Identifying Projects Capable of Building and Sustaining Momentum is Critical to Investor Success
Those who launch revolutions … will almost certainly fail to make the leap from good to great. No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. Rather, the process resembled relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum until a point of breakthrough, and beyond — Jim Collins
Jim Collins was talking about companies in relation to flywheels in Good to Great. I think his description is equally relevant to cryptoasset projects. As crypto markets are shaping up to be winner take most if not winner take all markets.
If you want to invest in them. A framework to think through how the factors critical to success relate to each other. Is vital to identify projects with the highest chance of breaking through to long term viability.
Flywheels are powerful because they harness the power of compounding. Sustained effort in a series of continuous small inputs adding up to a valuable output. Creating a positive feedback loop increasing the payoff of incremental efforts.
This is why I like the flywheel analogy for thinking through cryptoasset investments. Where a group of self-reinforcing activities is required for success and fueling any part propels the project forward. But, some elements are more critical than others.
Why? A flywheel is all about building momentum. While hard to start spinning once a flywheel gets going it takes less effort to sustain and grow the speed at which it moves. Increasing the compounding effects of additional inputs around the wheel.
Generating momentum from a solid cryptoeconomic foundation is hard. It’s challenging to attract the first few users and begin building the network effects required for success. Projects able to do so will gather more momentum as they move around the flywheel than their peers with shakier foundations.
Sustaining momentum once you get the cryptoeconomics right is almost as daunting. Making a project investable by fostering demand, capturing value, building a brand, and building a defensible moat are difficult tasks.
Once they get this far teams have to distribute the project’s token in a manner setting it up for further growth. While simultaneously properly rewarding efforts made on behalf of the project to date.
Think of Ethereum. It worked out the early kinks, Ex: infamous DAO hack, in time to scale from the ICO craze. Which naturally improved its security as additional users set up nodes and mining operations. Leading to an opinion from prominent SEC employees that it was sufficiently decentralized to no longer qualify as a security.
Putting these factors into place positions a project to take advantage of an engaged community to increase its long term sustainability. Versus just getting a temporary price bump for projects attracting interest without the foundation in place to capitalize on it.
Making the project less risky. Feeding into improved cryptoeconomics as more users feel comfortable using the protocol. Starting the cycle anew once more.
Why Order is Important
While a project doesn’t require perfect cryptoeconomics to succeed. Poor cryptoeconomics are harder to overcome than some other factors like decentralization. Making it more critical to success.
Many successful projects have started out centralized, like Ethereum, and decentralized over time. Where-as projects without a defensible tokenization model almost universally struggle to gain traction.
Why? If a token is issued exclusively to raise capital. Then the only rationale for holding the token is the expectation of an increase in value. Meaning your holders are always looking to cash out.
Syscoin is an example of how otherwise solid projects can struggle when this is the case. A decentralized version of Ebay. Syscoin accepts Bitcoin and other cryptoassets as payments in their marketplace along with their native token.
Users don’t need to acquire actual Syscoins to conduct transactions on the platform. Meaning, even though the team is impressive and the project delivers real value to users. Token holders are unlikely to realize returns on their investment.
Why would a new user buy Syscoin’s when they can already use Bitcoin or another cryptoasset they already hold to buy and sell in the marketplace.
The Starting Line
The Flywheel is a circle and the cycle can be started anywhere. Starting on the left side provides projects with less margin for error than starting at the top though.
Tron for example did not start out with sound cryptoeconomics and arguably doesn’t even have them now despite its success.
From the start Tron was highly investable because of Justin Sun’s personal brand and an ability to raise capital more technically sound projects could only dream of.
Kin, the Kik messaging app token, which had a massive community of users and dominant market position in the crypto hotbed of South Korea. Leading to a $1 billion network value shortly after its ICO. Making it seemingly a less risky bet than many other tokens with lower levels of engagement.
This momentum wasn’t enough to keep the flywheel spinning due to cryptoeconomic shortfalls and lack of investability though. With network value falling below $40 million as of April 12, 2019.
While Kik’s community is impressive. The Kin token does not possess any mechanisms to generate and capture value from the community as many other forms of payment are accepted in its ecosystem.
To date other sources of demand for the token via partnerships and other value add activities have proven elusive.
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