HomePostImages

Image

The Domain Name System (DNS) is something that the average internet user has regularly interacted with, but rarely they have an idea of how it works under-the-hood.

Putting it on a silver platter, this integral piece of internet infrastructure is what allows you to type the namespace “linkedin.com” instead of the IP address “108.174.10.10” on your web browser. Imagine if you have to remember every single IP address of your favourite internet services — not too convenient, isn’t it?

With that said, there exist gross inefficiencies plaguing the traditional DNS value chain — giving rise to the narrative of blockchain domains as the next-generation solution towards IP address naming.

Before we get into it though, you will need to know some of the key concepts regarding how the traditional DNS actually works behind-the-scenes.

Read on.

The Domain Name System (DNS)

Traditional DNS infographic
[Kinsta.com]

The name “google.com” might be easily ‘remember-able’ for us humans, but for computers who are actually doing the grunt work, this alphabetical string is actually a pain in their (metal) ass.

We assign alphabetical names like “Joe” or “Jill” to people, mainly because it is easy for us to refer to people by these names. For computers however, it is easier for them to refer to each other with numerical names (or what we call as IP addresses) like “105.21.51.78”.

To address this difference in naming preference between humans and computers, we came up with something called the Domain Name System (DNS). In simplest terms, it allows humans to assign a human-readable name in place of a computer’s machine-readable name. These records are then stored on a huge lookup database.

From the user’s perspective, upon requesting “google.com” from the web browser, the text will be directed to this lookup database — which then determines whether “google.com” actually exists. If it does, the database will return its associated IP address, in which the web browser will use it to locate the server where the content is hosted on.

The whole process is analogous to asking a librarian where a certain book is located: 1) you tell the librarian (the lookup database) the name of the book that you’re looking for; 2) the librarian searches for the book’s location as per the library’s records; 3) if it exists, the librarian replies you with the book’s exact aisle, shelf, and row number, so that you can go and retrieve it.

ICANN logo: root of traditional DNS
[Coin Bureau] ICANN: the librarian of domain names

This huge lookup database is collectively maintained by ICANN and its network of registries and registrars. ICANN (Internet Corporation for Assigned Names and Numbers) oversees maintenance of the root name server. Following on, registries are responsible for top-level domains (TLD), and registrars manage second-level domains (SLD) and its constituents.

Relating back to our library analogy, aisles will be the equivalent of the root name server, shelves will represent top-level domains, rows will be like second-level domains, and so forth.

Traditional DNS: A graphic illustrating its hierarchy (root, TLD, SLD)
DNS hierarchy: the root name server (ICANN), TLDs (registries), SLDs and its constituents (registrars)

The hierarchical design of the DNS means that only ICANN is able to add a new TLD into the root name server. To register a new TLD, registries must submit a paid application to ICANN, then wait for approval before the TLD is reflected on the root name server by ICANN.

Registries come in all shapes and sizes depending on the nature of the TLD. In the case of “.com” and “.net”, since they are meant for commercial purposes, they are maintained by Verisign, an American for-profit firm. There are also TLDs reserved for sovereign nations such as “.au” for Australia, or “.uk” for the United Kingdom — usually maintained by a government-sanctioned entity.

Traditional DNS: closer look on TLD vs SLD
[Business 2 Community] a closer look: TLD vs. SLD

Going down the bottom of the food chain, just like how registries require ICANN’s approval to register a TLD on the root name server, registrars will also need to obtain a registry’s approval for the right to register SLDs on top of the registry’s ICANN-approved TLD. Fees will depend on the registry itself — but as a rule of thumb, commercial TLDs like “.com” will usually cost more.

Registrars are usually the first point-of-contact for most people: interfacing with the likes of GoDaddy when looking to buy domain names. Accordingly, registrars maintain SLD ownership records for their customers — where its main responsibility is to prevent ownership conflicts.

All in all, the DNS is essentially a unified view on world domain ownership, spearheaded by ICANN along with its network of registries and registrars.

Blockchain Domains: Disrupting Registries and Registrars in One Fell Swoop

Blockchain Domain Protocols: Unstoppable Domains vs. Ethereum Name Service (ENS)
[CoinCentral] Blockchain Domain Protocols: Unstoppable Domains (UD), Ethereum Name Service (ENS)

Due to the nature of the traditional DNS, gross inefficiencies will emerge as a byproduct of the coordination overhead amongst participating intermediaries. Recall that the DNS involves at least three separate entities: ICANN, registries, and registrars.

With each layer of intermediary comes additional red tape to jump over when processing SLD registration requests, and more cuts taken from the “domain registration pie” to sustain each intermediary’s operations (along with some profits for its shareholders). As a consequence, these costs get directly passed down to us, the end-users buying up the SLDs in the first place.

Blockchain Domains vs. Traditional DNS (context: meeting room suggestion meme)

Historically, there needs to exist a separation of powers on TLD and SLD registration. If not, rent-seeking practices would gradually ensue — a natural repercussion of centralized management. But now for the first time ever, TLD and SLD registration could be rearchitected into a single cohesive unit: the blockchain domain protocol.

Building on from the above, just like how DeFi has managed to disrupt the entrenched banks and financial institutions of our traditional financial system, blockchain domain protocols could potentially take on the roles of the registries and registrars of our traditional DNS in one fell swoop.

Instead of having Verisign and GoDaddy as the TLD registry and SLD registrar respectively, a smart contract could act as a “container” for a TLD, in which SLDs on top of this TLD would be represented as distinct NFTs — one NFT for each SLD. As such, anyone will be able to claim an unowned SLD for a fee anchored on supply and demand, wherein the fee determination algorithm would be enshrined within the protocol itself. This transparency ensures that instances of manipulation is highly unlikely, if not infeasible.

This “SLD NFT” would also be freely tradable, since it is an on-chain NFT. In terms of market dynamics on highly sought-after domain names, the same implications found on the traditional DNS would also carry over to blockchain domain protocols: the more lucrative an SLD is regarded (for instance, a short SLD with a catchy name), the higher price the SLD would command.

Blockchain domains vs traditional DNS (context: they don’t know sidelined at a party meme)

Underpinned by the blockchain’s properties of credible-neutrality and decentralized consensus, once a party claims a domain name via SLD NFTs, ownership of the domain will be irrevocable and immutable — assuming the owner pays its associated renewal fees in time throughout its tenure. Since SLD NFTs are transferrable just like regular tokens and NFTs, they would be able to be resold on secondary markets at the discretion of their owners.

In the event of domain name defaults, the smart contract will automatically update the subject domain name’s ownership status on its registry, such that it is available for purchase by interested parties. The SLD NFT belonging to this defaulted owner would become worthless — the smart contract will mint a new SLD NFT for the domain’s new owner upon verification of the purchase, which will then be reflected on its registry in place of the old SLD NFT.

In addition, it offers an additional benefit native to the crypto space: referencing a crypto address with a remember-able name. In this case, if the lookup database of the traditional DNS only contains two “columns” (namespace, IP address), the lookup database of blockchain domain protocols would consist of three “columns” (namespace, IP address, crypto address). As such, users will be able to send crypto transactions via remember-able domain names instead of having to input the full string of a crypto address.

Blockchain domain vs traditional domains (context: drake refuse meme)

In a nutshell, blockchain domain protocols safely combine the functions of registries and registrars under one unified umbrella. The deterministic nature of smart contracts, coupled with the blockchain’s inherent properties of credible-neutrality and decentralized consensus, eliminates the need for centralized intermediaries to step in and mediate world domain ownership.

The cost of domain ownership would significantly decrease: less intermediaries would mean less red tape and more efficiency across the board, eventually leading to cost-savings for the end-users.

Looking Forward

Blockchain Domains: ENS spending decisions (context: spongebob wallet meme)

Currently, the utility of blockchain domain protocols is still restricted to referencing crypto addresses via human-readable names. For blockchain domains to be able to reference IP addresses (for hosting websites, etc.), the protocol needs to first obtain ICANN’s approval for its TLD, so that the TLD can be reflected on the root name server.

