11 Lessons For Cryptoasset Investors from Zero to One
Many domains can benefit from the insights articulated in Zero to One. The book that evolved out of Blake Master’s participation in a class Peter Thiel taught at Stanford.
I recently revisited the book to see if there were any lessons to be learned for evaluating Cryptoassets. Unsurprisingly there were and they follow here.
Original Notes these lessons came from.
1. Look for Projects with Fresh Ideas
The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them. Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange.
Do not invest in forks
2. There is no Formula
The paradox of teaching entrepreneurship is that such a formula (for innovation) cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be more innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas… If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
To reiterate, do not invest in forks
3. Identify a Contrarian Truth
What important truth do very few people agree with you on?
- Identify Cryptoasset projects other Cryptoasset investors think won’t succeed.
- Understand why they think they will not succeed
- Decide if this logic is valid
Do not be contrarian for contrarian’s sake. Being contrarian and wrong is useless. You need to be contrarian and right to succeed.
For instance if the consensus around a project is it has been abandoned. Then you need sound evidence of the possibility for resurrection before it would make sense to invest.
Throwing money at it because most people think it’s cooked. Is a good way to lose money because most of the time it turns out people are right and it is.
4. By Understanding what Everyone Agrees On
OUR CONTRARIAN QUESTION-What important truth do very few people agree with you on?-is difficult to answer directly. It may be easier to start with a preliminary: what does everybody agree on? … If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
Narratives evolve rapidly in crypto markets. Which are prone to wild swings between too the moon and the end of (insert name of cryptoassets here). Look at Ethereum which started out as a world computer and more recently evolved into the foundation of the burgeoning Defi ecosystem.
Investors were euphoric on Ethereum throughout 2017, early 2018. When it became clear expectations had gotten ahead of themselves on building a world computer. It suddenly was useless.
Projects with utility continued to build out around Ethereum. Now with the success of Dai and other decentralized financial products coming to the forefront. The case for Ethereum is resonating with the market again.
An investor who understood building a world computer was unlikely to happen overnight and got out when the market skyrocketed. Would have pocketed a nice sum they could reinvest at the low.
When Ethereum was being written off for dead. Just as its use case as the foundation for decentralized financial products was emerging.
5. Sales matter just as much as the product.
What nerds miss is that it takes hard work to make sales look easy… If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business-no matter how good the product.
Superior technology does not always win out in crypto. Projects need to sell people on the value of their protocol and why they should use it. Engaging a community of supporters to propel their success.
6. Last Mover advantage
You’ve probably heard about “first mover advantage”: if you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. That can work, but moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover — that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.
It’s commonly believed early projects with growing network effects have insurmountable leads versus upcoming ones even if the technology of the new project is superior.
While it is challenging to overcome network effects. It’s not impossible and investors backing successful late mover projects earn outsized returns.
I’m not convinced an Ethereum killer is out there. If it is and you are able to identify it. The return on your investment will be spectacular.
7. The history of progress is a history of better monopoly businesses replacing incumbents.
In the case of crypto progress reflects replacement of a traditional business with a decentralized network.
Leaving us with two key criterion to evaluate:
- How is the centralized incumbent offering deficient?
- Why is a decentralized network the right solution?
Ideology should not cloud your judgment when making crypto investments. Facebook’s use and abuse of user data may bother those with Libertarian political inclinations. This does not in and of itself make Facebook’s offering deficient.
As evidenced by continued user growth since the firestorm beginning in 2016.
If it does rise to the level of a deficiency that can be exploited. Despite the advantages for privacy and data security crypto offers. It’s not clear a decentralized social network could scale to accommodate user growth the way Facebook has.
So, before investing in a decentralized Facebook killer you would need to be confident it could scale efficiently to onboard new users.
8. Characteristics of Monopolies
Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding. This isn’t a list of boxes to check as you build your business-there’s no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable. As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
There is a high degree of overlap between monopoly businesses and successful crypto projects. To succeed crypto projects require novel* technology, a mechanism to generate network effects, a path to scaling, and a brand to help build mindshare with potential users.
*In crypto you should prefer open source technology. A distinction versus the model traditional software companies employ.
9. Sequencing markets correctly is underrated
The most successful companies make the core progression-to first dominate a specific niche and then scale to adjacent markets-a part of their founding narrative… if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.
Bitcoin traveled this path organically. Its narrative evolving over time as the ecosystem using it grew.
Other projects with defined teams and formal governance structures like Foundations. Need to define their narrative via public communications.
If a project defines itself through comparisons to centralized alternatives and/or other cryptoassets projects exclusively. It probably isn’t a good investment.
10. Great companies have secrets
Specific reasons for success that other people don’t see… when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
Seek out projects striving to right a wrong. Are they building a decentralized alternative to stop user abuse? Providing a financial service to a historically ignored community? Then you are on the right track.
11. Was the project launch successful?
As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.
The ICO model was an interesting and ultimately flawed experiment for raising project funds. Why, tokens typically end up concentrated in a few hands who couldn’t possibly use them all for the intended utility of the project.
So, new users who do want to use the service have a hard time obtaining the tokens necessary to do so. Given existing holders reluctance to sell since they believe the tokens value will rise.
Thanks for Reading
Sign up for my newsletter to stay up to date on my latest cryptoasset research.