What's going on with crypto? (TC Disrupt 2021)
TechCrunch Disrupt is synonymous with trends and innovation. Fintech is an industry with considerable excitement since blockchain evolution is creating opportunities that startups are trying to leverage daily, and investors are trying to get that significant return. This hype comes with a lot of capital availability that accelerates innovation even more.
This blog post covers the main insights shared around the crypto space, which were plenty since the crypto market resurfaced. Some of the topics were non-fungible tokens (NFT) and how they’re reshaping the ownership of digital assets, decentralized finance (Defi) and its growth, and decentralized autonomous organizations (DAOs).
NFTs were the main topic around the Collecting Crypto Opportunities talk where Roham Gharegozlou, CEO at Dapper Labs told how they created and launched many digital collectible marketplaces into the mainstream of society.
What’s an NFT?
NFT stands for “non-fungible token”, a unique crypto token that represents ownership of a unique digital asset. It uses blockchain technology and can’t be replaced or duplicated. NFTs are not crypto, even though we need crypto to buy them. They can be traded in specific marketplaces such as OpenSea.
The emotional aspect behind NFTs
Ben Rubin, CEO and co-founder of Slashtalk, shared the emotional aspect of NFTs with this thought: “Our identities pretty much rely on what we do own”. Our physical assets identify ourselves and our values, and digital assets are rapidly going in the same direction. Let’s think about people born in the digital era and how everything is changing so fast; this makes total sense. Digital assets will be as valuable as physical ones as time goes on, and it’s something people will want to possess.
From Ethereum to Flow
Gharegozlou dedicated some time explaining why Dapper Labs moved from the Ethereum network to a Flow blockchain that focused mainly on NFTs and was developed from scratch by his team. They created cryptokitties.co on top of Ethereum at the end of 2017. Still, it wasn’t efficient for trading NFTs because they created it to enable general purposed DApps by running any smart contracts, not just ERC721 (the standard required to make NFTs in Ethereum). So they decided to create a blockchain-focused on NFT, improving the consumer and developer user experience. It’s also much more scalable and significantly cheaper gas (transaction cost) and energy consumption due to a more efficient consensus mechanism.
Using Flow, Dapper Labs launched NBA Top Shot earlier this year, for NBA fans who want to own that special moment. It turned out to be a big hit.
What’s coming for NFT
The digital collectible craze is real; in a world where crypto is regulated and under so much speculation, we still have to wait and see if NFTs are here for good. Flow is doing great work in accelerating NFT adoption by lowering the barriers through reduced gas prices and user-friendliness.
We have to wait until mass adoption occurs or it draws down. What’s genuine is the current interest in the industry and the considerable capital liquidity that allows the space to push forward, test new ideas, learn from failure until delivering valuable apps around NFT to the mass.
Another central topic around crypto was its regulation. There’s an open dialogue around this issue as it’s highly sensitive for the industry. Leading players expect clear direction around regulations so they can concentrate on innovating.
Brian Armstrong, CEO of Coinbase, spoke of his experience talking with regulatory agencies. Recently he made a conversation between him and the SEC (“Securities and Exchange Commission”) public after they refused to allow Coinbase to launch a new Defi product this year.
Check out Brian’s tweet about SEC’s response and his expectation around regulations.
1/ Some really sketchy behavior coming out of the SEC recently.— Brian Armstrong (@brian_armstrong) September 8, 2021
The thread said the following:
- Coinbase was about to launch a new product to market that allows crypto holders to earn a yield on their assets. And although many companies already offer this service, it’s something that’s still unregulated in the US.
- After reaching out to the SEC and its response to treat it as a security, Coinbase decided to abort the product launch. SEC never explained why they considered Coinbase’s crypto yield a security, but the same criteria didn’t apply to competitors.
- Brian’s, and the crypto industry’s expectations around regulation, are to have clear rules and directions that allow investors and crypto companies to continue innovating.
- He said they are happy to follow any regulations. The problem is there are no regulations, or they’re unclear.
- He emphasized that only Coinbase was not allowed to offer crypto landing, while other companies are already doing it, calling for an unfair application of regulations across the industry. Brian feels that SEC is going against its main objectives: protecting the investors and building a fair market.
