building open protocol ventures
TRANSCRIPT
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Building Open Protocol Ventures
tom ding @string labs
ETH Silicon Valley Meetup | Sep 4,2016
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protocol noun.
a system of rules that explain the correct conduct and procedures to be followed in formal situations.
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State-less / Non-economic protocols, e.g. BitTorrent
Cryptoeconomic Network Protocols, e.g. Ethereum
Open Business Protocols, e.g. Gnosis, Supply Chain systems
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Diff. classes of protocols
{
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protocol opportunities novel biz model | defendability laws & regulations
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Promise of the Internet:
More Equalized Economy
democratizes participation, but also creates massively powerful monopolies
that are just networks/platforms
Reality is more complex:
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What are blockchain systems valuable for?
Can It do better than these monopolies?
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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
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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
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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
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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:
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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.)
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• 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
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E.g: Uber v. d-Uber
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• 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
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E.g: Phi v. P2P Lending v. Commercial banking
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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
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• Potentially slower technical evolution
• Dilution of responsibility & incentive
• trade off for more scalable contributor network / mass incentives
• Public protocol governance
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Challenges with Open Protocols
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protocol opportunities novel biz model | defendability laws & regulations
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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
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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.
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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>
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New paradigm: Open Business Network
public topology permission-less platform regulatory shift to => edge network effect still exist but diff.
Radical Openness
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Not all network effect created equal
Metcalfe’s Law
Value of a network proportional to square of of
connected users
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
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Facebook’s evolution
A Simple Network:social users interacting with
each other
Platform:Open Platform with
additional applications
Marketplace:Matching Ads with User
interactions
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• Exchange: Liquidity
• Platform: Developer support
• Ecosystem: service provider support, e.g. Identity system KYC providers
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Open Network defendability
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• 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.
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Business Models for Open Protocol
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• Massive opportunities to create “RocketInternet” of in the crypto world to disrupt existing intermediaries
• Mesh with venture capital model
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“The Rocket Crypto Model”
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protocol opportunities novel biz model | defendability laws & regulations
FOLLOWING ARE NOT LEGAL CONSULTATION OR ADVICES
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• 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
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E-GOLD
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(1) Standardize rights & responsibilities -> reduced tx cost
(2) Restrict contracting scope
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Why Securities Law? (when we had contract law, properties law, etc.)
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• 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,
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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)
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• All Securities require to be registered with SEC, with a few exemptions: private deals, intl., JOBS Act, & etc.
• Constraints on transfer of restricted securities
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Development of Securities Regulation
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• 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
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• 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
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Federal / State regs for money service business
Source (Mar 2013): https://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html
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String Labs <an open protocol development studio>
http://string.technology
Tom Ding
https://medium.com/@tom_ding email: [email protected]