Now is the time to explore how the venture capital industry will change due to the decentralization trend. Let’s start with the history of venture capital and its evolution over the past few decades, then look at the background and issues of the current crowdfunding and ICO boom, and then look ahead to see how things will change in the future.
A brief history of venture capital
Although the first venture capital firm was founded in 1946, there were few participants and few deals before the late 1960s. Back then, no one was going to invest in your startup or small business if you didn't have adequate cash flow and revenue projections.
In the 1970s, the microcomputer industry emerged, and great companies such as Apple and Genentech emerged. In the 1980s, venture capital experienced several ups and downs. Over these 10 years, only one factor has remained constant: When investors are confident about the future and boldly enter "risky" and disruptive markets, they see higher returns.
The venture capital industry has only really taken off since the 1980s.
Success stories like IBM nurture and extend this belief. Venture capital and angel investors played a key role in the success of the hardware era and the subsequent software era. Then came the dot-com boom. Suddenly, you could start a company with far less capital than before and recruit market veterans with more capital.
Then, the dot-com bubble burst. Surprisingly, people's trust in Internet companies was quickly restored. A good small team can create a product that competes with giants like Oracle or Yahoo. Paul witnessed this process firsthand when the Y was founded and used it to co-found the Y. The first decade of this century saw incredible growth, with the emergence of many other investment entities such as micro funds, syndicates, accelerators or business incubators.
Y has become the common brand of super startup companies, bringing maximum added value to entrepreneurial projects. YC Entrepreneurship Bootcamp graduates also possess extraordinary self-confidence.
The evolution of investment paths
For a long time, the investment transaction process has been restricted. Quality deals are only possible when someone connects you to a company that is raising capital. What's more, this often means you need to be near Sand Hill Road, known as "Silicon Valley's Venture Row." Only a few people have the opportunity to participate in a Series A round from Microsoft, Oracle, or Amazon. If the average person wants to invest in any of these companies, they typically have to wait until the company goes public via an initial public offering (IPO).
That is, companies used to go public very early in their life cycle. For example, Amazon had its IPO just three years after its founding. Since these companies still have considerable room for growth, IPO investors have higher expectations for investment returns.
The number of initial public offerings has fallen sharply over the past decade due to high costs, bureaucratic burdens and reduced liquidity. As companies remain private longer, new investment options emerge. Public mutual funds, hedge funds, private equity buyout firms, sovereign wealth funds and family offices provide companies with capital to operate without going public.
Against this background, in 2009, Guagua was born. The advent of crowdfunding gives everyone the opportunity to support new creative products and art. A year later, the equity crowdfunding platform secured funding with the goal of democratizing the investment process.
But there's still a big problem: Under SEC rules, only accredited investors can invest in private equity securities. Thanks to the crowdfunding exemption movement, the JOBS ACT (full name: Quick Start Act) was signed into law in 2012. Everyone can participate in crowdfunding to obtain shares or securities issued by a company. After it came into effect three years later, equity crowdfunding sites like and began to pop up.
Stepping back, you can see the democratizing trend more clearly. Now, there are more trading opportunities that may be completely private. However, the number of companies choosing to raise capital through these new channels is relatively small, and public access to the best private startups remains limited. The fragmentation of the crowdfunding scene, limitations on raising capital, and bureaucratic hurdles prevent this route from becoming a standard path for early-stage startups.
Bitcoin debuts
Just before its birth, the Bitcoin white paper was released publicly. It was not an investable asset at the time, let alone used to raise capital. Without an exchange, you can only earn Bitcoin through mining. In 2010, the first exchange was launched, and a few months later, the first real-world transaction was made, when he bought two pizzas for 10,000 Bitcoins.
Order flow is thin, liquidity is non-existent and volatility is high. Mt. Gox emerged in July 2010 and became the entry point into cryptocurrency for avid investors. Before the crash in 2014, its trading volume accounted for 70% of Bitcoin’s total trading volume. Mt. Gox was so successful that other exchanges followed suit in 2012. The market is starting to mature, confidence in Bitcoin is rising, and liquidity is increasing.
In 2013, the first Initial Coin Offering (ICO) appeared. (now renamed Omni) raised 4,700 Bitcoins, totaling $5 million at the time, and generated corresponding tokens for distribution to crowdfunding participants.
