A New Way to Fund Non-Crypto Projects with Crypto

One major trend we have seen over the past 10 years is the rise of cryptocurrencies. Despite being often “dissed” by some powerful elders, cryptocurrencies continue to grow from strength to strength. The design space for cryptocurrencies is large enough to support innovation at least on the same scale as the Internet, allowing hackers, open source developers, and entrepreneurs to use cryptocurrencies to build new, trustless infrastructure and applications. Because of this, hot money continues to enter this field.

The size of venture capital funding in the cryptocurrency/blockchain space in the past 6 years. Data source: Galaxy Digital

Still, the field is still young and lacks a lot of infrastructure that will likely spawn a host of new applications. So it’s no surprise that there is money being invested in the cryptocurrency space through venture capital firms. In fact, they are already happening.

But from another perspective, can cryptocurrencies be reverse-funded to non-cryptocurrency fields?

For me, this has always been an interesting and thought-provoking question. Because the full power of cryptocurrencies can only be fully unleashed when they are tightly integrated with the technologies and innovations that drive human productivity. In the recent first round of BNB Grant DAO funding, there were at least 5 tracks in the frontier technology track alone, dedicated to providing support for teams conducting research in open source quantum software, space technology and other fields. This is the first time the DoraHacks community has used cryptocurrency to fund non-cryptocurrency BUIDLers. Can we turn this into a long-term effort to support more meaningful projects? Can we scale up further? Let us try to explore in this article.

First, financing with cryptocurrencies has shown some clear advantages:

1. Fast and affordable global payment services without compromising compliance

2. high liquidity

3. Reduces the appearance of old governments. (Translator's Note: A gerontocracy is a form of oligarchy in which an entity is ruled by leaders who are significantly older than the majority of the adult population.)

4. community support

5. Open source and a more collaborative culture …

But even with all of these advantages, we still haven’t seen new industries being funded by cryptocurrencies.

What are the concerns about not using cryptocurrencies for financing?

Most people in the world use fiat currency, as do most businesses/organizations. If we want to fund anything with cryptocurrencies, we need to increase the awareness of cryptocurrencies among individuals and organizations. In order for people/organizations to accept and be willing to use cryptocurrencies, we may need to address three main issues:

1. Stability: Most businesses want a stable currency.

2. Compliance: Funds must comply with regulatory requirements and meet legal requirements such as Anti-Money Laundering laws.

3. Easy conversion between cryptocurrencies and fiat currencies: most supply chains use fiat currencies, and employees still need fiat currencies in their daily lives, so once they are financed with cryptocurrencies/stable coins, fast conversion between cryptocurrencies and fiat currencies is crucial. This problem will remain until cryptocurrencies are not adopted on a large scale.

Technically, a 1:1 pegged stablecoin such as Circle’s USDC can meet all of the above requirements. Although for really large-scale transactions, stablecoins may not have enough liquidity. However, the current stablecoin market can definitely support transactions in the hundreds of millions of dollars.

If we want to scale it further, we need more cryptocurrency adoption. Some statistics show that as of 2021, the global cryptocurrency adoption rate is only 3.9%, and only more than 18,000 businesses are willing to accept crypto payments. Assume a 10x increase in cryptocurrency adoption and a 100x increase in enterprise adoption. In this case, stablecoins and cryptocurrencies can provide better liquidity and have the ability to handle larger transactions.

It’s worth noting that changes in adoption rates take time. From 1990 to 2010, it took about 20 years for the Internet to reach 70% adoption worldwide.

Effectively Unify Token Economics and Profitability

Another major hurdle currently encountered is the “inconsistency” between the token economy and its profitability.

In cryptocurrencies, value is created by token economies. In business, value is calculated in terms of the ability to make a profit (or to make a profit in the future). If we draw these two regions in a Venn diagram, then from the beginning, the two regions do not overlap.

Token economics is based on the utility of tokens for a certain product (network, infrastructure, or application). The value of some cryptocurrencies is based on their scarcity ( Bitcoin , and possibly NFTs), while the value of others is based on their utility/speed of exchange (BNB, Ethereum , etc.). Since token prices are driven by demand and supply, the utility of a token largely determines its price. Taking the utility of gas fee tokens as an example, as more transactions compete for block space on the Ethereum network, the demand for ETH will continue to rise, thereby driving the price. This is why the concept of "building an ecosystem" is important to Layer1. With more use cases and applications, more users will join and more transactions will happen on the network, creating more demand for the token.

In the business world, a company's value is based on its profitability. Compared with commercial valuation models, there is not even a standard way of valuing cryptocurrencies so far, which is one of the reasons why the cryptocurrency market is volatile.

A Venn diagram of token economics and profitability, from separation to overlap.

While token economics and profitability may seem like completely different beasts, they are actually not that different. At least, there is some overlap. Here are a few examples:

1. The Gas fee of Ethereum can be regarded as the income of the network. Miners and stakers earn profits in the form of ETH, and network users (EOA/smart contracts) pay Gas fees. Gas fee revenue for the Ethereum network in the first quarter of 2022 is reported to be $2.4 billion. Profits are distributed first to miners and then to stakers.

2. The value of Defi protocol governance tokens fundamentally depends on its profitability. It is worth noting that the Defi protocol does have a clear profit model, which usually collects commissions from transactions, but the commissions are mainly distributed to LP token holders instead of centralized collection.

3. Users can exchange tokens using centralized exchanges, get allocations from new token listings, or stake to reduce transaction fees. These tokens are essentially capturing a portion of the centralized exchange’s value, as they represent a portion of the profits the exchange is willing to give to the community.

So, what exactly is the difference between token economics and profitability? The answer is "decentralization". Token economics essentially distributes profits to the community while allowing the token community to participate in governance, although the governance part is often optional.

This also applies to non-profit DAOs. Examples of non-profit DAOs include DAOized non-profit organizations and no-fee protocols (such as Gnosis SAFE). Non-profit DAOs can only rely on donations, and the tokens of these DAOs can only capture governance value, depending on the size of their vaults.

When token economics and profitability start to overlap, we have the following two possible model situations that could arise.

We can see three areas: Pure Token Economics (A), Pure Profitability (C) and Point of Convergence (B). Here are their general meanings:

A - Store of Value

B - Profits distributed to the community

C - Centralized Profit

Companies that distribute profits and governance to the community can move from centralization to decentralization (at least in part).

Making it possible to fund all businesses with cryptocurrencies

1. Using Stablecoins as Equity Funding

The first step is not to change the organizational structure, but to use stablecoins as funding currencies. This is actually already useful, because using stablecoins is easier, faster, and cheaper than fiat currencies.

2. Venture capital for early-stage businesses through cryptocurrency donations and grants

Businesses in the early stages of development are often underfunded for two reasons: uncertainty and lack of liquidity. At the same time, early-stage businesses already desperately need funding. Cryptocurrencies can solve this problem by matching grant funding for projects by engaging and partnering with early community supporters. This already happens with platforms like DoraHacks. Notably, this is more exciting than just using stablecoins as equity funding.

From the adoption of stablecoin funding to the mass adoption of token economics and cutting-edge technology funding, there is so much more we can do as we move from fiat to crypto funding.

3. Funding Frontier Technology

Since the dotcom boom of the 90s, private investment has overfunded the internet and underfunded many cutting-edge technologies. Human space exploration is an example - the last time humans landed on the moon was in the 60s. It’s only in the past few years that investment focus has shifted from the Internet to blockchain technology, artificial intelligence, renewable energy, and commercial space technology due to the slowdown in Internet growth.

On the other hand, there are often gatekeepers from so-called "mature" industries who naturally block the birth of new ideas. When Warren Buffett keeps belittling cryptocurrencies and ignoring the progress of the industry as a whole, it is unlikely that any portfolio companies under his control will embrace cryptocurrencies, even if they would.

Therefore, exploring the ways and possibilities of cryptocurrencies to fund cutting-edge technologies is not only more urgent, but also more feasible.

We can draw a timeline of industrial development centered on cryptocurrency. The industry left to cryptocurrency is a "mature" industry. The industry that started right from cryptocurrency is a nascent industry. It is easier and more important for cryptocurrencies to fund new industries than old ones.

4. Convergence of Token Economics and Profitability

There has long been a "politically correct" sentiment within the cryptocurrency community, pitting decentralization against centralization. This is true when it comes to centralized power doing evil, but not always. In the long run, any technology will only matter if it increases productivity, creates opportunity, and makes people's lives better. As time goes by, there will be fewer and fewer "purely decentralized" or "purely centralized" organizations, and the area B in the Venn diagram will become larger and larger, eventually forming a bigger cake.

in conclusion

Investing in crypto into non-crypto is exciting and doable. It can speed up venture capital investments, help early BUIDLers create a more vibrant community, and provide funding for underfunded projects in the fiat world.

Concerns about using cryptocurrencies to fund non-cryptocurrency businesses include stability, liquidity, and compliance, all of which can be addressed.

While widespread adoption of cryptocurrencies will take time, there are steps we can take to speed this up. The design space for cryptocurrencies is limitless. Examples of what we can do in the short term include:

(1) Use stable currency for equity financing;

(2) Fund early-stage start-ups through donations and grants using cryptocurrencies;

(3) Use cryptocurrencies to fund cutting-edge technologies;

(4) Further explore the integration of token economy and profitability.

Reference link:

1. Circle's USDC: https://www.circle.com/en/usdc

2. Crypto payment statistics: https://triple-a.io/crypto-ownership/

3. Ethereum network Gas fee income: https://finance.yahoo.com/news/ethereum-revenue-falls-44-average-060403733.html

4. Dora Hacks: https://dorahacks.io/