumer adoption of crypto and NFTs
Why does this bucket exist? • Adds liquidity to NFT markets; liquidity adds value to underlying NFTs
• Provides credibility/trust for transactions
• Unlocks speculative demand from consumers
• Brands looking for partners to help them deploy intellectual property with new technology
• Acts as a consumer onramp into crypto/NFTs
What does this bucket take advantage
of?
• Authenticity/composability/provenance of blockchains
• Acceleration of new NFT projects
• Wallets and fiat onramps like MetaMask and Circle enabling easy capital transfers
• Creators that develop digital art
• Communities of engaged fans and collectors
• Consumer demand for speculative crypto assets
• Individual artists reputation and brand
Investable Traits • Advanced analytics and vendor support in-platform
• Superior UI/UX
• First-class consumer experience and support
• Ease of minting process
• Embedded design tools for creators
• Creative curation and discovery to support creator distribution
• (For vertical marketplaces) Founders with relevant vertical-specific experience and specific insight around the needs of the vertical’s specific
community
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NFT Bucket: Marketplaces – Market Size
• Crypto art sales on seven of the top art marketplaces topped out at $200M volume in the month of March, falling to $100M in April and just over
$60M in May
• The significant drop-off in primary and secondary sales on art marketplaces is demonstrative of the Q1 speculative NFT bubble popping
• This data doesn’t include OpenSea, the largest marketplace, because OpenSea is an aggregator; OpenSea has had $565M in all-time volume as
of 6/15/2021
• The top artist, Beeple, has sold over 1300 pieces of art with a total value of $139M (figure skewed by the $69M sale of “First 5000 Days”)
• Each of the top 100 digital artists (by sales volume) have sold over $1M in art
• Total CryptoArt Value: $646M (253K ETH) (as of 6/15)
• Total Artworks Sold: 600,000+ (as of 6/15); note: OpenSea not included
¹https://dappradar.com/nft
2https://cryptoart.io/data
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NFT Bucket: Marketplaces – Areas for Improvement
There are already over 50 different NFT marketplaces, but a variety of problems still exist
Challenges Challenges
Closed source Some or most of the embedded smart contract functionality is lost when the NFT is sold on the secondary market on a
different marketplace
• Most importantly, secondary royalties aren’t enforced cross-platform (barring an inter-marketplace agreement like
Foundation’s agreements with OpenSea and Rarible)
Customer experience Still several challenging aspects of utilizing NFT marketplaces for creators and consumers
• Issues of account hijacking, theft, difficulty of withdrawing balances on some platforms, KYC/AML, complex UI/UX in
some cases
Copyright infringement &
repercussions
Many NFT platforms still struggle with enforcement of copyrights
• NFTs replicating copyrighted artwork, like Disney characters or famous movies, are still on many platforms
• Refer to this link to learn more about NFT copyrights and counterfeits
Transaction cost With ETH as the dominant blockchain, gas fees to mint on ETH are added to the platform-specific transaction fees
• This area for improvement is closely related to the infrastructure bucket; scaling solutions are alleviating the
burden, and there are existing workarounds like not minting until a transaction occurs on OpenSea
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NFT Bucket:
Crypto Art &
Artists
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NFT Bucket: Crypto Art & Artists
Description
Definition • Tokenized art on a blockchain, and creators of tokenized art
Tailwinds • Media buzz from major digital art sales like Beeple's $69M sale
• Explosion of the creator economy
Why does this bucket exist? • A new way to create and immortalize art by listing on immutable digital ledgers
• Artists looking to monetize more effectively
• Greater accessibility and distribution for artists
of?
• Primary marketplaces making it easier to mint and list digital art
• Display and showcasing technology
• Individual artists reputation and brand
• New distribution methods enabled by curated marketplaces
Investable Traits • Not an area of investment interest for Alpaca (individual artists and artwork aren’t venture-backable from a traditional venture fund perspective)
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NFT Bucket: Collectibles
Description
Definition • Little-to-no-utility assets tokenized and on a blockchain
・While collectibles are arguably a segment of digital art, collectibles don’t necessarily need to be artwork
・Collectibles are generally released as a series of similar collectibles with individual features or traits amongst the series
Tailwinds • Crypto ethos of demonstrating community in early-adoption
• Rise in demand for collectibles (digital and real-world)
• Success of early crypto collectible communities (like CryptoPunks, BAYC, etc.)
