Autor Cointelegraph By Christos Makridis

The SEC is bullying Kim Kardashian, and it could chill the influencer economy

The SEC is bullying Kim Kardashian, and it could chill the influencer economy

Uverejnil používateľ | okt 4, 2022 |

The Securities and Exchange Commission announced on Oct. 3 that Kim Kardashian settled an allegation that she promoted “a crypto asset security offered and sold by EthereumMax without disclosing the payment [of $250,000] she received for the promotion.” While she cooperated and closed the case with $1.26 million in penalties, the charge highlights the liability that “influencers” increasingly face as a result of an activist SEC that has failed to establish regulatory clarity.Pushing influencers to leave the United StatesAddressing the agency’s action against Kardashian, Jacob Robinson, a legal scholar and host of the Law and Code podcast, noted that “The net-positive is [that] this probably leads to less shilling by celebs who have zero knowledge of the underlying project & are just receiving a big payday.”Thanks to the proliferation of social media platforms, content creators and influencers have emerged and are working with brands to promote products and services. Sadly, the “creator economy” has also had downsides. In particular, influencers have often sold products and services that may not serve everyone’s interests, accepting payment from companies in exchange for their support.While that privilege can be, and often is, abused, influencers are not doing anything systematically different than what corporations do when they take out paid advertisements in the media and on television, or even when board members join and take on a retainer to share their network and promote an organization. When a corporation takes out an ad in a large paper or magazine, such as The New York Times or Vogue, are the media outlets equally liable for not disclosing their acceptance of payment to all the readers? Clearly not, and the media’s business model would quickly crumble if they were unable to accept such paid advertising opportunities.Related: Biden’s anemic crypto framework offered nothing newSo, why are influencers treated so differently, and why can they personally be liable and targeted by a federal agency? Consider the car market: If a used car salesperson sells a customer a car that is later recalled or turns out to have some other flaw, are they singled out by a regulatory agency? The car company might be — as we have seen with Volkswagen, Toyota and others over the years — but the individual employee is generally free from such liability.The SEC’s action against Kardashian risks alienating and stifling other members of the creator economy. While she can “afford” the $1.26 million fine — a little more than $1 million in excess of what she earned — many content creators are not making six-figure-plus salaries each year. The action also threatens to push many content creators outside the United States to countries that have more favorable policies.Defining securities and liabilityThe SEC has adhered to an old Supreme Court ruling from 1946, SEC v. W. J. Howey Co., which led to what is now known as the “Howey test.” The Howey test defines an “investment contract” if the following conditions are met: 1) an investment of money 2) in a common enterprise 3) with the expectation of profit 4) derived from the efforts of others. The test, however, was introduced in an entirely different economy than the one we have today. To be sure, many projects that involve the release of fungible tokens easily fall into the category of a security regardless of how liberal one wants to be with the definition. But other projects, especially nonfungible token projects, are in a much grayer area. Many NFT projects do not convey any expectation of profit to their potential holders but rather emphasize perks and exclusive access to events, classes or deals.Related: Get ready for the feds to start indicting NFT tradersAdmittedly, the SEC’s recent regulatory action went after Kardashian for her promotion of EthereumMax (EMAX) without disclosing that she had received payment rather than for EthereumMax being a security, as it was arguably an easier, more clear-cut case. But the case highlights a major challenge influencers will inevitably face in the Web3 economy if they have to worry about regulatory risk against themselves for promoting different projects, even if they just make a social media post.Other countries are taking a vastly different approach toward Web3. For example, the United Arab Emirates has gone on record saying that it wants its economic success to be measured according to its “gross metaverse product” rather than the conventional gross domestic product that has become the norm for cross-country comparisons in productivity. The UAE, among others (such as Singapore), has become a hub for entrepreneurs and startups.What happened to Kardashian could happen to othersIf the regulatory concern is that influencers are abusing their authority by promoting products and services without disclosing receipt of compensation, then Web3 lends itself perfectly through greater transparency and accountability on the blockchain. In particular, influencers could have their digital wallets open for viewing so that their remuneration is open and their own purchases visible. (There is still a need for privacy-preserving blockchains since everything in everyone’s lives should not be on full display, but with the blockchain, there is much more potential for transparency and accountability where it matters.)Web3 also allows content creators to receive payment for their creative content without having to rely as much on centralized entities for brand deals and partnerships. NFTs, for instance, allow artists to transform audiences into communities that engage with their content directly.What happened to Kardashian could have happened to several influencers. While regulatory actions without penalties admittedly do not have much bite — and often, such penalties are needed to signal that an agency is serious — an alternative strategy would have been to reach out to Kardashian and galvanize support among a body of influencers to establish stronger, more transparent norms around the promotions of products and services, particularly crypto projects that could be classified as securities. Such an approach is more collaborative and would contribute to establishing shared norms and best practices among crypto enthusiasts.Christos Makridis is an entrepreneur, economist and professor. He serves as chief operating officer and chief technology officer at Living Opera, a Web3 multimedia startup, and holds academic appointments at Columbia Business School and Stanford University. Christos also holds doctorates in economics and management science from Stanford University.This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph. The author was not compensated by any of the projects cited in this piece.

