Brief Market Thoughts

Lots happening in the market! Currently spurred on by rumors of the ETH ETF being expedited by none other than the SEC? My assumption in this mess is that the SEC has been acting as a political arm of the democratic party, and maybe the Dems are realizing that alienating the crypto community may not be a strong tactic with the upcoming election.

Another note: in the EtherFi and New Pastures article I laid out a strategy to move ETH into a new rollup (Linea) as well as a few different LRT and Defi protocols. Thus far Renzo and Zerolend have distributed their initial (and largest %) airdrop. Unfortunately these returns did not come close to the returns seen by Athena and Etherfi earlier this year. Market timing surely had something to do with it, but the main issue I saw was execution and communication by both teams. There might be some significant opportunity yet as the Linea surge just began and should distribute some value later this year.

As far as LRTs go, it feels like EtherFi is the king similar to how Uniswap is the king of decentralized marketplaces. That said, I have decided to add value to KelpDAO and hold rsETH in a few different Defi and ZK rollup positions. If anyone decides to do the same make sure to join Turtle DAO to reap a bonus 50% on the points you're earning in Kelp! There's no smart contract risk involved with signing up. Add my referral code when you do (OKDUNC)!

Ok, onto understanding LRTs at a high level...

One of the more novel technical innovations this cycle involves liquid re-staking tokens (LRTs). These tokens provide a way for staked cryptocurrencies to be re-staked on other systems that require economic security (think: proof of stake systems). In return, the LRTs given to those systems generate additional yield. This is all made possible by Eigenlayer – a protocol built to facilitate the commoditization of economic security. Today, the LRT ecosystem focuses on re-staking ETH but could move on to include other networks in the future.

Economic security in a Proof of Stake consensus system refers to the robustness of defense against attacks. Essentially, the more value that is staked to validate and secure the network, the more resilient the network becomes to hostile takeover. Read more about attacks here.

Ethereum provides the most robust and immutable foundation for smart contracts to run on a blockchain. At the same time, the Ethereum network has limitations around transaction speed and cost, making applications expensive. 

Improving network scalability and reducing transaction costs requires a significant amount of middleware (rollups, bridges, oracles, transaction execution and computation). Eventually these transaction states move to the mainchain for final verification.

This infrastructure is well on its way to being a critical resource for decentralized applications to function in a more accessible and cost efficient way, at the same time the rollup ecosystem developing alongside Ethereum has some challenges:

1. Rollups and sidechains today are unable to share liquidity, Defi apps are forced to choose which rollups to deploy on top of and are limited to the liquidity available in those specific environments.

2. Rollup and some sidechains verification today uses centralized transaction sequencing that has a higher chance of manipulation and corruption than a decentralized system.

3. Adding liquidity to rollups and sidechains requires bridges that also rely on systems that have a high degree of centralization in order to act quickly.

Liquid re-staking tokens provide a way for new, decentralized middleware systems to leverage the economic security of the Ethereum network to handle transaction execution in a more efficient and decentralized way. The extra yield generated for holders of LRTs comes from these new forms of middleware infrastructure.

There’s a LOT of jargon and detail I’m glossing over in here, much of which I am still learning myself. The big takeaway tho: LRTs and Eigenlayer help leverage Ethereum’s economic security to develop scalable and secure environments for smart contracts to function. 

The risks involved with any software project (especially large scale decentralized systems) bring a combination of known and unknown factors. Ultimately, some problems will not show themselves until the system is live and in action. 

The highest risk noted by Vitalik Buterin and Justin Drake (who recently joined as an advisor to Eigenlayer) last year generally revolve around the event a significant portion of restaked ETH is slashed (ie. re-staked ETH is burned due to malicious activity). If a new system emerges via LRT economic security relies on a similar Proof of Stake system as Ethereum, there could be a massive loss of fund on the mainchain. The core worry stated by Vitalik and others is to prevent another DAO hack situation where the community leverages social consensus to perform a hard fork of the chain (read here).

Today, this risk is relatively mitigated due to Eigenlayer’s focus on low risk applications “based on either objective attributability or no slashing.” Despite that point, just like in Defi, smart contract risk will always present a concern for new decentralized software. This technology is still in an early stage of life and standard development and auditing practices continue to mature with time.

Another outstanding question for Eigenlayer and LRTs: will the additional yield be worth the compounding smart contract risk? Ultimately this ecosystem is nascent and many speculate that additional yields will be lower than projected, indicating that the $15B in value staked today might be bloated for the needs of the few systems providing yield to Eigenlayer stakers.

https://defillama.com/chains/Rollup
https://www.blog.eigenlayer.xyz/eigenlayer-universe-15-unicorn-ideas/
https://www.dlnews.com/articles/defi/restaking-like-ai-ethereum-trend-network-stability/

BTC has an annualized return of 139% over the past 11 years. Notice that the pendulum swings dramatically between returns and losses. Years that are positive often produce +100% gains, while in a downturn the value can lose more than 70% of its ATH. While it is the “best performing asset” of the last 11 years, it is also the most volatile. Handling emotions amidst the volatility is the key to participating properly.

While growth over the past month has been choppy, 2024 continues to show signs for significantly more crypto upside.

How I see 2024 playing out…

• Memes will continue to outperform (and also rug) for the next 6+ months.

• Airdrops on zk-chains, associated Defi protocols, and LRTs will begin drawing more attention and liquidity in Q2/Q3.

• Promising AI x Crypto protocols and products will come online in Q3/Q4, drawing even more attention and liquidity.

• The ETH ETF will be approved in some form by Q4.

• Liquidity won in meme markets will quietly move to more fundamental-based tech (Defi, LRTs, AI x Crypto) in the later half of the year.

The biggest question and uncertainty for this cycle revolves around whether retail enters the market in the same way they did in 2021-2022. A few studies suggest current popular interest is far from that of previous years. Time will tell. 

At the moment, the narrative is largely driven by a sense of financial nihilism pushing people into the hope for 10,000% gains in the memecoin market.

Financial nihilism, a term I learned recently, refers to the general population losing faith in institutions, the American Dream, the belief that upward mobility is possible, and thus results in a populist vs elitist viewpoint that encourages collective gambling. This might look like sports gambling but includes events like WallStreetBets pushing the Gamestop short squeeze in 2021.

Travis Kling digs deep on this idea in this article from early March. As an anecdote, here’s a (great) Twitter thread of his that includes the recent rise in gambling.

Travis Kling

@Travis_Kling

4. If you’re looking for further proof of my point about financial nihilism, look no further than gambling trends. They are staggering.

391

10:29 AM • Feb 2, 2024

So, if the market activity comes from memecoins and betting on 10,000% or bust opportunities… is crypto valuable? 

I find myself frequenting this conversation with various friends and strangers. “Crypto is just a scam.” In 2022 millions of people lost billions of dollars in some of the largest financial house of cards in history. Reasonably, that put a sour taste that continues to this day, and I would be blind not to agree that the space facilitates many ponzi schemes and con artists. That said, I don’t think it’s ALL a scam. I’d even argue that some of these memecoins are building fundamental value into their networks (see $DEGEN). Vitalik also recently made an argument for flipping the degen-tendencies into a more socially conscious system (albeit this was posted on April 1st).

There are plenty of weeds to be unearthed within cryptoanarchic philosophy and fundamental network productivity that I wont get into here. The most important answer to “is crypto valuable” is understanding the currency in cryptocurrency. The market determines whether they want to assign value to these decentralized networks. Only time will tell whether those networks do something, or simply sell vaporware. 

When considering investing in the crypto space, I think a more important question revolves around persistence and adoption:

1. “Will this technology continue to exist?”

If you agree with the Lindy Effect, the probability for “Yes” increases every day. Taking the thought a step further:

2. “If the technology exists, will it continue to build market share?”

If the concept of financial nihilism hits a nerve, and that does seem to be the basis for this growth currently, market adoption does feel inevitable. In addition to this sentiment, let’s use Internet adoption and credit card adoption as proxies for crypto adoption:

• The “first” credit card was created in 1950 and the payment method took two decades to reach more than 50% of the US population.

• The public Internet was first online in 1983 and took a decade to penetrate 14% of the US population. 

• Bitcoin was created in 2009 and fifteen years later penetrates between 25% and 40% of the US population.

At a high level, crypto adoption seems on track for the length of time. Assuming this is true, I see the protocols with fundamental value (Defi, LRTs, AI*…) outperform memecoin mania on a mid to long term time horizon. I know I am missing out on some 10x returns not participating more heavily in the microcap memecoin economy, but I prefer to focus on risk mitigated 3x – 5x returns within protocols showing fundamental value.

Ironically, this seems to be the contrarian play at the moment. 

* While I say this, I also agree with Travis that these technologies will not come with surefire execution in this cycle… especially the new wave of Crypto x AI protocols. I do think they will carry over some heavy narrative value as the cycle matures.

