The Protocol Investment Vehicle
From complex societal problem to collaborative ecosystem
The ‘Protocol Investment Vehicle’ is an answer to the current undesirable situation regarding investing in the digital commons, specifically commonized (ownerless, decentralized) protocols, AKA digital public infrastructure. Current methods of investing compensate for high startup failure risk with large Return on Investment (ROI) multipliers, and do not guarantee a protocol to be self-owned. This results in an inability to have well-funded commonized protocols which are required to drive adoption. Odyssey, together with Circularise, Milvum, YES!Delft, and Loyens & Loeff, incubated an ecosystem that is developing the Protocol Investment Vehicle. It allows economically viable commonized protocols. In this article, we elaborate on how we are discovering this: by actually building it.
Update June 23, 2020: note that the event formerly known as Odyssey Hackathon has been moved online and rebranded as Odyssey Momentum. More: https://www.odyssey.org/odyssey-hackathon-becomes-momentum/
What on earth is Odyssey?
At Odyssey (who said we’re from Earth?), we focus on <complex societal problems> that we solve by <incubating ecosystems> that enable <mass collaboration>.
<complex societal problems>
Complex societal problems are not owned by a particular group of people, which is part of the reason why it is so hard to solve them: nobody is responsible in particular. Rather, complex societal problems are shared amongst a myriad of stakeholders that presumably do not trust or even know each other. Examples of such problems are climate change and surveillance capitalism. In order to solve complex societal problems, their relevant stakeholders need to assemble into an ecosystem of willing venturers.
“We make these endeavors not because it’s the simple way of doing things, but because it’s the price of participation in the future”
Vinay Gupta, CEO of Mattereum
<incubating ecosystems>
Since complex societal problems can’t be solved in one go, they require to be concretized, framed and outlined, and be divided into digestible chunks. This is exactly what happens during the Future of Trust Summit at the beginning of each new season of the Odyssey Innovation Program. Shared complex societal problems are turned into concrete (but not narrow) challenges by an assembly of relevant stakeholders. In the six following months, momentum is gathered through 12 preparatory events and energy is compressed for the Odyssey Hackathon, resulting in a Cambrian explosion of new ways of thinking and novel solutions. The best solutions and the teams behind them join their particular ecosystem of stakeholders: Some build the solution, some contribute to the solution, and some want to see the solution happen. These are the ecosystems that we incubate.
<mass collaboration>
Regardless of the technology used to build the solution (AI, blockchain, IOT or buzzword#4), we let the teams focus heavily on building a public digital infrastructure; absolutely neutral and independent. We call them #commonized protocols: a procedure or system of rules governing a digital infrastructure, agreed upon by all stakeholders and part of the digital commons. Commonized protocols aren’t owned by a company, government or any formation thereof, enabling everyone to participate and co-create: mass collaboration. Proprietary solutions can be built on top of these protocols, as long as they obey the common governance of that protocol. These commonized protocols are not new ideas; HTTP and email have no owner, and even the internet itself has no owner. Yet, everyone can use it and build on top of it. We merely vouch for a thicker stack of commonized protocols within our public digital infrastructure, allowing for mass collaboration and inclusivity.
A wild complex societal problem appears!
Despite high-quality teams of builders and well-connected ecosystems of stakeholders, allocating adequate financial resources for the adoption of a commonized protocol has proven to be difficult. The challenge lies in the fact that development must rely on grants and bounties since conventional investment methods do not make sense here.
The Silicon Valley model, for example, is seeking very high returns on investments (ranging from 100x to 1000x) to compensate high startup failure risk, resulting in highly stressed and competitive startups which are incentivized to conduct unfair schemes to drive insane amounts of adoption to the point that they potentially become monopolies (which ironically equals a successful investment — for the investor, that is). In this way, the protocol that the startup is using is privatized and not commonized. The adoption of the product is driven, not the adoption of the protocol.
Even if the investor understands that he can have first access to a new market of proprietary solutions on top of a commonized protocol, a paradox emerges since he cannot invest in this new market because taking shares of the protocol is obviously out of the question.
Similarly, newer investment methods like ICOs have shown to be full of frauds, hacks, Ponzi/pyramid/pump&dump schemes, etc. Next to these serious issues, it is hard to determine what an investor is actually acquiring by participating in an ICO (i.e. how does the purchased token appear on his balance sheet?). Also, investors in an ICO have the incentive to drive up the price of the particular token, and not the incentive to drive adoption of the underlying protocol.
The challenge is to create an investment vehicle that aligns investors with builders to drive the adoption of a protocol while mitigating the risk of startup failure.
Making commonized protocols economically viable will create a more inclusive way of investing, enable the influx of institutional money, and result in mass adoption of commonized protocols.
An ecosystem emerges
Through multiple meetings with stakeholders related to this problem, we further defined this challenge and came up with a potential solution. This solution, the Protocol Investment Vehicle (PIV), is a completely open source investment method that any type of ecosystem could use to enable funding commonized protocols.
Investing in protocols through the PIV does not give high ROI multipliers, but allows earlier ROI. In the PIV, the ROI multiplier is capped (e.g., 4x: a 100.000 investment will return 400.000). The cash flow that pays the investors is established by higher transaction fees of the commonized protocol they have invested in. Please note that the goal of the commonized protocol is to have low transaction fees (=less friction), a temporary higher transaction fee in the beginning simply allows investors to onboard, resulting in a larger community of builders. Since the cash flow is based on transactions of the protocol, the investor is incentivized to push its adoption (higher adoption rate = earlier ROI). The investment process is now not about how much money investors can get back, but how soon.
This is achievable since the rate of adoption can be quantified by the current transaction fee.
