The Decentralized Future Series

Bitcoin Whitepaper</a> he defined it as a peer to peer electronic cash system. Its main achievement was solving the <a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Double-spending/">double spending problem</a> without any centralized authority. It was a significant leap, allowing us to transact without intermediaries. It’s not a coincidence that the whitepaper was published after the 2008 subprime mortgage crisis. Just like the printing press removed the power of knowledge from governments and religions, Bitcoin and other cryptocurrencies give people the tools to control their own money.\nBitcoin kickstarted the so-called decentralized future<a href=https://www.ycombinator.com/"#footnote1\">1</a>, where products could be built not by centralized companies or authorities but by groups of peers that work together towards a common goal. These new products would exhibit the main features and benefits of Bitcoin. Let’s dive into the clear use cases.\n<h2>1 – A New Asset Class</h2>\nWith most cryptocurrencies anyone can make transactions but, once they are confirmed, nobody can alter or roll them back. They are tamper-proof. Most cryptocurrencies also have a limited supply of coins by design. The maximum number of coins is set in the source code and nobody can create more. Bitcoin, Litecoin, and Monero are examples of this. And its value isn’t stored in a physical object therefore nobody can destroy or <a href=https://www.ycombinator.com/"https://twitter.com/AriDavidPaul/status/941832482256592896/">seize your coins</a>.\nThis property leads to the first real use case of cryptocurrencies, a digital store of value. Bitcoin is probably the best-positioned to dominate this use case because it’s the most adopted and its network is the most secure because it has the most miners. So far, we have seen adoption by citizens in countries with record-setting inflation rates like Venezuela<a href=https://www.ycombinator.com/"#footnote2\">2</a>.\nHowever, for first world countries and their institutions to take the Bitcoin market seriously it needs to grow. The gold market sits at around $7T<a href=https://www.ycombinator.com/"#footnote3\">3</a>, and the offshore-account market is about $30T<a href=https://www.ycombinator.com/"#footnote4\">4</a>. The Bitcoin network value now is around $130 billion, so there’s still a long way to go. The release of futures by the CME and rumours about a potential ETF are signs that point in the direction that adoption is going to keep increasing.\nInvesting in crypto assets to gain a financial return has been incredibly profitable for the last few years. However, skeptics would quickly remind you that it has been a market with high volatility and big doses of speculation. That said, cryptocurrencies and crypto assets might be the philosopher’s stone of a modern portfolio. Chris Burniske and Jack Tatar suggest that crypto assets have low/negative correlation with traditional asset classes<a href=https://www.ycombinator.com/"#footnote5\">5</a>. They could offer diversification and thus, reduce the risk of your portfolio. The asset class is starting to gain traction as an investment; according to a Citi report, it amounts to several GDP points in countries like Russia, New Zealand, Nigeria, and the UK<a href=https://www.ycombinator.com/"#footnote6\">6</a>.\nThere are still significant risks when you use cryptocurrencies as a way to store your wealth or as an investment. The price volatility is an emotional test for investors, seeing them decrease by 60% in a week is not easy to stomach. Investing in it and keeping your investment safe is not simple. Your private keys can be damaged, lost forever, or stolen. Nobody can save you if it happens. Nobody can rollback illegal transactions made with your private keys. Multisig wallets, hardware wallets, time-locks and vaults are initial attempts to solve this problem but they are way too complicated for the normal user. In the next few years, custody is going to become more and more critical, and a new industry will be created to solve it.\n<h2>2 – Disintermediation</h2>\nThanks to blockchain technology, all transactions included in the ledger can never be altered. Every transaction contains an identifier from the previous one and you cannot change the ID without changing the content. That makes this ledger immutable and tamper-proof. Today, we resort to many layers of documentation and mediators to ensure that transactions happen. In many cases it is more costly and time consuming to prove that you did something than actually doing the work. You can see this behavior in real estate property rights and transfers.\nMany people would argue that all you need to solve this excess of paperwork is a good distributed database. However, a distributed database without incentives wouldn’t be maintained but if this distributed database is maintained by a company, you are trusting a third party. When you put sensitive data in the hands of a single trusted entity like a health company, a bank or Equifax, your information is eventually going to get exposed<a href=https://www.ycombinator.com/"#footnote7\">7</a>. The question is not whether they are going to be hacked or not, the question is when. These are natural honeypots for hackers.\nAnother benefit of removing intermediaries is that you can perform tasks that were prohibitive before because of pricing. Now, with LTC or the Bitcoin Lightning Network you can send cents or fraction of cents to anyone in the world with nearly zero fees. Micropayments may seem like a pretty niche use case. Many people would be right to remind us than Venmo, Paypal and other solutions work perfectly for us today. Why do we need an alternative? How often do we send fraction of cents?\nA compelling answer may be then that six billion people don’t have access to these applications, let alone bank accounts. Andreas Antonopoulos argues that the same way many developing countries leapfrogged directly into mobile phones and skipped landlines, they will skip traditional banking and have a crypto account in their mobile phone<a href=https://www.ycombinator.com/"#footnote8\">8</a>. They will still need to compete with services such as <a href=https://www.ycombinator.com/"https://www.mpesa.in//">M-Pesa that attempt to solve this problem and are quite mature.\nCryptocurrencies provide a clear path to transact without borders and offer banking resources to the unbanked. In order to do so, they need to improve their wallet user experience considerably. Clearer and more natural ways to convert to/from fiat currencies are also needed.\n<h2>3 – Governance</h2>\nThe Bitcoin whitepaper also created a network of participants that collaborated on a single project without knowing each other. Bitcoin has a primitive governance mechanism that ensures that the incentives are aligned. Mutual trust is built-in, enforced, and ensured by the miners.\n<a href=https://www.ycombinator.com/"https://medium.com/@homakov/stop-calling-bitcoin-decentralized-cb703d69dc27/">“But miners are centralized!”</a> Yes, they are to some degree. Decentralization is not black or white, it is a range and it is going to <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/crypto-evolution//">keep evolving</a>. We can see Bitcoin as the first iteration. It is just the starting point. The mechanism for change and how to evolve a network based on consensus from the participants is what matters. <a href=https://www.ycombinator.com/"https://dfinity.org//">Dfinity, <a href=https://www.ycombinator.com/"https://www.tezos.com//">Tezos or <a href=https://www.ycombinator.com/"https://aragon.one//">Aragon are exploring this space further.\nWe also touched on incentive alignment. The average tenure of an employee in Silicon Valley is less than two years<a href=https://www.ycombinator.com/"#footnote9\">9</a>. One of the causes is the lack of alignment between employees and the owners. This is called the <a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Principal–agent_problem/">Principal-Agent Problem</a>. Every group of people has principals (owners) and agents (employees) and it is easy for them to become misaligned. What may be good for the employee may not be good for the company. In startups, principals and agents are the same. That’s why they are all really motivated to work together and can create enormous amount of progress in small periods of time. The velocity in crypto development teams like Ethereum exhibit this same energy along a greater number of participants.\nAnother interesting parallel happens between startups and cryptocurrencies. Most corporations govern by law and process. Startups in their early stages govern with a limited process. Most actions occur implicitly, built on trust. As companies get bigger, you have to deal with procedures and rules to get anything done. An avid reader may note that Bitcoin’s community lack of consensus also stalled the network and it precipitated the creation of several forks like Bitcoin Cash. The difference here is that there is a mechanism for evolution (forks) and the decisions are taken by all the participants, not just by the owners (consensus mechanism).\nCryptocurrencies provide a way of organizing people at scale with the potential to prevent the Principal-Agent problem and the <a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Tragedy_of_the_commons/">tragedy of the commons</a>. Bitcoin participants were so aligned, and the network effect was so strong that they ended up creating the <a href=https://www.ycombinator.com/"http://jasondrowley.com/2015/12/04/the-bitcoin-network-is-11000x-faster-than-the-top-500-supercomputers-combined//">most prominent computer network</a>.\n<h2>4 – Tokens</h2>\nBitcoin is also programmable. It’s programmable money. You can define certain conditions to trigger transactions if they are met. For example, if you want to add extra security you could say that any transaction bigger than $1,000 USD needs to be verified by both you and your father. Ethereum took the concept a step further and supported more complex functionality in its <a href=https://www.ycombinator.com/"https://github.com/ethereum/wiki/wiki/White-Paper/">smart contracts</a>. Everyone can now create their own token that models their network, assets or team and distribute it accordingly. We wrote more about this <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/the-token-effect//">token effect here</a>.\nThe token conversation is particularly confusing because of the variety of tokens and use cases they support. Tokens are being used to raise money through <a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Initial_coin_offering/">ICOs. They are a way to raise funding from many contributors. It is important to note that you can also have a cryptocurrency or token without raising money through an ICO. Bitcoin or Litecoin never did an ICO.