There have been 3 major cycles in crypto since Bitcoin’s introduction in 2009.

• The 2013 Bitcoin boom: bitcoin currency run

• The 2017 ICO mania: asset bubble fueled by boom in Initial Coin Offerings, crypto’s equivalent of an IPO

• The 2021 NFT hype: asset bubble fueled by mass market adoption & euphoria around NFTs

Crashes in 2014, 2018, and now in 2022 followed - every 4 years like clockwork! So why is crypto so cyclical? At least 3 reasons:

• Most financial markets experience some cyclicality; crypto isn’t unique

• Crypto is a young asset class that’s still going through adoption cycles & associated price discovery (adoption => higher prices => more adoption)

• Every 4 years Bitcoin experiences a programmatic halving; miners then receive half the rewards they used to (unchanged demand growth & halved supply growth => prices up)

The original bitcoin bull run was triggered by the 2012-2013 financial crises in Cyprus! The country ended up receiving a bailout from the EU but had to tax bank deposits and put restrictions on citizens’ accounts. Some lost as much as 10% of their money.

The injustice of the government claiming citizens’ money sparked mainstream interest in bitcoin given its decentralized benefits. If you held bitcoin, no one could confiscate it!

Bitcoin’s price tripled from $30 to $90 during March ‘13 as Cyprus issues unfolded. In the fall, it went on another run, climbing from ~$150 in October to ~$1,200 in early December driven by Chinese demand.

Who didn't like that? Chinese government, which then banned banks from handling bitcoin transactions and bitcoin collapsed the following year, reaching a low of $100.

What else happened that didn’t help? In February ‘14, the largest cryptocurrency exchange, Mt. Gox, was hacked. At the time it handled ~70% of all bitcoin transactions globally. Hackers stole bitcoin from both the customers & the company itself (roughly 7% of all bitcoins in existence!), with Mt. Gox going bankrupt shortly thereafter. The hack rocked trust built to date in the fledgling crypto industry.

2017 saw an unprecedented cryptocurrency boom, this time fueled by the emergence of Initial Coin Offerings (ICOs).

So what are ICOs? Crypto’s hybrid of an IPO & a crowdfunding campaign - project tokens are pre-sold to investors/public, with the expectation that the project will use the proceeds to build the product, giving tokens future utility (and also increasing their value).

If you participated in ethereum’s ICO in ‘14, you could buy each coin for just $0.31… 3 years later each coin was trading for 1000x that! As new projects were looking for funding and speculators for the next ethereum-like reward, ICOs boomed. Since many new ICOs were launched on the ethereum blockchain, and investors used ETH to buy whatever token was ICO’ing, demand for ETH exploded.

ETH price jumped from ~$8 in January ‘17 to ~$1,433 in January ‘18… then collapsed all the way to ~$80 by December ‘18. Why? Majority of ICO’d projects failed to deliver a product, with their tokens dying after the hype wore off. Facebook & Google banned ads for ICOs & token sales. SEC also took notice, claiming that ICOs were selling unregistered securities. The ICO boom was over.

There is a gestation period for any new technology. ICO mania didn’t start until ‘17 even though the first ICO was in ‘13. Similarly, the first ethereum-based NFTs were minted in ‘15 (and the famous CryptoPunks in ‘17), but the mania didn’t take off until ‘20, kicked off by Top Shot’s NBA highlights NFTs. Many different NFT projects followed, including gaming, PFP communities, music, and more.

Similar to ICOs, NFTs have brought many new people to crypto. Many came for speculative profits, but NFTs have also offered new consumer experiences, like digital collectibles, play-to-earn gaming, and more. All those new use cases (in addition to other innovations in DeFi, DAOs, etc.), and new crypto holders, increased demand for cryptocurrencies, driving their prices up.

Market was booming until a perfect storm–including rising interest rates, UST/Luna stablecoin collapse, and Celsius crisis (which we’ll cover tomorrow)–resulted in liquidations & souring sentiment.

So what’s next? Following both ‘13 & ‘17 peaks, recovery didn’t start until ~2yrs later. Of course there are reasons why this downturn could be shorter, but it’s anyone’s guess when recovery begins.

Celsius was one of the largest custodial crypto gateways, at one point managing almost $30B of user funds. Last week, Celsius faced an apparent liquidity crisis, pausing user withdrawals and hiring restructuring attorneys to help them through potential bankruptcy. What happened?

Celsius claimed to make investing in crypto as easy as using a web2 fintech app, unlocking access to DeFi without the hassle of self-custody. However, while investing ETH on users’ behalf, Celsius both staked ETH & purchased illiquid stETH tokens, neither of which could be easily converted back to user deposited ETH.

The CEO was son Twitter urging confidence in Celsius, then <24 hours later, Celsius paused withdrawals, igniting speculation about their liquidity position & putting the potential of user withdrawals in question.

Celsius is yet another reminder of the adage “not your keys, not your coins,” and investing via services like Celsius means funds may be at far greater risk than is disclosed.

In traditional financial markets, contagion is defined by the World Bank as “the spread of market disturbances–mostly on the downside–from one country to the other” due to global financial and trade links.

This was the case with the ‘07-’08 Global Financial Crisis, which began with the burst of the housing bubble in the U.S. then spread globally.

Similarly in crypto markets, the collapse of Terra led to Celsius and other lending platforms freezing customer withdrawals, while a hedge fund called Three Arrows Capital went bankrupt severely impacting its crypto lenders, like Voyager and BlockFi.

If crypto is decentralized, how can it still experience contagion? While those companies dealt with cryptocurrencies, none of them were decentralized themselves. They were classic financial intermediaries, operating in private & governed by humans – it’s just that their strategies involved crypto (and lots of borrowing to buy more crypto!); when prices collapsed, so did their business models.

Meanwhile pure DeFi lenders governed by algorithms and executed on-chain (e.g., MakerDAO) simply carried on as designed, automatically calling margin loans & liquidating collateral as needed, with full transparency of transactions, leverage, etc.

While the contagion shocks are rocking the broader crypto market, these developments have also been an interesting reinforcement of DeFi’s benefits.

While contagion first affects the most interconnected parties (like borrower-lender pairs), associated price & sentiment shocks can meaningfully affect unrelated parties and the entire crypto ecosystem (which is still young & fragile).

In traditional financial markets, government entities tend to step in as lenders of last resort and limit contagion through bailouts/emergency credit lines.

In crypto, traditional customer & enterprise protections are lacking given both immature regulatory environment/jurisdiction uncertainty and the decentralized nature of many market participants.

So who’s been stepping in to stop the spread and calm the markets? Sam Bankman-Fried (known simply as SBF), through two companies he founded: a crypto exchange, FTX, and a hedge fund, Alameda Research.

SBF has been making rescue acquisitions and extending credit lines to companies of choice. This mirrors what industry magnates like J.P. Morgan did during the Panic of 1907 (before the government-as-a-rescuer era) to prevent a larger financial crisis.

Helping the crypto ecosystem is clearly on SBF’s mind, but buying interesting assets at rock bottom prices is of course a potential profit opportunity as well.

SBF’s bailouts and emergency credit lines are traditional finance solutions - are there no crypto-native approaches to liquidity issues? There is a precedent for that in the form of decentralized liabilities (i.e. effectively users accepting IOU-style tokens or providing additional capital in exchange for IOU tokens) although not at the scale many crypto lenders are experiencing right now.

Back in August ‘16, crypto exchange Bitfinex got hacked, resulting in a loss of 120k Bitcoins (~$72M at the time). All customers were given a 36% haircut on their assets and issued BFX tokens representing an obligation to return that 36% in the future. The exchange thus tokenized its liability to users (instead of, for example, borrowing from another company to pay back users immediately).

