Why we invested in NervOS, and where it fits in the blockchain ecosystem

by Lionschain Capital

Plus a history of crypto as an intro to the value proposition of public blockchain networks

To someone that hasn’t been closely following the developments within the crypto or blockchain industry over the last two years, it might appear that nothing noteworthy has happened since the token bubble popped in late 2017 and early 2018. We have spoken to a number of otherwise successful and intelligent technologists who simply haven’t found it worthwhile to investigate crypto after the crash and bear market of 2018 validated their initial skepticism.

This article will serve to review the history of the space, while highlighting the meaningful events and narratives. Understanding this arc will help contextualize where we are today, what this technology is really good for, and where it’s all going. This will lead to our thesis for our investment in NervOS CKB. We believe that entrepreneurs who invest time in understanding the true value proposition of blockchain and cryptocurrency will be in position to build the next generation of meaningful internet companies.

This is intended as an introductory post and we will dive deeper into many of these topics at a later date.

Intro: So, didn’t crypto die?

One could take a quick glance at the total market cap of crypto assets and assume we saw a major bubble in 2017, it popped, and the market has been downtrending since, which doesn’t really warrant further attention.

We wouldn’t blame someone for doing that. After all, the 2017 token bubble was riddled with scam ICOs that never had any intention of producing anything of value. Even many of the high profile projects that raised hundreds of millions from brand name VCs have still failed to launch or failed to design a system where the token really enhances the network and captures value.

However, despite those points, we believe there is tremendous value being built, and that the chart above closely parallels the following chart.

It wasn’t that long ago we had a technology bubble inflated by the promises of a world changing innovation (the Internet), which popped when the market realized the reality was further away than the vision. The market crashed and then based out as the real work of building was undertaken.

Of course, the Nasdaq eventually hit new highs and far surpassed the 2000 peak. It was during the years after the bubble popped that Google IPO’d (2004), Amazon announced Prime (2005), and Netflix launched its streaming service (2007). Still, the Nasdaq didn’t approach its previous highs until 2015. Despite internet companies finally living up to the promise and offering real value, their valuations remained far lower than during the no-product hype days. At Lionschain Capital, we believe we’re seeing the exact same dynamic today in the crypto markets. This bodes well for entrepreneurs and investors who invest time in understanding the true value proposition of blockchain and cryptocurrency. We believe they will be in position to build the next generation of meaningful internet companies.

In this article we will review the evolution of this space in an attempt to frame the value proposition and utility of the technology, leading to our investment thesis on NervOS CKB.

TL;DR

• Crypto is first and foremost a financial innovation.
• Crypto/public blockchain technology will do to finance what the internet did to communication — namely, make it open, borderless, and permissionless, and enable a wave of innovation.
• Private blockchains are not a critical piece of the industry.
• Layer 1 networks offer the valuable service of trustless settlement of digital assets.
• In the near future we will see a proliferation of businesses that will settle their financial activity on these public “layer 1” networks. These businesses will comprise a major opportunity for developers and entrepreneurs interested in being at the forefront of a disruptive emerging industry.
• We believe NervOS has brought to market the best architecture to support these use cases,

Crypto History

The Birth of Bitcoin (2009–2013)

Bitcoin was born January 3, 2009, in the depths of the financial crisis which saw Wall Street collapse and eventually get bailed out by the US Treasury’s unprecedented “Quantitative Easing” program. The Federal Reserve committed to purchasing trillions of dollars worth of distressed assets to support banks whose balance sheets had been destroyed as a result of the collapse. This initiative essentially represented a massive increase in the base money supply of the US Dollar and thus a potential inflationary catalyst. It was in this environment that Bitcoin was launched as P2P network enabling the movement of a provably scarce, non-sovereign digital currency. A P2P digital cash network with a provably scarce money had never before been achieved despite numerous attempts.

Bitcoin’s 21M supply cap and predictable, low issuance monetary policy, appealed to gold bugs, Austrian economics enthusiasts, and libertarians, who for years had been vocally opposed to inflationary monetary policy and touted the need for a gold standard. It is worth noting that between 2009 and 2011 gold saw a 2.5x increase in its value.

