THE LIMITS OF COINS AND CONTENT

WHEN I ENTERED THE SPACE IN JANUARY 2021, SECONDARY ROYALTIES WERE A MAJOR SELLING POINT USED TO ATTRACT ARTISTS TO TOKENIZING THEIR WORK ON BLOCKCHAINS. ANYONE FAMILIAR WITH THE CONTEMPORARY ART MARKET WILL ATTEST THAT THE PRIMARY SALE OF AN EMERGING ARTIST’S WORK RARELY ACHIEVES THE PRICE POINT THAT SECONDARY MARKETS PROVIDE WHICH REDIRECTS THE MAJORITY OF REVENUE GENERATED BY ART TO MEDIATORS LIKE GALLERIES, DEALERS AND AUCTION HOUSES. SECONDARY ROYALTIES TRACKED & BACKED BY BLOCKCHAINS MARKETED THEMSELVES AS A SOLUTION TO THIS WIDESPREAD PROBLEM.
AT THIS POINT, SECONDARY ROYALTIES FOR NFTS WERE A SOCIAL CONVENTION - THEY WERE NEVER ENFORCEABLE ONCHAIN. IF YOU THINK ABOUT THIS LONG ENOUGH, YOU REALIZE THAT A CENTRALIZED POINT OF AUTHORITY (SOMETHING BLOCKCHAINS FAMOUSLY DO NOT HAVE) IS NECESSARY FOR THE ENFORCEMENT OF SECONDARY ROYALTIES.
LET’S SAY THAT YOU HARD CODED INTO A CONTRACT “EVERY TIME THIS NFT IS SOLD, THE CREATOR GETS 10% OF THE SALE PRICE”. THEN I MINT THAT NFT AND DECIDED TO SELL IT TO MY FRIEND. ALL I NEED TO DO IS TELL THE CONTRACT THAT I AM SELLING THIS NFT TO MY FRIEND FOR ZERO DOLLARS TO EVADE THE SECONDARY ROYALTY. THEN I WRITE A SEPARATE CONTRACT THAT SAYS THE 2ETH MY FRIEND PUT IN ESCROW CAN BE RELEASED TO ME ONCE THEY RECEIVE THE NFT I SOLD THEM FOR ZERO DOLLARS. IF ANYBODY ASKS, WE ALL INSIST THAT THIS 2E IS COMPLETELY UNRELATED TO THE SALE OF THE NFT. TO COUNTERACT THIS BEHAVIOR YOU’D NEED EITHER; A REGULATORY ENTITY TO APPEAL TO OR A CONTRACT THAT PROHIBITS THE TRANSFER OF AN NFT FROM ONE WALLET TO ANOTHER FOR ZERO DOLLARS. AND IF YOU DID THE LATTER, MAYBE I JUST SEND IT TO MY FRIEND AND THEN RECEIVE .0001E INSTEAD OF ZERO.
ATTEMPTS TO ENFORCE SECONDARY ROYALTIES EITHER REQUIRE SOME SORT OF CENTRALIZED AUTHORITY (A NON-STARTER) OR SOME SORT OF CONTRACTUAL MECHANISM THAT WOULD RESTRICT THE FREE TRANSFER OF TOKENS BETWEEN WALLETS (ALSO A NON-STARTER) . CONSEQUENTLY, SECONDARY ROYALTIES ONLY BECAME A THING THROUGH SOCIAL CONSENSUS WHICH IS ACTUALLY PRETTY COOL IF YOU THINK ABOUT IT.
