July 5, 2022

Renting NFTs and a quick trip to Europe

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.

Many of our US-based subscribers are rolling into a short work week after the long Independence Day weekend.  You probably have a ton of e-mails piled up, so we'll keep this newsletter short.

So much more than your typical celebrity endorsement

With all of last week's coverage of the NFT.NYC event, we didn't mention that the Doodles collection has appointed Pharrell Williams as Chief Brand Officer.  (Mostly because we were holding out for some additional details, which have just arrived.)

"Celebrity + NFT" is a common combination these days, sure. (Did we mention that Snoop and Eminem song?  The one with their Bored Ape NFTs in the video?)   So it would be easy for Williams to take this as your standard endorsement deal: we do some photo-ops, you get to associate your brand with my name, we both get paid.  

But he's taking a more involved approach.  Like releasing "Doodles Records: Volume 1," an album inspired by the NFT collection.  And then tying that album back into the NFT ecosystem, with perks:

The Doodles album will be available to stream via various platforms, but will only be sold via NFTs. According to the representative, the Doodles album NFT will also be bundled with additional, as-yet-unspecified NFT collectibles.

The Doodles team is making the most of this publicity splash to reveal the new Doodles 2 collection.  Unlike the original collection, Doodles 2 is intended for a much wider audience.  And buyers can customize these NFT characters with wearables from the new Genesis Box set.  

Bonus: Remember how the Otherside launch clogged the Ethereum network and sent gas fees sky-high?  Gas for the Genesis Box "bucket auction" only ran 23ETH.  This is already off to a good start.

If you can't sell it … rent it out?

It's not just crypto tokens and DeFi platforms that are in a rough patch.  NFTs are also seeing prices fall, and celebrities have quietly swapped out those fancy profile pics (PFPs) for, well, pretty much anything else. What? A Bored Ape, you say? No no no, this old party photo has always been my PFP. Why do you ask?

It may be tempting to sell off those NFTs and cash in before prices get any worse.  Doubly so, since a widespread rush to sell can bring additional downward price pressure.  And what if prices come back up?  Selling too soon means you're leaving money on the table.

Another option is to rent the asset. You get to maintain ownership (so you can sell it for a higher value later, as market conditions improve) but still collect some revenue (as a consolation prize for not being able to sell right now). This may be modest revenue, sure.  But "modest" still beats "zero." 

A new Ethereum Improvement Proposal (EIP) aims to make it easier for people to rent their (Ethereum-based) digital assets. EIP-4907, "Rental NFT, ERC-721 User And Expires Extension," 

[...] proposes an additional role (user) which can be granted to addresses, and a time where the role is automatically revoked (expires). The user role represents permission to "use" the NFT, but not the ability to transfer it or set users.

(FYI: ERC-721 defines NFTs.)

Beyond the in-game assets used as examples in EIP-4907, we see potential use cases for utility-based tokens such as access passes, membership cards, and loyalty club cards. These NFTs usually carry benefits beyond the pure bragging rights of ownership, so we imagine people will be eager to rent them out.

Say your NFT membership pass entitles you to a free meal every month in a particular restaurant.  You're out of town next month, so why let the asset sit idle?  You can loan it to someone who will actually be in town.  Keep in mind that this could also be a no-cost loan, say, so your spouse or kids could leverage your membership in your absence. 

(We also respect that some groups will not permit those loyalty club cards or access passes to be rented out, the same as they do with memberships that predate NFTs.  Expect them to check that user attribute and turn some people away at the proverbial door. And maybe issue those access passes as soulbound tokens.)

There is no technical barrier to giving someone an NFT for a specified period of time; but ERC-4907 wraps it up in a clean framework.  And just like automated liquidation on DeFi exchanges (as compared to the old-school margin call by phone), ERP builds in the functionality to return the asset to the owner on the specified date.  You won't have to prod someone to return that loyalty card once you're back in town.

Your Block & Mortar editors are pretty excited about the prospects of utility-based, membership-style NFT use cases. So we see ERC-4907 as a step in the right direction. 

DeFi: Things are getting worse and … also … better?  Maybe?

It's one thing for a single player in an industry to experience problems.  Quite another when the entire sector is under pressure.  That is pretty much the story of DeFi at the moment.

Sure, there was the TerraUSD/Luna crash back in May, but everyone tried to pretend that was a one-off failure.  A month later, Three Arrows Capital (3AC) and Celsius have fallen over. And groups that (allegedly) had exposure to those two companies – including lenders Genesis and Voyager – are sweating.

All of this is to explain why BlockFi has been in the news this week.  Crypto exchange FTX has extended a line of credit to BlockFi, with the option to acquire the company.

Distressed buyouts can happen in any industry, sure.  And FTX founder Sam Bankman-Fried – "SBF," to those in the know – has been on a shopping spree, buying up failing crypto companies.  What makes this stand out is how SBF has approached these deals: he's conducting orderly liquidations of founders and investors in a way that preserves client funds.  

On the one hand, that can add some much-needed stability and continuity.  Clients are more likely to put money into crypto platforms if they feel that their funds are reasonably secure.  (That is: they know they'll only lose the money because of their own bad bets, not because the platform goes under.)

On the other hand, despite all of the Twitter memes portraying him as some kind of ruthless gangster, the Possibility of Getting Bought Out by SBF would be a welcome outcome for some companies.  And it may therefore reduce incentives for good behavior, creating a form of moral hazard for crypto platform founders.

As always, time will tell.  Perhaps this latest round of DeFi shakeups will lead to a more stable industry down the road.

EU regulators unveil MICA and TFR

We went all the way to Europe for this story!  Well, we "went" in the virtual sense in that we read some French- and German-language news sites to understand some upcoming regulations.

(The minus side of our virtual travel: we didn't get to enjoy crepes and high-speed rail.  Plus side: we didn't get caught in any of the recent air travel snarls.)

Last week the EU put the finishing touches on two new, long-anticipated laws related to crypto: Markets in Crypto Assets (MICA) and Transfer of Funds Regulation (TFR).  These laws define boundaries around the issuance and sale of cryptocurrency tokens, capitalisation requirements for stablecoins, and information crypto exchanges must collect about their users.  

(Notably, these laws won't cover NFTs and DeFi platforms.)

This is when you might ask: why does a US-based web3 newsletter care about EU crypto laws? Especially since those laws don't take effect for another 18 months?  And our answer is: because Europe will be a testing ground for how these kinds of regulations work out.  Which may – just may – help guide American laws.

One common complaint in the crypto space is that there are so few laws. Sure, this encourages legal grey areas where people can make a lot of money very quickly. But it also leads to cases where someone doesn't really know where they stand until the government steps in and says: "oh hey that's against the law. Come with us, please." 

So some extra certainty could improve growth and adoption of the entire crypto sector.

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