Generalized mining — An DLT investment avant-garde
Generalized mining, often referred to as mining 2.0, is defined as supply-side assistance provided to a decentralized distributed ledger project. These services are provided by any third-party in exchange for compensation by the development team or by the network directly. And is not necessarily limited in the form of hashing power supplied to a blockchain that utilizes Nakamoto consensus (Proof-of-work).
So what is it?
The phrase has become a buzzword amongst institutional investors and is a notion that embodies a plethora of different meanings. The core principle of the concept is that a third party would supply non-financial resources that would benefit a decentralized network project, and the recourse supplier is incentivized in terms of financial compensation.
When the cryptocurrency movement started off it was near impossible for institutional tier investors to become involved in the space. This was, and often still is, due to two distinct reasons, regulatory hurdles but also the nature of these complex networks and digital assets. Most cryptocurrency enthusiasts are aware of Mike Novogratz’s Galaxy Digital Holdings and Barry Silbert’s Digital Currency Group, who both have been involved in the space far longer than the majority of cryptocurrency investors. These are the institutions that beat the retail investors in the one market where they have (had) the upper hand. We have to note they are the exceptions, one is a VC fund and the other an impromptu merchant bank and to a large degree these types of specialized institutions operate with a high degree of regulatory freedom relative to other traditional investment organizations. But neither Mike nor Barry could have invested in certain aspects of this industry and this is purely due to their principal as pure financial investors. It isn’t a problem for them to buy bitcoin from the market or equity in some startup exchange, but for several promising projects, it is not that plausible.
The growth of the decentralized world is not based on the amount of capital that is thrown at it, decentralized networks require a variety of different contributors. And this is often by means of intangible resources that are supplied by investors and community members which is not always apparent to the traditional investor.
To clarify this statement we would take a look at the Grin and Beam projects. Both are privacy-focused blockchains that have recently launched, both are defined as Proof-of-Work (PoW) cryptocurrency projects that could compete with the likes of Monero and ZCash. They were highly anticipated projects who drew attention due to the new innovative ‘mimblewimble’ protocol that is implemented into both blockchains. Despite some technical nuances, the projects essentially aim to fill the same perceived gap within the market technology framework. The general operational methodologies of the projects are where they differ considerably, these include monetary policy, mining, community, and overall governance. Beam has a VC-backed company styled approach that is similar to how ICO projects are structured, the project initiation is a call to investors to support the project founders who promise to deliver and enrich both parties. The team will ensure all relevant growth aspects, and investors just have to supply the capital. This structure is very similar to how the VC industry has operated, capitalists often support the projects in terms of incubation, but primarily in terms of funding. On the other hand, the Grin project was launched free of an ICO, pre-mine or founders reward, which basically means that zero GRIN is created at the launch of the blockchain. In essence, this means that and all coins are created by means of the consensus mechanism and more importantly that that team has not received investment capital. Relative to Beam the public mainnet launch of the Grin project is a call for community members, which include developers, communications managers, and content creators among many, and by means of their combined efforts would the project flourish and benefit everyone involved. The collective would benefit early contributors as they are inherently also the early miners. Now, this creates an interesting problem for large scale investors if they were inclined to include GRIN in their portfolio, as any considerable investment off the secondary market would massively inflate the price due to the very limited supply during the early stages of the project. To become embedded with the project the investment organization would have to supply resources to the network in terms of hashing power, the size of the investment would be relative to the other network contributors. Even though this is a PoW mining example, it clearly shows how decentralized projects are often structured extremely different, but with similar scopes.
From an investors perspective, it is important that one gathers how the obscurity of the technology — combined with alternative economic models — creates a value capture opportunity that often completely differs from the traditional space.
The tokenomics of the Grin project are relatively simple and thus allow for easy understanding, but several decentralized projects (those that do not launch by means of a public sale) are far more complex. For such a network to become successful adoption is required beyond just users on the client side of the experience, various different forms of services, software and hardware are required depending on the project. And one thesis that is very prominent within the crypto movement is that nobody provides critical infrastructure without compensation.
