My mom left the Philippines when she was 21 years old — armed with a degree and $50 in her pocket.

She would navigate America with a quiet determination.

Every educational course became an investment in her professional agency.

Every dollar became a brick in her financial foundation.

She would earn her Master of Nursing at UCLA, and go on to work directly with countless military veterans in VA hospitals over a 40+ year nursing career.

Like most Americans at the time, both naturalized and natural born, her mobilization was made possible by a unique country with three features:

(1) An open economic system;

(2) incentivizing merit-based contributions;

(3) with established property rights to protect ownership over new wealth generated.

Work hard. Outperform. Store wealth.

Compound these actions over a lifetime, and anyone could enjoy a piece of the American dream.

As I expand upon in this essay, I’m no longer confident our legacy playbooks will hold up against the emerging truths of tomorrow — namely, the breathtaking acceleration of artificial intelligence, and its disruptive potential on American labor.

I believe it’s critical for America to start navigating toward a new framework to match new labor realities.

And it starts by understanding the two most disruptive technological innovations of the last twenty years:

AI and Crypto.

Artificial Intelligence

Thirty years ago, internet search engines were introduced to the world.

Their value was deceptively simple:

Retrieve the world’s data.

Twenty five years later, OpenAI’s ChatGPT is the fastest growing consumer application in history. The product enjoys 300M weekly users, with over 10M in monthly paying subscribers. In just under two years, the product generates roughly $3B in annual revenue.

The value of these AI systems?

Combine “retrieval” with “completion”.

Put simply:

(1) Request any job using natural language; and

(2) Outsource the job’s completion to computer intelligence.

Over the last three months, it’s become clear that these products are rapidly improving in their ability to complete these job requests, across a growing number of modalities — text, math, audio, video, geometry, coding.

And so far, the scaling hypothesis for improving AI systems is holding.

More data. More compute. Better models.

Further, new dimensions for scaling these models are being explored, with innovations like test-time compute emerging. Last month, OpenAI’s latest reasoning model completed a 25% score on the frontier math benchmark, composed of problems that only deeply specialized mathematicians can solve.

These next generation reasoning models are taking significant steps adapting to novel tasks with observable answers.

Meanwhile, new advancements in robotics are making machines increasingly capable of performing complex physical tasks.

Intelligent, human-like hardware will:

- Never get tired.

- Never take weekends off.

- Never go on strike.

Technological productivity unlocks like this are not without precedent.

The industrial revolution (18th century) and digital revolution (20th century) radically reduced costs and increased efficiencies across various forms of labor, fundamentally reshaping markets and economic structures.

But, artificial intelligence already feels like a different type of technological revolution.

These systems are able to create value in ways previously thought impossible or impractical — unburdened by legacy cost structures.

Anthropic CEO Dario Amodei believes that AI may give us the next 50–100 years of biological progress over the next 5–10 years, simply by offloading most of our human labor structures to AI-enabled systems.

As the infrastructure to support the growth of these systems continues, I believe two trend lines will become obvious to humans around the world:

- The cost of all intellectual labor will trend down to the cost of running AI systems; and

- The cost of all physical labor will trend down to the cost of a robot’s mechanical parts.

The promise of this technology is clear:

Unbounded outcomes.

Radically cheaper costs.

Across every category of value.

For the purpose of this essay, let’s assume the above trends are true.

As someone who deeply believes America’s next generation should enjoy access to the same opportunities as the generations that came before — there are two questions I can’t shake:

First, how can America win the AI revolution on the merits?

Second, how can individual Americans participate in the upside of tomorrow’s AI systems — recognizing its disruptive potential on human labor?

Enter Crypto

In 2008, Satoshi Nakamoto published the Bitcoin whitepaper.

The paper laid out a new, gamified accounting system where distributed computers all over the world could work together to agree on a shared digital truth — namely, the state of Bitcoin’s ledger.

Today, Bitcoin is the most powerful supercomputer in the world.

The network is orders of magnitude larger than the combined network sizes of Amazon, Google, and Microsoft.

Yet fifteen years in, blockchains are still clunky.

- Poorly written code can create vectors for theft or zeroed-out account balances.

- User mistakes managing private keys led to the largest share of stolen crypto last year.

- Decentralized applications are difficult to use compared to legacy web applications — with astronomically high rates of user churn.

But even with these limitations, interaction with crypto is at an all time high.

One study estimates that 40% of Americans now own cryptocurrency, up from 30% in 2023.

Nearly 24,000 monthly developers around the world actively contribute code to blockchains and blockchain-based applications, up from 1,000 monthly developers ten years ago.

Given all its limitations — why does crypto keep growing?

I believe it is because crypto enjoys five features that — working together — can’t be replicated by any other database architecture on planet earth:

Digital Ownership. Blockchain databases are global, fully auditable, community-owned, tamper-proof, and run 24/7 across the internet.

Using blockchains, individuals can enjoy sovereign ownership over any digital object on the internet — laying down a global digital property rights system for the first time in human history.

Coordination Incentives. Using autonomously executing contracts, blockchain-based protocols can wield programmable incentives to coordinate new types of digital work on each network.

This can include incentives for those who use a product or service, provide economic security, contribute core code, provision marketplace supply or demand, refer others to the product or service, and much more.

Frictionless Micropayments. Today, prohibitively high transaction costs force most internet businesses to adopt business models like subscriptions, bundling, and ad-supported services. This constraint limits business model innovation across the internet, restricting consumer-friendly alternatives that could unlock new product/service revenue.

Conversely, blockchain databases facilitate frictionless, 24/7, low-cost, digital payments on a global scale — bypassing digital payment inefficiencies and enabling low-fee, instant transactions without the risk of chargebacks. Further, any cryptoasset can be divided into an arbitrarily small denomination.

Shared Standards. By leveraging shared settlement standards on top of blockchains, various types of protocol tokens, stablecoins, applications, games, and financial services can all seamlessly compose with one another’s logic — much like how lego blocks can connect regardless of color or size.

Distributed Security. Blockchain networks are often distributed across numerous nodes around the world, eliminating single points of failure. This decentralized architecture makes it far more difficult for malicious actors to compromise these networked systems, as it requires control over a majority of nodes simultaneously.

Today the market cap of the crypto economy is roughly ~$3.6 trillion — across a number of emerging verticals.

And over the next ten years, I believe the crypto economy will be repriced radically higher — spurred largely by the growth of AI’s intersection with crypto across two major trend lines —(1) AI x Crypto Infrastructure and (2) AI x Crypto Applications.

AI x Crypto Infrastructure

To understand the current landscape for AI infrastructure, it’s useful to look back at a historical analog.

In 1849, the California gold rush quickly drove new investments into the region.

Hundreds of new roads were constructed to facilitate rapid transport. San Francisco’s port became one of the busiest in the world — shipping in gold prospectors, goods, and tools from around the world. Robust banking and financial systems were developed to network the demands of an emerging global enterprise.

The infrastructure investments made during this time would create the foundation for the region’s future as an economic powerhouse.

175 years later, the world is now witnessing a similar gold rush — one to create AGI.

This time, however, the infrastructure designed to support artificial intelligence is not confined to a specific region.

These networks — encompassing data, compute, and power — are being constructed by competitors around the world.

Not surprisingly, the capital and computation required to build, train, and optimize AI infrastructure is prohibitively expensive, accessible only to a select few.

Conservative estimates suggest that training GPT3 cost roughly $4M+ for a single training run. For GPT4, estimates suggest the training run cost roughly $60M+.

More capital. More compute. Better performance.

While I am deeply proud and supportive of the work accomplished in America to build artificial intelligence under our traditional corporate forms, I also believe it’s possible to acknowledge their structural limitations:

Captured Value. Although centralized companies wield risk capital to drive meaningful AI innovations, the economic benefits of these products are narrowly scoped to a small group of equity holders, limiting broader societal impact.

Proprietary Knowledge. Advancements in technology frameworks often remain proprietary to centralized firms, slowing overall progress in the field by restricting access to crucial breakthroughs — at a time where information now moves 24/7 at internet speeds.

Opaque Systems. Concentrating synthetic intelligence in opaque, closed, centralized systems makes it impractical for independent verifiers to audit company practices regarding data collection, safety, and accountability.

Closed Competition. The immense computational requirements for advanced AI development create significant barriers to entry for new products to enter, allowing only a few well-funded giants to participate. Opening up competition to a wider range of participants, from individual researchers to smaller teams, may foster a more diverse AI ecosystem — leading to breakthroughs that may be otherwise overlooked.

I believe that by orienting America’s AI infrastructure towards crypto’s five unique features — digital ownership, coordination incentives, frictionless micropayments, shared standards, and distributed security — we can both temper the downsides of centralized AI, and renew the spirit of competition that has long been a hallmark of American capital markets.

Further, by availing America’s AI infrastructure to crypto, I also believe it will lead to AI systems with (a) better performance, (b) greater transparency, and (c) more equitable ownership across millions of American participants in the future.

(a) Better Performance

To understand the breakthroughs that can be achieved in AI without significant funding, look no further than the DeepSeek team. Two weeks ago, the China-based research group released DeepSeek-V3, a 670B parameter model rivaling the performance of many closed-source SOTA models, including GPT-4o and Claude-Sonnet-3.5.

DeepSeek has taken no venture funding to date.

As open source projects like Bitcoin and Ethereum have proved, issuing programmable incentives to a global pool of contributors can supercharge highly qualified labor and compute networks to form on the internet — far greater than what single labs or centralized systems can achieve.

Under this lens, creating systems for rewarding AI labor and compute networks over the internet is no different than creating systems for rewarding Bitcoin labor and compute networks over the internet.

A few examples:

For improved training data, crypto networks can reward human contribution for curating high-quality, labeled datasets — including private data, proprietary intelligence, or information otherwise not found in traditional web scrapes.

For more robust compute networks, crypto networks can incentivize individuals and organizations to contribute tiers of computational power over a decentralized marketplace — bootstrapping a global network of machines on demand without upfront capital investment.

For more performant model training, a network of open source developers can contribute, customize, and improve upon existing models in exchange for tailored rewards. Further, when code and model weights are openly available, hundreds of researchers and developers can simultaneously publish improvements, debug issues, fine-tune custom models and agents, and create novel applications on top — aligned by a network’s incentive model.

Over time, I believe this style of broad collaboration — pioneered by decentralized projects like Nous Research, Prime Intellect, and Bittensor — will outpace what even well-resourced private companies can achieve internally.

(b) Greater Transparency

Open source AI models allow their training process, architecture, and behavior to be thoroughly examined (and improved) by a broader research community. This transparency can help identify potential risks or biases early, translating into more reliable systems that people can trust.

By leveraging blockchains during this process, the entire stack for creating, rewarding, and improving AI protocols can remain transparent and auditable.

(c) More Equitable Ownership

Crypto networks, designed for individual verticals across the AI stack, will establish a more equitable ownership structure than current centralized models for creating synthetic intelligence.

With programmatic incentives, all contributors and participants to a crypto protocol can be transparently compensated for their contributions.

Further, entire markets can form around *any* job in the AI infrastructure stack — leading to granular competition across all categories of AI design. Categories and sub-categories across data, compute, training, and deployment can all compete and accrue value in isolation of one another.

Ultimately, however, it’s not just AI infrastructure that aims to benefit from crypto rails.

I believe AI agents are on track to completely reorganize the current trajectory of global crypto adoption — across every application vertical.

AI x Crypto Applications

The complexity of crypto applications have long been criticized as a significant barrier to widespread adoption.

Over the last fifteen years, blockchains have required users to navigate intricate approvals, manage private keys, and understand complex UI patterns that are beyond the grasp of most internet users.

With agents, these user patterns are changing quickly.

If you view AI models as reactive infrastructure, responding to prompts based on previous training data, then you might view AI agents as proactive applications — integrating models into new architectures to accomplish narrow objectives.

Simply, AI agents leverage foundational models to autonomously think, autonomously plan, and autonomously take action.

It is important to understand that agents are unique from the “bots” we know from yesterday.

Unlike bots, AI agents can reason on demand. They can analyze their own performance, adapt their strategies, and fight through complex tasks that sometimes require hundreds — and in the future — thousands of unique steps.

In September 2024, I met with one of my portfolio founders building an AI agent protocol for navigating blockchains.

The protocol is called Wayfinder.

Using his phone, and a few short natural language prompts, I deployed a front end and token contract replicating the monetary policy of Bitcoin to the BASE blockchain, using ETH bridged from Ethereum mainnet.

The whole process took less than four prompts on Wayfinder, and a total of five minutes from start to finish.

Nascent applications like Wayfinder suggest an important trend:

AI agents will mediate all of crypto’s longstanding technological frictions.

Over the next 12 months, agents will transform blockchain’s complex structure into seamless, natural language interactions that increase protocol accessibility, safeguard users from their own mistakes, help developers deploy safer code, and dramatically lower consumer churn across a complex decentralized web of products and services.

Importantly, key management networks will extend all of these agentic utilities, allowing agents to roam seamlessly over blockchains even when humans are not at the computer. And universal namespace networks will connect every agent’s actions — across every blockchain — under one human identity.

Put simply:

Crypto agents make building or using any crypto product, across any blockchain, easier for humans.

- In decentralized finance, agents will collapse crypto’s financial friction into simple natural language intents, in integrity with each user’s risk demands.

- In crypto gaming, agentic workflows will empower personalized and ownable generative objects, more sophisticated non-player characters in cryptoeconomies, and tailored experiences for players on-chain.

- In decentralized organizations, humans will agree on overarching policy objectives and constraints at the edges — and allow the agentic middle to execute across all dimensions of business, protocol, or administrative functionality.

These navigational benefits are a radical zero to one moment for all crypto applications.

Millions of new users will onboard this way.

No category will be spared.

AI, Crypto and Ownership

Understanding the grand trend line in front of us, it’s important to take a step back and honor the lessons from our past.

For most of human history, the ability to secure and defend resources meant survival itself. Modern property ownership emerged from millions of years of this evolutionary pressure.

The concept of property rights are so integral to the human experience that they are enshrined in the US Constitution (5th Amendment). America’s founding fathers viewed property rights as fundamental to our system of governance and way of life.

Economists have also long argued that strong property rights are a cornerstone of economic growth. They are critical for allowing individuals to feel safe generating income, preserving/storing wealth, and leveraging these assets for credit and investment over time.

Research backs this up.

A study of over 100+ countries from 1990–2002 revealed that countries with stronger property rights were able to grow faster than those with weaker property rights, in part because of their effect on stimulating technology growth and improved resource allocation.

From a property rights lens, blockchains are a winning technology.

They are the strongest technological foundation for the world’s digital information — by empowering immutable record-keeping, cryptographically-secured ownership, distributed security, and programmatic enforcement of rights through smart contracts.

And as America moves into the age of digital intelligence, blockchains can also serve as the canonical environment for all AI infrastructure and applications — ensuring that America’s AI systems can benefit from the structural tailwinds of crypto’s five unique features.

Over history, America has created unprecedented opportunity for individuals and country alike — from breaking free of colonial rule, to its constitutional commitment to personal freedom, to fighting segregation — coupled with fierce market competition and an entrepreneurial focus.

Today, on the precipice of AGI, I believe America has an important opportunity to further solidify itself as a leader on these same dimensions.

Integrating America’s AI policy goals with crypto will catalyze unprecedented individual participation in open source networks, through incentivized contribution at all layers of the AI stack.

Widespread participation in our AI markets will stimulate competition, encouraging new forms of bottoms-up mobilization and broader social impact.

And finally — blockchains will provide a secure digital foundation for America’s next property rights system, facilitating a trust-minimized framework for Americans to store and preserve digital wealth across the internet.

AI, Crypto, and America.

Three of the world’s most important experiments — operating together.

So that future generations of America can dream like our parents did.

Disclosure/Disclaimer: This article does not constitute an offer to sell, or a solicitation of an offer to buy the interests of any Fund. Any such offer will be made pursuant to its offering documents. This article reflects the current opinions of the author(s), is educational in nature and should not be considered to be a recommendation to invest. Investing in digital assets, NFTs or cryptocurrency includes risk including the loss of principal. Past performance is not indicative of future results. While attempts have been made to verify the accuracy of the information provided, we cannot make any guarantees. Any forward-looking statements made are based on certain assumptions and analyses of historical trends, current conditions, and expected future developments, as well as other factors. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict.

All sketch artwork in this essay was created by Harry Lange (1930–2008) for Stanley Kubrick’s 2001: A Space Odyssey.

Grateful to those who contributed ideas, conversation, or review during the construction of this piece — including MP, Fred Wilson, Kalos, Foobar, Stats (Punk9059), Ben Roy, Jack Butcher, David Sneider, Gmoney, and the killer crew at Collab+Currency (my business partner Steve and awesome team Amanda, Karen, Greg, Aradtski, Justin, Jerry, and Mark — with a special thank you to Zack and Ronan).

AI, Crypto, and America was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

Part I: The Attention Network

In the age of information abundance, most value can be traced back to some form of attention-generating event.

The top three largest companies in the world all build consumer products that interact daily with the attention of hundreds of millions of end users:

Three out of the four most valuable sports teams in the U.S. have markets in states with leading network hubs (travel, media, and technology):

Mr. Beast, a 24-year-old who enjoys over 125M+ subscribers on his YouTube account, recently turned down $1B for the rights to his channel and associated properties, later raising a round of financing at a reported $1.5B valuation.

You don’t have to look far to see how aggregated attention, pointed toward the right opportunity, can translate into value, whether for brands, companies, or individuals.

But the idea that these same attention flywheels can drive value to a single unique object is less widely understood.

What does this look like in practice?

One common way an object becomes valuable is on the object’s merits.

Historically, this happens when an object has reached a new threshold of creative, cultural, or technical value.

Take the Honus Wagner T206 baseball card, minted in 1909 and referred to as the Mona Lisa of sports cards. Due to a broken printing plate during production, only 60 copies of the card are known to currently exist. In 2022, one of them sold for $7.25M in a private sale.

A second common way is when a creator, celebrity, or brand associated with an object is able to easily garner attention themselves — which can translate into value for objects associated with them.

Take the Salvator Mundi, the most expensive art piece ever sold ($450M). The work is a restored painting controversially attributed to Leonardo Da Vinci, who many recognize as the most famous artist of all time. The mere (and perhaps misguided) attribution to Da Vinci alone drives attention and value into the painting.

