A conversation with Web3 art collector, investor and DAO co-founder Derek Edward Schloss. Derek was an early advocate for the economy that has grown around the collecting of digital art. He is the co-founder of Collab+Currency, a crypto-focused venture fund that made early investments in companies like SuperRare, Art Blocks, Async Art, Metaversal, Rarible and PROOF. He is also a founding member of the ultra-exclusive crypto-art-collecting Flamingo DAO, which boasts the world’s most valuable collection of NFTs. In the conversation, Derek discusses the assessment of value, his love of generative art and the inner workings of an art-collecting DAO.
Craig: [00:00:11] This is Art Sense, a podcast focused on educating and informing listeners about the past, present and future of art. I'm Craig Gould. On today's episode, I speak to Web3 art collector, investor and DAO co-founder Derek Edward Schloss. Derek was an early advocate for the economy that has grown around the collecting of digital art. He's the co-founder of Collab+Currency, a crypto focused venture fund that made early investments in companies like SuperRare, Art Blocks, async art, Metaversal, Rarible and PROOF. He's also a co-founder of the ultra exclusive crypto-art-collecting Flamingo DAO, which boasts the world's most valuable collection of NFTs. In the conversation, Derek discusses the assessment of value, his love of generative art and the inner workings of an art collecting DAO. And now, a case for Web3 optimism with collector and investor Derek Edward Schloss. Craig: [00:01:15] Derek Edward Schloss, thank you so much for joining me today on the Art Sense podcast. Derek, you have your hands in a number of things from Collab+Currency to Flamingo DAO. If you sit down next to somebody at a dinner party and they start asking you what you do, how do you where do you start to describe to them what you have your hands in? Derek: [00:01:46] That's a really great question. I guess it would depend on who I was talking to and what I think they would be most interested in. I would say the bulk of my work today is done in the Web3 space. So I'm an investor. I run a fund called Collab+Currency. We're on our third fund. That fund was activated in 2018. First fund was 50 million, second fund was 65. Third fund, which we've activated and we're closing shortly, is probably going to be close to 85 million. We are consumer Web3 investors, so we look at the technology stack of blockchain technology. We understand that that design space fairly well and intuitively, and we've now moved far enough up the stack to the application layer that sits on top of this technology where folks can start creating applications that affect consumers in the same way that consumer applications affect the hundreds of millions of people that interact with them in Web2 over the last two decades. And so our view is that when we look at things like trust minimized ledgers and blockchains, that same phenomenon is now able to happen because of the work that has been done over the last decade refining this technology. So our thesis is very much consumer Web3. We invest in things like NFT marketplaces or consumer applications and Web3 or protocols or platforms where we think there's a chance where in the future hundreds of millions of people can interact with the application that we've invested in. So we've invested in in over 100 projects over the last four or five years. Derek: [00:03:37] I'm also a very popular art collector in the blockchain space, so I invest in what's called NFT art. We can talk a little bit about what the NFT is and what that unlocks for art that sits on top of blockchains. But before we go down that rabbit hole, I'll also say that I'm a founding member of a number of DAOs. So this is decentralized autonomous organizations. It's essentially a way to coordinate governance or value flows or decision making through people all over the Internet in a legally compliant way. But using blockchain as the rails and digital assets as the vehicle that travels throughout to be able to make decisions quickly. In the case of the DAOs that I'm a founding member in, towards making acquisitions or investing in projects, so you can think of it like a subreddit with a bank account. And I think that's a clever way that people have been used to use to describe what DAOs are. But some of the DAOs that I'm a founding member are of our are some of the largest in the world. Things like Flamingo DAO, Neon DAO or Noise DAO or Red DAO and so on and so forth. I'm also an attorney by training I passed the bar. I don't currently practice. I was a teacher at the University of Oregon for a bit of entrepreneurship. I've built startup companies in the past, so hopefully there's an answer in there for everybody. Craig: [00:05:08] But you know, it's interesting because you're you're involved at several different levels, right? I mean, there's Derek the Collector, Derek, the VC, Derek the member of a DAO. It seems like the commonality there would be identifying value, right? So how do you determine value for an NFT? I mean, how do you assess whether some unknown project has promise or some certain piece that's out there in the market may be undervalued? Derek: [00:05:38] Yeah, it's a really great question. So I think there's there is an objective part and there's somewhat of a subjective part. And maybe the objective part we start there for the audience that's still trying to get to understand and grok what this technology offers. Maybe just like a basic primer on why NFTs are what, what is an NFT. And so the way I like to explain is that over the last few decades, we've spent more and more time on the Internet. We spent more and more time with digital value. But there's never been a native way to create scarcity that travels or pairs with unique digital property. So if you think about an MP3 or a PDF or a digital image or digital written content or video game character or shows or movies or whatever digital content we're interacting with when we've wanted to interact with that content, anything could be copied or replicated without actually referencing the original. So if I wanted to send you, Craig, an MP3, I could load it into my email, zip it, throw it over to you. I would still own a copy of that MP3 and you would own a copy of that MP3 and there would be no way in a trustless fashion to determine that I had the original, right? And that is a problem when we talk about how we can imbue digital objects with property rights. Derek: [00:06:54] There hasn't been a way to do that because we couldn't even solve the original problem of can we make digital content scarce in the same way that we know physical property can be scarce? And when physical property is scarce, whether it's, you know, the deed to your house, Craig, or the fact that you have this ticket stub that you sat in this seat at this big game or whatever it may be in the physical world, your employment