Ownership, Technology & Mints | IkarisDaily #26
Thursday, 7 April 2022
Today was a really long day. I worked on a lot of things. As you may have noticed, I changed my posting schedule for Twitter (as I had mentioned yesterday). I also looked into First Principles Thinking again after almost a year. It’s definitely going to be useful in the coming future, once I start to develop my investing framework.
I also started on my Crypto Reading List by re-reading Zero to One by Peter Thiel. I’ll share some lessons later on. In addition, I came across this interesting recent article on NFT Project Mints that is very relevant to me as an investor. I will share on this later as well.
To start off, let’s begin with today’s efforts on the 50 Hours of Homework. Today’s topic was interesting to me because it is really complex. It requires a concrete understanding of Web3 and blockchain technology, due to which you may notice holes in my reasoning. I decided I wanted to tackle this topic because it differs from the thoughts I shared in my Web 3.0 Thesis. Depending on your perspective, these ideas either expand on my thoughts or outright disproves them. I feel it’s the former and have chosen to embrace them. In time, I will update my NFT Thesis and will be sure to include today’s topic.
1) Web3 is about Ownership, not Decentralization
Jesse Walden believes that Web3 is about ownership, not decentralization. Decentralization is what validates the infrastructure which enables internet-native, digital asset ownership. Simply put, the blockchain is what enables digital ownership and its decentralized nature is what gives user’s the belief that it will permanently and immutably record the ownership of their assets.
Users cannot trust centralized databases to record the ownership of their assets as the controlling entity can alter the database at will. The blockchain’s decentralised nature means that no one can edit the information that was added to the blockchain. This allows users to trust that their record of ownership is being stored safely and cannot be changed by any entity. By not requiring them to trust any entity, they can trust the software known as the blockchain. In addition, the issue with digital ownership has always been that copies of the asset could be made and there would be no way to tell which is the original. By recording this information on the blockchain, the original is always known. That is what Jesse Walden means — Web3 is not about decentralization. It is about what that decentralization enables, which is, proper ownership of digital assets
Today’s topic is definitely a candidate for a Bull and Bear Case analysis. However, turns out, there was no Bear Case on Twitter. I tried to come up with one myself but any way I reasoned always ended with me proving the Bull Case. Due to that, I will just share some interesting perspectives on this topic.
Firstly, there is the idea that in Web3, the backend is decentralized and the frontend is centralized. This is an interesting perspective that many need to understand. The blockchain does enable decentralisation and, as a result, ownership. However, it does not enable 100% decentralisation. Dapper Labs, Yuga Labs, Opensea — They are all centralised entities that are making big strides in Web3. Why? Because they are at the front end. These entities build applications on Layer 2 of the blockchain. Layer 2 represents the front end, the actual applications that the user interacts with. The entities that build these applications may or may not be decentralised. But, they build on Layer 1, the blockchain, which is usually decentralised. Web3 is not about 100% decentralisation. It is about Layer 1 decentralisation that brings certain utility — ownership, open-source development, sovereignty. The backend (Layer 1) is decentralised but the front end (Layer 2) is centralised (as of now). This further drives home the idea that Web3 is about ownership, enabled by Layer 1 decentralisation, not about complete decentralisation.
Secondly, there is the concept that VC Ownership in Web3 is not a matter of centralisation, it is a matter of unfair ownership allocation (unfair token distribution). This expands on the earlier point. Many complain that Venture Capital involvement in Web3 causes centralisation. While it is easy to assume this (like I had), the VC involvement does not actually cause centralisation in itself. This issue is also about ownership here as well. Web3 companies use the SAFT (Simple Agreement For Tokens) method in which they issue tokens instead of equity to the VC. The so-called ‘centralisation’ is actually an unfair ownership allocation, i.e. the tokens are distributed unfairly which VC firms benefit more. Centralisation occurs only if governance and decision-making are controlled by one party or a group of parties. The allocation in itself is just a matter of unfairness. It is centralisation if those tokens become tools for governance and decision-making, as they are in DAOs. In such cases, the majority token holder will make the entity more centralised. This is an important point that most misunderstand. VC involvement in Web3 does not result in centralisation. If an unfair allocation of tokens happens, and those tokens are later used in governance, that is when centralisation occurs.
Lastly, is an idea that I developed myself. It is the expansion of my Web 3.0 Thesis. Some of the greatest achievements of web3 occurred because the centralisation was eradicated, which allowed true ownership. DeFi gives ownership of money to the individual instead of the central bank. Proof of Fandom gives ownership of a creator’s work to the fan, rather than the label. In fact, even permissionless innovation relates to ownership — It is the result of a lack of ownership of source code by a centralised entity. In my own Web3 Thesis, the key idea behind why Web3 is revolutionary was that it gives Power to the people. The entity that owns something, has power over it. Power is given to the people because ownership of the internet is distributed among them through their digital assets. Power is not given as a direct result of decentralization.
2) Zero to One — Chapters I & II
There are 2 types of progress. Horizontal Progress means copying things that work and improving on them. This is easy to imagine because we are building off existing work. Then, there is Vertical Progress which means doing new things. This is harder to imagine because you have to do something new. The single word for Vertical Progress is technology — ‘Any new and better way of doing things’
New technology tends to come from startups. Startups are small groups of people bound together by a sense of mission to change the world for the better. They operate on the principle that you need to work with others to get things done but also need to stay small enough so that you actually can. A startup’s most important strength is its new thinking.
A set of beliefs were born out of the Dot-Com Bubble that most startup founders immediately adopted. However, Thiel believes that a set of beliefs opposite to those adopted by most are much more valid:
- It is better to risk boldness than triviality — Grand visions should be indulged
- A bad plan is better than no plan — You should know what your business will do
- Competitive markets destroy profits — Create new markets by innovating from the very start with new products, rather than building on existing products and entering the competition
- Sales matter just as much as the product — Distribution of your product is just as important as the product itself
We need new technology. In fact, we may even need the hubris of the late 90s to get it.
3) Key NFT Mint Data
Firstly, in regards to NFT Mint Price, the data shows that collections that set mint prices above 0.25ETH rarely achieved returns greater than 10x. The most apparent reason is that a higher initial price dampens the potential returns for the initial investors, which could impact the secondary sales volume. Collections that priced their mints between 0.05ETH to 0.1ETH performed the best.
Secondly, the market volume is also a key indicator. There was a negative correlation between the primary sales revenue and performance since mint. The most successful collections raised less than $5M in primary sales. The reason could be that it is harder to generate higher multiples of returns when starting from a larger base. Another reason is that creators who landed large amounts early on have less incentive to focus on the project’s long term success. Primary sales volume and secondary trading volume also had a negative correlation. Projects that raised little at the mint saw significant traction in secondary markets.
Lastly, there is also the wallet cap aspect. Most of the best performing collections had 5 to 10 mints per address. Lower allocated mints per address did not lead to higher returns.
Was definitely a long one today. I studied a lot of things. To be honest, the last article was really because I was getting worried that even if I do identify good projects, I won’t be able to buy into them. I’m still working out the optimal point to enter a project, but I seem to have settled that it should be during or soon after the mint.
Anyways, tomorrow is Friday. I have a unique writing opportunity I am interested in. I’ll be working on that for a while. Other than that, I should be focussing on the 50 Hours of Homework once again. After 5 sessions on it, I’d say I’m at least at Hour 10 (heh). Of course, I’ll continue through until I reach the end of my following list. Lots to do so I’ll see you tomorrow!