— by Evan McFarland
I’ve been pretty outwardly opposed to the NFT movement and its collector use case since it began. Given my obsession with the idea of Web3 replacing Big Tech, I just thought the cryptosphere could do better. It took me more than a year to come around on that, and it’s for a reason I think the cryptosphere has failed to realize: The NFT world is almost wholly responsible for the future design patterns of Web3.
The Dream of Web3
Put candidly, the promise of Web3 is to create permissionless Internet services in line with the principles of decentralization, i.e., a win for the platform is a win for the individuals involved and vice versa. It’s hard to say that promise has been fulfilled, as we all still rely on legacy banking, utility, and social applications every day — but the dream is more alive than ever as awareness about Web3’s benefits continues to grow. So what’s the idea here? How does this work?
As I understand it, the main advantage of a service offering that moves from Web2 to Web3 is that the fate of the platform and its community become intertwined, since there are no middlemen to suck up generated value. For example, if you post on Facebook, you get likes and Facebook gets ad revenue. If you post on a “decentralized Facebook,” you get governance tokens and value-bearing NFTs and the platform gets a larger reach. This example can be mirrored in any place where users serve as workers with their data being the product, so all Big Tech services.
In Web3, you get this feedback loop where the value created is wholly redistributed to those that created it, and so they create more. Creativity is unleashed, value for the platform is unlocked on a massive scale, and the “size of the pie” increases.
But why is this not too good to be true? Can you really have your cake and eat it too?
The explanation, as I understand it, has everything to do with capital efficiency. Elon Musk famously explains how a decent private corporation operates at up to an order of magnitude higher capital efficiency than a government, the main reason being governments have limitless money and companies don’t. I would extend that further to say each time you shrink the organizational structure involved with some creative achievement, the capital efficiency will increase up to an order of magnitude at each step:
Governments → Private Corporations → Startups → Individuals
Each step-down, group size, and available capital is lessened. That’s to say $1 in the hands of the right person is 1,000X more useful than it is in the hands of a government.
Now this isn’t the full story of course, otherwise individuals would run everything. Here’s the catch: The largest productive outcomes require coordination in the largest groups — think economies of scale. Group size increases with the success of those outcomes, and capital efficiency goes down with a bigger group. Hence the conundrum, and the reason Big Tech companies grew multi-trillion-dollar valuations in a decade where their services barely changed. Can we ever have massive productive outcomes without getting bogged down by the structure?
Web3’s answer is yes because humans never had a decentralized framework in which to congregate. The great differentiator for Web3 is its ability to scale group coordination without decreasing capital efficiency. No matter how big a true DAO becomes, there will never be middlemen or employees to drain value. So long as it remains decentralized, the meritocratic rules of code that reward participants based on platform contributions will continue to put those “dollars” in the hands of the right people, and the growth flywheel of value generation gets set into motion.
Right now, this is just a dream and has been for quite some time now. We haven’t got that growth flywheel spinning yet. There’s no “decentralized Facebook” or Internet service that rivals its Big Tech counterpart. We are seeing inklings of banking rivals in DeFi, but the Web3 advantage isn’t as apparent there because a bank’s “productive outcomes” are based on investment, a category that only increases capital efficiency at scale. The first industry with growing evidence of this dream coming to fruition came totally out of left field about a year ago… art.
Enough broad strokes and macro claims. Let’s get to the examples.
In DeFi
We never mentioned how crypto projects get dollars in the hands of the right people in a way that companies do not. That paradigm shift came from the radical design patterns and marked success of DeFi.
Bitcoin never spent a dime on marketing, or anything really, yet it has one of the world’s most powerful brands. Bitcoin as a project built wealth by giving all of it back to its community.
Before 2020, DeFi was a baron wasteland of userless protocols. Providing a useful service alone was not enough for them to gain traction. It took a radical shift in their design patterns to change this, which started with liquidity mining. Once the ball got rolling, winners of the competing DeFi protocols became akin to those giving away the most value to their communities.
The trend started outside the dex space with Compound and Ampleforth liquidity mining. When that made it to dexs, liquidity providers were earning the tokens of the native pool they were contributing to. Dexs started to gain some traction, especially Uniswap. Sushiswap responded with a vampire attack that changed the liquidity-providing model to give away the native platform token, SUSHI. Uniswap’s response: The most egalitarian airdrop ever in their native token, UNI. Bancor, the former AMM goliath, immediately followed with its own liquidity mining program, then Balancer, then Pancake, and the dozens of AMMs that spawned as a consequence. Airdrops became the norm for bootstrapping communities, and the first dictum of every good DeFi project now revolves around rewarding users.
Uniswap didn’t suffer by giving so much away, quite the contrary. Uniswap’s airdrop placed life-changing money into the hands of thousands of the right people — DeFi’s earliest users, which we now know from the transaction sizes of the time, were average Joes, mostly young, broke, crypto degens and tech nerds. The productive outcomes coming from that are incalculable but proved invaluable for Uniswap and the larger DeFi space. By mid-2021, Uniswap had a treasury larger than that of the Ethereum foundation, and it’s still undisputed king of the AMMs. In short, Uniswap got the flywheel spinning and single-handedly sparked the 2021 bull cycle.
Everyone in crypto intuitively knows this stuff: Crypto is the generational wealth transfer, a rising tide lifts all boats, etc. These are old lessons. But the “token economic theory” that underpins them is totally counterintuitive, and it goes something like “the more you give away, the more successful you become.” This kind of egoistic altruism falls flat when applied to companies, as they are sustained by taking from, not giving to, their communities.
