The Future Of Blockchain, pt 3 - WFM #193
Blockchains Will Revolutionize Everything...But It's Going To Take A While
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The Pessimistic View Of Blockchain
By Elliot Koss, Founder of Future Mints
Last week, I wrote about the optimistic future I see for blockchain technology. And I didn’t have space to cover cool areas such as how blockchain will revolutionize identity management. So yes, I’m very optimistic about the future of blockchain. However. If you paid attention, you noticed that I didn’t add a timeline for when the optimistic view will materialize (except the price of ETH).
There’s one reason I’m pessimistic in the short term for blockchain. Infrastructure.
I was completely wrong about 2022, because I got caught up in the excitement and didn’t pay enough attention to the infrastructure. While we actually built a product, (futuremints.com) 90% of NFT projects did not. Why? Because it’s f*cking hard.
We are in the early days of blockchain, the equivalent of having to build your own servers for your website-based business that you IPO’d in 1999. And like then, the vast majority of money raised went to people who couldn’t execute any part of their vision beyond marketing razzle dazzle. Except this time, there’s a bunch of scammers and fraudsters in the mix, and only a small fraction of them are getting arrested.
Does that mean that I believe that 90% of money invested in web3 / blockchain companies is going to 0? Yes.
In a year or two, we are going to see a ton of companies disappear who raised money with so much promise. Even Fred Wilson thinks that a large number of startups will either die or take a down round (which used to be a super negative signal but for the next 18 months may become normal).
Do VCs care? Nope. Because their business model is to invest across a variety of companies knowing that 5-10% will be winners and pay for all of their investments plus profit. The remaining 90-95% failed businesses will have trained the next batch of employees who will scale the businesses that employees from the few successful companies will found. Let’s call this Startup Fossilization: a foundation of dead startups that seed the next phase of innovation.
And the VC cycle will continue. It’s literally their business model, and it’s going to help ensure that Web3 and blockchain lives up to the optimistic promise we all believe is possible.
But going back to the pessimistic view, we’re going to see a bloodbath of failure over the next 24 months when all the money raised in the last year will run out with little to show for it.
So What’s The Problem With Blockchain?
This comes back to the lack of infrastructure.
Let’s take one of the most common use cases that people mention when trying to convince people that blockchain is the future. Hell, I even mentioned it in the optimistic view. Home titles on the blockchain.
What will it take for that use case to become reality?
First, there needs to be a company that has actually built the product that takes a house title and puts it on the blockchain in a secure manner so that someone can’t lose access to their wallet and thus can’t sell their house. Or have their wallet keys stolen and thus LOSE their house. Those are just the two most obvious scenarios that currently have no good solution. They are not the only scenarios with no good solution.
But let’s imagine the technology problem has actually been solved (which is a big thing to imagine given all the scams and security vulnerabilities in self-custodied wallets). Now what?
Is a homeowner going to simply pay money to change their title from a paper record to an NFT just because they like technology? Maybe some small fraction of a percent, but the overwhelming answer is no. The vast majority of people don’t spend money simply to spend money. And city governments surely don’t have the money to upgrade their paper or digital records to NFTs. Plus, again, what reason would they have to do so? Technology for technology’s sake is not a valid reason for technology to exist. The most compelling time to transition would be when a home sells, but that only happens once every 13 years on average.
This isn’t to say it’s not going to happen (someone has to build this and with 5M+ real estate transactions per year and 140M homes in the US, it would be a solid business. And yes, if 140M homes are sold once every 13 years, then it doesn’t make sense that only 5M+ homes are sold each year but those are the sources 🤷🏻♂️). But the transition time is substantially slower than anyone is talking about.
Which leads me back to why I decided to stop building Future Mints full-time.
I don’t believe that NFT research or notifications will hit mass appeal or even large appeal for a few years (at the earliest 2025). Here’s why:
1. NFT utility is substantially lagging.
Even a large number of people who bought NFTs don’t understand what they can do. Some are so uninformed that they think that digital art is the biggest reason you’d buy an NFT.
