Erik Budde

Crypto Curious 9/15: Starbucks Merges

Published over 1 year ago • 6 min read

🟢 The Merge Has Landed

(Big Idea: Proof of Stake)

In the immortal words of the sage Gary Gnu, “No Gnews is Good Gnews.” Such was the case last night as the Ethereum Merge launched successfully at 2:43 AM Eastern. After reaching a total terminal difficulty of 58750000000000000000000, the Ethereum network switched from Proof of Work to Proof of Stake in 12 seconds and with zero downtime.

The most notable element was how uneventful it all was. Sure, there was a watch party and cringy original songs, but despite planning on staying up, yours truly only made it to “East Coast” New Year’s Merge and didn’t seem to miss much. With billions on the line and a million ways things could have gone wrong, the team effectively replaced a gas engine with electric while flying at 35,000 feet.

We talked a few issues ago about some of the implications of the Merge, but it’s worth recapping now that it is done:

  1. Energy Efficiency: ETH now uses 99.9% less energy than under Proof of Work, largely negating the environmental criticism (it’s a bit less efficient than AWS now, but only marginally). Bitcoin is now the only significant blockchain still using Proof of Work.
  2. Deflationary Monetary Policy: Having removed the block subsidy for miners (effectively 2 ETH printed every 12 seconds as a reward), it is expected that more ETH will be burnt (i.e. destroyed) than created going forward. 192 ETH have been burnt since the merge and estimates are around a 2% reduction in supply each year.
  3. Positive Yield for Stakers: Having removed miners, those fees now get recirculated in the network to those who “stake” their coins to help build and verify blocks. Again, estimates vary, but staking is likely to earn holders 4.5% or more per year.

Beyond some pretty big benefits, it’s reassuring to see such an ambitious, complicated engineering and operations effort come together behind a worldwide, distributed, decentralized team. It’s one thing for Amazon to pull off a big launch, but it’s an impressive feat for a crypto community and one that bodes well for the future.

🟦 Starbuck NFTs

(Big Idea: Crypto Rails)

Last newsletter was all about NFTs, but some interesting news dropped since then so consider this a bonus edition. Starbucks announced they will be launching NFTs into their loyalty program. Customers can play games and complete challenges to earn “journey stamps” (AKA NFTs). Or, you can use the credit card conveniently stored in your Starbucks account to skip the journey and directly buy “limited-edition stamps” (AKA NFTs). Both sets of stamps will have a point value based on rarity and can be bought or sold (hmmm, that’s new!). But, as you collect more stamps and earn more points, you unlock new benefits and experiences (which honestly are probably only interesting to the type of people that would collect Starbucks stamps). Plus, all NFTs, excuse me, stamps, will “feature iconic Starbucks artwork” so I suspect they will actually look pretty cool, at least in that pleasantly accessible Starbucks kind of way.

Starbucks calls it a “Revolutionary Web3 Experience,” but what I find most interesting about this is that it isn’t Web 3, but really Web 2.5. This is not “true” crypto. Users don’t need to set up a crypto wallet, they don’t need to make purchases denominated in ETH, they don’t even really need to know what an NFT is (Starbucks specifically calls them “collectible stamps”). Members who use these features “may not actually know they're interacting with blockchain or NFTs," according to CMO Brady Brewer. They don’t even mention the underlying blockchain technology (Polygon, an Ethereum Layer 2) until they address the environmental sustainability of said chain at the very end of the press release.

But hear me now and believe me later, this is the way. Most people look at crypto right now and just kind of say “ugh”. It’s ugly, awkward, and confusing. Oh, and if you mess up, all your sh*$ is gone. That can be a deterrent. So it’s especially easy to dismiss crypto on the consumer side.

But for developers, it’s all inverted. This is heaven. Effectively everything is open source and composable; you can easily build one thing on top of another (i.e. “money Legos”). It’s permissionless so you can just start building. Data is open and accessible.

So I think this Starbucks offering is what we will see much more of and will be the way crypto works its way into the world. This is what I call the “crypto mullet”: party in the front, crypto in the back. The user experience is focused on ease of use, simple UI, password recovery, etc. But, underneath, all of the rails run on crypto which allows the builders to tap into that ecosystem's unique advantages. We’ll talk about this more in future newsletters.

◆ Why Bother With a Blockchain?

(Big Idea: Blockchain advantages)

One of the other criticisms of crypto is, “Wouldn’t it be easier to use a SQL database? Why use a blockchain at all?” And in lots and lots of cases, this is exactly right. IBM might like to sound cool in their Super Bowl commercials by touting their blockchain expertise, but that’s just there to get CIOs to spend millions on an Oracle installation.