PS: I just moved here from Substack. If you want to learn more, check Paradigms Driving Crypto Cycles and my Following Up articles.

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We’re in the first inning of this market cycle. Some things I’m seeing that suggest this:

• Rumors of more crypto ETFs (ETH/XRP/SOL) are circulating. 

• Interest rates are lowering. 

• The election cycle encourages the US Office to stimulate the economy. 

• The Bitcoin halving is coming up in May. 

• Retail hasn’t even entered the market yet (the new capital is institutional due to BTC ETF).

• We’re still in the Meme Coin season with many new Airdrops on the near-term horizon.

In the last post I mentioned the technologies driving innovation and momentum in this cycle. I failed to mention how capital typically flows within the crypto economy. Generally, value moves from BTC into smaller cap, higher upside opportunities. Last cycle it went something like this:

1. BTC (the king of all crypto) reaches All Time High (ATH).

2. Liquidity flows from BTC into ETH and subsequently other smaller blockchains (SOL, MATIC, etc…).

3. Liquidity then flows into decentralized application protocols built on top of these blockchains (mainly Defi).

4. Finally liquidity reached the NFT space, which is largely socially driven (we saw this in 2021).

Memecoins drive various narratives as well throughout the cycle. They generally represent the most “degenerate” opportunities in the space. With memecoins you can make 10,000% one week and lose everything the following. Some people play this game well, and seem to have their system down to a science when analyzing communities and growth potential, but I honestly can’t do it. Following the movements there takes too much time and attention, and feels a little more like playing craps than executing an investment thesis.

Currently we’re in the first phase of the cycle described above. BTC has yet to push past ATH. ALT Season (which surmises points 2 & 3 above) has yet to fully form. Memecoins are on a tear at the moment… I’m honestly not sure how to place those because I don’t participate, but at minimum it indicates that people within the space are deploying capital.

OK, so let’s think about the opportunities for a sec. Last post I mentioned Real Yield, Liquid Restaking Tokens, and Airdrops. 

Note 1: I don’t include memecoins in part because I don’t understand them (LOL). Maybe will co-write a post in the future with a friend who does.

Note 2: All smart contracts or Defi applications carry some amount of risk. They’er kinda like a digital vault securing gold that clever hackers do their best to acquire. As the crypto industry matures, so does development of stronger systems to prevent these types of attacks. Ultimately, we’re still early and learning. There’s a few ways to tell if a contract is water-tight. One good indicator is if it has been audited by 2-3 auditing teams. THE BEST indicator of a safe smart contract comes from the amount of value held over time. The formula isn’t exact, but essentially, if something has held hundreds of millions of dollars over a long period of time, you can assume that every hacker in the world has tried to crack the safe. A strong audit + value held over time = battle tested smart contracts.

Real Yield

This type of yield is distinct from the Defi summer of 2020 where people were incentivized to add liquidity to smart contracts via protocol tokens that were minted at will. Projects like YFI, Olympus DAO, and (most notoriously) Terra Luna, led the charge in this yield offering. When Terra collapsed in 2022, much of the bloat that entered the ecosystem seeking these synthetic yields also fell. Many of these projects (at the time considered cutting edge leaders) are shells of their peak standing, both socially and technology-wise. 

Today, Real Yield indicates yield generated by protocol fees. Tokens aren’t just being minted and handed out. As users participate in decentralized marketplaces, they pay a fee. A portion of that fee is given to the liquidity providers of the platform. These fees are generally distributed in ETH, because the grand majority of Defi apps live on Ethereum or adjacent networks. The first protocol I saw doing this was GMX (I think Curve also offered something like this to their LPs earlier).

When considering deploying liquidity to these protocols there are a few risks to consider. For instance, if you deploy into a decentralized exchange, understanding the impermanent loss of your position is critical. It’s also important to note how the yield fluctuates over time (it may offer 20% today, but is that just due to a spike in usage?). Lastly, the smart contract itself should be battle tested before deploying liquidity (see above). If you want more specific thoughts about particular market opportunities welcome to join my telegram group here.

Liquid Restaking Tokens

This is the newest and arguably most impactful technology available in the ecosystem. A few concepts to understand at a high level:

• PoS: Ethereum runs on a “Proof of Stake” consensus, meaning the network is secured by economic staking, no longer by GPUs running an algorithm like in Proof of Work.

• Liquid Staked Tokens: typically staking in Proof of Stake means you need to lock your ETH to earn the yield provided by the network. Protocols like Lido changed this in 2020 when the network switched to proof of stake. Lido provides a Liquid Staked Token, so, rather than just locking your ETH, you are able to earn protocol fees from securing the network AND put that liquid staked token to work somewhere in the ecosystem, earning additional yield.

• Liquid Re-Staking Tokens: Rather than securing the ETH blockchain LRTs are used to provide economic security to other applications, rollups, etc that leverage a proof of stake type consensus system.

This section deserves its own deep dive. I am learning about the tech at the moment and honestly haven’t put everything together myself. Eigenlayer provides the fundamental backbone of the LRT space.

If you want to get deeper into understanding how this all works I’d suggest starting from this podcast and this article.

Airdrops

Uniswap is the leading Defi decentralized exchange. They launched in 2018 and quickly captured the majority of global liquidity facilitating decentralized transactions. In fall of 2020 Uniswap changed the game by airdropping their token to all users of the platform. This amounted to a minimum of 400 UNI tokens ($2000 at the time). The most significant users though (determined by a combination of contributed liquidity as well as trading volume) were rewarded millions of dollars of the token. 

Airdrops like this have happened throughout the past few years,  but 2024 is gearing up to be a very significant “airdrop season”. In early 2022 Blur (an NFT trading platform) created a game to show users their place on a leaderboard using a “points” system. Ultimately these points correlated to an airdrop they launched in the fall of the same year.

Today, POINTS are everywhere. Nearly every crypto application has a points system. Will they all airdrop a token? Will the token be worth anything? Both questions are uncertain, but I think it’s safe to assume the larger protocols that raised hundreds of millions of dollars will do something significant for the users who bootstrap their network.

OK that’s all for now… will try to keep this going in a semi consistent way (maybe bi-weekly, or more). There’s a lot happening and it’s fun to force myself to share in this way. 

If you want more consistent updates or want to get deeper in the crypto-native world, join my telegram group here.

This article builds context to understand what might occur in the next cycle. At the end I mention the technological paradigms associated with this early bull market.

If you want to ask questions or learn in real time — join our alpha group in telegram [push button]👇.

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Markets cycle. They go up. They go down. The Tulip Mania of 1634-1637 provided one of the first examples of this socio-economic behavior. The Roaring 20’s led to the Great Depression of the 30’s, and unprecedented valuation of Internet companies in the 90’s led to a market crash in 2000. Cryptocurrency economies offer a market that exhibits a similar, but distinct pattern.

Each cycle is driven by technological narratives within the ecosystem and also FAIL due to these technologies being poorly executed or manipulated. Here I mention the tech narratives of past cycles, and touch on the narratives driving this early cycle we see today.

Note: I will not cover all technologies and failures, nor will I touch macro trend details. I will share the technologies I perceive to be most critical for each cycle.

FWIW I didn’t experience this cycle, but I think it’s worth considering how changing demographics factors into market momentum.

In the first few years of Bitcoin’s launch, the community online using the network consisted of:

1. Drug dealers and customers,
2. Cryptographers, and
3. (very rarely) Investors.

In every cycle, the space expands into new demographics and institutions that drive market behavior.

I started following crypto in 2017, reading white papers about energy on the blockchain. I then fell down the rabbit hole, reading more than selling solar (my job at the time). Many of these white papers resulted in failed startups based on hand-wavey technology that didn’t exist. The market peaked early 2018 and then fell into a bear for two years.

The defining narrative and technology of this cycle: the ICO. Initial coin offerings offered a way for anyone with an internet connection to fund startup ideas. The technology launching most of these leveraged the most simple Smart Contract on Ethereum (an ERC20 contract).

Once funded, these tokens trade on Centralized Exchanges (CEXs), and many people with Alpha insight via the right networks became multimillionaires buying early.

The Bear: 2018-2020

Ultimately this cycle was driven most by marketing rather than usable technology, which was a key reason for the collapse. Very few applications existed on any blockchain network, and thus very few people used crypto outside of an investment on Coinbase. This realization along with the awful user experience offered by Crypto applications deflated the economic bloat over a fast ~12 month period.

Much of the promise in these cryptonetworks of 2017 failed to launch due to overoptimistic entrepreneurs selling an idea they did not fully understand and failed to execute.

After capital fled the space in mid to late 2018, the tide went out, and all these developers, entrepreneurs, designers, cryptographers, crypto anarchists, remote-first workers, etc. stayed around and appreciated the extent to which the ecosystem needed to evolve (there were no users). The opportunities to make an impact were abundant, and still are.

