Before we dive in, a quick caveat that I am not an expert on these topics. I’m learning in public and everything here is piggybacked on something I learned from someone else. That said, I quote those people often. 

This is a rapidly evolving space, so if any of this is not quite right, I’m open to hear it!

Ok onward.

"GPT-4 Was Able To Hire and Deceive A Human Worker Into Completing a Task."

That headline ran earlier this year.

On one hand, the deception is concerning. On the other hand, an AI "hiring a human worker to complete a task" is a sign of an accelerating reality.

Autonomous AI agents act on their own to accomplish a predetermined goal. This has been a fast-growing space with projects like AutoGPT able to define sub-tasks and execute them on its own. As these tasks become more complex, they will include coordinating with other agents and other humans.

However if you're a developer interacting with AI models then you have a payment problem. The commonly used credit cards and subscription plans are limiting your creative potential and excluding customers. The traditional payment systems are not designed to handle the demands of the emerging economy of AI agents.

But a new solution is here.

It's the latest release from Lightning Labs that offers a suite of developer tools to implement two significant features: 1) a digital money account for AI agents to pay for services they need and 2) gated APIs that collect micropayments at time of resource use.

In this post, I explore these new tools and how developers can benefit. Here's the plan:

• The new priority customer

• A new payment option

• Financial capabilities for AI agents

• Micropayments and on-demand APIs

• Offsetting costs to grow sustainably

Let's get to it.

The New Priority Customer

Earlier this year, Twitter and Reddit increased the price of their APIs. And it's influenced by the rise of AI applications.

Forbes writes: "The social networks believe the AI companies have been given a free ride on their data, and so are cranking up the cost of accessing their APIs. But instead of only targeting the AI companies, the cost of accessing the APIs has been increased across the board, ruining the business models of third-party app developers, many of whom send lots of valuable traffic to the social networks in the first place."

While there may be several reasons for this change, it’s clear they are sacrificing existing customers while adjusting to the demand from AI customers.

And this trend is just beginning.

A whopping 60% of Y Combinator's summer 2023 batch are AI companies. Much more demand from them is on the way.

Meanwhile, within these AI companies, there is a unique factor in their pricing models: the high costs of queries. In a TFTC podcast, developer Kody Low explains that AI and the now popular LLMs (large language models), require high GPU usage, which results in queries that cost 5-10 cents. Whereas non-AI intensive queries are essentially costless.

This means non-paying customers are a larger cost burden, which adds financial risk to support top-funnel try-before-you-buy accounts. If you achieve hyper-growth or encounter high levels of spam—especially with AI bots increasingly able to solve CAPTCHAS—you'll face skyrocketing costs.

All these changes for developers and data providers make it the perfect time to consider a new payment and pricing method. One with on-demand micropayments and built for the digital economy.

Of course I'm referring to Bitcoin and the Lightning Network. These technologies are evolving rapidly to meet the needs of AI agents and their networks.

Now let's dig into the new resources available, and the benefits to gain from them.

(If you're new to Lightning or need a refresher, you can check out these two articles I wrote recently to catch up.)

A New Payment Option

The Lightning Labs release creates a framework to implement bitcoin payments for AI agents and API developers. The main pieces are as follows:

LangChainBitcoin: a suite of developer tools that enables LangChain AI agents to interact with Bitcoin and the Lightning Network. This allows agents to hold a balance, send, and receive money for services they need.

L402: a protocol standard for payment-metered APIs in distributed systems. It's a way to do authentication, access control, and payment without the need for centralized user databases or 3rd party payment services. It relies on Lightning Network payments and Macaroons, which are bearer authentication tokens similar to cookies. The Macaroon holds data about the type of access requested and the payment required. Upon making a request, the client provides the Macaroon and Lightning proof-of-payment to gain access.

Aperture: a server implementation of the L402 protocol which can gate an API, turning it into an on-demand pay-per-use resource. It interacts with requesting clients, sends them Lightning payment invoices, and validates access permissions.

More technical details are in this announcement from the team.

There are immediate benefits to implementing these tools. Let's go over three big ones.

Financial Capabilities for AI Agents

LangChain, the popular framework for AI agents, believes that the most powerful applications will interact with their environments. They'll rely on other agents and 3rd party services to accomplish their goals.

To do that, they need a way to pay for external services. They need a way to hold a balance and transact. Hunter Horsley, CEO at Bitwise, called out a problem: "Agents are not a person, and will you want them running around the internet with your credit card, social, and PII signing as you? How will they have a budget they can spend?"

Lightning Labs further explains that "these payments, evaluations, and decisions will lead to thousands of AI agents making countless micro-payments and micro-decisions a day."

The good news is that the Lighting Network supports micropayments as low as fractions of a cent, its a bearer instrument that does not require sharing personal information, and it's instantly settled.

Technically, adopting the newly released tools results in an L402-aware LangChain AI Agent with a bitcoin balance and lightning channel. Quite the mouthful, but a giant leap forward in possibilities.

Micropayments and On-Demand APIs

API pricing models are rigid, and we're seeing with Twitter and Reddit how they have lost valuable customers that cannot make their economics work with the options provided.

One way to capture this business is to offer an on-demand pricing with micropayments for each usage. The problem today is that micropayments—usually under a dollar—are not sustainable with credit cards due to transaction fees and risk of chargebacks that come with lost revenue and fees upwards of $15. It's just not worth the risk to accept it.

Fortunately, the internet-native micropayment system is here and ready.

In addition to enabling micropayments, this system opens the door to customers who do not have access to the traditional banking system. Relying on credit cards excludes billions of people around the globe who do not have one. Bitcoin makes your product globally accessible.

Offsetting Costs to Grow Sustainably

For AI app developers, a breakout success can cause heavy cost burdens. Given the high costs of GPU usage, a company that hits hypergrowth will encounter fast-rising costs to support the growing number of queries. CNBC reported OpenAI's GPT-3 costed multiple millions of dollars to train.

Lightning Labs says that this could be a barrier to growth as "a popular application either must be ready to rack up exorbitant credit card bills, or be shut down (or rate limited) to protect the creator from their own success. In order for these applications to properly scale, creators need a way to offload all or part of their cost."

With payment-metered APIs, apps can accept micropayments at time of use to ensure they've been collecting enough revenues to offset cost increases. It won't matter if the request is from a human or ten thousand AI agents.

Advanced, Inclusive, Accessible

This release from Lightning Labs helps AI developers and data providers take advantage of the paradigm shift with emerging technologies. With Lightning, Bitcoin, and these new tools, developers can finally shake off the limitations of traditional payment systems.

In other words, as Lightning Labs CEO Elizabeth Stark said: “We are in the realm of enabling use cases that weren't previously possible.”

That said, as a general payments technology, it still has a long way to go. Just like other new entrants, it doesn't solve every need for every person, but it does solve hard problems for an important group of people, and that group will grow over time.

In this post, I do a bottoms-up analysis of who is using Lightning, what problems it solves for them, and how it fits into the context of other payment technologies. Here's the plan:

• Lightning adopters today

• Criteria to decide which payment technologies to use

• Public vs private payment infrastructure

• Lightning value proposition

• Lightning limitations and risks

Lightning Adopters Today

Let's start from the ground up with a look at the ecosystem and any patterns among their users. Although a year old, this map below has many of the active players today.

Within that ecosystem, there a few categories driving much of the end-user activity:

• Consumer payments: Chivo, Cash App, Strike

• Crypto Exchange or Bank: Bitfinex, Kraken, Xapo, Rain, Binance

• Digital content and social media: Nostr, Twitter, Zion, Fountain, StackerNews

• Gaming: Square Enix, Fumb Games, THNDR, ZBD

• Merchants: PizzaHut (in El Salvador), Lightning Store, McDonalds

• Crypto wallets: Phoenix, Wallet of Satoshi, Breez

And within this group, the users seem to have one or a few of these common traits:

• Active cryptocurrency users

• Sending small consumer payments

• Threatened by fragile financial system (e.g. countries with inflation)

• Want protection from getting de-platformed (e.g. Nostr, Zion)

• Trying new models for content creators (e.g. Fountain)

Criteria to Decide Which Payment Technologies to Use

I have nine payment apps on my phone.

Innovations in payments come fast and often. There's Visa, Mastercard, ACH, PayPal, Venmo, Zelle, Apple Pay, Starbucks App, Cash App, WorldPay, UnionPay, FEDNow, Stripe, Amazon Pay, every bank app.

Companies make decisions on which payment gateways to integrate for a variety of reasons. The reasons typically include credit card transaction fees, international transaction fees, currency conversion fees, countries supported, currencies supported, and recurring payment support.

On certain dimensions, Lightning is a strong alternative to existing options.

Private vs Public payment infrastructure

The reason Lightning is a strong alternative is because it's built on the world's first public payment infrastructure: Bitcoin. "Public" in the sense of not owned by any one company or government. It works without intermediaries, unlike the payment technologies today that rely on a concoction of banks, tech companies, and service providers. These private companies all insert their business model into the payment flow, often taking a cut and increasing costs to users.

The best explanation of this is the congressional testimony below from Peter Van Valkenburgh, Director of Research at Coin Center.

As Peter says, to send money over the internet today, you need to open a bank account. So does your counterpart. You need to find a common payment rail, either through your bank or through connecting to an external application like Venmo. To pay a merchant you might open a Visa credit card and rely on even more private companies to transfer the value. All these steps include gatekeepers and fees.

On Bitcoin, anyone can open an account for free to receive value. There's no restrictions on race, gender, location, or creditworthiness. As he said, "bitcoin is the first globally accessible money."

So what does this mean for businesses and consumers?

Lightning Value Proposition

Lightning outperforms other payment technology in its fees, global support, and interoperability. Here's what that means for businesses today.

Reduce fees and offer better prices

According to the WooCommerce chart, credit card fees are usually 2.9% + $0.30, international transactions add another 1-1.5%, and currency conversations add another 1-4%.

There's also dispute fees and the risk of chargebacks.

Lightning fees are fractions of a penny, essentially negligible. And it's inherently global so there are no international fees or conversion fees. Businesses can choose to pass along the savings to their customers and offer lower prices than their competitors still paying that 2.9+% in fees.

Easy onboarding for global customer base

As you can see in the chart above, not every provider is supported globally. This means merchants will lose customers if they don't offer a service supported in the customer's region.

Bitcoin is the first globally accessible money. By using Lightning, a provider is immediately tapping into a global audience of everyone who simply has an internet connection.

Faster cross-border payments

Rain is one of the largest crypto exchanges in the MENA region. I'll let their press release explain this one:

"[Lightning] will enable faster and cheaper remittances, allowing people to send and receive money across borders in a matter of seconds, rather than days or even weeks. Any other financial application, in any country, that supports Lightning Network can now speak to Rain users. For example, a Rain user can for the first time send Bitcoin instantaneously to a CashApp user in the US."

Improve robustness and reduce dependence on fragile financial system

Peter, in the video above, explains that reducing reliance on the private institutions intermediating our payment networks is important because these institutions are getting fewer, bigger, and causing harsher catastrophes when they fail.

We're living in a time with increasing signals of risk that are worth hedging against. In the US and abroad, we've had had bank collapses like SVB and Credit Suisse, inflation at historic highs, debt at historic highs, and a likely recession approaching.

It seems prudent to consider a parallel system to stay online in case surprising events happen like when SVB became insolvent and halted withdrawals without warning only a few months ago.

Attract like-minded customers

Bitcoiners are a strong cultural group that likes to use Bitcoin technology. Offering Lightning payments will attract this group to you.

Lightning limitations and risks

All that said, currently, there are significant limitations and risks.

It's technically challenging to operate. Lyn Alden explains that "your node has to be on all of the time, you tie up a lot of capital, and it can be tricky to balance your liquidity." Service providers are sprouting up to help, but even they are still learning how best to provide enterprise-grade reliability and stability. Much of the operational processes are still manual and time consuming. On top of that, the network itself is rapidly evolving and requires effort to keep up.