As blockchain domain protocols approach maturity, governance of the smart contract registry could be gradually handed over to a DAO, where its scope might include: adding a new TLD and creating a new registry for it, removing underutilized TLDs and deleting its associated registries, leading ICANN talks to register a new TLD to the root name server, altering the protocol’s value accrual model for its native token, protocol fiduciary elections, and other ad-hoc resolutions.

The evolution of social media has been nothing short of revolutionary, connecting people across the globe. However, it has also raised significant concerns about privacy, data ownership, and censorship. In response, decentralized social platforms have emerged as a new frontier, promising a reimagined digital landscape that prioritizes user control and privacy.

The Privacy Paradox of Centralized Social Media

Centralized social media platforms have become an integral part of our daily lives. We use them to share our thoughts, connect with friends and family, and discover new content. However, these platforms often come at the cost of our privacy. Here’s the privacy paradox of centralized social media:

  1. Data Collection: Centralized platforms collect vast amounts of user data, from our posts and messages to our location and browsing habits.
  2. Data Ownership: Users often have limited control over their data. Once you post content on a centralized platform, it becomes the platform’s property.
  3. Censorship: Centralized platforms can moderate and censor content, leading to concerns about freedom of expression.
  4. Data Breaches: High-profile data breaches have exposed the personal information of millions of users.
  5. Algorithmic Manipulation: Algorithms on centralized platforms determine the content we see, potentially shaping our views and opinions.

The Promise of Decentralized Social Platforms

Decentralized social platforms offer a compelling alternative to the privacy challenges posed by centralized networks. Here’s how they are reshaping the digital landscape:

  1. User Control: Decentralized platforms prioritize user control. Users own their data and have the final say on how it’s used.
  2. Censorship Resistance: These platforms are resistant to censorship, making them attractive to those who value freedom of expression.
  3. Privacy-First: Decentralized social networks implement privacy features like end-to-end encryption, protecting user communications from prying eyes.
  4. Data Monetization: Users can choose to monetize their data, receiving rewards for sharing information with advertisers or researchers.
  5. Open Source: Many decentralized platforms are open-source, allowing for community-driven development and transparency.
  6. Interoperability: Users can communicate across different decentralized platforms, fostering a more open and inclusive digital ecosystem.

Challenges and Considerations

While decentralized social platforms hold great promise, they also face challenges and considerations:

  1. User Experience: These platforms may require a learning curve and can be less polished than their centralized counterparts.
  2. Adoption: Mass adoption remains a challenge. Encouraging users to transition from familiar centralized platforms is no small task.
  3. Regulatory Hurdles: Evading government regulations can be challenging, especially regarding data privacy and content moderation.

Examples of Decentralized Social Platforms

Several decentralized social platforms are making waves in the digital space:

  1. Mastodon: A decentralized microblogging platform that resembles Twitter but is community-driven and open-source.
  2. Diaspora: A distributed social network that allows users to host their own nodes, retaining control over their data.
  3. Signal: An encrypted messaging platform known for its strong stance on user privacy.
  4. Steemit: A blockchain-based blogging and social media platform that rewards content creators with cryptocurrency.

The Future of Decentralized Social Platforms

The rise of decentralized social platforms represents a turning point in the digital era. As privacy concerns continue to mount, users are seeking alternatives that put them in control of their data and digital identities. While the journey towards mass adoption may be long, decentralized social platforms offer a new dawn for privacy, putting the power back into the hands of users.

In the coming years, we can expect a growing ecosystem of decentralized social platforms, each with its unique features and communities. As more individuals recognize the value of privacy and data ownership, the shift towards decentralized networks may become a fundamental transformation of the digital landscape. The era of user-centric social media has begun, and it’s poised to redefine the way we connect and share online.

The grandfather of cryptocurrencies, Bitcoin, is notorious for not being environmentally friendly. According to a University of Cambridge study, Bitcoin is estimated to consume around 121.36 terawatt-hours (TWh) a year, which is more electricity annually than what Argentina consumes, being a country of 46 million people. This is even more than the consumption of Google, Apple, Facebook, and Microsoft combined!

At this point, it is common sense to see that Bitcoin indeed has a carbon problem. Critics are of the opinion that Bitcoin’s “utility” doesn’t justify the energy expended for it, and that the world would be better off with the traditional financial system if having a decentralized financial system meant expending gigantic amounts of energy for it. Proponents argue that Bitcoin’s inherent decentralization is worth its cost in energy consumption, and that mining is an inseparable part of Bitcoin itself.

Read on.

Proof-of-Work = Proof-of-Waste?

Environmentally Friendly Cryptocurrencies (context: flooded farms as a result of climate change)
[Destroying the Planet] farm flooding: climate change is breeding storms with heavier rainfall

The main cause of Bitcoin’s mammoth energy use can be boiled down to one thing: proof-of-work mining. Before we get into it, think of blockchains as decentralized ledgers powering its underlying cryptocurrency: the Bitcoin network can be regarded as a decentralized database that anyone is free to download and maintain — Bitcoin balances are merely entries to that database.

To write data (in other words, assign $BTC balances to an address) into this decentralized database, there needs to exist some kind of foolproof mechanism that governs this function (if not, people could just write $BTC to themselves at will). This mechanism must be free of human interference, such that there exists no room for opportunistic behaviour to skew incentives. To satisfy all the above criteria, Satoshi Nakamoto (aka the pseudonymous creator of Bitcoin) came up with what we now know as proof-of-work.

[Tokenize Xchange] proof-of-work, in a nutshell…

In simplest terms, proof-of-work pits “miners” (a term referring to anyone maintaining the Bitcoin database) together into a “math competition”, where the fastest computer to solve the mathematical problem gets to write data into the database.

This competition occurs on every block time, meaning that for each block (the “row”) that gets appended into the blockchain (the “database”), there exists an “evaluation period” (the “block time”) in which the host of the math competition can adjust the difficulty level of questions on the next round based on how well or terrible the computers have performed on the previous round.

The target benchmark is 10 mins for Bitcoin, meaning that if a computer can solve the question below the 10-min mark, the difficulty will be adjusted upwards in proportion to how much faster the computer is relative to this 10-min mark (and vice versa).

[Bitcoin.com] competition drives proof-of-work’s race-to-the-bottom — miners acquire more and more powerful ASICs, which further exacerbates Bitcoin’s carbon footprint

Since people get rewarded in $BTC when their computers are the first ones to solve the math puzzle, they are incentivized to procure more and more powerful computers in a bid to get more $BTC, which in turn triggers the Bitcoin network to adjust its difficulty further up, which then spurs people to obtain even more powerful computers.

This race-to-the-bottom is essentially the root cause of Bitcoin’s huge carbon footprint. In theory, if people stop procuring more powerful computers in a quest to outcompete each other, then Bitcoin’s energy use can be brought down to the tiniest of levels. But this is wishful thinking at best: as long as there are outsized incentives to be won for a select economic actor over the others, then competition will always exist by default.

Bitcoin = Crypto; Crypto ≠ Bitcoin

Environmentally Friendly Cryptocurrencies: more than just BTC (list of crypto)
[Master the Crypto] not an endorsement: Bitcoin is just one of the numerous cryptocurrencies out there…

Make no mistake, Bitcoin is by far the largest cryptocurrency by market cap. However, it is not the only cryptocurrency out there. In fact, there exists thousands of cryptocurrencies, each with their own consensus (proof-of-work is Bitcoin’s consensus mechanism). Critics and proponents of Bitcoin can go at it all day on whether Bitcoin’s consensus mechanism justifies its utility — but it is simply unfair to drag other cryptocurrencies into the fray, considering the fact that they are running on a completely different consensus mechanism than Bitcoin’s proof-of-work.

[Ethereum.org] not an endorsement: energy-efficient PoS Ethereum, compared to PoW Ethereum and Bitcoin

One such cryptocurrency is Ethereum, currently the second-largest by market cap. Ethereum is a smart contract compatible blockchain, meaning that unlike Bitcoin which can only do simple send/receive transactions, applications can be developed on top of Ethereum to do more complex computations such as swapping tokens, lending/borrowing, minting NFTs, and other kinds of applications that we are not exposed to yet.

