November 15, 2023

Blockchain, Crypto & NFTs

The Seedfunders Podcast
The Seedfunders Podcast
Blockchain, Crypto & NFTs

Show Notes

Hello Sir.

Good afternoon Joe.

You look puzzled.

Well Joe actually, I am. I’ve been researching a lot about Blockchain, and I feel like a blockhead. I’ve seen a lot lately about these startups. They’re using blockchain, cryptocurrency and now something called non-fungible tokens. What the heck is that? So, I decided to do some research. One of the first things I find out is that, you just won a top award from the Global Blockchain Association just a few weeks ago. I believe it was called the Global Impact Award. Since you’re obviously an expert. I think I should ask you the questions

I’m not an expert, but I think that I can lend a hand in helping to understand. So, where do you want to start?

Let’s start. What exactly is blockchain?

A blockchain is a ledger. It’s essentially transactions or any kind of tracking of movement of money or goods or whatever. A blockchain is essentially a public immutable ledger. It can track any kinds of transactions. Just like you would put transactions into a standard ledger, with these the transactions go in a block. Then the block is added to the previous blocks to create a chain. What that does is, actually provide a history of all the transactions as the blocks are all linked together through the chain that you can search, and track anything back through history.

That’s the word blockchain, right? I got it. I’m getting there. So, why is it useful?

It’s useful for a lot of reasons, but probably the most important one is that it eliminates the need for trust. One thing I didn’t mention previously is that that ledger is shared by everybody. So, everybody has this entire chain available to them. Everybody has copies of it. It eliminates the need to trust, because you can just go check your own blockchain. With eliminating or reducing the need to trust, it reduces or eliminates the need for intermediaries that act as trusted agents in certain situations.

When you say everybody has access to it, is that everybody in the world?

Pretty much, yeah. Everybody in the world can do a search on the blockchain. It’s open to be searched. But then, individual folks have complete copies of it as well. Then there are services that let you search the blockchain as well.

Why is it useful?

It’s useful in any ways that eliminating the middleman or eliminating trust would be useful. A really cool example is a DAO called compound. I’m going to give you a new acronym that you can throw out at the cocktail party next time. A DAO stands for Decentralized Autonomous Organization. What compound is, is essentially a banking protocol. What you can do is put dollars into compound and receive tokens, which we’ll get to a little bit later. Then if folks want to borrow those dollars, they can bring their currency like a bitcoin in. Put their currency into compound – the DAO. And pull out some percentage of dollars relative to the value of the bitcoin.

Just like a normal bank might have 80% loan to a value ratio on a house, the DAO sets the terms that maybe you can borrow 60% of the value of your bitcoin just in case there’s any kind of volatility. People take their cash out. They use it and then they pay it back with interest. Then they get their bitcoin back. The folks who put that money into compound earn that interest. It essentially opens up banking to the whole world. You can see here, because it’s all recorded on the blockchain, and it’s immutable. There is no need to actually have the bank, which means you can cut out that middle man. And allows any person to access loaning their money out and receiving income on the interest.

Wow, are there any significant issues in using these systems?

There are. For startups, a lot of it is people try to use blockchain when it’s not necessary. Blockchain because you have this immutable record that’s shared by everybody. If you’ve heard of mining, what mining essentially is, is verifying the blockchain. Miners get paid for that, which means that using the blockchain costs money. Traditionally, we think of, “I have a database. I put data into it.” It doesn’t really cost them anything other than the cost of employees to monitor it or whatever. But there’s actually transaction costs associated with the blockchain.

Right now, because there are a few dominant blockchains, and there’s a lot of demand on them, the price can get pretty expensive for doing transactions. That right now is a big drawback. As more blockchains come into existence, and certain blockchains find their way to be used for certain things, then the price points should come to match the value of the transactions that happen on this blockchain.

Another one is the political issues, because the example I gave for compound. There’s like $100 million flowing through compound at any one time. But nobody technically owns it. So, it’s still a really grey area politically for how to think of a cryptocurrency from an ownership and tax standpoint. And how to think of these protocols that can run autonomously from a regulatory and tax standpoint. Those are some of the main issues that we’re seeing right now. The technology itself is pretty straightforward.

You said cryptocurrency. What is that? And how does that play into this whole system?

Cryptocurrency is kind of a misnomer. Not that anybody purposely branded this, but that was a real branding mistake. Tokens, which are essentially what people call crypto. Tokens are simply stores of value. The same way a stock may be a store of value. Yes, that was unfortunate that it was called cryptocurrencies, because they’re not really currencies in the traditional sense. They are stores of value that represent some utility underneath them. It’s almost like you could think of them better – for startup purposes – as a stock. It’s a way that people fund startups now. People will buy tokens. Then the recipients of the funds from those tokens – the project owners – will take those tokens and build their project. If the project works, the value then goes back up into those tokens increasing their value.

It’s really much more like a stock or investment vehicle than it is like a currency. But, that being said, some of the purposes of those projects could be for exchanging value and being like a currency or storing value in general which is bitcoin. Its purpose is to be gold – a digital gold. It’s a deflationary asset in that there’s only 21 million. Like regular gold, which actually regular gold isn’t completely demand side driven. Because if there’s a bigger demand for gold, people will increase their mining operations or if there’s a decrease in the price for gold, they’ll decrease the mining operations.

So, there is actually some supply impact. But bitcoin is truly demand-driven. There’s a finite amount. As the value goes up, it actually deflates the pricing for bitcoin. But because of that, it’s not really great in transacting in, because it’s only going to get more expensive like gold. So, now there are other cryptocurrencies or other tokens that try to be transactional. But that’s simply their function. It could be one of many functions.

It’s not really money, but it’s kind of stock or gold.

Yeah, it is what its purpose is. There’s things called Litecoin for example is the one that’s really trying to be a transactionary vehicle. You may go to the store and pay with Litecoin someday. But then there are dozens of other tokens which you would never go and pay with. But they’re all lumped under the term cryptocurrency.

You mentioned startups using this to actually raise funds versus selling equity. Since we’re talking about startups here, can you explain that a little bit better?

I think this is going to be huge. This is falling on the hills of – this is even a more liquid and accessible way to fund startups in the sense of crowdfunding. That is completely unregulated. If a project wants to raise capital, it can create a token and say, “Here is our token.” I’ll give you an example. Say, we wanted to have the biggest gift card store on the planet, and we needed to build it. So, we’re going to sell gift card coin or whatever. And we raise all of this money. Then we build this big platform with that money to sell these gift cards and say every gift card charges the 7% fee to the platform for selling the gift card. That 7% fee minus the operating expenses, we could absorb back up into the token. Then those tokens once they’re offered on exchange are completely liquid. You could invest in the projects by buying the token. Receive value into the token as the price goes up, because it’s receiving the revenue from the gift card store. And then that any time, sell those tokens on a decentralized exchange.

You say, it’s not really regulated. What does the SEC have to say about this?

That’s evolving on the time. I would say, Google have the most current answers. But right now, they’re mostly treating them like securities. If you buy bitcoin and then sell bitcoin. A lot of the exchanges are falling in the Know Your Customer laws like any transaction exchange would in America, at least. They’ll treat it like a capital gains exercise in these instances. Because a lot of people in that sense are buying and selling them. But where it gets a little bit different is if you put currency or put your money onto the system and buy coins, but then use those coins for things that are completely outside of just investing the actual functional use of the tokens like to buy an NFT or to buy a ticket to something or whatever. Then it just becomes an expense. There’s still a lot of work to do with regulating crypto.

You said NFT, my research shows that means non-fungible tokens. I’m afraid to even ask about that.

They’re actually quite simple. Fungible means swappable, right? I have a dollar, you have a dollar. We can swap them. It’s worth the same. Those are fungible. Non-fungible is simply the opposite of that. It’s a unique one-off indicator. There’s just one of a kind. What it essentially does is, anytime you would want to use one of a kindness in the digital world, you would use an NFT. That could be as simple as a ticket. Every ticket has its own seat and its own ID number. When you go to a concert or a sporting event, sell a ticket or even as we see now getting email tickets. That’s essentially what an NFT could be considered.

What’s more popular are NFTs as art, because they’re selling for tens of millions of dollars. Again there, it’s an interesting dive into what is rarity really. So, if you look at something like the Gettysburg address, it is insanely valuable. Priceless, you might argue but at the end of the day it’s just ink on paper, right? What makes it valuable is that it is a store of the historical event it represents. Its perceived rarity. Its place in time, but it is just ink on paper.

