One major trend we have seen over the past 10 years is the rise of cryptocurrencies. Despite being often “dissed” by some powerful elders, cryptocurrencies are still going from strength to strength. The design space for cryptocurrencies is large enough to support innovation at least on the same scale as the Internet, allowing hackers, open source developers, and entrepreneurs to use cryptocurrencies to build new, trustless infrastructure and applications. It is precisely because of this that hot money continues to enter this field.
The size of venture capital funding in the cryptocurrency/blockchain space over the past 6 years. Data source: Galaxy Digital
Nonetheless, the field is still young and lacks a lot of infrastructure, and this infrastructure to be replenished is likely to yield a large number of new applications. Therefore, it is not surprising that there is money invested in the cryptocurrency space through venture capital firms. In fact, they are already happening.
But from another perspective, can cryptocurrencies be reverse funded to non-cryptocurrency fields?
For me, this has always been an interesting and thought-provoking question. Because the full power of cryptocurrencies can only be unlocked when they are closely integrated with the technologies and innovations that drive human productivity. In the recent first round of BNB Grant DAO funding, there are at least 5 tracks in the frontier technology track, dedicated to providing support for teams conducting research in open source quantum software, space technology and other fields. This is the first time the DoraHacks community has used cryptocurrencies to fund BUIDLers in the non-cryptocurrency space. Can we turn it into a long-term effort to support more meaningful projects? Can we scale further? Let’s try to explore in this article.
First, the use of cryptocurrency for financing has shown some clear advantages:
- Fast and affordable global payment services without compromising compliance
- high liquidity
- Reduce the emergence of old age regimes. (Translator’s Note: A geriatric regime is a form of oligarchy in which an entity is ruled by a leader significantly older than the majority of the adult population.)
- community support
- An open source and more collaborative culture…
But even with all these advantages cryptocurrencies have, we still haven’t seen any emerging industries being funded by cryptocurrencies.
What are the concerns of not using cryptocurrencies for financing?
Most people in the world use fiat currency, and most businesses/organizations also use fiat currency. If we want to fund anything with cryptocurrencies, we need to raise awareness of cryptocurrencies among individuals and organizations. In order for people/organizations to accept and be willing to use cryptocurrencies, we may need to address three main issues:
- Stability: Most businesses want a stable currency.
- Compliance: Funds must meet regulatory requirements and comply with legal requirements such as Anti-Money Laundering laws.
- Convenient conversion between cryptocurrency and fiat: Most supply chains use fiat, and employees still need fiat in their daily lives, so once cryptocurrencies/stablecoins are used for financing, fast conversion between cryptocurrencies and fiat is critical. This problem will remain until cryptocurrencies are not adopted on a mass scale.
Technically, a 1:1 pegged stablecoin (like Circle’s USDC) can meet all of the above requirements. Although for truly large-scale transactions, stablecoins may not have enough liquidity. However, the current stablecoin market can definitely support transactions on the scale of hundreds of millions of dollars.
If we want to scale it further, we need more cryptocurrency adoption. Some statistics show that as of 2021, the global adoption rate of cryptocurrencies is only 3.9%, and only more than 18,000 businesses are willing to accept crypto payments. Assume a 10x increase in cryptocurrency adoption and a 100x increase in enterprise adoption. In this case, stablecoins and cryptocurrencies can provide better liquidity and the ability to handle larger-scale transactions.
It’s worth noting that changes in adoption rates take time. From 1990 to 2010, it took about 20 years for the Internet to reach 70% adoption rate worldwide.
Effectively unifying token economics and profitability
Another major obstacle currently encountered is the “inconsistency” between the token economy and its profitability.
In cryptocurrencies, value is created by the token economy. In business, value is calculated based on the ability to make money (or to make money in the future). If we draw these two regions in a Venn diagram, then from the beginning, the two regions do not overlap.
Token economics is the utility of a token based on a product (network, infrastructure or application). The value of some cryptocurrencies is determined by their scarcity (Bitcoin, possibly NFTs), while the value of others is determined by their utility/speed of exchange (BNB, Ethereum, etc.). Since token prices are driven by demand and supply, the utility of a token largely determines its price. Taking the utility of gas fee tokens as an example, as more transactions compete for block space on the Ethereum network, the demand for ETH will continue to rise, driving the price to continue to rise. This is why the concept of “building an ecosystem” is important to Layer1. With more use cases and applications, more users will join, and more transactions will happen on the network, resulting in more demand for the token.
In the business world, a company’s value is based on its profitability. Compared to commercial valuation models, there is not even a standard way of valuing cryptocurrencies so far, which is one of the reasons why the cryptocurrency market is more volatile.
A Venn diagram of token economics and profitability, from separation to overlap.
