Pixelmon NFTs are so bad, they are almost good!
Bored Apes prices continue to rise, HAPEBEAST launches, Invisible Friends hype continues to grow. Sadly, not all projects are as successful.
Of course, there are many factors to consider when buying an NFT. Is the project a scam? Will the reveal derail the project? Possibly, but when Pixelmon first teased its launch, it generated a lot of buzz.
With a primary sale mint price of 3 ETH ($8,100 USD), it started as an expensive project, with plenty of fans willing to invest in what was sold as a game. After it was revealed, it fell rapidly.
Why? It was overpromised and under delivered.
According to the project's creator[^1], the funds generated will be used to develop the artwork. "The Pixelmon reveal was wrong. This is what our Pixelmon look like in-game. "Despite the fud, I will not go anywhere," he wrote on Twitter. The goal remains. The funds will still be used to build our game. I will finish this project."
The project raised $70 million USD, but the NFTs buyers received were not the project's original teasers. Some call it "the worst NFT project ever," while others call it a complete scam.
But there's hope for some buyers. Kevin emerged from the ashes as the project was roasted over the fire.
A Minecraft character meets Salad Fingers - that's Kevin. He's a frog-like creature whose reveal was such a terrible NFT that it became part of history – and a meme.
If you're laughing at people paying $8K for a silly pixelated image, you might need to take it back. Precisely because of this, lucky holders who minted Kevin have been able to sell the now-memed NFT for over 8 ETH (around $24,000 USD), with some currently listed for 100 ETH.
Of course, Twitter has been awash in memes mocking those who invested in the project, because what else can you do when so many people lose money?
It's still unclear if the NFT project is a scam, but the team behind it was hired on Upwork. There's still hope for redemption, but Kevin's rise to fame appears to be the only positive outcome so far.
[^1] This is not the first time the creator (A 20-yo New Zealanders) has sought money via an online platform and had people claiming he under-delivered. He raised $74,000 on Kickstarter for a card game called Psycho Chicken. There are hundreds of comments on the Kickstarter project saying they haven't received the product and pleading for a refund or an update.
More on NFTs & Art
Scott Duke Kominers
3 years ago
NFT Creators Go Creative Commons Zero (cc0)
On January 1, "Public Domain Day," thousands of creative works immediately join the public domain. The original creator or copyright holder loses exclusive rights to reproduce, adapt, or publish the work, and anybody can use it. It happens with movies, poems, music, artworks, books (where creative rights endure 70 years beyond the author's death), and sometimes source code.
Public domain creative works open the door to new uses. 400,000 sound recordings from before 1923, including Winnie-the-Pooh, were released this year. With most of A.A. Milne's 1926 Winnie-the-Pooh characters now available, we're seeing innovative interpretations Milne likely never planned. The ancient hyphenated version of the honey-loving bear is being adapted for a horror movie: "Winnie-the-Pooh: Blood and Honey"... with Pooh and Piglet as the baddies.
Counterintuitively, experimenting and recombination can occasionally increase IP value. Open source movements allow the public to build on (or fork and duplicate) existing technologies. Permissionless innovation helps Android, Linux, and other open source software projects compete. Crypto's success at attracting public development is also due to its support of open source and "remix culture," notably in NFT forums.
Production memes
NFT projects use several IP strategies to establish brands, communities, and content. Some preserve regular IP protections; others offer NFT owners the opportunity to innovate on connected IP; yet others have removed copyright and other IP safeguards.
By using the "Creative Commons Zero" (cc0) license, artists can intentionally select for "no rights reserved." This option permits anyone to benefit from derivative works without legal repercussions. There's still a lot of confusion between copyrights and NFTs, so nothing here should be considered legal, financial, tax, or investment advice. Check out this post for an overview of copyright vulnerabilities with NFTs and how authors can protect owners' rights. This article focuses on cc0.
Nouns, a 2021 project, popularized cc0 for NFTs. Others followed, including: A Common Place, Anonymice, Blitmap, Chain Runners, Cryptoadz, CryptoTeddies, Goblintown, Gradis, Loot, mfers, Mirakai, Shields, and Terrarium Club are cc0 projects.
Popular crypto artist XCOPY licensed their 1-of-1 NFT artwork "Right-click and Save As Guy" under cc0 in January, exactly one month after selling it. cc0 has spawned many derivatives.
"Right-click Save As Guy" by XCOPY (1)/derivative works (2)
XCOPY said Monday he would apply cc0 to "all his existing art." "We haven't seen a cc0 summer yet, but I think it's approaching," said the artist. - predicting a "DeFi summer" in 2020, when decentralized finance gained popularity.
Why do so many NFT authors choose "no rights"?
Promoting expansions of the original project to create a more lively and active community is one rationale. This makes sense in crypto, where many value open sharing and establishing community.
