The Breakdown - Polkadot Courts Controversy with Ad Spend

Episode Date: July 4, 2024

NLW brings his perspective as the former Head of Marketing for FTX to this discussion about Polkadot's recent marketing spend. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, July 3rd, and today we are talking about some serious crypto marketing spending. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hey, hello friends. Today is July 3rd, obviously just one day before the July 4th holiday in the U.S., which means that things are a little bit quiet. Today then, I thought it would be interesting to look at two main stories, both of which in some way or another, give us a little bit of a state of play for crypto right now.

We're going to kick it off with the discussion that has been dominating the Twitter sphere, which is PolkaDOT's marketing spend. Given that at this point I have still probably allocated more marketing dollars than just about anyone else in crypto, I thought it would be interesting to dig in and give you my perspective on all of the hullabaloo that has engulfed the X conversation. Now, I have missed this, but many of you, it seems, have noticed a massive wave of advertising for Pocod this year. They've had ad-saturating crypto podcasts. They've been plastered across influencers' Twitter accounts. According to a new Treasury report, Pocod has spent five times more on outreach during the first half of this year than they did in the previous six months. They've spent around 37 million on outreach so far this year,

which includes spending on advertising events and business development. Overall, that represents around 42% of overall expenses, with the next largest portion being 26% spent on development. The advertising budget includes 10 million spent on sponsorships and 5 million on influencers. They've sponsored a race car driver, a soccer club, and they've done private jet branding. Much of this was funded by spending down the Treasury's dot tokens, which presumably added to selling pressure for the protocol's native asset. This significant uptick in spending has raised questions across cryptomedia. Pocod currently has around 245 million worth of dot tokens remaining. Defy researcher Ignis questioned the efficacy and sustainability of their rate of spending.

They tweeted, Pocod spent 37 million USD in outreach during the first half of 2024, targeting new users, developers, and businesses. Yet Pocodot seems invisible on X and elsewhere. In total, Pocod spent 86 million USD in the past six months. At this burn rate, they'll go bankrupt in less than two years. A similar sentiment was expressed in the Treasury report itself, which stated, at the current rate of spending, the Treasury has about two years of runway left, although the volatile nature of crypto-dominated treasuries makes it hard to predict with confidence. This has sparked discussions ranging from a stricter budgeting approach to a change in the

inflation parameters of the system. Fabian Gomp, the CEO of the Web3 Foundation, wanted to correct a few issues with this analysis. The Web3 Foundation is a major stakeholder in Pocodot. Gompfro, it's worth saying a few things here. One, this is not Web3 Foundation spending but on-chain treasury spending voted on by the community. The foundation has more than a five-year runway without selling a single dot. Two, the whole notion of a runway for the on-chain treasury is misleading. The treasury has continuous inflows. It's never going to run out of funds. Three, in my opinion, the treasury should spend its funds on more out-there initiatives not covered by the foundation. Some of the unspent on-chain treasury funds are eventually automatically

burned. I personally agree with the overall sentiment here, though. In the last month, the on-chain treasury has spent too much on what are likely low ROI activities. Polka-dot community, time to vote if you want change. So, before we move on, this notion of a self-funding treasury is worth unpacking a little bit. The treasury received around $32 million from token inflation or staking during the past two quarters. The Pocodt treasury receives around 7% of the total staking rewards for the protocol. This revenue is only dependable if DAQ continues to be valuable in the market. Treasury spending itself could put pressure on the token, making excessive spending even more risky. Dot investor Giato DiFilippi wasn't concerned about the Treasury running out of resources,

stating, the inflation in Pocod is split between stakers and the treasury to ensure that the Treasury will always have money. So it doesn't make sense to talk about money. Still, when it comes to the Twitter discourse, much of what captured attention was the ad spending. Marketing professional Stacey Muir noted that during this time that this spending was going on, there had been a 14% loss in daily active users and a 59% slowdown in new accounts registered. On the flip side, token holders have increased by 15% so it hasn't been a total failure, but not necessarily what you'd want to see from such a big spend. Mure suggested that race car sponsorship aren't useful for user acquisition and suggested that they're