ARTISTS BANDED TOGETHER AND ENTERED SUGGESTED SECONDARY ROYALTY AMOUNTS INTO CONTRACTS AND THE MAJORITY OF SECONDARY MARKETPLACES IN THE SPACE RESPECTED THIS SUGGESTED ROYALTY WHEN THEY PROCESSED SECONDARY SALES. OPENSEA, BY FAR THE MOST POPULAR AND WIDELY USED SECONDARY MARKET, DID ALL OF ITS MARKET MAKING (THE PROCESS OF PAIRING BUYERS WITH SELLERS AND HELPING THEM EXECUTE TRADES) OFF-CHAIN. BECAUSE OF THIS, THEY COULD NOT EASILY INTEGRATE THE SUGGESTED ROYALTY CONVENTION INTO THEIR PROCESS SO THEY ADDED THE OPPORTUNITY FOR ARTISTS TO GO INTO THEIR SYSTEM AND MANUALLY ENTER A SECONDARY ROYALTY THAT THEY WOULD ENFORCE IN THEIR OFF-CHAIN MARKET MAKING PROTOCOL.
IN FEBRUARY OF 2023 A MARKETPLACE EMERGED THAT IGNORED SECONDARY ROYALTIES (BLUR) AND ATE UP A DECENT AMOUNT OF OPENSEA’S VOLUME. WHAT ENSUED IS BETTER DOCUMENTED ELSEWHERE. BLUR WISELY SAID AND DID VERY LITTLE BESIDES STAND BEHIND THEIR PRODUCT. OPENSEA EVENTUALLY ADOPTED A NEARLY IDENTICAL LEVEL OF OPTIONALITY AROUND ROYALTIES AS BLUR BUT NOT BEFORE TRYING SOME RIDICULOUS INCOHERENT SYSTEMS OF THEIR OWN (WHICH BLUR ELEGANTLY GAMED) AND SAYING A BUNCH OF NONSENSE ABOUT HONORING CREATORS. TO SUMMARIZE;

SECONDARY ROYALTIES FOR NFTS HAVE NEVER BEEN MEANINGFULLY ENFORCED ON-CHAIN AND HAVE EXISTED THROUGH SOCIAL CONVENTION, ON-CHAIN SUGGESTIONS AND OFF-CHAIN MARKET MAKING.
EVENTUALLY THESE SYSTEMS WERE NOT STRONG ENOUGH TO RESIST MARKET FORCES AND SECONDARY ROYALTIES FOR NFTS ARE NO LONGER AN INDUSTRY WIDE CONVENTION
THE MARKET MAKER WITH THE MOST VOLUME HAS SIGNIFICANT LEVERAGE AROUND SECONDARY ROYALTIES BECAUSE THEY HAVE THE BEST ENVIRONMENT FOR TRADING (I.E. THE MOST BUYERS AND MOST SELLERS)

UNISWAP IS AN ONCHAIN MARKET MAKER DEPLOYED IN 2018 TO FACILITATE THE SWAPPING OF ERC-20 TOKENS. ERC-20 TOKENS ARE DIFFERENT FROM NFTS IN THAT THEY DO NOT POINT TO MEDIA (NO PICTURES) AND THE ARE FUNGIBLE (NOT UNIQUE). THE LACK OF UNIQUENESS ALLOWS FOR FAR MORE ELEGANT MARKET MAKING BECAUSE YOU NEVER HAVE TO WORRY IF YOUR ERC-20 TOKEN IS WEARING A PARTY HAT OR AN EYE PATCH OR IF IT HAS LASER EYES - THERE ISN’T EVEN AN ON-CHAIN PICTURE FOR YOU TO WORRY ABOUT.
UNISWAP ALLOWS FOR USERS TO PERMISSIONLESSLY CREATE LIQUIDITY POOLS AROUND ANY PAIR OF ERC-20 TOKENS. YOU CAN USE UNISWAP WITHOUT UNDERSTANDING HOW LIQUIDITY POOLS WORK - JUST CONNECT AND SWAP ONE TOKEN FOR ANOTHER AT THE PRICE DETERMINED BY THE PROTOCOL. I USED UNISWAP FOR YEARS BEFORE STARTING A LIQUIDITY POOL OR EVEN ASKING HOW THE SWAPS I EXECUTED WERE ENABLED.
