Multicoin Capital's three major investment themes for the future: Composability, Data DAOs, and Proof of Physical Work

Original Author: Mario Gabriele, Founder of The Generalist
Original Title: "Multicoin Capital: In Search of Outliers"
Translation: Biscuit, Chain Catcher

This is the third part of the Multicoin Capital trilogy. You may want to read the first part and second part first.

Key Insights

Here are the guidelines that investors, operators, and founders should know about Multicoin Capital's search for its next successful investment target (we will refer to the company as Multicoin hereafter), which only takes a few minutes to read.

• Composability is at play. Cryptocurrencies have become like Lego, making it easier to combine existing building blocks and create novel applications. Multicoin has supported several startups that align with this theme.
• Data DAOs allow users to profit from personal information. Companies like Google and Facebook leverage user data for value. Crypto networks enable users to control their valuable data themselves. We may see decentralized hedge funds, banks, and health insurance companies emerge on the blockchain in the future.
• Crypto has real-world applications. Projects like Helium demonstrate that crypto incentives must protect and develop physical networks. Similar offline projects can be seen, such as alternative power grids, ride-sharing platforms, and logistics providers.
• Multicoin is not interested in building an empire. Partners Tushar Jain and Kyle Samani do not wish to rapidly expand into a large team or accelerate the increase of assets under management (AUM). Instead, Multicoin focuses on expanding the "state" of crypto networks (a computer science concept referring to the sum of user interactions, frequency, etc.).

Great football coach Sir Alex Ferguson won every trophy his club sought during his nearly forty-year coaching career, leading Manchester United into an unprecedented era of dominance. When asked about the challenges of his job, Ferguson emphasized winning back-to-back championships. Winning one championship requires so much energy that it becomes difficult for the team to maintain the same vigor to secure a second. Additionally, competitors stung by failure respond with a tougher attitude in the next season. Ferguson won the Premier League six times in a row, including two three-peats. Perhaps more important than the honors is how to keep the team energized and enduring.

The same principle applies to the venture capital industry. Undoubtedly, founding a top-tier fund is impressive, let alone a fund with returns as high as Multicoin's. True greatness requires endurance and persistence; to showcase skills as an investor, merely succeeding once is not enough; one must demonstrate success through countless examples across cycles and market conditions.

This is the task for Multicoin's next cycle: to prove that the team can maintain its winning edge. Even after significant losses from past investment failures, the market has seen the wisdom of Jain and Samani's early investments and is trying to replicate it. Like any great team, Multicoin must find new value niches. In the context of VC, this means seeking and funding the next Solana, Helium, and The Graph.

This article will analyze where Jain and Samani are looking for the next hot areas using Multicoin's public statements and insights from private interviews. Specifically, it will cover three investment themes and how they may manifest:

• Composability. The crypto space has created a series of "money Legos," allowing users to combine foundational protocols in various ways, especially in DeFi. The future may be ripe for an explosion.
• Data DAOs. Consumers are numb to the behavior of Google and Facebook stealing personal data. In the crypto space, users have sovereignty over this information. Once users fully control their data, what can they do with it? Web3 applications will see rapid growth.
• Physical Proof of Work. People may think the crypto world is a virtual realm that exists only online. But projects like Helium show that the crypto industry can help the real world. In the future, one might call a taxi, receive deliveries, and gain value from decentralized entities.

The article will also contemplate what the future holds for Multicoin itself.

Theme 1: Composability

Multicoin has not completely hidden what it sees as the biggest opportunity in 2022. Visiting its team's Twitter profiles, you are likely to stumble upon the same word in their usernames: composability.

Kyle Samani's speech at the 2021 Multicoin Summit also focused on composability. In that talk, Samani outlined some of the investable opportunities.

Before delving into these opportunities, let’s define composability. Samani noted in his keynote that the company aligns more with the description by Variant co-founder Jesse Walden: "A composable platform allows its existing resources to be used as building blocks and programmed into higher-order applications." Walden added, "Composability is important; developers can achieve more with less effort and bring about compound innovations more quickly."