influencer spending wasn't being used effectively. Some others pointed out that ironically, the discourse and controversy around the marketing spending might have been more valuable than the advertising itself. While as Crypto commented, Not going to lie, I took another look at Dot based purely off of the marketing catastrophe going viral. This is an absolute clown world market and this is the biggest media exposure polka dot has seen in months. And to be fair to that point, we here at the breakdown haven't had a reason to talk about polka dot for years, so maybe this was just a way to get and some earn media. Others were surprised by the size overall. Naraj Agrawal, who manages

comms for Coin Center, wrote, I've never seen a crypto company marketing budget before. The Pocodot spend is insane to me. But he also pointed out, blowing the entire budget on marketing turns out to be a great way to get back in the conversation. After all the information was digested, Ignis Wade back in with his opinion, commenting, hot take, Pocod is right to promote via key opinion leader content on X. I believe influencer marketing is the most effective strategy for Web3 companies. They should reduce spending on ads in airports, private jets, and F1 sponsorships and focus more on quality educational content on X. All key users are on X, but they are not dumb. Your product must provide value, otherwise no amount spent will help, as crypto natives won't stick

around. So spend more money on devs, liquidity mining incentives, attracting unique daps, and then invite top KOLs to write on what you have to offer. However, the pricing is an issue. 478.5K per month is extraordinarily high. I know this because I run a defy KOL agency myself. It's easy to criticize these calls on the list, but with 20K per month for a few tweets, they are the ones laughing. Pocodot should change the way they do marketing. Prioritized community and builders, then showcase what you've got to native web 3 users. Hello, friends. Before we get back to the rest of the show, I want you to join me at Permissionless.

Permissionless is a conference for crypto-natives by crypto-natives. And the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the U.S. remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, which will lead to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is a conference for those using and building on-chain products. It's home to the power users, the devs, and the builders.

And what's more, I'm going to be there. The location is Salt Lake City. The dates are October 9th to the 11th, and right now, tickets are just $199. Towards the end of the month, they're going up to $499, and if you want 10% off, use code breakdown 10 when you check out. If you go to the Blockworks website, blockworks.co, there will be lots of information about how to register, and again, use code breakdown 10 to get 10% off. All right, so lots and lots of armchair quarterbacking here. And so of course, I will engage in more of the same. Now, first of all, my perspective. Obviously, if you were a long time listener to this show, you know that I was

before the collapse running marketing at FTX. Keep in mind that at the time, every day Sam would report how much money we were making. In 2022, we had reportedly made a big, billion dollars. Now, as it turned out, we actually had made more like $950 million, and Sam and Nashad had backdated something to make it look like that billion dollar number had been reached. And of course, that was just the tip of the iceberg when it came to sketchy stuff that they were doing with the budget. However, the salient point when it comes to marketing strategy is that for as much as there was that was fraudulent about what Sam and Nishad were doing, with FTX customer money and shipping it over to Alameda, the company was

making serious dollars from, just from trading fees. Now, obviously, we were also spending a huge amount of money on advertising, significantly more basically than any other crypto company has ever spent. Crypto.com gave FtX a run for their money for a while, but we had the stadium naming in Miami. We had ad campaigns with Tom Brady, Stefan Curry, Shohei Otani, Shaquille O'Neal, and of course the Super Bowl ad with Larry David. We had our own F1 sponsorship with the Mercedes team and Lewis Hamilton. And yes, there was very nearly a nine-figure deal with Taylor Swift. So what was the logic behind all of that spending? In what universe could that have possibly made sense, assuming that the money hadn't been fraudulent. And what might it suggest about Pocodot spending?

The goal of FtX's ad spending from basically late 2020 to when the party ended was to radically and rapidly increase our brand awareness, particularly in the U.S. market. Coinbase had a 10-year head start in terms of brand awareness. They were the default number one. Internationally, Binance was the default number one. And so FTX was trying to spend its way to the upper echelons. None of those big strategies were precisely about user acquisition. You don't put your name on a stadium because you think it's going to get you users in the short term. You sign a 20-year deal to have your name on a stadium to become perceived as one of, if not the biggest player in the space.