\nA common question about raising money through tokens is “how are they different from crowdfunding?” There are three key differences. First, you don’t trust any centralized entity to do the fundraising. Second, you have a lot more flexibility in what you can offer to your contributors (equity included). Third, contributors can transfer their assets instantly and easily to other people (pending regulation).\nTokens can be used to incentivize participants and prevent the rent seeking behaviour that affects many communities and networks. This problem basically states that many participants of the network look to capture value without creating any. One specific version of this is spam. Any sufficiently adopted tool will see many people advertising their own endeavors for their own personal gain, decreasing the overall quality of the network and reducing trust. Online communities are littered with this problem and all of them devote countless amounts of time and money to keep the quality of their community safe from trolls and spammers.\nTokens resolve these two problems. You need to contribute if you want to participate in the network. If you want to run some code on Ethereum you need to pay for it. It basically makes spam and rent seeking costly and, ultimately, not viable. If you have an online community, in order to post you need to stake your reputation. If your post benefits the network, you get rewarded, if it doesn’t, you get penalized and next time you want to post you will be charged accordingly. <a href=https://www.ycombinator.com/"https://steemit.com//">Steemit is experimenting with some of these ideas.\nHistorically it’s been very complicated for companies to give equity to early adopters that help kickstart their products. Using tokens new companies can create network effects that help them compete with established incumbents. Tokens allow new ventures to bootstrap networks from the beginning with a solid wave of early adopters invested in their product that are committed to help it grow. Ethereum, from its inception and through its ICO, has created a strong decentralized community with skin in the game.\nExperts like David Sacks and Balaji Srinivasan believe that ownerships will get blockchained the same way content (video, text, and music) got packetized and sent over the internet<a href=https://www.ycombinator.com/"#footnote10\">10</a>. Once tokenized, they can be subdivided into near infinitely small pieces and exchanged freely, providing liquidity. Legal instruments of ownerships like deeds or securities will benefit from using a blockchain in terms of affecting transfers and chains of title. At the same time, it is also true that many things that are being tokenized now are just attempts of raising quick money from unwary investors. We need some type of regulation here and a solid framework to foster innovation while minimizing bad actors.\n<h2>5 – Power (And Data) To The People</h2>\nBitcoin is cryptographically secure. You can transact with other people without ever exposing your private key i.e the series of characters that give you access to your funds. It is like signing up to many websites on the internet without communicating your password.\nBitcoin has a 150 billion dollar bounty on it. So far the protocol has never been hacked. People may argue that Mt Gox, Okcheck, and other exchanges have been hacked, but Bitcoin the protocol has never been hacked. Exchanges, wallets, and custodians were compromised. Again, central, trusted parties can be hacked and will be hacked because they are honeypots.\nIn this day and age, we see hacks happening every week. We need to handle dozens of passwords with complex passwords managers. Blockchains and cryptocurrency will solve this problem. Using a <a href=https://www.ycombinator.com/"https://radarrelay.com//">Decentralized exchange</a> or playing <a href=https://www.ycombinator.com/"https://www.cryptokitties.co//">Crypto Kitties</a> without needing to create an account is a magic moment.\nYou can now own all your data and assets. Nobody can access your information without your private key. Third parties like social networks would not be able to benefit from it without your permission. Your privacy, finally, belongs to you. This use case is gaining adoption. For example, Microsoft is working on decentralized digital identities<a href=https://www.ycombinator.com/"#footnote11\">11</a>.\nHowever, right now you need to install browser extensions like <a href=https://www.ycombinator.com/"https://metamask.io//">Metamask to interact with websites that enable “crypto functionality”. They are still really clunky and the average user does not know they even exist. Native and more polished experiences both on web and mobile to sign and validate transactions need to happen for this to become meaningful. Until then, only tech savvy adopters will benefit from secure identification on niche use cases.\n<h2>6 – Permissionless Innovation</h2>\nBitcoin, Ethereum, and most cryptocurrencies are open source. Every person in the world can contribute and send a pull request. Innovation is pushed to the edges. Innovation is not controlled by Satoshi, Vitalik Buterin, or any group of developers. It is permissionless. You can rely on being able to build your business on top of it.\nThe Internet started the same way. It was built on open protocols like email or TCP/IP and everyone was able to create an easy to discover website. That’s not true in the internet anymore. Closed networks like Facebook or Twitter are gated communities that use their user data to gain an unfair advantage. They also have the potential to shut you down as soon as you compete with them or violate their ToS <a href=https://www.ycombinator.com/"#footnote12\">12</a> <a href=https://www.ycombinator.com/"#footnote13\">13</a> <a href=https://www.ycombinator.com/"#footnote14\">14</a>. And rightly so, they spent many years building their walled gardens and they don’t want to grow their successor in their yard.\nThese closed entities or corporations argue that it is all about blockchain, not about cryptocurrencies. They say that private blockchains would be used to empower business process and increase efficiency. In my opinion, a blockchain without a cryptocurrency is just a distributed ledger or a glorified spreadsheet. There is no censorship resistance, no alignment of incentives, no network effect, and no trustless collaboration. This is extremely important if we want to empower equal networks where any individual can participate without being censored.\nAn inclusive network allows any participant to innovate and the group benefits from it. Organizations and networks that restrict innovation will eventually stall and lose momentum. It already happened on the intranet vs internet debate. A lot of people argued for intranets at the beginning. They become really difficult to maintain and the content eventually stalls. A similar thing is happening between permissioned and permissionless blockchains right now. Permissioned blockchains will probably exist in closed organizations, but they will be interconnected by open permissionless blockchains.\nThese open blockchains are powering protocols that will support open and permissionless applications. Decentralized <a href=https://www.ycombinator.com/"https://truebit.io//">computing, <a href=https://www.ycombinator.com/"https://filecoin.io//">storage, and <a href=https://www.ycombinator.com/"https://0xproject.com//">payments are setting up the groundwork for the proclaimed next web<a href=https://www.ycombinator.com/"#footnote15\">15</a>. These decentralized alternatives are fighting a difficult battle because their unit economics and/or customer experience may not work better than centralized options like Amazon Web Services. Censorship resistant may not be appealing enough for end consumers in many applications.\nHowever, because of its permissionless nature, you now may access a global and decentralized world computer that nobody owns. Whether this world computer would become the new standard or just for use cases where censorship-resistance is important remains to be seen. It has been true in the past that open innovation trumps permissioned innovation and we can sincerely hope this trends continues. The alternative doesn’t look different from an Orwellian future where we use government cryptocurrencies. Everything is recorded but still in the possession of the few.\n<h2>Conclusion</h2>\nIn my opinion, real adoption is coming. There is an infrastructure inversion on the horizon. We have suffered several infrastructure inversions in the past century. They are never obvious, only in hindsight. Cars were made fun of when they got stuck in mud roads dominated by horses. Once the infrastructure switched and roads improved, horses could still walk on them, but cars got way faster. Telecommunication companies refused for years to switch from analog to digital to communicate more data. Once they did, it was trivial to run voice over their new infrastructure, but the other way around was almost impossible. I think the same is true with Bitcoin: traditional banking that takes days and charges high fees can be easily implemented on Bitcoin, but the opposite is not true.\nThat new infrastructure is being built today. During this series we are going to speak with subject experts that are building it to make these long held promises possible. We are going to release deep-dives on the following topics:\n<a href=https://www.ycombinator.com/"https://blog.ycombinator.com/the-decentralized-future-series-a-new-age-of-investing//">A New Age of Investing</a>. \nThe Future of Payments. \nThe Future of Organizations. \nTurning Assets into Tokens. \nSecurity starts with Identity. \nThe New World Computer.\nStay tuned and HODL on for more!\nNotes \n1. <a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Bitcoin#Decentralization\">Bitcoin Decentralization</a>. Wikipedia.<a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2. <a href=https://www.ycombinator.com/"https://www.economist.com/blogs/graphicdetail/2018/02/daily-chart-1/">When the prices are too damn high</a>. The Economist.<a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3. <a href=https://www.ycombinator.com/"https://www.fool.com/investing/2017/08/17/how-does-bitcoins-market-cap-stack-up-next-to-gold.aspx/">Bitcoin Market Cap vs Gold</a>.<a href=https://www.ycombinator.com/"#footnoteid3\">↩</a> \n4. <a href=https://www.ycombinator.com/"https://www.reuters.com/article/us-offshore-wealth/super-rich-hold-32-trillion-in-offshore-havens-idUSBRE86L03U20120722/">Trillions in offshore Havens</a>. Reuters.