May 4, 2022

Of credit cards, digital land, and real money

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.

Otherside land grab

The company Yuga Labs, best known for the Bored Ape Yacht Club NFTs, has broken ground on its metaverse offering.  (Did you catch that  slick announcement video from March? The one with a rather fitting tune from The Doors as its soundtrack? That only gave a hint as to what was coming.)

Similar to other metaverse setups, Otherside is divided into plots of virtual land with NFTs as deeds.  As each of the 55,000 plots runs a cool $6,000, Yuga Labs will net more than $300 million in initial sales.  

The lead-up to Otherside's unveiling saw large price swings in the underlying ApeCoin token that would be used for purchasing (well, "minting") the NFT deeds. Anticipation about the metaverse project sent prices sky-high, while updates from Yuga Labs about the auction rules brought them back down. The world of cryptocurrencies can be an introduction to the harsh realities of market dynamics and variable-priced assets. As the saying goes: "buy the rumor and sell the news."

(The Otherside unveiling also caused some upset on the underlying Ethereum blockchain over the weekend.  We'll cover that in more detail next week.)

Price movements aside, writing deeds to a blockchain sounds useful. What will the real estate market be able to borrow from this idea?

Also, will Otherside pipe in more classic rock tunes throughout its metaverse? Or maybe some songs from this guy? If so, we're in.

Credit where it's DAO

A Distributed Autonomous Organization, or DAO, is an interesting web3 concept: a group of people, most of whom are strangers to one another, develop a pool of funds and adopt a governance structure to guide their operations and investments. The DAO can serve a variety of purposes, such as (attempt to) buy the US Constitution, manage a portfolio of NFT investments, or help creators better connect with their audience

For all that it can accomplish, a DAO is not a formally incorporated business.  (Nor is it completely off the books.  Some US state laws recognize them as "unincorporated associations" ... but that's a story for another day.) It therefore doesn't get access to traditional banking services. Payments startup Rain aims to fill that gap by offering corporate credit cards to DAOs.  Being able to tackle business purchases directly will be much cleaner than juggling reimbursements to individual DAO members. 

We here at Block & Mortar HQ are especially interested in the role of DAOs as business entities.  So we look forward to seeing more services bridge web3 to traditional business infrastructure. 

Things Go Wrong™

Cryptocurrency is a blend of money and software.   The same code bugs that lead to app crashes and hacker exploits can make money disappear. 

The Aku Dreams project recently saw $34M worth of tokens "bricked," or made inaccessible, due to a flaw in a smart contract's code. (We first saw this on the @0xInuarashi Twitter account, which went deep into technical detail. For a higher-level overview, check out this article on PYMNTS.)

It's easy to rip on crypto because money can get locked up like this.  Let's not forget how the traditional banking sector has experienced its own trials over the past, oh, couple hundred years. And there are still issues. Just ask anyone who has mistakenly wired money into the wrong account. 

Similar to the trading industry, crypto is a space where code flaws are unforgiving. It pays to hire experienced talent and support them with robust testing and a solid risk management function. The old belt-and-suspenders approach. 

Given the high cost of failure, we wonder: when will smart contracts go the way of concurrent programming or encryption, in which developers are strongly discouraged from rolling their own from scratch? Far better to extend frameworks that have been built by experts and thoroughly road-tested for edge cases. 

More Things Go Wrong™

Where there's money, there's crime. And where theft can be difficult to reverse, expect more crime. Crypto involves lots of money that is hard to reverse, so you can see where we're going here. 

This week hackers compromised the official Bored Ape Yacht Club (BAYC) Instagram account and Discord server. They used this access to send fraudulent links to BAYC NFT holders, who unwittingly gave up their digital possessions when they clicked through. 

It's practically a rite of passage to be scammed out of your crypto tokens or NFTs. Such thefts often involve carefully crafted phishing e-mails or Twitter DMs from lookalike accounts.  While BAYC holders are frequent targets of scams, this one feels particularly sneaky because users don't expect to be ripped off by someone speaking through official channels. It would be like, say, big tech companies relinquishing user data to people who had hijacked police department e-mail accounts. Not that this has ever happened…  

Still, the laws are catching up to this new reality. The state of New York wants to formally declare certain types of crypto crime – notably, rug pulls – illegal. This may not seem like much, but laws (ones that are properly enforced, at least) have a way of building trust in a system. And trust leads to increased adoption.

Getting that sweet sweet crypto payout

Pro athletes are increasingly taking some or all of their compensation in cryptocurrency.  Since token prices can fall, skeptics may see this as a needlessly risky way to get paid. Why not stick with cold, hard cash?

Try to replace "paid in crypto" with "paid in stock options" and ask how you feel. In both cases, a person takes some amount of comp in an asset that they hope will increase in value.  

One key difference is that an employee paid in company stock can work harder to keep the share price high. (Some roles have more influence than others, but you know what we mean.)  But since celebrities can have an outsized impact on a token's price, a sufficiently famous athlete can tie their on-field performance to the value of their payout. Maybe it's not so different, after all?

Having your crypto and spending it, too

But what do you do when you've amassed a mountain of cryptocurrency?  Sure, you can trade in your tokens for cash. You can also hold onto the assets and use them as collateral for a loan.  

Florida startup Milo Credit will issue you a 30-year mortgage so long as you hold enough crypto to cover the cost of the home.  This makes sense to us: someone approaching Milo is essentially saying, "I have enough to buy this place outright. But I'd like to spread out the payments over the long-term."  What better way to demonstrate that you can afford a property by effectively fronting the entire purchase price?

That said, one part of the Milo story really stands out.  According to that Bloomberg article:

Milo wants to make such loans a big business by pooling them and selling them to banks, asset managers and insurance companies, maybe even offering them as bonds in a securitization, according to founder Josip Rupena.

Is anyone else getting some serious "run-up to 2008" vibes here...?  Oh wait, yes.  It's not just us

Still, it's unfair to assume that mortgage-backed securities would rehash their role as one of the horsemen of financial apocalypse.  Maybe.  Time will tell.

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