Interestingly, the BFX tokens, which had $1 face value, traded at a big discount ($0.50-0.65) for most of 2016, suggesting doubt that users would actually be repaid. However, the exchange managed to build back trust, and trading volumes (and thus the company’s financial position) began to recover. In April ‘17, all BFX tokens were redeemed by the exchange at the promised $1 per token value.

CoinFLEX, a crypto lender affected by the current crisis, is trying a similar approach - raising money by selling to new investors interest-yielding tokens that represent debt owed by a third party. When the debt is repaid, token holders will be repaid (CoinFLEX promises to cover from its own balance sheet if the debt isn’t repaid). It’s a creative approach but potentially risky for users.

Given how mainstream crypto has become in the last couple years, current market turmoil has potential impacts on companies in other sectors. One direct example is Robinhood: while it’s best known as a commission-free stock trading app, cryptocurrency trading represented 23% of revenue in 2021 (up from 3% in 2020!). Price collapse and market slowdown are certainly impacting its bottom line.

Another example is sports. Crypto was the #2 sponsor last NBA season (up from #43!). FTX inked a 19-year, $135M naming rights deal for Miami’s arena while Crypto.com made a 20-year, $700M deal in LA. Coinbase signed a ~$200M, 4-year, NBA-league-wide deal. Socios has deals with 28 of 30 teams. Will those get re-negotiated? Financial impacts could be large, especially if any companies go bankrupt.

From Jan 1 to July 14 of this year (2022), Ethereum’s price was down ~70%. Since then, price is up +45% (in only 10 days!). What happened? The short answer: a core Ethereum developer announced a target date for Ethereum’s official switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS) (called “The Merge”). This week we’ll discuss why this is a big deal in context of Ethereum’s history & roadmap.

In Week 2, we explained how Bitcoin used PoW to create the first scalable blockchain. When Ethereum launched in 2015, the vast majority of blockchains still used PoW, because it was the only proven consensus mechanism at scale. So, Ethereum did too. The problem: not all blockchains are like Bitcoin & there are challenges with PoW, which have particular impact on blockchains like Ethereum.

PoW is highly energy intensive, which creates a high level of security but lower level of scalability. This works well for Bitcoin, because (arguably) its main purpose is to be like digital gold. But, if, like Ethereum, you’re a global virtual computer of smart contracts powering decentralized apps, scalability is extremely important. Transitioning to PoS is the next step in that journey.

When you transact on any blockchain (e.g., buy Bitcoin), there’s a network fee (“gas fee”) paid to miners (PoW) or validators (PoS) to verify & add the transaction. Without fees, there’s no incentive to verify / add, and the decentralized consensus mechanism falls apart.

Fee amount depends on each blockchain’s properties (# of transactions per block, block generation speed, etc.) & congestion (usage at that moment). Unfortunately, Ethereum struggles with both.

Properties: Ethereum’s design focused on decentralization & allowing anyone to review the network, so it processes only ~15 transactions per second (“TPS”) (Solana processes ~2,700 TPS). Thus, even if usage was constant across blockchains, Ethereum would be more expensive.

Congestion: Demand for Ethereum usage is also higher than alternatives (e.g., Ethereum has ~10x the # of dApps as Solana).

Together, these drive Ethereum’s fees higher than alternative chains’. Between Jan ‘21 and May ’22, Ethereum’s avg fee was $40 (on May 1, 2022 it was $197!), whereas the avg for relevant alternatives was pennies (Solana’s was <1cent).

Clearly, something needs to change if Ethereum wants to maintain its leadership over the long term. Moving from PoW to PoS (“the Merge”) won’t actually materially lower gas fees (fees just go to stakers / validators instead of miners). But, it will reduce Ethereum’s energy consumption by ~99.95% and set the stage for the next steps of Ethereum’s roadmap, which create the real scalability.

There are 3 main components: “The Merge,” sharding, and Layer 2’s (also known as “roll-ups”).

As mentioned in the prior post, the next step is “the Merge.” While this doesn’t directly impact fees or transaction processing speed, it reduces energy consumption (a form of scaling!) and sets the stage for “sharding.”

Sharding is commonly used in standard databases, whereby a large database is divided into smaller chunks (“shards”) to improve speed and efficiency. This design allows the database to parallel process information.

Ethereum plans to use sharding to speed up transaction processing. With sharding, validators will be able to verify / add transactions simultaneously on each shard, instead of processing a single block at a time on the main chain.

Sharding, along with Layer 2’s, will allow Ethereum to exponentially increase its processing speed (and thus lower fees).

More on Layer 2’s and specific estimates for all-in scalability in the next post.

Layer 2’s (“L2’s” or “roll-ups”) are blockchains built on top of Ethereum that bundle hundreds of transactions together into a single transaction that is then posted to Ethereum (the “Layer 1” or “L1”). Thus, Ethereum can process many transactions simultaneously, instead of one at a time.

And they already exist! They're still early, but Optimism, Starkware and more are already live.

There are 2 main categories – Optimistic and Zero-knowledge (ZK).

Very high level: Optimistic roll-ups assume each transaction is valid & have a time period to report fraud; ZK roll-ups use cryptography, compress transactions off-chain and batch them together. Both provide scale for Ethereum.

Together, sharding & Layer 2’s are estimated to help Ethereum process ~100,000 transactions per second (“TPS”) – almost 1000x vs. Ethereum today & 4x Visa’s 24,000 TPS.

If successful, Ethereum’s roadmap will be the largest update of a functioning blockchain in the industry’s history – an impressive technological, environmental & financial feat. (But it also might face issues along the way!)

Last week (Aug. 8, 2022), the U.S. Treasury Department made it illegal for Americans to use crypto protocol Tornado Cash. Since then, Circle – issuers of stablecoin USDC – and other centralized crypto companies have frozen assets & wallets that have interacted with Tornado Cash. On Friday (Aug. 12, 2022), Dutch authorities arrested a Tornado Cash developer. In response, the Crypto community has been enraged. Why all the hubbub?

Tornado Cash is a decentralized “crypto mixing” protocol, giving users more on-chain privacy. Typically, all crypto transactions are recorded on-chain, so there is no privacy – anyone can monitor all of your wallet’s transactions. With Tornado Cash, you can “mix” your crypto with crypto from other users, making it hard to determine who’s crypto came from where, thereby adding a layer of privacy.

There are 2 sides to this story: (A) Tornado Cash is a privacy tool, allowing users to transact safely & without harassment (many used it to donate to Ukraine without Russian retaliation); (B) Tornado Cash is a money laundering tool (North Korea used it after hacking $600m).

This week, we’ll explore both sides and broader topics in privacy, free speech & anti-money laundering.

The govt perspective on Tornado Cash (TC) is pretty clear. The goal of crypto mixers, like TC, is to hide the source of funds and make it easier to move money without observers being able to tell where the funds came from or where they were sent. This can clearly be used to launder money. One report showed >$1.5B of illicit money has moved through TC (the U.S. govt alleges up to $7B).

TC was put on the Office of Foreign Assets Control’s (OFAC) blacklist, immediately prohibiting U.S. citizens & businesses from using TC. The govt cited: “Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors” and highlighted that hackers have used TC to hide stolen funds (including North Korea’s Lazarus Group).

On Friday, the Dutch govt arrested a software engineer who helped develop TC for being involved in “concealing criminal financial flows and facilitating money laundering” through TC. “Multiple arrests are not ruled out.”

