Learn about new ways to fund non encrypted projects with cryptocurrency

One of the main trends we have seen in the past 10 years is the rise of cryptocurrencies. Although it is often "diss" by some powerful elders, cryptocurrency is still growing. The design space of cryptocurrency is large enough to support innovation on at least the same scale as the Internet. It allows hackers, open source developers and entrepreneurs to use cryptocurrency to build new infrastructure and applications without trust. Because of this, hot money continues to enter this field.

The scale of venture capital funds in the field of cryptocurrency / blockchain in the past six years. Data source: Galaxy digital

Nevertheless, this field is still very young and in a state of lack of a large number of infrastructure, which is likely to produce a large number of new applications. Therefore, it is not surprising that there are funds to invest in cryptocurrency through venture capital companies. In fact, they are already happening.

But from another perspective, can cryptocurrency reverse fund to the field of non cryptocurrency?

For me, this has always been an interesting and worthy of in-depth thinking. Because only when cryptocurrency is closely combined with the technology and innovation that promote human productivity, can the full power of cryptocurrency be fully released. In the recent first round of funding from BNB grant Dao, there are at least five tracks in cutting-edge technology alone, which is committed to providing support to teams engaged in research in open source quantum software, space technology and other fields. This is the first time that the dorahacks community has used cryptocurrency to fund buidler in the field of non cryptocurrency. Can we turn it into a long-term effort to support more meaningful projects? Can we further expand the scale? Let's try to discuss it in this article.

First, the use of cryptocurrency financing has shown some obvious advantages:

  1. Fast and affordable global payment services without compromising compliance

  2. High liquidity

  3. Reduce the emergence of old-age regimes. Old age regime is a form of oligarchy in which an entity is ruled by leaders who are significantly older than the majority of the adult population

  4. Community support

  5. Open source and more collaborative culture

But even if cryptocurrency has all these advantages, we still haven't seen any emerging industries funded by cryptocurrency.

What are the concerns about not using cryptocurrency for financing?

Most people in the world use legal tender, and most enterprises / organizations also use legal tender. If we want to fund anything with cryptocurrency, we need to raise the awareness of individuals and organizations about cryptocurrency. In order for people / organizations to accept and be willing to use cryptocurrency, we may need to solve three main problems:

  1. Stability: most companies want a stable currency.

  2. Compliance: the funds must meet the regulatory requirements and the legal requirements of the "anti money laundering" law.

  3. Convenient conversion between cryptocurrency and legal currency: most supply chains use legal currency, and employees still need legal currency in their daily life. Therefore, once cryptocurrency / stable currency is used for financing, the rapid conversion between cryptocurrency and legal currency is very important. This problem will remain until cryptocurrency is widely adopted.

Technically speaking, 1:1 linked stable currency (such as circle's)USDC)It can meet all the above requirements. Although for real large-scale transactions, the stable currency may not have enough liquidity. However, the current stable currency market can definitely support transactions of hundreds of millions of dollars.

If we want to further expand its scale, we need more cryptocurrency adoption. Some statistics show that as of 2021, the adoption rate of cryptocurrency in the world is only 3.9%, and only more than 18000 enterprises are willing to accept encrypted payment. Suppose that the adoption rate of cryptocurrency increases by 10 times and the adoption rate of enterprises increases by 100 times. In this case, stable currency and cryptocurrency can provide better liquidity and have the ability to handle larger transactions.

It is worth noting that the change of adoption rate takes time. From 1990 to 2010, it took about 20 years for the Internet to reach 70% adoption rate worldwide.

Effectively unify token economy and profitability

Another major obstacle currently encountered is the "inconsistency" between the token economy and its profitability.

In cryptocurrency, value is created by token economy. In business, value is calculated based on the ability to make profits (or future profits). If we draw these two regions in the Venn diagram, the two regions do not overlap from the beginning.

Token economics is based on the token utility of a product (network, infrastructure or application). The value of some cryptocurrencies depends on their scarcity(Bitcoin, and possibly NFT), while the value of some other cryptocurrencies depends on their utility / exchange speed (BNB,EthereumEtc.). Because the price of token is driven by demand and supply, the utility of token determines its price to a great extent. Taking the utility of gas token as an example, as more transactions compete for block space on Ethereum network, it is right ETH The demand for will continue to rise, driving up prices. This is why the concept of "building an ecosystem" is important for layer1. With more use cases and applications, more users will join, and more transactions will occur on the network, resulting in more demand for tokens.

In the business world, the value of a company is based on its profitability. Compared with the commercial valuation model, so far, cryptocurrency does not even have a standard valuation method, which is one of the reasons for the large fluctuation of cryptocurrency market.

Venn diagram of token economy and profitability, from separation to overlap.