It cannot support large size transactions. From my research, the method to send large payments on Lightning was able to send 0.6 bitcoin a year ago. The limit is likely higher today, which is enough for most consumer payments, but less than many large-size transactions.

Many people do not want to transact in bitcoin. Many view bitcoin as a store of value, and not something to spend. Also, transacting in bitcoin is a taxable event in many countries.

Step by Step

Lightning is in the early adopter phase of its tech adoption curve. A niche group is willing to accept the challenges because the reward is high for them. With more tech improvements, service providers, and integrations, it will become more valuable to more groups and outperform its competitors along more dimensions.

I'll conclude the same as last post, with the mic drop from Lightning Labs CEO Elizabeth Stark:

But the Lightning Network is here to address this problem. It uses the Bitcoin network in a new way to enable fast, inexpensive, secure payments. This is how bitcoin becomes a medium of exchange.

Lightning is a layer 2 technology, but in a different way than many other layer 2 blockchains. There’s no additional token.

"The Lightning Network is changing the way people exchange value online, and it's one of the most exciting advancements to happen in Bitcoin's history... We're only beginning to see the opportunities the Lightning Network provides to Bitcoin, including improved privacy, speed, and scale." - Mastering the Lightning Network

In this post I'll walk through the excitement:

• Shortcomings of Bitcoin

• How Lightning works

• Payment Channels

• Routing and Pathfinding

• Current uses of Lightning

• What comes next

Before diving in, I want to note that this article is me learning in public. It's my analysis from studying Mastering the Lightning Network and resources online. It has not been peer reviewed. That said, I rely on those primary sources as much as possible.

Also heads up this ballooned into one of my longest posts yet. It was a fun deep dive.

Let's get to it.

Shortcomings of Bitcoin

Let's begin at the beginning, with the introduction to the Bitcoin Whitepaper. The bold section highlights a current shortcoming of the network.

"Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions."

It's the goal of Bitcoin to solve this problem, however it falls short today. Firstly, Bitcoin fees are currently around $4 USD. Secondly, transactions are added only every 10 minutes, and best practices is to verify after 6 blocks which is about an hour. Paying $4 and waiting an hour does not provide a casual payment experience.

One solution for this shortcoming is to create payment channels, which we'll cover shortly. The history of payment channel discussions dates back to Satoshi, and has extended to at least six proposals with varying techniques. This article will discuss the Poon-Dryja payment channels introduced in the increasingly popular Lightning Network, and you can read about the others at this link.

How Lightning Works

Lightning is a different way of using the Bitcoin system.

It took me a few reads and re-reads to understand it, but the following quote from Mastering the Lightning Network is a good start that will become clearer as we go deeper:

Now we're going to get a bit technical to explain how this works. The system relies on multisig, timelocks, hashes, and revocation keys.

One note on terminology: Bitcoin uses words like accounts and transactions whereas Lightning uses payments and invoices. Payments are also sometimes called commitments.

Payment Channels

Lightning uses off-chain Bitcoin transactions with a novel incentive structure that enables transfer of value without settling each transaction on the Bitcoin blockchain. An analogy is like a bar tab: you open a tab, make many transactions, then settle at the end. It's also like how much of traditional finance works, where banks trade throughout the day and send one net settlement at the end of the day. However, Lightning channels do not need to settle until the participants decide.

The textbook explains: "Historically, Bitcoin transactions are broadcast to everyone and recorded on the Bitcoin blockchain to be considered valid. As we will see, however, if someone holds a presigned Bitcoin transaction that spends a 2-of-2 multisig output that gives them the exclusive ability to spend that Bitcoin, they effectively own that Bitcoin even if they don’t broadcast the transaction."

These presigned Bitcoin transactions are exchanged back and forth as payments. The transactions include a payout output to each party for the amount they're owed, which is updated with newer transactions that have different payout amounts. The transactions can be settled to the Bitcoin network at any time, which would close the payment channel. However there are transaction fees to settle to Bitcoin, so it's in their interest to keep the channel open as the trades continue.

Let's explain these transactions and outputs.

The transactions are 2-of-2 multisig, with each party as one signer. By signing a transaction and sending it to your counterparty, they can broadcast to Bitcoin at any time to settle the payment.

One reason for this design is to ensure the funds are available from the sender. So, taking a step back, the first action is to create the payment channel with a funding transaction on Bitcoin. Bitcoin is deposited into this account and requires both the two signatures to transact from it. Given the funding is by one party, they would also create a refund transaction that the counterparty signs so that the funding party can get their money back if the counterparty becomes irresponsive. Here’s an example of what the channel states and commitments could look like:

The next question arises, if you're sending payments back and forth, but transactions never expire, then how do you prevent the counterparty from broadcasting an old transaction that would give them a higher balance than the current one? This is achieved through a penalty mechanism using a revocation key. The mechanism gets technical, but essentially, every presigned transaction includes two conditions 1) a timelock that delays the cash-out payment to the party that broadcasted the Bitcoin transaction and 2) if the counterparty provides a revocation key, they can claim all the funds in the account.

Let me explain this picture as it's the centerpiece to every payment. Alice is sending a new commitment. It's 2-of-2 multi-sig (shown on the left), with two outputs (shown on the right.) The outputs dictate the payouts if the transaction is broadcast to Bitcoin. The first output is for 70,000 satoshis (100 millionth of a bitcoin.) The destination for that amount is based on the conditions that follow. to_remote sends funds to the counterparty, and to_self sends funds to the submitting party. So, those 70,000 sats go to_remote if the revocation key is submitted. This is the penalty for submitting old transactions. Meanwhile, as you see next, there is a 432 blocks delay which is the time delay to give the counterparty time to catch an old transaction and submit the revocation key to punish them. If there's no key provided after the 432 blocks, then the payment goes to_self. The second output, also 70,000 sats, is paid immediately to_remote.

When a new payment is sent, and the presigned transaction is delivered, the counterparty responds by sending the revoke message related to the prior transaction so that the counterparty can punish them if they broadcast an old transaction. As shown above, the timelock gives a period of time for the parties to monitor and discover these situations. This way the counterparty can be confident the most recent payment has been accepted.

The net scenario is that to send a payment is to send a presigned Bitcoin transaction that the counterparty can broadcast and settle on Bitcoin. There is a penalty mechanism that dissuades submitting old transactions for a payout. The mechanism uses a timelock delay period where their counterparty has an opportunity to penalize them if this is not the most recent transaction. They achieve this by submitting the revocation key which claims all the funds in the account. The counterparty does not have the revocation key to the most recent transaction because the key is only shared for past payments, after a newer payment is sent.

In sum, there is confidence in the most recent payment state.

Routing and Pathfinding

So far we've covered how two parties exchange value using off-chain Bitcoin transactions. However, how do you send payments to people you do not have direct payment channel with? This is through routing and pathfinding.

Routing is like when you want to pay your friend's friend on Venmo. You pay your friend, whose number you have. And then they pay their friend, whose number they have. Each hop is always between two parties, and depending how far you're going, there will be any number of hops to get to your destination.

Pathfinding, as Mastering the Lightning Network says, "is the process of finding and choosing a continuous path made of payment channels that connects sender A to recipient B. The Sender of a payment does the pathfinding by examining the channel graph that they have assembled from channel announcements gossiped by other nodes." So, they create a path through payment channel hops to their destination. They notify each hop of the next hop for them to follow.

The questions arises here, how do you ensure each hop participant will not steal the payment or renege on their obligation to pass along the payment?

Here's the textbook's explanation which I'll breakdown: "The recipient of a payment generates a random secret number and calculates its hash. The hash becomes the condition of payment, and once the secret is revealed, all the participants can redeem their incoming payments." The mechanism for this is called a hash time-locked contract (HTLC).

First, to ensure the payment won't be stolen by the intermediary routers, the payment is protected by a password that is generated by the final recipient, Dina. To begin the payment process, the sender, Alice, requests what's called an invoice from the recipient. This invoice includes a hash of a secret, which is called a preimage. The hash is a one-way math function where you can validate the result with the secret, but you cannot reverse engineer the secret. Thus, providing the hash is like providing a lock that only you have the key to unlock. This prevents anyone else from stealing the payment along the routing hops.

Each routing participant is paid fees to pass along the payment. These fees are also locked with that same hash lock.

Once the final recipient gets the payment, they reveal the secret to unlock the funds. Then, the secret is sent backwards along the route for each participant to unlock their fee payments from the hop before them.

In practice, there are a few more layers to execute this, but this incentive structure is how fairness is manifested without intermediaries.

Current Uses of Lightning

Lightning opens the door for a fast, cheap, global payment system. There are a few companies showcasing the early use cases for such a system.

Zion is showcasing micropayments and tipping

With Lightning, micropayments in the amount of cents or fractions of a cent are now possible without transaction fees that would make such a payment unreasonable. It opens new models of paying for content online. You can tip a creator for funny video, a writer for a useful article, or pay for access to content. Zion is creating a community platform, similar to twitter, where you can post a feed of content, and with Lightning integration you can enable payments. In this example below, you can listen to a new song for 100 sats, which is $0.0263 USD.

Lightspark is showcasing enterprise payments

Lightspark is working with banks and crypto platforms to enable Lightning as a new cost-saving payment rail. They provide the tools and infrastructure to make Lightning easier to use with enterprise-grade performance and capital efficiency. Interestingly, their CEO and co-founder is David Marcus, previous lead of payments and crypto at Meta/Facebook and before that founded a mobile payments company acquired by PayPal in 2011.

El Salvador is showcasing merchant point-of-sale and consumers payments

El Salvador declared bitcoin legal tender and merchants accept Lightning payments. There are many stories of international travelers in El Salvador able to make payments on lightning without having the challenge of currency conversion fees or credit card fees. Here's one example from a Forbes article: "I experienced the remarkable convenience of Lightning Network transactions firsthand. From procuring street-side tamales to hailing taxis or reserving accommodations."

So yes, people there are buying coffee with bitcoin!

What Comes Next

One of the most exciting developments with Lightning is that it can innovate faster than Bitcoin. It can evolve without consensus of the Bitcoin layer, which will rapidly expand possibilities for the network.

One significant work stream in development is adding new asset types to Lightning, so that payments can occur in more currencies than just bitcoin. The protocol is called Taproot Assets, and the first asset seems to be a USD stablecoin. This would allow Lightning to be used with the benefits of the stability of the dollar.

The docs further explain that "Taproot Assets lets you issue all kinds of assets on bitcoin, both unique and fungible. There are no technical limits to what these assets can represent, including stablecoins, shares, tickets, ownership rights or art."

What's yet to be seen is which types of assets have demand to be included in Lightning. Will it remain a payments platform for bitcoin and fiat currencies, or will it expand to NFTs and financial instruments? The exciting part is that it's now possible to experiment and test these applications.

That said, I'm most excited for the developments in the primary use case: cheap, immediate, global payments. Or said another way, here is Elizabeth Stark, CEO of Lightning Labs:

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Rekt News is a busy website; it tracks all the hacks across the crypto industry. There's about one per week lately, and the leaderboard would scare off any risk-averse business.

Many of these "rekt" companies employ the most highly-technical and security minded engineers with the deepest experience in crypto. If they're getting hacked for millions, then it's unlikely mass adoption of crypto will ever happen.

I wanted to know why this is happening and what's being done about it, so I listened (three times 😬) to an a16z podcast with leading smart contract engineers from a16z and their guest Sam Blackshear who they describe as “Co-founder/CTO of Mysten Labs, who has a long history in programming languages from his PhD to working at Facebook (and Libra/Diem) to being one of the authors of Move programming language.”

One thing seemed obvious from their conversation:

Here's a walk through their topics of conversation:

• Traditional programming languages

• Smart Contract Problems

• New behaviors

• Designing a solution

• New language efforts underway

Let's dig in.

Traditional Programming Languages

"Programming languages are problem solving tools. What new problem arose? What new language came in to fill that niche?" - Sam (4:20)

Over the past several decades, many programming languages were created to solve problems that emerged from new behavior patterns.

