Protocol | Fintech

How Dapper Labs scored NBA crypto millions

The company behind CryptoKitties, the first glimmer that consumers might get excited about blockchain-backed digital goods, is poised to hit the mainstream with NBA Top Shot.

​A digital collectible captures NBA player LeBron James mid-dunk.

A digital collectible captures NBA player LeBron James mid-dunk.

Image: Dapper Labs

This may be the blockchain's mainstream moment.

NBA Top Shot, a set of digital trading cards capturing key game-play moments, is raking in millions of dollars of transactions. Some have sold for more than $100,000. It hasn't hurt that NBA players are buying their own "moments" and bragging about it: New Orleans Pelicans player Josh Hart, who often tweets about buying his own and other players' moments, got 65,000 views on a Twitch video of him and other NBA players opening "packs."

Not everyone's on the crypto train yet. LeBron James and James Harden recently admitted ignorance about sales of the officially licensed digital collectibles featuring them. Dallas Mavericks owner and tech investor Mark Cuban has bought his own NBA Top Shot. And so have some 88,000 other buyers. As a result, NBA Top Shot has become the most visible proof that non-fungible tokens, or NFTs — the technical term for digital art using blockchain technology — can find a market beyond wealthy nerds.

It's also a huge turnaround for the company behind every Top Shot. In 2017, Dapper Labs was best known for creating CryptoKitties, the product of a digital cat-breeding app that ran on an Ethereum blockchain. It was a phenomenon — and not in a good way. In November of that year, CryptoKitties was popular enough to slow Ethereum transactions to a crawl, throwing a wrench into other Ethereum apps at a time when the crypto technology was still trying to prove itself.

Dapper Labs, a Vancouver startup, took an unlikely path to winning a major licensing deal with the NBA. One step: building its own blockchain protocol to avoid a repeat of the CryptoKitties snafu. This full-stack approach has critics, who say Dapper Labs is taking on too much. But that step has meant Dapper holds the potential to capitalize on crypto and the NFT craze the way few companies can.

After the CryptoKitties episode, Dapper Labs, which spun out of the Axiom Zen studio in Vancouver and in March 2018 raised funding from Andreessen Horowitz, Union Square Ventures and others, realized it had to go a different route. While figuring out a new app to build, they decided that Ethereum was not built for the volume of a large consumer app.

"We were frankly stunned by how few users it took to destroy Ethereum's ability to handle more traffic," said Dieter Shirley, CTO at Dapper Labs.

Other startups were raising millions, "promising to revolutionize the industry with blockchain technology built on Ethereum. Here we were, we built this silly cat game and after a few tens of thousands of users [we] pushed blockchain to the absolute limit," said Shirley, a former Apple engineer. "We were getting nasty emails from people saying they were annoyed we built this thing because we were ruining the network for everyone else."

At the same time, the popularity of the digital felines was fading. The median value of CryptoKitties had fallen from $41 to about $5 by June 2018. This also coincided with a crash in bitcoin prices — another "crypto winter" that saw prices fall some 80% from a peak in December 2017 to December 2018.

"People forget how [CEO] Roham [Gharegozlou] and Dieter pulled the company forward in some pretty dark times and they were able to raise the capital when no one believed in crypto and NFTs," said Boris Wertz, founding partner at Dapper Labs investor Version One Ventures.

Dapper Labs had already realized that it needed a more robust blockchain to run future apps it was already planning. It evaluated other blockchains to build on but there were too many issues. For example, some blockchains had fewer nodes — which enabled them to run faster — but that defeated the purpose of having a distributed blockchain, Shirley said.

Others were trying sharding, an approach that could make the smart contracts needed to run NFTs more complex because communication would be necessary across different shards, Shirley said. Building large applications depending on sharding was too risky.

There were also big obstacles to consumer adoption: Costs per transaction were too high, and you couldn't just pay with a credit card to buy a digital product.

"We realized we could take a lot of those ideas and combine them with our own ideas," Shirley said.

Dapper Labs uses blockchain technology similar to the kind that powers cryptocurrencies to authenticate its Top Shot collectibles. Dapper Labs uses blockchain technology similar to the kind that powers cryptocurrencies to authenticate its Top Shot collectibles. Image: Dapper Labs

Build your own blockchain

Ultimately Dapper Labs decided it would build its own blockchain from scratch, since it couldn't find one that matched its needs of both speed and enabling broad participation.