During that bear market, core Decentralized Finance (DeFi) infrastructure was created. Uniswap, AAVE, Compound, Maker DAO and many others created new ways to utilize internet money without an intermediary via smart contracts. These tools offered decentralized trading, decentralized lending, options trading, and stable coin protocols that ultimately drove the spark and foundational momentum for the two year cycle in 2020.

The maturity of DeFi infrastructure led to Yield Farming. These technologies catalyzed the second cycle I experienced (2020-2022). The tech stack for DeFi opened up many new avenues for Debt Creation, Decentralized Exchange, and Gamified Token Distribution.

From my memory, things kicked off gradually in January due to Compound, Synthetics, and later Yearn.Finance introducing a new type of token distribution method called the “Fair Launch”. Traction continued to develop into the notorious “DeFi Summer” with unprecedented (+1000% annualized return) yield opportunities in different liquidity pools for various DeFi protocols. That said, these returns were constantly fluctuating and required a significant amount of active management.

Note: “Fair Launch” is no longer a term used today.

The reason people described this token distribution as a “Fair Launch” is because *anyone in the world* could theoretically participate. The limiting factor in this experiment was 1. Internet access, and 2. Investable capital. The process for distributing this “Fair Launch” yield happened in this way:

1. A DeFi protocol launches

   • This is typically a smart contract based system that allows for trading or debt to form. The important thing is that the system needs liquidity to run, and anyone with internet access and money can add liquidity!

2. The protocol creates a “Liquidity Farm” where protocol tokens are distributed to liquidity providers.

   • The “Liquidity Farm” essentially allocates a certain amount of protocol tokens to liquidity providers (LPs) on some consistent basis. As more LPs join a farm, the APY (annualized % yield) decreases.

3. At some point the market matures, triple digit yield is reduced to double or single digit yield, and liquidity moves to a new protocol offering higher opportunities.

This pattern still happens today. In the market at the moment there’s a furry of “points” systems ongoing that indicate a user’s personal contributions to a specific network (just search “Points Crypto” and you’ll see what I mean).

Ultimately, the “Fair Launch” more handsomely rewarded those with large amounts of capital, putting the name into question. Today we use Yield Farming.

I’m going to skip over the social token developments of late 2020 and NFT mania of 2021. The opportunities there are inherently social, marketing, and reputation based. Value relies less on technical innovation than financial products in the space. Ultimately the paradigms driving crypto in this cycle at the moment are protocol/DeFi driven. 

The Bust: 2022 – 2024

Fast forward to May 2022. Terra Luna, a top 10 protocol imploded.

Terra, a key player in Yield Farming, collapsed. You can read my take here… TL;DR the protocol was offering aggressively subsidized ~20% yield opportunities to people who participated in their network. The system was vulnerable to manipulation due to a dependency on a weak token economy. The yield offered did not come from real revenues, rather Do Kwon etc. minted tokens arbitrarily to incentivize the network usage.

This collapse led to many more downfalls in the following months. Most notably FTX and Sam Bankman-Fried’s house of cards. These also related back to BlockFi and Celcius, where many people in the mainstream population felt safe, and lost significant sums of money due to obscure fund management and a lack of awareness of systemic risks.

Crypto suffered a significant setback due to these failures of protocol and financial design. At the same time, these crises occurring force the space to mature.

Note: these explosions occurred with a common thread, both Terra and FTX core teams leveraged their own token economies ($LUNA and $FTT) in a manual (non-programatic) way to bolster synthetic, unsustainable growth.

Ideally the industry leaders learn, and we will see fewer FTX, Terra Luna explosions.

Not to jump on a bandwagon, but I’m confident we’re witnessing an early stage bull market. We have yet to see previous All Time Highs in ETH or BTC, but the stock market literally hit an All Time High today, Friday, Feb. 24. Crypto and stocks aren’t directly correlated, but they do indicate similar macro economic trends with capital flow.

OK, so the technical paradigms driving this crypto bull market:

1. Real Yield — indicates yield opportunities generated by revenues and usage, not by arbitrarily inflating a token economy.

2. Liquid Restaking Tokens — gives users the ability to generate yield on ETH and also use that position as collateral in DeFi protocols to earn additional revenues or leverage into debt.

3. Airdrops — crypto protocols reward early users for participating in their network. Uniswap really changed the game with this strategy in 2020, and there are MANY opportunities out there today that could offer significant income for early participants.

Will explain each of these in more detail soon. The opportunities are literally endless at the moment. Ultimately, in a bull market like this, I’ve found the most lucrative strategy is to pay attention and participate.

If you want to keep up to date in more real time, join this telegram group! Will talk more strategies, opportunities and risks with my people there.

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What you’re witnessing in the crypto market the past 72 hours has been one of the largest liquidation events in history. I’m writing this to briefly reflect and provide a very high level overview of what’s happening.

Terra Luna is an algorithmic stable coin protocol. If you remember the concept of a collateralized debt position (CDP) implemented by Maker DAO protocol on Ethereum, this is similar. The difference is that while Maker is overcollateralized (ie. more value locked than debt out) Terra relies on their ecosystem to leverage an arbitration opportunity of minting and burning UST based on the $LUNA price.

Users of the Terra protocol create “stable” UST coin by burning Luna. UST is also backed by some amount of diversification into Bitcoin made by their founder Do Kwon, but the primary asset backing UST is the $LUNA token. Further, it was made to be “highly efficient” meaning the value of UST on the open market matched closely to the value of collateral supporting it. While this can work in theory (and did work for a year and a half since Oct. 2020) the $UST price recently broke the $1 peg in a massive way.

Other stable coins might fluctuate some, but this systemically challenges the algorithmic system supporting UST.

Some people believe that the peg will return within a few days, others say a few weeks. I personally do not know what will happen, but there are many cascading effects from this event.

Lightly collateralized algorithmic stable coins prove to be the biggest threat to crypto at the moment. These types of systems rely on sophisticated minting, burning, and yield to balance themselves, and as we see today, are easily manipulated by large players looking to extort a profit.

Mark Slapinski - Technology @SlapinskiMark

Nevin Freeman warned about the dangers of algorithmic stablecoins like Terra and Celo years ago, but nobody listened. #terraluna #cryptocurrency

2:53 AM ∙ May 12, 2022

153Likes54Retweets

There’s a rumor that Blackstone and Citadel made this occur via a 100K BTC loan and OTC deal with Do Kwon himself. I’ve yet to see a credible new source confirm this, but it isn’t outside the realm of possibility…

Onchain Wizard @OnChainWizard

How to make a >800 million dollars in crypto attacking the once 3rd largest stablecoin, Soros style: Everyone is talking about the $UST attack right now, including Janet Yellen. But no one is talking about how much money the attacker made (or how brilliant it was). Lets dig in🧵

8:27 PM ∙ May 10, 2022

28,696Likes8,978Retweets

And it isn’t that the Terra ecosystem wasn’t warned, nor aware… this next post made in 2021 describes how Terra can be attacked the same way Soros broke the bank of England in 1992.

FreddieRaynolds @FreddieRaynolds

A few weeks ago I responded to @tbr90’s tweet with a brief outline of how a wealthy attacker could not only break @terra_money but profit heavily doing it with a Soros style Black Wednesday attack. Below I provide a detailed breadown...~$1B capital needed. https://t.co/MIbSH3Lwpq

7:59 PM ∙ Nov 25, 2021

2,348Likes772Retweets

Unfortunately, programatic economic systems hold flaws that can’t be reduced to pure math/science.

Lunatics (Terra’s community) speculate the price of UST to repeg in the coming days or weeks.

This is a terrible day for the ecosystem at large, and deeply unfortunate for retail investors and consumers who were convinced to use Terra and related products for their benefit.

Regardless of whether UST comes back to peg, the ecosystem just suffered a massive multibillion dollar hit that will take weeks or months to settle. I would anticipate an actual bear market to form for some months if not longer.

Definitely not the end, but a new opportunity for people to learn and become aware of protocols with systemic risk.

I hope you all are left unscathed by the situation. Money is certainly not everything, and the technology being built in the crypto space will prove to be continually important despite this setback.

All the best,

JD

John Bisu (bluebean.eth) @jl2fa

Didn't win the raffle for @moonbirds_xyz ? Mint price out of your range? Come join us! We're starting a Alpha Birds Album, starting with collective ownership of Moonbirds: szns.io/album/alphabir… Read more: docs.google.com/document/d/1nL… Anyone can join, but keeping it small at 50e!

docs.google.comAlpha Birds Album on szns.ioALPHA BIRDS Album TLDR We are aiming to acquire several Moonbirds on Secondary with max of 50e in a SZNS album with an exclusive group of NFT enthusiasts. For those who can’t afford a full Moonbird, you can buy $ABIRDS for collective ownership. Join for as little as 0.001 ETH Contribute any am...