Creativity depends on cultural significance. NFTs may allow verifiable ownership of any digital asset, regardless of license, but cc0 jumpstarts "meme-ability" by actively, not passively, inviting derivative works. As new derivatives are made and shared, attention might flow back to the original, boosting its reputation. This may inspire new interpretations, leading in a flywheel effect where each derivative adds to the original's worth - similar to platform network effects, where platforms become more valuable as more users join them.
cc0 licence allows creators "seize production memes."
Physical items are also using cc0 NFT assets, thus it's not just a digital phenomenon. The Nouns Vision initiative turned the square-framed spectacles shown on each new NounsDAO NFT ("one per day, forever") into luxury sunglasses. Blitmap's pixel-art has been used on shoes, apparel, and caps. In traditional IP regimes, a single owner controls creation, licensing, and production.
The physical "blitcap" (3rd level) is a descendant of the trait in the cc0 Chain Runners collection (2nd), which uses the "logo" from cc0 Blitmap (1st)! The Logo is Blitmap token #84 and has been used as a trait in various collections. The "Dom Rose" is another popular token. These homages reference Blitmap's influence as a cc0 leader, as one of the earliest NFT projects to proclaim public domain intents. A new collection, Citizens of Tajigen, emerged last week with a Blitcap characteristic.
These derivatives can be a win-win for everyone, not just the original inventors, especially when using NFT assets to establish unique brands. As people learn about the derivative, they may become interested in the original. If you see someone wearing Nouns glasses on the street (or in a Super Bowl ad), you may desire a pair, but you may also be interested in buying an original NounsDAO NFT or related derivative.
Blitmap Logo Hat (1), Chain Runners #780 ft. Hat (2), and Blitmap Original "Logo #87" (3)
Co-creating open source
NFTs' power comes from smart contract technology's intrinsic composability. Many smart contracts can be integrated or stacked to generate richer applications.
"Money Legos" describes how decentralized finance ("DeFi") smart contracts interconnect to generate new financial use cases. Yearn communicates with MakerDAO's stablecoin $DAI and exchange liquidity provider Curve by calling public smart contract methods. NFTs and their underlying smart contracts can operate as the base-layer framework for recombining and interconnecting culture and creativity.
cc0 gives an NFT's enthusiast community authority to develop new value layers whenever, wherever, and however they wish.
Multiple cc0 projects are playable characters in HyperLoot, a Loot Project knockoff.
Open source and Linux's rise are parallels. When the internet was young, Microsoft dominated the OS market with Windows. Linux (and its developer Linus Torvalds) championed a community-first mentality, freely available the source code without restrictions. This led to developers worldwide producing new software for Linux, from web servers to databases. As people (and organizations) created world-class open source software, Linux's value proposition grew, leading to explosive development and industry innovation. According to Truelist, Linux powers 96.3% of the top 1 million web servers and 85% of smartphones.
With cc0 licensing empowering NFT community builders, one might hope for long-term innovation. Combining cc0 with NFTs "turns an antagonistic game into a co-operative one," says NounsDAO cofounder punk4156. It's important on several levels. First, decentralized systems from open source to crypto are about trust and coordination, therefore facilitating cooperation is crucial. Second, the dynamics of this cooperation work well in the context of NFTs because giving people ownership over their digital assets allows them to internalize the results of co-creation through the value that accrues to their assets and contributions, which incentivizes them to participate in co-creation in the first place.
Licensed to create
If cc0 projects are open source "applications" or "platforms," then NFT artwork, metadata, and smart contracts provide the "user interface" and the underlying blockchain (e.g., Ethereum) is the "operating system." For these apps to attain Linux-like potential, more infrastructure services must be established and made available so people may take advantage of cc0's remixing capabilities.
These services are developing. Zora protocol and OpenSea's open source Seaport protocol enable open, permissionless NFT marketplaces. A pixel-art-rendering engine was just published on-chain to the Ethereum blockchain and integrated into OKPC and ICE64. Each application improves blockchain's "out-of-the-box" capabilities, leading to new apps created from the improved building blocks.
Web3 developer growth is at an all-time high, yet it's still a small fraction of active software developers globally. As additional developers enter the field, prospective NFT projects may find more creative and infrastructure Legos for cc0 and beyond.
Electric Capital Developer Report (2021), p. 122
Growth requires composability. Users can easily integrate digital assets developed on public standards and compatible infrastructure into other platforms. The Loot Project is one of the first to illustrate decentralized co-creation, worldbuilding, and more in NFTs. This example was low-fi or "incomplete" aesthetically, providing room for imagination and community co-creation.
Loot began with a series of Loot bag NFTs, each listing eight "adventure things" in white writing on a black backdrop (such as Loot Bag #5726's "Katana, Divine Robe, Great Helm, Wool Sash, Divine Slippers, Chain Gloves, Amulet, Gold Ring"). Dom Hofmann's free Loot bags served as a foundation for the community.
