Warm Crypto

In venture as in life, navigating that constant tension between the flip and the flop is the great game. If meaning derives from the juxtaposition of opposites, deviation outlines definition. Critics see only the extremes their perceptions color; yet it’s the blend between perspectives that drives innovation. With experience comes the comfort of knowing you just don’t know, and trusting intuition and energy in recognition that fluid realities can’t be compressed into static bookends. In a world of gray, schizophrenia is the dominant strategy, because only the paranoid survive.

Of late, I’ve been struggling with that schism dividing and reality. Deeply convicted in crypto’s role in empowering opportunity and connection, yet mentally exhausted from the copy pasta of short-term money games that don’t engender real change. Surely we can do better?

In March I found myself in Oaxaca for Mezcal Amaras, a “one-night, ​word-of-mouth festival in the agave fields that occurs once a year for 24 hours in early spring—and then vanishes”. That’s where I met Star. Super early into crypto, but disengaged since 2014. When I asked him why, he pointed to the temperature of the space: too cold.

Over the course of that night, I became convinced that “warm crypto” is the way forward. The concept is defined less by its strict contours than by the delineation of what it is not. Not money, but energy. Not exclusive, but inclusive. Not scarce, but abundant. Not isolating, but connected. Not trustless, but trusted. Not anonymous, but known. Not zero sum, but positive sum. Not ngmi, but wagmi. Not cold, but warm.

In a space that heralds trustlessness as its core primitive, and a cultural ethos glorifying anonymity, self-sovereignty, decentralization, and mass financialization, is it any surprise that we have struggled with mass adoption? Most aren’t interested in devoting their life to promoting a cockroach currency in a dystopian future. Crypto has had its zero to one moment (BTC). Maybe even its one to ten moment (ETH / Defi / NFTs). But what if, in order to scale from ten to a hundred, we first need to unlearn everything we have learned?

At a $2 trillion market cap, crypto has been one of the greatest generational wealth transfers in history. But we are in the late stages of the purely memetic game. And if we don’t get off the train that got us here, the accumulated expectation is not going to end well for the early believers.

This venn really hittin in this range innit

Each of the evolutionary waves in crypto stack to provide the foundations for the “modern industrial revolution”: the rise of virtual economies fueled by open markets, global connectivity, and the boundless personal passions that fuel the human spirit. My goal is not to provide a history lesson, but instead to offer a glimpse into my personal experience surrounding where we’ve come, and where we might be going from here:

The First Wave: Digital Currency + Trustless Consensus => BTC

Conversations on crypto with industry vets in my world (gaming) inevitably start with the refrain, “Why couldn’t you do this on a database?” As an ex-markets guy (FX/EM), the question never ceases to perplex me, and my response is, “Why would you?” The confusion is likely driven by the fact that the problem has been ill defined.

Crypto punters point to “true ownership” as a panacea to all the problems gamers didn’t know they had. Little do they appreciate the counterproductive nature of taking a confrontational approach (“You know all that time you spent earning that legendary sword and divine robe? Well you’re an idiot because you don’t actually own it.”), exacerbated by a solution that doesn’t even solve that problem (NFTs don’t transfer IP ownership, or if they do, it’s not the NFT that does it).

There’s a more straightforward way of illustrating the value of crypto, and it starts with what BTC has already proven. If the intent is to create a construct for the realization and exchange of financial value within digital economies, the worst way to build it would be to create ledger entries of debits/credits of virtual currencies and goods across non-interoperable databases and later try to find a way to link those entries to a fragmented international financial system. Yes you could construct a system of database entries and linking them together through a shared communication network, but that would be a bit like creating SWIFT in the 1970s:

SWIFT is a communications protocol for sharing messages around debits/credits that ultimately roll up to the central banks of each currency. Much of the delay around sending a cross-border payment derives from the fact that updating the “golden record” across layers of intermediaries is cumbersome and prone to error. Why does a cross-border payment take days to settle? Because there are no settlement pipes for the exchange of two currencies, only communication protocols. Why is it so costly? Because access to the central bank ledgers are restricted to regulated market participants. What happens when the regulators decide to freeze access to your fiat credits? You’re out of the game.

