The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy sits down with Jake Brukhman, Founder & CEO at CoinFund, a blockchain-focused investment firm based in Brooklyn, New York. The two spend over two hours discussing all things NFTs, including NFT liquidity, judging NFT communities, CryptoPunks, fractionalization, scarcity, DAOs, pricing NFT assets, the future of NFTs, and much more!
- Jake’s Twitter
- CoinFund website
- Past interview with Jake
- “Appraisal games and the NFT liquidity problem”
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Hey, everyone, welcome back to the podcast. I’m your host, Tom Shaughnessy. I also helped run Delphi Ventures today. I’m thrilled to have on Jake, who is an absolute pioneer in the space for a long form podcast focused on NFTs.
Jake, how’s it going?
It’s going great. Thanks for having me on, Tom. I’m super excited for this one.
Totally, man. It’s funny. This week I was looking through my tweet history abit, looking for an old tweet, and I realized one of my first crypto experiences was an event you hosted back in the day, unlike the Constantinople ETH Fork or something. It’s been a while.
Yeah, yeah, that was we would run the rabbit hole talks back in New York, I think I think we might start those up again, actually.
They were fun. I missed them.
Yeah, Covid definitely put a dent in all of the meetings, as you know.
Yeah, for sure. Well, Jake, tell us a bit about yourself, man. You have quite the storied career in Crypto. Give us your background and tell us a bit about CoinFund before we jump into the podcast.
Yeah, thanks. I mean, I’ve been in the space for a long time as the seventh full year of investing and block chain. My background is mathematics and computer science, with a ten year career in technology, mostly in hedge funds, but also in pure tech at Amazon and in some really interesting kinds of private company research contexts. And then since this podcast is about NFT, I just want to say, like NFT has definitely been a passion vertical for me. I’ve been interested in art all my life I’ve always been pretty creative from a young age.
I’ve done creative coding and I learned how to code at 14. And so some of the very first things I’ve coded were actually things like games and something bordering on an art. And so as an investor Coinfund, who is a crypto investor and has a pretty broad mandate.
We’ve actually been quite early in NFTs. So some of the things that we’ve done is we did the dapp around back in 2018. We funded one of the first open platforms where anyone could mint an NFT in 2019, which was called additional.
We are pre-seeders of Rarible.com and super excited about Rarible protocol and we’ll talk about that. And what we’re seeing, you know, today, on Saturday is this kind of dramatic playing out of the thesis that using DeFi and NFTs can actually become a very active, very liquid asset class.
And so we have a number of investments along that front, including fractionalization companies, NFT lending, and something that I’m personally super excited about, which is Upshot. It’s a mechanism for valuing NFT in a decentralized manner.
So that’s a little bit about what we’ve done in the space. Oh, I love that. One more thing. I’m personally very involved, like I’m a member of Flamingo DAO I run the first edition, the XYZ, which is the NFT Art Gallery since 2019, it has a pretty interesting collection.
And you know, I’m in all the… kind of following the latest and Ifti crazes these days.
Yeah. No, I, I saw you go so deep. I mean you’ve created your own artwork. I think I may own a couple of pieces or not. I gotta check, but it’s exciting. But before we dive into everything you’ve mentioned, let’s just start at the basics.
What exactly is an NFT like? What is the technical specifications for it? You know, is it a token? Is it not? I hate playing dumb here, but we got to start at the beginning.
Yeah, no worries. Well, let me start. You know, I’m a math guy, so I like, you know, taking the abstract and then working our way into examples. But broadly speaking, what are we doing in blockchain? We’re doing digital assets.
And when digital assets came onto the scene, what does that mean? We’ve mostly been socialized to digital assets, through fungible assets, through things like cryptocurrency tokens, things that look like stocks, things that have token suppliers of monetary policies.
But actually, if you look out into the world, probably most assets are not fungible. They’re all kind of unique. You know, every piece of real estate is unique. Every car is in a different level of, let’s say, disrepair. Right. And so it might be worth different amounts of money. Art is not the same. And what you know, what NFTs are. NFTs stands for non fungible token, it’s the onchain embodiment of what a non fungible asset is.
When people talk about an is sort of in the mainstream or in the Crypto mainstream. They tend to equate NFTs with digital art or digital collectibles or like a punk or a crypto kitty or something like that.
But what I think in NFT is, it is actually a very broadly applicable piece of infrastructure into which you can fit the concept of a non fungible asset. So what does that mean? You know, in the crypto world?
And what does that mean in the real world? Well, in the real world, it precisely means things like real estate and no. And the title to your car. But the way that the space is developing is that we’re starting with digital assets and we’re starting with these different types… starting with digital art, digital collectibles, digital in-game assets like axes. And what you can do is you can extrapolate and say, well, what other kinds of digital content are there? And there’s actually tons, right? There’s movies, there’s music, there’s design assets like fonts and stock photos and icons.
There are financial instruments that are non fungible, like options, contracts and so on and so forth. And so we realize that we can actually fit many different kinds of digital goods, digital content and even financial assets and property into this construct.
So what NTFs are to me are, you know, the financial framework for working with those kinds of assets. And then today, we mostly understand them, and then we have a very important lesson in there, but we mostly understand them as sort of social cultural assets.
It’s an awesome, abstract kind of way to think about it. I really like that. And I guess do you think that it’s kind of hard for me to think people understanding your depth of it versus just the fun and exciting kind of let me buy a punk, let me buy a Meebit?
Do you think people are going to understand what you’re discussing? Like how do you get people up that learning curve? When do we actually get to what you’re talking about here, where basically anything can be an NFT?
I think people understand it very intuitively, very viscerally when they participate. So when you see that collectible or piece of art or something or, you know, maybe it’s not just artistic, maybe it’s financial. But when you see that sort of connection you’re drawing between yourself and that asset, like that’s what NFTs, you know, sort of abstractly are right. They are the really terse way of summarizing it is that — They’re the financialization of cultural assets. What does cultural assets mean?
It means things like art, things like movies and music and symbols. Right. Or brands or intellectual property or Disney characters, or just the idea that you like a certain TikTok influencer. What we have found using an NFTs, is the digital embodiment of that connection, of that feeling.
But it’s more than that, the financialization of that, it’s like once you have it as an asset, you can put it to work. It’s wealth. It’s something that you can use as collateral. It’s something that you can send to other people.
What we’re seeing now is a lot of fractionalization, meaning many different people can own pieces of the same artwork. Imagine like, you know, you could own a piece of the Mona Lisa. And we should talk about what owning means, right?
That is its own rabbit hole. But to answer your question, I think I think people very intuitively understand it. And as soon as they get these assets into their hands and we give them the right tools to treat them in a financial way, a lot of people will do that. And they’re already doing it.
I definitely want to talk more about fractionalization later on, but I guess you bring up a really interesting point in that people can take financial use cases of their NFT use, but I guess the question for me is like it’s easy to see that in a DeFi sense.
Let me fractionalize something, get liquidity, you know, maybe let me use this collateral for a loan. But do you actually envision NFTs being used in more Web2-ish, content ways like, you know, let me lease out my NFT for a movie or for an appearance or a song like do you think that they’ll touch the way the traditional world, the way content does today? Or do you think that these are mainly going to be more financially used in nature?
There’s definitely movements here of different views of the world, right? So the other day I watched, you know, a crypto whale battle, a DAO in an auction. Right. And this is really not something that happens too often. Doesn’t. And the DAO was being crowdfunded in real time as they were, like, battling. And this is not something that you see in the real world. Right. But at the same time, you have a lot of mainstream attention on NFTs.
You have absolutely a ton of, you know, influencers and brands looking at it. I’ve personally been on calls with, you know, consumer tech companies who have consumer goods divisions and are very, very interested in what might be the application of if if to consumer goods and digital makes a lot of sense, you know, in a Covid context, in a context where probably digital goods are creating more engagement between customers and issuers. We’re launching an NFT strategy called Metaversal. And part of that strategy is doing a studio where, you know, Metaverse is working with different brands on how to tokenize the IP that already exists.
And so, in short, I think I think there are movements to tokenize what’s already out there and kind of bring them into like a more modern digital media and a more modern way of interacting with customers, which has a lot of promise from a marketing perspective.
And there’s also a movement to create, just like absolutely new things. And so when you see things like Avatar series and what that is, is, you know, something like crypto punks or bored apes or nouns, right.
It’s. A set of non fungible, but they sort of share a provenance right there, part of the same kind of collection, they’re the same kind of thing, but they’re not exactly the same. And that is almost something in between a fungible asset and a purely like one of one, you know, non fungible asset. So the things that we’re seeing being innovated on, I would say, is actually more in these like series categories than than others. And one of the core themes of innovation there is just liquidity. It’s like we’re finding different ways of giving these serious prices.
It’s a really good point, and, you know, let’s bring it back to, you know, before we go into like the future of where they’re going. Let’s go back to the people creating NFT. Right. There’s many different kinds of pure artwork, you know, status symbols.
You know, I kind of think of punks in that basket. There’s potentially revenue generating and NFTs like rare Axies you can battle with and stuff like that. You know, there’s obviously different types of NFT I want to talk about.
But how do you think about like early communities here? Like everyone knows, like Punks has a community. Everyone knows Axies has a community. But how do you like how do you investigate an early NFT community? It seems kind of hard because they might be dealing with one creator or one artist or, you know, they need to take that to the next level. Like, how do you dig into that? How do you judge that?
Yeah, this is such an important point because. It’s not, it’s not even just a point about NFTs. It’s a point about digital assets broadly, and maybe we should actually just start there. Right. So when Bitcoin came around, it showed us this really profound thought that most of us have really never had in our minds or even had any interest in thinking about, which is that the dollar is a consensus among, you know, millions and millions and billions of people in the world that this like green piece of paper backed by that government is valuable.
And when Bitcoin came around, it showed us that… like it really brought that into focus simply by being like the second thing that you could compare to it. And what it showed is that this idea of consensus. And that consensus, of course, emanates from communities of people looking at the same thing is just an incredibly valuable thing, right, because it creates the possibility of currency or, you know, or an asset or an asset supply. And so when you go from, you know, fungible assets to non fungible assets.
Very counter-intuitively, that thesis is actually being played out in a much more dramatic way. Here’s what I mean. The way that an NFT aggregates consensus and community is just dramatically a more powerful mechanism than the way that a cryptocurrency aggregates consensus and community.
And there’s something really human about that. There’s something like really human about taking a picture of a cute cat, making it go viral, but that like silly activity aggregates. I think like measurably more consensus and community than than the other thing.
And the way that I thought experiment with this the other day was I said like. Basically, if you think about it, like crypto punks. Or whatever, you know, iconic NFT series will probably survive the complete destruction of its base layer.
Like if Ethereum starts to lose market share. Like, I don’t think crypto punks will lose value, I think. I think the community around crypto punks will move it somewhere else.
It’s a really interesting point, I mean, is it just because the hurdles and the market potential is potentially larger, like it’s just it’s just so much easier to understand a crypto punk than it is to understand a Ethereum’s move to proof of stake and the future of sharding and optimism, Zk rollups.
Like is it just because the target market is larger and you have an easier path to social adoption? Or is it because I mean, I think we could argue that obviously Ethereum and Bitcoin obviously have more economic protection, I think.
But yeah. How do you kind of view that hurdle for social adoption? Because it’s obviously way easier, but I don’t know if it’s as high, but I don’t think Punks have the same level of potential as Ethereum, but to your point, it’s way easier for people to understand it.
Yeah, so I think I think that…Exactly. So I think like… I’m not saying that Punks would compete with Ethereum or something like that. I’m just saying that that the social consensus around Punks probably has more people who understand your point, who understand what punks are than like think about the number of people who like understand what punks are and can appreciate punks and the number of people who can judge whether Ethereum 2, is a scalable infrastructure for a block chain.
It’s kind of wild, though, because to your point, like I totally agree. But punks aren’t, you know, well fractionalized now. I mean, they’re being fractionalized, but there’s still only ten thousand. And to see the amount of people that understand it beyond that number is pretty crazy at this point, because not everyone around the world has economic buy-In. But there is, you know, pretty strong social buying around the world, which is kind of interesting that they’re disconnected economically, but they understand it socially.
