Good morning, and welcome to Protocol Fintech. This Wednesday: Razzlekhan’s crypto world, Layer 2 as the answer to high NFT fees, and Apple’s new Tap to Pay iPhone feature.
Off the chain
Is cringecore a thing, and is it a thing you need to know about if you’re in tech and finance? Maybe so, if the story of Heather Morgan has crossed your desk. Morgan, one of two people charged with stealing $4.5 billion in bitcoin, is a Forbes columnist, tech entrepreneur and straight-up rapstress who goes by Razzlekhan. She and her husband, Ilya Lichtenstein, were arrested Tuesday in connection with the 2016 Bitfinex hack. You can have a good laugh at her videos, but it’s a reminder of how so much of the crypto world emerged from the extremely online culture of the past decade. Take Tumblr blogs, YouTube reply videos, some Lamborghinis and add a whole lot of money, and … if you can figure out what that adds up to, more power to you.
— Owen Thomas (email | twitter)
The NFT fees are too damn high
NFT fees are sky-high, and that’s a problem for the long-term growth of the industry. The fees come in many forms, but the most common complaints are about gas fees, the term for transaction fees on the Ethereum network. The high fees are in part a symptom of success: The more people who use the Ethereum network’s limited capacity, the more it costs to push a transaction through.
“The best analogy for it is: There’s a train, and a whole bunch of people want to get on it. There’s only so many seats, and there’s more people who want to get on it. So they pay more for that seat.” said Dorian Banks, CEO of Looking Glass Labs, an NFT design company.
Fees, fees everywhere. There are a variety of fees with NFTs; “gas fees” can mean different things.
- There are fees for getting ether in the first place, if you’re starting with different cryptocurrencies.
- There are often fees for buying or selling an NFT on a marketplace. OpenSea, the largest NFT marketplace, charges 2.5% per transaction. Others, like SuperRare, charge more. OpenSea also allows creators to charge up to 10% as a royalty fee. Meanwhile, a growing new marketplace, LooksRare, is charging 2% per transaction.
- And there are fees for minting, or creating, a new NFT, which can pose an obstacle for creators. OpenSea allowed people to mint an NFT for free, but the vast majority created that way ended up being fake, plagiarized or spam.
- OpenSea is the single largest generator of gas fees. When I spoke to Banks recently, gas fees were about $500 per transaction. He noted that $100 for a transaction is considered cheap now.
Layer 2 networks are an increasingly attractive alternative. These networks process transactions on top of Ethereum, bitcoin or other so-called Layer 1 chains and add them to the core blockchain later in the bundle.
- Polygon is the largest at the moment, with its sidechain on the Ethereum network, Banks said. GameStop and Gary Vaynerchuk are using Immutable X, a Layer 2 network designed for NFTs. These transactions happen for pennies instead of hundreds of dollars. GameStop is promising no fees for NFTs.
- A coming upgrade, Ethereum 2.0, is designed to reduce gas fees by moving to proof of stake instead of proof of work. That will make lower-cost NFTs more popular and greatly increase the quantity of NFTs, Banks said. Right now, cheaper NFTs don’t make sense if the gas fees are almost as high as or higher than the NFT price.
- Meanwhile, there are also a variety of other Layer 1 blockchains that are faster and offer cheaper fees, and therefore cheaper NFTs.
- But cheaper NFTs can also increase chances of fraud. Some sophisticated NFT buyers prefer Ethereum-based NFTs because there is less chance of fraud and “rug pulls” than on other Layer 1 networks, Banks said.
Some question whether the NFT market needs to pay for gas. A number of companies have tried to obscure gas fees, get rid of the need for a crypto wallet and otherwise make buying NFTs simpler.
- Dapper Labs’ NBA Top Shot allows users to pay with a credit card and not have to ever touch cryptocurrencies. It charges 5.26% of the purchase price plus a flat $0.30 for each purchase to cover credit-card fees and other costs. People can choose to pay with crypto, but they’ll have to cover the gas themselves.
