Token-Curated Venture Capital: vol. 2

(co-authored with Richard Malone - BTBlock and Hambardzum Kaghketsyan - SmartGateVC. Vol 1 of the article is here).

Our first article introduced the TCVC concept and its potential shift in early stage investment paradigms.

We believe this change to be necessary, and more importantly, we believe it to be inevitable.

In the following sections, we lay out what TCVC is, what components, rules, and mechanisms comprise the system, and what functional processes make its wheels turn.

Introduction

• Rationale: A Need for Change
• TCVC: Core Principles

Components

• Stakeholders: Their Functions and Incentives
• Goals, Incentives, and Drivers
• Tokens: A Layered Approach
• Layer 1 Tokens
• Layer 2 & Re-Fungible Tokens
• Attestation, Trust-Building, and Bootstrapping Trust
• Smart Contracts, Governance, Speciation, and Processes
• Disputation, Settlement, and Arbitration

Remuneration and Returns

• 20–5–75 model
• Performance-based carry
• LP to GP — carry
• (5%) — How the Platform (we) Make Money

Processes

• Fundraising
• Know Your Customer (KYC)
• Custody
• Transference of Funds
• Portfolio Inclusion
• Portfolio Inclusion

Reputation, Staking & Transaction Fees

• Reputation
• Staking requirements
• Due Diligence
• DD Syndicate
• Yes
• No, Final NO, and No-to-Yes

Allocation of Capital

• Quarterly Reports and 6 Month Votes
• Change of requested amount

Portfolio Success

• End of Fund Lifecycle
• Promotion
• Consumption
• Scouting/Nurturing

Appendix, About, Glossary

• Appendix
• About Pale Blue Dot
• Glossary

Introduction

Rationale: A Need for Change

The world economy is rapidly evolving, yet Venture Capital has remained at a practical stand-still since its inception. With each passing day, we see newly proliferated paradigms running concurrently with blockchain’s enablement of decentralization. As of this writing, the cryptocurrency market is worth more than $200 billion. This figure indicates a nascent movement towards decentralization and democratization in our economic and commercial systems. The advent of the ICO (and subsequent evolution of the more formalized “STO”) supports this notion, as this fundraising mechanism enables anyone — regardless of accreditation — to participate in the tokenized future.

Even so, most of this capital infusion unfortunately originates from crypto hedge funds incentivized to generate short-term shareholder value. In practice, this means buying and holding many “utility” tokens built for underlying network consumption and deployment. Worse yet, it can mean the speculative profitization of such tokens. If this practice continues, many networks will suffer from stagnation or speculative manipulation.

We at Pale Blue Dot envision a better way forward. Therefore, we are developing a model focused on cultivating long-term shareholder value that simultaneously supports what we think might be the operating systems of tomorrow. If we are to bring this tokenized future to fruition, TCVC’s proposed model is positioned to be that enabling factor.

Building on the principles of curation & recommendation markets (powered by token-curation), we intend to exploit the potential utility in what we’ve come to think of as token-curated portfolios (TCP’s).

TCVC: Core Principles

1. Long-term thinking and value creation: TCVC’s model embodies a long-term investing ethos. We intend to support paradigm-shifting innovations, and thus couldn’t care less about monthly, quarterly, or even yearly gains. Post-ICO token speculation is not our concern or interest. We’re thinking about and considering investments on timescales of years (not months) into the future.
2. Decentralized decision-making: Crypto hedge funds and traditional VC alike centralize the portfolio inclusion (company selection) process. They alone dictate fund exposure and performance. At TCVC, we believe that a group of well-aligned, incentivized actors can outperform, at least, the portfolio success of traditional VC management structures.
3. Easy access to funding: Fundamental to the ethos of TCVC is the premise of creating a vehicle built to benefit everyone — not just accredited investors. Everyone should enjoy the potential to experience outsized gains.
4. Accelerate growth of blockchain ecosystem: TCVC supports all of our participants and our portfolio companies at the same time. By amassing a large group of network participants, we provide a built-in network effect with which other investment entities cannot compete.
5. Active participation of stakeholders: We want to democratize early stage investing. All stakeholders should have a say in the performance of the TCVC community. By leveraging the core mechanics of the TCR architecture, we are building models which clearly incentivize consistent, perpetual participation in the ecosystem, while also disincentivizing apathy and abstention.
6. Driving right decisions: Tokenomics, incentivization/disincentivization, and game theory are at the forefront of our thinking. Good systems align different stakeholders through commingled incentives. Great systems also structure very specific disincentives to deter bad actors; systems born of such thinking benefit from deterring bad actors rather than having to reactively punish them after some detrimental decision has been made. TCVC participants who act in the best interest of the community know they will be rewarded. Participation is obviously and transparently incentivized.
7. Perfect alignment of individual and community interests: We want to establish game-theoretical incentive models that position individual financial incentives in ways that better the community at large.

