Multicoin Capital: In Search of Outliers

The greatest football* coach of all time is Sir Alex Ferguson. Over a nearly forty-year managerial career, the Scotsman won every prize available at the club level, guiding Manchester United through a period of unprecedented dominance. When asked about the difficulties of his work, Ferguson highlighted the challenge of winning back-to-back championships. So much effort and ambition is expended in winning one title that it can be difficult to summon the same energy to secure a second. Not to mention that one’s competitors, stung by defeat, up their game in response. Such were Ferguson’s gifts that he managed back-to-back Premier League titles six times, even stringing together three-in-a-row twice. Perhaps more than any other achievement, this endurance has given his teams the patina of greatness – an admission that gives me no pleasure to admit as a lifelong Chelsea fan. 

The same dynamics exist in the venture capital industry. It is undoubtedly impressive to produce a top-decile fund, let alone one with the historic return profile of Multicoin’s inaugural vehicle. But true greatness requires endurance and persistence. To demonstrate one’s skill as an investor, it is not enough to do it once – you must show you can succeed again and again, across cycles and market conditions.

This is Multicoin’s task over the next fund cycle and beyond: prove it can maintain a winning edge. It must do so even as large funds push into once deserted territory and as the market recognizes the wisdom of Jain and Samani’s early moves and tries to mimic them. As with every great team, Multicoin must find new ways to win. In the context of VC, that means finding and financing the next Solana, Helium, and The Graph – finding the next outlier capable of returning a fund many times over. 

Today’s piece will use Multicoin’s public admissions and context from private interviews and research to see where Jain and Samani are looking for their next megahit. In particular, we’ll touch on three investment themes and how they might manifest: 

1. Composability. Crypto has created a collection of “money Legos” – primitives that can be combined in unusual and impactful ways, especially in DeFi. Now may be the moment to build with them more decisively.  
2. Data DAOs. Consumers are used to having their data siphoned by Google and Facebook. Crypto makes it possible for us to take sovereignty over this information. Once under our control, what might we do with it? Web3 applications abound. 
3. Proof of physical work. We may think of crypto as a somewhat intangible realm. But projects like Helium have shown that the industry can help real-world networks emerge. In the future, we might hail taxis, receive packages, and get our power from decentralized entities.

To finish, we’ll also think through what the future holds for Multicoin itself. 

On we go. 

*I cannot betray my English upbringing and use the term “soccer” in good faith. 

Theme 1: Composability

Multicoin isn’t exactly hiding what it thinks will be the biggest opportunity in 2022. Visit the Twitter profiles of its team, and there’s a good chance you’ll stumble across the same word in their user name: composability. 

Composability was also the subject of Kyle Samani’s keynote address at the 2021 Multicoin Summit. In that speech, Samani outlined the investable opportunities this theme has created. 

Before diving into these different opportunities, it’s worth settling on a definition for composability. In his keynote, Samani notes that the firm prefers Variant co-founder Jesse Walden’s description, “A platform is composable if its existing resources can be used as building blocks and programmed into higher-order applications.” Walden adds, “Composability is important because it allows developers to do more with less, which in turn, can lead to more rapid and compounding innovation.”

The classic metaphor to understand this definition of composability is Lego. Each block is a resource developers can use to build a larger, more sophisticated structure. That structure can, in turn, be added to another. Crypto has created discrete “money Legos” – blocks with specific financial functions that can be recombined into new applications. For example, you might have a “lending” block that could combine with an “exchange” block that would allow for issuing loans across asset classes. This is a simplistic definition but gives a sense of how the idea manifests. 

In Samani’s speech, he predicts that we will see novel applications emerge thanks to this composability over the next twelve months. Multicoin’s confidence in the specificity of this estimation comes down to the emergence of Solana and the ecosystem it has spawned. 

To understand why Solana and composability are linked in the firm’s mind, we must take a brief side-quest (how meta) into the world of “sharding.” Part of the reason Ethereum has succeeded as a blockchain is that it enabled developers to build interoperable applications. The downside of this native composability is that the Ethereum network has become congested as applications have grown. The greater the activity, the longer and more expensive transacting becomes. To counter this, Ethereum is working on a new architecture that involves “sharding,” a process of splitting a blockchain into splinter chains that operate semi-independently. A blockchain like Ethereum effectively diffuses demand and lowers transaction costs by making this sub-division. 

