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Dec 10 2018

#60: The redefined role of investment funds in the Blockchain space

📌 An opinionated recap of the most interesting news in crypto
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The redefined role of investment funds in the Blockchain space
Jake of Coinfund tweeted an extremely interesting insight the other day.
I find this insight fascinating and worth of deeper analysis.

The crypto space is a completely new world, where the recipients of investors' monies aren't companies anymore - and can be networks, ecosystems, open source projects, non-profit foundations, cooperatives and DAOs.

At the same time, the product is not a simple consumer- or business-targeted software or real product, but a protocol.

This means that investors have to re-think a number of different parts of their model that were targeted towards product-based companies.

The usual thinking here has been around liquidity and how to manage a now uncertain type of asset, but the more interesting thought is around what the actual structure, scope and vision of an investor will look like.

Jake envisions a version of the future where investors will be "miners, stakers, validators, bonders, curators, dispute resolvers, nodes, hubs, watchers, routers for networks". 

We're actually already seeing a bit the lines blurring in private sales happening at the moment.

Oftentimes we're seeing market-makers, hardware-producers and other ecosystem players invest and be welcomed by founders.
We're seeing founders actively request mining, node-running and similar services from their investor base and oftentimes only allocating capital to such entities. This could be one argument for the ballooning number of participants in rounds, as founders look for as much service supply as they can get their hands on to bootstrap they networks. Of course the other argument is that founders raise way too much money while it's hot, letting in anyone with a cheque. 

Adding a structured portfolio of services and infrastructure like the one envisioned by Jake, might even become table-stakes in the future of crypto investing.
🔥Thoughts
🔦Featured on Token Economy

Cuy shares a super interesting thesis on Ether long-term value capture potential. The background to it is that, in the context of assessing current market valuations, there's a heated debate around the ability of ETH the currency to capture the value of the economic activity that one day may sit on top of its protocol: if ETH becomes 'working capital' for the economies its protocols enables, velocity could spiral up exerting downward pressure on network value and potentially compromising its security.

Here Cuy presents an alternative narrative where, assuming trillions of dollars of economic activity will be handled by the Ethereum protocol (a huge 'if' of course), some large entities, even state actors, may have an increasingly strong incentive to maintain the network secure and thus have no choice but hold significant capital in ETH (under PoS), in the same way as a % of GDP is allocated to military/defense and increasingly cyber security budgets. Store of "Economic Security" might be a more apt definition, as Panek points out. 

In this case, Ethereum network value would have a natural backstop at the level required to maintain its ecosystem economies secure.
Another *fantastic* post by John Backus. Make sure you read this one if you are investing in this space.

Once again he looks back at the p2p file sharing wars of the year 2000s to draw some possible inferences to today's decentralized platforms. In short, since the most interesting decentralized technologies typically "flirt with the boundary of the law", the optimal strategy to play for the win (read: survive) is to forgo short term breakneck user growth, even product-market fit, while favouring legal optionality (something BitTorrent played really well against Kazaa, Limewire & co):

"If we haven’t seen any sort of legal attention yet, we should be cautious in how we interpret growth if we’re investing in the long run. Weird legal structures and strange public relations decisions might actually be worth analyzing deeply in search of hidden meaning. Spotting the ugly duckling may be the name of the game when investing in decentralized technology."

It's interesting to read this with the investor's hat on just as BitTorrent gets acquired by TRON for $120M or so. BiTorrent "won" at creating value, not so much at capturing value ultimately.
A recent tweet by Ryan perfectly outlines this dichotomy👇
Nick from USV introduces the idea of "Minimum Viable Economy" as the sufficient critical economic mass required for a network to support its own native currency, with a clear parallel to the real world.

In Nick's view, that will differ depending on the supply/demand density required to enable a specific use case, whether it's a medium of exchange currency or a single-purpose network currency, or anything in between.
The other way to read that is that, so long as a given economy is sufficiently strong, it should be able to support a native currency. Will Warren of 0x thinks there will be many in the crypto world.

Whether and how such currencies will capture value is a different matter.

BONUS: a lot more came out from the USV stable this week, showing how dominant crypto is in their minds:

>> Drinking From The Crypto Firehose by Fred. Nothing particularly new in there if you've heard about the Carlota Perez framework before, but hey it's Fred. One thing we particularly relate to:

"...what is going on is a frenzy of innovation that will lead to many important things. But keeping up with it all is exhausting."