For example, they spoke about how the rise of web development brought a need for programability beyond the existing CSS language. Wikipedia explains that in the early 1990s, "during these formative years of the Web, web pages could only be static, lacking the capability for dynamic behavior after the page was loaded in the browser. There was a desire in the flourishing web development scene to remove this limitation, so in 1995, Netscape decided to add a scripting language to Navigator."

Navigator was the most-used web browser at the time, and wanted websites to be dynamic and reactive. So Javascript was adopted, and then evolved in the following decades into a global community with many open-source libraries and support.

Anther language they mention is SQL which is now the lingua franca for handling databases and large data sets.

The key question, as Sam said, is: "What are programmers trying to do? Where is the language helping them, and where is it getting in the way?"

If its doing more harm than good, then theres a good case for something new.

Smart Contract Problems

The quantity of hacks and money lost is a sign that a new language may be in need.

Here’s the Rekt leaderboard with losses in the hundreds of millions:

Sam explains that smart contracts are the "most adversarial programming environment we've ever seen, with the highest stakes." Attackers can directly call into your code, and you need to enforce protections on assets that may engage with attacker's code you may not even imagine could exist. All the while millions of dollars are at stake.

He says it bluntly: "Smart contract safety is an existential threat to broader crypto adoption... If the developers today are the most hardcore, there's no way this space is going to grow without making security problems worse."

New Behaviors

In the podcast, they discuss the new programming behaviors focus on tasks like:

• Define assets

• Define policy for transferring assets

• Access controls for interacting with assets

• Enforceable constraints such as

  • Cannot copy

  • Hard to delete

  • Set supply

They also mentioned changes in developer mindsets:

• Resource usage: Normally developers code in a world of abundance, but smart contracts involve resource constraints and transaction fees

• Developer productivity: ordinarily devs write lot of code with only a few errors, but in smart contracts you write a little code that must be perfect, otherwise lose peoples money

• Upgrades: the barrier to changing code is higher than any other environment due to the immutability of blockchains

• Adversarial mindset: devs need to think not only about intended usage, but think of attackers writing code you may not even imagine yet

Sam explains at 6:55 that at first, for designing solidity, flexibility was most important because we didn't know what would be the dominant use cases. But now we know the trends and types of constraints we need, so we can include the constraints and safety checks in the language itself.

Designing a Solution

Sam explained that the way the solidity code is written is indirect. Its like you're trying to talk about something but there's no vocabulary to say it (1:13:50).

For example, Eddy, Head of Engineering at a16z Crypto, mentioned how ERC-20 tokens are not designed as you would expect. You don't hold tokens in your wallet, as many would assume; rather there is a mapping of owners and balances stored in a smart contract. It's like a central registry. When you transfer, what's literally happening is your balance is decreasing while someone else's is increasing. I did a breakdown of the code in a previous article, NFTs Literally.

Creating assets in solidity is like trying to explain American football without the game-specific terms. Try explaining it without touchdown, quarterback, and first down. Sure you could, but it would take longer and potentially leave gaps in understanding. If millions of dollars were on the line, it'd be much safer to use the specifically defined terms.

Sam's team explains their intentions for a new language is to "provide first-class abstractions for these key concepts, [that will] significantly improve both the safety of smart contracts and the productivity of smart contract programmers—having the right vocabulary for the task at hand changes everything.

To design a safer and more useful language, he mentions three specific elements:

1 & 2) A strong type system at the source and byte code level + Guarantees about constraints

Wikipedia explains a type system: "In computer programming, a type system is a logical system comprising a set of rules that assigns a property called a type (for example, integer, floating point, string) to every "term" (a word, phrase, or other set of symbols). Usually the terms are various constructs of a computer program, such as variables, expressions, functions, or modules.^[1] A type system dictates the operations that can be performed on a term. For variables, the type system determines the allowed values of that term. Type systems formalize and enforce the otherwise implicit categories the programmer uses"

In this case, the types could refer to an asset with the associated enforcement of values and operations allowed to be performed on it (e.g. can or cannot copy). The designers could also make more intuitive asset ownership model, instead of the central registry model.

Quick aside on source and byte code from Mastering Ethereum: "The EVM is a virtual machine that runs a special form of code called EVM bytecode... [which] is rather unwieldy and very difficult for programmers to read and understand. Instead, most Ethereum developers use a high-level language to write programs, and a compiler to convert them into bytecode."

3. Permission checks or Access control

OpenZeppelin describes access control: “That is, "who is allowed to do this thing"—is incredibly important in the world of smart contracts. The access control of your contract may govern who can mint tokens, vote on proposals, freeze transfers, and many other things. It is therefore critical to understand how you implement it, lest someone else steals your whole system."

Unfortunately, access control vulnerabilities have contributed to billions of dollars in exploits. A more tailored language design could be safer.

New Language Efforts Underway

They spoke primarily about two new language efforts, and then I'll add one they did not mention.

1) New languages that compile to the EVM. Vyper in particular.

Eddy said the reasons to pursue this avenue are that there are existing network effects in solidity and EVM, and there's plenty of space to improve the experience and safety at the source code level (22:25).

However, there's one big limitation that the low-level design of the EVM constrains how much a new high-level source language can help. At minute 21, Sam says "what's important is protection at the byte code verifier and VM level from other programmers... and a new source code language cant give you that. That has to be baked in to the VM. No matter how much you iterate at the source language... where you get to is not as good as where you get to if you have these protections built into the VM."

Eddy agreed: "The ability to do type checking for more useful blockchain native types or smart contract native types in the EVM is really difficult to solve" (22:10).

2) Move

This is a new language that Sam helped create starting at Libra/Diem. It's now used on a few blockchains like Sui and Aptos. It includes the design elements above, and its created to be flexible across different VMs, so developers can take their skills between blockchains.

Sam mentioned this tweet thread where he explains how hacks on Ethereum could have been prevented with Move.

3) Cadence

They did not mention this language but it’s similar to Move and also used by some of the largest web3 products like NBATopShot. It's also potentially a competitor to Move, and the two tech architects later had a little spicy twitter exchange, which may be why it wasn't mentioned.

The Cadence docs say its "use of resource types maps well to that of Move." And Cadence's other design features seek to solve many of the same fundamental issues that Move addresses.

From my research so far, it seems both Move and Cadence teams identified similar smart contracting behaviors, problems with existing languages, and possible designs for a better solution. Then they took their own paths to solve it, which are different, but appear directionally compatible.

A direct comparison is a topic for another day .

The Road Ahead

The creation and adoption, or not, of new languages will affect the safety and potential for web3.

The bigger the developer community, the more investment in tooling and libraries, which all attract more developers and support.

With this, we’ll start to see answers to Eddy's question kicking off the podcast:

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Bitcoin transaction fees hit their highest level in over 2 years this week. Up 30x from just a few months ago. Demand for the network is rocketing. And it’s because of ordinals and inscriptions. (See last post for an intro.)

As I researched them, I was struck how the creation story follows a familiar path as many other crypto breakthroughs. It seemed like a surprise at first, but after digging deeper I found a decade-long evolution in thinking and technology that led to this pivotal moment. The confluence of the right people, technology, and market conditions set fertile ground for the Cambrian explosion of development.

All the familiar signs that we could be living through a special moment.

Here's the back-story.

Motivation

Casey Rodarmor is a programmer with past jobs as Google, Oculus, and Chaincode Labs. He hosts the SF BitDevs meetup which is where the grassroots Bitcoin developer community meets. I went to a few NYC BitDevs meetups around 2017 and the Bitcoin ethos and revolutionary energy was palpable, even though 90% of the discussion was over my head.

Although an active crypto developer, Casey couldn't morally justify participating in the Ethereum NFT boom. He's a bitcoiner, a generative artist, and has controversial opinions on the Ethereum tech stack.

His view (4:50 in this video) is that Ethereum's smart contract language is "complicated and insecure." And that (3:30 in this video) NFTs have weird properties, such as the content is often stored off-chain, meaning it could be removed or changed.

For high value art, he says, we expect it would be stored on-chain. Many people are surprised it's not. So in 2022, he set out to build a way to bring the digital art and artifacts to Bitcoin.

10+ Years of Development

From 2011-2014 a few projects experimented with NFTs in the Bitcoin community: Colored Coins, Namecoin, and Counterparty are some examples. Counterparty "had a significant role in successfully introducing NFT culture to the Bitcoin community for the first time," says Galaxy Research. It is the foundation for the most famous Bitcoin NFT project to date, Rare Pepe Cards. Yet it is not very relevant today, and has some features that the Bitcoin community typically rejects, as Casey points out, namely that it has its own token and separate layer on top of Bitcoin L1.

Then from 2017-2022, NFTs on other chains (e.g. Ethereum, Solana, Flow) exploded into a multi-billion dollar industry, currently valued over $15 billion. A flurry of developers built a broad NFT ecosystem and even breached into a mainstream consumer base. NFT became a household acronym. It seemed like every media, fashion, and entertainment company was developing their NFT strategy, from Nike to Starbucks to the NFL.

During this period, applications like ArtBlocks ushered in a new era for generative artists. NFTs are a perfect fit for generative art—both are digital native mediums and NFTs are a way for digital art to prove authenticity and ownership. This is one of only a few areas with product-market fit in this industry, and it caught the eye of Casey who also creates generative art. But again, after his reservations with Ethereum, he decided to hold back.

Technology Upgrades

Meanwhile in this period, Bitcoin released two upgrades that would set the stage for ordinals and inscriptions. The two upgrades, SegWit and Taproot, effectively opened a space for arbitrary data storage that could sufficiently house the digital artifacts. These were the necessary building blocks. For a deeper technical explanation, let me bring back Galaxy Research to explain:

"First, the Segregated Witness upgrade (BIP 141) that enacted in 2017 reorganized transactions by moving the signature data (witness) to the end of the transaction, replaced the concept of bytes (data size) with virtual bytes (weight), and recalculated the weight of signature data such that each byte of it counts as only ¼ of a weight unit. This change resulted in an effective block size increase, particularly when lots of data is stuffed into the witness portion of a transaction. Bitcoin’s next (and most recent) major upgrade, Taproot (BIP 341), activated in 2021 and brought several upgrades to the network. Importantly, though, Taproot allows for much more complex scripting in the witness portion of a transaction and also removes the size limit for witness data, among several other changes."

Market Conditions

Then in 2022, the crypto market crash ushered in our current bear market. People are looking for something new, something interesting, and many are out of a job from the tech sector layoffs.

Amid the slumber, Casey works on Ordinals. He wants to bring digital art and culture to Bitcoin. His discovers that creating serial numbers for satoshis has been debated before, but never implemented. He finds inspiration from satoshi atoms, included but commented out of the original Bitcoin code, and a BitcoinTalk forum in 2012. Then in December 2022, Casey pushes his ordinals code live.

Breakthrough

Today, in May 2023, ordinals has become the building block for so much activity attracting headlines like "Bitcoin Network Struggles with Unprecedented Traffic." There’s over 4 million ordinals inscriptions. You can view them at Ordinal.art.

Much is left to be written, but this journey through technology and people and market cycles is a familiar symptom of a breakthrough moment.

And hopefully we can achieve the most important of Casey's goals:

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Amid the rubble of the crypto market collapse, one area is growing exponentially: NFTs on Bitcoin. From what was virtually unknown just a few months ago, Bitcoin ordinals NFTs are now predicted to be a $4.5 billion market by 2025.

And this is not a flash in the pan; there is real differentiated value to creating NFTs on Bitcoin.

In this article I'll cover:

• Intro to Bitcoin ordinals NFTs

• Why this is happening now

• What this means for the NFT creators and buyers

• What comes next

Onward.

Bitcoin Ordinals NFTs

In December 2022, bitcoin developer Casey Rodarmor introduced the ordinals protocol that runs on the bitcoin network. It's a way to verifiably own a digital media asset. And this asset is stored on arguably the most secure and indestructible data file storage in the world: the bitcoin blockchain.

Here's how it works.