With these principles in mind, we would like to re-introduce you to TCVC: Token Curated Venture Capital, its main components, and processes.

Components

Stakeholders: Their Functions and Incentives

There are three primary types of stakeholders in the TCVC ecosystem. In this section, we discuss these stakeholders, their motivations, and their functions as rational actors within the TCVC system.

Potential scheme for making things more interesting, and for providing better gas/brake pedals on TCRs and aspirant admissions: Every 28 days, a limited number of new aspirants are considered for induction into the TCP.

1. Token-Holders: In a decentralized ecosystem like TCVC, Token-Holders are akin to the role of GP’s in traditional VC jargon. These actors curate the portfolio of Candidates and investments, and can either be “influencer investors” — such as Tim Draper — or consumers who upgrade their status and opt into actively participating in the ecosystem.
   
   Token-Holders accumulate and analyze high-quality information around the TCP and share these insights with Consumers (Onlookers). First-wave Token-Holders will start with a “voting weight”, which is determined by a mix of experience (e.g., if you’ve worked for a VC firm or ran a fund) and some proven portfolio stats outside the TCVC ecosystem (e.g., the totality of equity investments). Token-Holders are awarded a total percentage of management fees relative to their “voting weight” and total Layer 2 protocol tokens. Their primary drive is to create and accrue value for the TCP, and all its participants. Compared to “Consumer” type participants, they are incentivized by their percentage of profit received from their carry.
2. Consumers: Consumers reap the benefit and insight of the Candidates curated by Token-Holders within TCP’s. There are two subtypes of Consumers:

• Aspirants: Aspirants are the active “Consumer” component in our ecosystem. They most closely resemble Limited Partners (LP’s) in traditional VC terminology. They enter the platform with the goal of eventually becoming Token-Holders. They are awarded a baseline amount of unweighted Layer 2 protocol tokens based on the amount of fungible tokens they’re willing to collateralize into the smart contract for a given TCP upon entry. All consumers start at the same baseline vote weight, but will increase their rank, standing, and weight over time. These aspirants “level-up” to the status of “Token-Holder” by process of a collective vote. Votes for induction into Token-Holder status are initiated when aspirants nominate themselves, or are nominated by Token-Holders. We will go into further depth regarding the governance and rules around such votes.
• Onlookers: We lovingly refer to the second group of passive “Consumers” as “onlookers.” They pay an upfront fee for short-term access to and opportunities with the curated information from token holders in a given TCP. They are the most passive component in our stakeholder scheme. While this section is related to stakeholders, and not to governance, it is worth noting that the usage/distribution of fees paid to the TCP by onlookers is subject to the governance of that specific TCP. That is to say, TokenHolders of a given TCP can decide (for themselves) through voting what is to be done with these fees. For example, Token Holders can decide to simply split the fees among themselves, or can decide to pool those fees into their TCP’s liquidity pool to be used for investment rather than remuneration. More interesting ideas to play with might include things like appropriating those funds toward charity donations, technological or biomedical research, etc.

3. Candidates: Candidates represent the fundamental building blocks in our tokenomic system. These are potential investments (companies) who are sourced from industry groups, TCVC participants, partners, and other VC firms. Candidates admitted into a TCP essentially become portfolio holdings. They provide token-holders with all information relevant to investment and technical due-diligence, and as such are accountable to the token-holders of the TCP they are listed in. So long as there exists some number of viable candidate projects interested in portfolio listing/inclusion, there exists the requisite first-principles demand for perpetuating a token-curated portfolio. Their primary drive is to receive investment and funding, and they are held to delivering on milestones and deadlines.

Taken together, these three types of stakeholders comprise the primary citizens of our system. The profit split among these stakeholders is as follows:

• Token-Holders (GPs): 20%
• Consumers (LPs): 75%
• TCVC: 5%

Goals, Incentives, and Drivers

Let’s take a breather from all of these bullet-point lists, and look more deeply into stakeholder goals, incentives, and the concepts of “work” and “transaction fees.”

In terms of what constitutes “work” in our network, one could consider the processes of scouting, conducting due-diligence, and proposing new investment Candidates for inclusion into a TCP as human-driven “mining” on the part of Token Holders and Aspirant Token Holders. A set of detailed, well laid out, and clear criteria will exist within all TCPs — fundamental and universal to the TCVC protocol that underlies the entire system — that will clearly specify what information is required in order to present a complete due-diligence report on all proposed Candidate startups. TCP smart contracts will be parameterized and flexible, in cases where newly-formed TCPs will want to add certain required criteria to the scouting and due-diligence process.

Furthermore, Aspirants or Token Holders can charge, or be rewarded, the equivalent of a “transaction fee” by auctioning or spending their skills/time (based on their reputation), so that other individuals or groups can request a specific Token Holder — or any Token Holder — to vet a given proposal, or assess and improve a given investment deal. Simply stated, it is the tokenized equivalent of asking a GP or an LP to “please have a look at this company and this investment deal,” and then reward them when they do useful work.

