Game Theory Group

The Blockchain Brief

Proof of Everything?

Over the past few days, several people have emailed me inquiring about the upcoming blockchain project “Chia”. As Techcrunch points out, Chia is eschewing the traditional initial coin offering in order to raise money via the JOBS Act Regulation A+. This would allow Chia to raise up to $50M from non-accredited investors. The Chia statement on this IPO: “This may be the first fully compliant public offering for a crypto company”.

Personally, I find it a bit silly to promote this as some sort of investor-friendly offering, when it’s just a debatably legal workaround to the SEC issues around ICOs selling tokens to non-accredited investors. How do you value equity in a crypto network that runs exclusively on proprietary tokens?

For those wondering, Chia will pre-mine and own 100% of all the tokens on its blockchain. The plan is, ostensibly, to then airdrop to IPO investors and partners to establish the beginnings of the network. Maybe they will provide tokens on a 1-for-1 exchange based on how much people invested in the IPO ($100 of tokens for $100 of equity investment)?

Okay, so what is Chia? 

Chia is billing its blockchain as a “proof of storage and time". Essentially, the founders want to remove the environmentally unfriendly proof-of-work (computing power) that secures the Bitcoin protocol. 

Proof of storage and proof of time are virtually untested alternatives. In a nutshell, those looking to "prove a transaction to be legitimate” send proof to a “verifier” that they have set aside “storage” space on an unused hard-drive or server. The idea is that by setting aside those resources (space, storage, etc.), the provers are making an economic sacrifice and are thus incentivized not to try to cheat the system. In Proof-of-Work, that idea applies to computing resources — you don’t want to spend all that time mining without being provided with a reward, which is what would happen if you were caught trying to cheat the system.

Chia is not the first to attempt this consensus system. Filecoin, one of the largest ICOs, raised $250M+ in September of 2017. To my knowledge, they have not yet gone live and distributed tokens. Though, hilariously, Filecoin futures are trading are at a major premium (even with the downturn). 

I am not a cryptographer, but have had enough conversations with experts to remain skeptical of novel consensus systems. Proof-of-Work is, for lack of a better descriptor: proven. Major crypto-networks like Bitcoin and Ethereum have shown themselves to be generally secure against bad actors. On the other hand, proof-of-storage, to my knowledge, has never been deployed on any public blockchain. It might work, it might not, it might need four more years of development.

That said, there is no discounting the strength of the investors behind Chia. Naval Ravikant, Andreessen and Greylock are top tier players, known to back winning companies. My concern, as with any blockchain project, is the "insider" deals. Early investors in projects like these can almost guarantee returns if they know that a huge round, hyped by media (ie Techcrunch) is already virtually guaranteed. 

The one thing I do know: entrepreneurs are innovating on multiple fronts when it  comes to blockchain; the technology, the business models and the fundraising strategies. 2018 might not be the 20x year everyone is hoping for, but it's going to be quite interesting.

Boris Revsin