Below are a few of the basic frameworks we use before making an investment. These are basic frameworks designed to help an investor ensure a project aligns with their investing vision. Before jumping in you need to determine why you're investing in crypto. Are you here for decentralized projects, memes and jokes, or cutting edge tech? Crypto Resource Group does not judge. CRG does, however, focus on decentralized projects and cutting edge technologies. In our opinion these are the projects most likely to generate long-term intrinsic value. Memes are fun and Doge routinely mints multi-millionaires. The reality is these are lottery tickets. CRG does not want to invest on the whims of troll billionaires, as much as we enjoy the trolling.
(1) Is the blockchain decentralized? CRG is a believer in a decentralized future. Not fake decentralized like Solana, but truly distributed and protected from state, regulatory, or corporate capture. These are quite rare in the wild. Bitcoin is the most well known decentralized project. There are other blockchains and crypto technologies attempting to decentralize, however, many suffer from various forms of centralized or scaling limitations. When reviewing the level of a project's decentralization, one needs to check:
(a) decentralized front ends (see: https://medium.com/4everland/the-needs-for-a-decentralized-frontend-b329334726d5)
(b) decentralized validators (https://www.coindesk.com/markets/2019/02/24/validators-create-new-attack-vectors-for-decentralized-systems/)
(c) decentralized back ends (https://www.freecodecamp.org/news/how-to-design-a-secure-backend-for-your-decentralized-application-9541b5d8bddb/), &
(d) decentralized entities/organizations/developers interacting with and supporting the network
Further, are key network nodes and operators geographically decentralized or are they clustered in certain jurisdictions? Are material portions of each network in rival states? Do certain founding members/insiders have or control a disproportionate amount of power and influence over the blockchain? For example, do they control multiple entities with outsized power and influence over the blockchain? Each of these must be reviewed independent of one another to determine a blockchain’s level of decentralization.
(2) Alternatively, does it even matter whether the base layer is decentralized? Just because Ethereum may (arguably) be captured (OFAC-compliant censored blocks) it does not mean there’s no network value. Ethereum generates tremendous daily revenue, which go to its staking validators. From a fundamental investing perspective (i.e., intrinsic value), Ethereum is one of the only blockchains that actually has any tangible value (i.e., generates cash flows). A similar idea goes for Solana. Solana is super centralized but it has incredible network effects and tons of developer and user activity. What it may lack in decentralization is made up for in developer and user market share. According to some investors, network effects trump all (including decentralization).
(3) Are there Layer 2 blockchain scaling solutions (see: https://www.coindesk.com/learn/what-are-layer-2s-and-why-are-they-important/)? Is there an execution or smart contracting layer built on top of the base layer in order to solve one or more of the blockchain trilemma issues? Scalability, decentralization, & cost to transact. If you plan to invest in a Layer 2 solution you need to determine whether there is value accruing to these layers? Said another way, does the Layer 2 make money or do all the fees flow down to the base layer? If there is value accrual, then the scaling layer may be a great investment in addition to scaling the ecosystem. There are many different forms of Layer 2 solutions with an almost infiinite amount of trade-offs. These include peer-to-peer networks, sidechains, and separate global ledgers. A few examples include: Optimism, Lightning, Arbitrum, zkSync, Stacks, Rootstock, & Polygon.
(4) Are there promising ecosystems or critical infrastructure outside of the Bitcoin and Ethereum blockchains? These blockchains may either be base layer blockchains or innovative infrastructure designed to scale the crypto ecosystem agnostic of chain loyalty. Further, do these projects have compelling value accrual mechanisms in place to reward token holders (i.e., is there fundamental value)? We always come back to whether there is fundamental value or whether it's mere speculation. Sometimes speculation pays but you need to have a deep understanding of the project(s) you are investing. A few examples include:
(a) Cosmos (ATOM) provides an ecosystem of blockchains designed to scale and interoperate with one another. CRG has not performed due diligence on this project yet but it does appear to be an interesting piece of crypto infrastructure that could grow the ecosystem.
(b) Thorchain (RUNE) is a decentralized cross-chain liquidity protocol that allows users to swap assets between blockchain networks. A very interesting piece of infrastructure. Again, CRG has not performed diligence and does not know the level of decentralization provided nor the types of assets that can be swapped. Are they native assets or wrapped? These pose further investigation before considering any serious thought of investment.
(c) Chainlink (LINK) is a decentralized blockchain oracle network that interacts with any blockchain. It provides off-chain data for on-chain smart contract execution. Many think it is the most important scaling technology in the entire crypto space. Further, there have been attempts to provide fundamental value for LINK token holders in the form of staking. Staking goes live later this month.
First and foremost, Crypto Resource Group is believer of decentralization. CRG believes decentralized projects have tremendous intrinsic value as the highest form of public good (they transcend nation-state and corporate boundaries). Truly decentralized protocols are pressure relief valves for an increasingly dangerous and autocratic world. Alternatively, investors may prefer cash/token flows and need to be able to discount these flows well into the future (think DCF modeling). Cash flows, blockchain native discount rates (i.e., yield curves), and network effects (Metcalfe's Law, Reed's Law, etc.) generate real value to a blockchain. These blockchains may act more like traditional tech companies instead of their decentralized cousins. The net net is there are many ways to invest in the crypto markets. The way to succeed is to have a strong well thought out vision and find projects to invest within that frame.
CRG hopes this post was helpful for framing your investment thesis. If you'd like to learn more please schedule a call today!
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