NFTY #58: What happens to digital goods on a scalable blockchain?

Breaking down digital goods on higher throughput and lower throughput blockchains

NFTY tracks the ever-evolving narrative of how mainstream will enter crypto through user-facing applications.

If you've ever asked someone what makes NFTs valuable, most people would say scarcity. Tony Sheng wrote a great post on focusing on demand instead of supply, so I won't go much into it.

As blockchains start to scale and higher throughput is used, many have questioned what makes digital goods valuable. Is it their demand as utility? Or is it their scarcity? There’s been two interesting developments last week that are relevant to this topic.

  1. Last week at Dapper Labs, we announced Flow - a new blockchain that is fully scalable while not making tradeoffs with decentralization, made possible through a multi-node architecture.

  2. While non-fungible tokens are still framed largely as collectibles, there’s a new standard trying to move away from collectibility to utility: The ERC1155 standard, implemented by OpenSea last week.

The ERC1155 standard is the first step to making digital goods less about scarcity and more about utility/liquidity. By having one smart contract manage a list of both fungible and non-fungible assets, users can trade digital goods in bulk as opposed to a single item (like ERC721). OpenSea just implemented ERC1155 this week, and many more games on Ethereum have been looking to implement the standard because it "brings for more interesting possibilities in economies." as Enjin puts it.

On a lower throughput blockchain like Ethereum, there is many digital goods but no clear leaders because the benefit to create a new market rather than participate in an existing market is much higher. This ultimately leads to spreading liquidity thin, making it difficult to find if a market is worth participating in.

On a more scalable platform, the value of digital goods is no longer about scarcity because the cost to create a market (digital goods) is low. This leads to a longer tail of NFTs compared to a less scalable blockchain. Not only is there more digital good, but more transactions occur because fees are cheaper, leading to more trade automation. More transactions and more users means there is more trade data, leading to more liquidity compared to a less scalable platform. With more liquidity, there is more benefit to participate in an existing market than there is in a new market, even though the cost to create a new market is cheaper and easier on a more scalable platform.

My theory is that 1) Ethereum may end up be the platform for collectibles, while more scalable blockchains use digital goods for more utility. 2) ERC1155 will be specifically used for sidechains on Ethereum since they require heavier transaction usage than ERC721s.

While there isn't enough data to support this yet, it's interesting to think about what types of applications should be built for more scalable platforms. Should they focus on collectibles, taking upon what was learned in lower throughput blockchains? Or should they focus on creating games that are unique to crypto?

Time will tell to see how these applications change over the next year.

Disclaimer: I work on helping create a world of infinite possibility at Dapper Labs. All opinions and words written in NFTY are my own.

NFTY #57: The value of blockchain games is prototyping incentives

Talk about blockchain games have declined at ETHGlobal hackathons

NFTY tracks the ever-evolving narrative of how mainstream will enter crypto through user-facing applications.

After ETHBerlin last weekend, many individuals on Twitter have pointed out that blockchain games & NFTs were barely incorporated inside of hackathon projects, let alone talked about. Here are my thoughts of why this has been the case, and what the future of blockchain games are:

No consensus on the value of blockchain games

If you asked ten different individuals who are deep into blockchain games what the value of blockchain games are, you'll most likely receive a different answer from each one. Some may say "true item ownership" while others may say "player-owned economies". DeFi and DAOs are much easier to have consensus on for Ethereum developers.

Ethereum has not proven itself as the blockchain for games.

Many existing blockchain games have moved to sidechains or state channels in order to reduce fees and create games that seek to compete with centralized games. The fragmentation of ecosystems has created further debate among which blockchains/scaling solutions are the best for games.

Composability makes it easier to hack together projects from primitives; blockchain games take much longer to build

Primitives like Compound are easy to build on because of the existing developer network effects. Many developers at hackathon prefer to use multiple building blocks to speed up development time as opposed to creating an application from scratch. This also enables them to hit multiple bounties. Primitives like Uniswap and Compound are also starting to prove themselves as essential pieces for multiple projects (ie. Dharma V2 pivot).

