Posts from blockchain

Video Of The Week: The MIT Bitcoin Experiment

Two and a half years ago, MIT gave every undergraduate enrolled at the school $100 of Bitcoin. I helped to fund this experiment at that time. I thought it was a great way to “infect” young engineers with blockchain enthusiasm.

MIT Sloan Professor Christian Catalini has studied the ~3,500 MIT students who took the $100 Bitcoin offer and looked at what they ended up doing with it.

Here is a talk he gave last fall in which he discussed the results of his research.

Decentralized Self-Organizing Systems

Mankind has been inventing new ways to organize and govern since we showed up on planet earth. Our history is a gradual evolution of these organization and governance systems. Much of what we are using right now was invented in ancient Greece and perfected in western Europe in the 17th, 18th, and 19th centuries.

I have been thinking for some time that we are on the cusp of something new. I don’t know exactly what it will be but I think it will be inspired by the big technological innovations of the late 20th century and early 21st century and it will be based on decentralized and self-organizing systems.

The Internet is, at its core, a scaled decentralized system. Its design has been a resounding success. It has scaled elegantly and gradually to well over 2bn users over fifty years. No central entity controls the Internet and it upgrades itself and scales itself slowly over time.

Open source software development communities are also an important development of the past fifty years. These communities come together to create and maintain new software systems and are not financed or governed by traditional corporate models. The goals of these communities are largely based on delivering new capabilities to the market and they don’t have capitalist based incentive systems and they have shown that in many instances they work better than traditional corporate models, Linux being the best example.

And, for the past decade or so, we have seen that modern cryptography and some important computer science innovations have led to decentralized blockchain systems, most notably Bitcoin and Ethereum. But there are many more to study and learn from. These blockchain systems are pushing forward our understanding of economic models, governance models, and security models.

I think it is high time that political scientists, philosophers, economists, and historians turn their attention to these new self-organizing and self-governing systems. Maybe they have and I am not familiar with the work. If so, please point me to it. If not, maybe this post and others like it will be an inspiration for the liberal arts to catch up to the computer scientists and mathematicians or at least work closely with them to figure out what is next, to articulate it and put it in the context of other governance and economic systems. From that work can come progress that mankind needs to move beyond the current systems, which work, but have many flaws and are becoming stale and in need of an upgrade.

Stocktoberfest East

My friend Howard Lindzon, who I met on this blog something like twelve years ago, runs an annual conference for fintech entrepreneurs and investors called Stocktoberfest.

Yesterday he hit me up on sms and told me they are doing Stocktoberfest East in NYC next week on March 29th and 30th. He asked me if I would do a chat with him. I told him that I’m not that interested in stocks but super interested in digital assets, cryptocurrencies, blockchain, etc. So we are going to do a 30min chat and I’m calling it Cryptoberfest.

My vision for this talk is a completely unprepared and unscripted talk between two old friends about all the amazing things happening in crypto land these days. It should be fun. If you want to attend, you can get a ticket here.

The Decentralized Startups

If someone were to ask what the most successful startups of this decade are, the answer would likely be Snap (market cap $22bn). Uber and Airbnb might also be on the list although those companies were launched in the prior decade (2009 and 2008 respectively).

But what might be missed is the massive success of the decentralized startups, most notably Bitcoin (BTC) and Ethereum (ETH) this decade.

Look at these charts:

During this decade BTC has gone from essentially zero to about $1000/share which is a market cap of $16.3bn.

If anything, ETH is an even more impressive story. In less than two years (Ethereum was initially released in July 2015), it has gone from zero to a market cap of $3.4bn.

And anyone located anywhere in the world can invest in these decentralized startups and profit from them, unlike the traditional startups.

Obviously, there is no way to know where we go from here. Does ETH go to $100 or $5? Does BTC hard fork and cause the price to crash?

But of course the same is true of Snap, Uber, and Airbnb. Past performance is no guarantee of future success.

And it is also true that using traditional valuation methods (DCF, etc) on these decentralized startups is really hard. One of USV’s investors (LPs in the industry vernacular) asked me how to value a digital asset. It’s a great question and one we are working hard to understand. We don’t know the answer to it yet, to be honest.

But this much I know. There’s a new game in startup land. A new way to do things. And it is working for a lot of people who are playing that game right now.

Token Summit

I’ve written a bit here about crypto tokens. How they can be a monetization model for new protocols. How they could be a new monetization model for online media. How they can be a business model for an online “commons.” And why USV invested in a hedge fund that will invest solely in these tokens.

I believe that these crypto-tokens are an important innovation in the world of technology. They allow for the financing and monetization of technology projects that rely on a network of contributors (of software engineers:open source, of contributors:online communities, of computers:p2p systems, etc) to deliver value to the market.

To date, we have mostly seen tokens used as financing vehicles. The last time I looked, over $300mm has been raised in “Initial Coin Offerings” (ICOs) to finance projects like the ones I referenced above. That number continues to rise as more tokens are sold to raise funds to develop these new businesses.