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Music NFTs will take gaming to new levels

Music NFTs will take gaming to new levels

Uverejnil používateľ | sep 9, 2022 |

The GameFi industry has surged since 2020, with some estimating a market capitalization of $55.4 billion as of February 2022. While others have much lower estimates closer to $3 billion, one thing is for sure: The industry grew rapidly from zero and is poised for continued growth. What matters, however, is not the day-to-day or even month-to-month market cap, but rather the continued rise of users who feel like they’re extracting value.Games are created so that people have fun. But the rise of “gamification” refers to the application of gaming principles into otherwise boring, but usually value-enhancing, activities. For example, many educational activities can be boring until they are gamified. Technology can be applied to more complicated classes in mathematics and science, but it can also be used to help students learn how to navigate a large university campus. One Arizona State University scavenger hunt, for instance, “guides users to landmarks around ASU’s Tempe campus for a fully virtual experience or to visit in the real world,” gamifying the way students learn about the campus.But one aspect that is often forgotten when constructing virtual or augmented leisure activities, or other gamified experiences, is the role of music.In-game musicOne of the most underappreciated aspects of games is the music. Everyone always thinks of the imagery, storylines and technical performance, but we sometimes forget about the music. To be sure, all the aforementioned factors are crucially important, but music is also what enhances the in-game experience and makes it more realistic and memorable.Related: GameFi developers could be facing big fines and hard time“Music is probably one of the most underappreciated yet high-impact parts of any game. When it’s done right, you don’t even notice that you are being influenced by the music, but when it’s done incorrectly, it is very obvious. What we focus on in the games is the emotions we want the user to experience, it sounds simple, but in reality, finding the right array and options is exceptionally time-consuming,” said Corey Wilton, co-founder of Mirai Labs.Example of in-game skin selection from Mirai LabsStudios often access sample packs or purchase an audio file from a website and modify it as they see fit. For example, audio packs of a specific genre often provide five-to-10 options and suit the tone for the game. Most developers will have hundreds of these stacked over time if they are a casual- or medium-sized studio that ships many titles. But the limitation of this approach is that the artist behind each song receives a small fraction of the contract size.The reason for that is economic: studios buy audio in bulk at a much lower price than they would if they were buying individual songs. While the upside for them is a lower cost, the downside is that their search is often less directed. Similarly, the upside for the artists who produce songs is that they find some demand for their audio, but the downside is that they are not remunerated for their individual contribution – rather, they’re compensated at a discount based on where in the audio pack it lands.Revolutionizing the sourcing of musicNonfungible tokens (NFTs) have the potential to transform the way music is curated and even created for games. Rather than having to rely on large contracts that take forever to get approved, GameFi leaders can simply buy up individual music NFTs or commission a group of artists who agree upon an equitable split of the revenues and collectively mint an NFT. Once done, the NFT would immediately plug into the game and the artists could receive remuneration for their created content based on the popularity of the music. This could be implemented through ratings and other feedback mechanisms.Classical music NFTs have a special role to play. There is simply no audio substitute for the epic nature of classical music, ranging from Wagner’s “Ride of the Valkyries” to Carl Orff’s “Carmina Burana.” Related: Crypto developers should work with the SEC to find common groundFortunately, adding music NFTs to games isn’t much of a stretch. Digital assets are already being traded in games. One project — House of Blueberry — has created more than 10,000 assets that people can buy to express who they are and to use in games and online communities.Source: House of Blueberry. Provided by Katherine ManuelAnd music NFTs can also create value for games that are not purely blockchain-based. The only difference is that the creators would purchase the NFTs on the blockchain and find a way to remunerate the artists.“I work hard to remind them that the end user wants ease of access (i.e., download and account creation), games that are quick to start and learn but hard to master, instant purchasing ability if they wish to spend money in-game, and a game that is heavily engaging and keeps them coming back for more. If they are unable to execute these foundational game design elements with blockchain, they are creating themselves a losing formula,” Wilton added.Christos A. Makridis is an entrepreneur, economist, and professor. He serves as COO/CTO for Living Opera, a web3 multimedia startup, and holds academic appointments at Columbia Business School and Stanford University. Christos also holds doctorates in economics and management science from Stanford University.This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph. The author was not compensated by any of the projects cited in this piece.