Further incentivization mechanisms like referral bonuses will be built into the game theoretical mechanics of the network in order to help amplify and drive network effect, which in turn grows the network and increases the quality of its citizens. If a Token Holder refers a useful, productive new Token Holder into the system, they will be rewarded after some period of time wherein the new Token Holder completes some amount of useful “mining” and voting on the network, and build some baseline reputation of their own.

Tokens: A Layered Approach

TCVC’s tokenomic architecture needs to satisfy some important requirements. The “top-layer” token that buys you into the system must be a token that is generally architected for stability. TCVC participants’ financial interests must first and foremost be protected from price manipulation and insulated from market speculation. To that end, the foundational fungible token (instrument of entry and participation) in TCVC should be a stablecoin. As of this writing, the most attractive option we’ve investigated appears to be MakerDAO’s Dai. (Note: TCVC continues to conduct research along these lines.)

Participants can buy into the TCVC network in one of two ways:

1. Participants can purchase/acquire Dai, and bring it with them to our network.
2. Participants can sign up directly with TCVC, deposit some amount of fungible asset (Dollars, Euros, Ether, Bitcoin, etc.), and we will switch their deposited fungible asset against the fair market price of the equivalent amount of Dai. A small switch fee will be applied, but said switch fee will be many basis points lower than conventional banking switch fee rates.

Layer 1 Tokens

TCVC tokens will be issued to verified participants who have deposited their fungible assets at a 1:1 ratio against Dai (1 TCVC token : 1 Dai Coin). Their Dai will be held in the TCVC network’s master contract. As of this writing, our token bonding curve against this contract is assumed to be a simple, linear function. We continue to investigate more robust algorithms and reference implementations (Bancor, quadratic bonding curves, etc), while also statistically modeling and simulating these options, their edge cases, and black-swan possibilities with academic mathematicians, statisticians, and economists.

From there, users are free to move throughout the TCVC network’s many Token-Curated Portfolios. Users who satisfy the protocol-defined requirements for eligibility to create new TCP’s will also be free to organize, structure, and instantiate their own new TCPs.

Taken holistically, TCVC tokens can be loosely classified as work tokens, in addition to functioning as a fungible/collateralize-able asset, since you’ll need to hold and stake said tokens in order to participate in the “mining” & rewards processes.

Layer 2 & Re-Fungible Tokens

When a participant wishes to join (or subscribe) to a specific TCP, they will be depositing their desired amount of Top-Layer (L1) TCVC tokens into the smart contract for that specific TCP. TCP contract-layer tokens will be minted in a continuous curve-bonded fashion, on a rolling window of time (e.g. — every 28 days) which is flexibly delegated to the contract-level protocol governing the TCP itself.

Upon its creation, a TCP will be issued (and therefore represented by) a single, Non-Fungible token that is escrowed (like the deed of a trust), into the smart contract that governs that TCP. Against this digitally bonded NFT deed token, fungible tokens will then be issued to TCP participants, which represent partial ownership and carry voting rights. These are akin to Re-Fungible tokens (RTFs). They can be bought against the TCP, and sold (burned/consumed) back into the smart contract of the TCP upon a participant’s exit or liquidation.

Some TCP’s may decide to continuously bond tokens on a daily basis, others on a weekly basis, and so on, and so forth. TCVC has done considerable research and investigation into bonding curves for continuous token models. We continue to assess whether single-bonding curves, or more complex bonding curves are most effective for our continuous token models.

These L2 (RFT) tokens correspond to their specific TCPs. They can only be used within the TCP they correspond to. They are contract-layer tokens that are minted and dispersed to a given token-holder or aspirant based on what they collateralize into the TCP/fund. When a given candidate is added to a TCP, only the L2 token for that TCP will function as a mode of investment into the holdings and deals that TokenHolders pipeline for that particular portfolio.

Taken in this way, one could classify an L2 token (descended from that TCP’s escrowed NFT) for a given TCP as also functioning as an index token. The NFT component of the TCP allows for a flexible architecture in which the portability, encapsulation, and transferability of the TCP as a whole becomes possible — and therefore audit-able.

By structuring L2 tokens this way, we incentivize Candidates to apply to good TCPs, and also incentivize TCP token-holders to curate the highest-quality list of applicants. The concept of uniqueness and scarcity is placed on the holdings in that portfolio, rather than playing on the classic blockchain trope of correlating quality-maintenance to token scarcity itself. That is to say: Instead of banking on the limited-number-ness of a token in order to motivate Token-Holders to curate high-quality lists of things, we tie the desire to curate high-quality lists to the exclusiveness of a given listing within a single TCP, and instead use gas/brake pedals built into the bonding curve and governance protocols of the TCP smart contract to regulate each TCP;s micro-economy.