<a href=https://www.ycombinator.com/"#footnoteid4\">↩</a> \n5. <a href=https://www.ycombinator.com/"http:// https://www.barrons.com/articles/the-bitcoin-consensus-yes-its-a-bubble-buy-it-anyway-1511909599/">The Bitcoin ‘Consensus’: Yes It’s a Bubble, Buy It Anyway</a>. Barron’s. <a href=https://www.ycombinator.com/"#footnoteid5\">↩</a> \n6. <a href=https://www.ycombinator.com/"https://www.businessdailyafrica.com/news/Citi-warns-over-risk-of-Kenya-bitcoins/539546-4263658-format-xhtml-rxcrr3z/index.html/">Citi Bitcoin GDP study</a>. <a href=https://www.ycombinator.com/"#footnoteid6\">↩</a> \n7. <a href=https://www.ycombinator.com/"http:// https://techcrunch.com/2017/09/10/unsecurity//">Equifax Hack</a>. TechCrunch. <a href=https://www.ycombinator.com/"#footnoteid7\">↩</a> \n8. <a href=https://www.ycombinator.com/"https://www.amazon.com/Internet-Money-Andreas-M-Antonopoulos/dp/1537000454/">The Internet of Money</a>. <a href=https://www.ycombinator.com/"#footnoteid8\">↩</a> \n9. <a href=https://www.ycombinator.com/"http://www.businessinsider.com/employee-retention-rate-top-tech-companies-2017-8/">Retention Rate Silicon Valley</a>. Business Insider. <a href=https://www.ycombinator.com/"#footnoteid9\">↩</a> \n10. <a href=https://www.ycombinator.com/"https://www.cnbc.com/2018/02/06/ex-paypal-david-sacks-on-craft-fund-and-harbor.html/">David Sacks on Craft Fund and Harbor</a>. CNBC. <a href=https://www.ycombinator.com/"#footnoteid10\">↩</a> \n11. <a href=https://www.ycombinator.com/"https://cloudblogs.microsoft.com/enterprisemobility/2018/02/12/decentralized-digital-identities-and-blockchain-the-future-as-we-see-it//">Decentralized Digital Identity</a>. Microsoft. <a href=https://www.ycombinator.com/"#footnoteid11\">↩</a> \n12. <a href=https://www.ycombinator.com/"https://thestack.com/cloud/2015/10/05/twitters-withdrawal-of-reliable-share-count-api-is-a-bold-monetising-move//">Twitter ShareCount endpoint shutdown</a>. The Stack. <a href=https://www.ycombinator.com/"#footnoteid12\">↩</a> \n13. <a href=https://www.ycombinator.com/"http://fortune.com/2015/04/22/facebook-newsfeed-algorithm-publishers//">Facebook Advertising Algorithm Changes</a>. Fortune. <a href=https://www.ycombinator.com/"#footnoteid13\">↩</a> \n14. <a href=https://www.ycombinator.com/"https://www.recode.net/2016/6/30/12067578/spotify-apple-app-store-rejection/">Apple Itunes Spotify rejection</a>. Recode. <a href=https://www.ycombinator.com/"#footnoteid14\">↩</a> \n15. <a href=https://www.ycombinator.com/"https://medium.com/@FEhrsam/the-dapp-developer-stack-the-blockchain-industry-barometer-8d55ec1c7d4/">The Dapp Developer Stack</a>. <a href=https://www.ycombinator.com/"#footnoteid14\">↩</a>\nThanks to Raul San Narciso, Alex Shelkovnikov, Brad Lightcap, and Craig Cannon for reading drafts of this post.\n","comment_id":"1102207","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2018-02-14T00:00:15.000-08:00","updated_at":"2022-02-03T16:40:21.000-08:00","published_at":"2018-02-14T00:00:15.000-08:00","custom_excerpt":"A good method for discovering startup ideas is to look into technological breakthroughs and think about what they unlock that wasn't possible before. In this introductory post, we are going to use this framework to examine Bitcoin.","codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a710b8","name":"Ramon Recuero","slug":"ramon-recuero","profile_image":"/blog/content/images/2022/02/ramon.jpg","cover_image":null,"bio":"Ramon was a Hacker at YC. Before working at YC, he worked at Zynga, Moz and founded Netgamix.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/ramon-recuero/"}],"tags":[{"id":"61fe29efc7139e0001a7118f","name":"Blockchain","slug":"blockchain","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/blockchain/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"}],"primary_author":{"id":"61fe29e3c7139e0001a710b8","name":"Ramon Recuero","slug":"ramon-recuero","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/ramon.jpg","cover_image":null,"bio":"Ramon was a Hacker at YC. Before working at YC, he worked at Zynga, Moz and founded Netgamix.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/ramon-recuero/"},"primary_tag":{"id":"61fe29efc7139e0001a7118f","name":"Blockchain","slug":"blockchain","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/blockchain/"},"url":"https://ghost.prod.ycinside.com/the-decentralized-future-series/","excerpt":"A good method for discovering startup ideas is to look into technological breakthroughs and think about what they unlock that wasn't possible before. In this introductory post, we are going to use this framework to examine Bitcoin.","reading_time":12,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},"mentions":[],"related_posts":[{"id":"61fe29f1c7139e0001a717f9","uuid":"5afbbacc-c7ec-400f-a48d-c45b59d13c23","title":"A Guide to Seed Fundraising","slug":"this-brief-guide-is-a-summary-of-what-startup-founders-need-to-know-about-raising-the-seed-funds-critical-to-getting-their-company-off-the-ground","html":" \nContents:\n<div class=\"half left\">\n<ul>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part1\">Why Raise Money</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part2\">When to Raise Money</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part3\">How Much to Raise?</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part4\">Financing Options</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part5\">Convertible Debt</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part6\">Safe</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part7\">Equity</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part7-2\">Valuation</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part8\">Investors</a>\n </li>\n</ul>\n</div>\n<div class=\"half right\">\n<ul>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part9\">Crowdfunding</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part10\">Meeting Investors</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part11\">Closing the Deal</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part11-2\">Negotiations</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part12\">Documents You Need</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part13\">Next</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part14\">Appendix</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part15\">Glossary</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part16\">Sources</a>\n </li>\n</ul>\n</div>\n<h4>Introduction</h4>\nStartup companies need to purchase equipment, rent offices, and hire staff. More importantly, they need to grow. In almost every case they will require outside capital to do these things.\nThe initial capital raised by a company is typically called “seed” capital. This brief guide is a summary of what startup founders need to know about raising the seed funds critical to getting their company off the ground.\nThis is not intended to be a complete guide to fundraising. It includes only the basic knowledge most founders will need. The information comes from my experiences working at startups, investing in startups, and advising startups at Y Combinator and Imagine K12. YC partners naturally gain a lot of fundraising experience and YC founder Paul Graham (PG) has written extensively on the topic <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e1\">1</a>, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e3\">3</a>, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e4\">4</a>. His essays cover in more detail much of what is contained in this guide and are highly recommended reading.\n<h4>Why Raise Money?</h4>\nWithout startup funding the vast majority of startups will die. The amount of money needed to take a startup to profitability is usually well beyond the ability of founders and their friends and family to finance. A startup here means a company that is built to grow fast <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e12\">12</a>. High growth companies almost always need to burn capital to sustain their growth prior to achieving profitability. A few startup companies do successfully bootstrap (self-fund) themselves, but they are the exception. Of course, there are lots of great companies that aren’t startups. Managing capital needs for such companies is not covered herein.\nCash not only allows startups to live and grow, a war chest is also almost always a competitive advantage in all ways that matter: hiring key staff, public relations, marketing, and sales. Thus, most startups will almost certainly want to raise money. The good news is that there are lots of investors hoping to give the right startup money. The bad news is, “Fundraising is brutal” <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e1\">1</a>. The process of raising that money is often long, arduous, complex, and ego deflating. Nevertheless, it is a path almost all companies and founders must walk, but when is the time right to raise? \n<h4>When to Raise Money</h4>\nInvestors write checks when the idea they hear is compelling, when they are persuaded that the team of founders can realize its vision, and that the opportunity described is real and sufficiently large. When founders are ready to tell this story, they can raise money. And usually when you can raise money, you should.\nFor some founders it is enough to have a story and a reputation. However, for most it will require an idea, a product, and some amount of customer adoption, a.k.a. traction. Luckily, the software development ecosystem today is such that a sophisticated web or mobile product can be built and delivered in a remarkably short period of time at very low cost. Even hardware can be rapidly prototyped and tested.\nBut investors also need persuading. Usually a product they can see, use, or touch will not be enough. They will want to know that there is product market fit and that the product is experiencing actual growth.\nTherefore, founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate. How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. And to raise money founders need to impress. For founders who can convince investors without these things, congratulations. For everyone else, work on your product and talk to your users.\n<h4>How Much to Raise?</h4>\nIdeally, you should raise as much money as you need to reach profitability, so that you’ll never have to raise money again. If you succeed in this, not only will you find it easier to raise money in the future, you’ll be able to survive without new funding if the funding environment gets tight. That said, certain kinds of startups will need a follow-on round, such as those building hardware. Their goal should be to raise as much money as needed to get to their next “fundable” milestone, which will usually be 12 to 18 months later.\nIn choosing how much to raise you are trading off several variables, including how much progress that amount of money will purchase, credibility with investors, and dilution. If you can manage to give up as little as 10% of your company in your seed round, that is wonderful, but most rounds will require up to 20% dilution and you should try to avoid more than 25%. In any event, the amount you are asking for must be tied to a believable plan. That plan will buy you the credibility necessary to persuade investors that their money will have a chance to grow. It is usually a good idea to create multiple plans assuming different amounts raised and to carefully articulate your belief that the company will be successful whether you raise the full or some lesser amount. The difference will be how fast you can grow.