A third common way is when an economy forms around an object with rules that are well understood by its participants.

For example, in the popular online video game Counter-Strike, some of the rarest in-game objects are valued at $1.5M per piece. These objects provide aesthetic utility (identity, prestige, wealth) within the game. Significant attention flows to these items irrespective of their limited utility outside of the Counter-Strike economy.

For most of history, an attention flywheel for objects required decades to take shape, and often involved heavily intermediated physical places or printed publications where communities could gather, such as trade shows, conferences, auction houses, and print magazines.

With the rise of online networking, previous constraints to generating attention for objects have now been removed.

Today, digitally-native communities, celebrities, and influencers can often generate thousands of impressions in seconds on social platforms. This has the net effect of the attention flywheel playing out over minutes and hours, instead of years and decades, in spaces where communities aggregate today.

Over the last 36 months, the attention flywheel has moved on to not only include unique physical objects — but purely digital objects as well.

As a result, an efficient object attention machine has been created:

Online communities;

generating attention;

in real-time;

for unique digital objects.

And it’s starting to fire on all cylinders.

Part of this recent phenomenon can be explained by the unique design space of digitally-native objects rooted in blockchain technology, which have unlocked a number of new features with little to no precedence in purely physical objects:

Near-Frictionless Exchange. Unique digital objects can move frictionlessly across peer-to-peer rails and self-sovereign wallet custody, bypassing expensive and time-consuming costs associated with shipping, settlement, storage, and legal contracting.

Real-Time Provenance. Unique digital objects benefit from a global, public, tamper-proof database that can be publicly queried at any moment — helping prevent forgery and claim infringement, and providing a path to quickly identify fraudulent behavior by contracting parties. Transparency of information makes it simple to audit and track specific objects, issuers, market participants, and trends.

Global Trade. Both an identifier and the content/media of a unique digital object can be permanently contained on a 24/7 globally-connected database, enabling deeper markets and more efficient price discovery compared to physical analogs.

Networked Awareness. The vast majority of high-end physical objects remain in storage, with some observers estimating that museums only display 5% of their collection at any one time — often the result of the amount of physical space required for display. Unique digital objects can be viewed, heard, or enjoyed by the public at any moment, though ownership can only exist in one wallet.

As a result of this unlocked feature set, these objects have the potential to become more networked with attention than ever before.

Digital Attention, Digital Objects

And similar to physical analogs, there are a few common ways by which the attention flywheel can start for unique digital objects.

First, a number of digital collections have already started to become singled out on the merits — having reached a new threshold of creative value, cultural value, or technical value.

For example, CryptoPunks, Autoglyphs, and Chromie Squiggle are three important blockchain-based generative art projects. Each collection employed new standards that inspired how media, art, and on-demand community formation could unlock new territory for creative works.

A second common way is that a creator or brand is able to easily garner attention themselves — which can translate into digital objects associated with them.

Mike Winkelmann, the artist commonly known as Beeple, released free digital art on a daily basis for 13 years on Instagram before selling his first digital object in 2021.

XCOPY, an anonymous digital artist, similarly posted free digital art on Tumblr on a monthly basis for 10 years before selling his first digital object in 2017. Each artist carved out a unique style over years that became beloved by their audiences.

A third common way is when an economy forms around an object with rules that are well understood by its participants, and there is demand to own a digital object because it provides a unique experience within that economy.

Otherdeeds are digital objects for virtual land that will be used in Yuga Labs’ upcoming immersive environment Otherside. Each parcel has a unique blend of environments, resources, artifacts, and creatures which provide unique advantages within the game’s economy.

Similarly, the PROOF membership card is a digital object from the PROOF team that provides unique access to new art, community gatherings, live media productions, and other benefits within the digital economy.

In addition, over the past 24 months, I’ve identified a number of new attention-generating factors specific to unique digital objects:

Online Networking. Some of the most interesting spaces to generate attention exist in off-chain channels. Creators and projects who build their digital objects in public, engage positively with their communities, and workshop their process transparently, can quickly become attention-generating artists.

For examples, look no further than creatives like Grant Yun, Gmoney, 0xdgb, Punk 6529, Claire Silver, Justin Aversano, Jen Stark, and Jack Butcher.

In addition, online products that highlight a unique object can also help the object gain attention, without the possibly dilutive effects of more supply around a collection. One example is QQL, a generative art project led by Tyler Hobbs.

Hobbs’ QQL allowed anyone to play with the algorithm’s parameters to create their own generative artwork, regardless of whether they would be able to reach the economic bar to owning a digital object in the collection. This led to over 10M unique versions of the project to be pre-generated in the weeks leading up to the object’s release, which would go on to generate $16M in digital object sales on the first day of the collection’s launch.

More Objects, More Attention. Allowing multiple owners to own unique objects within a single collection opens up the opportunity for generating more attention from a larger pool of incentivized holders.

The continued success of pioneer generative media projects like CryptoPunks and Chromie Squiggle demonstrates that a single, unified collection of iterative works can generate compounding network effects, a benefit that can far outweigh the scarcity benefits of a single object.

As a result, collections with a large set of unique editions can become very networked with attention at sizes of 10,000, 15,000, and 20,000 outputs. This trend, which started with unique generative objects, is now starting to spill over to non-unique digital editions in large quantities, illustrating the network effects that are achievable with a large collection supply.

I predict that the next several years will bring valuable single collections comprising millions of unique digital objects. These projects will challenge our rigid beliefs about scarcity and value accrual within a hyper-networked world where attention is the scarce resource.

“Free” or “Low Priced” Objects. Some of the most well-known digital objects started off as free or low-priced at the time they launched (e.g., XCOPY’s 1/1s, CryptoPunks, Chromie Squiggle). Removing economic friction at a collection’s launch can have the net effect of standing out from the crowd and bringing attention to a project early in its lifecycle. Take the recent meteoric rise of Art Blocks’ Friendship Bracelets, a free project of 38,000 iterative versions. Although these digital bracelets were initially given away for free, today bracelets trade for a minimum of $600 per object across over 13,000 unique holders.

No Copyright Reserved. No Copyright Reserved, or CC0, is a tool to relinquish all copyright that an owner holds in a work and dedicate those rights to the public domain. Because blockchains act as a database of record for every digital object, I propose that for certain projects, tight copyright can constrain the network effects of a collection at a time where value and information are now moving faster than ever before.

By relaxing the inherent friction around copyright enforcement, digital object owners and non-owners alike can commercialize, remix, meme, productize, or build on top of CC0 collections to generate attention for the project or digital object at the speed of the internet, unthrottled by legal layer jurisdictions or copyright enforcement.

This has a second-order effect of opening the floodgates to attention-generating activities for a digital object.

Economy Games. Participants in Damien Hirst’s 10,000-piece Currency digital art project (July 2021) had one year to decide between keeping their unique digital object or destroying it in exchange for a physical object. This dilemma forced participants to determine what object form holds greater personal value — the digital or the physical. Over the course of the twelve-month project, hundreds of online articles, reports, podcasts, and conversations debated how the final numbers would tally. After the one-year deadline, roughly half of the collectors chose to keep the unique digital object, destroying the associated physical artwork from the total supply.

Economy games around a digital project’s supply like Currency or Jack Butcher’s Checks (VV Edition) can help bring enormous attention to a project throughout its life, as participants watch the economic game play out in real time.

Category-Specific Marketplaces. A unique object often stands a better chance of being discovered if it is listed or sold in a primary marketplace where buyers and sellers for that specific category are known to form.

These category-specific marketplaces act as natural Schelling points for buyers and sellers within a specific vertical.

Having a “town square” for an object category offers market participants a space to discuss new and existing work, and the recent sales of category-specific digital objects, giving them increased visibility and allowing a more robust social layer to form around the work.

Curation. Much like we rely on experts — engineers, scientists, political leaders — to point our limited attention in the right direction, so too do the unique digital object markets look to experts for similar signals of curation.

As it relates to digital objects, curators actively find and ascribe economic, symbolic, and cultural value to old and new objects alike. These curatorial leaders can be found publishing thought pieces, speaking on podcasts, or posting on social networks like Twitter.

In Web3, many of the leading curators are decentralized groups of people. This includes on-chain collectives like Flamingo DAO (art), NEON DAO (metaverse), RED DAO (fashion), and Noise DAO (music).

While many digital object owners continue to look to legacy media channels for these curatorial signals, an increasing amount of curation is happening in Web3-native spaces. Many digital object curators now have their on-chain collecting behavior tracked publicly on Web3 native platforms like Gallery, Deca, Floor, and Soho, among other object signaling tools.

Part II: Products vs. Store of Value Assets

While new models for attention and networking are driving value to certain digital objects, not all digital objects are created equal. Some will accrue value, but many will not, and determining the difference depends on the type of the digital object in question.

My view is that in the future, blockchain-based digital objects will wrap every unique category of information. These categories will include digital representations of real-world assets, financial instruments, employment contracts, property deeds, products, services, commodities, and every other category of unique value in the physical world we live in today.

One framing I’ve found useful for explaining this concept is positioning blockchains as a simple recording format upgrade for all the world’s assets.

This idea seems overly ambitious on its face, but it articulates the inevitable intersection of two growing trends — (a) the digitization of all information; and (b) blockchains as a device for recording digital information onto a public, neutral, tamper-resistant database.

For me, this end state is not a question of whether it will happen — but rather on what timeline.

However, given the early nature of this technology, there are only two valuable categories of unique digital objects on blockchain-based databases today:

(1) Products/Services; and

(2) Stores of Value

I’ll provide a short background on both of these categories, and their application to digital objects in the future.

Physical Products/Services

In the physical world, a product or service is something that is created with the intention of satisfying a particular market need or want.

This can include consumer objects such as clothing, video game skins, or sporting equipment. It can include industrial objects like heavy machinery or manufacturing equipment. It can include services like gaming or streaming subscriptions, live music events, or ride-share services.

In the aggregate, the monetary value of global products and services represent tens of trillions of dollars in GDP each year — a meaningful amount of the world’s traded value.

While products and services are tremendously valuable in the aggregate, their individual value is often capped relative to the market outcome that the product/service solves.

For many of these products/services, outcomes can be quite low impact or invaluable, or naturally depreciate in value over time as the product/service is consumed by the market.

Store of Value

Alternatively, a store of value object is something that is stored or saved as means to retain purchasing power. These objects often enjoy a large attention network, are provably scarce, highly durable, and have few external dependencies to maintain value over long periods.

Store of value objects represent some of the largest markets in the world, unbounded from revenue targets and project deliverables. Value accretes to the object simply by the demand to own these objects outpacing supply over time.

Three of the most common store of value objects are gold, real estate, and art.

Gold has been used to store wealth for millennia, relied upon by its inherent scarcity, durability, divisibility, and networked markets across geographic boundaries.

Real estate is another traditional store of value asset. It is verifiably scarce, durable, and can be passed down or parceled out in divisible bundles generation after generation, relying on a jurisdiction’s legal layer.

Art is one of the oldest forms of store of value objects, today representing $65B in annual sales. Influential artists like Mark Rothko, Jackson Pollock, and Willem de Kooning command tens of millions of dollars for their work in secondary markets.

Digital Object Applications

For the first time in human history, blockchains empower any digital object to enjoy the properties of verifiable scarcity, durability, divisibility, and globally networked markets.

As a result, these internet-optimized objects now have the same or greater potential to become globally networked as a (1) product/service; or (2) demonstrate the properties of a store of value asset — all over a public, tamper-proof, trust-minimized database.

The implications across both these categories are massive.

However, given their digitally-native wrappers, it can be difficult for market participants to determine how best to distinguish between these radically different categories.

In my view, determining whether a unique digital object takes on the features of a product/service or a store of value requires one look to the object’s external dependencies.

In software, an external dependency refers to an external software component or library that is required by a project to function, but is not included in the project itself.

Digital objects that have *many* external dependencies rely on external factors to sustain value. This can include ongoing product expansion, continued messaging/positioning, and development that brings continued value to the object.

As a result of this reliance on creators or third-party actors, these digital objects should be valued more like products and services.

Alternatively, objects that only have a *few* external dependencies are often non-intermediated, durable, and require little to no support in order to sustain or accrete value over time.

These objects, without requiring direct creator or third-party reliance, have a stronger path to be evaluated as a store of value object.

In my view, the three most important ‘external dependency’ indicators to evaluate whether a unique digital object fits the category of a product/service or potential store of value are (a) asset sovereignty, (b) content durability, and (c) contained value.

(a) Asset Sovereignty. Today, when a purchaser buys a Fortnite gaming skin, what they are really buying is a single entry on a privately-owned database. Ownership over the skin or digital object can be intermediated at any time by the database owner (Epic Games). Alternatively, projects like Chromie Squiggle and Otherdeed are two collections, in art and gaming respectively, that issue ownership tokens that can be held in self-custodied wallets on the Ethereum blockchain. A huge network of participants verifies and secures every transaction on Ethereum, making it impossible for an unwanted party to interfere with this ownership.

(b) Content Durability. For the strongest guarantee in object persistence, an owner of an object would ideally want both the ownership token and the content associated with the object to be recorded directly on a blockchain. However, pairing both ownership token and content on a blockchain can be prohibitively expensive. As a result, many ownership tokens are simply a pointer, directing holders to off-blockchain storage of the media.

In our example, the art file associated with a Fortnite skin and Otherdeed land is non-durable. The art files for both objects live on a private database, and can be modified by Epic Games and Yuga Labs respectively.

Oppositely, the content of each Chromie Squiggle is mostly stored on the Ethereum blockchain. Each token’s on-chain transaction hash acts as the permanent seed to populate unique variables against the project’s on-chain algorithm. If for whatever reason the Art Blocks platform doesn’t exist to serve Chromie Squiggle art in the future, an owner can still recreate their Chromie Squiggle in any resolution with a browser, a simple HTML template, their on-chain token, and the on-chain code.

(c) Contained Value. This indicates whether wealth stored in the object can be preserved without requiring new value creation by the object’s creator. For ongoing value creation, both Fortnite skins and Otherdeed land require project creators to build and deliver utility that ties together the game, the assets, and the economy over time. These objects are likely not valuable without continued value creation by the object’s creators.

Oppositely, Chromie Squiggle was created with the intent to stand alone as a creative project — one that illustrated the infinite variability of on-demand, algorithmically generated, on-chain artwork. There is no ongoing creator support required.

Many External Dependencies: A Feature

Evaluating the three indicators above, Fortnite skins and Otherdeed land have a number of external dependencies, making these objects look more like digital products/services.

Alternatively, Chromie Squiggle — along with previously mentioned projects CryptoPunks and Autoglyphs — enjoy few external dependencies across all three dimensions. Networked correctly with attention, these objects may be evaluated as digital stores of value in the future.

Not dissimilar to gold, real estate, and other high-value art.

However, it’s important to note that external dependencies can sometimes bring benefits to an object over time. For example, if a creator or team continues to deliver functionality, utility, greater performance over time, the demand to hold that object in order to utilize the product/service will likely increase. This design space is some of the most exciting from a value creation perspective.

Under this framing, external dependency decisions like storing content/media off-chain (instead of on-chain) — which tend to look unfavorable for store of value wealth preservation — may often be the optimal decision for unlocking new product/service value over time.

As a result of this growing use case, a number of decentralized content storage solutions are starting to be used today for product/service digital objects, based on the premise that some mutability should be tolerated for driving new value over time. Further, some of these decentralized content tools can be used in ways to create fewer external dependencies in the aggregate, making it possible that some store of value digital objects in the future have pieces of content that live on dynamic off-chain environments.

In the not-too-distant future, we will see many of the largest communities on the internet aggregate around these blockchain-based products/services.

And it may already be happening.

Just last year, 80% of all blockchain wallets’ first transactions were related to unique digital objects. Amazon, Meta, Starbucks, and many other large publicly traded companies in virtually every vertical have announced initiatives that leverage both digital objects and blockchains.

Over the coming years, you can expect to see natively digital objects power virtually all major consumer product/service use cases. In the short-medium term, I believe they will become natively integrated into business models related to social applications, gaming, music, television, live entertainment and many of the other largest consumer verticals in the world.

Eventually, these use cases will span outside of global media and entertainment, into regulated assets, financial instruments, property deeds, employment contracts, and all other forms of unique value.

Meanwhile, we’ll also begin to see a growing number of unique digital objects play a major role in trust-minimized wealth preservation — acting as digital stores of value.

For this use case, time is instructive.

The Lindy effect (“Lindy’s law”), which theorizes that the future life expectancy of non-perishable objects is directly proportional to its age, is often applied to store of value objects. If an object has proven to be a reliable store of value over a long period of time, it is likely to continue to do so over a similar time in the future.

Throughout history, the objects that humans have used to store value have varied greatly over time. Gold, land, art, and collectibles have all served this role.

As societies develop new technologies and economic systems, the concept of storing value so too will evolve to match new realities.

In this regard, one final area to keep an eye on is the intersection of digital finance x digital store of value objects. Traditionally, a myriad of complex financial instruments will exist around legacy stores of value objects. These financial instruments allow owners to obtain leverage, hedge downside risk, and take on other financial planning strategies using these assets.

Similarly, digital object lending platforms like NFTfi are already starting to break out. On these platforms, CryptoPunks, Autoglyphs, and Chromie Squiggle currently have lending rates which mirror home loan rates (<10%), and an increasing amount of lenders are willing to lend up to longer durations for these three objects, further reinforcing the point that unique digital stores of value are here to stay.

While the digital asset ecosystem is still only a decade old, I believe we’re in the midst of a fundamental, once-in-human-history transition from physical stores of value to digital stores of value.

And a growing number of unique digital objects may start to serve this important role, acting as trust-minimized wealth preservation for a global, 24/7, internet economy.

Disclosure / Disclaimer: At time of publication, Collab+Currency or its members may have exposure to some of the assets described in this piece. The author and Collab+Currency do not endorse or recommend ownership of any project or collection described in this article.

Grateful to the Collab+Currency squad, including my awesome business partner Steve and our giga-brain investors Amanda, Greg, Arad, Karen, and Ronan.

Big thank you to Zack Rosenblatt, our C+C Chief of Staff (and part-time graphic designer).

