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Cryptocurrencies for science: Asset-backed tokens for science

This post explores the idea of creating cryptocurrencies, and more specifically, “asset-backed tokens”, to finance scientific assets. This post is the first of a longer series exploring how commercializable scientific risk profiles could potentially be recorded, structured, and financed leveraging blockchain technology.

Many of the innovations in our society today are built on the foundation of scientific breakthroughs. Scientists spend a painstaking amount of time to uncover and understand how things work (“basic research”), and apply these learnings to create new goods and services (“applied research and commercialization”). While we have reasonably robust mechanisms for funding the former, modern day finance has not yet found a good answer for funding the latter.

Cryptocurrencies (or “tokens”) offers a mechanism for addressing structural issues associated with the funding of commercializable scientific assets — most of which currently sits in academic institutions and research labs around the world.

Challenges with scientific assets

For the purposes of this post, scientific assets are broadly defined as any commercializable scientific project that derives its value from a deepened understanding of how the world around us, or within us, works (e.g. new drug treatments, more efficient energy generation, novel building materials, etc). Unfortunately, while scientific assets often have a positive net present value (NPV), they also have undesirable features that make it challenging for institutional investors to evaluate and include in their portfolios.

At its core, scientific assets require a longer investment timeframe and a sizable upfront investment to buffer against early technical uncertainty. Even VCs who are used to funding illiquid risk assets find it difficult to 1) consistently syndicate institutional capital for these moonshot bets, and 2) create an LP funding structure matching timelines for science.

Cryptocurrencies as asset-backed tokens

Cryptocurrencies (or “tokens”) provide a potential mechanism for addressing issues of illiquidity and a narrow investor base.

Tokens are financial structures that are part-currency/part-commodity/part-equity[1]. Tokens are issued, recorded on a distributed ledger, and tradable on decentralized exchanges. This improved liquidity allows for the re-pricing of risks on a more continuous basis and generally crowds in a larger and more diverse pool of investors (beyond conventional VCs).

In these early days, we already see natural experiments using tokens and the blockchain to bring liquidity to historically less liquid markets — from real estate, to art, to new digital infrastructure. For example, a closer look at the funding and development of landmark projects like Ethereum, should reveal parallels not too dissimilar to the risk profile of a commercializable scientific asset.

Analogous to a commercializable science project, Ethereum (and other crypto projects) would not be possible if they had been treated / funded like a mobile app. To have a chance at success, Ethereum requires a relatively larger upfront investment, a pool of investors with diverse risk appetites, and a mechanism to provide intermediate liquidity over the entire lifecycle of their development roadmap.

Looking ahead

We’re still in the early days of experimenting with asset-backed tokens and use cases for private assets.

Commercializable science is one such asset that may be a natural fit for token-based funding. There is no shortage of research ideas that could be commericialized currently sitting on the shelves of academic institutions and labs around the world — just ask any Professor or PhD student.

As we see more assets migrate onto the blockchain, creating this investment market for science will require practical regulations that balance consumer protection and innovation. If we can get this balance right, we can unlock one of the largest pools of value for society, and in the process, establish science as its own alternative asset class.

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[1] Depending on the nature of the application, each token exhibits features more skewed to one of the three. A further look at the bucketing of cryptocurrencies into these three categories will be covered in a separate post.