Just like Bitcoin, Ethereum’s consensus mechanism is currently proof-of-work — however, the Ethereum community is of the opinion that this mechanism is unsustainable in terms of its energy use and potential scalability, and as such has committed to transition towards a more energy-efficient consensus alternative called proof-of-stake.

The key distinction of proof-of-stake with proof-of-work is that instead of having miners compete for blocks, the network assigns blocks to miners based on their number of staked $ETH. The bigger a miner’s $ETH stake out of the network’s total staked $ETH, then the miner will have a higher chance for the right to write the next block into the blockchain. The absence of “math competitions” to determine consensus means that proof-of-stake by default will be significantly more energy-efficient than proof-of-work.

[Fantom Foundation] not an endorsement: Fantom is fully operational, being both energy-efficient and smart contract compatible

Indeed, “The Merge” is still in the works at the time of this writing. However, there are still plenty of other environmentally friendly blockchain networks that are already fully operational.

One such example is Fantom, where it uses a consensus mechanism called Lachesis PoS in a bid to further scale the Fantom network even more than ETH2.0. To achieve this, instead of using a “traditional” blockchain data structure for its decentralized ledger, they employ what we call as a DAG (directed acyclic graphs).

[Solana.blog] not an endorsement: Solana just brought energy-efficiency to the next level, where a single Solana TX is comparable to the energy expended for a single Google search!

Another example of a scalable and energy-efficient cryptocurrency is Solana. They are highly touted as the world’s most performant blockchain, which is achieved through its so-called seven core innovations, spearheaded by its proprietary Proof of History PoS consensus mechanism.

[MetaCrunch] not an endorsement: Celo’s branding perfectly reflects its core values — to be carbon-negative

Heck, there is even a carbon-negative blockchain network (at least according to its transparency reports). Celo, a mobile-first blockchain network with Valora as its flagship product, achieves its carbon-negative goal through a combination of its already energy-efficient blockchain along with its “Carbon Offsetting Fund”, which basically sets aside a fraction of the rewards that is meant for Celo validators in favor of donating them to an organization that commits to using those assets for carbon offsetting projects.

No Size Fits All

Environmentally friendly cryptocurrencies getting yelled at by nocoiners (context: woman screaming at cat meme)

It really doesn’t have to be one way or another. Pro-crypto doesn’t necessarily entail an anti-environment stance, nor that anti-crypto is pro-environment.

As such, no matter if you are a hardcore environmentalist with the belief that the most important consideration for a product or service is its carbon footprint irrespective of its utility, or a “decentralization maximalist” with the opinion that the superiority of Bitcoin’s proof-of-work renders its energy usage worth its weight in gold (this is an infamously contentious issue; for further reading: Blockworks’ take on proof-of-work vs. proof-of-stake), the plethora of cryptocurrencies ensures that there will exist communities that are aligned with your principles or the causes that you are advocating for.

In the world of decentralized communities and blockchain networks, a new and innovative trend is emerging – the gamification of community governance. This groundbreaking concept is transforming the way decisions are made, fostering engagement, and empowering participants in decentralized ecosystems.

The Challenge of Governance in Decentralized Communities

Decentralized communities, built on blockchain technology, often face the challenge of governance. These communities can consist of thousands, if not millions, of participants worldwide, all with their unique perspectives and interests. Deciding on network upgrades, protocol changes, and resource allocation can be a daunting task. Traditional methods of governance, such as voting and decision-making by a select few, may not fully address the complexity and diversity within these communities.

The Rise of Gamified Governance

Gamified governance introduces elements of competition, reward, and participation in the decision-making process. This approach leverages game mechanics and incentives to engage community members actively. Here’s how it works:

  1. Tokens as Votes: Participants use tokens or cryptocurrency to cast their votes on various proposals and decisions. The more tokens one holds, the more influence they have.
  2. Staking and Rewards: Users can “stake” their tokens to express their support for a particular decision. If the decision passes, they receive rewards or additional tokens.
  3. NFT Governance: Some projects are experimenting with non-fungible tokens (NFTs) as governance tokens. Holding specific NFTs grants voting rights.
  4. Prediction Markets: Gamified governance platforms often include prediction markets where users can speculate on the outcome of decisions.
  5. Liquid Democracy: This model allows users to delegate their votes to trusted individuals, creating a fluid and dynamic decision-making process.

Benefits of Gamified Governance

Gamification of community governance offers several advantages:

  1. Increased Participation: Gamification encourages more members to actively participate in the decision-making process.
  2. Transparency: Decisions and their outcomes are recorded on the blockchain, ensuring transparency and accountability.
  3. Rewarding Engagement: Participants are rewarded for their involvement, increasing community loyalty.
  4. Incentive Alignment: Gamification aligns the interests of participants with the success of the network or community.
  5. Dynamic Decision-Making: Liquid democracy and prediction markets create fluid, adaptive governance models.

Challenges and Considerations

While gamified governance is a promising trend, it also comes with its set of challenges and considerations:

  1. Token Distribution: Ensuring fair token distribution is critical to prevent centralization of power.
  2. Sybil Attacks: Protecting against Sybil attacks (where one entity creates multiple fake accounts) is essential to maintain the integrity of the process.
  3. Complexity: The gamified governance process can be complex, which may deter some participants.
  4. Regulatory Concerns: Regulatory authorities may view token-based governance as a form of securities and subject to legal oversight.

Prominent Examples of Gamified Governance

Several blockchain projects and communities have already embraced gamified governance:

  1. DAOs (Decentralized Autonomous Organizations): DAOs like Compound and Yearn Finance allow token holders to vote on proposals and manage decentralized funds.
  2. DeFi Projects: Many decentralized finance projects employ gamified governance models, including AAVE and MakerDAO.
  3. NFT Communities: Some NFT platforms use gamified governance to make decisions about platform improvements, art curation, and collaborations.

The Future of Gamified Governance

The gamification of community governance is set to play an increasingly significant role in decentralized ecosystems. As blockchain technology continues to evolve, innovative governance models that engage and empower participants will become more commonplace. Liquid democracy, prediction markets, and dynamic decision-making will redefine how communities govern themselves. In this gamified future, participation and engagement are not only encouraged but also rewarded, ensuring the continued success and growth of decentralized networks and communities.

The crypto/web3 space has matured considerably as a whole. Long gone are the days where Ethereum is the only platform for smart contracts — the emergence of multiple smart contract chains have provided us with faster and cheaper alternatives to Ethereum.

As a testament to this fact, Ethereum’s TVL (total value locked) dominance is quickly dwindling by the day — from 95% for the most part of 2020, now down to ‘only’ around 60% at the time of writing. In fact, this current cycle could mark the first time in which the “starting base” to DeFi and NFTs for the majority of new crypto adopters is not Ethereum!

Make no mistake, Ethereum remains a significant lynchpin throughout the whole crypto ecosystem. Major DeFi or NFT innovations mostly still start out from Ethereum before being ported over to other chains, largely due to Ethereum’s huge lead in developer count over other chains. The most capital is still on Ethereum, and even if its dominance isn’t as strong as it used to be, Ethereum’s TVL figure by far still trumps over any other competing chain.

With that being said, the crypto space is surely not going to go the path of maximalism — a scenario where only one dominant chain wins. Expect Ethereum’s TVL dominance to keep decreasing over the years, with other chains taking up this share. As such, blockchain interoperability becomes imperative to allow seamless capital flow amongst chains, instead of the silo-ed liquidity that we’re mostly accustomed to right now.

The Current State of Blockchain Bridges and Other Interoperability Solutions

Full Mindmap of Blockchain Bridges
[Dmitriy Berenzon/1kxnetwork] imagine having to remember all these different bridging protocols depending on your source and destination chains — there’s got to be a better way…

Currently, the most widely preferred option to transfer capital between chains is via a centralized exchange. And it is completely understandable why.