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Crypto developers should work with the SEC to find common ground

Crypto developers should work with the SEC to find common ground

Uverejnil používateľ | aug 30, 2022 |

Regulators are tasked with balancing between protecting consumers and creating environments where entrepreneurs and the private sector can thrive. When markets face distortions, perhaps due to an externality or information asymmetry, regulation can play an important role.But regulation can also stifle entrepreneurship and business formation, leaving society and its people worse off. The United States Securities and Exchange Commission has been particularly hostile against cryptocurrency companies and entrepreneurs. For example, SEC Chairman Gary Gensler has remarked that he views Bitcoin (BTC) as a commodity but that many other “crypto financial assets have the key attributes of a security.” He reiterated the line in an explosive Aug. 19 op-ed penned for The Wall Street Journal, arguing that “you could replace ‘crypto’ with any other asset” when talking about the regulation of securities.But rather than “regulating by op-ed,” as some crypto enthusiasts have framed it, a better strategy would be for developers, investors and regulatory agencies — like the SEC — to work together at least around common standards that can raise the quality of projects overall and establish best practices that the entire community of Web3 participants will benefit from.Related: SEC reportedly launches investigation into insider trading on exchanges“Regulators are effective when they’re also in the trenches with the innovators and industry builders,” Mirai Labs co-founder Corey Wilton told Cointelegraph. That means there needs to be an open and free dialogue between regulators and developers. “Developers need to become familiar with Know Your Customer (KYC) best practices, vendors that are available, and how those KYC services are integrated, and how they need to manage user roles [and] capabilities,” said Simon Grunfeld, vice president of Web3 at Cogni.Defining securitiesAlmost every article on crypto regulation points out the classic Howey Test based on a 1946 Supreme Court case that established precedent around the definition of a security. But Gensler has honed in on arguably the most important one of the criteria, namely that “the investing public is hoping for a return.”To be sure, many nonfungible token (NFT) projects launch, and their founders promise investors large returns that turn out to b patently false or at least exaggerated. However, the problem with these projects is not that NFTs need to be classified as a security, but rather that these founders are engaging in dishonest marketing and making claims that they simply cannot deliver on.According to the Howey Test, an “investment contract” exists if there is: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, and (4) to be derived from the efforts of others. But what if we applied the Howey Test to a house? A household could be considered a common enterprise, especially if there is a family business, and every homeowner invests with the expectation of house price appreciation. One counter is that a household is too small to constitute a common enterprise. But where is the bright line? What if the family is big? Or what if the immediate family lacks the resources and relatives contribute to help finance the house? Or what if a handful of people decide to rent a bigger house in anticipation of spending some time in it but also intend to rent it out on Airbnb as they travel and spend time in other locations? The problem with the Howey Test is that it was designed for a much more specific and narrow situation — one that involved leasing to farmers.Sadly, the absence of a clear bright line between securities and commodities in the digital asset space has created substantial regulatory risk for Web3 entrepreneurs and companies, causing many to locate their activities offshore. Given the inherent anonymity involved in the Web3 community, particularly related to company formation, quantitative estimates are unavailable, but anyone who spends any amount of time talking to people in Web3 quickly sees that they are outside the United States.However, even then, both users (especially in GameFi) and owners must be cautious. “I see no path for U.S. regulators to come after a (U.S.