So I wanted to answer kind of your question before, and maybe that’s a good segue when segue into how to judge communities. Right, but the idea, I think, is that we’re in this evolutionary process and block chain where we’re constantly experimenting.
And every once in a while, like we hit this like zero to one moment or the step change like this, like. Right. And then and then we’re like on this new–
We’re not sleeping on it.
Exactly. Yeah. And I’ll tell you a couple of the moments that historically have. So Bitcoin came along, obviously, that was like the first one. But then as soon as Bitcoin came along, you had Litecoin and Dogecoin and you had, you know, thousand almost two thousand replicas of the same thing.
Right. And then blup like Ethereum came along and were like, oh, okay, we’re doing smart contracts now. We just leveled up. Right. And then suddenly everyone started rolling, you know, dapps and competing smart contract platforms and platforms that work faster and had more security or less security or scalability interoperability, right? And so then we enter there. Like in the same sense, the idea of digital assets as things that are almost like quasi conscious that like go out there as memes. Right. As communities and try to aggregate attention.
Cryptocurrency proved to be a good way of aggregating attention, but now blup like zero to one. And now NFTs are a probably better way of aggregating attention. And I think that’s exactly right. I think more people like I’m saying this in retrospect and it’s obvious in retrospect, but in the summer of 2020 right, everyone was looking at the inflection of DeFi. It was saying, there we go, guys, like we’re about to hit like mainstream adoption. Here it is. You know, everything is going up. We’re now two billion dollars in DeFi. And by the way, we’re over like a hundred billion dollars in DeFi now.
Bitcoin. Yeah, it was like a year ago. Right. And so like but the reality is that most people out there in the world, they’re not tech finance nerds like us. They don’t want to trade options all day or decentralized derivatives or like provide liquidity, even though they should, they should absolutely do this. But I’m just saying that it speaks much more to them, like it’s much more understandable to say, oh, you know, like a crypto punk is a status symbol for you know, this is a piece of artwork in a limited edition that you can own in a digital wallet.
I think that experience in retrospect has probably converted vastly more users than any of the other things. And that’s why. Kind of surprisingly early mainstream adoption of block chain technology is literally proceeding on the like, on the back of digital art, digital collectibles that
You bring up a really interesting point, and I totally agree, like I don’t think traditional like the traditional global user base cares about which project is launching on which L2 and, you know, stuff like that. It’s just too hard.
But to your earlier point, you started the pod with kind of this idea of the financialization of NFT. And it’s kind of funny because DeFi is getting so complex and NFTs are so simple. But do you think that in your NFT financialization thesis that eventually we’re going to hit that kind of same obstacle where, you know, the DeFi use cases get so complex? Or I guess how do you think about NFTs playing out? Because right now it’s very simple. But, you know, a couple of months, a couple of years from now, people could be doing some very complex stuff with them and we might kind of get back to that same point.
I think the difference is that the people who are innovating in the NFT space are more of the flavor of the kind of people that are in the NFT space, and so that’s more heavily weighted toward creators, artists, people who are in tune with culture. And it’s almost funny because within, you know, crypto native audiences, it’s almost like the DeFi people have become the Wall Street suit boomers and the NTC people are kind of running around like innovating right now, you know, which is not to detract from anything.
Oh, it’s funny. It’s true. We’re becoming the banks again. And now everyone else is having fun.
The only point I’m making is that there’s definitely a cultural, you know, distance between like the core of the NFT community and the core DeFi community. And I think that actually, if you look at the history here, it goes all the way back to like new media art.
I remember like new media. It was all the rage in New York City in like 2013. But it’s actually coming even earlier from people. You know, when the Internet came along in like the late 90s for artists. Right. They realized they could use like these digital media and these weird artistic people who, you know, have always tried to combine art and technology are the people who were basically the first non tech non finance audience of block chain technology.
And they’re the people who like started trading NFTs early and supported SuperRare and, you know, kind of helped to bring this, you know, area into critical mass, which only in February of 2021 has really like spilled out into the mainstream and was on Saturday Night Live.
So there’s such a strong community aspect to this, like that stretches back 30 years probably. And maybe that brings us back to your point, like how do we find communities? So I think what NounsDAO is doing speaks very interestingly to this idea of community building. And your point about complexity. So what NounsDAO is, is a version of Crypto Punks. But now it’s putting in a distribution mechanism. It’s kind of a much more complex one than Crypto Punks.
CryptoPunks we’re just kind of sold on the website one time. And then what nouns DAO is doing is they auction off… They generate every day a new noun, a noun as a special generative and if t character that they’ve created. And every day there is an auction. And once that auction is won by someone, the Ether that is won is placed into a DAO and the holder of the noun gets a vote in the down. That goes on until infinity.
I’m on the website right now, it’s Noun 14, current bid is 70, 80. That’s wild. And the treasury has, you know, over 1500 ETH in it that’s pretty wild. I’ve never even heard of this until you mentioned it.
o within the first 10 Nouns, two of them. No, excuse me. Three of them are owned by DAOs. And starting with noun 11, there is a party DAO everyday, if you don’t know what party DAO is, it’s kind of a social crowdfunding platform which is compatible with these noun auctions, and you can go and try to bid every day as part of a crowd. And this is what I was saying before. You know, we were watching in Noun 11. We were watching a whale battle, you know, a decentralized crowdfunding in real time for winning this auction.
So the DAO won and the DAO folks won Noun number 11. They lost Noun number 12 and they lost Noun number 13. So I think they’re feeling like they should… they need to get out more and they need to like build a community a little bit more.
So what makes a great community? It’s projects that can aggregate community and social capital quickly. And what nouns DAO is specifically designed to do is to aggregate that attention, aggregate that social capital, aggregate that community around it. And that’s very differentiating from other just like, you know, Avatar series that are pretty static that are out there.
The crazy part about NounsDAO, though, is I mean, they’re going to auction off one forever. I mean, is there I guess that comes into question like I meant to talk about this a little bit earlier, but the whole scarcity versus one of one NFT idea is definitely an interesting one, especially with fractionalization. Do you… I mean, just bring it back to Noun. Do you think that people might get a little weirded out if they’re buying now? No. You know, one million. Well, I mean, it’s going to take a long time to get there. But, you know, it’ll take years to hit the punks level.
So it’s a– it’s a super interesting, crypto economics and it’s very illusive. Right. So. So a lot of people and myself included, when I saw this, I was like, wait a minute. So, you know, so the first guy paid like 600 Ether, you know, to get Noun number one. But then like the tenth guy is going to pay like one Ether or something or or the hundredth guy is going to pay one Ether. Or the thousandth guy is going to pay like five cents or something. But they get one vote just like the first guy.
So doesn’t that mean that the first people are being diluted every day as people come in? And in terms of on chain governance, that is absolutely true. They are being diluted now in terms of overall government governance. That is not true, because the first 10 nouns will aggregate vastly more social capital than the people who came in later. So, right away, as the first 10 nouns were released, you start to get like fan art around each noun. There’s like all these. And if the creators who put out an NFTs that sort of like, you know, they’re just kind of derivative works that are tributes are homages to these nouns. And so the first 10 nouns become like way more iconic than the thousands now. And the people who hold the first 10 nouns, by definition, have been there three years longer or so. Right, than the thousandth guy.
And so they’re much more, you know, long standing members. They’re they’re they’re much more parity. And, you know, and. And so what I actually think happens is that despite the fact that they’re diluted on chain, they have way more influence in that community.
I mean, the funny part is it would take years to hit the level of… actual nouns that Punks have because, you know, 365 a year, it would take 30 years or maybe less. But to your point, if push comes to shove, what you’re saying is that even though, you know, users 10 and beyond technically hold control, the social capital and control of the first 10 probably end up driving the decisions. What would be the correlation there to Punks? Would that be like the zombie punks kind of, you know, showing the way on what people want to do or what would be the comparison?
I mean, there isn’t one that is technically different, but–
Zombie punks are just kind of like members of the series with rare features. And so in that sense, yes, it’s like, you know, the first nouns are sort of the rarest in some sense, because they were the lowest number. And you kind of see the same with crypto kitties, right? Like crypto kitties. And maybe this is also to the point of like does, you know, does scarcity matter? But crypto kitties, they have millions and millions of kitties, and that’s because people can kind of freely breed them as the game goes along.
But there’s this like hundred crypto kitties that are called founder cats. And those are the ones numbered, you know, like one through a hundred. So they’re rare in that sense, even though the supply isn’t rare.
And, you know, how do you take something like NounDAO that is a technical innovation, so one noun each day money goes to the DAO, noun control you know, the votes in the DAO, I’m new to it so might be missing some of that out.
But how do you go from a technical innovation like that to a real community? Like what do you think is like the longevity of nouns? Is it just playing into this whole financialization of NFTs or like does there have to be something on the roadmap that gets people to buy in? Or it seems like there’s a distinction here between like the coolness and clout and technical innovation of NFT launch and then like its longevity, which is another question.
Yeah, well, so one one thing we didn’t mention about the Nouns project is that the capital that goes into the DAO is sort of meant to be governed by the noun holders. And the really like the purpose of it is to strengthen the brand, strengthen the community, you know, allocate capital to things that, you know, sort of aligns the community and gets it out there more. And so that happened pretty naturally in some of these avatar series, like especially the earliest ones, like crypto punks. And there were you know, there were people early on who were working very hard or for the distribution of these assets.
What’s super interesting is that in this context, it’s just a natural mechanism. It’s just like whoever has affinity to this. And as you can see, the auction prices have been quite high. Right. So it’s like that. That is a filter to who can enter this DAO right now. It’s like you have to like really care about this project, about this idea to the tune of like hundreds of thousands of dollars in order, you know, realistically probably like to enter the DAO. So I’m not sure if I answered your question, but like–
No, you definitely answered the question from the sense of, you know, the buy in and the initial hype and and getting people in. I’m just wondering, though, how much of a future–
You mean like down the road?
Yeah. Yeah, exactly.
Yeah. So… so again, I think the future is proportional to the social capital that you can build. And what’s happening right now is that NounsDAO is building social capital more quickly. Much more quickly than series in the past have done that organically. Yeah, and so I think it’s absolutely right that it’s an open market. Right. So these are these auctions, they’re going to sort of have this very high barrier to entry and then maybe down the road, like they’ll be kind of a hype cycle and the auction prices will spike. And then people, you know, overheat and then the auction prices will go down and they’ll get cheap again. And suddenly someone will come around and say, hey, you know what, this is a great idea.
But a lot of community members maybe and this is pretty cheap, maybe we should buy it. So what I’m expecting from the noun’s auction price chart, if you will, is that that pressure should resemble the price chart of any other digital asset. And those usually look like viral measurements, right. It’s like they hype up, they kind of crash. They had a trough, they brew, and then they, you know, they experience highs again.
Not to get off track, but how much of these initial drops do you think is just driven by, you know, very well funded whales, just trying to buy the first of everything versus, say, you know, community grassroots interest? Because to your point, like, you know, most people don’t have 70, 80 to bid for Noun Number 14, how much of a do you think is a give and take of whales versus retail grassroots movement?
I think there’s a lot of whales. And I think the market has done well and and, you know, there are a bunch of people with that status, and I definitely think people with that status drive some of the exuberance, and they certainly drive the purchases of this kind of pricing. Now, I know where you’re going with this, Tom. You’re going to say you’re going to say whales are bad because whales kind of skew the market. And what we’re actually seeing in NounsDAO, in my opinion, is a miraculous and wondrous demonstration of, again, crypto economic mechanisms, overpowering whales.
So if you look at I think it was auction of noun number 13. What happened was that, that was an auction where the two main kind of entities that were battling in it was like one whale and a party DAO. And as I said, the whale won. And after they won, it turned out that I think they reached out to me. It turned out that I know who that whale is. And what that whale told me was that he was watching the partyDAO real time crowdfunding. And so he knew the maximum capital that the DAO could sort of pit against him in the auction. And he said that he himself had a kind of top price that he was willing to pay. Mm hmm. And while, you know, what he said was that if the DAO started to crowd fund more than what he was willing to pay, his strategy would actually flip and he would join the DAO because he wanted exposure to this asset.
Wow. That’s pretty cool.
And so what this game theory and there’s some nuance there around like joining the DAO late, joining the DAO earlier… we can talk about. But the overall takeaway is that this game theory is creating one of the first mechanisms. Which actually dissipates the power of whales. Because if that, DAO gets like enough, you know, people around it, they’ll actually flip the game theory. Some whales always want to join them–
That’s, that’s super cool. That’s actually really interesting. Yeah, I was going to say like it would be cool if when you bid for a noun, your marginal Eth contribution, so the extra 1-2Eth gave you that percentage of the total noun. But basically what you’re saying with the PartyDAO is that people can just own a piece of it. Can you go a bit more into depth on PartyDAO? I guess that kind of movements tie in with grassroots ownership of NFTs?
Yes. So so it’s very interesting because… so PartyDAO is kind of the crowdfunding platform and it’s resting on this idea of Fractionalization. PartyDAO connects to auction mechanisms. I’m not sure exactly which ones they’re connected to. I know they’re connected to Nouns– probably a few others. And then they create– you sort of you come in there, you lock in some ether, then the swarm is able to bid whatever relevant auction is going on and anyone in the swarm can trigger a bid at any moment. And then once the auction is over and if the DAO wins, then basically the asset is fractionalized and the folks who entered ether into – [Tom shares screen] Yeah, there we go. So maybe you could take a look at Noun.
Yeah, you could look at 14, for example. This is the one that’s happening today.
It might be closed out.
OK, it’s not clicking. OK. Well, in case it gets fractionalized. Now what’s really interesting is that, when you fractionalize assets, there’s a lot of questions around like what does that governance look like? And how do you like un-fractionalize something once you’ve fractionalized it? And what I think we’re about to see is this very interesting phenomenon where these fractionalized token supplies will also turn into DAOs. They’ll gain the power of like issuing new shares and they’ll gain the power of like allocating capital to further the interests of that asset. And then the same idea that’s happening across Nouns might happen across all iconic assets.
That’s that’s pretty cool, I mean. Yeah, I mean, I’m trying to figure this out, so like for something like PartyDAO, to go back to this – and for those who could see my screen we’re looking at it – what exactly does this mean?
Like the bidding pool is only 16,000. But you can take the lead with an additional 77Eth? Does that mean you have to… you obviously don’t contribute that amount of Eth. You just contribute the marginal amount?
Sorry what do you mean by 16,000?
It says the bidding pool is at 16,000 for now and 14 on PartyDAO. Like how does PartyDAO work? You just contribute just a small amount of Eth?
Oh, so, yes. So anyone can come along. Like you and I can come along and we can contribute like 0.10Eth. The point is that that pool of capital needs to be bigger than what we see on screen as 77.14 if we want to outbid. And so I think what’s happening right now, if you open up the partybid.app for Noun 14 you’ll see that we’ve only crowdfunded $16,000, which is much less than what we’d need to win this auction.
But the thing about these auctions, Tom, is most bids happen in the last five minutes.
Yeah. No, totally. And you mentioned governance a bit. So how does governance within something like PartyDAO work? So the bidding pool’s at 16,000 give or take. We need an additional 77Eth. So if I come in here and I’m a whale and I put in the majority of the Eth for the PartyDAO, do I control that much on-chain? How does that all work?
So I don’t have too much in-depth experience with actual governance on PartyDAO just yet, I’m still looking into it. I can tell you from my research, you actually don’t even really need 50 percent of the tokens to be a dictator in such a system, in a weighted voting system, which all token voting systems are. So I’m sure there are definitely some governance kinks and edge cases that can be ironed out there. But the high level principle is… so if a thousand people bid on Noun 14 through the DAO and then they win, they will have governance through PartyDAO and then PartyDAO will have governance in NounDAO through the noun. And so they have, you know, they have governance kind of going to the underlying capital.
That’s super cool, and I mean, it’s a good segway into fractionalization here, and there’s a lot of topics here. I mean, one of the first ones I wanted to talk to you about was just the idea of owning a piece of a super rare asset. Let’s take a Zombie Punk, for example. So, you know, there’s only a couple of them or I’m not sure how many. But, you know, owning one one thousandth or one one millionth of that Punk versus owning Punk #10000, I mean, I wanted to get your takes on the scarcity versus open ended nature. And then like, if you see people preferring ownership in their rare NFTs versus just the longtail?
Yeah, so that’s a great question, and people often ask like, yeah, does scarcity really matter. And I think I think no. And the way that – here’s what I mean by that, right, so if we run the thought experiment, like would Crypto Punks be as successful if we only issued five Punks?
The answer is like we probably would have failed, right. Probably not, and Crypto Punks arguably wouldn’t have been as successful if we issued like 100 million Punks, right? So we see very clearly that there are optima. It’s not just like oh, you need to do one-of-ones or you need like a certain number. I think relative – like the number almost also varies with like the average price that the market values NFTs at. And the market is bigger or smaller, so it varies with time.
It’s like a universal constant, like changes over time or something. Right. And like so I don’t think that just like in an absolute sense, scarcity matters. It has to be contextualized and it has to be optimized for the audience. So if you’re a creator. And your thing is like really unique works of art. Right. Like you might want to do one of one’s own. But if you are a an Avatar series, then by definition you’re doing like 10000 or something, and that number could be different depending on your audience or maybe three years from now, that that optimal number is like three thousand, that 10000. And so but the major takeaway from the scarcity discussion is that scarcity is not the factor that creates value. Social capital is the factor and community is the community.
Consensus is the factor that creates value, because those things so social capital determines like how high something can trade. And social and community consensus determines basically a kind of floor where there is a bunch of people that believe long term in the projects so much they’re willing to buy it up when it gets cheap. And those two things work together, right, to support the price and to create liquidity. And that’s what actually matters.
Jake, just playing devil’s advocate to your example, which I loved on the you know, how much of an NFT you should drop – one or a million. What do you think the Punks drop would have been like if there were only one but you could buy fractions from the get go? Do you think it would have been, you know, as stellar of a release or… it’s just kind of weird to think about because, to your point, you don’t get the community of having, you know, so many different Punks and comparing traits and stuff like that. But on the other side, you have one community that helps drive the vision of, I guess, one NFT.
Yeah. So you bring up a very interesting point like broadly that… that you can drive community consensus either through a number of sort of individual NFTs or through a fractionalization of a smaller number of NFTs, and actually that in and of itself, again, might not matter as much because you can support a 10,000 person community with either architecture. But I think in the case of Punks, to answer your question, that would have been a devastating blow to Punks because you lose like the – like Punks are cool art, they’re very expressive in a small number of pixels, like there’s definitely some, you know, community and collector interest value in having different features where some are more scarce than others. So you would have lost that if you could just fractionalized one thing. But I think maybe like Punks is the wrong example. Maybe if you take, I don’t know, you know, just some really, really iconic work of art.
The Mona Lisa goes on-chain, right? And suddenly you fractionalized that, not into 10,000 shards, but, you know, one shard for every person on earth. Seven billion shards. And everyone on earth is entitled to one. Right. Like you can see that… you can see that potentially that being like a more, you know, impactful example.
I’d be crazy to think about. Yeah, it’d be a lot of gas fees, but it’s an interesting example. The other question I have for you on that line of thinking is how do you view fractionalization in the terms of – and I mean we’ll get to liquidity – but how do you view that in community building in the sense that, you know, take Gmoney, for example, he’s a partner of ours at Delphi. He’s built an incredible brand around his ape, his Punk. But now you can have, you know, the Coinfund ape and everyone at Coinfund can own a piece of it and use its likeness and build a community around it. How do you see that playing out? Do you think we’ll have, you know, an ape for a project or a punk that’s, you know, for a certain community? Because basically you can apply them anywhere as long as I guess, your community doesn’t fracture.
I think I think different groups and communities and entities will have different cultural assets. So again, we see, you know, a lot of the NFTs we see out there today are influenced by, you know, Internet culture, by digital creators, by sort of the movement which those creators are in art wise, as is a product of our time. Right. But I could see us again I could see companies taking some kind of historical asset, cultural asset that they own. I’m thinking like the Apple logo, OK? Right. Like how many people know that logo? But imagine if – they’ll never do it – but imagine if Apple tokenized that and allowed everyone to have a piece. I mean, I’d definitely buy that. It’s just… the level of how iconic and cultural that logo is, it’s hard to understate. So I do think there’s all these possibilities, it’s just a matter of adoption and what assets are you kind of putting forward to tokenize?
How iconic are they? How useful are they for your purpose?
I like that. And thinking about fractionalization brings up the concept of, you know, millions, billions of owners. I saw a tweet by Kyle Samani. I’m going to botch what he said because I don’t have it up in front of me. But he kind of brought up the point of like, how do you support, you know, the millionth NFT creator and their work of art? And I guess there’s, you know, comparisons here to the traditional world where, you know, the long tail of or the end of the long tail of content creators don’t really make much money.
But how do you view like the sustainability for the income streams of individual creators at the longtail? Because not everyone’s ACSI, not everybody is Ember’s or not everybody is staff or labs or larger labs is, you know, take your pick. But how do you kind of view the long tail and the sustainability aspect for the individual creators?
Well, I think these things tend to look like power laws. Right. So let’s just take a step back. So think about it like celebrities. You know, I don’t know, 35 years ago. So like Michael Jackson thirty five years ago is a celebrity who is known on every continent of this planet. Everybody knows him like it doesn’t matter if you’re in sub-Saharan Africa or Europe or America. And then you have like a bunch of like movie stars and then you have… the point is that power like drops off like really sharply.
Like there’s a few mega celebrities that have gotten that status through, you know, putting out iconic art and music and content and whatever it is that they do. And then like most people are in the long tail and unable to be monetized. And then what happens is that YouTube comes along and takes that power law and just makes it less steep. It’s just now instead of having like one celebrity that’s known everywhere, you have millions of local. And when I say local, I don’t mean physically local. I mean like glocal. I mean like Internet local, like influencers. Click away. Yeah. Who each have a smaller, vastly smaller audience than Michael Jackson, but are able to monetize that audience in a way that is sustainable for their business.
And so that power law has smoothed out, in other words. And so if you believe that, you know, there’s this overall process that is smoothing out power laws, what is that process? Well, in the case of Michael Jackson and celebrities, it’s like the speed of information. It’s like I don’t need a giant like recording label, right, to promote me to become a music celebrity. I could just go on YouTube. And the cost of going on YouTube is low. The barrier to entry is low. And I could be a good marketer and aggregate enough of an audience.
What does that mean? What does that power law mean in an art sense? Well, the distribution mechanism for art has been similar to the distribution mechanism of, you know, music labels or mainstream media or whatever else. So before to become.
You know, to become an artist, you had to get sort of fostered by a gallery and now you can remove that middleman and go sell your art on the global market using an NFTs. And so the process that smoothing out the artist’s power law is watching technology or like global access to not even block chain technology, just global access to digital markets, a block chain technology really supercharges that. So that’s what I think, like I think we’re not going to get everybody. Not everybody can be monetized. But we can do so much better than, you know, than we have done in the past in various areas.
You brought up a lot of good points, Jake. I want to cue in on the example of Michael Jackson. Obviously, a person who’s super famous, clearly made some mistakes. If you take a Punk like, let’s just take up a Zombie Punk again just to keep the examples easy. Let’s say there’s a community around the Zombie Punks. Let’s make it easy. There’s 10,000 shard owners. They build a community around it. They have content in movies and what have you. How do you think through, though, like the ability for that personality to stay the same or change?
Because at the end of the day, there is a community behind, say, this Punk. There are people making decisions, they might be on Discord, they might be in a DAO. It may come down to people who are louder, who are better salespeople, who want to take it in a certain direction.
