Over the last five years of investing in the blockchain space, our team at CoinFund has arrived at a basic principle of blockchain investing: we want to invest in products that employ the core value propositions of crypto networks in a way that makes them highly competitive to traditional products. So we ask the following questions about products we come across:
- Should this product be implemented as a crypto network?
- What are the advantages and disadvantages of implementing it this way?
- How well does this product compete with incumbents or centralized approaches?
So what are these features? We identify 9 core value propositions that, in aggregate, make crypto networks a transformative innovation that will outpace legacy products.
Blockchains can enable networks that are resistant to centralized control and censorship.
The value proposition of permissionlessness is a combination of being open — as in having an open API that anyone can use as well as maintaining open source code — together with strong, verifiable guarantees about that API. One example of a strong guarantee is immutability (“this API will never change”). Another is transparency (“this API can change, but only transparently by way of public governance”).
Open, permissionless crypto networks compete with centralized incumbents who use their monopoly power to skew open markets and co-opt the platforms upon which commerce is progressing, often disadvantaging their own customers. Examples include Amazon using platform data to compete as a merchant with sellers, or Twitter disrupting third-party businesses by modifying its public APIs to suit their own interests.
In contrast, once a protocol has been established on a blockchain, cryptographic security ensures that it is hard to change the rules and creates the value proposition of censorship resistance. This feature does not apply merely to “state censorship”, but to any adversary of the network’s legitimately established rule set. Censorship resistance is a check on power, both technologically and politically.
Using the value proposition of borderlessness, crypto networks are advancing the notion of the Internet as its own cross-jurisdictional commercial zone.
Blockchain technologies have opened up new cross-border markets by making transactional commerce more efficient and viable.
Unlike communication and financial technologies of the past, these networks are an Internet technology that are not inherently bound by political borders. The technology simply works across the network of globally connected smartphones, computers, and devices.
Borderless technology is harder to achieve as a centralized organization beholden to hundreds of countries and legal jurisdictions. But unhindered by borders, crypto networks act as a global technological substrate upon which local commerce is executed, with jurisdictional concerns delegated to the edges, to the jurisdictions themselves.
Blockchain technology enables public governance of capital, resources, and organizations in a way that has never before been possible. Namely, it has ushered in an era of governance-as-software, creating inclusive, transparent, and digital governance systems that manage millions in real value.
This is not a prospective technology: public governance of crypto networks is in the market today. Applications built on top — such as decentralized marketplaces — are beginning to take on the role of public or common goods. We are used to such goods being regulated by governments, but now a new model of direct public governance by users is possible.
Most interestingly, crypto networks are well-suited to deliver the technology of governance in the form of secure voting and decision-making systems. They open up a whole new era in the theory and practice of governance systems themselves. Today, this field is growing rapidly with decentralized autonomous organizations (DAOs).
Political decentralization refers to the ultimate owners of network hardware, software, and assets. When we say that Bitcoin is not owned by any one person, organization, or government we are referring to the distributed ownership of the network. Ownership and security of the network are shared among its public participants — the developers, miners, and users.
Cooperatives and consortiums are the “traditional” examples of political decentralization. But blockchain networks take this kind of decentralization to the extreme, allowing individuals or even devices and AIs to be direct participants, stakeholders, and beneficiaries of the network.
One of the most disruptive aspects of political decentralization is that it creates large-scale regulatory arbitrage. Regulators, often concerned with ensuring the legal compliance of corporate entities, must now adapt to systems which are digitally native, have distributed public ownership, and can operate by strong programmatic rules. As a result, crypto networks don’t neatly fit into regulatory frameworks and can ensure properties like consumer protection without the legal or practical requirement for traditional licensing.
Crypto networks are a coordination technology that can create safeguards and strong recourse for those times when a particular group of participants becomes too powerful and begins to exercise tyranny or suboptimal network governance.
Just like in software, decentralized networks can be forked, or split off, by subsets of participants who disagree with a network’s way of doing things. The open market can then decide which version of the network is more suitable, or they can coexist for the sake of consumer choice.
