Original author:Cookies

Original compilation: Lynn, MarsBit

1confirmations GP Nick Tomaino discusses the investment framework 1confirmation employs with Jason and Santiago at Empire and his papers on user onboarding (not UX people), DAOs, NFTs, RWAs, and stablecoins.

In this article, I highlight the key points made by Nick and give my thoughts while extrapolating some points to identify potential innovations.

The next generation L1 is bullshit

Nick believes that social innovation is more critical. In Nicks view, in order for L1 to achieve new social innovations, there needs to be a radical on-chain governance method/sovereign chain method, in which not only a single chain can be resolved, but multiple application chains for settlement, while mutual connect.

Authors thoughts: Ive been thinking about the concept of governance as a service (disclaimer: this is a very, very simple idea at this stage). This idea stems from several considerations:

• There are many stakeholders involved in governance (protocol founders, protocol operators, and users) and these stakeholders have very different views on what they think might be good for the protocol/themselves

• When we look at the broader picture, the interconnectedness of existing protocols is clear: LST CDP, loan markets, yield farms, and more

From the above two points, I think there is a need for a common platform with common governance indicators. This allows stakeholders to better understand how their choices affect outcomes and preemptively prevents the passage of certain agreement proposals that could affect other partner agreements.

With a common framework in place, it can track protocol data based on proposal history. For example, how the number of agreements changes after a certain proposal is passed. More metrics can be tracked, including user metrics, etc. Eventually, as more and more information is collated into the database, it can be used for backtesting. In the future, new protocols can refer to such backtest results to understand which proposals to roll out, and potentially use the available data to create a simulation framework.

Nonetheless, I believe the starting point has to be some kind of incentive program that addresses the cold start of participation. Thereafter, it becomes a fine-tuning game of slowly removing incentives to maintain market equilibrium.

Solana

Nick gave the example of Solana, where the narrative is clear: (a) cheaper (b) faster. Its intuitive and it makes sense to people, but in the long run it doesnt matter.

Authors thoughts: Nick didnt delve into why it doesnt matter in the long run, but I think its because Solana is a base layer that people dont interact with visibly and tangibly, and I agree with that. Nonetheless, I would say that the advantages brought by the base layer will be present in the application layer, i.e. directly interacting with the user. One example is DePIN, which performs better on chains like Solana because of what it is: fast. So does it really matter in the long run? Maybe maybe.

Cosmos

Then Nick brought up the example of the universe, which so far doesnt seem to have a clear narrative because it doesnt relate to anything that exists. What he calls Cosmos refers to the concept of a sovereign chain.

The stronger the narrative, the further it is from the truth

The truth is subtle and most people dont appreciate nuance. There is a narrative that suggests a lot of people believe something, which shows a lack of nuance and a statement that is far from the truth.

Author’s Thoughts: Is narrative, in some sense, necessary before people can recognize nuance?

Can the best product win?

Santiago brings up the point that sometimes the best product doesnt win. Osmosis, for example, has people like Zaki at the helm, creating a very interesting product that offers a nuanced treatment of the existing landscape. However, there is no BD and marketing team to attract market traction and thus attract product adoption.

When asked how the above phenomenon affects 1confirmations investment thesis, Nick mentioned that he focuses on authenticity, which wins out over time, while aspects like BD and marketing are not as important in the long run , but maybe in the short term terminology products with good BD could lead the way. In terms of authenticity, Nick briefly mentioned, it refers to products that innovate from a social perspective and effectively move the space forward.

Author Thoughts: In the early stages of a new technology, it is often very subtle and not intuitive to the market and users. My belief is that it takes a combination of good UI/UX and BD to attract the first wave of users. Perhaps in the long run the stickiness and usefulness of a truly beneficial product/tech will remove the need for excessive BD/marketing, but that doesnt seem to be the case in the early stages.

This is one of the reasons Ive been looking at whether there are UI/UX automation tools, not only for designing, but also for evaluating user responses to various designs.

Prediction markets: The next market to attract mainstream attention

Jason asked Nick what he thought of prediction markets as a backdrop to the publics disillusionment with institutions. The truth of society used to come from governance and institutions, but in recent years, it has been difficult to find the truth of society. Following this line of thought, a large-scale global hyperliquidity prediction market may be the best way to reveal the real information.

Nick agreed, stressing that markets are fundamentally a better source of facts than media and narratives. This is because prediction markets are not just narrative, the participants are the ones who participate in guessing the outcome, which can bring truth to society.

Authors Thoughts: But how likely is groupthink/peer pressure in this case? People may subconsciously make choices based on what they see/what the majority of the population chooses.

A very interesting point that Nick made was the potential of prediction markets as a business model for creators. This idea originated from the mention of the founder of Polymarket, who pointed out in the paper that the success of NFT is because it provides an excellent business model for creators. The same is true for prediction markets, where each influencer creates their own pool and generates revenue by charging fees.

DAO topic

The question the market has to think about is whether our products will bring speculation and dependence on investment capital beyond the main aspects. Nicks bet on the DAO is for it to grow in human organizations to the point where it allows people from different parts of the world to contribute resources to the same/different organizations. Nick also stressed that he has yet to see a product that makes it easy for people to participate in a DAO.

NFT topic

Nick put forward several points on the NFT vertical field

1. NFT has the potential to become a bigger market than cryptocurrencies in 5 years

• NFTs will continue to grow as an investment class

• More people care about culture than pure finance

• NFTs: The intersection of currency and culture

Author Thoughts: This is a very strange case for how these investment opportunities potentially present themselves. So far, I think projects exploring using ERC-6551 could be interesting as they are investigating nascent design boundaries and may be able to introduce new forms of design.