Bitcoin was built as a distributed ledger system. The ledger was built as a list of transactions between addresses on the network, which was updated by miners who competed for the right to process transactions between users. The miners would get a reward of a small amount of BTC, which came from the inflation budget. “Blockchain” was the term given to the process of updating the distributed ledger which tracks the movement of Bitcoins between users’ public keys.

It would take too long to really explain the functioning of Bitcoin in depth, so for a more detailed explanation of how Bitcoin works, see here.

When summarizing “what is Bitcoin”, it’s important to differentiate between Bitcoin the network and BTC (Bitcoin) the asset. The Bitcoin network is a P2P distributed ledger, updated by miners, which tracks the ownership of the BTC asset, of which there are 21M provably scarce units (which can be subdivided to an even smaller unit, but the concept still holds). The Bitcoin “blockchain” network is a settlement layer for the BTC asset, which is publicly accessible and viewable to anyone with a basic internet connection.

We haven’t yet said much about security, but in short, as BTC gains market adoption, the higher its price rises, and the more valuable the rewards are for processing, “mining”, the transactions. Since these rewards become more valuable, the miners are incentivized to invest more processing power in mining, which increases the security of the system (ie the cost to attack and attempt to steal BTC or corrupt the network).

In its first few years of existence, the price of BTC rose and fell in a series of peaks and troughs as adoption and network security steadily grew.

As the price rose, so did the ecosystem around BTC. The network attracted more miners, and companies launched exchanges and payment processors. In the Fall of 2013, the price of BTC ran from $100 to $1000 in a span of 2 months, hitting a total market cap of $13B. In February 2014, the exchange which handled 70% of BTC volume, Mt. Gox, was hacked. This led to a dramatic decline and subsequent bear market. Price corrected over 80% before settling around $250.

During the run up, there was a lot of hype around BTC, and many companies attracted VC investment, in the hopes of capitalizing off the new technology indirectly. Most of these investments in companies like exchanges, wallets, and payment processors, ultimately failed, while a handful of successes are still with us today.

“Blockchain Not Bitcoin” (2014–2016)

Following the price correction, the hype around Bitcoin died down, and technology investors widely adopted the “blockchain not bitcoin” narrative. This narrative suggested that while BTC was unlikely to become a significant monetary asset, the underlying process could be applied in corporate settings, and that private “permissioned” blockchains held more promise than public blockchains like the Bitcoin network.

We liken this argument to someone in 2001 claiming that there would be a use case for a local private “intranet” but that the global and open “internet” would not be very useful. In retrospect, this seems like a silly argument, as a primary component of the internet is its global and open nature.

To date there have been no significant examples of generic permissioned blockchain technology creating meaningful economic value, and this narrative largely lost its luster amidst the 2017 market boom. The value of Bitcoin and other public chains lie in their open and global nature — a financial system without borders. We see potential for private “side chains” to exist as closed financial networks which plug into public networks and leverage the resources available therein within a controlled environment. We will return to this later.

Smart Contracts & Ethereum (2014)

In late 2013 Vitalik Buterin, a writer for Bitcoin magazine, proposed that Bitcoin needed a scripting language for application development with a goal of building decentralized applications that leveraged the networks decentralized computational ability. The BTC community did not support this suggestion, and Buterin proposed the development of a new platform with a more general scripting language, which became Ethereum.

Ethereum featured a native token called ETH, which would be used as a payment mechanism to run operations on the Ethereum “World Computer”, a more generalized application of the public blockchain technology underlying Bitcoin. Due to its ability to program arbitrarily complex logic around the movement of ETH and other assets generated on the platform, Ethereum earned the label of being a “smart contract” platform.

Above we described the Bitcoin network as a settlement layer for BTC the asset. Ethereum is essentially a settlement layer for the ETH asset, as well as any tokens generated and stored on the network.

The ICO Boom (2017)

In the aftermath of the DAO Hack incident of 2016, market prices cooled down, but activity on Ethereum was just starting to heat up. New blockchain projects were leveraging ETH’s ability to easily issue tokens for fundraising. “ICO” or Initial Coin Offering refers to the sale of tokens generated on a public blockchain, and in the case of 2017, that pretty much meant on Ethereum. A history of ICO’s can be found here.