Several projects have begun metaphorical (lore) and practical (game development) world-building in a short time, with artists contributing many variations to the collective "Lootverse." They've produced games (Realms & The Crypt), characters (Genesis Project, Hyperloot, Loot Explorers), storytelling initiatives (Banners, OpenQuill), and even infrastructure (The Rift).
Why cc0 and composability? Because consumers own and control Loot bags, they may use them wherever they choose by connecting their crypto wallets. This allows users to participate in multiple derivative projects, such as Genesis Adventurers, whose characters appear in many others — creating a decentralized franchise not owned by any one corporation.
Genesis Project's Genesis Adventurer (1) with HyperLoot (2) and Loot Explorer (3) versions
When to go cc0
There are several IP development strategies NFT projects can use. When it comes to cc0, it’s important to be realistic. The public domain won't make a project a runaway success just by implementing the license. cc0 works well for NFT initiatives that can develop a rich, enlarged ecosystem.
Many of the most successful cc0 projects have introduced flexible intellectual property. The Nouns brand is as obvious for a beer ad as for real glasses; Loot bags are simple primitives that make sense in all adventure settings; and the Goblintown visual style looks good on dwarfs, zombies, and cranky owls as it does on Val Kilmer.
The ideal cc0 NFT project gives builders the opportunity to add value:
vertically, by stacking new content and features directly on top of the original cc0 assets (for instance, as with games built on the Loot ecosystem, among others), and
horizontally, by introducing distinct but related intellectual property that helps propagate the original cc0 project’s brand (as with various Goblintown derivatives, among others).
These actions can assist cc0 NFT business models. Because cc0 NFT projects receive royalties from secondary sales, third-party extensions and derivatives can boost demand for the original assets.
Using cc0 license lowers friction that could hinder brand-reinforcing extensions or lead to them bypassing the original. Robbie Broome recently argued (in the context of his cc0 project A Common Place) that giving away his IP to cc0 avoids bad rehashes down the line. If UrbanOutfitters wanted to put my design on a tee, they could use the actual work instead of hiring a designer. CC0 can turn competition into cooperation.
Community agreement about core assets' value and contribution can help cc0 projects. Cohesion and engagement are key. Using the above examples: Developers can design adventure games around whatever themes and item concepts they desire, but many choose Loot bags because of the Lootverse's community togetherness. Flipmap shared half of its money with the original Blitmap artists in acknowledgment of that project's core role in the community. This can build a healthy culture within a cc0 project ecosystem. Commentator NiftyPins said it was smart to acknowledge the people that constructed their universe. Many OG Blitmap artists have popped into the Flipmap discord to share information.
cc0 isn't a one-size-fits-all answer; NFTs formed around well-established brands may prefer more restrictive licenses to preserve their intellectual property and reinforce exclusivity. cc0 has some superficial similarities to permitting NFT owners to market the IP connected with their NFTs (à la Bored Ape Yacht Club), but there is a significant difference: cc0 holders can't exclude others from utilizing the same IP. This can make it tougher for holders to develop commercial brands on cc0 assets or offer specific rights to partners. Holders can still introduce enlarged intellectual property (such as backstories or derivatives) that they control.
Blockchain technologies and the crypto ethos are decentralized and open-source. This makes it logical for crypto initiatives to build around cc0 content models, which build on the work of the Creative Commons foundation and numerous open source pioneers.
NFT creators that choose cc0 must select how involved they want to be in building the ecosystem. Some cc0 project leaders, like Chain Runners' developers, have kept building on top of the initial cc0 assets, creating an environment derivative projects can plug into. Dom Hofmann stood back from Loot, letting the community lead. (Dom is also working on additional cc0 NFT projects for the company he formed to build Blitmap.) Other authors have chosen out totally, like sartoshi, who announced his exit from the cc0 project he founded, mfers, and from the NFT area by publishing a final edition suitably named "end of sartoshi" and then deactivating his Twitter account. A multi-signature wallet of seven mfers controls the project's smart contract.
cc0 licensing allows a robust community to co-create in ways that benefit all members, regardless of original creators' continuous commitment. We foresee more organized infrastructure and design patterns as NFT matures. Like open source software, value capture frameworks may see innovation. (We could imagine a variant of the "Sleepycat license," which requires commercial software to pay licensing fees when embedding open source components.) As creators progress the space, we expect them to build unique rights and licensing strategies. cc0 allows NFT producers to bootstrap ideas that may take off.
Protos
3 years ago
Plagiarism on OpenSea: humans and computers
OpenSea, a non-fungible token (NFT) marketplace, is fighting plagiarism. A new “two-pronged” approach will aim to root out and remove copies of authentic NFTs and changes to its blue tick verified badge system will seek to enhance customer confidence.
According to a blog post, the anti-plagiarism system will use algorithmic detection of “copymints” with human reviewers to keep it in check.
Last year, NFT collectors were duped into buying flipped images of the popular BAYC collection, according to The Verge. The largest NFT marketplace had to remove its delay pay minting service due to an influx of copymints.