-domiciled) individual for gaming on an illegal site unless that individual is using that site for money laundering or other illicit activities involving other U.S.-domiciled individuals,” Grunfeld said.Related: GameFi developers could be facing big fines and hard time“Otherwise, the individual assumes the risk of depositing funds,” he added. “In many cases, these platforms may trick people that they are subject to U.S. regulation. Then, the regulatory risk is all on the platform — it’s the platform’s responsibility to comply with local and international laws, and if they are opening accounts for U.S.-based people, then they run the risk of being touched by the long arm of the U.S. Treasury.”A Web3 compromiseStandards have an important role to play in markets. They establish a predictable threshold for minimum quality. The best types of standards are those that emerge organically as a result of demand and coordination in a community whereby members recognize everyone is better off by adhering to a set of best practices. A common set of open-source and organic standards is perhaps best demonstrated by the W3C standards, which cover the spectrum of application development.In particular, the W3C standards for verifiable credentials and decentralized IDs have proven to be principal sources for coordination and adoption in global education. Organizations, ranging from governments to large publicly traded companies, need interoperable technologies that do not lock them into specific vendors or systems that could create unnecessary risk— (e.g., if one system goes down or a business fails. These types of standards become a requirement for true global adoption; without them, pioneering technologies will remain bespoke and never reach scale.We are seeing how open-source standards within the use case of education provide an opportunity for anyone, regardless of where they are in the world, to scrutinize a technology and ensure that it has passed through rigorous trials for privacy, security and interoperability, providing clarity and comfort for large-scale institutional partners who can bring new technologies to the masses.“Bringing Web3 education to the masses would be impossible without a firm standards-based backbone… all of the innovation happening in our industry would eventually become a fragmented mess of systems that do not communicate or exchange, no different than the centralized systems of the past,” said Chris Purifoy, chairman of The Learning Economy Foundation.Related: CFTC and SEC propose amending reporting rules for large hedge funds on crypto exposureThe question for us in the cryptocurrency space is whether we can develop a similar set of standards as the W3C standards for verifiable credentials in the market for education. Such standards create not only interoperability but also norms and best practices that ensure minimum quality. That would take the burden off regulators to look so intently at NFT and other crypto projects since the quality of projects would be higher overall and the incidence of “rug pulls” would be much lower.There is no simple solution here, but both sides need to understand each other’s positions better. That will only happen when they meet each other in the middle.Christos A. Makridis is the chief operating officer and chief technology officer for Living Opera, a Web3 multimedia startup, and holds academic appointments at Columbia Business School and Stanford University. He holds doctorates in economics and management science from Stanford University.The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.

