Thread by @jbrukh

1/Long have #cryptoinvestors posited that blockchain protocols create “backend-less architectures” where the network replaces the traditional backend, and applications are built by businesses on top.

Value capture in this scenario remains a complicated topic. . . 👇

2/In 2016, I wrote about equity vs. token investments in scenarios where private companies develop highly decentralIzed networks.

blog.coinfund.io/blockchain-inv…

3/The main takeaway was that value capture did not seem to happen ideally in equity. Traditional VC investors would have to consider whether owning tokens was a better exposure mechanism to protocols. Subsequently, many VCs adjusted to token investments and SAFTs.

4/The premise driving this hypothesis was that in an open network, a company’s competitive advantage of having built the thing could not last very long. Eventually competitors would learn the network and provide better service.

5/Investment opportunities that had this profile we referred to as ones with “decentralized network syndrome”. Founders would counterargue that first-to-network is defensible network effect, a kind of “Red Hat” model; but the efficacy of this model is still very much to be shown.

6/Since 2016, we learned much about d-networks. For one, we learned that “fat protocols” are too much an idealized view of how value is captured. And many token models, such as utility tokens, have been largely dismissed by the market. blog.coinfund.io/fat-protocols-…

7/Not just utility tokens, but even flavors du jour like #GovernanceTokens and #WorkTokens still raise many questions around value capture and are yet to be valued quantitatively and empirically. Value capture is *hard*.

https://twitter.com/jbrukh/status/1089901059206799362?s=21

8/As we get more and more d-networks into production, we see that private companies building on top of protocols are not necessarily creating VAS (value-added services). Instead, they may be creating new business altogether.

9/@multicoincap points out that there’s a huge layer of data that might be monetized using products like @graphprotocol. “Although Ethereum is logging under 1M txs/day, developers are querying Infura. . .over 10B times per day.”
multicoin.capital/2019/01/28/our…

10/Similarly, private equity driven businesses like @veil on top of the @AugurProject protocol may create side businesses around liquidity provision, accruing most value to their own investors despite creating transactions in the network or appreciating $REP indirectly.

11/Some companies who took on “equitable” token distributions (i.e. distributed most of their supply to third parties) early on might find themselves in a suboptimal position to raise money and opt for traditional equity offerings.

12/This further complicates matters for their networks, as incentives and alignments are bifurcated. Do traditional investors steer the company to capture enterprise value or build token value? Does token value actually accrue?

13/If d-network architectures create cost efficiencies, does the enterprise actually make use of them or keep the margins for their equity holders? @wen_xs

14/The relationship between d-networks and the centralized businesses making use of them is a non-trivial one. “Fat protocol” style heuristics get us only so far in the abstract, but actual scenarios and models need to be examined by their unique facts and circumstances.

/end