- He ended by highlighting they’re open to a dialog that creates the clarity the industry deserves. They would be more than happy to make changes on their products to follow any regulations deemed necessary whether they agree with them or not.
DAOs are another hot topic that’s worth paying attention to in the crypto space.
What’s a DAO
DAO stands for “decentralized autonomous organization,” and it’s a type of organization that exists only as a set of smart contracts that enforce rules by running on a blockchain. As with plenty of blockchain applications, people are particularly interested in its implications for the investment world.
We can understand a DAO as an internet native organization that is controlled and managed by its community.
Manasi Vora, who joined the “How DAOs Could Shake Up VC” panel defined a DAO with the following statement:
Organizations are just communities with aligned missions that are coming together. And usually, there is a treasury or financial incentives in place. Autonomous means there are rules that are encoded in code. And it’s governed by the rules that are already created at the beginning or at the launch of the DAO, thus making a lot of the decision makings really transparent. And then the last component is decentralized, which refers to just the decision-making process, where it’s not hierarchical, there isn’t a CEO or board that makes all the decisions, it’s really the community coming together, making decisions to proposals and voting, and leveraging the collective power.
Types of DAOs
Manasi Vora and David Pakman shared different types of DAOs that are successfully operating so far.
Like-minded individuals participating in the evolution of a software project need to have some coordination mechanism for decision-making. It’s pretty much how open source works, but the DAO is a more formalized and democratic approach to make governance decisions. Which direction should the software go? Which features should we add? What should its priorities be? How should its monetization work? All of these are governance decisions.
Pooled investment DAOs
This type of DAO had a massive increase in activity recently due to NFTs. These pools try to create a group of people to invest in NFTs together. Nowadays, NFTs price floor is too high and rising so fast that it’s super hard for a single person to invest in it. A pool is created to share the ownership of this asset. It’s pretty much an investing club that fractionalizes the ownership of NFTs or any collectible. Notice that typically investors are people in the crypto space and not VCs. BeetsDAO is an example of this kind of DAO formed in a discord chat to buy four EulerBeats’ NFTs.
These DAOs are more about finding commonality around a passion or interest area and utilizing a voting model to decide what the group should do together. It’s the less developed DAO class so far, but it’s interesting to keep track of it.
Why a DAO instead of a traditional VC
Manasi started the first DAO focused on funding female and nonbinary crypto founders. When asked why she chose a DAO and not a traditional VC to invest in underrepresented entrepreneurs, she gave multiple reasons.
- Setup times and costs are next to nothing. In Komorebi’s case, it took just a couple of weeks to go from idea to launch.
- The entry barrier in terms of setups is minimal.
- Capital formation happens very quickly.
- They are leveraging collective power. Komorebi group is very mission-aligned, talented, and has worked in the crypto space. They have the background to make these decisions efficiently.
- If we invest in crypto founders, we have to have a crypto native organization.
- DOA allows us to decentralize the decision of conforming to the investment portfolio. It will enable us to leverage multiple investors’ backgrounds instead of giving this decision to a VC partner.
Is a DAO a threat to the existing VC model?
It’s indisputable that DAOs enable individuals to pool their capital for group investments, and rules reproduced in code leave no room for trust issues between them. But the best capital and the most significant returns come from highly non-consensus investment decisions that are not obvious at the time. As of today, most people disagree with it.
In David words:
Consensus decision-making is poison to VC. If everyone agrees that it’s a great idea, then it’s either too obvious that it has already happened, or it’s just not, and therefore, it’s just not going to produce a great return. And VC is about, you know, trying to find the few that produce the greatest returns.
Normally these few investments are not that obvious and most people don’t have the context to make the right investment decisions or create a VC portfolio.
It’s important to clarify that a DAO can be set up using different rules, for example, maybe not everyone has to agree to make an investment, investors would put their capital and trust the investment decision-makers to make the right decisions, which is actually how traditional VC works.
In the future, decentralized world, a group of investors voting on which startups to back seems unlikely to David. Only a small number of people will have the background and information needed to make suitable investments. He believes crypto money will increasingly go into crypto projects, so their capital won’t necessarily come from VCs.
