Smart contract code is supposed to be immutable once itās deployed on blockchain, but in practice, you can create smart contracts that āmetamorphoseā into something else.Ā (Imagine turning a token-staking contract into a token-stealing one, for instance!) Since this could undermine trust in web3 decentralized systems, a16z crypto engineering not only shares how the shape-shifting works, but also built a tool to analyze smart contracts for such āmetamorphicā properties. While some metamorphic smart contracts may elude detection (or the detector could raise false positives), this tool is a useful first step for builders to understand and build on. learn more about metamorphic contractsĀ /Ā use Detector toolĀ
2. Zero-knowledge information sharing through āzkDocsā
Sam Ragsdale, Dan Boneh
Most blockchain transactions are public by design, but this can make them less favorable for relaying private information to institutions. For example: Does your mortgage lender getting your pay stubs really need to know all those detailsā¦ or just verify that your salary actually meets their loan requirements? This is where zero-knowledge proofs ā which allow us to cryptographically prove facts about information without revealing what the information is ā come in. a16z crypto engineering (& research) demonstrates how zero-knowledge-enabled documents could improve on traditional, error-prone, inefficient verification workflows ā while preserving both privacy and decentralization. learn more about zkDocsĀ /Ā watch demoĀ
3. What can web3 (& other) organizations learn from the history of democratic governance?
Porter Smith, Andrew Hall
web3 has created a new “laboratoryā for democratic governance ā through widespread experimentation; fast iteration cycles; and unprecedented digital participation and blending of civic and corporate, public and private. To date, however, web3 governance has overly relied on direct democracy, leading to low participation and concerns about weak oversight, interest-group capture, and group decision-making. But these are also the same challenges societies and organizations have experienced for millenniaā¦ So thereās lots of room to borrow best practices from the history of governance (drawing on bothĀ research, and observations of these systems in practice), to build more effective systems today. read article on āLightspeed Democracyā hereĀ
4. Decentralized creativity & collaboration
Rob McElhenney, Chris Dixon, Sonal Chokshi
āDecentralized mediaā and ādecentralized content creationā are hot topics, but what does this really mean, how would it work in practiceā¦ and does it even need web3?! In this first live taping of our podcast ‘web3 with a16z’ ā featuring special guest andĀ longtime writer, actor, executive producer Rob McElhenney (Itās Always Sunny in Philadelphia,Ā Mythic Quest; Adim) ā we discuss decentralized creativity, collaboration, community; managing writerās rooms, creator access; IP and NFTs; metaverse, storytelling across mediums; favorite TV shows, nostalgia, and more. listen to the episode here
5. Some books weāre reading this summer
Covering everything from algorithms, cryptography, markets, and system design to time travel, space, food, and philosophy ā hereās a list of readings that members of the a16z crypto team are personally reading and recommending this summer. Whether youāre looking for vacation reads for education or for entertainment, whether you prefer non-fiction or fiction (or science fiction!)ā¦ thereās something on this list for everyone. check out the list here
Smart contract code is supposed to be immutable once itās deployed on blockchain, but in practice, you can create smart contracts that āmetamorphoseā into something else.Ā (Imagine turning a token-staking contract into a token-stealing one, for instance!) Since this could undermine trust in web3 decentralized systems, a16z crypto engineering not only shares how the shape-shifting works, but also built a tool to analyze smart contracts for such āmetamorphicā properties. While some metamorphic smart contracts may elude detection (or the detector could raise false positives), this tool is a useful first step for builders to understand and build on. learn more about metamorphic contractsĀ /Ā use Detector toolĀ
2. Zero-knowledge information sharing through āzkDocsā
Sam Ragsdale, Dan Boneh
Most blockchain transactions are public by design, but this can make them less favorable for relaying private information to institutions. For example: Does your mortgage lender getting your pay stubs really need to know all those detailsā¦ or just verify that your salary actually meets their loan requirements? This is where zero-knowledge proofs ā which allow us to cryptographically prove facts about information without revealing what the information is ā come in. a16z crypto engineering (& research) demonstrates how zero-knowledge-enabled documents could improve on traditional, error-prone, inefficient verification workflows ā while preserving both privacy and decentralization. learn more about zkDocsĀ /Ā watch demoĀ