While ICO’s had taken place in years prior, it was in 2017 that things really took off. One could say this was due to the standardization and community acceptance of the ERC-20 token standard, a set of parameters for tokens to be created with a defined set of characteristics, that enabled them to be easily transferred and managed. In other words, if I built a wallet or exchange that supported ERC20, then all tokens issued under this standard would be compatible automatically. This drastically reduced friction to the issuance and trading of new digital assets. Combining this with the permissionless functionality that Ethereum offered allowed any entrepreneur in the world with an idea for a decentralized network to launch a token on Ethereum and distribute to investors seamlessly in exchange for cryptocurrency.

Today, tokens/cryptocurrency/coins (the terms are basically interchangeable) can serve many purposes, but in 2017 most served as payment tokens to be used on decentralized software networks offering novel services such as:

• Decentralized file storage and computation (Filecoin, Golem)
• Opt-in browser advertisements (Brave)
• Virtual reality land registry (Decentraland)
• “Better” smart contract platforms (EOS, Tezos, Dfinity)
• And more

These networks promised a vision of “Web 3.0” where software networks would be owned by their users who would reap financial reward commensurate to their contribution to network value, while also creating a “permissionless web” where these protocol tokens would enable stackable software pieces to remove platform risk and lead to a wave of innovation.

This vision captured the hearts of investors all over the planet and prices kept soaring. By mid 2017, there were at least 18 websites tracking ICOs. In May, Brave raised $35 million in under 30 seconds for its Basic Attention Token. In September Kik raised nearly $100 million for its messaging platform token. By November, there were nearly 50 offerings a month. The highest grossing ICO was Filecoin, which raised $257 million. By the end of 2017, ICOs had raised almost 40x as much capital as they had in 2016.

And then it all crashed.

But before reviewing “Crypto Winter”, let’s not forget to mention a critical piece of crypto history that occurred amidst the token madness…

The BTC Hard Fork (2017)

Amidst the token boom, both the Ethereum and Bitcoin public networks were often overloaded with activity, and sending transactions became prohibitively expensive. For most of the bull market, BTC transactions prices hovered between $1–2 per send. In October fees skyrocketed to as high as $35 per transaction, prohibiting small sum transfers.

On this backdrop, a debate in the Bitcoin community about how best to scale the network came to a head. After years of debate amongst the core stakeholders of the ecosystem, a small subset of Bitcoin miners and influencers decided to “hard fork” the network and create Bitcoin Cash (BCH), which would increase the block size for the stated intention of keeping fees down and usability higher.

The majority of the Bitcoin community opposed the move to increase block size because of the potential negative effect on network decentralization which could undermine the BTC value proposition. Bitcoin’s decentralization is partially derived by its limited state size, which is small enough that average users can maintain their own local copy of the blockchain and keep tabs on the validity of the miners activity. An unbounded block size, so says the theory, could lead to an inability for average users to independently verify the blockchain, thus putting too much power in the hands of a few powerful miners. It was ultimately this view that dominated amongst the BTC community, and continues into the present.

The Crypto Winter (2018)

The boom of 2017 led to a roughly 85% crash in the total value of publicly traded crypto assets.

The total market cap fell from more than $800B to roughly $100B over the course of 2018. While there is no way to really verify this, in our view the primary reasons were:

An abundance of scam projects

• Many projects raised raised millions (sometimes billions) of dollars with no intention of shipping anything of real value

Problematic underlying economics

• Most tokens did not actually add value
• Payment tokens as access points to network in practice really just added friction to user experience
• More than that, even for projects where a token made sense, there was no unified valuation methodology to determine pricing

An unclear regulatory environment

• Threats of legal action against projects that misled investors and discussions around tokens being categorized as securities put a wet towel on the fundraising environment in early 2018

Lack of shipped products

• Despite the hype, there were still many white papers, and very few actual usable products

DeFi (2018-Present)

The crash of 2018 was catastrophic for many of the projects which raised money during the ICO boom. Most of the fundraising was done in ETH, and as the price of ETH declined, so did the runway of most of these startups. They were forced to sell reserves to pay salaries, and this kept pressure on the price of ETH, driving a negative cycle. As price declined, so did sentiment around the decentralized future and crypto as a whole.

However, under the surface, promising financial building blocks were built and the fundamentals of Ethereum steadily improved. Decentralized protocols for exchange, synthetic assets, stablecoins, derivatives, prediction markets, insurance, borrowing and lending, and advanced wallets were launched and have seen continuously steady growth. The activity in this decentralized financial system is loosely reflected in the amount of ETH locked in DeFi protocols.

Below is a chart summarizing the scope of activity that emerged within this open internet financial ecosystem.

From our perspective as investors, what we have seen occur since 2018 and continue accelerating through the present, is the emergence of crypto finding product market fit as a global, permissionless, transparent financial system accessible to anyone with an internet connection. The term DeFi (short for decentralized finance) was coined in 2018, but one could argue that Bitcoin itself was the first DeFi product as a non-sovereign, digital, provably scarce, commodity money. Traditional businesses were built that support this innovation. Ethereum enabled businesses themselves to be built on decentralized systems, and extend the permissionless innovation not only to the money use case but also to the formation of companies and trading of financial assets of all different kinds.

We view the primary value proposition of layer 1 public blockchains as being the trustless settlement of financial assets. This is important because even in the Ethereum community there is no consensus around what Ethereum should be. To us it is clear — Bitcoin settles Bitcoin, while generalized platforms like Ethereum and its competitors (Tezos, Cosmos, Near, NervOS, etc) settle their native assets as well as other assets generated on top.

What do, and will, those assets look like? In 2017 it was thought they would all be payment tokens. In other words, if I built a decentralized Uber competitor, my network’s native token would be required of users to gain access, and would serve as the payment mechanism in the network. The crypto market later came to the conclusion that this model didn’t capture value as an investment nor add value to the network. Later, crypto builders suggested that tokens could be “staked” ie locked up by network participants to incentivize certain actions within a network, and when those actions were performed, they would be rewarded, and if not, they would be slashed. In our view, this attempt at creating velocity sinks by staking for the sake of staking, ie in order to drive up value, again failed to hone in on an optimal use case for tokens.

What use cases for tokens do we think make sense?

Commodity Money

Bitcoin introduced the concept of non-government, fixed cap digital money and is the dominant player, while other networks are competing for a share of the potential upside for this special use case.

Network Equity

Ethereum iterated on Bitcoin’s technology to introduce a multi-asset settlement layer which supports businesses built on public blockchains. The equity (and potentially debt in the future) of these networks can be represented in tokens.

Non-Fungible Digital Assets

An open sourced, programmable financial infrastructure has enabled offline assets such as real estate and business equity to settle to public blockchains. This configuration enables traditional assets to gain programmability and makes them easily transferable, reducing administrative overhead by orders of magnitude. They also become interoperable with the emerging crypto financial system.

Digitally native assets such as gaming collectibles gain a number of meaningful benefits when issued on public blockchains as well.

Most crypto enthusiasts are familiar with the commodity money and non fungible use cases, but have only started to get comfortable with cash flow producing tokens, which we call The Network Equity Token.

DAOs and Decentralized Business Models

The next step in the progression is the remote organization of decentralized businesses which issue blockchain based network equity.

In 2016 there was an attempt at creating a venture fund of remote shareholders built on Ethereum, dubbed the DAO (decentralized autonomous organization) which ultimately failed due to poor technical and security oversight. In the last 18 months we have seen a reemergence of experiments around decentralized organizations. The term DAO has been revived primarily in the context of organizations that distribute funds for grants. This started with MolochDAO, a decentralized organization focused on funding initiatives around launching the next version of Ethereum. The template was reproduced for MetaCartel, which funds projects which improve user experiences for decentralized applications and grow the Ethereum consumer user base. We have seen other projects follow suit like the MarketingDAO and OrochiDAO. What these have all had in common is that they were really built as a way for Ethereum community members to fund the improvement of specific aspects of the ecosystem, with no expectation of return beyond the increase in value in their core ETH holdings. So these types of DAOs did not have any business model to speak of. Recently, VentureDAO and the LAO have been launched as attempts to revitalize the original DAO of 2016 and create a for-profit investment fund run by a distributed group of investors. These are still in early days.

