Looking beyond token mechanics to what really drives value in Layer One.
I really enjoyed reading Chris Burniske’s Placeholder VC blog piece last week around Ethereum Killers (EKs). It’s interesting to look at the race to beat Ethereum and the amount of fresh Layer One projects that have recently started to go live and those that will in the near future. As many of these projects have chosen Proof of Stake (PoS), or variations of it as their de facto consensus mechanism, Burnkiske highlights the massive oversupply of potential transaction volume that will hit the market over the coming twelve months.
After the 2017 and early 2018’s “I can do a Gazillion transactions per second” hype it has lead to two things:
- The launch valuations of these projects in almost no way reflects the utility being provided by them on day one. We all know that presale valuations got a little frothy in 2018. Now it’s time for projects to meet their maker and set sail on the open market.
- A high amount of transactions per second (TPS) means there is plenty of block space that needs to be filled with transactions. A good way to visualise this is if we take something like Ethereum with its 15 TPS. Imagine a boat coming along the canal that docks in to a busy city port. This boat can only carry 15 containers at a time, until another boat must come and offload its cargo. That’s Ethereum. That’s the majority of the shipping (transaction) capacity back in 2017, when most projects were building on Ethereum. Now imagine 2020. We’ll witness several of those boats with the ability to dock at the port to pick up containers (transactions). Some of them able to carry 100 containers or even 1,000 containers at a time. This means we’re going to need to produce a lot more transactions to avoid half-empty boats and make the ‘ Layer One shipping businesses’ economy viable!
Chris writes about this being similar to what happened in the early days of the internet in the late nineties and that it’s nothing to worry about longer-term. I agree here and if you believe that we will see more adoption in the future, then you might want to consider his hypothesis. If you look at airports, shipping, or any public service, few are building anything large scale with only today’s needs for capacity in mind. You build for future potential.
However, it is worth pointing out that there will definitely be winners and losers in this race to fill blocks with transactions. Creating something meaningful, with organic momentum is no easy feat. That’s what I would like to highlight today.
The Value of an Ethereum Killer (EK)
Let’s go back to the Ethereum Killer article from Placeholder. There’s one major factor I think Chris misses from his analysis. I understand it’s a pragmatic and literal analysis of token price mechanics, but in my opinion, the price of Ethereum is heavily based around the strength of their ecosystem. After visiting Ethereum Devcon V in Osaka recently and seeing 2,000+ developers traveling for up to 20 hours to get there, you see the power of a robust ecosystem. Ethereum has created a base of long-term believers in the project which will likely contribute to a low token velocity for a large portion of the total Eth in circulation. With the arrival of Eth 2.0 it will be interesting to see just what percentage of the total supply is staked for long-term holding. Their ecosystem of hardcore fans will likely become a strong base of stakers on the network.
I’m not here to speculate on price or how to price things, but looking beyond transactions and blockchain usage, I believe you should add the following fundamentals into consideration when determining the value of a project. There may be more I’ve missed.
A (Number of Developers) +
B (Number of Github Commits) +
C (Number of tools/SDKS) +
D (Number of Monthly Active Meetups) +
E (Number of Monthly Active Developers at Meetups) +
F (Number of DApps being built) +
G (Number of Monthly Comments on Research Forums/Discord)
= Ecosystem Strength Metric (ESM)
The Ecosystem Strength Metric should be a multiplier between 1 and 10 that is factored into other calculations. 10 being a 10x boost to your price.
These variables should be the base set of KPIs for your Chief Ecosystem Officer (CECO).
What in the world is a CECO?
When you look at an atypical blockchain project you often see the same designated roles. A CEO, CTO, maybe a COO, CMO, and array of developers. After having many conversations with projects and investors in the last couple of years, it is evident that there has been a total disregard to what drives value for a protocol — a thriving ecosystem.
The CECO is the most important hire for Layer One blockchain projects. The future of your protocol relies on the success of your ecosystem, so in turn, you should really put your all into nurturing it. The CECO is the linchpin to help define and execute a strategy. It’s unlikely to be a one-person job and will require resources from tech, business development, research, and marketing; it will demand 24/7 quarterbacking. Otherwise, the outcome will be lacklustre. The rest of your C-Suite does not have time to dedicate themselves to this much needed ecosystem development. This is why I believe it’s the most important blockchain hire out there.
Let’s look back at the “Fat Protocol Thesis” proposed by Union Square Ventures in 2016. This thesis helped provide the rocket fuel for the Layer One fundraising boom in 2018. In short, the “Fat Protocol” means that most of the value created in blockchain would be captured at Layer One, contrary to the Internet Era, where most of the value was captured at the application layer “Fat Apps”.
Though there have been various teardowns of the Fat Protocol Thesis, I would say there’s still plenty of good logic there. To bring this back to the point of this post, how do you fatten up a protocol? You build an ecosystem! An ecosystem brings usage, utility, and hopefully, fees to the network. For any Layer One project, this should highlight that to build this fat, Ethereum-slaying protocol, your ecosystem is your secret weapon. You’re telling me you haven’t hired an absolute all-star Chief Ecosystem Officer to make that happen?
In 2017/18 people were so fixated with transaction speed that they completely underestimated and under-resourced their ecosystem building efforts. This lead to project teams building sometimes fully functional open-source networks, with few if any building on them (anyone remember the Interoperability Alliance?). Money or native tokens were thrown at the problem, which was like throwing gummy bears at a hungry dolphin. Little progress was made. Generally speaking, developers are not motivated by money thrown at them, they want to be part of something bigger.
Many high-calibre projects are launching their mainnet in 2019 and 2020. I do wonder how many of them have truly realised the magnitude of the task ahead of them when it comes to building an ecosystem. Each project will have plenty of time to grow, although a concerted effort should be made FAR before the launch date. Otherwise, there is a real risk of backlash from the open market and the community.
Hiring a CECO and giving that person the resources they need to execute is the number one move any potential Ethereum Killer can make. Effective ecosystem building done well is a costly and time-consuming endeavor, but it’s sink or swim.
A CECO should be cross-functional, they should understand the business and marketing requirements as much as they should understand the technicals. The message and culture of your open source community are as valuable as everything else. Being ‘Mission First’ and having real conversations with developers is the best way to find your true north (I’ll write more about this in future posts).
For any Layer One project that wants to achieve real success, adoption, and avoid being bashed on the market, look no further than your most important blockchain hire.