\nOne way to look at the optimal amount to raise in your first round is to decide how many months of operation you want to fund. A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k x 5 x 18 = $1.35mm. What if you are planning to hire for other positions as well? Don’t worry about it! This is just an estimate and will be accurate enough for whatever mix you hire. And here you have a great answer to the question: “How much are you raising?” Simply answer that you are raising for N months (usually 12-18) and will thus need $X, where X will usually be between $500k and $1.5 million. As noted above, you should give multiple versions of N and a range for X, giving different possible growth scenarios based on how much you successfully raise.\nThere is enormous variation in the amount of money raised by companies. Here we are concerned with early raises, which usually range from a few hundreds of thousands of dollars up to two million dollars. Most first rounds seem to cluster around six hundred thousand dollars, but largely thanks to increased interest from investors in seed, these rounds have been increasing in size over the last several years. \n<h4>Financing Options</h4>\nStartup founders must understand the basic concepts behind venture financing. It would be nice if this was all very simple and could be explained in a single paragraph. Unfortunately, as with most legal matters, that’s not possible. Here is a very high level summary, but it is worth your time to read more about the details and pros and cons of various types of financing and, importantly, the key terms of such deals that you need to be aware of, from preferences to option pools. The articles below are a decent start.\n<ul>\n<li><a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks / Babk Nivi: Should I Raise Debt or Equity</a></li>\n<li><a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html/">Fred Wilson: Financing Options</a></li>\n<li><a href=https://www.ycombinator.com/"https://bothsidesofthetable.com/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didn-t-understand-9fccf6854dee#.z63i0cy5g\">Mark Suster on Convertible Debt</a></li>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/announcing-the-safe-a-replacement-for-convertible-notes/">Announcing the Safe</a></li>\n</ul>\nVenture financing usually takes place in “rounds,” which have traditionally had names and a specific order. First comes a seed round, then a Series A, then a Series B, then a Series C, and so on to acquisition or IPO. None of these rounds are required and, for example, sometimes companies will start with a Series A financing (almost always an “equity round” as defined below). Recall that we are focusing here exclusively on seed, that very first venture round.\nMost seed rounds, at least in Silicon Valley, are now structured as either convertible debt or simple agreements for future equity (safes) <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e17\">17</a>. Some early rounds are still done with equity, but in Silicon Valley they are now the exception.\n<h4>Convertible Debt</h4>\nConvertible debt is a loan an investor makes to a company using an instrument called a convertible note. That loan will have a principal amount (the amount of the investment), an interest rate (usually a minimum rate of 2% or so), and a maturity date (when the principal and interest must be repaid). The intention of this note is that it converts to equity (thus, “convertible”) when the company does an equity financing. These notes will also usually have a “Cap” or “Target Valuation” and / or a discount. A Cap is the maximum effective valuation that the owner of the note will pay, regardless of the valuation of the round in which the note converts. The effect of the cap is that convertible note investors usually pay a lower price per share compared to other investors in the equity round. Similarly, a discount defines a lower effective valuation via a percentage off the round valuation. Investors see these as their seed “premium” and both of these terms are negotiable. Convertible debt may be called at maturity, at which time it must be repaid with earned interest, although investors are often willing to extend the maturity dates on notes.\n<h4>Safe</h4>\nConvertible debt has been almost completely replaced by the safe at YC and Imagine K12. A safe acts like convertible debt without the interest rate, maturity, and repayment requirement. The negotiable terms of a safe will almost always be simply the amount, the cap, and the discount, if any. There is a bit more complexity to any convertible security, and much of that is driven by what happens when conversion occurs. I strongly encourage you to read the safe primer <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e18\">18</a>, which is available on <a href=https://www.ycombinator.com/"http://www.ycombinator.com/documents//">YC’s site</a>. The primer has several examples of what happens when a safe converts, which go a long way toward explaining how both convertible debt and safes work in practice.\n<h4>Equity</h4>\nAn equity round means setting a valuation for your company (generally, the cap on the safes or notes is considered as a company’s notional valuation, although notes and safes can also be uncapped) and thus a per-share price, and then issuing and selling new shares of the company to investors. This is always more complicated, expensive, and time consuming than a safe or convertible note and explains their popularity for early rounds. It is also why you will always want to hire a lawyer when planning to issue equity.\nTo understand what happens when new equity is issued, a simple example helps. Say you raise $1,000,000 on a $5,000,000 pre-money valuation. If you also have 10,000,000 shares outstanding then you are selling the shares at:\n<ol>\n<li>**$5,000,000 / 10,000,000 = 50 cents per share*** \nand you will thus sell…</li>\n<li>2,000,000 shares \nresulting in a new share total of…</li>\n<li>10,000,000 + 2,000,000 = 12,000,000 shares \nand a post-money valuation of…</li>\n<li>$0.50 * 12,000,000 = $6,000,000 \nand dilution of…</li>\n<li>2,000,000 / 12,000,000 = 16.7% \nNot 20%!</li>\n</ol>\nThere are several important components of an equity round with which you must become familiar when your company does a priced round, including equity incentive plans (option pools), liquidation preferences, anti-dilution rights, protective provisions, and more. These components are all negotiable, but it is usually the case that if you have agreed upon a valuation with your investors (next section), then you are not too far apart, and there is a deal to be done. I won’t say more about equity rounds, since they are so uncommon for seed rounds.\nOne final note: whatever form of financing you do, it is always best to use well-known financing documents like YC’s safe. These documents are well understood by the investor community, and have been drafted to be fair, yet founder friendly.\n<h4>Valuation: What is my company worth?</h4>\nYou are two hackers with an idea, a few months of hacking’s worth of software, and several thousand users. What is your company worth? It should be obvious that no formula will give you an answer. There can only be the most notional sort of justification for any value at all. So, how do you set a value when talking to a potential investor? Why do some companies seem to be worth $20mm and some $4mm? Because investors were convinced that was what they were (or will be in the near future) worth. It is that simple. Therefore, it is best to let the market set your price and to find an investor to set the price or cap. The more investor interest your company generates, the higher your value will trend.\nStill, it can be difficult in some circumstances to find an investor to tell you what you are worth. In this case you can choose a valuation, usually by looking at comparable companies who have valuations. Please remember that the important thing in choosing your valuation is not to over-optimize. The objective is to find a valuation with which you are comfortable, that will allow you to raise the amount you need to achieve your goals with acceptable dilution, and that investors will find reasonable and attractive enough to write you a check. Seed valuations tend to range from $2mm-$10mm, but keep in mind that the goal is not to achieve the best valuation, nor does a high valuation increase your likelihood of success.\n<h4>Investors: Angels & Venture Capitalists</h4>\nThe difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part they are much more like hobbyists. Their decision making process is usually much faster–they can make the call all on their own–and there is almost always a much larger component of emotion that goes into that decision.\nVCs will usually require more time, more meetings, and will have multiple partners involved in the final decision. And remember, VCs see LOTS of deals and invest in very few, so you will have to stand out from a crowd.\nThe ecosystem for seed (early) financing is far more complex now than it was even five years ago. There are many new VC firms, sometimes called “super-angels,” or “micro-VC’s”, which explicitly target brand new, very early stage companies. There are also several traditional VCs that will invest in seed rounds. And there are a large number of independent angels who will invest anywhere from $25k to $100k or more in individual companies. New fundraising options seem to arrive every year, for example, <a href=https://www.ycombinator.com/"https://angel.co/syndicates/">AngelList Syndicates</a> in which angels pool their resources and follow a single lead angel.\nHow does one meet and encourage the interest of investors? If you are about to present at a demo day, you are going to meet lots of investors. There are few such opportunities to meet a concentrated and motivated group of seed investors. Besides a demo day, by far the best way to meet a venture capitalist or an angel is via a warm introduction. Angels will also often introduce interesting companies to their own networks. Otherwise, find someone in your network to make an introduction to an angel or VC. If you have no other options, do research on VCs and angels and send as many as you can a brief, but compelling summary of your business and opportunity (see <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part12\">Documents You Need</a> below).