Prepare for crypto to get bigger
This article was first published on flatoutcrypto.com on the 21st May. If you enjoy this article please follow me @FlatOutCrypto.
On the latest episode of Laura Shin’s Unconfirmed podcast Mike Novogratz, the CEO of Galaxy Digital Capital Management, discussed the Telegram ICO and why he wished he’d invested in it.
I wrote back in February that I thought the Telegram (TON) ICO was hideously overpricedand that it was hard to see what could justify the valuation. I had already been softening my position slightly on that over the last couple months as the extent to their potential ambition (the WeChat of the West and a well-funded competitor to the stable of Facebook/Messenger/WhatsApp and potentially a wider offering of digital startups, just as WeChat is far more than just a messaging app) became clear.
The missing piece on why Telegram was seen as so attractive by VCs came with the emphasis now being placed on having the resources to go to market and build a big following.
Tony Sheng wrote an interesting piece on the ‘fear of crypto copycats’, pointing out that crypto projects have “fewer moats to protect against competitors and copycats”. He notes that projects are vulnerable to being copied until they have reached scale because it is very difficult for crypto firms to defend against competitors — especially as the majority are open source. This open source nature is good for the industry, as projects can learn from one another and make advances quicker than if all systems were closed/patented, but it makes it difficult for the incumbent party to retain dominance. Telegram, with its existing business complete with 200m users, is one of the few players in a clear position to achieve market dominance.
Given the focus on attaining users — and mindful of the fact that true adoption of blockchain/DLT platforms remains very low — those with the resources to go to market possess a significant advantage. In this light, certain projects announcements take on a new significance.
Bar maybe the embattled Tezos and Telegram (and potentially some of the earliest Ethereum ICOs which raised huge amounts of ETH prior to its stratospheric rise), there is no project as well capitalised as EOS.io. As a result, Block.one (the organisation behind EOS) have been able to seed no fewer than four funds which will develop projects for the platform including:
- A $325m EOS.IO Ecosystem Fund in partnership with Galaxy Digital
- The EOS Global Asian focused fund, seeded with $200m and launched in collaboration with blockchain investors Michael Cao and Winnie Liu
- Joining with Tomorrow Ventures, Eric Schmidt’s (former Executive Chairman of Google/Alphabet) VC firm, which had an initial close of $50m
- A $100m fund with FinLab AG, a European tech investor
The company has endured significant criticism over its year long ICO model but the end result is that it now has the resources to throw at developing the ecosystem rather than solely the technology itself. Not only that, but it means that EOS — and essentially only EOS — have the means to pioneer a new way of funding DApps.
Up until now DApps have tended to be funded in a few ways:
- The developer (or developers, but usually a small team) builds something without any real capital, launching it to the world
- The developers airdrop the tokens to a grateful public who then push up the token price (“OMG these guys didn’t even do an ICO, they’re so selfless, this is definitely worth buying”) enabling the devs to sell off in stages for funding
- The developers do an ICO
Some projects can be launched without capital, but others really do need significant resources — be it for development or for other services vital to project success such as marketing or business development. Airdrops can be a very slow and unpredictable way of providing funding whilst ICOs suffer from unclear regulations and continuing action from the SEC and other government bodies.
EOS’s VC funds provide a new form of safe and easy capital which will reciprocally directly influence the value of EOS. These EOS VC backed projects will likely do airdrops (once the product is ready to be launched, not to fund development) directly to EOS holders. Everipedia, which received $30m in funding from the EOS.io Ecosystem fund, have already announced they will follow this route.
The network effect and being the home of talent in the space are the key to protecting against competitors. There is no doubt that Ethereum is currently the forerunner in this battle, but being able to lure developers with nearly $1.5bn is not a bad way to try to combat that and blows attempts by lesser rivals (I use that term loosely) such as Tron, who are promising a $100,000, 0% interest 18 month loan to developers, out of the water.
Most ICOs raise far more capital than they actually need. I suspect the VC funds will have tighter conditions and be less immediately lucrative than larger ICOs will be, but the additional marketing that will come from an EOS.io endorsement and the support available from the VC firms involved will likely offset this. It will also create relationships between developers through their mutual relationships with their benefactor and perhaps most importantly, avoids the regulatory issues that an ICO brings.
Any sports fan knows that throwing money around is no guarantee of success (just look at how poor Man Utd have been this year). Additionally, a lot of the most interesting projects start from developers who are already within the ecosystem and see an opportunity to build on a codebase/platform they are familiar with. However, it will be a significant advantage and one that makes EOS one of the few real challengers at present. There are so many competing platforms and the majority will simply die out due to lack of developer support (just look at the likes of Waves, a platform I like, and the dearth of quality projects launching on it).
The increasing presence of large money will continue a transition from community led developments to an institutionalised and more lucrative space leading to:
- A greater amount of the larger ICO’s skipping retail investors (particularly while regulations are unclear) and achieving their raises from VC’s
- More teams only selling small amounts of their token supply at ICO, retaining greater amounts they can subsequently sell to fund developers/ecosystem developments
- Teams keeping more of their technology to themselves, in opposition to the open source nature of Ethereum and Bitcoin
- Bigger raises for projects that have a clear route to scale
Novogratz brought up the point that Silicon Valley, on the whole, has missed out on the explosive growth of crypto thus far. Most of the larger crypto projects raised money from retail or private sales, not from Silicon Valley based VC firms. There is a desire to avoid missing out on future opportunities. The TON ICO offers the ability to invest in a crypto firm which already has a userbase of 200m+ users and a clear path to scale.
If Telegram was to reach the level of WeChat then even a $2bn ICO will lead to huge returns. The EOS VC funds provide a steady pipeline of projects launching on the best capitalised platform in the space whilst other existing crypto companies have begun to set up their own VC funds to invest in DLT startups. Huobi, for example, have commenced a $1bn fund to finance Chinese blockchain start ups.
These sort of developments will only become more common as crypto firms seek to entrench themselves against the entry of larger companies. You can already see the difficulty that older operations, those that did not benefit from the ICO boom, are having against teams with millions to throw around. How are the less well capitalised platforms and projects going to compete with companies who have billions?