Why does this bucket exist? • A sense of community among owners of NFTs
• Unlock speculative demand from consumers
• Potential to unlock future utility within collectible communities (added benefits, features, etc.)
of?
• Narratives surrounding the collectibles
• Display and showcasing technology
Investable Traits • Not an area of investment interest for Alpaca, but projects in the collectible space tend to be:
・Aesthetically pleasing
・Randomly generated
・Accessible (from a price perspective) at primary issuance
・Supported by a hyper-engaged community of collectors
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NFT Bucket: Collectibles – Market Size
• Forbes has estimated that the size of the global collectibles market (digital and non-digital) is over $370 billion1
• Enthusiastic collectors have demonstrated their willingness to pay several millions of dollars to hold digital collectibles
• The below chart shows the price of PUNK-BASIC, an NFT-based index fund created by NFTx and backed by CryptoPunks collectibles
• PUNK-BASIC is backed by CryptoPunks collectible and acts as a floor price tracker for the entire CryptoPunks collection
• Of the more than 4.5 million transactions on the NBATopShot marketplace over the past few months, more than half have been less than $50,
demonstrating consumer interest outside of the mega-purchases²
¹https://www.forbes.com/sites/darrenheitner/2016/04/11/playing-ball-in-the-multi-billion-dollar-sports-collectible-market/?sh=3a6c607114e3
²https://www.actionnetwork.com/news/nba-top-shot-ceo-concerns-digital-card-company-2021
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NFT Bucket: Collectibles – Select Profiles
Description History Most Expensive Sale All Time Volume
CryptoPunks (by
Larva Labs)
10,000 unique punk
characters with various
features; no two are
exactly alike
Released in 2017 for free as the
first NFTs on Ethereum; the
inspiration for the ERC-721 digital
art standard
CryptoPunk #7523 sold for
4,650 ETH ($11.8M at the time
of the sale) on June 10, 2021
13,825 trades for a total volume
of $357.4M (as of 6/15/2021)
NBA TopShot (by
Dapper Labs)
NBA plays and moments
with varying rarity levels;
Each collectible highlight
has pre-defined amounts
of moments within the
released series
Released in October 2020 on the
FLOW blockchain (built by Dapper
Labs after CryptoKitties ETH
transaction fees issues); reached
$200M in sales in 3 months
A Lebron James Legendary
dunk #12 (out of 59) sold for
$210,000 on March 20, 2021
6.2M trades for a total volume
of $601.1M (as of 6/15/2021)
Bored Apes (by
BAYC)
A collection of 10,000
Bored Apes; The NFT
doubles as a Yacht Club
membership card, and
grants access to members-
only benefits, like access to
THE BATHROOM, a
collaborative graffiti board
Launched in late April 2021 with
very little immediate momentum.
Rabid online community developed
after less than a week. Every Ape
initially sold for 0.08 ETH
The Bored Ape below sold for
50 ETH ($132,000 at the time
of the sale) on June 1, 2021
11,617 trades for a total volume
of $34.2M (as of 6/15/2021)
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NFT Bucket:
Consumer Products &
Services
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NFT Bucket: Consumer Products & Services
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Description
Definition • Products and services facilitating the pre- and post-purchase NFT experience for consumers
・Social media, NFT showcasing, search/discovery tools
・Portfolio management tools
・Data and market analysis
・Programmable, editable NFTs that owners can change and remix over time
・Dispute resolution and appraisal tools
Tailwinds • Consumer adoption of crypto and NFTs
• Regulatory grey area creates need for tax and portfolio management support
• Increased developer interest in building NFT-related products and services
Why does this bucket exist? • Provides credibility/trust for transactions
• Acts as a consumer onramp into crypto/NFTs
• Creates utility for NFTs without inherent utility
• A sense of community among owners of NFTs
of?
