  Exploring the transformation of value in the digital age By Michael J. Casey, Chief Content Officer March 26, 2021 This week, you could be forgiven for thinking bitcoin has ceded ground at the epicenter of the crypto zeitgeist to non-fungible tokens (NFT). Bitcoin's price dropped to its lowest level since March 8, after failing to consolidate gains made on yet another Elon Musk tweet.
At the same time, it's rather indisputable that NFTs are in a bubble. The question, asked by this week's column, is where their real value might be found once that bursts.  It's also true that bitcoin continues to attract attention in financial troubled parts of the world. There was a spike of interest in Turkey this week as its financial crisis worsened after President Recep Erdoğan got rid of his third central bank governor in less than two years. And there continues to be strong demand for bitcoin in Argentina, the country whose century-long troubles with money are the subject of this week's edition of our "Money Reimagined" podcast.
NFTs' Post-Frenzy Future Lies With DeFi  Illustration: Rachel Sun/CoinDesk In a recent CoinDesk TV interview, entrepreneur and digital economy maven Gary Vaynerchuk looked at the current mania around non-fungible tokens, with the mind-blowing prices being paid for tokenized digital artifacts, and compared it to the 2000 dot.com bubble.
"Gary Vee," whose utterances have earned him an Instagram following of 8 million and who will be a keynote at CoinDesk's Consensus conference in May, meant it as a positive analogy, not a negative reference. Once NFT prices correct to more reasonable levels, he said, it will clear the way for the technology's true transformative phase, much like the emergence of life-changing social media and mobile computing innovations in wake of the dot.com bust.
The question, then, is what's coming after the hype around NFT deflates?
To explore that, let's add another, more recent historical comparison: the initial coin offering (ICO) bubble of 2017 and the decentralized finance (DeFi) boom that started last year. That two-step evolution was similar to the internet's post-dot.com development, but in this case it's with decentralized, blockchain technologies especially relevant to NFTs.
Integration and Composability
In the subsequent Web 2.0 phase, developers discovered the real opportunity lay in integrating with other internet applications and services to build audiences through enhanced network effects. We saw an explosion of apps built on the iPhone and Android operating systems, as well as services that tapped Facebook's and Google's APIs. The apps and platforms forged symbiotic relationships that expanded the combined ecosystems' impact, utility and value.
Similarly, DeFi represented a break from the ICO model that preceded it. Whereas the unproven token projects of the ICO boom were mostly standalone ideas with self-contained value propositions, the defining features of DeFi are interoperability and "composability."
DeFi projects that incentivize participants to add liquidity to decentralized lending markets proactively encourage cross-integration with different protocols and applications, literally building on top of one another. They leverage the value generated by each to grow a wider lending, borrowing and payments ecosystem out of a network of decentralized exchanges, automated market-makers, self-executing collateral systems, trustless price data and stablecoins.
DeFi must overcome scaling and usability challenges before it can fulfill its promise as an alternative, decentralized financial system. But there are already strong lessons to draw from the breathtaking pace of innovation.
For NFT projects, a big one may be that they, too, must integrate with other elements of the open-source, blockchain, fintech and data economy if they're to add meaningful value to the creative, media and entertainment industry.
Speculation as a service
A second lesson is that speculation, too often derided as a source of excess and scammy behavior, can be your friend. It just needs to serve the project's objective.
That was not the case for most ICOs. They were built on "utility token" models whereby the underlying ecosystem was projected to grow as users exchanged a programmable token whose features were supposed to incentivize them to act in the common interest. The problem was that investors saw the tokens as get-rich-quick opportunities, as assets to buy and hold in the hope of price appreciation, not as something to exchange and use. There was a conflict between user motivation and intended outcomes.
By contrast, DeFi projects need speculators. Many of the key DeFi components work on the principle that, when traders in financial products seek to profit from market inefficiencies, their buying or selling behaviors will drive prices back toward equilibrium. In effect, speculators profit by removing the inefficiencies and DeFi seeks to harness that.
Thus, MakerDAO's decentralized platform automatically tweaks fees and collateral requirements to incentivize the profit-seeking actions of borrowers and lenders in ways that achieve one of the platform's main objectives: to maintain a steady $1 price for dai, the stablecoin in which loans are denominated. Similarly, other DeFi lending platforms have offered special rewards to borrowers and lenders to entice the liquidity they need to grow their platforms.
What about the NFT market? Well, there's plenty of speculation. But with headlines dominated by a few blowout deals, it might be doing more harm than good.
NFT proponents talk of democratizing arts and entertainment, of empowering up-and-coming artists and independent content creators, and of using this technology to raise money for worthy causes. In theory, the technology could give creators access to a wider potential market and encourage greater transparency to prevent powerful collectors and galleries from setting prices. It might also allow programmable features that automatically deliver some of the secondary market's proceeds to the original artist or to designated recipients.
But it's hard to speak of revolution if most of the value is captured by a few celebrity creators – like Beeple, whose $69 million sale was orchestrated by no less of an old-world art market player as Christie's, or like Jack Dorsey, whose NFT of his first tweet fetched $2.9 million. As with the traditional art market, these high-priced unique assets will likely not find much liquidity in secondary sales by themselves, which means the market itself won't grow, which in turn won't help lesser-known artists.
