Long Take: Creating, Transacting, and Storing Value in the Financial Metaverse of NFTs, DAOs, and DeFi

Hi Fintech futurists --

This week, we cover the following:

  • Thesis: The evolution towards a financial metaverse is rapidly accelerating, with the growth in generative assets, profile picture avatars, the emerging derivative structures that build on their foundation, and DAOs that govern them. This article highlights the most novel developments, and builds the case for what a digital wallet / bank will need to be able to do in order to succeed on the way to this alien destination.

  • Topics: DAOs, NFTs, Metaverse, visual art, blockchain, crypto, Robinhood & Say, financial community, video games, digital inventory, network states

  • Tags: OpenSea, Etsy, DeadBeef, Ringers, Fidenza, Casey Reas, Mondrian, Kandinsky, CryptoPunks, Bored Apes, CoolCats, Gutter Cat Gang, Blitmap, Accelerando, Axie Infinity, Dark Forest, Jay-Z, Logan Paul, PartyDAO, Nouns DAO

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Long Take

Time passes differently depending on where you are.

Imagine, dear reader, that you stand in front of a series of wormholes. Each one leads to its own laws of physics, tools and technologies, and alien societies. As the director of your own destiny, you can choose to look into each one and observe the evolution happening in each world.

The first world you see looks a lot like the one we are used to. Companies report earnings quarterly and serious people wear suits and ties. Being responsible means getting a good education, keeping your head down, and working at a well-branded investment bank. People use Microsoft Office. Average returns for well defined financial instruments average out to 5.5% per year, and 20% down seems like a very bad year.

The second world you see is a bit more zig-zaggy. Companies put “.io” and “.xyz” at the end of their domain names, and employ more software developers who wear hoodies. They get to be deeply unprofitable for a long period of time, until one day they go public and are showered with cash and fame. People who write code make almost as much money as people who know how to close a deal. Everyone uses Slack, and returns are 20% per year, but have a long tail change of going to zero.

Yet we are not sated by mere zaniness. We need raw, unadulterated transformation, insanity, calamity, revolution, and explosion. Theatre must escape its stage to devour the fabric of reality.

As we peek into the third portal, we see time racing recursively, looping onto itself. We see a hive mind of cartoon characters adding and subtracting gears and widgets on a giant network, making century-old mistakes, re-inventing things everyone knows, and then opening light-speed gateways to new digital planets. Memes and fashions fade in and out faster than you can understand their cause, only to be replaced by abstraction layered on abstraction. Nothing is sacred but the mechanical ledger, and we are all but cosmic dust in its gurgling maw.

You pull back. In the first world of finance, time ticks linearly. In the second world of fintech, we go 10x the speed of the old machines. In the third world of crypto, ideation, invention, and evolution disappear instantly into the event horizon of the singularity.

There are some truly strange things going on in 2021. We say this constantly, and try to find the right words to explain it. And yet, every week it feels that we are at some precipice. Like something has been unleashed that almost nobody else can see, but is profoundly reformatting the nature of the world. The tentacles flash into view occasionally, but we mistake them for shadows, or even worse, hallucinations of the insane.

It’s late August, and there’s not enough brain cells or time to make sense of things. The fall will bring a cool rationality. There are things to discuss about OnlyFans being censored by banks and payment processors, or the earning reports of SoFi, Marqeta and the spate of newly public fintechs. Let others say them. Look instead upon novelty, because it is the key for what comes next. We will organize all this into some meaning later.

Volumes Louder than Words

The leading NFT marketplace OpenSea has seen $1.2 billion of sales in August alone, or $1.5 billion of sales in the last 30 days.

That’s about what Etsy was doing per quarter in 2019, or per month in 2021.

Etsy is worth $25 billion in the public markets, while OpenSea’s latest private round was at $1.5 billion. This is before they connect Flow (NBA Topshots) and Tezos (Hic et Nunc) into the storefront. Etsy sells you handcrafted physical things made by people. OpenSea sells you handcrafted digital things. Which do you think will be a bigger opportunity in 10 years?