Interestingly, one of the most popular applications on Ethereum goes by the name MakerDAO. Maker is possibly the first successful example of an on-chain business which funnels profits to its token holders/governors. The MakerDAO is a profit seeking entity run by a distributed group of actors.

While some may claim Maker is a protocol, it sure looks like a business. Like many other projects that call themselves protocols, Maker took investment from VCs, rents an office, and has an engineering team on salary. This is a common pattern amongst many applications in the space. It is our view that most of the application layer services built on public blockchains, while still expressing more transparency and reduced platform risk viz a viz traditional businesses, will have business models and governance structures similar to the traditional equity model for corporations. The primary difference will be that the cash flow these businesses receive will be in the form of cryptocurrency which settles to the blockchain (BTC, ETH, DAI, USDC, etc), and that the equity of these entities will also settle to the blockchain while being freely tradeable globally. This will ensure that any users who desire to be part of the governance of networks they patron will at least have the option to do so. Over time they may very well become decentralized to varying degrees. Jesse Walden has written about the transition toward decentralization.

Below is our model for what Network Equity should look like:

We believe that there will be multitudes of high value on-chain businesses whose cash flow and equity (and in the future, debt) settle to a highly secure multi-asset layer 1 settlement protocol (Ethereum is currently the leader for this use case).

Summary

• Yes to censorship resistant, hard capped money
• Yes to multi asset settlement
• Yes to permissionless innovation
• Yes to composable open source financial software
• Yes to DAOs with sustainable economics
• No to payment tokens
• No to enterprise “private” blockchains
• No to blockchain buzzword soup

The Risks to ETH and BTC

Bitcoin and Ethereum are currently, by far, the most robust public blockchains with the highest security. This means they have the highest capacity to settle the transfer of economic value without risking loss of funds.

As a quick primer:

In the most popular consensus mechanisms, Proof of Work and Proof of Stake, difficulty of changing the history of the ledger, i.e. stealing funds, is tied directly to the price of the native token. If you can buy enough staked tokens, or enough of the network hashpower you can change what is considered the “definitive version” of the record of historical transactions. In a worst case scenario, this means potentially spending funds the attacker does not own. In a moderately bad scenario, this could lock the network, preventing any future transactions. When we talk about network security, in short we are talking about how expensive it would be for this type of history revision to happen.

Here is a summary of some risks we see to the economic security of each network:

Ethereum

• Ethereum is currently the most popular public blockchain for building open source, interoperable financial applications, and it has great momentum
• However, there are significant risks to the sustainability of the ecosystem due to the underlying economics of the network’s security
• There is no intrinsic tie between the ETH token value and the activity on the network, yet the network security relies on the ETH token growing in value to provide a “security budget” to the value stored on the blockchain
• As a result, Ethereum may be a victim of its own success at some point in the future, if assets on Ethereum grow in value to a level that the underlying network cannot reasonably support
• EIP-1559 (a proposal to improve functioning of the system) will cause ETH to be burned every time the network processes a transaction, thereby lowering the supply and increasing the value per unit of each token
• However, this proposal still ties the ETH value and thus the security of the network to transactions, not settlement or storage of assets

Imagine a reality where the total value of the ETH token is $100B USD, but at the same time $10T USD worth of digital assets have been minted on the platform. The miners who provide security to the network are rewarded primarily via inflation fees. Token holders of ETH are being taxed to secure a large sum of value (in this case 100x the value of the ETH asset they hold). In both PoW and PoS consensus mechanisms, the larger the market cap of the ETH, the more costly it becomes to perform a double spend attack on the network.

As more and more digital assets are minted on Ethereum, the opportunity to create a profitable attack increases. While we may be far away from this reality today, we are still close enough to recognize that in order for a world finance system to grow to fruition, a positive feedback loop must be created where the more assets minted on the network, the stronger the network becomes. In the current model of Ethereum, the opposite is true, the more assets minted, the weaker the network security. This is a substantial risk to something aspiring to become the basis of a global, trustless financial base layer.