6:17 PM ∙ Apr 15, 2022

45Likes13Retweets

The day prior to the Moonbird launch, some SZNS teammates launched a new Album on the platform called Alpha Birds. This drop was the highest anticipated event for major collectors in the NFT space at the time. In 12 hours 26 ETH was collected from 44 people and the $ABIRDS journey took flight. The inaugural Alpha Birds doc defined the broad mission of the Album to purchase some Moonbirds, and then collectively manage them via the SZNS Album tooling (btw, an Album is a DAO controlled by a governance token).

The purchasing phase of the $ABIRDS Album required members to trust the Album creators to make decisions. The goal was loosely set to purchase 3-4 birds at around 5 ETH. This expectation quickly turned out to be optimistic. A group chat opened in discord where members could get a play-by-play of the experiment, and shout out opportunities they saw.

At the end of the day the $ABIRDS group secured two Birds at an average of 12.15 ETH. The community continued to speculate and had the goal of becoming an Album that held more than just one blue chip. As the Moonbirds continued on an unprecedented tear to 20 ETH the community thought there might be an opportunity to sell and buy back if the floor dips post hype. One bird listed and sold for 24.69 ETH. Days later Moonbird floor price blew past 30 ETH.

Ultimately this was a remarkable learning experience. While the overall performance of the Album deserves a grade C, the learnings from the experiment are invaluable.

Album Management Takeaways

1. Stick to a plan with long term conviction.

2. Give authority to buyers. 

3. Listen to intuition. 

4. Reduce voices during time sensitive activities.

Defining a plan, and giving someone authoritative control over the execution of the plan would have proven to be beneficial to the effectiveness of the Moonbirds project. Further, the individual(s) who are given authority should feel comfortable making fast decisions on the day of the drop. Their intuition takes first priority, and the voice of the community suggestions second priority. 

Lastly, SZNS only supports trusted purchasing of NFTs at this time. The Album architecture works well specifically for raising ETH and distributing $ALBUM ownership. Once the Album owns the NFTs, the architecture does not move nimbly. SZNS Albums are build with long term thinking and security in mind. They don’t currently support rapid execution of trading as is necessary for those wanting to participate in the NFT market in a short term manner.

If you’d like to build an Album, the thesis should focus on long term NFT opportunity. Decentralization does not lend itself well to fast moving markets.

* PFP (profile picture) — used to describe NFT art collections that people flex in their Twitter profile. Typically 10K collections of generative imagery.

Checkout the Alpha Birds Album

Follow SZNS and join on Discord

Apply for Album Early Access

Feel free to message me, DMs Open!

SZNS provides communities a home for collective management of NFTs. The primary value proposition for these communities includes 1. Tokenized Ownership, and 2. Standardized Proposals. The benefits of tokenized ownership tie into the value and potential of Web3 offers the world, enabling a globally accessible means of fundraising, identity, management of assets, and decision making. These new structures facilitate an evolving experiment in governance that outpaces development in a traditional business environment.

In 2021 DAOs and decentralization became popular concepts, making multiple headlines in major publications. A DAO (decentralized autonomous organization) is broadly used as a definition for digital native ownership systems that rely on smart contract structures to make decisions.

Most commonly DAOs use a multisig to administer actions voted on by tokenholders. This means that a few (4-5) execute the decisions of the many, which creates a more centralized approach to management.

At SZNS we aim to provide a fully decentralized and secure approach to management out of the box. Creating these decisions typically requires some degree of technical knowledge to correctly construct transactions with a desired result. We address this problem via Standard Proposals which make decentralized action accessible to everyone (technical and non-technical).

https://twitter.com/sznsNFT/status/1507084719808135174?s=20&t=NQYM7n5eMA0fYFJdMbCDDA

After entering the app Album creators build their collective in a few steps. First they launch their Album. This comes with a robust toolkit to collectively manage their NFT assets. Next a distribution event occurs to give members an opportunity to receive governance tokens in exchange for ETH. From there the Album enters a “management phase”.

The management phase of Albums describes the period where Album members push forward the Album’s purpose. Each Album holds distinct missions. In just the first six Albums we see Art Collectives, PFP Projects, and Creative Agencies. The needs of each project varies. The common denominator being that they all collectively manage NFTs.

Signup Here For Early Access

SZNS initial development strategy focuses on shipping, receiving feedback, and adjusting (see our previous post to understand the learnings we took from our initial Album launches). The Album framework is core to the product offered by SZNS, and we are focused on building the most robust and decentralized solution to making decisions within these frameworks as a first step.

Two areas of primary focus for product development include the Album Page and Standard Proposals. The Album page defines the information displayed to provide context for an Album. Which NFT assets do they collect? How valuable is the token economy? Who are the top Album members? What is the governance activity? How can I get involved? What is the mission? All of these questions are answered by the Album Page.

Standard Proposals provide the core governance feature offering. They give Album members intuitive interfaces to democratically perform common actions furthering their Album mission. Our first product objective focuses on shipping the essential proposals. These essential proposals define the most common actions needed for users to manage an Album in a decentralized way. After this,  the team plans to follow on with more nimble decision making systems. 

Voting processes on SZNS don't cost gas but cost time (see our docs for more info). Our job is to further optimize the product without sacrificing security. This tension between trustlessness (security) and efficiency fuels our product thinking.

In theory, Albums can do anything. An Album is a collection of NFTs managed as a DAO in the SZNS platform. Today we have Divine DAO building a creative studio around their NFTs, Meebits is building a path for proxy ownership, and Chingona supports a Web3 diversity initiative. 

An Album bundles one or many NFTs in a collectively managed contract controlled by the Album governance tokens. SZNS Albums hold the same degree of function as a Gnosis multisig (which we use at the core). Transactions must be constructed using a transaction builder (see below) to create actionable decisions. 

https://twitter.com/sznsNFT/status/1522232963559268353?s=20&t=pmQltmKVVQsq2tMpxXS_AQ

Transaction builders are really created for shadowy super coders and software engineers. As we reach a broader audience, most Album members wont hold sufficient knowledge of smart contracts to create these on their own. SZNS aims to solve this power disparity by bringing intuitive interfaces to automate the transaction processes.

In order to assist anyone to make decisions, SZNS offers Standard Proposals. They serve as a core value add for decentralized communities. Proposals on SZNS include an ever-expanding list of actions used to manage NFT assets. At launch we will offer foundational actions, giving anyone the chance to collect, sell, buy NFTs and distribute proceeds. 

Essential Proposals (see tutorials for the following here):

• Bounty Board – offer $ALBUM tokens in exchange for select NFTs

• Add NFT – trade an NFT for a proposed amount of $ALBUM

• List NFT – list an NFT for sale on OpenSea

• Transfer NFT/ETH/ERC20 – transfer treasury assets to trusted autonomous parties

• Token Claim – distribute fungible tokens to all $ALBUM holders

This list functionally allows for Albums to perform the majority of their primary needs in trustless ways. As we continue to build out the product we will keep an eye on opportunities to 1. increase trustlessness, and 2. increase efficiency.  

Trustlessness describes the way web3 facilitates this internet of value in a collective and secure way. Nobody in particular holds the power to control the underlying value, but the community makes decisions together using the smart contracts they control. In contrast, traditional finance and management systems require a single trusted party to custody and make decisions on assets.

Efficiency of decisions offers the other side of the spectrum. Making decisions trustlessly requires a significant amount of input by the stakeholders in order to do so in an integral way. If Albums are to make decisions in a nimble and fast way, they will need to give some centralized decision-making authority to a trusted actor. 

The balance of trustlessness and efficiency provides the core tension for features we will continue to incorporate in the SZNS Albums product.

As we tighten up the core toolkit for NFT Albums we will open the platform to offer full public access this summer. Thus far we still work with a specific access list for Album creation, and each of which has given valuable feedback to shape our product.

Albums at public launch will include all the features above. We will continue building to quickly offer other high value features as community needs arise (see and contribute to our public feature list here). 

Thanks to our partners, investors, advisors, and creatives who’ve brought us here. We are stoked to keep building!

Twitter Discord Docs

** **

Decentralized governance holds amazing potential for new experiments in democratic decision-making. DAO tools coming out all carry distinct nuances that make them more or less appropriate to specific use-cases. For SZNS, the use-case focuses on NFT management.

This article dives into the proposals lifecycle in detail. All proposals by a SZNS Album move through a similar process: Submission, Voting, Verification, and Execution. There are nuances involved with each step. The goal for the SZNS platform is to provide an intuitive interface for anyone to make decisions efficiently in a trustless way.

Note: this is a follow on from the previous SZN-0 Governance post.

