Augur has been one of the most anticipated projects in the crypto space, yet following the product’s launch, the dominant conversation has been about what’s wrong: How hard it is to install the app. How expensive it is to start and participate in prediction markets. How big and cumbersome the data storage is. How susceptible to government takedown efforts it might be.
It’s unlikely that this reaction will be unique to the Augur launch. Augur is simply the first high profile project to launch in what is quickly becoming a very new context.
The irony of the ICO boom of 2017-2018 is that some of the fastest and, frankly, easiest risk capital in technology history is poised to be followed by a period of unprecedented demand for verifiable operational excellence.
The Good Ol’ Days
By any account, 2017 (and into early 2018) was a capitalization bonanza, with tokenized projects raising more - billions more - than seed stage venture capital. There are several reasons this explosion took place:
Token liquidity vs. equity Startup equity is a highly illiquid category of investment, requiring venture capital to be locked up for a decade of longer. This limits how much capital is available for the asset class. Tokens, meanwhile, are tradable almost instantly upon issuance, meaning positions can be taken, hedged, doubled down on, sold and more. This flexibility unlocks orders of magnitude more capital as compared to venture.
Logistics of capital formation were transformed Whereas even simple equity and convertible debt deals take significant time and legal fees, tokens on smart contract platforms can be bought and distributed nearly instantaneously. This innovation not only made capital easier, but more global. The fact that US-based crypto companies getting more and more nervous about regulation around securities offerings has only helped push the center of blockchain gravity abroad.
Stronger incentives to build and fund new things than work within existing ecosystems One unintended consequence of ICOs is that they create a strong incentive for capital and talent to build their own new projects rather than work within the context of existing protocols. While the upside of founding your own project has always existing within venture-backed emerging technologies, the radical capital inflows of last year’s ICO boom were a new level of incentive to start something new rather than build on top of.
Discounts created a self-propagating investment model It didn’t take long for professional investors - especially those who provided signaling value to the token projects they invested in - to develop a new business model. In effect, the earliest, most signal-valuable investors were able to buy tokens for a big discount of between 30-70% off the ICO price during a private sale period. When the public sale launched and/or tokens were listed on exchanges, they could immediately liquidate. Even by cashing out just the equivalent of their investment while holding the rest, they were able to recycle that principle into the next funding event.
Price appreciation created even more new wealth looking for outlets And of course, all of this is to say nothing of the large and (at the time) ever-growing group of new wealth formed by BTC and ETH holdings that ballooned by 100x, 1000x or more, providing a massive new cohort of capital to the space.
Whatever the full set of factors was, the ICO boom got out of control. Projects raised, raised a huge amount, and raised a huge amount at increasingly higher valuations.
RIP Good Times
But of course, it couldn’t last. Prices peaked in January, Nic Carter called “crypto recession” in March, and the last few months especially have been a slow slog down.
In the last few weeks especially, a popular article archetype has been the “X% of crypto projects that raised money fail within Y months of their ICO,” with both X and Y apocalyptically increasing the longer the bear market goes on.
The only rational response is…
Of course they have. Who didn’t see this coming?
First of all, most startups fail. The numbers we bandy around don’t accurately reflect the real failure rate because they don’t take into account the companies that started but never made it past a friends and family round. Or companies that have “exits” that are little more than a soft landing to save face. Or any of a million other situations that we don’t call as such but which effectively constitute failure.
This is not because the entrepreneurs behind them are poor entrepreneurs or did anything wrong. It’s because identifying a real need or opportunity, building a product or service that delivers against that, and then building a team and culture capable of scaling that solution is just about the hardest thing anyone can try to do. When we discuss most startups failing, it is not a judgement, but simply a statement of fact.
Second, while there are some major problems in the way the current fundraising system is constituted - especially the pattern recognition that reinforces the type of founders that get funding - a big part of why it’s so difficult is to filter out projects that aren’t likely to make it. While there are some tremendous benefits to letting more flowers bloom, the surplus of capital represent by the ICO boom necessarily means that there are going to be more underperformers, as well.
