The whole ICO phase of this market is based on one picture which may be wrong and if it is right 99% of ICOs are doomed (and that’s OK)


#1

This is the picture, which comes from Fred Wilson (read AVC in case you don’t know him). Actually two pictures as they “paint a thousand words” about the fundamental shift between the Dot Com era and the Blockchain, Bitcoin and Crypto era.

Side Note: we need something simpler to describe this era. Blockchain is not right as there are other non-blockchain ways to do immutable consensus and Blockchain, Bitcoin and Crypto is too long.

There are two possibilities here:

One: this theory is wrong. The big value creation will be at the App level of the stack.

Two: this theory is correct.

I incline to Two. I think the theory is correct and most or the value creation will be at the Protocol layer. That is where 1,000x returns will be found. That is also where 99% of ventures at the Protocol layer will fail. Not 90%, which used to be the old startup rule, but 99%. If we get 1,000 ICOs, maybe 1% will be big (and they will be humungously big). That is only 10 ventures. I suspect we will have something like 500 ICOs at the protocol layer. That 99% failure rate translates to 5 ventures making 1,000x and 495 ventures failing.

This is the 99/1/1000 risk profile.

That boring app layer is also huge because of two numbers - 40% and 90%. Financial Services accounts for as much as 40% of corporate profits and as much as 90% of that 40% can be digitised/automated. It is not just Financial Services firms that make money from money. Many big non-financial companies make a big % of their profits from services such as Lending (to customers and suppliers, think GE and Amazon) or Payments (think Alibaba, Apple, Facebook, Google etc). So there is a lot at stake. As money makes the world go around, innovation in other areas (such as health or energy) are also dependent on Finance.

So the App layer is also huge and it has a totally different risk profile. This is more like the old 90/10/10 rule. 90% of startups fail, 10% make 10x returns. Actually it is more like 10x to 100x depending on what stage you enter. The key point is the risk is lower than at the protocol layer and with 90% of 40% of corporate profits to play with, you won’t run out of opportunity. That is why at Daily Fintech we spend 99% of our time at the App layer of the stack.

The reason why the protocol layer is a 99/1/1000 risk profile is very simple - network effects. It is why I describe myself as an economic Bitcoin maximalist. All this talk of TCP/IP of money is a mirage.

ICO is a phase of the market. It is bubbly for sure and that’s OK. Without irrational exuberance we would not have most innovations (including Ethereum). The best ICO IMHO is MarmotCoin by @prestonbyrne We will know we have reached the top of the rollercoaster when Preston confirms he raised $100m in 10 seconds for the best ICO joke.

The next phase is when Innovation Capital will totally change. This is when all assets are tokenised and traded/settled in real time. This will drive innovation in things that really matter like new healthtech or cleantech. This will use the protocol layer ventures. But how many? The Dot Com era used TCP/IP. There were not multiple TCP/IP like protocols. There was one. There might be two protocol layer ventures for App layer developers to use. One could at a stretch conceive of 3 to 5. But not more than that.

For a discussion about the TCP/IP of money mirage from 2014, please go to this post:

and read Preston Byrne’s take on it: