Throughlines (Part II)

Taking the 10,000-Foot View

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Throughlines (Part II)

On a run in New York last week, while in town for NFT NYC, David Bowie’s “Changes” came on my playlist. As I ran along the Hudson, a few lines jumped out:

And these children that you spit on
As they try to change their worlds
Are immune to your consultations
They’re quite aware of what they’re goin’ through

Bowie’s song—one of his best—is about defying the status quo and stepping out to, well, change the world. To me, the lines captured much of the crypto movement.

It’s easy to look down on crypto or to dismiss it, particularly given the market’s irrational exuberance. Skepticism often falls along generational lines: almost everyone I met at NFT NYC was young; almost everyone I know at OpenSea is between the ages of 25 and 30; and it’s not uncommon for crypto people to refer to all non-believers as “Boomers”. Change often comes from the young. Bowie’s lyrics apply as much to Greta Thunberg, as to X Gonzalez, as to Vitalik Buterin.

This isn’t to say that a JPEG of a Clipart rock will still be worth $1.3 million in a few years. Many (most?) of today’s headline-grabbing NFT sales will end up worthless, just as many tech companies from the late 90s lost their value. But that doesn’t mean the movement itself is worthless.

If you strip away the noise, you get to the heart of why this movement matters: crypto is about removing gatekeepers and providing a more efficient and more egalitarian digital economy. Crypto infuses value into the web’s vast networks of information, people, goods, and services.

In Part I of Throughlines, I covered five buzzwords: community, authenticity, avatars, metaverse, and VR & AR. In Part II, I’ll cover five more, each related to crypto:

  1. Web3

  2. Tokens (Fungible & Non-Fungible)

  3. DeFi

  4. DAOs

  5. Creators

I’ll dig into how they interrelate and build on each other, and why they matter.

🕸️ Web3

On the web, the third time’s the charm.

Web1 ran from roughly 1990 to 2005 and centered around information becoming accessible on the internet. Documents and pages were linked together, with companies like Google and Yahoo! making the world’s information easily discoverable. In Web1, most people were passive consumers.

Web2, which has run from around 2005 through today, brought a shift to a participatory web. Rather than passive consumers, we became active creators; the web shifted from a reading platform to a publishing platform. Web2 brought the rise of user-generated content (UGC), which fueled massive platforms like Facebook, Instagram, Twitter, Snapchat, YouTube, and TikTok. If Web1 was about information, Web2 was about social connection and content creation.

But Web2 had a dark side: the major platforms vacuumed up all of the economics. The promise of the internet was to cut out the middlemen: instead of being tapped by a studio executive, you could post to YouTube; instead of going through a newspaper editor, you could tweet; instead of signing with a record label, you could upload your music to Soundcloud. But the big internet platforms became the new middlemen. In Web2, users created the value that the platforms then enjoyed.

Web3 is a reorientation of our digital economy. Web3 is the internet (finally) owned by creators and communities. This is made possible through blockchains like Ethereum. Smart contracts run on Ethereum as collections of code with specific built-in instructions—there’s no need for a centralized authority and no intermediaries are involved.

Instead of Facebook owning and profiting from user-generated content, everyday people gain from their own creations. Everyone contributes value to the internet, and everyone enjoys the benefits of that value creation.

I often think of the web’s chronology as:

Consumption ➡️ Participation ➡️ Ownership

And the language of each era matters. In Web1, we browsed. Web2 was about users who were acquired. (The old adage goes: “There are only two industries that call their customers ‘users’: illegal drugs and technology.”) Web3 is about creators and communities who are owners. This is a paradigm shift that rethinks underlying principles: who owns data; who makes decisions; and who reaps the rewards of our collective value creation.

🪙 Tokens (Fungible & Non-Fungible)

Tokens are the lifeblood of Web3: they underpin our new digital economy.

Tokens can be either fungible or non-fungible. Fungible tokens are interchangeable with one another, like dollars in the real world. In last month’s The Deceptive Complexity of Axie Infinity’s Digital Economy, I gave the example of Axie’s two tokens: AXS and SLP. Both are fungible. To use another example, The Sandbox (in some ways “Minecraft for Web3”) has a token called SAND that is the basis for all transactions.

The SAND token has particularly strong tokenomics, with three distinct purposes: (1) SAND is a medium of exchange, traded for land and in-game items; (2) SAND is used for governance, with tokenholders able to vote on decisions; and (3) users can stake SAND tokens, earning a share of the platform’s ad and transaction fee revenue. SAND trades today for $2.52, up from $0.04 at the start of the year. With 892,246,119 SAND outstanding, SAND has a market cap of $2.2 billion.

To be technical, tokens like AXS and SLP in Axie or like SAND in The Sandbox are ERC-20 tokens. By contrast, non-fungible tokens are ERC-721, a token standard on Ethereum that identifies uniqueness. Most things in the world are non-fungible: your house, your land, your art. NFTs are revolutionary because they inject scarcity into the digital world.