First, let me state that the smallest denomination of a Bitcoin is called a 'satoshi.' Its like the penny to the dollar, but there are 100 million satoshis in a Bitcoin.

Ordinals works by doing two things: first, it defines an ordering of the satoshis from the date they were created. This is like adding a serial number to the US Dollar—while all dollars appear the same, actually each is marked differently. Second, it enables you to attach a data file to that satoshi. This is something like if Picasso painted his famous self-portrait on top of a dollar. It would be valued as a collectible artwork more than the money itself.

With ordinals, the media asset can be any file type from text to video and audio. You can see the exponential growth:

The Gold Standard for NFTs

Bitcoin is digital gold because of its unrivaled security and decentralization. It would make sense then, that Bitcoin could set a new premium standard for NFTs. Owning one of these assets would carry a premium because of its added durability. And beyond the blockchain's security properties, the ordinals protocol stores the media file completely on-chain. This is in contrast to, and more reliable than, most existing NFTs where the media file is stored off-chain on a less robust decentralized storage network or a centralized server with its own centralization risks.

What This Means for the Industry

In this down-market, ordinals are a revenue making opportunity for NFT creators. It's a new frontier for the industry filled with early adopters who want to be early and learn. And it appeals to a whole new audience of Bitcoin holders—with market cap of $500+ billion.

Ordinals appear to be attractive for high-value assets from the leading creators. Yuga Labs, who's NFTs command 6-7 figure prices, netted $10+ million with their Twelvefold NFT art project. Later this month, another NFT collection OnChain Monkey is hosting a generative art drop, selling 300 pieces for 0.08 BTC, which will net them 24 Bitcoin, or almost $700,000.

What Comes Next

The ordinals ecosystem infrastructure is ramping up quickly. Companies are going to build the tools similar to the NFT ecosystems on other chains—wallets, explorers, marketplaces, token-gating APIs, physical displays.

New standards will be introduced to unlock new use cases. For example, the BRC-20 standard was launched recently to create fungible tokens on ordinals (i.e. the ERC-20 parallel.) Danny Yang, serial web3 founder including OnChainMonkey NFT, calls out one critical standard needed. He explains that ordinals all fall within the same NFT collection, so it's hard to distinguish between collections like you can with ERC-721 on Ethereum (i.e. the Bored Apes are a separate smart contract and separate collection from CryptoPunks and all others.) A new ordinals standard for collections will unlock the user experience and use cases we expect.

Lastly, more NFT companies will launch on Bitcoin. It's a way to add value to their holders, a way to make money in this down market, and a way to show they're at the edge of the industry.

NFTs were first invented on Bitcoin between 2012-2014 with Colored Coins and Counterparty. The traction since moved mostly to Ethereum, but now Bitcoin NFTs are back to claim their place in the market.

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Reddit built an NFT product experience that I think we'll see a lot more of in the near future. You can buy on the mobile app with Apple Pay, you can onboard with zero knowledge of web3, there's a clear value proposition to own the asset, and you can take the NFT off Reddit to use on third-party applications.

And they're doing well: The product, called Collectible Avatars, just launched the Generation 3 sale a couple weeks ago, with many of the NFTs sold out. Dune Analytics shows their total collection volume at 7.8 million owners and 11 million NFTs minted. Although data is often ambiguous in this industry, the magnitude of these numbers means its possibly the most widely-distributed NFT project.

There is much to learn from how they’ve built the product to attract both mainstream and degens. I’ll unpack it here.

The plan is:

• Reddit Avatars background

• NFT value proposition

• The business model

• Tech and Product decisions

• Prediction for what comes next

Let’s do it.

Reddit Avatars

Reddit is a top 10 social media site with 57 million daily active users. Like most similar sites, its users display profile pictures to represent their identity and status. For years, they could purchase a Reddit Premium subscription to unlock exclusive image styles like above and boost their status with badges.

Over the past year, they built a new business line selling limited-edition avatar artwork NFTs that users can display as their profile pictures. This new business appears to be the way of the future as they've committed prime real estate in their app to it—this shop is the first page displayed when you click to style your avatar.

NFT Value Proposition

So why buy this? First and foremost, it can be displayed as your Reddit profile picture which helps you "stand out in the comments" as they say on their explainer. It helps users win at a game they're already playing. It's about status and identity—flexing your limited-edition avatar; getting noticed; being part of the trend; being an early adopter; collecting artwork you like. It sounds simple, but they built something people want.

Furthermore, when you purchase, you claim the rights to "use, copy, and display the avatar art for your own personal use, and you can transfer these rights to others by selling or transferring your Collectible Avatar to another individual." This gives owners the sense of true ownership beyond the walls of Reddit properties.

Sustainable Business Model

For Gen 3 which just launched, Reddit partnered with 100 artists who designed the avatars. Reddit took a 20% split on primary sales and half of the 5% royalty fee on secondary sales. This is a model that can scale to the millions of Reddit users and generate income for the platform.

Technical and Product Decisions

The crypto wallet design is what I find most interesting. They designed a user experience that requires no knowledge of web3 to participate, while allowing advanced users all the options they may desire.

Here’s how it works:

1. User requests to create an NFT Vault on Reddit mobile app

   1. Mobile device receives: Public address, Private key, and Recovery phrase

   2. Note: Reddit does not have access to the Private key and Recovery phrase

2. User chooses an option for how to back up the Vault (image below)

   1. Backup to Reddit stores the encrypted private key on Reddit servers secured by a user’s password

   2. Cloud backup stores the recovery phrase on a cloud (e.g. iCloud)

   3. Recovery phrase backup is the user manually storing the phrase how they like

3. How to Transfer NFT from mobile device

   1. Click transfer

   2. Mobile device signs transaction with private key

   3. Reddit submits the transaction to blockchain

   4. Reddit pays gas for first transaction (for a limited time)

4. How to Transfer from NFT from web

   1. User must have backup encrypted private key stored with Reddit

   2. User inputs Vault password to decrypt the private key

   3. Transaction signed with decrypted private key 

   4. Reddit sends transaction to blockchain

(Note: this is an analysis based on data provided in FAQ and legal terms. There may be differences as they’ve evolved the product.)

In this setup, Reddit cannot access the account without the user's decryption password, and the user can choose to transfer the assets to their own crypto wallet, or import their vault to a third-party crypto wallet with the recovery phrase. Thus, novice users can easily join with a few button-clicks, and advanced users can take advantage of web3 ownership and interoperability.

The technical design of the NFTs also satisfies the expectations of web3 die-hards. They chose to build on public blockchains with image data stored using IPFS, which is a protocol used to publish data in a decentralized fashion. IPFS is a “network that reduces data silos from centralized servers, making [it] more resilient than traditional systems,” and it’s the same method used by Bored Apes. They expose the links to blockchain explorers and IPFS to prove the asset's existence. This is table stakes to appeal to the degens.

And critically important, because of this design, they're able to offer payments through Apple Pay. I was able to make a purchase quick and easy.

Prediction for What Comes Next

While continuing to offer Collectible Avatars, I think they will evolve this NFT project into a community building platform for subreddits.

They’re already building the infrastructure to create and distribute NFTs that interact with the Reddit app. The next step would be to allow their communities to create their own.

Reddit distinguishes itself from other social media because of its focus on community building through subreddits. Subreddits are forums focused on a theme or topic, with moderators and rules. There are over 100,000 active communities. One of the most popular you’ve likely heard of is WallStreetBets, which has 13.9 million members.

Imagine the power of WallStreetBets issuing its own NFTs which can be displayed as the profile picture and signal of group identity. From there, they could offer token-gated content to members of the subreddit. This gives the moderators a way to monetize their community, and Reddit would get a split.

Reddit understands community better than most, so I’ll be watching how they integrate NFTs into their flow, or not. There will be more to learn.

But one thing seems obvious: the future NFT UX will embrace more mobile, non-custodial options, social, and mainstream UX.

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"Get to know us and you’ll see: we are so much more than what we brew." - Starbucks

Earlier this year on March 9th, Starbucks sold out 2,000 of their latest NFT called The Siren Collection. Each purchased for $100, they're now selling for over $500 on secondary marketplace. In the midst of a bubble-bursting market downturn, with bankruptcies and botched corporate NFT drops, this success comes as a shining light. More exciting, however, is the profound story behind this drop. Starbucks is a deeply principled and long-term committed company. I wanted to know, how are they designing the NFT strategy to align to those commitments, what are their technical decisions, and what it could mean for corporate NFT adoption overall? Writing this essay opened my eyes.

Hot or iced? Room for milk? To be honest, I want the Mocha Frappuccino every time. While everyone has their own order, we can all agree that Starbucks is an iconic company. They have a track record of pioneering industries and technologies; from introducing America to the Italian-style coffeehouse, to innovation in corporate loyalty programs, mobile apps, retail stores designs, and restaurant product launches. One of their core values is "challenging the status quo and finding new ways to grow." It's in their DNA to be visionaries and leaders, and they have the business success to back it up. I think they could lead again with NFTs, in a way unlike anyone else in the industry today.

I'll show you why. Here's the plan:

• Starbucks Heritage and The Third Place

• Culture of Innovation

• The Digital Third Place

• Odyssey Stats and Technical Details

• Why NFTs and Why Now?

• Broader Implications

Starbucks Heritage and The Third Place

Starbucks is the largest coffee brand in the world. They have 33,170 stores. In 2022, they had record revenues of $32.2 billion. This is a global giant.

More importantly than their business power is their heritage and origin story. They bring something different than any other company building in web3.

The origin story centers around a trip that future CEO Howard Shultz took to Italy in 1983. He was marketing director for Starbucks who, at the time, was a coffee bean roaster with six stores in the Seattle region. Coffee was a commodity business then; you pick up your beans or beverage and be on your way . But in Italy, Howard fell in love with the Italian-style espresso bars that we know from Starbucks today. It was a daily ritual, a neighborhood hangout; what would later become known as The Third Place—a gathering spot between home and work. He decided to bring this back to America. He saw that the Third Place was a luxury that people would be happy to pay a higher price for. While the $4 coffee has been mocked through the years, Howard's original insight has remained fruitful as people continue to see the value beyond the beverage.

It's about community and culture. Yes, centered around coffee, but it's the experience that is the daily-ritualized product. Next time you walk into a Starbucks, notice how intentional everything is to create the neighborhood vibe: the long tables, barista greetings, local community notices boards, personalized loyalty rewards, and consistency across all their stores.

Their heritage also includes world-class leadership in ethical business practices. To name a couple, their coffee is verified 99% ethically sourced, as they're one of the largest buyers of fair trade coffee in the world. Also, they offer free college education to their employees through a partnership with Arizona State University. Their actions prove how they put their people and environmental sustainability top of mind.

It was this vision to see beyond the coffee that turned a small regional operation to a multi-billion dollar global enterprise.

Culture of Innovation

The Third Place insight was just the start of a long history of innovation. As stated before, it's in their DNA to challenge the status quo. Let's look at three more world-class examples.

Mobile payments. According to InsiderIntelligence, "the Starbucks app is the second most used mobile payment app for point-of-sale transactions in the US, right after Apple Pay. The coffee shop contender beat out Google Pay and Samsung Pay, and is used by over 30 million Americans." They accomplished this by prioritizing ease for mass audiences. Forbes explained that they "inverted the use case that most companies were using.  By allowing the register to scan the 2D barcode rather than the user scan a 2D barcode.  This was a maverick move at the time as most technologists were laughing at the 2D barcode and the way it was used." Their payments were smooth and easy. This, in addition to the custom features of their app, set the industry standard for retail mobile apps. They benefit in a number of ways, including avoiding credit card fees at each purchase, and collecting customer purchase information that allows them to optimize the loyalty program perks.

Loyalty program. Starbucks Star Rewards program has 30 million active members in the US alone. And these members drive around 50% of revenue, according to Axios. I listened to The Brainy Business podcast explaining all the ways they've pioneered methods in behavioral economics and psychology to create daily habits and keep customers coming back. In 2013, Howard Shultz said: "No single competency is enabling us to elevate the Starbucks brand more than our global leadership in mobile, digital, and loyalty."

