Fair Launches Will Disrupt Crypto VC
How $YFI, $YAM and "fair launch capital" point towards a future where pure-play crypto VCs become less relevant
|Ian Lee||Aug 31, 2020||12|
Over the last decade, venture capital has become increasingly abundant, while the number of investable founders has—relative to the amount of capital—become scarce. That’s why millions of dollars are being thrown at experienced entrepreneurs without a deck—VCs will literally give them as much money as they can, even if it’s not necessarily best for the founder or startup.
As a result, more and more founders (and VCs too) are acknowledging that capital is becoming a commodity. This dynamic is even more extreme in the crypto space.
Fair Launches: Crypto Projects That Never Take VCs’ Money
Andre sent shockwaves throughout the crypto industry when he launched $YFI with no pre-mine (i.e., founder ownership) or venture capital. If you’re a reader not in the crypto industry, just think about that for a second. A founder launched a crypto project with no founder equity or venture capital. 🤔
In four weeks, $YFI has gone from zero to over $30,000 per token and a $1 billion valuation. $YFI is owned by its community of users, and everyone had a “fair” (more on this later) chance to receive $YFI tokens when they were first distributed. (You can now buy them on decentralized exchanges like Uniswap.)
Since then, new projects launched following in $YFI’s footsteps including $YAM, $BASED, $SUSHI, and more with a similar pattern: no pre-mine, no venture capital, and no way to own the network before public launch (versus VC-funded projects where investors buy pre-public ownership allocations).
If fair launches become more common, sophisticated, and successful, they should scare the sh*t out of crypto VCs. In recent weeks, some of the world’s best crypto founders and builders are so inspired by Andre that they’re now questioning whether to take VC capital at all. In fact, many crypto projects may not need as much venture capital going forward, especially if they’ve forked a majority of their code and don’t require as much engineering, business development, or ongoing support. This is largely true for many fair launch protocols like $BASED and $SUSHI (Uniswap fork) as well as money games like $YAM, like it or not.
What Andre did with $YFI is truly extraordinary, but fair launches still have a long ways to go before they can truly disrupt crypto VC at a meaningful level of scale. That said, I’d like to talk about how this might happen in the coming months and year.
Below are a few ideas for how fair launches could evolve over time and eventually become dominant. Crypto VCs, take notice—the game is about to change.
Evolution #1: Fair Launches Will Become More “Fair”
The dominant mechanism that crypto projects use to fair launch is “liquidity mining,” which disproportionately benefits whales with the most liquidity. It’s simple: whales with more assets mine a disproportionate share of the fair launch—so fair launches tend to make the rich richer.
That said, fair launches are generally more distributed than most VC-backed crypto projects, even when you take into account the impact of liquidity mining that disproportionately benefits whales (e.g., the top 10 addresses own 20% of YAM v2). As fair launches are still early experiments, that means there’s a lot of opportunity to learn how to further iterate and improve upon the distribution.
Note: the analysis below is a snapshot and estimate based on Etherscan data after taking out exchanges and pooled contracts (e.g., Uniswap, Aave). It’s directional and may not be 100% accurate.
Looking ahead, if the intent of a fair launch is to not just fairly but more equitably distribute ownership of a network, then there’s still a lot of room to pioneer new models for fair distribution. Here are a few ideas:
Short and Long-Term Incentives: Reward not only short-term liquidity providers and yield farmers who help bootstrap the network, but also longer-term participants and participation like proposals, voting, or other forms of work that help grow and sustain the network.
Non-Linear Rewards: Create weightings, tiers, and/or logarithmic curves for rewards, so that returns does not scale linearly with the amount of liquidity a user has and thus disproportionately benefit whales.
Phased Rewards: Allocate rewards to different users by stage of the project’s development (e.g., pre-Alpha, Alpha, Beta, Public Mainnet, etc.). PowerPool has done something like this with the launch of $CVP and their network, where they’ve broken their liquidity mining program down into 4 phases: Alpha, Beta, Gamma, and Mainnet.
Rewards Based on User Archetype: Reward based on the users’ archetype and historical onchain activity to attract the users you want to your network. For example, are they a yield farmer who quickly rotates their crops? Or are they someone who typically invests, stays with, and votes on a network over long periods of time? (These calculations would be done offchain using onchain data.)
These are just a few of many possibilities that have yet to be designed and experimented with. Over the next year, I think we’ll see successful pathways or as my colleague Gavin likes to call them, ‘recipes’ that will take fair launches to even more optimal and equitable levels of distribution in the future.
