NFTs Need to ‘Shift Away from Ponzinomics’

Luca Netz is not afraid to strike out.

Fresh off the headline-grabbing success of the Pudgy Toys launch, which raised more than $500,000 in two days, the Pudgy Penguins boss is aiming well beyond just dominating Amazon’s toy charts.

“I think as we speak further, I will be the face of NFTs and I will be on track to become the number one NFT project in the world with the highest floor price,” he says. “That’s really my goal. I think we will reach that goal.”

While that remains an ambitious claim today, it would have sounded far-fetched just a year ago when the Pudgy Penguins were reeling from a scandal that drained the treasury and lowered the floor price. The project’s subsequent revival has been one of the most impressive comeback stories the NFT space has ever seen.

In a candid interview, Netz describes the highs and lows of bringing Pudgy Penguins back from the brink, his plan to dominate Web3 IP licensing, and why Pudgy Toys is a Trojan horse for mass adoption.

Matt Medved: Take us back to April 2022. The Pudgy Penguins project really seemed dead in the water. What appealed to you and gave you the conviction to buy it for 750 ETH? ($2.5 million at the time)

Luca Netz: I was frustrated with NFTs. I was disappointed because of how much money people had raised from the community and venture and how little production they were delivering. Everyone entered keywords like they are the next IP address, the next great game or the next great innovator in music. And it seemed like nobody did anything. Instead of complaining, I said, “This is a perfect opportunity to lead the charge in an NFT project that I believe is ultimately the future of technology and fundraising.”

750 ETH for @Pudgy_Penguins of NFT degenerates. Make your move @ColeThereum

— Luca Netz 🐧 (@LucaNetz) 6 January 2022

I bought it for $2.5 million, but you can’t really raise money and say, “Hey, I’m going to do an NFT project, raise a hundred million dollars and curate and grow that community.” You either have it or you don’t. In this situation, I was lucky enough to buy it. But these things matter in crypto and its historical significance and what it did to really kick off the space. That summer of 2021 set the tone for a craze that has finally brought us here. And you can’t just buy it. There are unquantifiable marketing dollars and cache and provenance and significance.

So you see my skills as an elite product mover and an elite marketer along with what I believe is the best Penguin IP ever made. They’ve always made Penguins ugly for some reason and Pudgy Penguins are cute… so you have this traditional IP that fills a needed void because right now there’s no premier Penguin brand… It has all the ingredients for traditional success, which excites me. It is the premier case study for building a brand in NFTs, Web3’s first real brand and first real IP business. And that is ultimately what we want to create.

There was a lot of excitement when you took over the Pudgy Penguins, but there is definitely a quick shelf life in Web3. Owners want results. What were the biggest challenges you faced in turning this around?

The hard part for us was really these black swans that the universe gave us. At one point I actually had to dig into my bank account and put more money into the business, more than the actual purchase. Because even our worst estimates did not account for the fact that NFT volume was reduced by 95 percent. We did not account for royalties that left. And we didn’t take into account that Ethereum took an 80 percent haircut — all at the same time.

I knew royalties were not the revenue drivers for this business. Royalties are EBITDA patterns, so that’s how I look at them from a revenue model. But I thought royalties could sustain us until we got our real revenue drivers going. 80 percent of the team were not paid for 11 months. It comes with internal friction and expectations… I’m thankful they pulled through and we made it out the other side.

I don’t think we could justify buying @pudgypenguins for $2.5 million if we didn’t have the safety net of royalties. We bought the project with no money in the bank, and we knew the royalties could sustain us until we got the consumer product line and content verticals up and running.

— Luca Netz 🐧 (@LucaNetz) 18 February 2023

Was there a moment when you felt the pendulum swing?

I would attribute this to my best friend in the room. His name is Frank Degods. He gave me a coaching session one day where he said he was so impressed with what we were doing, but I wasn’t doing a good job of galvanizing and spreading that vision, which is really my job as CEO. And within the first couple of days after he told me it started the uptrend for Pudgy Penguins, which was a little more vocal.

In Web2, I never really talked about my successes. I just showed them. I’ll let the results do the talking. That was always my mantra because I grew up in LA and everyone in LA is either lying or a trust fund baby. I’m a doer. But he showed me that it is a combination of both, talking and doing. So all I had to do was muster up the courage because I’m an introvert. It was a big moment because a lot of people in this room are making amazing things but falling on deaf ears because they don’t have a champion for those products.

Much of Web3 focuses on Twitter, but Pudgy Penguins has grown rapidly on Instagram and beyond. How are you thinking about different platforms to get this IP in front of a wider audience?

We must control our own destiny… If I keep my eggs in one basket, I inevitably compromise my future, the future of this company and our owners… Being subject to variables I cannot control is a fool’s game. And I’m not interested in playing a silly game. I have every interest in playing a wise man’s game, and a wise man will diversify his attention.