Blockchain bridges are a pain to use, as simple as that: UX is as unfriendly as it gets. To prove my point, try asking a crypto newbie to do a simple cross-chain transaction on their own:

“So you go to Wormhole, click on source chain and select the current chain that you’re on. Next, click destination chain and select the chain you want to bridge to and paste your address. Then, select the token you want to bridge, approve the token, and click transfer. Wait for a few minutes for confirmation, then redeem your token on your destination chain. Ah that reminds me, for non-EVM chains you’ll need to download another wallet that is native to the chain. Also, you’ll need to see the whether the wrapped tokens that you’re going to be receiving in the destination chain will have a liquid market for you to exchange to “native” tokens. If not, then bridge it back to the source chain and swap it to a token that has a liquid market on the destination chain. That’s all, happy bridging!”

By the end of your long-drawn speech, I guarantee 95% of the time that you’ll be met mostly by blank stares and visible confusions. What is the destination wallet? Why wrapped token? Where liquid market? And there goes another hour of your free time on the weekends…

Blockchain bridge slapping crypto mainstream adoption (context: Will Smith — Chris Rock slap meme)

Long story short, one thing we can say for sure is that current interoperability solutions are just a UX nightmare. We do this all the time, so we might not notice their struggles since it is like second nature to most of us — but for them, they’re charting on unknown territory, and hence it is extremely important for us to make sure that their onboarding process is as beginner-friendly as possible.

Blockchain Bridges: The Back-End Infrastructure

[CoinYuppie] Wormhole: a lock-and-mint bridge — wrapped tokens on the destination chain are backed by native token collateral deposited on the source chain

In fact, we have indeed made strides on the UX of bridging. If first-gen bridges are of lock-and-mint architecture (ex: Wormhole), second-gen bridges are actually not bridges per se, but more like a liquidity router.

In simplest terms, it basically matches bridging demand of a supported asset from the source chain with its available supply on the destination chain, and then upon verifiable proof that the asset has been deposited into a “threshold address”, distributed nodes collectively release the equivalent amount of asset from the available supply on the destination chain.

This “second-gen bridge” significantly improves the UX, as now the user won’t need to worry about wrapped tokens and its available liquid markets on the destination chain. Simply select your source chain, your token, your destination chain, paste the destination address, and you’re ready to go! The most prominent example of this second-gen bridge is AnySwap (rebranded to Multichain), with two billion dollars in TVL at the time of writing.

[@MultichainOrg/Twitter] Multichain (formerly AnySwap): a router protocol — users swap native tokens on the source chain for native tokens on the destination chain (think of it as AMM + bridge from one UI)

But we’re far from being done. The end goal isn’t to develop the most efficient bridge, but it is to allow seamless capital flow among chains. Bridges alone won’t solve fragmented liquidity or silo-ed smart contracts.

For ultimate seamless interoperability, liquidity must be made available to all chains, regardless of where its originating from, and smart contracts must be able to communicate with each other, regardless of its scripting language. Bridges are in fact just one part of the equation towards blockchain interoperability — they are meant to be a back-end infrastructure, not a user-facing front-end application.

To put this into analogy, imagine two islands separated by a sea — one has an abundance of coconuts, while the other is filled with bananas. Bridges are just that — bridges! To conduct trade, the coconut islander has to bring coconuts across the bridge to banana island, trade the coconuts with bananas over there, then carry the bananas back to coconut island. For the side of the banana islander, vice versa.

This is the state of blockchain interoperability today. However, what if both islands can agree on some sort of communications channel for the trade of coconut and bananas? That’s right, certainly it would significantly increase the trade volume of coconuts and bananas across both islands!

“Interoperability Layer”: The Front-End Application

[Coinweb/YouTube] Coinweb: a “cross-chain computation platform” (not an endorsement)

Back to the analogy, let’s assume both islands are provided with internet connection. In this case, instead of having to physically carry coconuts to banana island to trade (and bring them back), they can simply arrange the trade prior, then bring the actual goods to each other following a time interval.

As such, the liquidity of coconuts will not be limited to the amount that the islander is able to carry across the bridge — in fact, the whole island’s coconut stock is now available liquidity for the banana islanders. Same goes to banana liquidity to coconut islanders.

Fast forward a few years. Banana islanders have now acquired the skill to make banana splits out of raw bananas. Coconut islanders traded more coconuts for banana splits, as they think they can improve this “creation”.

After a few months, coconut islanders have indeed enhanced the banana split by sprinkling chunks of coconut meat on top, along with mixing it with some coconut juice. Following on, banana islanders proceeded to trade even more bananas for this “coconut-enhanced banana split” — in the process learning how to make banana juice from it. This self-reinforcing cycle will keep going on and on, supercharging the rate of innovation on both islands.

Sample Interoperability Layer Architecture: Axelar
[Tin Money/CoinMonks] Axelar: a “universal overlay network” (not an endorsement)

Relating this analogy to the real-world, it would be like if there is an interoperability layer that can connect fragmented liquidity pools residing on different chains (ex: Uniswap on Ethereum, Quickswap on Polygon, Raydium on Solana, etc.), while also allowing smart contracts to talk with each other regardless of its underlying chain’s language (ex: Solidity for EVM chains, Rust for Solana, etc.).

From a UX perspective, this interoperability layer will be able to update the user’s state balances on different chains, without requiring the user to select source and destination chains, paste destination address, and switch networks. One wallet address is all the user will ever need, and instead of having to remember the seed phrases or private keys of multiple addresses, this future interoperability layer will ‘link’ all of them together and cryptographically generate a single ‘master’ seed phrase that will allow users to update the state balances of its associated ‘child’ addresses across chains.

In practice, this would be like if you can initiate a swap from a Solana DApp to trade $SOL for $ETH, or buy an Ethereum-based NFT from an Avalanche DApp, without having to switch networks and approve on both chains. The interoperability layer will send you a single pop-up for you to sign with your ‘master’ seed phrase, and once approved it will automatically execute all the associated smart contracts for you (and update state balances if applicable).

Going Cross-Chain: The “Globalization” Era of Blockchains

[DayCryptoTrading] BNB, Solana, Ethereum (left to right): arguably the three chains with the fiercest communities

Division of labor is a well-known concept in economics. In short, it states how specialized workers could produce more economic output in the same timeframe as “general” workers, and as such separation of tasks is to be encouraged.

The rise of globalization has expanded the range of goods and services that each nation has access to. This allows each nation to get even more specialized, resulting in a higher overall economic output for itself and the world in aggregate. Without globalization, every nation is compelled to produce their own food, infrastructure, and other “basic needs”. There won’t be Japan as the world’s largest automobile producer, China as the world’s factory, or Singapore as the financial center of Southeast Asia.

Each blockchain network can be regarded as a separate nation with its own identity, language, and economic specialization. Like how open trade and globalization increases the economic output and overall wealth of all participating nations, a future where blockchains can seamlessly interoperate with each other will encourage all chains to double-down on their respective specializations, in which by the same effect will increase the economic output and aggregate wealth of all participating chains.

 

The concept of the metaverse, a collective virtual shared space, has captured the imagination of technology enthusiasts and futurists. As we inch closer to a world where the metaverse becomes a reality, it’s essential to explore how this digital realm will redefine virtual communities and social interactions.

The Emergence of the Metaverse

The metaverse is often described as a collective virtual shared space, merging aspects of augmented reality (AR) and virtual reality (VR) into a seamless digital universe. This evolving concept, popularized by science fiction and tech giants alike, promises to revolutionize the way we connect and interact in a digital landscape.

Virtual Communities in the Metaverse

In the metaverse, virtual communities will be more immersive and interconnected than ever before. Here’s how:

  1. Diverse and Inclusive: Virtual communities in the metaverse will be incredibly diverse, uniting people from various cultures, backgrounds, and locations in a shared space.
  2. Interconnected Worlds: Rather than isolated platforms, the metaverse will allow users to move seamlessly between different virtual worlds, creating a more fluid and interconnected experience.
  3. User-Generated Content: Virtual communities in the metaverse will encourage user-generated content, from building virtual homes to designing fashion items and artworks.
  4. Economy and Commerce: Virtual communities will have their economies, driven by cryptocurrencies and digital assets. Virtual real estate, unique digital items, and services will be bought and sold within the metaverse.
  5. Education and Work: The metaverse will also serve as a hub for education and work, with virtual campuses, classrooms, and offices providing new opportunities for learning and collaboration.
  6. Identity and Avatars: Users will have the freedom to create and customize avatars, representing themselves in any way they choose. Identity in the metaverse will be more fluid and adaptable.

