Grayscale’s Most Exotic Crypto Bet is Soaring Yet Not Many are Biting

What a wild moment.

When Grayscale Investments launched its Decentraland trust back in February it was hard to believe that a Wall Street firm with $40B in assets was firing up a vehicle to invest in one of the most exotic experiments in crypto. Created on the Ethereum blockchain six years ago, Decentraland is a virtual world that uses digital “real estate” to host applications. The project’s next iteration, called Iron Age, will create “a social experience with an economy driven by the existing layers of land ownership and content distribution.” Crazy stuff, eh?

And yet here was Grayscale, an outfit that caters its Bitcoin and Ethereum trusts to institutional investors, offering a way to bet on the future of MANA, the token running Decentraland’s ethereal economy. Grayscale is so mainstream that investors could even plunk shares of the Decentraland trust into their Individual Retirement Accounts. No sooner did the trust hit the market than the value of MANA quintupled over the next four weeks.

Investors who took a flyer on Grayscale’s Decentraland trust probably aren’t complaining either — they’re up 85% since inception. But only a handful have benefited as the investment vehicle has only drawn in $8.3M compared with about $28B poured into Grayscale’s ETHE and GBTC trusts to gain exposure to Ether and Bitcoin, respectively.

Four months later, MANA, like virtually everything else, has come back to earth. Grayscale’s move speaks volumes about the euphoria of that monster rally, and the sobering reality of a market coping with a historic sell-off. But here’s the thing: The Decentraland trust also highlights the promise that still burns inside the DeFi proposition. Because as far out as this project might look, it’s precisely the type of laboratory brainiacs like Decentraland’s creators, Ari Meilich and Esteban Ordano, and their crew needed to develop and test the innovations that can restructure finance. (Meilich is now the founder of Big Time Studios, which makes NFTs).

If you read the Decentraland white paper, what comes through is the simplicity of its value proposition.

There’s no denying that consumers, especially Zoomers, are increasingly spending more time in virtual worlds, especially after the Covid-19 lockdowns. Just look at how the NFT space is morphing into a vibrant new marketplace despite the crypto slump. Platforms such as Bored Ape Yacht Club and Meebits are creating red hot NFT avatars for people who spend, it must be said, alarming amounts of time online playing games and socializing. Wicked Craniums, an Ethereum-based project, sold out more than 10,000 of Grateful Dead-like skulled NFT avatars in just 30 minutes this month.

There’s a clear link between the NFT avatar phenomenon and Decentraland’s aspirations. By building what it calls a “traversable world,” Decentraland’s designers are wagering that the moment has finally come for a digital plane that runs in parallel to our corporeal one. Of course, this idea isn’t exactly new. Second Life and The Sims are just two ancient examples of virtual realities with bespoke economies, and of course gamers have long trafficked in currencies and assets on Fortnite, Rocket League and other multiplayer platforms.

But what’s different about Decentraland, of course, is its peer-to-peer structure. Thanks to the Ethereum blockchain, it lives on every computer that hosts it. More importantly, it uses the scarcity of its digital land parcels to help owners monetize what they do with their “properties”. The more interesting the applications they build on their sites, the more people will visit and trade, spurring owners to join with like-minded neighbors and create economies of scale. They can create services or games or content or 3-D art (yeah, more NFTs, get used to it!). It sounds complicated, but think of it as a university research center where you have a workstation to experiment and create whatever you want. The more people like your handiwork, the more you can grow your work space into a larger facility.

And it’s in payments that Decentraland can truly make a break with the past. Unlike the barbaric pre-blockchain period, Decentraland’s next phase will roll out a system of fast cryptocurrency payments for in-world transactions on programs such as Bitcoin’s Lightning Network or Ethereum’s state channels.

It’s all pretty heady, and of course just because you build a digital El Dorado doesn’t mean they will come. But the fact that Grayscale saw fit to go to all of the trouble to register and launch a trust, and tailor it for accredited investors who must have a net-worth of at least $1M, speaks to the resilience of the DeFi proposition. Underneath all the market chatter, the developers are coding the software, day after day. Even though everyday brings more headlines about Bitcoin’s market drama, serious dudes like Marc Andreessen, Dan Morehead and Peter Thiel have been quietly investing tens of millions of dollars in DAOs, the decentralized autonomous organizations that form the backbone of the Ethereum world. (More on that trend to come in The Defiant).