Welcome to the Block & Mortar newsletter! Every week, I bring you the top stories and my analysis on where business meets web3: blockchain, cryptocurrencies, NFTs, and metaverse. Brought to you by Q McCallum.

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#6 - This is not legal advice (but it's still worth a read)

(This issue includes contributions from Scott Robbin.)

“Terminology time: what’s a “DAO?””

The acronym stands for Distributed Autonomous Organization. It’s a web3 way for people to come together, pool funds, and take some kind of action.

Membership and voting rights in a DAO are usually based on acquiring and holding governance tokens.  Maybe members will decide to buy a copy of the US Constitution. Or raise funds for running a weekly web3 newsletter.  Anything’s possible.

Buying tokens in a DAO looks sort of (emphasis on “sort of”)  like buying shares of stock in a company.  You’re effectively giving that company money in exchange for some voting rights and dividends.  

There are some important differences, though:

So, DAOs can raise and spend money.  While that may look and quack like any other business entity, there’s one key difference: DAOs are not, in the legal sense, the same as the companies we encounter in the wild.  Your employer, your airline, and your florist are most likely incorporated businesses with a structure such as an LLC.

One important feature of a formally-recognized corporate structure is protecting the owners’ assets in the event Things Go Wrong™.  That’s why the two Ls in “LLC” stand for “limited liability.”  For the most part, US law still sees DAOs as a loose, ad-hoc collection of individuals. It treats DAO participants with far less protection than a company employee or a corporate officer.  (Except in the State of Wyoming. But that’s another story.)  And that makes things ugly in a courtroom scenario. To quote a recent paper on the topic: 

Yet for all the innovation enabled by DAOs, in the real world coordination and commerce invariably run on top of the rails of “legal personhood.”  In order to easily engage with service providers like bankers, lawyers and consultants, as well as be able to pay taxes, DAOs need a legal wrapper endowing them with a legal identity.  Furthermore, a formal legal wrapper is often required in order to limit legal risks to members, and protect them from the liabilities or damages caused by the DAO or other members.

That’s from “Legal Wrappers and DAOs” by Chris Brummer (Georgetown University Law Center) and Rodrigo Seira (Paradigm).  It landed around the same time as Part II of  “A Legal Framework for Decentralized Autonomous Organizations,” the series by David Kerr (Cowrie LLC) and Miles Jennings (Andreessen Horowitz, aka a16z).

The tl;dr on both papers is that most DAOs, particularly those that hold assets or are revenue-generating  organizations, should also have some sort of legal corporation or partnership.  This protects both the DAO members and the people who do business with the DAO.  

While these papers do not constitute legal advice, they were co-authored by attorneys.  We recommend you read both – and then, find a crypto-savvy legal advisor – if you have any interest in forming a DAO.  (The Brummer/Seira paper includes a handy diagram to help guide your research.)

“I will gladly pay you crypto for a hamburger today”

The credit for the first known Bitcoin purchase goes to pizza, in 2010. 

(Well, one person purchased the pizza with a plain credit card and the other person reimbursed them with the day’s equivalent of Bitcoin.  But still …)

Today’s merchants are eager to accept cryptocurrency payments directly.  Because who needs a middleman?  The trouble is that many common blockchain transactions, like those using the Bitcoin or Ethereum networks, can take up to an hour to settle.  Compare that to the seconds required to approve a credit card purchase.  So you’re left with a choice: keep the line moving, and lose money when a transaction fails after people have walked out with the merchandise; or hold up the line, and lose money because other customers walk out before they’ve even placed an order.

Chipotle has partnered with payments network Flexa to bridge that gap.  Flexa handles the point-of-sale (POS) matters in real-time, settles the blockchain side of things later, and then pays the merchant.  Chipotle gets to accept payments in crypto, and you get your burrito.  Win-win.

Flexa offers another important benefit, in that they absorb any losses due to failed transactions.  This is what’s known in the biz as a “risk transfer,” in that the Risk of Unintentionally Free Merch moves from Chipotle’s balance sheet to Flexa’s.

It may seem weird to saddle that burden, but we have a hunch as to why.  (We almost wrote “eat the losses” there, but we don’t do unintentional puns here.  So “saddle that burden,” it is.)  Providing this risk transfer eliminates barriers in Flexa’s sales process – “No, you’re never on the hook for a crypto payment failure” – which helps their business grow.  It’s not unlike in the early days of e-commerce, when credit card issuers limited consumers’ fraud risk to $50 per purchase.  Consumers felt less apprehension about handing their payment details to random merchants, and online shopping grew by leaps and bounds.