3. What can web3 (& other) organizations learn from the history of democratic governance?
Porter Smith, Andrew Hall
web3 has created a new “laboratoryā for democratic governance ā through widespread experimentation; fast iteration cycles; and unprecedented digital participation and blending of civic and corporate, public and private. To date, however, web3 governance has overly relied on direct democracy, leading to low participation and concerns about weak oversight, interest-group capture, and group decision-making. But these are also the same challenges societies and organizations have experienced for millenniaā¦ So thereās lots of room to borrow best practices from the history of governance (drawing on bothĀ research, and observations of these systems in practice), to build more effective systems today. read article on āLightspeed Democracyā hereĀ
4. Decentralized creativity & collaboration
Rob McElhenney, Chris Dixon, Sonal Chokshi
āDecentralized mediaā and ādecentralized content creationā are hot topics, but what does this really mean, how would it work in practiceā¦ and does it even need web3?! In this first live taping of our podcast ‘web3 with a16z’ ā featuring special guest andĀ longtime writer, actor, executive producer Rob McElhenney (Itās Always Sunny in Philadelphia,Ā Mythic Quest; Adim) ā we discuss decentralized creativity, collaboration, community; managing writerās rooms, creator access; IP and NFTs; metaverse, storytelling across mediums; favorite TV shows, nostalgia, and more. listen to the episode here
5. Some books weāre reading this summer
Covering everything from algorithms, cryptography, markets, and system design to time travel, space, food, and philosophy ā hereās a list of readings that members of the a16z crypto team are personally reading and recommending this summer. Whether youāre looking for vacation reads for education or for entertainment, whether you prefer non-fiction or fiction (or science fiction!)ā¦ thereās something on this list for everyone. check out the list here
There has been tremendous reduction of wealth in 2022.Ā A lot of this has to do with the reversal of easy monetary policy.Ā In the U.S. the Federal Reserve is withdrawing liquidity and reducing M2 money supply.
Across asset classes, there has been no safe place to hide in 2022.Ā Most asset have negative returns, with the exception of energy stocks and a few value stocks with strong cash flows.Ā This shows the market sensitivity to discount rates. Some assets with long-maturity cash flows, like tech stocks (NASDAQ) have particularly come under pressure.
There is a clear common factor across markets in 2022, which is monetary policy.Ā The Federal Reserve has been extremely aggressive in tightening.Ā We believe this is due to a fundamental policy error in 2021.Ā The Fed was late to recognize the growing inflation problem.
Capital will be more scarce as financial conditions are tightened.Ā We believe that this will be a severe drag on growth.
Even before the monetary tightening, growth was slowing.Ā This will likely transfer in lower cyclical inflation.Ā However, āsupply sideā inflation might continue to persist, as monetary policy cannot address these issues.
Our view is that inflation will persist above the Fedās 2% target.Ā Inflation may have peaked, but will likely remain structurally higher going forward.Ā We expect roughly 4-5% inflation in 2023.
There is a toxic mix emerging for policy makers of high inflation, declining real incomes, and slowing growth.Ā Consumer confidence has crashed.
The employment market has remained relatively strong.Ā Consumption patterns indicate that the consumer is spending their excess savings from the pandemic and adding more debt.
As a kid, most of us were attached to our favorite stuffed animal, blanket or another inanimate object. Weād carry it wherever we went. So much so, that it became part of our then identity.
Throughout our lives, our physical possessions become associated with our identity. You might be known for your collection of Marvel Cinematic Universe DVDs or baseball cards. You can prove theyāre yours and take them with you wherever you go.
But, this isnāt the case in todayās internet because you donāt technically own any of your digital assets.
In Web2, true ownership does not exist, only leased ownership.
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What is a Digital Asset?
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To put simply, a digital asset is content that is stored electronically. So images, audio, videos, word documents, e-books, in-game items, domain names, or someoneās account can be considered digital assets.
The real question is: who owns these digital assets?
Answer: Not yours. Itās the platforms that you use.
Ownership in Web2 is a Myth
In Aaron Perzanowski and Chris Hoofnagleās study, āWhat We Buy When We Buy Nowā, they found that 83% of people think they own digital goods in the same way they own physical ones ā free to do as they please with it. Free to lend it, sell it, or give it away.
But the truth is, you donāt own any of your digital assets.
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There are two reasons ownership is a myth in Web2.
1. You borrow digital products on the internet.
When you lease an apartment, itās clear that you donāt own the apartment. So you know that it cannot be sold to another person. Similarly, when you have a subscription to a platform like a streaming service, you understand that you donāt own any of the movies or tv shows.
But, what about when you buy digital products?
