This is the second part of The Lay of the Cryptoland. You can find the first part here:
While the last few years have seen scorching growth in cryptocurrency adoption, most of the mainstream attention and participation has been around speculative trading with different crypto tokens. This is illustrated by the Google Search trend comparison shared below.
(of goods contracted for without an individual specimen being specified) replaceable by another identical item; mutually interchangeable.
NFTs represent a unique crypto token which either has no replicas or a limited set of replicas. They are called nonfungible as, unlike a bitcoin or ether, you can’t replace an NFT with another one.
For instance, the header image in this post is an NFT minted by Todd & Rahul's Angel Fund. Only 399 of them were minted and airdropped to people across the internet. Similar to a crypto token, the ownership of an NFT is recorded on the Blockchain and it can be transferred to another person in the same way you would transfer a cryptocurrency.
Opensea, the largest NFT marketplace, has already done volumes worth $10 Billion in its last 4 years of existence. NBATopshot which is a blockchain equivalent of collectible sells short videos ownerships from key moments in NBA and has done close to $726 Million of sales since its launch in late 2020. NFTs hit a high point when famous digital artist, Beeple, auctioned Everyday: the First 5000 Days for $69 Million as an NFT earlier this year.
For someone who grew up on pirated movies and music 🙈 it was initially daunting for me to understand the allure of NFTs. While there is still a lot for me to comprehend, there are two things that I find interesting. One, in its current form at least, NFTs act as a signaling tool for what tribe you belong to. Each NFT collections have an associated community of followers on discord with their own personality and style. The second aspect that I find interesting is having a programmable on-chain representation of ownership can lead to some interesting usecases. Today NFTs act as a record of ownership of digital assets. But, there had been outlier cases too where NFTs had been used to represent ownership of an asset in the real world too. Techcrunch founder Michael Arrington famously sold an apartment he owned in Kyiv, Ukraine through an NFT.
In 2017, Dapper Labs launched Cryptokitties, a blockchain-based game where players buy, sell, breed, and collect virtual cats. Each cat was unique and sold as an NFT. Players had custody of the cat once they bought it and even the game developers can’t control it. It got so popular that at a point in time they accounted for 25% of the traffic in Ethereum.
Blockchain Games are different in the way that the rules of the game are coded in smart contracts and executed on the blockchain instead of centralized servers and the game’s artifacts such as player avatars, collectibles, etc. are distributed as NFTs.
Blockchain solves a critical part of gaming dynamics which is enabling players to actually own the artifacts they have gained by spending time playing the game and leveling up their skills and getting economic benefits out of it.
Axie Infinity has emerged as a leading blockchain game. As of August 2021, it had north of 1.8 Million Users and a daily sales volume of $33 Million. Axie Infinity is a game similar to Pokemon where you buy and breed characters called Axies that battle environment monsters (PvE) and other players (PvP). Users earn gaming tokens and collectibles playing the games. The AXS token is the governance token and the SLP token is used for in-game mechanics.
In the Philippines, where Axie Infinity has 60% of its user base, people made their living expenses playing the game through COVID. P2E is an interesting phenomenon that changes game economics significantly enabling the development of a virtual economy and empowering users to take advantage of it.
Decentralized Finance as the name suggests is a blockchain-based form of finance that does not have any central intermediaries such as banks or exchanges. Instead, it utilizes smart contracts to power different financial use cases such as lending and borrowing, trading, etc.
Ethereum has the largest DeFi ecosystem with total value locked (TVL) north of $100 Billion. Polygon (An Ethereum Sidechain), Binance Smart Chain, Solana, and Avalanche are some of the other blockchain networks with growing DeFi ecosystem.
MakerDAO was founded by Rune Christensen in 2014. It is credited as one of the pioneers in Decentralized Finance. MakerDAO uses a mechanism of overcollateralised loans and repayment process to issue a Stablecoin called DAI.
Stablecoins are cryptocurrencies that maintains a one to one peg with a fiat currency. DAI, USDC, and USDT are few examples of Stablecoins pegged to US Dollar.
MakerDAO has a TVL of $18 Billion. People can use Ethereum and ERC-20 tokens such as Chainlink (LINK), Matic (MATIC), and Yearn (YFI) to take out loans in DAI. For instance, a user can take out a loan of $1000 by putting in a collateral of $1450. Ether has a collateralisation ratio of 145% as of now. If the price of the underlying collateral goes down, below a certain threshold the protocol starts liquidating the collateral to minimise risk against the loans.
Uniswap is the largest Decentralised Exchange. It was launched on November 2, 2018 on Ethereum Mainnet.
The story of Uniswap founding is itself very interesting (and inspiring) starting with the founder Hayden Adams, a Mechanical Engineer who got laid off from his job at Siemmens. Hayden got a small grant from Ethereum and started working on Uniswap learning programming on the way.
A Decentralized Exchange unlike a traditional centralised exchange utilizes a construct called Liquidity Pools to enable trading. Liquidity providers contribute pairs of tokens into the pools which are then utilized by traders for completing trading transactions. The fees generated in return is passed on to the people who provided liquidity of the exchange.
Uniswap today does close to $3.5 Billion of trading volumes every day. For comparison, Coinbase does close to $7 Billion in 24 hours. Crypto traders prefer decentralised exchanges for its low fees and extensive range of tokens.Decentralised Exchange by design being permissionless enables listing of any tokens and participation from traders and liquidity providers across the world.
When compared to the total art industry, gaming industry, or the traditional finance market size, NFTs and Decentralized Apps still make a very small size of it. But at the pace it is growing, it is evident that they will play a very crucial role in the future we are headed towards. Blockchain creates a borderless and permissionless ecosystem democratising a kind of access that probably didn’t exist earlier. There is an interesting world that will emerge from here on.
As we went down the rabbit hole of all of this, we started developing a conviction that the future of financial services and property rights will be built on top of NFTs and DeFi. However, we also realised that while the technology is extremely exciting, the consumer experience requires a lot of work to make it more accessible. This is what we are trying to achieve with Brew. Please do check out and sign up for early access.