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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Just when you thought it was gone … Things Go Wrong™ is back. We thought this segment would be a one-off when it first ran in newsletter #2. But a week later there was the big TerraUSD/Lunda fallout, followed by a string of other Crazy Things Happening In DeFi. (Because it was always DeFi. Metaverse news has been relatively free of that kind of scandal.)
Then we had several glorious weeks without it. Mostly because we were too busy talking about metaverse properties and web3-based loyalty programs.
This week’s Things Go Wrong™ is not your typical scandal, though. You’ll see after we take a quick detour:
Handling big fish in a DAO pond
A decentralized autonomous organization (DAO) is a way for groups to pool funds and coordinate actions. (They’ve also hit some legal snags, which we described in newsletter #6 and #23, but that’s another story.) DAO members hold special governance tokens which allow them to vote on group issues.
DAOs face a vulnerability in that a “whale” – an individual who holds a disproportionate amount of governance tokens – can sway votes in their favor. Web3 startup Otterspace aims to even that playing field by issuing “NFTs that are earned rather than bought to reward certain behavior and recognize participation.” In particular:
[Cofounder Ben] Dobbrick believes that Otterspace’s NFTs badges offer […] a gateway into governance that isn’t dependent on one’s holdings. This not only gives influencing power to those that otherwise could not afford it but also engages new DAO members who may only hold a small number of tokens. Importantly these cannot be bought or sold thanks to the specific interface — EIP-4973 — these tokens are built on.
People earning NFTs through specific activities? That sounds a lot like a web3-based loyalty program. And companies designing such programs will be interested in these NFTs that can’t be sold on a secondary market. (See “Whose Status Is It, Anyway” for our take.)
Otterspace’s approach sounds like one way to address the whale issue in DAOs. Which leads us to:
“Things Go Wrong™: Mango
hack trading strategy edition”
DeFi platform Mango experienced a hack last week when someone pulled a twist on a pump-and-dump scam:
On Tuesday, an attacker stole $100 million worth of funds from the Mango Markets Solana DeFi trading platform. The attacker used a flaw in Mango Market’s design to show they had more collateral than they actually did, drove up the price of the MNGO token, and was then able to talk out a $100 million loan based on the data provided by the platform’s oracle.
The story could have ended there with a yawn. DeFi hacks are ten a penny these days, right? But the hacker’s loot included governance tokens in Mango’s DAO. And in a weird form of shareholder activism, they … tried to grant themselves amnesty:
The hacker communicated their proposal on the Mango Markets decentralized governance platform and proceeded [to] use votes tied to the stolen assets to support the proposition. […]
In a nutshell: A hacker who stole cryptocurrency says they should walk away with the majority of the loot and put that plan up for a vote to the people from whom they stole, using votes tied to the stolen cryptocurrency to vote yes.
That was weird enough, but then things got weirder. The Mango DAO held a new vote – one that didn’t rely on the stolen tokens – and decided to let the hacker keep around $47 million as a
ransom bug bounty. An article on crypto.news says this would be “the largest bug bounty ever issued in crypto history to expose vulnerable loopholes on DeFi protocols.”
(Hopefully paying this impromptu bounty doesn’t cause legal troubles for Mango. Just ask the folks at Uber how that can turn out.)
And for the story’s final dose of cognitive whiplash, someone claiming to have been behind the event has since explained that this whole thing was not really a “hack,” just a “highly profitable trading strategy.”
This has been interesting, but let’s hope that Things Go Wrong™ now goes away for a while …
Closing the vault
We see three main reasons to buy NFTs:
Utility: This is for what we call NFTs With Benefits. Owning one means getting access to events, exclusive communities, or loyalty programs.
Art Appreciation: Digital paintings, as it were. You enjoy showing them off on your fancy TV-turned-picture-frame. And there’s the bonus of knowing that, somewhere, there’s a record that you – yes, you – purchased them.
Speculation: You think prices are going to go up, and you hope to make a profit.