80% of NFTs removed by the platform were minted using its lazy minting service, which kept the digital asset off-chain until the first purchase.
NFTs copied from popular collections are opportunistic money-grabs. Right-click, save, and mint the jacked JPEGs that are then flogged as an authentic NFT.
The anti-plagiarism system will scour OpenSea's collections for flipped and rotated images, as well as other undescribed permutations. The lack of detail here may be a deterrent to scammers, or it may reflect the new system's current rudimentary nature.
Thus, human detectors will be needed to verify images flagged by the detection system and help train it to work independently.
“Our long-term goal with this system is two-fold: first, to eliminate all existing copymints on OpenSea, and second, to help prevent new copymints from appearing,” it said.
“We've already started delisting identified copymint collections, and we'll continue to do so over the coming weeks.”
It works for Twitter, why not OpenSea
OpenSea is also changing account verification. Early adopters will be invited to apply for verification if their NFT stack is worth $100 or more. OpenSea plans to give the blue checkmark to people who are active on Twitter and Discord.
This is just the beginning. We are committed to a future where authentic creators can be verified, keeping scammers out.
Also, collections with a lot of hype and sales will get a blue checkmark. For example, a new NFT collection sold by the verified BAYC account will have a blue badge to verify its legitimacy.
New requests will be responded to within seven days, according to OpenSea.
These programs and products help protect creators and collectors while ensuring our community can confidently navigate the world of NFTs.
By elevating authentic content and removing plagiarism, these changes improve trust in the NFT ecosystem, according to OpenSea.
OpenSea is indeed catching up with the digital art economy. Last August, DevianArt upgraded its AI image recognition system to find stolen tokenized art on marketplaces like OpenSea.
It scans all uploaded art and compares it to “public blockchain events” like Ethereum NFTs to detect stolen art.
middlemarch.eth
3 years ago
ERC721R: A new ERC721 contract for random minting so people don’t snipe all the rares!
That is, how to snipe all the rares without using ERC721R!
Introduction: Blessed and Lucky
Mphers was the first mfers derivative, and as a Phunks derivative, I wanted one.
I wanted an alien. And there are only 8 in the 6,969 collection. I got one!
In case it wasn't clear from the tweet, I meant that I was lucky to have figured out how to 100% guarantee I'd get an alien without any extra luck.
Read on to find out how I did it, how you can too, and how developers can avoid it!
How to make rare NFTs without luck.
# How to mint rare NFTs without needing luck
The key to minting a rare NFT is knowing the token's id ahead of time.
For example, once I knew my alien was #4002, I simply refreshed the mint page until #3992 was minted, and then mint 10 mphers.
How did I know #4002 was extraterrestrial? Let's go back.
First, go to the mpher contract's Etherscan page and look up the tokenURI of a previously issued token, token #1:
As you can see, mphers creates metadata URIs by combining the token id and an IPFS hash.
This method gives you the collection's provenance in every URI, and while that URI can be changed, it affects everyone and is public.
Consider a token URI without a provenance hash, like https://mphers.art/api?tokenId=1.
As a collector, you couldn't be sure the devs weren't changing #1's metadata at will.
The API allows you to specify “if #4002 has not been minted, do not show any information about it”, whereas IPFS does not allow this.
It's possible to look up the metadata of any token, whether or not it's been minted.
Simply replace the trailing “1” with your desired id.
Mpher #4002
These files contain all the information about the mpher with the specified id. For my alien, we simply search all metadata files for the string “alien mpher.”
Take a look at the 6,969 meta-data files I'm using OpenSea's IPFS gateway, but you could use ipfs.io or something else.
Use curl to download ten files at once. Downloading thousands of files quickly can lead to duplicates or errors. But with a little tweaking, you should be able to get everything (and dupes are fine for our purposes).
Now that you have everything in one place, grep for aliens:
The numbers are the file names that contain “alien mpher” and thus the aliens' ids.
The entire process takes under ten minutes. This technique works on many NFTs currently minting.
In practice, manually minting at the right time to get the alien is difficult, especially when tokens mint quickly. Then write a bot to poll totalSupply() every second and submit the mint transaction at the exact right time.
You could even look for the token you need in the mempool before it is minted, and get your mint into the same block!
However, in my experience, the “big” approach wins 95% of the time—but not 100%.
“Am I being set up all along?”
Is a question you might ask yourself if you're new to this.
It's disheartening to think you had no chance of minting anything that someone else wanted.
But, did you have no opportunity? You had an equal chance as everyone else!
Take me, for instance: I figured this out using open-source tools and free public information. Anyone can do this, and not understanding how a contract works before minting will lead to much worse issues.
The mpher mint was fair.
While a fair game, “snipe the alien” may not have been everyone's cup of tea.
People may have had more fun playing the “mint lottery” where tokens were distributed at random and no one could gain an advantage over someone simply clicking the “mint” button.