ICO starts
For the first time in history, we are witnessing a cryptographic proof of asset ownership open to virtually everyone in the world. This decentralized ledger technology offers companies the opportunity to store shareholder registers on the blockchain. Initially, such companies and projects will crowdsource sales and store contribution and ownership information about the Bitcoin blockchain. Then there's Ethereum, which extends functionality even further, allowing people to issue tokens and receive funds via smart contracts.
Ethereum opened the door to ICO, a new fundraising mechanism, and made it popular. In July 2014, Ethereum itself successfully raised funds through an ICO, raising 31,591 Bitcoins, with a market capitalization of $18.4 million at the time. Since then, the past four years have seen staggering growth in the total amount of money raised through ICOs by various projects, both decentralized and non-decentralized.
Additionally, it enables projects to raise small amounts of funding from a large number of dedicated individuals. These capable individuals can help launch and promote the project. Unlike the investment opportunities available to traditional retail investors, here you can invest in projects in their initial stages. You don’t need to know the founders or angel investors, or have any special investing relationships. Investing has become a democratized act. However, this comes at a cost. Everyone can participate in high-return investments early in the project. On the other hand, fake projects can also exploit and deceive believers who are not careful enough.
The cat-and-mouse game between regulators and financiers
From the beginning, there was a lot of uncertainty surrounding ICO legislation. At the time of the ICO, the company's board of directors issued a statement saying: "We are not making any commitments for dividends or equity. You simply purchase a password to access the software, and if you believe the software is valuable, you must do so." claim they Tokens are not securities. This is critical because if you are selling securities to U.S. investors, or if you are a U.S. institution or person selling securities to non-U.S. investors, you must comply with SEC requirements and regulations.
The wording is very strict, and they emphasize that what they are issuing is not a security, which makes sense. Many other projects raise funds by selling so-called utility tokens, but not all tokens are truly utility tokens.
Last year, a total of $6.5 billion was raised through the ICO model. The gold rush naturally led to many questionable projects, and this is the most notorious example. The SEC is working hard to protect retail investors from fraud and Ponzi schemes, which is a good thing. They issued numerous subpoenas and questioned the functionality (rather than security) of some token sales.
In the current scenario, the pendulum has tipped completely to one side.
Against this backdrop, it is difficult to navigate U.S. law easily. Last fall saw the launch of the Simple Agreement for Future Tokens (SAFT), co-sponsored by , , , , Labs and . This is a broad effort to establish a compliant sales framework in the United States. The original SAFT even went against the spirit of cryptocurrency openness by restricting sales to accredited investors. It is currently crowdfunded (partly) through SAFT. However, SEC Chairman Clayton recently questioned the validity of SAFT, claiming, “I believe any ICO is a security now.” One thing is for sure, many of the tokens that have been issued may be brought under securities jurisdiction.
The pendulum is now adjusting back.
So, where are we now? ICO issuers can still operate on the assumption that their tokens are securities and conduct token sales within the framework of existing securities regulations. To give a few examples:
Comprehensive guidance from relevant regulatory agencies can further protect and safeguard this financing model. For example, other regulators such as cryptocurrencies believe that cryptocurrencies may be subject to money transmission laws, not just securities laws.
In an ideal world, good projects should have a clear and relatively simple way to raise reasonable funding from an open network of people who believe in the project. Union's sees safe harbor as a potential solution. Another interesting option is to use PICO, which conducts token sales via the R Token smart contract and disables secondary market trading.
Design and choose a successful network
Regulation is only one piece of this complex puzzle. When you raise money through crowdfunding, you typically receive Bitcoin or Ethereum, as well as tokens specific to your project. Investors need to understand what is driving the price of a specific token both currently and over the long term. Because financial incentives maximize network effects, networks are likely to follow a power law, perhaps even more extreme than for the average startup. By this logic, the winner in each industry would be more valuable than all other candidates combined. Therefore, it is crucial for investors in this space to choose the companies in the industry that have the best chance of winning.
Designing a successful network is never a simple matter, it involves the optimization of a whole set of key components, most of which should perform well at the same time. These components should be unique to decentralized platforms and protocols and were not previously core functionality. These laid the foundation for a new discipline – cryptoeconomics or tokenomics.
Next, we discuss how monetary policy, token models, or token issuance can significantly impact outcomes.
Due to the unique properties of decentralized consensus mechanisms and applications, each project that issues a token can effectively act as a central bank, meaning they set their own monetary policies, inflation mechanisms, ecosystem incentives, etc. This requires not only the unique skills of the teams designing these models, but also the investors supporting these projects.
