A primer on cryptocurrencies

The very basic act of moving something of value between two people is treacherous. 

What if the thing you get has no value later? What if the recipient says they didn’t receive the thing but actually did and then doubles their money when you send it again? What if you trade something with someone but when you’re not looking they’ve actually taken it back? What if the third party you have to oversee a transaction screws you? What if, what if, what if...

The problem at the heart of transferring value is one of trust. 

Add into that the anonymous, opaque internet, which was never designed to have money rails, and sending and receiving money becomes even sketchier. 

Crypto solves all that. It’s trust in code form.

Let’s say you send me £10,000. To secure a record of this we write this down on a piece of paper and then set it in resin, like the fly in Jurassic Park. Now we have a record of this transaction, we can see through the resin to the paper saying it happened but can’t get into the resin easily to alter the bit of paper. We can trust it really happened. 

But what about if I just chuck that bit of resin off a cliff? Fair point. 

The crypto answer is copying that block of resin thousands of times and then sending them all over the world. Now the receipt of our transaction is in a chain that’s so distributed and massive that collecting and throwing all those bits of resin off the cliff is impossible. Now everyone would agree you did in fact send me £10,000. 

Putting the ledger of our transaction behind a wall of resin-like uncrackable cryptographic energy and then making so many copies that it would be impossible to delete all of them, is the magic behind crypto. 

And so we arrive at trust.  You sent me £10,000. It’s undeniable, unchangeable and un-arguable. And we don’t need a third party. We have the receipts. Thousands of them. 

Now we can build money for the internet off of this secure foundation.

But money is just the start.  

Tokenisation and NFTs

This gets us to tokenisation. 

You’ve heard of non-fungible tokens (NFTs), where mostly art has been given the crypto treatment. Here scarcity, and therefore value, is built back into digital creations because the blockchain can prove it’s the only one. 

Last month Coke, Burberry, Dolce & Gabbana and Louis Vuitton released NFTs - Coke with a digital bubble jacket, Burberry with its Sharky B for Mythical Games’ multiplayer online game Blankos Block Party, and Louis Vuitton launched a mobile video game, with 30 free NFTs to collect as they follow the brand’s mascot Vivienne to Paris. Included within ‘Louis: The Game’ there are ten NFTs by the digital artist Beeple, who made headlines selling work for more than US$69 million at auction earlier in the year.

In a sense this continues a tradition of branded items for collectors, following on from Norman Rockwell’s set of four Coca-Cola prints ($400), a vintage German Trink plastic cooler ($550), or a Steuben Crystal 125th Anniversary bottle ($275). Just now they’re in the digital world. 

NTFs are interesting, but they are only the start.

That’s because such tokenisation doesn’t just have to be for art or characters. 

Anything that requires trust in the world can now be underpinned by crypto: your identity, your signature, your property, your creations, your businesses. Property rights are the basis for all successful economic systems and when the digital population of 5bn people has access to them, the new economic possibilities are extraordinary. 

Ecosystems that are starting to flower in these virtual spaces out of crypto soil give us clues to the future. 

For example, a virtual estate ‘token’ in Decentraland, a virtual world, recently sold for more than $900,000, the largest sale to date. The sale was underpinned by the ‘local’ cryptocurrency MANA. There are also casinos in Decentraland that use the currency and behave like casinos in the physical world. A similar story is playing out in The Sandbox, another virtual space, too. Perhaps most interestingly, you don’t need to be a coder, motion artist, or memelord to build NFTs here - just a crafty gamer. NFT creation is being democratised and people are making serious cash in the process. ​​

And this is spilling over into the real world. 

The World Economic Forum (WEF) and Deloitte have forecast that the value-add of blockchain will grow to $176 billion by 2025 and exceed $3.1 trillion by 2030. Products and services with high price tags and a need for high trust in them being legit will likely go first, such as houses, cars, pills, wine, cultural artefacts and so on. Here are a few early examples: in 2019 IBM moved 28-tons of original mandarin oranges from China to Singapore on their blockchain. PO8 Ltd in the Bahamas, used the blockchain to tokenize marine archeological treasures worth billions of dollars. Mata Capital, a French asset manager, tokenised a hotel in Paris to attract a wider range of investors and reduce minimum investor subscription amounts. The €26 million issuance was one of the largest in Europe. 

Brandcoins and network ownership in the crypto age

Interestingly, these fan tokens do not represent fractional ownership of the entities themselves (but they could as in the Mata Capital Parisian hotel example, more on that soon). Instead, in the case of sport for example, they get you closer to the club, you can use the tokens to vote on club decisions, you can get rewards, like VIP access or personal messages from players, and you can connect to - and compete with - other fans. 

