#38 Anatomy of an NFT purchase
We've launched an NFT collection to help newcomers onboard safely onto crypto. Also, crypto makes strange new friendships. VISA, Mastercard, Google Cloud...
Small things often contain big truths. William Blake taught us to see “a world in a grain of sand and a heaven in a wild flower.” We will try to show you blockchain technology in an OpenSea transaction.
We came on a bit too strong, didn’t we?
Buying an NFT from OpenSea is probably one of the most convenient ways of approaching blockchain technology for any newcomer. And yet it can be intimidating. The process starts as something familiar and easy to understand. Still, it soon becomes challenging once you start seeing the different tokens and blockchains once you interact with a wallet.
We’ve launched our own collection of NFTs for educational purposes. We call them INTERPOLATIONS OF CARBONO INSIGHTS: they are Dall-E-generated images based on prompts inspired by the content of each issue of this newsletter. Even the collection logo is Dall-E’s interpretation of Carbono’s logo (”a black square with a red circle in the center”)
This is the artwork that corresponds with the current issue, #38. We asked Dall-E to produce an “anatomical illustration of a human body made of circuits” since we are about to dissect a transaction. You’ll find INTERPOLATIONS for every issue published so far here, and you can buy each one of them for 0.001 wETH (that is wrapped Ethereum or Polygon compatible Ethereum, in other words)
We created this collection to use in our training and educational activities. We often introduce groups or individuals to crypto, and we thought that having a clear, supervised path from zero to one could help some people get acquainted with crypto and de-mystify it.
Designing a collection for educational purposes is a game of tradeoffs (isn’t everything in crypto?)
INTERPOLATIONS is available on Opensea, the most popular marketplace for NFTs. It’s less decentralized than other alternatives and, therefore, a less pure crypto experience, but we went for a sleek, welcoming UI that would invite people to go all the way.
It was created on Polygon, an Ethereum Layer 2 that offers a cheap clone experience of the more mainstream Ethereum, and it is priced on wETH, Polygon’s wrapped ETH token. There were two reasons for this:
One, we traded the added friction of interacting with a less mainstream network in exchange for a drastic reduction in price that makes the price almost negligible (including transaction costs). We didn’t want cost to be a barrier. There are enough barriers already in the crypto UX. :P
Two, working with Polygon introduces some steps in the process that make it all a bit more complicated but also more complete. The assets are priced in wETH, Polygon’s version of ETH, and since you’re on Polygon, you’re going to need MATIC, Polygon’s native token, to pay for transaction fees. This means that you will need to add funds to your wallet once and then swap tokens (the most straightforward route would be to buy MATIC on Polygon and then swap some of it for wETH on Uniswap).
This issue of Carbono Insights offers a summary of the whole experience so that our readers can evaluate how crypto-savvy they are. If you realize everything sounds familiar by the time you reach the end of the post, then congratulations; you can consider yourself ready to jump (if you hadn’t already). On the other hand, if you find gaps in your understanding or experience, this is for you.
We will be using INTERPOLATIONS in our training sessions, and we are deciding how exactly we can help you, our community of readers, use it to break some barriers. So if you have any suggestions, let us know. We’re always happy to hear from you.
Assuming zero prior experience with crypto, what steps would you need to go through to purchase an item from our collection, and what are the underlying processes they reveal?
You’re going to need a wallet. Wallets are the software required to interact with a blockchain. People need to understand the decentralized nature of wallets: there’s no “forgot my password” or “contact support.”
This step requires some basic understanding of how blockchains work. How they are distributed ledgers that contain information, and how your wallet is the tool that allows you to operate on that information.
It’s also a primer into self-custody: it teaches how your private key and seed phrase guarantee that you own your funds even if your laptop spontaneously catches fire.
You’ll need funds. As much as we like to say crypto is decentralized, there will always be a place where traditional finance tools and new financial systems meet. You’ll either need to purchase crypto at a centralized exchange and send it to your wallet or purchase directly from your wallet software (credit card is the handiest, but Metamaks is working on adding bank transfers too).
Either way, this should be a more familiar process. These are the regular digital bank interactions. What you need to understand, though, is what you want to purchase because not all tokens, not all blockchains, are the same, which takes us to the next step.
You’ll want to understand what you’re buying. INTERPOLATIONS is a collection launched on the Polygon blockchain, and it’s priced on wETH, Polygon’s wrapped version of ETH. So you’ll probably want to fill up your wallet with MATIC first (Polygon’s native token and the currency you need to pay for transactions) and then go to a decentralized exchange (Uniswap is your friend here) to convert part of that MATIC into wETH. And remember to convert only “part of” your MATIC: you’ll always need to keep some MATIC to pay transaction fees.
This got a bit confusing. These steps require you understand that there are different blockchains and different tokens and what are the implications and tradeoffs. And it would also make you interact directly with DeFi to exchange currencies.
Welcome to the jungle.
You’ll pay for your NFT. Paying can be confusing for newcomers. Remember: you are interacting directly with a smart contract, a piece of software running autonomously on a blockchain. There are no customer support people and no bank clerks available to pick up your call and help you through the process. It’s 100% human-to-machine interaction, and therefore there are some variables you’re usually not bothered with because intermediaries take care of them for you.
Paying involves confirming that you trust your counterpart (in this case, Opensea) and permitting them to view your wallet information. And, once you’ve done that, you’re faced with transaction information that includes the price of the asset you are buying, plus a transaction fee that changes every few seconds.
Suppose you want to understand what’s going on here. In that case, you’ll do well to know how blockchain transactions work: how they first enter a queue (the mempool), then are bundled into a block, and then approved by validators or miners who verify and provide security to the network. And it explains why you sometimes have to wait in a panic, thinking that you messed things up.
