Playing the Game: The Nature of Competition among … · 2018-04-19 · THE BLOCKCHAIN APPLICATION...

Playing the Game:The Nature of Competition among Blockchain Networks

Meltem Demirors | Athena Capital

“in the midst of chaos, there is also opportunity.”

- Sun Tzu, The Art of War

THE BLOCKCHAIN APPLICATION STACK

We are still in the early stages of defining, building, and implementing protocols, but this time, billions of dollars of value are at stake at the protocol layer instead of the application layer

THE INTERNETInnovation in Information Transfer

Network: ISPs

Killer App: Email

Application Universe: Streaming video and music, data sharing, cloud

computing

Protocols:TCP/IP, HTTP, DNS, FTP

THE BLOCKCHAINInnovation in Value Transfer

Network: Miners, Nodes, Staking, etc.

Killer App: Bitcoin

Application Universe: Smart contracts, distributed computing,

tokenization

Protocols:Bitcoin, Ethereum, IPFS, ZCash, Blockstack

@Melt_Dem 5

DECENTRALIZATION IS A MYTH

APPLICATION

NETWORK

PROTOCOL

Applications# of independent applications that

have VC $ or users100s Dozens ? ?

”Ecosystem”# of funds

dedicated to ecosystem

Dozens 2-3 1 1

Network CostAnnual ”mining” reward or cost to maintain network

$6B $120M $0 $0

Nodes in Network # public nodes in network 10K 18K ? 156

Node Concentration# entities with >50% of voting

power3 3 1 1

Distribution of Tokens % supply held by top 100 accounts 19% 35% 97% 62%

Development# client codebases

that account for >90% of nodes

1 2 1 1

MEASURE METRIC

Source: arewedecentralizedyet.com, OnChainFX, BitInfoCharts.com, Blockdaemon research, my back of the envelope math

@Melt_Dem 6

UTILIZATION OR SPECULATION

Daily Transactions, Bitcoin Network Daily Transactions, Ethereum Network

Source: Coinmetrics.io

0

300

600

$0

$30

$60

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18Thousands

Billions

txVolume(USD) txCount

0

0.75

1.5

$0

$20

$40

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

Millions

Billions

txVolume(USD) txCountSource: Coinmetrics.io

@Melt_Dem 10

THE DATA DOESN’T LIE

$0

$5

$10

$0

$80

$160

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

Billi

ons

Billi

ons

Market Cap (USD) Exchange Volume (USD)

Value & Traded Volume: Bitcoin Network Value & Traded Volume: Ethereum Network

$0

$15

$30

$0

$175

$350

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18Bi

llion

s

Billi

ons

Market Cap (USD) Exchange Volume (USD)Source: Coinmetrics.io Source: Coinmetrics.io

@Melt_Dem 11

QUESTIONS TO ASK

@Melt_Dem 12

t = 4HOW DO NETWORKS DEVELOP?§ Initially driven by financial incentives including speculative demand and artificial scarcity§ Some networks are driven by mission and vision, but this is rare

HOW DO NETWORKS GROW§ Continued management of financial incentives§ Development of real use cases and applications

HOW DO NETWORKS MAINTAIN AND EXTEND USAGE§ Traditional business practices like customer experience, design, and marketing§ Increasing network value due to variety of applications uniquely and specifically enabled

THE RULES OF THE GAME

MAXIMIZE ACCESS KNOW HOW TO SCORE BEWARE THE ROBBER

§ Strategically choose position to increase access to resources

§ Beware of neighboring projects who could block access to resources or impede expansion

§ If you don’t have the resources you need, collude. Form alliances or partnerships.

§ Know what winning means and maximize routes to a “win”

§ Understand the resources you’ll need now and later to win

§ Compromise short term wins to ensure long term success

§ Even when no one is keeping score, everyone is keeping score

§ Understand risks that could keep you from playing the game and mitigate exposure

§ Minimize conflict with others to reduce the risk of getting “robbed”

§ Don’t engage in. battles you don’t need to fight

@Melt_Dem 14

POWER LAWS

0

65

130

BTC

ETH

XRP

BCH

LTC

EOS

ADA

XLM

NEO

XMR

IOTA

DAS

HUS

DTN

EMTR

ON ETC

BNB

VEN

QTUM XV

G

Billi

ons

Market Cap by NetworkData retrieved 4/4/18

Source: Coinmarketcap.com

80% of all market value

Why Clear Goals Matter

§ If the power law holds true, projects should aim to avoid the “long tail” in order to capture the distribution of value creation

§ Natural selection implies that the most widely accepted, supported, and adopted chains will survive while weaker ones will die out

§ Protocols want to be ”the one” that wins the entire category for a specific type of utility or application

§ As the dynamics of the market landscape change, network growth and expansion will require frequent adjustments to the winning strategy

@Melt_Dem 16

RESOURCES TODAY

@Melt_Dem 19

$0

$2

$4

$6

$8

$10

$12

FundsRaised

Value ofFunds

at Peak

LC:Today

LC:Peak

MC:Today

MC:Peak

HC:Today

HC:Peak

Billi

ons

Modeling Balance Sheet StrengthData includes ICOs April – Sept 2017

Source: CoinDesk ICO tracker, basic analysis

ETH: $1,000BTC: $15,000

Low CashCash: 10%BTC: 30%ETH: 60%

Mid CashCash: 20%BTC: 40%ETH: 40%

High CashCash: 50%BTC: 25%ETH: 25%

An Excess of Financial Capital

The risks of holding too much cash are numerous, and include:§ Opportunity cost of capital § Agency cost (engage in empire building)§ Inadequate control of spending & internal conflict

In traditional corporate finance, an excess of cash can be utilized in only a few ways:

- Dividend: give money to shareholders- Buybacks: reduce supply- Invest: invest in networking & applications- Mergers & Acquisition: reduce competition

BUT WHAT ACTUALLY WORKS?