This can be thought of as adjacent to a ‘Like’ on social networks in that it opens the door to a brand and its community. The crucial and dizzying differences are the 1) the brand does not have to rent access to its audience back from the social network. It owns that directly. And 2) as the network becomes more valuable the coin owners share in the economic benefits. 

Let’s unpack these. 

First, the direct relationships. Let’s say you’re Disney. You can access your community and customers directly through shops, email and more recently streaming. But people have to come to the shops, read the emails, or have the streaming services. Disney must therefore also reach them by paying: the networks hold the communities behind an algorithmic wall and release them - or their lookalikes - back to brands for a fee. 

Put coldly, today Disney is giving away economics to access its community. When brands have their own tokens or coins this relationship becomes direct and the economics don’t have to be given away. In fact, like we’re seeing with Paris Saint-Germain, FC Barcelona and the NBA, they can be beefed up. A Disney coin could allow preferential access to films, reward loyalty for doing more things in the Disney ecosystem and even spawn new businesses within the Disney ecosystem, like selling T-Shirts, NFTs or fan art. It’s the future of loyalty for forward thinking brands.

Now, to the value of the brand networks. Meet Raoul Pal, who was co-head of hedge fund sales in equities and equity derivatives at Goldman Sachs in Europe and has become a prominent voice in the crypto space, especially around tokenisation. He says  “As a token holder, I now share in the economic benefits of that community. So if the community becomes more valuable, I make more money. My token goes up, it’s an asset. So culture becomes an asset you can invest in”. In short, it may pay to be a fan. It may even lead to advanced financial markets of culture and brands where you can bet that Brand A or Club A or Player A will do better than Brand B or Club B or Player B - and long one and short another.

 Just as the internet democratized creators, so crypto might democratise community investment, opening now swathes of human life, like culture, for people to share in either as customers or investors. 

And while we’re on creators, here’s how that might change too because of crypto.

Creator economies and the new deal

Let’s say you’re popular on TikTok, having been discovered there and made famous by your fans. TikTok gives you a cut of advertising revenue in return for making their platform more popular and interesting. But it’s not a great deal - artists don’t get enough and fans get nothing. Creators need the platform because it has the network effects - the party is there - but tokenisation might offer a better deal.

Coins issued by creators could tokenise intellectual property, gather fans, accrue value and help new artists make it in the world with more control. Fans then can help creators with marketing, driving virality and network effects and enrich the creator and the community. Welcome to the new groupie. The way Discord just made a community inspired film to explain their brand is the embryo of that idea - but misses the shared ownership of IP.

With modern creators being across multiple art forms, the possibilities become more intriguing. Take for example the DJ, 3LAU, who is suggesting ownership of his NFT becomes an equity stake in future projects.

Similarly, Gary Vaynerchuk, CEO of VaynerMedia, an Ad Age A-List agency in the US and NFT advocate, has said “For me what I really like, what really caught my attention about NFTs...I’m in control [as creator]. If I decide I want to give 20% of the box office to my token holders, I can! That kind of power to support your community is extremely attractive to me”. 

Creators and brands share a common issues: the platforms take an unfair share of their value creation and the IP isn’t available to the community that helps build them. This offers intriguing possibilities of how community and brand can share equity and marketing like never before. 

The metaverse as platform for all this

But don’t you need somewhere to centralise all the network effects, a platform to house all the content and community? Yes, probably. 

One option is that the platforms adapt to this, and certainly Facebook Diem, Facebook’s coin, and Mark Zuckerberg’s latest vision for Facebook as a metaverse company suggest they are thinking this way already. As he said in July: “What is the metaverse? It’s a virtual environment where you can be present with people in digital spaces. You can kind of think of this as an embodied internet that you’re inside of rather than just looking at….Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow. Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate.” The answer may be sitting under our noses - or actually just above them if an Oculus type future is hurtling our way.

Another option is that something new comes along. The big platform killers could be the new platforms that offer creators - their lifeblood - a better deal. Clubhouse and Patreon point somewhat in that direction but without a shared content ownership model. A new platform could provide creator coin owners a place to create while the community and creator benefits from that and helps grow it - ao a YouTube and TikTok 2.0 in which creators and fans benefit more, and the platform benefits less. You can see how people could flock to such a platform destroying the network effects - and billions of dollars of value - on other platforms with the right incentives. 

A third option is a blend, where the metaverse is a decentralised space without an owner which many plug into, just as websites are to the internet. Star Wars built a drive-in theatre on an island in Fortnite, with a virtual JJ Abrams (the director) introducing a teaser clip. Balenciaga held virtual fashion shows through Oculus. The only limiting factors here are imagination and time, even the laws of physics can be broken, widening the walls of creative possibility massively. 

Right now, UX lags the nascent infrastructure. When it catches up, something like one of these scenarios may come to fruition. If it does, the implications for brands, media companies, talent management, record labels and endless others are profound. 

