August 2, 2022

New laws for digital goods? And keeping track of web3 assets

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.

What's that word?

Part of the Block & Mortar mission is to make web3 more approachable.  As much as we stick to plain language, it's tough to write about NFTs and DeFi without using some industry terminology now and then. Do we stop the action to explain each new and unfamiliar word? Or do we roll on and hope that readers will pick up on context clues? Neither path works, really.

That's why we're building our own glossary of web3 terms, so we can link definitions of key terms in the middle of a topic.  Click the link to see what we mean by "hot wallet," or keep reading if you're already familiar.  The best of both worlds.

And since the glossary is a living document, we can update it over time to reflect new industry realities.

Have you come across web3 terms that you'd like us to explain?  You can contact us through our website to let us know!

Tailor-made laws

People have a love-hate relationship with rules.  By defining boundaries, they give us a sense of certainty.  We know that action X is fine but action Y will have us standing before a judge.  And by the time we enter the courtroom, we have a rough idea of what's on the proverbial menu.  Without rules, we'd all just do whatever we want.  (And if you scale that out to "the entire population," you get the definition of anarchy.)  

Flipping that around, a lack of certainty pushes our behavior to the extremes.  The one involves the get-rich-quick charlatans innovators who try lots of money-making scams ventures while their activities are still not-yet-illegal.  The other is the group of folks who wait on the sidelines. They don't want to make any plans until they know precisely what's allowed.

What separates those two is how they feel about a certain Possible Future Event, the one in which regulators declare the activities illegal and take the money away.  The innovators are willing to take the chance because, hey, maybe they don't get punished and they walk away rich. The sidelines crew doesn't like all of those question marks on their balance sheet.

This is an especially acute problem in web3.  Laws around cryptocurrencies and NFTs are sparse and hazy. And rulings are usually based on regulators trying to adapt old laws to new concepts.  Which is messy.  (See: the ongoing "Is that crypto token a security, or no?" debate.)  

The UK is taking a step to fill this void. Last week, the Law Commission floated some ideas past the government to define some legal structure around digital assets:

If implemented, the reforms would make it easier for courts to decide ownership claims over tokens, and to identify risks that are unique to crypto. It could also put the UK at the forefront of establishing where crypto and decentralized finance fits into private law globally, establishing a precedent that other international legal regimes could follow.

People already possess a variety of NFTs, metaverse plots, and cryptocurrency tokens, and we don't see that slowing down any time soon.  By defining laws that are tailor-made for digital assets, the UK could spare judges from having to base their rulings on interpretations and adaptations of laws for physical property. 

The major recommendation from the Law Commission report is that crypto assets be treated as a new, third kind of property. UK law broadly splits property into tangible things (like houses and cars) and intangible things (like securities and debts) – this report would create a new category for property that is digital, exists independently of individuals, and can only be possessed by one person at a time.

To be clear, these are still recommendations and ideas_._ (This @craigwarmke thread hits the high points of the report.)  The final shape of any laws could differ from what the Law Commission has proposed.  But we still look forward to legal clarifications around crypto.  We suspect that there are a lot of businesses in the Wait On the Sidelines group who are eager to share their web3 offerings with the world.

Scam O'Clock™: Even the pros get hit

Oh yes, the Scam O'Clock™ segment is back.  (Did it ever leave?)   Last week, we talked about thieves infiltrating shared services that are trusted by NFT holders.  This week's twist is that a scammer impersonated a legitimate Twitter account.  That tripped up NFT OG @krybharat, who approved several transactions before noticing that something was amiss.

They avoided complete ruin, in part because of luck (the thief was removing NFTs one at a time) and in part because of good security practices:

11/ I'm fortunate that I have a multi-wallet setup with a vault & hot wallet for NFTs.  If this was my vault wallet, could've been a disaster.  This clearly outlines the need for a tertiary wallet for minting etc.  Also, don't be lazy your hot wallet bloats in time...hygiene!!!

12/ Hope this helps some of ya'll avoid this.  It could've been orders of magnitude worse.  I got lucky, but need to be extra vigilant.  Never forget that self custody means you need to build your own Fort Knox.  Don't be lazy, triple check and avoid multi-tasking.

(The added emphasis is ours.)

We'd like to underscore the idea that these crypto scams can hit anyone, from the web3 novice to the expert.  We're all human.  We all slip up and miss that clue that something's out of place.  Remember that a scam only has to look convincing long enough for you to click a poisoned link, so your greatest defense is to slow down and remain focused while doing anything related to crypto.

A different kind of land rush

It's hard to remember phone numbers, so we store them in an address book.  And there's no way we'd ever remember the IP addresses of our favorite websites, so we rely on DNS to translate internet domain names like "BlockAndMortar.xyz" into the dotted-quad format that every network engineer recognizes.  So it's no surprise that the crypto world has created services to translate those long wallet addresses into memorable, human-readable names.