The first blockchain-based network was Bitcoin, which introduced its own monetary policy, limiting supply and reducing inflation - although you could argue that it was generally negative inflation given the severe private losses and other circumstances Inflate currency. Bitcoin’s policies are widely followed and understood, and it is widely believed that these policies, along with resistance to censorship, form a core element in the appreciation of Bitcoin’s value and its underlying network.
Many different projects are now innovating around monetary policy, which is one of the important differentiators of decentralized protocols because it changes the economic incentives of participants. For example, unlike Bitcoin, Ethereum does not limit the total supply of Ethereum in circulation and was originally designed to promote the inclusivity of the Ethereum platform in the global economic and social system. Since then, Ethereum’s release rhythm has been a hot topic in the Ethereum community. These decisions, coupled with the difficulty of adjustment, serve as important levers to drive the Ethereum economy forward.
Another example is its monetary policy, which is equally distinctive. It is designed with a unique mechanism that enables the network to algorithmically adjust the token supply according to market changes to maintain a stable price.
Another important component to consider carefully is the token model and its derived properties. Tokens can serve as powerful incentives for the community to develop around the protocol. If well designed, they can facilitate network governance, such as through voting, specific tiers, or other models based on quantum token ownership.
They can also serve as a reward mechanism for performing useful work on the network (such as securing a protocol) or to support gaming functionality (such as some kind of betting mechanism). They also help us manage high-quality forms, such as token organization registries, or prove ownership of unique digital assets.
When a currency is designed to replicate some or all of the properties of money, you often need to make a difficult choice between three functions: store of value, medium of exchange, and unit of account, which boils down to security, monetary policy , and practicality. .
The coin issuance mechanism also plays an important role in assessing the future value of the project. Common indicators are transparency, fairness of issuance, and providing adequate long-term incentives to the developer community and ecosystem, such as token option pools. As we mentioned, it must also comply with laws and regulations.
Coin issuance mechanisms are designed to promote healthy online behavior. For example, many projects choose to sell a portion of their tokens to the public, claiming that they need a broad user base. In reality, however, only a small proportion of projects actually need to be open to the public. While distributing tokens to a wider range of contributors does have the potential to build employee incentives, most tokens distributed in this manner tend to end up in unexpected hands. Issuing coins through targeted airdrops or using airdrops to perform specific actions (as a famous example) may achieve the original goal more satisfactorily.
multifaceted network
I have emphasized before that the real power and opportunity of decentralized technology begins with the Satoshi Consensus. It provides a solution to reach agreements on a globally distributed peer-to-peer network in a trustless environment. Since then, multiple variants and new competitive consensus mechanisms have combined to create healthy competition. These new decentralized technology platforms will focus on decentralizing the most powerful user scripts and applications, with the main goal of designing better solutions to the challenges of blockchain systems. Optimize for one or two of three properties (decentralization, security, and scalability).
If you plan to invest in a decentralized consensus platform or protocol, you must be able to evaluate the pros and cons of the relevant consensus mechanisms and how optimized they are for the various intended applications on the platform.
In a given market, the goal of a consensus mechanism is to achieve its optimal design by responding promptly and adapting to its uniqueness. Alvin E. Roth, in his book Who Gets What and Why, brilliantly describes real-world principles and examples of efficient market design, some of which apply to decentralized markets. In efficient markets, rewards are often unfairly distributed, often intentionally. As networks evolve, they will have to appropriately adjust some key design parameters to cope with changing dynamics and environments. The needs of the stakeholders that creators must satisfy during the development phase may differ from those in later phases. Teams that are aware of this evolution are able to adapt their projects accordingly and continue to serve as community leaders.
The goal of the consensus mechanism is to respond and adapt to uniqueness in a timely manner, adjusting key design parameters to respond to changing dynamics and patterns as the network evolves.
Therefore, effective governance of a decentralized network is critical to its long-term sustainability and success. We believe governance will be a key factor in success.
In short, cryptoeconomics needs to make sense and fit each protocol/platform. However, this isn’t the only metric you need to stand out when choosing a network that has a chance to dominate. The degree of decentralization, community operations, developer activity, and community participation on social media such as , are all signs of a healthy and prosperous community.
Finally, don’t forget the fundamental principle of entrepreneurship: the team is everything. Choose the most efficient and motivated teams as they are likely to build the strongest community of contributors and users around the project. Market is obviously another key factor in motivating the right team to launch a great product as quickly as possible. Today, when many founders are asked about their competitive advantages, they always mention “decentralization” or “censorship resistance.” A good team is especially important. In most cases, end users don't actually care about these grand ideas. You have to ask yourself repeatedly, what are the benefits of decentralization? Using decentralized technology will always have to demonstrate that it has a legitimate advantage over existing businesses. Otherwise, it's just a buzzword that attracts unwary investors.