Special thanks to those who contributed conversation during the construction of this piece, including members of FlamingoDAO, Aaron Wright, Priyanka Desai, JDH, Quickrider, Ben Roy, Gmoney, Zeneca, Kevin Rose, Punk9059, Eli Scheinman, Jess Sloss, Todd Goldberg, Snowfro, Chris Ostoich, Seth Goldstein, Craig Shapiro, EJ, Alex, Quincy.

And always, to MP.

Storing Value in Digital Objects was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

This is the story of Rainbow, the world’s best mobile Ethereum wallet. How it started, where it’s going, and why compelling design matters more than ever.

In 2013, Vlad Tenev and Baiju Bhatt, two physics students from Stanford, sat together at a SF kitchen table jamming on their vision for a stock trading social network. This new trading platform was designed for a younger demographic. Trades would be free. Charts would be clean and simple. The platform would be mobile-only.

They would call it Robinhood.

Five years after the 2008 financial crisis, banking and financial institutions had made little progress bridging old world financial services to millennials and Gen Z. Poor UX, costly commissions, and desktop-only experiences kept young people emerging out of 2008’s rubble from meaningfully participating in U.S. equity markets.

By March 2015, just one month before Robinhood’s public launch, over 700,000 people had signed up for the app’s waitlist. The demand was palpable.

Robinhood’s design decisions had struck a nerve. Six years later, the firm is valued at $40 billion dollars.

The average account size is only $3,500.

Switching Costs

When trading in and out of Gamestop requires just a few taps of the finger on your phone, it’s easy to get the impression that the world’s financial rails have evolved. But the reality is that our banking, payment, and trading platforms still operate on legacy networks.

Earlier this year, Robinhood halted $GME trading at a time of exceptional volatility, leading to class action lawsuits and drawing the ire of regulators, legislators, and their own users. It was a stark reminder that many of the world’s most popular fintech apps are simply a veneer over old infrastructure, where financial information, identities, and assets are trapped in centralized silos and subject to the frictions imposed by decades of tech debt.

Throughout history, the siloed centralization of our data, particularly financial assets, has imposed high switching costs for consumers. Switching costs are best understood as the monetary, psychological, or time-based costs incurred by switching services or products, and it can include stuff like the time it takes to set up a new bank account, or tax and transaction costs imposed when you sell securities and repurchase them with a new broker. Banks and trading brokerages are known to enjoy high switching costs. Their platforms are sticky, not because they’re better, but because they’re just good enough to beat bearing the switching costs.

But a new era is upon us, one of trust-minimized infrastructure for finance, culture, gaming, organizations, and much more — known as Web3. Importantly, the decentralized nature of Web3 poses some challenges to traditional switching cost models.

Take Ethereum wallets, for example. Unlike legacy TradFi firms, which operate by referencing the siloed assets within their control, Ethereum wallet owners are always in control of their financial assets. We’ve referred to this concept previously as digital sovereignty. By using a Web3 wallet to manage blockchain-based assets, consumers can enjoy stronger ownership guarantees over their financial assets, and more control over the contracting environment as it relates to those assets.

This primitive has led to fascinating second order effects.

We have far more degrees of freedom to direct assets as we choose in a Web3 wallet. If we want to swap our ETH for an ERC-20 asset, we can connect our Ethereum wallet to any number of Web3 trading applications: Uniswap, SushiSwap, Balancer, AirSwap, Bancor. These trading venues enjoy no user lock-in and no meaningful switching costs. They compete on price and depth. We have the freedom to interact with any pool of liquidity, at any given moment.

This concept doesn’t just apply to applications. It also applies to the interfaces we use to access our wallets and connect to all these applications.

MetaMask is an example of browser plug-in that you can use to create and manage an Ethereum wallet. Let’s say you think MetaMask provides a good enough desktop experience, but you believe Rainbow Wallet provides a superior mobile experience. What should you do? Send all of your Ethereum assets in MetaMask to your new Rainbow wallet?

Nope.

By simply importing your wallet into Rainbow, you instantly have access to the same assets in your Rainbow mobile app. No lock in. No switching costs. Your same wallet in a beautiful mobile interface. The reason this works is because MetaMask doesn’t own your wallet, you do. You can easily use MetaMask to access the wallet on your desktop and Rainbow to access the same wallet on your iPhone.

This is a drastic shift from the legacy financial system. Robinhood controls your account. You can’t just decide one day that “I like the Schwab interface better” and instantly import your Robinhood assets into Schwab. If you want to move your assets from Robinhood to Schwab, you need to sell everything on Robinhood and repurchase it on Schwab, or fill out paperwork to transfer stock certificates. Not to mention that you need to go through an entirely new onboarding process at Schwab. These switching costs discourage change and keep users locked in to these services. They are an impediment to interface competition.

In Web3, the UI layer has been unbundled from the asset layer, which will give rise to a new era of interface meritocracy.

This brings up an interesting question, and one we talk about a lot at Collab+Currency: How will projects competing at different parts of the stack retain users over time, knowing that there’s no lock in and low switching costs? And what does it mean specifically for the future of mobile-first interfaces, as global consumers spend more time using smartphones than ever before.

We think the answer is killer design.

More specifically, killer design narrowly tailored to the new kinds of behavior unlocked by Web3.

Christian, Mike, and Jin

While Vlad and Baiju were designing their breakthrough mobile trading app in 2015, three teenagers were just getting their start in the world of design and computer engineering.

The first was Christian Baroni, who at fourteen started publishing reskins for jailbroken iPhones on the internet. iOS interfaces, icons — nothing was off limits. On one occasion, he decided to create a digital version of the click wheel, a simple homage to previous generations of the iPod.

His work generated tens of thousands of dollars on Cydia.

The PM leading Microsoft’s Mac Office team came across Christian’s designs and recruited him. Christian started contracting twenty hours a week for Microsoft. He took meetings during recess, lunch, and sometimes during the middle of class.

Microsoft likely had no idea they were contracting with a high school student. Christian graduated early, and at 17 years old, moved to San Francisco to take a design job at an upstart fintech called Stripe.

The second was Mike Demarais, who around this same time began to immerse himself in computer design, website creation, flash games, computer camps. Mike became obsessed with digital products, and how people used them. He hacked and tinkered on anything he could find, and his interests began to converge around jailbroken hardware, free packages on Linux, and torrenting.

Mike broke things down and rebuilt them in new ways. He followed the career trajectory of app developers in the same way his peers would track Lebron stats. He listened religiously to the Diggnation Podcast with Kevin Rose.

During these formative years, Mike became convinced that when it came to app design, if you argued for the user, instead of the business case, magical things could happen. Mike left college a few months into his freshman year, jumping in headfirst to work as an engineer at a number of high-growth startups: building, shipping, and advocating for the user.

The third was Jin Chung, who left home for college having had zero previous technical experience. She took her first computer science class, and felt her brain rewiring, starting to view the world as an engineer would. She decided to major in computer science engineering. She fell in love with algorithms, discrete math, logic problems. She was hooked. Eventually, Jin would write trading tools for equity derivatives at UBS, and later algos for eBay’s recommender systems. In her spare time, she and a friend built a Leap Motion-controlled point-and-shoot Death Star that could build and destroy solar systems.

In 2019, Christian, Mike, and Jin began work on what would become the world’s best Ethereum mobile interface.

Meet Rainbow. 🌈

The Future of Mobile Web3

Today, the Rainbow team leverages their unique backgrounds and design experiences to create narrowly-tailored UI/UX to both on-ramp non-crypto users and facilitate new behaviors unlocked by Web3:

Easy Web3 On-Ramp. For newcomers and experienced Ethereum users alike, going from “no crypto” to navigating across Web3 can be a painful experience. Historically, the process involved getting set up with a crypto exchange, linking back to your existing banking rails, depositing fiat, purchasing ETH, then sending ETH out of the exchange to a browser wallet that can connect to Web3 platforms like Uniswap, Rarible, or RabbitHole.

What Robinhood did for onboarding casual investors into traditional equities, Rainbow does for onboarding casual users into Web3. The on-ramping process is dramatically streamlined with Rainbow, allowing users to rely on Apple Pay infrastructure to make quick purchases of ETH or other ERC-20 tokens directly into a Rainbow wallet.

On-ramping casual users into the Ethereum ecosystem now takes less than thirty seconds.

NFTs and Social Flexing. Information on the Ethereum ledger is public and timestamped, and the rise of NFTs has supercharged the social graph. NFTs representing art, music, collectibles, essays, and other cultural artifacts have experienced exponential growth.

The Rainbow team has been designing for NFTs since day one— we still remember the CryptoKitties in their first pitch deck! It’s already the wallet of choice for NFT collectors, but there’s so much more to come.

Rainbow has an eye towards a world where friends can follow each other’s on-chain journeys across the Metaverse. Squads, DAOs, and distributed communities will be pervasive. So will showcasing your on-chain history, your on-chain collectibles, and your on-chain access.

With Rainbow, you’ll be able to trigger notifications to your best friend about an upcoming Art Blocks drop. Flex your “early-ness” to CryptoPunks in your NFT showcase. Update an RAC audio layer on Async Art. Watch your Mom and Dad invest in blockchain-based socks.

If Web3 is a video game, Rainbow is designing for mobile multiplayer mode.

Decentralized Finance. Over the past year, it’s become clear that social technology and financial technology are converging at a faster rate than ever before. The future of finance will be borderless, sovereign, and operate on a trust-minimized ledger. Startups will stream vested equity to founders, investors, and collaborators as it’s earned in real time. On-chain credit facilities allow global asset holders to trustlessly collateralize their digital assets in a debt position, and mint synthetic stable assets without requiring an intermediary. Liquidity for all kinds of assets will pool on decentralized platforms, and be relied upon for everything from trading and prediction markets to gaming items and concert tickets.

Sounds complex? It is. But interfaces like Rainbow will be the control center, helping translate financial complexity into simplicity.

With Web3, the transition to pure digital is catalyzing in real-time. Over the next few years, a generational opportunity exists to bring digital sovereignty and decentralized networks to hundreds of millions of users around the world. What Web2 did for information, Web3 will do for value.

As Web3 takes hold, the next Robinhood won’t look like Robinhood.

It’s going to look more like a 🌈.

A special thanks to Sean Lippel, Brian Flynn, Josh Hannah, Jin Chung, Christian Baroni, Mike Demarais, and the rest of the Rainbow squad. 💪

Disclosure: At the time of publication, Collab+Currency or its members have exposure to some of the liquid assets and NFTs described or pictured in this piece, including BTC, ETH, CryptoPunks, Chromie Squiggles, Meebits, Aerial View, Inspirals, Color Study, Avastars, Apparitions, Elementals, CryptoKitties, and Hashmasks. Collab+Currency are investors in a number of the infrastructure projects mentioned in this piece, including SuperRare, RabbitHole, Async Art, and Art Blocks.

You can find more thoughts from our team on Twitter: @Collab_Currency

Designing Rainbow’s Moat was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

In many ways, generative art is the tip of the spear to much larger trends related to digital art, NFTs, and digital property. Generative art is a category of digital art in which artists use a computer to intentionally introduce randomness as part of the creation process, producing both expected and unexpected results. In this article, we’ll take you through the past, present, and future of the generative art movement.

The History of Generative Art

In the early 1950s, generative art pioneer Herbert Franke would conduct unique photography experiments in his lab, playing at the intersection of light, movement, and randomness. In 9 analogue graphics (1956/1957), Franke created images on an oscilloscope using a friend’s computer, then photographed the images from a moving camera, aperture open.

Franke’s results were mesmerizing.

Later, Vera Molnár, one of the first artists to use computers in art, played with themes of “disorder,” frequently investigating variations in geometric shapes and lines. Her work, generated using the early programming languages Fortran and BASIC, was often showcased on the original raw printing paper, even opting to include each page’s perforated edges.

As computers proliferated in the 1960s, more artists began to experiment at the intersection of computer science and art to create line-bending generative works. New programming languages allowed artists to push digital boundaries in interesting ways, and redefine how computers could process orderly inputs into unique outputs.

Human-designed computer algorithms were core to the work of mathematician Frieder Nake. In Hommage à Paul Klee (1965), Nake found inspiration in a painting created decades earlier by renowned German artist Paul Klee, and generated a new piece from an algorithm that explored the proportion and relationship between Klee’s vertical and horizontal lines. The computer was empowered to make its own design decisions, given a pre-programmed set of variables.

Using various forms of controlled randomness as part of the creative process, these three artists helped contribute to building the foundation of the modern generative art movement.

Years later, Larva Labs and Art Blocks would do the same.

Blockchain-Based Generative Art

Over the last fifty years, artistic expression has become more strongly influenced by cultural trends in technology. The human experience has become increasingly digitized, which has informed the creative work artists make.

While digital artwork has unquestionably grown in influence, many of its creators haven’t enjoyed the same monetization potential relative to creators of physical works. Over the course of history, monetization around creative expression has been predicated on physical scarcity that travels with a given piece.

During the last ten years, blockchains have changed the game for immutable digital files. Bitcoin has illustrated that digital scarcity is possible in the realm of money. Ethereum extended the concept of digital scarcity beyond commodity money, enabling the information of any digital good (3D objects, music, files, GIFs, memes) to be tied to a unique “non-fungible” token (NFT). For the first time, creative digital works could enjoy verifiable scarcity, empowering the artist to endow authenticity and salability to downstream collectors of a digital creation.

It was only a matter of time before generative art migrated to blockchains, and that moment arrived with the advent of CryptoPunks.

Never Mind The Bollocks, Here’s The CryptoPunks

In 2017, a two-person game design studio called Larva Labs launched a digital art experiment on the Ethereum blockchain. The project paid tribute to London’s early ’70s punk scene, and came in the form of 10,000 unique, randomly generated, 24x24 pixel art images featuring humans, zombies, apes, and aliens. The full collection originated out of a Larva Labs algorithm that mixed together characteristics like species, hair style, and accessories to create a randomized combination of visual outputs.

Generative art had arrived on Ethereum.

Now recognized as the first historically significant NFT project to launch on a blockchain, values for these pixelated punk characters have skyrocketed in recent months. In March 2021, two of the nine CryptoPunk ‘Aliens’ in existence were purchased for 4,200 ETH each ($7.5 million USD).

In the summer of 2017, anyone with an Ethereum wallet could claim these tokenized digital characters on the Larva Labs platform for free, paying only a few cents in Ethereum transaction fees. Living somewhere between generative art piece, collectible, and technical achievement, CryptoPunks enjoyed three unique features compared to the generative work constructed in decades prior:

Each CryptoPunk was (i) verifiably unique, (ii) able to be self-custodied in an Ethereum wallet, and (iii) tradable on the Larva Labs marketplace.

Leveraging the Ethereum blockchain as a recording format, CryptoPunks had changed the generative media landscape forever. Inspired by CryptoPunks, the Ethereum community created a standard called ERC-721, for Non-Fungible Tokens. While CryptoPunks were traded primarily on the Larva Labs platform, future NFTs utilizing the new standards would enjoy the benefits of composability.

The Art Blocks Origin Story

Snowfro, a Mexico City born generative artist and technologist, was there for the original CryptoPunk claiming event in 2017. Today he owns over 60+ CryptoPunks, including seven Zombies, two Apes, and a partial claim to one of the nine Aliens — the rarest CryptoPunk character. He’s also one of the few Larva Labs designated CryptoPunks moderators, and is recognized in the crypto community by his Zombie avatar.

There aren’t many CryptoPunks OGs like Snowfro, and even fewer who share his technical expertise and appreciation for generative art. After CryptoPunks launched, Snowfro had a few questions bouncing around his green Zombie head:

In November 2020, Snowfro launched Art Blocks, the internet’s first marketplace for on-demand, on-chain, generative media. In the time between the launch of CryptoPunks and Art Blocks, pioneer on-chain art projects like Autoglyphs proved that artists could store more of the art “on the chain”, which validated Snowfro’s design decisions around NFT permanence for a generative art platform.

To finance early dev work, Snowfro sold fifteen of his prized CryptoPunk Zombies. Snowfro also launched Chromie Squiggles, a generative project he had been crafting for years, and the first generative art project to ever list on Art Blocks (Art Blocks Project #0).

In each unique Squiggle, hex pairs in the hash control the starting color, rate of change of the gradient, number of points, plus some surprise features that make some Chromie Squiggles more rare than others (e.g. “Hyper” Squiggles). As it relates to generative art, these “controlling” hex pairs are referred to as parameters.

As the first on-chain generative art project on Art Blocks, pieces from Snowfro’s Chromie Squiggles tend to trade at high values. Originally, the price to mint a Chromie Squiggle was just .035 ETH ($70). Today, the floor price for a standard Squiggle in the secondary market is .55 ETH ($1,200), with rare “Hyper” Squiggles trading up to 45 ETH ($97,000 USD) just six months post-launch.

Quickly, both Chromie Squiggles and Art Blocks took off. In six months, Art Blocks pieces have already generated $15M in secondary market volume, with nearly 4,000 unique collectors of art from the platform.

Today, Art Blocks collectors can browse from a variety of different generative art projects, although new drops from hot artists tend to sell out quickly. When a buyer identifies a collection they like, they pay to mint a unique output of that work, much like a vending machine for unique art. Except, you don’t know what’s going to pop out of the machine when you hit the button. Artists watch the mints unfold with as much fascination as the collectors.

Upon paying for a mint, the collector receives the generative media in their wallet, which is both unique (1 of 1) and simultaneously part of a larger collection: 1 of 1 (of x).

The unique output could be an on-chain image (Cherniak’s Ringers), an on-chain interactive 3D model (ge1doot’s Ignition), or even the first on-chain generative music project (Zeblock’s Unigrids).

In this way, the types of on-chain generative media that can be minted on Art Blocks is limited only by the artist’s imagination, the unique scripts they create, and the total amount of mints permitted by each artist.

Similar to CryptoPunks, the demand for each unique generative piece (as well as the overall collection) is driven by context around the artist, aesthetics, perspective, the rarity of traits presented in the work, and the total number of mints that can ever exist.

For example, a popular Art Blocks project is Cherniak’s Ringers, which has enjoyed > 1,800 ETH in secondary sales. As of this writing, the projected annualized royalties on secondary sales of Ringers are currently estimated to be over $2M (USD), divided up between artist, the OpenSea marketplace, and the Art Blocks platform.

