Otherside’s utterly avoidable NFT disaster

Yuga Labs’ much-anticipated virtual land sale sent the Ethereum network into a tailspin Saturday, renewing questions about whether the smart-contract network is up to the challenges new businesses built on it pose.

The creator of the Bored Ape Yacht Club NFT collection sold about $320 million worth of virtual land NFTs Saturday for Otherside, its planned metaverse project. The funds, raised in the apecoin cryptocurrency Yuga is using for Otherside, can’t be sold for one year, according to project organizers.

About 55,000 NFTs were sold for about $5,800 each at apecoin’s price at the time. Secondary sales have reached $586 million, according to CryptoSlam.

Ethereum’s problems are still very much with us. The network’s well-documented high transaction fees and slow execution speeds still persist.

• The massive demand caused Ethereum gas fees, as transaction fees are known, to spike. Yuga, which has also acquired the CryptoPunks and Meebits NFT collections, apologized for the episode and said it would refund gas fees for people with failed transactions.
• During the minting of Otherdeed NFTs, Ethereum fees spiked, jumping higher than the actual costs of purchasing the underlying Otherdeed NFTs themselves. Transaction costs reached $123 million, according to Bloomberg. Yuga had decided against doing a Dutch auction, where prices drop over time, as a technique that might reduce gas fees. Instead, it limited the number of NFTs each wallet could purchase in each wave of sales.
• Simple code fixes could have reduced gas fees, according to Will Papper, co-founder for Syndicate, a DAO infrastructure startup. “A lot of users were upset that Yuga didn’t have a gas-optimized smart contract for minting,” said Gabe Frank, CEO of NFT lending service Arcade.

Ethereum 2.0 is coming. Will it fix this kind of hiccup?

• Ethereum is expected to move to Ethereum 2.0 sometime later this year. It will move the network to a proof-of-stake consensus mechanism, cutting its environmental impact.
• But another major change, sharding, which will cut gas fees and increase transaction speeds, is not expected until next year.
• Even then, many analysts expect Layer 2 networks on Ethereum to take on more of the transactions on the Ethereum network. And other Layer 1 blockchains such as Avalanche, Solana and Cardano are trying to compete for Ethereum’s developers.

Why not just build your own chain? Yuga suggested the ApeCoin DAO, a technically separate organization that oversees apecoin, could follow Dapper Labs’ path in building its own blockchain.

• Dapper Labs, the crypto pioneer behind CryptoKitties and NBA Top Shot, looked at the available blockchains and said: Nah, we’ll build our own.
• Yuga already helped create a token, apecoin. But apecoin is just one of many cryptocurrencies riding on the Ethereum blockchain
• The ApeCoin DAO could set up its own blockchain. It makes sense, given the challenges facing Ethereum. But it is not a simple task. Dapper spent a couple years building out its own blockchain, Flow, which was announced in September 2019 and began operating in October 2020. Dapper customized the blockchain for consumer apps and even created its own programming language called Cadence for smart contracts.
• Having its own chain could be a plus as Yuga seeks to compete with other metaverse projects such as Decentraland and Sandbox, which both use Ethereum-based tokens.

Meanwhile, what Otherside is for, besides making Yuga Labs money, is unclear. So far, selling hot NFTs is easier than building a metaverse that people use. The headlines around all the money Yuga and its associated projects raise may be racing ahead of player interest. While a popular metaverse can draw many people in, a downside when everything is financialized is that people who may want to use these services could be driven away by the high prices. “The challenge with [the] ‘selling land’ model is that incentives aren’t always aligned,” said Anand Agarawala, CEO and co-founder at Spatial, a virtual gallery metaverse service. “Many people buy land as an asset and try to maximize price while creators who can actually develop amazing experiences in it get priced out. And you end up with lots of empty lots.”

— Tomio Geron (email | twitter)