Antifragility and Optionality in Fat-Protocols
Exploring Antifragility for Sound Investment Strategy
Blockchain based protocols can be compared to options. They represent fundamental infrastructure. They’re railways on the 8th continent, the internet. Some of these railways have unlimited potential for innovation and applications to be built on top of them. The right to use future apps based on the protocol is obtained by purchase of the native cryptoasset. To use the apps built on the Bitcoin network you’ll have to own bitcoins.
Bitcoin and Ethereum are technology options. These protocols retain useful solutions built on top of them while poor solutions are killed through market forces. Solutions built on the protocol are without down-side risk to the token holders. If the Apps (or DApps) built on top goes bankrupt, it does not matter to the protocol. On the other hand if an app built on top becomes a success, it adds to the value of the network. These protocols have convexity or what Nassim Taleb calls “anti-fragility”. Low down-side and large upside potential from experimentation, innovation and random events influencing the protocol over time.
Optionality operates by what Taleb calls Via Negativa. By experimentation and elimination of what does not work. This makes the price of experimentation relevant. For protocols with native cryptoassets, the cost of experimentation is low to nonexistent. Everyone can innovate on the protocol without negative impact on the value of the protocol if the experiment fails. Note that the exception is experimentation in the core protocol layer. Errors could potentially have major negative consequences that destroys the convexity properties. My hypothesis is that convexity from experimentation is achieved only in the 2nd and app layers.
Investing Strategy: Talebs Antifragility Edge
It’s not about predicting specifics, it’s about antifragility. It’s about buying the cryptoassets that allows you to be as ignorant as possible; the cryptoassets with most long term experimentation, innovation and use-cases and a secure core protocol layer, keeping down-side risk low. Finding these types of investments allows for minimal knowledge and predictions as the mathematical property of convexity unfolds itself. Find protocols with convexity properties and time will most likely make it a good investment.
Antifragile cryptoassets loves variance, turmoil, innovation and everything in motion. It benefits more from positive events than it is damaged by negative. It’s not about predicting specific events, but about maximizing investment in convexity and thus positive outcomes from optionality.
It makes more sense to improve convexity than trying to gather specific knowledge with the aim of investing toward a specific outcome. Generally, it makes most sense to invest in 1st layer crypto assets such as Bitcoin. 2nd layer assets requires a higher degree of knowledge about use-cases and provides less optionality from innovation in the layers on top. This is described by Joel Monégo from Union Square Ventures who writes:
“The market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer”.
Invest in innovation agents, entrepreneurs, rather than a specific plan or narrative. If invested in innovation agents, you have more optionality than if invested in a specific idea or plan that may not last. A skilled innovation agent can change direction and experiment. Fat-protocols may be seen as a gathering of innovation agents running experiments and building awesome apps. Look for protocols with skilled developers and community. Protocols with the greatest potential for permissionless innovation. The internet will route around protocols suffering from friction and censorship and let the most open protocol win (if it is also secure). Adam Back illustrates this thinking with his tweet: