The Army Vet Fighting Transaction Fees With NFTs

VF Protocol wants to use DeFi to make every purchase cheaper.

The top criticism of cryptocurrencies—made often by people who are hostile, but also by evangelists who believe in bitcoin and ethereum—is that they are mainly used for speculation.

Crypto is "a solution in search of a problem," as the saying goes. It's a currency, and traders try to profit from its price fluctuations just as much as they do from the exchange rates between dollars, euros, and renminbi. But day to day, relatively few people pay for coffee, Netflix, or sneakers with crypto.

But all this "solution in search of a problem" stuff is strange. Because the economic case for bitcoin and cryptocurrency is obvious; its utility is clear. It offers a way around transaction fees, which are too damn high.

If you buy coffee with your debit card, then Visa, MasterCard, and other intermediaries will charge the merchant a ~3% transaction fee. If you pay for Netflix with your credit card, Visa or MasterCard will charge a ~3% transaction fee. If you order sneakers online and pay with PayPal, they'll charge a ~3% transaction fee.

(And the café, Netflix, and Allbirds all charge higher prices as a result.)

"Since the dawn of markets, Visa has gotten to charge a 3% tax on the whole income economy," says Cameron Armstrong, founder of VF Protocol.

You know what doesn't involve a 3% transaction fee? Bitcoin and ethereum transactions.

There are good reasons why no crypto company has so far disrupted transaction fees—including the monopoly power and entrenched position of Visa, MasterCard, and others. But Cameron Armstrong, an infantry officer turned serial entrepreneur, is used to overcoming obstacles.

Today we're profiling our customer VF Protocol and how Armstrong is using NFTs in his mission to make transaction fees extinct.

Armstrong founded VF Protocol last year, raising $750k in October 2022 with the goal of killing transaction fees by moving every purchase and sale, whether that's buying a coffee or buying a house, onto the rails of decentralized finance.

"To me, this is a ridiculously compelling problem," says Armstrong, "because if I can save every small business 3% on all their margin, then I've quadrupled their lifetime earnings just by virtue of changing their money flow a bit."

If he could wave a magic wand, Armstrong would sign up every business for VF Protocol, as well as every human who spends money from time to time. Then everyone could buy and sell things with no transaction fees using VF Protocol.

For now, though, Armstrong has launched VF Protocol for one specific scenario: crypto-based escrow for private NFT sales.

Even if you don't use it regularly, you know about escrow. In traditional finance, it's when a 3rd party holds onto the money being sent from buyer to seller.

A simplified example: If Jose has a house that Sally wants to buy, Sally won't pay using a credit card or bank transfer. Since closing the deal (signing paperwork, doing inspections, stuff like that) will take weeks, Jose will want to know Sally's good for the money. And while Sally doesn't want to wire over her life savings until she has the title to the house, Jose doesn't want to hand over the keys until he has the money. So an intermediary, often a bank, holds Sally's money and releases it once the deal is done and Sally has the title.

Since crypto is described as "trustless," escrow may seem unnecessary in decentralized finance. But while it's true that bitcoin and ethereum don't rely on banks to manage the currency or transfer funds from buyer to seller, buyers and sellers still need to trust each other. If you send 1 ETH to someone from CraigsList for a couch and they don't give you the couch, you're just screwed. No couch for you.

That's why crypto needs its own escrow.

A year ago, Armstrong looked around and realized no company was really doing escrow for crypto. He thought he "was insane," since creating a trustless escrow, one run by code rather than a trusted 3rd party, seemed like "a canonical blockchain use case." But it was true.

There were good reasons for this, though. In particular, running code-based escrow is easiest for purchases of digital products that are on the blockchain. But there hadn't been a big market of on-chain goods—until, that is, the rise in popularity of NFT collectibles, which happened not long before Armstrong started thinking about crypto-based escrow.

So the timing was right for Armstrong to get his first customers and launch VF Protocol as escrow for private sales of NFTs.

When he dove into researching crypto and escrow, Armstrong realized that escrow was not just a good beachhead for his business. Escrow could—under the hood—be the engine of VF Protocol that kills transaction fees.

(This is why VF Protocol stands for "very fun." Because not paying transaction fees is fun!)

To understand how this would work, it's important to remember that when you buy or sell something with dollars or euros or yen—but not in cash—that transaction does not happen instantaneously. So when Sally buys Jose's house (or when Elon Musk buys Twitter), the buyer may pay in installments, often after certain conditions are met, and there are clauses like, "If the basement turns out to be full of raccoons who see themselves as the house's rightful owner, the deal is off and Sally gets her money back, minus a small fee."

Even when you just buy a coffee (with your Chase Sapphire Reserve card), it takes days for It's a Grind café to actually receive that money.