How might we proceed?
Minting For Fashion Hats Punks, I wanted to create a random minting experience without sacrificing fairness. In my opinion, a predictable mint beats an unfair one. Above all, participants must be equal.
Sadly, the most common method of creating a random experience—the post-mint “reveal”—is deeply unfair. It works as follows:
- During the mint, token metadata is unavailable. Instead, tokenURI() returns a blank JSON file for each id.
- An IPFS hash is updated once all tokens are minted.
- You can't tell how the contract owner chose which token ids got which metadata, so it appears random.
Because they alone decide who gets what, the person setting the metadata clearly has a huge unfair advantage over the people minting. Unlike the mpher mint, you have no chance of winning here.
But what if it's a well-known, trusted, doxxed dev team? Are reveals okay here?
No! No one should be trusted with such power. Even if someone isn't consciously trying to cheat, they have unconscious biases. They might also make a mistake and not realize it until it's too late, for example.
You should also not trust yourself. Imagine doing a reveal, thinking you did it correctly (nothing is 100%! ), and getting the rarest NFT. Isn't that a tad odd Do you think you deserve it? An NFT developer like myself would hate to be in this situation.
Reveals are bad*
UNLESS they are done without trust, meaning everyone can verify their fairness without relying on the developers (which you should never do).
An on-chain reveal powered by randomness that is verifiably outside of anyone's control is the most common way to achieve a trustless reveal (e.g., through Chainlink).
Tubby Cats did an excellent job on this reveal, and I highly recommend their contract and launch reflections. Their reveal was also cool because it was progressive—you didn't have to wait until the end of the mint to find out.
In his post-launch reflections, @DefiLlama stated that he made the contract as trustless as possible, removing as much trust as possible from the team.
In my opinion, everyone should know the rules of the game and trust that they will not be changed mid-stream, while trust minimization is critical because smart contracts were designed to reduce trust (and it makes it impossible to hack even if the team is compromised). This was a huge mistake because it limited our flexibility and our ability to correct mistakes.
And @DefiLlama is a superstar developer. Imagine how much stress maximizing trustlessness will cause you!
That leaves me with a bad solution that works in 99 percent of cases and is much easier to implement: random token assignments.
Introducing ERC721R: A fully compliant IERC721 implementation that picks token ids at random.
ERC721R implements the opposite of a reveal: we mint token ids randomly and assign metadata deterministically.
This allows us to reveal all metadata prior to minting while reducing snipe chances.
Then import the contract and use this code:
What is ERC721R and how does it work
First, a disclaimer: ERC721R isn't truly random. In this sense, it creates the same “game” as the mpher situation, where minters compete to exploit the mint. However, ERC721R is a much more difficult game.
To game ERC721R, you need to be able to predict a hash value using these inputs:
This is impossible for a normal person because it requires knowledge of the block timestamp of your mint, which you do not have.
To do this, a miner must set the timestamp to a value in the future, and whatever they do is dependent on the previous block's hash, which expires in about ten seconds when the next block is mined.
This pseudo-randomness is “good enough,” but if big money is involved, it will be gamed. Of course, the system it replaces—predictable minting—can be manipulated.
The token id is chosen in a clever implementation of the Fisher–Yates shuffle algorithm that I copied from CryptoPhunksV2.
Consider first the naive solution: (a 10,000 item collection is assumed):
- Make an array with 0–9999.
- To create a token, pick a random item from the array and use that as the token's id.
- Remove that value from the array and shorten it by one so that every index corresponds to an available token id.
This works, but it uses too much gas because changing an array's length and storing a large array of non-zero values is expensive.
How do we avoid them both? What if we started with a cheap 10,000-zero array? Let's assign an id to each index in that array.
Assume we pick index #6500 at random—#6500 is our token id, and we replace the 0 with a 1.
But what if we chose #6500 again? A 1 would indicate #6500 was taken, but then what? We can't just "roll again" because gas will be unpredictable and high, especially later mints.
This allows us to pick a token id 100% of the time without having to keep a separate list. Here's how it works:
- Make a 10,000 0 array.
- Create a 10,000 uint numAvailableTokens.
- Pick a number between 0 and numAvailableTokens. -1
- Think of #6500—look at index #6500. If it's 0, the next token id is #6500. If not, the value at index #6500 is your next token id (weird!)
- Examine the array's last value, numAvailableTokens — 1. If it's 0, move the value at #6500 to the end of the array (#9999 if it's the first token). If the array's last value is not zero, update index #6500 to store it.
- numAvailableTokens is decreased by 1.
- Repeat 3–6 for the next token id.
So there you go! The array stays the same size, but we can choose an available id reliably. The Solidity code is as follows:
Unfortunately, this algorithm uses more gas than the leading sequential mint solution, ERC721A.