In summary, one side of the story: Crypto mixers like TC make it easier to do illicit activity online, so they must be banned. Tomorrow, we’ll discuss the other side.

Yesterday, we discussed govt perspectives on Tornado Cash (TC). Today: crypto perspectives.

Privacy: Outsiders often say crypto hides crime. In fact, the opposite is true. Every crypto transaction is recorded on-chain, so, if anyone knows your wallet address, they can monitor ALL your transactions. Would you want everyone knowing your income or EVERY item you buy on Amazon? TC gives crypto users the privacy of traditional payments.

Free speech: Open source code is protected as free speech. Arresting TC developers (devs) violates this. Devs created a privacy tool for anyone – the tool itself is neutral. Hackers who use TC for illicit activity should be punished; not the devs. When a drunk driver does a hit & run, is Toyota punished?

Censorship resistance: Crypto protocols are autonomous (run by smart contracts not humans) and blockchains are immutable (can’t be changed). The TC website was shut down, but its open source code still exists on Ethereum. Devs can be arrested, but can’t switch TC off. In theory, hackers can still use TC software to mix their crypto (if there’s enough other crypto to mix with). The crackdown doesn’t fix the right problem.

Philosophy: Crypto evangelists build decentralized tools to remove middlemen & prevent govts from arbitrarily punishing or freezing citizens’ assets. The TC crackdown was arbitrary, without warning & may violate 1st Amendment rights. It also creates a bad precedent that may stifle innovation in crypto & beyond.

We’ve now discussed 2 sides of the story. Tomorrow, we’ll try to reconcile them.

We’ve discussed 2 sides of the Tornado Cash (TC) story: (A) TC is a money laundering tool, allowing users to hide dirty money; (B) TC is a privacy tool, allowing users to transact safely. How can we reconcile these views?

Both clearly have some merit. Privacy in financial transactions is important. It’s not safe to have neighbors know your salary, how & where you spend all your money, etc. Users shouldn’t have to forfeit privacy & safety to use crypto.

But, it’s also no surprise TC was targeted. “In US law, money laundering is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money.” Keyword there is “illegally,” but at least 35% of funds locked in TC last week fits this description. The govt can’t ignore that, and neither should the crypto community. Products supporting large scale illegal behavior play into the “crypto is for crime” narrative and hinder mainstream adoption. The question: can platforms like TC promote privacy & safety while preventing crime?

What’s troubling is TC was shut down without warning or a path to eliminate illegal activity on its platform. TC started trying safety controls back in April, but it was early days. The govt could have sanctioned wallets of known hackers and worked with TC to prevent crime. Banks have had countless insider trading cases against employees; those banks still exist.

Perhaps, most troubling is the TC developer arrest. As discussed yesterday, open source code has historically been considered free speech. Breaking that precedent could have a chilling effect on software innovation. Plus, crypto protocols are autonomous & permanent once they’re deployed on a blockchain. If a product has unexpected consequences (or illegal behavior), there’s not much a developer can do after the fact.

This leads to a tough but important question: How much responsibility (if any) does a product’s creator have for how a product is used?

A few weeks ago, we discussed the U.S. sanctioning crypto protocol Tornado Cash (“TC”). One important takeaway: the govt will likely be more active in regulating crypto entities. While previously the govt had mostly let crypto markets self-regulate, it will now be more aggressive.

This realization has deep implications, and led several crypto companies to tighten rules, freeze accounts that had interacted with TC, etc.

One fascinating result of this is a co-founder of MakerDAO – issuers of the most important decentralized stablecoin (Dai) – suggested MakerDAO consider removing Dai’s peg to the US dollar (USD).

As a reminder, stablecoins are fungible tokens with value pegged to the value of another asset (often USD). Example: 1 Dai = 1 USD. Dai is the most used decentralized stablecoin ($7 billion in circulation). The whole point of stablecoins is to provide a reference value for loans, payments, etc., in volatile crypto markets.

Thus, the proposal to “depeg” Dai from USD & allow it to “free float” surprised many folks.

This week, we’ll discuss the reasoning behind the proposal and explore MakerDAO, stablecoins & the quest for decentralization.

To understand whether Dai should depeg from the US Dollar (USD), let’s first explore: what is Dai?

Dai is part of 3 related entities. (1) Dai is a decentralized & fully collateralized stablecoin. (2) Maker is a crypto protocol (smart contracts built on a blockchain) through which users can permissionlessly (no one can block a user) create (“mint”) Dai. (3) MakerDAO, is the DAO whose token holders control the Maker protocol.

To mint Dai, a user goes to Maker, deposits pre-approved crypto as collateral & gets a loan in new Dai. These loans are “overcollateralized,” meaning you only get a partial loan (e.g., 60% of collateral). Once you have Dai, you can exchange for other crypto, spend, earn, etc. When the loan is repaid, the Dai is destroyed. If the collateral’s value drops too much (e.g., Ether price crashes) before repayment, the collateral is automatically sold & the Dai repaid. This overcollateralized loan mechanism keeps Dai safe, because it means Dai is always backed by underlying assets.

Maker uses 3 other mechanisms to maintain its USD peg: (1) interest rate to borrow Dai – impacts SUPPLY, because higher interest rates encourage borrowers to repay Dai; (2) savings rate for depositing Dai into savings vault – impacts DEMAND, because higher savings rate encourages users to get more Dai to save. (3) arbitrage incentives – users can make a profit by swapping Dai for other stablecoins like USDC if their prices deviate.

Together, these mechanisms allow Dai to hold a tight peg to the USD. In other words, every Dai minted is equal to $1.

In a prior post, we said the whole point of stablecoins is to be stable. So, why would the co-founder of Maker suggest Dai depeg from the US Dollar (USD)?

As we also mentioned, the Tornado Cash (TC) saga marked a new era of govt scrutiny on crypto. The shutdown of TC was abrupt, unexpected and complete. Overnight, it became illegal to interact with TC. Within days, one of the creators was arrested. As a result, many centralized crypto companies were forced to freeze accounts of users who had previously interacted with TC, for fear of being sanctioned themselves.

One important company to do so was Circle, issuers of the USDC stablecoin. USDC is a fiat-backed stablecoin, meaning that for every 1 USDC in circulation, Circle has $1 in a bank account. USDC is the #2 most used stablecoin ($50 billion in circulation), and generally considered the most transparent & compliant centralized stablecoin.

Following TC’s blacklisting, Circle froze >75k USDC linked to TC addresses – small vs. $50B but symbolically meaningful.

Here we return to Dai. In 2020, Maker added a new mechanism to mint Dai. Instead of only minting via the loan mechanism (described yesterday), you can now also exchange USDC (& later another stablecoin USDP) directly for new Dai. The goal of this feature was to help tighten Dai’s USD peg. It turns out, this feature was very popular. Today >50% of ALL Maker collateral is USDC; ~60% is USDC + USDP.

While this feature helped tighten Dai’s peg, it also created unexpected risk. If ~60% of Maker’s collateral can be frozen, is Maker really decentralized?

Let’s continue: If 60% of Maker’s collateral can be frozen, is Maker really decentralized?

Maker’s co-founder Rune Christensen says no: “Physical crackdown against crypto can occur with no advance notice, and with no possibility of recovery even for legitimate, innocent users. This violates two core assumptions that we used to understand real-world asset (RWA) risk, making the authoritarian threat a lot more serious.”

In other words, the TC crackdown changed Rune’s mind about the risk of centralized collateral like USDC & other RWA. If 60% of Maker’s collateral was frozen, Dai wouldn’t be fully backed by assets. This could cause Dai’s price to crash (like algorithmic stablecoin UST’s). RWA risk also hinders Maker’s permissionlessness, because user wallets can indirectly have assets frozen.