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The trouble with automated market makers

The trouble with automated market makers

Uverejnil používateľ | jún 10, 2022 |

Automated market makers are a true public good in crypto, enabling genuinely decentralized trading 24/7 and supporting the wider DeFi ecosystems. But they’re not without a host of problems, writes digital economist and academic Christos A. Makridis.The decentralized finance (DeFi) market has surged since 2021, growing from just over $20 billion to nearly $160 billion as of March 2022, compared with a rise in the total cryptocurrency market from $433 billion to $2.5 trillion over the same period.While the recent crypto washout in the wake of the collapse of Terra’s LUNA and UST has caused the market value of DeFi to fall almost all the way back down to $60 billion, there is still optimism in the crypto community and the market value will largely return for major crypto assets in the months and years ahead.The trouble with AMMs.The rise of DeFi has been thanks largely to the presence of liquidity made possible through automated market makers (AMM). Whereas centralized exchanges function as a custodian of their customers’ funds and function as a matchmaker for demand and supply, decentralized exchanges (DEX) do not have a custodian.Instead, peer-to-peer trading, as it was initially designed, is facilitated through a traditional AMM mechanism that says the product of any two assets must always equal some constant. In other words, if Bitcoin and Ether holders put $100 worth in a pool, then the product of the two assets always has to equal $100. If, however, a holder buys more Bitcoin, then the price of Bitcoin rises, and the other side provides more Bitcoin so that the equation balances. The hope is that the pool has many liquidity providers so that there is never a situation where the price of an asset rises so fast that there is insufficient liquidity to facilitate a trade at a reasonable price.Liquid goldAMMs have played an integral role in creating liquidity in the overall market. The latest research by Gordon Liao, head of research at Uniswap Labs, and Dan Robinson, head of research at Paradigm, shows that “Uniswap v3 has around 2X greater market depth on average for spot ETH-dollar pairs,” relative to their centralized exchange counterparts, such as Binance and Coinbase.Here, liquidity is measured using market depth, which refers to how much one asset can be traded for another asset at a given price level. One reason for greater market depth is that AMMs can unlock a more diverse set of passive capital and institutional investors who have different risk profiles.Uniswap research.Since the inception of Uniswap, other AMM designs have emerged, recognizing that the product of two tokens, X and Y, always equaling a constant, K, is not always the most efficient trading strategy — i.e., x*y = K — as Haseeb Qureshi, managing partner at Dragonfly Capital, pointed out in 2020. When a buyer purchases large quantities of X, they can experience slippage, which is when buying a token drives the price up before the order finishes executing it (or selling it drives the price down). Slippage can be costly, especially during times of high trading.To attract greater liquidity and avoid high slippage rates, DEXs have begun to offer extreme incentives for people to stake tokens in exchange for governance rights (and often a slice of protocol revenue), leading to the “curve wars,” which is a label for the ongoing race to offer better terms of trade. The race to offer better conditions may have some unintended consequences on creating mercenary capital, but the requirement of staking tokens in exchange for governance rights has also created much good.“Curve wars are representative of the fact that governance has some value… being able to govern how a protocol distributes its incentives even within its own protocol is very powerful: If you force people to commit to make a decision about something in governance, you can create powerful feedback loops,” Kain Warwick, founder of Synthetix, tells Magazine. Warwick has been called affectionately the “father of modern agriculture” for his role in popularizing yield farming.