Original title: "Multicoin Capital: In Search of Outliers"

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How do you find the next Solana? In this final installment of our Multicoin Capital trilogy, we look at where Multicoin is finding future fund returnees, exploring emerging themes and groundbreaking startups.

andfirst partandActionable Insights。

Actionable Insights

If you only have a few minutes, here's what investors, operators, and founders should know about Multicoin Capital looking for its next successful venture. (We will refer to this company as “Multicoin” below).

• Composability is at work.Crypto Lego bricks have reached a maturity that makes it easier to combine these bricks and create new applications. Multicoin has backed several startups that fit this theme.

• Data DAO allows us to monetize our own personal information.We all create data, and companies like Google and Facebook monetize it. Cryptocurrency networks give us control over our data, which we can use to our advantage. We may see decentralized hedge funds, banks, and health insurance companies built on this premise.

• Cryptocurrencies have real-world applications.Projects like Helium show the power of cryptocurrency incentives for the security and growth of tangible networks. We could see similar efforts creating alternative power grids, ride-sharing platforms, and logistics providers.

• Multicoin is not interested in building empires.Managing Partners Tushar Jain and Kyle Samani didn't want to have a large team or grow assets under management (AUM) too quickly. Instead, Multicoin focuses on expanding the “state” of a cryptocurrency network — a computer science concept that refers to the sum of remembered user interactions.

The greatest football manager of all time is Sir Alex Ferguson. The Scot has won all the awards at club level during his almost four decades in charge, guiding Manchester United through an unprecedented period of 'reign'. Asked about the difficulties in his job, Ferguson highlighted the challenge of winning back-to-back titles. So much effort and ambition went into winning one title that it's going to be difficult to bring the same energy to secure a second. Not to mention one's own rivals, being stung by failure will boost their motivation to play. Ferguson has such talent, he has won six consecutive Premier League titles, and even won the three-peat twice. Perhaps more than any other achievement, that stamina has given his team a historic splendor, a dynastic feel - and as a lifelong Chelsea fan, I admit it's not a pleasant one.

The same dynamic exists in the venture capital industry. Undoubtedly, it is impressive to generate a top 10 fund, let alone one with historic returns like Multicoin's inaugural fund. But true greatness requires stamina and perseverance. To prove one's skill as an investor, it's not enough to do it once - you have to demonstrate that you can do it over and over again, across cycles and market conditions.

That’s Multicoin’s mission for the next fund cycle and beyond: prove it can maintain a winning edge. It has to do so, even as big funds move into once-forsaken areas, and the market recognizes the wisdom of Jain and Samani's early moves and tries to emulate them. Like every great team, Multicoin had to find new ways to win. In the context of venture capital, this means finding and funding the next Solana, Helium, and The Graph -- finding the next "outlier" that can return funds multiples.

composability.

• composability.Crypto has created a collection of “monetary Lego blocks” — “primitives” that can be combined in unusual and impactful ways, especially in DeFi. Now may be the time to use them more decisively.

• Data DAOs.Consumers are used to having their data siphoned off by Google and Facebook. Cryptocurrencies make it possible for us to have sovereignty over this information. Once it's under our control, what can we do with it? Applications for Web3 abound.

• Proof of physical work.We might think of cryptocurrency as a somewhat invisible field. But projects like Helium have shown that the industry can help real-world networks emerge. In the future, we might hail a taxi, receive a package, and get our electricity from a decentralized entity.

Finally, we will also consider what the future of Multicoin itself is.

let us start.

1. Topic 1: Composability

Multicoin isn’t exactly hiding what it sees as its biggest opportunity in 2022. Visit their team's Twitter profile, and chances are you'll stumble upon the same word in their username: composability.

The topic of composability was also the subject of Kyle Samani's keynote at the Multicoin Summit 2021. In that presentation, Samani outlined the investable opportunities created by the topic.

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Multicoin Summit

A classic metaphor for understanding this definition of composability is Lego bricks. Each building block is a resource that developers can use to build a larger, more complex structure. This structure in turn can be added to another structure. Crypto creates decentralized "currency Lego" - blocks with specific financial functions that can be recombined into new applications. For example, you might have a "loan" block that could be combined with a "transaction" block to allow loans to be issued across asset classes. It's a simple definition, but one that gives a sense of how the idea manifests.