How do you like, I guess, how do you envision that? Because obviously the community members want to do what’s in the best interest of the Punks brand and thus its value. But, and a punk can’t get divorced or overdose or something like a celebrity can, but they can clearly make mistakes. They can tweet something stupid. They can make a bad decision. They could fracture their community. It just, it’s really hard for me to think through what a Punk looks like that’s backed by so many people. What do you think? I know it’s kind of a weird question.
Yeah, look this is one of those things that we’re sort of inventing anew, right, as we go along. And, you know, where my mind goes is… are you familiar with Lil Miquela?
Oh, yeah. Yep.
So there is this trend started by Lil Miquela and the studio behind it, which is essentially “can we create virtual influencers?” So there’s a studio, they 3D render this young woman character called Miquela. She has an Instagram account. She’s one of the most followed Instagram accounts. And people connect with this like digital character, you know, probably just as much as they connect with other influencers.
In that case, the behavior of little Miquela is determined by like a small group of people who are her, you know, progenitors, and what you’re describing is a sort of like democratization of that or decentralization of that, in other words, who will decide what this character will do? Well, you know, it’s a DAO of people that will vote. And as a collective intelligence, you’re right. Like I think the attitudes will evolve, I think these virtual characters will make mistakes or fall in and out of favor.
And actually, in many ways, what Brud, which is the studio behind the Miquela, they actually are heading in that direction. They have some decentralization plans, as far as I understand, and voting plans so we’ll actually be able to see that play out, you know, in character driven ways. But I don’t know what’s going to happen, Tom. I think like… let’s see a virtual character get canceled or something. And that will be an interesting kind of clash of culture.
It’s it’s kind of funny, though. I mean, the feedback loop is quick. Like if you cancel a celebrity, they still have money in the bank. If you cancel that Zombie Punk like liquidity for its shards and the price per shard will just fall off a cliff.
Like the feedback loop is a lot faster, I guess, to actions. But I’m not totally sure what that looks like yet. Yeah, that’s an interesting one.
So let’s go into NFT liquidity a bit, mechanisms. We mentioned fractionalization a few times. I’m familiar with Fractional. I know there’s obviously clearly a bunch of others, NFTX, Uniqly, et cetera. How are you thinking through NFT liquidity at a high level? I mean, obviously we talked about, you know, very rare Punks that don’t really trade that often. But then there’s things like Upshot where, you know, disclosure, we invested in Fractional and Upshot. But, you know, Upshot you can pay a group of people to crowdsource what they think is rare or not rare and back into a price.
So at a high level, how are you thinking about liquidity for NFTs?
Yup. Yup. So if we trace the history back to again, back to fungibles, it’s not that long ago, I would say two and a half years ago, Tom, if a team released a fungible token, the expectation of liquidity on that token would be like, oh, we’ll get liquidity a year from now and we won’t have to pay a million dollars to an Asian exchange depending on, you know, the situation. So that was like a reasonable expectation that teams launching tokens had. By the summer of 2020, which is what now about a year ago, the time to liquidity for a token went to zero, like using a liquidity mining mechanism. You know, Balancer was one of the first projects that did it. Ampleforth, you know, there’s many, many folks involved, Yearn. But what was clear is that, you know, for the space, this layout of like I have to wait a year and pay a million dollars was like not adequate.
And they’re like, “can we use the core value propositions of block chain technology to solve this problem? Can we create a mechanism, in other words, that incentivizes liquidity?” And that mechanism was liquidity mining program. It’s basically taking like DEX shares, right, staking them and then earning the token, that’s a distribution mechanism and a liquidity mechanism.
By the way, it’s dependent on this other precursor technology, which is the DEX. When people look at NFTs, they, again, they draw this traditional analogy to general goods or digital goods – like traditional digital goods are just traditional goods, and when you have unique non-fungible goods, the way that you get liquidity for them is you put them on a marketplace, you find a buyer, you transact. And of course, that’s always like slow going, it’s hard to find a buyer, NFTs a year ago were a very nascent space with not many buyers.
And so the consensus view was NFTs are not liquid. And NFTs might never be liquid, and some people even took this even further and said NFTs should not be liquid and we should work against like people trying to create liquidity for that. Right. And what was fairly straightforwardly obvious to me, having watched liquidity mining happen, is that the difference between a liquid and illiquid asset class is just what is the, you know, crypto economic mechanism that makes them liquid?
You know, the design space of crypto economic mechanisms is so rich. What is the mechanism that makes them liquid? And I started thinking about that and it was probably like late 19 or early 20. Right. And I even have a paper from like April of 20 or something about how to do this. So the answer is that the NFT liquidity problem boils down to the NFT pricing problem. If you can price NFTs, then you can create a smart contract that automatically gives you like exactly the right number of tokens that your NFTs are worth.
And there’s another aspect, and I wrote a whole blog post on this called Appraisal Games and the NFT Liquidity Problem on the Coinfund blog, a blog on Coinfund.io.. But it boils down that there’s a certain measurement here of how capital efficient are we. So if you take the marketplace approach and you want to value something that is worth a million dollars at a million dollars, then someone has to transact a million dollars for that valuation to occur. If you take the auction approach and the marketplace and the auction approach are the predominant approaches that have existed for the last four years, you take the auction approach, the capital efficiency of an auction, it potentially is even worse than the capital efficiency of a sale, because many people have to lock in more capital, right, to eventually get a valuation of a million dollars.
And so the first capital efficient liquidity mechanism or pricing mechanism that came about is fractionalization. It says, “you take this thing, you fractionalized into a bunch of pieces. Now someone only needs to transact five dollars.” And then it has an implied valuation. And so the capital efficiency light goes up. Now, the thing about fractionalization is that it is a pretty heavy machinery. So for every fractionalization, you have to create a token supply. For every token supply, you have to create a liquidity pool or multiple liquidity pools. For every liquidity pool, you have to find market makers and so on and so forth. So I think fractionalization is a zero to one capital efficient pricing mechanism for NFTs. But I also think that it applies the best to things that are really big, really iconic.
It’s that Zombie Crypto Punk and it’s now number one. And, you know, things that are like really expensive. When you think about how many NFTs are out there and if you think about like in the future, you’re going to have a 20 dollar music album as an NFT and a five dollar ticket to something, right? It’s hard to imagine creating trillions of tokens supplies. It’s just like you could do it, but it’s just not efficient. So what’s the efficient way of pricing those things? And that’s why I think Upshot is so interesting, because what Upshot allows you to do is it creates– Upshot is a you know, underneath it’s a protocol that incentivizes people to answer questions honestly. And this algorithm can be applied to subjectively valued assets and also objectively valued assets. You could say, you know, you can ask this algorithm like, “hey, Tom, you know, in Williamsburg, Brooklyn, like is that restaurant good?
And that’s not an objective question, right, but people who live in Williamsburg know that Mesa Coyoacan is good. And so you can find local or “glocal” again, you know, you can find local consensus around answers and you can report that consensus and the same exact thing can be done for NFT pricing.
If we have a Pak piece we have a whole set of humans who are privy to the history of how this piece sold in the past. They’re privy to the social capital that Pak has. They might be able to look up plans that he has for doing something in the future. They have internal feelings as collectors about what this might be worth. And altogether, they can report an on the ground local consensus around approximately how much this thing is worth. Like, I know that, you know, Punk number one is going to be worth more than some other punk in the collection or or I know that like an earlier piece from Pak, which was one of one, is probably going to be worth more than a later piece like the fungible, which is the, you know, the series that he did on Nifty Gateway later.
And so Upshot is able to report what amounts to pricing feeds of social consensus around pricing of these assets. And once you have those pricing feeds, then again, you don’t need a token supply necessarily to transact. Just by giving that price as a reference to buyers and sellers, you’re already increasing the probability that they will transact. And that’s not even to say that you can– there’s so much you can do with that pricing feed. Again, you can plug it into a mechanism where someone could just go to a smart contract and liquidate at that price.
Your Coinfund blog… I love it because you just pull out, the sales mechanism, the auction mechanism, fractionalization mechanism, everything you just ran through for those listening, I’ll link it in the show notes and I’m going to go back to this in a second.
But talking about Upshot, how do you get accurate prices, though, like from the globe? Right. And I guess my question is kind of a devil’s advocate question in that only the real like in the weeds, Punk people know the differences and attributes, how the market reacts and stuff like that. Like there isn’t exactly a million people out there – maybe there is, I doubt it, though – who can correctly and easily compare one Punk to another. And honestly, they may have biases. Maybe people like the Cyberkongz community more and they’re just going to raid every ape down.
How do you kind of think through getting, you know, moving beyond bias when you have something which I think is awesome by the way, incentivizing people to vote… How do you get rid of bias, though?
Yeah. Great question. So I think like… So there’s definitely many, many scenarios in the NFT world where things are much more objective than you think. Right. So like, for example, in series, there are certain traits that are objectively more rare. And by the way, this comes with a little bit of nuance. So we want to say that rare traits are more valuable. And my wife actually is a big fan of World of Women. And the most sort of like rare hair for the World of Women series is is like white and black hair. But it actually doesn’t fetch as much on the market as rainbow hair. And that’s just because like people look at rainbow hair and they think it like looks better than like this Cruella de Ville like style hair. And so it’s not actually totally obvious that something that is more rare is definitely more expensive.
But what is obvious is that a machine learning algorithm would do a fantastic job of telling the difference. So they could, like, look at the market. They could look at the traits. And then they can create an association of like, you know, how much this thing should be worth.
And there are several examples that I’ve seen of people using machine learning to create pricing. And from those examples, it works really, really well, especially for things like series, especially for things where you can, like, quantify factors. And that might even apply to art. Like, I can quantify factors about Pak, right? I could quantify his Twitter followers. I could quantify how many people hold his assets, how much they’ve sold for in the past. Right. So this idea of like automation and actually building machine learning models is the thing that will remove the human bias from people who are trying to game the system.
In the case of Upshot, the protocol itself has a really interesting property, which is, again, that it incentivizes you to answer honestly. What does that mean? Well, it means if you are answering, you know, in a way that the protocol judges that you’re being biased, you’ll be phased out, your voice will start to fade out of the price feed. And so I think that machine learning will go a very, very long way of definitely pricing objectively priced things. Could put a dent into subjectively priced things, and then the rest is like human kind of responses and ingenuity there.
I really like the meeting of the A.I. data science side and the human subjectivities side. I guess we’re getting into the nitty gritty of Upshot here. And I don’t have the answer to this. But, you know, I’d love to ask you, how do you incentivize people, though?
So you have this reputation where let’s say we have Punks, but they’re not popular yet, and you go on Upshot and you start rating them and you say, hey, man, is the future. They’re awesome. I love them. The AI says, nah, Jake, you’re dumb, man. Nobody cares about these. But six months later, Punks take off, my reputation’s already, I think, damaged. How do you – I guess just the reputation has to be over a longer period of time or how does that all work?
Yeah, this is really like in the nitty gritty of of Upshot. And, you know, I would say it would be damaged relative to that particular sort of question, but not necessarily others. Let’s not get into it. Like if you actually… like if folks want to go really deep on this, it’s quite a mathematical framework. There’s a blog post on Upshot called Peer Prediction 101. So Peer Prediction is a 20 year academic kind of discipline for being able to do this sort of mechanism. There’s a link to the papers that Upshot has used.
If you have a math degree, it’ll be really good and interesting or if you’ve studied economics. But for our purposes here, it’s suffice to say that, you know, this is an experiment we think is a very interesting protocol to put into production, and we’ll see sort of how far we can get with it.
No I like that. And just going back to your blog post on like NFT pricing, the fractionalization aspect always caught me as very interesting, because you can obviously take something that’s rare, give it up to people. They can buy it. They could buy into the community, the upside, the speculation. But the thing I thought was also really cool about it was just how these things are priced. And I know you may have a couple of bets here. And, you know, the one I know the best because we invested is Fractional and its peers.
But the thing that was interesting about it was, you know, everybody that owns a shard on Fractional sets of pro-rata reserve price. So if I owned 10 percent, I could say Punks worth a million, and that backs into an average. And then that price could be initiated by anybody, which would then start an auction. So you kind of get the fractionalization aspect and you get the auction aspect. And, you know, whoever wins the auction, they pay and people can trade in their shards for the escrowed Eth. It’s very simple.