Many crypto evangelists see this as a bad thing. It's an inefficiency. Code is instant, so transactions should not take days. But Armstrong holds a different view.

"The problem with NFT private sales right now is that they're atomic swaps: instant and irreversible," he says. "For a lot of people, that's a feature, but transactions being reversible is very useful in the economy."

Armstrong gives the example of buying a Bored Ape NFT that seems like a bargain. You transfer $100,000 worth of cryptocurrency, get your Ape, and two days later receive a DM from the former owner who says it was stolen from him. Now you're on the hook to return it, but you can't ask your bank to undo the transaction. Your money is gone.

That's why NFT sales on VF Protocol are not instant. They're held in escrow for a "diligence period" until buyer and seller both give the digital equivalents of thumbs up on the transaction.

"So I think that in order for crypto to become a mass-adopted economic platform, you have to have this emulated reversibility," says Armstrong.

An added bonus: Since VF Protocol will have a pool of customer money sitting in escrow every day, the company won't need to charge transaction fees. Instead it can put that money to work by running Ethereum validator nodes (i.e. being compensated for validating Ethereum transactions, like Lido does with staked ETH), and the yield from that pool of money can cover the company's costs and provide its profits. No transaction fees—that's pretty fun!

As Armstrong started pitching VF Protocol to angels and VCs, his technical cofounder had to leave the fledgling company for family reasons.

"I'm not great VC bait," says Armstrong, "and after 15-20 conversations where I basically got the same question of, ‘Okay MBA guy, who's going to build the thing?' I got mad."

Armstrong is a former infantry officer. He says he would have completed Ranger school with a broken foot, except an instructor pulled him out when he was limping during a navigation exercise. His company blog posts announce that "Fighting is in VF Protocol's DNA."

He felt up to the challenge. While not a developer, Armstrong has a relevant background. He'd done scientific programming as an undergrad. He'd taught himself Python for data science while in the army. He'd managed product at his previous startup, which he sold in 2021.

More importantly, after years in the military, navigating uncertainty was nothing new.

"What is lost in a lot of pop culture representations of the military is that you really need to have or develop values like resourcefulness and grit—and those are classic startup values," says Armstrong. "When you have a platoon and are told to ‘take that hill' or build a base, when you run into something that you don't know how to do, you have to figure it out."

So between pitches, Armstrong used resources like Speed Run Ethereum to learn the Web3 developer's toolkit ("I won't say I was hate-learning," he quips) and built a minimally viable version of VF Protocol. He's the first to say that it's not the best-looking application out there, but it works.

As he developed this first iteration of VF Protocol, Armstrong got some help along the way.

When ChatGPT came out, he found himself able to code two or three times as fast. "I'm super stoked to see what I can do over the next few months," he says.

VF Protocol also became a Center customer when Armstrong looked for the best approach to rendering NFTs. That's because our Center API provides NFT infrastructure for crypto companies.

"A core part of running private sales on VF Protocol is the visual and metadata layer for NFTs," Armstrong says. "That's a problem that I didn't want to solve myself because it's not useful for me to learn how to index the bajillion NFTs that exist and declutter spam."

By using Center's API, VF Protocol can see which NFTs a user owns and display their images on the site—a task that, due to the decentralized nature of the blockchain, is challenging to code for every situation. And it can do it without showing spam NFTs.

"I think it's reasonable to say that there's a 20% chance that I wouldn't have launched anything without Center," says Armstrong. "Even compared to another NFT API, Center easily saves me a week or so of work a month—because Center just freaking works."

While private NFT sales are a good place for VF Protocol to find its first customers, Armstrong is eager to sign up people outside the crypto ecosystem.

That's why he wants to expand soon to an overlooked part of the financial world: Selling your couch with just-a-few wine stains on CraigsList or Facebook Marketplace for $200.

"You'd like to know if that person actually has the $200 before they show up at your house and try to pretend they only have $80, right?" says Armstrong. "There's no good solution right now, but a micro escrow could show you that person's funds locked up before they arrive and then unlock the money when the exchange happens."

"You don't even need to understand that the app is crypto," he adds.

Moving to purchases of real-world, non-digital goods is tricky, but Armstrong imagines them also being powered by NFTs. For each transaction on VF Protocol, a "digital twin" of the object—a NFT that represents the medium coffee, CraigsList couch, or pair of Nikes—will be transferred when the escrow is finalized.

Still, Armstrong stresses that the biggest challenges are not technical. Coding escrow is relatively simple, but "the hard part is building trust and getting people to use it."

Companies like Visa have a half-century head start and the war chest to pay Morgan Freeman to voice reassuring ads about the brand's ubiquity and reliability. It's a tough hill to take, but Armstrong knows better than most startup founders how to expand from a beachhead to overcome an entrenched opponent.