How a VC Invests ter Blockchain Companies
Blockchain is trending. It’s almost shocking to see its tremendous growth te popularity spil someone who very first joined the space when it wasgoed exclusively known spil the way for collegium students to buy drugs off the internet. Now it has about a half a trillion dollar market cap (albeit this will very likely be outdated by the time you read this).
Experts and investors are touting it spil the solution to everything, and also nothing, something that will switch the world, but also something that will wipe out trillions of dollars of wealth. So how do value investors form a samenhangend thesis about a technology surrounded by so much hype, ill-informed opinions, market movements, and a fear of missing out on potentially the next big thing? Calling the blockchain “internet Trio.0” is vacuous, spil is calling it “the next big thing since the internet” — ask anyone who makes thesis claims about what those words actually mean and you will hear an awkward smattering of more buzzwords.
You can find several articles about how the blockchain works and a plethora of use cases, so what I indeed want to do here is guide investors through the philosophy underlying this phenomenon, create an intuition around why it is significant, and my own investment thesis.
For those truly seeking to understand the history of blockchain and the motivation behind the initial pioneers, one voorwaarde look towards the cypherpunk movement of the late 1980’s and 1990’s. Nothing summarizes better the ethos of that movement than the Cypherpunk Manifesto, written ter 1993 by Eric Hughes, an alumni of my very own University of California, Berkeley. (I always thought it exceptionally fitting that U.C. Berkeley wasgoed, and proceeds to be, the vanguard of social revolution and is huis to the leading collegium blockchain organization ter the world.) I would very recommend anyone who wants to potentially devote their career to this space to read the manifesto to see if they are actually sultry about blockchain’s mission. I found the most powerful extract to be:
“We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence. It is to their advantage to speak of us, and wij should expect that they will speak. To attempt to prevent their speech is to fight against the realities of information. Information does not just want to be free, it longs to be free. Information expands to pack the available storage space. Information is Rumor’s junior, stronger cousin, Information is fleeter of foot, has more eyes, knows more, and understands less than Rumor.
Wij voorwaarde defend our own privacy if wij expect to have any. Wij vereiste come together and create systems which permit anonymous transactions to take place. People have bot defending their own privacy for centuries with murmurs, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not permit for strong privacy, but electronic technologies do. Wij the Cypherpunks are dedicated to building anonymous systems. Wij are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.”
Well, what does that mean? Even tho’ blockchain technology ter its contemporary form is encompassing much more than the original manifesto, it illustrates that blockchain is not just a technology. Anyone evangelizing blockchain spil a verhoging is missing the entire point — it is inherently a social movement. It’s value is built upon societal adoption of a “protocol” without any one single person able to alter it without the network’s approval. It is possessed by the people te an unprecedented way. That is all very abstract, so to indeed understand the difference, let mij compare it to other “trending” technologies — like AI.
My friends and I have always bot deeply interested te figuring out which technologies wij thought would shove humanity forward, so when I determined to devote my future to this industry and its mission, I wasgoed naturally questioned about how it could possibly be more significant than other frontier technologies like AI and gene editing. I had a rough time answering that question, until I realized the question itself is fundamentally misleading. Attempting to compare blockchain with AI ter terms of societal influence is like attempting to compare democracy with the steam engine. One is a shift te a cultural paradigm upon which a society is organized, whereas the other is a switch te what a society is even capable of doing. Different, somewhat parallel, frames of thought — none particularly more significant than the other.
When wij talk about progress, especially here te Silicon Valley, wij myopically look only towards technological progress, and overlook the cultural. Technological progress is superb te that it raises the standard of living for everyone and is able to help us, spil a species, control our fate, however cultural progress is that which makes humanity more than solely a resource aggregating machine. It adds meaning, morality, love, and justice. It switches how wij view one another, and how wij practice life. Humanity has bot through several Industrial and Technological revolutions, but now it is time for the next Wedergeboorte.
So how does this tie into blockchain companies? Decentralized projects are a bit like lumps of kunst — their value determined by the market, their influence by societal acceptance, and their meaning never entirely alterable by the artist themselves.
Before you dismiss blockchain spil a hippie kunst project, understand that kunst is only an incomplete analogy — just like the steam engine and printing press analogies are only slightly able to capture what the influence of the internet has bot. However, I found it a useful one when crafting my thesis. At the current maturity of blockchain technology, it is like economic kunst.