A classic analogy for this definition of composability is Lego. Developers can use each module to build more complex structures. In turn, that structure can also be conveniently added to another structure. Crypto has created discrete "money Lego blocks," which are modules with specific financial functions that can be recombined into new applications. For example, a "lending" module can be combined with a cross-chain "exchange" module. This is a simple definition that makes the concept of composability clear.

In Samani's talk, he predicted that this composability would give rise to a plethora of new applications within the next 12 months. Multicoin's confidence in this prediction stems from Solana and its ecosystem.

To understand why Multicoin ties Solana to composability, a brief explanation of "sharding" technology is necessary. One reason for Ethereum's success is that it enables developers to build interoperable applications. However, the downside of this native composability is that as more applications are added, the Ethereum network becomes congested. To address this issue, Ethereum is exploring a new architecture called "sharding," which is a process of splitting the blockchain into semi-independent running chains. Blockchains like Ethereum can effectively distribute the load and reduce transaction costs through "sharding."

Multicoin believes this comes at a cost. That is, Ethereum loses some composability through "sharding." Cross-chain increases overall throughput, but it introduces latency when transactions need to be added to the mainnet. Even brief discrepancies can fundamentally disrupt the functionality of "money Legos." For example, when a transaction is split across multiple "shards," can the order book still function properly? Jain shared his thoughts on this topic:

"You can't shard an order book. It doesn't make sense. The point of an order book is to find the best price. By sharding the order book, market makers must synchronize multiple order books. By definition, an order book is a place that shows all trading orders and prioritizes the best price. No one wants the second-best bid."

This viewpoint raises a question: If sharding harms composability, how do we address the issue of large-scale transactions?

The reason Multicoin has confidence in Solana is that it achieves composability and high throughput without relying on sharding's different architecture. When Samani realized that Solana solved this problem, he recalled feeling like "a light bulb went off."

A year after Solana entered the top 10, Multicoin believes composability is ready. At the summit, the fund identified five specific areas of focus. Currently, Multicoin has found some suitable investment projects and is still on the lookout.

1. A "Fully Collateralized" Stablecoin

UXD is a composable algorithmic stablecoin that, like Terra, is truly decentralized. Unlike Terra, UXD requires collateralized assets, or as Jain describes it, "specifically, fully collateralized."

How does UXD achieve this? By following an "incremental neutrality" strategy, going long on the spot while shorting contracts.

This may be a bit difficult to understand, so for example, if a user wants $100 worth of UXD, they need to open the UXD app and deposit $100 worth of cryptocurrency (e.g., SOL). In exchange, the user will receive exactly 100 UXD, which can be used in the crypto market. If the user wants to redeem UXD for dollars, they can do so at a 1:1 ratio.

UXD can maintain price stability through clever mechanisms. When a user exchanges $100 worth of SOL for the stablecoin, UXD deposits that money into a decentralized exchange as collateral. Then, it opens two SOL positions: a $50 spot long and a $50 perpetual short contract. At this point, a balance is achieved: if the price of SOL drops by 10%, the short position increases by 10%, and vice versa. This architecture absorbs volatility, and assuming the platform and counterparties operate as promised, it will make UXD a scalable, decentralized, fully collateralized stablecoin.

To make UXD work, two composable application modules are needed: the decentralized spot exchange Serum and a spot and futures exchange like Mango Markets. By leveraging these Lego blocks, UXD will push the stablecoin to market.

2. DeFi-Native Prime Brokerage

Even if you are familiar with the term, you may not know what a "prime broker" does. As a service provided to large hedge fund managers, prime brokers act as a unified organizer for their clients, as their name suggests. Their responsibilities include managing cash reserves, connecting with major trading platforms, providing leverage, and cross-margining. Major prime brokers like Goldman Sachs or JPMorgan do these things for users rather than managing buy and sell positions across different venues and calculating collateral.

Multicoin believes the emergence of DeFi-native prime brokers is now feasible. The core building blocks of the aforementioned functions already exist, including buying and selling perpetual futures (Mango Markets, Drift, 01), date futures (Contango), and options (Zeta, Hxro, PsyOptions). With products like Marginfi, cross-margining is also possible. What remains is to combine these options and establish 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—yet it may still have many orders of magnitude of growth left.

