Crypto Investment Thesis: Path Towards The Network State
How I Will Invest From 2021–2025
Why Crypto?
Looking back, we have seen advances in computing technology every decade. From the mainframe to the Internet and now smartphones, there have been vastly different and innovative applications developed alongside these advances. Entire economies were built on top of these innovations with the likes of Shopify, Instagram, Uber, Spotify and so many more.
The next advancement started in 2008 with Bitcoin. With that came trustless computing — the foundation for all the blockchain applications we see now. We were given the tools to own digital money, digital property and automated smart contracts.
This creates entirely new economies and destroys friction in existing ones. Why pay for an intermediary to do a service for you when you can trust a computer instead? Why be bogged down by a government’s fiscal policy when you can truly own your assets? From decentralized finance to non fungible tokens, we have seen that there is high institutional and retail demand to interact in these economies.
That leads to our purpose: to invest in cryptoassets that redefine how people interact in digital economies.
Why Now?
Bitcoin first came out in 2008. It has been well over a decade since then. But cryptoassets still have a great deal of potential to grow. Institutional investors have only started their onramp into crypto with only 20% of these investors looking to invest in 2018 to now over 80% looking to invest if they haven’t already.
After the 2017 craze, the space underwent a time of tremendous growth and development. That culminated in 2020 with DeFi summer and in 2021 with the explosion of NFT based communities. Total locked value in DeFi went from $25B to now almost $100B. Opensea goes through nearly $3B in monthly transaction volume.
Institutional investors are continuing to pour in as cryptoassets stand at a total of $2T market capitalization whereas equities are at $90T and real estate at $400T. Venture capitalists, national government and other asset managers have increasingly bought into the space.
The smart contract race is now in full force. There are less talks about Ethereum killers compared to seeing which blockchain platforms are best suited for niche services and applications.
This is despite the macro conditions we live in.
Inflation is the highest it has been since 2008. Global debt set record highs with world governments shelling out higher and higher fiscal spending. The US has a new SEC Chairman and a new infrastructure bill that is targeting the crypto industry more than ever.
Yet cryptoassets keep moving forward because users want an alternative to what they see as inefficient solutions.
But what if we think beyond just step function solutions? What if we combine several trends within the crypto market?
Three Pillars to Build The Network State
A Trustless World
We cannot emphasize enough how important turning trust into software is. Decentralization is a spectrum and we always want to find ourselves leaning more towards it rather than centralization.
The main reason is progress. Finding efficiency through heavily centralized solutions is redundant. EOS was toppled after its centralization scandals went public. The purpose of trustless systems is to prevent scenarios like these from occurring.
There are blockchains everywhere on the spectrum of centralized versus decentralized. They understand lowering decentralization may mean better transaction speed. This is not necessarily wrong. The overall specs associated with blockchain technology will improve over time. In the meantime, we can hedge our bets by investing in several promising platforms alongside Ethereum.
The secondary reason is regulation. Bitcoin and Ethereum have been defined as not securities by US regulators. On the other side, we see the SEC going after Binance and Ripple.
New Economies
With DeFi and NFTs come the possibility of entirely new economies that never existed before. Software creates value where there was not any before. We have seen this with SaaS and marketplace companies. Blockchain applications take this to the next level as users are never at the mercy of a platform — they own their assets, their content and most importantly, their work.
Gaming and Land:
Economies in video games have existed for decades. But NFTs have allowed games to create new business models and economies.
Axie Infinity is the hallmark example. While the application is run by a centralized company, they have allowed entire populations to live purely off this play to earn game. Video games used to be completely owned by the game developers but now, the players create value out of a cryptoasset through its ability to create new NFTs in the Axie ecosystem. That is how this NFT marketplace goes through $1.5B in monthly transaction volume.
This also plays into virtual real estate where we see users create value on plots of digital land and charge other users to be on it. This could be art galleries, game arcades, amusement parks, concert halls and much more. Even better — we do not need to be constrained by physical limits in the metaverse.
DAOs:
Decentralized autonomous organizations are the next form of communities. We already see how rapid the demand for communities have grown in 2021 with Discord servers being packed full for many NFT projects. Turning those communities into a positive feedback loop via a DAO is the next step.
The NounsDao is an NFT based DAO that has earned $20M after a few months. Its governance purpose is to create more demand for its NFTs and a portion of the sales go back into its community treasury that is devoted to create more value for owners. While we do not know if Nouns will succeed, this could pave the way for future iterations of collaboration and business models.
To conclude this section, marketplace startups have dominated the last decade of technology. Now we can see new network effects take hold between developers, validators and users.
Bridges upon Bridges
The final pillar we use to evaluate investments is the possibility of creating new bridges. We see interoperability as the key variable to exponential growth. The Internet unlocked the full potential of PCs and the smartphone in turn unlocked the full potential of the Internet.
During 2017, the biggest promises of blockchain was in decentralized finance and interoperability. We have seen the first start to deliver. Now the second one will start to pave the way to connect different economies in ways we never seen.
The first way is blockchain to blockchain.
Blockchains ecosystems have long been distanced from each other but with the rise of platforms such as Polkadot and Cosmos, we see the first bridges being built between different ecosystems. Further bridges will be created from those via relays or hybrid connectors to get to private systems. This will become the globalization of crypto.
The second way is blockchain to existing infrastructure.
Helium Network covers over 800,000 miles of area with its hotspot coverage, providing internet connections to IoT devices through over 220,000 hotspots in 136 countries. We are a big fan of crypto projects that meet the vision of adding real world value.
With interoperability comes the possibility of connecting economies and NFT projects to generate exponential network effects. Why rely on a single marketplace when you can rely on several trustless ones that connect with one another?
Conclusion
We have seen the promise of DeFi and NFTs play out in 2020 to 2021. These spaces are nowhere near over. But our goal is to find the next waves that have been developing under the radar and balance that alongside longtime assets like Bitcoin who still have a great deal of potential growth.
The end vision? Imagine a multiverse of worlds ruled by digital assets owned by DAOs. They have their own economies that create real value for users with their own forms of finance. What if these worlds grow valuable enough that a state can be formed around them? Beyond what Peter Thiel or Balaji Srinivasan believe, this path is how we will create the network state.
