In this week's Deep Dive, we explore the potential ramifications of Elon Musk's $44bn acquisition of Twitter for the crypto industry, memecoins and the future of Web3. Musk's infatuation with DOGE in particular has ascended beyond the realm of farce and we explore the market impact the takeover has already had on the world's largest memecoin.
Last week, Elon Musk finalized a $44bn deal to take over Twitter, quickly appointing himself CEO and dissolving the board. Elon is set to contribute $27bn, other investors (including Larry Ellison, Qatar’s sovereign wealth fund, a Saudi prince, and Binance) will contribute $5.2bn, and $13bn will come from bank loans. In his few days in charge, Elon has wasted no time rolling out changes, including replacing the existing verification system with an $8 per month subscription and developing a system to reinstate accounts that were banned from Twitter.
Musk, Twitter, and crypto have a tangled relationship; his tweets have caused markets to soar, crash, and have brought DOGE firmly into the mainstream. Since the deal closed, DOGE is up over 100%, open interest is approaching all time highs, and it is currently the 8th largest cryptocurrency by market cap. However, it is still 80% down from highs achieved in May 2021.
It’s tempting to dismiss all this as meme token speculation, but, as we will see, it would be shortsighted to write off DOGE as a joke. It’s difficult to get a read on Elon’s opinion of crypto: Tesla bought BTC, then Elon announced they wouldn’t accept it as payment because of environmental concerns, and then Tesla sold most of it. Luckily for us, as part of the legal drama surrounding the Twitter takeover, some of Elon’s texts to advisors, business partners, and family were released, providing insight into his vision for Twitter and thoughts on crypto.
Elon's Vision for Social Media
In some of the earliest texts released, Elon writes to Twitter co-founder and Bitcoin supporter Jack Dorsey that “it’s worth both trying to move Twitter in a better direction and doing something new that’s decentralized.” These ideas are floated multiple times, and he seems to have competing visions: one is improving Twitter and one is a totally decentralized “blockchain social media system” where one would “have to pay maybe 0.1 DOGE per comment or repost of that comment.”
Interestingly, the latter idea seemed to get pushed to the wayside when Elon was introduced to Sam Bankman-Fried (“SBF”), CEO of FTX, who had also proposed an on-chain social media network that would charge users to send messages. Just 11 days after floating charging 0.1 DOGE per tweet, Elon wrote to an advisor that blockchain Twitter “isn’t possible, as the bandwidth and latency requirements cannot be supported by a peer to peer network, unless those ‘peers’ are absolutely gigantic, thus defeating the purpose of a decentralized network.” He also added that he would be willing to talk to SBF as long as he didn’t “have to have a laborious blockchain debate,” an incredibly relatable statement from the world’s richest man. According to the texts, SBF was interested in contributing up to $10bn to the deal, though he reportedly backed out after the two had a phone call.
But this is not the end of the story for Twitter and DOGE, nor for incorporating Web3 elements into Twitter.
DOGE and Twitter
Elon has frequently posted memes about DOGE, and for a long time this seemed to be mostly a joke. This all changed when, on May 12, 2021 he tweeted that Tesla would no longer accept BTC for payments because of environmental concerns, adding that they were “looking at other cryptocurrencies that use <1% of Bitcoin’s energy [per] transaction.” Many interpreted this to mean DOGE, and this was seemingly confirmed the next day when he tweeted that he was working “with Doge devs to improve system transaction efficiency.” (Despite this statement on BTC, Elon still seems to be a fan. Based on texts, he also appears to really value Jack Dorsey’s advice, and he is a strong proponent of BTC.)
So what would it look like if a 0.1 DOGE payment was required to post? Let’s first look at volume. Through 2022, the token has averaged over 20bn DOGE in weekly volume, cumulatively over $90bn USD year-to-date.
