Quote from Paul Ugbede Godwin on August 29, 2022, 5:22 AM

On August 9, 1995, Netscape fired the starting gun for a tech-stock craze that continues to this day. Despite being just 15 months old and going public before turning a profit (unheard of at the time), demand for the issue was so frantic that Morgan Stanley re-priced it from $14 per share to $28.

It still wasn’t enough: The stock traded as high as $75 on the first day of trading, before closing at $58.25 for a 108% gain. As per the LA Times, many thought it was a tell-tale sign of an overheated market.

Instead it was just the start: Headline-making IPO pops turned out to be great publicity for companies, great for CNBC viewership and great for the new generation of online brokers, such as eTrade. They were not great for retail investors, however: Only institutions are gifted shares at artificially low IPO prices — even though both the companies and the bankers know that most of them will be shareholders for less than a day.

In today’s parlance, retail investors provide exit liquidity for institutional investors. It’s one of the most unfair, inequitable and regressive aspects of traditional finance. And yet, Decentralized Finance somehow managed to do even worse lately.

Back to the Future

The current craze for Bluechip NFT mints feels a lot like the IPO craze of the late ‘90s. And, as evidenced by the sale of Otherdeed NFTs, we don’t seem to have learned much in the last three decades. In TradFi, IPOs are sold at artificially low prices to;

1.    Create buzz for the stock.

2.   Reward customers of the investment bank.

3.  Keep large shareholders happy by guaranteeing them an early profit.

Number three is the most important of these and also why more equitable options like Dutch auctions (designed to find the equilibrium of supply and demand) have never caught on. I suspect it’s also likely why Otherside canceled the original plan to hold a Dutch auction for its Otherdeeds NFTs and ran a very TradFi-looking offering instead.

In TradFi, it’s important to keep large shareholders happy because you’ll likely want to sell them more shares in the future. In Crypto, it’s even more important: Token or NFT holders are not just investors, they are users and customers as well.

Sticking users and customers with an immediate loss on an NFT sale is a sure-fire way to kill the community enthusiasm that every crypto project relies on to succeed.

This was even more so the case with Otherside: It's going to be a long time before anyone can do anything with the metaverse land they bought this weekend. And metaverse land is about utility, not identity. The only way Otherside can keep its community happy in that long interim before the land has any utility is to ensure they have an unrealized profit to feel warm and fuzzy about.

Otherside declared on Twitter that Dutch auctions are “Actually Bullshit.” A Dutch Auction would likely have resulted in many of Otherside’s new users being immediately underwater on their purchases, making for a very grumpy community during the long wait for something to do in Otherside’s yet-to-be-built metaverse.

Otherside canceled the Dutch auction and conducted another, only-in-Crypto type of auction instead: an auction for block space. This, unfortunately, did not serve the community well, either. In a first-come-first-serve mint (as most NFT sales still are) buyers have to effectively bribe their way to the front of the queue. The bribes are paid in ETH gas, with the proceeds either going to miners or being burnt. To get to the front of the Otherdeed queue, bidders had to pay as much as 2.5 ETH, This resulted in prospective minters spending $180 million on gas fees.

That’s $180 million for an NFT mint that raised $320 million for the seller. This is analogous to an investment bank issuing IPO shares to the customers willing to pay the highest commission rate. In this case, the winning commission rate was 56%. This makes the typical ~5% IPO fee investment banks charge issuers look downright charitable, (Making Wall Street look charitable is quite the feat.) Otherside still retained its full $320 million capital raised.

The issue, however, is that Otherdeed NFTs are now trading at a floor price below 2 ETH, Which means, after paying the mint price of 305 ApeCoin and Gas fees of as much as 2.5 ETH, much of the new community is now only about break-even on their investment. Otherside has not reaped the primary benefit of selling at an artificially low price: Community members do not have much in the way of unrealized gains to feel warm and fuzzy about, Imagine being charged a commission on IPO shares you didn’t receive.

In addition, many who failed to mint sold their ApeCoin at a loss — also not a great way to build brand loyalty. All of this could have been avoided with a well-designed “allowlist raffle," as was the case with the Moonbirds, Azuki Bobu and Azurbala mint. The downside of an allowlist mint is that you get a lot of buyers who are just looking to flip for a quick profit.

But you have to pick your poison: Flippers with an allowlist, underwater owners with a Dutch auction, or the worst-of-all worlds with first-come-first-serve.

Right now, Crypto is mostly opting for the worst-of-all worlds, TradFi has set the bar incredibly low with its IPO process, and DeFi still managed to stumble over it this weekend.