In Samani's presentation, he predicted that within the next 12 months we will see new applications emerge as a result of this composability. Multicoin's confidence in the specificity of this estimate comes down to the emergence of Solana and the ecosystem it spawned.

Fragmentation"Fragmentation", a process of splitting a blockchain into shard chains that run semi-independently. Blockchains like Ethereum effectively decentralize demand through this segmentation, reducing transaction costs.

Multicoin believes this comes at a price. That is, through sharding, Ethereum loses some of its composability. Sharding on-chain activity increases overall throughput, but introduces latency as transactions populate the entire network—necessary to maintain a single source of truth. Even a momentary difference can fundamentally disrupt"Currency Lego"function. For example, does the order book work well when transactions are split across several shards? Jain shared his thoughts on this question.

You cannot split an order book into shards. It doesn't make sense. The whole point of an order book is to find the best price. By splitting the order book, you force the market maker to synchronize multiple order books. By definition, an order book needs to be a single place that hosts all orders and emerges with the best price. Nobody wants a second best bid.

This view raises a question: how do you deal with scale if you think sharding hurts composability?

Part of the reason Multicoin has gained such conviction in Solana is that alternative layer 1s present a solution. By utilizing a different architecture without sharding, Solana achieves composability and high throughput. When Samani realized Solana had solved the problem, he recalls feeling like "a light bulb went on."

After a year in which Solana became one of the top 10 assets in the industry, Multicoin believes that composability is ready for its golden age. At its summit, the fund identified five specific areas of interest. In some cases, Multicoin has found suitable investments; in others, it is still searching.

1. A “fully collateralized” Stablecoin

One manifestation of composability is UXD, an algorithmic stablecoin - a topic we covered in some detail during our in-depth study of Terra. Like Terra, UXD is truly decentralized. Unlike Terra, UXD is collateralized; or as Jain describes it, “full, perfect collateralization.”

How does UXD do this? By following a "delta-neutral" strategy -- simultaneously going long in the spot trade and short in the futures contract.

This can get a bit confusing, so let's use an example. Let's say you want $100 worth of UXD. To get it, you'll open UXD's app and deposit $100 worth of cryptocurrency - for example, SOL. In exchange, you will receive $100 in UXD, which you can then spend, save, or exchange throughout the cryptocurrency universe. If at any point you want to redeem your UXD for USD, you can do so at a 1:1 ratio.

UXD can maintain this price stability through a clever mechanism. When you exchange $100 worth of SOL for a Stablecoin, UXD deposits the money on a decentralized exchange as collateral. It then takes two positions, long $50 worth of SOL spot, and another $50 permanently short. Equilibrium is achieved: if the price of SOL falls by 10%, short positions increase by 10%, and vice versa. This architecture absorbs volatility -- assuming the platform and parties function as promised -- allowing for a scalable, decentralized, collateralized Stablecoin.

For UXD to work, two composable elements are needed: a decentralized spot trading platform like Serum and a spot and futures trading platform like Mango Markets. By utilizing these LEGO bricks, UXD looks set to bring a truly different Stablecoin to the market.

2、DeFi-Native Prime Brokerage

Even if you're familiar with the term, you may not know what a "prime broker" does. A service offered to large hedge fund managers, prime brokers, as their name suggests, act as a unifying organizer for the clients they serve. Its responsibilities include managing cash reserves, connecting with major trading platforms, providing leverage, and cross-margining. A prime broker like Goldman Sachs or JPMorgan will do this for you instead of managing buy and sell positions and calculating collateral across venues (as long as you're big enough).

Multicoin believes that the emergence of DeFi-Native prime brokers has already met the conditions. The building blocks for the above core functionality already exist, including buying and selling perpetual futures (Mango Markets, Drift, 01), date futures (Contango) and options (Zeta, Hxro, PsyOptions). Cross margin is also possible thanks to products like Marginfi. All that remains is to combine these options to build a Goldman-style player on Solana.

3. Embedded sports betting

Philosopher Edmund Burke said: "Gambling is an inherent principle of human nature". The truth of this statement ensures that the speculative business is large enough - however, it may still grow by many orders of magnitude.

