Will Crypto Valley Replace Silicon Valley?

Ingenuism 51

In these two episodes, Robert Hendershott and Yaron Brook talk about feedback, the value of feedback, how we develop a healthy attitude and mentality to embrace feedback, and the lessons of failure.

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Crypto Valley

Does cryptocurrency have a killer application that will drive widespread adoption?  Not yet but we think that one possibility is as a powerful, innovative way to organize and execute on exciting projects.

Successful new ventures require organizing a team, launching the effort, raising money, and managing growth.  Today this happens using the Silicon Valley model, at least for ambitious efforts.  Entrepreneurs flock to Silicon Valley (as an approach more than a geography – although roughly a quarter of global venture capital still flows through the San Francisco Bay Area) to connect, develop ideas, launch companies, and partner with venture capitalists (VCs).  VCs are the gatekeepers - screening ideas and teams, providing capital to a select few, and nurturing growth.  Equity ownership (common stock for founders and early employees, convertible preferred stock for investors, and options for later employees) divides up control of the venture and any economic value the start-up creates. 

Silicon Valley has an effective, time-proven model for creating and nurturing new ventures.  But it is also centralized and expensive – and hasn’t evolved much over the past few decades.  In this and future essays we propose a possible crypto-based alternative for ambitious entrepreneurship.

Imagine a future where all the steps for a successful new venture happen in what we’ll call Crypto Valley (an approach more than a virtual geography).  Instead of a small number of VCs acting as gatekeepers and financiers, a distributed global network (perhaps including professional VCs) enables and supports exciting entrepreneurial projects.  What would this Crypto Valley look like?

The Silicon Valley Model

VC largely drives the Silicon Valley process.  Ambitious start-ups organize around attracting VC investment to execute their plan.  VCs evaluate the plan/team/progress at every step deciding whether the company gets more capital or gets shut down.  While this is a high bar, in practice it means at each step convincing a single new VC that the company warrants further resources/runway.

Consider the case of Airbnb, currently valued at over $65b.  Angel investors deemed the Airbnb effort worth exploring, providing over $600k in seed money in 2009.  The firm’s ideas/progress earned a $7.2m A-round in Nov 2010 led by Greylock and then a $115m B-round in July 2011 led by Andreessen Horowitz.  In addition to providing capital, each round negotiated terms that determined how Airbnb ownership would be split (A-round investors got a little over 10% of the firm for their investment while B-round investors got a little less than 10%).  Airbnb’s continued success garnered the company billions of dollars of additional investments on steadily more favorable terms over time, culminating with the firm receiving $1b for a little over 3% ownership in 2016.

After Airbnb went public in Dec 2020, the company was valued at over $100b, with roughly 10% owned by each of the three cofounders (and the largest VC investor, Sequoia Capital).  This kind of result – in Airbnb’s case turning less than $5b of investment capital into a $100b company, to say nothing of the value created for the platform’s users – is typical for the very best Silicon Valley start-ups.

The Silicon Valley model has been so successful that it is hard to imagine something better. 

But that is a failure of imagination.  In this essay we envision crypto as the backbone for Crypto Valley, an ecosystem that connects entrepreneurs, screens ideas, allocates capital, and distributes value even more effectively and at lower cost than the current Silicon Valley model.

The Crypto Valley Model

Let’s continue the example and imagine a hypothetical distributed Airbnb-like project, called the Stay Network, being launched in Crypto Valley.  What would it look like for a crypto-based system to mimic Airbnb’s innovation and value creation?  And generally, how would each of Silicon Valley’s roles get filled in Crypto Valley?

The Stay Network’s success would have to follow Airbnb’s trajectory – 1) attract the resources to build a wildly useful platform with painless property listing, excellent search functionality, powerful rating feedback systems to create and maintain trust, secure payments, etc., 2) reach critical mass so there are enough Hosts listing their homes/room to attract potential Guests and enough Guests to keep Hosts engaged, and 3) navigate the rapid growth associated with successful network business models.

All outside the traditional VC-backed start-up model.