• Investor interest in the next iteration of the NFT gold rush
Investable Traits • Ease of on-ramp for non-crypto-native creators
• Easy onboarding with a strong platform lock-in
• Large enough market for the solution; big enough to be a company/platform vs. just a feature; fills a need, not a want
• Direct business model (not reliant on advertisements or sponsorships)
• Wide customer profile (not just crypto-native enthusiasts)
• First-class customer experience and support

alpaca.vc 2021
NFT Bucket: Creator Tools
Description
Definition • Platforms and tools helping creators create, monetize, distribute, and manage their NFTs
• This bucket does not include marketplaces, although marketplaces are a primary source of distribution and content discovery for creators
Tailwinds • Consumer adoption of crypto and NFTs
• Explanation of the creator economy
• Media buzz from major digital art sales, like Beeple’s $69M sale
Why does this bucket exist? • Creators looking for partners to help them deploy intellectual property with new technology
• Artists looking to monetize more effectively
• Greater accessibility and distribution for artists
of?
• Creators that develop digital art
Investable Traits • End-to-end solutions for creators to manage their various creations, royalty streams, sales, and engaged communities across platforms
• Support for creators continuing both digital and physical sales
• Business model aligns with growth of underlying creators; revenue growth as creator grows
• Easy onboarding with a strong platform lock-in
• Embedded design tools for creators
• Issuance and management of social tokens for creators; community and management tools
• Ease of on-ramp for non-crypto-native creators
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NFT Bucket: Games
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Description
Definition • Any type of game (Puzzle, strategy, RPG, card games, etc.) that uses NFTs to give players:
・Control and ownership over in-game assets
・Secondary marketplaces of in-game assets
・Provable scarcity/rarity/authenticity of in-game assets
・Interoperability across different environments outside of the original game
・Immutability in the event of a shutdown for the specific gaming platforms
• Several games could plausibly be considered a subset of metaverses
Tailwinds • Desire for true ownership of in-game assets
• Rise of eSports and gaming as a content class
• Gamers general familiarity with the concept of in-game economies (i.e, RuneScape, World of Warcraft)
• Ability to ‘plan-and-earn’ in developing economies
• COVID-19 pandemic forcing increased digital interaction
• Consumer adoption of crypto and NFTs
Why does this bucket exist? • Acts as a consumer onramp into crypto/NFTs
• Entertainment
• Potential to create larger universes with several games and multi-player modes
• Democratization of in-game-asset ownership
• Game developers building ways for consumers to interact with their NFTs
• Unlock speculative demand from consumers
What does this bucket take advantage of? • Authenticity/composability/provenance of blockchains
• Gaming community familiarity with crypto-native concepts (in-game economies, digital asset ownership)
• Communities of engaged gamers and collectors
• Rise of metaverses and interoperable worlds
Investable Traits • Play-to-earn dynamics that encourage widespread adoption
• Gameplay guidance, assistance, and continuity for retention and engagement of new users
• Multi-player collaboration required and/or helpful
• Complex strategy layers to breed conversation and collaboration within community; in-game fairness for strategy
• Differentiated gameplay (not a derivative of existing game)
• Leverages or generates some form of interesting intellectual property
• Brings together multiple communities (collectors, crypto-native, sports, gambling, fantasy, etc.)
