Welcome to the Block & Mortar newsletter! Every week, I bring you the top stories and my analysis on where business meets web3: blockchain, cryptocurrencies, NFTs, and metaverse. Brought to you by Q McCallum.

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(Photo by Clint Patterson on Unsplash.)

Tremors in the layer cake

Crypto never runs out of drama. In recent months we’ve witnessed the SEC’s increasingly tense relationship with Coinbase, the FTX bankruptcy proceedings (running as a backdrop to the SBF trial), the Montenegro arrest of Terraform Labs co-founder Do Kwon (which has just been cleared for extradition)… And two weeks ago, Binance CEO Changpeng “CZ” Zhao’s $4 billion settlement with the US Department of Justice.

(Side note: CZ still faces up to 18 months in prison because Binance allegedly skirted anti-money laundering laws. Then again, he’s also semi-credited with kicking off the collapse of FTX and the trial of Sam Bankman-Fried. Hopefully the judge will keep that in mind and reduce the sentence?)

Friends who aren’t in the web3 space see these headlines and ask me: “just what the hell is going on with that stuff? Is it all falling apart?”

Fair question. I start by explaining that the term “web3” describes a layer cake:

• The base layer is blockchain, the distributed, tamper-resistant ledger.
• Sitting on top of blockchain is decentralized finance (defi), a version of banking and trading that uses cryptocurrency constructs instead of traditional contracts.
• Then you have an application layer of NFTs and DAOs, which leverage defi mechanics to express membership, access, ownership of goods, or voting rights as tokens.

That breakdown lets us explore each layer on its own:

Blockchain? That layer is here for the long run. Defi was the first major use case, but it’s entirely possible we’ll find others. Some groups are already experimenting with blockchain for supply chains, for example.

The application layer? This one also shows promise. NFTs have taken root in some high-profile loyalty programs (notably, Starbucks Odyssey) and are used by big-name fashion houses.

Defi? Hmm … To use everyone’s favorite relationship status, it’s complicated. Defi is the part of web3 that most directly competes with incumbent solutions. Heavily regulated incumbent solutions which represent deeply entrenched interests by sector participants. Defi, by openly waving its “hey come over here to where there are no rules” flag, was always going to face the toughest road over the long term. (Those 2022 Super Bowl spots, which were an unwitting prelude to Crypto Winter, didn’t help.)

Back to my friends’ questions: is web3 falling apart? I don’t think so. Defi – the layer most closely associated with the term “crypto” – is going through some pains as regulators define clearer boundaries. That will scare away some of the outright scammers and will make the field less exciting for the gamblers.

But that’s just defi. Disturbances in one part of the layer cake shouldn’t cause much of an issue in the others. In fact, defi’s regulatory pains may just give the blockchain and NFT layers more room to grow.

Putting that power to good use

Last week I shared a link about a court in Poland uncovering a hidden crypto mining rig on their premises. That’s small potatoes compared to the Kingdom of Bhutan, the government of which has purportedly built a sizable crypto mining infrastructure.

When it comes to crypto mining, finding GPU cards is hard (especially now that generative AI is a big deal) but finding cheap, plentiful electricity is even harder. Thanks to its sizable hydroelectric power system, Bhutan has access to tons of as-good-as-free electricity.

The kingdom used to sell excess power to other nations; now, it’s using that power itself for crypto mining. To give you an idea of the size of their crypto operation, they’re also importing power from other countries.

Does this seem odd to you? Replace “electricity” with “money” and try again. When you have extra cash lying about, you can loan it out to people and make money on the interest. When you get a hot stock tip, though, you’ll divert your spare money into that investment. And if you have enough faith in that stock tip, you’ll even borrow cash to improve your returns.

Bhutan’s approach is also a different way for a government to be bullish on Bitcoin. Instead of adopting it as the nation’s currency (see: El Salvador) they can mine it and sell the proceeds. Doing it this way keeps the nation’s day-to-day economy isolated from Bitcoin price drops while still leaving the government open to the upside gains from price jumps.

And since Bhutan already has access to electricity, their greatest risk is the cost of the mining infrastructure. Should crypto take a turn for the worse, they can pivot all of that tech to become a generative AI provider.

We’ve seen this before

In the year since generative AI became popular, we’ve seen it chip away at a variety of professional roles. The latest example involves a company using generative AI to create synthetic models because it couldn’t deal with (human) influencers’ egos. Fair enough.

Zooming out, the big reason to favor virtual brand ambassadors over real people is the risk. I wrote about this last year, in relation to a virtual music group Kingship:

When a label backs a band, or when a film studio backs an actor, they’re investing in high-profile people with real lives and real personalities. It’s entirely possible that there will be some messy story in the press. The scandalous love affair. The shocking drug habit. The old, racist tweet rant that somehow slipped through the nonexistent due-diligence exercise.

[…]

[The virtual band members] only have the life and personality that they are given. They only “exist” when and where the company wants them to. They can’t get into trouble.

People are messy. People have backstories. Even someone with a relatively clean history may go awry in the future. So when you put a real person’s face on your product, you are crossing your fingers that they don’t do (or haven’t already done) something that’ll damage your reputation.

This is the tour that never ends

Closely related to synthetic models, we have virtual representations of real people.

Remember when model Eva Herzigová digitized herself, such that her avatar could participate in photo shoots in her stead? Rock band KISS has followed suit: they ended a five-decade run this past weekend, but announced that digital avatars will play on.

Hats off to their hustle. It feels like KISS was on its “farewell tour” for ages, right? Now that their digital versions can continue to work, they’ll keep earning money. I wager this will exhibit stronger revenues than, say, relying on sales of old albums.

The wrap-up

This was an issue of Block & Mortar.

Who’s behind Block & Mortar? I'm Q McCallum. I've spent the past two decades in the emerging-tech space. And I'm very interested in web3 use cases.

Credit where it's due. Big thanks to Shane Glynn for reviewing early drafts. Any mistakes that remain are mine.

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