What are the types of generalized mining activities that investors could offer?
// Transaction processing
The original form of mining that formed part of our example.
The industry encompasses a variety of consensus mechanisms that determine the transaction verification process and the incentive distribution mechanism that is incorporated. PoW and staking based projects form the majority of transaction processing. Staking (PoS) is a form of consensus by means of a deposit, where miners (transaction verifiers) contribute to the process through their asset ownership. PoS generally is divided between projects who incorporate masternodes and those who do not. Masternodes require a relatively large amount of assets to contribute to the consensus protocol which makes it ideal for larger investors, we have also seen how delegates are incorporated into this system so that reputation becomes another determining factor which furthers my argument.
// Hardware provision
A variety of projects aim to expand on how society utilizes the internet as a network of distributed hardware. The most common applications are decentralized processing and data storage. These are some of the fastest growing services in the technology industry, we merely have to think of Google Drive and Amazon’s AWS. For a decentralized network to compete with these tech giants they have to meet their goal of building the distributed hardware ecosystem that encompasses idle equipment and increase overall efficiency. In an ideal future, centralized service providers would merely migrate to become part of the network and thus operate similarly in a generalized mining manner.
// Liquidity provision
There has been massive development in regards to on-chain asset exchange (DEX) and decentralized finance (DeFi) protocols and applications. Innovations that are built on distributed computing platforms, like Ethereum, and basically allow massive variation in terms of asset utility, think in terms of trading, loans and derivatives.
Several of these protocols require a form of asset liquidity that ensures a seamless process. This liquidity is provided by 3rd party participants that benefit from delivering the service, and thus allow for large asset holders to function similar to banks that operate as the intermediary between lenders and borrowers, except they only provide the liquidity and the process is automated by the protocol.
// Regulation
Some of the above mentioned DeFi projects incorporate a process that requires independent actors to function as decentralized regulators that ensure the stability of the ecosystem. The regulation process incorporates a financial incentive which is often captured due to the inefficiency that regulators aim to resolve.
The best example is Maker, a decentralized lending platform that allows one to solidify assets in a CDP (collateralized debt position) smart contract to acquire USD pegged stable coin called DAI. This type of operation allows for various inefficiencies. Within the Maker ecosystem, keepers are actors that profit from these inefficiencies that arise due to the dynamic nature of the market. A keeper is an independent (usually automated) actor that is incentivized by profit opportunities to contribute to decentralized systems. In the context of the Dai Stablecoin System, keepers participate in the Debt Auctions and Collateral Auctions when CDPs are liquidated.
Polkadot is newer blockchain project that incorporates stability regulation actors they are called fishermen. Fishermen seek out malicious behavior by bad validators on the network which they report to the validator system. They are motivated as bounty-hunters looking for substantial one-off rewards by proving that a bonded party (i.e., validator or collator) acted maliciously outside of the rule set.
//Other
An interesting blockchain project development has been the inclusion of development funds. These funds are capitalized by means of a variety of methods, the most common approach is where a portion of all mined assets are automatically allocated to specified fund managers that employ these assets to further the ecosystem of the specific blockchain project, either by means of direct investment or bounties. Bounties are tasks that are open to the public and incorporates a financial incentive to the bounty hunter that completes the task. Initial bounties were aimed at freelance developers but these tasks have grown considerably and often require complex operational efforts. Enter institutional investors, the next generation of investment firms are highly aware of the accelerated technological environment that they operate and investment teams include investment analysts, software engineers, data scientists, and even blockchain engineers.
These specific complexities in terms of asset creation and utility create an investment environment where it is paramount for large investors to understand the fundamental differences. To envision this adaption we merely have to study how Renaissance Technologies confused the American hedge fund environment just a couple of years ago. Modern investment teams should consolidate skills and tools that could be leveraged beyond just the initial investment decision.
Investment means participation.