My intent is not to argue for a wholesale revamp of the traditional financial system. Depending on one’s ideological leanings, there are arguably significant benefits to the current system from an operational (transaction capacity, security, privacy, disaster recovery), regulatory (transaction monitoring, KYC/AML, consumer protection) and political standpoint (sanctions). My point is more specific. If what you are trying to do is to create a virtual currency for a digital world with an open-market economy, you’d be crazy to do it without leveraging crypto as currency — a use case BTC has already proven out. By creating a natively digital currency on a shared settlement layer, and backing it up with censorship-resistance to prove you won’t retrade the “moneyness” of your currency later on, you have a strong foundation for a fully functioning digital economy.

The Second Wave: Smart Contracts + Composability + Incentive Farming => ETH/Defi/L1s

The killer use case of Ethereum to date has been the combination of financial lego blocks with turbocharged token incentive structures. The mind-boggling market cap expansion of early defi protocols spawned a flurry of narrative positioning around alt-L1s and a flourishing Crypto Twitter culture around trading the metagame.

I recounted my own journey into defi summer in Sep 2020, and in hindsight ended up just playing a bunch of ponzi games. I remain suspect of most “governance token” models I see across the space, as there is a fundamental tension between delivering real value to token holders and avoiding classification as a security from the expectation of profits derived from others. This tension is magnified when you have a team that has raised equity and generates fiat revenues, but has also issued a governance token meant to capture the value of network expansion over time. Not enough thought is being given to the conflicts this raises between the interests of equity holders and token holders.

Despite its shortcomings, the innovation in defi has been real. The infrastructure developed around trustless exchange, borrowing/lending, derivatives, yield farming and synthetic asset management vehicles has become foundational to unlocking the GDP of the digital economy.

The Third Wave: Creativity + Scarcity + Flex => NFTs

When you unleash the creative potential of artists worldwide by unlocking digital scarcity, against the backdrop of a generational shift in identity from a primarily physical to digital world, it’s no surprise that the NFT market has exploded to a multi-billion dollar industry. (Matt Deslauriers has written one of the best expositions of the crypto art market, so that I don’t need to.)

There are at least two distinct segments of the NFT space. One is a means to an end, and the other is an end unto itself. The former is dominated by profile pic (PFP) and “metaverse” communities, often with long roadmaps promising utility, future drops and flooded with cult-like hordes obsessed with floor prices and trading volumes. The latter is art, most of which doesn’t claim to be anything other than art, and largely serving no purpose other than aesthetic value. Often, the lines are blurred between these segments, as many collectors “come for the market, but stay for the art”.

For me personally, I’ve become an avid collector of generative art, a journey I detailed first here and a few months later here. “Controlled randomness” characterizes the aesthetic milieu of our generation, and the combination of provable scarcity plus global flex in the context of a natively digital art form resonates deeply with me. My personal favorite artist at the moment is Zancan. Mainly because I can’t figure out how the guy does it, again and again…

The Fourth Wave: Games + Payers => Community Currency

For the foreseeable future, the most successful community currencies will come from games. What makes a virtual currency sustainable? The willingness of payers to convert and retain. Who has figured this out better than anyone? The free-to-play gaming industry, with annual microtransaction revenue of nearly $100b. What drives the willingness of gamers to pay for virtual goods despite a -100% ROI? A sufficiently compelling array of status games. As Eugene Wei wrote in 2019, status is the foundational primitive that serves at the core of consumer social:

One thing you often hear from crypto VCs now dabbling in P2E gaming is that they are focused on teams building “great games”. Great gameplay alone though is not enough. Specifically what most crypto games are missing is the ability to convert and retain a large base of payers. Too much of the narrative has focused on “play to earn”, without considering where the sustainable demand to sop up all of the token supply will come from. This has resulted in linearly declining grind currency prices, manifested most notably in Axie’s SLP (which has fallen over 95% to $0.02).

