The Breakdown - Tokenized NBA Contracts & The Hunt For Crypto’s Killer App

Episode Date: January 13, 2020

Starting today, accredited investors will be able to part of $13.5m in tokenized bonds connected to the contract of Brooklyn Nets Point Guard Spencer Dinwiddie. The first-of-its-kind offering took months of negotiation with the NBA but marks a seminal moment for both crypto and the larger idea of Income Share Agreements.  In this podcast, we discuss how big a deal Dinwiddie’s offering is and whether Income Share Agreements could be a breakout use case for crypto. We also discuss other contenders for “crypto killer app,” including undercollateralized DeFi loans and NFT-based games. Finally, we discuss whether crypto’s actual killer app has already arrived - in the form of using bitcoin to escape local political and economic controls.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Monday, January 13th, and today is a narrative watch around income share agreements tokenization and the hunt for Crypto's Killer App. So this was inspired by the fact that today is the long. of Spencer Dinwiddie's tokenized bond for his NBA contract. So Spencer Dinwiddie plays for the Brooklyn Nets. He has been working to tokenize his contract for months now. And after tons of negotiation and really kind of unfortunately a neutering of what he was going for, he has been

able to push forward a tokenized bond on Ethereum that represents something really interesting in the context of how fans might relate to athletes and just we think about the way that people participate in the success of others around them. The other part of this, though, is that on this morning's Masari Newsblast, Ryan Selkis wrote about why income sharing agreements might be an early contender, one of the contenders over the next few years, for a killer app for crypto. So today I'm going to talk about what killer apps are, this specific context of income share agreements and Spencer Dinwiddie. And then finally we're going to look at some other contenders for quote crypto's killer app, specifically Bitcoin. And we're going to ask about whether in fact

the killer app is not these aboveboard mass adoption use cases, but the simple ability to use a non-debassable non-state money in situations where otherwise you would be hamstrung by the local political or economic reality. So that's what we're going to do today. And to start, let's kick it off by exploring Spencer Dinwiddie's contract and his tokenized bond on Ethereum. Okay, so first let's talk about what Dinwiddie originally wanted to do. And this is Lawmaster, aka Larry Sermak from the Block, put it really succinctly and really well. He said Spencer's original design was to tokenize 40% of his 34.4 million three-year contract, which included potential bonuses, for example, for making the playoffs, as well as a player option for his third year.

Most of the upside came from the player option. If Dinwiddie opted out of his third year in 2021 and negotiated a more lucrative contract with his or another team, investors would collect the difference between the original contract and the new one. Further, this is still Larry's analysis here. This could have effectively led to the creation of real fantasy sports. Investors could bet on the upside of the last year, and players' value could freely trade on the open market based on how the player performed. It would tie price to performance. So that was the original idea.

The problem was that there were a lot of hurdles. The NBA really didn't like this. In their estimation, this was a version of gambling. They effectively said that we're not going to allow you to do this, and we will potentially threaten your contract. They threatened termination of his contract if he continued without approval. So they went back to the drawing board and continued to persist. And what they came back with is what is theoretically launching today.

there's a couple pieces that it changed. One, they had to remove the player option. Now, that was the part that was the biggest potential upside. So that's obviously a big deal. Second, the offering is restricted now through Redd to only accredited investors. So the way that the mechanics will actually work is he's selling a $13.5 million dollar tokenized bond, 90 tokens each being sold for $150,000. So the token sale will last for the next month or so. It starts today, ends February 10th. The tokens won't be tradable for the first year. They'll earn 4.9% interest. The token holders will paid on a monthly basis, and the full principle will be paid at maturity. Now, the other parts of this to just incentivize participation, because obviously a lot of the

big financial upside and the big teeth were taken out of it by the NBA is an experience component. Dinwiddie said that if he makes it to the All-Star game and his tokenized bond is actually gone through, he takes eight investors with him as part of the token holder experience. He's also promised to give Bitcoin to all of his teammates. And so that's kind of the upside now is a little bit more experience-oriented than just strictly speaking financial. But the reality is that this is obviously for Spencer, and I think for a lot of people watching him, clearly a step one. He tried to do something big, bold, and totally different, had to do something that is still pretty friggin different, let's be clear, but which is within the confines of