As such, one could posit that escrowed NFT tokens are a sort of “sum-total index token,” acting as a single point of reference, representative of the collective value of all holdings in a given TCP.

When a Token-Holder or Aspirant of a given TCP wishes to liquidate their position, they can simply sell their L2 tokens back into the TCP’s smart contract, thereby “burning” the tokens, reaping their profit, and liberating their originally collateralized L1 tokens. Cost substantiation is based on the algorithmic bonding curves and rules inbuilt to the master contract of that TCP. A participant is then free to cash out of TCVC, which is an identical process, or they can move on to participate in some other TCP for investment.

Attestation, Trust-Building, and Bootstrapping Trust

Given that we’re not talking about an online video game or a digital crypto-collectible cartoon character application, we know that it is of the utmost importance to conduct deep KYC of all participants within the network. Everyone will have to pass through a standard KYC/AML process, laid out at the time of their signing up to become participants of TCVC. TCVC’s legal team possesses extensive background in corporate law, venture capital, entrepreneurship, and corporate compliance processes. Multiple strategies are being considered here, some of which include partnering with 3rd parties that specifically deal with KYC/AML and identity verification.

To bootstrap the network, TCVC intends to first build an initial list of publicly known, reputable Venture Capitalists, investors, and technologists. These individuals will then engage in a process of attesting to/for one another’s integrity and trustworthiness. It is conceptually similar to the way in which EOS was bootstrapped. Dan Larimer was the first entrant. Upon announcing himself to the network (at the time of the network bootstrap), David Moss immediately announced himself and attested to Dan’s identity within the network. Reciprocally, Dan attested to David Moss’s identity, and between them, an initial trust was formed. Similarly, our first batch of entrants will attest for one another’s identity. Attestation has to begin somewhere, with some reputable party, so we’ll need reasonable verification of identity prior to attestation — which is why KYC/AML will naturally have to gate the entrance to the network, and will include identity verification.

As mentioned previously, the due-diligence requirements will be inbuilt to the TCVC protocol, with flexibility and extensibility to extend or make requirements more robust on a per-TCP basis. This due-diligence “template,” will be reviewed by reliable, institutional 3rd parties prior to implementation, and will remain under constant, perpetual review, iteration, and improvement.

It’s also important to note that we will be bootstrapping the network not only with Venture Capitalists and Investors, but also reputable technologists. As part of the due-diligence process for any prospective Candidate project, there also exists a technological attestation in which reputable technologists within the network can inspect, analyze, and attest to the technological integrity of the potential investment in question.

Smart Contracts, Governance, Speciation, and Processes

As is evident, much of the system runs on the idea of token-holders having a right to vote. Additionally, leveraging the game mechanics of TCR’s as first proposed by Mike Goldin creates the necessary mechanism for ensuring the autonomous quality-maintenance of both the participants in the system and the investment Candidates curated into all TCP lists. At all levels of TCVC, token-curation by way of voting is an absolute requirement, and maintains democratization, systemic openness, autonomy, and quality-maintenance.

These considerations very intentionally apply (but are not limited to) to the following:

• the process of accepting new Token Holders and Aspirants to a TCP
• the process of defining, modifying, and parameterizing TCP-level governance
• the process of proposing, vetting, and accepting/declining new Candidate projects to a given TCP
• the process of dispersing funds to portfolio holdings based on milestone achievement
• the process of liquidating a TCP
• the process of de-listing a bad actor holding from a given TCP
• the process of removing bad actor Token Holders/Aspirants from a given TCP

The MOST important consideration built into TCVC’s voting protocols is that of COMMIT/REVEAL voting. In order to maintain fairness, and prevent bad actors from doing things like forming conspiracies or simply following the voting trends they observe among their peers, as well as to prevent voting apathy, votes cast by Token-Holders of the system will not be visible to ANYONE, until after participants have committed their votes and have waited for the conclusion of the voting period. In this way, conspirators cannot depend on one another to do what they promised to do (as part of a conspiracy), since individuals cannot audit or observe one another’s votes until after they’re cast, and the voting period concludes.

Stated plainly: If I cannot watch you cast your conspiratorial vote, I cannot depend on you to hold up your end of a conspiratorial bargain. In this way, we try to promote a trustless sort of fairness.

From the perspective of how investments take place, and under what conditions, we can think of a TCP’s investment into a given Candidate as being similar (mechanically) to a DAICO (as proposed by Vitalk Buterin). Raising will function as an investment vehicle. That is to say, a total sum will be raised for investment into a Candidate/portfolio holding, but will not be dispersed/transferred as a lump sum to the Candidate upon being accepted into the TCP. This is to ensure that bad actor Candidates cannot subvert the system by defrauding it outright.