The Future of Generative Media

The Art Blocks platform has three key features that point towards the future evolution of generative media:

(i) Joint Creation: Artists set the parameters, but collectors trigger each randomized mint, creating a new vector for collectors to participate in the artist’s creative process. Unique generative media is tailor made for community formation.

(ii) On-Chain: One substantial challenge inherent in many NFTs is that the token points to a file that lives off-chain. If the off-chain file disappears, the pointer asset is an empty shell. In the time since CryptoPunks, on-chain art projects like Autoglyphs and Avastars have proven that you can store more of the art on-chain. Similarly, the generative scripts that produce Art Blocks pieces are housed on Ethereum, along with each minted NFT. This allows the media to enjoy similar security guarantees as other assets on the Ethereum blockchain.

(iii) The Playground: Art Blocks has evolved into a playground where any generative artist around the world now has a creative home to launch complex, on-chain, generative media projects — whether that project is static, dynamic, 3D, interactive, audio, or any combination thereof.

We believe these three primitives enabled by Art Blocks will lead to fascinating second-order effects for the art world, and generative media creation more broadly:

Joint Creation -> Community Formation

Most things in crypto boil down to community, and the joint creation process encourages the immediate formation of a community around each project.

While limited edition 1 of 1 artworks can connote immense value through scarcity, the powerful CryptoPunks community proved that unique versions from a single body of work can compound a different type of collective value.

Platforms like Async Art allow multiple owners to own unique layers of single works, leading to interesting community dynamics around single pieces. Similarly, Art Blocks enables collectors to mint hundreds of unique versions from a single artistic theme, allowing artists to tap into novel community-formation as part of the creative process.

One example is Squiggle DAO, a community-led project and decentralized art house powered by hundreds of Chromie Squiggles owners. Squiggle DAO acts as a place for on-chain generative art education, a financier of on-chain generative art, and a foundry for new generative artists. We expect to see more powerful communities form around generative media works in the future.

On-chain -> Composable Finance

The digital composition of CryptoPunks pre-dates the ERC-721 standard, limiting the project’s ability to be widely used in Ethereum’s trust-minimized financial stack. In contrast, most Art Blocks projects, like Chromie Squiggles, enjoy full composability. Further, the fact that many artist scripts are on-chain ensures permanence. Generative outputs can also plug into DeFi rails and applications, adding an interesting layer of financialization previously inaccessible by both generative artists and collectors over the last fifty years.

For example, anyone around the world can quickly list their Art Blocks pieces as collateral for a loan on NFTfi, Ethereum’s leading NFT marketplace for collateralized lending. In addition, and with just a few clicks, any collector can bid or buy an Art Blocks piece on secondary marketplaces like OpenSea or Rarible.

Over the coming decades, we also expect on-chain generative media, pioneered by early projects like CryptoPunks, Autoglyphs, and Chromie Squiggles, to play an important role as a new class of store of value assets — not unlike what we see today in the high-end physical art market.

The Playground -> On-Chain Building Blocks

With Art Blocks, any artist can use previously generated outputs as building blocks to create new projects in an entirely trustless way. The on-chain data that lives within each Art Blocks output will unlock future utility and intersect with metaverse projects like CryptoVoxels, AI-powered NFT projects like Alethea, or simply act as access keys for new artist drops.

One artist, Xenoliss, recently launched an Art Blocks project of 2,000 unique planets with infinite variations of terrain, shapes, and biomes that can be generated by collectors. Upon completion of all 2,000 pieces, each individually-owned planet will be used to construct an interactive solar system. From this foundation, Xenoliss will launch a second space-themed generative art project that can interact with the assets generated in their first.

Projects like this hint towards the intersection of generative media and gaming environments. Generative in-game items will be here before long.

Artists, digital storytellers, video game developers, and DAOs of all kinds will leverage the power of on-chain generative media to create groundbreaking works across multiple digital environments. You can even imagine an Art Blocks powered script that references a collector’s on-chain work credentials on RabbitHole, with each output unique to a collector’s previous work history.

We don’t know what projects will emerge as these on-chain building blocks unfold. The future of generative media, like our own lives, will be randomized and unique in ways we least expect.

One thing is for certain — Art Blocks, and the rapidly growing community within its digital walls, will play a large role in that future.

Join the fast growing Art Blocks community on Discord, follow Art Blocks and Snowfro on Twitter, and mint your first (totally unique) piece of generative media on the Art Blocks platform. Once you’re done, tag us @derekedws and @sbmckeon on Twitter to show off your brand new mints :)

A special thanks to gmoney, Aftab Hossain / DCinvestor, Brian Flynn, Cooper Turley, Dmitri Cherniak, Donovan Escalante, Josh Hannah, Priyanka Desai, Aaron Wright, Snowfro, Yuan Xue, Robi (wrappedpunks), Quickrider, Akira, Flamingo DAO, The LAO, and our friends at Libertus Capital.

An additional thank you to Larva Labs’ Matt Hall and John Watkinson for getting the generative fire started on Ethereum.

Disclosure: At the time of publication, Collab+Currency or its members have exposure to some of the liquid assets and NFTs described in this piece, including BTC, ETH, CryptoPunks, Chromie Squiggles, Ringers, Ignition, Unigrids, CryptoVoxels land, and Autoglyphs. Collab+Currency are investors in a number of the infrastructure projects mentioned in this piece, including SuperRare, Async Art, NFTfi, and Art Blocks.

You can find more thoughts from our team on Twitter: @Collab_Currency

Punks, Squiggles, and the Future of Generative Media was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

By 2010, the recording music industry was in big trouble.

Napster had debuted a decade earlier, giving an entire generation of fans the ability to swipe their favorite songs and albums off the internet. Revenue from U.S. music sales plunged 60%. Digital piracy was rampant.

Limewire. uTorrent. Demonoid. Pirate Bay. Well-funded incumbents tried to shut down a number of peer-to-peer file sharing sites, but found themselves playing an expensive game of legal whack-a-mole. Spend the resources to hammer one down and another would immediately spawn.

Looking to upgrade the existing paid model, pioneer services like Apple iTunes launched distribution platforms that facilitated paid downloads of digital music, either as singles or as albums. But in 2010, Forrester Research reported that only 44% of U.S. internet users believed that downloading digital music was worth paying for.

While music distribution was in the throes of massive disruption, so too was another notable area of the industry: music production.

Independent artists armed themselves with YouTube tutorial videos, pirated versions of ProTools, and inexpensive dynamic condenser mics. Advancements across recording, mixing, and mastering music were manifesting through moderately priced recording gear and feature-rich software. By the end of 2010, the gap between expert sound engineer and home studio had narrowed substantially.

A tsunami of bedroom digital creatives began to swell.

In early 2011, following a 10-day suspension from high school, 17-year old Chancelor Bennett from Chicago started working on his first full length music project — a mixtape aptly titled “10 Day.” He released it as a free digital download on a streaming site called DatPiff where it was downloaded and streamed thousands of times.

A year later, Bennett released his second mixtape as another free digital download. Acid Rap was a game changer that found its way to multiple “Best Albums of the Year” lists, including Rolling Stone, Pitchfork, Complex, and NPR.

Chance The Rapper, one of the hottest rising stars in music, had sold zero records. The independent music revolution had arrived.

The Incumbents Strike Back

The record industry found itself in unfamiliar territory. Technology now allowed users to create and share perfect copies of audio files over private and open networks, bypassing copyright laws and a legal layer that had been optimized for a physical world. Their business model had to find a novel way to adapt to digital environments — or risk death by a thousand free downloads.

Under the legacy model, record labels would advance cash to new artists to complete studio recording, mixing, and mastering. In exchange for these loans, the record label would acquire the copyright to the studio recordings and masters.

Simply put, the artist relied on the record label for financing and distribution. The record label relied on the artist for the content.

How did labels recoup their investment? By monetizing the copyrights. In the decades prior to the digital download crisis, this meant printing a physical copy of twelve recorded songs, bundled with paper art, sold in plastic wrap to consumers at Circuit City or Tower Records. The physical format adapted to new technology through the years, from vinyl records to cassette tapes to compact discs (CDs), but the business model did not change.

In other words, the model revolved largely around distribution of the physical album, of which the record company could expect to see 30% of total album sales and gross profits up to 60% after recouping recording advances and promotional costs.

But without a way to monetize their services in a digital age, the decline of CD sales from 2000–2010 was inducing the fall of the record labels in real time. With the rise of inexpensive creator tools like GarageBand, and online platforms that enabled direct distribution like SoundCloud, things weren’t looking good for the record label value proposition.

Their business model was breaking.

As distribution revenue began to falter, the labels increasingly sought to grab a piece of all the other revenue streams from the artist, known as 360 deals. Record labels also began to take their bags of copyrights and shop them around, eventually converging around unique partnership agreements with internet radio stations like Pandora and Spotify. Under these new models, users could stream an unlimited amount of ad-supported licensed music for free, or pay monthly for an ad-free listening experience.

No mp3 downloads required.

By 2014, an estimated 41 million people worldwide were paying for a music subscription service. For the first time in a long time, music sales started to climb again.

The reason was simple — it was a better user experience. Pirating music was hard work and downloads were annoying. It was easier to pay for unlimited streaming access and just be able to listen to anything, anywhere, anytime, on any device.

With fans aggregating on their platform, firms like Spotify were now the first in line to get paid for digital music sales, of which they would keep 30% of total revenues. After taking their cut, Spotify would pay the remaining 70% of revenue as royalties to rights holders (typically, the record labels) on a per stream basis. Next, record labels would take their cut. Finally, the record labels would pay the artists and musicians based on their individual contract agreements.

So what’s left for the artist? As it turns out, not much. According to recent estimates, a whopping one million streams on Spotify translates to roughly $3,500 — $4,000 for individual artists. Less than one half of one cent per stream.

As more listeners flocked to these streaming services, new artists, and even established artists with tremendous leverage, were forced to take raw deals to satisfy the consumptive preferences of their fans.

Record labels learned to love this model too, squeezing fresh dollars out of their most valuable copyrights and continuing to target new musicians who needed cash upfront and marketing help, in exchange for the rights in their recorded masters.

By 2017, streaming overtook physical sales for the first time as the largest source of global recorded music revenue. That year, the music industry generated $43 billion in revenue, but only 12% of that made its way to the artists. To put that number in perspective relative to other performers, professional basketball players capture roughly 50% of revenue generated by the NBA.

Even though the internet enabled artists and fans to communicate and exchange files peer-to-peer, the heavily intermediated value flows constructed a century earlier around physical album distribution found a way to persist in the digital age because the record labels and streaming services owned the payment channels.

The independent music revolution had failed.

That is at least, until now.

Meet Audius

Audius is a community-owned audio streaming platform that gives anyone the freedom to distribute, and more importantly monetize, their own creative audio content. The project is a call to arms to the world’s musicians, podcasters, and content creators to opt-out of the models plagued by rent-extraction, opacity, and powerful incumbents. It’s a signal to legacy intermediaries that the exchange of value between two parties should not be gated unnecessarily.

Bitcoin illustrated that digital scarcity is possible in the realm of money. Ethereum extended the concept of digital scarcity beyond commodity money, enabling any digital good (3D objects, music, files, GIFs, memes) to enjoy programmatic scarcity by its creator.

Verifiable scarcity is a game changer for digital content, which for the last three decades could be readily duplicated without reference or attribution to its creator. Outside of enforcement by a legal layer, there’s been no great way to track property ownership that travels alongside natively digital content.

For goods like recorded music and crypto art, programmatic scarcity is an important primitive. The ability to verify a digital work’s edition size is the first building block by which to recognize and transfer the property rights associated with that creative work. Audius’ tech stack leverages these digital property rights to power new models of value exchange directly between artist and fan. The era of blockchain-enabled liquid IP is just beginning.

Internet-native, mission-driven communities aim to be more transparent, democratic, and governed by the collective mindshare of its contributors. For Audius, this means its music streaming protocol will be owned and operated by its artists, fans, node operators, developers, curators, and tastemakers.

Audius’ governance token $AUDIO, went live last week spurring a tidal wave of new content. The streaming catalog has grown by 33,000 tracks in four days. The network dashboard, which reports various metrics in real time, indicates that Audius is tracking towards nearly a million unique users this month.

Importantly, the power of this audio platform is now in the hands of its users, allowing stakeholders to remedy a number of problems faced by digital music creatives today:

Misaligned Incentives. Today’s audio streaming model suffers from misalignment across recorded music stakeholders, including streaming services, recording labels, studio artists, and songwriters — eventually resulting in rent seeking by the system’s most powerful participants. The fractured incentive structure also results in significant time delays for things like artist payments, effectively resulting zero-interest loans to streaming platforms and labels by the system’s most powerless participant — the artist.

Alternatively, Audius is owned, operated, and governed by all of its users, aligned around the $AUDIO token. The future of Audius is one of community ownership, resulting in a more equitable network across the ecosystem.

Data Opacity. No incentive exists for industry incumbents to make various types of data public if that information can be tightly controlled and used to their advantage. Today, there exists little transparency around the origins of artist payouts for streaming, including a track’s number of plays, location, original gross payment before fees, and other pieces of data that should be made available to artists of creative works.

Alternatively, activity for Audius artists are wholly transparent. All files, earnings, and other information distributed through the protocol are publicly available and independently verifiable.

Content Censoring. Today, services like Spotify and Apple Music actively censor content available through their products, leaving the future of artist monetization at the whim of centralized decision makers. In addition, remixes, covers, and other derivative content are largely censored due to frequent rights management issues.

Alternatively, individual Audius artists, working together with a mission-aligned community at large, are in total control over the future of these recorded creative works. Original artists can generate immutable and timestamped records for audio that persists indefinitely, bypassing a number of rights management issues that plague the siloed centralized streaming model.

The Future of Audio

This month, Spotify launched Anchor — a new effort allowing DJs, podcasters, and producers to integrate any Spotify track into their episodes or recordings, compensating its artists like it does any other stream on their platform. However, Anchor breaks RSS and requires Spotify-based distribution, which has the effect of building even higher walls around the Spotify garden, further trapping artists inside its monetization playground.

On a free and open internet, the incumbent stranglehold on creative audio works continues to squeeze tighter.

Digital goods require a new kind of digital ownership — one where the rights surrounding creative work can always travel with the artist, guided by their sole discretion, free from the influence and interests of third-party intermediaries. As the value proposition of artistic sovereignty becomes clear to the mainstream, a new generation of creatives will opt to own their digital work from the very start.

As a result, we believe this next generation of creatives will be able to seamlessly exchange value peer-to-peer with a global fanbase. They will do things like crowdfund the creation of new digital works by fractionalizing revenue streams, drop unique artist tokens to incentivize fan engagement through exclusive access, and distribute their art on networks like Audius. Thereby harnessing a channel owned and operated by the creators and consumers of music, rather than those that stand between them.

If the last twenty years have taught us anything, the transition won’t be easy. The recorded music incumbents will fight back. But the future we collectively aspire to build is worth the fight.

Technology will always continue its inexorable march towards efficiency. People get fed up. On a long enough timeline, the rent-extractors and middlemen are eventually bypassed.

The early internet enabled early forms of value exchange between artist and fan, sparking the independent music revolution. Audius allows this independent music revolution to continue, allowing anyone to earn ownership in the digital streaming stack. Their tagline is pitch perfect: “Don’t just own the masters, own the platform.”

A community-owned audio platform, for sovereign digital works.

We’ll see you on the other side.

A special thanks to Forrest Browning, Jake Brukhman, Priyanka Desai, Brian Flynn, Roneil Rumburg, Kyle Samani, Cooper Turley, Paul Veradittakit, and Aaron Wright for their feedback and insights during the construction of this piece.

Disclosure: At the time of publication, Collab+Currency owns some of the assets described in this piece, including BTC, ETH, and AUDIO.

You can find more thoughts from our team on Twitter: @Collab_Currency

The (Audio) Revolution Will Be Tokenized was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

Over the coming decade, we believe verifiably scarce and boundary-pushing digital works will power one of the internet’s most valuable industries. Crypto art is a natural evolution of the perpetual question: what is art? But in a natively digital medium, art takes on a more expansive role, intersecting with virtual worlds, decentralized finance, and the social experience.

Don’t quite understand the opportunity? We’ve got you covered.

The Case For Crypto Art

To understand crypto art, it’s important to frame the opportunity in the context of previous art movements. Looking back across history, legacy art movements can typically be viewed as reactions to (1) prior art movements; and (2) relevant cultural events.

If you asked “what is art” in the mid-1800’s, you might hone in on realism: the more accurate and realistic the art, the better. But this movement morphed into impressionism, where artists reacted against accuracy by playing with conceptual ideas, and then expressionism and abstract expressionism, where artists distorted their work for effect, focusing more on emotional intensity rather than literal depiction. (Note: We are collapsing 20,000 PhD dissertations into sixty words, and we acknowledge art history is far richer and nuanced.)

Given cultural context, and the lens of the artist, the form of an art piece can also be ephemeral and intangible — think street art or performance art.

While it’s a bit difficult to define an art movement’s period while it’s happening, we do know creative expression in recent history has become more strongly influenced by cultural trends in technology. As our lives have become increasingly digitized, so has the creative work we make and share with the world.

While “digital” art has been around for nearly four decades, many creators haven’t enjoyed the same monetization potential relative to physical works.

One reason? Over the course of art history, much of the monetization potential around creative expression has been predicated on the physical scarcity that travels with the art. You can’t buy and resell a one-time live performance art piece, at least not in the same way you can buy and resell Cézanne’s The Card Players for $250M or Damien Hirst’s formaldehyde shark for $12M.

The monetization limitations of ephemeral art creation have plagued the digital world as well, but for the opposite reason — the features of a digital original can be perfectly copied and shared. Digital GIFs and MP3s are readily duplicated, without reference or attribution to the originator. Outside of enforcement by a legal layer, there’s been no native way to create and track digital scarcity that travels with creative digital property.

Over the past decade, Bitcoin has illustrated that digital scarcity is possible in the realm of money. BTC has become a store of value commodity money with an aggregate value of over $100B as of this writing. Ethereum extended the concept of digital scarcity beyond commodity money, enabling any digital good (3D objects, music, files, GIFs, memes) to become programmatically scarce. In many cases, these objects are unique, or in other words, non-fungible. Jake Brukhman from CoinFund wrote an excellent piece about this idea earlier this week.