something that the NBA finds comfortable, that the existing legal apparatus finds comfortable. But Dinwiddie has even in tweets made it really clear that he intends to continue to push this and that he wants it to be the type of thing that everyone can participate in, not just accredited investors. So going back to Ryan Selkis and Masari this morning, he wrote a post called Shoot Your Shot Dinwiddie, and he starts it by saying, quote, I'm convinced one of the top killer apps crypto will mainstream in the years ahead is the tokenized income share agreement. Okay, so what is an ISA? ISA is something that's been talked about for decades, but the buzz around it has increased, right? Particularly in Silicon Valley, there's much, much more interest in this

for a variety of reasons. Effectively, an ISA securitizes part of your future income stream and trades it for cash up front. It's effectively an alternative to debt. So the places that you're starting to see a lot of interest in this are vocational programs like Lambda School, where instead of incurring a bunch of debt, students that go through the program agree to pay a fixed part of their income over a fixed period of time or a percentage of their income over a fixed period of time. So if a lot of the focus so far, though, has been on the education use case of ISAs and trying to get out of the kind of debt model, which is hamstringing an entire economic livelihood of a generation right now, Ryan is effectively arguing in this piece that this sort of high-profile celebrity ISA equivalent could really jumpstart that whole industry, right? So he says the fact that the contracts are huge, so it's easier to bootstrap liquidity and interest in the instruments.

Second, that the contracts are fixed in length, so there's more no ability around that. And since careers are relatively short, the payback timeline is short, which makes it a more appealing investment option. And then there's this other element that is more about the way that fans engage with their favorite athletes. This is something that Arjan Balaji, who's an investor at Paradigm, also brought up when he posted about this last week, where he said that basically over the last 15 years, we've seen a decoupling of fans from teams and focus on just the relationship with individual players.

And he was kind of pointing to LeBron James as a pioneer in this. And that fans are starting to follow their favorite players, not just their favorite teams. This is a natural extension of that where basically super fans get bought in on a deeper level. So effectively, this is all to say that this sort of action potentially mainstreams the idea of ISAs. But then the question is, where does this tokenization come in? and why does crypto matter? Well, let's turn to an article by probably the Silicon Valley investor who's thinking honestly the most about ISAs, who's Eric Torrenberg.

Eric Torrenberg wrote a piece last year called Life Capital, and he's talking about the entire history of ISAs. If you're interested in this, you should go check it out. But he comes to the point about why crypto. And he says, crypto can securitize so much more than we currently do. In essence, we can tokenize ourselves in all future income. Once these personal tokens exist, they can be traded instantly anywhere in the world with infinite divisibility.

Arbitragesers and professional traders could create new financial products, i.e. ISAA aggregations and buy, sell with each other to price things to near perfection. So the point about this is that once you introduce tokens, you create a radically different profile for the market. We're basically market efficiency mechanisms kick in, and instead of it just being a different form of charity or a different form of debt, you actually create entire new economic networks around it. That's why this tokenization piece of it seems so interesting, right? This is an area potentially where it's not tokenization for the sake of tokenization.

tokenization potentially answers some of the challenges of ISAs, including liquidity, price discovery, et cetera. So what do I think? I think that ISAs are going to be a part of the conversation over the next couple years. I just, I can't imagine that it's not. We're looking for solutions to issues like student debt. And there are lots of them. There's lots of ways to attack this problem. There's kind of the popular Democratic candidate answer of making college free, different structural changes in the nature of education, in the form of how people get trained and what they do. There's this sort of ISA. I think it's going to inevitably be part of the conversation. I also can grok how tokens potentially create more efficient markets around this, how the tokenization aspect is actually relevant and important,

It's not just some random thing from people who are looking for a purpose for tokens, but can't actually solve problems. Now, how that will bear out in reality and whether the beneficent and useful mechanisms of tokens are how it actually plays out or whether it in fact becomes just another category for kind of abuse and rampant speculation, I think is a much different question. But I can grok that this is why people would be interested in tokens in the context of ISAs. I think another point worth mentioning is just the extent to which the sports domain is becoming a leader in kind of pushing the ideas and the actual assets in the digital asset space to the mainstream, right? You have Russell Elkung who's in the NFL wearing Bitcoin or BitPay server, BTC pay server cleats and is just screaming about it on Twitter every day. He's hosting conferences. He's getting his teammates on Periscope to talk about it, just really spreading awareness in a big way.