So there’s a genuine question of why Starbucks is doing this with a real blockchain and what it hints at. I can guarantee you that United isn’t opening up Mileage Plus anytime soon (can you imagine the carnage if people could actually sell their miles and/or status?). Everything is easier in the closed world of loyalty that currently exists: you can make up your own fake currency, set your own rules, instantly kick off people doing things you don’t like, etc.

There are a few reasons that Starbucks may choose to go this way, but I’ll admit upfront that I’m not 100% sure of the answer. Let’s run through just a few of the advantages of a blockchain:

  1. Permisionlessness: Anyone can build in the ecosystem; you don’t need approval from a central authority. Unlikely here. I don’t think Starbucks is trying to pull in developers from all over the world. They will still control most of the experience.
  2. Composability: You can build one tool off of another and then build a new tool off of that tool. This is amazing if you’re building a deep eco-system, but probably not what Starbucks is working towards here.
  3. Credible neutrality. If Facebook launches a set of developer tools or APIs, you as a developer never really know if they may change their mind later and revoke or limit your access down the road. Blockchains enforce credibly neutrality since it becomes much harder to change the rules halfway in.

Another way to think about this issue is “legitimacy” and I think that may be one of the key drivers here. In a closed world, the value of your digital good is tied to the size, significance, and socialization of that world. In Fortnite, the value of that specific skin might be significant in your social strata whereas a special sticker in your Target app may not mean much. By putting these rewards on-chain, Starbucks gives them an aura of significance. Most users won’t know or pay attention, but it sends an important signal to those that do.

There’s all sorts of non-tech reasons that Starbucks may have launched this as well. Frequently, like those IBM commercials, it’s PR or some attempt to boost a stock price. (Remember when Long Island Iced Tea changed their name to Long Island Blockchain? Genius).

I suspect that has to play some role here. Being seen on the cutting edge must be important for Starbucks, but the timing of the program is a bit unusual. It’s not like NFTs are taking off at the current moment. Google search volume for “NFT” peaked in January and is now 1/10th its peak.

Ultimately, I might just take Starbucks at their word. “We’re bullish on the future of these technologies enabling experiences that were not possible before… It’s really important that we’re looking at it for the long-term.” My guess is that the Polygon team made it highly affordable to use their chain and Starbucks sees this as a really good chance to build some experience in a space that could be really big and meaningful to their brand. They’ve certainly seen some of the numbers Nike has been doing selling NFTs (see last issue).

I also think Starbucks feel good enough about its brand and its customer loyalty that they don’t need to lock users in. United and American know that everyone hates them and that if their miles weren't stranded and if their status didn’t get them on the plane in front of the unwashed mases, they would instantly jump ship. Starbucks customers actually like Starbucks and generally go there even when they have other choices. So building something open isn’t nearly the same kind of risk.

We’ll see more of this in crypto where building in an open world changes the terms of competition. If your customers are locked into your platform, it’s hard for them to leave. If I want to use Facebook, I have to use the Facebook app. But if the platform itself is open, it’s a boon for customer choice to be able to own their data or their NFTs or their coins and take them where they best see fit.

This Week's Burning Hot Take

“It’s easy to criticize something you don’t fully understand…”

As always, thanks for reading. Send me questions and please share with your crypto curious friends.

Erik Budde

Read more from Erik Budde

Today we'll get our hands dirty and I'll teach you how to Dougie use Solana, because, you know, all the female dogs crypto curious love me. 🟢 Gradually Quick update at the top on the Bitcoin ETFs. As of Friday, total net inflows to Bitcoin ETFs are at $2.3 billion. Again, I’m not a trader and this is not investment advice, but I think there is a good chance that Bitcoin goes on a bit of a run here. There seem to have been a number of investors waiting to get the heck out of GBTC and over $6...

19 days ago • 9 min read

I gotta get this out so I can go watch the next episode of the Adventures of Taylor & Jason. First, we’ll quickly recap the Bitcoin ETF launch. Then, we’ll introduce Solana, the blockchain du jour. 🟢 Bitcoin ETF Launched As predicted last issue, 11 Bitcoin ETFs were approved on January 10 and started trading the next day. By most measures, the launch was wildly successful. Both Blackrock and Fidelity are nearing $2 billion in assets already, trading spreads have been narrow and the NAV...

about 1 month ago • 5 min read

No “Happy New Year” for you. We’re past the statute of limitations and ain’t nobody got time for that when crypto is poppin’ off. Also, given I now have a day job, I’m going to switch up the structure of these e-mails. Instead of intricately interwoven gripping 3-act stories you’ve been getting, they will now be shorter, one-off pieces. Let’s see how it goes. 🟢 Oh My God, It’s Happening Remember that feeling on Christmas Eve when you were *sure* Santa was going to bring you that G.I. Joe with...

about 2 months ago • 3 min read
Share this post