- Separately, Dapper charges a 5% fee for sales on its secondary marketplace.
- Others, such as Nifty Gateway, have offered a credit card option for purchasing NFTs.
- Coinbase has a deal with Mastercard for its upcoming NFT marketplace which will let people buy NFTs with Mastercard debit or credit cards in fiat currency.
NFTs require a blockchain, but not cryptocurrency. They’re often confused, because NFTs emerged from the crypto world as a proof that blockchains could be used for more than just financial purposes. And because OpenSea has become so popular and it chose Ethereum, unpredictable and expensive gas fees have become part of the NFT experience for many. But these are all technical and operational choices. And the industry can make different ones. It may have to if it wants to break into the mainstream.
A MESSAGE FROM PLAID
The open finance era has arrived as 9 in 10 Americans report using fintech apps and services, up from 30% last year. Download our whitepaper to explore the ways open finance is changing the lives of consumers and how your institution can benefit from this shift in customer behavior.
On the money
On Protocol: The DOJ recovered $3.6 billion in bitcoin from the 2016 Bitfinex hack. The couple, who allegedly stole 120,000 BTC, worth $4.5 billion, face charges that carry prison sentences of up to 20 years.
Mitsubishi UFJ is issuing a stablecoin tied to the Japanese yen. Considered the biggest bank in Japan, Mitsubishi UFJ intends to use the digital currency to streamline its settlement process.
Kazakhstan might up its electricity taxes for crypto miners by 335%. The proposal, made by Marat Sultangaziyev, Kazakhstan’s first vice minister of finance, also includes taxing mining equipment.
A House hearing did not shed much light on stablecoin regulation. Treasury Undersecretary Nellie Liang, the sole witness for the hearing, said that there needed to be a regulatory framework for stablecoins. Members of the House Financial Services Committee appeared skeptical.
Stolen crypto is a significant source of revenue for North Korea’s nuclear missile program. A report by the United Nations Security Council and Chainalysis found that there were at least seven attacks on crypto exchanges and other firms, with $400 million worth of crypto stolen.
Stripe and Shopify tap in to Apple
Apple unveiled its contactless payments feature through iPhones Tuesday, a move that could simplify and expand acceptance of in-person, phone-to-phone payments.
Tap to Pay on iPhone, the NFC-reading hardware feature and supporting software, will be available soon for developers to integrate into their services, the company said. Apple isn’t involved in processing the payments and can’t read the card numbers transmitted to a phone. Stripe will be the first payment company to offer the service, and will provide these payments for Shopify’s point-of-sale app this spring. The move could also boost Shopify’s efforts to offer more in-store payments and shopping services.
Though some jumped to characterize the feature as a “Square killer,” Apple’s payments feature only replaces the card readers Square provides, not a full-featured point-of-sale system or other business services. But it could enable Square competitors — like Stripe and Shopify — to compete more effectively for in-person retail transactions.
— Tomio Geron
A MESSAGE FROM PLAID
How can financial institutions accelerate their open finance journey? What are common misconceptions to avoid? What should I make of pending regulation? Discover the answers to these questions and many more in Plaid’s guide.
Just one question for Claudia Kolonas, co-founder of Pluang
Kolonas is co-founder of Pluang, an Indonesia-based savings and investment app which recently raised $55 million in a funding round led by Accel.
What’s been your biggest professional blunder, and how did it help you?
One thing that I have learned time and again is the negative impact of slow decision-making in a business. Prior to being a founder, I was working in my family business, operating in the traditional financial services space. I handled all kinds of projects, from new initiatives to turnaround projects in various sectors, from lending to asset management to insurance companies.
One of my biggest professional blunders involved my indecisiveness on firing during a turnaround project. The key lesson for me is people rarely change, and when things don’t go well in businesses, in my experience, nine out of 10 times it is people-related. As a leader, the key is being decisive and moving fast to remedy a management problem before it worsens. My indecisiveness cost us a lot of money and also resulted in low morale for those working in the company, which subsequently resulted in a talent drain.
Thanks for reading — see you tomorrow!