You have obviously Spencer, who's going to the next level and actually getting people to participate in a real financial and tangible way while also evangelizing. So that's really interesting to me to watch just what it might do for this sector that so many athletes are seeing these tools, these cryptocurrencies as tools for asserting control over their own careers. But I also think we should note that ISAs aren't the only place that people are looking for killer apps. So going back to the idea, what is a killer app? A killer app is an technology application that drives mass adoption of a technology. So basically, it's an application that's so valuable to people that they're willing to go figure out how to use a new technology in order to get it. So the Netscape browser is often cited as the first killer application of the internet.

Napster is often cited as one of the early killer applications for the internet for people to do p-to-p file sharing. Obviously, social networks were radically killer app in terms of bringing people onto this new Web 2.0 apparatus. When it comes to mobile, obviously photo sharing in the form of Instagram was a huge, huge driver. So these killer applications are things that take hold in the mainstream and drive people to adopt new technology because they want to be able to participate in that thing. We talk about killer apps in the context of crypto because often it can feel like a technology

in search of demand, right? A technology in search of a need, a technology in search of adoption. Most of the people who are into this industry, it has to be said, are still really, really early adopters. That creates a certain amount of insularity where a lot of us think similarly. And it's funny sometimes, given how vicious the tribal battles can be, that so much of the disposition of participants in this market is still shared, at least compared to the rest of the markets. So what are the other places that people are looking in crypto for killer applications? Well, one that I heard a lot while doing the breakdowns end of year recaps in 2020 predictions was the idea of undercollateralized loans on D5. Obviously, at this point, we're

now really familiar with over collateralized loans. We're seeing a lot of permissionless loans in the form of these different lending platforms. Now people are trying to figure out how to do under collateralized lending in a permissionless way. The idea here is that if people can figure it out, it is potentially game-changing. To allow people to access the resources they need outside of kind of a predatory centralized structure seems like a really valuable goal, especially when you see the abuses. Now, there are huge, enormous challenges for that. In fact, this weekend, there was a massive and kind of very intense debate kicked up by Taylor Monaghan from the CEO of My Crypto, who was also one of our guests actually on that breakdown end of your podcast about the challenges

of decentralized identity and how it can turn into a surveillance system really quickly. So under collateralized loans on defy are something that people are extremely excited about, but there's a huge number of unanswered issues. Another area where people are looking for this idea of a killer app is NFT-driven games. So NFTs non-fundable tokens are basically unique digital assets. So whereas in the context of digital monies, you want every token to be equivalent to every other token. You want them to be fungible. The idea of NFTs or non-fungible tokens is that you actually want that uniqueness as a property, right?

And so where this comes to bear is in context like games, where you want people to be able to own their own digital assets. You want people to be able to do missions in the game and collect unique things that have value because they are unique. you want people to be able to then control them, right? Not subject to the rules of the game. There's a famous anecdote about Vitalik and how effectively, because of a decision from Blizzard who owns World of Warcraft, Vitalik lost a huge amount of effectively the digital representation of his effort overnight because of some decision, and it taught him the evils of centralized decision-making, and that was a very inspiring moment.

So now what's happening with a new generation of game designers is that they're saying, well, what would the opposite look like? If you were able to actually own, truly own your digital assets, you could do things like sell them in secondary markets in new ways. You could create secondary markets for valuable assets. So you could actually create more economic activity that is currently allowed. You could have a different level of collectability, right? If a certain card was used in a huge tournament, some collector could actually buy. that actual unique cryptographically verified, unique digital asset. And so on and so forth. There's a lot of other use cases of NIFTs or NFTs depending on what parlance you go with.

