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!1
Some Views on
Cryptocurrencies,
Blockchain & ICO’s
Mark Suster
@msuster
April 2018
The problem with discussions about cryptocurrencies and blockchain is that
people conflate too many issues.
!2
• Will key crypto prices keep going up?
• Will the fed crack down on Bitcoin or ICOs?
• Will cryptocurrencies disrupt governments?
• Will ICOs replace venture capital?
Anti-Authoritarians
• Libertarians
• Emerging Market
Citizens
!3
Disruptive technologies challenge incumbents in good & bad ways. New entrants both innovate
and over-hype. Understanding motives is critical to knowing where markets will likely head.
Incumbents
• Governments
• Banks
• VCs
Disruptors
• Technologists
• Crypto funds
Crypto
!4
I like to think of the topic as three distinct layers that are related but need to be
understood in their own rights. Each is worthy of its own debates. Today I will discuss 1 & 3.
3. ICOs
2. Cryptocurrencies / tokens
1. Blockchain
!5
ICOs
Cryptocurrencies / tokens
Blockchain
!6
Digital assets on the Internet have been freely copied and distributed. This
obviously doesn’t work when it’s money.
Pictures
CDs
Movies
• Napster
• BitTorrent
• Early YouTube
• Flickr
!7
The big idea for Blockchain that excites me is that it can create both provable rights for digital assets, scarcity
that helps defend the value and decentralization that could reduce the control of today’s technology giants.
Images, Art
Money
Music, Video
Distributed, P2P networks verify
ownership with public ledgers
Digital Asset & Ownership Info
Cryptographically sealed hash
of data
SHA-256
!8
But many naive evangelists think that “blockchain” databases & consensus mechanisms are applicable
to every situation. They are less scalable, performant & flexible than other database solutions.
Relational
Object
Flat file, etc
• Scalability issues
• Performance issues
• Governance issues
The benefits of having
less performant
databases must exceed
the obvious technical
costs
Other Database TypesBlockchain Ledgers
!9
Why is “decentralization”a big idea?
IP
TCP
HTTP
HTML
Open protocols beat proprietary
“closed” networks.
“Walled garden”
Internet 1.0 Internet 2.0
Internet Protocols
The majority of the value has been
accrued to a small number of tech giants
who built scale on global, open,
connected networks.
!10
Big Company
Protocol
User
identity
User bank
details
Social graph
(who you know, how
well you know them)
Interest graph
(how they serve
relevant ads)
Reputation
(am I a 5 or a 2 when I
work with people?)
The companies we loved have established a “network effect” that creates lock you in because
through all of your data they are more efficient at serving you than any other startup could be.
!11
If blockchain projects supported by cryptocurrencies are successful, it is possible an Internet 3.0 could
return us to return to a decentralized web where the dominant tech companies have less control.
If services were blockchain
protocols then users could
“port” their information more
easily to new startups. Today’s
tech giants would have less
market power over innovation.
IP
TCP
HTTP
HTML
Identity
Banking
Reputation
Socialgraph
Interestgraph
Internet 3.0
!12
• Google & Apple can charge a 30% tax on apps.
• Apple can decide it doesn’t like fart apps.
• Facebook can decide how to promote news & media.
• Google can display shopping competitors, flight
information, hotel booking and stop referring traffic.
Big Company
As a society we’re starting to see the consequences of this, which could
get worse if power concentrates even further.
!13
Businesses today are typically built by a centralized entity which raised large
volumes of venture capital & then concentrates power and profits.
Example: Dropbox
$ for storage
$M
UsersDropbox
• Raise venture capital
• Invest $$$ in servers to
store your documents
• Recoup money by
charging users fees
!14
If “distributed apps” (DAPPs) are successful it’s possible that new markets and companies
will be created where more network participants can share in the value creation.
Example: Decentralized Dropbox
$ for storage
UsersNetwork
• Provide server space,
processing power, bandwidth
• Collect a currency / token
• Pay a currency / token
!15
ICOs
Cryptocurrencies / tokens
Blockchain
!16
Out of nowhere ICOs captured nearly 6% of total financing of tech
startups in 2017.
ICOs Traditional VC
2017
$3.7Bn
$60Bn
~6% of the market
in just one year
But this may have been
due to an anomaly of the
quick & massive rise of
Bitcoin prices.
If ICOs continue to be
successful, my guess is
they will capture 5-15%
of the total funding
market.
Company
!17
Distributed applications (DAPPs) get most experienced venture capitalists
excited. But what should a VC own—equity or token?