But the longer term implications of tokens have more to do with monetization than financing. And I think its a very elegant and powerful idea that the same “currency” can be used to both finance and monetize a network.

So with that preamble, I am excited that the first ever Token Summit will take place in NYC on May 24th and 25th. This event is being organized by AVC regular William Mougayar and Nick Tomaino, who runs The Control, which I blogged about a few months ago.

William blogged about Token Summit today and says this about the event:

We have identified the following themes that will be debated in a variety of formats, including on-stage interviews and panels.

Token-based Business Models

How do tokens contribute to a business model? When do they make sense? How does an entrepreneur monetize? Where is the real value?

Token Protocols and Platforms

What are the emerging token-based assets? Where/How are we going to trade them? What are the implications for fund managers?

Distribution Mechanics

Lessons and best practices for pre, during and post initial cryptocurrency and token sales, including governance.

Valuation Strategies

How do investors and users value tokens? How does a token transition from a speculative to utilitarian function?

Legal Implications

Legal, regulatory and ethical practices for token creations.

I plan to attend this event and I encourage everyone working in or around this space to attend. It will be an interesting and lively discussion.

If you want to attend the event, you can register here.

Why Ethereum?

AVC regular William Mougayar gave this presentation at the European Ethereum Developers Conference, Edcon, in Paris a few days ago. In his talk, William argues that Ethereum, unlike Bitcoin, is developing into a rich environment with many different services coming together to provide developers a wide platform to build on top of.

I am increasingly viewing Bitcoin and Ethereum as complimentary, not competitive, and see both of them as important public blockchains that will grow in significance in the coming years. But regardless of that, William’s take on Ethereum is correct and there is a lot of developer momentum and enthusiasm around it.

Online Publishing Should Look At Steem, Not Spotify, For Inspiration

Yesterday Medium announced that they are moving away from ads and thinking about a different kind of business model for their online publishing network.

I saw this tweet suggesting they are looking at Spotify for inspiration:

I don’t have any inside information here. USV is not an investor in Medium and I am not privy to any of the strategic thinking at Medium. So they may not be looking at Spotify for inspiration. But they are certainly looking around to figure out where to go from here.

I don’t think Spotify (music), or Netflix (video), or Amazon (books), should be the inspiration for online publishers in search of a new business model. The sad truth is most people are not going to pay a monthly subscription for online publishing content. Certainly not for blog posts by people they have never heard of.

The new online publications that have a paywall have built nice small businesses that pay the bills and maybe make some money for the founders. That’s a great way to go if you want to be small. But if you want to be a large network with millions of readers and publishers, as Medium already is (2 billion words written on Medium in the last year. 7.5 million posts during that time. 60 million monthly readers), a paywall is not going to work.

I think the blockchain based social network Steem would be a more interesting place for the Medium team to poke around at. Here’s the Steem white paper. That’s a good place to start.

To be clear, I don’t think Steem has this all figured out. I don’t own any Steem (or at least I don’t think I do). And I think they have made things a bit too complicated with their tokens and incentives. To their credit, they have taken steps to simplify things and they are headed in the right direction.

The thing about token based business models is that the token captures the value of the network as it grows and it is the only business model that exists for the network. You can buy tokens if you want to speculate on the value of the network (or invest in the online publication business, as it were). You can earn tokens by participating in the network (or by publishing content on the online publishing network, as it were). You can spend tokens to participate in the network (or by engaging in or curating the online publishing network, as it were).

Twitter could also go this route but clearly it would be harder for them to move away from an ad-based business model than it was for Medium. And believe me, it was not easy for Medium to do this.

The most likely companies that are going to figure out this token based business model are startups. They have nothing to lose and everything to gain. It would be stunning, bold, and brilliant for Medium to do this. I hope they do.

What Is Going To Happen In 2017

Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:

  • Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
  • The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
  • The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
  • The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
  • AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
  • Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
  • Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
  • Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.

These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.

What Did And Did Not Happen In 2016

As has become my practice, I will end the year (today) looking back and start the year (tomorrow) looking forward.

As a starting point for looking back on 2016, we can start with my What Is Going To Happen In 2016 post from Jan 1st 2016.

Easy to build content (apps) on a cheap widespread hardware platform (smartphones) beat out sophisticated and high resolution content on purpose built expensive hardware (content on VR headsets). We re-learned an old lesson: PC v. mainframe and Mac; Internet v. ISO; VHS v. Betamax; and Android v. iPhone.

And Fitbit proved that the main thing people want to do with a computer on their wrist is help them stay fit. And yet Fitbit ended the year with its stock near its all time low. Pebble sold itself in a distressed transaction to Fitbit. And Apple’s Watch has not gone mainstream two versions into its roadmap.

