One of the most powerful features of crypto-economic protocols is their ability to create incentive structures that allow anyone in the world to permissionlessly contribute to a set of shared objectives. These incentive structures can be finely tuned to facilitate large-scale coordination to achieve specific goals.
This represents a step-function improvement in capital formation.
The vast majority of crypto-innovation to date has been focused on coordinating digital communities and economies; however, tokens also create opportunities for innovation in capital formation and human coordination that extend beyond the digital world and into the physical.
We refer to this thesis as “proof of physical work.” Protocols that fit this thesis incentivize people to do verifiable work that builds real-world infrastructure. Relative to traditional forms of capital formation for building physical infrastructure, these permissionless and credibly-neutral protocols:
- Can build infrastructure faster—in many cases 10-100x faster
- Are more attuned to hyper-local market needs
- Can be far more cost effective
Our first investment within this thesis was Helium. Helium is a crypto-economic protocol which incentivizes people to build and manage physical telecommunications networks—e.g., micro-cell towers. The Helium Network is built by “hosts” who mine HNT, the native token of the Helium protocol, in exchange for creating coverage and transferring data over the network. The Helium network launched in August 2019 and in the two and a half years since it has grown to over 600,000 hotspots that are currently providing connectivity and coverage all over the world.
For context, the entire U.S. telecommunications industry has 417,000 cell towers, and estimates for the total number of cell towers in the world range from 3M to 8M. The Helium Network has achieved a similar level of scale in just 30 months because it created powerful incentives that encouraged people around the world to build the network. While centralized corporations build their networks in a top-down and rigid process, decentralized crypto-economic protocols are able to grow faster in a bottom-up way everywhere at once.
Helium Hotspots are not the same size or power of corporate cell towers because they don’t need to be. The Helium Network makes up for this by having many more hotspots, all deployed at a tiny fraction of the cost of their corporate competitors. Permissionless, crypto-economic protocols rely on redundancy to offer network-level reliability even when individual network nodes are not as reliable. Whereas building new towers incurs incremental labor costs for traditional telecoms networks, labor cost in the Helium network is $0. This is an asymmetric advantage that enables Helium to compete on a vector that traditional telecoms cannot: the Helium network consists of a higher density of smaller antennas.
We recently announced our investment in Hivemapper, another protocol that traverses digital-to-physical realms using crypto-incentives. Hivemapper is a decentralized map built by people using dashcams—and it represents a fundamental shift in how maps are built.
Every photo in street view in Google and Apple Maps was taken by a Google or Apple employee in a specialized car with a 3D camera. Those cars are driven for more than 12 hours per day, and yet Google and Apple’s maps are in many cases years out of date. The cost of these cars and drivers is simply too high for Apple and Google to justify adding more of these resources. Therefore, there is no such thing as a real-time map, or anything approaching it.
Hivemapper creates a new way to update maps with much higher frequency and at much lower cost by outsourcing the mapping to individuals who already own “good enough” hardware. Hundreds of millions of people drive everyday. Imagine if just 1% of those people mapped the roads around them while they drove. The maps would include every new highway off ramp, small business, neighborhood street, pothole, etc. within a matter of hours or days. This is only possible because of HONEY, the native token of Hivemapper, which rewards mappers for continuously contributing fresh, updated information to its map.
Hivemapper is not just limited to street maps, though that is where it is starting. The same network can collect and map other types of data like air pollution, wireless coverage quality, noise, weather, and more. It's clear how Hivemapper is able to create maps at a lower cost than Apple and Google. With this in mind, the proof-of-physical-work naturally extends to other use cases as well.
Helium and Hivemapper are only two examples of protocols using crypto-incentives to bridge the physical and digital worlds. At Multicoin Capital, we’re fascinated by this space and think the design space is vast. We also think it presents one of the best opportunities to disrupt capex-intensive business models with a novel form of capital formation.
Some may argue that such models of coordination are replicable without crypto— stock agreements and bonus rewards for aligned actors are already present in most centralized organizations. However, crypto-economic protocols unlock five key benefits:
- Rapid Scale — Permissionless and borderless protocols can grow everywhere in the world in parallel across many legal jurisdictions.
- Credible Neutrality — Credibly-neutral networks give their stakeholders guarantees that the rules can’t arbitrarily be changed from underneath them.
- Collective Ownership — A system that is owned by its users creates loyalty, aligns incentives, and drives growth.
- Frictionless Payments — Blockchains allow for peer-to-peer micropayments that the legacy payments system cannot support.
- Integration with DeFi rails — DeFi rails are useful for bootstrapping liquidity via automated market makers. Overtime, we also expect proof-of-physical-work networks to leverage other composable DeFi-native tools, including NFT marketplaces, social tokens, derivatives, and more.
Given society’s collective experience with centralized capital formation over hundreds of years, the natural inclination is to think about solving this class of problem in a centralized fashion, in which a single company decides who, when, where, and how people are compensated. We contend that this model is obsolete in the internet era. A corporation making central planning decisions and compensating its stakeholders at its discretion will never be as effective as a properly designed permissionless network that scales and compensates its most productive actors using the free market’s conceptions of supply and demand.
Small individual operators have never been able to compete with large corporations on large-scale infrastructure (e.g., telecommunications, mapping, electric grids, third party logistics, etc.), until now. Proof of physical work represents a paradigm shift in how businesses operate and scale. Crypto-economic protocols allow for people to coordinate their economic activities without a centralized, rent-extracting party, and will help move these industries from corporate feudalism to meritocratic capitalism and freer markets.