Carbono Insights #76 | Crypto turns everything into a market. Friend.tech, Base, Tornado Cash, royalties, Solana, and perps.

Doldrums used to be as dangerous as storms for sailors in the past. They brought in a different breed of problems, like scarcity, hunger, tedium, and unrest. We keep sailing dead waters in crypto, but the reasons are exogenous: there’s nothing we can do while interest rates continue to threaten to rise, Putin continues to behave like a Bond villain, and China and the US fight their silent economic war.

To be honest, even though the sea looks flat, on board, there’s no lack of activity. As long as crypto remains this unpredictable, it will have my attention. Last week, the spotlight was occupied by the degenerate version of a social media platform. The scalability landscape continues to produce interesting developments, and so does regulation, this time with the Tornado Cash case setting new precedents for the way regulators view the responsibility of developers and community members over decentralized protocols.

In this issue, you can also read about the struggles of royalties in the NFT space (digital artists won’t be happy about this), a question about the likelihood of a Solana return, and an intro to perpetual futures, a crypto-native type of derivatives.

1. Crypto applications | Sell your social persona at friend.tech

Friend.tech became the most exciting thing in crypto since hamster races, which is no heroic feat, but at least it paints the space in a less depressing light. Friend.tech is a protocol-slash-social experiment built on Base (Coinbase’s Layer 2), where a user can tokenize their social media presence and sell shares (called keys, to try to confuse Mr. Howey) to users who get access to a private chatroom in exchange. Imagine buying a key to Elon’s private X profile and being able to sell your share if you see you can make a profit.

For a week or so, friend.tech, and, in consequence, Base, was the epicenter of crypto, generating millions in fees and gigas in tweets.

Friend.tech is a great piece of crypto vision, executed with excellent user experience, especially on the side of asset bridging, and born at an opportune moment. The tokenization of social media identity is an interesting take for the evolution of web 2 platforms. But the execution has been subpar, with tokenomics that misalign incentives and create perverse behaviors.

Crypto is full of projects that were born full of imperfections, though. The buzz around friend.tech has already decayed dramatically, and so has activity and fees. But it will be an interesting precedent for future entrepreneurs.

Scalability | Base and Optimism enter a revenue-sharing agreement

Russian doll recap!

🪆Base is a Layer 2 developed by Coinbase using the OP Stack.

🪆Base is the Layer 2 developed by Coinbase, one of the world’s most important centralized exchanges.

🪆Layer 2s are scalability solutions that attempt to improve Ethereum’s throughput by creating secondary layers that process and bundle transactions and validate single bundles on the mainnet, saving time and costs.

🪆 The OP Stack is the development framework provided by Optimism, one of the leading L2 projects, for any team to develop their own L2.

The OP Stack has already been used by some projects. Using the OP Stack is like borrowing a power tool and simply giving it back. Optimism is not reaping any benefits from the widespread adoption of their framework, other than seeing their toolkit and vision implemented over and over again. Coinbase feels differently. They plan to contribute in a truly meaningful way by sharing their revenue with Optimism and participating actively in its governance mechanisms. Another proof of Coinbase’s commitment to decentralization.

3. Regulation | Tornado Cash devs, indicted

Two of the three founders of Tornado Cash were officially charged by the US Department of Justice with money laundering-related crimes because of their involvement with the mixing protocol. With Alexey Pertsev detained in the Netherlands one year ago, this leaves 100% of the protocol founders in legal trouble.

Roman Storm and Roman Semenov were officially charged with conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business, according to a newly unsealed indictment. Techcrunch

Tornado Cash is a mixer: a decentralized protocol that mixes funds to obfuscate their origins. You input some ETH, with all its on-chain history, you output the same amount, but now with a clean record.

If you want to donate to Ukrainian troops without revealing your sympathies to any potential blockchain sniffer, or if you want to brush your fingerprints from a multi-million hack, Tornado Cash is the tool for you. The latter is the favorite use case of the North Korean hacking collective, the Lazarus Group. This is why back in 2022, the OFAC, the office in charge of financial crime in the US, banned US citizens from interacting with Tornado Cash. Today, US officials have finally charged the developers with crimes. Developers are prosecuted for the use of their software. Reductio ad absurdum says that Microsoft should be charged for providing Excel to drug dealers based on this same logic. Obviously, the Tornado Cash case is much more nuanced, but you get the gist of the defendant’s attorney’s reasoning.

Law enforcement is accusing the tool, not the criminal. This is a Pandora’s Box of legal precedents. The indictment questions the neutrality of developers, even after all the efforts put into decentralization, anonymity, and immutability. It will probably have implications for the way future lawsuits against DeFi protocols and DAOs are conducted.

4. NFTs | OpenSea ditches creator fees

Crypto is the magic potion that turns anything it touches into a market. The most notable contribution NFTs have provided to the world of art is that they’ve turned digital creations into unique pieces. But that has zero relevance from the point of view of contemplation. It only matters when you think about ownership, transferability, and marketing. NFTs gave artists superpowers to access a massive and thriving market of collectors, a new cohort of potential art owners, and a new business model where they would disintermediate some unnecessary intermediaries (unnecessary in the context of digital art). OpenSea, once the major NFT marketplace in crypto, has made secondary sale royalties optional. One of the strongest reasons that brought waves of artists to the NFT space was the ability to collect royalties automatically from every change of hands their art was involved with. But this, which was once one of NFTs major revolutions, has been so short-lived that it’s already sunsetting before digital art has even hatched the egg and made it to the mainstream.

5. Layer 1s | How alive is Solana?

Solana has been so present in my timeline, that I started to think there was a covert marketing operation going on. There were the bombastic announcements (partnership between Solana Pay and Shopify, the platform responsible for 10% of the US e-commerce), the “be happy staying poor”-type tweets, and the data-rich Substack posts. The truth is there are good points in all of these angles. Solana used to be the leading Ethereum killer, and their value proposition was disliked but powerful: cheaper, faster, and generally better unless you care dearly about decentralization. And, let’s be honest, decentralization, like privacy, is something people say they care about, but they ultimately don’t.

The big question is whether there will be room for alternative L1s once (or if) Ethereum-based L2s take off.

In previous bull markets, we used to believe that there would be use cases for everyone.

6. Crypto 101 | What are perpetual futures?

Perpetual futures, as a financial instrument, have their origins in the world of traditional futures and commodities trading. While traditional futures contracts have been around for centuries, perpetual futures, also known as perpetual swaps or contracts, are a relatively recent innovation that emerged in the context of cryptocurrency markets. Historically, futures contracts have been used in agriculture and commodities trading to manage price risk. Farmers and producers could use these contracts to lock in prices for their crops or goods, providing a degree of price stability in inherently volatile markets. Similarly, speculators could use futures contracts to bet on the future price movements of these commodities. The concept of perpetual futures, where a contract doesn’t have a fixed expiration date, is a departure from the traditional futures model. In traditional futures, contracts expire at predetermined intervals, and traders must either settle them by taking physical delivery of the underlying asset or rolling over the contract into a new one.

Learn more about perps with this “Cartoon Guide” by Paradigm.

And understand funding rates, the secret sauce of perps, with this long post on X