\n<h4>Crowdfunding</h4>\nThere are a growing number of new vehicles to raise money, such as <a href=https://www.ycombinator.com/"https://angel.co//">AngelList, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round//">Kickstarter, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round//">FundersClub, and <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round//">Wefunder. These crowdfunding sites can be used to launch a product, run a pre-sales campaign, or find venture funding. In exceptional cases, founders have used these sites as their dominant fundraising source, or as clear evidence of demand. They usually are used to fill in rounds that are largely complete or, at times, to reanimate a round that is having difficulty getting off the ground. The ecosystem around investing is changing rapidly, but when and how to use these new sources of funds will usually be determined by your success raising through more traditional means.\n<h4>Meeting Investors</h4>\nIf you are meeting investors at an investor day, remember that your goal is not to close–it is to get the next meeting. Investors will seldom choose to commit the first day they hear your pitch, regardless of how brilliant it is. So book lots of meetings. Keep in mind that the hardest part is to get the first money in the company. In other words, meet as many investors as possible but focus on those most likely to close. Always optimize for getting money soonest (in other words, be greedy) <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>.\nThere are a few simple rules to follow when preparing to meet with investors. First, make sure you know your audience–do research on what they like to invest in and try to figure out why. Second, simplify your pitch to the essential–why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company. Next make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets. In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long term commitment and most investors see lots of deals. Unless they like you and feel connected to your outcome, they will most certainly not write a check.\nWho you are and how well you tell your story are most important when trying to convince investors to write that check. Investors are looking for compelling founders who have a believable dream and as much evidence as possible documenting the reality of that dream. Find a style that works for you, and then work as hard as necessary to get the pitch perfect. Pitching is difficult and often unnatural for founders, especially technical founders who are more comfortable in front of a screen than a crowd. But anyone will improve with practice, and there is no substitute for an extraordinary amount of practice. Incidentally, this is true whether you are preparing for a demo day or an investor meeting.\nDuring your meeting, try to strike a balance between confidence and humility. Never cross over into arrogance, avoid defensiveness, but also don’t be a pushover. Be open to intelligent counterpoints, but stand up for what you believe and whether or not you persuade the investor just then, you’ll have made a good impression and will probably get another shot.\nLastly, make sure you don’t leave an investor meeting without an attempted close or at very minimum absolute clarity on next steps. Do not just walk out leaving things ambiguous. \n<h4>Negotiating and Closing the Deal</h4>\nA seed investment can usually be closed rapidly. As noted above, it is an advantage to use standard documents with consistent terms, such as YC’s safe. Negotiation, and often there is none at all, can then proceed on one or two variables, such as the valuation/cap and possibly a discount.\nDeals have momentum and there is no recipe towards building momentum behind your deal other than by telling a great story, persistence, and legwork. You may have to meet with dozens of investors before you get that close. But to get started you just need to convince <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e5\">5</a> one of them. Once the first money is in, each subsequent close will get faster and easier <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e6\">6</a>.\nOnce an investor says that they are in, you are almost done. This is where you should rapidly close using a handshake protocol <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e19\">19</a>. If you fail at negotiating from this point on, it is probably your fault.\n<h4>Negotiations</h4>\nWhen you enter into a negotiation with a VC or an angel, remember that they are usually more experienced at it than you are, so it is almost always better not to try to negotiate in real-time. Take requests away with you, and get help from YC or Imagine K12 partners, advisors, or legal counsel. But also remember that although certain requested terms can be egregious, the majority of things credible VCs and angels will ask for tend to be reasonable. Do not hesitate to ask them to explain precisely what they are asking for and why. If the negotiation is around valuation (or cap) there are, naturally, plenty of considerations, e.g. other deals you have already closed. However, it is important to remember that the valuation you choose at this early round will seldom matter to the success or failure of the company. Get the best deal you can get–but get the deal! Finally, once you get to yes, don’t wait around. Get the investor’s signature and cash as soon as possible. One reason safes are popular is because the closing mechanics are as simple as signing a document and then transferring funds. Once an investor has decided to invest, it should take no longer than a few minutes to exchange signed documents online (for example via <a href=https://www.ycombinator.com/"https://www.clerky.com//">Clerky or <a href=https://www.ycombinator.com/"https://ironclad.ai//">Ironclad) and execute a wire or send a check.\n<h4>Documents You Need</h4>\nDo not spend too much time developing diligence documents for a seed round. If an investor is asking for too much due diligence or financials, they are almost certainly someone to avoid. You will probably want an executive summary and a slide deck you can walk investors through and, potentially, leave behind so VCs can show to other partners.\nThe executive summary should be one or two pages (one is better) and should include vision, product, team (location, contact info), traction, market size, and minimum financials (revenue, if any, and fundraising prior and current).\nGenerally make sure the slide deck is a coherent leave-behind. Graphics, charts, screenshots are more powerful than lots of words. Consider it a framework around which you will hang a more detailed version of your story. There is no fixed format or order, but the following parts are usually present. Create the pitch that matches you, how you present, and how you want to represent your company. Also note that like the executive summary, there are lots of similar templates online if you don’t like this one.\n<ol>\n<li>Your company / Logo / Tag Line</li>\n<li>Your Vision – Your most expansive take on why your new company exists.</li>\n<li>The Problem – What are you solving for the customer–where is their pain?</li>\n<li>The Customer – Who are they and perhaps how will you reach them?</li>\n<li>The Solution – What you have created and why now is the right time.</li>\n<li>The (huge) Market you are addressing – Total Available Market (TAM) >$1B if possible. Include the most persuasive evidence you have that this is real.</li>\n<li>Market Landscape – including competition, macro trends, etc. Is there any insight you have that others do not?</li>\n<li>Current Traction – list key stats / plans for scaling and future customer acquisition.</li>\n<li>Business model – how users translate to revenue. Actuals, plans, hopes.</li>\n<li>Team – who you are, where you come from and why you have what it takes to succeed. Pics and bios okay. Specify roles.</li>\n<li>Summary – 3-5 key takeaways (market size, key product insight, traction)</li>\n<li>Fundraising – Include what you have already raised and what you are planning to raise now. Any financial projections may go here as well. You can optionally include a summary product roadmap (6 quarters max) indicating what an investment buys.</li>\n</ol>\n<h4>Next</h4>\nIt is worth pointing out that startup investing is rapidly evolving and it is likely that certain elements of this guide will at some point become obsolete, so make sure to check for updates or future posts. There is now an extraordinary amount of information available on raising venture money. Several sources are referenced and more are listed at the end of this document.\nFundraising is a necessary, and sometimes painful task most startups must periodically endure. A founder’s goal should always be to raise as quickly as possible and this guide will hopefully help founders successfully raise their first round of venture financing. Often that will seem like a nearly impossible task and when it is complete, it will feel as though you have climbed a very steep mountain. But you have been distracted by the brutality of fundraising and once you turn your attention back to the future you will realize it was only a small foothill on the real climb in front of you. It is time to get back to work building your company.\nMany thanks to those whose knowledge or work have contributed to this document. Of course, any errors are all mine. Please send any comments or questions to <a href=https://www.ycombinator.com/"mailto:geoff@yahoo.com\">geoff@yahoo.com</a>.\n<a id=\"email-bottom\" href=https://www.ycombinator.com/"http://eepurl.com/cbJZnj/">Sign up for weekly recaps of The Macro</a>.\n<div id=\"part14\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n Appendix \n </h2>\n<h4>\n Fundraising Rules to Follow \n </h4>\n<ul>\n<li>\n Get fundraising over as soon as possible, and get back to building your product and company, but also…\n </li>\n<li>\n Don’t stop raising money too soon. If fundraising is difficult, keep fighting and stay alive.\n </li>\n<li>\n When raising, be “greedy”: breadth-first search weighted by expected value <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>. This means talk to as many people as you can, prioritizing the ones that are likely to close.\n </li>\n<li>\n Once someone says yes, don’t delay. Get docs signed and the money in the bank as soon as possible.\n </li>\n<li>\n Always hustle for leads. If you are the hottest deal of the hour, that’s great, but everyone else needs to work like crazy to get angels and other venture investors interested.\n </li>\n<li>\n Never screw anyone over. Hold yourself and others on your team to the highest ethical standards. The Valley is a very small place, and a bad reputation is difficult to repair. Play it straight and you will never regret it. You’ll feel better for it, too.\n </li>\n<li>\n Investors have a lot of different ways to say no. The hardest thing for an entrepreneur is understanding when they are being turned down and being okay with it. PG likes to say, “If the soda is empty, stop making that awful sucking sound with the straw.” But remember that they might be a “yes” another time, so part on the best possible terms.\n </li>\n<li>\n Develop a style that fits you and your company.\n </li>\n<li>\n Stay organized. Co-founders should split tasks where possible. If necessary, use software like Asana to keep track of deals.