Tapestries-36 | Venturing in the network
An approach to blockchain investing built on self-awareness.
I’ve been spending a lot of time learning about, and interacting with, the blockchain community. I’ve been doing so in the context of my job as an investor, as well as somebody curious about what may be among the most important technological innovations of the last decade.
I drafted the below as a point-in-time summary that describes how I'm approaching the crypto or blockchain opportunity. It is framed from the perspective of my personal investment approach and style. It therefore lays out a style of thinking and approach, not an investment thesis per se. For the sake of constraining the scope, I've only alluded to things I like or dislike, without commenting directly on the things I'm most excited about, and why. I'll follow-up on those points in a future write-up.
I have been sharing this draft relatively widely in order to test and validate the approach described within. That audience has been comprised of investors (traditional as well as cryptocurrency investors), Ethereum developers, blockchain enthusiasts, and a range of other finance and technology professionals. By posting here, I’m sharing it with a wider audience for the same purposes: to test and validate the approach further.
With that context, here's what I'm thinking:
#1 The lens through which to view crypto/blockchain is as the next evolution of “computing”
The dominant crypto narratives, whether regarding BTC, NFTs or altcoins, are tied to their financial attributes i.e. price, value, market etc. This is a distraction and is driven by (a) a financialized culture completely fixated on money, wealth and celebrity, and (b) the fact that it’s the financial press providing the majority of coverage, driven by the price of different coins or tokens. Bitcoin has understandably come to dominate the conversation because it’s the most widely accepted and validated use of the blockchain. But my view is that it is simply the first, not necessarily the most durably transformational.
In reality, crypto and blockchain (especially in the Ethereum ecosystem) represent an evolved way for digitally native actors to interact with each other, using the blockchain and associated platforms as the computing and coordination layer. This view was validated by this podcast with Chris Dixon (not too long and very good).
BTC’s price action has dragged bitcoin and the blockchain in front of people in the financial world who have to express a view, but who I am certain (from a number of illuminating interactions I’ve had) do not understand the nature and potential of the change underway, and are therefore dismissive of the technology’s promise. This was reinforced by a small session I attended with a group of very senior and iconic finance professionals; the general thrust is captured in this piece by one of the attendees, who also happens to be one of my favorite writers and someone I have since struck up a friendship with.
This group, like many others, understandably views the industry through an asset-lens, when the more appropriate one is through a technology-lens. I believe that once you make this shift, the breadth and promise of what’s possible becomes really exciting.
#2 Once you begin viewing blockchain/crypto through a technology lens, it becomes clearer how one can participate
Cryptocurrency can feel a bit unapproachable. I think this is due to a few reasons: (a) the pace of change can feel dizzying; (b) the community itself can appear abrasive from the outside (in certain communities); and (c) there’s a technological barrier to understanding what’s actually happening. This dynamic may feel unique to crypto, but in reality, is consistent with other areas of innovation, albeit shaped by crypto-specific culture.
Whether it’s biotech or cannabis or social gaming, an outsider will always confront obstacles in understanding what’s actually happening at the base layers. An investor’s response should be to (a) form a simple, solid thesis as to why the opportunity set is interesting and compelling, (b) understand where he or she is likely to develop any sort of proficiency (e.g. technology, market dynamics, regulatory questions etc.); (c) understand the key vectors of change or development; and (d) surround himself/herself with the right people, ideally insiders, to steward them through the evolving landscape.
My thesis is therefore that this is one of the most exciting venture capital opportunities available today, and the approach I described above is just a venture mindset or approach. For someone like me, understanding the broad parameters of the landscape is the first step. The second is 100% focused on understanding what's driving the people building and funding projects within the ecosystem (see #5 below). Once I’ve completed these tasks, I can more accurately determine where to direct my attention and efforts, which I think is the biggest challenge facing outsiders.