Beverage innovation. Let's remember who we're talking about here: the company who built a $2 billion Frappuccino brand, who takes over each fall season with Pumpkin Spice Lattes, the company who makes headlines every year with red holiday cups, who introduced so many in the world to espresso and coffee. They know how to innovate, test, build hype, create scarcity, and drive headlines. All in service of long-term business growth.

Their CMO says it best: "Starbucks has a history of taking leading edge technology, innovating and making it accessible and approachable for mainstream audiences. Our history... has taught us how to engage customers at scale to unlock opportunities."

The Digital Third Place

Last year, in their biennial Investor Day, Howard Shultz announced Starbucks' Reinvention Plan to spur its next phase of growth. One highlight was they're evolving the "Rewards program with Starbucks Odyssey, a Web3-enabled experience that will bridge the physical and digital customer experience. Through Starbucks Odyssey, customers will unlock a new generation of experiential benefits – both digitally and in-person – and become a part of a digital community built on human connection." This is a big deal; it's a strong commitment from the top executive to the shareholders.

Their CMO Brady Brewer added more details in an article where he explained the intention to "extend the Third Place Connection wherever customers experience Starbucks." In this program, they're asking "What if Starbucks could create a new, global digital community ... centered around coffee to start, and then perhaps expanded into the many of the areas Starbucks has played in over the years as a coffeehouse; art, music, books and beyond?" "What if we could create an accretive business – adjacent to our stores – that ultimately benefited our partners, community and business?"

To achieve this, they plan to create a series of branded NFTs that provide a digital art asset, a membership pass to the community, and access to exclusive experiences and perks.

While many companies use similar language for their NFT visions, this holds more weight coming from a company with such rich history of making cutting-edge technology approachable for the mainstream in a way that drives business results. They have the culture and global reach to pull the entire industry forward along with them.

Odyssey Stats and Tech Details

Starbucks Odyssey is an extension of their Reward program. Users collect NFTs through completing tasks or journeys that "deepen their knowledge of coffee or Starbucks" says Axios. The NFTs are called "stamps." Each stamp carries a point value which will unlock unique benefits and experiences. They say the "experiences could range from a virtual espresso martini-making class, invitations to exclusive events at Starbucks Reserve Roasteries, trips to Starbucks Hacienda Alsacia coffee farm in Costa Rica to access to unique merchandise and artist collaborations."

There are 6 stamps available today, which you can see above and on their market website. Previous collections vary in quantities from The Siren Collection with 2,000 editions up to others with 30,000.

The Stamps today are minted on Polygon blockchain, but they said the project is likely to be multi-chain in the future. Original listings are sold through NiftyGateway, where Starbucks is able to gate the purchases to those who have signed up for the Starbucks Odyssey program, which has a waitlist (that I'm still waiting to be approved on.) NiftyGateway has a mainstream-ready offering, where users can pay with credit card and do not need to have self-custody wallets; NiftyGateway will custody the assets for you. Users can withdraw to their self-custody wallet if they want to, and sell on other marketplaces like OpenSea.

Starbucks is advised by Forum3, a consultancy for web3 loyalty programs co-founded by Starbucks' ex-Chief Digital Officer Adam Brotman. It looks like they'll scale this playbook to other brands. 

Why NFTs and Why Now?

The NFT aspect is needed for true ownership and composability, said Adam Brotman in his podcast on Overpriced JPEGs. The NFT assets can be held in self-custody wallets or trusted third-parties like NiftyGateway, which hosts the primary sales. The assets have their own value and are freely tradeable.

Composability is a benefit of building in web3 that allows for enhancements to owning an asset; the asset can be remixed through partner collaborations, and added to third-party experiences. Building on blockchains puts the data and software out in the public, so these enhancements can be provided by more than just the creating company. For example, if you wanted to sell your Siren Collection NFT, and didn't like the prices offered on the NiftyGateway marketplace where your original purchase is held, you could withdraw to your self-custody wallet and list the asset on third-party marketplaces like OpenSea. Composability is a competitive advantage as it adds value to your product without any additional effort.

And why now? Well, Starbucks knows the benefits of being early to tech trends. A Harvard case study explained a key reason to their mobile payment success was timing. They launched mobile payment in 2011, years before Apple Pay and Google Pay. "Since Starbucks launched its own branded mobile payment function before technology companies could successfully enter the space, many users became accustomed to mobile payments through Starbucks first." And 10+ years later, as mentioned, they remain the #2 retail payment app.

Are there benefits to being early to NFTs? There's already evidence of this; many early NFTs hold value better than others. Some examples are CryptoPunks as one the earliest created NFTs, CryptoKitties as one of the first NFT games, and Chromie Squiggles as the first ArtBlocks project. This could be related to the Lindy Effect, which states the future life expectancy is proportional to the current age; the longer something has been around, the longer it will stick around. For NFTs, it could mean the longer an asset has retained value, the longer we can expect it to in the future. So starting the timeline earlier will be a competitive advantage.

Broader Implications

Starbucks has the power to move industries. With NFTs, they can prove the use case for loyalty programs and customer experiences. If they succeed, many others will be watching to do the same.

And equally important, Starbucks can help rebuild trust that the NFT industry has lost through the mania and bubble burst last year. They're a trusted brand that's part of the daily lives of millions. They're long-term thinkers and global leaders in business ethics. They can introduce NFT technology to millions in an accessible and scalable way. The industry needs ethical champions to break through to new user bases. 

It’s clear to see, for NFTs and so much else, Starbucks really is much more than what they brew. 

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The number of weekly active accounts on Ethereum is 27,264 according to Glassnode. We have a lot of work to do to bring web3 to the masses. One of the barriers to broader adoption is usability. Ask any active crypto user and they’ll tell you they have multiple hardware wallets, seed phrases stored in hidden locations, and radars on high-alert for scams that have victimized even the most experienced of us. Do you think mainstream users will put money and time into a system like this? 

It is not inevitable we solve this problem, but there have been advances recently; notably ERC-4337 which introduced a standard for account abstraction. While many praised the significant step forward, I was surprised to find a more reserved reaction from the two companies at the forefront of account abstraction since 2018: Argent and Safe (previously Gnosis.) 

I wanted to understand why, so I dove deep in the rabbit hole; swimming through topics like smart contract wallets, multi-sig, social recovery, ECDSA-secured externally-owned accounts, mempool, bundlers, and UserOperations. I read the technical standard, Vitalik's explanation, company blogs, and many hot takes on Twitter.

I'm now emerging with insights for entrepreneurs interested in how account abstraction will help onboard new waves of users to web3. Here's the plan:

• Intro to abstraction

• The problem with accounts

• The solution & ERC-4337

• The reserved reactions

• Learnings from data and live apps

• Looking forward

Intro to Abstraction

“Abstraction is a fundamental concept in computer science and software development,” says Wikipedia. It is “the process of taking away or removing characteristics from something in order to…reduce complexity and increase efficiency,” says TechTarget. Let’s use Google Search as an example. 

In How We Searched Before Search, the author wrote that initially “the web community was a relatively close-knit one with an esoteric skill-set and knowledge base. So Tim Berners-Lee, creator of the web, took a very pragmatic approach to keeping track of new websites. He made a list for everyone to see. A list of every single website.” Other companies like NCSA and O’Reilly Media followed on with their own lists and manual curation. Then, modern search tools were developed to “traverse a large part of the web automatically by scraping its content one by one. This data was then compiled into a database.” From there, better user experience possibilities opened up.

Along came Google with its website: a simple text box. You don’t need to understand the web scrapers and indexers behind the scenes. You just enter what you want and it delivers a helpful set of links. 

This is an abstraction at the user interface level. There are also abstractions between the systems of software behind the scenes. 

The Problem with Accounts

Now let’s talk about Ethereum. In 2021, Vitalik wrote “account abstraction has for a long time been a dream of the Ethereum developer community.” Argent, a leading developer on account abstraction, explained why in a blog series that I'll summarize. In short, user accounts have limited flexibility, which makes it difficult to build experiences that mainstream users will accept.

To understand this, there's two important concepts to know: Accounts and Signers. The Account is like your bank account; it's where your assets reside. The Signer is like your bank log-in password; it's the authorization to transact with the assets. These two concepts are linked through what’s called a key-pair: the Signer is the private key and the Account is the public key. These keys are linked through a cryptographic math formula in which you can verify the Signer matches the Account. So it's important to keep your private key private.

The limited flexibility arises because as the blog says "the concept of Account (the object holding your tokens) and the concept of Signer (the object authorized to move these tokens) are basically the same thing! If you have a private key you automatically have an account at the associated address, and to own an account at a given address you must be in possession of the corresponding private key. That logic is hardcoded."

This means if you lose your key you lose your account. It means if someone else discovers your key they can steal your assets. It means you cannot have multiple approvers for company treasuries or joint-accounts. Imagine if you lost all your money every time you lost a password. 

This is why more flexibility is critical to onboard new waves of users. It opens the door for user experiences we expect in 2023, with security features like password recovery and multi-party signing. This is what account abstraction promises.

The Solution and ERC-4337

Argent goes on to describe the solution is to "decouple the object holding your tokens (the account) from the object authorized to move these tokens (the signer.)" We need accounts with "their own logic to define what a valid transaction is." In other words, the account would be a canvas for software code to define its rules for authorization and security. The account would be abstracted from the signer. For example, the code could list 3 keys, of which 2 need to sign before any assets are moved. This is called multi-sig and is a popular use case for corporate treasuries to protect from any single individual, or compromised key, from stealing the assets.

This type of code-based account is called a smart contract wallet. Popular developers of these wallets include Argent and Safe. Today, they offer many of the features touted as the benefits of account abstraction.

Ok, so why do we need ERC-4337? Vitalik explained in a blog that, although the benefits from account abstraction are possible with smart contract wallets today, the underlying Ethereum account structure makes it challenging. He describes that smart contract wallets cannot operate without being initiated by transactions from the user accounts. In other words, the user account instructs the execution of code in the smart contract wallet. Because there are transaction fees to interact with the Ethereum network, this could get expensive, and also introduces a layer of complexity as the user needs to manage the ETH balance in their user account just to connect with the smart contract wallet. There is an alternative system where user instructions can be sent through a side network—called a relay system—so that you don't have to pay the full transaction fee every time. The user instructions—called meta-transactions—are bundled together and added to the network by the relayer. One example is Gelato, who then offers lower fees, and also more flexible payments with various currencies like USDC. But Vitalik notes this has a centralization risk as it relies on the side network.

So how does ERC-4337 solve this? John Rising, founder of Stackup who's supporting the new upgrade, says that "unlike other implementations of account abstraction including Argent, Safe, ...and so on, it provides a decentralized relay system so it's censorship resistant." He goes on to say: "It unifies all of the elements of account abstraction that were previously fragmented... It provides a standard for everyone to converge on, so that smart accounts don't end up in closed ecosystems." In other words, the existing smart contract wallets were each built in their own way, with their own methods of sending meta-transactions to the network. This upgrade provides a single standard relying on a common UserOperation object and decentralized relay network. This achieves the cost reduction while reducing dependency on any single entity.

There was no shortage of excitement about the potential benefits. These tweets capture how it can improve user experience:

The Reserved Reactions

I uncovered nuances and uncertainty about this upgrade from the teams of the two companies mentioned throughout this article who are at the forefront of smart contract wallets: Argent and Safe. Here are their founders:

More nuance is explained in this thread by a Safe product manager. He says that the decentralized relay system is brand new, so it's currently centralized and fragile. It needs many companies to join the system for it to mature. He also says that the relay system relies on an economic model that is not yet proven. The relayers are compensated for bundling and executing the user instructions, but as he writes: "there is no certainty the incentives from [transaction] fees will be strong enough to ensure the sustainability of the system for users and bundlers."