Only users holding $ALBUM tokens (Album Members) can submit proposals. Submissions require a description of the intended action and often include an onchain transaction. There are two methods for Album Members to submit 1. Use a standard proposal, 2. Construct a custom proposal.

https://www.youtube.com/watch?v=b-HTcDd296U

At time of public access launch, Albums will include a set of essential standard proposals (details in a follow on post). These proposals exist in the SZNS Album interface and offer an intuitive flow for common actions. Albums need to sell, buy, distribute, and stake treasury assets. Building effective proposals in a custom way requires knowledge of smart contracts, etherscan, and public addresses (see below). Standard proposals abstract these aspects of the process (more details on proposals here).

https://www.youtube.com/watch?v=UTE4HHVK8LY

2. Custom proposals require knowledge of smart contracts to perform actions like sending, buying, selling, distributing, NFTs, and treasury assets. If the action you want to execute is not yet available as a standard proposal, Album members are able to create a custom proposal. Custom proposals are constructed in the Album’s Snapshot space and allow for Album members an interface to construct any arbitrary action. This does require significant technical expertise to construct transactions effectively, as seen in the video above (more detailed example here).

Anyone with an $ALBUM token is able to vote on active proposals via the SZNS interface. The default voting system uses a single choice voting strategy where addresses hold voting power proportional to their token amounts at the time of the proposal submission.

$ALBUM holders can vote in the SZNS interface or click out into the snapshot page to gather more details on the proposal prior to voting.

The verification of proposals occurs through a Reality.eth oracle after the voting period. This process requires users to stake a bond of 1 ETH that may be slashed if the outcome is not honest to the voting result. During this time users may request arbitration from the SZNS DAO in Discord (this process will be further formalized in the future).

For a proposal to be verified as valid, it must pass the Governance Rules. SZNS offers conservative default rules, but these may be modified via a proposal by the Album or changed by the Album creator before launch.

Example of verification:

https://www.youtube.com/watch?v=s4CnV5AUbrU

The execution step occurs only after the Reality.eth process finishes. Execution is only available if the Reality.eth oracle passes positively. If the oracle is set to the result being invalid, the execution onchain is not available. Execution occurs in the snapshot interface today.

Further, there are a number of nuances for the execution depending on the proposal type. For instance, the execution of an NFT listing on OpenSea must occur before the listing date in order to function properly.

Example of execution:

https://www.youtube.com/watch?v=srwST9Ik9DE

SZNS Albums offer a new way to make decentralized decisions for managing NFT assets. Make sure to be informed on the various steps for each proposal when you submit them to the Album for voting.

We’re excited to empower decentralized communities. Signup here if you’d like early access.

Docs Requests Twitter

The DAO governance space continues to evolve. Decisions around collectively owned assets all go through some sort of proposal system to create an action. The DAO proposal architecture manifests from a combination of soft proposals, hard proposals, and unilateral decisions.

Strong DAOs build architectures accounting for the organization’s risk, defined by rugability. While less rugable DAOs may require nimble, centralized decision-making, more rugable DAOs require more decentralized practices to succeed into the future.

The extent to which DAOs exhibit secure practices varies greatly. New cases of manipulation and “Rug Pulls” occur throughout the ecosystem due to a lack of decentralized management of treasury assets as well as hyper-inflationary tokenomics that incentivizing dumping on the base of holders.

The simplest term for understanding whether a DAO or tokenomic system is safe to participate in should be determined by the degree of rugability.

$$ Rugability = f(AUM, Social Capital) = Value at Risk / Social Capital at Stake $$

Projects controlling large amounts of value hold higher degrees of potential damage to incur to the membership population. Additionally, if the leadership of the project holds no public social presence, there is nothing at stake to prevent them from “ruging” and running away with the money.

The way to combat rugability is through decentralization of the management systems controlling the collective assets. Systems with higher degrees of technical decentralization mitigate the degree to which they are rugable by the founding members.

DAOs that fall into quadrant I (Anon Leaders with High AUM) require higher degrees of decentralization in their governance architecture. DAOs in quadrant III (Recognizable Leaders with Small AUM) can afford a more centralized and nimble governance structure.

How to determine the degree to which something is decentralized? It depends on the way the DAO uses Soft Proposals, Hard Proposals, and Unilateral Decisions.

This first category of proposals manifests various ways. Soft proposals gain a temperature check from the community via forum posts, Telegram polls, Discord emoji reactions, or snapshot proposals. This step in the process provides context for the community to understand a proposal, gives members an opportunity to voice their opinion, and gives the proposer feedback on the sentiment around their plans (ie. will this pass or fail before an on-chain vote).

Typically the soft proposal process should take the most amount of time, because this is the period of most thorough communication. The end state of the Soft Proposal should result in relative clarity or consensus around whether an idea will pass or fail a Hard Proposal. This process should always begin in communication channels (Forum, Discord, Telegram) and move into a Snapshot vote for communities that want extra clarity on where their token holders stand. Snapshot provides the most “legit” proxy of voting sentiment for on-chain action.

Depending on the community, and the complexity of the decision, soft proposals become more or less necessary. Decisions that clearly make sense and have fewer moving parts may require a very short (if any) soft proposal process. Further, communities made up of a tight knit group may only require a few messages in Telegram or Discord to find sufficient support for an idea. Forums are used for larger communities to develop a paper trail of logical context for themselves and new members.

The hard proposal stage of decentralized governance actually commits an action on-chain. Unless the action in question is controlled by a multisignature wallet (ie. a wallet that uses multiple signers to manage assets) hard proposals typically result from a token vote. There are a variety of frameworks that use this type of tooling. The most modular, useful, and efficiently adopted being Gnosis Safesnap and Governor Bravo. Both of these frameworks have security and efficiency tradeoffs. Each of these contracts hold billions of dollars of value.

While I believe the two mentioned are most efficient for decentralization and upgradability, there are MANY DAO frameworks out there innovating on decentralized governance in a variety of interesting ways. See the full list here 👇.

There are obviously too many frameworks to experiment deeply with each of them. Any of the above systems can be used for any purpose, but each hold distinct tradeoffs with the way they function.

Despite the point of “decentralized” in DAOs, many require unilateral decisions to function. The extent to which a DAO should offer unilateral decisions to their leadership should correlate to the degree of rugability. Unilateral decisions should be given to guardians of DAOs in order to execute processes beneficial to the organization. If a DAO refused to offer any unilateral decision, all processes would take weeks to execute, limiting the ability for pragmatic and nimble development or coordination.

Many DAOs today still use a Gnosis multisig with 3 of 5 signers to enact any on-chain action. This is a great example of a unilateral decision-making process that is both highly nimble, but also highly rugable (only three people need to be convinced to sign a transaction that sends millions of dollars to their own account, not technically decentralized).

As a DAO offers unilateral decisions there should be proper understanding by the community of these risks involved. Often these unilateral systems are set at the start (ie. Gnosis multisig and Jukebox fundraise both start with a central leader with unilateral control). Alternatively, projects like SZNS offers a fully decentralized system that eventually might give Guardian powers for limited unilateral control over specific functions useful for the DAO community.

In order for a DAO to function there needs to be a combination of soft proposals, hard proposals, and unilateral decisions. The way each of these processes and privileges are implemented depends on the needs and goals of the community and organization, as well as the limitations of the technology chosen to foster these goals. In order to coordinate these processes properly, attention should be paid to the extent to which a DAO is rugable. Higher degrees of rugability require more time in the soft proposal process as well as more security in the hard proposals and unilateral decisions.

Below we take the graph above and add a degree of technical decentralization. If you decide on how to choose which DAO to participate in, this kind of graph may give a good proxy for the risk involved.

DAOs falling in octant VI account for the most rugable governance architectures whereas DAOs in octant IV account for the most secure and least rugable governance architectures.

If you find this information useful please don’t hesitate to reach out to our team or myself specifically via twitter.

Please DAO responsibly.

____

Thanks for reading Square 1. If you like this post please share it on Twitter, and don’t hesitate to reach out. DMs are open across platforms.

square1.tech

Fractionalizing NFT projects into useful DAO structures remains a complex challenge yet to be fully solved.

This article serves as an explanation of the assumptions launched at SZNS MVP, the learning gathered from the initial Albums, and our path forward to develop the most useful fractional management platform in the world.

“If you aren’t embarrassed by the first version of your product, you launched too late.” – Reid Hoffman

At launch in October, the SZNS framework consisted of a relatively simple smart contract architecture and a security focused governance system that optimized for two standard actions (buy-out and NFT addition). Additionally, any Album could construct any arbitrary contract interaction if they had sufficient technical knowledge to construct such an interaction in their respective Snapshot instance (learn more about SZN-0 here).

The SZNS MVP wasn’t an embarrassment. We celebrated the success of both Album launches on SZNS. Meebits raised 250 ETH and Divine raised 333 ETH during their governance distribution and they have 1500+ and 200+ holders respectively. In total the combined AUM of the assets in the Albums sit around 1000 ETH. We also received high praise on our UI and design, as well as the ease-of-use in participating in the Album token offerings.

At the same time MANY optimizations stood out to the team as we witnessed our two initial launch partners perform (Divine DAO and Meebits DAO). Both of them hold distinct requirements and strategies to execute. They also generally align on a few repeatable actions to strengthen their respective ecosystems.

