Generalized Mining And The Third-Party Economy Meetup Recap

On the 30th of October, CoinFund and Cambrial Capital hosted a meetup in Prague. You can now watch the videos of the event below!

Alex Obadia
Nov 10, 2018 · 6 min read

A wave of new groups have taken to market to build mining companies and network-facing services that provision staking and validator nodes. The set of domain-specific problems that can be solved by global networks, from organizational governance to computational resources to social media, is bewilderingly large. As decentralized networks become ubiquitous as large-scale coordination mechanisms and, ultimately, publicly-owned institutions, it will become apparent that the role of technological actors in these networks goes far beyond PoS-style block validation.

We have termed the activity of engaging the set of techno-financial opportunities in decentralized networks generalized mining, a nod to the roots of third-party cryptoeconomics in systems such as Bitcoin and Ethereum. We have termed the general marketplace of networks, service providers, and cryptoeconomic business opportunities as the third-party economy.

Investors, companies, and projects play an important role in these upcoming networks. This meetup brought together the foremost participants in the generalized mining space to explore this set of opportunities. Here is a playlist of the presentation and panels of the evening.

Generalized Mining Intro, watch

Jake from CoinFund kicked off the event with an introductory presentation on Generalized Mining (GM). CoinFund has been exploring GM opportunities for a while on several networks that are part of their portfolios. Here, Jake shares his findings and how he makes sense of this new space.

Questions Jake addressed in his presentation include:

  • How is generalized mining defined? (aka mining 2.0)
  • How do you make sense of this new space? How do you make a decision about which networks to participate in?
  • Where do crypto funds fit within this landscape? Will participating in networks become a fiduciary duty to your LPs? Will crypto funds need to become more technical?
  • Why are cryptofunds well-positioned for GM vs other players?
  • What is the set of GM opportunities that’s already here today?

Panel #1: Supply-Side Services, watch

New groups are building mining companies and network-facing services to provision staking and validator nodes. Today, they are focused on defensibility strategies having to do with specialized hardware, operational security, and the deep economic understanding of proof-of-stake (PoS) systems.

The first panel of the night was moderated by Alex Felix, CoinFund’s CIO, and is composed of four such projects. Two panellists represent projects building validators on Cosmos and Tezos (Brian from Chorus One, Adrian from Cryptium Labs) and another two represent projects building validator marketplaces on Ethereum and Tezos (Darren from Rocketpool and Axel from Vest).

Questions addressed during the panel discussion:

  • How does a validator differentiate itself? Is it uptime? Security? Interest you earn to attract delegators?
  • What kind of auxiliary products such as insurance on stake, or bonds to have liquidity on staked tokens will be created to develop superior validators and increase the number of delegators?
  • What is the scope of the GM opportunity? Will there be thousands of networks or just a couple to service?
  • Do the panellists plan to go deep on a couple of network and amass delegation or be as broad as possible?
  • How complex will this landscape get with good money/bad money, other incentives that can be structured off-chain to destroy a network and earning on the downside?
  • Are validators exposed to money transmission laws in the US and what are other potential regulatory risks that validators might face in the future?

Panel #2: The New Role Of Crypto Investors, watch

We know from traditional marketplace businesses that bootstrapping the supply-side of a marketplace is easier than the demand. Crypto teams have learnt the hard way that bootstrapping the demand side is hard. The ability to provision networks during the ‘zero to one’ phase is the first substantive answer we’ve heard to what a value-add early stage crypto investor looks like.

The second panel of the night was moderated by David Fauchier, Cambrial Capital’s CIO, and is composed of three investors who are all experimenting with generalized mining projects within their funds. CoinFund has looked at Livepeer and Steemit, Fabric has looked at Ocean Protocol and Keep Network and Multicoin has looked at Factom and EOS amongst others.

We’ve been thinking about this a lot at Cambrial Capital and just released a post Generalized Mining: An Investor’s Perspective

Questions addressed during the panel include:

  • What are the bounds of GM with respect to each panellist’s funds?
  • What kind of opportunities to provide work to decentralized networks are NOT generalized mining?
  • How much does the quality of your software actually matter when participating in these networks?
  • If they received $20m of inflows into their fund, how much of that could be productively deployed into GM?
  • What do the panellists aim to achieve by actively participating in networks? Is it to help bootstrap the network? Protect against network inflation? De-risk their investments?
  • How big is the staking opportunity going to be? How much capital will be locked up to secure these networks and what will the ratio be between capital locked up and the actual value these networks are providing?
  • How would activist money assuming bad behavior look like as a networking participant? ie. shorting projects

Panel #3: Staking Economics, watch

The move to staking brings a complimentary decrease in user experience if done naively. (ie. for Ethereum 2.0, users might have to be aware of shards and experience might actually suffer, in which case validator requirements and staking economics can actually take a hit.) However, we can use crypto-economics as a tool to improve the UX and offer new opportunities within these networks (eg. aside from staking in Ethereum 2.0).

This final panel was moderated by Aleksandr Bulkin, Partner at CoinFund, and is composed of projects that already have launched GM opportunities live within their network (Livepeer with transcoders and MakerDAO with Keeper Incentives) and projects that have been thinking deeply about it (NuCypher for proxy re-encryption within their own network and Prysmatic Labs working on the implementation efforts for upgrading Ethereum 2.0).

Questions addressed during the panel discussion:

  • What is the long-term trajectory of the profits that people who participate in the panellists’ networks will be able to receive by performing GM activities? ie. in hardware-based Bitcoin mining, the block reward for mining typically gravitates towards the energy cost. Is that the same case here?
  • If the answer to the above is not participants being diluted to 0, what is driving the price up and what would an equilibrium look like?
  • Do you feel there is competition for the attention of stakers in networks, today or in the future?
  • Who are ideal network participants? Does the answer differ by the stage in the lifetime of the network?
  • How are liquidity and velocity thought of in the context of staking tokens?
  • How are correct incentives built in for the team developing staking economics to make sure they don’t screw the other actors of the network?

Thanks to the CoinFund team, especially Olga and Ryan, who helped co-organize this event and make it a success. You can listen to Jake’s latest podcast on GM with Laura Shin and read our piece GM: An Investor’s Perspective.

💭 We’d love to hear your thoughts on the content above and to continue the conversation online on Twitter (@cambrialcapital) or at our next event.

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Thanks to Ha Duong and Cambrial Capital.

Alex Obadia

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Twitter @ObadiaAlex

Cambrial Capital

Thoughts and reflections from the Cambrial Capital team on crypto and its wonders