contract, you can start to build property rights out of that scarcity. But we haven't been able to do that with digital goods ever. And that's the unlock here, right? That's what blockchains provide. And so an NFT is just a digital wrapper that goes around any unique digital object, and it says to anyone looking at a blockchain...so a blockchain is just a database, it's a trust minimized database. Anybody can write or read to that database, but an NFT as a digital wrapper, it says to these people that are looking at this database that, "hey, this digital object that you're looking at right now, it's scarce. It only exists this specific amount of times. It exists in this person's wallet. It was created on this date. It's been moved to these addresses over over its past history. We have perfect provenance of that digital wrapper that surrounds that digital object, and that's the primitive that gets unlocked when we're talking about NFTs." Derek: [00:08:08] That's why NFTs are such a big deal. It's the ability to make digital objects scarce. And like I just described, once you can make digital objects scarce, you can finally, for the first time ever in human history, build property rights out of that digital object. So that's why Nfts are such a critical part of what I believe the future value will be. It gives us the ability for the first time to write and read to this public database, what objects are scarce? What property rights exist with those digital objects? In the same way humans have been doing this with physical property for thousands of years. So that's the objective part, Craig. That's what drew me into this technology. We've demonstrated this idea of digital property rights for things like money over the last decade, things like smart contracts, things like applications like Bitcoin and Etherium and the protocols that are getting built on top. And for the first time, we're starting to tease out this idea of what it means to do it for any unique digital object. And it really was through the proliferation of a standard called ERC 721 on the Ethereum blockchain. That's the NFT standard. There's other standards for entities, but that's the one that really grew in popularity and that's what brought me into this sector of the space over the last few years in such a big and meaningful way. It's that unlock that has now happened. The question you actually asked was, "okay, well, now we know that technically it's possible to make these things scarce, right? We know we can do it. But what's actually valuable?" And that is a much different question. This is where I think I would take off my objective technical hat and put on my..."Okay, well, why? Why are things valuable?" Well, they can be valuable because there's an originality or a provenance or historical or cultural weight that is given to this thing by virtue of what was created. So an example would be Cryptopunks. There's 10,000 Cryptopunks there's 10,000 digital objects. It was a generative art project created by a group called Larva Labs, and that project was the first time that we saw an energy and enthusiasm come into the space where this generative art project was using blockchains as a recording format. It wasn't the first. There were like little experiments here and there where people were kind of putting different things on the blockchain over in the months and years before. But it was the first time that a project felt complete enough and also built enough network effects to actually see the enthusiasm around blockchains as a recording format for this generative art project. Derek: [00:10:37] And so it is the most important and the first project to really get the ball going. And so Cryptopunks are incredibly valuable. They're all unique, one of one of X characters that live on the blockchain, they're both art and also an identity marker that people use when they present themselves in digital spaces. It's kind of like this full package of historical and cultural significance rolled into a single art project that continues to see enthusiasm from folks all over the world and all over the Internet. And so the attention that's been brought to that project is actually quite tremendous, and it continues to persist as something where people want to store value. Another project that I think is slightly different. But within that same vein of like being highly networked is a project called Chromie Squiggles. So Chromie Squiggles was actually created by an artist and a founder of a tile company out of Houston, Texas. He actually was one of the original claimers of the Cryptopunks. Cryptopunks were actually free to claim anybody could interact with the contract on the blockchain and claim these cryptopunks for free until all 10,000 had been claimed, nobody paid anything, which is another virtue that I think has brought it a lot of significance. There wasn't like some commercial reason why this project had to exist. Derek: [00:11:58] It was just a community that formed around it. But he was part of that original claiming process and he became obsessed with this idea of blockchains as a recording format, but then also blockchains as part of the artistic process of creating work. And so he looked at the cryptopunks and he looked at Larva Labs who had created it, and he's like, "I just want to get to know these guys." And so he ended up becoming friends with Matt and John at Larva Labs, became one of the first moderators of the Cryptopunks Discord. Understood the (I think) the art side of what was happening and for two years straight really was like a huge and loud advocate for this technology. Inside the the NFT space at that time was the Cryptopunks Discord, and he was a big part of why people were coming into this space. He was ushering them and greeting them. Meanwhile, he was also engaged in his own creative projects, and one of them was this project called Chromie Squiggle. And it was this idea that you didn't just have to use blockchains as a recording format, you didn't have to just use it to to put that digital wrapper around a digital good. You could actually use it as part of the creative process to make the art. Derek: [00:13:04] And essentially, you know, what he did? What he built was a whole platform that allowed any artist to upload an algorithm to the blockchain and created a process that allowed anyone to purchase against that algorithm up to a certain edition size. Sometimes it was 500, sometimes was 1000, sometimes it was 10,000. In the case of the first project, Chromie Squiggles and the seed of your purchase mint on the blockchain. So like the transaction hash would be used as a seed to inform the unique output that you got against the on chain algorithm. Right? And so it would serve you a unique piece of art that only you could have based on your purchase meant against that algorithm. And so the first project, the platform he created was called Art Blocks. The first project on that