• Ease of on-ramp onto game platform for non-crypto-native users
• In-game economics with positive feedback loops (secondary markets, play-to-earn)

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NFT Bucket: Games – Play-to-Earn
• NFTs enable a new use case for gamers called play-to-earn, where open economies in otherwise traditional gaming styles are embraced and players
are rewarded as they add value to the ecosystem
• Players (typically in blockchain-enabled games) can earn meaningful sums of money by monetizing their gameplay and ownership of in-game assets
• By giving gamers ownership of their in-game assets and providing the ability to trade, monetize, and increase the value of in-game assets, players are
rewarded for spending more time and effort with the individual game
• In a game like Fortnite, players are limited to monetizing by streaming their gameplay via Twitch or Youtube
• In blockchain games, players can create value for other players/developers and can be rewarded with in-game assets or crypto
• Axie Infinity, one of the best known blockchain games, has famously been a beacon of hope for families in the Philippines
• Unemployment in the country spiked to 40% during the COVID-19 pandemic, but by playing Axie Infinity, families were able to earn around
$200 a week to support their families
• Entire companies have been built around enabling play-to-earn economies, such as Yield Guild Games (more on them in the NFT Finance
bucket)
• Many play-to-earn games have high entry costs, such as the cost to buy a player’s first in-game character, so scholarship programs and NFT loans have
developed as a way to increase accessibility to these games
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NFT Bucket: Metaverses
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Description
Definition • Shared virtual ecosystems, usually with one or more of the following features:
・Social interactions between participants
・Legitimate economies with the ability to earn income through in-world actions
・Embedded property rights (i.e, virtual land and real estate)
・Augmented Reality, Virtual Reality, Mixed Reality components
・Immutability in the event of a shutdown for the specific gaming platforms
• Several games could plausibly be considered a subset of metaverses
Tailwinds • Desire for true ownership of in-game assets
• Rise of remote work and collaboration tools
• Improvement of VR/AR technology
• Desire for user ownership of platforms
Why does this bucket exist? • The endgame for NFTs; enabling a fully digital, interoperable, decentralized world where users spend significant time living in the digital world and assets can be transferred
across platforms
• Brands looking for partners to help them deploy intellectual property with new technology
• Entertainment
• Potential to create larger universes with several games and multi-player modes
• Democratization of in-game-asset ownership
What does this bucket take advantage of? • Authenticity/composability/provenance of blockchains
• First generation of ‘metaverses’ like Runescape and World of Warcraft
• Gaming community familiarity with crypto-native concepts (in-game economies, digital asset ownership)
Investable Traits • Early signs of user governance; guidance, assistance, and continuous support for retention and engagement of new users
• Gameplay guidance, assistance, and continuity for retention and engagement of new users
• Some form of Intellectual Property with a built-in audience
• Ease of on-ramp onto game platform for non-crypto-native users
• Early metrics of a strong virtual community
・User-generated content, common factors amongst players, reciprocity, the “Power User Curve”
• Strong UI/UX
• Collaboration or partnerships with other projects within NFT ecosystem
• In-world economics that can become real-world financial opportunities (metaverse jobs, revenue streams, etc.)
• Technical teams with expertise building in crypto space and proven ability to hire top-class crypto talent

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NFT Bucket: Metaverses
“A small percent of people live in a real-world environment that is rich, even overflowing, with
glorious substance, beautiful settings, plentiful stimulation, and many fascinating people to
talk to, and to work with, and to date. These are *all* of the people who get to ask probing
questions like yours.
Everyone else, the vast majority of humanity, lacks Reality Privilege – their online world is, or
will be, immeasurably richer and more fulfilling than most of the physical and social
environment around them in the quote-unquote real world.”
- Marc Andreesen, interview with Nicollo Soldo
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NFT Bucket: NFT Finance
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Description
Definition • The financialization of NFTs; Tools that enable NFTs to act as a balance sheet asset
・Making NFTs more accessible (by fractionalizing high-priced NFTs)
・Improving the value proposition of the underlying NFT (by making NFTs yield-generating)
・Improving price discovery and liquidity for NFTs (through index funds or shards)
・Enabling additional use cases (through collateralization, lending, escrow, play-to-earn, and others)
Tailwinds • Consumer adoption of DeFi protocols
• Rise in demand for collectibles (digital and real-world)
• Media craze surrounding new consumer trends (Robinhood/GME/AMC stocks, NFTs in general)
• Ability to ‘play-to-earn’ in developing economies
Why does this bucket exist? • Make NFTs more accessible (fractionalization, utility, price discovery)
• Adds liquidity to NFT markets; liquidity adds value to underlying NFTs
• Alleviates opportunity cost related to owning an FT
of?
• DeFi protocols
• Games and play-to-earn dynamics
Investable Traits • Ease of on-ramp for non-crypto-native users
• Advanced analytics in-platform
• Tools for generating passive yield on NFTs without requiring massive time/effort
• Products that provide exposure to the underlying asset class without having to buy individual NFTs (i.e, index funds, derivatives, etc.)
• Traditional consumer finance mechanisms with a crypto twist (BNPL, credit scores, etc.)