Bitcoin

• Bitcoin is viewed as the simplest, safest, most straightforward crypto asset with the highest security budget
• The 21M supply cap is part of the asset’s core ethos
• However, this fixed supply also implies a fixed security budget over the long term
• In order for BTC to maintain high security, transaction fees will need to rise to compensate for the declining block rewards over time
• As an intentionally low throughput network (for the sake of maximal decentralization), this leads to a potential question mark for the long term sustainability of the security budget

Both of these leading projects have risks which can be overcome, just as many early stage businesses fixed critical problems in order to gain mass adoption. While we are optimistic on the long term success of both Bitcoin and Ethereum, we recognize the substantial opportunity presented by building a blockchain which overcomes these challenges from day 1. We spent a year researching different teams developing public smart contract blockchains and NervOS contained many of the elements we were looking for.

nervos.org

NervOS CKB: A sustainable multi-asset chain

Lionschain decided to invest in NervOS after hundreds of hours of researching this industry and building a framework for what we thought constituted the most important characteristics for a layer-1 public blockchain. This ideal base layer chain would need to support our vision for an internet native financial system. Those traits include:

• Enables multi asset issuance and settlement
• Has a security mechanism that scales with the value of assets on the chain
• Provides a store of value for long term holders of the native asset
• Offers the highest level of censorship resistance possible
• We think this likely necessitates Proof of Work
• Maintains the potential for a treasury to fund future development needs
• Not have on-chain governance
• Has consensus amongst community around the vision for the project

We had heard of Nervos in 2018 when it completed a seed round from some well known crypto VCs, but hadn’t taken a deeper look until mid-2019. At that point we decided that following the hype cycle, it made sense to revisit some of the projects that were funded privately from 2017–2018 too see if they still held promise. We were incredibly impressed with the thoughtfulness of the team. While most “next-gen” blockchain projects focused on solving the scalability issue, the NervOS team had honed in on addressing the primary risks we had identified. We highly recommend their positioning paper as a starting point. In summary, NervOS CKB is a public decentralized blockchain optimized to be a multi-asset settlement layer. Multi-asset settlement has proven to be the killer use case for Ethereum, however the ETH economics are built around transactions. CKB takes learnings from both ETH and BTC to enable the core value proposition of layer-1 public blockchains with sustainable security. It achieves this via the following properties:

UTXO Model

• Modified UTXO model dubbed the “Cell Model”
• Nervos enables multi-asset and settlement using a modified and enhanced version of Bitcoin’s UTXO transaction model.
• This thread summarizes the advantages:
• UTXO model puts less logic in the chain
• UTXO model allows parallel execution
• Generators can fill in the needed features to enable smart contracts

Economic Model focused on Sustainability

• An economic model which charges developers for storing state on-chain via the CKB token.
• This innovation differentiates NervOS from virtually every other blockchain we have seen, creating numerous beneficial side effects which enable the sustainability we are so excited about.
• Assets that store state on chain must pay CKB, and therefore, only state which is valuable will occupy state of the blockchain.
• This will reduce bloat, ensuring the chain maintains optimal decentralization.
• The value of CKB should rise as storage of stateful assets increases, along with network security.
• Kevin Wang, the project’s founder, describes this as a “Flywheel” virtuous cycle.
• The native asset CKB also has combined the best of both fixed issuance and inflation to provide a treasury for ongoing development with store of value properties for long term holders.