Although token economy and profitability seem to be completely different beasts, they are not so different in fact. At least, there are some overlaps. Here are some examples:

  1. Ethereum's gas fee can be regarded as the income of the network. Miners and Pledgors make profits in the form of eth, while network users (EOA / smart contract) pay gas fees. It is reported that the gas fee revenue of Ethereum network in the first quarter of 2022 was $2.4 billion. The profits are distributed to the miners first and then to the Pledgors.

  2. The value of defi agreement governance token fundamentally depends on its profitability. It is worth noting that the defi agreement does have a clear profit model, which usually collects commissions from transactions, but mainly distributes the commissions to LP token holders rather than collecting them centrally.

  3. Users can exchange tokens using a centralized exchange, obtain distribution from a new token list, or pledge to reduce transaction costs. These tokens are essentially part of the value of a centralized exchange because they represent part of the profits that the exchange is willing to give to the community.

So what's the difference between token economy and profitability? The answer is "decentralization". Token economics essentially disperses profits to communities and allows token communities to participate in governance, although the governance part is usually optional.

This also applies to non-profit Daos. Examples of non-profit Daos include daoized non-profit organizations and fee free agreements (such as gnosis safe). Unprofitable Daos can only rely on donations, and the tokens of these Daos can only obtain governance value, depending on the size of their vaults.

When the contemporary currency economy and profitability begin to overlap, we will have the following two possible model situations.

We can see three regions: pure token economy (a), pure profitability (c) and coincidence point (b). The following are their general meanings:

A - value storage

B - profit spread to community

C - centralized profit

Companies that decentralize profits and governance to communities can shift from centralization to Decentralization (at least in part).

Make it possible for cryptocurrency to fund all enterprises

1. Use stable currency as equity financing

The first step is not to change the organizational structure, but to use the stable currency as the financing currency. This is actually very useful, because using stable currency is easier, faster and cheaper than legal tender.

2. Provide venture capital for enterprises in the early stage of development through cryptocurrency donations and grants

In the early stage of development, enterprises usually lack funds for two reasons: uncertainty and lack of liquidity. At the same time, enterprises in the early stage urgently need financial support. Cryptocurrency can solve this problem by contacting and cooperating with early community supporters and matching grant funds for the project. This has happened on platforms like dorahacks. It is worth noting that this is more exciting than using only stable currencies as equity financing.

From the adoption of stable currency financing to the large-scale adoption of token economy and cutting-edge technology financing, we can do more when we shift from legal currency funds to cryptocurrency funds.

3. Funding cutting-edge technologies

Since the Internet boom in the 1990s, private investment has provided too much funding for the Internet and insufficient funding for many cutting-edge technologies. Human space exploration is an example - the last time humans landed on the moon was in the 1960s. Only in the past few years, due to the decline of the growth rate of the Internet, the investment focus began to shift from the Internet to blockchain technology, artificial intelligence, renewable energy and commercial space technology.

On the other hand, there are often gatekeepers from the so-called "mature" industry, who will naturally hinder the birth of new ideas. When Warren Buffett constantly belittles cryptocurrency and ignores the progress of the whole industry, any portfolio company under his control is unlikely to accept cryptocurrency, even if they are willing to do so.

Therefore, exploring the ways and possibilities of cryptocurrency funding cutting-edge technologies is not only more urgent, but also more feasible.

We can draw an industrial development timeline centered on cryptocurrency. The industry from the left to cryptocurrency is a "mature" industry. The industry from cryptocurrency to the right is an emerging industry. For cryptocurrency, it is easier and more important to fund emerging industries than old industries.

4. Integration of token economy and profitability

For a long time, there has been a feeling of "political correctness" in the cryptocurrency community, that is, the confrontation between decentralization and centralization. This is true when it comes to centralized power doing evil, but it is not always true. In the long run, any technology will become important only when it improves productivity, creates opportunities and makes people's lives better. Over time, there will be fewer and fewer "pure decentralization" or "pure centralization" organizations, and the area B in the Venn diagram will become larger and larger, eventually forming a larger cake.

conclusion

Investing cryptocurrencies in non cryptocurrencies is exciting and feasible. It can speed up venture capital, help early buidlers create more dynamic communities, and fund underfunded projects in the legal world.

Concerns about using cryptocurrency to fund non cryptocurrency enterprises include stability, liquidity and compliance, which can be solved.

Although the widespread use of cryptocurrency will take time, we can take some measures to accelerate this goal. The design space of cryptocurrency is infinite. Examples we can do in the short term include:

(1) Use stable currency for equity financing;

(2) Early start-up grants and use of cryptocurrency to fund start-ups;

(3) Using cryptocurrency to fund cutting-edge technologies;

(4) Further explore the integration of token economy and profitability.