In short, the PIV enables:
- An adoption driven approach that is beneficial for all end users
- An incentive to get competitors to invest with each other (they don’t per-se share interest, but have a mutual benefit from the protocol)
- An investment that becomes a calculable financial asset (the investment is turned into an asset with a revenue stream)
- Mitigation of startup failure risk since the builders and investors are aligned (investors seek builders for a public IP and builders seek investors to build public IP)
- Every protocol now has a clear deliverable: very low or even zero transaction fees. This is reached when adoption is high and thus the protocol has come to market. Also, investors have gained their fair share for their (relatively low) investor risk
As the PIV is completely open source in itself, ecosystems using the PIV could be Odyssey, an incubator like YES!Delft, or any other ecosystem across the globe. We had a hunch about why this solution could work, but not a way to test its various potential implementations.
Also, since the success of the PIV is of strategic benefit for Odyssey (we want to enable ecosystems to develop commonized protocols), we decided to create a challenge for the Odyssey Hackathon 2019: Create a prototype of the PIV that can be used to simulate how the investing procedure would work. The main goal was to make the PIV testable and provide a way to simulate various financing schemes for commonized protocols.
After a long and tough curation process, we selected 5 talented teams:
- Team deepDao. An international team of Blockchain enthusiasts thatfound each other during the preparatory events.
- Team Gazorpazorp. Physics students from the University of Groningen.
- Team Crowdfunding the Commons. An international group from the Giveth.io community.
- Team Circularise. A YES!Delft incubated blockchain startup.
- Team Schwungrat. A Berlin-based blockchain startup.
During the weeks prior to the hackathon, preparation was guided by multiple workshop sessions. These sessions consisted of diving deeper into the challenge and learning what every team’s approach was.
3, 2, 1 … Takeoff!
Although teams come very well prepared, once the Odyssey hackathon takes flight, nobody knows exactly what is going to happen. The magic is that the sheer amount of expertise crammed into a small space results in the fact that teams dare to explore the unexplored, and will come up with new unexpected results. It’s up to the teams how much they let themselves venture into the unknown, how far their Odyssey takes them.
After 48 hours of frantic coding, consulting Jedi, pressure cooking sessions with the challenge owners, considering legal aspects, and fighting sleep, only one team could reign victorious.
And the winner is…. Circularise! They understood best how to get institutional money into the space and make investments in commonized protocols attractive for any type of investor; even for corporates and governments. The team made an incredible journey. After lengthy discussions and many hours into the hackathon, they decided to make a huge pivot that basically rendered their previous work useless. This risky move did not pay off very well as more and more Jedi, stakeholders and challenge owners got confused. However, this did allow them to articulate very well how this approach did not work. After an even harder decision process, they decided to pivot back to their original approach, now armed to their teeth with better arguments and a more defined storyline. But, a mere 20 hours on the clock was looking at them with an evil grin. Too much to do, too little time. Not that they cared. A crystal clear pitch, a low-barrier and easy to understand demo of their prototype, a good understanding of their legal structure and open source strategy and a prudent 100-day plan gave little chance for the Jury to consider other teams as winner of the Odyssey Hackathon 2019.
The solution enables not only institutional investors, but also corporates and governments to invest in commonized protocols. Circularise built a prototype that allows investors to simulate investments in open protocols. These simulations provide insights to the investor about the potential return on investment, and how the investor could help out the protocol with adoption in a truly transparent way. Simulations are based on a projected adoption curve, transaction parameters, protocol rules, and investment details. When the optimal protocol and investment rules are found for a proposed protocol, a smart contract is generated directly from the simulation to fund the builders. This smart contract pays out returns to the investor until his return cap is reached. The solution uses machine learning on the adoption curves and transaction costs of current and future protocols to make the simulations as realistic as possible. Together with the licensing structure and the legal arrangements that have been made by the team’s overarching foundation, investments can be made directly with approval of the Dutch Authority for the Financial Markets (AFM), the key financial services regulatory authority for the Netherlands.
Mass collaboration is coming!
The most interesting thing about Circularise is that they have very strong ties with the challenge. After many years of developing their blockchain startup, which enables the circular economy to scale by making the provenance of materials transparent, they have hit a wall every time they have been talking to investors. The biggest stakeholder to the challenge was the team that won.
At Odyssey Ignite, the event that is hosted the day after the hackathon and is designed to kickstart the ecosystem around the challenge and its winning team, Circularise sat at the table with Odyssey’s token engineering friends. The best way forward was discussed and people like Vinay Gupta (Mattereum), Michael Zargham (BlockScience), QJ Wang (Ethereum Community Fund), Shaun Conway (ixo foundation), Irene Lopez de Vallejo (Ocean Protocol), and Aron van Ammers (Outlier Ventures) pledged their contributions.
After the dust from Odyssey Hackathon and Odyssey Ignite has settled multiple meetings were organized that followed our ecosystem incubation method. As we are currently expanding the ecosystem, we are looking for additional contributors.
Whether you are an investor, developer, regulator; if you’re interested in joining Odyssey, Circularise, YES!Delft, Milvum, and Loyens & Loeff in contributing to the mission of making commonized protocols economically viable, please don’t hesitate to shoot us a message and explain how you could contribute.
Written by: Abe Scholte
About Odyssey
Odyssey connects governmental, corporate, and nonprofit partners with innovative ideas to collaboratively address complex 21st-century challenges. We mobilize a global ecosystem of more than 6,000 members, among whom developers, creatives, startups, corporates, investors, governmental bodies, legal experts, regulators, scientists, and other key stakeholders. The past three physical editions of the event known as “Odyssey Hackathon” have drawn thousands of participants from around the world to Groningen, the Netherlands. The next edition, rebranded as Odyssey Momentum, explores the internet’s potential to unlock new levels of online collaboration and next-gen event experiences.