\n </li>\n<li>\n Have a thick skin but strike the right balance between confidence and humility. And never be arrogant.\n </li>\n</ul>\n<h4>\n What Not to Do While Communicating with Investors \n </h4>\n\n DON’T…\n \n<ul>\n<li>\n Be dishonest in any way\n </li>\n<li>\n Be arrogant or unfriendly\n </li>\n<li>\n Be overly aggressive\n </li>\n<li>\n Seem indecisive – although it is okay to say you don’t know yet.\n </li>\n<li>\n Talk so much they cannot get a word in edgewise\n </li>\n<li>\n Be slow to follow-up or close a deal\n </li>\n<li>\n Break an agreement, verbal or written\n </li>\n<li>\n Create detailed financials\n </li>\n<li>\n Use ridiculous / silly market size numbers without clear justification\n </li>\n<li>\n Claim you know something that you don’t or be afraid to say you don’t know\n </li>\n<li>\n Spend time on the obvious\n </li>\n<li>\n Get caught up in unimportant minutiae – don’t let the meeting get away from you\n </li>\n<li>\n Ask for an NDA\n </li>\n<li>\n Try to play investors off each other when you are not a fundraising ninja\n </li>\n<li>\n Try to negotiate in real-time\n </li>\n<li>\n Over-optimize your valuation or worry too much about dilution\n </li>\n<li>\n Take a “No” personally\n </li>\n</ul>\n</div>\n<div id=\"part15\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n A Brief Glossary of Key Terms \n </h2>\n\n The term you are looking for is not here? Disagree with the definition? Go to <a href=https://www.ycombinator.com/"http://www.investopedia.com//">Investopedia for a more authoritative source.\n \n<ul>\n<li>\n Angel Investor – A (usually) wealthy private investor in startup companies.\n </li>\n<li>\n Cap / Target Valuation – The maximum effective valuation for an investor in a convertible note.\n </li>\n<li>\n Convertible Note – This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock.\n </li>\n<li>\n Common Stock – Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges and preferences.\n </li>\n<li>\n Dilution – The percentage an ownership share is decreased via the issuance of new shares.\n </li>\n<li>\n Discount – A percentage discount from the pre-money valuation to give safe or note holders an effectively lower price.\n </li>\n<li>\n Equity Round – A financing round in which the investor purchases equity (stock) in the company.\n </li>\n<li>\n Fully Diluted Shares – The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants and other convertible securities.\n </li>\n<li>\n IPO – Initial Public Offering – the first sale of stock by a private company to the public.\n </li>\n<li>\n Lead Investor – Usually the first and largest investor in a round who brings others into the round.\n </li>\n<li>\n Liquidation Preference – A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.\n </li>\n<li>\n Maturity Date – The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)\n </li>\n<li>\n Equity Incentive Plan / Option Pool – The shares allocated and set aside for grants to employees and consultants.\n </li>\n<li>\n Preferred Stock – Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).\n </li>\n<li>\n Pre-money Valuation – The value of a company prior to when investor money is added.\n </li>\n<li>\n Pro-rata rights (aka pre-emptive rights) – Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.\n </li>\n<li>\n Protective Provisions – Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.\n </li>\n<li>\n Safe – Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.\n </li>\n<li>\n TAM – Total Available Market. In pitches, this is the estimated total revenue available for the product(s) you are selling.\n </li>\n<li>\n Venture Capitalist – A professional investor in companies, investing limited partners’ funds.\n </li>\n</ul>\n</div>\n<div id=\"part16\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n Sources \n </h2>\n<ol>\n<li>\n <a href=https://www.ycombinator.com/"http://www.paulgraham.com/fundraising.html/">A Fundraising Survival Guide</a>, Paul Graham Techniques for surviving and succeeding at fundraising\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/fr.html/">How To Raise Money</a>, Paul Graham Detailed thoughts on fundraising. A must read.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/equity.html/">The Equity Equation</a>, Paul Graham How to decide if you should accept an offer from an investor\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/future.html/">The Future of Startup Funding</a>, Paul Graham How startup funding is evolving\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/convince.html/">How to Convince Investors</a>, Paul Graham How to convince investors to invest in you\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/herd.html/">Investor Herd Dynamics</a>, Paul Graham How investors think about investing in early stage companies\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/">“Venture Deals”</a>, Feld and Mendelson Essential elements of a venture deal (book)\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.khanacademy.org/finance-economics/venture-capital-and-capital-markets/v/raising-money-for-a-startup/">Raising Money for a Startup</a>, Sal Khan Startup Fundraising from Sal Khan\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks: Debt or Equity,</a> Babak Nivi Discussion on debt vs. equity\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/first-time/">Venture Hacks: First Time</a>, Babak Nivi Advice for first time fundraisers.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html/">How Much Money To Raise</a>, Fred Wilson Advice on how much money to raise.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.paulgraham.com/growth.html/">“Startup = Growth”</a>, Paul Graham Description of a startup.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks / Babk Nivi: Should I Raise Debt or Equity</a> Discussion of whether raising debt or equity is the best answer.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html/">Fred Wilson: Financing Options</a> Another discussion of debt vs. equity\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand//">Mark Suster on Convertible Debt</a> An analysis of problems with convertible debt\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://www.clerky.com/transaction_templates/24/">Clerky Guide</a> Clerky docs and guides. A great place to start.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/announcing-the-safe-a-replacement-for-convertible-notes/">Announcing the Safe</a>, Paul Graham The simple agreement for future equity. A replacement for convertible notes.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.ycombinator.com/documents//">The Safe Primer</a>, Carolynn Levy Lots of detailed information on the safe and examples as to how it works in various cases.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://www.ycombinator.com/handshake//">The Handshake Deal Protocol</a>, Paul Graham A standard protocol to help ensure that verbal commitments turn into transactions.\n </li>\n</ol>\n</div>\n","comment_id":"1097662","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2016-01-07T09:54:44.000-08:00","updated_at":"2021-10-20T13:39:35.000-07:00","published_at":"2016-01-07T09:54:44.000-08:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a71092","name":"Geoff Ralston","slug":"geoff-ralston","profile_image":"/blog/content/images/2022/02/geoff.jpg","cover_image":null,"bio":"Geoff Ralston is the former President of Y Combinator and has been with YC since 2011. Prior to YC, he built one of the first web mail services, RocketMail which became Yahoo Mail in 1997.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/geoff-ralston/"}],"tags":[{"id":"61fe29efc7139e0001a7115e","name":"Fundraising","slug":"fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/fundraising/"},{"id":"61fe29efc7139e0001a71169","name":"Seed","slug":"seed","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/seed/"},{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"}],"primary_author":{"id":"61fe29e3c7139e0001a71092","name":"Geoff Ralston","slug":"geoff-ralston","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/geoff.jpg","cover_image":null,"bio":"Geoff Ralston is the former President of Y Combinator and has been with YC since 2011. Prior to YC, he built one of the first web mail services, RocketMail which became Yahoo Mail in 1997.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/geoff-ralston/"},"primary_tag":{"id":"61fe29efc7139e0001a7115e","name":"Fundraising","slug":"fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/fundraising/"},"url":"https://ghost.prod.ycinside.com/this-brief-guide-is-a-summary-of-what-startup-founders-need-to-know-about-raising-the-seed-funds-critical-to-getting-their-company-off-the-ground/","excerpt":" ","reading_time":20,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71a59","uuid":"00a3a0f7-e41b-47fe-9d1f-e9debf0d12a1","title":"Crypto Investors Linda Xie and Avichal Garg on Opportunities, Use Cases, and Regulation","slug":"crypto-investors-linda-xie-and-avichal-garg-on-opportunities-use-cases-and-regulation","html":"<a href=https://www.ycombinator.com/"https://twitter.com/ljxie/">Linda Xie</a> is the cofounder of <a href=https://www.ycombinator.com/"http://scalar.capital//">Scalar Capital</a>, a cryptoasset management firm. Before that she was a Product Manager at <a href=https://www.ycombinator.com/"https://www.coinbase.com//">Coinbase (YC S12).\n<a href=https://www.ycombinator.com/"https://twitter.com/avichal/">Avichal Garg</a> is a Managing Partner at <a href=https://www.ycombinator.com/"https://electriccapital.com//">Electric Capital</a>, a digital asset management firm. He’s also an Expert at YC. Prior to that he was the Director of Product Management at Facebook.\n<hr />\n<div id=\"backtracks-player\" data-bt-embed=\"https://player.backtracks.fm/ycombinator/ycombinator/m/74-linda-xie-and-avichal-garg\" data-bt-theme=\"orange\" data-bt-show-art-cover=\"true\" data-bt-show-comments=\"true\">\n</div>\n<script>(function(p,l,a,y,e,r,s){if(p[y]) return;if(p[e]) return p[e]();s=l.createElement(a);l.head.appendChild((s.async=p[y]=true,s.src=r,s))}(window,document,\"script\",\"__btL\",\"__btR\",\"https://player.backtracks.fm/embedder.js\"))</script>\n<script>\n(function(p,l,a,y,e,r,s){if(p[y]) return;\nif(p[e]) return p[e]();s=l.createElement(a);\nl.head.appendChild((s.async=p[y]=true,s.src=r,s))\n}(window,document,'script','__btL','__btR',\n'https://player.backtracks.fm/embedder.js'))\n</script>\n<script>\n!function(n,i,s,c){n[s]||(n[s]=function(i){n[s].q.push(i)}),n[s].q||(n[s].q=[]),\nc=i.createElement(\"script\"),\nc.async=1,\nc.src=\"https://c.bktrks.com/utils-1.0.0.all.min.js\",\ni.head.appendChild(c)}(window,document,\"BTUtils\");\nBTUtils(function(use) {\n var options = {\n autoplayLinks: false\n };\n use('backtracks-autolink', options).init();\n});\n</script>\n<hr />\n<h1>Subscribe</h1>\n<a href=https://www.ycombinator.com/"https://itunes.apple.com/us/podcast/y-combinator/id1236907421/">iTunes
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Premises, Promises, and Reality