The most popular one is the Ethereum Name Service (ENS), and it's the reason you see those ".eth" names everywhere.  By adopting an ENS name, you can have people send tokens to [An Actual Word].eth instead of wallet-address-1234-5678-abcdef.  And since crypto transactions only move in one direction – no refunds! – then getting the address right is of the utmost importance.

If you've ever bought an internet domain, you already know what comes next.  There's a race between people and companies buying up their namesake domains and … people who anticipate that someone will want a domain, so they buy it first and hope to flip it at a significant profit.  You know: domain squatters.

What do you do if someone has squatted your preferred ENS domain?  Well, if your first thought is to appeal to the domain registrar, you're still thinking in web2 terms:

According to Anirudh Chohan, Brand Marketing Lead of Safe, previously Gnosis Safe, the difference between the ENS project and the legacy DNS registry, is that "ENS has lived up to web3 ideals by creating a decentralised entity that issues self-custodial domains that are not managed by a centralized authority".

You really have two choices, then: you can try to buy the domain from them, or you can get creative and pick a new name.  Think of all of the [some name]Movie.com or Watch[some name].com domains that Hollywood has acquired over the years.  Maybe you can add "store" or "autodealer" or similar term.  

No doubt, someone will create a word-spinning service to help with this effort.  Google Domains does this for internet domains and, as a bonus, it checks your spelling.  Because you don't want to accidentally buy a typo of the name you really wanted.

Keeping track of it all

Similar to the way DeFi is "speedrunning the 400 year history of modern trading firms," the wider web3 space is fast-forwarding through emerging-tech history.  And one page it has taken from the early-day internet era is the so-called "discovery problem," which occurs when a sector grows too large, too quickly for a person to keep track of things.  (Any mobile app developers reading this?  You've suffered this in spades and we feel for you.)   With all of those web pages out there, and with new sites springing up every day, how do you find anything?

In the same way that internet search engines indexed the web to help us make sense of it all, web3 startup Center is poised to do the same for NFTs.  The company is:

[...] attempting to index and organize every NFT on every chain and says it has 120 million NFTs on its books so far.

“[...W]e're organizing all permissionless digital property rights,” the company said in a release shared exclusively with The Block.

If you only see NFTs as "those silly ape JPEGs," then you'll wonder why Center is a big deal.   But hopefully what we've said about the discovery problem sheds some light.

Beyond that, consider all of the businesses that can hang off the side of search.  Everything from advertising (so common with web search engines) to recommendations (like on a retailer's site) is fair game.  Any time you can say "if you're looking for Item X, have you considered Similar Item Y?" you can build a business opportunity on top of indexing.

Also, unlike web pages, NFTs have a price component.  (OK, a high-traffic web page has a monetary value in the form of potential ad revenue or the like.  But here we mean an actual, public price tag.)  Assuming Center also tracks the prices of those NFTs, it can build a very rich dataset and derive any number of data products from it: pricing assistance, price predictions, fraud detection, … 

All of this potential probably explains why a five-person company has just raised $11M in seed funding.  

We're going to keep an eye on Center, and on the NFT indexing space in general.  You may want to do the same.

Coming soon: Tokenize This™

(Because the name "tokenomics" was already taken…)

Longtime readers of this newsletter will note that Block & Mortar is on a quest to find practical use cases for web3.  We want to see how (and, sometimes, "whether") developing a metaverse strategy could improve an existing business model, or how adding a well-placed splash of cryptocurrency tokens could open up new opportunities.

On this journey we've come across a variety of implementations, such as:

  • payment rails (customers can exchange crypto tokens for everyday purchases)
  • new crypto coins issued for fundraising
  • coins and other assets used as collateral for loans
  • token-gating (requiring token ownership to access events and services)
  • and our favorite, one we call NFTs with Benefits (tokens with perks).  

We'll let you in on a secret.  In addition to reading about existing examples of web3 in business, we also explore potential use cases we haven't seen in the news.  In these gedankenexperiments, we imagine sitting down with a business owner – the same way we do in our other roles, with Scott as a web developer and Q as an ML/AI consultant – learning about their business model and their challenges, and figuring out where web3 technology could move the needle for them.

In the spirit of cryptocurrency tokens, we call the exercise Tokenize This™.  And starting next week, we'll share short versions of select Tokenize This™ explorations with you.  

Please reach out to tell us what other industry verticals you'd like us to cover in this segment. 

Along those same lines, we also welcome any feedback you have on the newsletter.  Have a hot tip?  Interested in learning about a different area of web3?  Let us know!

Reading this online? Subscribers get this in their inbox on Tuesdays.

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