>> Browser, Wallet or Something New? Looking for Crypto Ease of Use by Albert, where he imagines the killer app for the decentralized web being something like a personal authenticator:

"A piece of software that I, the enduser, control and that represents me vis-a-vis the decentralized infrastructure". Who's building this?
Paul Krugman, the Nobel-prize winning economist known for, amongst many other things, having predicted in 1998 that the impact of the Internet on the economy by 2005 would not have been greater than the fax machine's, has just published a crypto bearish piece on the NYT.

Paul's not new to skeptical takes on Bitcoin, with his very first one dating all the way back to 2011. And he's not alone, his fellow economist Roubini has also followed suit vehemently on several occasions over the years. There's definitely room for critical views here and we have not been shy about sharing and surfacing them, but what's most remarkable in this missive is that, for someone undoubtedly sharp who's (presumably) been following its developments for the last 7+ years, he hasn't yet been able (or perhaps willing?) to appreciate the revolutionary potential at the core of digitally native, non-sovereign censorship-resistant money, as statements like this one suggest:

"Using a bank account means trusting a bank, but by and large banks justify that trust, far more so than the firms that hold cryptocurrency tokens. So why change to a form of money that works far less well?"

His best case scenario (or worst, depending on the perspective) is for bitcoin to support the black market. Not a small feat by any mean, but...yawn.

At the very least he closes with "Could I be wrong? Of course."Just in case it's more than, you know, another fax machine. 📠
Perhaps Krugman would enjoy reading this brilliant recap by Hasufly and Nic Carter of how different Bitcoin narratives have evolved over its 9 years of history. Pretty visuals included.

The authors believe we are currently into a relatively peaceful era since the BTC/BCH civil wars culminated in the fork last year, which has resulted into a more rapid pace of development.

With one potential looming conflict on the horizon though, as institutional investors start to look at BTC (or derivatives of it) as an uncorrelated financial asset.

Stefano's view is that in 10 years, we will probably have completely new narratives for Bitcoin that we can't imagine now, and they might form the majority of an updated version of the below graph.

---

BONUS I: it was interesting to see a paper come out, the day following this post was published, bringing back "The Case for Scaling Bitcoin On-chain" (by Node Blockchain).

BONUS II: on evolving narratives, Nathaniel published a top post outlining which ones can act as catalysts going forward. Recommended read.
Bitcoin
This is an interesting and timely thought piece by Outlier aimed at developing a mental model to navigate towards decentralization. There's nothing like an established playbook here, so everyone is in uncharted waters.

We see a lot more thinking going into this topic going forward as many evolving factors come into play, especially on the regulatory side (what is sufficient decentralization, what is full functionality?) and governance side.

"Committing to the codification of design choices too early can become restrictive when faced with the realities of the market and events generally (such as hacks) making the system more fragile and vulnerable to forking."
Great reporting by Motherboard on one of many cases of SIM swapping and crypto theft that ended with the scammer being caught, hopefully paving the way for more arrests.

Apparently the 20-year old managed to hijack several phone numbers at the latest Consensus conference in NYC. 😱

A good reminder not to link your phone numbers to online accounts (and not to give out your number to randos at crypto conferences).
First part of a Consensys series to follow if you want to get your heads around what's happening in the Chinese blockchain world from a regulatory, tech and investment perspective.

On that topic, you might be interested in Forbes controversial overview of one of the most prominent crypto hedge funds in the country.
The author tries to explain the differences between Tezos' "Liquid Proof of Stake" model and why it's different from / and often confused with the delegated proof-of-stake (“dPOS”) model specific to EOS or Lisk.

"In dPOS, election of a fixed set of Block Producers (i.e. delegates) is required for network consensus. In Tezos, delegation is optional."

Another good read for people interested in on-chain governance, and its skeptics
Counterfactual!

If you remember, we're great fans of the work of L4 and their open source Counterfactual implementation.

In this post they explore the reasons layer-2 approaches are hard and confusing, and what can be changed (and what they're doing) to make it easier for developers.

