The Virtuous Circle of Token Based Investment Funds

This is a follow up article to Blockchain -VS- The VC I posted last Saturday.

The virtuous circle refers to a complex chain of positive events that reinforce themselves through a feedback loop. A virtuous circle has favorable results, while the opposite, a vicious circle, has detrimental results.

Both circles are complex chains of events with no tendency toward equilibrium (social, economic, ecological, etc.) — at least in the short run. Both systems of events have feedback loops in which each iteration of the cycle reinforces the previous one (positive feedback). These cycles will continue in the direction of their momentum until an external factor intervenes and breaks the cycle.

A well-known example of a vicious circle in economics is hyperinflation. The subprime mortgage crisis of 2008 was an excellent example of the end results of a vicious circle.

In contrast, an Investment Fund based upon a large Token Economy is a prime example of a virtuous circle.

Differences of an Investment Fund based upon Tokens instead of Cash:

Investments and fees are dispersed in Tokens vs Cash.

What happens if the Crowd Optics are great around the investment’s (Projects) potential:

If the investment is in Cash –> Investment Fund’s LPs become excited = no exponential extra impact to the Fund or the investment, the dollar remains what it was worth prior to the excitement.

If the investment is in Tokens –> The Token’s Crowd become excited = Token holders tell their friends; more people are attracted to both the project and the token-> Value of the token increases -> project has more resources to use to improve the product -> Fund has more value to deploy into other projects -> Fund manager’s management fees value increases = A Virtuous Circle around the Token

Hypothetical example: Token is trading at a $0.01 on the secondary market. The Fund has 10B tokens to deploy so it is valued at $100M USD. An investment is made of 100M tokens into Project X. Fund manager is going to receive 2%/12 as a management fee at the end of the month due to that investment or 2M tokens/12. Let’s say the Fund Manager has a total of 12 of those investments currently under management, so they receive 2M tokens that month as their fee. When the investment is made those 2M tokens they received that month as a management fee would have a street value of $20,000.

However, an article on Medium about Project X receiving the investment and detailing the virtues of Project X goes viral. Project X lands a spot on Ellen. Everyone Loves Project X and believes it is the killer app for the Token’s platform. Smart people create video blogs about how Project X is the best thing ever and everyone will want to use it on the Token’s platform and needs the Token to do so. Demand for the Token goes up. Street Value of the Token goes to $0.03. The street value of the investment Project X received goes from $1M USD to $3M USD before they can liquidate their monthly portion. The Fund Manager’s Monthly fee’s street value for their total investments at that time goes to $60,000.

The Fund’s 10B tokens now have a street value of $300M USD.

The Fund Manager’s next investment only needs to be 33,333,333 tokens to have same value effect on the next investment as the 100M tokens did on Project X, so Fund Manager has extended their investment funds.

The process not only gives the Fund Manager, but all Token holders more incentive to help each new investment gain early exposure and traction. Everyone in the Virtuous Circle is properly incentivized to help each new investment achieve success.

We have received great feedback, face-to-face discussions, and suggestions from the first article on the subject and this was an outcome of those discussions.

Now the questions become for the gamification of the funds, what are the rules?

What is the proper activities / criteria to reward the fund managers for?

What should those rewards look like?

I am looking for the strongest example of this in blockchain projects and other economies, suggestions.

Please comment, like and share.

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