WHEN I WANT TO SWAP ONE COIN FOR ANOTHER ON UNISWAP, I DON’T HAVE TO PUT MY COIN UP FOR SALE AND WAIT FOR A BUYER TO COME BY; MY COIN IS IMMEDIATELY SWAPPED OUT BECAUSE THERE IS A POOL OF CAPITAL SITTING THERE WAITING FOR PEOPLE TO COME ALONG AND EXECUTE A SWAP. THIS POOL OF CAPITAL IS AN LP.
USERS CAN PUT UP BOTH SIDES OF A POTENTIAL SWAP (USUALLY ONE SIDE IS ETHEREUM AND THE OTHER IS THE ERC-20 TOKEN THEY ARE LOOKING TO SUPPORT) TO ALLOW FOR OTHER USERS TO EASILY BUY IN AND SELL OUT ON UNISWAP. IN EXCHANGE FOR PROVIDING LIQUIDITY TO ENABLE SWAPS, LP PROVIDERS ARE ENTITLED TO A PORTION OF THE FEE UNISWAP TAKES ON EVERY SWAP.
THE SIZE OF A LIQUIDITY POOL HAS AN IMPACT ON PRICE STABILITY. A TOKEN WITH A VERY LARGE LIQUIDITY POOL (COINS LIKE $DEGEN HAVE LPS WORTH MILLIONS OF $USD) WILL HAVE A STABLE PRICE BECAUSE SMALL INDIVIDUAL TRADES WILL NOT MEANINGFULLY IMPACT LIQUIDITY. COINS WITH SMALL LPS WILL HAVE A VERY VOLATILE PRICE POINT. A LIQUIDITY POOL IS INSULATION FROM VOLATILITY. SHOULD YOU EVER FEEL MOVED TO PARTICIPATE IN THE TRADING OF AN ERC-20 TOKEN, IT IS WORTH CHECKING THE SIZE OF THE LIQUIDITY POOL TO UNDERSTAND THE STABILITY OF THE CURRENT PRICE.
IT IS WORTH NOTING THAT YOU CANNOT PROVIDE LIQUIDITY WITHOUT ASSUMING SIGNIFICANT RISK. IF PEOPLE ONLY BUY OR ONLY SELL YOUR ASSET, ONE SIDE OF THE POOL WILL DRAIN AND UNISWAP WILL CONVERT SOME OF THE OTHER SIDE OF THE POOL TO COMPENSATE. OVER TIME, THIS CAN ESSENTIALLY DRAIN YOUR LIQUIDITY POOL. CONSEQUENTLY, PROVIDING LIQUIDITY IS A HIGH RISK BEHAVIOR. SOLICITING LIQUIDITY IS ALSO RISKY BEHAVIOR & PROMISING PROFIT IN EXCHANGE FOR LIQUIDITY IS UNWISE.
APPARENTLY, THE SEC THINKS THIS WHOLE THING IS A SECURITIES CONCERN AND IS CURRENTLY TAKING UNISWAP TO COURT SPECIFICALLY CITING LIQUIDITY POOLS AS THEIR AREA OF INTEREST. I PERSONALLY BELIEVE UNISWAP IS AN INCREDIBLE INNOVATION AND SANE ADULTS CAN BE TRUSTED TO USE IT RESPONSIBLY.
TO SUMMARIZE;

ERC-20 TOKENS ARE FUNGIBLE TOKENS THAT DO NOT EXPLICITLY REFERENCE ANY MEDIA. EXAMPLES INCLUDE DOGE COIN, ETHEREUM, WRAPPED ETHEREUM AND MOST MEME COINS ON ETHEREUM & ETHEREUM L2s.
UNISWAP IS AN ONCHAIN MARKET MAKING PROTOCOL THAT ENABLES SWAPS OF ERC-20 TOKENS BY ALLOWING USERS TO PROVIDE LIQUIDITY POOLS IN EXCHANGE FOR FEES GENERATED BY THE PLATFORM.
PROVIDING LIQUIDITY IS A HIGH RISK BEHAVIOR AND SHOULD NOT BE THOUGHT OF AS AN INVESTMENT OPPORTUNITY.
UNISWAP CAN BE THOUGHT OF AS A SECONDARY MARKET FOR ERC-20 TOKENS. LP REWARDS CAN BE THOUGHT OF AS A KIND OF ONCHAIN SECONDARY ROYALTY

LAST NIGHT, ZORA DROPPED THE LIMITLESS ZORB TO SHOWCASE A NEW FEATURE SET THAT ENABLES ONCHAIN SECONDARY TRADING THROUGH UNISWAP. THE FOLLOWING THINGS HAPPENED;

THE LIMITLESS ZORB WAS AVAILABLE AS AN ERC-1155 (A FUNGIBLE TOKEN WHERE EVERY TOKEN REFERENCES THE SAME PIECE OF MEDIA) FOR A THREE HOUR WINDOW.
542,000 ERC-1155 TOKENS WERE MINTED
UNTIL THE MINT WINDOW CLOSED, THIS FUNCTIONED THE SAME AS ANY OTHER ZORA MINT.
THE ONLY FUNDAMENTAL DIFFERENCE BEING THAT ZORA HAS RECENTLY ADJUSTED THEIR FEE STRUCTURE FROM .000777E/MINT TO .000111E/MINT.

WHEN THE MINT CLOSED, THINGS GOT INTERESTING. HOLDERS COULD CHOOSE TO WRAP THEIR ERC-1155 TOKENS INTO ERC-20 TOKENS THROUGH UNISWAP. THIS MEANS THAT AN OPTIONAL FEATURE OF HOLDING THE ERC-1155 LIMITLESS ZORB IS GOING TO UNISWAP AND RECEIVING AN ERC-20 TOKEN IN ITS STEAD. THE CORRESPONDING ERC-20 TOKEN FOR THE LIMITLESS ZORB IS $ZRTK. A SMALL PORTION OF THE MINT FEE FROM THE LIMITLESS ZORB WAS ROUTED TO AN LP FOR $ZRTK THAT USERS COULD PARTICIPATE IN VIA UNISWAP. A PORTION OF THE REWARDS GENERATED BY THAT LP WILL BE ROUTED TO THE CREATOR OF THE ORIGINAL NFT. PRICE ACTION PUSHED THE PRICE OF $ZRTK FROM 0.20$ UP TO 8.00$ OVER THE COURSE OF THE EVENING. IT INEVITABLY CRASHED AS MOST ERC-20 TOKENS DO.
HOLDERS OF THE ERC-1155 TOKEN DO NOT HAVE TO UTILIZE THIS FEATURE OR ENGAGE WITH UNISWAP AT ALL. YOU CAN TRADE THE LIMITLESS ZORB ON OPENSEA OR BLUR IF YOU PREFER. YOU CAN HOLD ONTO YOUR ERC-1155 TOKEN IF HAVING THE PICTURE OF THE LIMITLESS ZORB IN THE TOKEN DATA IS VERY IMPORTANT TO YOU.
IT IS WORTH NOTING THAT USING AN NFT AS A LAUNCHING DEVICE FOR AN ERC-20 TOKEN IS NOT NECESSARILY A NEW IDEA. THIS PROCESS CAN BE TRACED BACK TO PARTYBID (NOW PARTY) WHICH STARTED BY FRACTIONALIZING SINGLE ERC-721 TOKENS INTO ERC-20 TOKENS THAT COULD BE REDEEMED BY USERS FOR A PORTION OF THE PROFITS OR LOSSES IF THE ERC-721 TOKEN WAS SOLD. PARTY HAS EVOLVED INTO A SOPHISTICATED COORDINATION TOOL WHOSE LATEST ITERATION INCLUDES MANY OF THE FEATURES IN ZORA’S UNISWAP INTEGRATION. RUG.FUN IS ALSO A TOOL FOR LAUNCHING ERC-20 TOKENS WITH PIECES OF MEDIA THAT NOTABLY PITS DIFFERENT ASSETS AGAINST EACH OTHER AND REWARDS LIQUIDITY TO THE MOST & LEAST POPULAR MEMES OUT OF THE TOP TEN MEMES SUBMITTED THAT WEEK. I’VE FOUND ALL THREE OF THESE TOOLS TO BE CONCEPTUALLY & TECHNICALLY CHALLENGING. CONSEQUENTLY, THE MENTAL MODELS THEY DEPLOY TO EXPLAIN THEIR INTERIOR LOGIC ARE EXTREMELY IMPORTANT AND WILL LIKELY DEFINE THEIR ADOPTION.