NFTs have exploded in 2021. Trading volume surged to $10.7 billion in the third quarter, +704% over the second quarter. OpenSea has emerged as the go-to destination for buying and selling NFTs, capturing 97% market share. In August, transaction volume on OpenSea grew ~10x month-over-month to $3.4 billion. That’s more volume in a single month than Etsy’s GMV in all of Q2.

OpenSea’s volume has mostly kept pace since August, hitting $3 billion in September and $2.6 billion in October.

Seeing what’s happening, brands are rapidly entering the NFT space. Everyone from Pringles to Gucci to Burger King has joined in:

Last week, McDonald’s even introduced McRib NFTs 🍔

Slowly, NFTs are seeping into the mainstream with innovative partnerships and use cases. For the upcoming reboot of The Matrix, for instance, Warner Bros. will offer 100,000 NFT avatars for $50 each. On December 16th, NFT holders can choose to take the “Red Pill” or “Blue Pill” and if they choose the “Red Pill”, their avatar will transform into a resistance fighter. Pretty cool.

But despite more companies entering, NFTs remain niche: only 25% of U.S. adults are familiar with NFTs, and only 7% are active users. OpenSea has about 300,000 monthly active traders. By comparison, Ebay has close to 200 million monthly actives. (OpenSea’s October volume implies ~$9,000 of volume per user.)

Volume is concentrated among a small group of crypto enthusiasts: about 70% of OpenSea buyer volume comes from the top 10% of buyers.

The most recent NFT hype cycle was driven by PFP (profile pic) projects. Projects like CryptoPunks, Bored Ape Yacht Club, and Meebits have done hundreds of millions in transaction volume. Having a Punk or an Ape as your Twitter pic is a coveted signal of status in the crypto community.

But PFP projects are traditionally inaccessible to the masses, unless you’re early. There are only 10,000 Punks and only 10,000 Apes. The floor price for an Ape right now (the lowest price you can buy one for) is $155K; the floor price for a Punk is $379K.

Fractional ownership of NFTs, enabled by companies like Fractional, is allowing more people to partake in the NFT market. Fractional ownership also often drives up price. The original image of Doge, the Shiba Inu dog turned into the Dogecoin mascot, was turned into an NFT in June that sold for $4 million. In September, fractional share sales implied a $300 million valuation for the entire NFT.

Essentially any digital asset can be tokenized. Royal, for instance, is a platform that lets fans buy fractional ownership of songs. Fans then earn royalties on those songs.

Say you’re an Adele fan and you believe she’ll be an iconic artist for generations to come. You may have bought a share of ownership in her song “Easy on Me” last month, her first new song in six years. You’ll earn a share of future earnings that the song brings in.

In this way, NFTs are an interesting combination of patronage (support for the artist), fandom (closer connection to the artist), and investment (financial upside from the appreciation of the digital asset).

In Q2, digital art was the killer NFT use case. In Q3, it was PFP projects. What’s next?

I expect utility NFTs to be next, pushing NFTs further toward mainstream adoption. Utility NFTs, as the name implies, provide some underlying utility or application. They could be tickets that unlock exclusive experiences or gaming assets that unlock special powers in a game. Blockchain gaming, in particular, will hit a tipping point. There are many promising companies approaching the space from different angles: gaming studios like Laguna Games; scaling solutions like Immutable; picks-and-shovels like Stardust. Utility NFTs in games may be the mass adoption use case NFTs are waiting for.

Across all of Web3, tokens are being used in new ways to influence behavior. Fungible tokens are becoming the currencies of virtual worlds; NFTs denote ownership and scarcity. Above all, tokens inject incentives into the digital economy. They incentivize creation and consumption, investment and governance. They are the architecture behind the complex economies being built.

💰 DeFi

DeFi is decentralized finance, a blockchain-based form of finance that doesn’t rely on traditional financial intermediaries like brokerages, exchanges, and banks. Fewer industries have more middlemen than finance, and DeFi obfuscates them all.

You don’t need your government-issued ID or Social Security number to use DeFi. By using blockchains—software-based smart contracts—DeFi enables frictionless peer-to-peer transactions with no institution or bank or company facilitating.

At NFT NYC, I overheard two friends arguing over whether DeFi or NFTs will be more impactful.

“There’s over $200 billion of value locked in DeFi,” one said.

“But way more people know about NFTs,” the other countered.

The argument is moot: crypto needs both money and culture. If DeFi ushers Wall Street into a new era, NFTs will do the same for Hollywood, for Fifth Avenue, and for other cultural hubs. Both matter, and both will be massive.

🗳️ DAOs

I kicked off Part I with the buzzword “community”. I wrote about Discord’s 19 million active servers—each the living, breathing nucleus of a community—and how on the internet, nothing is too niche. A DAO is essentially a crypto-native community. I like how Chris Dixon frames it: a DAO is an internet community with a balance sheet. DAO stands for decentralized autonomous organization and DAOs are communities in which the members are in charge.