This is most noticeable when minting multiple tokens in one transaction—a 10 token mint on ERC721R costs 5x more than on ERC721A. That said, ERC721A has been optimized much further than ERC721R so there is probably room for improvement.
Conclusion
Listed below are your options:
- ERC721A: Minters pay lower gas but must spend time and energy devising and executing a competitive minting strategy or be comfortable with worse minting results.
- ERC721R: Higher gas, but the easy minting strategy of just clicking the button is optimal in all but the most extreme cases. If miners game ERC721R it’s the worst of both worlds: higher gas and a ton of work to compete.
- ERC721A + standard reveal: Low gas, but not verifiably fair. Please do not do this!
- ERC721A + trustless reveal: The best solution if done correctly, highly-challenging for dev, potential for difficult-to-correct errors.
Did I miss something? Comment or tweet me @dumbnamenumbers.
Check out the code on GitHub to learn more! Pull requests are welcome—I'm sure I've missed many gas-saving opportunities.
Thanks!
Read the original post here
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Jeff Scallop
2 years ago
The Age of Decentralized Capitalism and DeFi
DeCap is DeFi's killer app.
“Software is eating the world.” Marc Andreesen, venture capitalist
DeFi. Imagine a blockchain-based alternative financial system that offers the same products and services as traditional finance, but with more variety, faster, more secure, lower cost, and simpler access.
Decentralised finance (DeFi) is a marketplace without gatekeepers or central authority managing the flow of money, where customers engage directly with smart contracts running on a blockchain.
DeFi grew exponentially in 2020/21, with Total Value Locked (an inadequate estimate for market size) topping at $100 billion. After that, it crashed.
The accumulation of funds by individuals with high discretionary income during the epidemic, the novelty of crypto trading, and the high yields given (5% APY for stablecoins on established platforms to 100%+ for risky assets) are among the primary elements explaining this exponential increase.
No longer your older brothers DeFi
Since transactions are anonymous, borrowers had to overcollateralize DeFi 1.0. To borrow $100 in stablecoins, you must deposit $150 in ETH. DeFi 1.0's business strategy raises two problems.
Why does DeFi offer interest rates that are higher than those of the conventional financial system?;
Why would somebody put down more cash than they intended to borrow?
Maxed out on their own resources, investors took loans to acquire more crypto; the demand for those loans raised DeFi yields, which kept crypto prices increasing; as crypto prices rose, investors made a return on their positions, allowing them to deposit more money and borrow more crypto.
This is a bull market game. DeFi 1.0's overcollateralization speculation is dead. Cryptocrash sank it.
The “speculation by overcollateralisation” world of DeFi 1.0 is dead
At a JP Morgan digital assets conference, institutional investors were more interested in DeFi than crypto or fintech. To me, that shows DeFi 2.0's institutional future.
DeFi 2.0 protocols must handle KYC/AML, tax compliance, market abuse, and cybersecurity problems to be institutional-ready.
Stablecoins gaining market share under benign regulation and more CBDCs coming online in the next couple of years could help DeFi 2.0 separate from crypto volatility.
DeFi 2.0 will have a better footing to finally decouple from crypto volatility
Then we can transition from speculation through overcollateralization to DeFi's genuine comparative advantages: cheaper transaction costs, near-instant settlement, more efficient price discovery, faster time-to-market for financial innovation, and a superior audit trail.
Akin to Amazon for financial goods
Amazon decimated brick-and-mortar shops by offering millions of things online, warehouses by keeping just-in-time inventory, and back-offices by automating invoicing and payments. Software devoured retail. DeFi will eat banking with software.
DeFi is the Amazon for financial items that will replace fintech. Even the most advanced internet brokers offer only 100 currency pairings and limited bonds, equities, and ETFs.
Old banks settlement systems and inefficient, hard-to-upgrade outdated software harm them. For advanced gamers, it's like driving an F1 vehicle on dirt.
It is like driving a F1 car on a dirt road, for the most sophisticated players
Central bankers throughout the world know how expensive and difficult it is to handle cross-border payments using the US dollar as the reserve currency, which is vulnerable to the economic cycle and geopolitical tensions.
Decentralization is the only method to deliver 24h global financial markets. DeFi 2.0 lets you buy and sell startup shares like Google or Tesla. VC funds will trade like mutual funds. Or create a bundle coverage for your car, house, and NFTs. Defi 2.0 consumes banking and creates Global Wall Street.
Defi 2.0 is how software eats banking and delivers the global Wall Street
Decentralized Capitalism is Emerging
90% of markets are digital. 10% is hardest to digitalize. That's money creation, ID, and asset tokenization.
90% of financial markets are already digital. The only problem is that the 10% left is the hardest to digitalize
Debt helped Athens construct a powerful navy that secured trade routes. Bonds financed the Renaissance's wars and supply chains. Equity fueled industrial growth. FX drove globalization's payments system. DeFi's plans:
If the 20th century was a conflict between governments and markets over economic drivers, the 21st century will be between centralized and decentralized corporate structures.