platform was called Chromie Squiggles. It was his project. So he was both the author of the art project that launched Art Blocks, but then also the author of The Platform itself of Art Blocks. And that process has become a gold standard and how on-chain art is created. Now, there's other ways to create on-chain art, but the Art Block's method threaded the needle of artistic creativity and also security of using these ledgers as both a creation process and a recording format, such that over $2 billion in GMV has now been created as a result of this method that he pioneered. Derek: [00:14:29] And so. So, look, getting back to your original question, Craig, is like, where? How do I think about value? Well, the ChromieSquiggle, as this highly networked asset with the provenance of Eric Snowfro as the creator of both the platform and the project and also the ability for him to have been bridged from the Cryptopunks lineage into this thing that ended up opening the aperture and throwing gasoline on the fire to explode the movement of on-chain art. Chromie squiggles to me, serves that idea of of both being technically innovative and also culturally significant in terms of really getting the NFT industry off its feet. And so crypto cryptopunks is certainly the first. It was like the genesis, the thing that got everyone excited. To me, Chromie Squiggles as the first project on Art Blocks and being done by the author of the platform is also another project that I think it's easy to identify that as being valuable. Now I think that's I think both of those fit this bucket of culturally significant, historically significant projects. Only so many projects can fit into that bucket. The next question I always hear is like, okay, well, what's next? And the calculus for what's next is typically a little bit different, right? Can you? Only so many people on earth can be pioneers. Derek: [00:15:44] Only so many people can really like technically innovate in the 0 to 1 fashions. I would say that at that point my mind shifts to how value accretes to art in contemporary art or in traditional art, or why things are valuable in other spaces. And so if I think about why a Rothko sells for $50 Million or $80 million or $100 million, or why the "Salvador Mundi" sold for $400 million, or why a formaldehyde shark sold for $7-or-10 million, and so on and so forth, you can start to back into these comps that have always existed where people are storing value in these objects based on these the creators and the lineage of the work and and maybe the movement that that they are now part of or the significance of the work itself. As you know, it's maybe less about the the author of the work, but more about the work that has been created. And it starts to look a little bit more subjective. But I certainly believe that there is a there's a way to value these things, or at least the market can value these things as these things enter public consciousness or, you know, the the arena for for work to get judged and valued in real time on the Internet 24/7. And that's what I would consider to be the bulk of how nfts get valued today. Craig: [00:17:05] Well, I mean, it's it's really interesting because, I mean, when you hear people talk outside of the space, I think they complain about how much chatter is around the objective side. A lot of the talking, you know, refers to kind of unique collectible traits and scarcity, which means you're really talking about collectibles versus the subjective sid you're talking about, you know, it seems like the generative side and the sort of projects that we've seen in Art Blocks with Dmitri Cherniak and Tyler Hobbs, those are incredibly creative projects that are really kind of transacting, especially like back when you were talking about, you know, with Snowfro and in the Chromie Squiggles, you know, how I think a lot of people kind of overlooked the users piece in creating that unique work of art. When you're talking about the unique hash, you know, in the contemporary art world, I mean, there have long been people printing editions, but this is an aspect of your unique edition isn't exactly like everyone else is. Your unit is specific to you and your hand in it. And we really see that kind of in like something like QQL, right? Derek: [00:18:34] Yes, definitely. You're touching on something which I think has been unlocked by this space in the. I mean, you walk into any hotel room in the world and you look at the art on the wall and there's a high probability that the art you're looking at on the wall and this is just kind of a basic example is an edition, right? It was the infrastructure to support making work. Many as opposed to one is such where the costs associated are just too much to make every hotel room in the world have a different unique piece of art. The same can be said for wallpaper. It could be said for bed sheets. It could be said for homes. It could be set for on and on and on. The infrastructure to support creating unique generative outputs is just not easy. When we're talking about legacy infrastructure and working within legacy rails to create these outputs. I think one of the unique features of blockchains is that they're not restricted. The generative art as it relates to blockchains is for the first time, we're not restricted to this idea that when you create work, it needs to be in this in the same format because there's no legacy tech debt or no legacy infrastructure that it needs to follow within. Right? So the ability for Dmitri Cherniak to launch Ringers or Tyler Hobbs to launch Fidenza or, you know, Matt Kane to launch Gazers, they are operating under a different set of constraints. But importantly, this idea of the algorithm dictating...being able to scale with the amount of users that interact with it in such a fashion that allows every output that gets interacted with that algorithm to be unique. Derek: [00:20:17] Yet very clearly, part of this diverse collection is a huge unlock when it comes to creating outputs. My view is that, I mean, editions have been a way to scale outputs in the past. We're no longer we don't require that same that same output structure. We don't have to follow that same output structure now that we have this ability to pair amazing generative algorithms, generative scripts with a trust minimized ledger that can record those outputs in real time. And so my view is that you're touching on something, which is when people get served a collection or an output from a collection that's unique and only could have been created because of their mouse clicking at that exact time in human history and the block having been filled at that exact in in, in spatially at that exact point that creates this connection to the work that is like that has never been unlocked before because it's unique to them. And they served a role in the creation of that piec. Simultaneously, the benefits of taking that unique piece and saying, well, this