But as much as I love the fractionalization, there are concerns here. Right? Like, you know, fractionalization gives you a cool price or a straightforward price fee because people are buying and selling these shards each day. But there’s issues here, right? Because the shards are traded on an AMM and not a hundred percent of the shards are even on the AMM. So you’re getting a price feed, to your point, on the liquidity price feed oracle side, but it could also be skewed, right? Because, you know, if you only have five percent of the shards in the AMM and somebody starts to buy it up, the price will skyrocket. So there are, I guess, still concerns here, right?
Yeah, I think so. I’m not sure I like fully followed all the mechanics there, but I think that like…. essentially, what we need to do is we need to experiment a ton with these things and we need to have an overall framework of, you know, why can this service like… like there’s this like wide gamut of NFTs, like why is this good for all NFTs or like a certain class of NFTs? I think the main criteria that really brings things out and makes the growth here exponential is this idea of capital efficiency.
So like when you lock capital into these systems, you tend to… like it’s good in some ways because, you know, you take units out of production. Right. And like maybe you raise prices in like ether or something, but what you really want is you want like people who own NFTs to have the most freedom with their capital to have the least amount of locked up, you know, kind of illiquid capital as they can and NFTs are by default liquid. So these mechanisms like I think they can have all kinds of configurations.
They can have, you know, AMM pieces and fractionalization pieces and auction pieces. And the things that I sort of listed in the article are just kind of the elements of what’s possible. But I can’t even predict what combinations of these things or new things will come along. And by the way, the other really interesting mechanism here is synthetic NFTs. So if you have price feeds say you can create an asset that tracks the price of, you know, Punk number one or whatever without actually owning it. And that’s actually really capital efficient in some sense, right?
So I think there’s going to be experiments, there’s going to be problems. We’re going to learn a lot. There’s problems today. Like when I go to NFTX, I really, really peeved by the fact that, you know, no matter what asset I deposit into, you know, the Hashmasks pool, I only ever get one Hash token. Like to me, I understand why, that’s a simple mechanism. But to me, that pricing is just totally broken. It means it incentivizes the person depositing to only deposit the lowest price asset in the collection and what they should really be getting is not floor pricing. They should just be getting pricing. Like when I deposit a Hashmask into the fund, I should get as many Hashmask tokens as the thing is worth, as determined by an oracle versus just one. And I had this whole, like, Twitter rant about this.
I was just on your Twitter now because I was looking at our podcasts and I was looking at your scarcity and NFTs, which we covered earlier. And I agree with you on the mechanisms there. I want to go back, Jake, because we’ve been discussing like the DeFi use cases, the NFT financialization aspects. I want to discuss more of, you know, not the centralized players, but like, you know, the larger traditional – I say traditional in quotes here – but the OpenSeas, the Raribles, the SuperRares… I feel like there’s so many exchanges now.
Like, how do you think through the exchange market, the differences, the user experience? Because this is where primarily the majority of the world is going to interact with NFTs I think.
Yeah, this is a great question. So as an investor, I have had so many decks across my desk the last six months that are all kind of, you know, identified that NFTs are a thing and they want to capture the value of NFTs and a strategy to capture capturing the value of NFTs is to build, you know, some infrastructure, some marketplace, and maybe have a go to market for it or or maybe have a compelling supply side funnel for it.
But these projects are all, you know, in some sense very similar in that they’re taking – they’re making a few mistakes. And the most common mistake is number one that I want to build a marketplace, because, again, I am under this traditional assumption that marketplaces are the way that we create liquidity for non-fungible goods. Number two is that they tend to build a whole stack of that marketplace. So when you meet such founders, they’ll say, you know, we’re going to build a website, we’re going to create a mechanism where people can add inventory or mint, you know, onto the platform and other people can buy it. And what we’re going to do is we’re going to facilitate the issuance of NFTs and we’re also going to facilitate the exchange of NFTs.
And so after you see 50 decks that are doing this, you realize like someone’s going to have to recognize that rail, that ability to issue and to do exchange, is a really highly commodified technology that everyone will eventually find in some standard protocol. In my analogy here is AMMs or, you know, protocols for fungible exchange. First, we had all of these centralized exchanges.
And then DEXs came along, and what you find in DEXs today is that the top, I don’t know, 95 percent of crypto native DEX volume is handled by something like nine or 10 protocols for fungible exchange, in other words, AMMs. And by the way, 60 percent or so, last I checked, was handled by Uniswap. And the same exact process will happen in non-fungible exchange as soon as people like realize that, you know, that this commodification is a natural process.
Now, the other process we’re seeing is, just like in 2017, traditional founders are coming into the space right now. And we finally have enough infrastructure, unlike in 2017, that they can go and take products to market. Like the base layers are built. You know, the exchange mechanisms are there, the liquidy mining mechanisms are there. The best practices have been furthered. Right. And understood. And what you want a team of NFT entrepreneurs to really be focusing on is actually the go to market to the mainstream user, to whoever their audience is.
And Tom, there are so many different cool audiences, right? There’s artists who want to do digital art. There’s k-pop fans. There’s people who want to buy digital autographs from Ashton Kutcher, who signed, you know, some memorabilia from one of his movies or shows. There’s Asian markets, there’s Western markets, there’s sports fans. I mean, like you can break down again the you know the collectibles space across like probably like tens and tens and tens of demographics. And for every demographic, it’s a very different problem to go to market, like to go to market for k-pop fans is a dramatically different problem than selling the NFT for a house. Right. For real estate.
And so what we want to see as investors is we want to see someone build a pretty robust NFT infrastructure. And then we want to invest in the traditional teams, or just great teams who are taking the value proposition to market.
And today you have… every team has to do everything. And so this is why I’m like super excited about what Rarible is doing with Rarible Protocol, which got launched about two weeks ago. And Rarible Protocol is that rails that someone can come along and just, you know, just use as the back end for this NFT application, not worry about having to implement ERC 721 contract or 1155 contract, not having to worry about building the auction, you know, contract or the or the exchange contract or the lazy minting facility. Right. So people don’t have to spend onchange fees or or maybe like making the decision of should I be on Ethereum or Polygon or Flow or whatever.
Like all of that is just kind of supported in the back end infrastructure. And then they can focus on going to market. And that’s how I think about it. When I when teams in the NFT space come to me, I’m like, OK, what are you doing? Are you building infrastructure? Are you building liquity technology? Are you building a marketplace? Are you someone who can get IP through the door and get them tokenized? Are you a buyside person who’s collecting NFTs? Right. So there’s there’s very few areas you can categorize into, but the ones that I think are going to be the most impactful are the ones that create this sort of picks and shovels infrastructure layer and the ones who get away from that traditional marketplace approach and really create like innovative ways of of making liquidity in the asset class.
Yeah. No, that’s a really cool comparison. I mean, it’s really interesting to think about competing for liquidity and having like Uniswap or Sushiswap versus DODO versus, you know, et cetera, versus centralized exchanges because the NFT world, you’re competing for liquidity, but you’re also competing on that experience and the different target markets. And I guess it would be lazy to think of OpenSea as being able to just serve all these different markets with different subfilters on their site, because in reality, like I use Snapchat for a totally different reason than Instagram.
And, you know, people use TikTok for a different reason than Reels. Like there’s very legit segmentation there. I guess, how do you think about it, though long term, like, you know, converging on something like an OpenSea is like the easy answer. But do you think like the differences in how these different marketplaces approach their target markets? And I’m not too familiar with Rarible’s protocol, but might be interesting to describe that a bit more like how do you think about the longevity of consolidating down to one or two winners versus maintaining this differentiation?
I think when you look at traditional marketpla– well, when you look at traditional kind of like retail marketplaces, things like Amazon, they tend to… first of all they might own their inventory, like Amazon has all these like warehouses where they actually own the inventory and can optimize it in various ways.
But the more important issue is that they create very strong network effects. And sometimes that’s based on owning inventory. And sometimes it’s based on just like traditional marketplace aggregation. What’s happening in NFT world and in the sort of decentralized marketplace world is that network effects do not work the same way.
So first of all, NFT marketplaces do not own their inventory. So if I’m a NFT creator, I can put a sell order on Opensea and I can put a sell order Rarible, and I could do that in quantum superposition at the same time.
And whichever marketplace gets me my eyeballs first and whichever one transacts first. That’s where I transact. And that’s enabled by basically like off chain technology, right? Like I can put in those orders simultaneously because they’re off chain.
The other thing is that that two sided marketplace, traditional lock in, really doesn’t work in blockchain protocols as well as it does in the traditional world. So imagine, I don’t know, traditional exchanges so NYSE, BATS, NASDAQ right. If I wanted to move just massive amounts of liquidity from one exchange to another, the network effect is very strong and the network effect is really the switching costs. Right. I used to work on wall street right.
I mean, they have infrastructure below the New York Stock Exchange, like in the server, like just the cost of switching from one exchange to another is huge. Now, when you go over to the protocol world, you have Sushiswap vampire attack Uniswap, and you extract something like a billion dollars of value overnight.
Or I can come in and move a billion dollars of value in a single Ethereum transaction using a five dollar transaction fee. So those switching costs really don’t work the same way. The same thing in an NFT marketplaces like the core functionalities of these marketplaces are just technologically the same.
It’s even less diverse than AMMs, like at least in AMMs. You have, you know, Uniswap v3. And like Balancer right, to the by-side they look largely the same, right? They’re like, OK, we swap tokens.
But to this, to the liquidity side and supply side, they look dramatically different. Right, because V3 has those range queries and then like Balancer’s, more like an automated rebalancing portfolio mechanism. Right. So at least there’s a differentiation on the supply side.
But there’s no analog to that in the NFT world. NFT infrastructure is very straightforward, it’s like we want to enable liquidity and we want to enable you to transact and to issue. And maybe in the future, we’ll help you, like, distribute the things too. And so I just don’t think that the NFT marketplace world is a winner take all world. Do you know, Tom, the official definition of winner takes all? Did you ever read it?
I don’t think so, to be honest.
But so the official definition of economics is winner take all is if you provide a service that is one percent better, you’ll take the majority of the market. Right. But it’s just like it’s impossible to provide a one percent better service than a fully commodified infrastructure.
Yeah. Yeah. It’s too competitive. Yeah.
So, you know, so the way that I think this will play out is that power law will also be less steep and there will be more players. But what I do think is that if you own an NFT issuance and exchange protocol, there’s very few folks that have put forward that strategy in the market today. But it’ll probably start to be more competitive now. But if you put forward that issuance and exchange protocol strategy, that is actually a better lock in than having a marketplace.
And the reason it’s a better lock in is because once the engineer knows how to use your framework and can enjoy the standardization of that and can enjoy that development process, can enjoy the royalty protocol, which is so important within these protocols right.
Then I think the switching costs of those things are just bigger, and being on a single issuance protocol actually does create some, you know, some lock in for assets like it’s mostly like psychological problems, but there are going to be some advantages to having all that stuff in one place.
What do you think, though, about… I mean, you mentioned targeting different communities. You know, the K-pop bands versus different artists, but like going on Superare, going on Rarible, going on Opensea. You know, it’s just such a different experience, right? Like it’s like you go there for different reasons.
They have different artists, like different collections. Do you think that lasts? Like I just don’t know the comparison to the traditional world. And I know you mentioned it’s obviously very different. And I agree. But it just feels like, you know, eventually we have to converge to something, right? Like some mass, like some UI or some UX better than others, marginally. And maybe take in that parallel I guess.
I wish I could share my screen. I’d show you a diagram that I really love or maybe you can pull it up if you want it. If you go to Rarible or and you scroll to like the middle of the page, there’s this diagram.
I’ll pull it up. Should be sharing now.
All right. See? Yeah. There we go. So if you just scroll down just a tad right there. OK, so what the middle part is, is the protocol is basically like the smart contract and the API that allows you to easily issue and exchange NFTs and might have other features like search or easy indexing of, you know, of everything in the protocol. Underneath you have this… operating a cross chain fashion, across multiple block chains that are also interoperable. But the thing I want to draw your attention to is the top portion.
