Building something people need
The Dilemma
Here is an increasingly popular investment rationale debate within the blockchain space, which matters in the wider context of mapping the futire proliferation of technology — what’s likely to accrue more value (and faster) and what is more timely now as the product design space:
a) blockchain protocols and other platforms (exchanges, interoperability systems, etc.) — many of them largely focused on the infrastructure problems faced and tackled by developers and blockchain community
b) consumer-facing dApps focused on real-world applications of blockchain to impact behavior and value creation via removal of intermediaries and introduction of individual incentives for users to build global communities with shared economic value
We are biased and focused on the latter direction, as we are working on a digital economy for an important online demographic. Electronic peer-to-peer money is the origin and presently the only killer app for blockchain technology, which underlines that individuals, rather than institutions, are the ultimate consumers of ongoing innovation in the space. Even within the “enterprise blockchain” applications, as they are adopted by consumer-facing enterprises. Like banks, for instance. But let’s examine the more specific considerations.
“Lean protocols”
The greater portion of funding and arguably some of the best technical talent to date has been captured by the protocol projects. This is in line with the “fat protocol” thinking and relentless focus on technical innovation as the quickest route to value creation (mostly speculative so far), by the leadership of many of the notable protocol projects. They are focused on some of the most intriguing technical problems, like transactional scalability. However, they face a few relative obstacles as the leading contenders to lead blockchain adoption and value creation within the space:
a) They assume addressable and solvent demand for their infrastructure. In fact, that is driven ultimately by consumer appetite / real-world economic value creation that can support real businesses. Margin of the revenue of those businesses, once they are defined, will fund the infrastructure R&D (including protocol efficiencies) which will need to address specific business problems
b) The infrastructure R&D is largely focused on the theoretical problem of full decentralization of networks (users being solely responsible for the consensus mechanism). The ultimate users (those less fluent/excited about the tech than the developers) are more immediately interested in financial incentives and a trustless way to account for their earnings and spend, which is what’s needed to drive social scalability of economic networks. They would later dictate a more nuanced demand for infrastructure products
c) Because the infrastructure layer projects do not necessarily pursue an end user-driven product development process, many are design-specific and serve the self-fulfilling short-term objectives of their founders and early supporters, rather than those of well-defined end-users. Tens of millions of dollars and a few market phases down the line the developers and their investors may learn the hard way — by failing to produce any advantages vs new and more flexible infrastructure solutions, general or project-specific, on- or off-chain, that have the ultimate consumers at the heart of their design. Or forks simply hijacking the value of the original protocols
d) Experimentation is entirely hypothesis-driven and uninformed by user-input. Developers are mistaken for the ultimate users and as technically brilliant as many developers are, their product thinking can be circular, not business-focused and is at times trapped in the “build it and they will come” mentality that buried many consumer-centric ideas. Telegram’s recent record-breaking private token sale has seen constructive criticism by some of the accomplished protocol investors — with respect to its exorbitant valuation and characteristic bold claims of the superior protocol tech it will build. That criticism aside, Telegram’s key advantage over some of the most successful infrastructure-layer projects that fundraised in 2017 is, of course, that it has plenty of active users to talk to during construction. Also, best-in-class team, product and now a war chest approaching $2 bln in size.
e) There is a credible and spreading opinion (examples here, here, here and here) that fat protocols are a questionable investment strategy. Based on an intense competition among a number of well-funded and well-staffed protocol projects working on a fundamental problem of transactional efficiency (e.g. cost and speed of “medium-of-payment” property), the “mature equilibrium” of their market may be achieved by commoditising the capacity they ultimately deliver for profit and prices “racing to the bottom”. This, by the way, is in line with the maximalist ideology that a lot of the blockchain developer community coalesced around originally — base tech should be open-sourced and decentralised. In contrast, a lot of protocol layer funding is presently spent to stimulate proprietary development on specific protocols and to form “protocol investment funds” that seem to bridge gaps in business strategy with incentives for developers to stick with a specific future commodity utility provider. Whether there will be one dominant protocol (unlikely, imho) operating a viable business or a number of players providing interchangeable ones at very low margins — makes these relatively challenging as investments on a probability-weighted risk/return basis.
Scale in consumer applications
In the consumer space where the ultimate use-cases are to be found and implemented, the following elements are essential, in our view, to deliver the best (or most realistic) opportunities with long-term potential, which can really drive proliferation of blockchain:
- existing or addressable global community of users (not just speculators, investors and observers) that will be delivered access to a substantial new economic value — via being paid for things they did for free or didn’t do before. Ideally those economic activities are compelling for reasons other than incentives, as noone knows whether incentives alone would drive network effects (like paid marketing they might not). Bitcoin may have already claimed the one pure incentives-driven scalable consumer application
- incentives need to extend to economic stakeholding by the users in the network they are incentivised to build and need to work well in a native currency that would necessarily grow in value as the network grows. That way the interests of operators and users are aligned and centralization becomes less of a conflict between them
- intrinsic value fueling token economy (like fiat revenue from selling attention and data) or addressable value (like investment/speculative income in the case of Bitcoin) need to exist to drive transactions/scalability
- existing successful product that demonstrates the existence and growth potential of the community, effectively addresses their needs before incentives and provides adequate design and experimentation space
- proven team that is expert in the problem and has track record that speaks to its ability to build the relevant network
- balanced and thought-through token economics models that operate reward and redemption utility of the tokens and address real-world demand for tokens to counter speculative volatility.
Check out our website and join the conversation on Telegram!