Grab your popcorn.

A practical guide for brands

Now we have some of the core ideas established, we had a go at a rough model so brands can start to think about their strategies. 

Level 0: The Observer

Many brands may wish to do nothing, watch as others make the mistakes, go down the dead ends and join whatever this whole thing becomes (or doesn’t) once it’s more established. People may remember Apple, the world’s most valuable brand, got to social media much later than others. One difference is that social was a marketing channel, whereas parts of what have been described above offer new revenue streams. The risk may be opportunity costs.

Level 1: The Basic NFT

Brands create branded NFTs, like characters, collectibles and art, following in the footsteps of Coca Cola, Burberry, D&G, the NBA and Louis Vuitton. This will likely start with status brands and fan brands, where signaling with that brand in digital spaces has value or collectorship is fun. It’s possible to imagine how iconic brand assets or mascots receive some NFT treatment just for fun too, like NFT Meerkats or M&Ms, and agencies can open new revenue channels through IP, taking 1% of every future sale perhaps.

Level 2: The Diet Metaverse

Here brands create experiences in the metaverse, like a showroom, gallery or gig in others’ virtual worlds like Roblox or Decentraland. This level is called ‘Diet’ because it’s an entry level to the metaverse, essentially setting up shop in existing virtual worlds rather than creating their own. Here you can expect to see car showrooms, cooking classes from food brands, immersive film trailers from Hollywood.

Level 3: Product Tokenisation 

As we saw with wine, treasure and property, the real world can be tokenised too. At its most boring this becomes about certificates of authenticity, like a digital watermark. Supreme crowbars may come with these to add extra cachet and avoid fakes. The more interesting question for brands is how can tokenising your products help create more revenue either by increasing the penetration of your products (multiple people sharing ownership opens up more potential sales if the product was unobtainable before) or by adding new services to customers, like top tier Gucci fans sharing ownership of a Gucci hotel, like a luxury timeshare.

Level 4: The Brandcoin

Brands create their own coins or tokens, allowing fans to get closer, be part of the action and receive benefits like early access to content or rewards. This can be thought of as the next frontier of CRM, ‘Coin Relationship Management’ if you like. But in this world, as the network connected by the coin grows in value, the coin value goes up and the community shares in the brand’s success. Brands become assets beyond social value for people: they become financial assets too. In this world, a proportion of consumers logically become advocates for the piece of culture they have a share in, turning influencer and affiliate marketing on its head yet again. 

Level 5: The Brandcoin and Equity 

Here some sort of connection between brandcoin and brand equity exists, as we saw 3LAU and Gary Vaynerchuk, CEO of VaynerMedia, hinting at. That is, the brandcoin and the commercial performance of the business become connected in some way, supercharging all the fractional ownership and advocacy effects mentioned above. Perhaps these exist as two value systems always but perhaps twinning these two produces some fascinating changes. 

Level 6: Branded Metaverse Design

Here brands create their own worlds in the metaverse, complete with their own economies in which NTF, VR, branded experiences, selling, buying, advanced rewards, preferential treatment and brand economies become established. Audi may have for example a world designed by Denis Villeneuve and scored by Nicholas Britell complete with showrooms, racetracks, clubs and so on. Test driving on the M25 might be free, but doing it on Silverstone might carry a micropayment in crypto. Car launches in NFT form may happen in concert with real world launches - and the cars may then be able to move between virtual worlds freely. This level is marked by the exterior world being recreated in the metaverse beyond just selling platforms, like showrooms, instead extending to the fullest expression of a brand, even beyond the laws of physics.

Level 7: Extended Reality (XR)

That gets us to the final level: where the digital and real worlds overlap in curious ways underpinned by coins and tokens. This level offers the most sophisticated mix of all the ideas covered here. Here physical objects get tokenised and become extensions of the digital crypto world and metaverse. There may be tokens for a property, allowing fractional ownership and upending the property markets. People might share tokens for a car, making the average time a car is unused drop significantly. Real car showrooms might have sections where you enter the metaverse to build and try out your car, chat to other owners and jump into virtual brand experiences like driving through the craters of the moon or taking a breather to watch Balenciaga latest interactive theatre show. 

A recap

As you can see, it’s dizzying and exciting. Let’s recap our journey.

The internet was never set up to deal with money. 

Crypto allows trust to be built into the digital world because it’s an unhackable, decentralised ledger of transactions. The receipts are in resin and reproduced all over the world. 

This unlocks property rights, internet currencies, coins and tokens. Now you can move value online safely, and prove scarcity and provenance.

This unlocks a secondary layer that moves on top of these foundations, like digital objects or NFTs, which can also be connected to real world objects too - and which agencies could mine new revenue from.