Today, if you want to bet on sports in the United States, you have to go into a casino or call your bookmaker. It's not the most perfect experience. Multicoin sees an opportunity for this kind of transaction to happen on the internet, thanks to the existence of “building blocks” like BetDEX, a decentralized gaming protocol. With this kind of tool, you can imagine a world where fans of a certain sport gather on a Discord-like, decentralized messaging platform like Satellite to talk about their favorite team. A friendly conversation can easily lead to speculation. With just a touch of a keypad, consumers can place a real bet without ever leaving an app.

As Samani describes it, this type of product will "combine social, money, and wagering in a way that was not possible before."

4. Targeted fan engagement

Although 2020 is the year when the "creator economy" has received peak attention, the monetization and participation options for creators are relatively limited. Multicoin believes there is an opportunity for someone to build a blockchain-native platform for artists to better connect with their fans.

Let's see how this might work.

Imagine you are Taylor Swift. One day, after getting sent off, you decide to upload your entire catalog to Audius, a music streaming platform built on the blockchain. By doing this, you can earn AUDIO Tokens by uploading tracks and having people listen to your music.

Ahead of your next tour, you decide you want to reward your biggest fans with a chance to get pre-sale tickets. In order to do this, you use Dialect, which is a smart messaging protocol that allows you to send messages based on what users are doing on-chain. You decide to send your message to everyone who has listened to your music over 1000 times, the real Swifties. Only these folks will be able to buy early tickets, possibly even at a discounted price.

On open, permissionless systems, many kinds of interactions are possible.

5. Decentralized Record Labels

At the end of his keynote, Samani compared venture capital firms to record labels. While both invest in emerging projects with a high failure rate, they fundamentally play different games. As outlined in part two of this series, the way to drive excess returns in venture capital is to get non-consensus and right. Following the wisdom of the crowd will not find the next Solana.

Instead, record labels succeed by identifying the most popular artists. These entities exist not to oppose public comment, but to serve public comment.

Based on this dynamic, Multicoin sees an opportunity for a decentralized record label to emerge. In order for this to happen, an artist may first need to adopt a social token, a valid token that aligns the holder with the fans and future of the subject. For example, I can issue MARIO, which readers of this newsletter can choose to purchase. As The Generalist has grown, and my other activities, fans may see MARIO as having more social status or value.

In the music space, aspiring artists can offer their tokens to subsidize their work and attract mass attention. (As Samani points out, "When people have a token, they like to talk about it.") Those who buy early and prove themselves as token holders for emerging artists will gain financial and social capital in successful picks, building their own As a deft curator of music.

Over time, Multicoin believes these curators may choose to join forces to form a kind of Universal Music DAO. Since their activity is on-chain, the rest of the world will see when they have endorsed a new artist - equivalent to signing a new act.

In his presentation, Samani noted: “This music venture DAO is the most convincing thing we’ve considered internally because it represents pure ambition. It’s not just an app — it’s much bigger than that. Much. It’s a huge step forward in capital formation.”

2. Theme 2: Data DAO

At the beginning of this trilogy, we tell the story of Tushar Jain's first company. As a recent graduate with some medical experience, Jain decided to build a business around the proliferation of electronic medical records. He asked himself, "What is the best use for this data?"

Jain appears to be back on the issue in 2022. During our conversation, he highlighted "data DAOs" as a particularly promising field and a budding obsession. This time, the central question he asked himself was: "What activities can you do as an individual that is of little value, but becomes very valuable when many, many people do the same?"

While early investing in Helium is one answer to this question, Multicoin believes there are many others. I have identified four areas that fit this thesis and could yield promising opportunities.

1. Map DAO

While reviewing other videos from the Multicoin Summit, I found a discussion between Jain, Helium co-founder Amir Haleem, and a third guest. Ariel Seidman, founder of Hivemapper.

Hivemapper is creating a decentralized global map that rewards contributors. The company incentivizes the collection of location data through a network of independent drivers. By installing Hivemapper's dashboard camera, drivers can start earning local Token HONEY. This makes contributors owners of the network and rewards them for being early contributors - as Hivemapper becomes more valuable, so does the price of HONEY. Early adopters are rewarded handsomely, as Helium is a case in point.

Like Google Maps, Hivemapper makes money by providing a mapping API to developers. But importantly, Hivemapper does it in a more cost-effective way. In his presentation, Seidman pointed out that the cars Google uses for mapping cost about $500,000, while Hivemapper only needs to provide relatively low-cost cameras.