To eliminate this risk, Rune suggests capping RWA collateral, which he thinks requires Dai to free float – because demand for Dai is high & supply will be constrained if users can’t swap USDC/USDP to get Dai. 60% of Dai is backed by USDC/USDP today, because the overcollateralized loans required to otherwise mint Dai are “capital inefficient” (lock up crypto; only get partial loan). Capping RWA could cause Dai’s price to rise >$1 (if no new mechanism is created).

Full analysis is out of scope today, but we encourage you to consider this question and others like:

*How important is full decentralization for Dai?
*Can Maker limit RWA without causing Dai to free float?
*Does free float mean depegging from USD?
*What would happen to Dai’s usage if it’s no longer $1?

Last Monday, the SEC announced a $1.3 million settlement with Kim Kardashian (“KK”), over an ad she posted to her Instagram story, promoting cryptocurrency EthereumMax (EMAX).

Although EMAX is down ~97% since the ad (and hasn’t delivered most of what was promised), that’s actually not what KK is in trouble for. The SEC said laws require celebs to disclose “how much they are paid to promote investing in securities.” KK included #ad in her post but didn’t disclose her $250k compensation.

Some experts argue KK could’ve fought the SEC, since (a) she disclosed #ad and (b) there’s no clarity on which crypto are securities, but for a billionaire like KK, $1.3m is a rounding error & perhaps not worth the legal headache. (Other celebs, like Floyd Mayweather Jr. & DJ Khaled, have reached similar SEC settlements.)

Regardless, promoting financial products is more highly regulated (and rightly so!) than, say, a new sports drink, or even the exchanges that sell the financial products! (e.g., Matt Damon & Larry David promoted crypto exchanges crypto.com & FTX, respectively, with no SEC investigation.)

As always, we encourage our readers to do their own research when it comes to buying crypto products – particularly when viewing ads from celebs who, like KK, may have never even used the product before : )

Ads are just one way celebs have gotten involved in web3. This week, we’ll highlight the other (healthier) ways they’ve participated in the ecosystem.

Rapper Snoop Dogg is perhaps best known for his music (and his love for certain substances : ). So how did he become an NFT guru?

Snoop has been a public evangelist for NFTs since early 2021, including launching several of his own. He jumped particularly into the crypto spotlight when, on Sep 20, 2021, he tweeted that he is also Cozomo de’ Medici – a pseudonymous Twitter influencer with a multi-million dollar NFT collection (including CryptoPunks, Meebits and more). It remains unclear if Snoop is ACTUALLY the person tweeting / responsible for the whole collection, but his intent & interest is clear.

More recently, Snoop has partnered with Metaverse platform The Sandbox to create The Snoopverse, his own branded world within The Sandbox. He’s even dropped an NFT collection of 10,000 3D Snoop Dogg avatars for The Sandbox, with special access to events in the Snoopverse.

And, in, perhaps, his most innovative move, Snoop announced earlier this year that he wants to make his record label (Death Row Records) the first NFT Music Label. In his words, “I want to be the first major [record label] in the metaverse.” Exactly what that means is still in progress, but Snoop has already launched music NFTs for himself & others and experimented with new platforms, disrupting traditional music industry models (the potential of which we discussed last week!).

Snoop Dogg is a great example of a celebrity who sees the power of NFTs and has walked the walk – both as an investor and as a builder.

Tom Brady is arguably the GOAT (Greatest of All Time) of the NFL. But, is he also the GOAT of the digital gridiron?

Brady’s support for crypto became mainstream in May 2021, when he added red “laser eyes” (a popular meme for folks who support Bitcoin) to his Twitter profile pic.

That year, he also officially launched Autograph, an NFT platform he co-founded to help athletes & celebrities launch curated NFT collections (in Jan 2022 Autograph raised another $170m (!) from VCs).

Autograph provides agency-like services to help stars – like Brady, Tiger Woods, Simone Biles, The Weeknd, etc. – launch NFT collections, and has partnerships with ESPN, DraftKings, etc.

Brady has taken a leading role in launching collections on the platform & Autograph’s first Signature Experience, “Season Ticket” NFTs acting as memberships to essentially a digital age Tom Brady Fan Club (with “unique access to exclusive content, digital collectibles, custom-made merchandise, and private, in-person events”).

Brady is an example of a celebrity who saw the potential of NFTs, and combined that with his personal experiences & network to build an exciting web3 company.

According to Fortune, Paris Hilton is the #6 most influential person in NFTs. How is she making NFTs “hot” (her famous tagline)?

Paris first invested in crypto in 2016, but has become increasingly focused on helping make NFTs mainstream.

For example, in Jan 2022, Paris went on The Tonight Show with Jimmy Fallon, during which they discussed their Bored Ape Yacht Club NFTs and other NFTs. At the end, Paris gave Jimmy and everyone in the audience a free NFT of her not-yet-released collection commemorating her relationship with her husband.

In August, Paris announced that (like Snoop Dogg) she’s launching a “land” in The Sandbox metaverse platform in which she’ll interact with fans & sell digital goods. She’s already “planning social and community events such as rooftop parties and glamorous social experiences in her virtual Malibu mansion.”

In fact, Paris is already a metaverse pioneer, having launched “Paris Hilton World” inside Roblox (a web2 metaverse game) in 2021. In Paris Hilton World – visited by nearly 544k fans – she’s thrown a virtual New Year’s Eve party, a “Neon Carnival Festival” during Coachella & more.

Paris is using both her fame & her entrepreneurial spirit to help make the industry more mainstream. She sees the power of digital worlds. As she says, “At the Neon Carnival we had almost half a million people there and in the real life party there was 5,000. That’s the power of the metaverse where you can have people from all around the world be able to enjoy & experience things that are usually, you know, exclusive events.”

To summarize celeb week: there’s a range of ways in which celebrities can get involved in crypto / web3. They can: be paid to do ads, invest in projects / tokens, actively use web3 projects, or launch a project themselves.

This week we discussed 4 folks across this spectrum. Here are a few honorable mentions:

Funniest: Redfoo from LMFAO! (famous songs include Party Rock Anthem & Sexy And I know It) is now a crypto coder

Walking the Walk: Rapper Nas has invested in various web3 platforms like Coinbase & Royal and was a debut artist on Royal’s web3 music platform

Web3 Investors: Mark Cuban & Ashton Kutcher have both invested in many web3 platforms, participated in web3 podcasts, and / or launched NFTs

Meme Overlord: Elon Musk (‘nuff said)

If I sell you a Jeff Koons sculpture, you do not automatically own the the underlying intellectual property and aren’t legally allowed to commercialize it (e.g., sell t-shirts with a photo of that sculpture) - ownership of an item does not automatically confer ownership of related copyright. The exact same thing happens with NFTs - owning the NFT doesn’t *automatically* grant you its IP rights.

WAIT, WHAT? Recall that NFT is a token: a proof of ownership stored on the blockchain. Some NFTs (but not all!) have visual representation, which is stored somewhere else (either centralized servers like AWS or, preferably, decentralized options like IFPS & Arweave).

An image-based NFT is like a Picasso painting: you do own it (hang it! sell it! burn it!), but you can’t commercialize it, as THOSE rights remain with the artist. The artist can decide to separately sell the IP rights (e.g., when musicians sell their catalogs), or bundle them with the art - and that’s exactly what many NFT projects have done, bundling related IP rights with the NFT itself. Tomorrow we’ll discuss different types of such arrangements.