Challenges and Considerations

The metaverse brings with it a unique set of challenges:

  1. Privacy and Security: With extensive data sharing and digital interactions, privacy and security will be paramount concerns.
  2. Digital Divide: Access to the metaverse will be unequal, creating a digital divide between those who can afford immersive VR experiences and those who cannot.
  3. Monopoly Concerns: Tech giants developing the metaverse may face antitrust and monopoly concerns, limiting competition and innovation.
  4. Regulatory Frameworks: Governments will need to establish regulatory frameworks for virtual communities within the metaverse, addressing issues like virtual property rights and digital currencies.

The Promise of Web3 in the Metaverse

Web3 technologies, including blockchain and decentralized applications, are expected to play a significant role in the metaverse:

  1. Digital Ownership: Blockchain technology will enable true ownership of digital assets, from virtual real estate to unique in-game items.
  2. Decentralized Identity: Users will have more control over their digital identities and data, reducing the power of centralized platforms.
  3. Interoperability: Web3 will foster interoperability between different metaverse platforms, allowing for smoother transitions and interactions.
  4. NFTs and Virtual Collectibles: Non-fungible tokens (NFTs) will enable the creation and trade of virtual collectibles, artworks, and unique items.

The Future of Virtual Communities

The metaverse offers an exciting glimpse into the future of virtual communities. It promises a digital realm where people can connect, create, work, and play in ways that were previously unimaginable. As we venture deeper into this immersive digital landscape, it’s crucial to address challenges and ensure that the metaverse remains an inclusive and innovative space that benefits all of humanity. The evolution of virtual communities in the metaverse represents a significant step in the ongoing digital revolution that is reshaping our world.

The Bored Ape Yacht Club (BAYC) is by far the crown jewel of NFTs. At its peak, its floor price reached a staggering $300k. To put things into perspective, $300k could get you a comfortable house in almost any part of the world, or a high-end sports car like Lamborghini Huracan, with plenty still left over!

As such, it can be perplexing for most of us to comprehend how on Earth is a digital image be worth that much. Who in their right mind would pay $300k for the JPEG of an ape that anyone can right-click and save?

You’re right — they don’t. Hang with me for a bit here.

More Than JPEGs: The Social Utility of BAYC NFTs

NFTs TLDR: Use Case of BAYC — Social Utility (image of six BAYCs)
[Binance] just a bunch of weird-ass apes… probably nothing?

$BTC or $ETH, just like the USD, is fungible: every unit is equivalent to each other. The $ETH in your crypto wallet will denote the same value as any $ETH out there, just like how the USD1 note on your hand will represent the same value as any USD1 note out there.

By contrast, NFTs are unique tokens living on the blockchain. They are non-fungible — hence the acronym NFT: non-fungible token. Each BAYC is not identical to one another, despite existing under the same NFT collection.

As an analogy, you and your friend could both live in Beverly Hills, but your property is not identical with your friend’s, or in fact with any other property in Beverly Hills. Each property will have their own designs and layout, which means they will all have differing market values (although highly correlated).

NFTs TLDR: fungible vs. non-fungible
[Coins to Use] simple illustration: fungible vs. non-fungible items

Diving into how cryptocurrency (and blockchain) works under-the-hood is beyond the scope of this article — for further reading:

Back to BAYC. To wrap your head around it, you have to stop looking at BAYC NFTs as 2D JPEGs, but rather the social utility associated with owning the NFT alongside highly prominent figures: athletes like Neymar (#5269, #6633) and Steph Curry (#7990), musicians like The Chainsmokers (#7691), Post Malone (#961, #9039), and Marshmello (#4808), and public personalities like Kevin Hart (#9258) and Mark Cuban (#1597).

To further illustrate, imagine a scenario where Yuga Labs (the creator of BAYC) hosts a private yacht party, with access only given to BAYC NFT holders. The guest list is star-studded — Neymar will be there; Steph Curry will also be attending; and hence you’d want to attend the party as well.

Its utility would now become apparent: you can right-click and save as much BAYC JPEGs as you want, but in the end you will still be denied access to the yacht party. Why? Because the “real” holders own the underlying NFT of that JPEG, which is transparently verifiable on the blockchain by anyone.

NFTs TLDR: Use Case of BAYC — Social Utility (BAYC JPEG vs. Etherscan)
[Opensea] BAYC#6662: the associated JPEG vs. its “real” NFT

The above is just a specific instance. What if Yuga Labs partnered with Steph Curry to give first priority to BAYC holders for the tickets to Golden State’s NBA Finals Game 7? Or teaming up with Post Malone giving away free front-row seats to BAYC holders for his upcoming concert in Paris? Or joining forces with Mark Cuban to allow BAYC holders to a one-time private dinner session?

Even better, what if Yuga Labs partners with Epic to bring BAYC skins into Fortnite? Or collaborating with Coca-Cola to feature a couple of BAYCs drinking Coke for the latest Super Bowl ad? Or joining forces with Marvel to showcase BAYC NFTs in a 1-min scene on its latest MCU movie?

With the amount of money sloshing around Yuga Labs’ coffers and the celebrity-clad holders of BAYC NFTs, these scenarios are certainly on the cards. Epic won’t see BAYC as a mere collection of digital ape JPEGs — rather as a powerful brand boasting a sizeable big-name following. Same goes to Coca-Cola or Marvel when they are on the negotiating table with Yuga Labs.

NFTs TLDR: Use Case of BAYC — Social Utility (BAYC as a cultural brand; Otherside Metaverse)
[The NFT Unicorn] The Bored Ape Yacht Club is now a cultural brand — BAYC NFT owners get the front-row seat

With a self-imposed artificial cap of 10,000 units, BAYC NFTs also double as a status symbol as a byproduct of its exclusivity — akin to owning Rolex watches or Ferraris. In due time, its prestige could even surpass those of physical luxury goods, as we march towards an ever-increasing digitally-literate society led by millennials and Gen Zs — only time will tell.

Finally, the programmable, composable nature of on-chain tokens, fungible or non-fungible, would enable just about any NFT (including BAYC NFTs) to be tapped into as a “money Lego”. Unlike physical items like Gucci bags, NFT owners could easily trade their NFTs no matter where their counterparty is based on, collateralize their NFTs and borrow money off it, sell fractional shares of their NFTs, or even spin up custom derivatives out of their NFTs!

NFTs TLDR: Use Case of BAYC — Collateral for Loans (NFTFi Dashboard)
[Forkast] NFTFi: a P2P on-chain marketplace enabling loans backed by NFTs as collateral

BAYC is undeniably a special case: a first-mover (or “OG”) of the NFT space, with a massive audience populated with prominent figures and celebrities. As such, the value of its NFTs are largely derived from the social utility that it can bestow upon its holders — backed by the coffers of Yuga Labs as well as the public standing of its VIP holders.

With that said, most NFT projects are not of BAYC’s stature — they are more often “pure” digital art collections launched by artists with no distinguishable community, nor money or influence. This begs the question: do NFTs even have any value beyond social utility?

NFTs for Provenance in the Digital Age

NFTs TLDR: Provenance cannot be right-clicked and saved (Mona Lisa wikipedia image)
[Wikipedia] Mona Lisa, arguably the world’s most well-known work of art

On permanent display at the Louvre in Paris, Mona Lisa is believed to be worth circa $850m as of today’s dollars. While the painting itself is indeed no slouch, it is by no means irreplicable. A skilled artist given enough dedication could have painted a “perfect” replica of Mona Lisa (in fact, there has been a replica of it; this one sold for $300k back in 2021), which would have been indiscernible from the original except for the eyes of a few aficionados.

But then, why is the original painting is valued almost 3000x more than its “perfect” replica?

Short answer: historical provenance.