In the next year I want to have the biggest Facebook, YouTube, TikTok, Instagram, Snapchat and GIPHY of anyone in the Web3 space. After we do that in a year, we’ll go and tackle the traditional IPs.

What is the vision behind Pudgy Toys? How did you take it from idea to fully realized success?

On the face, to the common person, it is a cute, cuddly, Pudgy Penguin. But for the Web3 world, it’s a Trojan horse to get people into Web3 without them knowing. There is a birth certificate attached to it with a QR code. You scan it and it gives you a redemption code and points you to pudgyworld.com. You sign up for an account via email and a password, which gives you a custodial wallet. In a few minutes you can buy and sell NFTs and put them on your eternal Pudgy Penguin in real time. If you decide to make it, it’s a dynamic soul-bound NFT. So the penguin itself is additive to our core collection, not dilutive. To have a tradable Pudgy Penguin asset, you need to go to Ethereum and spend big dollars. But it still makes people comfortable with the digital identity and part of the community.

If you want to introduce a friend or family member to the space, right now, you have to teach them about MetaMask and OpenSea, which sounds rigorous and time-consuming. Now with Pudgy Toys all you have to do is buy them an action figure and follow the instructions. Within five minutes they will understand the beauty of Web3.

If you spend an extra 10 minutes on Pudgy World and sell a property, there have been some amazing anecdotes up to this point of people using $60 worth of toys and selling $230 worth of digital trades. Making that mechanism sticky is the hard part here, and we’re working hard to create that feedback loop to make sure it’s fun and engaging. But a world where someone spends $20 on a toy and makes $30 back is a world where everyone says, “Oh my god, what is this?” They will eventually learn that it is an NFT and the likelihood of them becoming a Web3 consumer is very high.

“The elephant in the room today is NFT holders want monetary gain.”

Luca Netz

In a post-royalty world, how do you think community-based projects can create these new revenue streams in a sustainable way, while driving value back to the holders?

The elephant in the room today is NFT holders want monetary gain. Most founders don’t want to talk about it…but I get it because I was an NFT collector. I know what they want. They want monetary gain. And how are you going to give them monetary gain today? Well, today it is through airdrops of tokens and NFTs, which are liabilities. The best advice I got when I got into this business was to avoid creating obligations for yourself. So I have too many collections. I bought the Pudgy Penguins with the Lil Pudgys and Pudgy Rods that already exist. So I don’t have room to make more NFTs today. And the tokens are pretty far away because I don’t think my NFT market cap has warranted and justified a token airdrop.

So at the end of the day, I can’t provide financial gain by creating imaginary objects out of thin air and releasing them. So the only way I can give monetary gain right now is through the floor price going up, which I also can’t control other than just executing and showing up every day. The only other option is to create a real business and share that income…through licensing because [holders] owns its digital assets. As the company, I want to license that IP from them and use it in the products and tools I make, and it’s a scalable way to make money. If we really want this space to work, we need to move away from Ponzinomics. We need to move away from creating things out of thin air. They are nice and I’m sure I’ll make them at some point. But it cannot be the be-all and end-all. It just has to be a function.

“If we really want this space to work, we need to move away from Ponzinomics.”

Luca Netz

How does IP licensing work? How do you plan to scale it with the expansion of Pudgy IP?

Right now the toys use a licensed royalty, where they are paid in perpetuity on an annual basis. So at the end of each year we will consolidate the earnings of the toy rollers and we will pay them out accordingly. Going forward, we will likely do so through non-exclusive prepayments. So I’ll pay you for the non-exclusive right to use your Pudgy Penguin and an upfront payment of whatever the deal is worth. And I’ll just send it directly to your wallet.

We developed a platform called Overpass, which we will launch at the end of June, maybe the beginning of July… [that] solves Web3 licensing at scale… Licensing is the lowest hanging fruit in terms of utility projects can bring to their holders, and Web3 licensing today is a pain in the ass. I learned that because we were the first major Web3 company to license IP directly from holders for a mass market product… Web3 licensing should be done the Web3 way, which is a few clicks of a button. Web3 extracts a lot of the friction, and it has not yet been abstracted for the licensing business. So we created this licensing marketplace where if you’re a company and you want to license IP, you enter into an agreement. You issue the collections you want on board and they will submit proposals of their nature and what they want to pay for it. With a few clicks of a button, they can send the money and sign the papers. It’s all done on-chain… I humbly believe it’s one of the three most important pieces of technology that an NFT project has ever shipped.

This interview transcript has been edited for brevity and clarity.

For the full and uncut interview, listen to our podcast episode with Luca Netz.