Crypto, Blockchain, Bitcoin, NFT, Metaverse — These Things Are Not the Same

For the first post of the New Year, I thought I’d start with something I expect to have to refer back to periodically throughout 2022.

There’s a lot of confusion, and as a result a lot of FUD (Fear Uncertainty Doubt) about all things crypto, blockchain, NFT, the Metaverse, etc. etc. Just today, I saw a tweet about how crypto makes no sense because of gas fees. As I was answering that, it occurred to me that the issue is that we all are lumping together a number of disparate concepts and ideas and things together into one giant blob of “crypto” and dismissing them all in one package.

That’s a mistake. It would be like dismissing the internet in 1998 because GeoCities was a shitshow. Click here for a trip down memory lane, because that’s what websites often looked like in the early days of the web.

Fact is, there’s a lot of hype (and I mean, a LOT of hype), a bunch of scams, stupid ideas, and things that don’t make any sense in 2022 with this new frontier in technology. But that really reminds me of the early days of the internet itself. A lot of hype, a bunch of scams, a ton of stupid ideas, and a lot of things that didn’t make any sense. People becoming overnight millionaires because they started a Dotcom, companies rebranding themselves as something-something-DOTCOM and getting crazy valuations… I remember most of that. In the midst of all the confusion and hoopla, there was transformative technology. Most of us who were around those early years couldn’t even have imagined what the modern web would become.

I imagine that most of the coins today will be worthless. It’s safe to say that many if not most of the projects people are working on today in blockchain and web3 will be useless. Fortunes will be made, and fortunes will be lost. But in the midst of all that, there is transformative technology.

What I wanted to do was simply try to explain as best as I can (with the full knowledge that I’m hardly an expert myself) the differences between these things so we all can talk about if and how and why they might or might not apply to the world in the years to come, and to the industry in the years to come.

Crypto

First place to start is where everyone starts: cryptocurrency. We start here because just about everybody who gets introduced to this world comes in because they have heard something or another about this “crypto” thing and how young slackers are overnight billionaires because they bought Dogecoin. People get into it chasing riches: 10X in two months!!! 20,000% returns!!! ZOMG!

But what is cryptocurrency?

Wikipedia defines it this way:

cryptocurrencycrypto-currency, or crypto is a collection of binary data which is designed to work as a medium of exchange. Individual coin ownership records are stored in a ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.[1][2][3] Cryptocurrencies are generally fiat currencies, as they are not backed by or convertible into a commodity.[4] Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.[5]

Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC).[6] When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.[7]

Chances are, reading those two paragraphs will only confuse you further. I know it did me when I first started researching this.

I think the simplest way to understand cryptocurrency generally is to understand money. Robert Breedlove has an entire YouTube channel titled “What Is Money” and I do recommend it, and there are a number of books and economists and smart people who have tried to really define money. Let me give it a try.

My definition: Money is consensual hallucination that enables people to achieve economic goals.

We simply agree that something has value so that we can use it to trade with one another. It’s just a tool. I have chickens, and I want new shoes. You have new shoes, but you want a car. Your neighbor has a car, but wants wheat. The wheat farmer wants chickens. By all of us agreeing to hallucinate and pretend that some shiny rocks are worth something, we can all more easily get what we really want: chickens, shoes, cars, and wheat.

There are plenty of historical examples of societies using seashells, glass beads, and even giant rocks as money. The point is that whatever we all agree is money becomes money, because we all agree to treat it as valuable.

In a sense, crypto is merely a new proposal for mass hallucination. Today, we all mutually hallucinate that a piece of paper with a dead president on it is worth something, or even more importantly, that some numbers on a screen saying that someone has XYZ dollars in the bank account is worth something.

Crypto is merely a group of smart software engineers who are proposing that we all agree to mutually hallucinate that some other numbers on a screen are worth something.

So when skeptics say that crypto is a ginormous bubble, because it isn’t backed by anything, they’re correct. But what they’re missing is that no form of money is really backed by anything, not even gold. The idea of “intrinsic value” is misplaced when it comes to money since the whole point of money is to be a tool that allows us to get shoes, chickens, cars, etc. The jewelry value of gold is a fraction of its value as money, and the monetary value depends on thousands of years of collective human hallucination/agreement that this bit of yellow metal that can’t be eaten is worth something.

Bitcoin vs. Altcoins

I think it is important to make a distinction here between the original cryptocurrency, Bitcoin, and all others that have come afterwards, including the big names of Ethereum, Tether, Solana, Cardano, etc. etc. Most of the cryptoheads call everything that isn’t Bitcoin “altcoins”, because they are alternative coins to Bitcoin.

Why is this important?