• Founding teams with strong finance (DeFi and/or traditional finance) background
• Access to institutional capital to provide early liquidity for platform

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NFT Bucket: Infrastructure
Description
Definition • NFT infrastructure in our context can be broadly defined as any solution that enables the other buckets to exist as crypto-native solutions
• This wide-ranging bucket is purposely broad; most of the companies that fall within the infrastructure bucket are crypto infrastructure rather than
NFT-specific infrastructure companies, so this bucket encompasses the core infrastructure that allows crypto networks to exist, the payment and
authentication infrastructure that facilitates transactions within crypto networks, and the developer tools that support the creation of applications
on top of the core infrastructure
Tailwinds • Tech improvements (development of infrastructure begets further development of infrastructure)
• Desire for user ownership of platforms (which will be built on crypto infrastructure tools)
Why does this bucket exist? • Necessary for the development that enables the entire crypto ecosystem to exist
• Enables the creation of consumer applications, which facilitates mass adoption of crypto ecosystem
of?
• Investor interest in ‘picks and shovels’ of crypto gold rush
• Growth of crypto ecosystem necessitating core infrastructure improvements
Investable Traits • Technical teams with expertise building in crypto space and proven ability to hire top-class crypto talent
• Strong business models with recurring revenue streams
• Low-friction adoption, ideally self-serve
• Bottom-up developer adoption (if appropriate for customer segment)
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alpaca.vc 2021
NFT Bucket: Infrastructure - Context
• Infrastructure could be broadly or narrowly defined, but for the purpose of our field study, we group all infrastructure
subcategories together and describe infrastructure as anything that enables other buckets to build crypto-native
projects
• Some examples of infrastructure subcategories include:
• Protocols, such as blockchains, sidechains, and layer-2 solutions, that enable crypto networks to operate and
exist
• Sidechains are blockchains with their own consensus mechanisms, but compatible with other blockchains;
interoperate with each other and with the parent without their own coin
• In contrast, Layer-2 solutions are another mechanism to operate alongside a parent blockchain (and
minimizing transaction costs and congestion), but reliant on the parent blockchain for consensus
mechanisms
• Crypto wallets (custodial and non-custodial) and payment infrastructure that enable easy transfer of digital
assets
• Developer tools, node management, software development kits (SDKs), suites of APIs,
performance/reliability/monitoring solutions; products that help developers build crypto-native projects
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NFT Bucket: Infrastructure– Select Profiles
Description Infrastructure
Subcategory
Relationship with NFTs Business Model Funding History
Circle Payments and treasury
infrastructure for the next
generation of internet
finance and commerce
products
Payment Infrastructure –
enables crypto-native
companies to build a
traditional fiat on-ramp
(i.e, credit cards) and
process stablecoin
transactions
Companies building
platforms in the NFT space
can use Circle to easily on-
ramp customers that are
intimidated by
interactions with
cryptocurrencies
Tiered monthly
subscriptions based on
usage
Raised $440M in late-
stage financing from
Fidelity, Digital Currency
Group, and others (05/21)
Alchemy The ‘AWS for blockchains’
– a developer platform
with a wide array of tools
for developers building
blockchain applications
Developer Tools – various
products, like node
management APIs and
performance-monitoring
dashboards, enabling
developers to build on
blockchains
NFT-centric platforms
(OpenSea, CryptoKitties,
Gods Unchained, etc.) use
Alchemy to power their
applications; 70% of the
world’s top ETH apps use
Alchemy
Freemium model with
tiered monthly
subscriptions based on
usage and feature set
Raised $80M Series B at a
$505M valuation led by
Coatue and Addition, with
participation from DFJ
Growth, the Chainsmokers,
and others (04/21)
Polygon A protocol for building
and connecting ETH-
compatible blockchain
networks
Protocols – a layer-2
solution that helps
applications build on
Ethereum while mitigating
ETH’s scalability and
congestion issues
Many NFT platforms
(Decentraland, ZedRun,
AletheaAI) use Polygon to
get around ETH’s high
transaction fees
Token economics with the
MATIC token
Raised an undisclosed
amount of seed financing
from Mark Cuban and
Coinbase Ventures (04/21)
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40
NFT Bucket:
Other Utility
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alpaca.vc 2021
NFT Bucket: Other Utility
Description
Definition • Broad buckets to encompass all other NFT-centric projects that don’t fit into other buckets
・Domain Name Systems
・Identity and credentialing
・NFT Decentralized Autonomous Organizations (DAOs)
・Other physical/digital NFTs (wine, sneakers, land, etc.)