What they do is essentially splitting the state channel resolution logic from the application logic.
Tuur outlines why he doesn't believe in a significant bounce back in bitcoin prices this year:

1/ continued selling pressure from smaller miners on the back of reduced mining profitability
2/ weak demand from net new buyers both from the retail and institutional side
3/ 'fundamental' ratios line NVM and NVT in over-bought territory

Note: this post was published right *before* the ICE/Bakkt news (more on that below), which may have an impact on some of his underlying assumptions.
💥Newsy stuff
Big news coming from Wall st. 🏙️

The Intercontinental Exchange (ICE), parent company of the NYSE and several other global exchanges and clearing houses, have announced a new venture called Bakkt (as in "backed"), with the financial backing of both large corporates (Microsoft, Boston Consulting Group, Starbucks) and financial institutions (Fortress, Eagle Seven and Susquehanna). Aim of the venture is to take bitcoin mainstream by providing a federally regulated "on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility". One of the largest owner and operator of the infrastructure of 'old' financial system will be head to head competing with the native crypto players, but no doubt unlocking a bigger pie for everyone.

Starbucks involvement is particularly fascinating, since their app powers mobile payments for something close to 25M users in the US alone (bigger than Apple Pay):

"Starbucks will play a pivotal role in developing practical, trusted, and regulated applications for consumers to convert their digital assets into U.S. dollars for use at Starbucks”

From a technical perspective, subject to CFTC review and approval, Bakkt will operate as physical-backed futures exchange on a centralized L2, where transactions won't touch the blockchain unless they enter or leave the digital warehouse. For an analysis of the implications of this type of "leverage-based financialization" of bitcoin we reccommend reading Caitlin Long's excellent piece on Forbes.
So this may set the scene for how institutional crypto will play out:

“To evolve, the cryptocurrencies need to run on established infrastructure. They need the trust and rules that have been built into our financial system for many years. They need the kind of trust that the Big Board represents.” says the CEO of ICE.

While sounding like a rather backward-looking statement, it does raise the question of what sort of trade-offs will need to be made to take bitcoin, or crypto more broadly, mainstream. A maximalist view is that bitcoin is not meant to replace public market infrastructure, it's only meant to disrupt money. 

Lots to unpack as usual, overall it's a major piece of news with large ramifications for the industry.
In other news:
- More Wall st. Asset manager Norther Trust, $1T AUM, founded 130 years ago, is launching a custody solution for digital assets.

- NFT craze. Hyperion, one of the four unique Gods Unchained Genesis Titans, went on auction for 146 ETH.

- Bitmain. The numbers are just *insane*: $1.1B in net profit in Q1 '18, almost matching 2017 profits for the whole year. Raising another $1B at $14B valuation form Tencent, sovereign wealth and pension funds ahead of its IPO.

- M&A: Binance snapped up Trust Wallet for an undisclosed mixture of cash, equity and BNB tokens. The plan is to keep it independent and leverage it as a building block for its upcoming decentralized exchange. Crypto M&A is heating up.

- Crypto celebs: Ripple is paying up to get none other than Bill Clinton to keynote their conference.

- Crypto IPO: Argo has had a successful listing on the LSE market, with a ~$50M market cap. They provide a cloud-based Mining as a Service product.
😎 Cool new projects
A new debt-relayer called QuickLine has launched on main net as an interface for interacting with the Dharma protocol to lend/borrow ERC20 crypto assets. It allows for instantaneous borrowing as lenders can list up their offers and terms.

PS: Dharma also just released their Relayer Kit, so expect to see a lot more activity in this ecosystem.
Status is extremely impressive. After bouts of silence, they come out with things like Nimbus, which are amazing.

Nimbus is basically a client for Ethereum, that already aims to implement a lot of the next-generation features that are planned for the nextwork, such as Sharding, Plasma, STARKs, better signature aggregation.

All available on Github
We've featured The Graph already, but now they released their code, so it's worth to have a look at. Super useful stuff.
The Sparkswap team have unveiled a new way to instantly settle trades P2P using trustless, atomic cross-chain swaps over the Lightning Network, the first working application of this tech. This would allow to create off-chain cross-chain swap markets.

Currently live on testnet for BTC-LTC. Keep an eye on this.
This is not new, but somehow we've never featured it: Andreas Antonopoulos's book on Ethereum.

It's all free on GitHub.
Cred is yet another of the invest your spare change in crypto apps.

This one comes out of the Science incubator in LA and has raised $1M already.
Crumbs is live on the iOS app store with their app that lets you round-up your credit and debit card expenses and auto-invest them in crypto assets. It's only available in certain US states for now, but it's fully functional.

Unlike other similar apps that we have see coming up, Crumbs offers a broader set of user controls and investable assets as well as the ability to cash out to USD at any time, while not requiring a linked Coinbase account.

The 22-year old founder shared some key learnings from launching the app.
Curated on a Product Hunt collection!
💰 New funds
Linda Xie's Scalar Capital has topped $20M AUM after signing up some industry heavy weights like Marc Andreessen, Chris Dixon, Bain Capital Ventures, Brian Armstrong, Fred Ehrsam and Elad Gil. 

🙌 Linda! 
💸 Funding rounds
The big talk of the week on Twitter has been Handshake: a decentralized certificate authority and naming.

The main reason for all the talk is the stellar team: Joseph Poon, Purse's CEO Andrew Lee, Private Internet Access founder Andrew Lee and CTO Christopher "J.J." Jeffrey. The other reason is that they have kept it all incredibly secretive to date, we've even heard rumours of some investors blindly committing only knowing the founders names.

They raised $10.2M from an all-star roster of investors who bought 7.5% of the network at a $136M valuation.
The interesting twist here is that there is no entity. There's no foundation or anyone else involved, it's just the network.

The "principals" (eg. founders, who don't want to be called that for probably legal reasons) have allocated 7.5% of the tokens to themselves.

They plan on giving away most other tokens to open source developers, and seems they want to give away the full $10.2M raised to famous Free and Open Source projects, in addition to grants.

I fear all of this might even distract from how important what they are building is (like ENS): an un-censorable system for maintaining domain name zones is crucial for a free internet.

BONUS: here's a deep dive deck on Handshake by Ausum Ventures, one of the investors listed above, if you want to dig further.
Hashgraph announced its $100M raise.

What we have heard is that they were aiming for $250M but had quite a hard time reaching that amount, and recently started reaching out to folks who they'd previously dismissed given a low ticket commitment to fill the round.

Funnily enough, BlockTower participated in this mega round as well, after the $500M Tatatu one.
Radar Relay announced its Series A round. $10m led by Blockchain Capital with participation from many others including Breyer Capital, Collaborative Fund, DCG, SV Angel, Kindred, V1.vc and more.

You might remember us talking about Radar Relay and how we were impressed with the execution from an anonymous non-SV based team. Well, it seems our thoughts were right in not needing to know many people in the investment community and just shipping amazing software.

Congrats!

The ecosystem around 0x keeps on solidifying. 
Ultrain raised a $20M round from Draper Dragon, FBG Capital, DanHua VC, Arrington XRP Capital, Bixin, OKCoin, Morningside Capital and Ceyuan Capital - for yet another Ethereum competitor. 
Pomp shared one of the first investments from Morgan Creek Digital in their quest to tokenize the securities world.

OpenFinance Network is a US based regulated security token trading platform, built for a tokenized future.

It looks like it will list all tokenized securities created by its network platforms including Securitize.io, Harbor, Polymath, Republic and so on.
Logos raised a $3M seed from ZhenFund, Digital Currency Group, INBlockchain, Blockwater Capital, Global Blockchain Innovative Capital, AlphaBlock Capital and AlphaCoin Fund.

It looks like it's a DPOS model with sharding built in.
Interestingly, it doesn't look to compete with Ethereum or other development platforms but only focuses on payments and value transfer.
🤡 ICO madness
July 2018 ICO update
The decline continues steadily, with 40 reported ICOs raising just north of $400M (mostly privately), back below the levels seen a year ago.

The Top 5:
1/ Cryptosolartech: solar powered mining operation in Spain ($60M)
2/ Origo Network: privacy focused dapp platform ($30M)
3/ Sparkster: decentralized cloud platform ($30M)
4/ Nervos Network: network of interoperable protocols ($28M)
5/ Flogmall: eCommerce application ($24M)

Notable absence of US based teams and mega rounds (Hashgraph technically closed in August). For a dissection of the numbers and update on ICO performance, take a peak at TokenData's analysis. 
July
👮 This week in regulation
Crypto "heavens" are having their prime time on the back of the regulatory uncertainty surrounding the more traditional jurisdictions, with this sort of headlines appearing on the NYT. 

And they don't come unprepared, having regulated tough industries like gaming and gambling for many years.
Speaking of uncertainty. Preston sends a frustrated missive addressed to the UK financial regulator, urging to get to grips with the proliferation of questionable ICOs after in his opinion letting it run loose for too long.

This comes on the back of the shocking revelations that a MP who sat on a Blockchain working group allegedly failed to disclose an interest in tokens in a project he was advising potentially worth $3.7M.

"Regulators of the world, the time for exploratory work is past. Clean house, come up with a battle plan, establish a supervisory framework, and enforce it."
ℹ️ About us
Token Economy is written and curated by Stefano Bernardi & Yannick Roux.

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