The Inevitable Crypto Plunge
I felt like I was in a weird and foreign casino the last few days. Part one of x?
This week crypto clicked for me. I finally felt like I understood the relationship between Ethereum, NFTs, DAOs, blockchains and more at a deeper level. Today might get a little technical, so bare with me. A handful things happened to converge all in the same few days and it all started to make more sense. The first was this tweet from Packy McCormick:
The name probably sounds familiar because I’ve mentioned him more than a handful of times here, but the tweet and image probably look very strange. Some foreshadowing here, but as my girlfriend, Melissa, put it, “you paid for that?”
Starting simply, the image is an NFT. Non-fungible token’s (NFTs) are “units of data stored on a digital ledger, a blockchain, that certifies a digital asset to be unique and not interchangeable”. In other words, it’s a receipt that gives proof of ownership of an asset, visible to anyone wanting to confirm. NFTs can be used for art, music, collectibles, and more. They are non-fungible because each NFT represents a different token and has a different value. So a generic smiley-face NFT may have a different value than the NFT for Lebron’s rookie card. Let’s get back to Packy’s Tweet.
The strange looking thing in the NFT image is a “punk”, fka a CryptoPunk, smoking a pipe with some stringy hair. While this ugly, simplistic jpeg looks like a Twitter avi in 2009, it’s actually part of a series of similar-ish images created by Larva Labs that are considered incredibly valuable. The series of images were inspiration for the ERC-721 standard, which is what single-image NFTs and modern crypto art is based on. While the punk we’re talking about right now might be ugly, in this niche community it’s considered part of a blue-chip selection of art investments a la a Van Gogh. No, seriously. There are only 10,000 of them and all are made/confirmed scarce thanks to the Ethereum blockchain. Each punk was randomly generated by a computer, no two punks are alike, and some traits are rarer than others. In the case of this pipe-smoking punk, whimsically known as “Hooka Punk”, the NFT went for 60.9 Ethereum ($184,692). That’s a lot of money. But compare it to some other punks, who have ranged in price from 205 Etherum ($382.6K) to I shit you not 4200 Etherum ($7.57MM). You can even see who owns what and how many thanks to the blockchain.
The blockchain is a digital ledger, as I mentioned in the NFT definition. I’ll try to simply explain it here, but this is a good video for more detail. Think of blockchains as technology that enables the transfer of any sort of digital asset (e.g. an NFT) from one place to another. One of its underlying purposes is to simplify, speed up, and secure the transfer of money. Blockchains prevent the need for a 3rd party to handle the money, removes the extra step and time entailed with that third party, and confirms with “proof” that the monetary exchange happened securely. The blockchain, as visible in the screenshot below from the video, shows how the transactions are linked (although not necessarily chronological) and open. Everyone in the network can see where the money is and if a transaction is valid (black marker) or invalid (red marker).
Anyone who participates in the broader network associated with a blockchain can also view the distributed ledger themselves, and therefore a central one is unnecessary. Most importantly, with the distribution of the blockchain and addition of new items to its ledger, as new transactions are added, they are validated by other nodes (participants) within the blockchain. These nodes are often called miners. They confirm that the party leading the transaction has the funds to place it, and upon confirmation, receive a payment for their work. After validation, the transaction is added to the blockchain and confirmed to the broader network. Everything becomes traceable.
Taking all of that in, if we look back to our CryptoPunk - the rarity of the NFT, confirmation of ownership on the blockchain, and cache that CryptoPunks has all registered with me. For the longest time I had been a skeptic, and for what it’s worth still am somewhat, of the intrinsic and extrinsic value of owning a jpeg. As Packy pointed out about “stupid jpegs” in a recent essay: “They’re largely empty vessels into which the community of owners and supporters can pour stories that turn into a narrative. Studying what makes certain NFTs valuable is instructive for anyone trying to build a narrative today.“ Ownership is like a badge that describes you, your interests, and why you’re here. The kicker for me was how that ownership can be achieved.
Back to the punk again. I do fine in life, but I am nowhere close to liquid enough to buy said $184K jpeg and not completely regret it. Few people are. This is where DAOs and PartyDAO, where the screenshot in Packy’s Tweet was from, come into play.
DAO stands for decentralized autonomous organization, which is a member-owned community that doesn’t revolve around hierarchical leadership and enables groups to add funds to a specific cause. While this is an extremely high-level description, it covers the general premise of how a DAO differs from traditional organizations. DAOs are based on smart-contracts or code that defines the rules of the organization. That code can’t be altered or configured without a vote. Hence, smart-contract. It also can’t be jeopardized by someone trying to bend the rules. Those types of actions fail (e.g. someone in the DAO tries to send all the funds to themself) because the code doesn’t accept them to be true.
Now that our definitions are out of the way we’re coming full circle. I recently took the plunge on DAOs and NFTs thanks to PartyBid, “a product for collective bidding on NFTs”. The product’s premise is to form a bid on something, invite friends to join that party, place bids together, and have a whole lot of fun. It sounds dumb at first, but let me put it this way. Think of a hybrid between a GoFundMe and a luxury-item Ebay (a la 1stdibs). Because it’s built on smart-contracts though, it will give the bidding party the reward at the end automatically and no one can stop that from happening. It’s like splitting a rare Supreme shirt with friends. While the bids are still for things like jpegs or mp3’s, a $50-$200 purchase is a much easier pill to swallow than say, a $184,000 one. Unless you’re a multi-millionaire. While that’s still money on something I could just as easily copy and paste as my Twitter avi, it meets that desire of mine to belong to the subculture of people who also understand the hype behind CryptoPunks, dabble in tech/crypto land, and get excited by new internet phenomenon. I’m happy to be here early, experiment, and learn.
Justin Paterno said it best with Everybody is Having Hilarious Fun and You’re Not. While the title may not be 100% true, when you take the plunge into this emerging world there is tons of support from those who have been around longer and just want to help. Justin put it perfectly with this quote:
The genuine delight of owning a part of internet culture you help create, where the memes can make you money, where communities can build both off and on-chain monetizable digital franchises/IP, and where you grow to not want to sell these weird digital things you bought with magic internet money…
The first few times NFTs sold for a lot of money, it was strange. Then it happened again, and again, and again. When something repeats a process over and over again to the point where it’s accepted as the norm, it becomes legitimate. For a while, Bitcoin and Ethereum were just weird forms of internet money. Eventually they gained steam, appreciated in value, and became part of everyday conversations. Banks put out research on them, people sold their bitcoin and ethereum for millions of dollars of gains, and products are being built on/for them. That’s legitimacy. The same can be said for Banksy’s art, Cathie Wood’s investments, and Charli D’Amelio’s dances. New forms of cryptocurrencies, blockchains, and tools are being built daily. We’ll see if NFTs have the same staying power, but it feels like they might be more than a blip. And if not, something else will inevitably take their place.