A few weeks ago my partner Nick and Sam McIngvale, who runs our portfolio company Coinbase’s custody business, did a talk at the CoinAlts conference. In it they talk about the evolving role of custody in the crypto markets, and what they are excited about in crypto in the next few years.
Posts from blockchain
I am sitting in the airport lounge in Geneva waiting to board an airplane. I am here because yesterday was the inaugural Libra Association member council meeting. The Libra Association is a Swiss organization which will operate the Libra blockchain network and the Libra reserve.
Yesterday was an important milestone for the Libra project. We adopted the initial charter for the Libra Association, we elected the initial five board members, and we set in motion a number of important initiatives. “We” are the twenty-one founding members of the Libra Association.
It is fashionable to be negative about the Libra project right now. And it is equally fashionable to call it “Facebook’s crypto-currency project.” Both are understandable under the circumstances.
But yesterday was the beginning of an independent effort, one that Facebook does not control, one where Facebook is one founding member among many, and one where Facebook has one board seat out of five.
But even more important is Libra’s mission to create a stable cryptocurrency that can operate at sufficient scale such that Facebook and others can use it as a means of exchange/payment system in their applications.
The most meaningful conversations I had yesterday were with the members from Kiva and Women’s World Banking who joined the Libra Association because the people they serve are under-banked and under-provided for by the legacy financial system. Like them, I believe a stable cryptocurrency that is broadly adopted around the world will bring new services to people who don’t have access to the financial system that many of us who read this blog do.
One of the powerful things about being in the venture capital business is that we can support projects that are necessary but unproven, unpopular, and/or misunderstood. Not everyone can do that and so it is even more important that we do.
A bunch of friends and colleagues were in China a few weeks ago for a big crypto conference and since then, I’ve had a number of fascinating conversations about the crypto sector in China.
Over the last few years, it has become apparent to me and others that China is innovating in the crypto sector in ways that the US and other western countries are not. This is happening for many reasons, including stronger user value propositions for crypto in China, a different regulatory environment, and a vibrant crypto trading sector.
This podcast explores many of these issues and is a good listen if you want to understand what is going on in the Chinese crypto sector better.
My partner Nick did this podcast recently. In it he talks about how we think about and make investments at USV, our thesis on crypto, and a number of our crypto investments.
If you want to bypass all of the intros and sponsor messages, fast forward to 3mins.
You might ask “why do we need yet another blockchain?” and you would be right to ask that.
The answer is that Dapper has built several games on Ethereum, one of them a top-three smart contract this year (CryptoKitties) and they have found it challenging to build the games they want to create on that platform. They looked around at all of the other options and could not find a blockchain that addressed all of their issues. So they are building Flow.
Here’s a primer on Flow.
From that primer:
Flow’s technical architecture balances three priorities:
Scaling with Full Composability: Flow improves throughput without breaking up the network shared state. This preserves a developer-friendly environment for applications, making it much easier to write secure and composable code.
Speed and Efficiency: Flow is capable of handling the transaction volume needed to support modern consumer applications while consuming a tiny fraction of the computing resources needed by current networks.
Decentralized Participation: The security of a decentralized system is directly related to the number of independent participants working to secure the network. Flow supports large numbers of participants with a range of technical and financial commitments, resulting in a system that’s cheap to join while being costly to subvert.
If you are building a game, a collectibles experience, or some other mainstream consumer decentralized application, you should check out Flow. You can do that here.
And if you want to engage with Flow and the Flow community, you can do that here.
The crypto sector is in an interesting phase right now.
The market has rallied from its lows this past winter and is up a lot in 2019:
But Bitcoin now makes up almost 70% of that aggregate market cap.
In some ways, Bitcoin is the one protocol that has found lasting product-market fit. In terms of a censorship proof digital store of wealth, there is nothing that comes close to Bitcoin. There are some protocols, like the privacy-focused ones, that offer similar and in some cases better use cases. But for the most part, Bitcoin is our digital gold.
Ethereum, as many of you know, confounds me. It has shown the way to so many important things; smart contracts, programmable trust-free computing, potentially proof of stake, and a lot more. But it remains hard to build on, scaling issues abound, and many developers are looking elsewhere.
