Wendy Xiao sa, a venture capitalist at Northzone, about how to use the capital raised blockchain startups.
During the ICO it was possible to attract about $ 5 billion, but the value of cryptocurrency startups remains unreliable, and it is tempting to call what is happening on the market a bubble.
![](https://steemitimages.com/DQmdr3Z4zgDqY4JQwkXnoK1gRAvRSh2aziseVomcTtCGX59/image.png)
However, it is more likely that the world of cryptocurrencies is governed by the same forces that gave us incredible changes in the technology market. Yes, perhaps, it is really a bubble, but the key difference between Tulip bulbs and cryptocurrencies is how speculative capital is used: in the first case, it is spent on the production of an asset, and in the second — on the development of technology.
Be that as it may, money alone does not guarantee success, so I spent a lot of time thinking about placing capital on the cryptocurrency market. I am convinced that this topic deserves much more attention, because it can be used to demonstrate the long-term prospects of this market.
In addition, the next five years the placement of capital will be an important area of competitive advantage of cryptocurrency projects. This is due to their important difference from the centralized technology companies to which we had time to get used.
Entrepreneurs working on decentralized projects cannot scale a business simply by hiring a team of top managers, and then adding the Vice President for each new function, forming a kind of pyramid structure.
All the money and effort in such a project should go to strengthening the value of the platform, and not to develop the organization itself.
This leads to the fact that the success in this paradigm is achieved mainly by entrepreneurs with a very special mentality. In addition, the allocation of capital for the development of decentralized systems is a new, unexplored area. Fortunately, tokens proved to be a very effective tool for motivating investors. What is most remarkable, their acquisition does not limit the people who are directly related to the organization, as is the case with securities.
It is logical that the system should reward participants in proportion to the amount of work they do to develop the platform.
If we look at the growth dynamics of bitcoin (Bitcoin) and ether, we see that at the beginning of mining was a very elegant mechanism of capital placement. Alas, and this model still needs some revision — in its current form, it does not encourage small players to participate fully. This, however, is a topic for another post.
Tidbit
I would like to point out that this is just a hypothesis, not backed up by any data, except for a few projects, which I think confirm my assumption.
I have long thought that token sales should be used as a mechanism to raise capital only as long as the centralized management of the platform remains a more profitable strategy — and this is probably true only at the stage of product development.
After that the most effective way to ensure user input into the system will be a well thought out system of incentives (free distribution of tokens, mining or perhaps some other, quite a new approach), which will allow users to directly enjoy its benefits.
In other words, if we simply describe the growth of the platform's value, excluding speculative effects (see the graph below), any excess funding received by the team before the "breakpoint" will result in loss of value for future participants.
In this case, the rapid growth of the token value plays into the hands of the team rather than the project. At the same time, the team needs to figure out how to redistribute the attracted capital in a decentralized system, while ensuring profitability for any Unallocated capital.
If the team has already followed this path, one way to minimize the losses associated with inefficient placement of capital is to ensure that the remuneration of participants is calculated as a percentage of the total value of the network.
Alas, it is not so easy in the case of platforms that are already estimated at billions of dollars.
![](https://steemitimages.com/DQme4Ch9fmRMud1CEqx2yAKCN2ETdNQsNt4aRr3FxVwwDHz/image.png)
However, my hypothesis does not take into account other variants of capital placement, such as business development or investments in application development for the platform.
I would suggest that such tasks can seriously distract developers in the early stages of work on the project. However, the question of whether the depositors, who became rich as a result of a rapid increase in the price of a token, are able to best cope with the challenges in the field of business development and investment, remains open. If we take bitcoin and ether as an example again, it turns out that such investors have indeed made a significant contribution to the development of both ecosystems.
Free token distribution
I may be overly influenced by the experience of venture capital investment, but now it seems to me that this hypothesis is confirmed in the market, where large investors Finance teams at an early stage and take risks associated with product development, and the public joins later.
Only six months ago, the situation on the market was markedly different; in part, changes are associated with regulatory risk, in part — with market mechanisms of self-regulation. Building on this trend, I believe that free token distribution should become the norm for the next development phase, as it is a great way to form a community of users after the initial product is created.
The free distribution of tokens is interesting because it can be the first stage of creating a large-scale incentive mechanism, which I mentioned above. The best mechanisms for distributing tokens should involve users who are able to provide the platform with the greatest value, and their distribution should be based on their potential contribution to its development.
By distributing tokens according to this model, it is possible to effectively stimulate the use of the platform, since the idea of its "free"is added to the marginal usefulness of the product. However, users can decide that the product should be free for them always and regardless of their direct contribution.
Economists have long noticed that the subjective value of a product is directly related to how much of your own energy you spent on purchasing or developing it. This is perhaps another argument in favor of the free distribution of tokens modeled on mining: free tokens should go to a small group of enthusiasts who are ready to commit to the development of the project.
Speed is on our side
Finally, I want to note that in the field of cryptocurrencies, we often try to use financial incentives where previously we were content with social ones. I think that most teams underestimate the difficulty of creating an ideal model of financial incentives, because the possibilities seem endless.
But once we introduce a financial incentive mechanism into the equation, people quickly give up regulatory mechanisms of social origin, and it's very difficult to change that. Therefore, in our experiments, we need to understand that financial incentives can change some of the models beyond recognition, and not always for the better.
Perhaps we should not abandon the social stimuli at all, but to think about how to Supplement them with financial incentives for more sustainable growth.
Overall, I am very optimistic. Only recently has mankind been able to establish a stable monetary and financial system suitable for most of the world's enterprises, and the result has been a sharp increase in the economy. And the blockchain technology, without a doubt, will allow us to experiment and create new mechanisms for market coordination faster and more efficiently.