Neck Deep in Incentivized Testnets
I have always made the argument that the chances a crypto asset will “disappear” or “go bankrupt”, are inversely proportional to its number of users. The recent collapse of Luna shows what happens when holders lose confidence and begin to abandon a project en masse. But what about projects that are not being abandoned, but where we, like explorers of old, are charting new waters? What about being the first people on a new asset?
Well not the very first. But early, really early. As in we helped plan the expedition and have underwritten some of the ship building. Columbus couldn’t have done it without us. Is that a bet worth taking, when the outcome can not be precisely measured ahead of time? I am talking of course about incentivized testnets.
I have been…busy. But the word belies the chaos. You see my friends, I drank the incentivized testnet kool-aid, powdered the bottle it came in, and snorted it. It’s a great high, and after a year’s of work I’m slated to receive tokens on 7 high quality chains. Some of these tokens will come soon; others, like Solana, are at least a year of grinding away. But it hit me today as I contemplated a $3000 dollar VPS (Virtual Private Server) bill covering almost 20 machines, that I have come a long way from a couple of articles ago, where I advocated investing a few hundred dollars and some of your “cheap” time into incentivized testnet projects.
But I had a problem deploying capital. Our investment philosophy has a low inherent risk of loss, because we look for the right projects with the right qualities and discard all else. But this leads to multi-year periods of cash sitting in low interest accounts, undeployed. And since Wall Street put up a shingle in crypto land, seed round or first offering opportunities are nil. Straight crypto investing is where the big dogs play. And big dogs don’t play well with smaller dogs. Perhaps that is why I have become so enamored with incentivized testnets.
When I started investing in crypto in 2011, and certainly by 2012, there were very few “big dogs” doing it. No hedge funds that I can recall, that’s for sure, and an investor would have his pick of projects if he wanted to fund any of them; not that the cash for tokens model had been pioneered back then, but it’s a nice thought experiment.
Seed and early series crypto investing, at least for worthwhile projects, has not been about money for at least a few years, it is about who you are and who you know. The bigger the name the more easily you can get in on the ground floor, and there are teams of the Wall Street avant garde combing the world to invest in these projects. So what was a lowly investor to do? We focused on early release tokens, that is tokens that have hit the market recently, and that was fine for several years.
And then Wall Street came in and fucked that up too by taking over the platforms. Have you seen a Coinlist sale lately? There are up to hundreds of thousands of people queuing up to buy tokens on the first day. It’s like a lottery to these people, “Well my friends Coinlist sale tokens tripled, so why shouldn’t mine?” And all of a sudden launch day investing became “hopefully a few weeks down the road investing”. And this new mechanic mucked up our pricing advantage. It’s just too competitive to get in early. I am not saying straight token investing can’t be done, we have been successful at it for many years, including now, but I would like to emphasize at our current size, there is a better way. Incentivized testnets.
The good thing about incentivized testnets is that they are subject to the same mechanics we have been discussing on this blog for several years, but on a different stage of the protocol. By definition these testnets will generally be pre-launch (with some program exceptions like Solana) so the number of mainnet users or the general reception of the technology can not be judged until way after we have provided our sweat, toil and tears to a protocol.
But we can expect that our trusty old sorting aides: team, technology and funding; will give us a basic idea of whether this protocol has high survivability. We don’t need to project to take off immediately to cash in our testnet chips, we just need to know there will be enough people coming in the door after we prime the garden hose, to justify the time we have invested. No matter how high the incentives we receive, if no one is attracted to a protocol post launch, our investment is moot.
We have a slimmer margin of safety in this sort of bet than we do in our normal work. There are a lot of unknowns and up front investment. But a large proportion of protocols will attract some attention post launch, so it is unlikely any investment you make will be a total loss. You will probably not make all your money back if you are waiting for a dud to launch, but you won’t lose all of it either. That’s your first edge.
Your second edge is that as an incentivized testnet participant, you have a great handle on the team. You’ve interacted with them, you know who they are and how they react to pressure and to success. You know the technology inside out, you’ve been running bleeding edge software for months or years waiting for its launch. If you’re excited, someone else will be too. And finally, you just got paid in tokens. Do you value them? If you aren’t thinking of selling immediately by this late point, you probably have a good reason. You’re in a prime position.
What these three inside pieces of information tell you is not so much about the chances that people will hop on into the project and make it bigger, but rather that your fellow testnet jockeys will abandon it. The last thing you want is to be in a testnet where everyone is waiting to jump ship; I’m there on a couple of tokens, and it will be a slaughter. But it’s pretty hard for any team to mess it up that badly. Testnets are exploding in popularity, and by offering pre-launch participants rewards, network entrepreneurs have baked in users for the foreseeable future of the post launch network. It’s theirs to lose.
So circling back to investing in incentivised testnets, you have clear advantages as an early insider. You do not have a fixed investment, if you don’t like what you see down the road, you can jump ship any time. And your only investment is in VPS time. There is money to be made, because if you and your fellow testnet jockeys with the inside knowledge aren’t jumping ship, this suggests that at some point in the future, others will hop on as well. And that’s where our real money will be made. Moderate risk, high reward investing at its finest.