Many people didn't take Dapper Labs seriously when they decided to build a blockchain, Shirley said. "Everyone knew us as the CryptoKitties people," he said. "We'd say, 'Hey, we're building a whole new protocol.' They'd say, 'You're the cat guys, right?' And they're busy people. A lot of people dismissed us."

In one innovation, Dapper Labs split blockchain nodes into four different roles. Some nodes would run the consensus process to build the blockchain, and others would execute computations, verify correctness and collect transactions. This separation into different stages of each transaction rather than across different transactions, which happens with sharding, is what made Dapper Labs' new blockchain, which it ended up calling Flow, different.

"By separating into those two buckets we could get to massive scale without resorting to sharding," he said. "By the end of 2018, we had a really strong and solid idea of how this all could work. It was just a matter of spending the next two years actually building that."

Because Dapper Labs built Flow specifically for consumer apps, whereas most blockchains are built for payments or other financial uses, Dapper Labs had to build parts of the blockchain from scratch. For example, they created their own programming language called Cadence specifically for smart-contract development.

"We chose to rethink all parts of the blockchain and ended up having to build a lot more than most teams building their own blockchain," Shirley said.

While some other token projects were raising billions of dollars through ICOs, Dapper Labs decided to go a different route, Wertz said.

"We knew it was possible that it might have to be a full-stack company," said David Pakman, a partner at Venrock, which invested in Dapper Labs in mid-2018. "They'd need to build the platform and the apps on top. That's exactly what they've done. It's not for the faint of heart. It's a huge amount of work. If anyone could do it, I had a feeling this team was the one to do it. It was a challenging several years of development."

Flow was announced in September 2019 and had a public auction for its tokens on Coinlist in October 2020.

But Dapper Labs needed an app to show that Flow would work. "We felt we couldn't just build the technology. We had to show the world what could be built on it — with a very explicit go-to-market," Shirley said.

At that point, Dapper Labs had already been talking with the NBA. Caty Tedman, head of marketing and partnerships for Dapper Labs, who had worked at the National Football League and the National Hockey League, approached the NBA about becoming the first application for Flow. The NBA was already looking to develop blockchain experiences, so they came to a deal.

"They agreed to take the NBA license and make it the launch title for the Flow blockchain," Shirley said.

Dapper Labs also decided to tear down and rebuild Top Shot mid-stream, in January 2020, Shirley said, to create a broader range of items available. "By late 2019 we had a system of how to mint [video] moments and how they're packaged into series," he said. "The more we thought about it, we realized it wasn't conducive to collectors. … Ownership of a moment was a bit too commodified. We needed to serve a wider range of fans."

Dapper Labs announced NBA Top Shot in July 2019 and launched a beta version in October. It has seen explosive growth, seeing $361 million in sales, $337 million of which has come from its peer-to-peer marketplace. February sales were $232 million, up fivefold from $44 million in January. Dapper Labs is now reportedly raising new capital at about a $2 billion valuation.

As the technology matured, more brands became interested in using Flow for their own NFTs, with UFC, Warner Music Group, Dr. Seuss Entertainment and Ubisoft in development. The tokens are tied to each item, the system uses proof of stake, it has nodes and there's token network controls.

But few consumers know that NBA Top Shot uses a blockchain.

Dapper Labs focused on making NBA Top Shot consumer-friendly; the accompanying app doesn't even mention blockchain or crypto. That was "100% intentional," Shirley said. "We very consciously said from the beginning we need to focus on creating value for people who don't even know the token exists."

So is this a collecting product or a new form of online game? If it's just for collectors, there's always the danger that crazed fans or speculators will lose interest and the market will crash, like Beanie Babies.

"For all these things without utility value, the default is to assume there'll be bubble and a crash," said Parker Thompson, general partner at TNT Ventures, which is not an investor in Dapper Labs. "That's almost always the case. Crypto doesn't change that."

But Dapper Labs sees NBA Top Shot as more than just for collecting digital highlights, Shirley said. It already has some game features, and plans to roll out more fully-featured aspects such as game squads that compete against each other in a sort of fantasy sports format.

As it manages massive growth, the company is trying to balance scarcity, which drives interest and shows uniqueness, with accessibility for fans so it doesn't become used by just speculators or gamblers. It has done things like providing certain periods where anyone who pre-orders a pack is guaranteed to get one.

"We think you can't just create hype and financial value, you have to create real, lasting value," Shirley said. "If no one's buying and holding them to have them, then eventually the party ends."

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