The narrative is now shifting to “play and earn”, but I find this to be a disingenuous formulation, as it again ignores the payer side of the equation, while disguising the underlying economic activity as play (play “and…”) rather than work (play “to…”). Real sustainability will be driven by “pay to win to win” (p2w2w) models, where a defined player base is willing to pay for the grind token, in order to apply their skills in the hopes of earning a bigger share of the network’s economic rewards.

One of the best ways to bootstrap, convert and retain a payer base is to give them tokens for free. This is where existing models premised on scarcity and gates are misguided (i.e., forcing players to buy a team of Axies for $1k to start earning). Going back to one of the core principles from Robert Cialdini’s Influence, one of the best ways to get value is to give value first. I’d much rather bet on an established midcore loop with a pre-existing but churned player base, that can be airdropped tokens for their participation in v1 of the game, to be reincarnated in a v2 that is token-based. The key is what happens after the distribution of the initial “welcome pack” … do you leave your players wanting more? This is the core insight that F2P developers have spent over a decade honing their craft in. Naturally, they are going to be the ones best equipped to compete in the brave new world.

With literally hundreds of blockchain games in development, we are likely nearing the end of the first inning of the “community currency” meme. Over the coming months and years, I expect value to concentrate amongst the experienced game developers whose games matter enough to escape the gravitational constraints of attention deficit disorder. Outside of games, we are going to see sports leagues, esports teams, cultural institutions, and creator collectives of all kinds incorporate virtual currency models into their previously closed loop communities. Most of these will fail to gain traction, but at least a few are going to become very, very big.

The Fifth Wave: Warm Crypto => Autonomy, Relatedness, Purpose

Where do we go from here? Thinking through the core unlocks of each wave: censorship-resistant digital currency, incentivized open source frameworks, scarcity and exclusivity, community tokens … I can’t help but observe how sad it would be if this whole movement were ever only about money and status.

If crypto is fuel for the self-sovereign digital native, I believe many of us have lost sight of why we started the race to begin with. For me, it was about the promise of melding that inner fire within—the passions, interests, and motivations that drive who we are and why we are here—with the humanity of the broader collective. The tribalism we’ve witnessed in crypto on the most arcane of subject matters that can’t possibly resonate at the individual level is a clear indication of how strong some of these latent inclinations are. This desire to forge clan kinship is deeply ingrained into our anthropological identity.

What tokens have unlocked is the ability for clans to instantiate the network effects of passion, engagement and affinity and redistribute that value in fractional form back to participants. As I wrote in Thoughts at the Intersection of Creative Culture and Web3:

To date, most web3/NFT communities and token models have gravitated around “status as a service”. These are defined less in terms of the shared passions and intrinsic motivations that bind the group, and more by ingroup/outgroup dynamics such as who owns the exclusive NFTs that give the keys to the kingdom. But what if we could expand the sample space of what drives sustainable community, by optimizing for abundance and inclusion, not scarcity and exclusivity?

What would it take to alter the foundational unit of account in web3, so that its bedrock comprises not just money and status (the “yang”), but is counterbalanced by the weight of good deeds, self-discovery and shared purpose (the “yin”)? Harmony lies in opposites, and for all the opportunity that the $2 trillion crypto market has enabled, the reality is that a small number of individuals have accrued the vast majority of the benefit. It’s time for everyone in the space to expand their minds and think about how to bring crypto mainstream. For me, it boils down to three areas of focus: how crypto can be used to create millions of jobs in the digital realm, how it can create create real-world social impact, and how it can kindle our passions and drive us to connect with meaningful communities.