And there you have it. Ideals of openness, transparency, decentralization, etc. seem to win in the long-term for DeFi projects (for the most part). Ones that don’t mirror such ideals don’t make it, and we have a healthy DeFi space.
But there’s a big problem for Web3: The masses don’t care about DeFi — they care about NFTs. Though their communities somewhat overlap, their conventions, and thus ideals are not the same.
The game-fi and social-fi dapps of the future are now looking to integrate NFTs in the race toward mass adoption. NFTs don’t have a set precedent yet, but they will be a huge part of Web3. The type of conventions they will impose on the very impressionable Web3 world still remains to be seen.
In NFTs
It’s not as easy to say that NFT projects get dollars in the hands of the right people because all the sleazy practices of crypto that are known to do the exact opposite are easier to employ with NFTs. There are at least three solid reasons:
- The barrier to entry is non-existent. There is no need for a well-defined concept, team with technical chops, or path to MVP.
- The barrier to success is more circumstantial than meritocratic, depending more on social norms set by influencers and celebrities than artistic quality or project outcomes.
- The barrier to manipulate is much lower. The near-zero overhead and unique market dynamics of NFTs make it a breeze for even the smallest projects to manipulate price and volume.
That’s not to say these characteristics are representative of every NFT project. The degree to which they are is something you could decide for yourself. My claim is that in each case where one or more of these practices are successfully employed, capital generated disproportionately lands with the wrong people: Those operating with low capital efficiency.
- Wealth from the community is distributed to an unproductive team.
- Wealth from the community is distributed to wealthy individuals.
- Wealth from the community is distributed to market manipulators.
The issues along these lines are accentuated by the fact that they can replicate indefinitely. In the FT world, diluting holders in some unpredictable way is extraordinarily rare and completely unacceptable. In the NFT world, it’s synonymous with making a secondary collection.
In short, if you want to take advantage of retail investors, making an NFT project is your best bet. If this remains an accepted way to use a tool as powerful as NFTs, the consequences stand to destroy the dream of Web3.
In BTC Flower
The Internet Computer (IC), for all intents and purposes, is the best technological embodiment of the Web3 dream we have. Since this is a personal blog, and it’s something I’ve discussed ad nauseam in Blockchain Wars, I’m letting myself get away with this one.
Being such a young and foundationally different type of blockchain, the IC has no set precedent. BTC Flower’s goal is offering one aligned with the dream of Web3, and it is succeeding at that.
First of all, it’s made independent of Web2 infrastructure (barring Twitter and Discord) and with all the technical bells and whistles Web3 people like to ooh and aah at, etc. But BTC Flower’s relation to the dream of Web3 comes from the intangibles that arose as a consequence of its decentralization-enabling technology.
The artist Ludo spent 30 years honing his craft, all throughout keeping a strong desire to share it with the world for free, as per the street art. But to pay the bills, he needed to operate in the confines of the conventional art world, with all the intermediary services and contracted gigs that tailor his work to the needs of galleries and high-end collectors. With such a rigid system of monetization for the single most creative industry, it’s no wonder artists go underappreciated until long after their death.
As a true master of his craft, Ludo should be free to focus on what he loves without constraints. It’s the best thing for Ludo and the art world because that place of boundless creative freedom is where the best creations come from.
With BTC Flower, Ludo has no constraints. His art does not have to appeal to any group, because it is equally available to everyone. His art and message can spread across the globe without help, permissions, or approval from any entity. And not the degree to which Ludo art is recognized, appreciated, and rewarded is solely up to the world at large, not the art world’s gatekeepers.
But the benefits only begin with the artist. The vast majority of the value generated from BTC Flower was returned to the right people. To see how, let’s recap the launch.
So BTC Flower is highly decentralized, with the average holder currently having 2.6 flowers, but the spread is what’s significant here. The graph shows the unique buyers (red) and median price (green) over time. The vast majority of new buyers got in at prices below 20ICP, and that’s even after the 5ICP public sale. The steep price rise to follow was driven by a small number of large buyers, and those early folks are now sitting on a 15–60X.
This is essentially the opposite trajectory of a typical asset launch. Usually, early investment privileges go to whales who later dump on minnows. This time it was a launch of diamond-handed minnows who forced whales to get in at high premiums.
It was quite easy to do really. It just required sticking exclusively to organic marketing and launching with a grassroots community at a modest price. In addition, no wash trading or other funny business in the markets. It just so happens this is so unique because that this criterium is scarcely ever met.
It’s also not hard to see how a modest launch and subsequent giveaways like the ETH Flower airdrop are strategic, and it all comes back to capital efficiency. BTC Flower is a community-driven project. Just think, who is going to provide more value to the community: A whale that gets a hefty payday from 50 flowers, or 50 struggling artists that each make life-changing money from one flower.
BTC Flower wasn’t the only one to benefit either. All the created value flowed right back into other communities and brought about massive volume and floor price spikes for the entire IC NFT ecosystem as thoroughly explained by Kyle Lanham:
This is the promise of Web3 in action. Examples of the sort are still few and far between in the cryptosphere. A lot is coming to the IC, quickly, and the next challenge goes well beyond NFTs. It’s reimagining legacy Internet services in the realm of social, gaming, utility, and finance. Doing so meaningfully hinges on our ability to leverage what Big Tech can’t: The power of (1) decentralization and (2) community.
BTC Flower’s goal is to set a precedent for IC projects, much like Uniswap did in DeFi, and it goes something like this: If you want to make a successful Web3 project, generate massive amounts of value and then give it all away to your community. And if we as a crypto community want Web3 to be successful, we better make damn sure the ones following this path are the winners.