While token economics and profitability may seem like completely different beasts, they are actually not that different. At least, there is some overlap. Here are a few examples:
- Ethereum’s gas fee can be seen as the network’s revenue. Miners and stakers earn in the form of ETH, and network users (EOA/smart contracts) pay gas. The Ethereum network reported gas fee revenue of $2.4 billion in the first quarter of 2022. Profits are distributed first to miners and then to stakers.
- The value of a Defi protocol governance token is fundamentally dependent on its profitability. It is worth noting that the Defi protocol does have a clear profit model, usually collecting commissions from transactions, but the commissions are mainly distributed to LP token holders instead of centralized collection.
- Users can exchange tokens using centralized exchanges, receive allocations from a new list of tokens, or staking to reduce transaction fees. These tokens are essentially capturing a portion of the value of the centralized exchange, as they represent a portion of the profit that the exchange is willing to give the community.
So, what exactly is the difference between token economics and profitability? The answer is “decentralization”. Token economics essentially distributes profits to the community while allowing the token community to participate in governance, although the governance part is usually optional.
This also applies to non-profit DAOs. Examples of non-profit DAOs include DAO-based non-profit organizations and no-fee protocols (such as Gnosis SAFE). Unprofitable DAOs can only rely on donations, and the tokens of these DAOs can only capture governance value, depending on the size of their vaults.
When token economics and profitability begin to overlap, we have the following two possible model scenarios.
We can see three areas: pure token economy (A), pure profitability (C), and coincidence point (B). Here is their general meaning:
A – Store of Value
B – Profits are distributed to the community
C – Centralized Profit
Companies that decentralize profits and governance to the community can move from centralization to decentralization (at least partially).
Making it possible for cryptocurrencies to fund all businesses
1. Using Stablecoins as Equity Funding
The first step is to not change the organizational structure and just use stablecoins as funding currency. This is actually already useful because it is easier, faster and cheaper to use stablecoins than fiat currencies.
2. Provide venture capital to early-stage businesses through cryptocurrency donations and grants
Businesses in the early stages of development are often underfunded for two reasons: uncertainty and lack of liquidity. At the same time, early-stage companies are already in desperate need of financial support. Cryptocurrencies can solve this problem by engaging and partnering with early community backers to match projects with grant funding. This is already happening on platforms like DoraHacks. Notably, this is more exciting than just using stablecoins for equity funding.
From the adoption of stablecoin financing to the mass adoption of token economics and leading edge technology financing, we can do so much more when we move from fiat money to crypto money.
3. Funding cutting-edge technologies
Since the Internet boom of the 1990s, private investment has overfunded the Internet and underfunded many cutting-edge technologies. Human space exploration is an example – the last time humans landed on the moon was in the 1960s. It’s only in the past few years that the focus of investment has shifted from the internet to blockchain technology, artificial intelligence, renewable energy and commercial space technology due to the slowdown in internet growth.
On the other hand, there are often gatekeepers from so-called “mature” industries who naturally block the birth of new ideas. When Warren Buffett keeps disparaging cryptocurrencies and ignoring the advancement of the industry as a whole, it is unlikely that any of the portfolio companies under his control will embrace cryptocurrencies, even if they were willing to do so.
Therefore, exploring the ways and possibilities of cryptocurrency funding cutting-edge technologies is not only more urgent, but more feasible.
We can draw an industry development timeline with cryptocurrency as the center. The industry on the left to cryptocurrencies is the “mature” industry. The industries starting with cryptocurrencies to the right are emerging industries. Funding new industries is easier and more important for cryptocurrencies than funding old ones.
4. Convergence of Token Economics and Profitability
There has long been a “politically correct” sentiment within the cryptocurrency community, where decentralization and centralization are pitted against each other. This is true, but not always true, when it comes to centralized power doing evil. In the long run, any technology will only matter if it increases productivity, creates opportunities, and makes people’s lives better. Over time, there will be fewer and fewer “purely decentralized” or “purely centralized” organizations, and area B in the Venn diagram will get bigger and bigger, eventually forming a bigger pie.
Investing cryptocurrencies into non-cryptocurrency areas is exciting and feasible. It can speed up venture capital, help early BUIDLers create more vibrant communities, and fund underfunded projects in the fiat world.
Concerns about using cryptocurrencies to fund non-crypto businesses include stability, liquidity, and compliance, which can all be addressed.
While widespread adoption of cryptocurrencies will take time, there are things we can do to accelerate this. The design space for cryptocurrencies is limitless. Examples of what we can do in the short term include:
(1) Use stablecoins for equity financing;
(2) Funding early-stage startups through donations and grants using cryptocurrencies;
(3) Use cryptocurrencies to fund cutting-edge technologies;
(4) Further explore the integration of token economy and profitability.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/article-about-new-ways-to-fund-non-crypto-projects-with-cryptocurrencies/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.