#10 NFTs (WTF?), regulation, scalability and games
The reasons behind paying millions for JPGs, the SEC gets serious against DeFi and lending, and gaming turns upside down.
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Welcome to issue #10. We are Carbono, a crypto consultancy, and fund managers at Abacus Carbono. Carbono Insights is where we help people get acquainted and updated on crypto from its many angles. We would love to hear your comments. Write us at team@carbono.com or find us on Twitter: we are @carbono_com, @raulmarcosl and @miguelatcarbono
DO NFTs make sense at all? TL;DR, oh yes.
Would you pay $3.9M to be the official owner of this image? Not a print, not a painting...this exact image. Right-click → save, and anyone has it on their computer...but only you are the actual owner.
Would you pay $3.3M for this?
Or $270k for this?
Most people's first reaction to NFTs is disbelief. Obviously. But most people don't invest in art regularly. For those involved in the industry of art and collections, NFTs make sense. They might love it, or they might hate it. But they understand it. Even those who hate it do so because they get it. They mean something to them.
Love and hate belong to the same side of the coin, and the other side is indifference.
When Sotheby's auctions Bored Apes (literally, illustrations of bored-looking monkeys), they understand what’s going on. They have been selling perfectly easy-to-copy pieces by Warhol for decades. They know art is a marketplace for unique stories, experiences, and ideas. So who cares if they are made of paint, bronze, ink, or pixels?
It's been a long time since art stopped being about raw talent and technical prowess. Especially when it behaves like a product within a market, its added value is sending a message. Oftentimes that message is as simple as "I own this" Art is an asset that shares many properties with other financial products (it can be traded, exchanged for fiat, it re/devaluates...) but with the incorporated feature of conveying prestige to its owner, thanks to its intellectual significance.
NFTs so far is foreign to traditional investors. They are the flexing ground for crypto holders. A natural destination for capital generated within the frontiers of digital currencies that don't want to leave the space but wants to do something special. NFTs are crypto native, and therefore there are some new characteristics it displays that are not to be taken lightly.
"I own this" is still the prevailing message. And ownership gets a brand new meaning when the piece you own can be showcased publicly to a global audience through social media avatars and other bragging websites. But there is another significant message crypto is constantly sending. It says, "we are not like you" Every time someone resentfully says, "I don't get it," crypto giggles and goes, "I know."
Don't underestimate the power of passive-aggressive humor in crypto. It is a billion-dollar industry. Just take Dogecoin as an example.
This zombie belongs to the original collection of 10,000 cryptopunks minted in 2017 by Larvalabs. It's not even the most expensive! Punk #7523 was sold for $11.8M, but this was on the news more recently.
Cryptopunks will probably go down in history as the first crypto native art piece-slash-collectible to get mainstream attention. Jay Z, Steve Aoki, Logan Paul... have one. They were the first real NFTs to get traction. Punks already belong to the history books, and crypto inhabitants have a special place in their hearts for them as a symbol of identity. Hear this: $3.9M is a bargain.
This is a Fidenza. Fidenza is a collection of algorithmically generated pieces created by artist Tyler Hobbs. There are only 999 Fidenzas, all of unquestionable aesthetic value. It looks like adults' art, but with a crypto twist. Machine-generated, unique, beautiful, tradeable,..." and you don't get it."
This is the first-ever NFT minted on FTX. It was created by its founder, Sam Bankman-Fried, and probably took him less than 10 seconds to produce it. Sam is one of the most charismatic leaders in crypto industries, and his company, FTX, is an example of ambition and good execution. FTX is a centralized exchange valued at $18B as per its last investment round. It recently launched a brand new NFT platform, and that TEST jpg was the first piece ever to be created and launched on it.
Sam Bankman-Fried is one of the world's youngest billionaires. He's smart, innovative, and articulate. You can find him interacting with users on Twitter every day and often being interviewed on the TV or niche podcast. He's "one of us,” and he is most likely going to make it.