How would the Stay Network effort get organized in Crypto Valley?  This is easy to imagine post-pandemic where distributed virtual teams have proven effective and become the norm.  In 2007 founders Brian Chesky and Joe Gebbia would have begun offering their San Francisco loft as a designers’ bed and breakfast, realized they were on to something that might be big, and added their old roommate Nathan Blecharczyk to the founding team. 

The next critical relationship in Airbnb’s actual trajectory was Paul Graham, a founder of and driving force behind the incubator Y Combinator.  Y Combinator is a fascinating niche of Silicon Valley and in later essays we will discuss how key Silicon Valley roles might be filled in Crypto Valley by analogous organizations.  For now, we’re interested in whether it would be possible to build out teams to tackle ambitious projects in virtual Crypto Valley without the physical presence start-ups have in Silicon Valley.  We think so – the internet is a proven way to find and collaborate with likeminded people (in fact, Y Combinator already offers a co-founder matching platform).

Let’s assume that Crypto Valley evolves a refined system of open, distributed innovation that takes the power of the internet and the lessons of the pandemic to an entirely new level.  New entities like Y Combinator emerge.  Smart contracts mature into new powerful forms that manage decision-making and the relationship between contributors.  All speculative but possible – something that we will discuss in a future essay.

How would the Stay Network get resources and build the platform in Crypto Valley?  In theory development can be crowdsourced and financing crowdfunded.  But traditionally financing and development go hand in hand.  Raising capital attracts and funds developers.  While major crowdsourced efforts like Wikipedia have been accomplished on a relatively shoestring budget, for the hypothetical Stay Network initiative to mimic Airbnb’s success, it will need significant resources.  In Crypto Valley that means a particular type of super-charged crowdfunding.

The Stay effort begins with a cryptocurrency launch offering, say, one hundred million StayCoins for sale to underwrite the Stay Network’s initial development.  StayCoins are created to be the currency for transacting on the envisioned Stay Network of vacation homes – Guests will pay Hosts in StayCoin.  And like how Airbnb has expanded into additional offerings, the Stay Network will likely evolve into a platform for multiple travel-related services like Dining, Experiences, Travel Sharing, etc.  The sky is the limit.

But the Stay Network does not exist yet – StayCoins are completely speculative. To have value the network needs to be built and widely adopted – only then will you be able to swap your StayCoins for a beach house in Maui.  But developing the Stay Network requires people buy StayCoins today.  Why would they?

Maybe they wouldn’t.  If not, the Stay effort goes nowhere.  And that is a good thing!  While it might seem counter-intuitive, the challenge the Stay Network faces selling its initial StayCoins is a critical feature of Crypto Valley.

With no VCs as gatekeepers, Crypto Valley needs a mechanism for allocating capital.  Only some new venture ideas warrant the time, energy, and money necessary to try to get them off the ground.  In the case of the Stay Network, no demand for StayCoins would be a good indicator that this idea is not worth pursuing. 

But maybe people will buy the initial StayCoins.  Who can buy StayCoins?  In theory, anyone!  People who envision and value a world in which they will have millions of destination options.  Hosts with a vacation home that they would love to be able to rent out on the Stay Network.  Even people uninterested in using the Stay Network but excited to speculate on how much StayCoins will end up being worth given the possibility that the network will be wildly popular.  High demand for StayCoins indicates optimism about the effort’s potential and leads to the initial one hundred million StayCoins being sold at a relatively high price.

StayCoins’ eventual value depends on future supply and demand, although the uncertainty is with demand.  The Stay Network becoming popular would boost demand for the (largely) fixed supply of StayCoins, driving the price up.  We don’t know whether this will eventually happen but the more potential users and speculators like the Stay Network’s future chances, the more the initial StayCoins sell for today.

The key is that if lots of people are enthusiastic about the Stay Network project, then it should be possible to sell a hundred million StayCoins for, say, a $100m.  If demand is stronger, the coins sell for maybe $150m; weaker, they sell for $60m.  If everyone thinks the Stay effort is laughable, the coins simply don’t sell.

Voila – Crypto Valley has a financing mechanism that screens for great ideas and provides the appropriate amount of initial funds.  The Stay Network is off to the races.

Of course, money does not equate to a fully built Stay Network.  Crypto Valley needs a mechanism to organize talent to fulfill on the great ideas – to incentivize/reward entrepreneurs, attract key contributors, and overcome obstacles to success.