There is a massive divide between the promises of cryptocurrency and the use cases they currently support. Most skeptics point out reasonably that there’s little to show regarding real adoption. At the same time, people in the industry argue that they need time to finish the infrastructure before they can deliver game changing apps. And the tribalism clouding the topic doesn’t help. There is room for dialogue that would benefit both sides.

A good method for discovering startup ideas is to look into technological breakthroughs and think about what they unlock that wasn’t possible before. In this introductory post, we are going to use this framework. We’ll look at Bitcoin and consider potential use cases that we can directly deduce from its properties. We’ll discuss the common counter-arguments and what needs to happen for each use case to become widely adopted. Finally, we’ll outline the posts coming up in this series–each will dive deeper into specific use cases.

Why

When Satoshi Nakamoto released the Bitcoin Whitepaper he defined it as a peer to peer electronic cash system. Its main achievement was solving the double spending problem without any centralized authority. It was a significant leap, allowing us to transact without intermediaries. It’s not a coincidence that the whitepaper was published after the 2008 subprime mortgage crisis. Just like the printing press removed the power of knowledge from governments and religions, Bitcoin and other cryptocurrencies give people the tools to control their own money.

Bitcoin kickstarted the so-called decentralized future¹, where products could be built not by centralized companies or authorities but by groups of peers that work together towards a common goal. These new products would exhibit the main features and benefits of Bitcoin. Let’s dive into the clear use cases.

1 – A New Asset Class

With most cryptocurrencies anyone can make transactions but, once they are confirmed, nobody can alter or roll them back. They are tamper-proof. Most cryptocurrencies also have a limited supply of coins by design. The maximum number of coins is set in the source code and nobody can create more. Bitcoin, Litecoin, and Monero are examples of this. And its value isn’t stored in a physical object therefore nobody can destroy or seize your coins.

This property leads to the first real use case of cryptocurrencies, a digital store of value. Bitcoin is probably the best-positioned to dominate this use case because it’s the most adopted and its network is the most secure because it has the most miners. So far, we have seen adoption by citizens in countries with record-setting inflation rates like Venezuela².

However, for first world countries and their institutions to take the Bitcoin market seriously it needs to grow. The gold market sits at around $7T³, and the offshore-account market is about $30T⁴. The Bitcoin network value now is around $130 billion, so there’s still a long way to go. The release of futures by the CME and rumours about a potential ETF are signs that point in the direction that adoption is going to keep increasing.

Investing in crypto assets to gain a financial return has been incredibly profitable for the last few years. However, skeptics would quickly remind you that it has been a market with high volatility and big doses of speculation. That said, cryptocurrencies and crypto assets might be the philosopher’s stone of a modern portfolio. Chris Burniske and Jack Tatar suggest that crypto assets have low/negative correlation with traditional asset classes⁵. They could offer diversification and thus, reduce the risk of your portfolio. The asset class is starting to gain traction as an investment; according to a Citi report, it amounts to several GDP points in countries like Russia, New Zealand, Nigeria, and the UK⁶.

There are still significant risks when you use cryptocurrencies as a way to store your wealth or as an investment. The price volatility is an emotional test for investors, seeing them decrease by 60% in a week is not easy to stomach. Investing in it and keeping your investment safe is not simple. Your private keys can be damaged, lost forever, or stolen. Nobody can save you if it happens. Nobody can rollback illegal transactions made with your private keys. Multisig wallets, hardware wallets, time-locks and vaults are initial attempts to solve this problem but they are way too complicated for the normal user. In the next few years, custody is going to become more and more critical, and a new industry will be created to solve it.

2 – Disintermediation

Thanks to blockchain technology, all transactions included in the ledger can never be altered. Every transaction contains an identifier from the previous one and you cannot change the ID without changing the content. That makes this ledger immutable and tamper-proof. Today, we resort to many layers of documentation and mediators to ensure that transactions happen. In many cases it is more costly and time consuming to prove that you did something than actually doing the work. You can see this behavior in real estate property rights and transfers.

Many people would argue that all you need to solve this excess of paperwork is a good distributed database. However, a distributed database without incentives wouldn’t be maintained but if this distributed database is maintained by a company, you are trusting a third party. When you put sensitive data in the hands of a single trusted entity like a health company, a bank or Equifax, your information is eventually going to get exposed⁷. The question is not whether they are going to be hacked or not, the question is when. These are natural honeypots for hackers.

Another benefit of removing intermediaries is that you can perform tasks that were prohibitive before because of pricing. Now, with LTC or the Bitcoin Lightning Network you can send cents or fraction of cents to anyone in the world with nearly zero fees. Micropayments may seem like a pretty niche use case. Many people would be right to remind us than Venmo, Paypal and other solutions work perfectly for us today. Why do we need an alternative? How often do we send fraction of cents?

A compelling answer may be then that six billion people don’t have access to these applications, let alone bank accounts. Andreas Antonopoulos argues that the same way many developing countries leapfrogged directly into mobile phones and skipped landlines, they will skip traditional banking and have a crypto account in their mobile phone⁸. They will still need to compete with services such as M-Pesa that attempt to solve this problem and are quite mature.

Cryptocurrencies provide a clear path to transact without borders and offer banking resources to the unbanked. In order to do so, they need to improve their wallet user experience considerably. Clearer and more natural ways to convert to/from fiat currencies are also needed.

3 – Governance

The Bitcoin whitepaper also created a network of participants that collaborated on a single project without knowing each other. Bitcoin has a primitive governance mechanism that ensures that the incentives are aligned. Mutual trust is built-in, enforced, and ensured by the miners.

“But miners are centralized!” Yes, they are to some degree. Decentralization is not black or white, it is a range and it is going to keep evolving. We can see Bitcoin as the first iteration. It is just the starting point. The mechanism for change and how to evolve a network based on consensus from the participants is what matters. Dfinity, Tezos or Aragon are exploring this space further.

We also touched on incentive alignment. The average tenure of an employee in Silicon Valley is less than two years⁹. One of the causes is the lack of alignment between employees and the owners. This is called the Principal-Agent Problem. Every group of people has principals (owners) and agents (employees) and it is easy for them to become misaligned. What may be good for the employee may not be good for the company. In startups, principals and agents are the same. That’s why they are all really motivated to work together and can create enormous amount of progress in small periods of time. The velocity in crypto development teams like Ethereum exhibit this same energy along a greater number of participants.

Another interesting parallel happens between startups and cryptocurrencies. Most corporations govern by law and process. Startups in their early stages govern with a limited process. Most actions occur implicitly, built on trust. As companies get bigger, you have to deal with procedures and rules to get anything done. An avid reader may note that Bitcoin’s community lack of consensus also stalled the network and it precipitated the creation of several forks like Bitcoin Cash. The difference here is that there is a mechanism for evolution (forks) and the decisions are taken by all the participants, not just by the owners (consensus mechanism).