We wouldn’t be where we are without the support from our initial communities. Both Divine DAO and Meebits DAO proved to be amazing launch partners, and collectively raised 583 ETH in their distribution events. The lifecycle of an Album looks like the following:

1. Concept Come to the table with an idea of what this Album is meant to support. Is this for the development of a broader community? Is this to collect NFTs with friends? This initial strategy determines the subsequent steps.

2. Distribution Based on the concept for the Album, determine the method of distribution. Our initial albums opted for a raise of ETH to distribute, but future Albums may distribute ownership more manually, or via airdrop.

3. Maintenance How will the Album continue to serve the community? Will it incentivize the collection of more NFTs? Will it airdrop governance tokens to a wider population based on contributions? Do they want to buy and sell NFTs through their collective treasury?

4. Dissolution or Evolution At some point, the Album will reach a point that either a. Someone makes a successful buyout offer, or b. The Album continues to evolve as a community, perhaps even growing into a more complex structure of sub-DAOs.

As seen above, the lifecycle of the first two Albums has come into the Maintenance phase of development. Both communities raise different needs to satisfy their goals.

For instance, Divine Loot wanted to aggregate more NFTs of certain attributes in order to grow their treasury. They could do this via a governance proposal, but found the process cumbersome to implement at scale. Divine also wanted to interact with a variety of custom contracts within the Loot ecosystem but could not do so without significant technical support.

Meebits, on the other hand, wanted immediate access to the liquidity raised in order to sweep the Meebits floor. Ideally, they would have been able to do this in a decentralized way. They also decided to airdrop a portion of their economy to reward contributors to the broader ecosystem.

Feature builds that come from feedback above include things like adding an NFT swapper system, a sell proposal, an ETH distribution proposal, and many other on-chain actions regarding Album maintenance. Effectively, what do NFT DAOs want to achieve together as collective owners of NFTs, and how can SZNS be the best tool for those users?

Decentralized governance is HARD. Tools require a high degree of understanding to execute on-chain action, and giving members the context for communication and participation serves its own product opportunity. We’re seeing increasing demand for tools that allow for DAOs to actually function in a meaningfully decentralized way, whereas many existing “DAOs” today have mindboggling treasuries of a community managed by 1-3 people on a single address or simple multisig.

Our goal not only focuses on fractionalization of NFTs, but on making the collective decision-making process fun! There will continue to be processes that leverage quick and dirty, trusted parties to make valuable decisions for their networks, but as time goes on SZNS will provide a robust opportunity to manage assets in a more trustless environment.

If you want an opportunity to join our early access list, or have ideas/questions, don’t hesitate to reach out in our Discord or on Twitter!

Cool things coming 🔜 👀!

Below is a summary of Defi I made to quickly explain the structure of the ecosystem to a friend looking to better understand and invest in the space.

Defi is a huge space and it’s difficult to keep up with the various new technologies and protocols being built. Ultimately, most protocols use a few core smart contract mechanisms and continually remix them to build new types of products. 

Find the core pillars of the space below.

Maker DAO (2017) was the first significant modern defi protocol, and continues to be highly relevant to the ecosystem. They pioneered the Collateral Debt Position (CDP) in order to create a “stable coin” called DAI. A CDP is a mechanism that secures the value generated by a protocol (in this case DAI) by staking another asset (initially ETH, but now other assets as well). Maker was also a “DAO” (decentralized autonomous organization) from inception and uses its own smart contract governance system to adjust parameters within the protocol, such as adding new collateral types, or increasing the “debt ceiling” for a certain collateral type. 

The Uniswap (2018) decentralized exchange (DEX) was the second significant Defi protocol to emerge. It has a more elegant smart contract and tokenomic structure than Maker DAO. The purpose of Uniswap is to allows anyone to create a decentralized marketplace for digital assets. It uses a smart contract that acts as an “automated market maker” or AMM. This AMM sets the price of an asset based on the ratio between another asset. The people adding liquidity to this pool are “Liquidity Providers” (LPs). LPs are extremely important in decentralized markets for assets that are yet to be listed on centralized exchanges (ie. Coinbase, Binance, etc). Their trades incur a certain amount of slippage (price differential) in a trade, which is determined by the volume traded and the depth of the pool. If a pool is shallow, a higher amount of slippage occurs. Another concept to familiarize with in DEX-world is impermanent loss (IL). IL negatively affects LPs and is worse for more volatile assets. For example, if I hold an ETH/DAI LP position and ETH moves 100%, people will be continually selling their DAI for ETH from the pool to balance the market. This results in a significant loss of exposure to ETH.

Synthetix (2020) was the first major protocol that developed the idea of “Liquidity Mining” (LM). As noted above, liquidity is extremely important for Defi apps. Total Value Locked (TVL) is the most significant statistic a Defi protocol boasts to show their value (see Defi Pulse). Synthetix is a protocol that creates derivative assets on-chain that represent the price of an off-chain asset (ie. sTSLA). The protocol still incentivizes participation via LM activities that give the “stakers” a reward in network token for participating in the protocol. This type of yield spurred the creation of “Yield Farming”, and often resulted in pools that offered 1000% APY for a very short amount of time. LM is a technique still used regularly with a large number of variations and twists such as token vesting and bonding.

Yearn Finance (2020) drove the explosion of Defi summer in 2020. Yearn would not exist without the adoption of liquidity mining. The point of Yearn was to allow for a “vault” to optimize yield opportunity for specific asset types. This system allowed users to collectively aggregate millions of dollars of value to automatically deposit into the latest yield farm activity. Additionally, Yearn (YFI) developed the idea of a “Fair Launch”. Today, Fair Launches reward the largest initial liquidity providers with a larger token reward, as they stake a larger portion of the pool.

The most recent Defi pattern to develop (outside of governance mechanisms) is the Olympus Pro (2021) bonding system to create a “Protocol Owned Liquidity” scheme. There’s also Convex Finance (2021), which works to support the most efficient DEX in the world (Curve (2020), a stable coin-based DEX that optimizes for reduced IL).

Lastly, there are insurance protocols, options and derivatives, index protocols, and undercollateralized lending solutions available on the market today, but the above projects cover the important mechanisms at work in the ecosystem.

— JD

PS: This is a great new article diving into the meat and evolution of Liquidity Mining and Protocol Treasury Development.

The way people manage buy and sell pressure is via either 1. Economic mechanisms, or 2. Cultural mechanisms. Economic mechanisms can be thought of as Maker DAO’s scheme of Collateralized Debt Positions to create DAI, or Olympus Pro’s liquidity bonds in exchange for discounted Ohm. Both of these require people to add to their system in order to grow based on predetermined mechanics that can be modified or changed by whatever governance system stands. 

Cultural mechanisms, on the other hand, rely somewhat on obscurity and hype to create positive market forces. This can be seen in ecosystems like Bright Moment’s Cryptocitizens, Dom’s random experiments (ie. Loot), or Pak’s famous art developments. In general, cultural mechanisms lean more on NFT token standards (typically ERC721) and economic mechanisms leverage fungible token standards (typically ERC20’s). 

As tech develops both of these standards will continue evolving together, complimenting each other, looking like each other… soon NFTs will leverage robust economic mechanisms developed within the Defi ecosystem to create even more useful opportunities for holders of these tokens. As utility increases, which will happen with composability, the value generation also increases (as does the risk to some degree). 

All this to say, I put out a tweet yesterday to ask whether people like inflationary, deflationary, or static token economics. Ultimately the opinion was spread evenly, distributed higher at the edges (equally significant preference for inflationary and deflationary). I think the question is a bit misleading, because unless you are making another Bitcoin or Ethereum, your protocol is not “immutable” but it’s success is checked by the design and development combining the cultural and economic mechanisms that push forward the buy and sell pressure.

OFC, anything successful also comes from a great deal of luck. Mr. Market still exists in Web3, no matter how perfectly engineered the incentive design.

Note: I recently joined as SZNS product manager. Thus the use of DAO SZN-X, etc…

DAOs (decentralized autonomous organizations) are the most exciting innovation in the world. They feel like the Internet and the American Revolution had a baby.

Smart contracts and applications enabling these digital native organizations provide novel paths for fundraising and decentralized decision-making, recently igniting a Cambrian explosion of experiments implementing democratic ownership of protocols, products, digital assets, and other things (like the Constitution).

Communities using a DAO to coordinate rally around a variety of missions, from organizing a local working group to developing a multi-billion dollar token network (eg. Bitcoin and Ethereum). They allow for collective action and decentralized decision-making in a digital, crypto-native way.

Shreyas @HelloShreyas

Bitcoin and Ethereum are the most successful DAOs to date.

7:09 PM ∙ Dec 6, 2021

68Likes3Retweets

While DAOs serve as a pillar of value for web3 technology, democratic management largely functions in contrast to delightful UX. Building a transaction for a DAO to execute if a vote passes requires some level of technical expertise and then asking token holders to make decisions via voting asks a lot from each individual.