ERC 721 is a standard interface for non-fungible tokens on Ethereum (i.e. tokens with a unique identifier). We can observe every address that’s ever held it, bid on it, or transferred it. In other words, perfect provenance. Today, when it comes to blockchain-based art, we must not conflate an object’s reproductive capabilities with its underlying rights. Ownership over a digital work can be imbued with programmatic scarcity by its creator, a first step to indicating authenticity.

Property lawyers (including IP attorneys) tend to think about property rights as a “bundle of rights,” much like a bundle of sticks. All the different sticks in that bundle (e.g. usage rights, rental rights, publishing rights, film rights, distribution rights, etc.) may be held by one person or many people over the course of a property’s lifecycle, parceled out in unique combinations.

A token’s verifiable scarcity through standards like ERC 721 is the first building block by which digital artists can start enjoying these property rights, and the transfer of those different rights, for their sovereign digital creations. Standards like ERC 1155 build off this idea, allowing owners to create licenses and model out each exclusive right provided under the Copyright Act. We expect more innovation on this front by teams like Open Law.

In this way, crypto art will be as subversive to the traditional art world as BTC has been to the traditional financial world. As we describe below, BTC and crypto art are more similar than different. Art is one of society’s favorite store-of-value assets. Sales reached $64B in 2019 alone and the aggregate value of traditional fine art is estimated at over $3T, but these figures just barely scratched the surface.

A large portion of the current market for art is driven by the wealthiest segment of society, but crypto art promises to bring a new generation of market participants into art, as it merges with the markets for collectibles, gaming, and investments. Measuring the market for crypto art based on the current traditional art market is like measuring the aggregate market for air travel using only data from passengers that travel on private jets.

The Business of Art Markets

Now that we’ve laid the foundation for crypto art, let’s talk about the business of art. Broadly speaking, there are six participants in the traditional art market:

• The Artist (Creator)
• The Gallery (Primary Market)
• The Critic (Writer/Author)
• The Auction House (Secondary Market)
• The Collector (Investor)
• The Curator (Museum)

The artist is the creative that powers the business of art. Without them, the industry ceases to exist.

The gallery is a business partner and agent for an artist, and primary sales of new art will occur at gallery shows and exhibitions. It’s easy to mistake a gallery for just a room with white walls to hang and showcase art, but the real function of the gallery is that of broker, sales team, operations, logistics, and collection management.

The critic reviews art publicly, often publishing critiques in newspapers, magazines, and art blogs. An artist’s financial career, and the investing public’s demand for their work over time, is heavily influenced by the opinions of critics and curators.

The auction house is where secondary trades occur. While secondary sales can occur anywhere, the majority of secondary art sales for top artists will occur downstream at events led by auction houses like Christie’s and Sotheby’s.

The collector is the investor. Collectors often rely heavily on the opinions of curators and critics, sale prices at art galleries (primary) and auction houses (secondary), and the progression of an artist’s career and work over time.

The curator is the specialist within each museum charged with conducting art research, developing exhibitions, managing the site’s collection of works, and educating the public on the progression of art movements over time. There are also independent curators not associated with a single museum, but stage their visual essays in museums, parks, and galleries around the world. For example, every two years the Whitney Museum puts on the Whitney Biennial, where two of the best curators in America team up to create a visual essay about what it means to make art in America during that particular moment. The art that appears in that show will set the tone for the art world over the next two years.

Importantly, while all six participants of the traditional art ecosystem help bring new value into the art market, incentives are often not aligned:

• The artist is focused on the primary sale;
• The gallery is focused on the primary sale;
• The critic is focused on attracting readers/views for the publication;
• The auction house is focused on the transactional aspect of the secondary sale;
• The collector is focused on appreciation in the secondary market over time;
• The curator is focused on representing the museum’s institutional interests.

The question then becomes: for crypto art to thrive in the same way that the traditional contemporary art market thrives today, is it possible to bring the mechanics of the contemporary art industry into the digital age, while simultaneously improving the design for how art is curated, purchased, critiqued, and collected in this new digital space?

We think the answer is yes.

Case Study: SuperRare

Today, SuperRare is one of the world’s leading crypto art marketplace and social galleries by GMV. Built on Ethereum, the platform is equal parts gallery, auction house, social forum, and museum. Think Instagram meets Robinhood meets The Whitney. A curated, social-finance platform tailor made for the growing world of contemporary digital artists.

As more and more crypto artists, collectors, critics, and tastemakers have entered the SuperRare ecosystem this year, art sales in their marketplace have jumped:

Since launch, over $2 million has been earned by crypto artists and collectors from over 178 countries on SuperRare, the majority of which has occurred in just the last few months. What’s powering this emerging trend?

First, the creative sandbox that crypto art provides is unmatched across other mediums. For the first time, digital artists can monetize provably scarce digital works, whether it’s memes, GIFs, or VR installations. The creative surface area for digital art is vast, and by linking these works to an ownership token that carries collection and investment potential, more artists, investors, collectors, and critics are jumping into the crypto arena.

Second, crypto art is going mainstream. Celebrities like Ashton Kutcher have brought attention to the space. Pieces now regularly sell in SuperRare’s gallery for thousands of dollars. Influential digital artists like @Pak and @Hackatao have broken down economic barriers in crypto art, with some pieces commanding $10,000+.

Third, infrastructure projects like SuperRare have built compelling digital spaces to house the growing crypto art market. In SuperRare’s case, the team has taken the principles of the traditional art market and created a more efficient, trustworthy, expansive ecosystem to support the budding crypto art industry.

On SuperRare, new artists must first apply in order to tokenize and sell their digital art in the marketplace. Each submission is carefully reviewed and vetted by committee each week, leading to a curated roster of 400+ (and growing) digital artists.

Collectors place bids and flex their collections in an Instagram-like social feed. And critics, curators, and other crypto art influencers power crypto art’s education through long-form pieces in the popular SuperRare Editorial, a publication helping democratize the role of the art critic and educator.

Over the last few years, SuperRare’s thoughtful architecture has led to impressive growth for bringing new digital art collectors into the ecosystem.

But most importantly, by bringing together traditionally siloed parties of the art ecosystem into one community-powered digital platform, SuperRare now has the unique potential to align incentives across all actors of the crypto art space.

Today’s contemporary art market thrives because of its powerful (and invisible) curation layer, one composed of galleries, critics, curators, and collectors. Perhaps the future of SuperRare holds some decentralized version of this: a community owned and operated network for artist selection, primary and secondary markets, creative review/critique, and curated exhibition. In this way, we believe SuperRare’s future decisions around community governance (and aligned token incentives) could contribute meaningfully to the growth of crypto art’s financialization, and crypto art’s role as a powerhouse in the world of contemporary art.

To say we’re excited would be an understatement.

Crypto-Enabled Art Market Innovation

Better Economics For Creators. Like many platforms in crypto that collapse intermediation, the economics for the first link in the supply chain, in this case the artist, are demonstrably better than the legacy system. The creator of a physical piece of fine art typically nets about half of the proceeds from a primary sale at a gallery. SuperRare artists receive 85% of primary sales.

Capturing a larger fraction of the initial sale is a big deal for the long tail of emerging artists, but the economics get really interesting around secondary sales once an artist’s career is established. Today, traditional visual artists get 0% of secondary sales in the U.S. so there’s plenty of room to improve.

This is a known issue in art markets and artists have been fighting for years to capture royalties on secondary sales to get a taste of subsequent appreciation. At the national level in the U.S., bills to establish residual rights for artists have been proposed in 1978, 1986, 1987, 2011, 2014, 2015, and 2018. None passed.

In other countries the situation is a little better. For example, in France artists get 4% (up to 50k euros), but it’s a sliding scale and their cut drops down to 0.25% for higher priced works. This notwithstanding, enforcement is a massive challenge, differs by jurisdiction, and engaging the legal layer is often required to collect.

The current system has largely failed artists with regards to residual rights. In contrast, SuperRare artists receive 10% commission for all secondary sales of their scarce digital creations in perpetuity. Perhaps more importantly, payment is immediate upon a secondary transaction. Because the smart contracts have dominion over the assets, no legal layer is required for enforcement.

Today, dozens of SuperRare’s artists have earned over $10,000 selling art on the platform, with the leading artist having already earned nearly $100,000. The advent of millionaire digital artists is within view.

Democratized Access x Crypto Incentives. On the collector side, crypto art enables seamless investing into this asset class previously restricted by geography, information, and access. In the future, we expect the programmability of crypto art to result in unique incentives and royalty structures that affect the investment returns of a work to extend throughout its entire lifecycle, from creator to collector. Imagine secondary sale residuals that accrue not only to the creator, but also those buyers who identify valuable works early in their lifecycle. Game on.

Cost Reduction. Today, the contemporary art industry suffers numerous cost frictions. Think shipping costs, storage costs, payment processing, and legal contracting costs. On the crypto side, digitally native art flows outside of these meatspace limitations, moving frictionlessly across peer-to-peer crypto rails and self-sovereign wallet custody.

Provenance. In 2010, The Independent estimated that 20% of art in major U.K. museums might be fake. Barenaked Ladies’ musician Keavin Hearn released a documentary earlier this year chronicling his experience purchasing what he believed to be an original Norval Morrisseau painting, only to find himself caught in the middle of one of the largest art fraud rings ever discovered. Crypto art? Since each original piece is tokenized as a scarce ERC- 721, artists and collectors in the future will be better able to identify a forgery, claim infringement, and identify damages since virtually all of a piece’s history can be tracked on chain.

Global Markets. Today, the contemporary art market for both primary and secondary sales is deeply fragmented and heavily geographic. For example, many top contemporary artists work with a number of galleries spread out across the world, most often in places where wealth aggregates like NYC, London, Berlin, Singapore, and Los Angeles. Each gallery is responsible for the artist’s career in that geographic region. Alternatively, SuperRare facilitates a 24/7 globally-connected marketplace for buying, selling, and showcasing crypto art.

Data Transparency. When buying or selling contemporary art, it’s important to understand how the market’s value of an artist or piece may have changed. In the physical world, it’s expensive to pull this kind of historical sales data and often requires expensive subscriptions to proprietary data providers like Artnet.com. With crypto art, historical information always lives on chain, making it trivial to audit and track specific pieces, artists, and trends.

All of the innovations listed above that improve on traditional art markets are available right now. But the most exciting scenarios for crypto art will occur not just by solving existing market frictions, but instead by expanding how society interacts with art.

Let’s think about how it might evolve…

The Future of Crypto Art

As interesting as crypto art has already become, we believe digital creatives are just scratching the surface of what it might look like in the future. Within a blockchain-based digital environment, bits of value and scarce information will always find a unique way to converge — unbundling and re-bundling in new composable forms yet to be discovered.

What we do know is that in 2020, there are a few interesting trends beginning to emerge, with which crypto art may intersect.

Art Display Meets Virtual Reality. The vast majority of physical art is in storage. Some observers estimate that museums only display 5% of their collection at any one time, and even for the very top artists, it’s often less than half. Part of the problem is the amount of physical space required for display.

In contrast, virtual worlds are not similarly constrained.

Yes, you can always display crypto art in a physical format, like a screen on your wall. We believe digital art will extend out to the physical world in exciting ways, like Async Art’s dedicated digital frames. But the first time you engage with crypto art in a more immersive virtual environment your jaw drops. The experience moves from looking at art to interacting with art.

Earlier this summer, SuperRare launched a crypto art museum on Decentraland, simultaneously providing functionality for artists to monetize around this new virtual canvas (VR/mp4). The platform’s most recent VR exhibit Atlantis is an interactive art piece in and of itself, exhibiting larger than life sized 3D VR sculptures. In these new virtual worlds, we’re likely to see an expansion of what crypto art can be. From the smallest VR installations to the tallest skyscrapers, it’s possible the next few decades may begin to blend art and architecture, allowing digital artists to unlock salable creative work in new ways.

In the future, creative works of art may expand in directions that include all forms of creator-owned mixed-media NFTs, painting our future world with visuals, sounds, and creative expression in combinations we can’t yet imagine.

Decentralized Finance. It’s hard to write an article about crypto in 2020 without mentioning decentralized finance (DeFi). Protocols can now plug in and reference one another like lego pieces to create new rails and applications for the movement of sovereign on-chain value. Ethereum is the dominant player, but we expect these same composable ecosystems to develop on additional base layers like Flow and Polkadot.

As it relates to leveraging composability, valuable crypto art really isn’t that different from many other tokens. NFTs are simply another form of digital wrapper. They allow value in the form of art to be traded and priced on-chain, and used within the same trust-minimized (and composable) contracting environment as stablecoins and other programmable stores of value.

We believe that crypto art’s composability with the financial stack will unlock a new universe of potential for what has historically been a siloed asset class. Think collateral, revenue through subscription, fractionalization, and thematic DAOs.

This certainly wouldn’t be the first time art has intersected with finance. Bowie Bonds broke ground in 1997 as a new financial product where performance artists could capitalize royalty streams. The difference today is the ecosystem of money lego applications and protocols that are agnostic to asset class as long as the wrapper adheres to the same technical standards. Crypto art just represents another asset class that can join a vertical that is expanding at warp speed.

The future of crypto art is as incalculable as it is identifiable, as threatening to the status quo as it is empowering. A sandbox of untapped programmable value that will change the way we monetize, share, and think about the borders of sovereign creative works.

You’ve been warned. Don’t sleep on crypto art.

A special thanks to David Berezin, Jake Brukhman, Chris Burniske, John Crain, Brian Flynn, Roham Gharegozlou, Madison Page, Jonathan Perkins, Curtis Spencer, Nick Tomaino, Aaron Wright, and the Collaborative Fund team for their feedback and insights during the construction of this piece.

Disclosure: Collab+Currency is an investor in SuperRare.

You can find more thoughts from our team on Twitter: @Collab_Currency

You’re Sleeping on Crypto Art was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Derek Schloss and Stephen McKeon

Ampleforth has received a lot of attention lately from both market participants as well as new experimental projects that are incorporating similar features into their own protocols. It’s a project that we’ve been following for a long time so we wrote this two-part article as an explainer and a framework for thinking about how it may evolve. Part I covers Ampleforth’s design and pricing mechanics. Part II (below) covers Ampleforth’s psychology and demand drivers.

The Psychology of Ampleforth

The network value of Ampleforth spiked in July and subsequently retraced about 65% from the high point. What caused this spike in demand and, more importantly, what are the longer term drivers of demand? We can point to three factors:

• (1) The Power of Incentives
• (2) Short-Term Speculation
• (3) AMPL’s Rising Economic Utility

The Power of Incentives

The initial spike in demand for AMPL illustrated the power of incentives. As we’ve been watching Ampleforth over the past year, one question we’ve debated is what the catalyst might be for a greater number of people to start participating? If AMPL units are going to be used as a commodity-money in the Ethereum ecosystem and beyond, the Ampleforth system needs more players.

Enter yield farming.

On June 23, 2020 the Ampleforth team launched ‘Geyser’ — an incentive program that distributed rewards (in AMPL) for users who supplied AMPL-ETH liquidity on Uniswap, a non-custodial decentralized trading platform. Liquidity begets liquidity, and this was the demand catalyst.

In addition to earning Liquidity Provider (LP) fees on Uniswap, users who provided AMPL-ETH liquidity could take their LP tokens and stake it on the Geyser platform (for background reading, see Placeholder’s Proof of Liquidity). Users who provided more liquidity on Uniswap and staked on Geyser would earn a greater share of AMPL rewards through the program.

It’s important to note here that blockchains aren’t just useful for tracking asset balances — they’re also pretty killer at tracking the length of time those assets are held. How does this play into Ampleforth’s incentive program? In addition to the amount of liquidity supplied in Uniswap, Geyser also rewarded users for the length of time they staked in Geyser — up to a 3x reward multiplier over a 90 day period of staking.

As a result, one could say that part of Geyser’s success thus far isn’t just predicated on incentivizing liquidity. By adding a temporal component, the program also incentivizes not withdrawing liquidity deposits. This has led to a mind-boggling ~70% retention rate since Geyser launched.

Geyser’s three stacked incentives — (1) income generated as a LP on Uniswap, (2) rewards generated based on deposit amount; and (3) rewards generated based on deposit length — has created a flood of new interest in Ampleforth with a few interesting second order effects on Ampleforth’s system.

One effect of Geyser has been the much improved distribution of AMPL ownership. In June 2018, Ampleforth was still a private project with ownership over the network tightly controlled by the team, their advisors, and a small group of investors. In June 2019, Ampleforth made headlines when they raised $5M in just eleven seconds in a public Bitfinex IEO — an important first step in the progressive distribution of AMPL. By June 2020, roughly 4,000 Ethereum wallets held AMPL.

Then came Geyser.

The number of wallets holding AMPL today has reached nearly 20,000 as of this writing.

Another effect of Geyser on Ampleforth has been the massively improved liquidity for AMPL. The AMPL-ETH Uniswap pool has been the largest pool on Uniswap for the last 30 days (reaching as high as $45M) — allowing a fairly deep market to form around the trading pair. At one point, the AMPL-ETH pool accounted for over 50% of total daily volumes, and about one third of the total liquidity on Uniswap. During the month of July, AMPL-ETH represented over $500M of Uniswap’s volume.

Ampleforth is optimizing around a commodity-money use case, and reliable money requires reliable liquidity. The incentives they created to establish a deep pool of liquidity catalyzed demand. As a result of Geyser’s success, the Ampleforth Foundation recently announced that 23.5% of the network would be earmarked to support Geyser or Geyser-like programs over the next 10 years, with a focus on decentralization, liquidity, network health, and broad rewards.

Short-Term Speculation

The second source of demand is short-term speculation, also known as FOMO, hot potato, trend trading, etc. The idea here is demand begets demand. As the asset gains momentum, more speculators pile in hoping to make a quick buck. Let’s be clear that this definitely drove part of the run up in AMPL’s network value and also that it’s not long run sustainable. But, we hasten to note that this alone is not a reason to dismiss the project. We’ve witnessed the same demand pattern in BTC and ETH. The popular press rushes to declare the death of Bitcoin after each of these events, and we’re loath to jump to the same conclusion on AMPL.