Each new listed holding will require some stake/collateralization, which can either be fronted by one of the GPs or LPs who makes the proposal for a Candidate’s inclusion, or can be deposited directly by the Candidate project itself. This staking requirement can be thought of like a deposit, or a bond, which acts to disincentivize fraudulent actors or trivial applicants from applying or being proposed for inclusion to a TCP. Yet again, this goes back to the game mechanics that help to ensure quality-maintenance.

Milestones will be laid out. Projects will operate under the supervision of the members of the TCP in which they’ve been listed. Accountability and transparency are paramount. Funds will be allocated in a rolling fashion, as milestones are laid out, verified, and achieved. This is analogous to a DAICO’s “tap” mechanism for dispersing held funds as needed. Aside from creating an accountability incentivization, this also confronts the LPs and GPs of a given TCP with the active role of working to help, supervise, and aid their holdings in succeeding, since their return on investment is tied to the success of the Candidate in which they’ve invested.

Our hope is that the relationship between investors and the projects they’ve invested in becomes less passive and more active. Passively throwing money in the direction of a potentially viable project is less useful to the company receiving investment than incentivizing investors to take an active interest in helping bring that project to success.

Disputation, Settlement, and Arbitration

In the case of conflict or dispute, settlement mechanisms will be built into the network. Verified 3rd parties and trusted/reputable TokenHolders of the system can convene as-needed in order to review and arbitrate disputes between token holders themselves (as it concerns transaction fees and rewards regarding due diligence), as well as between TCPs (groups of token holders) and the listed holdings they’ve invested in. From such disputes and arbitrations, TCPs (and TCVC itself) can continuously improve their own inbuilt governance protocols. It is important to note that we intend to operate on a blockchain that resembles EOS in the sense that the smart contracts upon which TCP and TCVC protocols will be built are update-able. In this way, we allow the network, its underlying protocols, and the TCP-level parameterized protocols to perpetually evolve and remain extensible.

In the interest of protecting the integrity of the whole network, and protecting the interests and wealth of our Token Holders, TCVC is also building a “Global Settlement Contract” into the platform. This Global Settlement Contract exists and functions similar to that of MakerDao’s Global Settlement Contract. This contract would be triggered in the event of some “Black Swan” event. Such events could include some sort of catastrophic hack, some non-trivial bug, some external speculative force against which TCVC has not been properly insulated against, or some sudden efflux of a large amount of capital staked/collateralized within TCVC.

Furthermore, TCVC intends to build deferred transactions and transaction delays into certain transaction types, in order to protect TokenHolders and listed TCP holdings against being hacked, robbed, or otherwise attacked. In doing so, we create a flexible system that operates with the ability to catch and reverse malicious activity and bad actors before the network or its citizens can be harmed.

Remuneration and Returns

20–5–75 model

The remuneration model we suggest is similar to that which exists for most VC funds, with a slight change. We suggest that GPs receive 20% of the profit, LPs receive 75%, and 5% gets paid to the TCVC vehicle to cover maintenance and licensing.

Performance-based carry

GPs (token-holders/curators) will receive a weighted voting score (like a reputation score) for the work they do in maintaining a trustful pool of venture deals. Those scores will be transformed to regular tokens based on the formula:

(owned amount of scores) / (total amount of scores) * (number of regular tokens allocated to the GP pool)

This formula introduces a naive, but very effective, performance-based carry for each of the curators based on individual record.

LP to GP — carry

LPs (consumers) are the same GPs (curators) but with an initial knowledge score of zero. They can participate in everything GPs can, and get to improve their scores based on their performance.

(5%) — How the Platform (we) Make Money

The TCVC team continuously builds, iterates, and maintains the platform’s protocol and the infrastructure. We essentially lease it out to newly-formed Token-Curated Funds/Portfolios, charging a fee of 5% of the profits reaped by the funds/portfolios.

Processes

Fundraising

Fundraising is a dynamic, somewhat complicated process in a decentralized environment like TCVC. Outlined below are the procedures to ensure both decentralization and compliance.

Know Your Customer (KYC)

Identifying participants in a decentralized community can seem antithetical to the essence of blockchain. That’s because, in theory, it is. However, it is imperative for crypto hedge funds to identify their customers in order to remain compliant with the SEC. For better or worse, TCVC must also implement a robust KYC program to remain compliant, but just as importantly, to inhibit foul play in the TCVC network.

We can imagine a situation where one person deploys multiple agents in an attempt to effectively skew the results of a particular vote. By identifying each participant in the network, we can uphold the integrity of our democratic processes.

Numerous options for KYC exist. We continue to assess the most robust and compliant option, to be integrated as a 3rd party partnership.