THERE HAS BEEN A LOT OF ANXIETY CIRCULATING AMONGST THE CREATIVE COMMUNITY OF WEB3 AS THE MOVE TOWARDS ERC-20 TOKENS UNDERSTANDABLY FEELS LIKE A MOVE AWAY FROM MEDIA AND CULTURE. IF YOU ZOOM OUT A LITTLE BIT, I BELIEVE THAT ERC-20 TOKENS ACTUALLY DO ‘POINT TO MEDIA’ - THEY JUST DON’T POINT TO MEDIA USING THE ON-CHAIN CONVENTIONS UTILIZED BY NFTS FROM 2020-2024. IF YOU THINK ABOUT DOGE COIN, YOU SEE A PICTURE OF A SHIBU INU DOG. JUST BECAUSE THAT PICTURE ISN’T LINKED TO THE TOKEN CONTRACT DOESN’T MEAN THESE TOKENS CAN’T BE ASSOCIATED WITH MEDIA. HUMAN BEINGS ARE COMPLEX CREATURES, WE DO NOT NEED OUR TOKENS TO REFERENCE AN IPFS LINK TO KNOW THAT SPECIFIC MEDIA MAY BE ASSOCIATED WITH THOSE TOKENS. INSISTING ON THIS (OR INSISTING THAT THE INFORMATION NEEDED TO RENDER AN IMAGE MUST EXIST INSIDE THE BODY OF A CONTRACT) REPRESENTS AN OVERLY LITERAL UNDERSTANDING OF HOW MEDIA AND TOKENIZATION RELATE TO EACHOTHER.
WE ARE SEEING A NARRATIVE SHIFT EMERGING AROUND TOKENIZED ASSETS. WE STARTED BY PROMISING SECONDARY ROYALTIES IN PERPETUITY TO FINE ARTISTS FOR TOKENIZING THEIR UNIQUE 1/1 WORKS. WE ARE NOW IN AN ERA WHERE ERC-20 TOKENS WILL BECOME BRANDS AND THESE BRANDS WILL REQUIRE CREATIVE AGENCIES TO GENERATE PROMOTIONAL MEDIA AS WELL AS ON & OFF CHAIN ASSETS. THESE THINGS MAY OR MAY NOT BE EXPLICITLY LINKED TO THE BRAND’S ERC-20 CURRENCY VIA CONTRACTS AND I DO NOT THINK THAT IS VERY IMPORTANT. YOU CANNOT FIT A VIBE INSIDE A CONTRACT.
THE BEST EXPERIENCES I HAVE HAD WITH ERC-20 TOKENS HAVE INVOLVED GROUPS OF CREATIVES, DEVS & DEGENS COMING TOGETHER TO GENERATE MEDIA, EVENTS, ZINES, VIBES AND NFTS TO SUPPORT AN ERC-20 TOKEN’S BRAND & LIQUIDITY POOL. THE SUCCESS OF EACH OF THESE BRANDS IS LARGELY DEPENDENT ON THEIR ABILITY TO FOCUS ON THE MISSION; DRIVING VALUE TO THE TOKEN. I HAVE NO DOUBT THAT THE TEAMS CAPABLE OF ACCOMPLISHING THAT MISSION WILL WIN THIS NEXT CYCLE.

THIS ESSAY WILL TURN INTO AN ERC-20 TOKEN ON SUNDAY.