Repeated episodes of rise and fall are characteristic of cryptocurrencies as they go through the maturation process. BTC saw demand spikes in 2011, 2013, and 2017. Each event led to a huge run up followed by a substantial decline, but leveling out at a new higher price. For example, at the beginning of 2013Q4 BTC had a network value around $1.5B. It spiked up to over $13B that quarter, only to drop 50% relative to the ATH by 2014Q1 and then half again by 2015. It never touched $1.5B again, leveling out between $3–4B for most of 2015. Fast forward to 2017. BTC started the year around $15B, spiked to over $300B during Q4 and declined substantially during crypto winter, leveling off around $60–70B in late 2018 and early 2019. It never touched anything close to $15B again. A key indicator for AMPL will be leveling out at a higher network value following demand spikes and subsequent declines.

Only time will tell how resilient Ampleforth proves to be. The long run success or failure will be a function of the usefulness of the protocol and strength of the community. Speculation may provide a window into the market’s views on that usefulness, but the short term volatility in the network value is also a bit of a distraction.

Gauntlet Network’s recent August 2020 research report on Ampleforth analyzed the trading period of Ampleforth between January 3, 2020 — June 22, 2020, while also running a simulation that measured the effect of different short-term trading strategies on the Ampleforth system. The simulation employed a hypothetical distribution of various market participants such as arbitrage traders, equilibrium traders, mean reversion traders and momentum traders. The headline finding was that the Rebase Arbitrage Trader’s strategy appeared to be the only modeled trader type that demonstrated significant profitability. It will be interesting to reestimate the simulation on data from the second half of 2020.

AMPL’s Rising Economic Utility

Neither short-term incentives nor short-term speculation is sustainable in and of itself if the asset offers no economic utility. To have long term sustainability, the Ampleforth protocol (and AMPL unit) must be a compelling economic product, and the compelling-ness of the product must result in a sticky community of users.

In the years since Bitcoin launched, the network’s open, immutable, transparent ledger — working in concert with provable scarcity — has reshaped how individuals and institutions across the world think about money and digital value.

However, as it relates to fiat money (e.g. USD in 2020), paper claims on commodity-money (e.g. USD’s “gold standard” pre-1971), or commodity-monies themselves (e.g. gold coins), sovereign digital money is still a fairly young monetary experiment.

A number of other cryptoasset networks are also optimizing for the commodity-money use case. By leveraging some of the economic design features of Bitcoin (e.g. fixed supply) while iterating on other features (e.g. privacy, governance, consensus), we’ve seen a number of differentiated experiments create new forms of cypher-money. Supply is simply another dimension of the design space and one that hasn’t been the subject of nearly as much experimentation. This is in part because supply increases negatively impact asset holders if they don’t accrue pro-rata to holders.

When an asset has a fixed supply, the volatility in demand to hold that asset manifests entirely in price. In supply-elastic assets like AMPL, supply expands and contracts to absorb positive and negative demand shocks, allowing price to remain comparably more stable. Importantly, a holder’s wealth (units*price) will still respond to demand shocks, but the volatility is driven into units rather than price. This comes back to the old adage that financial risk is rarely eliminated and more often just shifted somewhere else.

Is it useful to shift volatility from price to units? Perhaps. Consider the three functions of reliable money:

Unit of Account (UoA). “This candy bar costs 1.00 AMPL”

Medium of Exchange (MoE). “Yes, I will gladly accept AMPL for my candy bar”

Store of Value (SoV). “I will put this one AMPL in cold storage until I want to buy a candy bar in ten years”

We note that prior to 1971, the US used gold to regulate the supply of base money dollars, but gold was not very useful as a medium of exchange, and the unit of account was the dollar on top of the gold rather than the gold itself. Furthermore, there were switching costs to move between dollars and gold. As crypto wallet and exchange infrastructure continues to evolve and merge, transitioning between assets is becoming increasingly frictionless. Switching costs are trending towards zero — eventually, it won’t even be visible to the user.

What this allows is the unbundling of the properties of reliable money. A supply-elastic asset may be more useful as a unit of account relative to fixed supply assets, and an asset with the deepest liquidity pool may be best as a medium of exchange. If AMPL can reach a steady state around the target then it would represent the optimal UoA since the target rises with fiat price inflation.

Of the three functions of reliable money, the store of value property is the hardest to predict over long horizons for young experimental assets. Since volatility is driven into units rather than price, the candy bar might still cost 1.00 AMPL in 10 years, but you could open up your wallet to find that you either have 0.01 AMPL or 500 AMPL. Instead of putting your one unit of AMPL into cold storage, you would buy a forward contract on AMPL, shifting the risk onto an investor that wishes to bear the market cap volatility.

To prove out the SoV property, AMPL needs to reach a steady state where it reliably trades within the equilibrium band over long horizons, perhaps only periodically bumping outside in response to shifts in genuine usage demand (not speculation). For example, say that a popular app adds AMPL as an accepted payment and it drives demand for AMPL. Ideally, the price would rise outside the band in response to the demand, generate the new units to satisfy the demand, and then return to equilibrium.

This steady state is not likely to materialize in the presence of substantial speculative trading activity and will instead be driven by integrations of AMPL that enable non-speculative usage. Additionally, it’s a psychological phenomenon — AMPL reaches steady state only when the market believes it has reached steady state. Steady state will be characterized by consistent buying pressure just below the target and selling pressure just above the target, within the equilibrium band. Investors that are holding AMPL long term are betting that the steady state will eventually materialize, and that it will materialize at a high network value.

While it’s still early days, AMPL appears to be generally working as intended:

• Supply Elastic. The protocol has been expanding and contracting AMPL supply for the last year without pause.
• Low Price Volatility. Outside of a period of exceptionally low demand in Sept-Oct 2019 and a period of exceptionally high demand in July 2020, AMPL has continued to oscillate between $0.50 and $1.50. This is still a bit outside the equilibrium band, but it’s proven to be comparatively price stable relative to fixed supply assets.
• Uncorrelated. Gauntlet Network’s August 2020 report concluded that on a market capitalization basis AMPL’s “historical returns have been uncorrelated from both BTC and ETH across various timescales.” We’ll be watching this closely to see if it maintains a low correlation with other cryptoassets and the Ampleforth network value grows.

Importantly, AMPL (the unit) reaching steady state as a base money must also coincide with Ampleforth (the system) reaching a point of credible neutrality. Over the coming years, its decentralization will be graded by the market across many qualities — for example, protocol changes, oracle reporting, and ongoing development around the project.

Some projects striving toward progressive decentralization are solving these challenges through the construction of community-powered governance processes. For other projects, the protocol’s reliability over time may better align with removing human coordination wholesale. Last week the Ampleforth team announced that the protocol’s “emergency pause” abilities — setRebasePaused and setTokenPaused — had been removed from the protocol contracts entirely. Early indications are that the team appears committed to a minimized governance, rules-based approach as the system evolves.

As we’ve learned with all types of money — shells, stones, gold, fiat — durability is predicated on market psychology. The question is not only whether Ampleforth has created a compelling economic product, but whether the compelling-ness of AMPL as a commodity-money is perceived and used as such in an economy over time.

To complicate the money narrative even further — it’s possible that our legacy construct for reliable money (MoE, UoA, SoV) doesn’t end up mapping as cleanly on-chain as it has off. Today, we find ourselves exploring a new world where any asset can be digitally wrapped and programmed to taste, giving us the power to exchange, price, and store value with minimal friction and switching costs. The functions of money we’ve come to rely on may end up becoming unbundled and rebundled in alien forms difficult for us to imagine today.

We welcome this monetary experimentation.

A special thanks to Evan Kuo, Spencer Noon, Paul Veradittakit, Curtis Spencer, and the Collaborative Fund team for their feedback during the construction of this piece.

Disclosure: At the time of publication, Collab+Currency has exposure to some of the assets described in this piece, including BTC, ETH, AMPL, and USD. We do not own any gold or cows.

Stephen McKeon (@sbmckeon)

Derek Schloss (@derekedws)

Collab+Currency (@Collab_Currency) // collabcurrency.com

The Rise and Fall (and Rise and Fall) of Ampleforth — Part II was originally published in Collab+Currency on Medium, where people are continuing the conversation by highlighting and responding to this story.

The opportunity calculus for security tokens is different than what I just described. Blockchain-based securities are distinct from the fixed-supply, bearer, store-of-value cryptoassets like BTC, ZEC, DCR, and others.¹

Instead — security tokens, and the trust-minimized contracting environment they operate within, may be best understood as a formatting revolution.

Let’s begin.

The Legal Layer

In the United States, the foundation of contract law and securities law originates out of two principles.

The first? Protection.

Contract law protects the promises we make with others — if we enter into a set of promises with a counterparty, we should be remedied if our counterparty’s promises go unfulfilled.² Similarly, securities law protects investors by providing them with information deemed significant, while prohibiting deceit, misrepresentation, and fraud.³

The second? Incentivizing value exchange.

When rule of law is understood across transacting parties, confidence in the system allows new value to enter, wrapped in legal contracts.

Over the last few hundred years, both contract law and securities law have evolved out of these two principles.

Judges play a critical role in advancing these principles. Under a common law system, when contractual disputes enter our legal forums, judges apply the reasoning used in prior cases to the new set of facts presented in front of them.

We call this system stare decisis⁴ — “to stand by things decided”.

Life is complicated, and so are the promises and obligations that we exchange with others. Leaving complex fact patterns up to human arbiters leaves breathing room for more equitable decisions — especially where the black letters of law may dictate otherwise.

Securities may best be understood as a special kind of contract. Simply, they are a kind of tradable contract for financial instruments — things like stocks, bonds, and investment pursuits.

Like contract law, so too has securities law been carved and shaped over time at the hands of human lawmakers and judges. For example, the Securities Act of 1933⁵ defined the types of assets covered by federal securities law — while simultaneously prohibiting things like deceit and fraud during the sale of them.

A year later, the Securities Exchange Act of 1934⁶ empowered the SEC with broad authority over all aspects of the securities industry, including the power to register, regulate, and oversee entities like brokerage firms, transfer agents, clearing agencies, and our nation’s securities exchanges.

Over time, a rich history of stare decisis has formed around these laws. One of the most famous examples — in 1946, the Supreme Court reasoned that an “investment contract”, a term previously left undefined in the Securities Act of 1933, should be evaluated using a flexible four-part test. We call this The Howey Test.⁷

To recap, we have the underlying rights and agreements that parties make with one another. We have an array of laws written and codified by our legislators — and the principles behind that lawmaking. We have human interpreters of those laws known as state and federal judges. And finally, we have a never-ending book of unique fact patterns that create a lineage of stare decisis in our country.

This is the legal layer.

The Formatting Layer

Throughout history, the legal layer has enjoyed a unique relationship with its corporal counterpart — the formatting layer. Where the legal layer focuses on laws, principles, rights, and remedies, the formatting layer focuses only on one thing:

Optimal formats for the legal layer.

As long as legal layers have existed, humans have sought out the best formats to amplify the law’s underlying rights, rules, and principles. We’ve seen this play out over history.

Let’s take contracts, for example. Under this framework, contracts have naturally gravitated towards formats that (1) better protect contracting parties, and (2) better incentivize the exchange of value — the two driving principles of contract law.

To anchor this in practice, let’s start at contract law’s first formatting layer — the oral contract.

Within the Roman Republic, stipulatio was a legal format created to facilitate binding oral agreements between two parties.⁸ The format required specific words to be stated in order to create “offer and acceptance” of the agreement, in the form of “question and answer”. By not requiring an intermediating scribe to a contract, stipulatio incentivized greater levels of participation in Rome’s economy, while creating sufficient legal protection around the agreement.

Flash forward to today, oral contracts are still deemed a legally enforceable contracting format across the world — a remnant of human’s pre-literate contracting history.

But that doesn’t mean the oral format is optimal for the legal layer.

Today, most oral contracts are ignored by modern contracting parties. Samuel Goldwyn, the 20th century Hollywood executive, once argued, “A verbal contract isn’t worth the paper it’s written on.”

The problem with the oral format? While it’s frictionless to enter into verbal agreements, the format doesn’t lend itself well to evidencing that the agreement was formed — not to mention, the specific terms of the agreement.

As technology improved over time, contracting parties gravitated away from the oral format — and toward formats that better harnessed the principles of its legal layer.

The Written Format

The written format had several “killer features” that rendered it superior to the oral format.

The first feature was durability.

The Code of Ur Nammu (2050 BC), the oldest legal writing on record, was carved on clay tablets.⁹ Importantly, clay’s durable format allowed the code to be read and understood thousands of years after its creation — including rules about tax, perjury, and courtroom procedures. In fact, the code’s unique “if this, then that” structure is credited for influencing much of lawmaking thereafter.

The second feature enjoyed by the written format was the signature and other authentication methods — which helped demonstrate the seriousness of an undertaking by evidencing an individual’s willingness to be held to its terms.

Magna Carta, the peace charter signed in 1215 between King John of England and the rebel barons, was hand written on parchment and signed with the King’s seal.¹⁰ Used in concert with parchment, King John’s wax seal was an important formatting feature used to evidence his intent to be bound — while simultaneously preventing downstream forgeries of the agreement.

The third feature enjoyed by the written format was its distributive power.

In 1439, Johannes Gutenberg optimized the paper making process by introducing the wooden printing press and movable type.¹¹ Gutenberg’s first major project advanced a different kind of legal layer — religious laws. Gutenberg’s Bible sold for 30 florins — a significant price reduction compared with the manuscript Bible, which typically required one year to compose by hand.

A few hundred years later, the first industrial revolution brought new advances in machine tooling, including the creation of the Fourdrinier paper machine (1799).¹² This modern paper machine dramatically reduced the cost of books and paper over the next century, and coincided with the expansion of basic education and the rise of world literacy. In 1820, nearly 90% of the world was illiterate. By 1950, that number had been cut in half.¹³

Armed with a proliferating paper-based format, and with literacy rates on the upswing — the legal layer made significant strides in its dual pursuit of (1) protection and (2) efficient value exchange. These principles were on full display in the famous Ferguson Farm case, Lucy v. Zhemer (1954), heard by the Supreme Court of Virginia.¹⁴

On December 20, 1952, Lucy and Zehmer met inside Zehmer’s restaurant and proceeded to drink significant quantities of distilled spirits. In time, they began to discuss the sale of Zehmer’s Ferguson Farm to Lucy.

Finally, Zehmer wrote on the back of the restaurant’s receipt:

“We hereby agree to sell to [Lucy] the Ferguson Farm complete for $50,000, title satisfactory to buyer.”

Zehmer signed the receipt.

The next day, Lucy hired an attorney to examine the Ferguson Farm title. Once assured title was clear, Lucy wrote a letter to Zehmer asking to close on the deal. Zehmer backed out, insisting that due to Zehmer’s intoxicated state, Lucy should have known the “receipt contract” was written in jest.

The Supreme Court of Virginia unanimously found in favor of Lucy, holding that the circumstances were such that a reasonable person would believe that Zehmer intended to enter into a serious legal contract.

A simple paper receipt, facilitating the exchange of value, and the protection of two individuals’ legal promises — the legal layer had found its best format yet.

Paper’s Weight

Over the next few years, the underlying rights to assets — and the contracts humans made with others to own, trade, and manage those assets — thrived under the written, paper-based format. While oral contracts had allowed for frictionless contracting, written contracts were clearly the superior record keepers (durability), included evidence of a party’s intent to enter (signature/authentication), and by the mid-20th century, could disseminate with far greater ease and less expense (distribution) due to rapid advances in paper manufacturing.

But as trading exploded in the late 1960’s, U.S. markets began to wobble under paper’s weight. By the end of the 1960s, what was once the legal layer’s prized formatting tool — paper — was turning into a nightmare.¹⁵

In the public markets, stock certificates were spilling out across Wall Street — filing cabinets, tables, briefcases. Certificates were being delivered to wrong locations, or failed to be mailed at all — leading to costly mistakes. At scale, other new problems emerged as a result of paper’s format — damage, loss, theft. Between 1967 and 1970, $400 million in lost or stolen securities were reported.¹⁶

Back office expenses increased. Longer hours were required. On the streets, hundreds of bicycle messengers were employed to shuffle paper certificates back and forth between brokers. Eventually, exchanges were forced to close on Wednesdays, just to catch up on the administrative overload.

The paper format was failing in its pursuit of (1) protecting contracting parties, and (2) incentivizing the exchange of value. To match growing demand in the public markets, the legal layer for contracts and securities would need a new formatting upgrade.

The Trust-Dependent Electronic Ledger

In the second half of the 20th century, a new format began to emerge with the development of the microprocessor, and eventually trends in corporate and personal computing. Powered by small electrical circuits that could be turned on or off — the computer hit the mainstream.

Binary code, a computer language consisting of ones and zeroes, allowed humans to communicate with computers by defining how these machines took in information, stored and processed that information, and produced useful computer-readable outputs. Coding allowed for new tools and automated commands to develop into commercial applications.

In 1973, to help remedy the growing number of paper shares transferring back and forth between buyers and sellers on Wall Street, the DTC/DTCC was created to kick off the book-entry method of stock ownership we still use in our public markets.¹⁷

Today, the DTCC manages public market stock ownership as an entry on its electronic/digital database. Securities transactions on each stockbroker’s internal database are later shared, tallied, and reconciled on DTCC’s electronic/digital database.

And for privately held assets? Today, underlying rights to securities are often found in the form of electronically-signed and searchable PDFs on cloud-based storage (Dropbox), or as ledger entries on centrally-operated software (Carta) or spreadsheets (.XLS).

Looking back, it’s clear now that the switch from paper to electronic/digital unleashed tremendous value for the legal layer. Importantly — moving our public and private markets to electronic/digital optimized on the three core formatting features of the written format — (1) durability, (2) signature/authentication, and (3) distribution.

In regards to durability, ones and zeroes stored on databases no longer shared paper’s physical limitations. Unlike written contracts, digital entries could be trivially copied, shared, and saved across multiple electronic/digital databases. For example — after Hurricane Sandy destroyed $39.5 trillion worth of stock and bond certificates held by the DTCC, the firm announced that computer records had detailed inventory files of the damaged stock certificates, mitigating against total loss.¹⁸

For signature (authentication), there was also an important upgrade with the jump from paper to electronic/digital. By linking personal information to digital signatures, the legal layer began to recognize new forms of identity that could bind a contracting party — including things like Acrobat’s digital authentication system, or contracts made by email address. Where the first signature created the ability to codify a party’s intent to enter into a contractual obligation — the electronic/digital signature iterated on this feature by improving its speed, efficiency, and interoperability.