・Social tokens / proof-of-attendance
Tailwinds • Consumer adoption of NFTs
• Brands looking for new ways to deploy existing intellectual property
• The “tokenization” of everything, including physical products
Why does this bucket exist? • Brands attempting to further monetize products and/or intellectual property through NFTs
• Desire to enable the provenance/authenticity of blockchains for real world physical products
• Desire to act as collectives to democratize ownership (DAOs)
• The "land grab" of web3 (DNS)
of?
• Tech improvements
• QR codes, Near-Field Communication, and other methods of connecting physical world products to digital world NFTs
Investable Traits • Tools facilitating the connections between digital goods and physical goods
• NFTs for credentialing / validation of experience
• Superior UI/UX
• First-class customer experience and support
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NFT Bucket: Other Utility – Context
• The “Other Utility” bucket is a catch-all for all other NFT projects with some sort of inherent utility
• Some examples of “Other Utility” subcategories include:
• Domain Name Systems
• Work in the same way as a traditional website domain, but the site in question is on a blockchain
• Beyond holding a site’s address, crypto domain name systems can also process payments in cryptocurrency and are impossible to block
(and therefore, resistant to censorship)
• Identity and credentialing
• Potentially more efficient way to manage time-consuming, labor-intensive credentialing and identity processes (for employers,
governments, licensing boards, etc.)
• Decentralized Autonomous Organizations (DAOs)
• Collective organizations managed by its members with governing rules written into smart contracts
• Essentially, self-governing LLCs on a blockchain
• DAOs have been formed to acquire expensive NFTs or to manage an NFT project
• Other physical/digital NFTs (wine, sneakers, land, etc.)
• NFTs for physical products still have question marks around trusted third parties needed to execute transactions
• Mexican soccer team selling a 1% ownership stake (transferrable with no restrictions to other KYC-compliant individuals) as an NFT –
listing on OpenSea is here
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NFT TAM
1https://www.forbes.com/sites/geraldfenech/2018/11/08/unlocking-a-200-billion-dollar-collectibles-market-on-the-blockchain/?sh=7c5ed6ec5554
2https://www.artbasel.com/news/art-market-report
3Deloitte Consumer; “Global Powers of Luxury Goods 2020”
4https://www.juniperresearch.com/press/video-games-market-value-to-grow-to-over
5https://dappradar.com/nft
The total addressable market for NFTs is difficult to quantify – NFTs aren’t just a
single vertical; NFTs are the global transition to digital assets in every vertical
• NFTs represent the digital equivalents of physical products with massive markets
• Collectibles – $200 billion1
• Art – $68 billion2
• Fashion – $281 billion3
• Video games – $200 billion4
• NFT-based financial assets, like index funds and collateralized loans – ???
• Significant value creation occurs on top of individual NFT projects themselves
• Fervent communities encourage the growth of surrounding ecosystems of
applications built on top of individual projects
• Revenue potential is massive because of commissions on secondary trades
• The top NFT projects so far have generated massive amounts of trading volume5
• Marketplaces like Rarible ($150M) and Foundation ($45M)
• Collectibles like NBATopShot ($600M) and CryptoPunks ($357M)
• Games like Axie Infinity ($107M) and SoRare ($83M)
• Metaverses like Decentraland ($44M) and the Sandbox ($25M)
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Concluding Thoughts
68
• We conducted this field study to determine whether NFTs are a place of interest for Alpaca moving forward, and if so, where we should focus
our attention
• We believe that NFTs represent the next wave of the worldwide transition from analog to digital
• Several trends, like the rise of the creator economy, the COVID-19 pandemic lockdowns, and improvements in blockchain scaling
solutions have accelerated experimentation with NFTs
• The early wave of speculation in digital art has already deflated; however, the second wave of NFT projects will create several venture-
backable companies
• It’s still very early; estimates suggest that less than 2-3% of the worldwide population interact with crypto
• There’s a massive opportunity for games and metaverses to onboard a large percentage of the world into crypto/NFTs and for other
onramp projects to get non-crypto-native consumers into the space with trust and safety (like Lolli/BTC)

Alpaca NFT Field Study

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