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Algorand is searching for the Amazon of blockchain finance

Posted: 12 June 2020 7:16 pm
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Amazon's playbook for conquering the Internet can also apply to blockchain, with a few key differences.

The Internet has proven to be a great leveller for startups to quickly scale up and tackle incumbents. Online shopping is a good example, and today it's difficult to imagine any major retailer without an online strategy. With the benefit of hindsight we can now look at success stories like Amazon and see how they all began by combining two things:

  • An understanding of how the Internet can be used to deliver products and services better than current systems
  • An understanding of which products and services are best delivered over the Internet

That's exactly how Jeff Bezos began. In the mid 90s he read a report predicting 2,300% annual ecommerce growth (an example of how the Internet can deliver products and services) and then sat down to make a list of the top 20 products best sold online instead of in-store. Books topped the list in the end, on account of their massive global demand, low unit cost and enormous variety. It probably also helps that all the main reasons for someone to walk into a bookstore, such as to browse excerpts or ask for recommendations, can be easily recreated online.

The rise of the Internet presented a historic opportunity for people who managed to figure out how it can be used, and who then focused on using it to deliver the most suitable products and services in the best way possible.

And then we have blockchain, which is often described as another opportunity on par with the Internet itself, and another chance to press the same two factors into action.

Finance 3.0

Blockchain can be used to deliver products and services better than current systems by disintermediating transactions in trust-heavy areas, improving efficiency and reducing costs. As such, the products and services best delivered through blockchain are those which are currently being tied up by expensive trusted intermediaries.

Finance definitely qualifies. Indeed, the need for trust in the form of heavy regulation, and strong reliance on existing intermediaries, are among the reasons no fintech startup has yet come close to doing to the big banks what Amazon did to J.C. Penney.

Blockchain might change that.

But just as the Internet needed to evolve from a gaggle of networks into the World Wide Web before future juggernauts like Amazon could emerge, underlying blockchain infrastructure needed to hit a certain level of maturity for the giants to start sprouting. That's what's happening now.

A multitude of comparatively scalable public blockchains are going live, while others have been live for a couple of years now, with varying degrees of security and flavours of decentralisation. Now that we have a solid technical backbone, as well as a more comprehensive understanding of which areas blockchain stands to disrupt, more attention and investment is going towards the search for the future Amazons of blockchain.

The blockchain developers themselves also have a strong motivation to identify and attract these startups. By getting future giants on board, the value of their growth can accrue to the entire blockchain ecosystem.

Right place, right time

Right now Algorand (ALGO) provides an excellent example of this principle in action. It's already earmarked millions for its grants and developer incentives program, largely oriented around things that are more necessary than profitable, such as cryptographic research, developer tools and proofs of concept. However, now it's started getting to the pointy end of real world blockchain adoption: the search for the future Amazons of blockchain in the form of commercially viable blockchain startups with rapid growth potential.

To this end, the Algorand Foundation, in partnership with Longhash Ventures and Borderless Capital, has launched the Algorand Asia Accelerator. It offers upfront seed funding of $15,000 for projects, with followup investments of up to $250,000 for good looking candidates and access to a mentor network and prospective investors.

There are no hard and fast rules about what a project can be, where it fits in the technology stack or what it brings to the Algorand ecosystem, but one of the big differences between the good and the great applicants will be how well they exemplify the potential for rapid, sustainable and unstoppable growth, said Algorand COO Fangfang Chen.

"We welcome solutions across the full technology stack of Finance 3.0, from infrastructure to middleware, and from technical and financial primitives to institutional and retail applications," she said. "Finance 3.0, also known as Open Finance, is the vast, new ecosystem of financial products and services built using blockchain technology that removes friction in transactions, payments and global trade. Digital securities, electronic and programmable payments with digital currencies and/or stablecoins, instant swap of digital assets, and trustless collateralised digital loans are but a few of the application examples we hope to see being proposed and built on Finance 3.0 principles.

"That being said, especially in the nascent and rapidly maturing blockchain sector, we are also focused on solutions which are immediately applicable and likely to win adoption in the short term."

What an exceptional candidate looks like

At a minimum, good projects will need to have a good team and a good idea.

"There are a few criteria that are common across the projects that are selected for our accelerator program," Chen said. "The first is a balanced and committed team, with a demonstration of critical domain and technical expertise. At the same time, this also often comes complete with a positive attitude and a consistent passion or track record."

"Secondly, these projects bring to the table a balanced and innovative/disruptive solution, and in an order of magnitude better than existing ways of solving a large, clearly defined problem. Last but not least, indicators of validation are also taken into consideration, which includes product launches, customers, revenue, partnerships, and fundraising, to name a few."

Great projects will exemplify a few characteristics that make them look like a potential Amazon of Finance 3.0.

"Exceptional projects stand apart when they exhibit unique qualities," Chen said. "These qualities can be in the form of hyperscaling, where users, volume, or revenue are on sustained exponential growth, usually due to organic word of mouth, supported by a scalable business model. Strong defensibility is another indicator, which includes technology barriers, flywheel business models, as in the case of network effects or loyalty, and proprietary assets, such as exclusive relationships."

"Projects also differentiate themselves when they prove to be at the intersection of megatrends, where timing of launch and growth coincides with pivotal moments, whether it be in regulation, macroeconomic shifts, or changes in user behaviour," Chen said.

In other words, the perfect candidate puts themselves at the centre of historic world-changing trends, of which there is no current shortage, and thinks big about how they can tap into these trends to carve themselves a big slice of this brave new world, with an immediately-relevant business that can grow quickly from day one to become an unstoppable juggernaut.

Once again, Amazon presents a good case study.