And finally, many folks have acknowledged the complexity involved. This is a new layer that developers have to learn and interact with. Crypto researcher Kofi points out (via MilkRoad) that it's possible "there’s too much complex terminology like account abstraction, paymasters, bundlers, etc., that will make it hard to build products that regular people will like and understand." John Rising agrees this upgrade would be better if included at the base Ethereum layer but "unfortunately, this hasn't worked out in practice. [ERC-4337] is the best incremental step we have to align the ecosystem right now."

Learnings From Data and Live Apps

What I love more than exciting new technology is meaningful results from users. I always try to anchor down to the data to see how people are actually engaging with live products.

So if the excitement is about onboarding the next waves of users, I want to look at who has been most successful at this so far and how do they manage their accounts in a way that allows new users to join.

How do we identify those products? My opinion is that NFTs are how most new users will first interact with crypto. NFTs are about culture, art, and games; things that have broad mass appeal. Cryptocurrencies and DeFi are about financial assets; things that the users-not-already-here don't get as excited about. After focusing on NFTs, we can filter for all-time transaction count as a barometer of user engagement. Here's the results:

What can we learn from them? What are their patterns? Let's go bottom to top.

Pattern 1: User interface account abstraction on Ethereum-based chains

Sorare and Gods Unchained have succeeded on Ethereum and ImmutableX (an Ethereum L2 for web3 games), respectively, by relying on user interface account abstraction, also called app-custody, where they link a user's sign-in email to a blockchain wallet they manage behind the scenes. This allows the app to provide mainstream UX like email log-in, 2FA, and account recovery, while they hold the assets until a user decides they want to withdraw. This is a significant advancement from the closed nature of the tech giants today. In The Exit Option, I wrote that “to have digital property rights, we must also have the option to exit.” Sorare and Gods Unchained enable the right to exit with your digital goods in a way that companies like Twitter and Meta do not.

However, this model raises a conflict between self-custody and app-custody: do you care about true ownership and interoperability, or do you want to use the app without connecting your self-custody wallet for every interaction? I'm watching if they change their account structures based on ERC-4337, as that will be a showcase of this upgrade’s impact for new users.

Pattern 2: No account abstraction

Axie Infinity is an outlier case in that they reached this scale of engagement despite requiring users to create a self-custody wallet to onboard. They developed their own sidechain and wallet, Ronin, for a custom user experience. We can say it worked for this niche game at this time in the market, but now there are more efficient ways to onboard users than the massive lift of building your own blockchain infrastructure.

Pattern 3: User interface account abstraction on Flow

NBA Top Shot has succeeded on the Flow blockchain (a newer L1 for mainstream dapps) in a way similar to pattern 1 but with one notable difference: it's built on Flow which has native account abstraction at the protocol level. It's a differentiated account model using resource-oriented smart contract language Cadence and an architecture similar to a file system, in which the assets reside within the account's data structure, in contrast to Ethereum where ownership is maintained on a ledger in a smart contract. This opens a broad creative space for account design.

One breakthrough design is their recently-announced hybrid custody model—that I wrote about here—which is like joint-custody between the app and self-custody wallet. If we imagine each Flow account as a filesystem, then the hybrid custody model allows an app to have write access to a specific folder within a user's account, but not the entire filesystem. The user still owns all of their files and can revoke external access at will. It aims to solve that conflict from pattern 1: You can log in with email, the app signs transactions for you, meanwhile you can also list on a third-party marketplace via your self-custody wallet. That said, there has not yet been an announcement if Top Shot's wallet, the Dapper Wallet, will implement this model. I'm watching if that announcement comes and resulting changes in user behavior. That architecture would look something like this:

Looking Forward

These patterns tell us that most of the products that have onboarded waves of new users rely on off-chain account abstraction that present a centralization risk in conflict with web3 ethos. But this is an exciting time with innovations like ERC-4377 and Hybrid Custody that may offer new ways of preserving true ownership alongside better user experience. We need to experiment in many ways with many patterns to learn what will work for the next wave.

Web3 is at a crossroads: regulators are chomping at the bit, bankruptcies are underway, meanwhile we just endured a 60+% market downturn. It feels like we’re fighting for our right to exist. Like we’re fighting to prove we can bring value to the world.

So let’s prove it and break through. Good luck to you out there leading the charge.

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This week Yuga Labs announced a new NFT art collection TwelveFold launching on the Bitcoin blockchain. Many of their community members responded that it seems odd and a far departure from their existing Ethereum-based projects like Bored Apes, CryptoPunks, and Meebits. But it’s fully on-brand if you know how the best NFT companies operate.

I led community and growth at multiple NFT companies over the past couple years, during which time I studied the industry leaders—Yuga Labs, Dapper Labs, ArtBlocks, FWB, PixelVault, and more—to understand their patterns of success. I put these patterns in practice and learned a lot more about what moves the needle. In this article, I'll share the four most useful and non-obvious lessons I found.

It all boils down to: SHARPEN YOUR EDGE. Define who you are, amplify your differentiation, and cut through the noise to grow. Or else your dull efforts will bounce off people like a nerf gun.

TRUE FANS ARE THE TRUE NORTH.

Futurist Kevin Kelly famously described True Fans as the ones who will consistently buy your products and recruit their friends to as well; they're your best sales and marketing engine. They'll stick with you through market downturns and media bashing. They'll keep you afloat for the long term. Cultivate this group and you have a good shot at an enduring business.

Yuga Labs True Fans are the NFT degens, the early adopters, the techies, nerds, gamers, metaverse-believers. The ones who own a Oculus, who are in 15 Discord servers, who have ledger wallets and twitter profile avatars. This person loves to be at the forefront of tech trends like the recent Bitcoin NFT momentum.

These are the people to build a company around. They're consistently ape-ing into new Yuga-led experiences like Mutant Apes, Dookey Dash chase game, and Otherside metaverse. Casual fans are nice-to-have, but True Fans are must-have. Yuga projects are consistently the top traded NFTs.

To put this in practice, you need to first define what a True Fan profile looks like, and then help them win at the thing they're doing. For example, Star Wars true fans show up to the premier in a Storm Trooper costume signed by Harrison Ford. Find a way to excite them, and you'll have a valuable customer.

BE A DUNGEON MASTER.

There's a saying in crypto: "buy the rumor, sell the news." It's proven correct time and again. We're all playing a game: it could be the status game, the money game, the entertainment game, or the fandom game. We all love to be part of an important story, to be on a compelling adventure. The best NFT companies create the environment for people to fall into the adventure together. They tease announcements days in advance, they leave questions unanswered, they create mystery and surprise.

Underlying all of that, they're masters of incentive design. They know incentives drive behavior, and they create mind games that instigate actions and guide fans to lose their shit. No one is better at this than Yuga Labs. Every drop is headline news.

From my experience, the lowest hanging fruit to quickly generate this dungeon-master characteristic is to create inner-rings of exclusive benefits for your best customers and to tease future benefits to everyone. This creates desire and FOMO to get in on the action, and rewards those who achieve inner-ring status.

EXCLUDE PEOPLE.

One lesson from Influence: The Psychology of Persuasion is that opportunities seem more valuable when availability is limited. NFTs have essentially zero cost of replication, but the best NFT companies know that limiting availability is important to drive demand. Scarcity drives FOMO.

On the community side, boundaries create a safe space for members to be effortful and vulnerable. It creates a space with shared knowledge of what it's like to be on the inside. This creates stronger relationships and social value to the community members.

Twelvefold is limited to 300 art pieces. It's a stroke of the keyboard to add more, but they know scarcity will drive attention and demand.

The most powerful and quickest way for you to evoke exclusion is limit supply of the NFTs and create inner circles with exclusive benefits for token holders. This is offered easily with token-gated Discords and exclusive merchandise.

PEOPLE ARE HERE FOR NFTS.

Your stories and community are important, but today's market wants NFTs. The consistent buyers are early adopters who want to be at the forefront of the technology.

Yuga Labs started as one PFP project Bored Apes, and have retained attention by presenting a stream of breakthrough NFT experiences. TwelveFold being the latest.

I learned this lesson the hard way by facing the momentum-killer of waiting for IP contracts to sign for new drops. If you're working with an IP partner, consider how you can sign one contract to cover multiple NFT drops. Signing a league like the NBA is great for an NFT company: one deal, many NFTs. This is also why the music industry is so hard because each artist and label needs its own contract.

LEARN FROM YUGA LABS. They endlessly sharpen their degen-serving edge. Bitcoin NFTs makes sense because the proud techies and geeks lose their shit for the new and weird technology. Or said another way by Yuga founder and degen idol: because "fuck doing expected things."

The alternative path is to appeal to newer or first-time NFT buyers. The pickle is that these new buyers are different from the existing ones; they have different demands for what they find valuable. The core of this is the Custody Chasm.

All customers fall somewhere on this spectrum.

Early Market Earl is on the left side of the chasm. He works at a tech startup and bought his first bitcoin in 2017. He owns a Ledger self-custody wallet where he holds 17 different NFTs, two of which are worth over $5,000. He’s skeptical of Big Tech and excited for the promise of a more open web3.

Mainstream Maddie is on the right side. She's an executive at a media company who loves listening to Lizzo and watched every episode of House of the Dragon. She bought her first NFT recently, the Game Of Thrones one, through a website Nifty's where she could use a credit card. She thinks it’s cool, but isn't sure what to do with it.

The Custody Chasm is the technical barrier inhibiting companies from appealing to both Earl and Maddie.

Earl demands a self-custody option where he can hold the NFT in his Ledger wallet. He wants to be able to trade the asset on a third-party marketplace like OpenSea and retain ownership even if the issuing company goes out of business. He has no problem connecting his Ledger wallet to do in-app interactions.

On the other hand, Maddie appreciated that she could buy the GoT NFT with a credit card and email address. She has no desire to learn about Ledger wallets and crypto exchanges. Nifty's uses an app-custody model where they do the on-chain activity behind the scenes; they link your email to a blockchain wallet that they create for you. This opens the door to offer mainstream experiences that she is familiar with. The trade-off is that Nifty's controls her assets; she can only do what they allow. Earl thinks this defeats the whole promise of true ownership in web3.

How can we attract Maddie without alienating Earl?

What if there was a hybrid custody model that allowed both a self-custody wallet and app-custody wallet to access the single account holding an asset? The app could provide mainstream UX — credit cards, email signup, and avoid external wallet signing — and the self-custody wallet could interact with 3rd party marketplaces.

This is the recent proposal from the Flow blockchain team. It works like a joint custody bank account; two parties can have access. It’s still early in its implementation, so we’ll see how it gets adopted, but it looks to be a way to solve this chasm problem.

Flow Chief Architect Dieter Shirley described it this way: "A new user, without a self-custody account, can sign up for a new account without having any wallet software. But when they are ready for self custody, they can delegate control of the app-custody account to their self-custody account."

It would look something like this:

Flow Product Manager Chris Ackermann summarized the benefits:

• Full user control of their assets in both their self-custody wallet and in-app account, while the app can continue to use the assets in the context of the app without an interrupted user experience through transaction approvals.

• The option for users to bring their assets with them elsewhere in the ecosystem of Web3 apps, while retaining the ability to seamlessly use them within the app.

• App visibility into assets that the user holds in their self-custody wallet, and the ability to request temporary access for use within the app, if it makes sense to do so.

I’ll also underscore a problem I’ve faced across multiple companies where my team dropped NFTs before our marketplace was ready. We used an app-custody model so transactions were impossible for users. In the hybrid scenario, the user could trade from day 1—through a 3rd party marketplace— while the app builds out their own.

It looks like someday soon Maddie and Earl will be able to enjoy the same NFTs. Companies will welcome customers from both sides of the chasm. And we'll all be able to buy, to hold, and to loiter in Discords as projects take-off together.

Stark said in an interview that she was initially drawn to NFTs because they seemed "so abstract and crazy." Two words that also describe her artwork. In Digital Paint, she built an interactive canvas where collectors become artists in creating 5,000 unique pieces.