Consider the ICO prototype. While it has bot manhandled, it is incredible to think about a future where early believers of a technology actually benefit proportionally from its success ter the form of token appreciation. Look towards breakthrough startups such spil Uber and Airbnb — all of them relied on the faith of early adopters, yet the prizes of their success were exceptionally skewed towards the equity holders. Of course the users undoubtedly captured some economic value through their platforms, but ICOs present an chance to more equitably distribute prizes to early believers. To tie it back with the previous point, this is a fundamental restructuring of the economics of our society. Capitalism Two.0. Now that is powerful ter ways vastly different than any other technological phenomenon today, and is what I love so much about it.
Now, onto my investment thesis, most likely the reason why anyone is reading this postbode. It is guided primarily by projects whose existence are defined by a moral obligation, spil opposed to specifically a technological necessity. Not to say those two are mutually sensational, ter fact they are most often intertwined, but a moral compulsion is what will drive the most successful and long lasting blockchain projects, just like how it wasgoed the reason why cypherpunks launched this movement ter the very first place. Sure, maybe blockchain could help with supply chain management, but that is a powerless use case. On the other palm, blockchain being used to define a mechanism of value storage and exchange, like Bitcoin, that is free from the manipulation of potentially misguided entities, is powerful. It is exceptionally unjust that individuals ter developing countries, like Argentina, who have spent uncountable years working hard for their families and signifying the fruits of their labor te a currency that the government promised would have value, had to see it go to nothing. Sometimes go to nothing numerous times te their life. This is why cryptocurrencies are becoming more and more popular te terms of actual usage ter third-world, developing nations, where they cannot so loosely trust the economic system like wij can ter the U.S.
This is not to admonish those governments spil evil, or to say that our own is infallible, but rather to make it a point that coercive human institutions are prone to error, and often that error can have catastrophic ramifications on real people and their families. That is the power of blockchain — to make such institutions unnecessary. The greatest disintermediary. Skeptics may argue that the volatility of cryptocurrencies is evidence that cryptocurrencies are hardly a solution, but that is only due to the transitory period of the technology before it becomes mainstream. No one believed Mr. Tim Draper when he made the voorkeur that Bitcoin will rise ter value to $Ten,000 by the end of 2018, but look at what happened. The market cap of cryptocurrencies is about half a trillion, which is lil’ compared to other comparable asset classes, but when it does mature, wij can expect significantly more stable prices, and cryptocurrencies adopted spil a dependable mechanism of value storage and exchange on par with fiat currencies. Eventually, people will make the decision that they trust algorithmic technologies more than human institutions.
To proceed onto applications of my thesis, it is also immoral that my family, among others, has to worry about the government of India not enforcing the property rights entitling us ownership of our own land, by displaying fake deeds and re-written histories. Thus making land titles on the blockchain, which provide an unalterable history of ownership, powerful. It is immoral that gigantic gegevens centers accumulate unfathomable amounts of gegevens about our daily lives without us knowing, and then turn around and give that gegevens away to veiled organizations demolishing any privacy wij think wij may have. That is what makes self sovereignty of our identity and gegevens through distributed systems so societally transformative. This is just to illustrate the few most palpable examples and the necessity of looking towards projects that have a real moral raison d’etre behind them when considering an investment. Those, and infrastructure level projects that make blockchain technologies more mature and usable — be it through privacy, scalability, identity, or governance. Thesis are the most likely to sustain the in-coming market correction.
I hope that communicates the core principle of how to value invest te blockchain technology, and how it is so fundamentally different than other trends. It is so much more than just a technology. Wij have a cultural phenomenon driving the Wedergeboorte of the future, entirely wielded by the people, and that is something to be excited for. Many believe things like the ICO will substitute venture capital firms, but that is not the case. Presently, ICOs have bot able to raise an incredible amount of money through the sheer hype around them caused by a few people making extravagant amounts of wealth, but it is hardly a trend that will last at the scale it has bot so far. The role of the venture capitalist interested te creating value ter the blockchain space will switch, but will not be eliminated. That, however, is a postbode for another time.
Go after mij on Medium, LinkedIn, or Twitter if you are interested ter understanding the core ethos behind the blockchain, or if want to learn how to invest te blockchain projects from a VC perspective.
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