Offices vs. telecommuting. China vs. onshoring/friendshoring. Oil & gas vs. diverse energy matrix. National vs. multilateral policymaking. DAOs vs. corporations Fiat vs. crypto. TradFi vs.
An age where the network effects of the sharing economy will overtake the gains of scale of the monopolistic competition economy
This is the dawn of Decentralized Capitalism (or DeCap), an age where the network effects of the sharing economy will reach a tipping point and surpass the scale gains of the monopolistic competition economy, further eliminating inefficiencies and creating a more robust economy through better data and automation. DeFi 2.0 enables this.
DeFi needs to pay the piper now.
DeCap won't be Web3.0's Shangri-La, though. That's too much for an ailing Atlas. When push comes to shove, DeFi folks want to survive and fight another day for the revolution. If feasible, make a tidy profit.
Decentralization wasn't meant to circumvent regulation. It circumvents censorship. On-ramp, off-ramp measures (control DeFi's entry and exit points, not what happens in between) sound like a good compromise for DeFi 2.0.
The sooner authorities realize that DeFi regulation is made ex-ante by writing code and constructing smart contracts with rules, the faster DeFi 2.0 will become the more efficient and safe financial marketplace.
More crucially, we must boost system liquidity. DeFi's financial stability risks are downplayed. DeFi must improve its liquidity management if it's to become mainstream, just as banks rely on capital constraints.
This reveals the complex and, frankly, inadequate governance arrangements for DeFi protocols. They redistribute control from tokenholders to developers, which is bad governance regardless of the economic model.
But crypto can only ride the existing banking system for so long before forming its own economy. DeFi will upgrade web2.0's financial rails till then.
Simone Basso
3 years ago
How I set up my teams to be successful
After 10 years of working in scale-ups, I've embraced a few concepts for scaling Tech and Product teams.
First, cross-functionalize teams. Product Managers represent the business, Product Designers the consumer, and Engineers build.
I organize teams of 5-10 individuals, following AWS's two pizza teams guidelines, with a Product Trio guiding each.
If more individuals are needed to reach a goal, I group teams under a Product Trio.
With Engineering being the biggest group, Staff/Principal Engineers often support the Trio on cross-team technical decisions.
Product Managers, Engineering Managers, or Engineers in the team may manage projects (depending on the project or aim), but the trio is collectively responsible for the team's output and outcome.
Once the Product Trio model is created, roles, duties, team ceremonies, and cooperation models must be clarified.
Keep reporting lines by discipline. Line managers are accountable for each individual's advancement, thus it's crucial that they know the work in detail.
Cross-team collaboration becomes more important after 3 teams (15-30 people). Teams can easily diverge in how they write code, run ceremonies, and build products.
Establishing groups of people that are cross-team, but grouped by discipline and skills, sharing and agreeing on working practices becomes critical.
The “Spotify Guild” model has been where I’ve taken a lot of my inspiration from.
Last, establish a taxonomy for communication channels.
In Slack, I create one channel per team and one per guild (and one for me to have discussions with the team leads).
These are just some of the basic principles I follow to organize teams.
A book I particularly like about team types and how they interact with each other is https://teamtopologies.com/.
Ajay Shrestha
2 years ago
Bitcoin's technical innovation: addressing the issue of the Byzantine generals
The 2008 Bitcoin white paper solves the classic computer science consensus problem.
Issue Statement
The Byzantine Generals Problem (BGP) is called after an allegory in which several generals must collaborate and attack a city at the same time to win (figure 1-left). Any general who retreats at the last minute loses the fight (figure 1-right). Thus, precise messengers and no rogue generals are essential. This is difficult without a trusted central authority.
In their 1982 publication, Leslie Lamport, Robert Shostak, and Marshall Please termed this topic the Byzantine Generals Problem to simplify distributed computer systems.
Consensus in a distributed computer network is the issue. Reaching a consensus on which systems work (and stay in the network) and which don't makes maintaining a network tough (i.e., needs to be removed from network). Challenges include unreliable communication routes between systems and mis-reporting systems.
Solving BGP can let us construct machine learning solutions without single points of failure or trusted central entities. One server hosts model parameters while numerous workers train the model. This study describes fault-tolerant Distributed Byzantine Machine Learning.
Bitcoin invented a mechanism for a distributed network of nodes to agree on which transactions should go into the distributed ledger (blockchain) without a trusted central body. It solved BGP implementation. Satoshi Nakamoto, the pseudonymous bitcoin creator, solved the challenge by cleverly combining cryptography and consensus mechanisms.
Disclaimer
This is not financial advice. It discusses a unique computer science solution.
Bitcoin
Bitcoin's white paper begins:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” Source: https://www.ussc.gov/sites/default/files/pdf/training/annual-national-training-seminar/2018/Emerging_Tech_Bitcoin_Crypto.pdf
Bitcoin's main parts:
The open-source and versioned bitcoin software that governs how nodes, miners, and the bitcoin token operate.