In conclusion, Hivemapper is a classic response to Jain's problem: while it may not make much sense for a single person to record their daily driving, millions of people can create the most accurate maps of humanity.

2. Invest in DAOs

Our article on investment firm Coatue discusses how the firm uses its internal data platform, Mosaic, to gain an investment edge. Mosaic helps Coatue measure the granularity of the startup's traction and revenue by pulling in credit card and spending account data. Services like Second Measure have emerged to replicate this advantage, providing anonymized purchase data.

The emphasis that hedge funds place on such services reveals an obvious fact: the more relevant data you have, the better investment decisions you are likely to make. We can re-imagine what a hedge fund model would look like if it were built with a DAO structure. Investing in a DAO is not about buying datasets (available to anyone with sufficient funds), but rewarding consumers for voluntarily donating their data. Upload your Amazon transaction history, export your Twitter social graph, share your location data -- and get tokenized compensation.

We generate a wealth of information in our daily lives that may mean nothing to us but can provide a real investment advantage. By giving, we can be compensated and share the upside generated by our collective message.

3. Bank DAOs

The same mechanisms described above could prove useful in other financial contexts, notably lending. Over the past 20 years, tech-enabled lenders have emerged that use alternative data to underwrite loans. In some cases, this involves social graphs and behavioral information. Lemonade, a provider of home and renters insurance, once boasted that its app was able to catch"nonverbal cues"-- before realizing how terrifying that sounds.

Again, we can rethink this pattern as symbiotic rather than parasitic. Rather than having our faces, social lives, and online activities scanned unknowingly, we can donate our data to improve the underwriting capabilities of a jointly owned bank. In exchange, we will receive a token and share ownership of the entity. Assuming this data is somehow predictive, our bank DAO should have compound value.

4. Healthy DAOs

Much of the logic above applies to the healthcare world. We create -- and contain -- data that can be extremely valuable for a wide range of healthcare applications. First, we can contribute our data to improve health insurance underwriting. Relevant information may include our biometrics, eating habits, Seamless history, and how much we walk each day. You can connect Strava, Pokemon Go, Uber, and any number of other apps to produce a clearer bird's-eye view of risk by demographic. Again, consumers can benefit from the upside this process creates.

Other opportunities abound. Healthcare startup 54gene has raised more than $40 million in funding for its genetics platform. The company compiles unique datasets to improve healthcare, with a focus on gathering genetic information from African immigrants. According to 54gene's CEO, the data was donated by volunteers.

At least one project is reimagining this on-chain structure. By purchasing an NFT from GenomesDAO, users receive a genome sequencing kit. The information is sent back to the GenomesDAO team and stored securely. In the future, DAOs could sell this anonymous information to improve drug discovery and other healthcare efforts. We should expect different configurations to come to market, utilizing similar structures.

3. Topic 3: Physical Proof of Work

We've touched on Helium several times throughout this trilogy. As a refresher, Multicoin's portfolio companies have curated a fully decentralized wireless network. By purchasing a Helium hotspot, consumers can help expand and improve a vast network of connections. It's effectively an alternative infrastructure project that's self-reliant and borderline unkillable.

proof of physical work"proof of physical work"-- This is a phrase coined by Jain.

1. Power grid

Last year, blackouts rolled through Texas. As a winter storm sweeps through the Lone Star State, inadequately protected equipment freezes and stalls, leaving 11 million residents in the dark. It could be worse; the chief executive of the state's power grid says it's only one step away from catastrophic outages of the kind that could take weeks or months to resolve."seconds and minutes". Even those with access to electricity were hardly spared. Thanks in part to Texas' deregulated energy market, the cost of electricity has skyrocketed, with some seeing monthly bills jump from $130 to $3,000.

In the aftermath of the crisis, generator sales rose sharply as citizens sought to protect themselves from future power outages. With generators costing thousands of dollars, this solution is only available to some of the population.

Creating an independent grid coordinated by cryptocurrency incentives could be a fruitful solution. Through a combination of generators, solar panels, and even wind turbines, it is possible to create a"Microgrid", as a fail-safe or real alternative. Houses that generate excess electricity can distribute electricity locally and earn Tokens. Those who utilize this surplus electricity can make payments, all within a closed system. As a benefit, much of this infrastructure could be tilted toward cleaner, renewable energy.

While Texas may be the best market to experiment with such an effort, the growing likelihood of climate disruption means there will be global demand for operations like this.

