Crypto Crazes: NFTs, DAOs, and My Efforts to Understand the Blockchain

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This week I‘m writing about the latest changes in crypto and other such financial adventures. Helping me understand this complex and fast-changing universe (or metaverse) is Zack Guzman, writer of Crypto Uncomplicated.

Earlier we talked about the evolution of Bitcoin’s purpose, and the possibility of a digital dollar from the Fed.

Today we draw back the curtain on related digital assets or investments, because billions of dollars are being spent on things that aren’t really... real.

NFTs Are Moving Past Art to… Everything (But Don’t Tell the SEC)

THE HISTORY: NFT stands for non-fungible token. What a terrible name. When I first saw “NFT” I assumed it meant “Not F—ing True,” and, well…

A non-fungible item is unique. If I give you a dollar, it doesn’t matter what dollar I hand over. A dollar is a dollar. But if I sell you the Mona Lisa, there’s only one. She’s non-fungible.

So far, the majority of NFTs have been digital artworks. Most are sold on the Ethereum blockchain because Ethereum started doing it first. But that’s changing. Mark Zuckerberg says NFTs are coming to Instagram.

An NFT gives the buyer ownership of an artwork’s underlying digital key, which also allows the buyer to resell it.

Let’s go back to the Mona Lisa. If I own the Mona Lisa NFT, I’m kinda like the Louvre, the museum where she’s housed. I have her under lock and key. Meantime, the rest of you could still print up posters of her, and Leonardo Da Vinci’s estate could still own the actual painting and maybe even sell it other museums. (In reality, the Mona Lisa is owned by the French government, but work with me here.) “Ownership” of NFTs is often more about bragging rights — “Here she is! In my house!”

Some NFTs are selling for millions of dollars, especially in collections like the Bored Ape Yacht Club, where auctions reportedly hit $1 billion last year. The creators behind the Apes just bought another collection called CryptoPunks, which had over $2 billion in auctions.

An image of one of the 10,000 Cryptopunks NFTs/Dia Dipasupil, Getty Images

I told Zack it reminds me of the pet rock, that must-have gift of 1975.

At least the rocks were real.

“There are ‘Ether Rocks’ out there,” Zack replied. People are selling rock NFTs??? “One sold for more than a million dollars.”

Hey, whatever the market will bear. Beauty and value are in the eye of the beholder. Importantly, scarcity drives up price. There may be a bazillion posters of the Mona Lisa, but I have the only unique digital... key... thingie.

But art is so 2021.

ZACK SAYS: NFTs are moving into new areas, from art to access — a doorway to something else — and the potential is limitless. NFTs are becoming digital ownership stakes. The wildest example is one man’s futile attempt to create an NFT of an over-the-top mega-mansion in Los Angeles. It even has a name: “The One.” (It qualified for Dumb and Dumber in January.)

Nile Niami built The One and tried unsuccessfully to save the house from foreclosure by pitching it as an NFT people could buy into. If he had raised enough money, he could’ve kept the house. Those who bought shares in the NFT would have gotten a portion of any profits generated from high rollers renting the house for big events.

Oops. I used the word “shares.”

“This is where it gets maybe dangerous,” Zack says. “If you call something a share, you’re going to have to register with the SEC, if you’re promising upside.”

And the SEC is not just watching NFTs. Get ready for the next acronym.

DAOs Are Like SPACs, But Without Regulations (Yet)

THE NEWS: The hot new(ish) trend in crypto is DAO, which stands for Decentralized Autonomous Organization. I thought that’s what they called the Borg.

A DAO is a group of people with a common purpose who pool their crypto resources in a shared digital wallet. Each investor gets a digital token. For example, a group of investors wants to use a DAO to raise $4 billion in crypto to buy the Denver Broncos. If successful, the Broncos’ ownership would operate as a cooperative, similar to the ownership structure of the non-crypto, non-DAO, pre-Bitcoin Green Bay Packers.

DAOs remind me of SPACs, or “special purpose acquisition companies.” This is when a group of investors pool their money and turn that pool into a public stock as a “blank check” company. Then they hunt for a private company to buy with their pooled funds. Once they buy something, they merge the new company with their blank check stock… and makes oodles of money. Sometimes.

SPACs have become popular as a way to avoid the costs and hassles of a traditional IPO, though they’re still subject to securities laws. DAOs avoid both the stock market and securities laws for now, even though the SEC ruled in 2017 that DAO tokens are securities and, therefore, subject to regulations. Five years later, the agency hasn’t taken much action.

Yet.

Get in while you can, right?

ZACK SAYS: Just do your due diligence. If someone is pushing an NFT or a DAO (LOL? WTF?), you may be setting yourself up for a crypto con called “the rug pull.” Don’t be that person. DBTP.

…

JANE ADDS: So… have I made any of this clearer? If you’re still saying “I don’t get it,” you’re not alone. None of us knows exactly how this sphere of investing and ownership will expand and evolve.

Picture yourself inside UCLA’s Boelter Hall in 1969 as a message is sent between two computers over what will eventually become the internet. Now imagine someone that day describing the future of this technology. “You’ll be able to shop on it, send money over it, search for anything — including a date, watch porn, make movies, spread lies, show what’s really going on inside a bombed out maternity hospital… all in real time, wirelessly, on a device you can hold in your hand!” To which you might reply: “Are you NUTS??”

Don’t beat yourself up for being flummoxed about crypto and NFTs and DAOs (oh my!). We’re all flummoxed.

I’m especially confused about the blockchain, the underlying technology that processes all of these crypto transactions.

I have questions.

The Blockchain Makes My Head Hurt

The blockchain is supposed to be decentralized, autonomous, transparent, honest and unbreakable.

Okayyyy.

If you have a half hour, here’s a helpful video that Zack uses on his Bulletin page.

Here’s how I think the blockchain basically works, without getting too much into the digital weeds.

Say I want to send you $500 worth of Bitcoin. That transaction goes out onto the Bitcoin blockchain to a community of “miners.” The entire history, or ledger, of Bitcoin transactions is on this blockchain, and miners are people running computers worldwide on the platform. (Each cryptocurrency has its own blockchain.)

The miners see my transaction pop up (well, their computers do), and they also see the transaction fee I’ve offered to pay. The higher the fee, the more likely they’re willing to put my transaction into a block.

To create a block, miners compete against each other to solve math problems already built into the system — problems which take a lot of computing power and electricity. The system isn’t very green. Whoever solves the problem first creates the next block. (There’s other stuff going on to make all of this secure, but my head is already exploding.)

It takes about 10 minutes to create a Bitcoin block, and each block contains about 2,400 transactions like the one I’m trying to complete. Miners are rewarded for doing all this work by creating a little bit of Bitcoin for themselves in each block. They're also paid with transaction fees like mine.

Allegedly everyone on the blockchain can monitor the ledger.

Whatever you say, dude.

But most importantly…

IS THE BLOCKCHAIN BREAKABLE?

Each new block contains the signature of the previous block, so if someone tries to hack into a block to steal crypto, the signature of the corrupted block changes, and the chain is broken.

ZACK SAYS: “The Bitcoin blockchain has never been hacked. No payment has ever been undone.”

Zack adds that in order to corrupt a blockchain transaction, a miner would probably have to control more than 50% of the network on the platform, “which would require an insane amount of computing power.” You’d need to dominate more than half the network to beat out all the other miners solving math problems to create the next block... over and over again. It’s about as close to impossible as one gets, while still being possible.

But it has happened on other blockchains. So...

YOUR QUESTIONS ANSWERED!

Zack and I took questions during our Facebook Live sesh (watch it here); here are a few of them.

Dave Carstens — Should I buy now before regulations hit?

Probably, though it’s at greater risk.

ZACK SAYS: Regulation is the most important development to watch. “I do think regulation in the long run is — on the margin — a good thing,” he says.

Mark Storer — What is the impact of government control?

Could the U.S. government just shut down crypto and ban it, as other countries have done?

ZACK SAYS: “I think we’re far past that point, especially as they’ve come to define crypto as real estate.” Seizing your digital real estate would be as illegal as seizing your house.

But that doesn’t mean there aren’t choke points, especially in what Zack calls the “on and off-ramps” between crypto and traditional banking. He points to the Canadian trucker protest. Truckers were blocked by the Canadian government from receiving Bitcoin donated by supporters.

Curtis Schultz — What about putting NFTs inside gaming?

Why can’t someone sell his or her portfolio of digital assets acquired in a game like Fortnite to someone else?

ZACK SAYS: That’s a good idea, but it should be bigger than one game. Perhaps there should be an open-source gaming system where assets can travel across games and be traded anywhere.

Peter Winters — Where’s the inflection point to greater adoption?

When will crypto reach enough critical mass to be a dominant player, not a bit(coin) player — even though the current total value of all crypto is estimated to be $2 trillion?

ZACK SAYS: It depends where you live. In the U.S., we may want to own crypto, but we don’t really need to. But as I mentioned in my last column, Zack thinks the rate of adoption will be much faster in countries where people have “distrust for their governments and their own financial systems.”

Finally, Zack’s Favorite Crypto? Terra.

Zack likes the way the creators of Terra are trying to create a stable coin detached from the banking system. “It’s attracted a lot of attention from some very smart people,” he tells me.

The coin has increased 13,000% in value against the dollar in one year. Time for a correction, amirite? Zack thought he’d see that, but so far he hasn’t. “Weirdly, it’s still going, and the adoption is still there.”

Yes, weirdly.

I'm sure you have thoughts about this. Please join the discussion, 📪 me at jane@janewells.com, or ping me on social media: Twitter, Facebook, Instagram, and LinkedIn.

You can also learn so much more about this space by subscribing to Zack’s Crypto Uncomplicated.