DOGE's liquidity is on par with other tokens in the top 10 by market cap (excluding BTC and ETH). Below shows the total market depth of bids and asks placed within 1% of the mid price, aggregated across 8 of the world’s largest exchanges. DOGE’s liquidity is roughly equal with that of BNB ($53bn market cap) and ADA ($14bn market cap) but about half of that of SOL ($11.5bn market cap).
Additionally, most major centralized exchanges have listed DOGE. In fact, the total number of active spot markets for DOGE across all exchanges is greater than those for ADA, SOL, and BNB. Today, 82 DOGE spot markets trade on nearly 30 centralized exchanges.
DOGE liquidity is sufficient to handle a large number of market-based transactions. Most estimates put daily tweets at over 500mn, or 3.5bn per week. Using the suggestion of 0.1 DOGE per tweet and assuming that number of tweets wouldn’t drop (a big assumption), that would increase weekly buying pressure by about 350mn DOGE, a negligible amount that wouldn’t meaningfully change volumes and would not stress liquidity.
But, if payments were on-chain, the Dogecoin network would be totally overwhelmed. It has handled 30,000 transactions in the past 24 hours – more than 15,000 times fewer than would theoretically be required with Twitter – with a median transaction fee of over $2. The suggested tweet fee of 0.1 DOGE is worth just over 1 cent, making the transaction fee over 200 times the hypothetical cost of tweeting.
It’s possible that this is part of the reason why Elon seemed to sour on the idea of a decentralized social media network requiring payment for each tweet. Dogecoin would not be able to handle such massive transaction volume without higher fees or compromising on decentralization; it currently maxes out at about 40 transactions per second (TPS). At its current rate, Twitter would require nearly 600 TPS. Newer networks like Solana and Ethereum Layer 2s boast TPSs of over 1,000. (Given SBF’s close ties with Solana and Elon’s unwillingness to engage in a blockchain debate, it’s easy to imagine how their phone conversation might have gone.)
However, DOGE could be a natural fit for one of his first changes: getting rid of verification and offering Twitter Blue for $8 per month.
Next Steps
Using DOGE for Twitter Blue payments would be far more feasible on a transaction count level. It has been reported that Twitter is developing a wallet prototype that would allow for crypto deposits and withdrawals. Additionally, Binance CEO Changpeng Zhao (“CZ”) said that Binance provided $500mn for the deal to be supportive of “anything that is to do with crypto or Web3,” and floated Binance Pay as a solution. He said that Elon has mentioned “Dogecoin, charging for tweets, charging for comments, charging for the blue tick… I think all of those things are coming.”
Yesterday, Binance fueled further speculation by launching an index and perpetual future contracts that track DOGE, BNB, and MASK, aptly named the “Bluebird Index.” MASK is the token of the Mask Network, which brings Web3 features to Web2 platforms like Twitter and Facebook. Within the first few hours of launch, more than 100,000 trades were executed and all three tokens made gains. At one point, MASK had rallied more than 40%, although markets have retraced slightly since. However, CZ also said that he was surprised the Twitter deal closed and didn’t know about the update to Twitter Blue until it was announced, so I wouldn’t put too much weight in the inclusion of MASK and BNB.
Overall, open interest for the perpetual future tracking the index has increased to about $1.4mn, with funding rates slightly negative.
Conclusion
A recent internal Twitter research document found that crypto is one of the fastest-growing topics of interest among heavy users, while news, sports, and entertainment are declining. Offering crypto payments would appeal to an increasingly important user base that is often extremely conscious of anonymity and would be hesitant to use traditional payments.
Given all this, the likeliest scenario seems to be that Twitter will develop or adopt a wallet with DOGE and BTC as the first two crypto payment options. This would be an important step in the development of X, Elon’s vision for an “everything app” that would likely function like WeChat, offering messaging, social media, payments, e-commerce, and more. As demonstrated by Reddit NFTs, when done correctly, integrating simple crypto features into a widely used platform can be successful for both the platform and users.
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