In this Fanning the Flames episode, Neel Saunshi joins Yvette Bohanan to discuss a very hot topic in the industry – NFTs. Tune in as they break down smart contracts, what’s happening behind the scenes, and examples and applications for how this technology is being used to disrupt various industries. ㅤ
Yvette Bohanan:
Hi everyone. This is Yvette Bohanan, one of the partners at Glenbrook and co-host of Payments on Fire. Along with George Peabody. Today, we’re doing a special Fanning the Flames podcast for you. A short format of our normal podcast series that we do. With me today, instead of George is Neel Saunshi. One of my colleagues here at Glenbrook and someone who is intently focused on the area of digital currency systems, cryptos, stablecoins, Central Bank digital currencies that are getting a lot of attention. And one of the things that we talk about often in our workshops and our education material is NFTs, non-fungible tokens, which are getting a lot of press these days, mostly because of a bunch of bored apes. We’ll look into that in a moment. Neel, welcome to Fanning the Flames.
Neel Saunshi:
Thanks Yvette. I’m really happy to be here.
Yvette Bohanan:
It’s always great to be talking with you about this area. It’s so fascinating and it’s changing constantly. So just trying to keep up what topics are relevant has been interesting so far. Non-fungible tokens and the rise of non-fungible tokens. What is an NFT? Let’s start at the beginning for our listeners.
Neel Saunshi:
Sure. An NFT is an acronym that stands for non-fungible token. What this means is that it’s a unique token that is prescribed to a contract. So when you hear the term smart contracts and NFT is actually a smart contract. A smart contract is actually a business logic in solving a physical contracts problems. Now that might be a little confusing. I know for some of our listeners.
Yvette Bohanan:
Problems are like execution of the contract.
Neel Saunshi:
Yeah, execute.
Yvette Bohanan:
When should something happen?
Neel Saunshi:
Yeah, exactly right.
Yvette Bohanan:
Between two parties.
Neel Saunshi:
Okay. It’s interesting because a smart contract, this is the first time we’ve actually seen the ability for logic computer codes like what if and else statements to actually be used to provide a service in the real world. So that means that both parties have to say yes to the contract, and if they say, yes, there are rules that happen, whether there’s a bad actor in that process, or there’s not. It’s a very simple process. You sign on both users agreed to the contract, but no user can get out of the contract unless the other user decides that’s applicable.
Yvette Bohanan:
Okay. It’s a binding sort of situation between two counterparties or two end parties. They’re bound by logic, this, if-then-else logic based on data. Data from a source outside of the blockchain distributed ledger environment. And when this data is input into the logic, things happen on the chain, things happen on the ledger, “money moves” or “value passes” or “ownership” of whatever that is transferred from one party to the next. NFTs are just a form of a smart contract. It’s sort of like they’ve been branded or marketed, right? As a token. What are some examples of an NFT out there today?
Neel Saunshi:
In the early days, there weren’t many NFT applications, but in today’s world, we’re actually seeing a lot. Let’s start with the first concept of decentralized finance. This is also commonly known as DeFi. These are smart contract between two parties that want to borrow and lend their cryptocurrencies or any form of digital currency for that matter. They want to borrow and lend it. And they’re earning interest almost a 10% APY or 20% APY. Some of these rates are a little ridiculous in today’s world. And then on the other side of it, you actually have something called decentralized autonomous organizations, also known as DAOs. These DAOs are a new way to create a smart contract between who is actually running the organization, who has what say in the organization, and the roles and responsibilities are actually codified within the contract to make sure that the organization is able to stay afloat. This is the concept of making an organization as decentralized as possible while still having some form of governance.
Yvette Bohanan:
Okay. So it’s how governance is implemented in a digital currency system.
Neel Saunshi:
Exactly.
Yvette Bohanan:
We always say there’s rules. These smart contracts have a lot of the rules in them about how things work to begin with, theirs processing and obviously the technology, the blockchain, or the distributed ledger and all the stuff that goes with it is the messaging that we’re talking about. Governance has kind of been one of those tricky things. And now, we see these DAOs forming, which are a form of smart contract to give it a sense of governance to something that’s oftentimes very decentralized, where it’s the permissionless environment that people talk about all the time. Okay. One example of this could be, how does a smart contract? How does an NFT kind of materialize to say a content creator, a musician, an artist out there, because these things are starting to become the backbone in a sense of what we’re calling web three. Let’s look at musicians, how would a musician use an NFT to make money?
Neel Saunshi:
Sure. Let’s say, I am JayZ and I have produced a new album. I want to attract all the listeners to my album, but as of right now, I have to go put my album on Spotify. Spotify is actually taking a good chunk of change out of my hard work, right? To provide me listeners for my new album. But let’s say I have a big following and a fan base, and I want to reach out to them directly. What an artist like Jay-Z could do is create an album as an NFT and provide that ownership to their constituents that are the actual listeners behind it, so ownership could be divided. Whereas if a user or listener wants to listen to or own a Jay-Z track, he could do that and actually earn a royalty out of it.
