Real Ventures Crypto Brief - January 25, 2018

This is an oldie but a goodie from 2016. Brian Armstrong and Fred Ehrsam, founders of Coinbase, were among the earliest to recognize the game-changing potential of tokens in solving the “chicken-and-egg” problem. In brief, these problems arise when network effects are involved; e.g. Twitter has no value to its first user because there’s no one for them to follow. The value of a network is proportional to the square of the number of participants (Metcalfe’s Law). Tokens can incentivize early participants of a network by allowing them to capture a disproportionate share of the network in its early days. 

Blockstream, a Real Ventures portfolio company, is taking another important step towards integrating “legacy” financial infrastructure with the crypto world by providing pricing and order book data from 15 crypto exchanges to the Intercontinental Exchange (ICE). This will make it easier for larger players to gain exposure to cryptos, which should result in a large influx of capital. 

This statistic isn’t too surprising. I always take statistics from large organizations (nothing against EY) with a grain of salt because I always wonder where they get their data and who actually bothers to check it, but this figure doesn’t seem too far off the mark. It would be interesting to see what amount of the $400m actually winds up in the hands of the founders who claim they were “hacked”.. without a way to prove the funds are actually stolen, it would seem there is a pretty high incentive for inside jobs. 

The team at Ledger are highly competent people with a great vision for security in the crypto space. They’ve been around forever - I recall seeing Nicolas Bacca, Ledger CTO, present at just about every Bitcoin and crypto event going back years, talking (with a thick Frech accent) about the bank-vault security and design integrity of their products. It’s great to see a solid team like this, which could have easily taken advantage of the token hype cycle to raise tremendous capital in exchange for precisely zero equity, choose to raise a traditional venture round as they work to grow their business. Much respect for Ledger, can’t wait to see what they cook up next. 

An informative overview of the Lightning Network, Bitcoin’s second layer scaling solution. “Second layer” means that this technology does not run directly within the Bitcoin protocol, but sits on top of it. In a nutshell, it’s a system for state channels (trading between 2 parties) to link up between one another to form a kind of mesh for transactions to be sent to people quickly and without having to pay the large transaction fees currently required on the main Bitcoin blockchain. If Bitcoin hits the mainstream, this tech will be a big reason why. 

Another symptom of nascent markets is misinformation. Since there isn’t (yet) a Wall St. Journal or Financial Times for the crypto ecosystem, the community is left to its own devices to disseminate information, which has led to some annoying (for some, disastrous) consequences. Another reminder that the best way to think in investing is to think for yourself. 

This is thoroughly researched analysis by Cornell University students and professors about how decentralized Bitcoin and Ethereum are. Considering decentralization is the “magic sauce” that makes this technology so disruptive, it’s critically important and reports like these are highly valuable in determining the health of these networks. It’s important to remember that we’re still in the “early days” of both platforms’ deployment into the world, so the fundamentals used to determine how decentralized a network is will change and evolve. 

This is highly technical and difficult to follow. Why am I including it here? Because it’s one of the best ways to get a bead on how development of the Ethereum protocol is progressing and where things are headed. An interesting key takeaway from this meeting is that Constantinople, the next hard-fork upgrade for Ethereum, isn’t too far away (no date given, perhaps ~6 months or so) and when it is released, it will likely include Casper FFG - the first implementation of Proof of Stake. 

I don’t really like modeling and quantitate framework pieces like this (I find they’re long on jargon and short on predictive utility), but this author Alex Evans has put some time and thought into this so I thought I’d include it here for those who are more model/quant oriented. Would love to hear your thoughts - just reply to this message. 

Stellar is an alternative blockchain to Ethereum that is attempting to provide a similar platform that can accommodate tokens (and other arbitrarily complex programs). It doesn’t have quite the mindshare or developer community as Ethereum, but it has a skilled team and dedicated ecosystem around it that’s worth keeping an eye on. Their plan for 2018 mirrors that of many other blockchain projects: create tools that make it easier for more participants to transact on the network. Scale scale scale. 

Robinhood, the go-to no-fee brokerage for millennials that’s growing like wildfire, has announced that they will be launching support for buying and selling of cryptos within their app starting in February. Since Robinhood has millions of young users who have likely heard about cryptos and might be intersted in investing, this is a pretty big deal. I’m bullish. 

Blockgeeks is such a great outfit. They put out some of the best content in the industry. This guide will take you from zero-to-one the world of blockchain applications, which I believe is one of if not the best way to quickly understand the disruptive potential behind this technology.