Same with sponsoring Tom Brady. You don't put a code at the end of those ads hoping that it's going to convert because people pick up their phones as they're watching them. You do it so that everyone calls you the Tom Brady Exchange, which is exactly what happened. The point being that there is a fundamental difference between growth or acquisition marketing and brand marketing. All of these sponsorship things, even frankly, a lot of the sponsorship things that people do that aren't those big deals, things like podcast sponsorships, are fundamentally about brand. They're about associating yourself and borrowing the brand equity of others in order to build

awareness for yourself or your company. Now, many people will disagree with the FTX strategy in general, even holding aside the fraud. But what's important to remember is that FTX was an exchange that theoretically everyone could use. The total addressable market was all crypto users, both internationally and in the US. That is fundamentally different than a token project. The number of potential users of a blockchain in a direct way makes it, in my opinion, extremely ill-suited for this type of brand spend. Plus, frankly, when you get into this sort of brand sponsorship game, you kind of can't do it halfway. You really have to go all in. Because the whole point is having enough saturation to really get multiple touch points with people who then remember your brand

later on. It is an extraordinarily expensive game to play. And again, not one that I think that really almost anyone except the biggest exchanges in crypto has anywhere near the capacity to be able to play. Now, one thing that I agree with is the assessment of a lot of these folks like Igness, who think that for Pocodot's purposes, KOLs are what we used to call thought leadership strategy or influencer strategy, makes a lot more sense. The enfranchised people who do think about whether they're going to spend time and money on Pocodot versus other chains, live on X. They interact with those quote-unquote influencers. From my perspective, I certainly don't think $500,000 a month is a priori too much in the abstract. This is a strategy that can be ROI positive even in the short term.

I think the bigger question are just the efficacy of these resources and what they were paying each individual. I haven't dug in deeply enough to know whether I think they got their money's worth, but it does seem like the overall perception is that there's been a lot of allocation without consideration. In terms of the aggregate numbers, once again, it's all contextual. 37 million sounds like a lot, but that's in the range of what FDX spent on that single Super Bowl campaign, between the production, the talent, the media buy at the Super Bowl, and then the media buy that followed. But again, a token project is not the same as an exchange. And what's more, the environment today is very different than it was two years ago. Two years ago, crypto was finding its way into the mainstream.

Celebrities left and right were getting in on NFTs. There was a broader openness in the public to thinking about and engaging with crypto, and of course the travesties and the chaos of 2022, from Luna running all the way to the collapse and revealed fraud of FTCS, have made that a fundamentally different situation. The markets have come back, but I do not believe that retail investors have. I think that people in general now are much more likely to view crypto negatively and sarcastically and cynically than they were a couple of years ago. If I was still running marketing for a major exchange, I wouldn't be using the same techniques that FTX had been using. The unfortunate reality for people who want to bring crypto back into the mainstream and to

reattract a new set of users is that it's just going to require a long, slow building of trust. You can't get that by slapping your logo on a car, at least not in the short term. My final concern and then the positive side. Without giving any financial advice or commenting on the merits of Pocod in general, I will say that when I hear people say things like the Treasury is never going to run out of funds, or that it, quote, doesn't make sense to talk about money, I am running as fast as I can in the other direction because those things have never in the entire history of the world in any context been true. So it's either misunderstanding, hyperbole, or outright lying in deception. The good news, though, this is a public blockchain community.

You can vote literally or you can vote with your feet. Some of the spend may not have been transparent when it happened, but there's certainly a lot more ability for people who are involved in this community to shape what happens next than, for example, there are in any sort of centralized exchange marketing decision-making. So, if you don't like it, do something about it. Trying to sum up moving away from the specifics of this situation, I do think the fact that this is getting so much concern does say quite a bit about where we are. I think people in general right now are quite worried that the cycle has burned itself out faster than we would have thought or would have wanted. I think people recognize that this bull market looks nothing

like the one before. Sure, Bitcoin is sitting at a higher price, but it feels in some ways on shakier foundations, at least when it comes to general consumer sentiment. The ETFs in institutional demand are pretty much propping up this thing, whereas in the past, market strength in bull markets has always come from retail. Then again, it's summer. We're still only a few months after the having. There are big macro questions which are unresolved. We've got the volatility of a U.S. election happening. There are many reasons that we might discover the feelings that we're all feeling right now do not actually reflect the reality of the situation. Unfortunately, there's no way to know that until time passes. And so, as I have often recommended,

the best thing you can do is grab a hot dog, something called to drink, go to a beach, a lake, or just sit on some grass. Appreciate you guys listening as always, and until next time, be safe and take care of each other. Peace.