Caffeinated Contribution

Mechanized Money

What enables us to have truly programmable money? After your Welcome to Web3, let’s keep curiosity fed with hot sips on crypto and how decentralized finance (“DeFi”) galvanizes web3!

Extra Shot
This caffeinated contribution is by scottrepreneur, a UX designer and blockchain developer building at the forefronts of web3.

Blockchains

As we dive into web3, we must grok the traditional finance world. One of the primary challenges that bitcoin and blockchains seek to solve is the double spend problem. Double spending occurs when digital tender/fiat/currency is sent to multiple parties simultaneously or after a sender’s balance has elapsed. (There’s a ton more to learn about consensus and the Byzantine Generals’ problem, but we’ll leave that for another cup.) This, effectively, creates money from thin air and is what banks and the central banking system have helped prevent for the last few centuries. This power can be abused, so bitcoin looked to democratize the process of approving transactions by folks called miners.

The Bitcoin network went live in 2009. Initial traction was modest, but the “unspent transaction output” (UTXO) model for tracking transactions and balances proved to be groundbreaking. Bitcoins are “fractured” from their initial whole. These fractions are used as currency, which makes accounting inclusive, verifiable, and very transparent.

Blockchain technologies have evolved toward mainstream adoption, but cryptography has been studied since the 1980s. Bitcoin was first to crack the code, but different blockchains and more on-chain layers are being combined in powerful ways. Today, there are four main types of blockchain networks: public blockchains, private blockchains, consortium blockchains, and hybrid blockchains. It’s impossible to count private blockchains, consortium blockchains, and hybrid blockchains, but there are hundreds of public blockchain that are permissionless, meaning they are fully decentralized and anyone with an internet connection can equitably access the blockchain as an authorized node. Bitcoin and Ethereum are the two largest, with 10% of the global population owning some form of over 2,000 different cryptocurrencies.

Within each blockchain, layers provide infrastructure for web3 developers. Hardware, data, network, consensus, and application layers make blockchain technologies more usable, with each layer offering unique functionality.

The last ingredient in the blockchain recipe is hashing, which gives blockchains verifiability. With hashing algorithms, miners are assembling a historical ledger where any tampering of previous transactions will disrupt current calculations. With verifiable ledgers storing only valid transactions, the next cool thing we can do is automate value.

Smart Contracts

Smart contracts allow us to program, exchange, and intermediate value using the storage mechanisms first introduced by Bitcoin.In 2014, Ethereum introduced a new programming language called Solidity, which allows smart contracts to store value and other data. Gas is paid in Ether, the native token of Ethereum, for transactions that interact with smart contracts. Computationally intensity and network activity determine gas fees at any given time. These primitives have helped developers explore a vast array of mechanisms for coordinating value. Some have been successful while many others have taught us valuable lessons about this antifragile system.

One of the earliest successful smart contracts of Ethereum, The DAO, had a catastrophic contract bug (flaw in the programming) which we now refer to as a Reentrancy Attack. The DAO had coded a “shared bank account” where stakeholders could deposit Ether into the contract and receive a proportional share of tokens back. The goal was to collectively fund projects via token-weighted voting. While tokenomics and technical improvements have addressed many of the early missteps,  the major mechanisms are still widely used in token governance today.

Tokens & Standards

As the Ethereum Improvement Proposal (“EIP”) process matured in 2017, smart contracts began conforming to implementation standards. ERC-20 was the twentieth iteration, which included a request for comment offering a fungible token standard. To support an endless variety of projects, this token standard became the default for initial coin offerings (ICOs) that were sourcing funds to solve blockchain challenges. The power of this mechanism led to many overly ambitious projects that damaged trust with unfulfilled promises, but some of the powerhouses of today were launched during the ICO bubble.

Some other notable token standards are ERC-721, the non-fungible token,, and ERC-1155, the semi-fungible token. The adoption of these standards across the ecosystem allows for tight composability and interoperability across protocols. These “money legos” act like building blocks for DeFi, but before we get to decentralized finance, let’s first cash in on the most prolific tokens within our global economy: stablecoins.

Stablecoins

Stablecoins peg their value off another asset, generally something stable like the US Dollar or gold. Stablecoins can also derive value by being fiat-backed, collateral-backed, and algorithmic. 

Fiat-backed stablecoins are backed by fiat money in an auditable bank account. Fiat money is a government-issued currency not backed by a commodity such as gold. Popular examples are Circle’s USDC, Gemini’s GUSD, and Tether. While fiat stablecoins are quite easy to scale they also have trade-offs with their decentralization properties. The blocklists of these stablecoins are growing as more projects comply with jurisdictional requirements.

Collateral-backed stablecoins are backed by assets that are locked on-chain and transparently auditable at any time. The largest of these, Dai, is mostly backed by Ether. When done right, these types of stablecoins have great decentralization properties, but are much more difficult to scale and can have liquidity issues from a market squeeze.

The final type of stablecoin is algorithmically balanced with a system known as “seigniorage shares”. It’s important to mention “algo-stablcoins”, as implementations have not been successful to-date, so you may want to avoid these types of stablecoins until technology can unequivocally support the ideology. Alright, with tokens and places to store value, let’s look at innovating within traditional financial exchanges.

Lending & Exchanges

After the rush of late 2017, the buidl market set in. Organizations committed to building, have delivered on overcollateralized lending and borrowing on-chain. Lenders can lock their collateral to earn from borrowers, but borrowers need to be lenders of another token and ensure their loans remain sufficiently overcollateralized. Lending and borrowing rely on asset prices to determine liquidation thresholds, but if these can be manipulated, then the system is vulnerable. The Oracle Problem is one that doesn’t often get surfaced, but is becoming more crucial as the value of attacks increases.

Early experiments around what order books looked like on-chain were clunky. Each bid, update, acceptance, or cancellation required another transaction and gas. This changed in 2018, when Uniswap used the Ethereum blockchain to provide a simple interface to swap tokens. Uniswap flipped the concept of traditional order books on its head. Instead of creating offers to buy or sell, a market maker can provide two tokens in a pool and the protocol holds the ratio of the tokens in the pool equal. These pools are called automated market makers (AMMs) and the pools leverage the equation  k=x*y, generally referred to as the constant product market maker (CPMM). You’ll see AMMs often, with the CPMM formula occasionally cited. This supports a very simple token swap without accepting a costly series of orders. Being a non-custodial, decentralized exchange you also never give up control of your tokens until the swap actually occurs.

As crypto is managed, liquidity incentives were initially implemented by Yearn Finance, a protocol that automates the lending process to earn yields from on-chain assets that could be held or traded on the market. Many incentives came from token inflation that hadn’t found value loops and proved to be unsustainable. Since 2020, years of rapid experimentation has revealed innovations that are continuing to push DeFi forward.

DeFi’s Destiny

This magical dark forest can be treacherous, but system level engineering takes time and it’s liberating to build with so many intrepids learning together. As we complete this download, here are a few interesting use cases to keep us thinking about what’s possible beyond traditional finance.

  • Instead of getting paid every two weeks or each month, smart contracts can create payment streams. Instant access to financial capital furnishes more financial freedom, while still maintaining refill or cancellation options. Along with incoming compensation, outgoing subscription fees and self-repaying loans are also use cases where automation can further optimize financial control.
  • Also known as no-loss lotteries, prize-linked savings accounts, are not uncommon in the traditional finance world. Local municipalities and credit unions have generally handled them. Pooling capital and lending it to others is also used in smaller communities to help with small, low-cost loans. With an end-to-end process, smart contracts enable little to no overhead, which makes nearly all of the earnings available to participants.
  • The most magical of our new tools! Flash loans allow for borrowing a near-infinite amount of a token, given the loan is paid back within the same transaction. This visualization of a flash loan transaction will add clarity, but in short, if there are transactions that require more capital and can be facilitated within one block, they have been democratized to anyone with access to a scripting language and a relaying node.

DeFi provides composable tools for traditional and innovative finance primitives. Being able to mechanize your money and the value it delivers within a network is super powerful. When web3 concepts hook into the financial primitives of crypto, the global economy can leverage faster, more equitable, and safer peer-to-peer commerce.

By Ben McDougal, ago

Fresh Powder

Let’s take a lift to the top.

Whether you ski or snowboard, you’re not getting far without the right equipment. Financial modeling is an important technique that helps you simulate different scenarios for your business. Imagine we’ve made it to the top of the snow-covered mountain. There are endless ways to make it down. Similarly, there are endless ways your business can evolve.

Extra Shot
This caffeinated contribution was written by Jeff Erickson. Based in the silicon slopes of Utah, Jeff is an angel investor, experienced advisor, avid skier, and leads partnership development at Forecastr. Forecastr is a financial modeling platform that helps founders forecast revenue, predict runway, and use dynamic insights to get funded.

Having worked with hundreds of early-stage startups, I often hear founders talk about how everyone knows financial projections will be wrong, so why is financial modeling important?

A financial model is a tool to help forecast the financial performance of their company over time. Financial models are generally based on a combination of the company’s historical performance and assumptions about the future. Financial models can be used by entrepreneurs to help make better decisions when raising financial capital and to assess the potential returns of a given venture. Returning to our mountainous metaphor, think of financial models as your map of the snowy terrain. It provides an overview of the area, routes to explore, and dangers to avoid. Similar to a trail map, financial models use numbers to set the scene, then help entrepreneurs determine the speed and direction of their business. Along the way, they also help identify potential risks and optimize how different types of resources are used.

As a startup founder, it’s important to understand why investors ask for financial models. A financial model is essentially your roadmap for the future and it gives investors an understanding of how you plan to generate revenue and scale up over time. Having a solid financial model demonstrates that you have done research into the market, understand potential risks and opportunities, and have thought through the key drivers for success in your business. Ultimately, your financial model helps investors see how you think about your business and whether you understand the levers that matter. It also gives them confidence when they see that you know how to strategically allocate the money they may invest and that you know how to project and manage cash flow.

Most investors speak in the language of finance. Terms like run rate, CAC, LTV, runway and burn rate are common vernacular. Going through the process of building your financial model helps you learn, decipher and understand this language of finance. A shared understanding will help you more effectively work with investors. A common mistake for many founders is thinking that it’s you and your financial model versus the world. Instead of falling in love with your assumptions, consider how you can work with potential investors, by using the financial model to analyze various scenarios. When founders can cruise down the mountain with investors, while explaining different scenarios in real-time, strategic partners will get excited about taking the lift back up for another run.

Ready to create a financial model that’s useful? Most models have historically been built in spreadsheets, but new software tools, such as Forecastr, make it easier for companies to create financial models. Entrepreneurs need to be aware of the changing terrain in order to make the best decisions for their evolving business. Let’s avoid the trees and carve out a few key steps that will land you in a position to know the numbers.

Define

Before you can create a financial model, it is important to define the company’s business model, revenue streams, and financial objectives. This understanding will help determine how you structure your assumptions in order for the projections to accurately reflect what could realistically happen with your startup.

Gather

Once you define company goals, gather historical data relevant to creating accurate projections for your startup’s future performance. This includes information such as past sales, costs associated with running operations, generating revenue, customer acquisition, and any other financial data that may help tell the story of your business.

Build

Using qualitative (e.g., industry trends) and quantitative (e.g., past results) data points, begin building out realistic assumptions to drive your financial model. Here are templates for a jump start! Begin with customer acquisition (e.g., paid ads, partner referrals, reseller channels, sales outreach, etc.). Next, build out assumptions around revenue streams. Consider all the ways you can make money by adding value to your customers (e.g., advertising revenue, product sales, services, etc.). Now you’re ready to build out assumptions in regards to building a team, then focus on projecting the changes in your operating expenses based on the company’s performance. Finally, consider any required expenses to scale your business and how you plan to finance the overall venture.

Validate

With all your initial assumptions in a financial model, it’s important to track the accuracy of your assumptions each month and update the numbers based on actual data. As metrics are consistently tracked over time, your financial model becomes more accurate and reliable. You will notice trends in customer acquisition, identify the most profitable revenue streams, and monitor your expense projections. Additionally, you will be able to run different scenarios using your financial model to help you confidently make better decisions in running your business.

Extra Shot

I hope you’ve enjoyed this month’s theme, dedicated to early moves that help anyone avoid that new business idea from floating toward someday! As you compile the various resources you’ve created into an investor pack, you’ll be astonished at how well you understand your new venture. As you stay committed, the self awareness brews confidence from true understanding and others will be even more excited to join you.

By Ben McDougal, ago

Extra Credit

I have always loved listening to stories. 

At home, my parents used to tell me stories whenever I’d go to sleep. In school, I enjoy listening to friend’s and telling my own stories as well. Lately, my growing interest in entrepreneurship has me listening to people discuss their entrepreneurial journeys. These stories of solving problems and building a business have captured my attention, but I had to go beyond the status quo to find them.

Extra Shot
This caffeinated contribution was written by Ani Soni. Anirudh is a student who is becoming indispensable as he explores entrepreneurship within a startup community.

As a student in high school, there are a few classes, programs, and clubs that hint at what entrepreneurship is all about, but they lack heart, let alone the realities that come from actually building a startup or small business. I enjoy hanging out with my friends, but they don’t share the same interest I have in building my own company. My family is supportive too, but I really haven’t had a way to consistently share stories about building a business.

To fill this storytelling gap, I started looking for ways to meet other entrepreneurs. While it took a little research, I found many ways to meet people who own their own business. I’m eager to continue exploring “entrepreneurial ecosystems”, but I feel lucky to have chosen to first attend a weekly program called 1 Million Cups. Attending 1MC has allowed me to listen and learn from the stories of entrepreneurs, but showing up wasn’t easy.

I was so nervous at first! As a high schooler, I wasn’t sure if or how to show up. I assumed everyone was more qualified and successful. I didn’t think I would be able to understand, let alone contribute to the conversations. In my own mind, I didn’t belong and it was like I didn’t deserve to be there. It would have been easier to say, “maybe someday”, but I’m glad I decided to take the training wheels off.