Users who invest in tokens to fund
development of the service
Token
ownership
Value of
tokens
!18
• Illiquid
• Relatively stable, with few
valuation fluctuations
• Governance and shareholder
rights; management lock up due
to stock agreements and
illiquidity
• Liquid
• Potentially huge daily price
fluctuations
• Potential moral hazard without
governing rules
EquityTokens
On the surface you may think most VCs would highly value the liquidity of
crypto-tokens. The answer is - it depends.
!19
If we were in a largely ICO dominated world, how would you stop management
teams from leaving with millions without even delivering value?
• Need legal governance
• Likely to see SEC oversight
• How to stop pump-and-dump coin trading if coin owners are
anonymous
• How do you make sure your co-investors stay committed to the
long-term health of the business? Think of today’s activist hedge-
fund, public investors on steroids.
!20
We are lacking mechanisms to enforce governance and world order.
If the transactions are partially anonymous, then how do governments:
• Track the flow of money to terrorists, white supremacists, criminal
gangs?
• Track the flow of illegal “money of influence” to state actors?
• Manage large economies and not give up control of money
supply?
!21
ICO from
Inception
Ultimately ICOs can lead to the unintended consequence of less
accountability and democracy within startup companies.
VC from
Inception
• More democratic financing
• Moral hazard risk
• Autocratic company
governance (less oversight,
less concentrated financial
ownership)
• More centralized control of financing
• Market forces help choose best VCs
• More democratic company
governance (control helps set policies
that hold founders accountable to
employees & shareholders)
!22
Ultimately I believe the growth of ICOs will create more opportunities for the
best VCs who understand how to work with new structures.
Creates
much wider
top of funnel
for best
VCsProliferation of
early stage
funding sources
Accelerators,
crowd-funding,
angels, etc.
!23
And VCs will continue to play an important role in shepherding companies to
downstream, large financing options & exits
Traditional VC
Sovereign
Wealth Funds
IPOs
Private
Equity
Hedge
Funds
Corporates
!24
My advice to you - be careful of any ICO that doesn’t
have an explicit reason to exist to incentivize network
participation / resources (otherwise it is just another form
of crowd funding and one that is likely to be highly
regulated).
!25
Where are we in the crypto
market lifecycle?
!26
I suspect that today’s overfunding and hype without real projects affecting users will lead to a big value
correction. Ultimately this crypto / blockchain enabled world is likely to produce long-term sustainable value.
We’ve seen this before:
• Cable
• CLECS/DSL
• Wireless
• Internet 1.0
We are
somewhere here
Time
Euphoria /
value
!27
Thank You
Mark Suster
@msuster
April 2018

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Views on Cryptocurrencies, Blockchain & ICO's

  • 1. !1 Some Views on Cryptocurrencies, Blockchain & ICO’s Mark Suster @msuster April 2018
  • 2. The problem with discussions about cryptocurrencies and blockchain is that people conflate too many issues. !2 • Will key crypto prices keep going up? • Will the fed crack down on Bitcoin or ICOs? • Will cryptocurrencies disrupt governments? • Will ICOs replace venture capital?
  • 3. Anti-Authoritarians • Libertarians • Emerging Market Citizens !3 Disruptive technologies challenge incumbents in good & bad ways. New entrants both innovate and over-hype. Understanding motives is critical to knowing where markets will likely head. Incumbents • Governments • Banks • VCs Disruptors • Technologists • Crypto funds Crypto
  • 4. !4 I like to think of the topic as three distinct layers that are related but need to be understood in their own rights. Each is worthy of its own debates. Today I will discuss 1 & 3. 3. ICOs 2. Cryptocurrencies / tokens 1. Blockchain
  • 6. !6 Digital assets on the Internet have been freely copied and distributed. This obviously doesn’t work when it’s money. Pictures CDs Movies • Napster • BitTorrent • Early YouTube • Flickr
  • 7. !7 The big idea for Blockchain that excites me is that it can create both provable rights for digital assets, scarcity that helps defend the value and decentralization that could reduce the control of today’s technology giants. Images, Art Money Music, Video Distributed, P2P networks verify ownership with public ledgers Digital Asset & Ownership Info Cryptographically sealed hash of data SHA-256
  • 8. !8 But many naive evangelists think that “blockchain” databases & consensus mechanisms are applicable to every situation. They are less scalable, performant & flexible than other database solutions. Relational Object Flat file, etc • Scalability issues • Performance issues • Governance issues The benefits of having less performant databases must exceed the obvious technical costs Other Database TypesBlockchain Ledgers
  • 9. !9 Why is “decentralization”a big idea? IP TCP HTTP HTML Open protocols beat proprietary “closed” networks. “Walled garden” Internet 1.0 Internet 2.0 Internet Protocols The majority of the value has been accrued to a small number of tech giants who built scale on global, open, connected networks.
