Good Evening [%first_name |Dear Reader%],

Welcome to this week’s edition of Tokenised.

The craze surrounding non-fungible tokens (NFT) has slowed down a bit since last year, but the Bored Ape Yacht Club remains an outlier. The firm behind ape jpegs that have sold for millions of dollars has raised bumper funding rounds, and recently, conducted a sale of virtual land (I’m not kidding) that earned US$320 million. 

In many ways, the ape frenzy is reminiscent of what happened with digital cats in 2017. But I believe it also points to a deeper problem. 

That’s what we’re looking at in this week’s edition. And now that a second country has granted bitcoin legal tender status, we’ll also check in on how El Salvador’s experiments seem to be going. 

Let’s jump right in.

Kitties, Apes, and the illusion of artificial scarcity

[Source: Bored Ape Yacht Club]

In economics, scarcity is defined as a situation where the demand for something exceeds its supply. It’s a straightforward concept that powers pricing and related aspects of production, but what happens when you impose the same concept on thin air? 

Well, typically, not a lot of good comes out of it. 

On Sunday, Yuga Labs—the firm behind NFT collection Bored Ape Yacht Club—held a sale of virtual land for its yet-to-be-built metaverse. All told, the sale netted Yuga Labs YS$320 million and crashed the Ethereum blockchain, which was unable to handle the demand associated with the auction. 

There’s quite a lot of things to unpack here, but let’s start with this startling fact. By the time the auction for 55,000 parcels of virtual land ended, users had paid US$123 million in transaction fees to get their purchases processed by Ethereum. That’s a fee-to-value ratio of close to 40%. 

In some cases, users even paid between US$6,500 to US$14,000 to buy virtual land that was selling for a flat rate of US$5,800.

[Source: ParikPatelCFA/Twitter]

Now, I am no one to judge people for throwing money at abstract, intangible items that they value, but these things are at least scarce, right? Like, a limited supply will perhaps function as a floor for their value? 

Turns out, the answer is not really. In addition to bestowing no commercial rights, Yuga Labs has reserved the right to create additional virtual land as and when they see fit. Because why wouldn’t they? 

In many ways, the ape mania is reminiscent of what happened with digital cats back in 2017. The Cryptokittties project became immensely popular, choked ethereum, and has since disappeared from popular imagination. Oh, and it also migrated to a blockchain of its own called Flow, developed by Dapper Labs—the firm behind the project itself. 

Yuga Labs, too, has hinted at the possibility of a similar blockchain shift sometime in the future. 

Source: Yuga Labs/Twitter

So, to sum it all up: A company created ape images and earned millions selling them. Then it launched a token of its own that has a market cap of US$4.1 billion. It sold virtual land that could only be bought using said token. But now, it seems like it’ll have to make a blockchain of its own to get any of this working smoothly. 

All of this money just sloshing around with no real use case or utility emerging out of it. 

Back in October, when I started writing this newsletter, I acknowledged that there was a strange sense of irony in the fact that our climate-focused newsletter, Green Margins, shared the day with Tokenised—a newsletter about a sector notorious for sucking up capital and energy. 

Nothing highlights that irony better than Yuga Labs right now. It’s a project that is fueled by venture capital and is cashing in on the frenzy, and it’ll probably work out well for early-adopters on the money end of things. But is it also a sign of the times when cartoon apes find it easier to raise money than green energy tech? 

The answer’s a depressing ‘yes’. Or as a report from The New York Times put it: 

With that, let’s turn to some other things that happened in crypto this week. 

Crispy bytes

• Singapore’s crypto regulations must be strict and clear, according to Ravi Menon, the head of the country’s central bank. [Bloomberg]
• Panama has passed a bill to authorize and commercialize the use of crypto-assets in the country long-known to be a global tax haven. [Reuters]
• The Central African Republic has become the second country to grant bitcoin legal tender status. [BBC]
• Warren Buffet, a longstanding critic of crypto-assets, reiterated his skepticism last week noting that he wouldn’t buy all the bitcoin in the world for US$25. [CNBC]
• Investment bank Goldman Sachs and crypto exchange Coinbase executed the bank’s first bitcoin-backed loan, with Coinbase receiving an undisclosed amount of dollars collateralised by the cryptocurrency. [Bloomberg]

What caught my eye this week

Over six months after adopting bitcoin as legal tender, El Salvador is no closer to solving its woes. 

While ambitious plans to raise US$1 billion had raised limited hope among some investors, the country is yet to raise a single penny from that offering. Its old-fashioned bonds, meanwhile, are trading at about the same premium as Ukraine and Sri Lanka—a country rocked by war and one dealing with a severe economic crisis, respectively. 

With rising public debt, soaring prices, and not a lot of solutions in sight, El Salvador’s bet on crypto might just end up as a moonshot that fails to reach escape velocity. 

That’s all for this week’s edition. If you have any overarching thoughts (or even nitpicky ones) about this newsletter, please do write to me at [email protected].

I’ll see you again next week. Take care!

Regards,

Jaspreet Kalra