If we look at what types of things are being crafted and resold, they fall largely into two categories. When Beeple had the incredible $70 million sale last year, people were buying large individual artworks. To some extent there’s a bit of this still going on, and it mirrors the most conservative use case — to have a thing you can show like a painting. But this is not what is most popular. Instead, there is accelerating interest in (1) profile picture avatars (i.e., PFP NFTs), and (2) generative art engaging with the onchain medium, largely led by Art Blocks.

Here is an example of a recent $6MM+ sale from an artist known as DeadBeef, which include both visual and sound work.

Another absolutely stunning collection is Ringers by Dmitri Cherniak. Sales have been hitting $1MM+ for one the rarer versions of the 1,000 generative pieces printed. Similar numbers have come from a mint called Fidenza by Tyler Hobbs. A number of other generative art celebrities (e.g., Casey Reas, Joshua Davis) have engaged on Art Blocks with beautiful pieces.

Some of you might be skeptical about art. That’s okay. A lot of people were skeptical of Kandinsky, or Klee, or Mondrian a century ago as cubism, constructivism, and abstraction entered the mainstream once photography rendered portraiture a commodity. You can see their ideas echo in the software code that is now being written by developers to be printed by a crowd of crypto millionaires interacting with a techno-art commune.

It feels expensive. It feels unbelievable. But it also feels like the floodgates for digital creative work have been opened, after being repressed for decades. The human need and desire to collect, to create, to set a beautiful fire and tell stories — these things are timeless and true. Art gives us capacity for vision and metaphor. We can finally feel like it is our again.

But this is small potatoes relative to what’s happening in PFP land.

Heads, Tribes, and Flags

We won’t rehash our thesis that PFP avatars are flags of tribes on Web3, and that Decentralized Autonomous Organizations (DAOs) are their fortresses from which to build a shared narrative about the outside world. This should be obvious to anyone who has interacted with a Bitcoin maximalist or a CryptoPunk holder.

To get into the fortress comes with major social and financial benefits — like early access to investment information, or a sense of belonging and a social following, or co-investors in a pooled vehicle. You would have something in common with Jay-Z. But it comes at a price. The most basic Punk will now cost you over $100,000.

Maybe you are merely Logan Paul, the super bro. In that case, you would “ape” into an Ape. But membership to that club is also limited, with the minimum floor also rising to $100,000.

There is a long tail of less popular projects, each forming “gangs” and vying for citizens in the open wilds of the Internet. There are millions of people — make that billions of people — that want social status. And there’s not that much to go around. They’re not Facebook profiles, after all. The same billions will need avatars for the metaverse, and will end up comin in at the bottom of the hierarchy.

What’s really strange to us here is that PFP avatars indirectly attack the problem of decentralized identity. Lots of crypto teams have been fruitlessly trying to convince holders to somehow encrypt and tie their real world selves to crypto rails. But users haven’t wanted to adopt it, because it is hard and there is no benefit. Identity is boring! And yet in a flash, literally everyone wants to hold a third party video game representation of themselves as an avatar, use that avatar for access to virtual worlds and communities, and collect items and powers for that particular NFT.

Twitter avatar for @zapper_fiZapper ⚡️ @zapper_fi
Wallet Avatar customization is now live on
zapper.fi! From your dashboard, hover over your avatar icon to prompt an edit button to appear. Click & select an NFT you own as your new wallet avatar. 🐱🧚‍♀️🧙‍♂️🐵 Congrats on expanding your identity in the Zapperverse! ⚡️ Image
Meet PunkBodies, NFTs Composable with CryptoPunks - by William M. Peaster -  Metaversal

Here’s a flavor of the types of narratives being spun to get people to buy into $5,000 NFT avatars. It is a game — and the rest of our reality looks like a game too.

Things Get Weirder

Still here? Good. Everything so far has been pretty basic — just digital culture spilling into the financial world.

Here’s the obvious point to make: traditional sports vs. esports. At first esports was not taken seriously, because it was just video games for kids. Now, it rivals every traditional sports league for revenue generation and attention. How do you think these numbers will shift over time?

But as the tweets upfront from Balaji and Ian said, we are on the verge of network states (vs. nation states) that function as social techno-communes and are organized with DAO governance. Or perhaps we are already there. Entertainment conglomerates like Disney have generated persistent story-telling metaverses that just need to be populated by human protagonists. Check out the thread below.

