Welcome to Issue 114:

▹ Week's highlight "Lowlight"
▹ Erik Voorhees on FTX & DeFi
▹ Andy Hall & Ethan BdM on Governance Participation
▹ JGP's Trent Token Curated Registry Thesis
▹ Li Jin throwback creator platforms <> Legitimacy
▹ Matt DesLauriers w/ Social Media Protocols
▹ ... much more

— Let’s get into it!

This week’s highlight is more of a lowlight… but of course, it was the biggest news of the week.

Without digging into the details of the SBF vs. CZ fiasco, let’s quickly discuss the status of FTX leading up to the collapse. According to the Financial Times, FTX exchange held just $900mn in easily sellable assets against $9bn of liabilities the day before it collapsed into bankruptcy.

The largest portion of those liquid assets listed on a FTX international balance sheet dated Thursday was $470mn of Robinhood shares owned by a Bankman-Fried vehicle not listed in Friday’s bankruptcy filing, which included 134 corporate entities.

It’s obvious that FTX had zero intention of keeping customer funds safe, but were instead funneling them into leveraged trades through Alameda, SBF’s hedge fund.

The impact this will have on the space should not be taken lightly – FTX was massive, and the full extent of the ripple effects remain to be seen. However, anyone building in crypto knows that FTX – and every other centralized exchange – aren’t indicative of the reason we’re building in the first place.

Jacob Horne reminded us this week that “protocols offer realtime and verifiable proof of reserves. Platforms built on protocols will get this functionality by default and are trustless.”

In addition to regulation, which at the centralized exchange level is probably needed to ensure that user funds are not being improperly managed by a third-party, our ecosystem needs to double down on building truly decentralized protocols, and more importantly, user-friendly applications built on top of these open protocols.

TAKE NOTE
We hope that folks are able to come out stronger from this news and double down on building what really matters. Crypto isn’t going anywhere, and the FTX debacle is more proof of why open protocols are more necessary than ever.

Sophistry and the Savior. This piece from ShapeShift's founder Erik Voorhees is a rallying call for DeFi. FTX had become a poster child of the “responsible” and “compliant.” FTX operated within the laws, it was “safe and regulated.” With the general public looking down on crypto in the worst way once again in light of this week’s implosion, it’s important to remember that the solution to many of the problems facing the industry today have already been built. With DeFi, accounts are transparent. Transfers are transparent. Trades and even complex financial derivatives are transparent. Balances are proven cryptographically. FTX collapsed because they were able to commit fraud under the guise of morality. A truly decentralized solution wouldn’t have allowed FTX any sort of guise at all.

Yuga Labs Co-Founders On Marketplaces and Creator Royalties. One of the co-founders of Yuga Labs, GordonGoner, published a piece this week on marketplaces and NFT creator royalties. He begins by pointing out that OpenSea has made $35M in revenue from marketplace fees off of Bored Ape Yacht Club secondary sales alone. In light of that, marketplaces across the ecosystem are still racing to the bottom on creator fees. Their solution? “When a transfer comes in, check if it’s a regular wallet making the request. If it’s a normal wallet, then you let it go through… If it’s a smart contract that has initiated this transfer, check against an oracle of contracts that are known to respect royalties. If it matches, let it go through. If not, nope.” Essentially, NFT creators could enforce transfers only by whitelisted addresses (marketplaces) that historically support creator fees. The essay discusses the drawbacks of this approach, but it is certainly a novel experiment.

Paying People to Participate in Governance. This essay from Andy Hall and Ethan BdM for a16z Crypto discusses how projects could reward people for participating in a way that would be hard in the physical world but is easier with blockchain. The team lays out a direct revelation mechanism (with lots of math) that makes it rational for voters to honestly report how much they would need to be rewarded in order to vote. This lets projects pay rewards efficiently—paying only as much as required to secure the level of participation they desire. The piece also addresses the natural concern that simply rewarding participation could lead to bad incentives, with people or bots voting just to reap rewards, with more on this topic coming in a future essay. All in all, experimenting with governance incentives will be critical to increasing activity across the DAO landscape. Analyses like this one are necessary to building a great ecosystem for all users.

Can TCRs Make a Comeback? A Case for Crowdsourced Information in Web3. “Every 6 months or so, a tweet enters the void to the tune of 20 or so likes declaring that ‘20XX is the year of the TCR.’” This is very true, and Trent believes the use case is finally here. First, he examines why TCRs have failed to gain traction in the past, with off-chain data, governance apathy, and legitimacy being key reasons. He believes TCRs will gain traction when they curate information that currently lives on-chain, and which has not been properly curated. Additionally, they must base the system upon reputational reward in a high status and high passion arena: “rather than playing money games, play status games.” Finally, a successful TCR must become the source of truth for such data. While not focused on a specific use case for TCRs, this essay does a great job of laying out the previous downfalls of the technology and how it can succeed moving forward.

Social Media Protocols. Centralized social media networks are not ideal, but also hard to avoid. This essay outlines the benefits of social media protocols vs. platforms, with examples like Farcaster, BlueSky, Mastodon and more. The parallels to internet protocols like email are drawn, and the drawbacks of self-hosting and user ownership of data are also explained. According to Matt, all of this might sound interesting, but protocols like Farcaster are still nascent: “beyond the invite-only beta, there are still no open source client implementations, the spec is in constant flux, and some hard problems have yet to be clearly solved.” Nonetheless, there is so much exciting work being done in the world of web3 social it is difficult to ignore. Farcaster and Lens are gaining real adoption, and it is only a matter of time before more clients, more use cases, and more unique protocols surface to solve problems for users across the internet.

Legitimacy Lost. This is a Li Jin throwback, but it’s especially relevant given the last few weeks of conversation both in and out of this newsletter. Li and Katie Parrott open the piece discussing “Adpocalypse,” a time in 2017 where YouTube creators realized that their revenue was dependent on creating content that their advertisers were comfortable with being associated with their brands. Like feudalism and divine right monarchy before it, they argue, the creator economy (at least, in its current, highly centralized form) is experiencing a legitimacy crisis. They define a legitimacy crisis as “when that trust is eroded—when the governed no longer believe that those in power are exercising that power with the collective good in mind.” They then discuss the rise and fall of legitimacy in the creator economy, and open the door for a discussion of web3 and creator-owned platforms. This is a fantastic read to refresh on why many of us are building in this space today.

Market data on the last 7 days. Last updated Nov 14, 2022

▹ FF Library - Internet-Native Organizations
▹ Crypto - Where do we go from here?
▹ Fresh Take - Thermodynamics, Pynchon and Meme
▹ Watch - Ethereum is Punk
▹ Update - NounsBuilder Proposal Passed
▹ Interesting - Venn Diagram: DAOs
▹ Cool - Twoplus Mental Fitness Program
▹ Tooling - CEX transparency dashboard
▹ Thread - Web3 Network effects <> Defensibility
▹ Tweet Check - Osuzuha on Mastodon

◎ Check out FF Signal  for daily top web3 social headlines