Things Go … Better? ™  Maybe?

Block & Mortar issues #3 and #4 covered the TerraUSD/Luna meltdown and the ensuing fallout.  The latest plan offered by Terraform Labs CEO Do Kwon has gotten the thumbs-up from the community though, understandably, there are still some skeptics.  (At least Luna 2.0 is actually backed by a running blockchain. Unlike, say, OneCoin.)

Luna 2.0 is off to a rocky start, but it’s only been up for about a week as of this writing.  Time will tell whether this reboot gains sufficient trust and trading activity.  Hopefully it won’t appear in another Things Go Wrong™ segment of this newsletter.

Welcome to Goblintown

There’s no shortage of people trying to cash in on NFTs.  With enough hype marketing behind it, any collection has a chance at becoming the next CryptoPunks or Bored Ape Yacht Club.  Maybe.

Releasing NFTs for free is one way to build a buzz, because early adopters don’t take any risk in picking items from an unknown collection. (The backing smart contracts typically grant creators a portion of sale revenue each time the tokens trade on the secondary market, so even a “free” NFT can make the creator money over time.)  Creators therefore have an economic incentive to focus on volume of releases rather than quality.  Which is why expectations of free NFT projects can be a little … low.

All of this is to say that the mysterious Goblintown NFT release has exceeded expectations.  After just two weeks on the market, the average Goblintown NFT trades at 9ETH ($17k). Rarer assets go for 69ETH ($136K).  And the collection has attracted celebrity investors, including Val Kilmer.  Not bad for a project that began with a minimalist tweet  – “ₘᵢₙₜ ₙₒw dₒwₙ dₒwₙ ₜₒ gₒbₗᵢₙ ₜₒwₙ goblintown.wtf” –  and promised “No roadmap. No Discord. No utility.”

They should have added “No names” to that list.  The project clearly has some money behind it – the sound design alone is an indicator – so rumors abound.  Some claim it’s Yuga Labs (the company behind Bored Ape Yacht Club) because they once mentioned “Goblins” in their investment deck. Others think it’s Beeple, the artist who made NFT history when his collection sold for $69 million.  Some people hint that it’s both.  

And the project continues to evolve.  Late last week, the goblins unveiled the interactive  McGoblinBurger experience, where NFT holders can mint virtual burgers.  It’s not clear what impact these burger NFTs will have.  Given that the goblins have been so tight-lipped about everything else, though, who knows when they’ll tell us?

The best title for this section was already taken

In other NFT news, it’s been a busy week in the entertainment business.  Snoop Dogg’s new restaurant, which is connected to his Bored Ape NFT character, will include NFTs for patrons.  Binance will sponsor The Weeknd’s upcoming tour, for which some attendees will receive commemorative NFTs.  And we learned about French startup Pianity, which sells music NFTs.  

(Well, there was also that story about Kanye West filing for some NFT trademarks … but it’s not yet clear what’s going to happen with that.  Maybe this is just a proactive measure, to protect his work? Or perhaps he’s on the verge of announcing his own project?)

Even with all that, one story stood out:

Warner Bros announced plans to release NFTs of the classic Looney Tunes characters through a partnership with social platform Nifty’s.  As is increasingly common with commercial NFT releases, Warner Bros will weave the tokens into a wider engagement campaign:

Warner Bros. has created a new storyline for the program, filled with playful antics and humor, that unfolds over the course of multiple years, exclusively for members of this Looney Tunes fan community. Along the way, NFT collectors will have the ability to participate in fun activities and games — both digitally and in real life. Fans will have the opportunity to earn rewards, including virtual meet and greets, exclusive never-before-been-seen content, special access and offers to Looney Tunes merchandise and experiences, new NFT drops, and much more.

So, these NFTs will be more than just JPEGs that anyone can right-click-save.  They’ll serve as access passes to experiences.  (If your business has plans to release NFTs, take note.)  And by promising a multi-year arc, Warner Bros is letting prospective buyers know that their investment will have lasting value.  

As a bonus, the reporting on this topic has inspired some witty wordplay.  The best we’ve seen is the name of the collection itself:  “What’s Up, Block?”  That beats out any title we could have come up with for this section, so we didn’t even try.

The wrap-up

This was an issue of Block & Mortar.

Who’s behind Block & Mortar? I'm Q McCallum. I've spent the past two decades in the emerging-tech space. And I'm very interested in web3 use cases.

Credit where it's due. Big thanks to Shane Glynn for reviewing early drafts. Any mistakes that remain are mine.

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