Today, if you want to place a sports bet in the U.S., you must either go to a casino or call a bookmaker. Neither is the most perfect experience. Multicoin sees the opportunity for this transaction to happen online, thanks to the existence of "building blocks" like BetDEX, a decentralized betting protocol. Using this tool, one can imagine a world where fans of a sport gather on a decentralized information platform similar to Discord, like Satellite, to discuss their favorite teams. A friendly conversation could easily lead to speculation. With just a keystroke, consumers can place a real bet without leaving an app.

As Samani described, this type of product will "combine social, money, and betting in a way that was previously impossible."

4. Targeted Fan Engagement

While 2020 was a peak year for the "creator economy," monetization and engagement options for creators were relatively limited. Multicoin believes there is an opportunity to build a blockchain-native platform for artists to better connect with their fans.

Imagine Taylor Swift, after being sent off with a red card, decides to upload all her songs to Audius, a blockchain-based music streaming platform. By doing so, she can earn AUDIO Tokens by uploading tracks and allowing people to listen to her music.
Before her next tour, Taylor Swift could decide to reward her biggest fans by giving them the chance to access presale tickets.

To do this, Taylor Swift uses the smart messaging protocol Dialect to send messages based on user behavior on-chain. She decides to send messages to everyone who has listened to her music more than 1,000 times, the true Swifties. Only these individuals can purchase early tickets, and they might even do so at a discount.

In an open, permissionless system, many types 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 operate under different rules. As outlined in the second part of this series, the way to drive outsized returns in venture capital is to be non-consensus and correct. Following the wisdom of the crowd will not lead to finding the next Solana.

In contrast, record labels succeed by identifying the most popular artists. The existence of these entities is not to oppose public opinion but to serve it.

Based on this dynamic, Multicoin sees the opportunity for decentralized record labels to emerge. To achieve this, artists may first need to adopt social tokens, effective tokens that align holders with the fans and future of the subject. For example, I could issue MARIO, which readers of this newsletter could choose to purchase. As The Generalist column grows, along with other activities, fans may perceive MARIO as having more social status or value.

In the music realm, aspiring artists could offer their tokens to subsidize their work and attract public attention. (As Samani pointed out, "When people own tokens, they love to talk about them.") Those early purchasers who prove themselves as token holders of emerging artists will gain financial and social capital in successful selections, establishing themselves as savvy music curators.

Over time, Multicoin believes these curators may choose to unite and form a global music DAO. Since their activities occur on-chain, others around the world will see when they supported a new artist—equivalent to signing a new act.

Samani noted in his talk, "This music venture capital DAO is the most compelling thing the team has considered internally because it represents pure ambition. This is not just an application—it is much larger than that. This is a huge leap in capital formation."

Theme 2: Data DAOs

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

Jain seems to have returned to this question in 2022, emphasizing that "data DAOs" are a particularly promising area and a budding concern. This time, his core question is: "What activities can you do as an individual that are not very valuable, but when many, many people do them, become extremely valuable?"

While early investment in Helium is one answer to this question, Multicoin believes there are many other answers and has identified four areas that align with this argument, which may yield promising opportunities.

1. Map DAOs

While reviewing other videos from the Multicoin Summit, one can notice the discussion between Jain, Helium co-founder Amir Haleem, and a third guest. Ariel Seidman is the 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 tokens, HONEY. This allows contributors to become owners of the network and rewards them for being early contributors— as Hivemapper becomes more valuable, the price of HONEY will increase. Just as Helium is a case with such signs, early adopters are richly rewarded.

Like Google Maps, Hivemapper makes money by providing a map API to developers. But importantly, Hivemapper does this in a more cost-effective manner. Seidman noted in his talk that the cars Google uses for mapping cost about $500,000, while Hivemapper only requires relatively low-cost cameras.

In summary, Hivemapper is a classic response to Jain's question: while one person recording their daily driving may not mean much, millions can create the most accurate map of humanity.

2. Investment DAOs

An article about investment firm Coatue discussed how the company leverages its internal data platform, Mosaic, to gain an investment edge. Mosaic helps Coatue gauge the traction and revenue nuances of startups by extracting credit card and spending account data. Services like Second Measure have emerged to replicate this advantage by providing anonymous purchasing data.

The emphasis hedge funds place on such services reveals an obvious fact: the more relevant data you possess, the better investment decisions you can make. One can reimagine what a hedge fund model built with a DAO structure might look like. Investment DAOs would not purchase datasets (anyone with sufficient funds can access those) but would reward consumers for voluntarily donating their data. Uploading Amazon transaction histories, exporting Twitter social graphs, sharing location data— and receiving tokenized compensation.

A vast amount of information is generated in daily life that may be meaningless to users but can provide a genuine investment advantage. Users can be compensated for donating information, and collective information creates upward potential.

3. Banking DAOs

The same mechanism can prove useful in other financial contexts, particularly 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 tenant insurance, once boasted that its app could capture "non-verbal cues"—only to realize how terrifying that sounds.

Similarly, this model can be reimagined as symbiotic rather than parasitic. Instead of having faces, social lives, and online activities scanned unknowingly, users can donate data to improve the underwriting capabilities of a jointly owned bank. In exchange, users would receive a token and share ownership of that entity. Assuming this data is predictive to some extent, then a banking DAO should have compound value.

4. Health DAOs

Much of the logic above applies to the healthcare world. Users create—and contain—data that can be extremely valuable for a wide range of healthcare applications. First, users can contribute data to improve health insurance underwriting. Relevant information may include biometrics, dietary habits, Seamless history, and daily step counts. Users can connect Strava, Pokemon Go, Uber, and any number of other applications to generate a clearer risk overview by demographics. Once again, consumers can benefit from the upward potential created by this process.

Other opportunities abound. The healthcare startup 54gene has raised over $40 million for its genomic platform. The company has compiled a unique dataset to improve healthcare, focusing on collecting genetic information from African immigrants. According to 54gene's CEO, this data is donated by volunteers.

At least one project is reimagining this on-chain structure. By purchasing an NFT from GenomesDAO, users receive a genomic sequencing toolkit. The information is sent back to the GenomesDAO team and securely stored. In the future, the DAO could sell this anonymized information to improve drug discovery and other healthcare efforts. One can expect project teams to utilize similar structures to enter the market with different configurations.

Theme 3: Physical Proof of Work

Helium has been mentioned several times in this trilogy. As a recap, Multicoin's portfolio company orchestrated a fully decentralized wireless network. By purchasing a Helium hotspot, consumers can help expand and improve a vast connectivity network. It is essentially an alternative infrastructure project that is self-sustaining and nearly unstoppable.

Multicoin sees the opportunity to create other networks similar to Helium. As partner and communications lead John Robert (JR) Reed described, the company believes there will be many other large, valuable networks that rely on "physical proof of work," a phrase coined by Jain.

1. Power Grids

Last year, power outages rolled through Texas. When a winter storm swept across the Lone Star State, inadequately protected equipment froze and stalled, leaving 11 million residents in the dark. The situation could have been worse; the CEO of the state's power grid said it was only "seconds and minutes" away from a catastrophic blackout that could take weeks or months to resolve. Even those who managed to get power were not spared. Partly due to Texas's deregulated energy market, electricity costs skyrocketed, with some seeing their monthly bills jump from $130 to $3,000.

In the aftermath of the crisis, generator sales surged as citizens sought to protect themselves from future outages. Given that generators can cost thousands of dollars, this solution is only accessible to a portion of the population.

Creating an independent power grid coordinated by cryptocurrency incentive mechanisms could be a fruitful solution. By combining generators, solar panels, and even wind turbines, it may be possible to create a "microgrid" as a fail-safe or true alternative. Homes generating excess power could distribute electricity locally and earn tokens. Those utilizing this surplus power could make payments, all within a closed system. As a benefit, much of this infrastructure could lean towards cleaner renewable energy.

While Texas may be the best market to experiment with such efforts, the increasing likelihood of climate disruption means operations like this will have global demand.

2. Car Sharing

Reed mentioned in a discussion that Multicoin is looking for a decentralized Uber competitor. This idea has been circulating for some time, but no credible challenger has emerged. An article from The New York Times in 2018 outlined the potential of this idea. Relying on insights from Union Square Ventures co-founder Brad Burnham, the article explained how a "transit protocol" could facilitate the emergence of on-chain challengers.