When people buy NFTs, they are purchasing a statement and a piece of history. A future piece of valuable memorabilia. It is not only a .jpg file in their computer, an annotation in their wallet, or their Twitter avatar. It is an investment in a cultural revolution, a statement of endorsement, a hilarious joke on old-fashioned folk...and who knows? It might pay for their dream house not far from now.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.
1. 🏛️Regulation | SEC goes after Coinbase
The SEC has taken two relevant steps in its approach to crypto recently: they requested information from Uniswap Labs about how investors use the exchange and how it is marketed, and they communicated to Coinbase its intention to sue the company over its lending activities.
The two moves seem quite different in nature. The information request from Uniswap Labs does not point at any wrongdoing on the company's side and looks more like an attempt from the SEC to understand the workings of DeFi better. Uniswap Labs is the team of developers in charge of the frontend of Uniswap, the leading DeFi protocol in daily volume traded. That theoretical separation of responsibilities is precisely what the SEC seems to be trying to figure out. And, after Gary Gensler's (SEC chairman) latest remarks, the request for information has a threatening aftertaste to the whole sector of DeFi.
The move on Coinbase is much more aggressive. The SEC has sent a note warning of an upcoming lawsuit related to Coinbase's lending services. Coinbase has always been on the compliant side of things. Brian Armstrong (the company founder) expressed his rejection of the SEC's course of action. In his opinion, this looks like a display of power following a political turf war. The SEC never intended to provide clarity and chose the hard way.
Look….we're committed to following the law. Sometimes the law is unclear. So if the SEC wants to publish guidance, we are also happy to follow that (it's nice if you actually enforce it evenly across the industry equally btw).
But in this case they are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors. Whatever their theory is here, it feels like a reach/land grab vs other regulators.
Read the whole thread here:
2. 📜 Smart Contracts | Cardano, under the looking glass
Cardano belongs to the second generation of smart contract platforms. Cardano's founder and spiritual leader, Charles Hoskinson, belonged to the original team of Ethereum founders. He entered the project in 2013 but was requested to leave in 2014.
"Hoskinson wanted to accept venture capital and create a for-profit entity with a more formal governing structure. Buterin wanted to keep Ethereum a nonprofit organization with an open-source, decentralized governance. A Fight Over Ethereum Led A Cofounder To Even Greater Crypto Wealth (article from 2018)
Hoskinson and company started developing Cardano in 2015 and launched it in 2017. It is a Proof of Stake blockchain whose native cryptocurrency, ADA, is currently the third in market cap after BTC and ETH. And finally, after many, many years, it is about to launch its smart contract capabilities, with an upcoming update on September 12th.
Cardano is a divisive topic.
Friends say Cardano is here to solve Ethereum's scalability problems.
Foes say Cardano is a marketing stunt that has gone on for too long.
Friends say Cardano critics are generally Ethereum maximalists scared of competition.
Foes say Cardano is a bubble the size of $91B, about to explode, and wonder where all that money will land.
Developers have already been messing around with the upcoming update technology on the testnet, and things don't look too promising. One particular design decision seems to be at the center of the debate. In its current form, Cardano can only handle one single transaction per block, which would make DeFi on Cardano SciFi.
Friends say there are easy and effective workarounds, and you will soon see.
Foes say it's no time to look for workarounds; they should be here already and are eager to see Cardano finally play the game.
3. 🕹️ Gaming | Loot, a paradigm shift in crypto gaming
Sometimes innovation happens most unpredictably. Loot was born serendipitously can become a sensation in a record amount of time. Regardless of where the future takes it, its rapid growth to stardom already tells a story of how things can be done differently.
What is Loot?
Loot was an experiment born from the side of the brain of Vine co-founder Don Hoffman.
Hoffman launched a smart contract with 6,000 "bags" containing a list of virtual items, minted as NFTs. They look extremely underwhelming and do nothing more than exist.