As we described yesterday, NFT projects decide what type of IP-related license they grant to the NFT holders. Note: a usage license is different from IP rights sale (more on that tomorrow). There are 4 main types of IP licenses in NFTs today:

• Full commercial rights: grant unlimited monetization rights to the NFT owner (e.g., Bored Ape Yacht Club: holders can use BAYC for merch, movies, etc.); yes, even BAYC owners don’t own the underlying IP, just a generous commercial use license (that CAN be changed by Yuga Labs at any point in the future)

• Limited commercial rights: put restrictions like type of activity, length of time, or total sales (e.g., Doodles allow merch sales up to $100k); the degree of restrictions can vary and can be adjusted at a later time (which is… not great)

• Personal use only: prohibits commercial activity AND restricts display rights to just personal use (e.g., VeeFriends, TIMEPieces, NBA Top Shot)

• Creative Commons (CC0): effectively waives creator’s copyright and puts the art in the public domain where ANYONE (NFT holder or not!) can freely use it for commercial purposes (e.g., Nouns); unlike the other license types, this one is non-reversible (!!)

If web3, and NFTs, is about ownership, then why do we settle on very-web2, revocable licensing when comes to underlying IP rights like copyright?

Copyright is the only legally recognized form of digital ownership in the US today. For the NFT to grant FULL ownership of a digital asset to the buyer, including any & all commercial rights, the copyright itself needs to be transferred alongside the token. Otherwise, the full vision of web3 digital asset ownership cannot be realized.

World of Women is a unique project that does transfer IP ownership to the NFT owner based on its copyright assignment agreement. But it’s not on chain- the agreement governs the initial WoW-holder sale, but not secondary transactions (e.g., if Mags wants to buy a WoW NFT from Ben), which need their own agreements.

Web3 needs a solution that transfers the intellectual property rights away from the project owner (as is the case with CC0) but does so not to the public but to the NFT holder (which lets the holder defend that IP from others).

Since copyright sales are governed in the US by the Copyright Act, the govt needs to recognize such on-chain transfers as legally compliant as traditional “IP Assignment Agreements.”

IP is an asset like any other, and from the project perspective, licensing it while retaining ownership is a “have your cake and eat it too” approach - can keep the control of the asset while potentially getting the community to help build out its value.

Why does control matter? If the IP is transferred, the project can no longer protect it, especially if bad actors (e.g., a Nazi group) adopt the NFT as their symbol, thus damaging the value of related NFTs held by others. If the IP is just licensed, the IP owner can legally shut down any problematic activities & protect other holders.

But is there a downside to not transferring IP ownership? Projects that give commercial licenses want holders to build out their individual NFT’s IP because it elevates the whole project (and NFT’s prices); if someone develops a TV show around their Bored Ape, it increases exposure & value of all other Apes. However, a holder doing that with licensed IP is “building on borrowed land” given licenses’ changeability, which might deter such activity.

Moonbirds is one of the most hyped and valuable NFT collections. For months Moonbirds stated in its materials that as its NFT holder “you own the IP,” only to seemingly abruptly change its license from the commercial use license (allowing holders to profit from the IP) to Creative Commons (allowing anyone to use & profit from the IP).

Moonbirds NFT holders took their outrage to Twitter & Discord, especially those who were in the middle of negotiating commercial agreements to license their characters; with the IP now in the public domain, companies no longer need to pay for the right to use the artwork and the negotiations (and profits for NFT holders) collapsed.

As we discussed, since CC0 is irreversible, community outrage was for naught as even if Moonbirds team wanted to reverse the decision, they couldn’t. The decision run counter to web3 values like transparency & community co-creation; NFT holders expect to be consulted on such impactful decisions (even if there’s no legal obligation to do so). It also highlighted the instability of NFT licenses, which can be changed at a moment's notice.

For many people, crypto has a criminal perception problem due to its prominent role as payment rails for the online anonymous marketplace, Silk Road. And what buyers & sellers care the most about anonymity? Illegal goods traders.

Shortly before Silk Road’s shutdown by the FBI in late 2013, 70% of products listed on the site were drugs (interestingly, the site’s terms of service officially prohibited sales of stolen credit cards, weapons, or assassinations). All transactions were conducted in bitcoin, with the buyer’s bitcoin held in escrow by the site until the transaction was successfully completed.

Silk Road and similar sites were the first real use case for bitcoin, proving cryptocurrencies’ benefits in anonymous online transactions - offering the necessary safety & verifiability but doing so fully outside the traditional banking & legal system. While many, many new use cases have since emerged, that reputation as crime-enabler has stuck in the public's and media’s mind.

There are two types of “crypto crime” - traditional crime but using cryptocurrencies as payment (e.g., money laundering, illegal transactions like those of Silk Road discussed yesterday), as well as “crypto-native crime” involving crypto assets (hacks, scams, etc.).

While the two types differ in many ways, they depend on similar theoretical criminal benefits of cryptocurrencies:

• anonymity (which is only partially true … more on that tomorrow!)

• ease of cross-border transfers

• non-reversibility of transactions

• regulatory limbo (incl. jurisdictional disagreements)

There is also simply more upside to crypto-related hacks than traditional web2 hacks (e.g., money “directly on the blockchain,” limited victim recourse).

While the concerns are valid, crypto crime is likely not THAT prevalent. MOST studies estimate that just 0.15-1% of crypto activity is tied to illegal activities, but some do place it a whopping 46% of all crypto. Eek. Why the range? Estimates are based on identifying “suspicious wallet addresses” - which is still more art than science (if Mags sends Ben 1 ETH, it’s hard to know if it’s a payment for a legal vs. illegal good).

While there are clear reasons why crypto crime occurs, the reality is that (a) all payment forms have some form of criminal activity associated with them (e.g., wire fraud, stolen cards), and (b) cash remains the ultimate anonymous payment form. While both cash and crypto transactions can be anonymous, crypto is more easily traceable - after all, all transfers are recorded on the blockchain.

As a result, all transactions–even anonymous ones–can be tracked, all the way to on-ramp (transferring of fiat to crypto) & off-ramp (crypto to fiat). That’s why the US government insists on all on-ramp & off-ramp points “KYC’ing” their users: Know Your Customer requires ID identification of the user before a transaction is completed, which gives it a personally identifiable legal trail.

Even without KYC, law enforcement can frequently use publicly & permanently recorded data to link transactions to IP addresses and/or clusters of individuals, regardless of how many times any given crypto is transferred.

Crypto transactions’ traceability (and that traceability’s use to uncover criminal behavior) is why the US government took swift action against Tornado Cash & its users. As discussed in a prior week, TC used “crypto mixing” (i.e., obscuring fund sources by mixing different users’ transactions) to enable fully anonymous transactions and was used by North Korea to launder over $1B worth of proceeds from crypto hacks (!). TC made it impossible to “follow the money,” which is how financial crimes are uncovered, so the US government sanctioned it.

If you think of traditional financial crimes, those committed with cryptocurrencies pale in comparison to other forms of payment - estimates show that less than 1% of all money laundering globally is done with bitcoin.

In general, 99%+ of all cryptocurrency transactions in the US are completed through Anti-Money-Laundering compliant exchanges (like Coinbase or FTX), which include KYC and therefore a legally identifiable trail. Crypto crime is thus both a tiny part of all crypto transactions and a tiny part of all crime, and should only decline over time as security & on-chain identity further develops.

At the end of the day, cryptocurrencies & tokens are tools, and tools are neither good nor bad - they are tools that can be used for good or bad. We at Vitamin3 believe that it would be a shame to throw the baby out with the bathwater - crypto has so much potential, and while any crime is regrettable, in crypto, crime is a small part of the whole ecosystem.