There are some — many even — who believe that Bitcoin is the only true digital asset, the only true digital money, and that all others are not.

The reasoning is that Bitcoin serves no other purpose other than to be digital money: a medium of exchange, a store of value, that is transportable across time and space, is provably scarce, and serves no other function. It is pure money. Other altcoins, in contrast, usually have some functionality or feature that makes them useful as things other than money.

Ethereum, for example, is the first of the Smart Computing Platforms, which allows developers to write software onto the Ethereum blockchain, using Ethereum itself as a way to pay for operating that software. (This has to get into how the blockchain works, etc. and incentive structures; for now, just go with Ethereum’s own description of needing ETH to pay for “gas fees” to power this software.) That means the value of ETH, the coin, is in its usefulness to power software written on the Ethereum blockchain.

Other altcoins have various other features and functions. Some are similar to owning stock, as they pay out a share of the project’s revenues to coin holders, while others allow coin holders to vote on governance decisions.

I do think it is important to distinguish between Bitcoin, which is intended to be pure money and nothing else, and altcoins that are intended to be useful in some way, shape or form. In a weird way, the altcoins have more “intrinsic value” than Bitcoin does.

The analogy I use to distinguish is that Bitcoin is most like digital gold, while altcoins (particularly Ethereum) is most like digital oil. Both are valuable, but for different reasons. Oil has far more intrinsic value than gold, since it can be used to power the world, but gold is a purer form of money as a result.

Finally, we do have to touch on so-called “memecoins” which are digital entries that serve no function (like Bitcoin) and are created purely for the sake of existing. The condemnation of crypto as ponzi schemes and bubbles is most often applied to memecoins, like Dogecoin, Shiba Inu, and others that do nothing whatsoever. The only real difference between Bitcoin and memecoins, to be fair, is that Bitcoin’s supply is mathematically limited to 21 million while memecoins have billions or quadrillions of supply, and often have no limits to creating more at all. Dogecoin for example has no maximum limit and there are 129 billion DOGE in circulation, with 10,000 being added every minute.

Most of the get-rich-quick schemes and overhyped scams are in the memecoin and altcoin worlds, where the tantalizing promise is that if you buy into XYZ coin at $0.00001, it could go 20,000X in a year, and you become a billionaire in a year or two. Stories like this one from Business Insider profiling one anonymous investor who bought $8,000 worth of Shiba Inu in 2020 to see the value skyrocket to $5.7 billion in 14 months fuel that hope and hype. On the other hand, there is no shortage of stories from across the cryptoverse of people losing everything from one shitcoin or another.

So let me summarize like this:

  • Bitcoin is intended to be pure money, aka, digital gold.
  • Altcoins are intended to be useful in some fashion, aka, digital oil.
  • Memecoins are intended to be gambling chips.

Blockchain

The underlying technology, that enables cryptocurrency to exist, is referred to as “blockchain.” I think this is a bit of a shorthand, as there are a number of elements that go into enabling crypto. But it’s easier to just lump them all in together and call them “blockchain” collectively.

There are at least three crucial technologies:

  • The blockchain itself, which means that data is written in such a way that the validity of one set of data (“block”) depends on the validity of the set of data that immediately came before. Hence, it’s a chain of blocks. The importance here is that changing one element in one block ends up changing the blocks that came before and after.
  • Public-Key Cryptography, which ensures that we can have the idea of “ownership” over data, since only the private key would decrypt or “unlock” data that was encrypted using the public key. Yes, it’s a ton more complicated than that, but for our purposes, this cryptography is what allows us to say that I “own” some ledger entries (aka, Bitcoin).
  • Distributed Ledgers, which means that the entire database (on a chain of blocks) is replicated and synchronized across multiple computers. This “decentralization” is critical. It is entirely possible to have a blockchain using cryptography running on one computer, but most people would not consider that to be real blockchain technology.

The importance of decentralization to this technology scheme cannot be emphasized more. A really solid description comes from Amazon Web Services:

What is decentralization?

In blockchain, decentralization refers to the transfer of control and decision-making from a centralized entity (individual, organization, or group thereof) to a distributed network. Decentralized networks strive to reduce the level of trust that participants must place in one another, and deter their ability to exert authority or control over one another in ways that degrade the functionality of the network.

Why decentralization matters

Decentralization is not a new concept. When building a technology solution, three primary network architectures are typically considered: centralized, distributed, and decentralized. While blockchain technologies often make use of decentralized networks, a blockchain application itself cannot be categorized simply as being decentralized or not. Rather, decentralization is a sliding scale and should be applied to all aspects of a blockchain application. By decentralizing the management of and access to resources in an application, greater and fairer service can be achieved. Decentralization typically has some tradeoffs such as lower transaction throughput, but ideally, the tradeoffs are worth the improved stability and service levels they produce.