What is the future of blockchain games?

The decline of talk about blockchain games has led many to question the value of blockchain games. Here’s how I see it.

I like to compare blockchain games to open-world building games like Roblox, Minecraft or RecRoom. Many indie developers actually use Roblox to prototype their games because it's faster, more efficient, and easier to get testers. While I don't think blockchain games poise any real threat to centralized games due to current scalability problems, blockchain games are a great way to prototype blockchain economies and other decentralized applications.

Here are two ways in which this can work:

Incentivized Testnets

Simualtions such as incentivized testnets are a great example. Game of Stakes on Cosmos or Tour de SOL on Solana are a lot of setup work for little reward. Coda Protocol takes this one step further and creates a point system for completing certain tasks related to their incentivized testnet. Protocols could incentivize further participation by award NFTs to validators for completing certain tasks.

Consumer Facing DeFi

Jed Halfon wrote a great post about how future blockchain games can trick you into investing a significant amount of your net worth into the S&P. For example, If Dharma wanted to grow the amount of money locked in it's new V2 contracts, they could easily create a game that requires at least 100 DAI/USDC locked up in order to play. PoolTogether's new V2 contract is coming close to this with things like philanthropic pools and automatic buy-ins.

We need to remain focused on creating proper incentives

The importance needs to remain on exploring proper incentive systems. Using games as a way to rapidly prototype and bootstrap value is still a very underexplored territory for DeFi applications and blockchain economies who wish to draw newcomers to their ecosystems.

Disclaimer: I work on helping create a world of infinite possibility at Dapper Labs. All opinions and words written in NFTY are my own.

NFTY #56: Making ICE ❄️

What is the real value of Interoperability, Composability, and Extensibility?

NFTY tracks the ever-evolving narrative of how mainstream will enter crypto through user-facing applications. In each edition I explore dApps, games, and the ecosystem affecting consumer crypto applications.

The definitions of Extensibility, composability, and interoperability (ICE) are frequently talked about in the crypto community, but there is always some debate at what they actually mean and what value they provide for crypto applications.

I'm going to start by defining ICE:

  1. Interoperability - the ability of computer systems or software to exchange and make use of information.

  2. Composability - components that can be selected and assembled in various combinations to satisfy specific user requirements.

  3. Extensibility - the quality of being designed to allow the addition of new capabilities or functionality.

Interoperability is made possible by open standards. Many of the government's internal systems are interoperable and makes use of existing data.

An Android Phone is composable - a user selects different components that they'd like to use on their phone. The more components that exist, the more the user has a choice in creating the system that they desire.

Minecraft is very extensible but it is neither composable or interoperable. It's a game that benefits from multiple developers and creators building mods on top of it.

Why ICE matters for blockchain games and consumer experiences

There has been some debate on what value ICE provides for blockchain games

Extensibility - CryptoKitties is historically one of the only NFTs to have data on-chain. Even though it's more expensive to store the data on-chain, it allowed for more extensibility. Games like KotoWars give users the ability to fight their cats based on their on-chain traits. Developers for CryptoKitties and the KittyVerse are more often players themselves - they feel they have a sense of “duty” to increase the value of the NFTs.

Composability - Cheeze Wizards is built for composability as opposed to extensibility. The entire gameplay of Cheeze Wizards is stored in a single smart contract, making it easy for developers to spin up their own tournament if they choose. The CryptoKitties breeding contract is not composable because it doesn't benefit third-party developers like the tournament contract does.

Interoperability - Interoperability is the most difficult to achieve of the three, and the business case has not been proven. While users would love to use their game items from game to game, companies leak out potential revenue by including outside data (items) created by another company. It's safe to assume that interoperability between games in one studio is beneficial - and may even provide a new acquisition loop.

You need decentralization at the base-layer in order to make ICE

Many blockchain games have recently been using second-layer scaling solutions like sidechains in order to create a better user experience. In an effort to create a better user experience, this actually makes makes ICE worse. By separating data into partitions rather than a single layer, it makes standardization, extremely crucial for ICE, difficult.