At a high level, development is crowd-sourced with StayCoins playing the critical role of compensation and incentives.  In addition to providing the initial funds, the Stay Network is organized to reward contributors with StayCoins, much like Bitcoin miners receive Bitcoins for their efforts.

Why would founders and talented contributors focus their time and energy on the Stay Network?  Well, we have a $100m, which helps.  But Airbnb raised billions as well as offering employees stock options.  How does Crypto Valley empower and sustain growth?

Again, this is easy to imagine – if StayCoins maintain and grow their value.  StayCoins trade on crypto exchanges so this signal is easily visible.  In the same way that global demand for StayCoins allowed the Stay effort to launch, ongoing demand provides resources that accelerate progress – as long as the project is going well.

If the Stay Network is slow to develop, then enthusiasm for the Stay Network effort wanes and the price of StayCoins falls.  In this case everyone can see that Crypto Valley is getting (justifiably) skeptical about the long-term demand for StayCoins.  If things don’t turn around, eventually a vicious cycle kicks in where slow progress leads to lower StayCoin prices leads to less interest from contributors leads to slower progress, and the cycle continues until the Stay Network effort crashes back to earth. 

Not only are bad ideas rejected by Crypto Valley, good ideas that fail to fulfill on their promise are promptly starved for resources and shut down.  You can imagine that in this event the original StayCoins might be automatically redeemed under specific conditions, albeit at a loss, winding down the project before the coins become worthless.

But if the Stay Network’s development progresses rapidly, the opposite happens – StayCoin prices rise with increased expectations for long-term demand.  Early contributors benefit and new contributors are attracted to the effort.  Additional StayCoins can be sold at market prices based on a pre-specified schedule, replenishing the Stay Network’s coffers.  Success breeds success and both StayCoins and the Stay Network’s development are benefiting from a virtuous cycle.  Crypto Valley can marshal as many resources for the Stay Network as Silicon Valley mustered for Airbnb.

In both the up and down cases StayCoin prices provide a dimension of transparency into the effort’s prospects beyond what you find in Silicon Valley start-ups.  Start-ups typically burn through all of their money even in the absence of progress.  This happens because clear signals about the odds of future success only coincide with fundraising rounds.  And the fact that all the money gets spent regardless constrains the amount of money it makes sense to give entrepreneurs when they start out – funding a great idea with $100m out of the gate is very risky so VCs will generally start with something closer to $5m and steadily increase their investments if things are going well.  This staging minimizes losses in firms that fail but comes at a cost - often an entrepreneurial team spends significant time and energy chasing additional capital rather than building the business.

Additionally, in Silicon Valley both potential investors and employees have limited market signals when deciding which firms to back/join.  One common “market” signal is looking at who has already backed the effort.  This makes sense but can also lead to situations like Theranos where having Rupert Murdoch and the Walton family as investors leads to a lack of needed scrutiny. 

This is not to say that Silicon Valley has no market mechanism for making funding decisions in the face of start-ups’ uncertain future prospects.  But an exciting aspect of Crypto Valley is that coins produce a new market signal that can augment the VC approach – something that we’ll be discussing in a future essay.

Crypto Valley evolves a highly effective capital allocation mechanism that both creates and leverages market signals.

What about overcoming obstacles to success?  Again, StayCoins can be a powerful tool.  For example, getting to critical mass is a crucial challenge for matching platforms like the Stay Network.  Hosts on the Stay Network (and Airbnb) are there to rent out their property; Guests are there to find a property to rent.  Hosts don’t get what they want unless there are sufficient Guests on the platform and vice-versa.  So, when the Stay Network first launches how do you attract enough Hosts and Guests to get momentum?

Hosts are likely the bigger challenge - they risk their property as part of the rental.  If there are plenty of Maui beach houses available, the Guests will come!  So perhaps early on the Stay Network gives Hosts StayCoin bonuses for listing and renting their property – an extra boost to accelerate progress towards critical mass and providing Hosts with a bigger stake in the eventual success of the effort.

Before long a billion stays are booked on the Stay Network, the price of StayCoins has soared, and the effort is thriving to the benefit of Hosts, Guest, and StayCoin holders.  A shining example of Crypto Valley success!

