Thread by @fintechjunkie

It’s been fun learning in public. I could write hundreds of tweets each week about my crypto journey. Instead, I’ll do my best to be topical and synthesize my learnings.

Today’s topics: DAOs, NFTs and Lending

DAOs

I’ve had a number of conversations with people involved in DAOs and it’s easy to see why there’s excitement surrounding this “organizational innovation”. But having managed teams in the thousands of FTEs, I can’t help but see land mines that could be crippling.

An observation:

Every DAO fanatic I talked to shared a story about having his/her contributions and ideas marginalized by a traditional hierarchical corporate structure. Since they weren’t at the top of the food chain, someone always had the ability to brush them aside.

They all described how a perfectly run DAO could create a true meritocracy and empower talent and ideas to be the currency of impact vs. experience and seniority. Rules would replace the need for oversight. And value would naturally flow to the most valuable contributors.

The benefits are blindingly obvious If a DAO attracts amazing talent and its project is succeeding. But, I had the unenviable job of taking over broken businesses multiple times in my past life as an operator and this colors my view of how a DAO could break down.

Businesses typically don’t break overnight. Many break slowly due to poor decisions being made over stretches of time. Management should be blamed because they guided the team and made the decisions. But the truth is that many times it’s not just a management issue.

Many fixes start by reframing of a business’s product, positioning and value proposition. Many fixes require an infusion of fresh blood to add energy and ideas to the team. And almost all fixes come from transformative, non-consensus decisions to made and implemented swiftly.

The DAOs that I’ve studied don’t seem well structured to deal with failure or situations that require making a large % of participants unhappy. When people report up through a hierarchy they expect to be overruled and deal with it. In DAOs, they might just disengage or leave.

I’m excited to see Darwinism exert itself on the “grand DAO experiment”. My intuition says that there will be a flushing out process in the next few years and that DAOs will be better structured once a few failures have worked their way through the system.

NFTs

I absolutely love the energy in the NFT space but it’s very clear the base of the pyramid has lost the narrative about what NFTs are. And whenever the base of the pyramid in any ecosystem acts irrationally, it incentivizes schemes and bad behaviors to emerge en masse.

In a free market, an item is worth what someone is willing to pay for it. Price discovery is enabled when multiple people are interested in an item. And value is grown over time when there’s a supply/demand imbalance for items with no obvious substitute/alternative.

But many people in the base of the pyramid consider each NFT they invest in as having no alternative given its “non-fungible” nature. This is a false belief in a world of infinite artificial scarcity and is guiding very sloppy investment theses and trading behaviors.

To be clear, there is true “scarcity” in the NFT space that’s worth internalizing. Some of the most valued “things” in life are representations of historically significant moments. And there’s a class of NFTs that might end up being just that.

A lot has been written about CryptoPunks and how it was an inspiration for the ERC-721 standard for NFTs. The project is widely recognized as the father of the modern crypto art movement, and as a result it makes what might be a historically significant moment.

Other NFTs might also be markers for critical moments in the crypto movement’s history.

Other important pieces include 1st generation Rare Pepes, BAYC, EtherRock, Everydays – The First 5000 Days, and Quantum.

And some NFTs are really just technology enabled Kickstarter campaigns that allow for value to flow back to early backers. NFTs that are attached to successful projects that also grant special privileges or share economics with their owners could become interesting investments.

But when I see hundreds of people in Discord groups talk about “selling my rare to buy up the floor” and obsessing about which celebrities and whales are getting involved in which projects, it’s pretty clear that the narrative has been replaced by FOMO and greed.

Lending

I’ve been studying all the “lending” activity that’s taking place in the crypto space and have to admit that it’s impossible to ignore all the “up and to the right” charts. This is a topic that I know I’ll be writing more about in the coming weeks as I learn more.

But an early observation is that almost everything I see feels more like “leverage” than “lending” and almost everything I see works for the 100,000 crypto millionaires who don’t want to sell their crypto assets but wouldn’t work for a more mainstream borrower.

Traditional lending companies advance capital to borrowers today in return for a stream of payments that will vary based on future market conditions, economic scenarios and borrower characteristics. The volatility of future payment streams is what makes lending challenging.

The activity I see on Compound and Aave is really exciting but to me more of a “proof of concept” than a broad market solution. The protocols work well if you have assets to pledge that are in excess of the capital you want to extract.

But the majority of lending exists to help people pay for goods and services that they can’t pay for directly from savings or the liquidation of assets. They have to borrow money in order to procure what they want or need today.

And lending money requires mastering underwriting/collections along with assembling the infrastructure necessary to navigate licensing requirements and regulatory/compliance exams. It’s a multi-faceted discipline that doesn’t map well into a world that values anonymity.

Expect more about DeFi lending soon as I work through concepts like:

“Credit scoring that can preserve anonymity”, “How Reg B and disparate impact can co-exist with DeFi principles”, and “Collections in a DeFi context.”

Ending with a random observation:

I don’t know how anyone can become well versed in crypto/web3/DeFi without being hands-on. And I don’t know how you can do it without investing many thousands of dollars on the journey. This has to change for mass-adoption to take hold!