  • Tapped megatrends. Amazon was created in anticipation of ecommerce becoming the world's favourite way to shop, at a time when Internet access (and literacy rates) were on the up and up.
  • Growth from day one. Amazon's business was able to take off and grow immediately with a clear value proposition – online, wider selection, lower price – from day one. Amazon's sales were up to $20,000 a week within two months of launch. Barnes & Noble didn't launch a website until 1997.
  • Flywheel. A heavy flywheel takes a lot of energy to spin up, but it's very hard to stop once it gets going. Amazon constantly expanded its selection, cornered cloud computing before it was even a thing and created a galaxy of third party vendors, all of which gave Amazon a decisive edge against competitors.

Of course, the closest approximations to this in crypto today are probably Coinbase and Binance, whose flywheels are already humming along on a steady stream of acquisitions, and who have already become ecosystems in their own right.

By contrast, the projects this accelerator is searching for will be joining the wider Algorand ecosystem, which changes the dynamic a bit.

Cooperative capitalism

Amazon built its empire out of synergistic components, and every piece serves multiple purposes.

Amazon Web Services began when the company overhauled its own infrastructure, and then realised it could rent out some of those computing resources for extra revenue. Amazon Video, Twitch Prime and Prime Reading (which is itself driven by the Kindle product) are services in their own right that also act as value-adds for Amazon Prime. The company also leveraged its distribution network to attract third party sellers who now account for about half of Amazon's sales.

The result is an organism that's much greater and more impactful than the sum of its parts – kind of like the other Amazon. It's also a prime example how a business can be almost unstoppable once it gets that flywheel turning.

The same synergy is found in blockchain ecosystems, but often in quite a different form. In a blockchain ecosystem, all these synergistic components can be independent but largely cooperative businesses, whose incentives are aligned by a need for each other's services and the fact that all participants benefit from ecosystem growth in the form of higher token values, more potential customers and other network effects.

The overlap between investors, mentors and ecosystem participants in the Algorand accelerator program speaks to this.

"Our accelerator provides fundamental support and guidance that extends beyond just a one-off monetary investment," Chen said. "Algorand Asia Accelerator is structured with a dedicated weekly hands-on venture building session, across the spectrum of strategy, go-to-market, and fundraising. At the same time, we tap into and offer our collective, expansive network across LongHash Ventures, Algorand Foundation, and Borderless Capital."

"Our mentors include some of the most active and experienced investors in the space, including Fenbushi Capital, HashKey Capital, and NGC Ventures. Veteran blockchain entrepreneurs such as CEOs from IDEX and Securitize are also on the list. Together, they bring valuable perspectives on fundraising, practical business building know-hows and requisite industry insights. These relationships, if maintained well, go a long way in helping projects to succeed beyond the 3-month acceleration program."

Investment, expertise and tools also come from the Algorand protocol developers, and invested or simply interested volunteers, who are similarly incentivised towards mutual ecosystem success.

"At Algorand, we also pride ourselves on the strength and vibrancy of a global community. In line with our exponential growth, we are taking the lead to gather feedback, put out resources, and most importantly connect with our community to understand their needs better," Chen noted. "Our developers have access to a dedicated portal, with a selection of tutorials, articles and a forum, all of which aims to curate and facilitate their journey onboard Algorand to be as seamless as possible."

Cooperative advantage

Blockchain's ability to create ecosystems around shared incentives and technological infrastructure is massive, for several reasons, and can do a few things that the Amazons can't yet.

Firstly, it helps do away with some of the natural inefficiencies of siloed competition, such as some of the endless duplication of efforts.

For example, instead of a dozen companies hiring separate teams of contractors to all do the same thing as all their neighbours, (all while investing resources into pretending that it's some kind of big secret in the hope of impressing their shareholders), you could have independent developers providing the same feature to multiple businesses in the ecosystem on a subscription basis. The unification of all these entities around shared technological infrastructure makes it possible, while the alignment of their incentives around overall ecosystem growth helps encourage it.

Secondly, it creates a good framework for breaking certain businesses and services into more sensible constituent pieces, which could have some especially profound implications in the world of finance.

Consider, the current status quo where commercial banks are the root of all money. They are simultaneously responsible for transporting it, making it available in the form of loans, storing it safely, storing it riskily, maintaining profitability, paying interest to account-holders, satisfying shareholders, collecting user data, protecting customer privacy, enacting central bank reforms and being independent commercial entities.

The reason it's this way is because that's just how things have ended up, rather than because it's an especially good system. Many of these responsibilities are actually directly at odds with each other. More money for shareholders is lower interest rates for depositors. Tighter lending criteria in a recession is less circulating currency when it's needed most. Fractional reserves are at odds with safely storing people's money.

In Finance 3.0, different applications break down and reassemble these functions in new ways. There are P2P lending platforms focused solely on issuing loans and paying high returns to lenders, there's Maker DAO which takes DeFi lending on the backend to support a stablecoin on the front, and many more. We can't yet have narrow banks in the real world, but the concept of a full, no-risk collateralisation is quite common in crypto.

As Circle CEO Jeremy Allaire pointed out, economists have been observing these problems in banking for a long time, but it's only recently that technology has allowed us to start thinking about rebuilding the global financial system in a safer and more decentralised form. Meanwhile, blockchain's ability to align incentives among participants could then help keep it decentralised.

Amazon emerged in 1994, and through a keen understanding of how the Internet could be utilised, very quickly set about stomping retail incumbents. But the financial system, despite being perfectly happy to meltdown with little provocation, hasn't had its Amazon moment yet.

That could be changing soon. And who knows... maybe it'll all begin with an applicant at the Algorand Asia Accelerator.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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