“Loot is the unfiltered, uncensorable building block for stories, experiences, games, and more, in the hands of the community, at no cost,” its website describes. Crypto’s latest trend is to play games before they’re even built (The Block Crypto)
But the bags are free and open for use. Just like the internet, just like crypto. Anyone can grab this initial seed and turn it into whatever their imagination can come up with. Developers have already started creating character designs, games, spinoffs...
This is the first time we see a gaming product marketed in pieces and expecting the community to build the actual game.
Loot’s success could be explained by the perfect fit with some of the most outstanding features of the crypto zeitgeist: network effects, open-source philosophy, fragmentation of services, money, and fun.
Vitalik said it was NFTs what surprised him the most (more on this later). We can understand why.
4. 🚀 Technology | Layer 2 platform Arbitrum goes live
Ethereum has a scaling problem. Transactions are too slow and too expensive. And there is a whole ecosystem of initiatives, projects, and companies trying to solve that problem.
The three main vectors or improvement are:
Ethereum 2. The Ethereum Foundation is working hard to bring relevant updates to the protocol ASAP to multiply Ethereum's throughput.
Layer 1 solutions. Brand new blockchains built from scratch with scalability in their DNA. Solana, Terra, Avalanche...we spoke about them in our last newsletter because of their outstanding performance and compelling momentum.
Layer 2 solutions. Projects that are built on top of an existing blockchain to help them speed up.
Arbirtrum is one of the most anticipated Layer 2 solutions, and it went live recently. Arbitrum applies Optimistic Rollups: it processes transactions at a higher speed and lower cost outside of the Ethereum blockchain and then links with Ethereum to make smaller, bundled operations.
If you took money from your friends to buy tickets to a concert, and then one morning bought all the tickets at once form the booth, the booth would be Ethereum and you would be Arbitrum.
Arbitrum is taking its initial baby steps, but it is already providing services to most of the biggest names in DeFi, such as Uniswap, Sushiswap, or Balancer. A breath of fresh air in times of prominent fees.
5. 👽 Communications | Vitalik AMA
Vitalik Buterin, founder of Ethereum and one of the most respected voices in crypto space, ran an interesting Twitter experiment, using a recent feature introduced by the social platform: he launched a tweet that only people he follows on Twitter could reply to, offering to answer ANY question.
Crypto is also this. It is a system based on trust. Technology does half of the job, bringing built-in guarantees to digital relationships. But people need to walk the other half of the way. Transparency and accountability are an essential part of the game, and AMAs like this are a great example.
This strange press conference offered a glimpse into Vitalik's brains and experience: what he is proud of (EIP-1559), what he is excited about (ZK-SNARKS, a type of encryption protocol meant to help Ethereum scale in the future), what he was most surprised by (NFTs) or what he regrets (the founding team is at the top).
6. 🔷Recap | Ethereum is all around us
Ethereum has been a central part of the news cycle in one way or another during the last weeks. It is even at the center of most of the topics inside of this newsletter.
NFT summer gets hotter and hotter. This week has brought an avalanche of new developments. Bored Apes are breaking Sotheby's expectations; FTX has launched an NTF minting and trading platform; Three Arrows Capital and anonymous investor Vincent van Dough launched an NFT fund; OpenSea reached $3,4B in transaction volume, making a 10x on July's results.
If you've recently been hearing about Ethereums transaction fees, here is the explanation about what's going on.
And speaking about fees and NFT activity, EIP-1559 reached a few milestones. On September 3rd, two days before reaching a month since the rollout, Ethereum lived its first deflationary day. The NFT mania helped burn more ETH than the amount minted on that day.
Layer 1 and Layer 2 solutions are also hot these days. Cardano’s L1 and Arbitrum's L2 value propositions are making headlines these days. Scalability solutions for the Ethereum blockchain are becoming increasingly important in institutional investors' portfolios.
It’s been some hectic couple of weeks for Ethereum, and we haven't even mentioned the price rollercoaster. But let's leave that for another time.
This only goes to prove that Ethereum is at the moment the heart that pumps innovation to crypto.
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