Mega Electric and NFT Escrow
In August 2021, the Bored Ape Yacht Club rewarded its members with an airdrop of serums from the Bored Ape Chemistry Club. There were three possible serums, M1, M2, and Mega Mutant (M3), that holders of Bored Ape Yacht Club NFTs could have received. These serums could be injected into their current BAYC to mint an NFT from the "Mutant Ape Yacht Club". During this event, only eight of ten thousand Bored Ape Yacht Club holders received a Mega Mutant (M3) serum.
"Mega Electric" metamorphosed from one of the 8 rarest serums, and immediately commanded the attention of Mutant and Bored Ape Yacht Clubs, as well as respect from thousands of traders within the NFT community.
Just a few weeks ago, the owner of Mega Electric came to Jacob Martin with one request: find a buyer. Because Mega Electric was distinct from other Apes, he required a high-touch method for transacting that matched both the buyer and seller’s needs. Jacob recognized the limitations of digital asset marketplaces and decided to create an on-chain escrow service to facilitate this deal. In this article, we will use the transaction of the Mutant Ape Yacht Club’s, Mega Electric, to explore the concepts of on-chain escrow, transparent transfers, and trust within the world of NFTs.
The Backdrop of Trust/Less Transactions:
In the current world crypto, transactions are governed by smart contracts. Smart contracts, described by Nick Szabo in 1994 are “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” In practice, these contracts function as autonomous software agents that perform codes or protocols upon the fulfillment of predetermined conditions. If a condition is true, the contract will execute without giving either party a chance to look back. As such, individuals no longer need to rely on interpersonal trust vis-a-vis the counterparty or contract law to enforce cooperation.
Although smart contracts facilitate trust-less and timely transactions, their prolific usage across non-fungible token marketplaces gives rise to a new set of concerns. First, marketplaces are absent a forum for communication between buyer and seller. This limits a seller from vetting a buyer based on their intentions and inhibits mutual negotiation. Second, smart contracts create a binary situation. One either has the NFT or does not. For deals that involve hundreds of Etherum, equivalent to millions of dollars, such absolute rigidity can be stressful or unnerving. Thirdly, many marketplaces have costly transacting fees that are coded as self-executing royalties sent to the swapping platform within a traditional deal. While the fees may only be 2.5%, the aggregate becomes expensive over time. In light of these challenges, the transaction of Mega Electric required a cutting-edge solution.
The Mega Electric Deal:
Within a marketplace, sellers can't publicly solicit buyers within the platform mechanic itself, as NFTs live on the blockchain and there is no messaging layer between wallets. If someone wants to advertise that their asset is for sale, their only hope is to do so via word of mouth, Twitter, or discord. Therefore, on Wednesday, September 22 - the owner of Mega Electric enlisted the help of Jacob Martin to find an interested buyer for the Mega Mutant Ape. After receiving an onslaught of interest via Jacob's personal network, Martin identified a serious buyer. The buyer offered 380Ξ for Mega Electric; however, they wanted to commit and lock in the price for 48 hours while they re-positioned their funds for the deal. At present, escrow has no place in smart contract-governed marketplaces. It is not possible to reserve a price and return to the deal at a later date. While some may see this as a difficulty, Martin saw this as an opportunity to innovate. He brought the concept of escrow to the blockchain.
Jacob acted as the neutral third party to mediate the deal. He started by laying out the terms and conditions in a group direct message with both the buyer and seller. Martin explained that he would create a new wallet, the seller could send the ape to the wallet, and the buyer would put a 10% deposit into the wallet. Once ready, the buyer could put the remaining 90% in the wallet. After both the buyer and seller agreed to the terms of the transaction, Martin went on to facilitate the transfer between the two.
At first, Martin created a new MetaMask wallet titled “NFTEscrow” and placed his CryptoPunk #2128 in the wallet to legitimize his identity as the trusted owner of the NFTEscrow wallet. All contents of the wallet are visible across the blockchain and confirmable via Etherscan. The wallet provides users and viewers with a complete set of status updates through the escrow process. Both the buyer and seller have full insight into the steps that are their responsibility, including where they are in the transaction process. The immutable transaction history builds a form of trust that reached beyond the identity of the individual.
The transactions proceeded as planned, beginning with the transfer of Mega Electric to NFTEscrow and the 10% deposit from the buyer. The wallet held the transaction in a secure, non-interest-bearing trust account. Both the buyer and seller could see the transaction take place, as well as anyone who was interested in following. Merely twenty-four hours later, the buyer sent the remaining 90% of the agreed-upon Ethereum to the NFTEscrow wallet. Once both parties had followed up as planned, Martin finalized the transaction and successfully sent the Ethereum to the seller and Mega Electric to the buyer.
This solution demonstrates that on-chain trust is the future of higher-value transactions. Whether a buyer or seller is anonymous or famous, it is their record of blockchain transactions - fully transparent, immutable, and tied to their digital identity. The story of Mega Electric introduces a new realm of negotiation and escrow in a way that brings privacy, trust, and communication to a world where buyers and sellers typically do not know or interact with each other.
Written by Kaesha Freyaldenhoven
JTM Tech Law