“Giving away ownership of a protocol in the early part of its lifecycle to the people who provide feedback and test it is incredibly powerful… It is a tool you just don’t have in the traditional startup world. We are witnessing a renaissance of decentralized finance strategies.”Front runningAlthough there are many comparative advantages that DEXs hold over centralized exchanges, most notably greater security and opportunities for community building among token holders, AMMs are imperfect. One of the major limitations to AMMs is the phenomenon of “front running,” which happens when another user places a similar trade as a prospective buyer, but sells it immediately after. Because the transactions are public, and the buyer has to wait until they can get added to the blockchain, others can view them and potentially place bids. Front runners are not trying to execute the trade; rather, they are simply identifying transactions and bidding on them to drive up the price so that they can sell back and earn a profit.By “sandwiching” the original bid from a buyer with a new bid, the speculator has the effect of extracting value from the transaction. In practice, miners are often the catalysts behind front running, leading to the term “miner extractable value” (MEV), referring to the rents that a third party can extract from the original transaction. These sandwich attacks have largely been automated and implemented by bots, accounting for the bulk of MEV. In an academic paper, Andreas Park, professor of finance at the University of Toronto, said:“The intrinsic transparency of blockchain operations create a challenge: an attacker can ‘sandwich’ any trade by submitting a transaction that gets processed before the original one and that the attacker reverses after.”Unfortunately, these attacks are driven by an incentive problem inherent in second-generation blockchains. “Validators may not have sufficiently strong incentives to monitor private pools because this reduces their MEV, so the execution risk for users who join these private pools goes up,” Agostino Capponi, an associate professor of industrial engineering and operations research at Columbia University, explains to Magazine.Capponi, together with co-authors, elaborate on this in a recent working paper that points out how private pools do not solve this front-running risk or reduce transaction fees — other solutions are required. Capponi continues, “Frontrunning attacks not only lead to financial losses for traders of the DeFi ecosystem, but also congest the network and decrease the aggregate value of blockchain stakeholders.”I’m working on a long post on the history of frontrunning Synthetix. Even as I wrap it up the community is debating what is likely to happen once exchanges are enabled on OΞ. One of the things I love most about Synthetix is our commitment to progress even under low information.— kain.eth (✨?_?✨) (@kaiynne) March 23, 2021Front running can also affect liquidity provision. Price oracles — or mechanisms for providing information on prices — play an essential role in ensuring adequate liquidity exists in the market. If the latest prices are not reflected “on-chain,” then users could front run the price with trades and earn a profit. For example, suppose that the latest price of ETH is not reflected on an exchange, which has it lower. Then, a user could buy ETH at its true price but sell it for potentially more, thereby earning a profit.While price oracles help ensure adequate liquidity, no amount of liquidity can solve the core issue that transactions on-chain need to be as current as possible. Warwick explains:“Price oracles do not directly help because they are pushing information on-chain. If you can front run a change in an AMM, you can front run an oracle update, too. Any transaction sequencing is going to introduce the potential for front running.”That is a challenge that Warwick has personal experience with: In 2019, Synthetix lost billions (technically if not in practice) as a result of an oracle pricing error. Although the funds were returned, the incident demonstrates how costly errors can be.Look no further than last week when an oracle pricing error on the Mirror Protocol on Luna Classic led to another exploit. Validators on Terra Classic were reporting a price of $0.000122 for both Luna Classic (LUNC) and the newly-launched LUNA when the new LUNA should have been at $9.32. Although the error was eventually fixed — resulting from an outdated version of the oracle software — the “exploiter got away with well over $30 million.”DeFi fees are a source of ongoing revenue, although not all tokens provide holders with a cut.Challenging business modelsAMMs were a revolutionary quantitative mechanism for enabling peer-to-peer trading because they instantaneously settle transactions after they are confirmed and included on the blockchain, and they allow any user to contribute liquidity and any buyer to trade tokens.However, AMMs have largely relied on expectations of future growth to drive their valuations; the revenue from transaction fees is not only small but also fundamentally linked to the liquidity providers — not the exchange. That is, while Uniswap could take the fees as revenue, the way the smart contracts are written is such that the revenue goes directly to the liquidity providers.Given that APRs from trade fees might be low, especially in newer AMMs, DEXs rely on offering their governance token for incentives, requiring a high price valuation to onboard and retain liquidity providers. These providers are often “mercenary capital” — going wherever the short-run return is higher. Black swan events, as well as volatility in the market, can damage AMMs beyond repair. For example, volatility in the exchange rate across tokens can lead to a liquidity freeze, according to Capponi and Ruizhe Jia, a Ph.D. candidate at the University of California, Los Angeles.The reality of the Uniswap business model is not an indictment; it creates incredible value, as evident by recent estimates of its daily trading volume of around $131 million. Rather, that it does not produce revenue is a function of its business model and actually makes Uniswap more of a public good for people in the DeFi community than anything else.“[AMMs] offer an integral service but don’t adequately capture the value they provide through their token… the current models simply do not provide a transition from pre-revenue speculation to postmoney sustainability,” according to Eric Waisanen and Ethan Wood, co-founders of Hydro Finance, in their April white paper.Emerging business modelsFront running is a problem in large part because pending transactions are generally visible, so a bot can detect it, pay a higher gas fee, and thus, the miner processes the transaction first and impacts market pricing.One way to avoid this is by hiding the transactions. The use of zero-knowledge proofs and other privacy-preserving solutions is becoming increasingly popular because it is thought to minimize front running and MEV attacks by obfuscating the size and time of transactions that are submitted and verified.Hydro Finance is a relatively new project being built on the Secret Network, a privacy-preserving blockchain with “smart contracts that contain encrypted inputs, outputs, and state…. an encrypted mempool,” according to the Network.Hydro is trying to decouple itself from the permanent reliance on external liquidity providers by growing its own treasury of Protocol Owned Liquidity, and it also codifies buy-pressure through the inflation of the assets that it supports. Instead of giving all of the trading fees to the liquidity providers, the DAO controls the revenue, and the liquidity providers receive the DRO token.“AMM’s, in their current form, are impractical but necessary services upon which the growth of DeFi is reliant. It is imperative that we evolve them past their inceptive shortcomings for the ethos of freedom and decentralization in finance to mature,” co-founder Waisanen says.Although AMMs have been absolutely integral to the expansion of the DeFi community to date, new business models may be required to sustain the community going forward. The curve wars that were observed in 2021 are unsustainable in the long run because there is not enough demand for different tokens. Ultimately, the value of a token comes down to the value of the community, which requires a core team to lead and direct traffic. Time will tell how current challenges to the problems plaguing AMMs fare, but one lesson is clear: The DeFi community will need to apply best practices from business to make sustainable and scalable organizations succeed.

