Investing to Build a Decentralized Trust Economy: Internet 3.0
The Largest Value Creation Event Since the Internet Itself
I have written before on Internet 3.0 and what I call the trust crisis, and many of you have asked me to dive in deeper on the what we believe are the best areas for investment. While Investors have had an amazing run over the last three years, with cryptocurrencies having shown dramatic growth, I want to emphasize that the industry is still in its early days, and the market is volatile and unpredictable with massive fluctuations.
COSIMO X, our tokenized venture fund is focused delivering superior returns by making equity investments in early stage companies that are focused on this new “decentralized trust” economy. With so many investment options in today’s global economy, we felt it to be of critical importance to establish a framework that organizes these opportunities and better informs our decision making.
We call this framework our Decentralized Trust Market Structure, and it has been incredibly useful to Team COSIMO.
INTERNET PROTOCOLS HAVE DECENTRALIZED ALMOST EVERY FACET OF OUR LIVES
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The Internet itself was originally designed to be a decentralized network that would survive nuclear attack. As its adoption increased, and the web became more accessible by individual users, it has been commercialized by countless numbers of entrepreneurs and reshaped by select technologists with new protocols to solve key shortcomings. Each of these new protocols decentralized yet another facet of our online lives. As entrepreneurs, the team at COSIMO has witnessed these new internet protocols emerge year after year over the past three decades.
WAVES OF DECENTRALIZATION SPAWN MASSIVE MARKETS
Each wave of innovative new protocols has created massive markets. By thinking back and reasoning forward, those who create and capture the most value have been able to predict which new internet protocols will decentralize which antiquated economic honeypot.
BLOCKCHAIN: DECENTRALIZED TRUST CREATES A NEW ECONOMY
Blockchain gives us, for the first time, a way for one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer or overwrite the details of what has occurred.
Paradigm shifts towards decentralized systems are enabled by new technological breakthroughs (i.e. blockchain, consensus mechanisms, and cryptography) that will transform and disrupt all industries.
Similar to the way new protocols created massive markets in the past, we believe Blockchain and AI will create the largest value creation opportunity since the internet itself.
THE DECENTRALIZED TRUST MARKET STRUCTURE
Team COSIMO has organized this new emerging market into 6 tiers or layers, each connected and dependent on the other.
- Distributed Protocols & Infrastructure
As global cybersecurity costs approach $6 Trillion annually by 2021, there is a growing market for decentralized blockchain protocols to securely transfer and protect user data online. Using public-private key pairs and zero knowledge proofs, it is no longer necessary to expose personal information to third parties during a transaction. With this, companies have begun to emerge that allow individuals to keep their personal data private or monetize it for commercial consumption — allowing economic rents to be recaptured by the consumer.
2. Identity, Authentication, Governance & Data Protection
With encrypted repositories of an individual’s personal identifiable information, it is possible for a blockchain-based protocol to displace the need for alphanumeric passwords on the internet and create a more secure method of identity verification. Because this method of information storage is decentralized and encrypted asymmetrically, a cybersecurity breach would only come at the cost of one individual, rather than thousands as seen with Equifax and Yahoo. With this service, honeypots of information become distributed and no longer present a systemic threat to personal and industrial security.
3. Reg-Tech & Custodial Solutions
To foster the broader adoption of digital assets, private entities have stepped in to develop methodologies for ensuring that a company’s offering, KYC documentation, and custodial solutions are in-line with local regulations on a zero-knowledge proof basis. This means that an individual or institution need not share sensitive personal or commercial information in order to be verified by a service provider or merchant. Instead, instant and private verification of an individual will be used to ensure the same kind of privacy achievable through identity services and data protection innovations. Although centralized custodial solutions for data and digital assets have already emerged through legacy financial institutions, such capabilities will evolve toward decentralization — eventually offering a more secure and less vulnerable form of value storage.
4.Digital Assets & Virtual Currencies
As the financial industry continues to become more digital asset and blockchain technology friendly, we have seen the rise of more advanced securities, currencies, digital commodities, and derivatives. Such sophisticated instruments will foster new kinds of financial markets and will require new types of trading platforms, liquidity providers, and exchanges. We believe that this will drastically reshape corporate cash management, payments, risk management, value storage, derivatives, and securities markets to a profound degree.
5. Brokerage Services, Exchanges, & Funds
As the securities market evolves, companies will emerge that allow for more robust lending, borrowing, and shorting capabilities for digital assets. Individuals will be able to interact more fluidly and securely between various financial institutions and exchanges by automating the margin call process, short-covering process, and money transfer process such that immediate and final settlement can be reached within seconds rather than days. This is particularly appealing for emerging and developing countries who will be able to use this new scalable infrastructure to foster and catalyze growing economies with increasing demand for financial services and payments infrastructure. Leapfrogging legacy financial systems, these capabilities will allow incipient economies to grow at a faster rate than ever before.
Platform & Software Applications
6. Platform & Software Applications
With the aim of dis-intermediating large, centralized platforms such as Facebook and Amazon, there has been an emergence of decentralized applications that bring together communities that can interact on distributed forums. With this, new monetization possibilities and revenue models have begun to surface in the form of micro-economies which are less asymmetrical than traditional, one-sided data collection and digital advertising. We see this decentralized application economy as the final step that acts as a network of user interfaces to make cohesive all of the aforementioned capabilities. It is only a matter of time before the decentralized nature of data and value becomes ubiquitous amongst the broader network of internet and mobile applications.
DECENTRALIZED APPLICATIONS: POISED TO DISRUPT
THE DECENTRALIZED TRUST MARKET STRUCTURE
We hope that our market structure helps you better understand where you are in this rapidly evolving market and how investors should think about deploying capital at this time. It is our intention that you share this graphic with anyone you believe might find it valuable — navigating this changing environment is not easy for any business or manager, but tools like these are essential to one’s success in doing so.