Like GPS, this new protocol would define a simple request. User here, wants to go there. A distributed ledger could record all users' 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, let’s call it the "transit protocol."

Once established, applications could build on Transit, using tokens to kickstart the system. Suppose you have a car and want to start offering shared rides. In this case, an application built on that protocol could be inserted, allowing you to earn Transit tokens that appreciate as the network's value grows.

Now may be the right time to revive this concept, as the infrastructure is more mature and cryptocurrency adoption is relatively widespread.

3. Third-Party Logistics

The final idea Reed shared was the concept of decentralized third-party logistics (3PL) providers.

While users may not spend much time considering them, it is likely that 3PLs play a significant role in the transportation of many goods. While businesses differ, 3PLs have three main purposes: warehousing, packaging, and delivering goods.

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

Micro-warehousing has become a popular method to drive rapid delivery within cities, perhaps paving the way for a citizen-first approach. A decentralized 3PL could rely on excess space in residential and commercial buildings and on-demand labor for picking and packing. As with previous examples, a protocol could pay participants in tokens, transferring ownership to stakeholders and providing meaningful appreciation opportunities.

4. The Future of Multicoin

Multicoin is looking for returns on its next fund investments. But what about Multicoin itself? What does the company hope to become in the next decade?

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

The company seems to believe that the best way to achieve this is to continue doing what it does best: identifying revolutionary projects early and helping them build "states." Notably, Multicoin's funds tend to be smaller than those of other participants in the industry. After its wildly successful inaugural venture fund, it raised a modest $100 million for its second vehicle. Rumors suggest that "VFIII" will not be too large.

While many other cryptocurrency funds have announced deals worth billions, Samani and Jain seem keen to maintain a sufficiently small scale to play the early game and still drive outsized returns. Limited partner Brian Walls noted, "These are the conversations the team enjoys," adding that he believes Multicoin may have turned down an additional $1 billion in LP interest.

Multicoin's asset management discipline indicates the long-term strategy the company seems to be adopting. It is not about optimizing fees or influence but rather steadfastly focusing on finding the top 1% of entrepreneurs and helping them through their lifecycle.

Reed emphasized this in conversation, noting that Multicoin will continue to prioritize this ultimate goal, even though market changes may require different approaches. Reed said, "You almost need to reshape the company every 12 months because the market changes. What services will portfolio companies need next year? What changes will occur as cryptocurrency mixes with new users, geographies, and markets? These are all things we focus on figuring out. The team's goal is to grow without losing core values."

However, do not expect Multicoin to quickly staff a large team. While companies like a16z have built extensive support services, Jain said, "Our goal is not to have thousands of people working here."

Could Multicoin geographically expand? It has proven wise to add Mable Jiang to cover the Chinese market. Given that cryptocurrency is a global phenomenon, it seems logical for the company to seek localized investors in markets like Indonesia, Nigeria, and India. For now, this does not seem to be a huge priority. Jain pointed out that India and Germany—particularly Berlin—could be key geographical areas, but the company does not expect to make any significant hires. "We have come a long way," Reed added.

To understand what Multicoin might become, one can return to Jain's statement. As the "state" of cryptocurrency grows, the company will succeed. What does that mean? Multicoin does not equate "state" with nation or sovereignty. Instead, it refers to a computer science concept where a "stateful" system remembers previous user interactions. In this regard, state reflects user engagement. The more activity that occurs on the blockchain, the more state the market has, allowing for richer experiences to be built. This is a flywheel that has already begun to accelerate.

This is what Multicoin is pursuing. It hopes for more usage, more value, and more state to be hosted on networks like Solana and managed by network participants. It is chasing something both amorphous and quantifiable—a stable revolution. To achieve this, Jain and Samani seem determined to be stubborn in increasing the state of cryptocurrency while remaining flexible in the details.

Sir Ferguson once said, "Once you say goodbye to discipline, you say goodbye to success." Great teams understand that to maintain victory, you must uphold your standards and keep your focus. As Multicoin looks to the future, it seems to recognize this directive. As always, it is pursuing ideas that many consider strange, placing bets that others would not, and retaining its outsider gene even as it rises to the top of its industry. Multicoin may have made history, but it is just getting started.