Episode 7: Money Makes the World Go Round

Because Snoop Dogg don’t perform for free

In past episodes we have touched on crypto asset classification and governance models, and both of these topics are a direct result of how a project chooses to raise capital. In this episode we discuss the various models that have been used by teams to fund development, to distribute their coin or token, and to “bootstrap the network” (a phrase which grinds our gears to the maximum).

With discussion around the expiry of the ZCash Founders Reward beyond 2020 and with crypto winter hitting token treasuries hard, the real question is what funding models can we beg, borrow, steal from the existing world of financing and what models are sustainable long term. See, trends aren’t just for Davos or Whole Foods! (did we just grind your gears?!?!)

This isn’t just limited to crypto — financing projects with massive and ambitious visions like Planetary Resources (now owned by a crypto company, I kid you not) and SpaceX are not for the faint of heart, and the financing shenanigans know no bounds when there’s big money on the table, honey.

Listen to Episode 7

This quote from Wolf of Wall Street was too perfect not to post

Show Notes

We’ve been financing human endeavor in various forms for millennia — and we have a pretty wide range of options when it comes to finding sources of financing for our ideas. Here’s a rough overview of financing types:

Private / Corporate Funding

• Venture Capital — a dollar for your ideas
• Debt and Equity — on-balance sheet or off-balance sheet funding
• Project Finance via an SPV, could be limited recourse — debt in which the creditor has limited claims on the loan in the event of default or non-recourse financing, where the loan is covered by project collateral only
• Each of these types of funding are priced and sized according to risk — which is determined by the quality of the collateral, the confidence in management (the agents employed by the principal), and the creditors or shareholder’s place in the pecking order should things go south and assets be liquidated.

Public Infrastructure Funding

• Government Funding (Local, State, Federal)
• Municipal Bonds, either general obligation bonds funded by a municipality’s ability to collect taxes, or a revenue bond tied to a specific project (like a public SPV)
• Ironic that these are public projects are mostly funded by a government’s ability to levy and collect taxes effectively, yet are largely funded by investors looking for tax breaks as most are tax advantaged. Talk about circularity of capital! (see Riccardo-Barro effect)

Non-profit Funding

• Grants or stipends from non-profits, foundations, or NGOs
• Partnerships with funding organizations or entities to conduct specific types of research or work
• Bug bounty-driven development
• Aid funding (the most ineffective form of financing)
• Project or deliverable based financing (pay for results)
• Generally non-profit funding has the most governance and the most stringent rules, and people who utilize public funding often spend an exorbitant amount of time complying with these complex governance rules or trying to raise funding.

Crowdsourcing

• Pre-orders or crowdfunding via Kickstarter, IndieGoGo, and content sharing platforms like Patreon
• Crowdsourcing or P2P development
• Open source funded by consulting revenue (Linux / Red Hat model)
• Freemium with fees for additional features
• Voluntary donations (Wikipedia)

So why do we care about these ideas? There are fundamental challenges in financing, and crypto has all of these same challenges but perhaps new features too?

• Tragedy of the commons, or the one where some asshole grazes all of his cows in the town field and there is no grass for your cows to eat
• History of FOSS (free open source software) and CBPP (commons based peer production)
• The mismatch in timing of capital outflows (investment) v capital inflows (returns) can be decades in infrastructure finance
• How do we get people who derive benefit from physical and digital “commons” to fund these causes

Crypto funding models have largely mapped back to the successful blueprints laid out by bitcoin in 2010 and the Ethereum Foundation in 2015. (see Episode 4: Square Peg, Round Hole where we grind on pattern matching and why I don’t believe you can copy paste Bitcoin and Ethereum’s success 100x over and over).

Initial Funding

• None — sometimes called a “fair” launch
• ICO — initial coin offering, often an offering where some of all of the assets are pre-mined in the Genesis block and then just divvied up, and sometimes done via a pre-sale where early investors get a special price or special terms. Often the proceeds from these offerings go to an entity of some sort which is supposed to provide “governance” and “oversight” and serve as a central coordinator for resource allocation
• Equity / company funding, become more popular via tokenizing equity

Ongoing Funding

1. Private enterprises — Bitcoin with Blockstream, Chaincode Labs
2. Academic Non-Profit — Bitcoin via the MIT DCI
3. Community Donation Based — Monero Developer Fund, Grin Developer Fund
4. Investor Consortium of Donors — Ethereum Classic funded by Grayscale’s ETC Fund, Digital Currency Group, and other investors
5. Project Foundation funded by ICO proceeds which issues development grants — Ethereum, Tezos, and many others, with varying degrees on Foundation governance
6. Other Types of Foundations
7. Company Driven — example of all $4B of EOS funds going directly to Block.one, the company, Ripple with it’s “gifted” XRP (see below), too many others to count
8. Companies who patent software and license it — Hashgraph’s model, kind of (it’s confusing for everyone involved)
9. A Rich and Benevolent Dictator — Charlie Lee printing money out of thin air by forking bitcoin and then using some of it to make the Litecoin Foundation
10. Founders Reward as part of Inflation — Zcash, Beam
11. WHAT ELSE?!?!

When two people love each other very much, magical things can happen. Not joking.

Every ongoing funding model depends on perpetual increases in the price of the token. This is why the only game in town is marketing — projects need to pump their value because they don’t have a product and a revenue stream.

Terminal Value and Residual Value

How do you even begin to sum the lifetime cash flows of a crypto project? Does every project simply converge on a terminal value of “infinity” or “moon”?

Is there any residual value in these projects and can a crypto network or token ever truly die? Or are we just creating zombie coins?

Referenced in the Show

• For the nerds, the Motley Fool provides a great overview of municipal bonds
• Neighborly’s efforts to bring broadband to communities through new financing models
• The Cartel of Good Intentions in Foreign Policy
• Protocol Labs’ Natalie Eghbal on the tragedy of the commons and decentralized funding
• Elenor Ostrom’s Nobel prize winning work on Common Resource Pools
• Simon Harrris — Why BitTorrent Mattered: Lessons for Crypto (a four part series) one | two | three | four

And shameless plugs for the content we each pushed the other to write:

• Jill Carlson on Short Convexity
• Meltem Demirors on Drowning in Tokens

A Final Note

We talk about Wikipedia quite a bit, and also link to it throughout. If you’d like to donate to the Wikimedia Foundation, you can do so here.