  • I thought one of the big four (Apple, Google, Facebook, Amazon) would falter in 2016. All produced positive stock performance in 2016. None appear to have faltered in a huge way in 2016. But Apple certainly seems wobbly. They can’t make laptops that anyone wants to use anymore. It’s no longer a certainty that everyone is going to get a new iPhone when the new one ships. The iPad is a declining product. The watch is a mainstream flop. And Microsoft is making better computers than Apple (and maybe operating systems too) these days. You can’t make that kind of critique of Google, Amazon, or Facebook, who all had great years in my book.
  • I predicted the FAA regulations would be a boon to the commercial drone industry. They have been.
  • I predicted publishing inside of Facebook was going to go badly for some high profile publishers in 2016. That does not appear to have been the case. But the ugly downside of Facebook as a publishing platform revealed itself in the form of a fake news crisis that may (or may not) have impacted the Presidential election.
  • Instead of spinning out HBO into a direct Netflix competitor, Time Warner sold itself to AT&T. This allows AT&T to join Comcast and Verizon in the “carriers becoming content companies” club. It seems that the executives who run these large carriers believe it is better to use their massive profits in the carrier business to move up the stack into content instead of continuing to invest in their communications infrastructure. It makes me want to invest in communications infrastructure honestly.
  • Bitcoin found no killer app in 2016, but did find itself the darling of the trader/speculator crowd, ending the year on a killer run and almost breaking the $1000 USD/BTC level. Maybe Bitcoin’s killer app is its value and/or store of value. That would make it the digital equivalent of gold and the likely reserve currency of the digital asset space. And I think that is what has happened with Bitcoin. And there is nothing wrong with that.
  • Slack had a good year in 2016, solidifying its position as the leading communications tool for enterprises (other than email of course). It did have some growing pains as there was a fair bit of executive turmoil. But I think Slack is here to stay and I think they can withstand the growing competition coming from Microsoft’s Teams product and others.
  • I was right that Donald Trump would get the Republican nomination and that the tech sector (with the exception of Peter Thiel and a few other liked minded people) would line up against him. It did not matter. He won the Presidency without the support of the tech sector, but by using its tools (Twitter and Facebook primarily) brilliantly.
  • I predicted “markdown mania” would hit the tech sector hard and employees would start getting cold feet on startups as they saw the value of their options going down. None of this really happened in a big way in 2016. There was some of that and employees are certainly more attuned to how they can get hurt in a down round or recap, but the tech sector has also used a lot of techniques, including repricing options, reloading option plans, and moving to RSUs, to mitigate this. The truth is that startups, venture capital, and tech growth companies had a pretty good year in 2016 all things considered.

So that’s the rundown on my 2016 predictions. I would give myself about a 50% hit rate. Which is not great but not horrible and about the same as I did last year.

Some other things that happened in 2016 that are important and worth talking about are:

  • The era of cyberwars are upon us. Maybe we have been fighting them silently for years. But we are not fighting them silently any more. We are fighting them out in the open. I suspect there is a lot that the public still doesn’t know about what is actually going on in this area. We know what Russia has done in the Presidential election and since then. But what has the US been doing to Russia? I would assume the same and maybe more. If your enemy has the keys to your castle, you had better have the keys to their castle. And as good as the Russians are at hacking into systems, the US has some great hackers too. I am very sure about that.  And so do the Chinese, the Israelis, the Indians, the British, the Germans, the French, the Japanese, etc, etc.  This feels a bit like the Nuclear era redux. Mutually assured destruction is a deterrent as long as both sides have the same tools.
  • The tech sector is no longer the belle of the ball. It has, on one hand become extremely powerful with monopolies, duopolies, or nearly so in search, social media, ecommerce, online advertising, and mobile operating systems. And it has, on the other hand, proven that it is susceptible to the very kinds of bad behavior that every other large industry is capable of. And we now have an incoming President who doesn’t share the love of the tech sector that our outgoing President showed. It brings to mind that scene in 48 Hours where Eddie Murphy throws the shot glass through the mirror and explains to the rednecks that there is a new sheriff in town. But this time, the tech sector are the rednecks.
  • Google and Facebook now control ~75% of the online advertising market and almost all of its growth in 2016:

  • Artificial Intelligence has inserted itself into our every day lives. Whether its a home speaker system that we can talk to, or a social network that already knows what we are about to go out and purchase, or a car that can park itself and change lanes on the highway automatically, we are seeing AI take over tasks that we used to have to do ourselves. We are in the age of AI. It is not something that is coming. It is here. It may have arrived in 2014, or 2015, but if you ask me, I would put 2016 as the year it had its debut in mainstream life. It is exciting and it is scary. It begs all sorts of questions about where we are all going in the next thirty to fifty years. If you are in your twenties, AI will define your lifetime.

So that’s my rundown on 2016. I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.

If you are in need of a New Year’s Resolution, I suggest moving to super secure passwords and some sort of tool to manage them for you, using two factor authentication whenever and wherever possible, encrypt as much of your online activities as you reasonably can, and not saying or doing anything online that you would not do in public, because that is where you are doing it.

Happy New Year!