Uniswap is the largest decentralized exchange (“DEX”) in crypto. It allows anyone with a crypto wallet to trade fungible tokens on the Ethereum blockchain (like a decentralized crypto Charles Schwab).

Typical trading platforms (TradFi or even Coinbase) are centralized, holding users’ funds (“custody”) and matching buyers & sellers with a “central order book”.

Uniswap is an automated market maker (“AMM”), using smart contracts, math formulas, and blockchains to eliminate the need for a middleman to match trades, and allow users to self-custody their funds.

Why is this important?

We’ve discussed DeFi, so won’t rehash the benefits of open access and removing middlemen. But, open access goes further. Since Uniswap is built on a public blockchain – not only can anyone use Uniswap, but also anyone can build their own dApp on top of its infrastructure (no permission required!). This increases speed of innovation and lowers the resources required for new DeFi startups.

Plus, Uniswap’s fungible token (UNI) gives voting rights, so token holders decide how Uniswap will evolve over time. For example, it currently charges no fee (there are trading fees but those go to traders (“liquidity providers”)). UNI token holders (not a central authority) decide if/when Uniswap ever charges a fee. Imagine if Fidelity (or Facebook) let users decide how much to charge.

Let’s explore Braintrust, a decentralized talent marketplace (i.e., the web3 version of Upwork). It connects high-skilled freelancers to companies like NASA, Nike & Deloitte.

Talent marketplaces allow job seekers & job providers to more accurately & securely vet each other, review past work and exchange payments.

Braintrust takes this concept further by using fungible tokens (BTRST) to incentivize behaviors that build and strengthen the network. Participants earn tokens for actions like building out a profile, providing referrals, vetting talent, or taking classes to learn new skills. In these cases, the tokens are like loyalty points, but can be used on the platform for perks, or sold on an exchange (like Uniswap!) for crypto or cash.

Unlike loyalty points, the BTRST token can also be staked. Job seekers can stake tokens to show they’re serious about a job interview (and lose those tokens if they no-show). Companies can stake tokens to get more visibility.

Like Uniswap’s UNI token, BTRST gives holders voting rights on Braintrust. Thus, users control fees, changes to token rewards, etc. Also like Uniswap, Braintrust is an open protocol, so anyone can build on top of it to create their own talent dApp (e.g., industry-specific talent marketplace).

Braintrust shows how marketplaces are ideal for blockchains & crypto, because tokens incentivize good behavior and supercharge network effects (key driver of value in marketplaces!). Removing middlemen & juicing network effects allow Braintrust to charge an industry low 10% fee.

STEPN describes itself as a web3 lifestyle app that rewards movement and has social & game elements. The goal: incentivize people to exercise & gamify the experience to make it fun. STEPN is a pioneer in “move-to-earn” & more broadly in the growing field of using web3 concepts to improve daily life.

How does STEPN actually work? To participate, users download a mobile app & buy a virtual pair of sneakers (NFT). Then, when you run, jog or walk outdoors, the app uses GPS & motion sensors to track your movement and rewards you with tokens. Tokens can be used for in-game purchases or exchanged for other crypto/cash. The project is early and still building out its roadmap, but so far has worked nicely. The app launched in December and, as of May, had 2.3m monthly active users.

It’s important to note that move-to-earn (and other X-to-earn projects) shouldn’t be thought of as a way to get rich (for example, the price of STEPN’s token has collapsed 80% since its April peak along with all of crypto). Instead, STEPN illustrates how projects can use blockchains & crypto tokens (i.e., financial rewards) to incentivize positive behaviors (and make them fun!).

In the prior post, we discussed STEPN and how crypto can incentivize behaviors to help yourself (e.g., health). In this post, we’ll discuss how crypto can incentivize behaviors to help others.

Helium is a decentralized wireless network that uses crypto to incentivize people to share their WiFi. Anyone can buy a Helium hotspot device and begin earning crypto for sharing their WiFi bandwidth with nearby connected devices (like Lime scooters, parking meters, etc.). The more your hotspot is used, the more crypto you receive.

What’s particularly interesting about Helium is that the founders originally tried to create the same company without crypto (long-range peer-to-peer wireless network). But, they struggled to get meaningful participation, so they pivoted and in 2019 relaunched as a decentralized network powered by crypto rewards. Today, there are almost 900k Helium hot spots.

Helium shows how crypto can (1) help companies get early users before the network has much value (“cold start problem”) and (2) incentivize individuals to take actions that help others (e.g., public goods).

Side note: If you’re interested in crypto funding public goods, check out Gitcoin.

Maker is a DeFi protocol for borrowing money. Users lock crypto (e.g. ETH) into a smart contract and borrow Dai (stablecoin pegged to $1), using the locked crypto as collateral.

Like most of DeFi, the loans are overcollateralized, so you get less Dai than your collateral (e.g. if you lock $100 of ETH, you get something like $60 of Dai). If your collateral’s value drops too much (e.g. ETH price drops a lot), your loan is canceled & your collateral is sold to repay the loan (plus penalty fees). There are many reasons why you might want a loan instead of selling your ETH (e.g., believe ETH price will rise, avoid paying capital gains tax today, etc.).

When you get a loan on Maker, you actually create Dai; when you repay your loan, you destroy that Dai. In other words, Maker enables the creation of a decentralized but collateralized stablecoin, that is “permissionless” (anyone can access). Dai has the benefits of decentralized tokens like Bitcoin (e.g. open access & not centrally controlled) without the high volatility of Bitcoin and other crypto. This has broad implications, which is why Dai & other stablecoins are often considered the backbone of DeFi.

A few weeks back we discussed algorithmic stablecoin UST’s downfall. While UST and Dai are both decentralized, algorithmic stablecoins (like UST) have no collateral behind them, making them risky. Dai is fully backed by loan collateral, which has helped it maintain its price-peg even in turbulent markets (like the current one!).

Starbucks announced a new loyalty program called Starbucks Odyssey that’s built on a low fee blockchain called Polygon. Existing Starbucks Rewards users can log in to the Odyssey site using their current credentials, then proceed to engage with various “journeys” like playing mini games or participating in Starbucks challenges to earn NFTs (termed “journey stamps”).

Limited-edition NFTs will be also available for sale. All NFTs will have varying rarity and can be traded in a marketplace. More stamps = more points = more exclusive benefits (not unlike existing loyalty points, but with a tradeable component, ability to earn for engagement beyond purchasing, and a richer set of benefits that the points can be exchanged for, like virtual classes and artist collab merch, rather than just food/drink).

Starbucks also says Odyssey will allow more community engagement - while the current program has built a strong connection between customers and the brand, it has not built a community among customers (it’s a separate question whether Starbucks customers want to be connected to each other!).

Starbucks Rewards is one of the (if not THE) most successful loyalty programs in the world - in fact, Starbucks’ app is the 2nd most used mobile payment app in the US after Apple Pay (!). So why are they messing with a clearly successful product? Especially when so few people (relatively speaking) have onboarded to web3, have wallets, bought NFTs, etc.?

Starbucks is likely betting on the value of an open system: they can gain greater customer satisfaction due to both new perks (a more involved program better serves superfans by allowing them to earn rare benefits like a free trip to Starbucks’ coffee farms) & flexibility that the Odyssey enables (e.g., selling the “stamps,” something you can’t do with Starbucks stars today).

Open system also allows the company to potentially expand the program to incorporate non-Starbucks brands. If tokenization is the future, there is value in not just launching your own program, but also being the first mover to establish a cross-brand tokenized loyalty platform (which leads to larger market, higher margins, and more reasons for someone to never switch from Starbucks!).

