Rekt Report Issue #25: Blockchain Questions Answered

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This year, I'm investing time into sharpening up my presentations to a general audience on blockchain topics. There's a huge appetite in the LA area for people that can come in and explain these complicated topics. I'm happy to do these to sharpen up my ability to communicate some of these often opaque topics and am doing them about once a week.

I enjoy getting feedback from audiences because it allows me to determine what parts of my presentations are the most impactful and, like a stand up comedian will tighten up their set, I use this as a good barometer of what to focus on and further build out and what to cut. Another good exercise is ask the audience afterwards: what was the real takeaway from this hour or two hour presentation that you'll take with you?

When I read a book, I like to write down a handful of thoughts, every hour, so that I can review impactful points, because after reading for five hours, I'm not going to be able to immediately recall all of the salient points that hit me at various times. People have limited free time and public speakers have a duty to get right to the point of the most impactful topics that's relevant to an audience.

I had a conversation about content structure with a colleague whose writing I enjoy and we discussed the push to impactful brevity. Blockchain influencers and fund managers are integrating memes and shorter form content by looking to the standard that if you can communicate something in less words, as impactfully as something that is haphazardly spilled out on a page, then it's an imperative that you do so. Every minute that something isn't tightly wound into something that's highly readable, you've introduced the potential to lose the reader so to the extent that you can prevent against that, you must.

In one of my recent presentations, I fielded questions during the slides, and I thought that in this Rekt Report, and ones that follow, that I would answer specific questions that I seem to be receiving on a recurring basis. Rather than try to weave answers into the context of a longer form article, which I will do from time to time, I think that it would be particularly useful for a blockchain newsletter that's facing the public to piecemeal out answers that are easily digestible. So here goes:

What is the Web 3 movement and why is it important?

Web 1 was the use of the internet with individual, static websites that were functionally more like online brochures for a business. Web 2, which has been the past decade, is the era of centralization where you login to your profile on a platform of a tech behemoth. They control the rules to the game, own your images, and you're creating content for them, much like writing for a regional newspaper about your life, telling all your friends about it, and doing so for free while the newspaper rakes in advertising.

Web 3 seeks to break the monopolistic control of tech companies who, first and foremost, have their profits in mind to meet analyst numbers projections and operate despite the preponderance of evidence that their sensationalist algorithms, coded to foment extreme reactions that will engage users enough to stay on their platform, are deleterious to one's mental health. The most savvy tech minds, like Professor Cal Newport, embrace a tech minimalism, with all social media apps off of one's phone, in observation of the toxicity of this phenomenon. If an activity is deleterious to our productivity or overall well-being, common sense would suggest that we disengage to the extent that we can practically, and professionally, do so.

By definition, Web 3 refers to a decentralized online ecosystem utilizing the blockchain. The real transformative aspect is that platforms and apps built on Web3 won’t be owned by a central gatekeeper, but by an abundance of users, who will earn their ownership stake by helping to develop and maintain those services, even independent of any capital investment! They're investing their time and talents to help a platform scale. This is transformative due to the ability of a great many users to get access to a percentage of a company.

In the start-up world, equity or stock options can be awarded but it's often a pittance, if at all, relative to those who founded a project. In Web 3 companies, you could have founders who contributed nothing more than good ideas and a structure to a business, coalesced a group together, and are able to earn a meaningful portion of a fast-moving, potentially highly valuable company for these formative efforts.

Already there are awe-inspiring stories of how talented coders have clocked decades in with the top tech firms, but only since they've dived into the world of Web 3 have they been given access to resources such that they can start to plan an exciting retirement. We're quick to jump into the job market, but often slow to create a career plan that understands the transformative power of gaining access to equity, tokens, or tools that allow one to amass wealth outside of the exercise of selling the limited resource of one's time.

Why did NFT (Non-Fungible Token) movement eclipse so many other blockchain movements in 2021?

In America, when an artist sells a work of art that's, likely, the last they'll see of it. Should they scale to international acclaim and fame and the value of that work goes up 100x, they take no meaningful participation in this appreciation. Contrast this with the European Artist Resale Rights laws, or?droit de suite, that remits substantial funds back to artists for every time a public sale takes place for one of their works. This gives fuel to ignite further growth

If you were an art dealer of an artist whom you had a significant amount of early, important works from you would give them studio space, spending cash to travel and exhibit wherever they could, press contacts to pitch themselves for artist profiles, and exhaust every resource you had to help them further their career. In this same way, if you're an investor in an artist, you want to give them access to all of the avenues for potential growth or success that you can. Doing so is very likely to appreciate the value of the art in excess of your contributions to their growth efforts, and, surprisingly, this synergistic relationship is not more aggressively nurtured more regularly, with some art dealers or collectors choosing to purchase a piece and simply hope that the artist's important grows on its own.

You wouldn't invest in a company and then wish them well for a decade. Likewise, it is inadvisable, if you're an art dealer, to not nurture these artists if you want them to have a better than not possibility of making it to prominence in their chosen discipline.

NFTs have, as the default, a royalty provision that remits value to the wallet making and minting the art, very often the artist's. From an artist's perspective, if you had sold an early work for $100 and, lo and behold, this work was worth 10k, then your 5% royalty share would be worth $500 each time it was sold. This doesn't make selling one's early works of art as distasteful knowing that they'll still be tethered to you, at least financially, for the rest of your life and thereafter to be collected by your estate, providing your loved ones with resources after you're gone.