But note the difference.  There is no company!  No VCs, no shareholders at all.  While the initial organizers were certainly rewarded with StayCoins, the Stay Network is a decentralized autonomous organization (DAO) that is mutually “owned” by StayCoin holders (its users).  All the value created by the network accrues to users – the Stay Network charges minimal fees versus roughly a 15% total booking fee at Airbnb (over $6b in the past year).

Granted, the financing, management, and governance of an effort like the Stay Network is complex well beyond current DAOs.  An effective structure would have to evolve over time, and we’ll discuss some possibilities in a future essay.

Why this matters

Crypto Valley is much leaner than Silicon Valley.  But are we really that excited about saving 15% on our vacation rentals?  Well, on a relative basis, this looks exciting - 15% is a lot more than what crypto might save replacing credit card transactions (and using StayCoins avoids interchange fees).  Further, while increased efficiency is an important part of progress, the most exciting innovations come from being able to do completely new things in completely different ways.  And Crypto Valley fits that bill.  We have no way of knowing the power of open, distributed innovation guided by explicit market signals – or the benefits this could bring.

By negating the need for companies Crypto Valley could, for example, break the link between sacrificing privacy and getting value/efficacy in many applications.

Consider smart super-apps (broad self-contained commerce/communication applications that provide many different service).  The natural extreme is an AI-driven personal assistant that supports and manages your entire life.  Want to rent a Maui beach house?  Your assistant finds one by connecting with the assistant of someone who owns the beach house and is willing to rent it to you.  No need for the Stay Network.  Or Uber.  Or eBay, Booking.com, PayPal - maybe even Twitter and Facebook (I mean Meta).  Your assistant curates and handles everything.

If this sounds like a natural evolution of Alexa, Siri, and Google Assistant – well, it probably is.  There is a reason that the largest technology companies are spending billions of dollars developing smart assistants.  Global super-apps have a massive network effect and if adopted, the dominant technology will potentially know everything about you – a 21st Century data gold mine.

Retaining control over our social media might be nice but controlling our own lives seems a lot more important.  And yet, a smart super-app could be wildly valuable to users – maybe even so useful as to warrant giving up our remaining privacy.  But is there a better way?  How could Crypto Valley develop a fully networked AI-driven personal assistant with all the upside but none of the downside?

Maybe it is as simple as following the steps above for building the Stay Network – but instead building the Life Network, starting with a large issue of LifeCoins.  And hopefully finish with a ubiquitous powerful smart personal agent, crowd developed/funded and empowering seven billion people to accomplish their goals.  Owned by those same seven billion via the Life DAO. 

That’s what Crypto Valley could potentially deliver and an upside that everyone from crypto evangelists to crypto skeptics should be able to get excited about.

Silicon Valley wasn’t designed and optimized as some kind of factory to produce start-ups like Airbnb – it evolved into a set of systems and norms that has become very effective at discovering and enabling potential Airbnb’s.  Similarly, we don’t expect Crypto Valley to emerge as we’ve described above.  It will take years, maybe decades, of experimentation to evolve DAOs that can handle the organization, financing, management, and governance of ambitious entrepreneurial ventures like the Stay Network – to say nothing of projects rooted in the physical world.  Could Crypto Valley gestate an Apple?  Maybe in the end we’ll discover that the centralized Silicon Valley approach works better, at least for some efforts.

But the innovative potential of a crypto ecosystem is undeniable.  Silicon Valley focuses on value capture, which requires value creation but is not identical.  Airbnb has to balance providing value to their users, Hosts and Guests, with extracting value from these users.  StayCoin holders benefit from the Stay Network providing value to attract users, period.  Crypto Valley focuses on value creation.

What will it take to get Crypto Valley?  In future essays we’ll be discussing the need for robust stablecoins, our thoughts regarding finance, management, governance, and regulation (given the SEC exists) in Crypto Valley.  Crypto Valley requires powerful DAOs and other sophisticated smart contracts along with an efficient and secure blockchain (or alternative technology), and who knows what else.  Crypto Valley won’t be designed – it will evolve as a set of systems, norms, and technologies that prove to be very effective at discovering and enabling ambitious projects like the potential Stay Network, all in the service of creating value.