2. Car sharing

Reed mentioned in one of our discussions that Multicoin is looking for a decentralized Uber competitor. The idea had been floating around for a while, but failed to create a credible challenger. A 2018 New York Times article outlined the idea's potential. Drawing on insights from Union Square Ventures co-founder Brad Burnham, the article explains how “transit protocols” facilitate the emergence of on-chain challengers.

Just like GPS gave us a way to discover and share our location, this new protocol will define a simple request. I am here and want to be there. A distributed ledger can record all a user's past trips, credit cards, favorite locations -- all the metadata that services like Uber or Amazon use to encourage lock-in. For the sake of argument, call it a "traffic agreement".

Once established, applications can be built on top of Transit, using Tokens to start the system. Let's say you have a car and want to start offering your ride-sharing service. In this case, you can plug in an application built on the protocol and start earning Transit Tokens, which appreciate in value as the network grows.

Now may be an opportune time to resurrect the concept, as the infrastructure is more mature and adoption of cryptocurrencies is relatively widespread.

3. Third party logistics

The last idea Reed shared was the concept of a decentralized third-party logistics (3PL) provider.

While you probably don't spend much time thinking about them, there's a good chance that 3PLs play an important role in shipping many of your home's belongings. Although the businesses are different, 3PLs serve three main purposes: warehousing, packing and delivering goods.

Could an on-chain, decentralized version of these activities work?

secondary title

4. The future of Multicoin

We know that Multicoin is looking for ROI for its next fund. But what about Multicoin itself? What does the company hope to be in the next decade?

When I asked Tushar Jain this question, he replied, "I think the right question is what is cryptocurrency becoming? We are not here to build an empire. We do not want to conquer the world. Our success comes from the growth state of the cryptocurrency network" .

The company seems to think the best way to do this is to keep doing what it does best: spot revolutionary projects early on and help them build "status." It’s worth noting that Multicoin’s funds tend to be smaller than other players in the industry. After its frenzied inaugural venture fund, it raised a modest $100 million second vehicle. According to The Information, the scale of "VFIII" will not be too large.

While many other crypto funds have announced multi-billion dollar deals, Samani and Jain seem keen to stay small enough to play the early game and still drive outsized returns. “These are conversations the team loves,” noted limited partner Brian Walls, adding that he thinks Multicoin may have turned down an additional $1 billion in LP interest.

Multicoin’s asset management discipline is indicative of the long-term strategy the company appears to be pursuing. It's not about optimizing fees or impact, but an unwavering focus on finding the top 1% of entrepreneurs and getting them through their lifecycle.

Reed emphasized this during our talk, noting that Multicoin will continue to prioritize this end goal, although changes in the market may require a different approach. Reed said: "You need to reshape the company almost every 12 months because the market changes. What services will the portfolio company need in the next year? When cryptocurrency is mixed with new users, geographies and markets, it will happen. How does that change? These are things we’re focused on figuring out. Our goal is to grow without losing our core values.”

Don’t expect Multicoin to staff a large team anytime soon, though. While companies like a16z have built extensive support services, Jain said, “Our goal is not to have thousands of people working here.”

Might Multicoin expand geographically? Adding Mable Jiang to cover the Chinese market proved to be a smart move. Given that cryptocurrencies are a global phenomenon, it seems logical that the company might want to add localized investors in markets like Indonesia, Nigeria and India. For now, this doesn't seem like a huge priority. Jain noted that India and Germany -- particularly Berlin -- could be key geographic areas, but the company isn't expecting any major hiring. "We've come a long way," Reed added.

To get an idea of ​​what Multicoin might become, we can go back to Jain's statement. The company succeeds when the “state” of cryptocurrency grows. what does that mean? Multicoin does not use "country" as a synonym for country or sovereignty. Instead, it refers to the computer science concept in which a "stateful" system remembers previous user interactions. In this regard, status reflects user engagement. As more activity occurs on the blockchain, the marketplace becomes more stateful, allowing for richer experiences to be built. It's a flywheel that's already picking up speed.

This is what Multicoin is after. It wants more usage, more value, more state to be hosted on a network like Solana and governed by network participants. It is chasing something both amorphous and quantifiable—a steady revolution. To achieve this goal, Jain and Samani seem determined to be stubborn in their vision of increasing cryptocurrency status, but flexible in the details.

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