Franklin Templeton: Evolution & Revolution: Web3 experiential tokens and asset pricing

Web3 consumer engagement models are still in their infancy but could have the potential to unlock incremental value and enable price discovery for creators and investors alike, according to Franklin Templeton Head of Digital Asset & Industry Advisory Services Sandy Kaul.
 

This article was first published on April 5, 2023, by CoinDesk.
 

Web3 consumer engagement models are still developing and only just beginning to migrate into the real economy, but some hints of what the future of transaction and asset pricing may look like are beginning to emerge. To plot this trajectory, it is important to understand how Web3 consumer engagement will differ from the current Web2¹ world.

• Today, exclusive access to transactional data is used to build and fuel network effects² and is often also monetized through advertising. But Web3 lives on blockchains,³ where key transactional data is openly available. Incentivizing network effects in this realm may come down to encouraging the crowd to engage through strategies specifically designed to deliver emotional appeal.

• Complex, multi-leg transactions require bespoke contracts and operational processes, people and systems to administer required activities. In Web3, smart contracts embed these contractual activities into a token and the terms self-execute when the right conditions are met. This is likely to reduce costs and enable more multi-leg transactions.

• The ability to assign additional rights to a token-based transaction—such as the payout of royalties or community access or both—is likely to turn such transactions into “experiences” that have value beyond the initial purchase. “Experiential” tokens become assets that offer a dual purpose: They are both a key to access benefits and a financial instrument that can be valued in decentralized-finance transactions or in an investment portfolio.

• Moreover, experiential tokens are transferable. If the asset is sold, the rights and remaining value are reassigned to the new owner. Today, contracts would need to be renegotiated and redrawn to enable such a transfer. In Web3, the rights are reassigned as soon as the token moves from one wallet to another.

The aforementioned attributes suggest the emergence of a new approach to valuation. As shown in the chart below, we believe the value of an experiential token increases each time a more precise target audience is used to price the asset. Identification of the target audience can be done using blockchain transactional data.
 

Importance of Emotional Appeal in Pricing “Experiential” Assets
 

Source: Franklin Templeton Industry Advisory Services.
(For illustrative purposes only: This chart represents Franklin Templeton’s view. There can be no assurance that these events or expectations will be realized. Actual results may be significantly different from that shown here.)
 

For example, in March 2022 two celebrity chefs dropped unique pizza-themed non-fungible tokens (NFTs) that offered digital art as well as access to a community connecting NFT owners with their favorite chefs through online master classes and events—both virtual and in real life. The ongoing “value” of each NFT will be based on the perceived desirability and value of the art, community, classes and events that the token offers.

That value might look quite different if the token price were to be based on demand from the marketplace at large as compared to demand from a community of cooking enthusiasts, and potentially even higher if the audience valuing the token was specifically interested in the particular chefs.

Algorithms able to evaluate digital wallets and find addresses with a transaction history that aligns to desired attributes may be designed to advertise token sales and request bids and offers in an increasingly targeted manner. Valuations may be created through this type of solicitation process (request for quote) and perhaps even invitation-only auctions created to enable targeted exchange of NFTs.

Obtaining the highest potential valuation for a specific asset will be in the interest of institutional investors because this can help to increase the value of an institution’s broader set of related holdings. For example, the recent NFT sale of royalty rights to a famous singer’s song from 2015 raised slightly more than US$60,000, but the success of the NFT drop may have helped to increase the value of the music catalog owned by the issuing platform.

While Web3 consumer engagement models are still in their infancy, we believe they have the potential to unlock incremental value and enable price discovery for creators and investors alike.

For more information on the differences between Web3 and Web 2, check out the December 2022 issue in our “Disruptive Technology Views” quarterly series,
“Web2 network effects vs. Web3 crowd effects—the coming shift in value drivers.” Additionally, the May 2023 issue has more information about experiential tokens:
“Experiential Investing: How Web3 commercial transactions are creating new asset classes.”

Contributors: Sandy Kaul, Head of Digital Asset and Industry Advisory Services, Franklin Templeton
 

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Endnotes

¹ In Web 2.0, computers use HTTP in the form of unique web addresses to find information, which is stored at a fixed location, generally on a single server. With Web 3.0, because information would be found based on its content, it could be stored in multiple locations simultaneously and hence be decentralized.

² The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. The internet is an example of the network effect.

³ A blockchain is a digitally distributed, decentralized, public ledger that exists across a network.

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Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.