The growth of marketplaces and second-layer games hasn't seen a huge uptick because developing on second-layer scaling solutions are difficult even though it hides the complexities of blockchain for the user.

I co-wrote an article that was published on CoinDesk this morning mentioning the opportunities for open ecosystems/ICE enabled by decentralization.

**Hope you can give it a read here.**

Disclaimer: I work on helping create a world of infinite possibility at Dapper Labs. All opinions and words written in NFTY are my own.

NFTY #55: The Case for On-chain Affiliate Fees

What does it mean when you can programmatically split fees with multiple parties forever?

NFTY tracks the ever-evolving narrative of how mainstream will enter crypto through user-facing applications. In each edition I explore dApps, games, and the ecosystem affecting consumer crypto applications.

Many crypto-native projects have added or are considering adding affiliate fees baked into their own smart contracts over the past six months. While on-chain affiliate links have the potential to increase liquidity in a more transparent way, many individuals believe it won’t help drive mass adoption for on-chain markets.

To date, composability and the incentives to use existing contracts are drastically outweighed by creating new markets & tokens. There has been a handful of attempts by exchange products like OpenSea and 0x Instant to enable referral/affiliate based rewards inside of exchange contracts. Some have pointed out that the introduction of affiliate rewards in these platforms have not seen a dramatic increase in the amount of total transaction volume and liquidity in these markets because of the baseline liquidity not being there.

Say we were to reach a point where liquidity on decentralized exchanges hits a point where volumes are rivaling centralized exchanges. What would separate the investment of new money into on-chain markets vs. tokens? On-chain affiliates may be the answer. Here are a few ways this can potentially shake out.

Social capital to flow from tokens to markets — while many content creators have been notoriously known for increasing demand for new tokens, NFTs on OpenSea and soon markets on Augur will possess an opportunity. As user experience and education improves, it would make it easier for the average consumer to invest in markets on-chain as opposed to exchanges. With Augur V1, it used to be that only creatives benefitted with coming up with the “perfect market”. Now investors can add long-term Augur V2 “markets” to their portfolio.

On-chain bounties are transparent — on-chain affiliate means on-chain, transparent data for everyone to see. Instead of donations and Patreon being the preferred method of monetization for creators, perhaps they would point to markets which offer affiliate rewards.

Composability encouraged — While Veil was primarily focused on creating their own markets, there was no upside to let users permissionlessly create their own markets (Veil created new markets based upon requests, creating too many markets would spread liquidity thin). Now, new overlays would be encouraged to highlight and funnel users into existing markets in order to generate affiliate fees.

I’ve noticed this trend starting to develop in Q4 of 2018. I wrote about the concept of “on-chain curation”. Instead of news sources following price movements, content would be incentivized to drive liquidity to specific markets.

Future curators will be reporting on markets rather than news. Affiliate fees will be taken at every inch in the market. This creates an entirely new effective way to convert attention to liquidity, something that a lot of native-crypto markets currently lack — NFTY #29

Disclaimer: I work on helping create a world of infinite possibility at Dapper Labs. All opinions are my own and don’t represent the opinions of Dapper Labs.

NFTY #54: Designing for composability

Designing for a good developer experience is proving to be more successful

The NFTY News tracks the ever-evolving narrative of how mainstream will enter crypto through user-facing applications. In each edition I explore dApps, games, and the ecosystem affecting consumer crypto applications.

I’ve been having the summer slowdown and haven’t been publishing each week. I hope to get back into the swing of things from here.

Many of the most popular decentralized applications today are products built for developers rather than users. The applications that design for users tend to struggle to attract users and undermine decentralization in order to create a better user experience. But even with the user experience improvements, the products built for developers have a higher total amount of volume passing through the contracts over user-facing dApps.

This is because third-party developers are creating the features & content for applications with composability. In the same way that Minecraft & Roblox became successful from user-generated content and third-party creators, so will many of the most popular decentralized applications today. Dapps that are built as closed ecosystems will have a difficult time finding product-market fit with the increasing amount of substitution products that exist with a similar value proposition.