Contentious forking is a capture resistance mechanism for those times when participants cannot agree on a common set of rules or parameters for the network, and the two groups must part ways. “Ragequitting” is another beautifully simple demonstration of capture resistance which prevents a tyrannical majority from running away with public funds in a DAO.
Overall, capture resistance is a powerful mechanism that protects against monopolization and capital capture in crypto networks.
Wikipedia defines mutualization as “the process by which a joint stock company changes legal form to a mutual organization or a cooperative, so that the majority of the stock is owned by employees or customers.” It is a certain way of taking a company public.
Most crypto networks are inherently mutualized by virtue of having native digital assets that represent public ownership by participants. In contrast, many corporations that provide modern public infrastructure like communications, digital services, and logistics are private today. Such organizations tend to be managed by executives who act in their own self-interest, creating the potentiality of agency problems and corruption.
So why is mutualization an important aspect of blockchains? Mutualization enables individuals to truly own, not just use, goods and resources. Enabling true ownership creates secondary markets which didn’t exist before, a huge growth opportunity for markets in all kinds of goods, digital and physical.
Unlike many centralized legacy applications, crypto networks place a strong emphasis on cryptographic primitives and their security. As public systems containing billions in value, crypto networks undergo a process of continuous compromise-resistance and security upgrading, making them some of the most secure IT systems in production today. Blockchain technology also provides cryptographic guarantees — like strong authentication and transaction verification — that legacy systems have no incentive or core competency in providing.
Crypto networks can provide financial and informational privacy through end-to-end encryption, private transactions, and self-sovereign data. Since blockchains are not owned by a party who controls and has a financial interest in private data, privacy is reclaimed by users. In these networks, users can truly own and benefit from the value of their data.
Crypto networks, and especially smart contract platforms, create an economic substrate for commerce where parties can do business with a significant reduction in transactional risks. Transparency, verifiability, and automation of transactions all play into the trustlessness of blockchains and few legacy systems can provide such guarantees today or have any incentive to do so.
The core value proposition of Ethereum and similar platforms is to enable cryptographic guarantees that economic transactions can proceed with high certainty about the outcomes. This is an efficiency mode that reclaims massive value otherwise lost to counterparty risk, intermediaries, and dispute resolution.
The ability to design financial incentive mechanisms using smart contracts and digital assets — generally known as cryptoeconomics — is the most disruptive value proposition enabled by blockchain technology as a whole. Based on the game-theoretical study of mechanism design, cryptoeconomics puts into practice the construction of incentive games for economically rational actors.
Cryptoeconomic mechanisms include proof of stake systems, decentralized exchanges, smart contract auctions, token distributions, hardware and software mining, decentralized oracles, on-chain dispute resolution systems, yield farming, liquidity mining, and much more. The design space of such mechanisms is bewilderingly large and the cost of implementation is incredibly cheap.
In the long term, crypto networks are only as viable as their ability to bring up sustainable marketplaces, protocols, and products that achieve fundamentally valuable results. But because cryptoeconomics enables these networks to navigate this stage effectively, they become highly competitive with centralized counterparts and other crypto networks.
A particularly interesting paradigm within cryptoeconomics is that of recursive incentives, wherein a token is used as a placeholder for future cash flows generated in a crypto network. As early network participants trade the token speculatively, they create the network capital used to actually generate the fundamental value of the network. In essence, recursive incentives help networks finance themselves, exploring new paradigms for capital formation and creating new investment opportunities for individuals.
In conclusion, here is what we look for when evaluating blockchain products.
- Networks implemented on permissionless, borderless blockchains that enable a high degree of decentralization, privacy, and security.
- Networks that are creating effective public governance with fair token distributions. Networks that can improve their governance systems over time and go out of their way to uphold the principles of capture resistance for users.
- Networks that create genuine ownership of their assets and resources, enabling secondary markets and unlocking value.
- Networks that implement amazing cryptoeconomic mechanisms that make them highly competitive in their areas. The bootstrapping mechanism across the token issuance, distribution, and emission is of particular importance.