Posts from blockchain

Video Of The Week: Ethereum 2.0

I just watched Vitalik Buterin’s keynote at Devcon 4 in Prague last week, on Halloween and on the tenth anniversary of Satoshi’s whitepaper.

In this keynote, Vitalik explains what has taken so long in getting from Ethereum 1.0 to Ethereum 2.0, what Ethereum 2.0 will include, and how we are going to get there.

It is a bit geeky, I can’t say that I understood everything, but if you own Ethereum, or if you believe that a scaled decentralized smart contract platform is important, and I can say yes to both of those emphatically, then this is worth watching. It is 30 mins long.

Engaging In Cryptonetworks

Ever since the first cryptonetwork, Bitcoin, was created, investors have had the opportunity to earn returns by engaging in the network. In Bitcoin’s case, that was done by mining the network, effectively powering it.

As the sector has grown, investors have largely turned their attention to buying and holding cryptoassets, and not that many of us are actively engaging in them.

But that is likely going to change for several reasons.

First, in proof of stake networks, asset holders will want to stake their tokens and earn the rewards of doing that, or risk being diluted/inflated. Conversely, those who do stake will earn rewards that will feel a bit like collecting interest or dividends on a bond or stock.

This technique of turning an idle asset into an incoming producing asset by engaging in the network is part of the design of many cryptonetworks and investors are going to increasingly want to do these things (staking, validating, governing, etc) to earn the rewards of that engagement.

There is another aspect to this, outlined by Tushar Jain of Multicoin earlier this week on their blog.

Tushar points out that asset holders can act with their capital to help bootstrap the network by providing storage on the Filecoin network or transcoding on the LivePeer network or creating DAIs on the Maker network.

The good news for investors is that there are a whole bunch of entrepreneurs setting up shop right now to help us do these things without each and every one of us becoming super technical about the ins and outs of each of these cryptonetworks. We will see (and are seeing) staking as a service, nodes as a service, and the like. These third parties will be like the proxy companies are in the stock markets.

I expect the custodians, like our portfolio company Coinbase, to offer many of these services, either as the provider themselves or the gateway to the third party provider, thereby making it even easier for us to engage in these networks.

It’s an exciting time to be a cryptoinvestor. A host of new cryptonetworks are starting to go live. The next 18 months will see many dreams come to fruition and with those dreams will come demands on the investors to engage instead of just hold. I am looking forward to doing that.

Fully Diluted Market Value

When someone asks you how much of a company you own, the answer could be two very different numbers. You might own 10,000 shares and there might be 1mm shares issued and outstanding. That would suggest you own 1% of the company. And that would be correct, as of right now.

What is often not calculated in these sorts of numbers is future dilution, particularly dilution that is visible if you look closely. The most common form of future dilution that is visible are outstanding options and warrants to issue stock that have not been exercised.

Let’s say this fictional company that has 1mm shares outstanding also has a 20% unissued option pool (so 200,000 options in it), and lenders have warrants to purchase 50,000 shares.

That would be another 250,000 shares that are not issued, but will be at some point, making the “fully diluted shares outstanding” equal to 1.25mm, and your 10,000 shares now represent 0.8% of the company. That is your “fully diluted ownership.”

Nowhere is this issue more important than the crypto token sector. There are many crypto tokens trading in the market that have a relatively small amount of their total supply outstanding and the market value numbers on many of the sites that track this market are a bit misleading.

For this reason, I like the concept of “year 2050 market cap” that the site OnChainFx reports.

Take Numeraire, a token issued by our portfolio company Numerai, and a token that USV owns some of (that is a disclosure if anyone is confused).

Coinmarketcap reports Numeraire’s market cap at roughly $7mm suggesting that you could purchase 1% of Numeraire for $70k.

But by 2050, there will be a lot more Numeraire out there and as OnChainFX reports, the 2050 Market Cap is more like $110mm. It would take more like $1mm to purchase 1% of Numeraire’s total supply.

This concept of a market cap that includes future dilution is called a “Fully Diluted Market Value” and it is something investors need to be focused on when thinking about value, upside, and dilution.

