EarlyBird Crypto Education Series Part 5: DeFi, DAOs, NFTs, Web3... Oh my

This reads in 6 minutes

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With a background on the performance, history, and challenges facing crypto, it’s time to dive into the next chapter of blockchain technology. Let’s take a crack at defining some of those buzzwords (you know: DeFi, NFTs, DAOs, Web3) to provide you with a primer on the latest movements in the crypto space and help prepare you for what’s to come (or at least what venture capitalists are banking on).

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Like I said in the first post, this should not be the last thing you read up on these topics, but it will get you started on the right foot.

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DeFi

Can you guess what that portmanteau stands for? If you said, “decentralized finance”, you’d be correct. If you said, “what the heck is a portmanteau??” well, you’ll have to google it.

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The goal of DeFi is to offer financial services to anyone across the globe in a decentralized, anonymous, and transparent way. Transparent in that every transaction gets recorded on the (Ethereum, usually) blockchain. Anonymous in that the only thing connecting you to your actions with these services is your wallet address. And decentralized in that there is no single authority making judgment calls about what can and can’t happen via these applications — it’s all written in code, and in many cases, involves some very clever tech!

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Cool, but what is DeFi?

It’s just a category of applications, a.k.a “decentralized applications”, a.k.a “Dapps” (another portmanteau), that provide financial services. I’m talking about the ability to save, borrow, lend, trade, and more, all through smart contracts written into the blockchain — in other words, no bank, brokerage, or escrow sitting in the middle.

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This is great if you don’t have access to those services, you have a deep distrust in the gatekeepers of said services, or you like trying new things that could have a massive impact on the future. It’s less great when something goes wrong (which tends to happen a lot with new technology) and you need to call customer support. Because when applications are decentralized, there is no customer support number.

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NFTs

NFTs (non-fungible tokens) are digital certificates of ownership of a virtual asset. “Non-fungible” just means that the asset is one-of-a-kind. An NFT could represent art, sports highlight videos, avatars, music, membership, etc. They can be bought or sold much like a tangible entity — sorta like rare trading cards. Just like cryptocurrency, NFT ownership is recorded on the blockchain (again, usually on Ethereum’s blockchain).

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Though NFTs have been around for a few years, they have catapulted in popularity over the past 12 months. NFT sales hit a sky-high $25 billion in 2021, compared to just $95 million in 2020.

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Why would someone buy an NFT?

Well, a few reasons come to mind — let’s go from best to worst-intentioned...

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Good: They think the art is cool and find joy in owning it. They like to participate in the tight-knit online communities that rally around certain collections. They want to support an artist they like. They consider digital art to be the future and see this as a good long-term investment. There is some promised “utility” that they are eager to redeem (e.g. access to a fancy restaurant or private island, or perhaps it represents some sort of tool or player skin in an online game).

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Less good: They see NFTs as a speculative investment vehicle (hey, if this is your M.O. and you can afford the risk, go for it!). Someone on the internet told them to buy one.

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Not good: They want to launder money. They want to bypass copyright laws and profit off of someone else’s work. They want to buy an NFT they created to generate the appearance of demand and sell it to someone else.

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As with all things involving money

There is a wide spectrum of good/bad behavior and use cases.

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While you won’t be able to buy NFTs (at least initially) through EarlyBird Crypto, we are offering Ethereum. I’m making this point because most NFTs leverage Ethereum’s blockchain (the same can be said of DeFi protocols) — thus, as the ecosystem of projects utilizing Ethereum grows, we expect that growth to be reflected in Ethereum’s price.

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DAOs

DAOs, a.k.a decentralized autonomous organizations, are basically online communities with three things: a purpose, a balance sheet, and strict rules on how decisions are made.

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A balance sheet, eh? But where does the money come from?

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It works like this

If I wanted to start a DAO, I’d write up a smart contract that says (in code), “the EarlyBirdDAO will have 1 million tokens, and each token counts as 1 vote. The tokens will go on sale in 2 weeks and you’ll be able to buy them for $1 each.” Somewhere on the EarlyBirdDAO’s website, I’d state our purpose and then bank on my copywriting and marketing efforts to compel people to buy the token and participate in achieving the stated purpose.

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People who bought the token would get access to the EarlyBirdDAO Discord channel (as well as some other apps), and discussion could begin on how we’re going to achieve our purpose — in other words, “what does the group think is the most efficient and effective way to use the money we raised?”

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The process of deploying our funds (raised through the sale of the DAO token) is subject to a semi-democratic voting process. It’s democratic because one token equals one vote. It’s only “semi” democratic because a rich person could hypothetically afford a lot more tokens than an equally enthusiastic poor person. In most cases, once the vote is cast, the action occurs automatically (via smart contract).

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A DAO is just a mechanism for organizing people and allocating resources

Does a DAO have the same legal status as an LLC or corporation? No. Not yet at least. And that could produce some sticky situations down the line.

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Is a DAO an undoubtedly fun way to organize people over the internet? You betcha.

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Web3

Let’s recap on what we’ve covered so far, then we’ll talk about Web3 (the buzziest buzzword of them all).

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DeFi is a way of using the blockchain to provide financial services to crypto users that eliminates many of the intermediaries commonly associated with the movement of money.

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NFTs utilize the blockchain to provide proof of ownership of one-of-a-kind digital assets (soon I suspect they’ll be used to provide proof of ownership of physical assets as well, like real estate).

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DAOs provide a decentralized mechanism for organizing people to achieve a shared goal — the right to vote is afforded to token holders of the DAO and votes are recorded on the blockchain.

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That was nice. Alright, let’s talk about Web3.

In short, “Web3” is a moniker for a type of architecture that will power a new generation of online applications. Uh... what does that even mean?

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Well, the “3” is a reference to prior generations of web-based applications. In the early internet (Web1), you had a lot of sites where there was no interaction, just one-way consumption (e.g. you could read magazines online).

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The ethos of “decentralization” stakes the claim that users should be the ones in control of their data.

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In the web as we know it (Web2), we interact with a lot of “free” apps — especially social media ones. These businesses, think: Twitter or Facebook, can offer free services to us (”the consumer”) because they are collecting our utilization data — that means everything we click, search, buy, like, etc. Once they’ve built a profile of our online behavior, they sell that information to advertisers, who sell us stuff and ideas. It’s a very effective business model.

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The two big ideas of web3

The first big idea is that applications are going to be interoperable — that’s sort of a fancy way of saying “open”. In Web2 applications, companies can decide what information they want other companies to be able to use through APIs (e.g. Google allows a lot of food delivery apps access to their Maps APIs). In Web3, the idea is that anyone will be able to connect to anything.

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The other big idea is that users will be the authorities of their data. Today, when I leave Facebook after checking whose birthday is today, Facebook still has all my data. In a Web3 world, when I leave Faceblock (just made that up), my data leaves with me. And it accompanies me to the next app that I choose to open up.

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The catch with Web3

Is that many apps built with this architecture probably won’t be free anymore. I’m not totally sure how much people are willing to pay to own their data, but there will have to be some cost associated with using these apps (fractions of cents, I hope). There is no free lunch — it’ll be interesting to see the price discovery over the next few years as we learn just how much people value their own data (and what it’s actually worth when it’s not being packaged up for hungry advertisers).

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That was a long post. Good job for getting through the whole thing. In the next post of the series, we’ll be going over some of the lingo that has emerged from the crypto movement. It’ll be fun and zero percent technical.

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Read Part 6 now...

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