Chapter 2: Trapped in the Zombie Crypto Casino

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We are All Going to Die. NFTs are Dead. But that's okay because Death will save us. This is the second part of a long multi-chapter hyper-thread on the NFT market from 2021 to 2023 Chapter two below Today we learn that 80% of NFT volume is done by 10% of the wallets. 🧵💀↓

Preface: Over the next several weeks I will post different chapters as threads in a broad arc on the recent NFT crypto cycle. This is the second chapter in the series.

The chapters are as follows: 1) Hallowed Ground - How do 666K people freeze $6.5B? (quoted) 2) Trapped in the Zombie Crypto Casino - Why do people stay? 3) Mausoleum for a Burned Ape - What was the 2021 narrative? 4) Network, Death, Rebirth - Do NFTs have a line of flight? twitter.com/poof_eth/status/1668771781166120961

🧟 Chapter Two: Trapped in the Zombie Crypto Casino On scale, addiction, quitting, and coming back (alive) again. Note: This will assume you read Chapter One.

The market is down. Everyone has "left." Only a few remain who may lead us to the promised land of mass adoption... This is the current narrative. It's largely false. For all of my talk about death, these zombies are "alive" and kicking. Waiting for their moment to eat.

We will turn an eye towards the users we identified in chapter one. Who are these people? What does the concentration of capital, assets, profit look like across them? And most importantly... how do they behave?

Let's start with a simple segmentation. We have wallets so let's work with wallets. We placed every ETH wallet into a bucket based on how much secondary volume they spent in 2021 and 2022. As we saw earlier, we end up with a similar wallet breakdown...

Now, if we want to have a little fun and create some drama... Let's look at how these wallets spend. 95% of all NFT spend is done by 12% of wallets! And 76% is done by the top 6% of wallets! But that's not what's important...

The actual insight to takeaway is twofold: 1) The actual material impact on price, volume of "light users" -- likely what is termed the "mainstream" adopters -- is largely irrelevant. 2) The ~600K user number seems to be resilient to assess a majority of the market dynamics.

We will focus on the 610K wallets that have spent >2.0 ETH during this time period. This is the distribution of this group across the buckets. Note: to the best of our ability, we removed wash-trading. Now, what does this represent in terms of buying power?

It's worth briefly mentioning the Pareto principle. Distributions of consumers, wealth concentration and consumption have a tendency to follow a "Pareto distribution" which is often summarized as "80/20." The top 20% of people do 80% of consumption...

Put more simply, Pareto essentially says the phenomenon of "whales" is reoccurring in a variety of statistical scenarios. Example illustration: the top 20% of spenders in a game spend 80% of the overall dollars. It's important as what I will share on NFTs is actually... common.

We will briefly shift to a simple table... This is a breakdown of the 610K wallets. What we will find is intuitive, the top 21% (~150K) of wallets do 81% of volume. And similarly the top 5% do 54%. All of this fits the hallmarks of a typical Pareto distribution.

So we identified the relative scale and size of the largest spenders and their import... Let's put this in context now. When we talk about adoption, when we talk about toy sales, IP deals, brand deals, Jimmy Fallon talking about Apes, and so on...

There is an assumption that ADOPTION will drive volume. Or more naively, that ADOPTION IS driving volume. While it has the potential to drive volume (10M users spending 0.05ETH = ~$12B volume), it has had minimal direct impact on the current state of affairs.

This is important since the primary price thesis was based in a narrative of "new money" coming in from presumably "new users." This isn't what's happening. Existing users and "early adopters" who are deeper into the system gain conviction in spending more.

Recall in Chapter one the liquidity assessment... Our ~650K wallets had $4B in liquid assets sitting in their wallet at the start of 2022. This is just what's sitting in a wallet. This is the money, largely, that was deployed and redeployed again and again into the market.

Now, each Cycle does add new users... I am an example of this as someone who largely was not serious about crypto until the middle of 2021. But the important thing to evaluate now is... How is it that the money doesn't seem to leave the casino?

If it's just PvP or just crypto rich people traading amongst themselves, won't the money eventually be taken out of the system? Let's first look at whether or not anyone leaves the Casino.

We looked at the entire segmentation of user above and came up with a % retention rate. What % of wallets in each group had more than one transaction on ETH in 2023? What we found... The more you spend, the more likely you are to stay.

