I have mentioned before how I enjoy reading and listening to Tim Ferriss. Last week I was listening to one of his latest podcasts, an interview with Chris Dixon and Naval Ravikant, two very experienced technology investors. It was one of the most fascinating podcasts I have heard in years.

The discussion was wide ranging but centred on NFTs (Non Fungible Tokens – more on this soon) and the potential of this innovative technology to transform the internet as we know it (Web2) and shape what has become known as Web3.

The explore-exploit dilemma

One of the concepts mentioned in the interview was that of exploiting v exploring. Unlike Non Fungible Tokens, we all understand these words, but in this interview they were used in the machine learning context, rather than their traditional meaning. In simplistic terms, in the machine learning context exploit effectively means continuing to build on what you know, and explore means to discover and learn new things. It is frequently phrased as the exploit-explore dilemma. Which do I choose and when?

I’ve been thinking a lot about this lately and the choices we make on a day to day basis. We face this dilemma in so much of life. Do I listen to music I already know and love (exploit), or do I listen to new artists and music (explore)? Do I go on holidays to the same place, or try somewhere else? We’re selling our house right now, so we’re asking ourselves, “Do we stay in an area we love, or do we find somewhere new?”

Let me tell you, this dilemma is everywhere!

Now take a breath. And follow me down the rabbit hole for just a little while.

With all the above in mind, I am firmly wearing my Explore hat, and have been taking some time to explore the crazy world that is known as Web3, and in particular, NFTs, or Non Fungible Tokens (more on these soon).

It is early days for this new ecosystem, with creatives emerging as one of the central users and builders of Web3, which is unsurprising given the promise that NFTs offer to their industry.

The internet has changed the world. The world is changing the internet.

There’s no doubt that the internet has been transformational for so many people, communities, businesses and organisations. Like most major change though, there are plenty of unintended consequences, some of them significant. There are widespread concerns with the concentration of power and economic value in the hands of a handful of companies: Facebook (now rebranded as Meta), Apple, Amazon, Google in particular.

Web2 disrupted the business models of the incumbents, and the Web3 movement has potential to create a new internet that better serves its users, and in doing so disrupt existing business models, including of those organisations who hold the power in Web2.

If you’re interested in learning more about the world of Web3, then I highly recommend listening to this podcast interview I mentioned earlier. Although I warn you, it is a long episode, so you probably need to be a fellow geek to hang in to the end!

So what exactly are these Non Fungible Token things?

I can hear you say, “Non Fungible Token makes no more sense to me than the letters NFT. Help!” These tokens confer unique verifiable property rights over an asset using encryption codes. But this 2 minute video explains it better than I can, so if you’re not familiar with the term, then pause reading this and go watch the video first.

Anyone tapped into the digital world cannot have missed hearing about all the hype around NFTs, much of it about people buying things at crazy prices, like the very first tweet that sold for over $2M USD (made by Twitter CEO Jack Dorsey), or a piece of digital art.

As an investment category NFTs are about as speculative, volatile and high risk as you can get. But what I am most fascinated about is not the possibility of buying and selling digital assets but rather the potential that this technology offers to future commerce and business models. In my view, what is most important now, is not to put your money into this, but to explore and seek to learn about it.

A sustainable business model that supports creatives is long overdue.

For creators such as musicians and artists, NFTs are potentially game changing, providing a mechanism to gain ongoing remuneration from their work.

An example: There is a talented teenage artist known as Fewocious who is doing some incredible innovation, not only producing digital art, but also bundling physical art with NFTs. He recently sold a sculpture through Sothebys for over £2M .

There is serious money here, and serious art players such as Sothebys are participating. This technology enables creators to build and deepen direct engagement with their communities in a way not previously available to them, and to reward their followers while being paid for their work. Fewocious is exploring this area too with a recent experiment in New York City at a secret location only made known to the holders of NFTs of his work.

It will be fascinating to see how it evolves, but it has the potential to significantly disrupt the centralised structures of the creative and entertainment industries, that have traditionally captured the lion’s share of value.

A new financial ecosystem is emerging.

While I have been talking about business models for creatives, rather than other business focused users, the reality is that it is impossible to dive into this space without also exploring what is means for the financial ecosystem.

NFTs are built on blockchain technology, and are purchased using cryptocurrency, which is also built on the blockchain. Cryptocurrencies are global digital currencies without any central management. If you are interested in learning more about blockchain, then this video is an excellent resource.

This new financial ecosystem is evolving rapidly, and is still maturing. It comes with significant risk and uncertainty, but the trend is currently moving towards the development of a decentralised financial system (this movement is known as DeFi – meaning decentralised finance), that would represent the largest disruption in the financial system in generations.

We don’t know how this will play out, but a “follow the money” approach to observing is usually instructive, and there is plenty of money being invested in, and on, this new financial ecosystem. In recent months, institutional investors have jumped into cryptocurrencies and are now investing more than the consumer/early adopters, so the acceleration of money is happening.

The dilemma for Directors

Now it’s time to climb out of the rabbit hole and bring it all back to the world of directors and executives. When we consider the exploit-explore dilemma, what should we focus our development time and energy on? Do we learn more about technology and disruptive trends, or spend more time honing our finance and risk skills? Or yet more time on what often feels like never ending compliance?

There is no right answer here, and as always it depends on the context. We are living in a world where the scale and pace of innovation is rapidly changing the business landscape, with potential to disrupt the financial systems that we are all connected into.

While risk is always a consideration for leaders, the overarching risk faced by directors is the sustainability of the organisations we govern. So, even though compliance and risk demands are overwhelming for directors, not engaging with and learning about disruptive future trends given the scale and pace of innovation being experienced is a high risk endeavour in itself. In my view, this context requires those of us in positions of influence to dedicate time to explore, and not just exploit.

Cryptocurrencies, NFTs and the overall cryptocurrency market are all highly volatile and high risk. Nothing in this newsletter is intended as advice and you should consider your own financial and tax advice.

I hope you enjoyed the exploration of this rabbit hole with me. As always, I would love to know your thoughts. If you’re also diving into these trends and would like to chat, please reach out, as I would love to share thoughts and learn from what you know.