Inevitably DAO governance results in information fatigue and low participation. Casting an opinion on-chain is as (or more) difficult as any action within the crypto space. So, how can we make governance simple? How can anyone involved with a DAO make a thoughtful proposal to leverage the collective resources in benefit of the whole? I believe development of standard proposals will result in governance becoming more fun and less exhausting as we iterate with time (this is why I joined SZNS).

To move forward thoughtfully, let's look at the past. Why do DAOs matter and where are we in development of these new forms of organization today? I share a brief history below to shine some light.

In 2016, The DAO was the most important project in the Ethereum ecosystem. More than 18 thousand people around the world participated in raising over 100 million dollars in ETH to develop the next phase of monetary management using the "wisdom of the crowd". The idea captured the ethos of decentralization, web3, and transcended nation-state governance. The DAO held 14% of all ETH in circulation.

Weeks after funds were collected for The DAO, a malicious actor found a contract vulnerability and proceeded to drain a third of the funds in the contract. The fall of The DAO prompted the most challenging event in Ethereum history, resulting in the hardfork that created Ethereum Classic and many years of "PTSDAO". The term "DAO" became something to generally avoid for years to come.

Note: there were many DAO frameworks building in this "PTSDAO" period, some of which raised millions in tokens between 2016 and 2019 (Aragon, DAOstack) but none of them held the same cultural context and significance as Moloch.

Fast forward to 2019, Moloch DAO came to reignite the space with the mission to solve coordination failures innate in human organizations. This DAO framework came from the ashes of the original DAO contract (a "DAO Framework" refers to the smart contracts structuring the ownership and decision-making systems for a DAO). Ameen Solemani and James Young stripped the contract of as many lines of code as possible, and added two mechanisms that would have prevented the hack from happening (a grace period for proposals, and the meme-famous "ragequit" function). From here leaders of the Ethereum ecosystem coordinated to raise more than $1M with the mission to push forward research for ETH2.0.

Note: The visionary behind Moloch, Ameen Solemani, was inspired by the poem Meditations by Moloch published by Slate Star Codex. Recently at MCon he said on stage something to the effect, "it's not about us beating each other, or another outsider. It's about us defeating our own inability to coordinate. That evil is Moloch."

From Moloch came MetaCartel, which spawned many of the most interesting DAO projects and communities seen today. MetaCartel formed to compliment Moloch, instead of only focusing on ETH 2.0 R&D, the MetaCartel mandate aimed to support Dapps. The community formed from a mixture of builders, designers, and entrepreneurs who believed in a decentralized future. Peter Pan assembled such a community via months of zoom calls. DAOs stemming from or tangential to this community include MetaCartel Ventures, the LAO, Fire Eyes DAO, the MetaFactory, MetaGammaDelta, and many more.

So, where are DAOs today? Well it's a wildly explosive landscape that continues to evolve. They are everything from a simple telegram chat to a multi-billion dollar token network. Most recently a DAO style group raised $40M from 17,000 accounts to purchase the constitution (average participation size of $200!).

Another post can tackle the details of each of these protocols / DAOs / networks above. This is what I can come up with from the top of my head and I know it’s only the tip top of the iceberg.

The landscape continues to evolve with new projects and protocols every day. "DAO" went from a term avoided post DAO Hack to today being the zeitgeist and corner of value for any tokenized project in the world.

One common theme with DAOs: decentralized coordination is a messy and unsolved problem. Specifically, the idea that everyone can participate in governance doesn’t mean that everyone a) wants to participate, b) has the context to participate, or c) has the time to participate. As stated before, asking people to participate in governance generally equates to bad UX.

okduncan.eth @OKDunc

People love democracy but People hate voting

1:51 PM ∙ Nov 26, 2021

18Likes3Retweets

DAOs aim to give democratic access and ownership to a broad group of stakeholders, and in doing so, risk the ability to move efficiently. Teams building DAO tools need to move toward increasingly efficient processes with a backstop of decentralization. Reducing the frequency of collective decision-making and offering recognizable patterns will assist in finding efficiency.

Note: Organizations with a flat hierarchical structure suffer from the issues defined by Joe Freidman’s article “The Tyranny of Structurelessness”.

When I started working with SZNS in August the assumption was that Albums (DAOs using governance tokens to manage baskets of NFTs) would want two specific functions for their NFTs 1) a Buyout to sell the basket, and 2) an Add NFT function to allow people to contribute and join the Album without purchasing tokens directly.

Quickly we realized this will not suffice the complex needs of a community building with NFTs at their core. Additionally, the process for making decisions defaults to a two-week voting period which does provide a degree of security for transactions, but does not equal a fun nor simple experience.

With two Albums launched ($DIVINE and $MBBT) we’re able to gather direct feedback on the types of actions needed to be performed by these communities. We aim to unlock new potential in community ownership of these assets by building standard interfaces for critical actions these communities need to execute.

SZNS leverages the Gnosis SafeSnap architecture which is the most flexible and gas efficient system for Mainnet governance available. Our team plans to iteratively develop on top of this primitive to create efficient and opinionated governance systems for Album communities. More can be seen in our SZN-0 governance post.

As the protocol and communities using SZNS evolve, new patterns will continue to emerge and the SZNS team and community will work to develop more effective paths of decentralized decision-making.

Note: SZNS is not the only new governance primitive available today, just the one I am most familiar with. Also checkout Juicebox, Orca Protocol, and Olympus.

https://www.constitutiondao.com/

https://en.wikipedia.org/wiki/The_DAO_(organization)

http://kronosapiens.github.io/blog/2019/06/16/aragon-daostack-colony-moloch.html

https://decrypt.co/6983/moloch-vitalik-buterin-consensys-joe-lubin-ameen-soleimani-spankchain

https://slatestarcodex.com/2014/07/30/meditations-on-moloch/

https://www.jofreeman.com/joreen/tyranny.htm

https://blog.gnosis.pm/introducing-safesnap-the-first-in-a-decentralized-governance-tool-suite-for-the-gnosis-safe-ea67eb95c34f

https://szns.medium.com/szn-0-governance-overview-d9cb6e0e2dce

https://juicebox.money/#/

https://www.orcaprotocol.org/

https://www.olympusdao.finance/

Square 1 is a content concept created by Duncan with the help of some friends. The goal of the project is to provide valuable, evergreen information for people interested in deeply understanding Web3 and crypto. A 12 episode podcast launched last spring and new podcast is in development. Learn more in the links below👇!
Website
Twitter
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Encyclopedia
Youtube

Subscribe to Square 1 on Youtube!

NFTs are blazing hot rn. WTF is a NFT and why are they so hot? Let me try to answer from the top of my head.

An NFT is a Non-Fungible Token. This is distinct from the typical fungible tokens you see traded on Coinbase or other exchanges. Fungibility refers to the concept that one token may be replaced by many other tokens of the same type. An NFT represents a unique token that does not share the same characteristics as any other token. NFTs therefore, are made for things like trading cards, in-game assets, and, most notably, art. Most NFTs today use the ERC721 Ethereum token standard, while most fungible tokens today use the ERC20 Ethereum token standard. To put it simply, NFTs are a standard type of digital asset that represent something unique.

Fun fact: Vitalik first created Ethereum to protect valuable items in games like World of Warcraft from being stolen or economies inflated. NFTs solve for this kind of issue by offering an immutable (non-changeable) manner for tracking ownership and creation of these tokens with a network like Ethereum.

NFTs have always been thought of as a potential “gateway drug” for crypto adoption. Rather than a token that represents a fractional share of some uncertain defi protocol, with NFTs you own a token that represents a cute digital cat, or a work of art from a renowned artist, or a ticket to join a cool new internet community! There’s a clear emotional connection to these items, and that connection drives familiarity and cultural significance. Companies like Dapper labs have raised millions of dollars leveraging the idea. Another benefit of NFTs is that, due to their fungibility, they do not act like securities in the same way an ERC20 does. Thus, NFTs are cute and offer some legal protection from the notoriously grey zone of crypto development. This makes NFTs the fertile ground for companies to build systems that attract large numbers of people to interact with the blockchain, but why did this bull market begin? Cultural development.

Last May, Beeple kicked things off with an NFT auction of his digital art in conjunction with the world renowned Christie’s auction house. This work sold for $69 million and validated the cultural significance of art using the NFT ERC721 standard.

In hindsight, it makes sense that this led into a bull market like we’ve never seen before. NFTs offer the general public a more intuitive use-case for why these digital assets feel valuable, and that connection is the key. It is the same reason fine art holds arbitrary value. Pricing culture is inherently arbitrary.

The crypto community continues to grow with new tools and ideas around how to make the tech more valuable and how to coordinate to create new forms of productive online organization. They rally around projects for a variety of reasons, CryptoPunks because they are cool and OG, BAYC because they are sexy and new, Cool Cats because there’s an interesting tv show being developed… the list goes on as the Cambrian explosion of ideas, JPEGs, and smart contracts culminate into the next big wave of financially driven cultural relevance. This might be a bubble at the moment, but the tech holds significant long term opportunity.