When I arrived that first Wednesday morning, everybody was welcoming, kind, and incredibly interesting! I was thirsty to return after experiencing the generous energy this room of fellow students, entrepreneurs, intrapreneurs, and community builders exuded. Attending 1 Million Cups week after week, I now realize that people of all ages enjoy sharing stories just like me. Entrepreneurs sure like helping one another as well!

It’s only been a few months, but I already feel connected to this community of entrepreneurs. In fact, I’ve offered to join the volunteer 1MC organizing team, because I’ve seen how stories create a bond, and perhaps that’s what it’s all about. No matter where you’re at within your own journey, I’ve learned we are not alone. Everybody helps everyone grow. Now I’m on a mission to learn from more entrepreneurs, to build into my own ideas, to ask for help, and to accelerate others however I can within the entrepreneurial ecosystem.

By Ben McDougal, ago

Breakout Valuation

Breakout valuations are achieved when a business is valued based on how it makes people feel and its future potential, not just what it’s done in the past.

The nine components of a breakout valuation are confidence, vision, curiosity, people, communications, cash management, financial forecasting, capital strategy, and business design. Whether or not you sell your company, business owners who optimize in these areas, position themselves to capture a breakout valuation.

Extra Shot

This caffeinated contribution is a special adaptation from Breakout Valuation, which is the #1 New Release in Venture Capital and was written by my good friend, Patrick E. Donohue. Patrick is an entrepreneur, mentor, advisor, investor, valuation expert, and community builder who offers unique insights into the dynamics of money and business.

While you’re running a company, breakout valuations make everything easier. It attracts talented employees and quality customers. This expands your market position, makes financial capital less expensive, and invites vendors to extend better terms based on your surging trajectory.

Knowing what your ownership of the business is worth helps you make important financial decisions and becomes increasingly important as a business matures. If a business grows to the point where it becomes valuable to acquire, academic and finance professionals attempt to make valuation objective, but the complexity of each transaction makes valuation subjective in the end. Along with all the objective data, valuation is highly influenced by the environment, relationship, and personal views of the participants in a transaction. Knowing how investors and lenders use objective valuation tactics is crucial, but understanding the potential value of the business, articulating it to potential partners, and having them buy into the vision will arm you with an advantage to get what you want—a breakout valuation.

Breakout valuations are not aspirational. They emerge from what you are doing right now. It’s all about being clear with your mission and vision. It’s knowing your numbers and how everything comes together through a shared mindset, communication, and workflow. The pursuit toward a breakout valuation compounds, requiring attention today, and every day moving forward. This aggregates understanding and builds confidence. When the day comes to part with some or all of your business, the confidence from a breakout valuation will maximize the payout or deliver assurance in walking away from the deal.

Extra Shot

What are we doing today to support our goals for tomorrow?

By Ben McDougal, ago

Ask For Help

I was raised to “go figure it out”.

This DIY mindset was reinforced through years of education and employment in traditional, corporate environments. If there was a problem that I didn’t have the answer to, I would naturally slide into problem solving mode to independently determine different ways to ensure progress. By and large, this mindset has served me well. It has taught me to be resilient in the face of challenges, even when it’s not the popular path forward. It’s left me with an open, achievement-oriented approach with less limitations, because I am a DIY business woman.

Extra Shot

This caffeinated contribution was written by Laurie Brown. I had the pleasure of collaborating with this operational savant through her work inside the Kauffman Foundation and with 1 Million Cups. Laurie is now helping fellow founders optimize their own business operations, so let me know if you’d like a warm introduction.

Lately, I’ve been re-thinking this approach. Perhaps my DIY mindset should include more asking for help?

Within a recent career transition, I’ve been exploring this new attitude through an experiment. On numerous occasions, I’ve encountered unknowns. In these moments of uncertainty, I’ve resisted my life-long instinct to figure out every answer on my own. Instead, I have started asking myself, who in my network might be able to help me learn?  As this experiment has unfolded, I have three key takeaways.

  1. Asking for help drives results. I can learn from others who have pioneered effective solutions, which saves me time (and pain) along the way.
  2. The collaboration from these exchanges go beyond the problem at hand. Many times it strengthens relationships, the fun of helping each other forms friendships, and mutual professional growth is a welcomed side effect.
  3. By leading the way to ask for help, I serve as a role model to my peers and open the door from them to ask me for help in return.

My DIY ways will continue to serve me well, but I’ve learned that an added dose of curiosity and willingness to listen can add fresh layers of potential. I’ll continue to carry forward my resilient, solution-driven approach, but plan to incorporate more inclusive problem solving and an “AFH attitude” within my engaged network. This will keep problems from staying problems, while also creating a new catalyst for prosperity.

By Ben McDougal, ago