Multicoin believes this comes at a price. Namely, by sharding, Ethereum loses some of its composability. Fracturing activity across chains increases total throughput, but when it comes time for transactions to populate across the whole network – necessary to maintain a single source of truth – latency is introduced. Even momentary discrepancies can fundamentally undermine the functionality of a “money Lego.” For example, does an order book work as well when transactions are split across several shards? Jain shared his thinking on the topic:

You can't shard an order book. It doesn't make sense. The whole point of an order book is to find the best price. By sharding an order book, you force the market maker to sync multiple order books. By definition, an order book needs to be a single place that hosts all of the orders and surfaces the best price. No one wants the second-best bid. 

This perspective raises a question: if you believe sharding compromises composability, how do you handle the problem of scale? 

Part of the reason Multicoin gained such conviction in Solana was that the alternative Layer 1 posed a solution. By leveraging a different architecture free of sharding, Solana allows for composability and high throughput. When Samani realized Solana solved this issue, he recalled it feeling like a “lightbulb had gone off.” 

After a year that saw Solana become one of the top-ten assets in the industry, Multicoin believes that composability is ready for prime time. At its summit, the fund identified five specific areas of interest. In some cases, Multicoin has already found a fitting investment; it is still on the hunt in others. 

A “perfectly collateralized” stablecoin

One manifestation of composability is UXD, an algorithmic stablecoin – a subject we covered in some detail in our deep dive into Terra. Like Terra, UXD is genuinely decentralized. Unlike Terra, UXD is collateralized; or as Jain described it, “exactly, perfectly collateralized.”

How does UXD do this? By following a “delta-neutral” strategy – simultaneously going long on a spot trade and short on a future contract. 

This can get a little confusing, so let’s use an example. Imagine you want $100 worth of UXD. To get it, you would open UXD’s application and deposit $100 worth of cryptocurrency – SOL, for example. In exchange, you would receive precisely 100 UXD, which you could then spend, save, or swap across the crypto-verse. If you want to redeem your UXD for dollars at any point, you can do so at a rate of 1:1. 

UXD can retain this price stability with a nifty mechanism. When you trade your $100-worth of SOL for the stablecoin, UXD deposits that money on a decentralized exchange where it acts as collateral. It then takes two positions, going spot long SOL with $50-worth and perpetual short with the other $50. A balance is achieved: if the price of SOL falls by 10%, the short position increases by 10%, and visa-versa. Volatility is absorbed by this architecture — assuming platforms and counter parties function as promised — allowing for a scalable, decentralized, collateralized stablecoin. 

For UXD to work, two composable elements are necessary: a decentralized spot exchange like Serum and a spot and futures exchange like Mango Markets. By leveraging those Legos, UXD looks set to bring a truly different stablecoin to market. 

DeFi-Native prime brokerage

Even if you’re familiar with the term, you might not know what a “prime broker” does. Started as a service for large hedge fund managers, the prime broker does what its name suggests, acting as a unifying, organizing agent for the customers it serves. Responsibilities include managing cash reserves, connecting to major exchanges, offering leverage, and cross-margining. Rather than managing buying and selling positions across different venues, and calculating collateral, a prime broker like Goldman Sachs or JP Morgan will do so for you (provided you’re big enough). 

Multicoin believes the pieces are in place for a DeFi-Native prime broker to emerge. Building blocks exist for the core functions listed above, including buying and selling perpetual futures (Mango Markets, Drift, 01), dated futures (Contango), and options (Zeta, Hxro, PsyOptions). Cross-margining is also possible, thanks to products like Marginfi. All that is left is to combine these options and build a Goldman-style player on Solana. 

Embedded sports betting

“Gambling is a principle inherent in human nature,” philosopher Edmund Burke said. The truth of that has ensured the business of speculation is plenty big – and yet, it may still have many orders of magnitude to grow. 

Today, if you want to place a sports bet in the United States, you must either enter a casino or call your bookie. Neither is the most seamless of experiences. Multicoin sees an opportunity for this kind of transaction to occur across the internet, thanks to the presence of “building blocks” like BetDEX, a decentralized betting protocol. Leveraging this kind of tooling, you can imagine a world in which fans of a particular sport congregate on a Discord-esque, decentralized messaging platform like Satellite to talk about their favorite teams. A friendly conversation might easily lead to speculation. In a matter of keystrokes, a consumer could place a real bet without needing to leave an application.

As described by Samani, a product of this type would “combine social and money and betting in a way that wasn’t possible before.”

Targeted fan engagement

While 2020 was the year in which the “creator economy” received peak attention, monetization and engagement options for creators are relatively constrained. Multicoin believes there’s an opportunity for someone to build a blockchain-native platform for artists to better connect with their fans. 

