building open protocol ventures

1

Building Open Protocol Ventures

tom ding @string labs

ETH Silicon Valley Meetup | Sep 4,2016

2

protocol noun.

a system of rules that explain the correct conduct and procedures to be followed in formal situations.

State-less / Non-economic protocols, e.g. BitTorrent

Cryptoeconomic Network Protocols, e.g. Ethereum

Open Business Protocols, e.g. Gnosis, Supply Chain systems

3

Diff. classes of protocols

{

4

protocol opportunities novel biz model | defendability laws & regulations

5

Promise of the Internet:

More Equalized Economy

democratizes participation, but also creates massively powerful monopolies

that are just networks/platforms

Reality is more complex:

6

What are blockchain systems valuable for?

Can It do better than these monopolies?

7

benefits shared certainty / finality (tamper-proof)

transparent (state v. logic) robust

secure (update) interoperable

constraints slower / harder to change

Enhancing & Automating Trust for existing businesses

8

benefits shared certainty / finality (tamper-proof)

transparency (state v. logic) robust

secure (update) interoperable

when multi party interactions frequent value transfers

security needed

Private equity exchange (Nasdaq/Chain)

Interbank settlement (Ripple, R3)

Trade Financing (SKUChain)

Captable management (Delaware)

Asset Exchange (DAH)

Syndicated loans (Symbiont)

Enhancing & Automating Trust for existing businesses

9

benefits ex juris

trust in code (v. brand) permanent / continuity

global reach network effect tools

Massive opportunities for new d-Businesses powered by open protocols

constraints slower / harder to change

complex social governance in public network

10

Q*: What type of businesses areas slow to change in protocol,yet benefit massively from global market / trust / network effect ?

Look for: Large / commoditized intermediaries

Broken trust Market incentive failures

Excessive margin Over complexity

Regulatory hurdle

Given above, now let’s refine the question:

11

Uber: 25% feeLending Club: fraud

Massive opportunities for new d-Businesses powered by open protocols

Broken trust Excessive margin | Over Complexity

Regulatory hurdle / Cross-Jurisdiction

Broker dealer / Asset Exchange: $10 & T+3

Market incentive failures

Social networks: User Identity/Privacy abuse

E-Zubao: $7b scam Prediction Market: Gnosis, Augur

Kickstarter: 8 - 10%

Commercial Banking (credit rating agencies, etc.)

• Uber ($15bil raised)

• Multi billions in marketing & driver subsidy ($1b loss in China alone)

• Fighting lobbying globally for each city / country

• Drivers = hourly workers. Low loyalty.

• d-Uber

• Likely crowdfunded in millions, not billions

• Drivers = partners w/ cash + participation tokens.

• Technical protocol, not regulatable

12

E.g: Uber v. d-Uber

• Commercial Banking (US/EU)

• Heavy securitization (since 1980s) => No skin in the game

• Failure of rating agencies (in subprime crisis) => Misaligned incentives

• Zero/negative consumer interset

• P2P Lending

• Loaded with scams (e.g. E-Zubao $7b loss)

• Collusion with borrowers (e.g. LendingClub)

• Platform take no risk => No skin in the game

• Phi (Decentralized Commercial Banking w/ StableCoin)

• Mandate on-chain deposit for validators => Aligned incentive

• Randomized loan validation to prevent collusion

13

E.g: Phi v. P2P Lending v. Commercial banking

14

Common Protocol Patterns

Decentralized Organizations Marketplaces On/Off-chain hybrid

systems

Maximize org value Facilitate exchange btw. participants

Protocol interact with real world entities

via bylaws / horizontal contracts

Self Capitalization

Protocols has its own store of value to fund

certain activities

• Potentially slower technical evolution

• Dilution of responsibility & incentive

• trade off for more scalable contributor network / mass incentives

• Public protocol governance

15

Challenges with Open Protocols

16


17

Today: Business model focused Entrepreneurs (less focus on deep tech)

reddit Steve Hoffman

airbnb Brian Chesky

uber Travis Kalanick

tencent | wechat Pony Ma

alibaba | ant finance Jack Ma

18

Today: Business model focused Entrepreneurs (less focus on deep tech)

reddit Steve Hoffman

airbnb Brian Chesky

uber Travis Kalanick

tencent | wechat Pony Ma

alibaba | ant finance Jack Ma

defense: Network Effect

Topology Ownership Platform Censorship

Regulatory Adv.

19

Thiel’s observation on startup

1. “Monopoly is the condition of every successful business.”. 2. “The best entrepreneurs know this: every great business is built around a

secret that’s hidden from the outside.”

- < Zero to One>

20

New paradigm: Open Business Network

public topology permission-less platform regulatory shift to => edge network effect still exist but diff.

Radical Openness

21

Not all network effect created equal

Metcalfe’s Law

Value of a network proportional to square of of

connected users

Facebook

Reed’s Law

Value of a group-forming network proportional to

number/ease with which groups form

Slack, FB Groups

1 - Network: interconnected set of

people or devices

2 - Marketplace: two or three-sided

network, with money flowing among them.

Credit: a16z on network effects

3 - Platform: network of users &

developers who can extend the base protocol

22

Facebook’s evolution

A Simple Network:social users interacting with

each other

Platform:Open Platform with

additional applications

Marketplace:Matching Ads with User

interactions

• Exchange: Liquidity

• Platform: Developer support

• Ecosystem: service provider support, e.g. Identity system KYC providers

23

Open Network defendability

• Launch new protocols

• Service provider to the protocol (e.g. mining, onboarding)

• Building on top of the protocol

• Dangerous fallacy:

• Trying to be a centralized controller in decentralized networks. Worst of both worlds.

24

Business Models for Open Protocol

• Massive opportunities to create “RocketInternet” of in the crypto world to disrupt existing intermediaries

• Mesh with venture capital model

25

“The Rocket Crypto Model”

26


FOLLOWING ARE NOT LEGAL CONSULTATION OR ADVICES

• eGold started in 1996 by Douglas J., processing $2b tx at its peak.

• 2001 Patriot Act made operating w/o money license a federal crime

• 2008 Treasury Dept. stretched definition of money transmitter

• Faced 20y max prison time & $500k fine • Sentenced 300h community service

27

E-GOLD

(1) Standardize rights & responsibilities -> reduced tx cost

(2) Restrict contracting scope

28

Why Securities Law? (when we had contract law, properties law, etc.)

• Between September 1929 and July 1932, stocks listed on the New York Stock Exchange lost 83% of their value.

• Initial Securities Laws - 1933 (Issuance Act), 1934 (Exchange Act) and Creation of SEC: Mandatory Disclosures and Anti-Fraud

• The Investment Company Act of 1940: Constraints on financial companies and officers

• Sarbanes-Oxley Act, Dodd-Frank Act, CFPB,

29

Development of Securities Regulation

Source: http://www.sechistorical.org/museum/timeline/1930-timeline.php

contract SomeStock is StandardUSStockV1933 { uint32 share_price; uint32 shares; // regulatory fields bool sec_registered; string issuer_entity; uint32 reg_time;

… function issueShare() { if (!sec_registered) {

throw; }

} }

For engineers, that probably looks like …

(no, don’t take it literally)

http://www.sechistorical.org/museum/timeline/1930-timeline.php

• All Securities require to be registered with SEC, with a few exemptions: private deals, intl., JOBS Act, & etc.

• Constraints on transfer of restricted securities

30

Development of Securities Regulation

• SEC v. W.J. Howey Co.,(1946): Howey sold plots of land that had citrus trees planted on them, and offered management contracts where the purchaser would lease the plots back to Howey and Howey would harvest them.

• Supreme Court: land sale together with management contract collectively constituted an investment contract, and thus a security.

• An investment contract: (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits; (4) solely from the efforts of others.

• Risk Capital test31

Howie Case: Defining Securities

• Money Services Business (FinCEN)

• State Money Transmitter Law (49 states require surety bonds)

• Convertible virtual currency

• Admin, Exchanger and User

• “De-centralized” and Centralized virtual currencies

32

Federal / State regs for money service business

Source (Mar 2013): https://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

https://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

33

String Labs <an open protocol development studio>

http://string.technology

Tom Ding

https://medium.com/@tom_ding email: [email protected]

mailto:[email protected]