This also unlocks communities being able to share in token ownership and also benefit from the network effects they create. Culture becomes a commercial asset.

This could all start to come to life in the metaverse, the next embodied version of the internet, with crypto rails facilitating whole economies within them. 

This could disrupt the creator economy through fairer property rights, leading to disruption for ‘traditional’ social platforms and a better deal for creators and communities (and a worse one for platforms). 

This could mean brands have their own coins, tokens, communities and commerce - both in the metaverse and in the real world - enriching themselves and their fans. From this they might get:

• direct access to their communities and allow communities to share in - and advocate for - the success of those communities. CRM 2.0.

• new revenue streams from digital assets like NFTs and community tokens

• the ability to tokenise their product offering to prove provenance, originality and scarcity. 

• the option to build virtual experiences underpinned by crypto in spaces run by others or their own corners of the metaverse.

• A huge amount more that we can’t even see yet

So, that completes our rough and early sketch of the terrain for adventurers. One thing’s for sure, we’re at the foothills of the foothills of this thing.

p.s Not financial advice, but if you buy any of this argument, consider looking into the crypto it will likely all be built upon: Ethereum. 

Notes

The point of this guide is to prepare brands for possible futures, mixing a bit of logic and imagination. It is not a defence of crypto. But inevitably some of the issues in the media come up and cloud the debate. So let’s anticipate and explore some of the criticisms of crypto so things can be seen clearly. 

First, environmental concerns. Crypto moves fast and earlier in 2021 when Elon Musk made his comments about Bitcoin, mining was predominantly from unsustainable sources and largely based in China. Now it is predominantly from sustainable sources as mining has moved to the US from China. The Bitcoin Mining Council reported in July that its members now have a 67% sustainable power mix. Based on this data they estimated that the global mining industry’s sustainable electricity mix had grown to approximately 56%, during Q2 2021, making it one of the most sustainable industries globally. 

There is reason to believe this trend will continue. There’s a market force to make it sustainable and to use wasted electricity, as for miners that’s the best setup. Being by a hydroelectric dam and using unused electricity is better business than buying coal for overheads. As Mike Colyer, CEO of digital currency company Foundry has said. “Miners around the world are looking for stranded power that is renewable. That will always be your lowest cost. Net-net this will be a big win for bitcoin’s carbon footprint.” 

Perhaps most importantly for this discussion, what is being described here - the applications that run on top of crypto technology - will likely run on proof-of-stake blockchains, which use 99% less electricity. Ethereum which is the dominant player here will switch to this in early 2022. 

And finally, context must be given. Ark Invest has compared energy expenditure for other financial products and Bitcoin is a rounding error versus the typical banking system and substantially less than gold mining.

Second, hype/bubble/volatility/fad/shady shit. In the Wild West there are hustlers, scammers, entrepreneurs, shillers and all of human life. Any new technology offers fuel for our angels or demons. Many parts of the crypto space are scams and will go to zero. The misuses shouldn’t be confused with the promising new uses. Bad apples shouldn’t stop new orchards growing. There is always a chance the whole of crypto goes to zero (through something that invalidates the fundamentals, like a quantum hack, or a Black Swan) but it is highly unlikely (and then the fundamentals could just update to counter that.) For Bitcoin, Ethereum and a number of other cryptocurrencies there’s reason to feel more secure. 

First, the growth of space is following Metcalfe’s Law, exactly as FANGS did in the last decade. That is, the growth is following defined mathematical models of how networks develop and appreciate in value exponentially. 

Second, there is sizable adoption from people, institutions and even nations are becoming interested. As KPMG just reported, “Investment in blockchain and cryptocurrencies heated up dramatically in H1’21, with investment more than twice the level seen in 2020 and soaring past the previous annual record high set in 2018.”. 55% of the top 100 banks now have crypto exposure. The smart money knows what’s up. As does the tech world: Microsoft just started developing on Ethereum this week, joining 200,000 other developers who’ve built 3700 applications on Solidity, Ethereum’s native language.

Finally, a word on volatility. Yes, it is a highly volatile space but that is the price of innovation. Amazon has retraced by massive double digit percentages too over its history. Growth isn’t always linear and crypto trades 24/7 on tweets, greed and anxiety so this is to be expected. As the market matures we can expect the volatility to reduce too.

Overall, it feels like the toothpaste is out the tube. Crypto solves too many problems too elegantly to be going anywhere. Currencies may come and go but the logic of the technology is extremely likely to stay.

Third, enriching the rich or anti-democratic nature. One of the transparent features of the blockchain is that it’s public. Analysis has shown that Bitcoin, the dominant player, is in fact becoming more democratic in time, with the percentage owned by the super rich decreasing while those with small holdings (<10 Bitcoin) have grown.