Read the whole thing; it’ll be worth your time if you care to understand this topic more.

The important concept for us in real estate specifically is how decentralization, and therefore blockchain, is all about not needing to know anyone or trust anyone in the network, and how that leads to a decrease of top-down control and authority. This is both a threat and an opportunity.

Inefficiency of Blockchain Technology

One important corollary to grasp is that as of today, and likely into the future, the very structure of blockchain technology means that it will always be less efficient, be slower, and be more expensive to operate than a traditional single database.

Therefore, a question that must be asked is what specific value you want to achieve with blockchain that you could not achieve with a traditional database. If there is no specific value, some specific benefit that only blockchain can provide, then it is likely that “blockchain” is mere hype.

NFT

Non-Fungible Tokens, or NFT, has been much in the news in 2021. We have all heard crazy stories of bits of fugly icons selling for millions of dollars. My favorite NFT-hype story so far is that a digital art NFT sold for $69 million in 2021, which is $15 million more than what a Monet painting from 1906 sold for in 2014. But that’s the art world, which seems insane to begin with anyhow.

But what is an NFT anyhow? Ethereum.org explains:

NFTs are tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they’re secured by the Ethereum blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.

Put more simply, an NFT is simply a ledger entry with a unique ID directly linked to a single unique address (aka, “wallet”) on the blockchain. This represents ownership. Put even more simply, an NFT allows for digital representation of real world items.

The application of NFTs to date has been in the art world, which is crazy to begin with, but the wider application of the technology is what interests so many people. It does open the door to the possibility of enabling digital transfers of unique real world items, whether those are collectibles, tickets to events, or houses.

Propy is prominent in the real estate space for having transferred ownership of a condo via NFT. There are dozens if not hundreds of companies now working on extending that idea to everything from fractional ownership to investment real estate to on-chain title and so on.

Metaverse

Virtual worlds are nothing new. MUDs (Multi-User Dungeons) were popular in the pre-graphical internet era. The first real virtual world to hit mass awareness was Ultima Online in 1997, followed by EverQuest and Asheron’s Call in 1999. I spent quite a few years and thousands of hours in Asheron’s Call as a younger man.

So why the hype over metaverse today? Why is Facebook changing its name to Meta, and why are so many people pouring millions of dollars into virtual real estate?

I don’t have any answers to these questions. Ask Facebook and the people spending the money. But I do think it would be useful to define metaverse for future conversations.

I define metaverse as a virtual world with NFTs, which results in unique digital items. It’s the uniqueness, the scarcity, that drives real world price since anything where demand exceeds supply will have the price go up. Without NFT, without uniqueness, the metaverse is little different from any of the online worlds in hundreds of games.

It is unclear just how important the metaverse will be in the future. As of today, the main purpose of the various metaverse worlds is entertainment and gaming drives most of the usage of the metaverse. Thing is… gaming is big business. It was $180 billion in 2021, but divided amongst all different kinds of games. As Motley Fool noted in October of 2021, gaming in the U.S. is bigger than movies and music combined. So just on the basis of gaming, digital entertainment (because what are movies and TV shows in 2022 after HBO MAX and Disney+ and AppleTV other than streaming media?), and gambling (do a nation’s laws apply to the metaverse?) alone, the metaverse is likely to be an extraordinary moneymaking opportunity.

These Things Are Not the Same

Hopefully, what I have outlined shows that these terms are not the same. Crypto is not Bitcoin, and Bitcoin is not the metaverse. NFT is not Ethereum, and Shiba Inu is completely different from Chainlink which is different from Solana.

That some memecoin collapses and people lose everything doesn’t mean that the NFT is useless and worthless. But just because NFT is a technology breakthrough doesn’t mean that the metaverse will be how people date in the future. They’re all related perhaps, but they are separate things.

There will be a lot of hype, a lot of scams, a lot of foolish projects, and a lot of great ideas that don’t pan out with blockchain, web3, and the metaverse. That doesn’t mean that those concepts and technologies are worthless, just like the collapse of Lycos, Infoseek, Geocities, MySpace, and Pets.com meant that the internet was a fad.

The reason I care enough to write and talk about these topics is that buried somewhere beneath the hype and the hope is fundamental technology that does transform nearly everything in much the same way that the internet transformed nearly everything. I thought it might be useful to start the new year, then, with some definitions, no matter how incomplete, how broad, and how shallow they may be so we can have more interesting conversations going forward.

Happy New Year, everybody!

-rsh

 

 

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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