NFTs are works of art, on the blockchain, that are written in code by artists themselves so the terms will be favorable to artists in a way they recognize will sustain them such that they can focus full-time on their artistic passions, but they're more than that.

• Celebrities like it because digital art projects are less fraught with potential legal complications associated with security tokens or cryptocurrencies, which often can be perceived by regulatory bodies as de facto securities.
• Affords opportunities for not only visual artists but also musicians, writers, or other royalty-based creative professionals to integrate their IP on the blockchain in a way that can be seamlessly crowdfunded or collected.
• Can be linked to trading--options, futures, leveraged trades, or plain vanilla cryptocurrency--positions in a way that will self-settle to the wallet owning the NFT at a particular time.

While DeFi has nearly $100 billion staked across various platforms, it's still working out jurisdictional challenges that often introduce friction points. Few of these friction points exist with digital art, which has been a well-established asset class, albeit modest in size compared to most mainstream asset classes, such that you're seeing the largest baseball card companies you grew-up with doing blockchain baseball cards to keep up with NBA Top Shot or other projects that operate using many of the principals of value that hold together the value of a baseball card.

As more digital artists come to the conclusion that they can keep their art in a digital form and not have to pay to print their works out and sign them by hand to extract the value they bring to the art world, the larger the NFT market volume will be. Much of the attention in March 2021 was on a singular artist, Beeple, for the watershed $69 million Christie's sale of his 5000 Days work. The months that followed saw the explosion of growth and appreciation of a multitude of individual projects and artists, providing capital for talented digital artists all across the ecosystem, allowing them to double down on their professional passion in a way they had never been able to do heretofore.

The same shrewd eye that you focus on an investment you would be best advised to focus on an NFT. Many generative art projects, with entirely anonymous founders, have sprung up and have seen tremendous volume. You have to understand, however, that very often this volume is internal, between the wallet addresses of the founders, such that it's not a true indication of authentic sales activity. Some NFT projects will bake in their business plan a certain amount of internal volume to get positioned on OpenSea's list of most active projects by volume so by no means treat this list as an authoritative source for the most active projects, even though the OpenSea platform does take 2.5%. The exposure in and of itself is worth that fee.

When it comes to valuing a work of art you have to understand the artist, the medium, and the narrative behind the piece. What makes this artist transcendent in the space and why is this piece of particular importance to this artist or the larger movement to which he's a visible member? But there is another element where the blockchain can be helpful: transparent provenance.

I spoke with Victoria Shaw, who worked at Christie's, has a blue-chip resume of teaching at the most important art-focused universities and consulting for important galleries, and who now advises New York collectors on collection management and best practices, providing clarity into this often opaque asset class. She was a first mover in building out the online art market for serious collectors on 1stdibs.com, which is pretty well the gold standard of high-end gallery-quality antiques, fine art, furniture, and other collectibles that are highly prized by traditional auction houses.

"Provenance is the French word the describes the chain of ownership of a work of art and is really important because of authenticity issues but also title issues. During WWII, people had their art collections taken from them by the Nazis and sometimes those pieces end up in small museums now and their heirs say, 'we want our paintings back.' And rightfully so!"

On a public blockchain, you can easily vet who is a collector of a particular artist, if it's been reported to have been stolen, who had title to an NFT since the minting of the NFT, who has owned this exact piece in the past, and what the auction records tell about every transaction in terms of price. The financial markets require at least some level of transparency and defaulting to offering this level of transparency, as blockchains do by design, does help to that end of doing one's due diligence. In the art world, the whole process of digitization was just a latter day phenomenon that only started to see full online record keeping in the last twenty years. While historical auction records exist in print form, of course, often these records are cumbersome to locate.

"There's a limit to how far back you can research the auction records. A lot of them are online, but a lot of them aren't because we only started going digital at the auction houses around 2000. So, prior to 2000, you're not going to find any auction records. I'm on auction databases all day long and I'm shocked if I see records prior to 2003."

Keep in mind, too, that there's no public reporting requirements for galleries or private sales. These are considerations that can make valuing a piece of artwork complicated, given a potential dearth of sales history from which to extract a current value for a particular artist. For this reason, a seasoned appraiser is often worth their weight in gold because, absent representative sale records for a particular artist for a few decades, there are so many price points to consider that may not be best befitting that distort the value of a work of art. The blockchain affords access to that information which provides a helpful level of transparency for the would-be art investor.

Just like when you view cryptocurrency projects with a healthy skepticism, you should view NFTs with a circumspection that would lead you to creating a due diligence checklist that would seek the answers to:

• Who is this artist and why are they relevant to their chosen art movement?
• What well-regarded collectors have a work of this artist in their collection?
• What meaning and significance does the subject matter depicted have to the artist?
• What level of visibility does this artist enjoy? Any recent shows or media events?

The largest NFT brands have focused heavily on on-boarding celebrities into the space through their project, implicitly positioning the level of importance of their project as at the top in the process. When the Bored Ape Yacht Club brings in Stephen Curry, they're not only intelligently tapping into their fanbase to promote their project, they're broadcasting that these tastemakers are choosing to align themselves with this brand because it's earned their stamp of approval. This reflects well on a project and is a tried and true process that has driven advertising for decades, because it works, and for artists and NFT projects it works just as well.

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