If Elon Musk gets to Mars and does the Mars address, that’s most likely not going to be written on paper. That’s going to be typed into a computer. It could be wrapped into an NFT to represent digitally the original. If you understand what comprises a rarity in something, the only leap between an NFT of the Mars address and the physical Gettysburg address is paper or non-paper. It’s just most of the value you wouldn’t say is in the value of the piece of paper. It’s in what it represents. That’s just transferred into the digital world as an NFT.

It would be interesting to know what Abraham Lincoln would think about all this. I’d like to talk a little bit about your award. The article I read said that you made a pitch for catalyst meta cities. What is that?

I’m really in love with this idea. I’ve been working on it for over a year. Essentially, it’s come out of working on the Catalyst which is our news platform, and seeing the community coalesce around that. It made me realize that we don’t have an online home for our civic self. When we think being professional, we go to LinkedIn. When we think about our friends and family social network, we go to Facebook. But even there, most people aren’t connected to their neighbors. That Nextdoor came along and served the neighborhood. That is going public now at 4.2 billion I think. Nobody really yet had served the city.

I started looking at how we could do that. One of the big challenges with social media is, how do you get enough incentives to get people to fill the platform with user-generated content? We set about solving that problem. And we’ll accomplish that by providing tools. For example, we’ll give every artist an online art gallery, every neighborhood association – a neighborhood newsletter and a calendar. High schools could have an online news platform or sports reporting tool, because the larger news organizations aren’t covering high school sports anymore. Then we can stitch all that content together to create an online experience that sort of mirrors. I call it a digital overlay for the physical city. And it has an online city experience. Once we have that attention and content as a base layer, we can start to add some on-platform in the meta city cool things.

For example, we mentioned NFTs. So, every artist gets a gallery. You can mint an NFT on demand and buy that from the artist. Gives them a chance to make some additional revenue on their art. Then that NFT would be ported over to your profile. And you could display it, or if you went to a show at the Mahaffey and bought a ticket as an NFT. Then you can enjoy the show and get the special things that came into your VIP NFT. Then that also goes onto your profile. So, when people come to see your profile, they will see which schools you’re associated to, which non-profits, which artists you support, which concerts you’ve gone to. And it becomes a nice civic, online home in the St. Petersburg meta city.

Wow, I saw your recorder saying meta cities bring local to the metaverse. Yeah, what is the metaverse?

The meta verse is the next level of that. It’s essentially, what I am building is connected to the city. The metaverse is really a world unto itself. It is a completely immersive online experience in theory, where you plug into this virtual world, and you just live. You interact and you do all the things presumably that you would do in the real world. Plus, all the things you’re going to unlock when you don’t have the physics holding you back. It is definitely Minecraft or Roblox, if you’re familiar with those games or certain mini-versions of it, where people go in and there’s dozens of people on the platform interacting with each other, and building together and even transacting together.

This would become more advanced as technology allows. I would recommend – if you want a nice popcorn movie. My high school classmate Ernie Cline actually wrote a book that became the movie Ready Player One. It’s a really fun movie. I believe Stephen Spielberg was involved in it. But if you just want to get a quick, very easy to understand view of what the metaverse will be eventually at its fully fleshed out self, watch Ready Player One.

Great, I’ll look it up. Maybe I won’t be such a blockhead after all. So, what does the future hold then?

The future is going to be very disrupted by blockchain. It is going to… I think, one of the biggest things it will do is it will allow people to form groups in unexpected ways. If you think about the bounds of what’s held us together in cities or in countries even, it was typically a shared culture, and a lot of things that were defined by geography. But nowadays – if you think about it – most people if they go into their apartment complex, they may be spending their evenings with best friends or even partners that are 2000 miles away. They may not even recognize the neighbor in the next-door apartment if they saw him walking down the street. What that’s showing is that people are gathering together digitally. If you look at what are the barriers to that happening more prevalently, a lot of them comes down to finance. Certainly, you can work remotely now.

But I think that this decentralization and this trustlessness will open up a lot of the things that were previously only available between trusted intermediaries like the government and banks and things like that. This will make it available for anybody to utilize and form new communities that can pretty much function independently. I think that will be a big change. At the startup level though, there’s just a lot of really powerful new functionality that blockchain will unlock. It’s a matter of seeing which of those companies are on the right track with actually using blockchain where it needs to be used. And unlocking that value and which are trying to find a problem to fit their blockchain solution.

That’s incredible. I think I’m going to home and watch your movie. Thanks Joe. It was great.

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