Stablecoins, including Facebook’s plans for Libra, are a bright spot. There has been much innovation in this sector and more is coming. There is no doubt that technology can provide a stable programmable crypto asset. We are still early days in the use cases but it is not hard to imagine why one would want to own and use stable programmable digital money.
We are also seeing signs that users like using crypto-assets in mobile and web apps. Kin, built by our portfolio company Kik, has become one of the most used cryptocurrencies in the world and is built into more than fifty mobile apps. Our portfolio company Blockstack has a Dapp platform that many developers are using to create consumer Dapps. And our portfolio company YouNow’s Props token is seeing a lot of consumers transacting with it.
But there is also plenty of disappointment to be had in crypto right now.
Regulators and banks in many parts of the world are downright hostile to crypto and have pushed much of the liquidity to Asia and the innovation has followed it there. Many of the most interesting things in crypto right now have emanated from Asia.
And many of the most promising and best-funded projects are massively delayed in getting to market. Some of this is that building scalable secure and decentralized protocols is not easy. But it is also true that the decentralized development approach that many of these projects are taking is not well suited to deadlines and ship dates.
And maybe most of all, crypto has not gone mainstream. Very few people earn in crypto. Very few spend in crypto. Very few use Dapps. Very few do anything with crypto other than buy, sell, and mostly hold.
I am an optimist. I am convinced that many of these disappointments will be overcome in the next few years. But it is easy to be bearish on crypto right now. The reality is well below the hype and challenges abound
I am long crypto and USV is long crypto. And we are putting more capital into the sector and will continue to do so. But it is not without risks and setbacks. Actually it is full of them.
Some crypto projects are developed from scratch. Bitcoin, Ethereum, and our portfolio company Algorand are examples of this. The developers have a vision and they go out and build it.
A particularly interesting example of the latter model is Numerai>Numeraire>Erasure. USV is an investor in Numerai which is a hedge fund that sits on top of the “The hardest data science tournament on the planet”.
Numerai initially developed the crypto token called Numeraire to allow data scientists to stake their predictions in the Numerai tournament and earn more compensation.
But as the Numerai tournament gained scale and the adoption of Numeraire grew, the Numerai team “realized that the primitives Numerai has built could have a wide range of applications beyond the tournament”.
And so they built the Erasure protocol which allows anyone to publish data and stake capital based on the accuracy of that information. This post explains some of the ideas behind the Erasure protocol.
The Erasure protocol is now live on the Ethereum Mainnet and you can build things on it. The Numerai team has already built two applications on Erasure:
Erasure Quantis a tournament used to crowdsource data on the Russell 3000 index. Participants submit daily price predictions on US stocks and are rewarded for contributing while building an immutable track record. Erasure Quant is a template that can be used by others to build their own tournaments.
ErasureBay is an open marketplace for information of any kind. It can be used to create credible signals over possession of local knowledge and attract a buyer willing to pay for it.
These crypto projects that evolve from something else are more focused and benefit from a real use case and market need. That does not make them more likely to succeed or more valuable. In the current market, almost all of the most valuable crypto projects are ones that started from scratch.
But I don’t think that will always be the case. Many of the most important technologies evolved from something else and I think that will be the case in crypto as well.
My partner Nick put together a deck outlining USV’s approach to crypto investing earlier this year and we have been using it with founders and investors since then.
One slide I particularly like from that deck is this one which describes how we think the crypto market will develop over time.
We have already seen an explosion of assets issued on blockchains and a number of very large and profitable custody/brokerage/exchange businesses built. We expect we will see continued innovation in the open finance (finance 2.0) sector in the next few years while the open data (web 3.0) sector will take longer to develop.
We also think that open finance will inevitably lead to open data as users (both consumers and businesses) will start to understand and appreciate the benefits of increased user control, lower transaction (and other) costs, and other benefits of decentralization.
The story was picked up by Coindesk and other news outlets.
I am not going to get into the details of this matter here on AVC, but this is not an open and shut case by any means.