Third, reiterating the above, startups are very difficult and very likely to fail even in industries where we know the business models and strategies that work. In crypto, we’re dealing with nascent concepts and models that reflect not only technological but structural, sociological shifts. No one can claim to truly know how things will play out.
In other words: “Oh, you’re building the Uber for in-home pet feeding? Cool. We’re working on a leaderless, decentralized autonomous organization that maintains the open source code base for a global marketplace that allows people to use magical computer money invented about six and a half minutes ago to make predictions and hedge real world exposure to exogenous real world events.”
It’s almost impossible to imagine that the failure rate for blockchain projects won’t be higher even than the already high rate for non-crypto startups.
Built For The Best Buidlers
So if first we had easy money, then were painfully reminded that this whole “inventing the future” is pretty difficult, what happens next?
My bet is that we’re moving to a period that basically requires verifiable operational excellence. Here’s why:
The Liquidity Of Everything Liquidity is a double-edged sword for crypto network projects. As we saw above, the introduction of true liquidity opened up significant new pools of capital. At the same time, whereas venture capitalists are locked in on a deal once they signed and wire the money, crypto investors are under no such pressure. They can withdraw positions, hedge into competitors, and generally be much more mobile with their money.
What’s more, that’s just the liquidity of capital. The blockchain space is defined by the liquidity of everything. The normalization of open source code bases massively increases network participant mobility. As easily as investors can sour on a project and take their capital elsewhere, the community of developers, miners, stakers and users can decide that the project isn’t moving in a direction they believe in and fork into a version that better reflects their interests and values.
The Liquidity Of Everything means capital, coders and community will only stay with projects that not only perform well, but do so with integrity to a shared mission and values.
Zooko’s Transparadox A couple weeks ago, ZCash’s Zooko Wilcox brought transparency around founder and developer incentives to a new level by revealing a breakdown of the ZCash Founders Reward that included his monthly allocation of ~2,000 ZEC. Worth something like $4m a year, it immediately provoked a conversation about what the appropriate remuneration for early project leaders was in relation to how other contributors to the project are incentivized.
Regardless of where people fell on that question, the ensuing conversation made one thing abundantly clear: for the crypto community, transparency isn’t some impressive thing. It’s the table stakes of being involved. Even if people lauded Zooko’s transparency, it was only in relation to the fact that he was one of the few actually living up to what they expected from anyone in his position.
What’s more, being transparent about something that people disagreed with wasn’t enough to win them over. Zooko’s Transparadox means that projects will have to do everything in the open and plan on getting crap for many of their decisions regardless.
Proof of Work One of the most influential newsletters in crypto is investor Eric Meltzer’s Proof Of Work. Each week, projects self-report exactly what they’ve accomplished and what’s coming next - almost like a mini-investor update. Eric does the blocking-and-tackling to make sure it is predominantly non-marketing technical updates from top quality projects.
As the bear market has quieted the hype cycle, Proof of Work’s popularity is one small example of a zeitgeist shift towards celebrating the projects that Shut-Up-And-Ship. It also exemplifies how resources that were traditionally only available to a closed community of professional investors are finding their way into the broader world. Spencer Noon’s recent tweet storm about his crypto project evaluation process is another example. As this sort of information becomes available to all investors rather than just a select few, the expectations of all those investors will go up. The extent to which crypto investors come to expect verifiable execution and talk about it openly in spheres of public influence can’t help but shape where projects put their emphasis.
So, let’s recap the difficulty of building a truly great crypto project today:
- Everyone can leave unless you kick ass
- You have to do that ass-kicking in public, with people yelling at you anyway
- Perspectives on your performance will be rapidly distilled into conventional wisdom by an extremely communicative community of investors
The Age Of Execution Maximalism
In short, we’re leaving the age of hype and entering the era of execution. Both successes and failures will be too public for anything but the best projects to sustain the support and conviction of their communities. In this context, we will all become Execution Maximalists.
And so it should be. It should be hard to reimagine money. It should be hard to enable new forms of human financial, social, and political organization.
The higher the standards, the more the best projects will be able to aggregate the talent and resources they need, and the more likely we are to see projects live up to their promise to write our future.