Manasi agrees but visualizes clear differentiators for DAOs, such as a sense of ownership, faster liquidity, and influence on governance and how the DAO functions.
Another super exciting characteristic of a DAO is its accessibility. These people don’t have hundreds of thousands of dollars to invest, and now they can pull with others and get returns similar to VC investors. Although DAOs might not disrupt traditional VC, she thinks it will take a substantial portion of the crypto space and even the investment industry.
How to create a DAO
These were the steps shared by Manasi:
- Define its mission and value. What’s that core thing that makes you come together as a community?
- Recruiting the community, people who are interested in the same mission. Getting the right people that will add genuine value to the mission.
- DAO needs to raise funds too so they can be invested in the mission.
- Last and most importantly, deliver your mission.
There are many tools available to create and manage a DAO and its different components. Aragon Govern is just one of them. There are still legal questions and complexities around forming and managing pool investments, and DAOs have yet to face an SEC regulation.
Crypto has flipped the investment world for early-stage startups. Before the crypto world, only institutions could invest in internet companies; now, crypto consumers and web3 users can invest in crypto projects, tokens, NFTs. Crypto changed that and allows end consumers to get returns and economic benefit too.
Let’s quickly recap the Web evolution to give context.
- Web 1.0 was the read-only web where most people were reading rather than writing. The content available online was created by few people, and the rest of us simply consumed it. There wasn’t much interaction among users neither.
- In Web 2.0, most users are content creators, and that’s how most people understand the web today. It’s the interactive version of Web 1.0, where end-users create the data, but a few big companies own it.
So, what’s Web 3.0?
It’s the decentralized web where these big companies’ power is given back to people, distributing the ownership of data and the whole network to everybody.
Bitcoin was probably the first Web 3.0 platform that turned the power to its users. Crypto wallets are replacing banks; now, owners have their private keys to trade on the network. You don’t need to trust banks anymore since Web 3.0 it’s backed by consensus mechanisms inherited by blockchains. Web 3.0 has no physical location or data restrictions; everything is global and public.
An excellent example of recent Web3.0 innovation is DeFi (Decentralized Finance), where anyone holding crypto can lend and borrow funds; banks are no longer needed to get returns from your assets. Here you can see how power is given back to the people rather than being centralized by entities.
Web 2.0 has a network owned by central entities and in Web3.0, it could happen (it’s a possibility, this is pretty much new and it’s in its early stages) that the network (everyone including you and me) owns the network.
Our identities are pretty much reliant on what we own, and Web 3.0 reframes how we think of ownership. Suddenly, People broadly accepted web 3.0’s financial layer, ownership shifts from person to person, and NFTs are on the rise.
How web3.0 could reshape social media in the mid-long term?
Ben Rubin points out how Web 3.0 and crypto have been evolving through three steps.
- The insiders get excited; it goes up, then it pulls back.
- Then the industry experiences something similar. People get excited, goes up, then pulls back.
- Ultimately retail (you and me, people using it as part of their day-to-day) get excited, goes up and back.
He concludes NFTs are an insider moment in the first step, so there are two remaining phases until retail users are reached. However, Ethereum and DeFi are in the second phase, the industry is already excited but it hasn’t reached the mass audience yet.
He said we are so early that there’s a lot of excitement regarding social media, which means a lot of capital in the market. An abundance of capital is translated to the implementation of ecosystem ideas. However, it’s tough to make sure they’ll deliver on their promise. There will probably be plenty of projects that’ll raise a lot of money and fail, but they will still help the industry move forward, and it will learn from those missteps. Eventually, after multiple failures, people will create something meaningful.
Crypto positively impacts several industries, most directly fintech, and others such as games, investments, creators economy, games, etc. Blockchain is the foundation for all these innovations; it allows us to run Dapps by implementing smart contracts owned by shared networks, bringing transparency, trust, autonomy, ownership, and ultimately, gives the power back to people. Regulations around crypto play a central role in how fast these innovations can occur. NFTs, DeFi, and DAOs are just the tip of the iceberg for what’s coming next.
If you have a business idea around crypto, we’d love to learn more about it and help! Do reach out and thanks for reading! 😊😊😊