But the point here is that people are really excited about this because it's something that has no equivalent in the digital world. Digital assets are defined by their replicability, right? So this potentially offers something really different here. Again, you have a challenge of, you sort of have to have an experience underlying NFTs, I think, in terms of like a game experience, that justifies the reason that people would care about why they're unique in the first place. So I think that that's one where we can't put the cart before the horse. You have to have the experience in the environment that creates the demand for the NFTs. But still, it is in this category of people looking for killer applications for crypto.

Here's the real rub. The question is whether crypto is the type of industry that is going to or needs to have a killer application in the same way other technologies have. So this is a question that I think was stirred up most recently and in the biggest way by Jill Carlson's end of year post for Coin Desk, which she titled, or actually, to be fair, the Coin desk editor is titled, Cryptocurrency is most useful for breaking laws and social constructs. And I'm actually just going to jump to her last sentence because it really captures the whole thing. To judge cryptocurrency based on mainstream adoption is to judge it on a metric it was

never designed to achieve. And effectively, what her argument is, is that the real killer application for cryptocurrencies is to allow people to transact in ways that would otherwise be censored by local political regimes or local economic mores, basically. the real value is in those transactions, which previously could not have happened otherwise. Now, this kicked up a lot of dust because people reacted. They almost had PTSD of fighting for five years or whatever, the narrative that Bitcoin and cryptocurrencies were just drug dealer money or terrorist money. They were just for black market activity, right? And that's not really what she was saying, although certainly inevitably,

those types of activities are a part of a technology that enables otherwise. censorable transactions to go through. She was talking more about places that have political instability where this allows people to opt out of the local economic structure. So this is a hugely important point. And I think my take on this, and maybe the place that I want to leave this conversation today, is that I think that this industry is really starting to outgrow the label that we have put on it as a single industry.

One of the things that I saw come up over and over again about Jill's post is that if she was just writing about Bitcoin, maybe it would have made sense. But in the way that she framed it, it lumped in so many other things, these defy use cases, these NFT use cases that have nothing really to do necessarily, or at least only little to do with otherwise censorable transactions, and are much more about new opportunities that simply weren't possible before, new software development paradigms, new ways to think. about economic design. I found over and over and over again in my conversations over the last couple months that the ability for this moniker of the crypto industry to encompass all of these

different things is just getting harder and harder and harder. There is overlap. Obviously, the underlying technology flows into all of these different use cases, what it enables flows into all these different use cases. But I do think to some extent we're starting to see the necessary balkanization of these different aspects of the industry, right? And it's not just based on the chains or the underlying protocols. It's based on what they're trying to do. Bitcoin is trying to do something different in many ways than what Ethereum is trying to do. Defi is trying to do something that is different and bigger than just Ethereum in some ways. Dow's are trying to do something that has, in some context, little to do with what any of those other parts of the industry

are trying to do, although, of course, there's overlap. The point of this is that as industries mature, smaller parts within that industry also mature into their own complete units, right? Their own complete communities, their own complete networks with different understandings of what they're trying to achieve. I think we're starting to see that. So when we talk about crypto-killer applications, I think we need to be precise in our terms and actually start to understand that we may be moving to a world where cryptocurrencies,

and digital assets are actually working on lots of problems simultaneously and running in ways that are perhaps parallel but diverging rather than converging to some singular thing. So I think this is a fascinating narrative to look at throughout 2020. Obviously, we've got the whole aspect of income share agreements and what that might mean and the future structure of our economy and just how big an impact that could have on it, especially in the context of student debt. But there's this question when it comes to crypto of killer apps, which I think is going to continue to come up, right? We've got the mass adoption conference, massive adoption coming up in February.

The whole point is to ask this sort of question. So I think you're going to hear more about it this year. For now, thanks for hanging out and listening to my little take on it. I'll be back tomorrow with a normal, here's the news, here's what it means, type of breakdown. But until then, thanks for listening, and I will catch you soon.