It doesn’t matter if a replica has “better” quality — the only thing that matters is the provenance of Mona Lisa. No matter how many Mona Lisas emerge in the future, the only one that was painted in oil on a white Lombardy poplar panel in the 1500s by Leonardo da Vinci, stolen from the Louvre in 1911 and brought to Italy but somehow was retrieved back to the Louvre in one piece, survived World War II, then finally became the property of the French Republic, is the Mona Lisa.

NFTs TLDR: Provenance cannot be right-clicked and saved (Mona Lisa viewing queue in Louvre)
[The Guardian] Mona Lisa on display at the Louvre: historical provenance, not art “quality”

NFTs could provide the digital art of an artist with provenance. Make no mistake, provenance doesn’t actually stop someone from replicating your work. Just like how Mona Lisa has countless replicas, your digital art will inevitably get duplicated — no way around that.

What provenance entails is that no matter how many exact replicas of your digital art that exists over the internet, there would only be one instance of it that is minted as an NFT under your public address.

NFTs TLDR: Provenance cannot be right-clicked and saved (Belugies Solscan)
[SolScan] Belugies NFT: anyone can verify the authenticity of an NFT simply by visiting a blockchain explorer and cross-check the minter’s public address(es) with those of the artist(s)

Sure, someone could actually mint your digital art as an NFT under their own public address, but the fact remains that you are its original artist, and hence the digital art’s provenance would be based off you as its rightful creator.

So long as the digital art is recognized as your work in the public eye (just like how you recognize Mona Lisa as Leonardo da Vinci’s work despite the existence of numerous replicas claiming to be the “original”), then no one could really “steal” your digital art. Once you announced your public address, then mint your digital art as an NFT under it, all value accruing from your digital art will rightfully flow straight back to you from the “fakes”, even if those grifters happened to mint their NFTs ahead of you.

NFTs TLDR: Provenance cannot be right-clicked and saved (Belugies NFT’s artist PeachSunday)
[Market Realist] 14-year-old Abigail aka “PeachSunday”, the artist behind Belugies NFTs — she plans to donate part of her profits to beluga whale conservation organizations and children’s hospital programs

Just like how the value of Mona Lisa mainly stems from its historical provenance, the value of a digital art NFT would heavily depend on the issuing artist itself: 1) the more enthusiasm for the digital art, the higher the value of the NFT; 2) the less NFT units reserved for the digital art, the higher price each NFT will command. And vice versa.

In theory, an artist could actually issue additional NFTs down the line for the same digital art that is already minted as NFTs earlier. In practice however, doing so not only dilutes the value for the existing holders of that digital art’s NFTs, it will also cause a significant loss of trust towards the artist.

NFTs: Your On-Chain Swiss Army Knife

NFTs Use Case is Everywhere (context: Woody Buzz Lightyear everywhere meme)

The use case of NFTs transcends beyond just BAYC-style social utility or provenance for “pure” digital art collections. Being programmable tokens at its core, NFTs could in fact be the on-chain representations of anything deemed to be of value: income sharing agreements (ISA), real-world assets (RWA), loyalty programs, in-game items, you name it!

Nonetheless, NFTs are no magic bullet — as the saying goes: garbage in, garbage out. The value of the NFT itself will ultimately depend on its underlying issuer: BAYC NFTs imbue holders with social utility, digital art NFTs provide holders with a trail of provenance, ISA NFTs represent claims to the issuer’s future income streams, RWA NFTs represent claims to ‘off-chain’ assets held in custody by the issuer, in-game item NFTs entail holders with certain in-game functions or utilities, and the list goes on.

The irrational exuberance of cryptocurrencies knows no bounds, and the gaming industry is just the latest field to get sucked into this sphere of influence. As a result, this has brought upon a deep divide between crypto-natives and game-natives: most crypto-natives are out of touch with regards to what makes a game work, while most game-natives tend to overlook the value-add potential of blockchain technology for the gaming industry.

At times, this misalignment has boiled over into ugly exchanges amongst the two ‘factions’ — culminating in crypto-natives being labelled as “greedy tech bros”, or game-natives being labelled as “dense gamers”.

Considering that the prevailing trend in the gaming industry has increasingly leaned towards excessive monetization of in-game content, gamers in recent times have understandably become dismissive of changes to their industry. The nature of crypto (and NFTs) makes them prone to be hated by gamers, seeing them as a tool for companies to extract more pennies out of their pockets: the bastardized version of microtransactions.

On the other hand, the manner on how current blockchain games are being marketed does not help the cause either. Instead of focusing on playability and game enjoyment, most blockchain games are in fact Ponzi schemes under the guise of a game — those so-called “play-to-earn” games. As such, their user base mainly consist of players primarily motivated by financial gains — which quite frankly doesn’t help either in terms of bridging this deep divide.

It doesn’t have to be this way.

Play-to-Earn: An Unscrupulous Pyramid Scheme Built Upon a House of Cards

The root cause of gamer dislike to blockchain: play-to-earn games (Crabada gameplay)
[PlayToEarn] Crabada: basically a crab-themed Axie Infinity, but on Avalanche

“A game is a structured form of play, usually undertaken for entertainment or fun, and sometimes used as an educational tool. Games are different from work, which is usually carried out for remuneration, and from art, which is more often an expression of aesthetic or ideological elements.” 

— Wikipedia

Games are exactly that, a form of entertainment. Gamers play games to relieve the stress of their day-to-day life, just like watching movies or hanging out with friends. This is the fundamental first-principles of what makes a game, a game.

Play-to-earn “games” (or just about anything with the “earn” tag; e.g: play-and-earn, etc.) introduce the wrong kinds of incentives towards its potential players — one where entertainment or fun becomes secondary to financial motivations. When NFTs or tokens are sold as a precondition in order to play a game, players won’t be buying it for its in-game utility, but as a speculative investment in expectation of future profits.

Sadly, this is the state of the current blockchain gaming landscape: filled with unsustainable “games” where demand is primarily fueled by financial motivations, not the fun or enjoyment derived from playing the game itself.

Axie Infinity is a case on point: early adopters shell out money to buy Axies and play the “game”, then they “make” money and cash out (fueled by external money coming in, specifically from the late adopters), and the cycle goes on until there is no new money left to come in and offset the old money coming out. Eventually the music stops, and late adopters will be the ones footing the bill — basically a pump-and-dump scheme masquerading as a “game”.

Play-to-earn the root cause of gamers’ dislike to blockchain: Axie marketplace dashboard
[Zipmex] Axie Infinity: a speculative endeavour disguised as a “game”

Don’t get me wrong, paying money for a game is perfectly fine — what matters is that the motivation behind the purchase must strictly be for in-game utility, not speculative intent. At this point, it is clear that spending $100 on an entry Axie implies a different meaning compared to spending $100 on cosmetic items, like champion skins in League of Legends, or utility items, like builder huts in Clash of Clans.

Make no mistake, an FPS blockchain game with its players’ best interests at heart could in fact opt for a gameplay loop in which all weapon NFTs are degradable and of unlimited supply: 1) people mint the brand-new weapon straight from the game for a fixed price (which prevents speculative intent); 2) the weapon will degrade and become less powerful the more it is used in battle (the utility of the in-game item). This mechanism ensures that each purchase of the game’s weapon NFT is not due to financial motivations — assuming other things equal, programmed wear-and-tear means that prices on secondaries will almost always be cheaper than in-game mint prices.

Elden Ring: Still a long way to go for blockchain gaming
[Bandai Namco] tough choice (or not!): would you rather pay $59.99 for Elden Ring, or $100 for an entry Axie?

All in all, games are first and foremost played for entertainment or fun — financial incentives, if any, must only be an afterthought, not the main value proposition. As long as play-to-earn remains the dominant narrative, the true value-add potential of blockchain gaming will never become apparent to the mainstream, and the deep divide between crypto-natives and game-natives will continue to exist — for obvious reasons.

Value-Add #1: In-Game Items as NFTs, Explained

in-game items as NFTs: sample Fortnite skins
[Sportskeeda] Fortnite: Renegade Raider and its various re-skins

Simply put, NFTs can represent anything deemed to be of value on-chain. What it actually represents, and how this representation is enforced will be down to very human factors: the social utility of BAYC NFTs will depend on its community, likewise the functional utility of blockchain domain NFTs will depend on the number of integrations and partnerships that its associated domain name protocol can attract.

