In this episode of the Superteam podcast, hosts Cash and Tanmay dive into the most interesting and impactful events in the crypto world as seen on Twitter. From the upcoming Ethereum merge to FTX's explosive growth, they cover a wide range of topics that are shaping the future of cryptocurrency and decentralized finance.

The Inevitable End of Creator Royalties?

The episode kicks off with a discussion on creator royalties in the NFT space. Cash highlights a tweet suggesting that zero creator royalties might be inevitable, prompting projects and creators to consider alternative revenue models. This development stems from the recent launch of NFT marketplaces like Yawww on Solana and Sudoswap on Ethereum, which have removed artist royalties.

Cash explains, "When NFTs first came on the scene, the normal argument from every VC or thought leader was, 'Oh, now artists can monetize in perpetuity.' But the truth is, that's not how the tech works." He reveals that creator royalties are not enforceable in smart contracts, contrary to popular belief. Instead, it's up to marketplaces like OpenSea to honor these royalties.

This revelation challenges the initial promise of NFTs as a perpetual revenue stream for artists. It raises questions about the long-term sustainability of the NFT ecosystem and how creators will adapt to this changing landscape. As the hosts point out, this development could significantly impact the art world and force artists to rethink their approach to digital asset creation and monetization.

Ethereum Merge Drama: A Fork in the Road

The conversation then shifts to the upcoming Ethereum merge and the potential drama surrounding it. Miles Deutsche's tweet highlights a major problem: Ethereum miners don't want to switch to proof-of-stake because they've invested heavily in mining equipment for the current proof-of-work system.

Cash explains the situation: "ETH miners are creating a separate road called proof-of-work ETH. They're trying to get people to switch over to that one." This fork would result in two versions of Ethereum - the official proof-of-stake chain and the miner-supported proof-of-work chain.

The hosts discuss the implications of this fork, particularly regarding the value of assets on each chain. They emphasize the importance of social consensus in determining which chain will be considered the "real" Ethereum. However, they also point out a crucial factor that could influence this decision - stablecoins.

The Power of Stablecoins in the Ethereum Ecosystem

One of the most intriguing aspects of the Ethereum merge drama is the potential power that stablecoin issuers, particularly USDC, hold in determining the success of each chain. Cash explains, "USDC and future companies like it get to choose which chains can be for which ones can't."

This revelation challenges the notion of true decentralization in the crypto world. The hosts discuss how a single centralized US company, subject to SEC regulations, could effectively decide the future of Ethereum. This situation raises important questions about the nature of decentralization and the influence of centralized entities in the crypto ecosystem.

OFAC Sanctions and the Future of Ethereum

The discussion then turns to the recent Office of Foreign Assets Control (OFAC) sanctions on Tornado Cash, a cryptocurrency mixing service. The hosts explore how these sanctions could impact Ethereum's future, particularly in a proof-of-stake system where many validators are centralized companies subject to OFAC regulations.

Cash outlines a potential scenario: "You can very easily imagine a regulatory future in the US where any bank is told, 'Hey, you can use it, but just make sure that people are KYC'd and there's no OFAC violations.'" This could lead to an "OFAC fork" of Ethereum, where validators comply with censorship requirements.

This potential fragmentation of Ethereum raises concerns about composability and the overall value proposition of the network. It highlights the ongoing tension between regulatory compliance and the ideals of decentralization that underpin much of the crypto world.

Canada's Curious Crypto Regulations

In a lighter moment, the hosts discuss Canada's new cryptocurrency regulations, which limit purchases to $30,000 per year for most cryptocurrencies. However, the regulation makes exceptions for four specific coins: Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.

The hosts express amusement and confusion at the inclusion of Bitcoin Cash and Litecoin in this list of "safe" cryptocurrencies. This peculiar regulation highlights the challenges governments face in trying to regulate the rapidly evolving crypto space, often resulting in policies that may seem arbitrary or outdated to industry insiders.

FTX's Explosive Growth

The conversation then turns to the impressive growth of cryptocurrency exchange FTX. According to a CNBC report, FTX's revenue jumped by 1000% in 2021, with 27% operating margins. The hosts note that most of FTX's business comes from outside the US, primarily from derivative products.

This growth story contrasts with the experiences of other exchanges like Coinbase, which have faced challenges expanding globally. The hosts attribute FTX's success to several factors, including:

1. Keeping the team size small and efficient
2. Separating the US business into a distinct entity
3. Taking calculated risks in markets outside the US

This discussion highlights the importance of strategic decision-making and regulatory navigation in the crypto exchange business. It also underscores the potential for growth in markets outside the US, where regulatory environments may be more favorable.

Crypto Adoption in Developing Countries

The hosts then discuss a tweet highlighting high crypto adoption rates in developing countries with lower financial freedom and economic quality. This observation challenges the narrative that crypto has "zero utility" and suggests that cryptocurrency may be filling important needs in these markets.

However, Tanmay offers a counterpoint, suggesting that the attraction to crypto in these countries might be more about the potential for quick gains rather than practical utility. He notes, "Most users in India, they're like India is shitcoin central, right? Most users buy shitcoins."

This discussion highlights the complex motivations driving crypto adoption in different parts of the world. While some users may indeed be seeking alternatives to traditional financial systems, others may be attracted by the potential for speculative gains.