Custody

Institutional custodial services are now on the rise. However, in a truly decentralized world, individuals should be responsible for their assets at all times, to ensure optimal security and autonomy. When it comes time for investors to allocate L2 tokens to selected portfolio companies, the partners initiate the equivalent of a “capital call”. The capital call process will be initiated every time a portfolio company in a certain TCP achieves certain milestones/KPI’s.

The preferred custody mechanism of TCVC is cold storage. Cold storage is the only known “impenetrable” storage mechanism on the market today. However, for purposes of community autonomy, every participant has the autonomy to choose their custody solution. That being said, TCVC will not be holding any of its user’s assets directly under its own custody.

Transference of Funds

Investors in the TCVC ecosystem are not able to transfer tokens to one another, as this will summarily alter reputation scores and could eventually lead to even more consolidation of power within the ecosystem. Members of the community can “cash-out” after a predetermined period of time, but cannot seek to re-distribute amongst each other. This is because of the possibility of collusion through token redistribution, as total tokens multiplied by accumulated reputation play an integral part in assigning voting weight and scoring.

Portfolio Inclusion

PBD has spent considerable time structuring the mechanics around the portfolio inclusion process. Application, consideration, and admission to a TCP should, above all, fall in line with TCVC’s core principles as outlined in Section 1.2. Incentives and disincentives have therefore been devised, as well as a clear, transparent, and specific set of steps in order to ensure that the quality-maintenance and integrity of each and every TCP is protected and ensured. What could be more disincentivizing to a potential bad actor than the prospect of having to lose their bond/deposit, when the surrounding community recognizes or deems their actions as being subversive to the quality and integrity of the system at large?

Portfolio Inclusion

A few necessary steps are required before an applicant company can be considered for portfolio inclusion.

Step 1: Staking Requirements

An applicant company (or the GP/LP that proposes them) needs to stake a certain “transaction fee” (which can vary based on the requirements of a specific TCP) of tokens in order to be considered for portfolio inclusion. The transaction fee is set by the community within a given TCP. Prominent TCPs will charge more than a TCP governed by lesser-known/less successful Token-Holders. This creates micro-free-market rules, further exemplifying the decentralization ethos of TCVC.

The transaction fees serves two purposes:

• deter unworthy companies from applying to the TCP
• incentivize strong, confident, viable companies to apply

Deterring suboptimal investment opportunities will remove the hassle of diving into the content of companies blatantly unworthy of inclusion, thus wasting the time and effort of all stakeholders within a given TCP. If no economic incentive is in place, then companies could simply reapply with no monetary penalty

Investors in a given TCP can put up an applicant’s stake if they are convinced of the viability of the undercapitalized organization. If the company is ultimately selected for the portfolio, then the sponsoring participant will be rewarded for the economic risk from the company receiving funding from the TCP.

Step 2: Due Diligence

All relevant information must be submitted to the TCP ecosystem for full review. This includes whitepapers, technical reviews, pitch decks, incorporation documents, fundraising objectives, product timelines, and other requested materials.

It is incumbent upon the GPs of a given TCP to extract and synthesize all Due-Diligence (DD) related content. This DD will then be available for two distinct purposes:

• For TCP ecosystem consumption
• For “consumer consumption”

Point #2 is imperative for generating the revenue which differentiates the TCVC ecosystem from other VC models, as this further incentivizes GPs to leave traditional fundraising structures and join the TCVC ecosystem. The TCP makeup is the product provided by the internal TCVC ecosystems. This mitigates the concern associated with GP’s not charging a typical 2/20 fee.

Assumptions and incentives are analyzed and validated. Then, valuation, network viability, strength of founding team, and relationship to bootstrapping entities are assessed. If all of these criteria are met within reason, then the company is pushed to Step 3 — the community vote.

Step 3: Community Vote

Participants in a given TCP submit vote in a “commit-and-reveal” fashion to mitigate the threat of collusion. They vote with their L2 tokens as a “vote of confidence” measure. Their native voting weight is pre-determined by numerous factors, which are outlined in prior sections.

To reach consensus, 2/3 of all voting power (combined voting weight score) is necessary for permission of portfolio inclusion. If a company does not achieve 2/3 consensus, then the vote is shot down. However, it is possible for companies (or their TCVC supporters) to re-apply. The re-application process requires companies to increase their “transaction fee” by 20%. We believe this provides enough of a disincentive for companies who are simply underprepared for TCP inclusion from repeatedly spam-applying to a TCP.

If a token holder abstains from a vote, they are automatically penalized some minimum staking requirement. This should appropriately deter voter apathy and encourage active participation across the entire TCP.

Step 4: Negotiation

After 2/3 consensus is achieved, negotiation proceedings begin. All negotiation is spearheaded by the TCP GPs, and all the terms are reviewed, voted on, and finalized by the TCP token holders. This is codified into a smart sub-contract, held as a child sub-contract under the parent TCP contract.