Finally, electronic/digital’s distributive quality also thrived as compared to the paper-based format. By coding legally enforceable content into ones and zeroes, contracts and assets could interoperate with computer-readable systems, and allow exchanges of these financial instruments to clear and settle much faster than ever before.

The electronic/digital database was the perfect format to match the modern realities of securities and contract (1) protection and (2) exchange.

The Trustless Digital Ledger

That brings us to today.

In 2020, much of what we recognize as our global financial system — and the contractual agreements within — have been captured by the electronic/digital format, trading from database to database across the world.

However, one major problem was left untouched during the migration from paper to ones and zeroes.

Trust.

Today, the contracting environment for the world’s financial assets is built on a network of trusted third-party databases, resulting in severe fragmentation for assets and trading around the world.

Owners of securities trust away their assets to electronic databases held by banks (hundreds), broker-dealers (thousands), law firms (tens of thousands) — or leave them idle on segregated cap table software or cloud-based spreadsheets (hundreds of thousands).

And what does a trusted, siloed environment mean for the world’s assets and its markets? It means value extraction, mistake, and inefficiency across all stages of an asset’s lifecycle:

• Costly fees accrued as a result of trading ownership or issuing distributions across siloed databases.
• Costly record keeping, auditing, and reporting services for transactions across siloed databases.
• Costly legal compliance and opinion for transactions across siloed databases.
• Inaccurate shareholder accounting and reconciliation systems.¹⁹
• Inefficient clearing and settlement speeds.²⁰
• Loss of appraisal/voting rights.²¹

As history has dictated over the last three thousand years, the legal layer will continue its inevitable march to locate more optimal formats over time — specifically where formats better pursue the principles of the legal layer.

And so — the terminal format for how securities and contracts are created, traded, and owned? This is a pursuit that will continue in perpetuity. It’s not whether the legal layer will adopt a new format — but what the next one will be.

Today, all signs point to blockchains as the next formatting layer.

In 2008, Satoshi Nakamoto published the Bitcoin whitepaper.²² Nakamoto gamified the double entry accounting process by creating a “third entry” — a dominant record of an event between two transacting parties, accepted as the truth by all parties.²³ Distributed computers all over the world — unrelated to an underlying transaction — were incentivized to provide costly amounts of electricity to power third-party receipt services for any transaction on the Bitcoin blockchain.²⁴ As a result, parties could trust that the transaction was accurately debited and credited, without having to trust their counterparty.

Over time, we learned that this type of data structure could track and store any kind of information reduced to ones and zeroes — including ownership rights to assets covered by a legal layer.

Like securities and contracts.

So — “why blockchain” for securities? Simply, using blockchains will unlock securities from the trusted, siloed, databases of the world — into an environment that enables trustless settlement and contracting.

In the context of the formatting layer, a “trustless” recording format optimizes on the three core formatting upgrades of the “trusted” recording format — (1) durability, (2) signature, and (3) distribution.

Compared to the durability offered by our current siloed system for securities, trustless ledgers offer unprecedented accuracy and record-keeping. Further, a blockchain’s transparency allows problems at both the asset and contract level to be seen and understood quickly — providing issuers, regulators, and contractual parties improved oversight to fight mistake, fraud, and abuse in our asset markets.

For signature (authentication), blockchains improve on the siloed database model by opening the door to a trustless, interoperable network for personal identity — in turn, removing the risk of storing personally identifiable information (PII) in multiple centralized databases around the world.

For distribution, blockchains are also a significant upgrade on the siloed database model. Our current matching and settlement systems are built on weeks/months-long matching periods (private markets) and days-long settlement times (public markets). Trustless ledgers offer the potential for transparent, 24/7, fractionalized, global, near-instantaneous matching, trading, and settlement — for any digitally-wrapped financial right or interest.

In the aggregate, these benefits make the distributed ledger a non-trivial formatting upgrade.

Digital Sovereignty

The formatting upgrade could stop there, and I believe that would be enough to bring the legal layer to its next evolutionary point. But trustless ledgers also unlock a new killer feature for the legal layer.

Digital sovereignty.

In 2018, Collaborative Fund’s Stephen McKeon wrote the following in his piece, The Security Token Thesis²⁵:

“The current stage of security tokens is analogous to broadcasting a radio program on television. We’ve just begun to tap the expanded design space for securities that it facilitates and we just don’t know how it will evolve from where we stand today. It could be a huge canvas for creativity over the next decade…”

I’ve had the last couple years to think about this idea, and I believe digital sovereignty is the heartbeat behind a new design space for financial assets. With digital sovereignty, individuals enjoy stronger ownership over their financial assets — one without siloed intermediation — and an improved influence on the security’s contracting environment over the asset’s lifecycle.

Attorney Gabriel Shapiro may have put this best, in his long-form paper Tokenizing Corporate Capital Stock²⁶:

“The [unique selling point] of blockchain technology is that it furthers the values of individual asset sovereignty by creating the technological predicates necessary for ordinary persons to hold, manage and transact with assets in an environment that is trust-minimized while also being secure.”

Over the last six months, we’ve started to see the earliest signs of how digital sovereignty will power a wildly expansive design space for the future of asset ownership, management, and exchange:

• Blockchain-managed “startups” may stream vested equity to founders, advisors, employees, and investors as it is earned in real time — providing each stakeholder new optionality and sovereignty in how that equity is used upon receipt.
• Securities issuers can provide direct and immutable messages, memos, dividends, voting, information, and marketing across a security’s pool of stakeholders — bridging together consumer markets and capital markets in previously impossible ways.
• Global investors can swap blockchain-based dollars for security tokens representing interests in US-based real estate — and later trade those security tokens on a P2P decentralized platform without requiring an intermediary or human counterparty to contract with.
• Blockchain-based credit facilities may allow security token holders to trustlessly collateralize their tokenized asset in a debt position, and mint a synthetic asset pegged to the US Dollar without requiring an intermediary.
• Blockchain-based decentralized autonomous organizations (DAOs), coupled with legal layer entities like LLCs, can creatively interoperate together in a trustless environment to streamline and improve governance, contractual undertakings, and for-profit opportunities — as a result, improving a number of inefficiencies and inequities that exist within the existing VC model.

These are just some of the earliest experiments highlighting digital sovereignty.

Over time, as more of the world’s assets reduce down to ones and zeroes onto distributed blockchain ledgers, an efficient and trustless global contracting environment will emerge. Humans and computers will paint together across a blank canvas — creating new forms of value, and value exchange, difficult to imagine in 2020.

The legal layer will evolve to accommodate — as will the laws, rules, regulations, and stare decisis wrapped within, better pursuing its principles of (1) protection and (2) incentivizing value exchange in a new open and permissionless formatting layer.

This is the power of digital sovereignty.

This is the formatting revolution.

Derek Edward Schloss (@derekedws) is the Director of Strategy at Security Token Academy (@security_token).

Special thanks to Professor Stephen McKeon (Partner, Collaborative Fund), Gabriel Shapiro (Attorney), and Professor Mohsen Manesh (Professor, UO Law) for their feedback during the construction of this piece.

To stay current on the latest happening across the security token industry, subscribe to the Security Token Stories podcast, and the industry-leading newsletter The Security Token Edge, delivered to your email each weekend.

For more long-form content from Security Token Academy, visit www.securitytokenacademy.com, join the conversation on Twitter @security_token, and jump in to STA’s security token Telegram group at https://t.me/SecTokenAcademy.

Additional Reading

Security Tokens and The Digital Wrapper (Schloss, 2018)

Security Tokens and The Investment Stage (Schloss, 2019)

Tokenizing Corporate Capital Stock (Shapiro, 2018)

The Security Token Thesis (McKeon, 2018)

Traditional Asset Tokenization (McKeon, 2017)

Appendix

¹ Value Capture And Quantification: Cryptocapital Vs Cryptocommodities (Burniske) — https://www.placeholder.vc/blog/2019/4/26/value-capture-and-quantification-cryptocapital-vs-cryptocommodities

² Restatement Second of Contracts — https://www.betterblackletter.com/wp-content/uploads/2019/02/Restatement-2nd-of-Contracts.pdf.

³ The Laws That Govern the Securities Industry (SEC.gov) — https://www.sec.gov/answers/about-lawsshtml.html.

⁴ Stare decisis (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/wex/stare_decisis.

⁵ Securities Act of 1933 (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/wex/securities_act_of_1933.

⁶ Securities Exchange Act of 1934 (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/wex/securities_exchange_act_of_1934.

⁷ Securities And Exchange Commission v. W.J. Howey Co. et al. (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/supremecourt/text/328/293.

⁸ Stipulatio (Encyclopedia Britannica) — https://www.britannica.com/topic/stipulatio.

⁹ The Code of Ur Nammu — https://en.wikipedia.org/wiki/Code_of_Ur-Nammu.

¹⁰ Magna Carta (Encyclopedia Britannica) — https://www.britannica.com/topic/Magna-Carta.

¹¹ Johannes Gutenberg (Encyclopedia Britannica) — https://www.britannica.com/biography/Johannes-Gutenberg.

¹² Fourdrinier Machine (Encyclopedia Britannica) — https://www.britannica.com/technology/Fourdrinier-machine.

¹³ Literacy: Our World In Data — https://ourworldindata.org/literacy.

¹⁴ Lucy v. Zhemer (Justia) — https://law.justia.com/cases/virginia/supreme-court/1954/4272-1.html.

¹⁵ The Remaking of Wall Street, 1967–1971 (HBS: Business History Review) — https://hbswk.hbs.edu/archive/the-remaking-of-wall-street-1967-to-1971.

¹⁶ The solution to Wall Street’s 1960s paperwork crisis could also save bitcoin (Quartz) — https://qz.com/370553/what-the-cigar-chomping-schleppers-of-1960s-wall-street-mean-for-bitcoins-future/.

¹⁷ The Depository Trust Company (DTCC.com) — https://www.dtcc.com/about/businesses-and-subsidiaries/dtc.

¹⁸ DTCC finds 1.3 million soaked securities in Sandy-flooded NY vault (Reuters) — https://www.reuters.com/article/us-storm-sandy-securities-idUSBRE8AE02G20121115.

¹⁹ Dole Food Had Too Many Shares (Bloomberg) — https://www.bloomberg.com/opinion/articles/2017-02-17/dole-food-had-too-many-shares.

²⁰ SEC shortens settlement cycle for securities trades (Reuters) — https://www.reuters.com/article/us-usa-sec-settlement-idUSKBN16T1SW.

²¹ Bullish on Blockchain: Examining Delaware’s Approach to Distributed Ledger Technology in Corporate Governance Law and Beyond (Harvard Business Law Review) — https://www.hblr.org/2018/01/bullish-on-blockchain-examining-delawares-approach-to-distributed-ledger-technology-in-corporate-governance-law-and-beyond/.

²² Bitcoin: A Peer-to-Peer Electronic Cash System (Satoshi Nakamoto) — https://bitcoin.org/bitcoin.pdf.

²³ Bitcoin: an Accounting Revolution (Permabull Nino) — https://medium.com/@permabullnino/bitcoin-an-accounting-revolution-40efcb903d7b.

²⁴ Id.

²⁵ The Security Token Thesis (McKeon) — https://hackernoon.com/the-security-token-thesis-4c5904761063

²⁶ Tokenizing Corporate Capital Stock (Shapiro) — https://gabrielshapiro.wordpress.com/2018/10/28/2/

Security Tokens and The Formatting Revolution was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

By: Derek Edward Schloss | STA Director of Strategy

In the past, colleagues and friends outside the blockchain space have asked about my work researching the intersection of securities laws, digital assets, and distributed networks. It’s a question I struggle to answer—mostly, because I’d like my response to be anchored to something relatable (to them and their work), and I find this difficult to do at our industry’s current stage.

Instead I find myself reciting a summary of the topics I’m writing about at that moment — bleeding edge stuff like sufficient decentralization or advancements across the regulated token economy. Areas that are timely and important today.

Like clockwork — their eyes start to glaze.

Take my parents for example. Sure, they’ll nod and smile. But I know my father would prefer not to hear about security token base layer tradeoffs for the seventh time. My mother has a tendency of circling the conversation back to healthy eating (or if I’m still taking a daily multivitamin).

Security tokens and digital assets are topics my parents should care about — my father’s been a real estate attorney for over 35 years, a paper-based industry itching for a digital disruption. My mother, having emigrated from the Philippines to the U.S. when she was nineteen, understands too well the difficulties of asset ownership and management for many non-U.S. individuals.

So, I find myself asking more and more these days:

What challenges still need to be solved for these conversations to become relatable?

In the coming years, I believe security tokens will radically transform how humans own and coordinate the movement of our value. At a minimum, I think the combination of digitized assets and trustless ledgers will reorganize our private and public markets — removing many of the inefficiencies that plague value transfer today. And once that infrastructure is properly built, I see that same combination leading to more trustworthy (and accessible) systems for individual asset ownership, wherever unrestrained access to the internet exists.

We’re not quite there today. Today, projects across the security token industry are focused on building the foundation for that kind of future — not necessarily the future we like to talk about when we talk about digital securities. At least not yet.

No hype, no fanfare, no leaderboards — just building.

Even if the mainstream hasn’t arrived, the conviction I see from projects across the space is at an all-time high. I hear it each week when I interview guests on the Security Token Stories podcast, and see it when I write The Security Token Edge newsletter each weekend.

A few weeks ago, our team at Security Token Academy reached out to our Corporate Members, a group that includes many of the teams and projects helping build out the digital securities industry. In the paragraphs that follow below, you’ll find their latest thoughts, ideas, and predictions around the future of security tokens— in 2020 and beyond.

The infrastructure build-out continues. Onward.

Question #1— Now that we have a greater information set about how the industry is evolving, what do you imagine the security token industry will look like in 2020?

Dave Hendricks (Vertalo): In 2020, the security token industry will appear — and be — more connected, more compliant, and thus more accessible. The elusive quest for ‘clarity’, with respect to securities law, should mostly come to an end by the close of 2020. The first half of 2020 is going to be dominated by discussions between leading platforms and the regulatory bodies that have maintained their focus on investor protection. As increasingly less skeptical regulators start to provide clear guidance in 2H20 to technology providers and issuers, data management platforms with compliant APIs and attendant data handling mechanisms will come to the forefront. These data management platforms, cleanly integrated with broker-dealers, custodians, and trading platforms, will drive the market forward while providing their joint issuer and investor clients with the confidence to choose a digital path.

Mason Borda (TokenSoft): With SEC registered offerings maturing into the market, we expect that regulatory certainty will provide for greater comfort in entering the market. We have our fingers crossed for FINRA approving a custodian which would provide greater comfort to companies small and large leveraging the blockchain to power their assets.

Jor Law (Verify Investor): I expect that 2020 will see greater momentum of security tokens as early players in the space refine their security token technology. Financial institutions will also have a greater impact in the space as they conduct further test offerings using the technology. The smaller, earlier players risk being left behind if they are unable to work with financial institutions in 2020 and 2021. 2020 will also be a battleground for various blockchains, including blockchains designed primarily for the securities industry. It'll be interesting to see the trends that develop in that regard.

Oscar Jofre (KoreConX): 2020 has to be the year of building TRUST. To gain TRUST, the key will be to bring everyone together and not leave anyone out. The current incumbents in the ecosystem will be in a reactive mode as more providers realize they need to be regulated. They are becoming broker-dealers or transfer agents. The current global incumbents in the private capital markets will begin to emerge with their own solutions, and look to work with providers who are not threatening to take them out of the process — this will be the key to mass adoption globally.

Luc Falempin (Tokeny): We believe financial institutions are now all convinced tokenization will happen. There is mounting pressure on margins for these players, and regulation is becoming stricter and more difficult to follow for these firms. Change is needed and central banks announcing digital currencies will encourage the adoption. We believe it will happen faster than previously expected, and financial institutions will go past the testing phase and roll out some of the initiatives.

Jamie Finn (Securitize): In 2020, the security token industry will continue its march to become a fundamental enabler of more liquid financial markets that are truly global.

Dan Doney (Securrency): We believe that 2020 will see an acceleration of the trend that links incumbent financial service providers with emerging security token firms to tokenize institutional grade assets. We should see tokenization platforms emerge provided by some of the largest technology firms (like Microsoft and Facebook) and issuances from highly trusted investment firms and asset managers.

Saum Noursalehi (tZERO): We believe that you will see an increase in the number of assets that are tokenized as issuers seek to reduce their cost of capital. Tokenization simplifies distribution to investors (globally) and with greater investor participation, more favorable primary issuance terms can be achieved. Additionally, as the liquidity on trading platforms continue to grow, traditionally illiquid assets will benefit from having a trading venue. Moreover, I anticipate investors will increase their holdings of digital assets in 2020. In fact, State Street recently conducted a survey of U.S. asset managers and asset owners, and 38% said that they planned to increase their holdings of digital assets next year. I also believe you will see more partnerships between traditional Wall Street institutions and those that are leading the adoption of digital assets. For example, our partnership with Box Digital Markets (BOX). And lastly, I believe we will have more regulatory clarity on the security token industry as a whole.

Question #2 — What challenges still need to be overcome for security tokens to thrive?

Jamie Finn (Securitize): The key items are having players that everyone is comfortable with from the institutional point of view — specifically you need a way to get digital securities into the dashboards of major banks’ private banking clients. I don’t believe these products are really ready for retail yet for the most part, as they are part of the alternative investment schemes and are less liquid and so they probably don’t suit a retail investor right now.

Dan Doney (Securrency): The biggest challenge is the gap between traditional financial services and the yet-to-develop tokenization markets. The gap remains in terms of market liquidity, user experience, cost structures, availability of high quality assets, and the convenience and trustworthiness of retail investment options. As issuance costs fall to a few basis points and back office reconciliation costs are eliminated, tokenization will compete on price with mature and trusted institutional models — bringing new, trustworthy assets into tokenized markets. In turn, institutional assets that can be easily priced will bring market liquidity. Market liquidity begets convenient transactions. Without these fundamentals, the tokenization industry has yet to achieve exit velocity — but the conditions are right for the breakthrough to begin this year.

Luc Falempin (Tokeny): The distribution side is still a work in progress — there is no exchange or marketplace that has a good number of quality assets listed. Once the distribution side is in place, we will see adoption accelerate across retail and institutional investors.

Jor Law (Verify Investor): We are already seeing adoption in both retail and institutional. It’s important to note the difference between the sell side and buy side. Retail “sell” side is seeing a fair amount of adoption, but retail “buy” side is lacking. Institutional quality deals will see a more balanced adoption of both the sell side and buy side. 2020 will see increased interest across the board, but will not likely be the breakout year.

Oscar Jofre (KoreConX): Our focus should be on infrastructure. We need to include everyone (lawyers, auditors, transfer agents, broker-dealers, media, marketing firms, newswire, incorporation providers, secondary markets, researcher) who are already providing these capital activities to companies.

Saum Noursalehi (tZERO): We are a proponent for progress and change in capital markets, and we are pushing to advance regulatory laws. However, this change will be incremental until it tips and will require complying with existing laws and regulations, while in parallel working on regulatory reform. It is assuring to see that the regulatory landscape is progressing with the recent announcement that the SEC is proposing to update the definition of what qualifies as an accredited investor, which will increase investor access to new investments.

Mason Borda (TokenSoft): We believe there needs to be an FINRA registered custodian that is compatible with blockchain-enabled securities. We see that as the final piece of infrastructure that needs to come into place to allow the market to flourish.

Dave Hendricks (Vertalo): Only four things are holding back the security token industry — regulatory clarity, interfaces, issuance cost, and offering quality. Just those things. Most participants will agree that regulatory clarity has been the greatest challenge to overcome, and that won’t change in January. Even once the regulators agree on standards and acceptable approaches, the security token technology providers will still need to refactor themselves and their APIs to comply with the current POV of regulators. User interfaces and experiences are a major deterrent to adoption. In order for this industry to take off, it needs to stop asking new participants to master arcane wallet technologies and private keys. Security tokens need to be as simple as email, Facebook, or Coinbase. The cost/benefit ratio related to issuance needs to improve — asking an early stage company to spend $100k to produce a token prior to a fundraise makes absolutely no sense when that same startup can spend $25k or less on a Reg D 506(c) offering. Asking that same issuer to spend $30k a year to manage their stakeholder registry when Carta can handle most of the same data for $10k is also a major deterrent. Total cost of ownership cannot exceed the benefits from any technology if it expects to scale and gain mass adoption. So issuers and offerings need to improve dramatically if security token technology platforms are to survive on revenues — and not investors’ funding. Once we can solve for regulatory, interface, and economics, the issuers and the revenue will follow.

Question #3 — Let’s talk assets. What category of tokenized assets will have the most traction this year?

Jamie Finn (Securitize): Real estate.

Luc Falempin (Tokeny): Real estate will continue to be the most popular asset tokenized in 2020 — debt instruments and investment funds do not lag far behind.

Mason Borda (TokenSoft): We expect every traditionally serviced asset to move onto the blockchain, and the category that will gain the most traction might be the simplest — such as tokenized equity or LP interest in a fund.

Dan Doney (Securrency): We’re excited about the tokenization of publicly traded assets. The disclosure requirements, strong pricing signal, and existing liquidity of these assets will bring much needed liquidity to the security token markets. These assets, backed by some of the most known and trusted financial service providers, will create the liquidity and trust needed for the foundation of the security token industry.

Saum Noursalehi (tZERO): In the near term we expect real estate to be a leading asset class — followed by funds and other private companies.

Dave Hendricks (Vertalo): The asset class that makes the most sense for regulated tokenization is real estate — not only is real estate the largest asset class by category, it is also suffers the biggest problems related to data management and liquidity. The team at Vertalo is very excited to focus on the real estate vertical in 2020 and will be announcing some big initiatives in this arena including a close partnership with Prime Trust where we will be digitizing billions of dollars of private REITs using a new platform that we are jointly developing called TREATs.

Oscar Jofre (KoreConX): Tokenized equity and debt — more complicated derivatives may soon follow. There is a well-established (though complex) securities regulation and corporate law in almost all jurisdictions. Tokenization of other assets — such as fine art — may take longer because the questions of trust, custody, and protection need to be answered first.

Jor Law (Verify Investor): Real estate has already established itself as a category with significant traction and should continue to see increased traction in 2020. Institutional debt and bond offerings will also see greater 2020 traction.

Question #4— Zooming out, what are you most excited for this year?

Oscar Jofre (KoreConX): Building trust, educating, and providing clarity to the market — the global landscape is highly fragmented, and looking to be glued together where no company or provider is left out.

Luc Falempin (Tokeny): We’re looking forward to discovering what happens with digital currencies — as these will help drive the industry forward.

Jor Law (Verify Investor): A greater amount of use cases in tokenization across the board — with closer integration between different market participants.

Dave Hendricks (Vertalo): I’m looking forward to working with all of our partners across this industry, and the regulators, to bring user friendly, cost-efficient, compliant, and reliable technology to the issuers and investors who have been waiting on the sidelines while we got our collective act together.

Mason Borda (TokenSoft): We’re very excited to raise awareness and participation to help move the world’s assets on to the blockchain — we will continue to educate the market and regulators domestically and internationally.

Jamie Finn (Securitize): Starting to see high quality deals move to become tokenized without the tokenization being a feature. In 2020, we will see growth in great assets being on-chain all over the world, and we will see increased liquidity as the current asset pools age and have more of a vintage.

Saum Noursalehi (tZERO): We are excited about the launch of the first regulated national security token exchange through our joint venture, the BSTX, in partnership with BOX. With BOX’s experience in building and operating a sophisticated securities exchange and tZERO’s industry leading blockchain technology, we have brought together our organizations’ combined expertise to fundamentally improve the marketplace for digital securities.

Dan Doney (Securrency): We’re excited to work with regulators who are embracing participants in the industry who seek to augment regulatory compliance rather than avoid it. We’re also excited for intuitive user interfaces that demystify blockchain for investors, issuers, and everyday retail participants. Coupled with high quality yield bearing token issuances and efficient global transactions, 2020 will finally be the year we unlock the accessibility which fuels mass global adoption — the dream of blockchain enthusiasts for over a decade.

Derek Edward Schloss (@derekedws) is the Director of Strategy at Security Token Academy (@security_token), the leading educational platform for the security token industry.

To stay current on latest news and research, make sure to sign up for STA’s industry-leading weekend newsletter, The Security Token Edge, delivered right to your email inbox each Saturday, and subscribe to STA’s Security Token Stories podcast on your favorite podcast aggregator — including Apple, Spotify, and YouTube.

For more content from the security token industry’s leading educational platform, visit us online at Security Token Academy, join the conversation on Twitter @security_token, and jump in to our industry-leading security token Telegram group at https://t.me/SecTokenAcademy.

Legal Disclaimer

Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

Security Token Predictions (in 2020) was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Digital Wrapper | Mitesh Shah

Derek Edward Schloss (TDW): Mitesh, great to sit down with you on STA’s The Digital Wrapper. Let’s start off by hearing a bit about your pre-blockchain background, and how you found your way into the space.

Mitesh Shah (Omnia Markets): Before jumping into the blockchain space, I was a student and received my MBA after a five-year accelerated program at St. John’s University, Tobin College of Business. I started working as a financial and equity analyst at SKN Capital Management LLC where I managed several portfolios. In my role, I would come up with different portfolio strategies, and eventually started using — and became certified for use with — Bloomberg Terminal¹. I ended up becoming very passionate about the blockchain and crypto space, and over time, I wanted to bring my expertise as a financial analyst into blockchain and cryptocurrency and carry these same tools with me. What made this even more exciting were the advances in artificial intelligence² and machine learning³ abilities. I started exploring new ways to apply these new abilities to the data analytics that I am familiar with.

Derek Edward Schloss: Did you find that some of the tools weren’t as strong in the cryptoasset space compared with those in our legacy asset markets?

Mitesh Shah: Exactly. There really was no similar tool to do the research I wanted to conduct. A lot of analytics platforms, while having come a long way, still have a ways to go. For example, I found that the information regarding price fluctuations were often displayed on historical price charts, with no information pertaining to potential causes or precursors, or explaining why the prices themselves fluctuated. I wanted to find sources where we might pull that information from — build teams around this. That led me to create Omnia Markets.

Derek Edward Schloss: Understood. Omnia Markets is described as a crypto analytics platform. Can you walk me through the vision of Omnia Markets, and the specific problems your team is trying to solve?

Mitesh Shah: Omnia Markets plans to become a one-stop platform that provides cryptocurrency-based data, proprietary and non-proprietary analytics, and industry information and trends to both individual and institutional investors. Besides providing the typical financial ratios that you can get at sites like Yahoo Finance, for example, we’ll also provide actionable proprietary analytics based on user-defined parameters — backed by our artificial intelligence and machine and predictive learning⁴ algorithms. Our goal is to provide reliable and pertinent information specific to the crypto industry. Additionally, we plan on having hub locations in several areas of the world, including alliances and partnerships, and intend to provide unmatched data and information for use with our proprietary machine learning program. What is also unique to our approach is how we plan to develop our own journalism and news reporting division that will provide our own generated content.

Derek Edward Schloss: The idea of building a global physical presence in this industry is always interesting to me, given some of the global benefits enabled by blockchain-based assets. How are you thinking about regulation as the platform starts operating across a variety of jurisdictions? Do you hope that some of the cross-border regulatory expertise you obtain will eventually translate into your products?

Mitesh Shah: Definitely. One of our goals is to become a leading voice within the industry — today, we’re actively participating in legal landscape conversations, specifically here within in the U.S., and we want to expand that participation around the world. We want to help contribute to the creation of legislation that encourages growth for the industry, while also promoting reasonable and appropriate safeguards for participants within the industry. To that point, being able to break this down in an easy to understand language for our consumers is important to us, and something that we’re really focusing on. We aim to provide all kinds of industry information so that any user can come in, get a handle on the industry quickly, and start to understand what makes the industry move.

Derek Edward Schloss: It would be great to unpack how the Omnia platform works — let’s say a new client starts using the platform. What might the customer journey look like? What’s a potential idea or data point they may be researching, and then how would Omnia play a role extracting and filtering that data into a package that a customer might be looking for?

Mitesh Shah: When it comes to any of our users, whether it is institutions or just everyday users, we offer different tiers. For starters, we offer a basic tier — a free tier where they can receive basic information on the industry. In the simplest example, an individual or institution may want to figure out a certain kind of cryptoasset to build into their portfolio — immediately, they can use Omnia Market’s reporting platform to begin analyzing and comparing different assets, filtered by their own parameters to match their investment strategy. They can also go to each asset’s basic data page to really understand the asset itself. In addition to the more basic historical price charts, we’ll combine these with other algorithms and tools to allow users to understand why a crypto price might be moving the way it has. As they go throughout the platform, they can start getting more hands-on, with reports and cryptoasset comparisons based on unique parameters and strategies.

Derek Edward Schloss: What might some of Omnia’s higher tiered products look like?

Mitesh Shah: We ramp our tiers all the way up to specialized and customized tiers for institutions. For certain categories of institutional investors, they’ll be able to create AI and ML-backed reports based on their own specific parameters and criteria. In addition, other customers might want a more customized product, which could include a dedicated in-house team at Omnia Markets. The great thing about blockchains is that they’re something you can easily access. When it comes to sourcing data, the blockchain is one of the major sources we rely on, among other key sources, that makes our platform unique. With that said, the industry has to be very careful with this information — recently, CoinMarketCap⁵ came up with a new type of filtering to take out the inaccurate information we might get from blockchains. Similarly, we want to make sure that all the information we’re getting is properly vetted and not manipulated in any way.

Derek Edward Schloss: Interesting. As it relates to pulling manipulated data —what is the role of things like artificial intelligence, machine learning, and predictive learning? How might some of these concepts help filter out some of the bad data one might get when pulling raw information from these transparent blockchain ledgers?

Mitesh Shah: Yes. Historically, we’ve seen AI and ML used in different platforms in the cryptocurrency industry, like using these types of tools to scan social media to come up with sentiment around a specific cryptoasset. Similarly, AI is starting to help companies and analytical platforms like Omnia Markets comb through the vast amount of data on blockchains and from our other sources. These concepts help eliminate unnecessary or inaccurate data — a data fog — allowing us to show more relevant and reliable information. So while some firms use things like AI to measure overall market sentiment, it doesn’t actually explain what causes prices to fluctuate. In other words, it’s a great first step, but it’s unable to answer the underlying cause behind the measurable sentiment.

Derek Edward Schloss: I think I understand what you’re saying— today, AI and ML for something like sentiment analysis⁶ might help explain the effects, but not necessarily the causes of asset movements.

Mitesh Shah: Yes. With Omnia Markets, the platform will be able to generate reports based on user defined criteria that provides insight into the likely causes and trends for price movement. With that said, this isn’t something that can be done overnight — it’s going to take time to develop. Our in-house analysts will need to make sure that the data being output has a high degree of accuracy. Eventually, we’ll take that data and combine it with AI and ML to generate insights from news and events around the world. It’s going to be an ongoing process starting from day one, when we first release the platform. Around year three or year four, we predict the full feature set will be built out.

Derek Edward Schloss: Blockchains are a ledger innovation, and that innovation comes with some unique transparency benefits that are still fairly untapped. I think the industry is really just scratching the surface with how the extraction and curation of transparent data might look in the future. Right now your team is focused on cryptoassets, but eventually, do you imagine your clients will expect to have the same information pulled for blockchain-based securities and security tokens?

Mitesh Shah: This is something that we’ve definitely thought about, even well before we decided to launch our own security token offering, or STO, with the team at Securitize. Right now, our initial strategy is to tackle existing cryptocurrencies in a top down manner based on market cap and volume traded — this is where the majority of participants are located. So, whether it’s Bitcoin, Ethereum, Ripple, Litecoin — we’re going to tackle it from the top down and provide information to as many people as possible. As we move forward and we start to go down the list of cryptocurrencies, we’ll also start tackling security tokens. And we’ll do it in a unique way on our platform, leveraging AI and ML algorithms — in addition to traditional information.

Derek Edward Schloss: As it relates specifically to blockchain-based securities, what are some of the on-chain analytics you think might be important to pull in the future?

Mitesh Shah: Today, a majority of security tokens are either equity-backed or revenue-backed. Looking at historic company performance will give us an insight into how that token might perform in the future, as well as if that security has any other additions built in — like dividends. All of this information is going to be key to investors. We’ll be able to pull any financial information, provide traditional ratios, and eventually, investors will compare that information against other security tokens, or other traditional crypto tokens like Bitcoin.

Derek Edward Schloss: I’m always interested to hear — why did your team decide to fundraise using a security token vehicle?

Mitesh Shah: I’m passionate about the industry, and the benefits of this industry — I considered a traditional offering, but I think it’s important to stand behind this technology. I also like the idea of building in different features into the token. In other words, while our investors have the ability to start trading the security tokens once the one-year lockup period ends, the tokens can also be used to purchase different subscription tiers on our platform. The ability for the token holders to trade after the lock-up period provides flexibility that an equity raise wouldn’t provide without taking the company public. That imposes a significant burden on the company to become public before it is quite appropriate. And yet, the token holders will also have the ability to use the tokens as currency to buy our products and services, something an equity holder would not be able to do. Moreover, our planned distributions based on profits to the token holders also provide an annual rate of return that would be difficult to structure in equity raises after several rounds of fundraising. I believe the STO, in full compliance with the SEC regulations, provides significant benefits to us and the investors.

Derek Edward Schloss: Your security token technology is powered by the tokenization team at Securitize — can you share what it’s been like working with them, and why you decided to move forward with that team?

Mitesh Shah: There are several companies working on this type of technology — I reached out to Securitize, and Jamie Finn, the Securitize Co-Founder, reached out to me on social media to start discussing our strategy at a high level. They have been absolutely amazing to work with, and have really assisted in the development of everything we’re looking for as far as technology goes. They’re also implementing their digital security protocol, the DS protocol, into our smart contract which gives our security token an additional layer of security when it comes to following securities laws.

Derek Edward Schloss: Mitesh — wrapping up, how do you think about the cryptoasset space evolving over the next year? What are some areas you’re excited to follow?

Mitesh Shah: You are very right when you said we are just scratching the surface here. There are a number of industries really starting to get involved with blockchain technology — to name three, healthcare, traditional finance, and real estate. We’re starting to see these industries use blockchain-based technology to address existing issues. As this starts to increase, we’ll continue to see new evolutions in how this technology can be applied to existing problems. I believe in a few years blockchain technology will be mainstream. And as the tech evolves, so too will the information and analysis. That’s where I’m most excited for Omnia Markets — to provide information for the industry, and to be part of that evolution.

Derek Edward Schloss: Mitesh, on behalf of Security Token Academy, thanks for joining me on The Digital Wrapper.

You can learn more about Omnia Markets and Mitesh Shah at the following links:

Website: https://www.omniamarketsinc.com/

LinkedIn: https://www.linkedin.com/company/11555407/

Twitter: https://twitter.com/OmniaMarketsInc

Facebook: https://www.facebook.com/OmniaMarketsInc/

Instagram: https://www.instagram.com/omniamarkets/

YouTube: https://www.youtube.com/channel/UC9SbQZ9vXoyfsug-5J-NbLg

Mitesh Shah (LinkedIn): https://www.linkedin.com/in/miteshshah93/

Mitesh Shah (Twitter): https://twitter.com/MiteshShah93

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Footnotes

¹ Bloomberg Terminal enables professionals in the financial service sector to monitor and analyze real-time financial market data and place trades on its electronic trading platform.

² Artificial Intelligence (AI) is an area of computer science that emphasizes the creation of intelligent machines in areas like speech recognition, learning, planning, and problem solving.

³ Machine Learning (ML) is the scientific study of algorithms and statistical models that computer systems use to perform a specific task without using explicit instructions — instead relying on patterns and inference. It is often referred to as a subset of artificial intelligence (AI).

⁴ Predictive Learning (PL) is a technique of machine learning (ML) in which an agent tries to build a “predictive model” of an environment by trying out different actions in various circumstances.

⁵ CoinMarketCap is a website that provides cryptoasset market capitalization information and charts.

⁶ Sentiment Analysis is a way to evaluate written or spoken language to determine if the expression is favorable, unfavorable, or neutral, and to what degree.

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Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

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