The social or functional utility of in-game NFTs are no different: they will depend on the going-concern of the game itself. Otherwise, it will simply be a useless token on the blockchain, devoid of any utility whatsoever. Ask the question: What remains of your NFT if its underlying game is discontinued for various reasons? What if developers decide to stop updating the game, or remove the in-game item that your NFT is supposed to represent?

Stripped to its bare bones, in-game NFTs are more like “access passes” to an in-game item. Contrary to popular belief, they certainly do not allow for “immutable ownership” of in-game items — if the game is no longer a going-concern, then your NFT won’t actually represent anything anymore.

So, what are NFTs even good for the gaming industry anyway?

gamers and crypto natives conflict: loads shotgun with malicious intent meme

For one, representing in-game items as NFTs will enable the item to be freely tradable to anyone with an internet-connected device, irrespective of their background and geographical location. While we do have centralized platforms like Steam that allows for trade between in-game items, it is heavily subjected to the T&Cs of each platform, as well as being highly inefficient: trading amongst in-game items within the same ecosystem is one thing, but trading in-game items across ecosystems is another thing.

To illustrate, to trade your CS:GO skin (Steam) for Fortnite skin (Epic), you will need to rely on a P2P matching service: 1) you send the CS:GO skin to your counterparty’s Steam account; 2) the counterparty sends you the Fortnite skin to your Epic account; 3) if the trade involves cash, then money is wired separately by the sender to the receiver’s bank account. This is notwithstanding the cross-border transfer fees in case of international wires, which is likely to cost you more than the in-game item itself!

If both of the said skins are represented in form of NFTs, challenges arising due to differences in a counterparty’s jurisdiction or an in-game item’s gaming ecosystem will be made irrelevant, since the trade will be executed under a common “financial layer” — the blockchain.

Transaction fees will be negligibly low (except on Ethereum, at least before ETH2.0 kicks in) no matter where your counterparty resides, or on which gaming ecosystem is the in-game item part of. On top of that, the atomic nature of smart contracts on NFT marketplaces will ensure that counterparty risk is significantly minimized, all without requiring a centralized intermediary to mediate the process.

In addition, the composable nature of blockchains will enable in-game NFTs to harness the full power of DeFi — for instance, pledging your in-game NFTs to be used as a collateral for borrowing money, or even “wrapping” it with a renting functionality such that when rented out to a third-party, the NFT can automatically return back to you upon duration expiry or in case of default.

Once NFT standards evolve to become sufficiently advanced, in-game items could even be made interoperable with one another — for instance, via a strategic partnership between game A and game B, a gun NFT in game A could be imbued with the power to redeem a sword NFT in game B, assuming the gun NFT reaches level 50 in game A.

[Astiberon/Reddit] Dota 2 Arcana skins: imagine borrowing money by pledging them as collateral…

With that said, a game choosing to represent its in-game items as NFTs will have to subject its virtual economy to external market conditions — often times, it could directly bring upon unintended consequences towards the playability of the game itself:

Due to this fragility, most games would in fact be better off not concerning themselves with NFTs (and cryptocurrencies) — the game itself needs to be of a certain magnitude for the endeavour to be worth it: although a blockbuster MMO might find blockchain integration to be a worthwhile pursuit, the same can’t be said for a casual mobile game.

Value-Add #2: In-Game Currency as Tokens, Explained

in-game currencies as tokens: Fortnite’s V-Bucks
[Epic Games] V-Bucks: Fortnite’s in-game currency

Like in-game items represented as NFTs, the main benefit of representing in-game currencies as tokens lies in its ability to be freely tradable irrespective of each party’s background and location, at a negligible cost compared to using centralized infrastructure tied to traditional banking rails.

Again, to illustrate, trading WoW’s gold for, say, Roblox’s Robux, is quite a hassle: it involves two completely different ecosystems, let alone if counterparties turn out to be in different jurisdictions. If both of the said in-game currencies are represented as tokens, trading them would be as easy as submitting an order at a decentralized AMM like UniSwap!

Like in-game NFTs, the value of in-game tokens is heavily dependent on the game’s successful going-concern, in which it will be based on the utility that each unit of token can have within the game itself (ex: payment for weapon crafting, etc.). Moreover, the composable nature of the blockchain will enable in-game tokens to also harness the full power of DeFi: swapping it to stablecoins, lending/borrowing, liquidity pooling, and so on.

[Telematika] perhaps we could see $ETH to $VBUCKS swap option on Uniswap in the future…

For the sake of a game’s virtual economy’s sustainability, it is imperative that token faucets (events that add tokens to circulation) and sinks (events that remove tokens from circulation) are strictly contained in-game: introducing external elements that could affect this dynamic will just cause the already fragile virtual economy of a game to be uncontrollable — worst case, rendering the game to be unplayable.

One such example is the pre-mining of in-game tokens (or in-game NFTs), an “external faucet” in which it is not tied to the overall gameplay of the game in any shape or form. As such, you can expect tangible consequences to befall on the virtual economy of that game down the road.

On the flip side, WoW, the longstanding MMO, is a great case study on how to manage a game’s fragile virtual economy. While not flawless by any means, WoW’s virtual economy is still well-oiled up to this day, mainly due to the fact that the faucets and sinks of WoW’s in-game currency, gold, are all triggered by events within the game itself.

Value-Add #3: Value Accrual via Governance Tokens, Explained

[LegalTemplates, PhoenixDAO] governance tokens are essentially the more efficient form of equities

Unlike in-game NFTs and in-game tokens, governance tokens do not affect the core gameplay loop of a game. Instead, they resemble more like a vehicle for value accrual, akin to equities in traditional companies (but better).

Goes without saying, the value of governance tokens will depend on its value accrual model. While the value accrual of equities will largely be based on the present value of cash flows plus net cash on the balance sheet, the programmability of governance tokens means that its value accrual model is up to the discretion of its issuer!

For example, a game could design the value accrual of its governance tokens such that holders who staked their tokens will be entitled pro-rata to proceeds generated from taxing sales of its in-game NFTs, as well as from reflections on its in-game tokens. Treasury funds in excess of the game’s operating expenses and future development costs could also be used to conduct token burns, in effect returning value to existing holders of the governance tokens (akin to share buybacks in the case of equities).

Automation of these functions via smart contracts will greatly reduce the probability of human error — at the same time significantly speeds up processes. The blockchain’s transparent nature will eliminate the need to engage independent entities for attestations — everything is out in the open, which means anyone will be able to go to a blockchain explorer and verify for themselves: whether the proceeds are actually distributed pro-rata, whether tokens are actually burned by virtue of excess treasury funds, and so forth.

[Etherscan] the go-to blockchain explorer for Ethereum

Furthermore, governance tokens provide games with an alternative method to fundraising: no longer are they restricted to private VC-controlled markets, they can now fundraise directly from the public through an ICO.

ICOs democratize early-stage investment access to the masses such that anyone, including an 18-year-old avid gamer who probably knows more about games than any accredited investor or venture capitalist could ever hope to be, can be given the chance to get in early on his favourite game’s early fundraising round.

[GameFi.org] a gaming-focused ICO launchpad

As a bonus, governance tokens could also be imbued with voting rights, just like voting shares in equities. But in practice, the extent to which decisions are made available to be voted on by token-holders remains in the control of the issuer itself — a decentralization theater.

In equity-based corporations, shareholders could seek legal recourse if their votes are not being honored by the management (on the grounds of fiduciary duty breach). Needless to say, we are still years (even decades) away in order for voting rights on governance tokens to reach the level of equities. Until then, expect voting proposals to resemble more like a community engagement tool — revolving around mundane stuff outside of the game’s core mechanics such as the gameplay loop or the virtual economy.

Bridging the Deep Divide

Why gamers hate crypto and NFTs: man looking at another woman meme

Ultimately, blockchain gaming spurs existing incumbents as well as budding challengers to rethink the best practices of game design and creation.

