May 31, 2022

Money in, money out, and a little Hollyweb3

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

Making investments into crypto

Technology is hot, investor money is pouring in from all sides, and companies are offering food delivery by bike messenger.  No, we haven't returned to 1999. All of this interest is pointed squarely at web3 projects.  One article, citing data from CB insights, pointed to an eightfold increase in blockchain-related VC investment from 2020 to 2021.

To understand this turn of events, it helps to consider two key points about investing:

  1. Money flowing into a space reflects investor confidence.  An investment is a means by which you express a belief ("I think this company is going places!") with your money ("I am willing to put my cold, hard cash into this company").  It's a magic money machine: you put money in now, because you expect even more money to come back later. 
  2. Venture capital is similar to emerging-markets investing. VCs know that only some of their portfolio companies will pan out.  But that's OK. So long as they occasionally land the next Google or Facebook, the asymmetric returns from those investments will wipe out the losses from every startup that craters.

For Point 1, consider the recent announcements: Kongregate and Immutable have paired up to run a $40 million fund. Volt Capital has raised a $50 million fund. Andreesen Horowitz (a16z) has launched a $4.5 billion crypto fund.  All of this money reflects the growing confidence in web3's business potential.  And there are probably several more such announcements that we've missed.  

Point 2 gets an extra jolt because of simple economics.   Crypto has come down a few pegs over the last months – including a big hit from the recent TerraUSD/Luna crash – so it's running at a discount.  These lower prices, driven by others' reduced confidence in crypto, leave room for the more bullish investors to step in.  They get to spread their same investment pool over a larger number of (now, cheaper) portfolio companies.  Because they can buy more  startup lottery tickets, they improve their chances of landing on a big winner. 

Before you rush to throw money at every crypto-themed startup, though, you'll want a deeper understanding of the technologies so you can spot what's real.  Alan Howard, co-founder of hedge fund Brevan Howard, says it best:

You have to be in, and have exposure to, the crypto world to understand what is going on there, to identify the challenges and opportunities you’ll face and to know what infrastructure you will have to build to meet those challenges and opportunities head on.

(BH Digital, a Brevan Howard vehicle focused on crypto, aims to deploy more than $1 billion into the space.)

Wise words for investing in any emerging-technology arena.  And if we are reliving the Dot-Com heyday, let's try to avoid recreating the Enron and Worldcom scandals, shall we?

Crypto, making investments

Having covered money flowing into the web3 ecosystem, let's consider the money flowing out of that space and back into the wider world.

Last week Sam Bankman-Fried, CEO of crypto exchange and growing financial empire FTX, dropped hints as to how he would donate his money to political campaigns.   About $1 billion worth of hints, to be clear.

He outlined his views in a Twitter thread, where he noted how he would align this financial support.  One tweet in particular sums it up:

6)In the end I care about policy, not politics, and I don’t think either party has a monopoly on good ideas.

My contributions could be substantial, or not; and their party breakdown will depend on the candidates and policies.

Bankman-Fried – or SBF, as he is more affectionately abbreviated – is hardly the first wealthy business owner to spread their influence by donating to a political campaign. What makes him stand out is that he hails from the crypto space.  And we doubt he'll be the only one.

That should serve as a wake-up call to politicians, government appointees, and business leaders who are openly anti-crypto.  Or who dismiss cryptocurrency as "magic internet money."  No one knows for sure where DeFi will be some years down the road; but for now, the money flowing through the space is very real.  And some of that money will find its way into campaign contributions.

This token's not for trading

NFTs mostly have a reputation as assets to be traded for profit. Maybe you grab something for a quick flip opportunity, or you try a slower, buy-and-hold approach.  

What does it mean for a token to instead be treated as an indicator of achievement or status, or something else that is meant to be tied to an entity?  Something that can't be traded?  Using crypto tokens for certificates is not new but a recent paper,  "Decentralized Society: Finding Web3's Soul,"  takes a deeper look into soulbound tokens (SBTs) and their use in decentralized society (DeSoc).