person owns a similar, unique piece and that person owns a similar, unique piece, and this person owns a slightly different but similar unique piece. The networking effect that happens when that when you feel both identity and this emotional resonance to your unique thing and also to the group writ large who all own very similar things that unlocks in the petri dish. Derek: [00:21:49] Something like that has never been unlocked before, which has brought an immense amount of attention into why people are feeling like they want to store value in these specific objects. Now, the rarities and the trading around the rarity features, I think that's just like a sub effect of what I'm describing. And I don't think it's it's good or bad. I think it is what it is. Maybe, you know, in squiggles, for example, there's only four hyper pipes that were ever generated. It's a very specific visual category of of squiggle. Only four of them were generated against like the 10,000 that could exist. Four is pretty small. It's why you know the one hyper pipe that has ever traded went for something like $2.7 million. I think that will always happen with these collections. If they're done correctly, people will value the things that are most scarce within them. But I also think the bulk majority, the bulk volume, the bulk of tension happens around the basic crummy squiggle. The thing that's only $15,000, and that's because of what I'm describing, the networking that happens even at these...like the layers of the stack that have nothing to do with, you know, rarity. It's just that these these network effects compound and make people feel very emotionally tied to the outputs. Craig: [00:23:03] And, you know, I think there's something really interesting about the transparency of the blockchain. And when you start thinking about QQL and just how collaborative that process is with the user or the collector, that collector actually is collaborating and creating the art piece. And it's interesting how, you know, given the transparency of being able to see the provenance, we're capable of seeing where someone who has their own reputation as an artist or a curator, how they chose this specific piece that they created collaboratively with Tyler Hobbs and Dandelions assets. And it kind of adds an extra level of provenance, right? Derek: [00:23:55] Yes. So you're touching on something which I think is a key feature of why art and blockchain have actually found like a magical symbiosis together, which is for the first time work that gets recorded and published can live on on a ledger, on a blockchain that can be read by anyone around the world. And that the reading of that ledger is not gate kept by anyone, right? It's this idea that it's trust minimized. So if I want to read or write to this thing, this blockchain, I can do so if I pay the cost associated with it, reading a ledger is free and the security guarantees of the blockchain are such where I know with confidence that that transaction that I'm looking at right now, whether it was a transaction to create a work or to sell a work or to transfer work, that that is what happened. There is...I have a sufficient level of confidence that the work there exists on this ledger and has always existed in this way and has moved and transferred and been imbued by different things over time such that I can have perfect provenance of that digital object as it exists on this blockchain. Now the design space that you're starting to touch on is that that's awesome. Not just for being able to track the sales history of a piece or, you know, how the evolution of what it's traded for in the past or which wallets are currently holding it. Derek: [00:25:22] But you can also use that design space to create things, and you can also use that design space to show how collectors have interacted with it. And so QQL, as an example, is a generative art piece by Tyler Hobbs and Dandelion. It's similar...I mean, everything kind of builds on top of of everything. And if you take Chroma Squiggle as being in the art blocks method, as being, you know, the bulk of how generative art is created, they built a derivative idea off of this, this concept to say, well, what if instead of somebody interacting with our algorithm and being served a random output, what if we gave them the tools to interact with the algorithm off chain, create, buy a mint pass. Maybe we only sell 1000 of these mint passes, but by a mint pass. And if they decide to interact with the algorithm by changing these parameters or moving this knob or changing this color or this flow field to this, they can mint whatever they wanted against that off chain generative algorithm on chain such that we're we're back to square one and using blockchains as a recording format, but it opens the aperture to how people can create art and put it onto this blockchain. And what we have found is there is some level of demand to do that, like this idea of customization around generative art and bringing it to this just minimized ledger. It's playing with this idea of, you know, what should the role of the human be in this very computer process? Which I think is a very elegant idea to play with. Derek: [00:26:52] And Tyler is a master of his craft. But what we've also seen is some people will buy the right to mint a piece and they'll give it to a completely unrelated artist, whether that artist makes generative work or not. And they'll say to that artist, Listen, I've got a mint pass, a you know, a the ability to mint against this QQL algorithm instead of me deciding what I want to create off chain, why don't you in your DeafBeef style or your Snowfro style or you in your Larva Lab style, make something against this QQL algorithm that you think speaks to you and mints it on chain under your address. And that way the provenance of you as an artist affecting this algorithm off chain can now be brought on chain and will always, for the rest of human history, know that DeafBeef made this QQL algorithm for this Tyler Hobbes piece and sent it to me. And we and everyone will know that there should be value that accretes to that because, you know, DeafBeef is a prominent artist in this unrelated category. And so there's, there's all sorts of fun things you can do with the design space of trust minimized ledgers, and we're really just scratching the surface of what that will look like in the future. Craig: [00:28:06] Can we talk a little bit more about DAOs? Because I think for a lot of folks, it's a term, it's a concept, but I think a lot of people have questions. So you're one of the co-founders of Flamingo Down. Now that that's a DAO, a decentralized autonomous organization, where you referred to it as a subreddit with a bank account. Right? Can you kind of give us just kind of an upper level description before we start kind of diving into specifics on how a DAO operates and why? Derek: [00:28:39] Yes. So just to quickly just