If you ever ābuyā a song from iTunes music, an e-book from Amazon, or a movie from the Microsoft Store, you donāt actually own them. You just purchase a license to access them. One that is revocable by the company at any moment or permanently lost if your account is deleted.
The ābuyā button for digital products is deceptive.
When you create a social media account like Instagram, you borrow the right to use the account in exchange for all your data. Do you remember when Facebook renamed itself āMeta?Ā News storiesĀ discussed how Thea-Mai Baumann, an Australian artist and technologist, had the Instagram handle @Metaverse. On November 2nd, 2021, it was disabled around the same time Facebook rebranded. This was a decade of her lifeās work that disappeared. Luckily, she got her account back, but this isnāt always the case.
Although most of your accounts online are free, you end up paying by giving up your data.
Thatās not right.
You donāt own the digital assets you ābuyā nor own the āfreeā ones either.
True ownership means that your digital assets are not at the whims of the platforms.
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2. You cannot transfer ownership.
When you own the Marvel Cinematic Universe DVDs, you can decide to switch to becoming a DC fan and sell or give away your MCU collection to someone. You have the power to transfer ownership to them.
You canāt do that in Web2.
When you buy an ebook on the Kindle, your book is bound by both the platform, Amazon, and your account. You buy the license to use it and donāt even know. Itās because Web2 companies want consumers to stay attached to their platform within their walled garden to maximize profit. So if you finish reading the ebook, you canāt let your friend have it unless they have access to your account.
Like in the real world, you should have the power to transfer ownership as you see fit!
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Hereās a simple formula for ownership of your digital assets.
True Ownership = Proof of Ownership + Transferability of Ownership
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Web3 unlocks this formula for you.
Web3 Enables True Ownership of Digital Assets
We are living in the Digital Industrial Revolution.
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In Web2, the commercial goals of the largest internet platforms are at odds with their most essential contributors ā their users.
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We can envision a world where ownership of the internet is distributed. Ownership in Web3 means that the contributorsāĀ builders, operators, and usersāĀ own a piece of what they use.
Thanks to Web3, digital assets are recorded on the blockchain, so you can prove ownership. Also, you can transfer ownership of digital assets to someone else through secondary marketplaces or direct exchanges.
Since you can prove ownership and transfer that ownership, you gain true ownership of your digital assets in the next iteration of the internet.
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There are three digital assets that are currently revolutionizing ownership online.
1. Cryptocurrencies and Tokens
A cryptocurrency is a digitally-native currency that is secured by cryptography and operates on the blockchain, which makes it impossible to counterfeit or double-spend. Because cryptocurrencies are built on blockchain technology, there is a distributed ledger across disparate networks of computers that keeps up with each transaction.
Cryptocurrency can feel like a vague term. So letās clarify.
A cryptocurrency is the native asset of a given blockchain. For example, some popular blockchains are Bitcoin, Ethereum, Cardano, and Avalanche, and their native assets (cryptocurrencies) are Bitcoin, ETH, ADA, and AVAX, respectively.
The distributed ledger allows you to prove ownership of your cryptocurrency (e.g. ETH) on the blockchain (Ethereum).
There are numerous ways to participate in any blockchain. You can be part of an NFT project, fund a Decentralized Autonomous Organization (DAO), or use decentralized applications (or dApps).
Most NFT projects, DAOs, and dApps have their own native token, which can be used to interact with them. For example, Bored Ape Yacht Club is an NFT project based on the Ethereum blockchain. The project team created a native token called ApeCoin, which was given to the NFT holders, ultimately transforming into a DAO. ApeCoin is a token used as both a governance token to vote on the direction of the project and used as a utility in its future ecosystem.
Since ApeCoin is a token on the Ethereum blockchain, you can:
Prove ownership on the Ethereum blockchain
Transfer ownership of the token by buying, selling or gifting.
The contributors become owners in Web3.
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2. Non-Fungible Tokens or NFTsĀ
NFTs are one-of-a-kind, verifiable digital assets on the blockchain. It canāt be replaced with something else.
The use cases for NFTs are endless.
NFTs make it possible for gamers to own in-game items, have real estate in a metaverse, contribute to their favorite artists and much more!
Imagine if Stan Lee made the Marvel comic books into NFTs when he and the team started. You could read the comic books and have ownership early in its conception. Or, what if you listened to your favorite artists before they went mainstream. If they released their songs or album as an NFT, you could not only own the digital album, but prove you were a fan before everyone else was.