The Apps=>Infrastructure=>Apps=>Infrastructure Cycle

My view has been, and is, that we are in the “infrastructure phase” of the crypto market development cycle.

To elaborate, I believe that we need better infrastructure (e.g. better base chains, better interchain interoperability, better clients, wallets and browsers) before we can see a robust application development environment and so I have stated many times that right now is a time to focus on building (and investing in) that infrastructure. That view has been the prevailing wisdom inside of USV for quite a while now.

Well a couple of our colleagues at USV decided to poke holes in that argument and spent a few weeks doing research and then writing this post.

The post is called “The Myth Of The Infrastructure Phase” and it was researched and written by Dani and Nick.

I have a feeling that this post may be headed to similar territory as Joel‘s now famous Fat Protocols post because, like that one, it takes a conventional wisdom and turns it on its head.

Dani and Nick argue that there are no distinct phases but in fact, a virtuous cycle of apps>infrastructure>apps>infrastructure that brings a new market/technology into its own.

Read the post, as this argument is well researched and well made.

However, as much as I agree with their arguments, I continue to believe that for investors, the best bets right now are infrastructure bets. It remains too hard, too expensive, and too frustrating, to build decentralized apps and the big value unlock will come when that changes. I think the returns on investment on infrastructure will be higher in the phase we are in right now. There will come a time when apps development will have a better ROI, but I do not think we are there right now.

USV has made investments in decentralized apps, like OB1 and CryptoKitties, and we will continue to do that. But our primary focus is on infrastructure right now.

Cloudflare’s IPFS Gateway

This post is jam-packed with conflicts. It is about not one, but two, of USV’s portfolio companies. The more the better in my view.

Our portfolio company Cloudflare announced yesterday that they have launched an IPFS Gateway.

IPFS is an open protocol built and supported by our portfolio company Protocol Labs that facilitates a peer-to-peer file system composed of thousands of computers around the world, each of which stores files on behalf of the network.

So why is this a big deal?

Well, here are a few reasons. You can all add more in the comments.

1/ Cloudflare is a massively scaled infrastructure company. By offering a hosted IPFS gateway, none of us need to download and run IPFS software on our computers anymore. Cloudflare will do it for us.

2/ IPFS is awesome. It decentralizes file hosting, which has historically been a centralized affair on the internet. The Cloudflare post has a really great primer on IPFS in it so go there if you want to learn more.

3/ We are one step closer to the decentralized blogging platform that I have long wanted. From the CloudFlare post, “Using Cloudflare’s gateway, you can also build a website that’s hosted entirely on IPFS, but still available to your users at a custom domain name. Plus, we’ll issue any website connected to our gateway a free SSL certificate, ensuring that each website connected to Cloudflare’s gateway is secure from snooping and manipulation.”

And yesterday’s announcement is just day one of “crypto week” at Cloudflare where each day they will be announcing support for a new technology that uses cryptography to make the Internet better. I love that. I love Cloudflare. I love Protocol Labs. And I love IPFS. /fin

Video Of The Week: Brian Armstrong at Disrupt

There is a narrative in crypto land that you are either in the “crypto is money” camp or the “crypto is tech” camp. This blog post from Erik Torenberg sums that up pretty nicely.

The interview below is from TechCrunch Disrupt a week or so ago. Brian Armstrong, founder and CEO of our portfolio company Coinbase, was interviewed by Fitz Tepper.

There are a couple points in this interview where Brian is presented with a version of that narrative. For example Fitz asked Brian “are you a tech company or a finance company.”

I like how Brian acknowledges that framework but ultimately concludes that the answer is neither, that Coinbase is a crypto company and that crypto is both tech and money.

I am of that view as well and I am glad to see leaders in the crypto sector articulating it.

Crypto On Campus

Our portfolio company Coinbase partnered with Qriously to study the adoption of blockchain and crypto on campuses around the world.

They published their findings on the Coinbase blog yesterday.

Here are some interesting findings:

Stanford, Cornell, and Penn lead the way in the number of crypto and blockchain courses offered to students.

Blockchain and crypto courses are taught by math, science, business, finance, and social sciences departments.

 

Almost 20% of surveyed students own crypto assets and 26% want to take a course on crypto.

You can read the entire report here.