touch base on some of these DAOs, I'm a founding member, so there isn't a hierarchical structure of like the co-founder employee relationship that you would normally find in organizations. It really is like a collective of people that come together and some people come together sooner in the DAO's lifecycle. Some come later in the DAO's lifecycle, some enter and exit over time. But I just wanted to caveat the explanation of a DAO with that just so folks can get a sense for how these things actually work high level. So a DAO and I think you've already described it quite eloquently. A DAO is just a distributed online community that uses hardcoded rules to automate the inefficiencies around things that a normal organizational structure would deal with. So those organizational activities could be fund raising. So bringing capital in. Could be voting on decisions, just general soft consensus or decision making systems of how value or information move inside of an organization. It essentially reduces the need for human inputs by transferring those obligations to code, and in turn it reduces operational costs, risks, things like vectors that are related to like human behavior, bad decision making, etc., etc.. So another like maybe a differentiated way of describing this is like instead of relying on the legal layer to do all of these activities, which is traditionally what you do with like an LLC operating agreement or articles of incorporation for a corporation, DAOs are just using computer encoded rules in the form of smart contracts (these are just rules that exist on a blockchain) to govern all of the things that an operating agreement or corporate agreement or an articles of incorporation would govern relying on the legal layer here, for example, in the United States. Derek: [00:30:34] And so I would say if like if I could just comp it to that, I think folks can start to understand like, "oh, well, yeah, relying on a computer to do these things that would require humans and courts and legal obligations. I mean, obviously that just seems like wildly more efficient and trust minimized and takes away the need for, you know, solo parties to make bad decisions on behalf of the governance or behalf of the entity". And so if you just take it from that framing, you realize this is just a massive upgrade in terms of how organized organizations work together to move information value around the organization and out in the world. Now, we're not at a point yet where we can totally rely on these smart contracts, on these blockchains. It's just like, for better or for worse, we live in a world of rules, like I'm based in the United States of America. I understand the importance of state and federal law, and we have a rich history of laws and stare decisis that govern exactly what you can and can't do when you're within the jurisdictional confines of a regulated geography. And so what these investment DAOs do today is they automate away as much as they possibly can and replace some of the operational documents and the structure and the banking of corporate or LLC-like entities. Speaker2: [00:31:59] But typically, the ones that do it the correct way will usually wrap this in like an LLC wrapper. So Flamingo DAO, for example, is essentially an LLC-wrapped DAO. Now, the pros are we're fully compliant. We are, you know, we report everyone pays taxes. Et cetera etc.. The cons are it doesn't quite use the thrust of this technology in its most optimal way. Right? Because there's still reporting, there's still, you know, all sorts of like meet space activities, there's still documents, there's still like things that need to get signed from time to time. I would call it an order of magnitude better, but still not at its full capacity of like what I think DAOs could do. Should they be should there be a more seamless way for them to plug into regulatory infrastructure? And it's just like we're just not there yet. The technology's too early. I do envision a world where much more of our legal layer and legal systems are...exist online, exists and touch blockchains. It's just not where we're at. And so I would just like caveat all of the benefits of DAOs with the fact that we're still in the earliest days. My view is that DAOs as an organizational format is going to be a much more interesting and much more compelling value proposition for the world's corporate entities ten years from now than it is today. And it's going to take some lever pulling on different layers of the regulatory stack. Craig: [00:33:32] I hadn't thought about just how much regulation can slow down the fluidity of the decision making there, But even then, the DAO is still far more nimble than than other options, right? Derek: [00:33:46] Unquestionably. I mean, a lot of what you would find in an articles of incorporation or an LLC operating agreement really can be done by a code. And that includes a lot of stuff. And so, yeah, I would just I mean, my experience has been having run companies in the past, having sat on boards and now being a member of these DAOs, it really is like night and day in terms of the operational efficiencies of like coming to a decision, executing on that decision and being able to seamlessly move value and information around all parties in a far more equitable way than, I think, hierarchical, top down corporate structures. Craig: [00:34:26] I think from the outside when when I think of Flamingo DAO, I really think of it as being an art collecting DAO in the NFT crypto art space. But is there a mission statement? Is it just about acquisitions of art or is the DAO open to investing in specific projects, investing in companies? Derek: [00:34:49] Yes. So it's kind of it I would call it a collective that's interested in acquiring digital objects on blockchains. And those digital objects primarily take the form of like what we would consider to be high value art objects. But also, we've done a number of investments in the venture space as well as a seed investor as projects are just getting going. We have a unique lens and I would say its members in particular have unique ones. Some are venture investors, some are art collectors, some run galleries. I mean, it's a really an amazing collective of individuals. But I would say the through line there is like we're able to determine problem areas or rooms for improvement in the technology stack just by virtue of us having these like this experience and then also being so in it day to day such that we can resource opportunities at the earliest stages knowing that there's giant problems to solve in the form of venture opportunities. And so we'll find ourselves investing in projects that we want to see exist because they'll actually solve problems in how this technology stack is going to get built out. And we have that unique insight as a collective of folks that are so intertwined and on pace with what's happening in this industry. Craig: [00:36:06] Well, that