Three Things #4: Feb. 6, 2022
The Big Three
A few years ago, it still wasn’t at all clear what blockchain was good for, other than self-sovereign money—and that money wasn’t great because it was so volatile and fees were so high. Fast-forward to today and things are looking quite different. Several new, popular, legitimate use cases have emerged. For me, three have risen to the top of the heap as clear, unambiguous, irrefutable cases of useful applications built on blockchain and cryptocurrency. You’ve probably heard of all three, but have you considered what they might become?
Thing #1: Stable Coins
A stable coin is a cryptocurrency that’s pegged to a relatively stable asset such as USD, using one of a small set of mechanisms. They’re a useful middle ground for people who don’t want to deal with fiat but also don’t want to be exposed to the volatility of assets like BTC and ETH. They were first widely used by crypto traders to move funds around between exchanges or to reduce exposure to volatility.
An even more important, interesting use case is that of people who happen to live in places with high inflation, and don’t otherwise have access to dollars or other stable fiat currencies, using stable coins to protect their savings from inflation. We’ve seen stable coins explode in popularity recently in places like Argentina and Turkey.
Another interesting, related use case is remittances: when workers want to send funds back home, typically from wealthier countries to poorer ones. Apps including Strike and Valora pioneered the use of stable coins for remittances, allowing people in Europe and North America to send funds to countries like El Salvador, Argentina, Kenya, Brazil, Ghana, Zimbabwe, and the Philippines.
As these apps get better and this infrastructure continues to get built, I see two compelling future directions for stable coins.
The first is more creative monetary policy and treasury management mechanisms. While the vast majority are built on naive, unsustainable ponzinomics (look into Olympus, Frax, Luna, etc.), there is some real innovation brewing and, over time, better designs will emerge. This experimentation can happen much more quickly and with less at stake than it could at the nation state level.
The second is crypto-enabled products and services that can be built once the basic infrastructure is in place, such as micro-insurance and peer to peer micro-lending. These would never get built on traditional payment rails because they’re impractical to run, operate, and keep compliant cost-effectively—but they would work on crypto rails due to different cost structures and incentives.
Thing #2: DAOs
In order to accomplish pretty much anything significant, human beings need to work together. Historically we’ve found lots of ways to do this, from marriage to slavery to guilds to indentured servitude to royal charter to partnership to, finally and most importantly, limited liability companies. This innovation is already 400 years old. It’s kind of incredible that, in the time since, humanity hasn’t found a much better way to cooperate or do business—but today we finally have in the form of a DAO.
Recently I’ve had a love-hate relationship with DAOs. I think it’s because they’re deep in the Trough of Disillusionment at the moment. DAOs, and the promise they hold as a novel form of human coordination, are the first blockchain use case that excited me, and I’ve written many times about the benefits of DAOs and of decentralized systems more generally. Two weeks ago, I wrote about the challenges they’re facing as they attempt to scale, find “protocol-market fit” and begin the process of going mainstream and replacing existing structures such as corporations.
To be clear, DAOs are not a panacea for the ills of the world. They’re not well-suited to every use case, and I don’t think they will ever completely replace structures like companies or cooperatives, but they’ve already begun to find traction in certain niches.
The best way to understand a DAO is as a form of lightweight company. They’re lightweight in the sense that they’re very fast, easy, and cheap to “spin up” and just as easy to dissolve. (In this way, they are to social institutions what the cloud was to server rooms.) They don’t require paperwork or lawyers. And they’re especially good for global, internet native communities. I’ve been part of many DAOs with contributors in 5, 10, or even more countries, jurisdictions, and tax regimes. There’s no way that these communities could function or would ever even have been created as traditional companies.
I think we’ll see many projects start as DAOs and later evolve into companies, but we’ll also see the opposite: companies “decentralize” themselves into DAOs, as Shapeshift has done. This will happen when a project cannot feasibly be run as a centralized company due to regulation, or for some companies that choose to “exit to community” (rather than IPO or be acquired).
It’s very, very early days for DAOs. If cryptocurrency is in the top of the second inning, the players aren’t even on the field yet for the game of DAOs.
Thing #3: NFTs
Like DAOs, NFTs are in their infancy. When most people think of NFTs, they think of bored apes, pudgy penguins, and other trendy Twitter profile pictures. This sort of NFT took off in a really big way last year. But NFTs have actually been around for a few years and they have potential use cases that go far beyond profile pictures, and beyond visual art.
The utility NFT is a good example. The first utility NFT, which you can think of as a ticket or a claim that unlocks or serves as a key to an application, was probably the Urbit ID, launched in 2018. Each portion of Urbit address space is represented as a NFT on Ethereum, which is like a deed that can be traded or sold independently of Urbit.
Another good example is the ENS domain. Domains purchased since 2019 are represented by NFTs that work a lot like Urbit address space. Other examples of utility NFTs are the Uniswap v3 LP NFT, which represents a claim to a particular portion of a liquidity pool, and Kong.land citizenship, where each citizen holds a unique “NFT cryptopseudonym” that serves as their passport to the Kong.land network state. Then of course there’s virtual land in one of the many nascent metaverses (which I wrote about last week).
We often hear about NFT use cases such as ticketing (trade those concert tickets without paying crazy fees) and gaming (letting players truly own their in-game items and take them across games and platforms). But we can get even more creative!
When you really boil it down, what is a NFT? It’s a unique, immutable piece of data that's provably scarce, ownable, tradable, easily addressable (e.g., with a token ID) and composable (i.e., it can be used inside of other applications). That’s a powerful set of properties that have never existed together before. All of the initial use cases, including digital art and deeds to digital property, are skeuomorphic, in the sense that they represent or connect to things that existed before the blockchain and before NFTs existed. Over time we’ll see even more creative, “native” NFT use cases emerge.
One example is digitally-native forms of identification, such as DIDs and SSIDs, that could finally allow users to take control of their data and their identities out of the hands of Facebook and Google. These schemes could be used to create digital credentials issued by, say, a decentralized university. Another good example is digitally-native social media “community passes,” which let fans of a particular artist or influencer participate in their community by buying and holding a NFT. These will allow artists and influencers to grant exclusive access to content, events, and swag to their most die-hard fans, and in some cases these NFTs could even allow fans to invest in an up-and-coming artist and participate in shared royalties. Yet another creative example is issuing location-base NFTs, such as those used by FOAM protocol’s proof-of-location system and the proof of attendance protocol.
I think, ultimately, NFTs will represent all digitally-native content that has (or could potentially have) value. And, as crypto has taught us through dog coins, digital rocks, and 2007 Kia Sedonas, value is subjective. NFTs will continue to get faster, easier, and cheaper to issue. Every photo we take, every tweet and TikTok we post, every YouTube video, and every article we publish will be a NFT. This trend is already beginning.
While it’s easy to forget, a NFT is, in fact, also a computer program (since it has a smart contract under the hood), meaning that it can be programmed to do, well, just about anything. The vast majority of NFTs today are static, like the first web pages were, but we’re also seeing the beginnings here in dynamic NFTs.
We’re on the verge of a veritable explosion in the creativity and use cases of NFTs. It’s a theme and a topic I expect to explore more in the coming weeks and months. Watch this space. Things are about to get squirrely.