#3 The crypto community feels relatively small and concentrated, which bodes well for a people-driven investment thesis
My feel is that the community today is still relatively small. In different conversations I've validated that the true number of alpha generators is as low as 100 or 1,000 people; this is a pretty simplistic and crude assessment, but at either number, the group of alpha generators is relatively small (especially compared to other thematics).
The human sources of alpha are therefore, at least theoretically, identifiable and accessible. It therefore presents goldilocks-like conditions for venture investing: (a) great technological promise; (b) a concentrated group of alpha-generators; and (c) a broader financial market that appears to misunderstand the opportunity set (query how consequential this is given the “money” in the crypto ecosystem, so this is a question of degree).
I don’t know enough yet about the ecosystem to know whether I’m getting close to alpha-generators. But I do feel like I’m getting closer to the people who themselves know or can access the alpha generators. For someone like me, accessing these people gets me sufficiently close to the alpha.
The network I've built to-date is spread across New York, Los Angeles, Puerto Rico and London. I am relying on the strength of the relationships I've built with these people to push me forward. I am leaning on humility, openness and curiosity to effectively build these relationships, with the aim of (a) developing a better understanding of the landscape, and (b) getting access to higher and higher caliber people—and therefore opportunities—in the ecosystem. This is consistent with my broader investing philosophy, and leads into my "strategy" in #4 below.
#4 To be a successful investor/allocator in this space (and any space really), it's important to identify where one may have edge
I will have little edge in identifying projects, getting to know developer teams, or picking technology winners. What I do believe I have edge in is identifying those people who may have a durable advantage over the medium-to-long term as an investor in these technologies. And importantly, I believe that one of my skills as an investor/allocator is becoming important to these people through being a truly wonderful partner.
It's clear we remain very early in the technology's evolution towards mass-adoption and general applicability. My feel (see #5 below) is that those building (and to a smaller degree investing in) the projects remain motivated by utility (i.e. "look at the incredible things this technology can do") and ideology ("decentralization is really important"). I think there will be inevitable growing pains and clashes as those driven by technical utility and ideology will be joined by more traditional product-market fit people; this is necessary if this relatively small industry wants to gain broader adoption by a population that doesn't care that much about the things the initial believers and developers hold true. But this evolution is likely to cause some disagreements.
For this reason, and other potential ideological conflicts that may arise (see #7 below for an example), a good investor will be one who is able to elevate themselves above the frenetic pace of development and over-intellectualizing, to be able to see the forest for the trees. The successful investor will be one who can effectively place/situate crypto's growth alongside other important narratives unfolding around us e.g. the breakdown of authority and trust in institutions, shifting geopolitics, rising inequality (potentially added to by crypto), and the evolution of digital vs real-world primacy.
I get the impression from some of the crypto content I consume and from what I gather from parts of the community I interact with, that certain sections of it believe crypto will become a world unto its own; that they are building a new world. I don't subscribe to this, and therefore am searching for an investor that's part-technologist and part-philosopher. I guess I'm looking for my own type of "unicorn."
#5 I am not yet clear on the make-up and drivers of the typical developer
Per above, I have focused my conversations with people in the ecosystem on understanding what drives the people building the tools and applications. I have learned that the most important and defining feature to consider when looking at the ecosystem is the strength of communities and sub-communities around each platform, network or product. I am learning that this is likely a project's key determinant of success.
Whatever it is that a particular community deems important from a values-perspective will inform the design and structure of the product or network. For example, the Ethereum community is very open, flexible and earnest (I think), and this comes through in the way the Ethereum network is flexible and constantly being upgraded and improved. Compare this to the Bitcoin community, which in parts possesses a more rigid ideological streak (almost anarchist), which manifests in a Bitcoin network that's highly conservative when it comes to change. These different approaches are probably appropriate given the different use cases, and show how the composition of the community—and their beliefs—flow through into network design.
The composition of these communities is also likely to change as more and more developers and participants join the communities. They will bring a more diverse background and value-set with them, and this will inform future network design. This is a good thing, but will create growing pains. It is for this reason I make the comments about the nature of successful investors in #4 above.
#6 Assessing who the developers are building for, and what they're building
With the examples from #5 in mind, I’m focused on understanding the balance between idealism (i.e. building more efficient and equitable tools) and building great products (i.e. things that customers actually want and will actually use). My current view is that the balance is probably still in flux. It seems to me that there’s amazing promise in the potential and capability/functionality of the tools (e.g. in DeFi), but the question remains whether they are solutions looking for problems. My sense is they are not, but there's a long way to go.
Let's take DeFi as an example. The technology really is quite remarkable, and continues to show its robustness. However, my sense (validated by a number of conversations) is that the value being created is relatively self-referential. The volumes being transacted across decentralized exchanges and automated market makers are definitely substantial, but it's comprised of a relatively small group (single digit millions) of the same people allocating their crypto-native capital across different networks, while using the leverage provided to allocate across other crypto projects. There's nothing wrong with that, but it's worth calling out to note the state of play, and to contextualize the usage/values being reported. The question for me (today) is therefore whether these are great tools that people will actually adopt and stick with. It feels at times, given the technical complexity and pace of innovation, that it’s still unclear what the market actually wants, and that there's a high barrier to entry for outsiders.
This will likely settle in time with greater adoption. The question raised in this section is appropriate given the current stage of the technology’s evolution. While it’s very young, the product-market fit of the products remains unclear, which is to be expected. I’d imagine that the dominant tools and applications in 10 years’ time will look very different to what we have in mind today.
What will give me more confidence in the companies/tools is a belief in the founding teams’ ability to address the customer/market question as much as the technical one. I believe there are quality entrepreneurs and founders in the ecosystem today, and will continue to improve with additional attention and capital. Hopefully the incoming entrepreneurs and investors can support the outstanding technical talent in building great products, not just great tools.
#7 Assumptions must always be tested
It is clear to me that people in blockchain and cryptocurrency make a number of assumptions that should really be tested. These assumptions are driven by a particular technocratic worldview, and a view that the network—especially a decentralized network—is the best structure for dealing with many of our problems. I think that if we are to consider blockchain as a transformational technology, we must challenge some of these assumptions. Here’s one example.
A core belief of certain proponents of the blockchain and decentralization is that the existence of “leaders” within a system—a common feature of hierarchies—presents key man risk or a single point of failure. Decentralization is intended to remove this single point of failure by vesting the network with control, not an individual or small group of individuals. This assumes in part that the world would operate more effectively with more decentralization, as it would reduce key man risk, as well as the ability for a single individual or group to act against the interests of the collective. It is a simple and coherent concept, but the world is not governed by simple concepts; it is messy. And in reality, people follow people. To a community entirely distrustful of legacy institutions and their form of governance, “leaders” represent a weakness. But to the majority of the world (I’d suggest), “leaders” more often represent someone to be followed.
If blockchain proponents truly want global adoption, then we must challenge their assumption that decentralization—and its emphasis on the network over the hierarchy—is the public’s desired structure to operate within. The network cannot be the prime operating system if human history and psychology show a clear tendency to follow individuals. Networks can harbor nihilism and utopianism in equal measure, and this is but one human notion to keep in mind when considering the interaction between a new technology and its human agents, and an important example of qualifying the sector’s assumptions.
#8 It’s impossible to understand what’s happening by sitting on the sidelines
If you want to be along for the ride, you have to get your hands dirty. This means using the tools, speaking to the people involved, and maintaining a regular cadence of engagement. Things are moving too fast to simply read a blog post here and there. I’m committed to engaging, and have cultivated a helpful and collaborative network of like-minded thinkers continue to educate me as my journey continues.
Hopefully that was a useful piece to read. It was a useful one for me to write! If you’re interested in chatting, hit me up by replying. If you’re interested in subscribing, hit the button below.
Photo by Alina Grubnyak on Unsplash