Yvette Bohanan:
Wow. Okay. Big pause here. I thought that pretending you were Jay-Z was like the stretch. I’m totally wrong. Of course, the stretch is this, “I’m Jay-Z and I’m willing to give my listeners, who’s not only a personal listening experience, which we get all the time when we listen to music, but I’m willing to give listeners a piece of the action.” They actually own this. You get the royalty, because you are a follower. You are a loyal fan. I’m giving this directly to my fan base to profit, not to the typical people in the value chain for music.
Neel Saunshi:
Exactly.
Yvette Bohanan:
The distribution and the production and all those folks out there that normally get compensated. This is a big deal. This is not just music. This is any content creation. We’ve often talked about the personalization of payments, the personalization of finance, the disintermediation of a value chain and web three fundamentally is saying, we’re going to figure out how to make this possible. This is huge.
Neel Saunshi:
Exactly. This all comes down to the ownership, right? If you want to see my data, you have to pay me for it. And that’s an interesting part about it. We’re kind of going back to the web one model of what the internet was supposed to be, but we haven’t reached that point yet. I think we still have a long way to go.
Yvette Bohanan:
Okay. We have this branded thing called a non-fungible token. It’s essentially a smart contract. It’s set to disrupt things. Disrupt kind of even the more current versions of value chains like in streaming. Like you’re saying, not just sort of the way they used to press music back in the day in the ’50s and ’60s, this is disruption of the current state. Okay. What could possibly go wrong? What do we see happening with things when we bring it into sort of the realm of the payments world? A lot of folks ask us about identity and can NFT smart contracts, this new technology help with identity? What are we seeing in that space?
Neel Saunshi:
It’s interesting. So because NFTs are unique, smart contracts, it kind of provides a basis for a unique identity. Just like how everyone in the world has, right? Everyone has a unique identity. Having an NFT based on an identification is actually beginning to take shape. There’s been two different projects. One is Cardano or also known as ADA. And then you have Civic, which is a company that has a coin that runs on the Ethereum. Blockchain. Cardano is actually looking at identity from an education perspective. They’re putting new graduates and the education sector on their blockchain and creating identities for all their students. This is actually happening in the Republic of Georgia. What we’re seeing is for universities, employers who are doing background checks, verifying credentials, they’re finding it a lot easier to verify identities of their students by having an NFT tied to the blockchain and the smart contract being used in real time. So that’s one side of it.
Yvette Bohanan:
Okay. The source of truth there for the data is the university system itself. They’re feeding into this and then the owner of the token is the person that graduated or whatever.
Neel Saunshi:
Exactly.
Yvette Bohanan:
The matriculated student.
Neel Saunshi:
Exactly.
Yvette Bohanan:
Okay. You have that with you essentially probe. You can pass it around or share it, so that other people can validate that you really do have that degree.
Neel Saunshi:
Exactly.
Yvette Bohanan:
Or you really did take those courses. Interesting. Okay.
Neel Saunshi:
It’s yeah. It’s a fairly new concept. We’re still seeing the initial days of it.
Yvette Bohanan:
What about Civic?
Neel Saunshi:
That’s an interesting part. Civic is actually on the other side and they’re focused on the business to business solutions. They’re trying to create an identity solution that can be used for businesses as an identity verification process. This is for businesses that are using this concept of decentralized applications, so also known as dApps. So when we talked about DAOs, DeFi artworks, musician royalties, these are all part of the dApp ecosystem or decentralized application ecosystem. Civic is trying to provide these businesses that are trying to use these protocols in their day to day business with identity metrics, to prevent fraud, and also allow KYC/AML procedures in real time. They’re slowly getting into the space. There hasn’t been as much demand as one would’ve expected, but I think this is the first inklings of how businesses and even these blockchain protocols are thinking about utilizing NFTs for the future.
Yvette Bohanan:
Okay. One of the biggest B2B domains out there is cross-border B2B global trade. One of the things that people are always trying to figure out is how can I do business with a small local provider? How can I source with someone who doesn’t have a Fortune 500 reputation or Fortune 1000 reputation out there, would this help with that? Do you think?
Neel Saunshi:
I think it would. I think the reasoning is because right now there’s a lot more unbanked people than people assume out in the world, right? There’s a lot of people that don’t have identity. They’re not connected to the traditional system, as we assume it here in the United States. There’s actually a big opportunity for these decentralized applications to make or take a market share away from the traditional incumbents. The cost of doing this is much cheaper. The identity is unique so that the contract itself could have models built around it that protect it, but also make sure that only certain stakeholders are able to see certain data points, right? This whole idea behind privacy can be implemented in these NFTs, which is really interesting. And then on the other side of it is, it’s actually easier for a lot of these institutions to be able to verify the identity in real time. Right now, you would have to go through multiple third parties and that process takes time. But with this, it’s potentially possible that the identification could all happen in real time in the real world.
Yvette Bohanan:
That’s pretty powerful. People are always asking us about the implications of this technology to identity solutions. So glad to see some motion here. It’s kind of interesting. What are the broader implications? If we kind of zoom out for a second, I’m thinking about, well, obviously revenue generation, I’m starting to imagine a world, where I got to choose my custodian very wisely, right? Because I can’t remember where I put the car keys yesterday.
