Everyone's Getting Roasted
The Deload is a weekly-ish newsletter that builds on the best ideas on the web in search for uncomfortable and investable ideas. If you haven’t subscribed, join over 1,000 independent and unconventional investors and thinkers:
The Build: NFT BBQ
Web3 supporters have been roasted this past week.
It’s not just the decline in crypto asset values. It’s the challenges to identify real use cases that were overlooked in a bull market.
First, Packy McCormick failed to defend an example of how putting property titles on the blockchain is better than the current non-blockchain version today.
Then, Marc Andreessen whiffed on explaining to Tyler Cowen why a podcast hosted on a Web3 protocol is better than today’s centralized structures.
Both guys are smart. I’m sure they’d do better in round two, but they got caught in bad looks trying to defend bad ideas about Web3.
And it’s not just about the failure of their specific examples. As crypto falls apart, the dominant voice in the space is shifting from the extreme optimists planning to retire on passive income from jpeg apes to extreme pessimists saying everything is a ponzi.
The reality, as it so often is, lives somewhere in between. Going against the grain now requires some belief in crypto and Web3. Full disbelief is consensus.
The market has told me I’m woefully wrong, but I’ve been and remain a believer in the NFT space, the prime Web3 industry. If I were to answer, “What can Web3 do better than current internet structures?” I would start with digital identity.
Retesting the Identity Thesis
I still think identity will be the Internet mega trend of the 2020s.
The case for identity as the next major boom trend is simple: The more time we spend online, the more we’ll want to uniquely identify ourselves, just as we do offline.
In my piece about identity, I wrote:
Oxford offers two definitions for identity: the fact of being who or what a person or thing is, and a close similarity or affinity. As such, identity creates a paradox that represents the intersection of individuality and conformity. It is the tension between individuality and conformity that demands persistent action by the individual to reaffirm both their uniqueness and alliance. Both uniqueness and alliance require the presence of others. Uniqueness must be relative to someone else, and alliance must be with someone else. Identity is both how we see ourselves and how others see us, even if those two don’t always match.
Identity is one of our basest needs as a human. We need to be unique while also finding others who are the same. This is human nature, and human nature doesn’t change. New technologies merely offer different ways to demonstrate our nature.
The internet has already provided an outlet for ideological identity.
We have social media profiles with Ukrainian flags, pronouns, MAGA pronouncements, and other political statements. Politics has proliferated as the identity tool online because it’s all intangible. How we identify ideologically isn’t tied to goods, although that might change in the future. It’s tied to what we believe and how we demonstrate those beliefs in public, which is the basis of social media.
Offline, we rely on different tools to demonstrate identity. We have Ferraris, Louis Vuitton handbags, and Jordan sneakers. We also have Nascar t-shirts, mullets, and work boots. All of these goods represent choices we might make to demonstrate who we are to others.
NFTs represent the combination of digital goods creators and verifiable ownership to unlock new tools for demonstrating identity.
Why Not Web2?
The next question should be, “Why do we need ‘Web3’ for NFTs? Why can’t we do it with existing systems?”
The answer: We probably can do NFTs with Web2 structures, but those participants haven’t shown a willingness or desire to do it.
Web2 worlds like Fortnite, Roblox, and Grand Theft Auto already enable in-game identity experiences. Fortnite is built on player willingness to buy skins that serve no purpose other than aesthetics.
The challenge with each game is that those goods are trapped permanently in the worlds owned by Epic, Roblox, and Take Two, respectively. Owners of goods can’t resell the goods, nor can they transfer them for use in different places online.
The reason players can’t resell — or for cases where they can, they can only resell for in-game currency that can’t be taken out — is that it would destroy the business model of the game companies. They make money on purchases of new goods. If a marketplace existed for players to sell digital goods they “owned,” sellers would expect to earn most of the commission, and the game companies would earn pennies on the dollar relative to new sales. It’s the same reason why digital goods aren’t transferable to other platforms.
It’s not that centralized Web2 protocols can’t work technically to enable NFTs. It’s that the incentive structures for Web2 business models don’t align with the concept of user “ownership.”
Digital goods as strong tools of identity don’t work if we don’t actually own them. Ownership creates value to others, which is a primary mechanism for identity creation.
It’s not popular to believe in NFTs right now, nor web3 more broadly, and deservedly so. Crypto was a big part of the everything bubble. Now we’re deflating to reality where we can reassess what does and doesn't work. The best way to do that is to base ourselves back in human nature, and identity is the basest nature that NFTs are uniquely suited to foster.
Notes and Quotes
Thinking About the Wealth Effect
My favorite quote from the week came from Noah Smith writing about wealth destruction from declining asset prices:
Financial wealth gets created and destroyed not just because the real economy changes, but because the amount we pay for financial assets changes.
I’ve always struggled with the idea of measuring wealth in the form of assets. Bezos is worth $130 billion. Elon is worth $200 billion or something. Yes and not really.
Asset prices change, and sometimes very quickly. Tesla is down 45% YTD, and so must be Elon’s net worth. Neither Bezos nor Elon are likely to change their lifestyles with a 50% decline in their net worth. Even 90%.
But the rest of the world is likely to change, and that’s one of the downstream effects we haven’t seen yet from this bear market.
The average person does make decisions based on their perceived wealth, and a lot of us are poorer than we were six months ago. The luxury car that was an easy buy last year might be tougher now. Parents fronting their kids a downpayment for homes increasing double-digit percentages y/y didn’t matter, but now maybe they call for a second thought.
Eventually this will start to show. Maybe sooner than later. Maybe some of it is priced in, but there’s always someone who doesn’t know or isn’t paying attention.
Avoiding the Anchor
The Transcript shared some notes from a Seth Klarman interview. My favorite:
“After you buy something you paid for, it doesn't matter. People cling to the idea that at least they should get their money back; maybe there is bad news, and you should sell before it goes lower; maybe put it into something else where you get your money back, but people prefer to make it back where they lost it. People anchor numbers in their heads, and they hold on to them. They have a way of remembering what happened relatively recently. If you recently had a pandemic, you over-worry about the next pandemic even though they don't happen that often. I was certainly guilty of that after 9/11 myself. It seemed obvious that we'd get hit again, and then we didn't for a long time.”
There are two important ideas here:
Holding on to losing assets believing they should work back to where you bought them. I’ve always liked the idea that your first loss is your best loss. You don’t want to sell a great business on a temporary issue, but when situations change, you should sell early rather than hold. It requires an informed view about whether something is one time vs persistent in nature, and the discipline to execute when persistent.
Recency bias. We’re still living through the war in Ukraine. Shortly after it happened, there was a strong belief that China would invade Taiwan. In retrospect, while there was certainly a chance, our recency bias probably fooled all of us into believing a much higher probability than realistic of a near-term invasion. Recency bias is where the contrarian should test what if this rare event that just happened isn’t likely to happen again? Where are people overestimating?
Thanks for reading, and see you again soon.
Thanks for reading The Deload! Subscribe for free to receive new posts and support my work.