How to calculate valuation
Okay, now you've decided that you want to trust a cryptocurrency, but you still need to know how to assign it an appropriate value. It is useful to benchmark this asset against other cryptocurrencies and cryptoassets. The most popular websites in this regard are calculated based on total market capitalization. It goes one step further in that it includes the total future supply. Nic, Chris, and Willy Woo propose another interesting approach: the network value transaction ratio, which is the network market cap divided by the number of transactions. The lower the number, the higher the asset value. The cheaper. These methods reflect the current price of currencies but fail to account for the fundamental value behind these assets.
When estimating the future value of an asset, considering the velocity of money is key. Velocity basically refers to the number of times the same coin changes hands within a specific time frame. Applying Fisher's equation MV=PQ, we can see that the currency circulation rate is inversely proportional to asset prices. I've found that there seems to be a sweet spot for loop speed. This is a very complex topic and the existing quantity theory of money may not be appropriate.
Many factors influence different elements of this equation. For example, cryptoassets, especially utility tokens, can be viewed through a working capital lens in an interoperable networked world with low-friction exchange capabilities, where you don’t need to store large amounts of tokens to facilitate blockchain protocols. Practical functions. As a result, tokens trade faster and the utility token protocol’s network value may be lower than currently believed. Governance model may also affect speed.
This is an evolving area and new valuation methodologies are rapidly emerging, both providing further clarity and providing alternatives, such as the dual-asset model VOLT with endogenous velocity.
winter is here
In recent years, there has often been optimism and belief in the potential of these projects. It provides incredible rewards. Recently, we have seen such giants planning to raise large amounts of money through ICOs. Other projects such as Tezos or Tezos have shown that the impact of an ICO on its underlying network, community and governance model must be carefully considered before launching a crowdsale.
Some projects are abusing the systems for which innovative network protocols are developed. These ICOs go against the spirit of the community. This false prosperity naturally attracted the attention of regulators. Due to increased scrutiny, we appear to be entering an ICO winter, at least until compliant ICOs take hold.
The future is here
The past year has been an exciting one for ICOs. Projects raise small amounts of funding from early contributors and developers to co-create innovative protocols and networks. They democratize investment, allowing anyone to participate in projects at an early stage.
Some experienced investors have also been backing the space for years. Angel investors or venture capitalists either purchase tokens individually or invest in blockchain startups through equity financing.
However, recently we have also seen a large number of other types of investors join, such as professional hedge funds, family offices, institutions, etc., which has led to a large amount of funds being used for early-stage projects, and the emergence of token private placement rounds and pre-sales. These types of private placement transactions often result in some investors liquidating their positions at the expense of public contributors before the token is even listed.
Too much private capital will certainly hurt the growth of the network, and a delicate balance needs to be struck. We believe it will become increasingly difficult to become an early private investor in large-scale decentralized projects. That is, sophisticated investors with deep cryptocurrency expertise can take on a level of risk and help teams solve problems in cryptoeconomics, governance, or token issuance, skills that most traditional venture capital firms don’t necessarily Possessed.
If venture capital proves effective for projects in the decentralized technology space, they will still be able to have a seat at the table and fund some of the best teams. Experienced investors can also help them navigate the complex regulatory environment and provide capital until the network is ready for a public sale or any other type of token issuance.
A truly meaningful decentralized network or protocol would likely need to distribute its tokens among users to align the goals of its early adopters. However, they also need to know the most effective and safest methods. Regulation exists to protect retail investors and consumers from unfair practices, misleading and deceptive practices. We hope regulators will provide clear guidelines for these projects and take sensible steps to protect innovation. Once clear regulation is in place, this disruptive space will be more fully trusted, attracting larger players to the market, which will in time bring more capital to emerging businesses.
By Alex, co-founder of Ramon, a venture capital firm backing builders of the new decentralized economy. Previously, he led investments in Deloitte Ventures and Deloitte UK’s blockchain business and co-created identity management platform Smart ID.
Compiler: Zhan Juan
Original link:
This article was compiled with the permission of Alex and Ramon and published in "Lianwen".
For reprinting by Chinese media, please contact "Lianwen".
标签： #Investment #Blockchain #ico #Bitcoin trading #Decentralization
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