For those who haven't spent much time with retention models... This is fairly typical (can cover why in a separate post if there's interest). What's shocking about the results is that this is simply ANY transaction during one of the deepest bear market years (2023)...

People actually stay. Let's look at NFT transactions now in a red line. Similar story, but, a lower number.

Before we move on, let's consider the aggregate numbers: 62% made >1 ETH transactions 42% made >1 NFT transactions But now if we look at just the top 21% who do 81% of the volume: 79% >1 ETH transactions 62% >1 NFT transactions Higher by roughly ~20 pts.

The "true" numbers are likely higher based on our earlier assessment of wallets too... So we learned that the more you spend, the more you are stuck in the Casino... Or put another way... the more liquidity you bring, the more you are unable to quit. More money, more addiction

While not perfect, this gives a sense of just how good that top line is against other benchmarks... Most systems have inherent churn, Netflix and Hulu have true subscription models making retention easier than something like F2P mobile gaming Top 20% of NFT wallets > Netflix

I was originally going to have a long discussion on gambling behaviors. And how NFT shares much in common with online poker and slot machines. Fundamentally though, NFTs and Crypto in general are far more totalizing than that...

Various examples: 1) Most of the mints from 2021 were poorly thought through or, worse, scams... yet 50% of that was still explicitly spent BACK into NFTs. Likely much more will show up in crypto broadly. ... twitter.com/poof_eth/status/1668771905862778880

2) Consider how major figures in crypto twitter are largely unable to leave. The (imperfect) Nansen list of top profit traders will yield a number of names that are still highly engaged. 3) In your own personal experience... you're stuck aren't you?

To understand Gambling behaviors I highly recommend two pieces... Natasha Dow Schüll’s book "Addiction by Design" on Slots and her article "The Gaming of Chance" on Online Poker Review here: natashadowschull.org/wp-content/uploads/2018/06/book1review-SSS-Hsu.pdf and natashadowschull.org/wp-content/uploads/2018/05/bookchap-modes-of-uncertainty-chance-online-poker-software.pdf

The most important insight in my view from the above is the following... Getting into a state of semi-conscious flow is more important than "winning" and the terms of "winning" can be arbitrarily changed.

There's further work here for someone to do on how ETH as a denomination largely functions in the same way as "gems" in online gaming which is a typical mechanism to add "sunk cost" to a game and psychologically underrepresent their value. But I digress...

So: The majority of spenders on NFTs are still in play a year later. Once they're in, it's hard to get them out of the casino... What about those who are not "active?"

Let's close on a discussion of Zombies.

Zombies are the wallets that are not active today, but may be reactivated at any time. Because the crypto system has a high barrier of entry... Once you have a wallet, you have gained this cursed knowledge forever. Enabling you to re-engage at any time.

There are two types of Zombies relevant for us: 1) Zombies with a new distraction... Those who, in our earlier example, stopped trading NFTs but continue actively engaging in crypto and ETH.

Consider the large liquidity available at the start of 2022. Whether active or inactive in NFTs, that $4B was ready to be spent. Ultimately much of it ended up in NFTs, but it also likely was spent in shitcoins, DEXes, gambling and so on.

2) The Zombies who have temporarily disengaged in ETH... but are likely ready to come back for the next bull (or new narrative) The high barrier to entry (setting up a wallet, buying ETH, etc) means that at any time these individuals can jump back on.

To conclude this chapter... let's highlight what's most important: There are roughly 150K wallets that drive 80% of the NFT market volume 80% of these individuals are still playing Ethereum ~2 years later in the midst of a bear The more you spend, the more you stay.

You'll noticed we have only talked about spend and not profit. And we didn't even talk about a single project! Aren't we missing something? Well that's on purpose... profit, projects chosen, and other factors had less correlation to stickiness than overall volume.

It's not about winning or losing, the more you engage, the more you want to stay in the casino. In Chapter 3, we will start looking at where money went... What projects won, what narratives were created, who profited in trading... How does a "narrative" work and accumulate?

Sources / resources: Tons of custom work thanks to rmas that is available here on his profile for anyone, get a free flipside crypto account to use it flipsidecrypto.xyz/rmas/ Worth perusing out all of Schull's work on gambling and addiction here natashadowschull.org/

You can read the unrolled version of this thread here: typefully.com/poof_eth/RKS2ByM