Let’s walk through how this might work. 

Imagine you’re Taylor Swift. After being red-pilled one day, you decide to upload your whole catalog to Audius, a music streaming platform built on the blockchain. By doing so, you earn AUDIO for uploading tracks and having people listen to your music.

Ahead of your next tour, you decide you want to reward your biggest fans by giving them access to a ticket pre-sale. To do this, you use Dialect, a smart messaging protocol that allows you to send messages based on a user’s on-chain actions. You decide to send your message to everyone that’s logged more than 1,000 listens of your music, aka the true Swifties. Only these people can buy early access tickets, perhaps even at a discounted price. 

Numerous kinds of interactions are possible with data on open, permissionless systems. 

Decentralized record labels

Toward the end of his keynote, Samani compares venture capital firms and record labels. While both invest in up-and-coming projects with high failure rates mitigated by breakout winners, they fundamentally run different playbooks. As outlined in Part 2 of this series, the way to drive outsized returns in venture capital is to be non-consensus and correct. Following the crowd’s wisdom is no way to find the next Solana. 

Conversely, record labels succeed by identifying the most popular artist. Rather than working against public opinion, these entities exist to serve it.

By dint of this dynamic, Multicoin sees the opportunity for decentralized record labels to emerge. For that to happen, artists may first need to adopt social tokens, currencies centered around a particular group or subject. For example, I could issue MARIO, a social token tied to the economic activities of The Generalist. Readers might purchase this token and as The Generalist grew, MARIO would appreciate in value.

The same process occurs among musical creators. Not only do social tokens allow musicians to raise money and gain attention — as Samani notes, “when people have a token, they like to talk about it" -— they may also give rise to a new kind of talent spotter. Over time, those skilled at purchasing the tokens for popular musical artists early could band together, forming a kind of Universal Music DAO. Since their activity would be on-chain, the rest of the world would see when they had backed a new artist – the equivalent of signing a new act.

“This music VC DAO is the most compelling thing we’ve contemplated internally in terms of just the sheer ambition of what it represents,” Samani noted in his speech. “This isn’t just an app – it’s much bigger than that. It’s a huge step forward in capital formation.” 

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Theme 2: Data DAOs

At the start of this trilogy, we told the story of Tushar Jain’s first company. As a recent graduate with a smattering of healthcare experience, Jain decided he wanted to build a business around the proliferation of electronic medical records. He’d asked himself, “what is the best use of this data?” 

Jain seems to be returning to this question in 2022. In our conversation, he highlighted “data DAOs” as an area of particular promise and a budding obsession. This time, the core question he has asked himself is: “What activity can you do as an individual that is not worth a lot, but becomes very valuable when many, many people do it too?”

While early investment Helium is one answer to this question, Multicoin believes there are many others. I’ve identified four areas that fit this thesis and may yield promising opportunities.  

Mapping DAO

In reviewing the rest of the videos from Multicoin’s summit, I came across a discussion between Jain, Helium co-founder Amir Haleem, and a third guest: Ariel Seidman, co-founder of Hivemapper. 

Hivemapper is creating a decentralized global map that rewards contributors. The company incentivizes location data collection through a network of independent drivers. By installing Hivemapper’s dash cams, drivers can begin earning a native token, HONEY. This makes contributors owners of the network and rewards them for being early contributors – as Hivemapper grows more valuable, the price of HONEY should increase. If Helium is any indication, early adopters could be rewarded handsomely. 

Like Google Maps, Hivemapper makes money by offering its mapping API to developers. Critically though, Hivemapper does so in a much more cost-effective way. In his talk, Seidman notes that the cars Google uses for mapping cost around $500,000 – while Hivemapper needs only to deliver comparatively low-cost cameras. 

In sum, Hivemapper is a classic response to Jain’s question: while one person recording their daily drive might not mean a lot, millions could create humanity’s most accurate map. 

Investment DAO

Our piece on Coatue discussed how the firm used its internal data platform Mosaic to gain an investing edge. Mosaic helps Coatue assess a startup’s traction and revenue by pulling in credit card and expense account data. Services like Second Measure have emerged to replicate that edge, offering anonymized purchasing data.

The value hedge funds put on services of this kind reveals an obvious truth: the more relevant data you have, the better investment decisions you are likely to make. We can reimagine what a hedge fund model might look like if built in a DAO structure. Rather than purchasing data sets (available to anyone with enough money), an Investing DAO could reward consumers for voluntarily donating their data. Upload your Amazon transaction history, export your Twitter social graph, share your location data – and receive tokenized compensation. 