The art use case for NFTs is so boring and currently fundamentally flawed. First, what’s the rational reason that the art market is going to suddenly explode to be valued substantially more than it was just a couple years ago? Seriously, I’m asking you, because I have no idea why it would increase. Taking physical art and simply making it digital doesn’t double a market without some other innovation. Hence why I call the art NFT use case boring - it does nothing new. And it’s flawed. The royalty that is supposed to be paid to artists isn’t enforced at the smart contract level but instead at the marketplace. And if you don’t use a marketplace, you bypass paying the royalty. What’s worse is that some marketplaces are allowing NFTs to be listed with 0% paid to the creator. Therefore, I do not believe that art NFTs will see the values from 2021 and early 2022 ever again. Just like traditional art, some will be incredibly valuable, but simply being an art NFT won’t imply value going forward. They’ll need some other utility factor.
2. NFTs will become seamlessly integrated into products. Users won’t know they’re being used.
Starbucks Odyssey is likely going to be the first product that reaches the masses with NFTs. Although they do say ‘NFT’ on the page (it’s minimal and only in definitions) they’ve intentionally branded their rewards ‘stamps’ instead of saying NFTs everywhere.
I’m curious to see the response to this extension of the Starbucks loyalty program. How regular users respond will be a bellwether for how 2023 performs, and my best guess is that it’s going to be a mild response at best.
3. NFTs won’t reach mass adoption for a few years.
There are a few reasons users will stay away from NFTs and crypto. Frauds and scams are at the top of that list. Most people probably don’t realize that FTX was a banking failure. They just see it as another crypto failure or scam led by the biggest fraudster.
Until there’s regulation or a sustained period of normal behavior, mass adoption won’t happen.
And regulation won’t be happening anytime soon. It’s simply not a legislative priority in the US, so how can we expect them to tackle regulating one of the most complex and challenging technologies of our day. The US doesn’t even have a proper federally regulated legislation for social media and privacy. We’re basically just relying on CCPA (California) and GDPR (EU). Even after the 1929 stock market crash, it took 4 years before the first substantial legislation was passed with the Securities Act of 1933.
If you think about the internet, many of us were using it back in the early to mid 90s, and yet mass adoption didn’t happen until the mid 2000s and the explosion of usage didn’t happen until after the first iPhone was released in 2007.
Tying it all together
When we put all of this together, we see that there is a LONG way to go before the technology can solve practical issues AND users have enough trust in the technology to adopt blockchain and NFTs.
It doesn’t mean it won’t happen.
But this is after all the pessimistic view, and I’m not expecting the needle to move substantially for the next 2 or 3 years. Similar to the crypto winter that spanned between 2017 and 2020, we’re going to be in a hibernating period where companies will die and others will be born.
Over the next year, we are going to spend our time exploring the big picture of how blockchain will change our world with the goal of inspiring the next iteration of blockchain founders and entrepreneurs to build the future that we all know is possible.
Cheers to a Happy New Year!
News of the Week
FTX has reportedly recovered more than $5 billion in different assets, “not including another $425 million in crypto held by the Securities Commission of the Bahamas.” Although the total amount FTX owes its creditors is still unclear, the announcement substantially raises the total FTX claims it holds, after the company said it could only find just over $1 billion on Dec. 20, 2022.
Yuga Labs dropped a thread on their upcoming interactive mint. Per Coindesk, the unique drop, which involves multiple steps, begins on Jan. 17 with a free mint of "Sewer Passes” for existing Bored Ape Yacht Club/Mutant Ape Yacht Club holders". These tokens are the key to unlocking a skill-based game called Dookey Dash, which opens for gameplay on Jan. 18.
Despite a climb in ETH price, the crypto winter rages on. Coinbase is expected to spend roughly $150M restructuring their workforce, as the company plans to lay off an additional ~1,000 employees (20%). Estimates suggest that the crypto industry has seen nearly 30,000 jobs lost over the past 8 months.