Smart contracts unlock new modes for trade, work, and play. Let's take a tour.
DeFi (Decentralised Finance)
DeFi is crypto’s way of Wall Street.
DeFi dapps let you swap, invest, earn, lend, borrow and insure financial assets directly with others users. Bankers are coded out: smart contracts automatically verify both ends of a transaction on the blockchain — slashing costs, overhead and bias. As of October 2021, ~$200bn of total asset value has been locked in DeFi protocols. (What is Total Value Locked (TVL) in DeFi?)
- Stablecoins — Stablecoins are digital tokens pegged against commodities like gold or fiat currencies like the dollar. For example, 1 USDC token is exchangeable for 1 ‘real’ dollar. Old-world assets get crypto features: they become programmable in smart contracts and, as such, can be used in DeFi protocols, DAOs and dapps.
- Uniswap — In spite of decentralised imperatives, most tokens are still traded on centralised exchanges like Coinbase. Uniswap fulfills the web3 promise: direct peer-to-peer currency trading.
- Aave — Aave is a crypto-lending protocol. Crypto-holders can earn high interests by lending out. Borrowers can take out loans without credit checks by putting down crypto as collateral. In case of default, collateral is sold off to cover the loan.
NFT (Non-Fungible Token)
A token is non-fungible when its value is perceived as unique, i.e. when it's not 1:1 interchangeable with another token. It's a matter of perception: dollar bills all have unique serial numbers, but qualify as fungible because the purchasing power of each is the same. It's a different story if you're a collector and care about the serial number.
In that sense, NFTs are just tokens with serial numbers that matter. If you issue 1,000 entry tokens for a giveaway, those tokens are non-fungible if a higher number increases chances of winning. They're fungible if the token number doesn't matter.
As I write this, NFTs have become hard to ignore. But as people and companies spend millions for Cryptopunks and Bored Apes, two important features of NFTs tend to get lost in the noise.
First, NFTs are on-chain tokens proving ownership of off-chain assets. They're not the assets themselves. Everyone can right-click + save a Cryptopunk .JPG, but only one wallet can hold its NFT.
Second, NFTs are not synonymous with digital artwork or even digital assets. Everything you’d care to own can be tokenised to make its ownership verifiable, unstealable, programmable, divisible, easy to transfer and cryptographically secure. That includes the Mona Lisa, Teslas, and your house. Digital artwork is but the top of an iceberg that will go on to tokenise every asset on the planet.
- Bored Ape Yacht Club (BAYC) — The BAYC is a community for Bored Ape NFT holders. A compelling example of how NFTs can be tied to access and exclusivity, as well as social status.
- Ethereum Name Service (ENS) — When you register an Ethereum domain name, its NFT is minted and stored into your wallet.
- Audius — Audius is web3-Spotify. Artists directly stream to listeners without music labels and companies in-between. Ownership of songs stored on the IPFS is recorded on-chain as NFTs. Streaming revenue goes to whoever owns the NFT.
NFTs free creators and consumers from the monopoly of platforms.
When you post image, video and audio files online, you copy-paste its ownership to Facebook & co as per terms of service.
Through NFTs, creators retain ownership of their content, without limiting their spread. However far and wide the files are copy-pasted across the web, origin and ownership are forever tracked on the blockchain. Platform-agnostic, endless content.
On web2, when content goes viral, it's the platform that profits. Verifiable NFT ownership inverts this relationship, redirecting all future cashflows of an idea to its creator — as defined in smart contracts. It is now in the creator's interest for their work to be copy-pasted virally. Every copy, share, display, use, and promotion accrues the cultural value of the original idea. NFTs capture ideas as assets so they become ownable and tradeable.
For a taste of how NFTs reinvent digital ownership, consider Mirror.
Mirror is a decentralised publishing platform, with tools that help creators express, share, and monetise their thoughts web3-style. You can publish posts on-chain, mint and auction off NFT editions for them, crowdfund new projects, split revenue with collaborators and tokenise your community. $WRITE tokens give creators ownership of the Mirror DAO.
You can read this post on-chain. As well as support my writing by collecting its NFT. Who knows, maybe it'll be worth a lot more in the future.
DAO (Decentralised Autonomous Organisation)
As noted earlier, organisations can be simplified as synced webs of contracts.
- Employees get paid to perform a set of tasks.
- Customers pay for products and services.
- Banks lend money on certain payback conditions.
- Shareholders invest in exchange for a stake in the organization’s activities.