seems to really blur the lines between what you do at Collab Currency versus what you do with the DAO, right? Or do you often kind of go alongside I mean, do you find a hole in the infrastructure and decide to invest money from what you directly have control over and then propose it also to the DAO? Derek: [00:36:27] All the time. So we've invested in a number of projects that Flamingo DAO has invested in, that Neon DAO has invested in, that Noise DAO has invested in, that Red DAO has invested in. Sometimes we'll lead those investments and Flamingo will come in with a small check because the vote the members want to see that product exists as well. Other times we'll be part of the syndicate and Flamingo will be part of the syndicate and there will be some other lead on the rare occasion. Sometimes Flamingo DAO or other down network will be the lead of the investment will come in as a smaller check. Typically it's the former. Our view is that you this unlike I would call venture over the last two or three decades where ownership targets where you want to own a very specific portion of the business because that's how these things model out. You know, typical venture only a couple of projects out of your portfolio really return the fund and provide the outsized returns, such that venture becomes an interesting proposition to your LPs who are giving you money knowing that there's only going to be a couple of projects that drive the returns of a portfolio. You really want to own as much of those projects as possible. Craig: [00:37:35] Right. Derek: [00:37:36] Because if those winners win, you want them to really pay for all of the projects that didn't win. Craig: [00:37:40] Right. Derek: [00:37:41] I would say the difference between that style of investing and the style of investing that I do at Collab Currency is that this technology is so unique in the sense that the value of the pie itself and I know this is going to sound trite, but the outcomes here can be so enormous if the right people are behind the table giving the right advice. Giving the right connectivity, giving the right kind of capital such that ownership targets mean less to me. In my business partner Steve, they mean less to me than I think other investors would consider to be proper, because we know that the networking value that can compound when you've got 50 DAO members that are part of a single line item on your cap table, or because you've got the right investors who understand the tech stack for what they're trying to build and they're coming in at a check that maybe makes you get a little bit less or you're bringing in these two people because they have a really sharp lens on consumer media and Web3 and they really know how to work with the team on go to market. Derek: [00:38:42] And so maybe you'll take a little bit less ownership, but you'll bring in greater people. I've just seen time and time and time again over the last four years of investing that those networking effects that happen when you've got the right capital around the table can create outcomes that were not even, you know, in the realm of possibility when if it was just going to be, you know, one large check backing a single company. And my view is capital is becoming more and more abundant. And projects understand that. It's easy to raise capital. Capital is everywhere, especially on this in a global environment where money can fly around at the speed of light. The thing to optimize for is getting the right people around the table for a project that it's early stages to make it become as big as humanly possible in terms of like the directional bet that it's making. And those outcomes actually can far outpace the ones where it's just a single investor taking, you know, a slice of the company and maybe hamstringing or limiting the growth possibility because they're just not thinking about a future that could be as big. Craig: [00:39:46] You know Flamingo DAO is not the only DAO out there collecting art. You know, maybe it's somebody like Pleaser DAO or whoever. In my mind, they probably have a different way they come about consensus building and making decisions. And so, if a piece comes up on the market, how does the group decide? I know there's probably planned meetings, but, you know, I know some DAOs have like a curation team that's able to respond quickly. Is everything in Flamingo DAO brought to the entire Dell. I know that you guys seek the input of like a curator advisory panel. How dynamic is that process for being able to identify acquisition targets kind of long term? And then those we need to move fast. This is on the market and it's not going to be there tomorrow sort of opportunities. Derek: [00:40:44] Yeah, this is a really, really great question. So the the short answer is we've we've tried everything and we continue to do lots of things. And so you know, what does that mean? It means we have bars of opportunity. So maybe we'll set a threshold and say anything below this value a member can purchase directly and the the DAO will reimburse them up to this threshold. Maybe the individual can purchase directly, but there needs to be an on-chain vote that decides whether or not the DAO wants to purchase it back from them. For anything above this value, there has to be both soft consensus inside of the group to want to move forward. Someone needs to put up an on chain proposal and everybody needs to Web3 often and put on chain their vote that this proposal should pass in order to allocate towards a specific strategy. I mean, and every variation thereof, there's teams, there's subgroups, there's individuals that have been empowered to make certain decisions depending on the sector or segment. I mean, the truth is this is more art than science at this stage. And we're trying to pare the opportunities that come and go very quickly with the realities of getting groups to make collective decisions, which can, you know, it doesn't matter how much a process is hard-coded instead of in on an operating agreement, it still requires some lift of human behavior to come together and reach a consensus. Derek: [00:42:14] And so the short answer to your question is it's kind of everything. And we use technology to empower a lot of this stuff, whether that's technology that relates to Web three or just relates to how social groups come together. The other just point I would note is the optimal way to to execute on an opportunity of any merit or size is really to really funnel it like where we default is always to try and make those decisions happen on chain. And that's what we consider to be the most equitable decision making is when a proposal can reach a sufficient amount of votes and those votes are reflected on chain such that it's the most transparent and equitable process possible. Given the realities of what you're describing, sometimes these opportunities are so low or moving so quickly. We've had to we've had to modify