So that represents that someone can essentially build an app store-like experience. So if I’m a K-pop fan, go to market, I create an app for K-pop fans. If I am an art marketplace, I create an art marketplace app.
And by the way, it doesn’t have to just be assets. It could also be like analytics. So you see, for example, Zerion is there. Zerion today pulls in NFT data from the rarible protocol and allows you to display your NFTs in your wallet.
You can imagine a Shopify for enterprise. People building Shopify like experiences right now on Solana is called… what is it called, Metaplex or something like that? Right. And it’s again, it’s not about who consolidates? It’s not about who wins the biggest audience. It’s precisely about differentiating the experiences across different audiences and just targeting them. But having a common, you know, sort of infrastructure to build on.
So just for those not watching the video, what we’re looking at is basically base layer Ethereum, Polkadot Flow. Middle layers, the Rarible protocol, the API and the smart contracts. And above it are things like Rarible and Zerion and custom marketplaces to Jake’s point. Jake, isn’t the Rarible thesis then that there will be a thousand marketplaces?
Yes, I think so. I mean, I think like, again, because marketplaces do not lock in, you know, sort of global supply, and they cannot. They cannot go to market to every market. It’s just not possible. It’s like I’ll give you like a weird example. So there’s a really interesting use case for NFTs, which is selling fonts. It’s not like selling stock photos, right.
Basically, there’s two functionalities. I, as a user, want a license for fonts. I want to pay Tom 20 dollars to use his font on my website. Or I want to be the owner of the font and enjoy the revenue stream of licenses. And so the first thing costs twenty dollars and the second thing costs the present value of all the future streams, call it 10,000 dollars.
Both of those things can be represented in NFTs. It could be very interesting if it might be a smaller market, right? But it could be a very interesting demonstration of decentralized marketplaces, if you take the way that we buy and sell fonts today and you completely disrupted by by taking font creators and bringing them directly together with the people who want to license their fonts and using a decentralized marketplace, technology and NFT technology. You know, to do so. I think you’re going to create a ton of value, I think people who create fonts will love this.
I think people who will buy fonts will get cheaper fonts, like it’s good for everybody. But how do you build it? Like it’s not a problem that someone who is a big marketplace wants to to think about. It’s too small of a niche.
But it’s something that like someone who really cares about this area, who really cares about fonns, who’s sick of those like stupid font marketplaces online. You know, that gouge you and whatever. And they just want to build this. They can come to this infrastructure on Rarible protocol and just focus on the front end experience of doing that.Get something out in a matter of weeks versus years and try it and then who knows, maybe it will 10x the font market.
It’s interesting, and just to bring it back to Rarible, I mean, what is Rarible, providing each marketplace? And then how does the success of each marketplace benefit Rarible token holders?
Absolutely. Great question. So every front end that we sort of built for this protocol becomes kind of like… yeah, well, not all of them, but a lot of them will become sort of issuers of NFTs. So if I want to create a platform for issuing, I don’t know, music and NFTs, I can build it on here.
And then the supply of music and NFTs will go into the protocol. So it’s almost like. If you are an LP in the fungible sense in an AMM, like you’re kind of creating supply and the protocol will well actually compensate front ends for doing that.
So it’s quite literally liquidity meaning of or yield farming, I should say. More accurately, it’s quite literally yield farming. But of the non fungible variety. So there are some technological incentives, it’s like easy to build, I can split my revenue stream you know, which is a nice feature to have.
Like, I can have indexing, I can have search, I can have issuance, I can have exchange. I can plug in different ways of selling NFT and transacting auctions, drops, you know, all of that as sort of encapsulated in the back end and allows the creator to focus on the front end and the user experience.
And then I also am compensated for being essentially a liquidity provider in this protocol. The protocol is open and governed by Rarible Protocol DAO. So if you’re holding you know, if you’re earning Rari token here, and then you can go and vote on how the protocol proceeds or how it forks or, you know, how it allocates capital. The Rarible DAO has so far produced insane amounts of money as rewards every week for the last year. And the big question for me as an investor is like, are we allocating this money efficiently?
Like, is it enough to just be giving it to people who transact? So I don’t know if you know this, but if you transact on Rarible, you’ll get a Rari reward every week. Now, that has been great for bootstrapping the brand, but is it more efficient to have the DAO reallocate some capital toward building a Shopify experience or some of these niche marketplaces? Right. So just like all of the other decentralized protocols. This will be openly, publicly government. But this is the first such an NFT protocol that is.
I may have missed it Jake, but so if you build a marketplace using Rarible, like a percentage of those fees will then flow back to the Rari DAO?
In principle, yeah. So you’re like if you’re creating volume, right? If you’re creating GMV on the protocol, the protocol will compensate you so that all of that is sort of in the roadmap. I’m not sure exactly what is in production today, but that’s that’s the idea.
That’s the wild part. I mean, not to like simplify it and to just to scratch the surface like it’s a pretty… I thought at first it was a pretty binary bet against Opensea, because you have one marketplace, Opensea versus, say, ten thousand Rarible.
But the funny part is on Rarible like doesn’t matter if you have 10,000 successful ones or you have Opensea V2 powered by Rarible, you kind of still win I guess. It’s just a bet on if you think there will be fragmented marketplaces versus one central marketplace, which frankly I don’t have a good answer on, but it definitely appears very interesting. Yeah.
Yeah, I mean, I think there’s some early start-ups that went out into the NFT space with a view of being in an art marketplace. But in the current context of NFTs being a very diverse set of assets, they’re now niche.
Right. So there’s like art marketplaces, but then there’s music marketplaces and then there’s other kinds of collectibles marketplaces. And so it actually would make a ton of sense if someone who was like an art marketplace actually moved over on top of this product because they would potentially save a lot of… I mean, long term, they would save a lot of back end work for themselves.
And this is certainly true for people who are coming into the market. Now, we see this in other areas of block chain like we’re investors and Biconomy and by Biconomy is essentially a SaaS where people can simplify things like moving or make a transaction.
Like moving capital across L2s, you know, things like that, or like onboarding a user and giving them that first Ether. Right. So what we’re seeing broadly in crypto is that the newer players don’t want to sit there and build that functionality from scratch. They want to pay a SaaS to not have to think about doing that and to focus on their target market. And this is exactly what we’re trying to achieve here.
That’s really cool. You know, after we hang up, I’m definitely going to compare Rarible and Superare and Opensea and dive in. But I like that they’re decentralizing and, you know, just a cursory look on their token econ, it looks like they’re using the token for curation.
How do you see that playing out? That’s a super interesting kind of attribute that I don’t think we’ve totally seen like work yet, but there haven’t really been many examples.
Yeah, so I think Rarible was one of the first venues in NFTs that had this problem of curation because there, you know, the thing that separates Rarible from, you know, like a Superare or or a Foundation is that they’re totally open.
Anyone can come in and mint anything they want. And this creates problems, right. Like as Rarible became more popular last summer. You know, a lot of people came in like wrote copyright and a lot of people would do this thing called wash trading of NFTs, which means that they were like sending them to themselves to try to game the rewards engine and Rarible really had this like internal problem of like, how do we stop this behavior? How do we curate, how do we monitor, how do we like to remove bad actors from a system that is a tough problem to have.
And they were the first such marketplace to have that problem. And so curation is a I think it’s an incredibly important aspect of what this open, decentralized protocol will do. Long term Rarible is also not the only marketplace and venue to have this problem.
Right. Like there’s many people who suffer in decentralized systems from anonymity in this way. And so these curation systems are going to be quite interesting. In fact, Rare coin from SuperRare got launched this past week right? Is a curation token.
So you see that trend continuing. And so I think in Rarible’s contexts, curation also opens up things like staking. It opens up like a new kind of yield that you can earn with Rari. It opens up some voting capabilities that maybe you didn’t have before on the platform. If you’re an involved user. This will be a way that you can really actively participate in the network.
And that’s my fault, Jake, I confused SuperRare, the one that just launched for curation and we’ve been discussing Rarible that got confused by the two.
Rari coin like it’s not launched today, but in sort of the staking… the concept of like staking the token would mean that you would like lock in Rari coin and that gives you governance and curation rights in the platform.
Got it. It kind of goes back to like using your token on a marketplace to curate NFTs I mean, we’re kind of going back to Upshot in a way, right? Or there’s some similarities here between me curating what I think is valuable and me curating… I guess my opinion on what I think is valuable on Upshot. I mean, obviously, the mechanics are totally different here and the economic interest is totally different.
Yeah, you’re not wrong. That’s right. It’s a different way of potentially pricing things or at least filtering them.
This is cool man, definitely postpartum going to dig into this and hopefully do a tweet storm or something, I’ll share with you. But just a couple other questions for you, Jake, on the topic while I have you and I know we’re going a while, but this is awesome.
One of the things that’s really important to me is longevity of where the metadata lives, the NFT storage lives. We just saw LarvaLabs this week, I think put all of their attributes on-chain on Ethereum. I’m not totally sure about the specifics.
People talk a lot about Arweave. We have these on-chain metrics versus the off-chain. What’s your take? Just on the NFT storage. And second question for you. How are people even sure what they’re buying is actually on-chain?
Yeah, that’s a great, great point. On that last point, I actually think there are some websites I wish I knew off the top, but I can look it up for you. Their websites where you can go to check what our assets are, are stored and kind of make a call as to whether you think that’s secure enough. And you’re absolutely right.
This is kind of an issue just in the sense of like good usability. Right. Like, I actually think that people make a little bit of more of a big deal of it, because what I’m actually buying when I buy NFT is the blockchain record rather than the JPEG.
But there’s also a case for storing. (Tom sends a link) Yeah, that’s right checkmynft.com. Yeah. There’s also a case for indeed checking it because there’s now some NFTs that come with like high resolution images versus low resolution images or unlockable content or things like that.
So I think what’s happening as we go through this NFT growth, at the same time, what I see is Web3 is maturing. Let me be clear what I mean when I say Web3, when I say Web3, I mean the stack of fully decentralized protocols that gives us digital services.
So this is things like computation, storage, you know, indexing like the graph, metadata like ceramic. And so I think the problem that we have today is that when we store these images, we’re going to networks that are sort of in alpha right? They’re not guaranteed to have one. Some of them do like Arweave… But like if you just stick something in IPFS, you actually don’t have strong guarantees that that thing will stick around forever.
Like if you’re the main sort of IPFS nodes that’s serving those assets. And then you go out of business, you might well take some NFTs with you. But I do think that it’s kind of a temporary problem.
I think that when networks like ceramic come out.And Arweave has been demonstrating, you’ll be able to store the assets with pretty strong guarantees about what they are. So that’s like content addressing. And how long they stick around. And so it’s quite possible that someone will owe the networks some kind of recurring fee. But that might be, you know, if you’re the owner of NFT, that might be on you or you might hire a service that does that for you on your behalf. There are some visible solutions that we can think of.
Yeah, it’s pretty cool, I guess, to think of it like the NounDAO paying forever just for storage… like that could be a key part. But then again, on Arweave you get that 200 year kind of guarantee. So that kind of makes some sense.
And like, what do you think are the attack factors there, though, for NFT, like are there any attack vectors on… I don’t know, like attacking where the metadata lives, if it’s not secure? Like I don’t think we’ve actually really seen a lot of these attacks or I’m just not really aware of them or even if they’re possible. But choosing where you store the data definitely makes a big difference on its, I guess, long term value and security.
While content addressing makes attacking the actual data like pretty hard, right. If you modify the data in some way or try to make it like invalid in some way, we’ll know immediately just on the hashing there.
But I guess I guess the other half of that is like, do you think people are more akin to buy… I mean, it’s kind of obvious, but like an NFT on Ethereum versus say a NFT on Polkadot or Solana just because of the network.
Not to go into security guarantees, which network. But do you think people just culturally, socially think that those networks are more secure because they probably are and they’d rather buy an NFT there? Or how do you think that plays into it?
Well, so let’s be very specific. So data for most NFTs is actually not stored on-chain. As you noted, the actual images are usually stored in a decentralized storage network of some sort or a centralized storage network in some cases.
So you’re more referring to the security of the base layer. You’re saying like, I think look, I think people have certain affinities to certain base layers. And like that’s going to preclude like if they like that base layer, they might transact NFTs.
But I think like today, the major factors in why people transact are just sort of situational, like most people are still on Ethereum when it comes to NFTs. It’s hard to move NFTs… It’s expensive. There’s not a lot of liquidity on other chains today. Like Solana just launched an NFT marketplace, but they have something like, you know, a few maybe like 10 million dollars of volume and sol punks right? So like the practical reality is that most people are on Ethereum today.
But I think that definitely will– Other networks will aggregate folks over time, and those folks will trust the security guarantees there. And I’m hoping also there’s a lot of interoperability between these networks. So if you bought a punk, you might be able to move it to a different network, or if you bought something on a different network you might be able to move it onto Ethereum.
Well, I was going to ask you about that. I mean, we talked a lot about the different communities for each NFTs. We didn’t really talk about the different communities per layer 1, it’s kind of weird to think about because ETH has so much creative juice and power right?
It’s just like fun and quirky. And we see a lot of buy-in. But something like Solana, like an NFT might, you know.. Solana is very financially oriented right? A lot of financial use cases there, a lot of big brain finance, Wall Street people building up things like FTX and Serum.
Like NFTs may not be an image, but they might be your Serum liquidity position or a liquidity position or something financially oriented. Like do you think that we’ll see a big dichotomy on different L1’s NFTs? I mean, on the creative side or the financial side or how do you think about that?
Yeah, it’s very clear to me that networks that are new are using NFTs as a go to market mechanism, like if you look people have built NFT products on NEAR. You know, they just launched NFT products on Solana, as I just said, there’s a few competing standards on Polkadot for like how NFT should work. So it’s clear to me that people are recognizing that NFTs are like kind of the early mainstream adoption mechanism, and they are building for that.
Whether that alone will be enough, right? To take them to hegemony in the basement remains to be seen. But I do think that most bass layers will have that functionality. I do think that when you’re talking about interoperability bridges, they do tend to support multiple kinds of assets, fungible and non fungible.
And so I think there will be a concentration of NFTs on Ethereum, but it’s also super expensive. And you need you know, you need scalability technologies to to transact in bulk. And so I do think we’ll see movement across chains.
Yeah. No, I’m totally with you. And I guess switching gears a little bit, regulation is obviously like at the forefront of everybody’s mind with the infrastructure bill and everything going on in Washington. I always get a little I guess I just don’t have a great take on regulation with NFTs like the financialization aspects.
Clearly, you start to wade into regulation matters, things like fractionalization, stuff like that. But on the other hand, you also get millions of people around the world who could potentially influence legitimate crypto laws and legitimate adoption in a way that DeFi may not have had in the past. How do you think about regulation with NFTs?
I think in the NFT space, regulation is probably a bit more straightforward than elsewhere, just because there’s more analogies to things that happened in the past. You know, this is like property versus like, I don’t know, derivatives or something like that.
So there is a view here that some of these assets could be just better understood. I’m not a lawyer, let me be clear. But, you know, my understanding is that there are some interest on the regulatory side around KYC requirements for NFT.
And I do think you see some of the platforms that have consumer go to markets, kind of speak to that by requiring KYC, don’t have much color on, you know, any fractionalization issues. I think it just kind of remains to be seen. And there’s a lot of different perspectives there, but no clarity at all. And yeah, so I think NFTs will probably be in a better position for clarity of regulation.
Yeah. No, I agree. I don’t have too much to add. I definitely agree with you. And I guess just zooming out, you know, after our conversation, just like you’ve been through more cycles in crypto than than most. I mean, you’ve been here twice as long as I’ve been much longer than I think other people have been.
And that kind of one speaks to your character. You’re here to build, which is incredible. But also, you know, you’ve seen the booms, the bust, the adoptions, the lack of adoption and stuff like that. How do you think about where we are right now in the NFT space, given there’s obviously a lot of hype, obviously out of interest, but obviously clear building. But you also have people leaping into brand new plays with absolutely no understanding of what they are like. Where do you think we are in that cycle?
Yeah. I’m an open market capitalist in that sense. Let me just say that. So again, I think we’ve talked about how NFTs are really the first sort of area of blockchain to get early mainstream adoption. So we’re there, right. I think in February that we saw critical mass. We saw NFTs on Saturday Night Live. You know, we saw brands taking a look. And I think what that has done is it kicked off a corporate R&D process that’s kicked off the interest of celebrities and brands and influencers.
And so there’s a certain product cycle there where like, you know, 12 to 18 months from February, we should probably see a lot of like more corporate strategies kind of come to market. I think what is really interesting now is… and I tweeted about this like earlier this morning, is that it really does feel like we’re about to go into kind of an NFT bull market. And this is coming on the back of this combination of like this early critical mass of adoption and attention, but also these like technologies that we’ve discussed that are really like getting people into the game and letting people transact.
Now, I want to say a few words about the speculation that you alluded to. So let’s rewind back to the ICO boom of 2017. We all kind of lived through it. We are well aware that there were good actors or bad actors. There were projects that succeeded. There were projects that made promises that didn’t succeed. Right. What is like the overall impact of the ICO boom as an overall positive or is it overall negative? And my position on that is that, that event created a ton of capital that got recycled into the space.
And moreover, it got recycled into projects that, like traditional professional investors, will probably never fund right? So like the one property of this open technology that is so involved with capital formation and moving money and moving value is that it democratizes capital in a way that funds things that we otherwise wouldn’t have and we would not be a two trillion dollar asset class today, I would argue, if we didn’t have that reinvestment from 2017. If you remember, there was like this brutal bear market…
(Chimes in) It’s not fun.
But what happened during that bear market is that we built the infrastructure that now in 2021 is allowing wonderful, experienced, amazing entrepreneurs to go to market and actually have enough tools to go to market. And so when I look at the experimentation and the exuberance and the speculation that’s happening in the NFT space, I know that some of these series are inevitably going to trade off right?
But it’s also part of that natural process where we’re experimenting and we’re seeing how far we can take some of these experiments and some of them will work and some will not work.
But what we absolutely will have as a result of this process is a reinvestment cycle into the NFT world. And that makes me, you know, as the first true vertical blockchain to go mainstream. That makes me extremely bullish on that vertical, even more bullish anyone else.
I love that. The reinvestment cycle. I mean, can’t you argue that the DeFi gains is kind of the reinvestment cycle to NFTs? Or would that be too short term?
I mean, I think that also played a role in it, right? I think the reinvestment from the 2017 boom went into design. DeFi, as we talked about right, it collapsed the time to liquidity for tokens and caused this like liquidity mining, you know, DeFi summer, we call it 2020 right.
That in turn, created a bunch of like angel investors and then people who are trying to figure out different assets to put their money in. And of course, that included NFT right? Some of the biggest sales started to happen like mid to late last year and after the DeFi summer.
So I think you’re absolutely right, Tom. What we’re seeing now is like… I just keep reading over and over on Twitter, like people being like I just made some, you know, fortuitous or intelligent investments in the NFT space, and it’s changed my life.
And so those people are much more likely to pay attention to the blockchain space, much more likely to reinvest. Punk4156, who I wouldn’t say is a run of the mill kind of person, but he is one of the founders of Nouns DAO. He tweeted the other day that he has made a two million percent return since starting his college loan in the early 2000s.
Oh, my gosh. That fixed rate sale he made *inaudible* really paid off.
Over 15 to 20 years. So I’d be willing to bet that like most of that was in crypto and a lot of that was in the NFT space. And you better believe that, you know, some of the benefit that he gets from Nouns DAO he is going to reinvest in this area. So, you know, it’s data points like that are…
I always see that, like, you know, some random guy made a million bucks on Twitter doing something in four days. And I used to get a little concerned, but then I understood… it’s a new market. We’ve talked about the exuberance. You know, we’re building something totally new and powerful. The other thing to discuss, though, is like the gains to people like that who are discovering it used to be the gains to mega funds on Wall Street that people never really heard about.
So, I mean, now, like, you’re kind of democratizing the upside in these things because, you know, it’s not some pension fund or some 20 billion dollar fund reaping all the benefits. But you have the guy you just described and guy and girl number one to ten thousand that are kind of reaping the benefits of the new cultural movement, I guess.
Yeah, absolutely, I mean, listen, I think I think it’s been an incredibly democratizing area in general. I mean, if I rewind back to 2015 when I was starting and like coming from, you know, technology like and looking at this technology, my first thought was like, can we make this a fund that a lot of people can participate in? And, of course, my dreams were quickly dashed.
It’s still hard today
It’s still hard today. But we have made enormous strides in that direction. So if you look in, if you look at what the law is doing, what Flamingo is doing, what some of these decentralized DAOs are doing.
It’s all kind of headed that way. And by the way, this is so interesting to me, like. The fact that the NFT space is creating a reason for DAOs is totally unexpected, even for me, who has been sitting here trying to figure out for months, like, OK, how did DAOs go mainstream?
Like what creates a proliferation and critical mass of DAOs? And what we’re seeing is, well, Nouns DAO plus Party DAO create a DAO everyday. Basically say, well, there’s going to be at least 365 new DAOs in the next year just from that set of projects.
And some people criticize that, by the way, and they said, you know, we’re too loose in what we’re calling a DAO, you know, and they’re not wrong. I mean, if you look at Vitalik’s definition of a DAO, it’s fairly general. We can find it, but it’s basically like an autonomous organization that still requires the hiring of people to execute some of the things that it can’t do.
I don’t really see an issue there, though. I mean, if a DAO is just where you and I and the people make decisions and we have to… I mean, if there’s if me and you just make a decision once a year, why can’t me and you be in ten DAOs on ten different Nouns.
Well, there’s this interesting philosophical disagreement that like, for example, if we come together in today’s auction, in a Party DAO right. If our Party DAO loses the auction, then in effect, this is a DAO that has existed for twenty four hours and then it dissipated.
And so, you know, but to me, that actually makes it even more of a DAO because like when I think about DAOs versus corporations I think of corporations as something that, you know, continuously wants to grow and, you know, and expand into different businesses and build value for its shareholders, and it’s just like this cancerous process that’s never satisfied with where it is.
Whereas I think of DAO as a very like precision scalpel-like instrument to perform a task that you need to perform as a swarm. And that task might be like participating in an auction for 24 hours. But, hey, you know, if it didn’t work out like that’s OK, we can shut down this company and go do something else.
That’s awesome framing. No, no, it’s great. It’s great framing. I mean, they have very specific use cases. They exist for life, and then they’re easy to shut down, easy to dissipate, whereas a corporation just funnels money into red tape and bureaucracy, which we’ve all seen. But yeah. No, I like that color.
I also just… last thought on that. Is when you work in blockchain enough and you think about capitalism and how everyone kind of associates the process of monopolization as this sort of like natural consequences of capitalism.
They’re like the reason why you have these giant big tech corporations who are trying to take over everything is because capitalism, what you kind of start to realize is that it’s actually not so much I mean, it is a little bit capitalism, but it’s mostly the operating system upon which that capitalism works. It’s because it’s really costly to start a company and it’s really costly to shut it down, that you have incentives to like grow these big corps right? And if you suddenly have a technology where you can be very efficient about that, you kind of create a very different set of incentives there.
You’re totally right. Oh, sorry, Jake.
And just the last thought on that. Because I was just listening to the podcast with Cooper Turley, where he said the other day, he said, you know, I’m a member of 87 DAOs so essentially like a machine. He’s an employee of EIGHTY-SEVEN pseudo corps right?
It’s insane to think about. I mean, on Wall Street, you couldn’t even have a Twitter. You know, you couldn’t even do a pet project or hobbies. And now you have people part of a hundred different DAOs. It’s incredible to think about, it’s kind of wild because people are being born and entering the DAO workforce without ever having a job or without ever having to clock in or wear a suit or anything. It’s kind of weird to think about, but maybe we’re just getting older.
