How does an investment thesis evolve? How will business models change alongside crypto, driven by the concept of user-staking? In a recent episode of Blockstack’s podcast The Stacks, Patrick Stanley, the company’s Head of Growth, did a deep-dive into these questions with Joel Monegro. Monegro shared his insights based both on his previous time at Union Square Ventures, and in his current role as Founder and Partner at Placeholder, a New York City-based venture capital partnership.
Placeholder’s Founding Thesis
Stanley opened the podcast by asking Monegro to share Placeholder’s thesis. “At the highest level, our goal is to invest in decentralized information networks that do a better job at distributing data, wealth, and power than the current systems that we have in society,” said Monegro. “How we got to that conclusion is an interesting story.”
When Monegro got started in venture capital at Union Square Ventures in 2014, it was an interesting time to be a web-focused VC because big web platforms like Google, Apple, Facebook, and Amazon were already dominating the space, and making it very difficult for startups to compete and succeed. “We were seeing round sizes get larger. We were seeing the cost of competition get higher. It was apparent that it wasn’t the best time to be a VC in that kind of environment,” said Monegro. So USV, which had just invested in Coinbase, started to look at the next cycle of innovation in technology. “There was an understanding that there was something really important happening with blockchains, Bitcoin, and so on. As we started making investments in the blockchain space, I studied the history of information technology and found this pattern of evolution based on open source platforms, starting with the transistor, which enabled the kind of hardware era that then consolidated around IBM.” Then the introduction of the microprocessor directly challenged the business model of IBM, followed by general-purpose processors that kick-started the software era that consolidated around Microsoft. Then, Microsoft smart market power was Linux in the web with an open operating system and distribution network.
“And then we got to where we are today,” said Monegro. “We are now consolidating into Google, Apple, Facebook, Amazon, all of which leveraged this open operating system architecture and this open distribution mechanism. And so all of a sudden blockchains seemed really important because they seemed to have the same characteristics with regards to how they counter the business models of the incumbents…because they’re based on open data and user ownership of data versus centralized data systems. So that’s what got my interest started in kind of pursuing or pulling the thread of blockchains.”
When Monegro and his business partner founded Placeholder, that idea expanded into the opportunity to create decentralized systems that — like the internet — were protocol based, but that also dealt in data, as opposed to only dealing in communication the way the internet does. “And so the intuition was that these systems were going to capture value in a way that prior generations of protocols were enabled to capture value within themselves,” said Monegro. “And so the original thesis was really based on that idea that open data systems, built- in blockchains, were going to create a bunch of business model innovations and then provide a platform for innovation for startups to compete against incumbents. That was the thesis when we started.”
Thesis & Business Model Evolution
Monegro launched Placeholder in 2017. But even over the past three years, the company has been workshopping their fundamental constructs and changing focus. “What’s cool about the job of investing is, you start with a thesis, you invest, and then you kind of evolve it and refine it,” said Monegro. At its inception, Placeholder concentrated their efforts on the technical innovation side of things, like the difficult task of building a decentralized file storage system. But eventually, they shifted their efforts more to services. “As we were investing in crypto, interesting opportunities were happening with people who were using the basic components of the technology — the creation of tokens, and the programmability of tokens — to create new business models around services. And we started to see people having somewhat centralized architectures, but then innovating with tokens into programmability with tokens.”
In 2018, Placeholder shifted their attention to spaces like DeFi to invest in infrastructures beyond the technical lens. “DeFi seems like one chapter out of this ‘book’ that’s rooted in tokens, ownership, and wealth creation,” observed Stanley. He said that after his first DeFi meetup, one of his takeaways was: ‘Wow, this is like a pulsating money planet — a program that’s hard to look away from as a developer.’ I think that’s still very much is the case, and it definitely attracts intellectually-curious people.”
Stanley also made the point that there are business models to be unlocked outside of DeFi that that leverage existing infrastructures. “Now the interesting thing — and something that I hadn’t really considered until we got to that point of understanding — was that DeFi is not so much a vertical category within the space of crypto, but it’s a horizontal layer of infrastructure…and it’s like the financial system,” Monegro responded. “If you go start a coffee shop, you rely on the financial system to provide a whole bunch of the infrastructure that allows you to operate, even though your business has nothing to do with finance. You have credit card processing, you have a bank account, you’re taking in payments. And so what we’re going to see is people leveraging DeFi to create business models that have nothing to do with finance at all, but that still use these pieces of infrastructure to create new business models.”
Stanley recapped Monegro’s recent post about thin applications as the launchpad for talking about user-staking (which Monegro defines as leveraging tokens to distribute value and upside to users). “I’m most fascinated by the user-staking models because they represent a genuine business model innovation. The examples above are built more like traditional web applications. They are more centralized and custodial than thinner apps like Zerion. But what I love about their staking models is how they change the user-service relationship. Web users are locked in by force through the centralization of data. Crypto applications, even if they’re built more traditionally, don’t have that same ability to lock you in. But user-staking creates a kind of ‘opt-in’ economic lock-in that benefits the user by turning them into stakeholders in the success of the service. It creates defensibility through user-ownership instead of user lock-in. This presents a universe of fascinating consequences, to be explored in future work,” wrote Monegro in the post.
What Stanley took away from that was that there is a huge business model innovation unlocking, especially if it has the right components around it. The complementary component aspect is vastly under-explored, in addition to the user-staking model itself. “I think that’s ripe for opportunity,” said Stanley. “But what’s really fascinating is you’re taking the user of an app and the stakeholder of an app, and combining them into one synthesized user. The thing I love about that is it adds a focus to what you’re measuring.” It also pushes the business model directly to the markets, creates a utility for the token off the bat, and creates a community that has a very strong network effect with a very well-defined use case.
To Monegro, there’s a parallel between this concept and unions. He wonders if we can use current technologies to create unions like workers did during the industrial revolution as a way of restoring some balance and gaining representation once corporations became too powerful. “Think about the whole idea that when we’re dealing with web platforms, we’re not the customers — we’re the employees,” said Monegro. “We’re the employees of Facebook when we’re giving them our likes and our data. Could we create user unions, maybe with a Dao model?” That might mean users get legal representation, or could hold a board seat in a company. Or it might be more integrated like what we’re seeing today with special rights or lower fees being granted along with the ownership of user tokens.
To Monegro, a key question to be explored next is how do you give upside to the user in the form of profit-sharing from the financial growth of a platform? How should users get rewarded for hodling, Stanley posed as an example. To that end, Stanley said, the Blockstack team came up with a concept called Proof of Transfer (PoX) — a generalization of Proof of Work where you secure the blockchain. “Previously you may secure in this way with proof of burn, needing to burn Bitcoin and producing Stacks from it,” explained Stanley. “In Proof of Transfer, instead of burning it, you send the Bitcoin directly to qualifying Stacks holders. And so you can use this concept in a fractal-like way, with app chains. If you’re logging into an app and you’re hodling the token, you’re not only getting the benefit of the utility you’re a stakeholder of, you’re also receiving a kind of bond earning for increasing your ownership in the decentralized internet.”
Monegro agreed that it’s better to have user stakeholders than user-workers. “If you require people to invest in the platform…to become part-owners, part stakeholders, that’s where you get that idea of voluntary economic lock-in. Where I’m locked into this service — not because I’m held hostage — but because I’ve made an investment in it.”
*Generated automatically and may contain transcription errors.
Today on The Stacks Podcast we have Joel Monegro from Placeholder VC. I’m really excited to have Joel on the cast to talk about Placeholder, the projects that he funds, and also some of his latest thinking on thin applications. Joe, thanks for joining the podcast.
Thank you for having me, Patrick.
Yeah, my pleasure. I got really excited to have you on, especially given your latest writing, but we’ll get to that after some housekeeping. I wanted to first dive into Placeholder as a company and its thesis. What I was reading was pretty dense, and I think you really got to focus in and pay attention to the thesis to understand what it is. I wondered what the thesis is and how it’s evolved, if any bit, over the past few years.
Sure. At the highest level our goal is to invest in decentralized information networks that do a better job at distributing data, wealth and power than the current systems that we have in society. How we got to that conclusion is an interesting story. I got started in venture capital in 2014 at Union Square Ventures. It’s been around since 2004, 2003. And when I joined, it was a very interesting time to be in a web-focused VC because we were already starting to see how the dominance of big web platforms like Google, Apple, Facebook, and Amazon was making it very difficult for startups to compete and succeed. We were seeing round sizes get larger. We were seeing the cost of competition get higher. It was apparent that it wasn’t the best time to be a VC in that kind of environment.
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