@Melt_Dem 20

t = 4ISSUE A DIVIDEND§ Illogical to issue a cash dividend given token holders have minimal rights

TOKEN BUYBACKS§ Unclear how token buybacks would impact market other than potential temporary price

inflation. Since supply is native to the protocol, risk would transfer from holder to project.

MERGERS & ACQUISITIONS§ Given that social and human capital are the rarest resources, M&A seems to be the most

effective way to deploy capital

INVEST§ Strategies for investment are limited, but many suffer from principal – agent conflicts as well

as adverse selection bias where low quality projects seek to tap into “easy” funding

INVESTMENTS: THE RISE OF ECOSYSTEM FUNDS

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Key HypothesesExamples

Investing in “the ecosystem” theoretically helps:§ Curate Demand for Tokens: By funding projects to

encourage them to build on your protocol§ Incentivize Developers: Many ecosystem funds

include allocations for developers to build tools like SDKs and tutorials or grants for R&D

§ Create Use Case Specificity: This is the most interesting opportunity – incentivizing experimentation with new use cases that could drive competitive advantage and network demand

§ Buy Social Capital & Credibility: Given the proliferation of ecosystem funds, it’s arguable how much social capital a fund buys at this pointSource: Nasdaq Newswire, BTC Magazine, Medium

MERGER: COMBINE TWO NETWORKS

@Melt_Dem 23

Key HypothesesA Hypothetical Scenario

Conducting a merger of two network, or as I like to call it, a spoon theoretically would:§ Aggregate Demand for Tokens: Instead of splitting

activity over two networks, concentrate on one. Too many architectures dilute value.

§ Incentivize Network Growth: Compute resources and oracles now support one network instead of building across two, simplifies growth

§ Accrue Value to Token Holders: Consolidate supply and demand, easier to manage price

§ Consolidate Social & Human Capital: Consolidate engineering talent to focus on one architecture, and own the narrative around prediction markets

§ Market cap: $270M§ Current Supply: 11M

circulating at $24§ Total Supply: 11M

Source: OnchainFX, back of the envelope math

§ Market cap: $67M§ Current Supply: 1.1M

circulating at $60§ Total Supply: 10M

GNOGUREthereum-based decentralized

prediction market

§ Market cap: $350M§ Current Supply: 11M +

3.3M circulating at $24+§ Total Supply: 21M

ACQUISITION: ONE NETWORK CONSUMES ANOTHER

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Conducting a network acquisition helps”§ Preserve Value for Token Holders: In friendly

cases, it may benefit holders of the acquired network’s token to get liquidated for a new token. In hostile cases, value likely isn’t a concern.

§ Bootstrap Network Growth: Acquiring, younger network can leverage existing network infrastructure from older acquisition target

§ Consolidate Protocol Engineering: The core team behind Cardano also built much of Ethereum Classic - maintaining two projects is unnecessary

§ Focus Ecosystem on One Project: Since both projects focus on similar functionality and use case specificity, consolidating efforts is beneficial

§ Market cap: $4B§ 24 hour TX vol: $1B§ Actively traded, active

community


§ Market cap: $1.4B§ 24 hour TX vol: $21M§ Thinly traded, largely

inactive community

§ Cardano “acquires” Ethereum Classic network§ ETC token holders either receive Cardano in

some fixed ratio or are liquidated using cash

ASSASSINATION: KILL COMPETITORS

@Melt_Dem 25


Source: Fork.lol

In an assassination attempt, one network will expend nearly all of its resources to kill a competing network§ Hijack Network: The most successful attack vector is

typically encouraging network compute resources to only mine or support one chain

§ Drive Competitor Value to Zero: There will be blood in the streets. Done in conjunction with a fork, this might be avoided.

§ Acquire Social & Human Capital Where Possible: Due to short term reputational damaging, there may be short term recruiting and narrative issues

§ Curate the Ecosystem: An assassination is a great way to weed out the types of users you don’t want

§ BUT BEWARE THE ROBBER

WHAT WILL HAPPEN?

@Melt_Dem 26

THE CHANGING RULES OF THE GAME

@Melt_Dem 27

COMPANIES HAVE WAY TOO MUCH FINANCIAL CAPITAL§ It’s poorly managed or completely unmanaged in most cases, but it’s waiting for opportunity

THE BATTLE IS ON FOR SOCIAL AND HUMAN CAPITAL§ There is a fierce competition for attention and talent. Projects who can sustain an inflow of

interest and stay relevant will accrue capital more quickly.

POWER LAWS DICTATE WINNERS WILL EMERGE§ Investors are currently adopting a “spray and pray” strategy when it comes to protocols and

tokens. In the future, activist investors will actively collude to make winners.

NO STRATEGIES ARE OFF THE TABLE§ To date, few novel approaches have been tried. In the coming months and years, no strategy

is too crazy to contemplate as networks compete for demand. Get crazier. Be bolder.

Want to Talk About Capital Management? Find me!

Hate this Presentation? Tell me Why!

@Melt_Dem

Playing the Game: The Nature of Competition among … · 2018-04-19 · THE BLOCKCHAIN APPLICATION...

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Transcript of Playing the Game: The Nature of Competition among … · 2018-04-19 · THE BLOCKCHAIN APPLICATION...