Typically, Token Holders mandate companies to achieve milestones/KPIs before they are allotted their pre-determined allocation. Negotiation strategy is highly predicated on the type of token offering in question. Security token offerings more mimic classical equity investing, and accordingly, are treated similarly. However, if the offering is geared towards utility or consumption, negotiation is critical to ensure favorable support for the underlying network’s efficacy. The TCVC community understands that buying and holding (a.k.a. long-term HODL-ing) of consumer tokens weakens the network that was invested in. Therefore, approved companies offering consumption tokens must be willing to buy back these tokens at a price determined later by the supply/demand factors of pricing. This serves two purposes:

• preserves underlying network efficacy
• incentivizes companies to achieve network effects
• safeguards against unintentional “network choke” of the Candidate in the TCP

Reputation, Staking & Transaction Fees

Reputation

The score which determines individual voting power is correlated to the amount of L2 tokens invested in a given TCP, factored against the overall reputation/weight that the individual has earned. This is because we assume that the more L2 tokens purchased by the individual, the more “skin in the game” they have.

Others factors contribute to a reputation score. A critical determinant is a Token-Holder’s validated industry experience. We believe industry experience equates a higher level of knowledge as to the efficacy of each applicant company. Another factor is total net worth. TCVC makes the assumption that total net worth correlates, if only to a smaller degree, to increased levels of business and investing acumen.

Lastly, reputation increases and decreases based on the outcomes of the vote relative to a Token Holder’s specific voting preferences. For example, when a vote takes place to decide on the inclusion of a portfolio company, if a specific Token Holder votes to “not include” a company into the portfolio, but the rest of the community votes to “include” a company, then the reputation score of the Token Holder that voted against inclusion will decrease. However, if that portfolio company ends up failing or fails to achieve predetermined benchmarks, that same Token Holder will actually experience a drastic increase in his or her reputation score. This is a critical function of reputation as we believe a Token Holder should be compensated for voting in the correct manner.

Staking requirements

A staking requirement of 15% for L2 tokens will be implemented to prevent any foul play within a given TCP. Furthermore, the staking requirement will incentivize continued participation within a given TCP. If there is nothing at stake, apathy is likely to ensue, especially if a specific participant consistently votes against the will of the TCP majority. Participants that pull out before a predetermined period of time will have their stake revoked and distributed equally among the TCP’s GP and TCVC. These periodic lengths are delegated to the TCP founders and voters to determine and modify, as they see fit.

Due Diligence

A foundational concept of the whole TCVC model is Due Diligence. Among the main steps of venture capital (raise, scout/nurture, dd, invest, portfolio success), Due Diligence may be considered as “the central transaction” that the whole model is built around. GPs are going to receive most of the scores and rewards for conducting DD.

DD Syndicate

Any token holder can offer a certain amount of tokens for conducting DD of any project. Curators should “choose” which project they want to look at in return for the offered “transaction fee” (amount offered by Token Holder for conducting the DD). For each DD, curators form a syndicate of a minimum of 5 GPs, from which at least one should be from the top 10% of curators. The lead curator is in charge of forming the syndicate and running the whole DD process.

Yes

Each of the syndicate curators should provide their opinion about the deal they look at, both positive and negative, with a final conclusion as to whether the project should be taken to the next step of investing or not. If 2/3 of the syndicate votes “yes” for investing, the project moves to the next stage.

No, Final NO, and No-to-Yes

If more than 1/3 of the syndicate votes against portfolio inclusion, then Aspirants may appeal with re-submitting the project for DD with a minimum 20% increase in the transaction fee. The increased fee (20% or more) will be returned to the Aspirant if their challenge qualifies and the project is moved to the next stage (investing). However, the opportunities for appealing are limited and after the 3rd NO, the project can’t be submitted anymore for consideration during the following 12 months. No participants from curators of previous DD round syndicates should be included in the next round of DD, in order to prevent potentially subversive personal agendas.

Allocation of Capital

Quarterly Reports and 6 Month Votes

Startups included into a TCP start receiving “raised” capital not at once, but every 6 months, based on quarterly progress. Similar to the process of portfolio inclusion, startups in a TCP can be challenged by anyone one of that TCP’s Token Holders, which triggers another round of voting on whether the startup should continue receiving capital or not. Below is the flowchart describing how it works:

• Challenging window opens 6 weeks before the voting day (6 month review period)
• Challenger stakes tokens as “good faith” deposit and describes the reason for the challenge in a “report”
• Startup replies to the challenger publicly with its “report”
• under each of these “reports”, there then opens up a thread for community discussions
• Both challenger and startup can update their “reports” showing what was updated as a reply, and when that update was made (all version history is available for public review)
• Community votes after a pre-defined period from the date of the initial challenge
• Meanwhile, weighting of the involved parties’ reputation/knowledge scores is taking place, based on the number of days a token holder committed before voting day — this should incentivize people to learn faster about all open challenges and make informed decisions sooner
• After deadline, all committed votes are revealed
• If the startup stays in the TCP, it gets its requested amount
• If the startup is disqualified from the TCP, it doesn’t receive anything
• The committed funds are then returned to the parent smart contract of the TCP in question, but are held in a separate sub-contract, where they cannot be liquidated, and are only eligible for re-investment into existing, or new Candidates. This is to prevent conspiracies in which bad actors can conspiratorially attempt to unfairly disqualify startups with the intention of cashing out their repossessed funds