some of these things away from what I would consider to be best practice. And the group has all voted in this favor in order to match some of those realities. Craig: [00:43:19] Can you help me understand the tokenomics of a DAO like Flamingo? I mean, how does the member of the DAO benefit from the growth of the portfolio? I mean, is it simply a matter of their share being worth more, or does a member have to sell their share to realize the actual revenue? Or are the profits from sales going back to members in something that looks like a dividend? How how does that how how does revenue extraction work for a member of the DAO? Derek: [00:43:52] Yeah. So revenue extraction is...I think there's a couple of ways to think about it. It's like what are the ongoing revenues towards the the entity over time and what does an exit event actually look like. Those are kind of two different questions. But I would say the best comp is just like how organizations generate revenue today and especially investment groups and what exits look like at the terminal end of holding company or a company that has investors that have come together for a single purpose of making an investment. So I would say right now it's purely...I would say the majority of value creation is happening at the NAV level. And so this idea that, like the shares of your seat continue to increase with the the if the decision making that is made by the collective is optimal and the the investments that have been acquired, whether those are venture investments or assets increase in value. And so how does one realize the value of NAV or the value of their their share? It can be through an exit event. It could be through someone else wanting. There's only, you know, a specific amount of seats that exists in this investment now, and there's quite a bit of demand to get into the DAO. And so on occasion, you know, people will approach to that and say, I want to buy a seat and I will pay this multiple to NAV in order to get one of these seats. And, you know, the group can decide, "okay, well, do we want does anyone want to sell a seat or do we want to, you know, provide one of these limited open seats to this person?" And there will be some discussion and sometimes people will say...we will come to different determinations depending on the person. Derek: [00:45:32] We very rarely sell. I think I can count on one hand the amount of times that we've ever sold a digital asset, and primarily because we're very long on this technology and this movement and the assets that we've collected, we think many of them are culturally, historically significant, are important or because the art that we believe in the artist's or we believe in the work or we believe in the project. And so very rarely are folks thinking about selling and paying dividends to members. I would say, you know, there's we touch base on this as a group and a collective from time to time, which says, Well, what does an exit event actually look like? Is there...do we tokenize and sell these seats to other people on the Internet? Do we get SPACs? Do we go public? I mean, what I mean, we've optimized for optionality given the structure of the vehicle. I would say the interest level right now is just I mean, it's not really there to think about that. It's really about value creation at this stage. And my gut says we'll be for the foreseeable future, the next few years. But to your question, it's something that we've talked about and no great answer for you at this stage. Craig: [00:46:43] The more we talk about it, the more I feel like I draw comparisons with a venture fund. Right? And I know like about a decade ago, there were a number of art funds that were popping up that operated like venture funds to buy traditional artwork. And they were structured like venture funds, but they would have a specific investment horizon instead of being open ended. They're just like a VC fund. Like, well, it's ten years. And they were charging the same kind of standard 20% management fee. But when you have that line in the sand where you say, "well, I have to liquidate at this time", the market might be down. And it was particularly problematic for those traditional art funds and that the way you would liquidate is through auctions and you never know what you're going to get there. And, you know, it just seems like the collecting DAO seems so much better suited to accomplish all those same goals. Derek: [00:47:47] I agree. Yeah, I, I definitely agree. I think there's a little bit more flexibility baked into this model that I think doesn't exist when you're dealing with a ten year fund and I run a ten year fund. So I'm fully aware of the nuances there. I think to your point, there's...this structure solves a lot from like the organizational side of things. Doesn't solve everything. Like I think there's a reason why folks seek out Collab Currency (the fund I run) to lead their seed investment in a pre-seed investment is because we're very good at what we do like from top to bottom, and we're very laser focused on accelerating these projects to the next level. And that job to be done isn't totally replicated by like an investment DAO at this stage I think it could be in the future and I think it probably will be. But its current form, I don't...I wouldn't say that investment venture investors are at total risk of like being disrupted by a technology. I do think...if I think about...I've spoken about this on panels before and in conversations and on podcasts, there's really three roles for a venture investor. There is capital. So like they give capital to teams. There's let's call it like advice. So they've built companies before, they've worked with hundreds of companies and they're able to issue spot at the earliest stages and say X, Y, Z is what you should be working on. Derek: [00:49:16] These are the types of people you should be hiring. This is the goal post that you need to be hitting. Here's how you should be thinking about the company management. So just advice, general advice. And the last one is connectivity. So like the ability to network your portfolio company with other portfolio companies or other investors or other projects that they could link up with or people that are relevant to the domain that that person is building in. You just have a large network. By the time you've done this for a while, you just you amass a pretty sizable Rolodex. My view is like those three jobs to be done are probably going to be completed at a higher rate in a better way by investment DAOs in the future. Right? Capital can come is no longer scarce can come from anywhere. You know 50 people pulling capital together at the speed of light is a pretty easy way to organize capital, to invest in something. In terms of advice, having 50 people with 50 unique experiences that are all incentive aligned to provide advice, it's probably going to be better than two or three really sharp partners out