  • 10. !10 Big Company Protocol User identity User bank details Social graph (who you know, how well you know them) Interest graph (how they serve relevant ads) Reputation (am I a 5 or a 2 when I work with people?) The companies we loved have established a “network effect” that creates lock you in because through all of your data they are more efficient at serving you than any other startup could be.
  • 11. !11 If blockchain projects supported by cryptocurrencies are successful, it is possible an Internet 3.0 could return us to return to a decentralized web where the dominant tech companies have less control. If services were blockchain protocols then users could “port” their information more easily to new startups. Today’s tech giants would have less market power over innovation. IP TCP HTTP HTML Identity Banking Reputation Socialgraph Interestgraph Internet 3.0
  • 12. !12 • Google & Apple can charge a 30% tax on apps. • Apple can decide it doesn’t like fart apps. • Facebook can decide how to promote news & media. • Google can display shopping competitors, flight information, hotel booking and stop referring traffic. Big Company As a society we’re starting to see the consequences of this, which could get worse if power concentrates even further.
  • 13. !13 Businesses today are typically built by a centralized entity which raised large volumes of venture capital & then concentrates power and profits. Example: Dropbox $ for storage $M UsersDropbox • Raise venture capital • Invest $$$ in servers to store your documents • Recoup money by charging users fees
  • 14. !14 If “distributed apps” (DAPPs) are successful it’s possible that new markets and companies will be created where more network participants can share in the value creation. Example: Decentralized Dropbox $ for storage UsersNetwork • Provide server space, processing power, bandwidth • Collect a currency / token • Pay a currency / token
  • 16. !16 Out of nowhere ICOs captured nearly 6% of total financing of tech startups in 2017. ICOs Traditional VC 2017 $3.7Bn $60Bn ~6% of the market in just one year But this may have been due to an anomaly of the quick & massive rise of Bitcoin prices. If ICOs continue to be successful, my guess is they will capture 5-15% of the total funding market.
  • 17. Company !17 Distributed applications (DAPPs) get most experienced venture capitalists excited. But what should a VC own—equity or token? Users who invest in tokens to fund development of the service Token ownership Value of tokens
  • 18. !18 • Illiquid • Relatively stable, with few valuation fluctuations • Governance and shareholder rights; management lock up due to stock agreements and illiquidity • Liquid • Potentially huge daily price fluctuations • Potential moral hazard without governing rules EquityTokens On the surface you may think most VCs would highly value the liquidity of crypto-tokens. The answer is - it depends.
  • 19. !19 If we were in a largely ICO dominated world, how would you stop management teams from leaving with millions without even delivering value? • Need legal governance • Likely to see SEC oversight • How to stop pump-and-dump coin trading if coin owners are anonymous • How do you make sure your co-investors stay committed to the long-term health of the business? Think of today’s activist hedge- fund, public investors on steroids.
  • 20. !20 We are lacking mechanisms to enforce governance and world order. If the transactions are partially anonymous, then how do governments: • Track the flow of money to terrorists, white supremacists, criminal gangs? • Track the flow of illegal “money of influence” to state actors? • Manage large economies and not give up control of money supply?
  • 21. !21 ICO from Inception Ultimately ICOs can lead to the unintended consequence of less accountability and democracy within startup companies. VC from Inception • More democratic financing • Moral hazard risk • Autocratic company governance (less oversight, less concentrated financial ownership) • More centralized control of financing • Market forces help choose best VCs • More democratic company governance (control helps set policies that hold founders accountable to employees & shareholders)
  • 22. !22 Ultimately I believe the growth of ICOs will create more opportunities for the best VCs who understand how to work with new structures. Creates much wider top of funnel for best VCsProliferation of early stage funding sources Accelerators, crowd-funding, angels, etc.
  • 23. !23 And VCs will continue to play an important role in shepherding companies to downstream, large financing options & exits Traditional VC Sovereign Wealth Funds IPOs Private Equity Hedge Funds Corporates
  • 24. !24 My advice to you - be careful of any ICO that doesn’t have an explicit reason to exist to incentivize network participation / resources (otherwise it is just another form of crowd funding and one that is likely to be highly regulated).
  • 25. !25 Where are we in the crypto market lifecycle?
  • 26. !26 I suspect that today’s overfunding and hype without real projects affecting users will lead to a big value correction. Ultimately this crypto / blockchain enabled world is likely to produce long-term sustainable value. We’ve seen this before: • Cable • CLECS/DSL • Wireless • Internet 1.0 We are somewhere here Time Euphoria / value