Welcome back to another issue of The Dropshot! As always, thank you for reading and subscribing.
A quiet start to last week had no major news coming out of the Topshot community, and a general market pullback as a result of investors waiting to see the next major developments during the NBA All-Star weekend. And major developments there were!
For those unfamiliar with the NBA, the All-Star weekend is basically the NBA’s yearly celebration of their best players that traditionally happens in the middle of the season. It culminates in the All-Star Game, which is basically an exhibition basketball game between the best players in the game as determined by fan and coach voting. It’s a big deal for the NBA every year, and the fact that Dapper Labs was able to piggyback on the event so seamlessly is a promising sign for their partnership with the NBA and future potential partnerships around the playoffs and the Finals.
All-Star Packs
Over the weekend, the team at Dapper Labs hustled to release over 210,000 packs in the span of three days (Friday - Sunday). The most hyped release was the Rising Stars pack, which corresponded with the traditional “Rising Stars” game (the game for the best young players in the league) played during NBA All-Star Weekend. Due to COVID restrictions, this year’s game was not played, but instead the NBA opted to announce the Rising Stars of the year via Topshot, which was a really cool promotional event. In addition, Topshot did its first “staged” pack drop by releasing specially-issued moments for the All-Stars (the best players in the league, period).
This staged pack drop was unique because it was specifically designed to be “fair”. Across three different time intervals, 60K All-Star packs (called “Seeing Stars”) were dropped. If you were lucky enough to get selected in the first interval, you were not eligible to enter any of the other drops. Dapper’s intent was to attempt to distribute the 180K “Seeing Star” packs to 180,000 unique users. Obviously, some people created multiple accounts and successfully got multiple packs, but I think Dapper is slowly but surely catching on to them. For one, they disabled gifting after the pack drops, which basically locked all the moments that had been distributed into different accounts and preventing someone from gifting themselves pack moments from their “burner” accounts.
Overall, this tit-for-tat battle between market manipulators and Dapper is something that I covered in my previous post. I think this was the first sign of Dapper taking a serious swing at finding and punishing the manipulators. I wouldn’t be surprised if more severe restrictions and actions are soon to come.
State of the Marketplace
I’m going to be writing about the marketplace rate-limiting that came into effect late Sunday night later in the week, but I did want to discuss the implications of all this new supply (210K packs) in the near term and the long term.
A classic microeconomics question is about happens to a free market when supply is increased and demand stays the same. In the “real world”, markets are very rarely static, and demand very rarely does not move after a change in supply and vice-versa. Yet Topshot is not a true free market yet; new sign-ups for Topshot have been disabled since late last week as consumer growth on the platform hit a fever pitch. So we were in a rare position where, after the pack drops, a huge batch of new “supply” (i.e. moments) was released to a marketplace that did not see new “demand” (i.e. users). Naturally, as your economics professor would have told you, this situation results in a price drop as the supply curve (in red) shifts to the right from S1 to S2 in diagram below:
This price drop naturally led to a further panic in the Topshot Discord chat group, when coupled with the giant collective marketplace yawn last week. This leads to a fascinating question about the different segments of users that actually transact on NBA Topshot. Over the weekend, I saw a survey about Topshot running on the popular analyst account chugsnbugs:
I agree with “Chugs” that many people who think they are investors are not “pure” investors. I myself have looked for good “deals” that I snap up on the marketplace with the sole intention of selling it later at a profit. Importantly, though, I think the key segmentation behavior is what users do once they have arrived at a point where they have a net “consumer surplus” and they have achieved a much larger (+200%) net profit when compared than their initial investment. At that point, they’re essentially playing with “house money”: even if Topshot goes to 0, they can keep their initial investment on their balance sheet and withdraw it back to their bank account.
The way I see it, the three archetypes use their profit as follows:
Traders keep the net profit on their balance to withdraw, or find new “deals” to invest in try to make more money. Over time, these arbitrage opportunities will become fewer and fewer as the Topshot user base becomes attuned to the pricing curve
Collectors take their net profit and attempt to use it to acquire high-value items that are “shiny” / attractive, like challenge rewards and extremely rare moments
Investors take their net profit and use it to buy moments that they see themselves holding for a long time horizon (>6 months). A good example would be a rare moment of their favorite player / team, high-value moments of the best NBA players, or moments that they have an emotional connection to
To be clear, I think these archetypes represent extremes, and most people are hybrids that can bounce between two or even all three archetypes based on market conditions. For example, last week during the market dip I was more of a “Trader”: looking to find deals that I could then quickly turn for a small profit. But in the long view, especially after the huge supply rush we received, I’m an “Investor”: the low prices that we are temporarily seeing on the market have made moments that were previously inaccessible to me affordable, as users look to liquidate their existing holdings to buy new moments and packs instead of pumping fresh cash into their Dapper balance sheets.
Overall, I would say it’s the perfect time to strike the market as an Investor, because prices are relatively low and volatile at the same time. Traders worry when markets are volatile, and Collectors worry when prices stay too low, but Investors are in it for the long haul!
Stay Tuned Later This Week…
I’m going to discuss the other big change over the weekend, which was the lengthy marketplace shutdown on Sunday followed by the rate-limiting of transactions within the marketplace early this week.
Great content, as always. two questions:
1. Obviously the marketplace price curve looks a certain way today. When you look out over 5-10 years how do you if you do at all expect this to shift? In a world where any old packs aren’t constrained but there’s less constant hype, what does this mean for top shots I have today? Should I expect my card values to go down on average, but an occasional top shot becomes more expensive?
2. I’m curious if there’s any rhyme or reason to the different theme and style of drops that are happening. It seems like they’ve tested a few different models of dropping packs. Anything those tests tell us about future of top shot?