of venture fund and then connectivity, you know, the networking effects that happen when you've got 50 incentive-aligned people all vying to make this seed or pre-seed investment as big of a success as possible, it's actually nontrivial. Derek: [00:50:26] That's a lot of people that are networked to make this thing work. And so if I look in my spyglass at the future, it's like, well, and having been a part of many of the success of these investment DAOs, it's clear to me like this is where the world is going. I think DAOs will achieve a higher rate of success and will do the jobs to be done of a venture investor in a way that's probably going to render the typical venture model moot in the future. That said, I think there is a delta in a time where, you know, folks like myself can create massive amounts of value structurally for what we do because we understand both of these lanes and are participating in it and recognize the value of both and similar to how DAOs are not their optimal function yet, but they will be in the future. I think the same thing in terms of like the, you know, the value prop to adding to these portfolio companies. It's a massive, you know, a massive amount of value that can be created by DAOs today, but it's still not quite at what what it will be in the future. And so I think venture investors in the structure of traditional venture will probably persist until that inflection point. Craig: [00:51:37] I spend a lot of time talking to people on both the traditional art side and the NFT art side, and so I spend a lot of time thinking about how to bring those two closer together, how to to bridge those two worlds. And I think I have a pretty clear picture in my head of what it would look like for some top international gallery to try to introduce traditional collectors to this new space. But what should one of those big galleries want to keep in mind if they're wanting to introduce NFT collectors to a wider world of art? I mean, like in your opinion, how would they get NFT collectors in that door? Derek: [00:52:19] Yeah, it's a great question. I would say there is technology that will allow what I would consider to be like traditional galleries and traditional artists to start taking their work and starting to integrate it more and more with blockchains and ledgers, which is really for many of the people that are in this space. That's where value creation will happen in the future. It's in these digital trust minimized internet like spaces. And so understanding the surface area of value prop for blockchains and these ledgers and NFTs I think is very instructive for the traditional gallerist or the traditional art creator to understand how they may be able to start taking some of their work or creating new work to have it live in some of these spaces. So an example. You talked about Tyler Hobbs earlier. QQL. I was chatting with Tyler about a month ago and we were talking about this idea he wants. He's been making physical works, so he's been creating computer art for a very long time that his whole on-chain career over the last few years has been built in these very digitally native spaces, art blocks in particular. And he's had a desire to continue to evolve his generative art path with more physical outputs. And so we had this conversation where he just showed a collection at Art Basel last week, and we were talking about how he could involve blockchains and these ledgers with purely physical pieces where the piece itself didn't live on a blockchain, it would use the computer to be created, and it still was a generative art piece, but the outputs themselves would be physicals. Derek: [00:54:04] And I brought up a portfolio cover of mine called IYK. So IYK.app essentially makes NFC chips. It's a resolver layer that allows you to attach an NFC chip to any physical object. That could be a T-shirt, could be a couch, it could be high-end artwork, and the possessor of that artwork could scan the NFC chip with their phone and very quickly create a digital representation that lived on a blockchain of that physical piece. Now, that object that lived on a blockchain can't be transferred out. It can't be sold on a blockchain, it can't be manipulated. It purely is a function of the physical existing and the owner of that physical at that moment of time proving that they own the physical by being able to scan it and create this digital representation that exists on the blockchain and the digital representation...although all the finance and the price and all of what I would call like the economic activity will only travel with the physical in this example. Derek: [00:55:07] But there are benefits to having a digital representation that can be proved through the possessor that lives on a blockchain, because now you can start to compose that ownership that exists with other things. You can start to show it in a digital gallery. You can start to show that you own these five pieces in your home when you're linking out to your gallery.so page, which is an on chain gallery of digital objects that allows you to curate and showcase the digital objects that you own. There's all sorts of ways and reasons why identity and know and all sorts of things can exist where traditional artists and galleries can leverage this technology to to start tapping in foot by foot into this space. And it's things like iyk.app that are starting to unlock some of that surface area that will allow collectors of purely digital objects to start getting interested in some of the stuff that's happening off chain. And so iyk.app is one for folks to look at and know Tyler successfully applied those apps to all of his physical works at Art Basel this year and I think it went very well. So that's one for for folks to check out and there's others that are that are coming out. Craig: [00:56:19] Well, Derek, I can't thank you enough for your time. I feel like I took a little bit more than than I was supposed to. But, man, it's...I feel like I just kind of scratched the surface. I would love to to pick your brain more sometime about things like A.I. and you know exactly what all is on the horizon. But I really appreciate you taking time to talk today. Derek: [00:56:47] Absolutely correct. Thanks for having me and looking forward to next time. Craig: [00:56:58] That's all the time we have for this week. You've been listening to Art Sense. You can find the show on Apple Podcasts, iTunes, Google Play, Stitcher Radio, Spotify or your favorite podcast app. If you've enjoyed this podcast, be sure to subscribe. And while you're there, please rate the show and leave a quick review. Your feedback is the key to other folks finding us. And if you'd like to see images related to the conversation, read the transcript and find other bonus features. You can go to canvia.art and click on the podcast tab. If you'd like to reach out to me, you can email me at email@example.com. Thanks for listening.Show More >