The puzzle analogy

Everyone in the DeFi community likes to use legos as the metaphor for composability. I see composability more as a puzzle. Pieces can be designed in multiple ways:

  1. One connecting side only (usually user-facing and not developer-facing, like Dharma)

  2. Two or three connecting sides (usually a middleware protocol like Compound, Uniswap, or 0x)

  3. Infinite edges (Coinbase Earn, InstaDapp, Coinmine)

If more dApps are built with composability & open ecosystems in mind, we’d start to build a larger puzzle with more possible edges. When puzzle pieces are latched onto existing pieces, they are deemed more innovative but with less upfront work to build.

We’re currently in the stage of trying to create these one-sided puzzle pieces (What can we build on top of Compound? What can we build on top of Uniswap? What can we build on top of Cheeze Wizards?) We must start looking outside the box to build even larger puzzle pieces.

Developer-focused applications and plug-and-play models have been most successful so far. Here’s a dive into the five products that I think are doing the best work on this front.

1) Compound - the building block for developers

Compound is designed as a puzzle piece with four edges, allowing developers to plug into it in multiple ways. This gave rise to products like PoolTogether, a no-loss lottery. Since launching V2, Compound has seen more growth than any other middleware protocol, with seven different projects using Compound's contracts to allow users to earn interest by supplying their digital assets.

Compound’s interest could also be a fascinating way to pay for gas in the future (supply DAI in a smart contract wallet and get x free transactions per month based upon how much borrow power you have).

2) CoinMine - plug into any protocol and deploy funds anywhere with low-risk

I talk about Coinmine a lot on this blog - but there's something magical about being able to earn without any risk and then being able to deploy in contracts and potentially earn more. Coinmine sets itself up as a way for any user to enter risky contracts with low perceived financial risk because the money already being made is peanuts. Coinmine users can instantly turn their mined ETH into DAI and supply it on Compound to earn more interest.

If Coinmine integrated PoolTogether, Coinmine users can basically mine for lottery tickets. The way the app is designed is for the end-game - for any content to be created and for users to take advantage.

3) InstaDapp - plug into any contract and design features around market conditions

InstaDapp isn't really much of a dApp - it's more of a portal interface. The interface is designed in a way that allows InstaDapp to plug into other contracts rather seamlessly. Since creating the bridge between MakerDAO and Compound, the total amount of ETH has grown quite substantially.

There are a handful of mobile wallets trying to design for decentralized finance interactions (Zerion, Rainbow, Ambo) but if you look closely enough, InstaDapp already has a clear advantage by 1) not focusing on wallet infrastructure and 2) not having to deal with Apple. The focus on being a portal gives the team more flexibility and freedom rather than giving users basic wallet functionalities. A long-term path for InstaDapp is to recommend what contracts the user should interact with based upon fluctuating volatility in price or APR rates.

4) Cheeze Wizards - developers have a sustainable way to build on top of core experiences

Cheeze Wizards is a tournament game run entirely run on-chain, exposing itself to many great benefits including the ability for developers to build features around the game. Developers can spin up their own tournaments using the tournament smart contract and receive a portion of the amount raised.

As more experiences are built on Cheeze Wizards, the easier it would to deploy a tournament and start getting users to contribute - this is a benefit of being on-chain as opposed to using a second-layer scaling solution.

5) Coinbase Earn - distribute & deploy to millions

Coinbase Earn is designed for the end-game. Jacob Horne wrote last year that we are entering the utility stage of crypto, a step up from the speculating stage. Coinbase Earn has found product-market fit for the utility stage:

Similarly to how Coinbase was part of every go-to-market plan for ICOs, Coinbase Earn will be part of many dApps/smart contracts in order to achieve critical mass.

The one part that’s missing for me is how these dApps will incentivize the users of Coinbase Earn without a token of their own. It worked well with MakerDAO because of the design of DAI. I guess this is a problem for Coinbase to solve in the future as they hope to court more tokens with utility.

Disclaimer: I work on helping create a world of infinite possibility at Dapper Labs. All opinions are my own and don’t represent the opinions of Dapper Labs.

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