Tokens are again the lifeblood—they enable access and incentivize action. Early members of a DAO buy tokens to gain access. As the community becomes more popular, tokens appreciate in value and early members are rewarded. DAOs are elegant in that the asset directly reflects the value that the community helps create. Tokenholders also oversee a community-owned treasury and vote on governance decisions. In many ways, DAOs are like an internet-native democracy: the power rests in the hands of the people.

DAOs have become a complex ecosystem with various subcategories. For more detail, Cooper Turley has a good overview of DAO types and offers a market map:

To provide a tangible example, Friends with Benefits (FWB) is one of the most popular and well-known DAOs. FWB is a social DAO—in some ways, you can think of it as a digital Soho House. FWB, which describes itself as “Where Culture Meets Crypto”, writes:

To join FWB, you must hold $FWB cryptocurrency tokens. This means that everyone in the community is literally invested in the community’s success and gets to participate in the upside of the value we create together.

You need 75 $FWB to join the members-only Discord, which currently costs ~$7,000 to ~$8,000. There are also token-gated events for FWB members, including in-person events last week at NFT NYC. And members of FWB vote on key decisions. Even the decision to take VC investment was voted on, passing with 98% of the vote. Instead of a company pitching VCs, VCs had to pitch the community.

This inverted power structure is what makes DAOs so fascinating. DAOs turn the pyramid upside down: power flows bottom-up rather than top-down.

For example, Mad Realities is a DAO-like project that flips the concept of a dating show on its head. Rather than a show’s producers selecting contestants and designing plot-lines, as on shows like ABC’s The Bachelor, Mad Realities puts the community in charge. Buying a Mad Realities NFT means that you get to vote on who is in the show and on what happens. Designed by Devin Lewtan and Alice Ma, the project launched last week and has raised 50 ETH (~$240K) of its 150 ETH target.

Mila Kunis and Ashton Kutcher created the animated show Stoner Cats with a similar concept: you buy an NFT to watch the show and to provide input on the show. If Stoner Cats is the next Family Guy or The Simpsons, tokenholders benefit.

While not full-on DAOs (yet), these examples illustrate the concept. DAOs are about throwing out antiquated power structures, using tokens to align incentives and put the people in charge.

🔨 Creator

During the Index Creator Summit last month, Figma’s Dylan Field and Patreon’s Jack Conte distinguished between creators and the creator economy. Everyone can be a creator with accessible tools, they argued; we all make stuff online. But only when you start earning income from your creations do you become part of the creator economy.

Web2 brought us UGC, which made all of us creators. But it’s been hard to make money off of your work. Web3 changes that. In Web3, it will become easier for us all to be participants in the creator economy—to earn income from the things we make. Instead of earning social capital on your creations—an Instagram like, a Twitter retweet, a new YouTube subscriber—we’ll earn real economic value in the form of tokens.

Creating is like building with legos. A song is a beat, a chord progression, a baseline. A piece of writing borrows from previous ideas and reworks them in new ways. A film fuses images and dialogue and music. The creation of culture involves remixing: we break things down into their atomic units and then assemble them in new ways.

Web3 introduces economic value flows into remix culture.

Imagine this scenario: you make a video of a popular dance trend set to Olivia Rodrigo’s “Good 4 U” that uses an augmented reality filter. In Web3, three creators earn income off of this: the person who came up with the dance trend; Olivia Rodrigo; and the person who originally made the AR filter. Each component part lives on the blockchain and value flows to creators frictionlessly and instantaneously.

The right economic system will expand the market for creators. Today, society devalues creative work—the “starving artist” stigma. In many circles, being an investment banker is more prestigious than being a course creator; being a lawyer is more prestigious than being a podcaster. Building better monetization will help solve this. The best companies and business models expand their markets. The market for digitally-native creative work will grow enormously in Web3.

One final example to tie together these thoughts: Loot is an NFT project launched in August by Dom Hofmann, one of the co-founders of Vine. Loot gives players a “bag” of eight pieces of randomized adventure gear. The adventure bag is just eight rows of text:

That’s it. Anyone can then decide what to create with those building blocks.

This is like fan fiction, with economics built in. Imagine if George Lucas hadn’t created Star Wars, but instead gave us the component parts: lightsabers, Jedi, the Millennium Falcon. The community would then be responsible for forging not only one story, but a hundred thousand stories built from the same atomic units.

Loot is fascinating because it changes how culture is made. Anyone can buy and sell tokens, anyone can take an economic interest, and anyone can be a creator.

Sources & Additional Reading

  • I enjoyed Naval Ravikant’s and Chris Dixon’s episode on the Tim Ferris podcast

  • OpenSea’s NFT Bible is a good primer on NFTs

  • David and Ben at Acquired have a great (3-hour!) podcast episode on the history of Ethereum, as well as an episode on Solana

  • Two great pieces on DAOs: Mario Gabriele and Cooper Turley

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