NFTs unlock the ability for true ownership of digital goods.
NFTs are an evolutionary step toward Web3 adoption as content online is increasingly created, operated, and owned by the users.
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3. NFT Domains
In the future, internet users will own digital property.
Matt Gould, Co-Founder and CEO of Unstoppable Domains states, āThere is going to be a massive development around the amount of property and around the amount of stuff people own online over the next few decades.ā
The Unstoppable Team believes your digital assets should be associated with your digital identity. But, in Web2, application silos make it impossible to own your holistic digital identity.
Domains in Web2 could have been a solution, but even domain names became a prime example of leased ownership. For example, the Top Level Domain (or TLD), .com, is owned by VeriSign. When you ābuyā a .com domain name, you pay a registrar like GoDaddy. That registrar pays VeriSign to register your domain. After that, you must register and pay on a yearly basis.
A domain name should be your digital property that you own, not something you rent.
In Web3, itās possible.
Say hello to NFT Domains.
At their simplest form, NFT domains are a digital name (example: Matt.nft) that exist as NFTs on the blockchain. They are unique to you and are stored in your wallet to provide special benefits that go far beyond traditional domains. It is a name to login everywhere you go. A name to pay and get paid with. A name to prove ownership of your data and digital assets.
I sometimes get asked what has surprised me about my move from TradFi to crypto. One thing I didnāt expect is that I miss sell-side research.
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The research produced by investment banks is easy to dunk on: The price targets usually donāt work out, there’s a lot of noisy maintenance notes, and you have to know that hold means sell, and sell means run for your life.
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But Iāve worked with a lot of investment bank analysts, and they were universally smart, ethical and trying their best to be right.
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Sorry, cynics, but there is no conspiracy to inflate markets with bullish analyst reports.
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Nowadays, I get most of my information from Twitter, which is starting to feel like a conspiracy toĀ deflate markets.
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The sentiment on the bird app is so overwhelmingly bearish at the moment, itās hard to imagine it could get any worse.
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Which means it can only get better?
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I know it doesnāt work like that ā sentiment was awful in 2008, and markets turned out to be even worse.
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But itās also unusual for Mr. Market to let everyone be right. So, maybe itās time to at least consider the radical possibility that markets could, maybe, by some dumb luck, goĀ up?
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I was reminded that there is a non-zero chance of that while listening to a podcast by RBC, whose US strategists have trimmed their year-end target for the S&P all the way down to 4,700.
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Thatās higher than now!
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Most of you cynics will scoff at the idea that the market could finish the year higher (let alone at a new all-time high), but, with my aforementioned respect for sell-side research, I was happy to hear that there is still a sensible bull case to be made for risk assets.
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I found it relatively convincing, as well.
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In short, the bull case rests on the possibility that the US economy avoids recession, which is what RBC expects: Their economics team sees real GDP growing 2% this year and about 1.5% next.
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That seems a little optimistic, especially if the Fed shifts into full-Volcker mode tomorrow. But itās notĀ impossibleĀ ā which is interesting, because the market seems to be putting a zero percent probability on that not-impossible outcome.
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RBC notes when net bullishness on the AAII survey is below 10% (itās well below now), stocks are usually up more than 9% seven months out and more than 15% 12 months out.
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That may not even be the best case scenario: Coming off of growth-scare lows (2010, 2011 2015/16, 2018) recoveries tend to be āfast and furious,ā with the S&P returning to pre-crisis highs within four to five months and finishing 25% higher just seven months out.
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We may be at a growth-scare low!
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Probably not, but imagine if we were back to all-time highs in five months. That would mess some people up ā which is generally Mr. Marketās favorite thing to do.
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Will Crypto Ever Go Up
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What would a surprise rally in equities mean for crypto?
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On the one hand, the price action in crypto looks pretty conventional: BTC has outperformed ETH and DeFi 1.0 has outperformed DeFi 2.0.
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That, to me, looks a lot like the S&P outperforming Nasdaq and old tech (INTC, IBM, ORCL, ADBE, CRM) outperforming spec tech (ARKK).
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On the other hand, I don’t see the current crop of altcoins outperforming in a recovery in the same way youād expect high-beta equities to outperform low-beta equities.
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The 2022 sell-off in tech equities is not a particularly scary one. Iām confident that the likes of Apple, Amazon, Alphabet, Microsoft and many more will be great businesses for a long time to come, irrespective of what their stock prices are doing.