We’ve explained the process of transaction validation in the past here in a post about the differences between Proof of Work and Proof of Stake.
You’ll want to review your purchase. What you just did was receive a token on a blockchain. And all information on a blockchain is public and transparent (although pseudonymous). Opensea will soon display your purchase, but you could also decide to go to the source and check your transaction and wallet contents in a block explorer: a more direct (and rough) interface for blockchain information.
If you got 2 points for understanding what’s going on in each of the five steps, what score out of 10 would you give yourself? That is a proxy to how familiar you are with the nitty-gritty of the crypto user experience.
Stay tuned. We have some fun ideas for INTERPOLATIONS and how this collection can help us engage further with our community of readers.
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⬡ 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 | Yuga Labs in the SEC’s crosshairs
Regulation summer continues. This time it’s Yuga Labs, the company responsible for Bored Ape Yacht Club, who have received a letter from the Securities Exchange Commission. So far, the SEC has only requested information, and Yuga has shown willingness to cooperate.
The US Securities and Exchange Commission is investigating Yuga Labs Inc., the creator of the popular Bored Ape Yacht Club collection of NFTs, over whether sales of its digital assets violate federal law. Bored-Ape Creator Yuga Labs Faces SEC Probe Over Unregistered Offerings
Yuga has many digital assets under its wing that the SEC could consider undercover securities. Bored Apes are one of them, but so are Mutant Apes and the Cryptopunks and Meebits collections they purchased earlier this year. Non-fungible tokens are harder to fit into the conditions set by the Howey test, the formula used to determine whether an asset is a security. But there are hints from overseas indicating that the fungibility of specific collections is being questioned. Some European regulators claim that certain NFTs, especially those pertaining to collections minted in the thousands, behave more like securities than unique assets (NFT Collections Will Be Regulated Like Cryptocurrencies Under EU’s MiCA Law, Official Says)
Some say that the situation of Apecoin, BAYC’s community token, is an entirely different story. So maybe that’s what the SEC is after with this probe.
2. TradFi | VISA, and Mastercard
VISA and Mastercard seem to be engaged in a race to build a solid position in crypto while the bull sleeps.
VISA is partnering with FTX to offer debit card in 40 countries. This partnership extends an offer currently available in the US to countries in Europe, Asia, and Latin America. “We don’t have a position as a company on what the value of cryptocurrency should be, or whether it’s a good thing in the long run -- as long as people have things they want to buy, we want to facilitate it,” claims the company.
On the other hand, Mastercard is partnering with Paxos to offer crypto investment to institutional clients. “There’s a lot of consumers out there that are really interested in this and intrigued by crypto but would feel a lot more confident if those services were offered by their financial institutions,” says Jorn Lambert, Mastercard’s chief digital officer.
These moves are the last steps in paths that go way back. VISA and Mastercard have a track record of service offerings and company acquisitions that show they’re serious. Today, the absolute lack of passion in their respective statements proves that these decisions are taken purely from a business perspective and that there’s no leap of faith and no PR agenda.
3. Centralized infra | Google Cloud
Google recently announced that by 2023 they will start to accept payments in six different cryptocurrencies from a select number of Google Cloud customers through a partnership with Coinbase Commerce. Standard toe-dipping strategy for the world’s third cloud service provider (behind Amazon and Azure).
Just a handful of cryptocurrencies, just a handful of customers, and nothing until next year. It sounds like not much, but it’s a meaningful move, coming from a company that now is more a core piece of infrastructure of modern civilization than a startup. Moreover, the experiment will build some interesting habits: Web 3 companies will be able to pay for traditional services with crypto-native assets instead of dollars, and big corporations will face challenges like custody and managing digital assets.
BTW: let’s stop for a moment to reflect on the irony of the two last angles: avoiding the excessive power of companies like VISA and Mastercard is part of Bitcoin’s DNA; avoiding centralized storage and computing is in Ethereum’s.
4. Security | Hackalot
We keep experiencing a constant flow of projects hacked and exploited. These recent weeks it’s been Solana-based DeFi platform Mango Markets (hacked for $100M), TempleDAO ($2M loss), and most notably, Binance, who was drained of over $500M and had to pause their chain from working for hours to prevent bigger carnage.
Chainalysis says October is “the biggest month in the biggest year ever” regarding money hacked. What an awful accolade to receive while still in the middle of the month.
5. Monetary policy | Deflationary Ethereum
After The Merge, Ethereum was already issuing less ETH than ever. It was understood that block rewards could de-scale accordingly because Proof of Stake required a much less intensive investment to keep the machines running. This was one big step towards a deflationary token in the new monetary model for Ethereum.
The other step had to do with EIP-1559. The one-year-old Ethereum improvement included a burning mechanism in the block validation process. Each block would burn Ether proportionately to the activity they contained.
These two measures combined anticipated what has finally happened. Ethereum went deflationary for the first time thanks to the activity of a mysterious project that made the network reduce its global supply by 2.000ETH.
6. Scalability | ZK what?
You’ll start seeing more and more news containing the weird acronym zk as part of their name. For example, last week, Uniswap voted to deploy on zkSync, Polygon launched the testnet for its zkEVM, and Binance soft launched their zkBNB (why have one acronym if you can have two in the same word).
Suppose you need a primer on what zk technology is (spoiler alert: it’s short for zero-knowledge) and where it fits in the general context of blockchain technology (spoiler alert, it is one of the most wanted improvements in L2 scalability). In that case, you can return to our paper on The State of Ethereum scalability. We explain what it is, why it matters, and the competing approaches racing to bring the most convenient, fastest, and cheapest transactions for the Ethereum network.