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AN INVESTMENT CASE FOR CRYPTOASSETS.

The world of blockchains and 'Crypto' is a labyrinth of jargon, hype, geniuses and conmen. Money makes humans behave in strange ways and as this space is about reinventing money and making it programmable, it's no surprise that it's an almost impossible ecosystem to navigate successfully.

If you're looking from the outside in, you couldn't be blamed for thinking that the entire space is madness and not worth your time and effort. If this is you, think again, as at the heart of this movement lies the potential for truly extraordinary growth.

Before we look under the hood, we need to have a quick recap on the space. Generally speaking you can split the crypto space into two.

Crypto-currencies and Crypto-assets. Bitcoin and a few others like Zcash, Monero and Grin have similar aims, to be either a direct medium of exchange or a store of value. The potential of a 'coin' becoming a major global store of value, while being rare in number, could create the perfect storm of price fluctuations. Take a quick look at a chart of Bitcoin's price movements since its inception and you'll see what I mean.

The second area of crypto-assets is all about smart contracts, decentralised applications and decentralised or trust-less infrastructure, which is where we're most interested at KR1, as it represents the widest range of possible opportunities for an early stage seed investor. Ethereum was the first platform to bring this part of the ecosystem to life with the aim to use the main attributes of a blockchain (permissionless, censorship resistance, borderless transactions and decentralisation) not just to create a store of value, but also to run decentralised applications. Imagine a company like Betfair, and now imagine you can interact with an almost identical application but one with no jurisdiction, no direct employees, no licenses, no fees and available to everyone, everywhere. Scary stuff? It certainly is for the current centralised businesses because they couldn't compete with the decentralised version.

In order to successfully take out central control of an application you have to do a number of things. Firstly, you have to replace the work of the centralised entity with code that processes the same logic, and secondly you have to incentivise the participants in the application's network to behave in a way that secures the blockchain and ensures they perform work that the code can't do. This is achieved with utility tokens aka crypto-assets, which, using the profit motive, programmes the behaviour of the token holder to perform certain work, like voting, putting up collateral and the sourcing and inputting of data etc. A good sized token holding represents a scarce slice of a potentially global network. Why would these have value? Let's dig a little deeper.

The key element, and probably one of the aspects of this space that's least understood, is that all the Ethereum code and indeed the codebase of anything built on top of it, is open source. Why is this so important? Having the code transparently available to all is the bedrock of decentralisation (we all can verify what the code is and what it's attempting to achieve) and decentralisation is the key to knowing that the application isn't under the control of one entity trying to enrich themselves at the expense of others.

Now, keeping this in mind, let's do a quick thought experiment. Imagine a decentralised version of Uber (let's call it =E2=80=9CDuber=E2=80=9D) where the computational work done behind the scenes isn't proprietary code as it is today, but open source code on a blockchain. This code is available globally and connects anyone looking to travel with a driver. The service takes a 0.01% fee, which pays the cost of the journey's transactions on the blockchain. Now envisage that this decentralised application has gained the network effect globally because of its permissionless technology that anyone can join (as long as they've built up enough reputational credit for people around the world to use the service). Why would you order a taxi through any other service? Why would you drive for any other employer? The driver keeps 99.99% of their fee and as the user pays far, far less for their journey than with a centralised, rent-seeking company like Uber.

Think back to this application being fully open source, and ask yourself, once a system like this has gained traction around the world, how could anything compete with it EVEN IF ANOTHER COMPETITOR IS DECENTRALISED? In a world of open source innovation, the application with the biggest network effects can endlessly take better code from around the ecosystem to upgrade itself. That's why at KR1, we're constantly on the lookout to buy tokens in networks that might one day gain the network effect. This logic does not only apply to end-user applications but also works for decentralised replacements of existing internet infrastructure, general computing, file hosting and many other things. As the above example shows, these applications stand a chance of gaining global dominance and due to the open source nature of the codebase they cannot be competed with. With no middleman, the fee structure would move to the lowest possible network fee for the system to stay stable. There's is nothing to undercut.

The =E2=80=9CDuber=E2=80=9D network token would capture the value moving through the system. Remember the network token is fully programmable and could all at once be the method of payment, the method of reputation, the method of network governance and the method of security within the network through collateralisation. If we continue at the current pace of innovation, this new decentralised world is not far away and nor are some extraordinary valuations.

James Bowater was in conversation with George McDonaugh, CEO and Co-Founder of KR1 plc, the London listed cryptocurrency and blockchain investment company. KR1 is a publicly listed investment company on the Londonbased NEX exchange. Visit www.kr1.io for more information.

IMPORTANT INFORMATION: THE VIEWS AND OPINIONS PROVIDED BY CITY A.M.'S CRYPTO INSIDER AND IN THE CRYPTO A.M. SECTION SHOULD NOT BE TAKEN AS INVESTMENT OR FINANCIAL ADVICE. ALWAYS CONSULT WITH YOUR FINANCIAL ADVISOR.

If we continue at the current pace of innovation, this new decentralised world is not far away.

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Publication:City AM (London, England)
Date:Jul 30, 2019
Words:1056
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