If you like this info, and want to get involved with helping build Season 2, don’t hesitate to reach out!

Reach Out

We are looking for people with marketing and writing skills who are excited about Web3!

Episode(s) Released

Check out the first two episodes of Season 1 on youtube!

Where does cryptocurrency come from? with Andy Tudhope

OS Systems and dGov with Jordan Ellis

Will keep these youtube episodes coming! It’s been fun to revisit these conversations with such knowledgable people.

Below are thoughts developed from working at Maple.Finance… this essay summarizes the way undercollateralized Defi systems break the traditional metric of Total Value Locked (TVL) for the industry. Let us know what you think!

~ JD

Undercollateralized lending will force Defi to rethink common success metrics.

Capital efficiency is an unsolved problem in the world of decentralized finance. Companies taking crypto loans today either rely on centralized OTC desks like Gemini or Coinbase, or use more capital intensive trustless protocols like Aave and Compound. Non-custodial undercollateralized lending does not exist in the ecosystem due to inherent risk of defaults and lack of intelligent decision-making by smart contracts.

In Defi lending protocols today (Aave, Compound, Maker DAO, etc.) smart contracts rely on borrowers to stake collateral that will be liquidated in case of default. The amount of collateral staked supports the value lent by the system. The most common success metric used for these protocols is the Total Value Locked (TVL) of the smart contracts. TVL is greater than the outstanding loans by ~300% on average today. 

An undercollateralized system flips this capital requirement. Instead of fully securing the value of the network, undercollateralized lending grants access to loans with the trust that the borrowers will pay these loans back. In traditional finance, that trust is determined through an underwritting process that takes into account credit score, financial statements, and various other factors. Underwritting in tradfi varies between firms, jurisdictions, and industries. Well defined standards do not exist. 

So, how should we determine value of these undercollateralized lending protocols?

New metrics will need to emerge to understand the value created by undercollateralized systems. Because these systems offer trustless lending, focus should be placed on liquidity provider risk. The LPs of these undercollateralized systems are the ones with the most to lose, and they deserve to understand metrics such as Default Rate, Total Incurred Losses, Collateral to Debt Ratio, and Average APY. 

The metrics associated with undercollateralized lending will take significant time to emerge. These systems are inherently risky, but will also provide a significant increase in capital availability for the entire space. While providing liquidity may be trustless, borrowing and decision making for borrowing should take a path of trust minimization to provide as much security as possible to those risking funds. 

The metrics we use to qualify the value of these systems will look very different from the over-collateralized lending protocols we saw emerge in the first wave of decentralized finance.

Thanks for your support through the first season of the Square 1 podcast! We finished with 12 episodes and reached a niche and engaged audience of people following along.

Currently we’re building a variety of new materials, including a Square 1 Season 2, publishing Season 1 on Youtube, and creating conceptual shorts on Tiktok < click that.

Launching our Youtube series with an unreleased episode we recorded in Season 1, a conversation with Louis Groux who works at SuperRare (they just launched a tokenized governance system).

We’re lining up new interviews to provide more evergreen information about cryptocurrency, remote work, product development, etc. Is there anyone you want to see on the Pod? Let us know!

Some new considerations include opponents of crypto, non-white males in crypto, and more emphasis on intro episodes : ).

Thanks for your support!

JD

https://twitter.com/sidbpowell

Square 1 @Square1_pod

Check the latest Deep Dive with @sidbpowell 👀 DAOs, Defi, @maplefinance, and the evolution of capital markets... what more can you ask for?

1:59 PM ∙ Jun 15, 2021

Stay tuned for more information on the evolution of Square 1! We will be taking some time to refine the strategy for Season 2, and would love your feedback as we build!

Thanks for the continuous support throughout the development of this content : ).

Best,

JD

PS: We failed to advertise the Deep Dive 11 with James Prestwich, if you missed it you can find here.

Welcome to another week of the Square 1 content series!

LISTEN HERE

Square 1 @Square1_pod

Episode 10 is out! Learn about the @thegrifft's experience pioneering in Web3. Beginning with @slockitproject and @The_DAO_Project Griff now builds and coordinates social good systems like @Givethio, @commonsstack, and @tecmns!

3:01 PM ∙ May 28, 2021

The podcast launch this week was recorded in February as Square 1 was just forming as a concept. We talk with Griff Green, who has been a crypto nomad for about a decade. Griff brings with him a wealth of stories and experiences describing some of the early events that shaped the crypto ecosystem (such as the DAO hack).

Learn about his experience, as well as his ongoing projects (links👇).

https://tecommons.org/

https://twitter.com/Givethio

https://commonsstack.org/

Q: Is now a good time to invest in crypto?

A: In general, timing for investments should be determined by your financial goals. Timing the market in the short term rarely ends well. Following a long term thesis on the other hand, generally results in compounding returns.

Q: A token has a partnership with a big well-known brand, is it worth investing in?

A: Understanding the value of token economies is incredibly nuanced and often requires understanding the ecosystem traction around the network. These systems are Open Source and Transparent, and are generally not built to expand the way organizations have in the past. Often, looking at the engagement in a token project’s discord server or community forum is more important than a partnership they announce.

Hope these answers are helpful as you continue exploring and getting involved in the ecosystem!

Best,

JD

Square 1

(find more metrics at Defi Pulse)

LISTEN TO THE EPISODE

As always, let us know if you have any questions or feedback. We’re approaching the end of the first season for Square 1 and would like to sharpen the direction moving forward. I go into more detail in the episode intro.

Best,

JD

PS: If you’d like a nice place to put gains from the bull market, Maple Finance is launching their liquidity pool today. 6 month lockup at ++10% interest.

Maple Finance @maplefinance

On May 21 at 5 pm EST, the Maple Liquidity Pool will open to the DeFi community for funding 🥞 By participating as a Liquidity Provider & depositing USDC, you'll earn yield and additional MPL rewards Guide to Liquidity Mining available here👇 maplefinance.ghost.io/guide-to-liqui…

maplefinance.ghost.ioGuide to Liquidity MiningMaple enables crypto native institutions to build sustainable businesses by accessing growth capital from the DeFi ecosystem. Many impressive businesses that have emerged in the crypto economy are highly profitable yet largely ignored by traditional finance. Maple’s decentralized marketplace enables…

6:11 PM ∙ May 20, 2021

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Democracy Earth with Santi Siri

Square 1 @Square1_pod

Launching Deep Dive #8 with leader of @DemocracyEarth, @santisiri! “If we can use the incredible coordination capacities that the internet has to troll a hedge fund on wall-street or make @dogecoin a multi billion dollar asset, why don’t we leverage that for UBI…?”

4:54 PM ∙ May 14, 2021

We’re launching a new deep dive episode with the founder of Democracy Earth, Santi Siri! Santi comes from Argentina and began building Democracy Earth in a YC cohort. This project continues to evolve, and at the time of the podcast he had just launched an experiment in Universal Basic Income called Proof of Humanity. If you’d like to take a first step into the crypto ecosystem, this would be a very interesting experiment and community to participate in (and you get streamed money for doing so!).

The Square 1 podcast focuses on gathering information from inspired humans and technologists building valuable products and systems. Blockchain technology attracts optimistic thinkers to come together and invent digital-native economics that have never before been possible. While you get a view of those building with best intentions through our conversations, there are also many who use cryptocurrency in ways that do not resonate with anything of great value. 

For instance, this past week there was a wild hype cycle in Dogecoin, and other related meme-y dog coins. Doge and Shib Coins show the way Memes can influence people, culture, and capital. While these examples do not come from a place of malice, their rise in popularity and market cap does not reflect the value created within the cryptocurrency space at large.  Vitalik clearly agrees with this, as he liquidated the value given to him in Shib to support a variety of charities around the world. Meme coins serve a purpose, but they are not providing fundamental value to the world in the way many of the most dedicated builders hope for.

Sari Azout @sariazout

And @Square1_pod is the owner of this experiment! Proud to be collaborating, experimenting, and pushing boundaries with the most curious minds on the Internet.

Sari Azout @sariazout

I wrote a thing with @Jad_AE on the future of the Internet What’s REALLY cool is we worked w/@viamirror to make this an experiment in Attribution+ where we not only attribute sources of inspo but route $ to them the key ideas 👇🏾 https://t.co/nShiSZbULw

3:06 PM ∙ May 14, 2021

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Square 1 bought our first NFT! We participated in an auction to support the essay written by Sari Azout and Jad Esber, both of whom are techno-humanists building ideas and products to serve a more collaborative and healthy digital future. If you are unfamiliar with their work, please take a moment to read the essay. This was a great experiment to participate in, and a very worthy cause to support with the grant we received from the Bloom token network.

As always, reach out if you have any questions or feedback!

Sincerely,

JD