NFT Projects are just MLMs for Tech Elites

Whenever a new technology bubble emerges, the end result is always name-calling. A bifurcation of belief usually occurs as people are dazzled by the latest shiny object. For the zealots, incentivized to see the bubble grow ever larger, they will call the uninitiated “normies, haters, skeptics, losers, closed-minded” etc. For those who are too late to the trend to achieve the truly ridiculous returns of early adopters, the next most financially lucrative option is to do as Michael Jordan did, and join the dunk industry. “Bernie Madoff! Tulip bulb 2.0! Pyramid scheme! Charlatans!”

The current tech hullabaloo is NFTs. Non-fungible-tokens are, depending on if you are talking to a zealot or a skeptic, either the second coming of TechnoChrist or the biggest scam to be invented in Crypto since the scam of Crypto was invented. (The venn diagram of NFT haters are almost exact matches of Crypto haters). 

Today I would like to straddle that very difficult middle ground of appreciating the promises of the technology while simultaneously pointing out the (very obvious) flaws of some of its current iterations. To do so, I’ve teamed up with the wonderful Kushaan Shah who writes a marketing-focused newsletter called Mind Meld which I’ve found valuable over the last year. We co-wrote the piece that follows.

We posit that the most prominent NFT projects, things like Bored Ape Yacht Club and Pudgy Penguins, hold such a remarkably similar structure to Multi-Level-Marketing companies (MLMs) that they will also suffer from the same failures. Investors should exercise extreme caution as they evaluate this emerging asset class. 

To begin though, we must start with hot dog leggings.

LuLaRipped Off 

When you peruse the aisles of most thrift stores in Middle America, the women’s section is all stuffed with similar products. Garishly bright neon colors are partnered with chevron patterns, a clashing cacophony neatly printed onto buttery soft pants. 

Staring at these garments, it is tough to reconcile their sometimes eye-watering appearance with the success of the business producing them. 

These are the leggings of LuLaRoe, the MLM that rose to $1.9B in sales before flaming out in spectacular fashion. It is the subject of the new Amazon documentary LuLaRich (which is excellent and you should watch).

If you are unfamiliar with the MLM industry, the structure is fairly simple. The originator of the scam *cough* business, comes up with some sort of retail good. It ranges from knives and essential oils, to in this case, clothing. A typical consumer goods company would find a retailer to display their wares with. In contrast with that, an MLM transforms regular consumers into retailers. Consumers buy X amount of inventory at wholesale prices and then sell those goods to their friends and neighbors. 

Growth for MLMs can take two paths. 

1. They can empower local distributors with better product/marketing support and thus help them sell more goods, or 
2. They can recruit additional distributors. 

The fastest and cheapest path to growth for a business will always be option 2. 

MLMs incentivize recruiting behavior with what they call the “downline.” This is MLM gobbledygook meaning that when an existing distributor recruits a new distributor they receive some sort of financial compensation—typically a % of that person's earnings. And guess what? When that new recruit suckers an even newer person into becoming a distributor, the person at the top receives a % of that person's earnings, too. Thus the term “downline” — you get to keep a cut of all the revenue from all your children, grandchildren, and everyone down your “line.” 

Note: This is exactly how the real-estate business works, too. Keller Williams pioneered it, and everyone else has copied it. Real Estate agents now get compensated based on recruiting other agents in addition to selling homes. And this is exactly why regulating MLMs is so damn difficult! They are just a few shades removed from legitimacy and are thus very difficult to build concrete regulation around. The line between solid growth strategy and unsustainable pyramid scheme is very, very thin.

This recruiting method is such an effective method of growth for the overall business that distributors will typically make more from creating new believers than they would by selling their own product. 

According to the Amazon doc, 1% of salespeople take 50% of the money. Over 80% of salespeople have nobody below them and thus lose money. To explain it, we will need to do some Napkin Math. Let’s start with the recruitment of new people. Let’s assume that each salesperson recruits 4 fresh bodies every month.

1x4 = 4

4x4 = 16

16x4 = 64

64x4 = 256

256x4 = 1,024

1024x4 = 4,096

4096x4 = 16,384

16834x4 = 65,536

65,536 x 4 = 262,144

262144 x 4 = 1,048,576

Within 10 months you have recruited every man, woman, and child within the state of Montana to sell leggings. 

1,048,576 x 4 = 4,194,304

4,194,304 x 4 = 16,777,216

16,777,216 x 4 = 67,108,864