A DAO puts this idea on steroids, automating value transfers through smart contracts. Human managers are programmed out by code that is democratically agreed on by token holders. Each member owns a fraction of the DAOs assets and can weigh in on decisions proportional to token holdings — as programmed per smart contract.
Integrating economic and social features, the DAO model makes companies more like communities and communities more like companies.
- The DAO — The very first DAO was a venture capital fund launched in 2016, aptly named The DAO. DAO tokens, purchasable with ETH, came with the right to vote on where The DAO's collectivised funds would be invested. Investors were to profit from dividends and rising prices of the DAO token. Unfortunately, the underlying smart contracts had a critical bug that was exploited by hackers. Or maybe not so unfortunately: hacks expose vulnerabilities we can't have. Where the DAO Hack initially posed an existential risk to the nascent Ethereum protocol, it ultimately came to strengthen it.
- MakerDAO develops a DeFi protocol and issues a stablecoin named DAI. Many teams building web3 applications are in fact structured like DAOs, including aforementioned Uniswap and Aave.
- PleasrDAO is a collective of NFT enthusiasts that pool together resources to get their hands on rare pieces. Notable acquisitions include the Snowden NFT, the original Doge meme image and an extremely rare Wu Tang Clan album. Each member owns a part of these NFTs proportional to the number of tokens they hold.
Tokens capture the economic value of community membership, subjecting them to laws of supply and demand. Prices rise as more people want to join. As well as gain certain rights tokens may represent: ownership, voting, exclusive access. When prospects of rising demand attracts investors, the price climbs even higher.
This is as true for ETH holders as it can be for any group of people. Brands, artists, creators, influencers can turn communities in economies through tokenisation. I myself could airdrop $GIL tokens to subscribers and mint NFTs of pieces I write. The more readers I get, the higher the economic value. More so if tokens also unlock exclusive content, a Discord group, events and other fun stuff.
- Socios enables sports teams to monetise fanbases with fan tokens. Fans can buy tokens for a sense of ownership in the club, other than for “superfan” access to team decision polls, giveaways and rewards. Soccer superstar Lionel Messi reportedly got part of his signing bonus paid in $PSG fan tokens when he signed for the Parisian club in August — consequently spiking the price.
- Mirror is a decentralised publishing platform, with tools that help creators express, share, and monetise their thoughts web3-style. You can publish posts on-chain, mint and auction off NFT editions for them, crowdfund new projects, split revenue with collaborators and tokenise your community. $WRITE tokens give creators ownership of the Mirror DAO.
Next, you can gamify the community by rewarding achievements with tokens.
If you’ve ever chased Pokémon, World Of Warcraft weapons and FIFA player packs, you understand the value of digital assets. With a blockchain, digital assets become economically scarce. There’ll be only one Pikachu in crypto-Pokemon. And it won't have a central corporate game developer non-stop pulling in cash from players through infinite duplication of game items out of thin air. Instead, scarce assets are earned, owned and traded among game players in what is a proper economy. Yes, your kids will make a living playing video games.
- Axie Infinity is a blockchain game in which players breed, raise, battle and trade cute animalistic creatures called "Axies". Players earn tokens they can leverage for breeding Axies, owned as NFTs. Trading Axies and tokens, some players are already able to live off the game. The game's economy is surprisingly complex, as this thread explains.
Human-to-human economies, NFTs, tokenised communities and play2earn converge in what's known as the Metaverse: a virtual world where people work, play and live together.
Consider how much our lives is already happens through screens:
- Work — From working in buildings to working from laptops and phones. From meeting rooms to Slack and Zoom.
- Community — We care more about online followers than offline neighbours. Spend more time socialising on Instagram, Twitter, Discord and Reddit than in bars.
- Play — More people today play online games than offline sports.
- Identity — More people care about how we look online than in real life. Profiles, tweets and stories is how we broadcast who we are.
To digital work, play, friends and identity, blockchains add digital assets and ownership.
If the prospect of living in the cloud sends shivers up your spine, mind that in sci-fi virtual worlds feel dystopian mostly because of the central power that designs and controls them. This is web2’s version of the Metaverse: a virtual Facebook.
A crypto-Metaverse is open and decentralised, built from the collaborative creativity of all its creators, economically allocated through supply and demand mechanics. A world free from natural constraints and dictating institutions can have tribes, vibes and markets for every human individual. Can't find yours? There's your cue to get creating and connecting. You don't need anyone's permission.