Why do we care about Starbucks launching a web3 initiative? Three reasons: depth of commitment, adoption impact, and peer signaling.

First, Starbucks didn’t just launch a side NFT project like many companies exploring web3 (e.g., Adidas) did - they are incorporating deep web3 mechanics into their core loyalty product. It’s not a PR move or a cash grab, but a clear statement of belief in web3.

Secondly, Starbucks recognized that the general market is not ready for a fully degen program. They are addressing limited web3 adoption to date by enabling customers to engage with the platform without a pre-existing wallet & allowing them to buy the limited-edition NFTs with a credit card, rather than cryptocurrencies. In fact, they never even mention crypto or NFTs in all their marketing! This will allow a lot of people (Starbucks Rewards has 25M+ members!) to become seamlessly onboarded to web3, a necessary first taste on the road of exploration.

Lastly, Starbucks has always been at the forefront of new tech adoption; such commitment to a web3 solution is a big signal to other F500 companies that there’s more to NFTs/web3 than just hype/speculation - others will probably follow!

After exploring Starbucks Odyssey, let’s take a step back - why is tokenized loyalty itself a big deal?

Imagine it's the early days of Instagram; the startup is trying to get more people to sign up and post photos to get content for other people to view / want to sign up (since value comes from the network at scale, early users have little incentive to join as there is not much to view). Marketing is one way - but tokenized loyalty is another.

In web3 world, Instagram could reward early users with $IG tokens: for posting photos, inviting friends, commenting, etc., all in a bid to jumpstart growth. As it grows, rewards become less important/used (because there’s intrinsic value to the platform - all your friends are on it!) but also all existing tokens become more valuable. As a result, those early users of Instagram are able to receive an equity-like upside for helping the platform succeed, esp. in critical early days.

While established companies like Starbucks can use tokenized loyalty for new customer engagement & revenue streams, startups can use it to get early adopters who help the company get off the ground, and reward those early supporters accordingly.

From a psychographic perspective, sports fans are likely the best primed user cohort to embrace NFTs: they understand tradeable collectibles (sports cards are basically IRL NFTs!), many enjoy “degening” (betting on sports-related things), and they’re part of strong communities.

They also follow pro athletes, who themselves embraced NFTs as early adopters, as sports teams are natural word-of-mouth communities composed of people interested in winning/investing/technology and who are spending quality time together in locker rooms/travel.

It’s not a surprise that Top Shot kicked off the current boom, selling NFTs of NBA highlights - blockchain-verified video sports cards.

Digital collectibles might not seem like a revolutionary use case, but for always-online users, digital “card” > physical card and NFTs are a way to verify digital uniqueness. NFTs are also easier to trade (no shipping, global liquid market, etc.).

Today some of the best funded NFT companies deal with sports collectibles, like Tom Brady-founded Autograph and Fanatics’ Candy Digital.

Besides NFTs, various companies have begun experimenting with fungible tokens for sports fandom in the form of fan tokens. Fan tokens are a type of social, or affiliation token issued by a team. You can think of them as shadow equity - they don’t represent actual team ownership but they grant fans special, ownership-like benefits like pre-sale access or voting rights over certain decisions.

Fans can use them or sell when no longer interested. The company Socios has been the primary enabler of fan tokens, with European teams like FC Barcelona, Arsenal, and Man City embracing the innovation. Teams got excited because fan tokens represent both a new revenue stream (guaranteed sponsorship payments from Socios + revenue share from token sales + other) and a fan engagement strategy.

However, there are problems - many fan tokens have quickly run up in price driven by speculators then lost most of their value; teams have also failed to meaningfully utilize the vote function, instead opting for meaningless questions (“who was the best player last month?”) that could be asked with an Instagram poll. Fan tokens are an interesting idea, but execution to date has been sub-par.

Fan tokens could become an ownership proxy but why pursue a proxy instead of true ownership by the fans? That’s where DAOs come in: fans can form a DAO - not that dissimilar from the ConstitutionDAO we discussed a few weeks ago - to purchase a minority or majority stake in a professional team. Many are exploring this structure, with the Krause House DAO perhaps the most serious effort.

The idea seems obvious - so many fans would love to own even a tiny piece of their beloved team, and a DAO structure enables that (as well as some form of governance / impact on the team!). However, the leagues are hesitant: any ownership/governance innovation is controversial to the owners (it took a long time to allow PE firms to buy team stakes!) and DAO’s legal status is still murky.

“Are DAO tokens securities?” is a particularly pressing issue and we wouldn’t expect a US-based league to allow even minority ownership by a DAO until it’s clarified, despite DAO’s potential benefits. If you’re interested in this topic, you can read more in Mags’ CoinDesk column on the topic a few months ago.

During this year’s Champions League final 70% of tickets attempted at entry were fraudulent - 30-40k fans clamored to get in with fake tickets; French police resorted to tear gas to control the crowds. To quote a common Twitter meme, “web3 solves this” - specifically using NFT technology for digital ticket verification to prevent fraud. But that’s not the only benefit NFT tickets would have.

By turning tickets into NFTs, event organizers can capture some portion of the resale market value away from scalpers. How? By programming a secondary sales commission into the NFT smart contract so that any time the ticket changes hands, some % goes back to the original creator/organizer (as is common for NFT projects). It could even prevent scalping entirely by making it uneconomical.

NFT-based tickets could also become collectibles (now that the physical ticket stub era is over!) plus they could accrue additional utility before & after the event (e.g., holding 5 NBA ticket NFTs could unlock special perks).

NFT-based tickets are objectively better, and with the right UX fans don’t even need to know that they are buying NFTs - they can just enjoy the peace of mind & perks.

Sports and web3 are clearly synergistic. What other kinds of innovation could we hope for and expect in the future? Let’s discuss 3 more emergent examples.

Tokenized fan clubs can tighten the relationship between a team/athlete and their fans: use NFTs as an entry to the fan club, with fans interacting with each other and being rewarded for their engagement (watching games, tweeting) with more tokens or unique digital & IRL experiences.

Web3-native leagues can implement some of those mechanics natively in the league itself. One example is Fan Controlled Football, a novel football league where fans vote on offensive strategies, that recently pivoted into web3.

We’re also seeing new games at the intersection of web3, sports, and betting. An early success story has been Sorare, an NFT-based fantasy league. Another example is an upcoming game Swoops (disclaimer: Mags is a big fan but also an investor) that just released a free daily mini-game where users play an NBA GM for a chance to win cash (if you’d like to check it out, click here).

Gamers, similar to sports fans, are already used to many mechanics of web3: digital currencies (e.g. Fortnite V-bucks), paying for & owning digital assets (e.g. skins), pseudonym-based communities (e.g. guilds), user co-creation (e.g. modding), and creator monetization (e.g. Roblox creators).

Web3 proponents argue that those elements of gaming are made better with crypto. For example, tokens are “safer” than corporate in-game currencies (can’t be wiped off or devalued by the company), NFTs make digital assets openly tradeable (while games don’t allow trading or only allow trading in owned marketplaces), and decentralization results in lower take rates so the creators keep more $.

While many gamers are surprisingly anti-web3 (more on that later), it’s undeniable how much web3 & gaming overlap. In fact, Vitalik Buterin, the creator of Ethereum, said that he was driven to decentralization because of his experiences playing World of Warcraft (and getting his character “nerfed” i.e. weakened due to a gaming update - yes, really); it made him realize how messed up centralized systems can be.