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Beyond the hype: NFTs can lead the way in transforming business experiences

Beyond the hype: NFTs can lead the way in transforming business experiences

Uverejnil používateľ | jún 5, 2022 |

Many businesses and big brands have already jumped on the nonfungible token (NFT) bandwagon, including Nike, the National Basketball Association, Pepsi and even Taco Bell. But are these just for the show, or are these NFTs creating value? Much like digital services have become essential for every business in and outside of the technology sector, I believe that tokens — and, specifically, NFTs — are likely to become equally crucial in the emerging Web3 economy for at least two reasons.First, my view is that NFTs tokenize ideas at the atomistic level, creating rivalry and exclusivity around goods or services. Markets cannot form when goods and services are non-rival — when one person’s consumption does not trade off with another’s — or when they are non-excludable — when it is prohibitively expensive to gate access to a good or service with a price mechanism. NFTs, on the other hand, create rivalry and exclusivity by leveraging smart contracts on the blockchain that deliver NFTs to peoples’ digital wallets when they make a purchase.Second, I also believe that organizations can use NFTs to efficiently attract and engage different tiers of customers each in their own unique way. Whereas traditional marketing involves selling goods and services at a discount, perhaps for a limited duration of time, NFTs allow brands to target specific customers and reward those who want to engage. For instance, perhaps a fashion brand decides to airdrop discount codes or special offerings that are not available anywhere else to NFT holders. Normally, that would be prohibitively expensive to do at scale, but NFTs provide a way.Related: Why are major global brands experimenting with NFTs in the metaverse?Building communityTo date, however, most of the NFT applications have been among bigger brands — or at least, so it seems based on media coverage. But either way, smaller organizations and even independent business owners will benefit from NFTs in the years ahead if they invest the time and energy to understand how they work. In fact, just think about the types of businesses that are most likely to benefit from NFTs: It is precisely the smaller organizations that do not have as much of a marketing budget to implement large-scale campaigns and discounts that benefit from the reduction in cost that NFTs provide to target consumers and invite them into a community.Forget thousands or hundreds of thousands of dollars that go toward buying email lists, creating sales funnels, and conducting surveys and market research. Understanding competition and knowing your consumer is always going to be important, but the landscape is fundamentally different when you think about reaching people on a blockchain based on their opting in and the ability to track what people are actually buying and engaging with in a transparent way.That’s not to say marketing doesn’t matter. Marketing and visibility do matter insofar as consumers need to learn about the goods and services that are being offered. But the mechanism behind it all is changing — simply having a big budget is not going to have as much bang as a smaller organization or independent business owner who has a clear community of loyal customers. NFTs are simply a new technological mechanism for conveying rival and exclusive goods and services to people who value them — they are not a substitute for creating valuable goods and services in the first place.Related: Web3 relies on participatory economics, and that is what is missing — ParticipationTake, for instance, the positive effects of airdrops and governance tokens, which I’ve covered in Cointelegraph Magazine before, citing Gary Vaynerchuk and 3LAU. When used with intentionality and prudence, airdrops are a great way of rewarding early users and building a close community. Then, as momentum builds, the community grows and enters into a new phase.Enhancing B2B servicesAlthough it’s easy to see how NFTs can enhance the consumer experience, ranging from fashion to content creation, what about businesses that sell services to other businesses?The principles are the same. Imagine, for example, a consultancy where businesses bid over time with different consultants by buying their NFTs. Then, consultant income would vary based on market demand and supply, providing stronger incentives for each person to carry their weight and add value in the process, as well as an opportunity for businesses to hire their preferred top talent.The same could go for an institution of higher education where faculty produce NFTs of their content and can license it out to businesses as an additional source of revenue, decreasing the need for growing tuition. Such an approach would also encourage faculty to create content that actually engages with the demands of the marketplace, rather than just talking about them.Beyond the outward-facing component, think about the impact that tokens could have on the internal labor market of an organization. One of the biggest challenges within organizations is the absence of a price mechanism, dating back to contributions by the late Nobel Laureate Ronald Coase in a 1937 paper, as well as another Nobel Laureate Oliver Williamson in a 1981 paper.Since prices in a market function to allocate supply and demand, a problem exists within organizations: There is no price! Instead, internal labor markets and organizational decision-making function through hierarchies. But these are inefficient, and there is a wide array of transaction costs — or factors that drive a wedge between what people want and need to exchange.Related: Demystifying the business imperatives of the metaverseSuch frictions can be resolved through the use of an internal economic system where tokens are used to facilitate exchange. For example, raising an employee’s salary might be a risky bet, but paying them in tokens creates additional skin in the game and incentives to perform since the tokens can only be redeemed if the employee remains in the organization. Obviously creating such an internal ecosystem is not simple, and there are costs and benefits to evaluate in more detail, but at its core, tokens have the potential to fundamentally transform the conversation about transaction costs.Taking stockIt’s easy to get caught up with the buzz about NFTs — and even fungible tokens — without knowing why. Clearly, there’s something special in the Web3 revolution we’re in, but sometimes it’s hard to put our finger on why. I believe the secret sauce is in the ability for NFTs to create rivalry and exclusivity at the atomistic level around ideas — and that has profound implications worth exploring further.This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.Christos A. Makridis is a research affiliate at Stanford University and Columbia Business School and the chief technology officer and co-founder of Living Opera, a multimedia art-tech Web3 startup. He holds doctorates in economics and management science and engineering from Stanford University.

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