We produce colossal amounts of information in our daily lives that may mean nothing to us but could provide a real investing edge. By giving it away, we could get compensation and share in the upside produced by our collective information. 

Bank DAO

The same mechanism described above could prove useful in other financial contexts, particularly lending. Over the past two decades, tech-enabled lenders have emerged that use alternative data to underwrite loans. In some cases, this involves social graphs and behavioral information. Lemonade, purveyor of home and renters insurance, once touted its app’s ability to pick up on “non-verbal cues” – before realizing how very creepy that sounded.

Again, we can re-envision this paradigm as symbiotic rather than parasitic. Instead of having our faces, social lives, and online activity unwittingly scanned, we could donate our data to improve the underwriting abilities of a co-owned bank. In exchange, we would receive a token and share in the entity’s ownership. Assuming this data was in some way predictive, our Bank DAO should compound in value. 

Health DAO

Much of the same logic above applies to the world of healthcare. We create – and contain – data that could be extremely valuable for a broad range of healthcare applications. Firstly, we could contribute our data to improve health insurance underwriting. Relevant information might include our biological stats, eating habits, Seamless history, and the amount of walking we do each day. You could hook up Strava, Pokemon Go, Uber, and any other number of applications to produce a clearer picture of risks by demographic. Once again, consumers could benefit from the upside created by this process. 

Other opportunities abound. Healthcare startup 54gene has raised more than $40 million in funding for its genetic platform. The company compiles unique data sets to improve medical treatments, focusing on gathering genetic information from the African diaspora. According to 54gene’s CEO, this data is donated by volunteers. 

At least one project is reimagining this structure on-chain. By purchasing an NFT from GenomesDAO, users receive a genome sequencing kit. Information is returned to the GenomesDAO team and safely stored. In the future, the DAO could sell this anonymized information to improve drug discovery and other healthcare endeavors. We should expect different configurations to come to market, leveraging similar structures. 

Theme 3: Proof of physical work

We have spoken about Helium several times in this trilogy. As a refresher, Multicoin’s portfolio company orchestrates a fully decentralized wireless network. By purchasing a Helium hotspot, consumers help expand and improve a vast mesh of connectivity. It is, effectively, an alternative infrastructural project that is self-reliant and close to unkillable. 

Multicoin sees opportunity in the creation of other Helium-esque networks. As described by Partner and Head of Communications John Robert (JR) Reed, the firm believes there will be many other large, valuable networks that rely on “proof of physical work” – a phrase Jain coined. 

Power grid

Last year, blackouts rolled across Texas. As a winter storm swept across the Lone Star State, inadequately protected equipment froze and stalled, leaving 11 million residents in the dark. It could have been much worse; the chief executive officer of the state’s grid said it was “seconds and minutes” from the kind of cataclysmic blackout that might have taken weeks or months to resolve. Even those with access to power hardly escaped scot-free. Thanks in part to Texas’ deregulated energy market, electricity costs skyrocketed, with some seeing monthly bills jump from $130 to $3,000. 

In the aftermath of the crisis, sales for generators rose sharply as citizens sought to protect themselves from future blackouts. With generators running in the thousands of dollars, that solution is only available to a portion of the population. 

Creating an independent power grid orchestrated by crypto incentives could be a fruitful solution. Through a mix of generators, solar panels, and even wind turbines, it would be possible to create a “microgrid” that acts as either fail-safe or genuine alternative. Houses that generated excess electricity could distribute it locally, earning tokens. Those that leveraged this surplus could make payments, all within a closed system. As a benefit, much of this infrastructure could tilt toward cleaner, renewable energy sources. 

While Texas might be the best market to experiment with such an endeavor, the increasing probability of climatic disruption means that an operation like this would have global demand. 

Ridesharing

Reed mentioned that Multicoin is on the lookout for a decentralized Uber competitor in one of our discussions. This idea has been in circulation for some time without creating a credible challenger. A 2018 New York Times article outlined the idea’s potential. Relying on insights from Union Square Ventures co-founder Brad Burnham, the piece explained how a “Transit protocol” might facilitate an on-chain challenger: 

Just as GPS gave us a way of discovering and sharing our location, this new protocol would define a simple request: I am here and would like to go there. A distributed ledger might record all its users’ past trips, credit cards, favorite locations — all the metadata that services like Uber or Amazon use to encourage lock-in. Call it, for the sake of argument, the Transit protocol.