This is Stark's tenth NFT project, so she has an existing customer base. She attracts them to her new project by offering a 50% discount and early access to purchase before the public. This is done via an allowlist, which is a registry of accounts owning her previous collections at a specific time. The owners are verified by querying data on the blockchain.

Allowlists help convert casual fans into true fans; to turn passive one-time buyers into repeat buyers and evangelists. These true fans are the engine of a creative's business, as described in Kevin Kelly's 1,000 True Fans. With allowlists, artists can maintain touch-points with past customers and continually offer value over time.

This benefit can translate into higher demand for her past projects. Collectors will buy the older NFTs to get allowlisted for the new NFT. Her past projects COSMIC CUTIES and GIFT GOAT show higher sales and prices since she started promoting Digital Paint around January 15.

In addition to benefiting the seller, this benefits Stark who will receive 10% royalty on the secondary sales via OpenSea.

Finally, Digital Paint carries a fun mystery about future benefits. What future experiences, allowlists, or access will the artist offer to her collectors? Will collectors be able to physically display the artwork in their houses? How will collectors value this piece as NFTs become more entrenched in virtual worlds and social media?

Jen Stark is a pioneer for creatives using NFTs. "What I love is the provenance on blockchain," she said in an interview. "You can always direct [benefits] back to you... In the normal art world, if you sell artwork, that's it. It's gone. Some of my fine artwork I don't even know where it is right now. Could be a sculpture in Idaho or Turkey. I have no idea."

McKinsey found that "Personalization drives performance and better customer outcomes... Seventy-one percent of consumers expect companies to deliver personalized interactions. And seventy-six percent get frustrated when this doesn’t happen... Companies that grow faster drive 40 percent more of their revenue from personalization than their slower-growing counterparts."

Look at Amazon's homepage and you can see why they're a juggernaut. We collectively shop there so much, so they have an enormous amount of our purchasing data, and can offer recommendations. My Amazon homepage sections include:

Individual stores have a harder time with this because we spend relatively less time shopping there, so they have less data to use for personalization. Also, each individual store has its own log-in which is annoying to find and enter at each site. As a result, we're shown the general page. Below, the Nike homepage requires several degrees of navigation to get to what I'd be interested in, even though I am a repeat customer of their site.

Additionally interesting is that, after I log into my account, I'm still shown this same homepage. Even Nike has yet to fully embrace personalized e-commerce.

NFTs and blockchain wallets offer new possibilities. A blockchain wallet is your purchase history across NFT stores. Its a single log-in that any store can use to understand your buyer activity and offer recommendations.

Doodles, an NFT company, and their partner Shopify are a good example of where this is heading.

Upon entering the site, you can connect your wallet:

I'm not a Doodles holder so I see the general store, but it's easy enough to show a separate store for those logged in and holding an NFT in their wallet:

The reviews on the Shopify tokengating app used here, called Manifold, show even more possibilities:

An added twist is that stores can offer deals based on purchases from other NFT stores. Doodles could offer discounts to Cool Cats owners. Cool Cats could offer exclusives to CryptoPunks holders. It's a new way to collaborate and compete and personalize.

Maybe it's just a bread crumb today, but the playbook exists for deeper personalization which can turn into some real dough.

The data tells us that we've reverted back to the characteristics of Q2 2021:

• Weekly Trade Volume is between $50-100m

• Ethereum is the dominant blockchain

• Yuga Labs is the dominant company

• Purchases are from NFT early adopters (not mainstream users)

Let's look at the charts.

Weekly trade volume is back to Q2 2021 levels, which is 1/10th of the levels one year ago.

Secondary marketplace volume is up 2x from Q2 2021, but down 10x from Jan 2022.

Ethereum remains the dominant majority of trade volume. (Dark blue is Ethereum in the graph.)

Lastly I compared Top 10 sales rankings all-time vs past 30 days for insights about what is working recently that’s different than historically. Some observations:

• Yuga Labs and its ecosystem are 6 of the top 10 in the recent list, 4 of which are also in all-time. These include Bored Apes, CryptoPunks, Otherdeed, Mutant Ape Yacht Club, Bored Ape Kennel Club, and Mutant Hound Collars

• Axie Infinity and NBA TopShot were on the all-time list and dropped out in the recent list. They are the two that accounted for the most new user adoption: their number of buyers and transactions are magnitudes higher than any other.

• All the recent top 10 are built on Ethereum. Axie and TopShot were the two that dropped out.

• 2 of the 3 entrants on the recent list are offshoots of early adopter projects: Bored Ape Kennel Club and Mutant Hound Collars. The other one is Sorare which was started in 2018.

This suggests that the dollars being spent right now are by the early adopter crowd. As explained in Crossing The Chasm, these buyers are here for the new, and accept risks to be early to the trends. They seek adventure, status, and technology breakthroughs. They were buying NFTs before the hype. To make money today, appeal to that audience.

The mainstream will be harder to win. Perception of NFTs is low. Many have lost money, and are skeptical to place any price on NFT ownership. So NFTs need to include other value that mainstream users understand: merchandise, IRL experiences, insider information, and community.

The dollars are back to 2021 levels, but the number of companies today is much higher. Competition will be fierce. It’s a war time for businesses.

There’s a lot of truth to that because of the lesson from the book The Black Swan. The lesson is that the world is a surprising place;  unpredictable events have significant impact on our lives. There’s always information we do not and cannot know. As such, it's often more useful to prepare for the full range of outcomes instead of trying to make a specific prediction - especially when there's a high degree of uncertainty.

That said, predictions are interesting and I read them. Last year's crypto prediction articles overwhelmingly called for increasing crypto prices and unicorn startup valuations. At the time, I said that "it seems to me that folks predict what they want to happen, without enough respect for the turbulent times we live in." Surprisingly to me, I was very right. But now we have a relentless stream of bankruptcies, war, and recession fears. However, if you squint, there are silver linings for crypto.

So I'll repeat my approach last year and, instead of making specific predictions, I'll focus on the major plus-or-minus catalysts that will largely determine industry outcomes.

US Regulation

Historically one of the biggest challenges for crypto companies and investors has been lack of regulatory clarity for operating centralized crypto businesses and launching tokens compliant with securities laws. The question up until last year was if the government cared enough to address these concerns.

Well, good news: crypto regulation is finally a priority for the US government and SEC. Earlier this year, The White House issued its first Comprehensive Framework for Responsible Development of Digital Assets and in December the SEC chair said they are accelerating its crypto actions. Unfortunately it's coming on the heels of the FTX blowup with millions of consumers hurt. But the end result will be better-understood operational risk for crypto business and possibly new government oversight that will lead to higher consumer confidence.  The downside, however, is that it will likely add operational costs to remain in compliance, and restrict certain business activities.

The question now is if the government will make it easier or more challenging for companies to succeed in the US. Will it provide the right controls to protect consumers? Will it be too restrictive forcing companies and products to leave the country? Will builders and investors see this as a signal of legitimacy or as a warning to stay away?

US Economy

Crypto is a high-risk asset class. The more money people or investors have and the more positively they view the future, the more they're willing to buy risky assets. And visa versa. 

This year did not help. The S&P is down 20%. People's assets are now worth less and there's consensus we'll face a recession in the next 12-18 months. The question is how disruptive of a downturn is this and how long will it last?

Legendary investor Stanley Druckenmiller has been right in predicting the past 18 months and he is not optimistic about next year. He confirms that we were in a bubble inflated by the zero-interest rate environment and years of Fed money printing. The Fed was wrong that inflation would be "transitory," and instead it remained at 40 year highs between 6-9% for the whole year. They then raised rates seven times progressively from about zero to 4.5%. This ignited the recession fears and slower growth expectations which led to asset price decline.

Crypto got hit hard: total market cap decline of 65%. Major layoffs from companies like Coinbase (18%), Opensea (20%), Dapper Labs (22%), and Kraken (30%). Collapses of billion-dollar businesses like TerraLuna, Three Arrows Capital, Voyageur, Celsius , BlockFi and FTX.

But there are signs the Fed policies are starting to work: The CPI inflation rate ticked down in November for the first time since June and the Fed slowed its latest rate increase from 0.75% the past four times to 0.5% in December.

Taiwan and Ukraine

Geopolitical crises are wild cards that cause disruptions and fear. Many investors reduce financial risk for fear something bad will happen.

The Ukraine-Russia war is a tragedy. There are reported 200,000 casualties. It's caused significant global energy disruptions. And Putin has warned of nuclear war which would send the world to a panic. But he also said recently he is willing to negotiate (though unclear if he's serious.) If this resolved, people may re-open their reserved stances.

Taiwan remains the same as I wrote last year: Smart people like Ray Dalio and Balaji believe Taiwan is an escalating battleground for the US and China, who are already engaged in economic and technology warfare. Heightened conflict and physical war could lead to fear and a flight away from new product innovations and high-risk investments like crypto and NFTs.

The conflicts could continue or get worse. But also they could de-escalate.

NFT Products and Adoption

NFTs could be the trojan horse for crypto this year. They may be down in market cap, but they could explode in user adoption. The opportunity is to appeal to consumers instead of investors; to provide art, community, merchandise and status instead of financial returns.

A few trends already in development could drive significant user adoption: 1) Deeper social media integrations from Instagram, Twitter, Reddit, TikTok and Snap 2) Consumer products from Starbucks, Nike, Disney, and all the major sports leagues 3) A breakout NFT-based game 4) Integrations through mobile app stores.

All that said, the regulatory enforcement actions and shaky economy could scare away new product launches.

This all seems 50-50: bad on the surface with some silver linings. My one hard prediction is that there's a 90% chance that I’ve missed the most significant catalyst for the industry.

So I’m preparing for the worst, but hoping for the best. Wishing you good luck as we go through it this year.

I'm leading the community efforts for a new NFT company JUKE built for film and TV fans. So I asked myself “how do I create a community that is aligned with a successful business strategy?” This is my hypothesis.

The strategy is to build a home for true fans and a pipeline to true fandom. 

A Home for True Fans

In his now famous article 1000 True Fans, Kevin Kelly describes true fans as those who regularly buy your stuff and recruit new members. They are the most valuable to the business because they're a higher reliability for income; they spend money repeatedly on this fandom. They are also more enthusiastic, which attracts new members. It's within this group that the business has an opportunity to sell things and earn consistent revenue to support operations and growth.

So the first goal is to build a home for this group, a place they want to spend time. To do that, I have to ask "What do true fans want? What do they go crazy for? And how can I help them succeed in a way they want to succeed?" Then provide them with this value in a way they're willing to pay for.

For example, Star Wars true fans go crazy for things like merchandise (movie posters, costumes, toys), access (movie tickets, exclusive content), VIP experiences (invited to premier, meet the talent.) If a community can offer this, then true fans will be more likely to want to spend time and money. They may also contribute to improving the community for themselves and others. So it’s our job to find the opportunities to provide this type of value.

A Pipeline to True Fandom

Since true fans are the engine of the business, we need a pipeline to add more of them. So we need to build a path from visitors to casual fans to true fans.

Casual fans are the ones who buy stuff sometimes. From a business lens, they're an inconsistent source of revenue. "The real win is in turning a casual fan into a true one," Seth Godin said in Tribes. To do that I have to ask "What do casual fans want? Can I show them new ways to connect with the things they like? How can I encourage them to want to take the path to true fandom?"

For example, I'm a casual fan of Star Wars. My family and I saw the movies in theaters each year when they came out. We wore regular clothes, not like the Storm Troopers above. Our fandom became passive after the theater experience. I love the characters and stories, and could be shown ways of deeper connection, but that hasn't happened yet. Opportunity here there is.

Lastly, I need to make a space for visitors to explore, learn what this community is about, and understand how to become a member. "Prospective members must have a way to behave like the current community members before we require them to believe in and value the same things we do,” Charles Vogl teaches in The Art of Community. “Newcomers may need time to grow into full membership.”

Thus the pipeline is complete guiding them to their hopeful true fan home.

I’m on an adventure with the JUKE team to build something new in the entertainment world. I’m putting these ideas in action, and maybe I'll discover obstacles and have to change course, but as Han Solo says “Traveling through hyperspace ain’t like dusting crops, farm boy.”