Proof of Work consensus

• PoW has been tested for over 10 years in many adversarial conditions. It makes sense to continue using PoW as a consensus mechanism until a superior method proves itself in the market.
• While there are plenty of arguments against proof of work, and many crypto enthusiasts believe proof of stake is/will be a superior consensys mechanism, PoS is still relatively untested at scale.
• Ethereum is moving to proof of stake in what will surely be a controversial upgrade.
• For all of the potential scalability benefits and environmental benefits of PoS, at the end of the day, it does have a weakness that at some point it can become a permissioned system where the current validators blacklist new entrants (or particular entrants).
• PoW is by definition open to anyone who wishes to participate in the consensus process, and therefore is maximally censorship resistant.
• We believe this to be a critical consideration for L1 settlement chains
• For an open permissionless financial system to exist, the base layer, the settlement layer, must be maximally censorship resistant and secure
• PoW creates a de facto cost to reorder a chain. This is not the case in PoS.
• Technical advancements continue to improve the efficiency of hardware mining equipment, this means the players that got in first do not have an advantage over those who enter the mining industry in the future.
• Ethereum 1.0 is working quite well as a low throughput PoW chain, specifically for the DeFi use case which we believe to be the core use case at L1.
• In our internal discussions, we often said that Eth 1.x would be the biggest competitor to Eth 2.0, then we found NervOS.

Leveraging L2 for scaling

• With many of the advanced smart contract platforms competing on scalability, we think this is actually of lesser importance at the base layer.
• As we have reiterated many times, we believe that the core function of a maximally censorship resistant base layer is secure settlement of financial assets.
• Layer 2 can be used for transaction throughput (therefore requiring lower censorship resistance), with settlement of transactions occurring periodically to the base layer.
• Layer 2 can focus on creating a great user experience for developers, while layer 1 is able to focus on security and simplicity.

Informal governance

• On-chain governance is still an area of open experimentation.
• We believe that layer 1 settlement chains should “ossify” at some point in time, in the same vein as Bitcoin.
• All of the properties that lend themselves to censorship resistance, transparency, and immutability, should not be subject to change.
• Therefore, minimal formal governance is an important characteristic in our view.
• Treasury for ongoing development via the NervosDAO
• The economics of the system will tax short term holders, and this tax funds a treasury which can be allocated to developers for core protocol upgrades.
• This enables a fixed supply store of value dynamic for long term holders while also providing a budget for ongoing upgrades, which we believe to be an elegant solution.

World-class founding team

• Feel free to take a look at their bios and work.

Opportunities for developers and entrepreneurs

The NervOS Foundation has established a USD $30M grant program to fund the development of its ecosystem. The goal of the program is to attract talent to research and build the necessary tooling for developing solutions around NervOS, and to incentivize developers and projects who are willing and passionate about working on these solutions.

Without shilling our bags too hard, it’s probably worth noting that CKB is currently listed on CoinMarketCap (at time of writing) trading at a $76M USD market cap (not fully diluted) and has around a $9M USD daily trade volume.

Calculating the issuance of future mining and “staking” rewards brings us to a fully diluted valuation of roughly $300M.

Ethereum, on its circulating supply (ie not fully diluted) is currently trading at a $14.5B valuation, ie 63x the NervOS network value. To put that in perspective, when ETH traded at a $230M valuation the value per token was roughly $3. One of the reasons the Ethereum community is so strong is because there was a wide distribution of its token early on, and many developers made a meaningful amount of money by buying in early, and that windfall grew into motivation to be part of building the ecosystem. The market is potentially offering that dynamic on NervOS right now. With a clear path toward building out a sustainable DeFi infrastructure, we think it’s a very compelling opportunity.

We love talking through these ideas with passionate entrepreneurs. If anything in this article tickled your fancy, feel free to ping us.

Conclusion

It’s taken a few years but public blockchain networks have found their use case with open source permissionless financial building blocks and applications. We have closely monitored the leading ecosystem (Ethereum), as well as upcoming challengers with various architectural approaches. We have determined that NervOS presents an impressive combination of traits which make it a leading candidate for the high value base settlement layer of the future open financial system. Our team is looking forward to contributing to the growth of the NervOS ecosystem by working directly with teams building ambitious DeFi applications and infrastructure.

Lionschain is a thesis driven long-short crypto fund that has significantly outperformed the market since inception. We combine public market trading with private market early stage investments and analysis to maintain a broad view of the space. If you are an entrepreneur interested in designing a token system or building on any public blockchain, or if you are interested to learn more about NervOS specifically and/or pursue a grant opportunity, please shoot us a line at contact@lionschain.capital.