The correct approach for venture capitalists to enter the blockchain field (knowledge)

summary

Blockchain is becoming popular. How should venture capital invest in blockchain startups? This article provides some opinions on technical principles, selection criteria, key judgment points, and how to follow the development of the industry. If you are engaged in venture capital, you should read this article. I hope it can be of some help to the development of blockchain in my country.

Preface

The wind has started to blow in Europe and the United States, and the domestic blockchain field has also begun to heat up. Everyone is thinking that the east wind will blow. It would be great to occupy a favorable position before the wind blows and enjoy hundreds or thousands of times of returns in the next few years! Congratulations to you and me. Obviously, we have already started on the road of rebuilding the Internet in advance. It is very likely that we will enjoy early entry because we provide the most original capital for building the value Internet, and thus enjoy excess and rich returns.

But wait... don’t be impatient. Based on the results of recent exchanges with several friends in the venture capital industry, I must hold back your vigorous pace. Please carefully examine whether you really understand blockchain. The following is a recent report from WIRED magazine (note [i]):

"Blockchain is a great design pattern right now, now how can we apply it to business? What is the key to doing that? That's what this group is thinking about." Blockchain is essentially a database that spans a global network and is maintained by independent machines. This database is not controlled by a single entity, but can still reliably track the transactions of assets. With Bitcoin, blockchain can track the transactions of money. But it can also be used to track anything that carries value, including stocks, bonds and other financial securities, as well as assets like houses and cars. In recent months, multiple projects have been seizing the possibilities of blockchain.

If you seem confused from the market and technology perspective, I suggest you read the following article carefully. After all, investment is a long-term job, so when the construction of the value Internet is just starting, find the right investment direction. As long as you are not biased, you don’t have to be afraid of slowness. In this way, you can always screen out a few unicorns, or even the next giant.

First: Thoroughly understand blockchain

If you want to invest accurately, precisely and quickly in the early market, you must first make an effort to understand what blockchain is. There is no trick here! Although there is no clear and recognized definition of blockchain at present, the characteristics are generally mentioned in a few points: distributed, trusted, collectively maintained, and reliable. And the four characteristics will lead to another two characteristics: open source and privacy protection. Blockchain uses a distributed collective operation method to implement a set of database technology solutions that cannot be tampered with, must be reliable and trusted, and obtain consensus. Although past history has proved that you can successfully invest in TMT without understanding Internet technology, the behavior of investing in TMT has become a trend after more than 40 years of information Internet construction, and blockchain technology research and development and market development are indeed in the early stage of the development of value Internet, and at the same time involve politics, economy, finance, society (digital society), law (computational law), computers, Internet, World Wide Web WWW, Internet of Things, artificial intelligence, automatic (unmanned) driving cars, e-commerce, Made in China 2025, big data, cloud computing and other fields.

By mastering the six characteristics of blockchain and gradually understanding them, you will be able to make decisions based on both rational judgment and intuition, and your judgments on projects will be more accurate. At this point, I suggest you attend a training course at Wanxiang Blockchain Lab X (Note [ii]), or similar training courses that the Internet Finance Museum will soon launch. These training courses are not for profit promotion. Investing one day and spending a little money to understand what blockchain is will give you a chance to justify the millions, tens of millions, or even hundreds of millions of dollars that you will invest. You will have a better idea of ​​what to do. You will also understand that the information Internet (first generation) has promoted or changed all aspects of human life, but due to its own technical defects, when it comes to business, when it comes to the basic structure of the micro-economy - the company - its organizational structure, operating methods, dividend distribution methods, etc. still retain the signs of bureaucratic behavior left over from the industrial era. If you do not want to attend the training course for various reasons, you must have an expert in blockchain technology in your team.

After completing the study, you must understand a few points: a super secure operating system that never crashes, a peer-to-peer and distributed database, encryption, open source, programmable, safe and transparent, and privacy-protecting, and there must be a unit of account and a token, etc. You must also understand in principle why blockchain is a credit creation machine and can create consensus.

Some questions to ask about your startup project are:

1. What is the consensus mechanism of this project?

2. Where is the mechanism for generating credit for this project?

3. How do you implement your distributed P2P transaction model?

4 After open source, where does your profit come from?

Second, the profit model of blockchain projects

What should be of most concern is the profit model and application scenarios of blockchain startups in the value Internet. The so-called value Internet, its connotation is the Internet that creates value, transmits value, and stores value. Its core is to construct a global distributed database operating system with blockchain. It can not only record transactions in the financial industry, but also record almost everything of value: ownership of shared cars, right to use shared cars, status of traffic lights, birth and death certificates, marriage certificates, education, financial accounts, medical procedures, insurance claims, voting, energy... anything that can be expressed in code and programming. Although blockchain was first applied in the financial field and used as FinTech, and the R3 CEV project on Wall Street, which is very popular but extremely mysterious, makes you believe that it will definitely develop in the financial industry (securities, insurance, banks), but it is always hard to guess how to do it. Or, what else can be invested in besides innovative projects in the financial industry. Here, I want to talk about the essence of blockchain technology: the expertise of blockchain technology lies in the ability to confirm the ownership, measure, trade, and permanently store every information and byte that will and will be liquefied online, representing value . Because its root is the atomization of information and data, that is, the determination of ownership. In this case, every individual or organization knows that "the data I create is mine", which will greatly stimulate the internal motivation to create more data. Moreover, if data is "unauthorized and cannot be moved", the Internet will have a brain and memory.