Change of requested amount

Before voting for continued portfolio inclusion, startups introduce how much cash they need for each 6 month voting period. Startups are able to change their requested amount of funding for each 6 months with proper explanation. This explanation should be submitted at least 2 weeks before the review and challenging window opens.

Portfolio Success

End of Fund Lifecycle

At the end of the fund lifecycle, funds are split in the aforementioned fashion of 75–20–5. Portfolio returns are constructed from both investment gains and the gains associated with selling TCP portfolio insights and DD. All income derived from the external consumption of DD will go to the TCP’s master contract (think of it like a pot), to be divided equitably amongst all Aspirants and Token-Holders of that TCP at the end of the fund lifecycle.

Upon the liquidation of a TCP, or when a typical Token Holder opts out of a given TCP, they convert their L2 tokens back into L1 tokens (selling them back and therefore burning them into the master contract of that TCP). At this point, they may choose to invest in one of the other TCP’s, or they may trigger the smart contract holding their collateralized Dai stable coin.

Influencer investors (influencer Token-Holders) are compensated for their time, efforts, and expertise. Therefore, they maintain the right to take their 20% of the total profit of that TCP. TCVC as a platform, for building the architecture that enables this new investment paradigm of decentralization, will take 5% of all L2 protocol tokens of that TCP.

Another option we contemplate is that tokens generated from consumption of DD will be given on a commensurate basis to how many service consumers the TCP can sell their tokens to. This allows the TCP to invest in utility tokens and achieve a profit without choking the networks of those utility Candidates.

Promotion

Constant promotion from all parties in the TCP is necessary to fulfill the value proposition of the TCP. Companies will want to get investment from any one (or multiple) TCP’s to gain access to an army of dedicated cheerleaders.

Therefore, throughout the course of the TCP’s lifecycle, constant and intentional promotion is necessary. TCVC has built-in tools to enable automated social media campaigns for all members of the TCP.

Consumption

Token holders should use the tokens they receive as the result of their investment in Candidate startups. If they don’t, they will be penalized, as those Candidates’ network vitality (and therefore, their value) is predicated on their underlying utilization. However, most investors will never use the underlying networks of the TCP holdings for any sort of service consumption. Therefore, it is absolutely imperative that token holders find avenues whereby they can sell these Candidates’ tokens to the Candidates’ underlying network’s consumers.

There is a trade-off that requires careful consideration: Networks need to be bootstrapped and require capital. Investors want to support these ecosystems, but also need to be compensated for their time and resources. Since buying and holding tokens is a sure way to profit from a network’s success — but also causes network choke in the case of utility token issuances — there needs to be some mechanism to remedy this conundrum.

Therefore, TCVC will enforce a mandate whereby Token-Holders within TCPs are incentivized and rewarded for finding ways to equitably sell their TCP’s held utility tokens to service providers which will utilize them to stimulate useful economies on those tokens’ native platforms at a predetermined premium.

Scouting/Nurturing

Traditional VC firms grow their teams and network in order to leverage the best available deals. In TCVC, the distributed VC model, scouting and nurturing is done by the army of Token Holders and Aspirants. Each Token Holder/Aspirant is interested and incentivized to bring in good deals (which help to meet the intended hard cap), as she will get recognition affecting her voting power. The same motivation is behind nurturing deals for bringing them for introduction to a specific TCP. Again, if a deal is good (got to hard cap), then those Token Holders/Aspirants who brought in the deal get respective credit with relevant consequences.

Appendix

About Pale Blue Dot Labs:

Created with l ❤ ve in Yerevan, Armenia & New York, New York by:

Armen Rostamian

• Founder, CEO||CTO, Tokenomics, CryptoArchitect: GRÜV
• Senior Strategic Advisor: illuria Security
• Contact: armen@gruv.me || LinkedIn

Hambardzum Kaghketsyan

• Co-Founder & Managing Partner: SmartGate.VC
• Contact: LinkedIn

Richard Malone

• Partner: BTBlock
• Associate Director: Emerging Innovations
• Contact: richardmalone@gmail.com || LinkedIn

Glossary

• FT — Fungible Tokens
• NFT — Non-Fungible Token
• RFT — Re-Fungible Token
• TCR — Token-Curated Registry
• TCP — Token-Curated Portfolio
• L1 Token — Layer 1 Token
• L2 Token — Layer 2 Token