4th January 2022 > > L1 & L2 protocols and more NFT stuff.

Market Snap

Market Wrap

The year is not getting off to a great start for cryptos though stocks are looking pleased with themselves.

Some of the pain can be put down to USD strength yesterday in the shape of the dollar currency index (DXY) up 3% or so in just a couple of hours, but that is merely an addition to the sentiment, and not a driving force.

Curious Cryptos’ Definition of the Day – Layer 1 (L1) and Layer 2 (L2) protocols Part One

L1 protocols incorporate, amongst many other networks, the first two iterations of the crypto revolution – BTC and ETH.

A commonly accepted definition of a L1 protocol is lifted from the BTC whitepaper – “decentralised, secure and scalable”.

The last two requirements are of course desirable, and cryptos cannot work in any practical sense without them. But cryptos cannot exist in any theoretical sense without the concept of decentralisation.

We will return to the topic of decentralisation later this week, but for now, let us take it as a given.

Security is achieved through ever growing hash rate (a topic for a later Definition of the Day) and difficulty (ditto). Again, let us take that as a given for now.

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Which leaves us with scalability.

BTC and ETH both suffer from a scalability problem.

Transactions per second (TPS) for BTC is about 7, ETH is about 15, VISA is 1,700, and Mastercard is 5,000, give or take.

The problem is obvious – the ever-increasing demands made on the BTC network, and the ETH network, results in ever-increasing congestion and high fees.

Complex Decentralised Finance (DeFi) operations have cost thousands of dollars. NFTs are restricted to simply the metadata (a problem which again we will return to) and not the underlying asset because of the scalability problem. Simply transferring some BTC or ETH sometimes results in fees of $20 or more.

This is not sustainable.

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This problem has spawned an incredible surge of innovation and creativity, which we will start to explore tomorrow.

Curious Cryptos’ Commentary – Adoption of Non-Fungible Tokens (NFTs)

Regular readers are very familiar with the almost endless possibilities that are being created by the NFT revolution.

Digital art such as CryptoPunks was the first famous foray into this world, which has proved very lucrative for those who grabbed one or more of the 10,000 Punks that were given out for free back in 2017. The most expensive one (so far) was recently sold by Sotheby’s for $11.8mm. Meet CryptoPunk #7523 who is an Alien – you can tell by his blue skin:

There are only 9 Alien Punks in the total collection. Combined with another rare, but very topical attribute, a face mask, this Punk will always rate highly in collectors’ desires.

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Mike Winkelman – the digital artist known as Beeple – had received a maximum price of $100 for his art in digital form before October 2020.

After adopting an NFT format, hence guaranteeing authenticity and ownership, he sold two pieces of his art for $67k each in October 2020, another series for $3.5mm in December 2020, culminating in a sale price of $69mm for his “First 5000 Days” sold by Christie’s in March 2021:

Not long after this ground-breaking auction, the buyer probably regretted not looking as closely as he should have done at this collage. There have been accusations of racial, sexual, and homophobic prejudice displayed in some of the images. In light of those accusations, its true value is somewhat less now.

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The application of NFTs goes far wider than simply the digital art world.

Football clubs are getting in on the act, selling still or moving images of famous players, or famous moments of sporting action. I suspect that Fort William, who still play in the Highland League despite enduring a record winless streak of 882 days up to 11th September 2019, do not have imminent plans to enter this market, though I would undoubtedly be a buyer.

Consumer brands are exploring the myriad ways in which they can engage with their customer base using NFTs. The CCC, as you are aware, is the proud (joint) owner of four of the recent Matrix NFT avatars, and the sole owner of one other avatar plus the “glitch in the Matrix” NFT.

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The key problem with all crypto applications is how to encourage, innovate, and develop mass adoption, with solutions that overcome the considerable technical barriers.

Secure crypto wallets (hardware or web-based) require a degree of understanding and application that most people, who unsurprisingly have little interest in the intricacies of cryptos, do not have time for in their lives.

Solutions to this problem are being proposed and implemented all the time. Now there is one for NFTs.

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Samsung Electronics have announced three new TV models for 2022 that will provide an:

“… intuitive, integrated platform for discovering, purchasing and trading digital artwork”.

The PR department continues:

"With demand for NFTs on the rise, the need for a solution to today's fragmented viewing and purchasing landscape has never been greater."

The CCC could not agree more.

It comes as no surprise that a Korean manufacturer is first to this market. When other TV makers are forced to follow this initiative because they have lost competitive advantage, then we will know for sure it has some legs.

Reserve Treasury Protocols (before they all go to zero)

Reminder – Olympus and Wonderland are, to the best of my knowledge, live viable projects. XEUS, FORT and JADE turned out to be scams, though they are still live scams. Scams are not uncommon in these Wild West fringes of Decentralised Finance (DeFi).

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