Cryptocurrencies provide a way of organizing people at scale with the potential to prevent the Principal-Agent problem and the tragedy of the commons. Bitcoin participants were so aligned, and the network effect was so strong that they ended up creating the most prominent computer network.

4 – Tokens

Bitcoin is also programmable. It’s programmable money. You can define certain conditions to trigger transactions if they are met. For example, if you want to add extra security you could say that any transaction bigger than $1,000 USD needs to be verified by both you and your father. Ethereum took the concept a step further and supported more complex functionality in its smart contracts. Everyone can now create their own token that models their network, assets or team and distribute it accordingly. We wrote more about this token effect here.

The token conversation is particularly confusing because of the variety of tokens and use cases they support. Tokens are being used to raise money through ICOs. They are a way to raise funding from many contributors. It is important to note that you can also have a cryptocurrency or token without raising money through an ICO. Bitcoin or Litecoin never did an ICO.

A common question about raising money through tokens is “how are they different from crowdfunding?” There are three key differences. First, you don’t trust any centralized entity to do the fundraising. Second, you have a lot more flexibility in what you can offer to your contributors (equity included). Third, contributors can transfer their assets instantly and easily to other people (pending regulation).

Tokens can be used to incentivize participants and prevent the rent seeking behaviour that affects many communities and networks. This problem basically states that many participants of the network look to capture value without creating any. One specific version of this is spam. Any sufficiently adopted tool will see many people advertising their own endeavors for their own personal gain, decreasing the overall quality of the network and reducing trust. Online communities are littered with this problem and all of them devote countless amounts of time and money to keep the quality of their community safe from trolls and spammers.

Tokens resolve these two problems. You need to contribute if you want to participate in the network. If you want to run some code on Ethereum you need to pay for it. It basically makes spam and rent seeking costly and, ultimately, not viable. If you have an online community, in order to post you need to stake your reputation. If your post benefits the network, you get rewarded, if it doesn’t, you get penalized and next time you want to post you will be charged accordingly. Steemit is experimenting with some of these ideas.

Historically it’s been very complicated for companies to give equity to early adopters that help kickstart their products. Using tokens new companies can create network effects that help them compete with established incumbents. Tokens allow new ventures to bootstrap networks from the beginning with a solid wave of early adopters invested in their product that are committed to help it grow. Ethereum, from its inception and through its ICO, has created a strong decentralized community with skin in the game.

Experts like David Sacks and Balaji Srinivasan believe that ownerships will get blockchained the same way content (video, text, and music) got packetized and sent over the internet¹⁰. Once tokenized, they can be subdivided into near infinitely small pieces and exchanged freely, providing liquidity. Legal instruments of ownerships like deeds or securities will benefit from using a blockchain in terms of affecting transfers and chains of title. At the same time, it is also true that many things that are being tokenized now are just attempts of raising quick money from unwary investors. We need some type of regulation here and a solid framework to foster innovation while minimizing bad actors.

5 – Power (And Data) To The People

Bitcoin is cryptographically secure. You can transact with other people without ever exposing your private key i.e the series of characters that give you access to your funds. It is like signing up to many websites on the internet without communicating your password.

Bitcoin has a 150 billion dollar bounty on it. So far the protocol has never been hacked. People may argue that Mt Gox, Okcheck, and other exchanges have been hacked, but Bitcoin the protocol has never been hacked. Exchanges, wallets, and custodians were compromised. Again, central, trusted parties can be hacked and will be hacked because they are honeypots.

In this day and age, we see hacks happening every week. We need to handle dozens of passwords with complex passwords managers. Blockchains and cryptocurrency will solve this problem. Using a Decentralized exchange or playing Crypto Kitties without needing to create an account is a magic moment.

You can now own all your data and assets. Nobody can access your information without your private key. Third parties like social networks would not be able to benefit from it without your permission. Your privacy, finally, belongs to you. This use case is gaining adoption. For example, Microsoft is working on decentralized digital identities¹¹.

However, right now you need to install browser extensions like Metamask to interact with websites that enable “crypto functionality”. They are still really clunky and the average user does not know they even exist. Native and more polished experiences both on web and mobile to sign and validate transactions need to happen for this to become meaningful. Until then, only tech savvy adopters will benefit from secure identification on niche use cases.

6 – Permissionless Innovation

Bitcoin, Ethereum, and most cryptocurrencies are open source. Every person in the world can contribute and send a pull request. Innovation is pushed to the edges. Innovation is not controlled by Satoshi, Vitalik Buterin, or any group of developers. It is permissionless. You can rely on being able to build your business on top of it.

The Internet started the same way. It was built on open protocols like email or TCP/IP and everyone was able to create an easy to discover website. That’s not true in the internet anymore. Closed networks like Facebook or Twitter are gated communities that use their user data to gain an unfair advantage. They also have the potential to shut you down as soon as you compete with them or violate their ToS ¹² ¹³ ¹⁴. And rightly so, they spent many years building their walled gardens and they don’t want to grow their successor in their yard.

These closed entities or corporations argue that it is all about blockchain, not about cryptocurrencies. They say that private blockchains would be used to empower business process and increase efficiency. In my opinion, a blockchain without a cryptocurrency is just a distributed ledger or a glorified spreadsheet. There is no censorship resistance, no alignment of incentives, no network effect, and no trustless collaboration. This is extremely important if we want to empower equal networks where any individual can participate without being censored.

An inclusive network allows any participant to innovate and the group benefits from it. Organizations and networks that restrict innovation will eventually stall and lose momentum. It already happened on the intranet vs internet debate. A lot of people argued for intranets at the beginning. They become really difficult to maintain and the content eventually stalls. A similar thing is happening between permissioned and permissionless blockchains right now. Permissioned blockchains will probably exist in closed organizations, but they will be interconnected by open permissionless blockchains.

These open blockchains are powering protocols that will support open and permissionless applications. Decentralized computing, storage, and payments are setting up the groundwork for the proclaimed next web¹⁵. These decentralized alternatives are fighting a difficult battle because their unit economics and/or customer experience may not work better than centralized options like Amazon Web Services. Censorship resistant may not be appealing enough for end consumers in many applications.

However, because of its permissionless nature, you now may access a global and decentralized world computer that nobody owns. Whether this world computer would become the new standard or just for use cases where censorship-resistance is important remains to be seen. It has been true in the past that open innovation trumps permissioned innovation and we can sincerely hope this trends continues. The alternative doesn’t look different from an Orwellian future where we use government cryptocurrencies. Everything is recorded but still in the possession of the few.

Conclusion

In my opinion, real adoption is coming. There is an infrastructure inversion on the horizon. We have suffered several infrastructure inversions in the past century. They are never obvious, only in hindsight. Cars were made fun of when they got stuck in mud roads dominated by horses. Once the infrastructure switched and roads improved, horses could still walk on them, but cars got way faster. Telecommunication companies refused for years to switch from analog to digital to communicate more data. Once they did, it was trivial to run voice over their new infrastructure, but the other way around was almost impossible. I think the same is true with Bitcoin: traditional banking that takes days and charges high fees can be easily implemented on Bitcoin, but the opposite is not true.

That new infrastructure is being built today. During this series we are going to speak with subject experts that are building it to make these long held promises possible. We are going to release deep-dives on the following topics:

A New Age of Investing.
The Future of Payments.
The Future of Organizations.
Turning Assets into Tokens.
Security starts with Identity.
The New World Computer.

Stay tuned and HODL on for more!

Notes
1. Bitcoin Decentralization. Wikipedia.↩
2. When the prices are too damn high. The Economist.↩
3. Bitcoin Market Cap vs Gold.↩
4. Trillions in offshore Havens. Reuters.↩
5. The Bitcoin ‘Consensus’: Yes It’s a Bubble, Buy It Anyway. Barron’s. ↩
6. Citi Bitcoin GDP study. ↩
7. Equifax Hack. TechCrunch. ↩
8. The Internet of Money. ↩
9. Retention Rate Silicon Valley. Business Insider. ↩
10. David Sacks on Craft Fund and Harbor. CNBC. ↩
11. Decentralized Digital Identity. Microsoft. ↩
12. Twitter ShareCount endpoint shutdown. The Stack. ↩
13. Facebook Advertising Algorithm Changes. Fortune. ↩
14. Apple Itunes Spotify rejection. Recode. ↩
15. The Dapp Developer Stack. ↩

Thanks to Raul San Narciso, Alex Shelkovnikov, Brad Lightcap, and Craig Cannon for reading drafts of this post.