Evolution #2: Fair Launches Will Receive Non-VC Funding
As we saw with the $YAM experiment, fair launches can attract a lot of excitement and capital, but they can also quickly lose it, especially when the contracts are unaudited. For fair launches to succeed long-term, they’ll need to find a new way to fund expensive security audits from top firms before launching on Mainnet.
Today, it’s nearly impossible for your average dev to fair launch without first seeking venture capital to fund a security audit—as a result, we’re generally seeing two modes:
Raise venture capital -> launch audited, secure contracts
Fair launch unaudited (and potentially not secure) contracts
But what if there was another option? What if something new emerged in between? Well, in the last five days, two new exciting experiments launched specifically to explore this:
Experiment #1: fair launch capital
My teammates at IDEO (Gavin, Joe), our friend Reuben, and a number of incredible advisors launched ‘fair launch capital’—providing *free* (yes, free!) capital to founders for fair launches to pay for security audits and other startup costs with no strings attached. Yeah, you heard that right.
‘fair launch capital’ also has a pay-it-forward mechanism to help the next fair launch, then the next fair launch after that, and so on. ‘fair launch capital’ went live last Wednesday, has received an incredible amount of interest and support from the crypto community, and is currently accepting proposals.
Experiment #2: yearn.finance unsecured funding DAO
Then on Saturday, only three days after the launch of ‘fair launch capital,’ Andre once again melted people’s minds by launching a new way for founders to borrow money (unsecured) from yearn.finance for fair launch projects.
yearn.finance @iearnfinanceDelegated Funding DAO Vaults a new decentralized funding mechanism https://t.co/ALKAz8VFmu
The response from the crypto community has been overwhelmingly positive—and many (myself included) are incredibly inspired by Andre’s vision, altruism, and generosity towards the crypto space and everyone who loves it.
zefram.eth @boredGeniusThanks @iearnfinance @AndreCronjeTech . Now I don't have to pander to VCs to fund building my crazy DeFi & DAO ideas. I imagine many other builders are in the same position. If you think this space is exploding now, wait till the new wave of builders do their thing.
I personally believe we’ll see incredible, community-owned networks (no pre-mine, no VC) spawn from ‘fair launch capital’ and yearn’s funding DAO over the next few months. Crypto VCs better pay close attention. Remember: we’re less than 7 days since ‘fair launch capital’ was announced, which means the craziest and best stuff is still yet to come.
Evolution #3: Fair Launches Will Support More Advanced Protocols
One of the immediate criticisms of fair launches from skeptics and crypto VCs is that fair launches are only for forks or simpler money games and won’t be able to launch and grow more advanced protocols.
It’s a fair argument, as it takes a lot more to build, launch, grow, and sustain a healthy protocol than just a security audit. Protocols may need a strong engineering, marketing, and business development teams, for example, to succeed long-term.
This to me, however, is where we’ll see some of the most exciting, innovative, and counterintuitive things in the next year for fair launches. Here are a few examples:
Free Help: Fair launch teams will receive free support from people and organizations (e.g., other crypto project teams, build-centric investors/incubators, etc.) to design, build, launch, and grow their protocols.
Reverse Foundations: Post fair launch, reputable design, development, and operating teams will apply to receive large grants from the community to continue to build and grow the network long term. This may also happen for other important functions that the network needs, like marketing, business development, and legal.
Liquidity Miner Activists: Post fair launch, large liquidity miners with large stakes in the fair launched network will start to assign and invest resources to support the development and growth of the protocol long term.
These are just a few ideas that I can imagine now, but who knows what new things will emerge in 3-6 months.
Venture Capitalism to Altruistic Capitalism
Fair launches are really, really exciting. I personally can’t wait to see what’s next and how fair launches will start to flip venture capital on its head. Fair launches don’t just make venture capital a commodity—fair launches potentially make venture capital unnecessary. 🤯
So what remains then in a post VC world?
We’ll have to wait to see, but in my mind, what becomes most highly valued and sought by founders is not money but generosity, contribution, networks, capability, community, and values. I believe that will benefit people and organizations who are highly capable, networked, and values-aligned (e.g., generous, altruistic, etc.).
It’ll take a lot of experiments, trial, and error—but fair launches have the potential to disrupt crypto and the crypto VC landscape—and that’s an incredible thing. If fair launches are successful at scale, crypto funds won’t completely go away as they will likely shift from private to public market investments, but at least fair launches would meaningfully level the playing field and give people more equal opportunities to participate in the development and growth of some of the most exciting and consequential networks and technologies in the world for decades to come.
Isn’t that the whole point of crypto and decentralization?