Week 46: The US Constitution, Tracking Web3.0 Hacks, and so on.

Briefing:

• A discord channel raised $30m+ in four days to buy the only privately held copy of the US Constitution from Sotheby’s, foreshadowing a world where DAOs with passionate leadership gain significant power.
• Tracking frauds, failures and security breaches in Web3.0. The largest hack to date was returned by the hacker.
• Don’t get carried away with parabolic commodity prices. They don’t last.

US Constitution DAO

Last week a group of crypto enthusiasts launched ConstitutionDAO to pool funds into a DAO (Decentralized Autonomous Organization) to buy the only privately held copy of the US Constitution from Sotheby’s. We mentioned last week that a DAO is like a “group chat with a bank account.” As of this writing, that “chat room” raised $30m+ in less than one week from over 10,000 contributors. We participated, of course. How could you not?

The ConstitutionDAO is foreshadowing what’s about to come next. DAOs are not LLCs, but they are getting closer to that definition. The people who participated do not own a fractional share of this constitution from a purely legal perspective. We receive a governance token to help vote what happens next to the physical document. In theory, we could buy/sell that token, but it’s not clear today what that means.

The SEC doesn’t allow hobbyists to create fractional ownership structures, not without lawyers at least, but that’s what is happening on a near-daily basis. Fortunately, multi-signature approvals and the blockchain ledger system make this process far less likely to be fraudulent. Frauds do occur, but the overlap between people who commit fraud and people who have an honest curiosity for the US Constitution is reasonably low.

Tracking crypto failures

It’s essential to keep a balanced view of all asset classes. In that spirit, the website Rekt has a leaderboard of the largest hacks and frauds in Web3.0. The largest hack to date is the Polychain hack from two months ago, where $611 million was stolen. In a shocking twist, the hacker returned all of the assets just two weeks later.

If you want to know where frauds and failures occur in real-time, Twitter is the best place to look. Here is an excellent Wired story about an employee of a venture capital firm, Divergence Ventures, caught publicly self-dealing in their crypto investment, Ribbon. Due to transparency on the blockchain, a curious hobbyist was able to track down the source of this activity and publicly call them out.

Frauds and failures are common, and security breaches do happen. It helps to understand where the points of failure can occur, and it’s crucial to keep your personal security extremely clean. A healthy dose of paranoia is a good line of defense.

Don’t get carried away with parabolic prices in commodity markets. They don’t last.

In early September, we wrote about global shipping rates spiking 6.5x due to Covid related issues with the global supply chain. We pointed out that “these price spikes reflect a complete shock to an extremely complex and sensitive system, and will eventually normalize.” Since then, the ETF that tracks the futures market for shipping rates, BDRY, has fallen 50%. The media likes to sensationalize these stories because they drive more clicks.

The same story unfolded with lumber in May. We pointed out a significant disconnect when lumber prices jumped from $300 to $1600, unprecedented in the last 40 years of price history. However, there was no price increase in the underlying cost of the trees themselves and no supply shortage. There was only an issue with labor and backlogs at the mills that process the trees. The majority of the publications focused on the high lumber prices but omitted the crucial context. Lumber prices subsequently fell 70% and are more or less back to normal today.

Parabolic prices in commodity markets don’t last, and it doesn’t take much work to look under the hood to see why. Be wary of scary headlines; they are optimized for emotional reaction, not for market intelligence.