The rings provide a path from a first-time visitor to a wise elder; the more personal growth, the more inner rings open up. And those rings can offer benefits such as insider knowledge, leadership opportunities, access, or status. 

NFTs turbocharge this journey when they’re able to combine asset ownership and inner-ring membership. In other words, when they’re valuable to hold and also used to measure the stages of development within a community. This creates a multiplier effect on value: it's the key to community belonging and also a financial asset. 

Let's look at an example.

NBA TopShot is a platform for basketball fans. The platform includes two things: 1) basketball highlight NFTs (called "Moments") and 2) a community for fans. The NFTs are collectible and tradable just like any other sports cards. But they're also the measure of fandom to access community inner rings. I'll show you how. (First let me mention that Discord is the community hub for TopShot and most NFT projects. The inner rings are demarcated by access to private Discord channels where member benefits are communicated.) 

As a newcomer, I was able to join the Welcome channels.

The first inner ring opened after I proved myself a “verified” fan by acquiring any 3 Moments. This unlocked the TopShot channels, where I could interact with other members, get support, hear about events, and see what else is happening.

But I just moved to Austin, Texas and wanted to connect with my new local team the Spurs. I noticed there were exclusive channels for each team. To join, I had to complete a team set, which required collecting a Moment from each player on the Spurs’ roster of a certain year. After completing this, I reflected on my new threshold of TopShot growth: I had proven that I’m familiar with the Spurs roster, can navigate the TopShot marketplace and platform, and have committed time and money to put my set together. In short, I’m a real fan. Which then opened the Spurs channel where I found my crew celebrating a little winning streak: Ring two unlocked.

And if I decide I no longer want to be in the community, I can sell my moments on the marketplace for a financial return.

This is just a skeleton example. But it offers the recipe for new types of community interactions. Ones that combine asset ownership and inner-ring membership through NFTs, marketplaces, and community hubs.

The most exciting thing is that this works many other fandoms too: art, music, movies, games, fashion.

I turned to the book The Art of Community for ideas, and was shocked to realize I didn’t even know the definition of what I was trying to achieve. Author Charles Vogl states:

Community is when two or more people share a mutual concern for each other’s welfare

According to that, most of the “communities” I contribute to don’t qualify. The concern for others’ welfare is weak.

But one group was an exception. This fall, I took Write of Passage (WoP), a 5-week cohort based program on writing online. The community was energetic and addictive. I had to dissect what was going on, and how I could use it in my world. I uncovered two things they do that promote ‘mutual concern’ among members: establish group identity and build a playground. Both are also related to principles in The Art of Community.

Establish group identity with understood boundaries 

Check out the WoP website and you’re bashed on the head with the purpose. 

Writing online. That’s it. 

They repeat this over and over again throughout the course materials. If you’re committed to writing better online, you're likely a good fit. If not, you aren’t. 

When we joined the course, we were added to private classes and discussion channels. There was no mistaking who was in, why we were here, and how to connect with each other.

This culminated in an enormous benefit: a safe space for members to be vulnerable and effortful. I cannot overstate how important this was. The internet can be a scary place to open up. Fortifying the boundary around this space allowed us to form meaningful connections. We developed insider understandings about what it’s like to go through this course together. We shared struggles, offered support, and celebrated wins. We got to know each other.

Going forward in my communuties, I’ll do a better job asking: Why is everyone here? What do we stand for and against? What can we achieve together? Then create a protected space for members to connect.

Build a playground, not an assembly hall

In WoP, we were encouraged to organize ourselves for our own reasons. We used Circle to start discussion threads and DM each other to continue conversations outside of the planned programming. Discussions emerged about writing newsletters, new opportunities, and niche topics.

There were also location-based groups, and I’ve met many of the students in Austin. I believe the IRL meetups will determine the vibrancy of the community for the alumni. As Vogl quotes in his book that “the most powerful thing an online community can do is create offline friendships.”

Many online groups I’m in are less like a playground, and more like a broadcast from stage. Everyone facing one direction to the leader, and rarely talking to each other. As a leader, I could do a better job creating paths for members to drive their own initiatives within the overarching purpose. This could include community proposals and voting, regional IRL meetups, or a grant program funding community projects. Members can then mold the community in a way they find valuable.

Return on Community

The business benefits to WoP were eye-popping. There were over 100 returning alumni (read: repeat customers). Of the first-timers I spoke to, most had signed up due to referrals from alumni. Myself included, as I joined after listening to an alumni speak about it on the Acquired podcast (read: free marketing). And lastly, most of their employees were previous students. Their community became their best recruiting asset.

After all this, I’m glad to finally know what my job is.

Time-tested principles can explain the emerging behaviors.

I deepened my understanding of this over the past 8 months when my job has been to create NFTs that people want to buy. There are many decisions from price, quantity, utility, and art that persuade consumers to behave in different ways. 

To make these decisions, I studied the book “Influence: The Psychology of Persuasion” by Robert Cialdini. Then I noticed how the tactics from his book are everywhere across the industry. In particular, companies rely on scarcity, social proof, and authority to influence behavior. 

Tactic 1: Scarcity

Opportunities seem more valuable when availability is limited. 

Often scarcity is reflected as limited time offers or limited quantities available. Does this language below look familiar?

The limiting factor is likely not too much demand. It’s a persuasion tactic.

In NFTs, scarcity is most felt in the limited quantities available. If everyone can have something, no one wants it. So projects need to constrain supply. 

For example, one popular NFT art collection is CryptoPunks. There are only 10,000 unique items. That number could have changed to 1,000,000 with a simple update to a line of code, but that would have dampened the scarcity persuasion. 

Today, these are considered blue-chip NFT art, like a Picasso for NFT nerds. It says something about you because you’re one of the few owners. You can see the effect on sales:

This also highlights a counter-intuitive point that you can often drive more sales by decreasing the quantity available.

Tactic 2: Social proof 

We often determine what is correct by determining what other people think is correct. 

Matthew McConaughey is a brand ambassador for Lincoln cars.

Is he a car expert? I don’t know. But he’s a cool guy and he chose this car. 

NFT projects rely on social proof to gain credibility and generate demand: proof points like their social media presence, venture backers, partnerships, media, and employees. 

CryptoPunks homepage displays social proof upfront with its press coverage:

A well-known NFT thought leader @punk6529 promotes his Punk as his twitter name and profile picture:

And world class auction house Sotheby’s hosted auctions for Punks last year:

Media and industry leaders deem CryptoPunks as bluechip so the rest of us do as well. Or as Cialdini says “The greater the number of people who find any idea correct, the more the idea will be correct.”

Tactic 3: Authority 

We have a deep desire to be obedient to authorities, which reduces our need to think for ourselves. 

Authority is established through titles and appearances. 

Below is the Chairman of the Joint Chief of Staff. Notice his attire and title.

I have no desire to debate him on defense strategy.

In NFT land, the military uniform can be conveyed through a twitter profile picture and bio. It can show what someone has achieved and what they represent. One example is Roham, the CEO of Dapper Labs. 

His picture is a rare CryptoKitty, which was the first breakout NFT project and signals he could be a very early collector. He has a Twitter checkmark. He is a CEO with a strong track record of pioneering NFT projects. He is followed by many of the same people I follow in this space.

This is a strong uniform. 

When he speaks, my default is to agree with him. Unlike other often louder voices that I’ll show in the next section.

The Dark Arts

Unfortunately these tactics can be engineered in sneaky ways. 

Social proof is easy to corrupt. Below is a common practice in NFT land where companies offer free rewards in exchange for social proof. I am not a fan of this. It is not proof that anyone enjoyed the product, it’s only proof they want something for free, often to sell for profit. 

As a consumer, it's important to recognize when you see social proof from people not acting based on deeper knowledge, but who are otherwise incentivized.

Authority is easy to corrupt too because 1) it’s easy to fake twitter titles and appearances and 2) NFT buyers crave “alpha” which is early information you can use to make a profitable trade. “Crypto influencers” have seized this opportunity to gain large followings by posting a lot of content people think could be alpha. This person below has many more followers than Roham.

Their expertise is a “collector” which requires only money and enough knowledge to make a purchase. They updated their profile picture to a project that others might respect, but I don’t know it. His job is “influencer” which means his voice can be purchased. An obvious misalignment of incentives if he is to be considered an authority on “working with top projects.”

This person is not an authority. It’s important to ask: are they truly an expert? And how truthful can we expect them to be with other motivations they may have?

It was enlightening to witness the impact of these tactics. As a practitioner, I check myself that I’m using these principles with good intentions, and not to deceive. 

And for you, whether it's NFTs or otherwise, it's important to recognize these tactics are being used, and to question the influence it's having on your decisions. If you feel rushed into a purchase, slow down. It’s likely a persuasion tactic.

I often learn most when someone challenges what I write. That happened last week and led me to this post. I also added a bonus "how I'll respond when my family inevitably asks about FTX" summary.

Have a great holiday.

Last week I wrote that NFTs represent digital property rights. My friend replied:

"The average user is not sophisticated enough to interact with blockchain without relying on some sort of centralized service as the intermediary/facilitator. That gives those centralized services massive power and also seems to defeat the purpose of decentralization. How does that get fixed?"

I agree with him: centralized actors put at risk the benefits promised from decentralization.

I think it's fixed by insisting on The Exit Option.

To have digital property rights, we must also have the option to exit. Technically, this means the ability to 1) withdraw assets to external wallets and 2) use assets effectively on external applications.

For example, NBA TopShot is an NFT platform. To buy from them, you must use their central marketplace and their wallet, the Dapper Wallet. However, anyone is allowed to withdraw their TopShots into external wallets like Blocto. And you can also use external secondary marketplaces like Gaia to trade. If you no longer like the Dapper Wallet, you can move to another. If you find better deals on another marketplace, you can trade there. In other words, you can exit with your stuff.

The ability to exit forces companies to compete in ways current walled gardens do not.

You cannot take your Instagram friends into Twitter. You cannot take your iTunes songs into Spotify.

There's at least four technical aspects to enabling the option to exit. First, transactions must be executed on-chain. This allows 3rd party applications to read up to date information and verify the state of the digital asset. Second, asset issuers must use NFT standards accepted by 3rd parties (e.g. ERC721 or Flow NFT Standard). This means the NFT will function on external applications. Third, a withdraw method is available for users to move assets to an external wallet. And fourth, media must be stored in a way that the creator cannot tamper with (e.g. decentralized file storage like IPFS).

TopShot is still evaluating the fourth aspect there. And that fact highlights one of the benefits of NFTs: it’s iterative. It’s all software, so you can progressively add rights and characteristics over time.

BONUS: how I’ll respond when my family inevitably asks about FTX

In many ways this is nothing new: shady offshore finance company does shady shit and loses everyone’s money. They used customer funds for business operations (illegal in US) and likely showed false information to investors (the same fraud that Elizabeth Holmes is now going to jail for). Nothing they did affects any fundamentals of crypto technology.

In other ways it is new: $10b+ lost in one of largest corporate frauds ever, involves crypto tokens which are broadly controversial, psychopath CEO who manipulated investors and politicians with "effective altruism" and donations, and cultural aspects like the 20-30 year olds living in Bahamas penthouse dating each other and jacked up on amphetamines. 

Regulation is now prioritized, and crypto industry welcomes it: SEC’s job is consumer protection. Consumers got hurt. The lack of regulatory clarity forced companies like FTX offshore, then they did shady shit. Industry leaders are asking for clarity so companies can safely operate in the US. We need clarity on 1) which tokens are securities and need to be sold through registered broker-dealers to qualified investors and 2) at what threshold does a token transition from security to a commodity or something else, and then can be sold to the public on exchanges. This clarity could have reduced impact of FTX who had created a FTT token that looks to me like a security.

All that said, what FTX did was criminal and current rules already cover those activities. The industry is facing choppy waters for the next while. Focus is on survival, keep building, and prepare for next cycle whenever that comes.

See you next week.

Brian