Yvette Bohanan:
Here, I’m going to have all of this information and all of this ownership and participation and contracts because as a consumer, as an individual, and as a business, you sort of creating a whole new function here of monitoring all of this stuff and managing it. And then you have the risks associated with who’s your custodian? What chain are you working in? Is that chain vulnerable in any way? This is all new technology. We see the vulnerability sort of popping up here and there on a daily basis almost. This is still fairly nascent and it has to get hardened from a controls perspective. When you think about different risks, especially with the gravitas of some of the stuff that’s out there that could be managed through the technology, but there’s a lot of upside potentially too, right? So, where are you landing here? Is this a good thing? Is this not a good thing?
Neel Saunshi:
I think it depends on who you are. So if you are the musician, you’re the artist, you’re the writer, this is fantastic. You will be able to get your money, what you’ve created. A lot of that is right now, given two third party middlemen. This application is actually beginning to take shape in real time where musicians can actually give their royalties to their listeners or they can even get the royalties themselves that they want to do so. Everything is between the artists and the listener, the user, the writer.
Neel Saunshi:
This ecosystem is kind of taking out the middleman. For musicians and artists, this is great. This is fantastic for some businesses like maybe Spotify or SoundCloud. This might not be the best platform for them, because they may actually lose a revenue share. That’s coming out of these new applications. There’ll be new decentralized apps that come out in the future that provide cheaper service that is more cost effective for both musicians and the consumers that can actually make it so that everybody’s getting paid, what they’re worth. No one is feeling dissatisfied. I’m not sure if you know this, but in the music industry, there’s been a lot of turmoil since the early ’90s. Now, there’s been different models in how to monetize music, how do artists get paid? And so, for the first time we’re seeing that maybe there’s a potential solution coming out in the future.
Yvette Bohanan:
Maybe some compensation for some of the original content that was produced back in the ’50s and ’60s that’s been used as well. So yeah, there’s a lot to think about just in one industry and if you multiply that out, that can be pretty simple. We’re also seeing regulations, which often don’t quite keep up with technology kind of starting to have a little bit of an impact here. So it’s a little bit of yeah, go out there, do something cool, but make sure you’re aware that there are even regs on the book and laws that they can invoke if they don’t like what you’re doing. There was a recent example, right? On June 1st, all heck broke loose here from something that happened to OpenSea. What happened?
Neel Saunshi:
This was interesting. One of the OpenSea executives actually got charged with anti-money laundering and they got charged with anti-money laundering in connection with the scheme for insider trading. This was interesting because that means they knew of the NFT before it was on the OpenSea marketplace and they’ve bought it before the NFT was sold to the public. So that’s technically insider trading.
Yvette Bohanan:
That is insider trading. It doesn’t matter if it’s a digital token or what a piece of stock. It is what it is, right? It’s insider knowledge.
Neel Saunshi:
Exactly.
Yvette Bohanan:
Interesting. So things can still-, just keep in mind folks don’t get over your skis here on the stone. So knowing the regulations and keeping up with the regulations as they evolve and come out in this space is going to be really important because contract law, right? There’s just a whole lot here. The uniform commercial code, I’m out on a limb, I’m not a lawyer, but you know, I can just imagine the things that are going to start to be turned over and looked at and examined in light of the new technology and the new use case, the new models and the contracts themselves have to be reestablished and rewritten, right?
Neel Saunshi:
Exactly.
Yvette Bohanan:
We have a lot of change occurring here from this basic notion of a smart contract at NFT to watch for.
Neel Saunshi:
It’s interesting that we may even see some NFTs as securities because of the way they’re built and created, because if there’s someone who’s willing to buy an NFT and he, or she assumes that they’ll profit from it, that might be concerned in an NFT. So we may see different categories of NFTs and different regulating these from a different perspective.
Yvette Bohanan:
Interesting. There’s tremendous nuance. We always say that it’s going to be difficult being a regulator because we usually don’t say our hearts go out to regulators that often. But if we have some empathy here, because there’s tremendous amount of nuance based on how the technology is deployed and it’s almost there’s an infinite combination is what it feels right now of how the technology can be used. And so, how do you distill that down into something that’s a solid regulatory framework that you can kind of future-proof, right?
Neel Saunshi:
Exactly. Yeah.
Yvette Bohanan:
And that you can modernize what we have in place with what we need going forward. So it is going to be bumpy, I think a little bit bumpy.
Neel Saunshi:
That’s for sure.
Yvette Bohanan:
And fun to watch. And so, I’m sure we’ll be talking more in the future, but until then, Neel, thank you. This has been delightful as always.
Neel Saunshi:
Same here. Thank you so much.
Yvette Bohanan:
And folks, if you have a question or a topic you’d like us to take a look at relative to payments identity, payments risk management, you can always send us an email at Payments on Fire, and at Glenbrook.com. And we’ll see if we can incorporate it into a future podcast until then. Thanks everyone. Take care and do good work.