Startups should find application scenarios in these business links and create new value. This is absolutely different from the first generation of information Internet. It is not just information, but information that carries value and property rights. Of course, a lot of valuable information can also be free. Back to the application scenarios of the financial industry, information is value, because its creation, transfer and storage of value is actually the creation of valuable information, and the path is relatively short. And because of the security, transparency, privacy protection and other characteristics brought by blockchain technology, it can greatly reduce operating costs and compliance costs, which will create a large number of new products. Imagine that when a person's life big data is used as an asset, it needs to be processed and processed to generate credit, and there will be a large number of credit opportunities. Therefore, commercial banks have gained new opportunities in the Internet era.

Based on the above, questions that can be asked to startups include:

5. What is the value of being able to access the Internet with your help?

6. In the process of value circulation, have you created new value?

Third, the infrastructure of blockchain

Just like plants and animals need land to grow, the value Internet that has taken root needs blockchain infrastructure. Otherwise, the foundation is not solid and the world will shake. Therefore, as a venture investor, the choice of blockchain infrastructure is the biggest risk and opportunity . Just as the infrastructure of the information Internet era is composed of a large number of routers, switches, servers, firewalls, smart phones, personal computers and other devices, the value Internet era also needs infrastructure. Only on this infrastructure can a large number of application systems that consider transaction behaviors such as value creation, circulation and storage appear.

In the short history of blockchain technology, which has been around for only 6 years, there are countless shoddy blockchains that cannot withstand the blow and thus cannot survive. According to statistics from coinmarketcap.com, there are nearly 700 publicly operating blockchain systems. There should be no more than 100 private chains that are not publicly available. In this case, how to choose a good blockchain system requires some observation indicators: First, in order to achieve consensus, in principle, all modules that build the system need to be open source, and even private chains need to be open source within the alliance, otherwise there will be hidden dangers of hooliganism. The second is the market share and the number of participating users. The options that can be entered are the Bitcoin blockchain, and the Ethereum blockchain that is being developed at a high speed, and BTS to be observed. Third, the participating institutions or flag bearers. In foreign countries, I think the two institutions that should be looked at are the progress of the "Open Ledger Project" launched by the MIT Media Lab and the Linux Foundation. Participants in this project include giants in the equipment field such as IBM, Cisco, VMware, and many financial companies. In China, it is the Standards Department of the Ministry of Industry and Information Technology and the Internet Finance Association, which has been rumored for a long time but has not yet been listed.

Based on this, you can discuss the following questions with startups:

7. What blockchain do you use?

8. Would you create your own blockchain infrastructure?

9 If you create your own system, how do you ensure the security of the system?

Fourth, what are the projects that can be invested in at present?

After talking for so long, you have understood it all, but you still want to ask me: "I have a lot of money now, and I have relatively large amounts of funds to spend. Are there any ready-made, reliable projects? What are the high-risk, high-return ones?" As mentioned earlier, blockchain projects are still in their early stages, but projects related to credit reporting, medical care, mutual insurance, identity information, equity crowdfunding, points, and encrypted storage are gradually emerging.

The first thing that should be invested in is infrastructure. Bitcoin vouchers and Ethereum vouchers are both accounting units, which are the oil that assists the operation of the value Internet. For example, the Bitcoin system and the Ethereum system participate in the system operation accounting business. This business is already relatively mature. In addition to relatively stable financial profits, it can also provide a window for observing the evolution and development of the value Internet.

The second area that should be invested in is digital content copyright management and the construction of a secure, stable and encrypted infrastructure for copyright confirmation.

The third one is the last, but the lightest facility is the financial Internet project, such as credit reporting. This type of project is closest to the current information Internet and Internet financial projects.

Fifth: Small investment + time means big returns:

You can invest in reading books and visiting some websites frequently.

1. The Origin of Value, by William N. Goetzmann and K. Gott Loewenhorst

2 Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto

3. CODE and Other Laws of Cyberspace, Lawrence Lessig

4. Technological Empowerment: China's Internet, State and Society, by Zheng Yongnian

5 "Investment Revolution: Asset Management in the Mobile Internet Era" by Xiao Feng

6 "Device Democracy: Decentralized, Autonomous IoT Device Democracy" IBM Internet of Things Paper

7 Bloballizing Capital- A hisotory of the International Monetary System Barry Eichengreen

8 Blockchain: Blueprint for a new economy MELANIE SWAN, Han Feng, etc.

9 Finally, there are 3 websites: coindesk.com, 8btc.com and bitcoinmagazine.com

(Note: The electronic documents of these papers cannot be found. You can search them in the book module of zhanglian.info )

Sixth Other

Faced with the trend of distributed Internet brought by blockchain, it is difficult for large Internet companies in the existing information Internet era to cope with it. 1. Because this trend is distributed, it mainly changes the structure of information Internet where information cannot be empowered, thus creating a beautiful era where information can be used at any cost. Therefore, it has shaken the survival foundation of large Internet companies, and of course it has also hit and imitated small startups.

At this early stage, as a venture capitalist, you can launch some hackathon-like projects to discover ideas and discover talents earlier.

Summary 7

This article discusses the trend of distributed Internet brought about by blockchain. On the road to building the valuable Internet, venture capitalists must ensure stable, accurate and fast returns on future profits.

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Copyright Notice:

This article will be updated and was originally updated on 8btc.com or zhanglian.info
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About the author: I am Wang Liren, and I am a programmer, financial engineer, computational law practitioner , network and security technology engineer, blockchain technology consultant, and founder of Renmin Huijin Technology.

[i] Wired Magazine reported: http://www.wired.com/2015/12/big-tech-joins-big-banks-to-create-alternative-to-bitcoins-blockchain/

[ii] Wanxiang Blockchain Labs X Training http://blockchainlabs.org/blocktrain-x-program-2