How Tokens Are Empowering Founders
On February 8th, Human Ventures welcomed Meltem Demirors, former Director of Development at Digital Currency Group. With many entrepreneurs, VCs, and crypto enthusiasts in attendance, Meltem touched on the history of blockchain, implications for capital formation, and the long-term potential of cryptoassets. Below are highlights from her presentation as well as our thoughts on the potential of blockchain-based innovation.
Blockchain Will Do for Value Transfer What the Internet Did for Information
“History doesn’t repeat, but I definitely think it rhymes. If you think about how the internet was constructed it started out with a bunch of different competing protocols that did similar things. The world had to get together and create standards so that when we sent emails we were using the same protocol or language.” — Meltem Demirors
The internet was mostly built upon open protocols, such as TCP/IP, HTTP, SMTP, and FTP. SMTP enabled email, the internet’s first killer app. Through the protocol, people could transfer information — instantaneously, at low cost. As SMTP acquired users, people built other applications on top of it. Value was captured through applications such as Gmail, not SMTP.
Due to this dynamic, technology investors have historically focused on applications, not protocols. These applications have been funded by traditional equity fundraising. Blockchain is changing this.
Blockchain-based projects incentivized by a token (a scarce, digitally-native asset) invert the relationship between protocols and applications. Similar to the advent of the internet, communities are assembling to build the core infrastructure of the open blockchain ecosystem.
However, this time its development comes with an attached financial incentive. Appropriately designed cryptoeconomic systems make it so that anyone acting in their self-interest will simultaneously grow the protocol network and benefit the greater community. As a result, value is concentrating at the shared protocol layer, not the applications later. Fueled by super-charged network effects, the blockchain ecosystem is moving rapidly.
As blockchains gain influence, we’ll start thinking about value differently. Blockchain gives us new ways to transfer value and to monetize things that are valuable, such as behavioral data and intellectual property rights. Organizations will benefit from increased liquidity and reduced transaction costs by tokenizing existing assets, such as equity and real estate.
Entrepreneurs and investors: take note.
Tokens are transforming the way we exchange value across industries and they will facilitate new forms of organizational structures that will change the way communities solve the world’s biggest problems.
Venture Capital is Transforming
“A [traditional] venture firm is supposed to provide three things, financial capital - money, social capital - meaning their credibility as an investor and access to their network, and human capital.
[But now] you can get all of this stuff without ever going to a VC using the token as an incentive to encourage people to participate. From a financial perspective you can raise money using a token. The token is the incentive and what people are doing when they buy a token is they’re capturing the future value of the network today.” — Meltem Demirors
Modern venture capital firms provide three things: (1) financial capital in the form of funding, (2) social capital in the form of prestige, validation and social signaling, and (3) human capital in the form of experience and robust networks of people and portfolio companies.
Blockchain is now allowing entrepreneurs to access these via token sales and the implications are transformative. Tokens, at their very core, are incentive mechanisms that motivate people to grow and improve the network. This enables new business models not possible in the traditional equity structure.
Let’s take a closer look at the bundled services typically provided by VCs and how they can be accessed by a token-based network.
Access to financial capital is greater than ever. Tokens are providing for a new form of crowdfunding that is decentralizing and democratizing the fundraising process. As Balaji Srinivasan wrote: “[Tokens] may represent a 1000X improvement in the time-to-liquidity and a 100X improvement in the size of the buyer base relative to traditional means for US technology financing — like a Kickstarter on steroids.” As such, virtually anyone in the world is now able to participate in an asset class with a similar return and risk profile to that of traditional venture capital, but with much higher liquidity.
Tokens also promote social capital in the process of bootstrapping networks by introducing a financial incentive. Networks are being developed around shared-value ecosystems, where users of the service are financially incentivized to become early adopters and recruit even more users, thereby enhancing a project’s social capital.
Additionally, tokens attract human capital by incentivizing network operators to provide work in exchange for tokens. Developers are also more likely to contribute to growing networks with financial upside, as are other stakeholders who have the ability to contribute resources to a network. As a prime example of token-based projects attracting human capital, Ethereum has 30x more developers working on it than the next leading protocol. The open-source nature of these protocols allow for virtually anyone to contribute to the progress of a protocol, no matter where in the world they are located.
Blockchain networks incentivized by tokens open up a world of opportunity for entrepreneurs. The flood of investment reflects this — with $1.4 billion in ICO funding during January, 2018 funding is already on pace to significantly eclipse the $5.4 billion raised in 2017. While the current ecosystem has many projects with misaligned cryptoeconomic designs and founding teams, we believe that, over time, well-designed networks led by exceptional founding teams will rise to the top and create immense value.
Given the shift in dynamics that tokens introduce, venture investors who plan on participating in the growth of the space over the long-term will need to add tangible value at the earliest stages in order to partner with the most promising founders.
At Human Ventures, we are very excited about the potential of blockchain technology to impact billions across the world. We believe it will play a critical role toward empowering marginalized populations, promoting self-sovereignty, and democratizing access to value exchange. Over the next couple months, we will be publishing a series of posts outlining promising areas in which we believe there is high potential for transformation.
If you are working on a project in the blockchain ecosystem or are looking to explore the space as you look for your next step, we’d love to hear from you.
Human Ventures is a company builder and venture fund based in New York City. We hold a monthly speaker series where we invite industry leaders to discuss emerging trends and technologies. Please sign up for our newsletter here to stay up to date on our upcoming events.