“It has something apocalyptic about it,” a friend recently told me.
We weren’t discussing the war. Or there’s the epidemic. Instead, we were laughing hysterically at a series of statements made by Yuga Labs, the firm behind the NFT sensation Bored Ape Yacht Club. Yuga has made a slew of eye-catching power movements in the last month. In weeks, they purchased CryptoPunks, established a currency, raised $450 million in early funding, and released a feature-film-quality trailer for a significant metaverse launch.
The purchase of CryptoPunks was not inexpensive. Hundreds of new millionaires were created overnight due to the currency’s debut. Yuga was valued at $4 billion in the fundraising round. The metaverse project, named “The Other Side,” was advertised as an attempt to build a “media empire,” and I’m sure Yuga didn’t pay a small fortune to license “Break On Through” for the trailer.
In the span of a year, 10,000 jpeg photos of monkeys dressed in various clothes grew into a multi-billion dollar corporation. Yuga’s NFT market cap is roughly 1.5 percent of Ethereum’s total market value (based on the Bored Apes and two offshoot projects’ total floor price).
In a nutshell
A single “base” animation of a bored monkey appears to be wreaking havoc worldwide. Yes, this world, but also a digital world that, like so many single-family houses in America, is still under construction.
On Saturday, I took advantage of the cheap “gas” (the charge you pay to transact on Ethereum) to dump the great bulk of my crypto investments. I kept some Bitcoin and distributed a few thousand dollars over other tokens. I also kept the few NFTs I purchased, mainly because they have no liquidity. For all intents and purposes, my three-month Web3 experiment is over.
My expedition into cryptocurrency, Finally, I couldn’t bear not having Bitcoin, and even more crucially, I couldn’t bear my own willful ignorance. I understood more about crypto than the next guy, but that wasn’t saying much considering how few people are invested in the area and how many of those who primarily use centralized exchanges and consequently have no previous experience with DeFi (decentralized finance) NFTs. So I set up some virtual currency on the blockchain and experimented with everything from DEXs (decentralized exchanges) to DAO (decentralized autonomous organization) tokens to photography NFTs.
I was first charmed with it, particularly the DeFi aspect. But my adoration rapidly faded, giving way to skepticism and, eventually, hate. I can summarize the major issue in a single line: It’s a fatally self-referential structure that assumes constant dollar appreciation (or the euro, etc.). When appreciation ends, the germs of an existential crisis are sown.
In light of this, I’d like to share a few things I’ve learned since January. If nothing else, I believe this will serve as a good CliffsNotes for anyone considering a dive into a subject that the majority of people are unfamiliar with. Continue slogging along if you become hindered. I’ve tried to make this as accessible as possible, and the NFT conversation is crucial. I SAVED IT UNTIL LAST because I’m prone to burying the lede.
Web3 Lucrative, as long as…
To begin, let’s look into decentralized exchanges. You can “stake” various tokens (including those issued by the exchange) for “rewards” or, euphemistically and alternately, “interest” on DEXs. A variety of factors determines the rewards. For example, you could collect a percentage of a platform’s trading fees. Interest rates are astronomically high, to the point of absurdity. This is an extremely profitable setup as long as the underlying tokens appreciate.
Although there are several venues where you can get interested in deposited stablecoins paid out at higher rates than you’d get in an FDIC-insured bank account, the best rates are usually linked with staking something other than stablecoins. Those incentives are generally in that coin’s or, at the very least, that chain’s native token.
Naturally, if the coins depreciate rapidly against the dollar, your principal (staked deposit) and interest will also depreciate. Only if the rate of token interest (i.e., the rate at which you get depreciating coins) surpasses the scope of the token selloff relative to the dollar can you avoid losing money.
Ponzi collides with hyperinflation.
Investing in a DAO can result in the loss of your entire investment, depending on the DAO’s structure, objectives, and your own degree of experience.
There are dozens of social media influencers claiming to evaluate the “tokenomics” linked with various projects and the developers behind them (many of whom utilize Bored Ape or CryptoPunk avatars as profile images to legitimize themselves as potential followers). One typical refrain is, “I don’t bet on coins; I bet on teams.”
The settings combine Ponzi dynamics with hyperinflation over a relatively short time frame in other situations. If you come in early enough, you can get a lot of emissions (e.g., 60,000 percent ). The wager is that you will receive enough free tokens to avoid hyperinflation.
However, that may or may not work. These tokens can sell off even worse than Bitcoin or Ethereum under difficult market situations (for example, if crypto is selling off alongside equities and other risk assets). This is especially true of initiatives constructed on top of other projects, such as when a team releases a token and then uses the revenues to buy more tokens to gain disproportionate control over the utility those tokens provide to the holder.
In the end, the chances of losing everything in such structures seem disproportionately high, even when compared to other high-risk DeFi areas.