If these ideas are true, they explain some of the more strange developments. Like the rise of mining DAOs that allow institutional or high-net-worth investors to buy large bulk orders of digital property and identity without being front-run by time-traveling arbitrage bots.

Or people literally just swapping and trading flat colors back and forth, as long as those colors can be inserted into their avatar backgrounds. Or designing generative art highlights that tie to a particular hash onchain to create a timestamp transformed into visual art, like some ancient scribe divining a new calendar system based on the movement of the stars at night.

Twitter avatar for @7Surfer7Silver7Silver Surfer 🍍 @7Surfer7Silver7
justbackgrounds.xyz My friend @jpegdigital launched a cool little on-chain collectibles project. .01 ETH per w/ 256 supply. Don’t ape too hard, save some for other collectors as well. 💙Just BackgroundsCollection of 256 rare and unique backgrounds.justbackgrounds.xyz

And game mechanics bleeding into the design of these avatars, decoupling the full identity to its component parts to recreate the $1B+ revenue streams that games like Fortnite and Path of Exile have so successfully constructed through optional skins and cosmetic upgrades.

Or look at new DAO models — like the Nouns DAO, which mints an NFT avatar every day in perpetuity, priced as an auction. All auction proceeds go into a collective treasury governed by the tribe. The treasury currently sits at $6 million and the price of admission is over $300,000 in order to be able to govern this war chest and direct DAO activity. The earlier you are, the more power and status you garner relative to late comers.

Imagine a venture capital fund where the investment strategy can be more strongly influenced by early partners, who had to buy in with higher conviction to be early. Or alternately, an operating company that took on founders that were willing to spend the most to invest in the company.

Another novel DAO model is the PartyDAO, which makes it much easier to build your own DAO and take collective financing action via the PartyBid app. We in Finance are still thinking about how to interpret the acquisition of Say by Robinhood for $140 million — will adding shareholder voice really mean that much for the broker?

In crypto, the answer to this question is obvious. There is *nothing but* financial voice and financial community. There is *nothing but* memes and collective action. Belief instantiates truth. One such version of a PartyDAO was able to purchase a rare CryptoPunk for $3.2 million and split ownership between 478 people. Twitter lit up with hundreds of people wearing the same avatar, cheering with the same melody.

It reminded us of the Borganism concept from Accelerando — a group of people sharing a single hive-mind consciousness in their brains. Step by step, technology is building such tools. All these alien creatures are going to inhabit digital worlds, lobby traditional power centers to implement their own laws (e.g., see Wyoming), and generate economic outcomes from simulated activity.

Crypto has unfolded like a multi-stage flower. First, the base layers of Bitcoin and Ethereum brought digital scarcity and computation. Next, the decentralized finance layers created a commercial chassis. Now, the creative economy is opening up the possibilities for people to produce and consume with NFTs. If you are wondering about 2022 and the future, it is a fair bet to point to blockchain gaming with large financial repercussions.

That has already happened with Axie Infinity, which makes $500 million in revenue per quarter.

And it will happen in games like the Dark Forest or other translations of traditional mechanics into on-chain compressions. One can anchor the logic engine of the interactions to a blockchain, and then swap out / decentralize front-ends such that different users may have different visual experiences depending on the NFT avatars and identities that they hold. We are literally going to live in separate universes, even if connected by the same rule set.

Key Takeaway

Thank you for making it all the way to the end of this exploration. It is a loose outline of what is happening at the very edge of commercial activity. The insights aren’t pre-packaged, but there are many links to explore and yours to build on. If any of this resonates, don’t hesitate to reach out with ideas.

The core thing we take away from these developments is that there needs to be an expansion of what it means to store value. We think it is possible that MetaMask, and other crypto wallets, could be larger custodians of assets than a Bank of America within 20 years. Whereas banks are focused on the abstractions of money and the financial instruments and transformations that derive therefrom, digital wallets contain not only the money layer, but also the actual digital objects that matter to the holder. Imagine a magic sack into which you can fold up your actual land, house, car, and all physical valuables. This is the wallet of the metaverse, and it is here faster than you think.

Just pick the right wormhole.

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