Once set up, applications could build on top of Transit, using tokens to jumpstart the system. Suppose you had a car and wanted to begin offering your ride-sharing services. In that case, you could plug into an application built on the protocol and start earning Transit tokens that appreciated as the value of the network grew.

It might be the right time to resurrect this concept now that infrastructure is more mature and crypto adoption is relatively widespread. 

Third-party logistics 

A final idea Reed shared was the concept of a decentralized third-party logistics (3PL) provider. 

Though you might not spend much time thinking about them, there’s a good chance 3PLs have played a significant role in delivering many of the possessions in your home. Though operations vary, 3PLs serve three primary purposes: warehousing, packing, and delivering goods. 

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

Microwarehousing has become a popular method to drive faster in-city delivery, perhaps paving the way for a citizen-first approach. A decentralized 3PL could rely on excess space in residential and commercial buildings and an on-demand workforce for picking and packing. As with previous examples, a protocol could layer on token payments for participating, giving ownership to stakeholders and offering the chance for meaningful appreciation.

The future of Multicoin

We know where Multicoin is looking for its next fund returning investments. But what of Multicoin itself? What does the firm wish to become over the next decade?

When I asked Tushar Jain that question, he responded, “I think the right question is what does crypto become? We’re not here to empire-build. We don’t want to conquer the world. Our success comes from growing the state of crypto networks.” 

The firm seems to believe the best way to do that is to keep doing what it does best: finding revolutionary projects early and helping them build state. Notably, Multicoin’s funds have often been smaller than other players in the industry. After its insane inaugural venture fund, it raised a restrained $100 million second vehicle. It’s rumored by The Information that “VFIII” won’t be much larger. 

Though many other crypto funds have announced multi-billion dollar deals, Samani and Jain seem keen to stay at a small enough size to play the early-stage game and still drive outsized returns. Limited Partner Brian Walls noted that “those are the conversations the team likes to be in,” adding that he thought Multicoin had probably turned down an additional $1 billion in LP interest. 

Multicoin’s AUM discipline is indicative of the long-term strategy the firm appears to be taking. Rather than optimizing for fees or clout, it is steadfastly focused on finding the top 1% of entrepreneurs and carrying them through their life cycle. 

Reed emphasized this point during our conversations, noting that Multicoin would continue to prioritize this end goal, though changes in the market might necessitate different approaches. “You almost need to reinvent the firm every twelve months as the space shifts,” Reed said. “What services will portfolio companies need next year? How does that change as crypto mingles with new users, geographies and markets? Those are things we’re focused on figuring out. The goal is to evolve without losing our core value.”

Don’t expect Multicoin to staff a vast team soon, though. While firms like a16z have built out extensive support services, Jain says, “the goal is not to have thousands of people working here.” 

Might Multicoin expand geographically? Adding Mable Jiang to cover the Chinese market has proven a sage move. Given how global a phenomenon crypto is, it seems logical that the firm might wish to add localized investors in markets like Indonesia, Nigeria, and India. For now, it doesn’t seem to be a huge priority. Jain noted that India and Germany – specifically Berlin –  could be critical geographies, but the firm didn’t expect to make any major hires. “We’re traveling so much already,” Reed added.

To think of what Multicoin might become, we can return to Jain’s statement. The firm succeeds when the “state” of crypto grows. What does that mean? Multicoin doesn’t use “state” as a synonym for nation or sovereignty. Instead, it refers to the computer science concept in which a “stateful” system remembers previous user interactions. In that respect, state reflects user engagement. As more activity occurs on the blockchain, the more stateful the space becomes, allowing for richer experiences to be built. It’s a flywheel already picking up speed. 

This is what Multicoin is after. It wants more usage, more value, more state to be hosted on networks like Solana and governed by network participants. It is chasing something that is somehow both amorphous and quantifiable – a steady revolution. To achieve that end, Jain and Samani seem determined to be stubborn on the vision of increasing crypto’s state but flexible on the details.

“Once you bid farewell to discipline, you say goodbye to success,” Sir Alex Ferguson once said. The great teams understand that to keep winning, you must maintain standards and keep focus. As Multicoin looks to the future, it appears to recognize this directive. As ever, it is pursuing ideas many consider strange, taking bets that others won’t, and retaining its outsider DNA, even as it ascends to the top of its industry. Multicoin may have already made history, but it is just getting started. 

Read Part One and Part Two, here.

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