So, Tom, tell us a little bit about what you think about this whole thing. And I mean, the NFT space and maybe DAOs as an extension.
Yeah. No, I appreciate you throwing it back. I definitely think it’s a little hype. I definitely think we’re getting a little bit where you start to question. You know, there’s obviously a lot of work being done. I mean, we’ve made a lot of public and private bets.
You know, we’ve done Fractional, we’ve done Nameless, we’ve done a bunch of others that we’ll release soon. But there’s definitely a lot of building going on. Definitely a lot of legitimate builders too. People that are not here for ICO money, people that aren’t here just to make money, but people who really love the idea of on-chain ownership and artwork and yield generating assets, like whether it be Axie land or whether it be other things.
And to your earlier points, there’s a lot of great teams building the hard things, too, like things like Upshot and synthetic NFTs and people are starting to answer the hard questions, which is awesome. So I’m pretty bullish on the space in general. I just get a little irked out when I see the 12,000th drop with the 45,000th NFT of the week. But, you know, when I see things that had incredible community generating events like the last two weeks, we saw Parallel drop trading cards.
And I mean, the response over Twitter was incredible. I mean, people are out there killing themselves to complete decks. And I mean, you know, it’s insane to watch, but like that stuff it is really nice to see. And I mean, that’s different than like when Gods Unchained launched because you could play Gods Unchained and right now, I can’t play Parallel. But if people are more interested in Parallel, probably because of speculation. But no, I’m definitely very bullish, but I do think it’s going to be a long road.
I think we have to answer questions like, you know, storage, maybe a bit more. We got to add the financialization aspects a bit more. But I love seeing these teams. And like you, I just love getting a new deck and reading through the stories and jumping down and investing because it’s fun, it’s exciting and it kind of feels like early DeFi, to your earlier point.
Yeah, and that’s fair and listen, this is all cyclical, right? So everyone gets super excited about something. They tend to go overboard and there’s no shortage of capital in crypto, both from traditional VCs and angels and some of these like even anons or whales that fund things around the space.
So, you know, so you’re bound to have these cycles. I’m happy we’re in an up cycle versus a down cycle. I much like the sine curve that we’ve had since the beginning of ‘20 to now verses like what we had from ‘18 to ‘20. Yeah. So I’m having fun.
The founder potential is different, though, like when I meet founders, like to your point, you saw like 50 marketplace decks. And I agree. But the founders on the NFT side are like, definitely– I mean, it’s a product of the space that they’re in, like the NFT space.
But they are really like creatively driven, very passionate people. Like the DeFi founders are awesome, don’t get me wrong. But a lot of them are very like mathematical goal oriented. Here’s our checklist. But the NFT founders are very viscerally like, we want this on-chain like Jimmy from Nameless, great guy. Like, you know, he has that vision and that stuff is pretty powerful, too. So it definitely needs meeting with the teams, I think, versus the decks. But to your point, it’s helpful.
Nice, yeah, I am. I think that the NFT founders really nailed the social capital aspects of some of this because they’re coming from NFTs, and I sort of feel it. And we’ve seen a few like congrats on Fractional.
I thought that was an awesome way that they kind of came into the market very quickly and really brought a community together very fast and are now serving as infrastructure to things like partyDAO and innovating in that space.
It’s like absolutely awesome to see, you know, and at the same time, like I also as an investor and you probably feel this, too, like we as investors have a higher level view of the trends that founders are operating in.
And a lot of times, founders are very like heads down and into you know, they know their project really, really well. They know their competitors, they know their friends, but they’re not as often plugged into like where everything is going like eight years from now.
It’s crazy you bring that up. And I hate to be that guy like saying it, but why not? Like one of my first questions for most NFT projects are like, are your founders super well-known in the community or do they know the top five or 10 people that will use your product? Because, like the community bootstrapping side is just so difficult, like not to bring it back to Fractional again. But like Andy was super well-known, you know, within NBA Top Shot. And with the MakerDAOs it was very easy for him to kind of get the community going.
And in hindsight, it’s obviously a benefit. But not being famous, like not having community fame or buy-in on the NFT side is like a death sign. I mean, if you’re not known, it’s weird. And DeFi, you could be not known, but the NFT side it’s hard to build something without being popular.
Absolutely. And you know what? Like maybe as a final thought on how people compete in blockchain and really in the NFT space as well. The thought that there is these two kinds of sets of customers right, there is the crypto native customer who wants to use metamask and has Ether and maybe as a whale can spend a bunch of money, right? And only wants everything to be decentralized and unchanged in the form of it.
And then there’s the mainstream user who has absolutely no cultural affinity to the underlying base layer, just wants a product that works, and wants to log in with his email or Google account. Doesn’t have Ether, doesn’t have Metamask. And so we’ve seen founders speak very effectively to both audiences. So like Opensea, which frankly has something like 98% of the GMV right now in the market. Is generating that GMV on the back of crypto native Avatar series.
If you know, we looked at the metrics a little while ago. A couple of weeks ago, it was something like 28 out of the 30 top things were like Avatar series being traded. And by the way, 60% of everything is Axie.
And then, you know, and then on the other side, you have folks like NBA top shot and dapper labs who’ve taken this position like, hey, you know, we’re just going to build the mainstream user experience. And then they were able to convert a bunch of niche like basketball fans right into their product, which is a blockchain which is like unheard of. They had a like one day — which is my go to metric for NBA Topshot, they had like one day of like $38 million revenue, right?
So crazy bootstrapping the other way around.
Yeah, selling moments right? And then they can take that audience and sort of like, you know, teach them about some of the value propositions of being on the blockchain. Like you can take this moment out and use it in a game or something like that.
And the last thing to say is I don’t see that like flow prioritizing bridge building to Ethereum that much. And I think the thinking is, yeah, people will build bridges. It’s fine. But it’s you know, we’re building for a set of customers that will just use us because we have great experience. And so historically, there’s been like two audiences. It’s the people that will bridge the gap between those audiences that I think will win big. And there’s still a bunch of work to do, right?
It’s interesting they’re not prioritizing the bridges. That was always like the selling point for every other layer 1 for a while. But it’s cool to see people focused more on their own community than to bridge to existing ones kind of I guess.
And Jake, I’m sorry, last question for you, because I forgot it earlier. The royalty aspect of NFT drops is really interesting to me. You know, being able to reward a creator in perpetuity for their work, there’s a lot to go into here. But can you kind of just give your color on, you know, how powerful that is?
It is absolutely powerful. So I have so– first of all, mentioned the beginning. I run a visual art gallery called firstedition.xyz, in that art gallery. I launched a very good friend of mine who I grew up with, his name is Dan, in an art series called Priority Slaps. You could see it on the website that if you go. Dan went to RISD school of design. He’s been like a tremendously talented artist, like all his life, but he’s never really monetized through selling art.
And so we changed that dramatically by selling this series. I think it’s just really cool art. And what Dan gets from that is not just the revenue from, you know, selling the works. It’s also the lifetime royalty stream from the secondary trading of those works. And so we in many ways, it was like a total game changer for him as an art monetizing creator right.
What you see is that in the traditional world, there are laws about royalties that no one ever follows or enforces. And what you can do is you can have very strong social consensus and do this on-chain. And it’s already so culturally ingrained in the crypto art space that basically no crypto artists will even entertain, you know, some kind of mint if there isn’t like a secondary royalty stream.
Now, the problem technologically with this is that there is no global standard for royalties. Right. So if you created a marketplace, you probably like, you know, entered a royalty functionality into your smart contracts. But what that means is someone issues their NFT somewhere else and then transacts on you like, you know, those royalties aren’t transferable across different platforms. And so there actually are a couple of proposals for Ethereum wide royalty standards like EIPs. But they haven’t really taken effect yet or been accepted. I think they’re going through that process.
And this is yet another reason why having kind of a predominant infrastructure of protocol like Rarible protocol is so important because the openness of it can allow other people to plug in to the royalties and really just, you know, get that royalty mechanism adopted as as widely as possible.
The status quo that we have today is that if you’ve minted something on SuperRare, then someone has to transact on SuperRare for you to get that royalty. If you minted something on Rarible, you got to transact on Rarible to get that royalty.
There’s some proprietary agreements right now between networks like, for example, I’m an art blocks creator and the secondary royalties which occur on Opensea mostly, they travel back to me through a series of human agreements between those companies and the dirty secrets of the blockchain space, this advanced technology for distributed ledgers, is that they track those royalties on spreadsheets.
Wow. Yeah, man, what have we been building for, geez.
So anyway, that’s just to underscore the importance of getting a royalty standard out there. And then culturally, it is a game changer for our creators and it is an incredibly important feature for this, you know, non fungible infrastructure.
It’s incredible, Jake. And last question for you. What is, I guess, the most specific NFT project you’re excited about that hasn’t launched yet or is planning to launch? Obviously nothing private, but is there anything you’re really excited about within a project or a new project within, say, the next couple of months?
I’m not going to name a specific project. I don’t follow projects that way, like I don’t know exactly what’s going to launch. But I’ll tell you the category of projects that I am excited about, I am excited about the category of projects that go beyond, you know, simple sort of collectibles issuance and start to integrate crypto economic mechanisms.
The first such thing we talked about was NounsDAO, but there’s so many other things that are possible, there are things like charged particles, there’s Aavegotchi. There are ways that you can tokenize like websites and locations.
Like things that are starting to combine the real world nature with the NFT nature. Things that are starting to put forward, mechanisms that aggregate attention, community, social capital. Things that integrate, DeFi or liquidity mechanisms like those things, I think will perform better because they’re new compared to some of the vanilla, you know, copycat series that are coming out of the market.
Now, I totally agree. Jake, it’s awesome having somebody who’s been around crypto for so long and still building. And ton of credit to you. I just straight up love seeing that. And then to somebody who’s just so engaged, not only investing in the NFT space, but actually building themselves here and understanding the contracts and the trops, getting their friends involved.
I mean, doing your own artwork is really interesting. I mean, even the way you curate art is super cool. So I really appreciate you staying on for this long. And it’s incredible to have someone on for so long. First long form podcast. We’ve done so. Jake, thank you so much, man. And for everyone, we’ll link Jake in the show notes and everything he mentioned as well.
Thanks, Tom. I’m absolutely honored to talk with you. And you’ve asked some great questions. I, I honestly think we were exhausted most of the really hot topics that are on my mind. And some of them, you know, like the DAO interactions with the NFT space.
They’re literally, you know, I’ve been watching this over the last couple of days. So this is like the, you know, the most up to date kind of thoughts that we have, I think. And so I really appreciate you asking those questions.
Of course, man, it’s cool just to see the products in real time. I never even heard of it until you mentioned it. But it’s really only 14 days old. It is so interesting to see. Jake, thank you so much for coming out so fast.
Yeah, thank you, Tom. Really appreciate it. Thanks for taking time on Saturday.
(00:00:53) Jake’s background and interest in NFTs.
(00:03:24) What is an NFT?
(00:12:35) Judging NFT communities.
(00:15:44) CryptoPunks and long-term resilience.
(00:21:05) Complexity of NFTs / cultural difference between the DeFi and the NFT communities.
(00:24:00) Nouns DAO is auctioning off a new noun every day.
(00:36:36) How PartyDAO works / crowdfunding capital.
(00:41:47) Jake’s thoughts on scarcity of NFTs and fractionalization.
(01:02:59) Upshot is a more efficient way to price NFTs.
(01:16:35) The NFT exchange market and importance of GTM strategies.
(01:21:00) Rarible Protocol serves as a back end for NFT applications.
(01:36:36) How the success of each marketplace benefits Rarible token holders.
(01:45:46) Jake’s thoughts on NFT metadata storage and on-chain vs. off-chain assets.
(01:54:22) Jake’s thoughts on regulation in the NFT space.
(01:56:34) Where we’re at now in the NFT cycle.
(02:12:17) Founders in the NFT space.
(02:14:40) The royalty aspect of NFT drops.
(02:21:48) The category of NFT projects Jake is most excited about.