Crypto-natives should be enlightened that a game is a delicate system of closely intertwined components grounded by the first principles of what makes a game, a game: a structured form of play undertaken for entertainment or fun. An unplayable game won’t miraculously become playable just by virtue of blockchain integration — if anything, it simply evolves to become the worst manifestation of itself.

On the other hand, game-natives should realize that blockchain gaming is more than just play-to-earn pyramid schemes. Cryptocurrencies and NFTs are not the bastardized version of microtransactions — they are merely an on-chain representation of in-game assets (currencies and items), in which its value will still be fully dependent on the underlying game’s going-concern.

 

SQR3D is pleased to announce that we are officially onboarded to Web3Port as an ecosystem partner!

Joining the likes of BNB, Aptos, NEAR, and OKC, the partnership allows SQR3D to tap into Web3Port’s extensive network across the web3 space, which bodes well for SQR3D’s planned MVP launch scheduled for 2023.

About Web3Port

Web3PORT is an accelerator of Web 3 projects, helping startups building from zero to one and to the next level. Our mission is to create a decentralized and transparent accelerator alliance that brings growth to the Web3.0 ecosystem.

We grant blockchain startups and entrepreneurs access to investors, token design, go-to-market strategy, and other key resources.

Website | Twitter | Medium

About SQR3D

SQR3D democratizes the Metaverse’s user-generated content (UGC) creation process to the masses. Being an intuitive and user-friendly 3D design tool at its core, SQR3D enables users to create their own fully customizable 3D assets and bring them to life on their virtual world of choice, regardless of background or experience.

No longer limited by the steep learning curve of existing 3D asset editors, SQR3D unlocks the vast creative potential hidden amongst ordinary Metaverse participants, setting the stage for the mass adoption of virtual worlds across the Metaverse.

“Corporate greed is evil!”, “DAOs will change everything!”, “Unlike corporate governance, anyone can have a say in DAOs!”. These are some widespread stigmas that, for a good reason, is widespread.

For a fact, DAOs are indeed, a revolutionary governance structure. It allows people, no matter where they are in the world, to have a say in the day-to-day operations of the DAO-governed protocol.

Before the advent of the blockchain, there is simply no way at all for people from all corners of the world to be as participative as right now in governing an entity. Given the same number of DAO tokens, a person in Africa right now can have equal influence with a person in say, downtown Manhattan, towards pending issues on the protocol.

However, DAOs are not the all-conquering innovation that most people make it out to be; most people misunderstand (understandably) what exactly is a DAO.

The Cold-Hard Reality of DAOs

The Truth Beyond DAO’s Hype: fiduciaries working in a coworking space
[TopCareerID] yes folks, this is a live illustration of a “DAO” in action…

Dialing down the hype, a DAO (or a decentralized autonomous organization) is simply a vehicle in which a democratized decision-making process towards proposals can take place. Sadly, most DAOs are anything but autonomous.

Just like any other governance structure, a DAO will need fiduciaries (or agents) to “run” it, as well as principals to govern it. In layman’s terms, you have the sitting “management” to manage the entity, and the “token-holders” to oversee it. Even for the most established protocols like Uniswap or Aave, they still employ fiduciaries to maintain their codebase, hosting, and other ad-hoc matters.

While it is a marked improvement if compared with corporate governance, the fiduciaries of a DAO are also… wait for it… humans!

Surprisingly to most it seems, fiduciaries are not robots that will carry out a majority DAO consensus without deliberation. In practice, there hasn’t been a case where developers blatantly refused to do what the majority of the DAO has decided with — but in the future at some point, there will inevitably be issues where the incentives of a project’s principals (the DAO token-holders) will contradict the incentives of its fiduciaries.

The truth beyond DAO’s hype: neglected children drowning meme

Let’s take PancakeSwap as an example. At the time of this writing, it is by far the largest DEX in BNB Chain by volume. For illustrative purposes only, imagine if one day BNB Chain for whatever reason suddenly implodes (Terra-style), which means PancakeSwap as a project must decide on which EVM-compatible blockchain do they want to migrate PancakeSwap to.

The DAO, mostly made up of retail users, votes for Fantom, as it is the fastest EVM-compatible chain. On the other hand, PancakeSwap’s core developers (the fiduciaries) value security and decentralization over speed. They posit that it will be much better if PancakeSwap migrates to Ethereum, and in a bold move against the DAO’s majority consensus vote, PancakeSwap is migrated to Ethereum.

Based on the above scenario, in the event that rogue developers fail to follow through on its fiduciary duties, the DAO token-holders have only two recourse: follow the migration to Ethereum, or forking PancakeSwap on Fantom, plus appointing new fiduciaries to manage day-to-day operations — surely not the ideal DAO governance paradise that everyone is expecting, eh?

The truth beyond DAO’s hype: billionaire laughing meme

The point is, DAOs are not a cure-all solution that will unequivocally grant whatever the people wish for. In the end, the core team of a protocol will be acting as fiduciaries whether you like it or not, which means you will have to trust them to act in good-faith and prioritize the DAO’s majority consensus at all times over their own resolve.

In addition, recall from our previous illustration that the only two recourse DAO token-holders can have in event of rogue fiduciaries is to either follow them, or to fork the protocol. This leads us to the most important criteria, one that makes a DAO work in the first place: an open-source codebase.

Absent this requirement, a DAO is as good as useless — not having the ability to fork simply means that nobody besides the protocol’s fiduciaries has any real voice whatsoever regarding the direction of the project.

Decentralization and Centralization: A Mutually Exclusive Relationship?

The truth beyond DAO’s hype: guy explaining to a seal meme

Building on from the above, governance of an entity is not a black-or-white choice between decentralization and centralization. Again, surprisingly to most it seems, they can actually… wait for it… coexist!

In any case, decentralization does not replace centralization — it merely complements it. Ethereum is Ethereum because of the vision of its core team. Same goes with Solana, Avalanche, or any other prominent cryptocurrencies out there.

While technically anyone can fork any of these cryptocurrencies and then spin up a new foundation to oversee it, gathering support is another thing altogether. Ask yourself, would your level of support for Ethereum remain the same if Vitalik Buterin is not involved anymore?

[cryptorobin] Vitalik and CZ, the respective lynchpins of the Ethereum and BNB ecosystems

The takeaway is, a healthy level of centralization gives a project its identity. The DAO merely exists as a mechanism to keep centralized incentives in check — allowing for a democratized decision-making process with regards to a project’s strategic direction, not to outright govern it.

Repeated for emphasis, the ones that will ultimately be pulling the shots will not be the DAO itself, but the protocol’s core team (or foundation). By law of nature, if the core team abuses its power (or is simply in disagreement with its DAO token-holders: aka the public), a project can be forked given enough support. For instance, the Bitcoin Cash fork on Bitcoin due to disagreement in block size, or the Ethereum Classic fork on Ethereum due to opposing views on resolution handling in the aftermath of TheDAO hack.

This is why open sourcing code for DAO-governed projects are so important, as it indicates to the public that you can be trusted to not abuse your authority (or at least is willing to be the subject of disagreement), and will actively engage them with regards to the project’s development and roadmap.

A Cause for Optimism

IQ bell curve meme for DAO (decentralized autonomous organization)

If there is one thing that we can take away since Bitcoin was first invented, it is that humans as a species are inherently good beings. Ethereum is fully open-source, as well as all the other major blockchains. People can fork their own version of Ethereum at any moment if they want to, but despite the numerous ill-intentioned forks of Ethereum, the only one that is still omnipresent until now is the “OG” Ethereum. Same goes to Bitcoin, Solana, and practically all other open-source blockchain networks.

Wikipedia allows anyone, regardless of background and qualification, to create new entries or edit existing ones. When it first launched back in 2001, you can’t help but expect that there will be lots of low quality entries and vandalism due to the absence of a supervising authority. Fast forward to the present, Wikipedia has arguably become one of the most reliable sources of information on the internet. Talk about irony!

As such, you can bet that despite the lack of “binding agreements” between the fiduciaries and principals of a DAO-governed project, the inclusiveness and participation that it brings to the table far exceeds anything of that sort that the conventional top-down corporate governance model is able to offer. 

Simply put, DAOs are here to stay.

Try Beta