On Economic Opportunity

The least pleasurable part of my job revolves around dealing with mass memetic replication of the in-vogue meme. I’d like to see less hyper-optimization from builders around the then-profitable market narrative (metaverse, play to earn, alt-L1s, defi 2.0), and more about how we can get the next million jobs created in the digital realm.

I think the answer lies in creating robust virtual economies with high fundamental GMV (driven not by speculative fervor but sustainable demand for the creative output of the community), giving mass retail locked value for their time and engagement (for free, vested over multiple years) by onboarding them as builders and participants, not speculators, and building bridges back to physical reality that will allow them to translate digital value back into local fiat value. It’s one reason why I’m obsessed with play-to-earn guilds as the epicenter for the emerging digital economy, particularly in regions with a dearth of economic opportunity.

On Social Impact

Within the NFT space, there is a long history of charitable giving. Recently, several artists commissioned Ukraine relief-related pieces, including the aforementioned Zancan:

Many Art Blocks projects donate 25-100% of their sale proceeds to charity, raising $23.5m for charity in August 2021 alone. Dmitri Cherniak’s Dead Ringers project was another compelling example, generating $3.2m for NYC Food Bank over a 24 hour open mint at 0.05 eth per piece.

Companies like The Giving Block have made it possible to donate tax-advantaged crypto to a wide variety of causes just like an index fund, with contributions split across a set of pre-approved charities operating across a particular space. I would love to see more innovation combining NFTs and social impact, such as NounsDAO-style perpetual funding models leveraging generative NFTs as access tokens to organize around particular social causes (e.g., homelessness in a region).

I believe the latent demand for crypto-based charitable contributions is high. The notion of collective impact sits well with the ideological bent of this generation, and offsets the nagging feeling of many crypto rich that their wealth was earned too easily. I believe more can be done to tie one’s charitable passions and supported causes back to a holistic web3 identity. As one’s digital persona becomes more broadly visible, the status game should cause market-wide velocity of contributions to increase.

On Connecting with our Broader Humanity

Finally, the relation of the individual to the whole. I first ventured down the crypto rabbit hole full time in 2017 after a decade in law and markets because I wanted to believe that crypto could be used as fuel to escape zero sum mentality—as potential energy to connect individuals to their broader humanity, converting passion into kinetic energy. In 2020 I became captivated by social tokens and the potential for a collective to create squad wealth off passion as a primitive.

Sam Hart, Toby Shorin and Laura Lotti raised foundational themes in Squad Wealth that got me thinking deeply about whether communities can sustain economic self-sufficiency purely from internal creativity and external vibes.

In a stream of social token consciousness, I concluded the unlock of social tokens is real, but models based on access/airdrops alone were likely unsustainable, because of the tension between social exclusivity versus and the need to expand the user base to sustain/increase token prices. What I realized in my own experimentation was that the ultimate social model was one where the token serves as a virtual currency for an ecosystem of user-generated content unified behind a shared passion or purpose, with community as the creation, curation and commerce engine behind its own creative contributions.

The biggest hurdle to realizing this vision is the “moneyness” of tokens — i.e., the financialization of previously closed-loop virtual currency through fungibility, exchangeability, and liquidity. Tokens are a double-edged sword that have the potential to unlock new economic models of self-sufficiency, but run the risk of confusing individuals into thinking they have developed lasting community, when all they have created is an unsustainable money game.

Herein lies the greatest unlock of all. Can we all earn a living for doing what we love, and loving what we do? Surely there is an entire sample space of token design resting on patronage, appreciation and respect as foundational primitives. One centered on the notion of energy that must be earned and refreshed anew in a world of constant entropy. I do believe the weight of historical good deeds can itself support a robust cryptocurrency—e.g., a matching charitable token earned for every dollar contributed to charitable causes or personal self-discovery, redeemable with corporates and individuals who want to support the giving economy. I don’t think we’re there yet, but I’m confident we’ll figure it out. The key: to not lose sight of why we are playing the game.