The native kind of token, known as a bitcoin token, may be created by mining (up to 21 million can be created), and it can be transferred between wallet addresses in the bitcoin network.
Distributed Ledger, which contains exact copies of the database (or "blockchain") containing each transaction since the first one in January 2009.
distributed network of nodes (computers) running the distributed ledger replica together with the bitcoin software. They broadcast the transactions to other peer nodes after validating and accepting them.
Proof of work (PoW) is a cryptographic requirement that must be met in order for a miner to be granted permission to add a new block of transactions to the blockchain of the cryptocurrency bitcoin. It takes the form of a valid hash digest. In order to produce new blocks on average every 10 minutes, Bitcoin features a built-in difficulty adjustment function that modifies the valid hash requirement (length of nonce). PoW requires a lot of energy since it must continually generate new hashes at random until it satisfies the criteria.
The competing parties known as miners carry out continuous computing processing to address recurrent cryptography issues. Transaction fees and some freshly minted (mined) bitcoin are the rewards they receive. The amount of hashes produced each second—or hash rate—is a measure of mining capacity.
Cryptography, decentralization, and the proof-of-work consensus method are Bitcoin's most unique features.
Bitcoin uses encryption
Bitcoin employs this established cryptography.
Hashing
digital signatures based on asymmetric encryption
Hashing (SHA-256) (SHA-256)
Hashing converts unique plaintext data into a digest. Creating the plaintext from the digest is impossible. Bitcoin miners generate new hashes using SHA-256 to win block rewards.
A new hash is created from the current block header and a variable value called nonce. To achieve the required hash, mining involves altering the nonce and re-hashing.
The block header contains the previous block hash and a Merkle root, which contains hashes of all transactions in the block. Thus, a chain of blocks with increasing hashes links back to the first block. Hashing protects new transactions and makes the bitcoin blockchain immutable. After a transaction block is mined, it becomes hard to fabricate even a little entry.
Asymmetric Cryptography Digital Signatures
Asymmetric cryptography (public-key encryption) requires each side to have a secret and public key. Public keys (wallet addresses) can be shared with the transaction party, but private keys should not. A message (e.g., bitcoin payment record) can only be signed by the owner (sender) with the private key, but any node or anybody with access to the public key (visible in the blockchain) can verify it. Alex will submit a digitally signed transaction with a desired amount of bitcoin addressed to Bob's wallet to a node to send bitcoin to Bob. Alex alone has the secret keys to authorize that amount. Alex's blockchain public key allows anyone to verify the transaction.
Solution
Now, apply bitcoin to BGP. BGP generals resemble bitcoin nodes. The generals' consensus is like bitcoin nodes' blockchain block selection. Bitcoin software on all nodes can:
Check transactions (i.e., validate digital signatures)
2. Accept and propagate just the first miner to receive the valid hash and verify it accomplished the task. The only way to guess the proper hash is to brute force it by repeatedly producing one with the fixed/current block header and a fresh nonce value.
Thus, PoW and a dispersed network of nodes that accept blocks from miners that solve the unfalsifiable cryptographic challenge solve consensus.
Suppose:
Unreliable nodes
Unreliable miners
Bitcoin accepts the longest chain if rogue nodes cause divergence in accepted blocks. Thus, rogue nodes must outnumber honest nodes in accepting/forming the longer chain for invalid transactions to reach the blockchain. As of November 2022, 7000 coordinated rogue nodes are needed to takeover the bitcoin network.
Dishonest miners could also try to insert blocks with falsified transactions (double spend, reverse, censor, etc.) into the chain. This requires over 50% (51% attack) of miners (total computational power) to outguess the hash and attack the network. Mining hash rate exceeds 200 million (source). Rewards and transaction fees encourage miners to cooperate rather than attack. Quantum computers may become a threat.
Visit my Quantum Computing post.
Quantum computers—what are they? Quantum computers will have a big influence. towardsdatascience.com
Nodes have more power than miners since they can validate transactions and reject fake blocks. Thus, the network is secure if honest nodes are the majority.
Summary
Table 1 compares three Byzantine Generals Problem implementations.
Bitcoin white paper and implementation solved the consensus challenge of distributed systems without central governance. It solved the illusive Byzantine Generals Problem.
Resources
Resources
Source-code for Bitcoin Core Software — https://github.com/bitcoin/bitcoin
Bitcoin white paper — https://bitcoin.org/bitcoin.pdf
https://www.microsoft.com/en-us/research/publication/byzantine-generals-problem/
https://www.microsoft.com/en-us/research/uploads/prod/2016/12/The-Byzantine-Generals-Problem.pdf
Genuinely Distributed Byzantine Machine Learning, El-Mahdi El-Mhamdi et al., 2020. ACM, New York, NY, https://doi.org/10.1145/3382734.3405695