The paper was written by E. Glen Weyl (Microsoft Research and RadicalxChange Foundation), Puja Ohlhaver (Flashbots), and most notably, Ethereum creator Vitalik Buterin.  When we first saw the headline, we had a number of concerns about the implications – everything from pseudonymity and privacy, to the mechanics of the operation – but the paper covered them in detail. 

We think it's worth a read for anyone considering use cases for crypto tokens beyond asset-trading purposes.  

One such example involves Know Your Customer/Anti-Money Laundering (KYC/AML) rules.  What if you didn't have to submit all of that personal information every time you opened an account at a crypto exchange?  What if, instead, you could point them to an SBT associated with your wallet?  "A central, trusted authority has already performed that KYC check and I'm clear.  It's right here, on-chain."  This reduces onboarding friction for the crypto exchange, because checking for that SBT is faster and cleaner than handling a bunch of personal info.  And this preserves the privacy of the wallet owner, because only the central authority has seen the details required to perform that KYC check.  Win-win.

(And if this sounds like SSL certificates to you – "I trust Verisign, Verisign trusts you, therefore I trust you" – you're on the right track.)

Hide and seek, scan and mint

Netflix's hit animated series Love, Death + Robots has returned for its third season.  So, apparently, Netflix doesn't kill every original show that people like.  Just … most of them?  

Perhaps this show gets to stick around because LD+R now involves an NFT scavenger hunt.  Viewers mint NFTs related to the show by scanning QR codes found on billboards, in social media posts, and even in the show's episodes.  

Larva Labs and NFT Worlds are also running blockchain scavenger hunts. This kind of game is a creative way to boost engagement through audience participation.  Players solve clues to sort out a twelve-word passphrase, which unlocks an Ethereum wallet containing NFT prizes.

(Our question: When do we get something on the size and collaborative scale of, say, 2004's I Love Bees campaign?)

The entertainment industry continues to explore web3 for other engagement opportunities.  The Gimmicks, an animated series from Mila Kunis's production company, will allow NFT holders to vote on the show's plot.  And Mad Realities, recent recipient of $6M in funding (including some cash from Paris Hilton), plans to operate as a DAO such that members can co-develop shows.  

Speedbumps on the road to Hollyweb3

It didn't take long for the Bored Ape Yacht Club NFT characters to wander into the entertainment business.  Universal Music Group has laid out plans to launch a BAYC band, and Coinbase is making BAYC movies.  Most recently, actor and producer Seth "Scott Evil" Green has been writing a series called White Horse Tavern built around his Bored Ape NFT.

Last week Green lost some NFTs to a phishing scam, including the aforementioned TV-bound BAYC character.  This raised the question of whether he would still be able to use the Bored Ape in the show.  On the one hand, the commercial usage rights in theory belong to whomever owns the wallet holding the NFT.  That person could possibly sue Seth Green for continuing with White Horse Tavern.  On the other hand, Green didn't exactly plan to let the NFT out of his possession. So … 

To use highly technical legal terminology, it's complicated.  Few crypto cases have been tried in the courts so there's little legal precedent to go on.  As we often say at Brick & Mortar HQ: you never want to be a case law pioneer.  But that is where this kind of situation leads.

Still, NFT thefts are so common these days, especially among BAYC holders.  Which might be why securities-lawyer-turned-Bloomberg-columnist Matt Levine took a jab at the story:

imagine making a whole television show about bored apes that was not about bored apes getting stolen

As of this writing, Green has been reunited with his BAYC NFT so he's clear to continue with the show.  

Now if you'll excuse us, we need to get back to work.  We're writing a series on the shenanigans of publishing a web3 newsletter.  (Anybody wanna join our DAO? You'll get to vote on the plot…)

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Note: We’d like to thank Shane Glynn for reviewing early newsletter drafts. Any mistakes that remain are ours.