Utility and Art Appreciation holders derive most of their benefit from what the token grants them. They sell when they need to sell – to address a cashflow need, or because they no longer desire access to the asset – so while they’d prefer to get a good price, they don’t have to. Speculation holders, on the other hand, derive benefit from selling at a profit. If they mistime a price drop, too bad.
This leads us to CNN, which – after just a little more than a year – has shut down its NFT marketplace:
You may have already forgotten about it, but Vault by CNN launched in the summer of 2021 as a marketplace for its own NFTs (non-fungible tokens) that would “offer collectors the opportunity to own a piece of history.” Sort of like NBA Top Shot except for media nerds instead of basketball nerds, it minted CNN reports of key events or artistic interpretations inspired by them, creating digital collectibles that owners could show off somehow or trade with others, like baseball cards.
While Speculation holders have certainly lost their benefit – the possibility of selling at a higher price – Utility holders suffer the burden of an unexpected loss because, well, they’d been promised special access. Though perhaps Utility holders were engaging in a form of speculation, since CNN hadn’t really elaborated on what those benefits would be?
Taking a wider view, should we also worry about NBA TopShot or Time Magazine’s TIMEPieces collection? It’s too early to tell whether the root cause is specific to Vault, or a systemic issue in the NFTs-of-newsworthy-events space. It may take a while to determine whether CNN went too far, or whether they didn’t go far enough.
One last point to consider, if your company is thinking about developing its own NFT marketplace: the underlying blockchain you choose matters. The TIMEPieces collection lives on Ethereum and is sold through compatible services such as OpenSea. TIMEPieces would live on in the unlikely event that Time, Inc were to stop supporting this collection. By comparison, NBA TopShot and CNN Vault run on the Dapper Labs Flow blockchain. Continued use of those collections requires Dapper to stay solvent and operating Flow.
But how are the interest rates?
In newsletter #18 we noted that the big metaverse players – Roblox, Fortnite, The Sandbox, and so on – are each sorting out the role they want to play. And one important outcome of that would be:
Other niches or roles will certainly shake out over time. The larger, established players will genuinely miss some (cue The Innovator’s Dilemma) and they’ll pretend to miss others (note how the big web2 players get squeamish around adult content). Those new niches will leave room for upstart and specialty players to find their space.
Which is why we were pleasantly surprised to see that a smaller, focused metaverse property has arrived:
[…] Everyrealm’s new free-to-play game – called Hometopia – will allow players to build virtual homes and communities “alongside friends,” according to the announcement. Players will also be allowed to own that which they create in-game, Everyrealm also said.
Everyrealm CEO Janine Yorio calls Hometopia “a gamified combination of Pinterest, Houzz and Wayfair” which is “poised to capture those looking for more adult versions of Roblox interior design games they grew to love as children.”
Who knew that “grown-ups who wanted to be around other grown-ups, to do ordinary domestic things” would be a metaverse niche? (Granted, when Kashmir Hill visited Horizon Worlds, she noted that she kept running into kids. So there’s that.)
Going back to our point that being in a metaverse is about digital escapism, what does it mean when people would want to escape to a simulated housing community?
It probably means that the real world is full of steep interest rate hikes and computer-driven rent increases. So yes, the digital version sounds just lovely.
“Well worth a listen: the Improbable founders on “The Scoop””
If you have 45 minutes to spare, we highly recommend episode 96 of The Scoop podcast.
Don’t let the title fool you. The interview with Improbable founders Herman Narula and Rob Whitehead covers a lot more than just the pricing of land in metaverse properties. They explore what makes a metaverse attractive to participants, where advertising (does not) fit, and why A Certain Company might be taking a big chance on its VR headsets. The key to it all? “Authentic engagement.”
Overall, we found it to be a deep and thoughtful look at digital escapism through the eyes of experienced practitioners. If you’ve enjoyed our metaverse musings, you’ll get a lot out of the interview with Narula and Whitehead.
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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