One of the biggest manifestations of web3 x gaming so far has been the first gen of play-to-earn (P2E) games. What’s P2E? Games that allow players to earn financial rewards for their gameplay (advancing/beating other players). In most P2E games, players have to buy into the game with NFTs and they get rewarded with tokens that can be exchanged into ETH (then ETH into fiat currency of choice).

The idea behind P2E is simple: players should be rewarded for the work & attention they give (attention is valuable but that value is usually only captured by companies), as well as share in the financial upside of a game’s success.

Part of the theory is that the P2E model allows companies to shift dollars from marketing to players’ pockets as the money-making & word-of-mouth fuel player acquisition.

In many games, players are also able to monetize by breeding their NFTs into brand new NFTs that they can then sell to new players entering the game. This has resulted in a common criticism of P2E as a “ponzi” since new player inflow is key to breeding being financially rewarding to existing players (after all, if no one is there to buy those new NFTs, increasing supply causes prices to collapse).

When people hear P2E, most think of Axie Infinity, the biggest game of the genre. Axie became a sensation when many people in emerging economies began playing it to replace their incomes lost due to COVID. It’s a trade-and-battle game where players use combinations of characters, or Axies, to battle other players and win tradeable tokens.

Decentraland and Sandbox are two Minecraft-style games where players construct their own spaces and experiences by buying and developing virtual land, using those platforms’ native currencies (MANA and SAND respectively). The mini games & quests within those platforms are user designed and executed, rather than centrally established by the companies.

Lastly, Zed Run is a horse racing simulation where players buy horse NFTs (all with varying strengths & weaknesses) to race against other players, as well as breed new horses for sale. It’s a sneakily analytical game as players attempt to analyze key qualities to racing and/or breeding success (and max probability of reward). Players can also bet on others to win, similar to classic horse racing.

Despite strong connections between gaming & web3, players have overwhelmingly rejected NFTs and other blockchain-based innovations. Why is that?

Many gamers are simply fed up with monetary extraction by the gaming industry, and NFTs feel as yet another way to reach into their pockets, similar to what happened with the emergence of loot boxes (“pay to upgrade”) and other microtransactions.

From gamers perspective, one of two things happens when companies introduce additional payments: they are either for cosmetic changes (like skins) that don’t have any impact on the gameplay (but are necessary to fully “level up” a character), or they are meaningful upgrades that result in pay-to-play or pay-to-win-like dynamics when buying the upgrades is the only way to feasibly compete, resulting in higher cost to play at best, and destroying the integrity of the game at worst.

Players are nostalgic for the times when there was one upfront payment for unlimited, fun-focused play. It doesn’t help that much of crypto & NFT gaming today is earn-first vs. play-first - that financialization & gambling-like mechanics feel at odds with fun & escapism that traditional gaming is supposed to provide.

We are in the early innings of web3 gaming but clear lessons are already emerging for the next generation of companies in the space.

First, tokenomics, or game economy design, are incredibly important - balanced token earning & spending is key but not easy to achieve. Flood the game with too much token supply and the economy crashes; restrict the supply too much and it becomes hard to grow.

Second, money can’t be the primary motivation for players to enter the game because it makes the relationship transactional, with players leaving as soon as a better-paying game emerges. That’s why the industry has begun repositioning into “play-AND-earn” similar to esports, where the game is intrinsically fun, and money-making is just a bonus. Fun means different things to different people (e.g., a casual mobile game, a complex skill-based MMO), but it needs to be at the center of any game that also introduces earning potential.

Gaming-as-future-of-work might be in our cards as metaverse takes over, but that won’t be the next gen of web3 gaming. For now, the industry has to start from a consumer-centric view of players’ needs: user benefits first or web3 gaming won’t happen.

Arguably no industry has been more disrupted by the Internet, with streaming replacing album sales and whole music industry revenue taking a hit (only beginning to recover). Today, non-live music is just a ~$34B industry (even cinema business is larger at ~$36B!).

In music, web3 has potential to add new revenue streams for both emerging & established artists (“increasing the pie”), create new fan engagement strategies (especially for superfans who currently have limited ways to support musicians beside concert tickets & merch), enable new collaboration & distribution models, and perhaps even disrupt some of the existing industry power structures.

After all, web3’s potential is particularly interesting as a disruption to middlemen inefficiencies (“your margin is my opportunity”), and estimates show that for every $10 spent by a Spotify user, just $0.65-$1.70 goes to the artist while $3.80 goes to the label.

One of the most funded music x web3 startups is a company called Royal, cofounded by one of the most popular DJs, 3LAU. Royal allows fans to invest in and own music rights as NFTs & receive royalties based on those rights, which gives artists an improved monetization & value capture and fans a new support avenue (incl. ability to benefit from “discovering” an artist early on).

This could even enable musicians to skip record label deals entirely and pre-fund an album through fans buying the NFTs (then sharing in the album's financial upside). It’s particularly interesting in the TikTok era, where a new musician seemingly blows up every day (and music distribution can be handled through social media/Spotify), but monetization remains a challenge for new artists.

At the same time, fans can use such NFTs to prove early support of artists before they reach mainstream success. This allows fan flexing (“I was here before they got big!”), but also upside sharing - investing in ownership of emerging artists’ music rights, fans can directly benefit from all the work they put to make that artist more popular (e.g., telling their friends, posting on IG, etc.).

Fan-investors pre-funding an artist’s album have potential to disrupt the record label’s role in providing the upfront resources. However, record labels perform a lot of other functions, including mixing/mastering, creative (incl. music videos), royalty management (so that all other stakeholders, like songwriters, etc. also get paid!), distribution, PR, etc.

Is there a way to build a full record label business in a web3-native way? Some are certainly trying, including Snoop Dogg planning to transition his own label Death Row Records into an NFT record label. What does that mean? Details are scant, but likely a combination of traditional creative support but with the music released as NFTs and marketed & distributed accordingly.

Some are even trying to develop record labels representing VIRTUAL musicians. Player Zero, one such startup, wants to develop a roster of “Animated Virtual Artists'' to release music in the metaverse. It’s a fascinating frontier of the music industry, where animated NFT characters (supported by those NFT communities) get paired with real voices to create unique musical experiences.

Today streaming accounts for the majority of all record music industry revenues - so many believe that this distribution/consumption point is the most impactful way to web3-ify music industry, especially given that today roughly 12% of streaming revenue goes to the artist and the other 78% to various middlemen facilitating that distribution. What if artists could have direct control instead?

Audius is effectively a Soundcloud of web3 - a distribution platform for musicians to upload their work for free (and not share any revenue with Audius, which monetizes through a token instead). The artists are paid immediately when their song is streamed (vs. traditional 12-18mo. delay!). Audius is also structured as a DAO, with both artists & fans having a say in the platform's direction.

On the web2 side, Spotify is not sitting idly either - it has begun hiring for web3 roles and has trialed NFT galleries in artists’ profiles. Spotify is unlikely to majorly alter its distribution mechanic or rev share, but it does have unique abilities given its scale, e.g., to translate listener behavior (those Year in Reviews!) into proof-of-fandom tokens usable elsewhere on the internet.

Let’s discuss web3’s potential impact on music creation itself. Arpeggi Labs is one of the startups in this space, building collaboration software on the blockchain: it allows creators to publish sounds for others to use and ensures that credit (and associated payments) goes to the original creator.

Another interesting area is incorporation of fans in the music creation process through fan submissions (e.g., beats or lyrics competitions) and fan voting (e.g., “which of the two versions of this song should we release?”), giving fans an opportunity for deeper engagement with their favorite artists and an opportunity to earn ownership & upside in the finished song.