A shorter version of this article was originally posted on VentureBeat
HBO’s Silicon Valley does a pretty good job of lampooning the absurdity of The Bay Area’s startup circus. At the heart of satire though is always a kernel of truth: there are a multitude of crazy ideas, and more than anywhere else in the world, Silicon Valley has made funding the teams behind them its modus operandi. Once in a while, one of these crazy ideas hits the big time, and those who were daring enough to believe in the team behind it, are handsomely rewarded.
Silicon Valley is a highly networked area. Individuals form, fund, and otherwise support teams to create value, which in turn attracts more teams, which generate more value, and onward in an ever increasing virtuous cycle. The infrastructure of innovation in Silicon Valley, exemplified by the robust ecosystem of startups, accelerators, and investors, is a direct result of that culture. Culture, however, is incorporeal — there is nothing special in the water which anchors it to The Valley. And, when something works, it tends to catch on. Today you can find Silicon Valley vibes in New York, London, São Paolo, Jakarta, and many other places.
In 2017 there is a new place for ideas (crazy ones included) to emerge, incubate, and flourish: the internet. Today’s internet, despite being orders of magnitude larger and more vibrant than ever before, is deeply centralised. Most people online today are surrounded by products developed or funded by a handful of power players. Whichever corner of the world a crazy new idea comes from, its creators generally need to go in search of funding. And that often takes them on a walk down Sand Hill Road, where unconventional thinking is regarded less skeptically.
While the internet has become an amazing place for the exchange of information and ideas, the infrastructure needed to transition from an idea, to a project, and thence into an actual business remains firmly rooted in meatspace. But this is changing.
Blockchain technology, in particular Ethereum, is a computing paradigm upon which a new kind of innovation infrastructure is being built. Unlike the platforms and ‘cloud’ services we’ve grown accustomed to, it exists publically in an abstract, non-physical realm that is secure, decentralised, and distributed across the internet. Ethereum encapsulates all the raw ingredients to build startups unconstrained by physical location: a highly liquid medium for value exchange (Ether), a common system for application/business logic (Smart Contracts), and most importantly, a culture which encourages and supports innovation. This is the beginning of the democratisation of Silicon Valley’s innovation infrastructure, and it’s happening in an entirely virtual space.
Over the past couple of years, dozens of startups in this new permissionless ecosystem have capitalised their projects by selling their own blockchain-based ‘tokens’ to a globally distributed crowd of early adopters. Tokens are specialised cryptocurrencies which have a utility within a given project’s application. Sometimes it’s an internal currency necessary to pay for the services the application provides, like Brave’s Basic Attention Token (BAT). Other times it’s a sort of licence which enables a special subset of users to do work for the protocol and earn rewards in exchange — like Augur. These tokens are publicly tradeable and can go up or down in value subject to market forces. For an Ethereum based project, selling a token solves two (and in the best projects, three) problems:
- It provides revenue with which a team can fund their project’s development.
- It catalyses network effects by bootstrapping a community of enthusiasts incentivised to help the application gain traction.
- It provides a basis for the game theoretic security of a decentralised economic model.
The enthusiasm for this new paradigm at present is at fever pitch. The most popular Ethereum based projects are having to go to extreme lengths to prevent their token sales from selling out too quickly. BAT’s $35m token sale for instance sold out in just 25 seconds to just 174 accounts! Status had to actually make it difficult for people to purchase their tokens in order to prevent their $100m sale from selling to too few people!
Some regard the token sale phenomenon as Ethereum’s ‘killer app’, while others have reservations about how they will be interpreted by regulatory bodies around the world. As the latest explosive innovation in a nascent industry, models will necessarily mature and adapt to better fit the needs of both startups and the increasingly complex token market. But the staggering success of token sales this year has made one thing clear: Ethereum has changed the game for startup funding. The culture of Silicon Valley has found a new habitat on the blockchain, and it contains all the elements needed for tomorrow’s unicorns to evolve from today’s innovative (and sometimes crazy) ideas.
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