The Rise of "Real Yield" in DeFi

Cash introduces the concept of "real yield," a new trend emerging in the decentralized finance (DeFi) space during the bear market. He explains, "These are projects which have some emissions, they're giving some rewards, but they're making more money than they're giving out in rewards."

This shift towards sustainable yield represents a maturation of the DeFi space. Instead of unsustainable high yields paid out in native tokens (often derided as "ponzinomics"), these projects are operating more like traditional businesses, generating real revenue to support their reward structures.

The emergence of "real yield" projects could mark a significant turning point for DeFi, potentially attracting more conservative investors and improving the long-term viability of the sector.

The Fat App Thesis

The hosts discuss the "fat app thesis," a potential shift in how value accrues in the crypto ecosystem. Traditionally, the "fat protocol thesis" suggested that most value would accrue to base layer protocols like Bitcoin and Ethereum. However, the fat app thesis proposes that in the future, more value might accrue to application-layer projects.

This shift could be driven by the increasing abundance of blockchain "block space" as more chains come online. Cash suggests, "I think the biggest rug pull would be like the app layer now starts to just go vertical and this L1 stuff just fizzles out."

If this thesis proves correct, it could have significant implications for investment strategies in the crypto space, potentially shifting focus from base layer protocols to innovative applications built on top of them.

The Utility of NFTs

The podcast concludes with a lighthearted discussion about the utility of NFTs, prompted by a humorous tweet comparing NFTs to expensive watches. The hosts argue that NFTs, like luxury goods, have utility beyond their practical functions - they can serve as status symbols, aesthetic objects, or markers of belonging to a community.

This discussion challenges the narrow definition of "utility" often applied to NFTs and suggests a more nuanced understanding of value in the digital asset space. It also highlights the importance of considering social and cultural factors when evaluating the potential of new technologies.

Throughout the episode, the hosts provide insightful commentary on these complex issues, offering listeners a comprehensive overview of the current state of the crypto ecosystem. From regulatory challenges to emerging trends in DeFi, this discussion covers a wide range of topics that are shaping the future of cryptocurrency and blockchain technology.

As the crypto market continues to evolve, discussions like these provide valuable context for understanding the challenges and opportunities that lie ahead. Whether you're a seasoned crypto enthusiast or a curious newcomer, this episode offers plenty of food for thought about the future of digital assets and decentralized finance.

Facts + Figures

• Creator royalties for NFTs are not enforceable in smart contracts, contrary to popular belief.
• The upcoming Ethereum merge has led to plans for a proof-of-work fork, potentially creating two versions of Ethereum.
• Stablecoin issuers like USDC could play a crucial role in determining which Ethereum chain succeeds post-merge.
• OFAC sanctions on Tornado Cash have raised concerns about potential censorship at the base layer of Ethereum in a proof-of-stake system.
• Canada has introduced regulations limiting crypto purchases to $30,000 per year, with exceptions for Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
• FTX's revenue jumped by 1000% in 2021, with 27% operating margins.
• Most of FTX's business comes from outside the US, primarily from derivative products.
• Developing countries with lower financial freedom and economic quality show high rates of crypto adoption.
• "Real yield" is emerging as a new trend in DeFi, with projects generating more revenue than they pay out in rewards.
• The "fat app thesis" suggests that more value in the crypto ecosystem might accrue to application-layer projects in the future, rather than base layer protocols.

Questions Answered

What is the "fat app thesis" in crypto?

The fat app thesis is a new perspective on value accrual in the crypto ecosystem. It suggests that in the future, more value might accumulate to application-layer projects rather than base layer protocols like Bitcoin or Ethereum. This shift could be driven by the increasing abundance of blockchain "block space" as more chains come online, potentially leading to a scenario where innovative apps become more valuable than the chains they're built on.

How is FTX achieving such rapid growth?

FTX's explosive growth can be attributed to several factors. Firstly, they've kept their team size small and efficient, allowing for quick decision-making and adaptation. Secondly, they've separated their US business into a distinct entity, allowing them to take calculated risks in markets outside the US where regulations may be more favorable. Lastly, a significant portion of their revenue comes from derivative products, which are particularly popular in non-US markets.

What is "real yield" in DeFi?

"Real yield" is an emerging trend in the decentralized finance (DeFi) space. It refers to projects that generate more revenue than they pay out in rewards, operating more like traditional businesses. Unlike earlier DeFi projects that offered unsustainably high yields paid in native tokens (often criticized as "ponzinomics"), real yield projects aim for sustainability by backing their rewards with actual earnings. This trend represents a maturation of the DeFi space and could attract more conservative investors.

How might the Ethereum merge impact the crypto ecosystem?

The Ethereum merge, which will transition the network from proof-of-work to proof-of-stake, could have significant impacts on the crypto ecosystem. It may lead to a fork, creating two versions of Ethereum - the official proof-of-stake chain and a miner-supported proof-of-work chain. This situation raises questions about asset values on each chain and the role of stablecoin issuers in determining which chain succeeds. Additionally, it highlights potential challenges around centralization and regulatory compliance in a proof-of-stake system.

Why are creator royalties for NFTs not guaranteed?

Despite initial promises, creator royalties for NFTs are not enforceable through smart contracts. Instead, it's up to individual marketplaces like OpenSea to honor these royalties. This revelation challenges the idea of NFTs as a perpetual revenue stream for artists and raises questions about the long-term sustainability of the NFT ecosystem. It may force creators to rethink their approach to digital asset creation and monetization.