So, again, it's time to take a leaf out of DeFi's book. How do you create useful speculation that fosters adoption and innovation?
DeFi-ing NFTs
The answer may lie not only in copying DeFi, but in joining it.
Integrating NFT minting platforms and marketplaces into DeFi's network of decentralized exchanges and liquidity engines would allow developers of those projects to tap into that ecosystem of self-reinforcing innovation and access its liquidity pools to harness speculation in a constructive way.
A key opportunity lies in the innovative, smart contract-driven approach to collateral management employed by DeFi lending platforms such as Compound, Aave and MakerDAO. After all, art works and collectibles are quite often used as security for loans in the physical world, even when there's not an especially liquid market for buying and selling them.
Already, startups such as NFTfi are working on a model that enables NFT holders to borrow against their assets in this way.
Meanwhile, if DeFi-based decentralized apps can both incentivize trading of NFTs and automate residual payments to the original creator's chosen causes whenever a secondary market sale occurs, other radical business ideas might also be possible. In that widening, more diversified market, independent creators of art and other content will find new opportunities to monetize their work, especially if lightweight licensing and copyright solutions can be incorporated.
The good news is that, per this piece by CoinDesk's Brady Dale, there are quite a number of teams in addition to NFTfi working at the nexus of DeFi and NFTs. The projects do everything from fractionalizing art ownership to creating more sophisticated, automated royalty payment systems.
The post-bubble NFT world might not be as headline-grabbing, but it promises to be more interesting.
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Off the Charts The Centralizing Canal In the parlance of hackers and crypto people, the Suez Canal is a centralized vector of attack, a single vulnerability that, if it fails, can do great harm to the much bigger system that depends on it. That's the read of the economic impact of this week's unfortunate incident in which a massive container ship ran aground in the canal and blocked traffic there for days. Lloyd's of London estimated that $9.6 billion in goods shipments per day was being stalled by the blockage.
To put this centralized vulnerability into perspective, Shuai Hao and I came up with pie charts to represent the Suez Canal's place within the global economy. The most significant measure is in dollar value, which may be a function of the fact that a great deal of the world's oil passes through the canal.  Shuai Hao/CoinDesk That leads to another point: One decentralizing solution that would reduce the global economy's dependence on this thoroughfare would be to shift more of the world's energy consumption to local, renewable sources such as solar and wind. Read last week's newsletter for a discussion of how bitcoin mining, counterintuitively, could be a catalyst for that.
The Conversation Musk Strikes Again (and Misses?)  Illustration: Rachel Sun/CoinDesk Another week, another tweet from Tesla CEO Elon Musk moves the crypto market. This time it was a remark, in the early hours New York time Wednesday, that Tesla is now accepting bitcoin for purchases of its cars.  The important aspect of the policy shift from Tesla was not that the company is accepting bitcoin payments per se but that it is managing the funds itself and won't convert them into dollars. That "HODLing" part could, in theory, support the price.  Naturally, the usual cast of Tesla and bitcoin enthusiasts weighed in to applaud the move. And, sure enough, over the course of the next five hours, the news helped the largest cryptocurrency add around $3,400, or 6.4%, to post an intraday high of $57,225.  But the gains were short-lived. Within just six hours, the price was back down below where it had been before Musk's tweet. The failure to consolidate gains seemed to act as a weight on bitcoin, such that by early Thursday morning it had dropped to within just $458 of the $50,000 level.
A message from Coindesk  Introducing Coin Toss, debating the future of money on CoinDesk TV From the world leader in crypto news and events, the all-new CoinDesk TV covers the rapidly evolving world of digital finance and its role in the global economy. Hosted by CoinDesk Podcasts Managing Editor Adam B. Levine, Coin Toss sets the stage for debate between guests with opposing views on policy and regulation, privacy and data integrity, fraud and crime and more. Watch Coin Toss Wednesdays at 10:30 a.m. ET on YouTube or CoinDesk.com.
Relevant Reads Money Laundering Watchdog  The Financial Action Task Force (FATF), an international alliance of financial regulators, is flexing its muscles toward the crypto industry. New guidance this week, reported by Ian Allison, shows the FATF has DeFi in its sights. It is also tweaking the wording around NFTs that could signal a tougher regulatory hurdle for companies involved in that space.
Moreover, it outlined a stricter line on the "Travel Rule," which will require virtual asset service providers (VASPs) – i.e., custodial cryptocurrency exchanges – to track their customers' transfers to self-custody wallets off-platform. This prompted a stern backlash from crypto regulation lobbyists such as Coin Center's director of research, Peter Van Valkenburgh, who bemoaned the "absolutely inappropriate" surveillance of individuals that the changes would entail.
Undeterred, Rick McDonell, the former executive secretary of the FATF, penned an op-ed for CoinDesk essentially chastising the crypto industry for asking that it be given an easier regulatory standard than that applied to traditional financial institutions.
A message from CoinDesk  Bitcoin + Ether: An Investor's Perspective A new report by CoinDesk Research explains how the two most popular cryptocurrencies by market capitalization behave in the market, how their infrastructure differs, and what on-chain metrics say about them.
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