The Exit Option
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.