In addition, defi has been touted as decentralized finance and providing financial services to everyone. The NFT scene is somewhat reminiscent of this, and the traditional art scene is highly restricted.

2. NFT Valuation Framework

Given that there is no cash flow available to value cryptocurrencies and NFTs in a traditional way, someone mentioned how to value them on belief. Nick mentioned that the approach taken in this case is relative valuation, such as Bitcoin vs. Gold, CryptoPunk vs. Dogecoin, etc.

3. Idol drama

Nick quotes Desires are not based on ourselves, but on others. This is obvious with NFTs, when a particular NFT collectible is minted by a celebrity, or even by a well-known person who posts memes of NFT collectibles, it can lead to user demand for that particular collectible A significant increase.

The authors thoughts: It is very similar to the behavior of existing fans. For example, fans tend to go to cafes frequented by their idols. A similar concept can be implemented with NFTs.

4. NFT fragmentation

This results in a transfer of ownership from the stronger hand to the weaker hand. In theory, it makes sense and promotes inclusion, but it will take time to strike the right balance.

5. The future of tokenization for OpenSea?

Santiago asked about the future of OpenSea, given the dwindling market share caused by strong competitors such as Blur. Given that crypto markets with tokens tend to better coordinate users and investors, does it make sense for OpenSea to eventually own a token?

Nick finds OpenSea to be the best product for getting new people into the cryptocurrency space. He acknowledged that there are indeed some crypto-native products that are more attractive to traders due to token incentives. However, he believes that as retail users come on board, OpenSea is well-positioned to attract those users, since other platforms dont cater to mainstream users in terms of how they work and interface.

Nonetheless, Nick finds that empowering user ownership is important for the marketplace and would like to see OpenSea have tokens in the future.

Authors thoughts: OpenSeas dominance may also be related to market cycles:

(a) OpenSea’s market share growth is very significant, assuming it reaches 70%

(b) Competitors enter, causing OpenSeas market share to drop to 45%. OpenSea retains its market leader position despite declining market share

(c) New users enter the field and are attracted to the market leader, which in this case remains OpenSea. This again increases OpenSeas market share

This could be a cycle, and as long as OpenSea remains the market leader, market cycles and the entry of new users will help keep its market share within a balanced range. Can be considered as first mover advantage

RWA topic

Nick said he didnt like RWA very much, and the main reason it didnt work was user demand. Cryptocurrency natives need innovation, but bringing real estate on-chain isn’t exactly innovation. Additionally, RWAs typically require a level of trust and the involvement of a third party, such as an underwriter, to underwrite the borrower/lender.

However, Nick admits that RWA will eventually come into play when everyone gets on-chain and looks to diversify their portfolios. This is when people will start diversifying into asset classes such as real estate.

Authors thoughts: According to the nature of Polaris, it does make sense to expose more people to cryptocurrencies and people want to invest in more diversified and safer assets.

The innovative potential here could be asset management dapps that keep portfolio assets composable. Currently, most DeFi activities do not require KYC, while the opposite is true for users wishing to participate in RWA. Therefore, there is a need for an infrastructure that allows users to seamlessly move from one asset type to another at low cost. Or for example, being able to use assets within the RWA protocol in a Defi protocol, and because of the KYC component, potentially get better terms, such as lower collateralization rates in the lending market.

But the composability features mentioned above may be developed further in the future. The infrastructure layer may mature to allow easy access to defi assets and RWA through a single platform. As mentioned above, asset management dapps may also have a default portfolio that users can invest in, for example, for users with a higher risk appetite, they can choose an asset management dapp that has 80% defi assets + 20% RWA, such as risk Users with lower preferences may choose products with higher RWA percentages.

Nick mentioned that in terms of potential, he would prioritize music NFTs over RWAs. The rationale for this is that it is difficult for people to understand RWA because it is not physical.

Authors thoughts: It may indeed not be physical. However, with current efforts advancing in RWA verticals, including T-bills, users are likely to gain access to RWA in a shorter period of time as they are able to compare their existing activity with theirs. Life. Additionally, as protocols like MakerDAO incorporate RWA into their offerings, crypto natives will also be seamlessly introduced to “new” asset classes that they haven’t had much exposure to before. Ultimately, as both web2 users and crypto natives adopt over time, the RWA, Lindy Effect can build, easing entry for large institutions.

Nick mentioned that the crypto narrative on Wall Street might be something like this: “It’s fun and experimental, but nothing really happens.”

Authors Thoughts: This is where RWA might help, right? When Wall Street analysts get something they already know how to calculate, like MakerDAOs vaults, which contain a decent amount of RWA, and as more RWAfi emerge, it can actually help TradFi adoption.

User experience may not be the answer to attracting more users

Despite acknowledging that smart contract wallets will help with onboarding, Nicks paper on user onboarding still highlights new user behavior. This could come in the form of NFTs, DAOs, both of which give users real ownership.

Stablecoin topic

Stablecoins have a clear PMF as a trading tool, which is currently the main use case, namely use in DeFi protocols. However, we have yet to see stablecoins being widely used as a medium of exchange. For example, NFT can be considered e-commerce in a sense, but they are mostly traded in ETH and SOL.

Perhaps the main reason why stablecoins have not yet taken off as a medium of exchange is the lack of developer tools. The focus is on the issuance of stablecoins, not on creating a good developer experience. Bridge.xyz, one of 1confirmations portfolio companies, provides an API for fintech companies looking to use stablecoins on the backend. Another use case might be a DAO that wants to pay taxes but doesnt want to manually perform the process of interacting with fiat currencies or the banking system. Bridge.xyz can facilitate this process, converting the DAOs stablecoin into dollars and paying taxes through the API-integrated fintech company.