Active Network Participation as an Investment Strategy

The merging of the roles of investor and miner has created an investment approach unique to decentralized networks

Summary

• Decentralized networks incentivize third parties to deploy services on their behalf in exchange for protocol-defined compensation. Examples of these services include security, transaction processing, lending, or providing computational resources like storage, computation, or transcoding.
• Investors that have acquired a stake of tokens early on in the life of a decentralized network are well equipped to provide core network services during its bootstrapping phase.
• By actively participating in networks, an investor can open or increase a position in a network at a potentially competitive cost basis, and increase the likelihood of network success.
• In some cases, active network participation is the only way to gain financial exposure to network growth.

Introduction

CoinFund recently announced the launch of Grassfed Network. Grassfed is an initiative that supports investment strategies involving active network participation. This announcement is the culmination of months of research and test deployments that CoinFund has performed across a number of networks, and we are extremely excited to collaborate with more teams on this work in the future.

However, after the announcement came out, I received many questions from friends and family who live outside the world of #cryptotwitter. Why should a fund actively participate in a network that it supports? How is this an investment strategy? Why should I care?

These questions have inspired me to take a step back and publish an overview of active network participation as an investment strategy. First, I will walk through the lifecycle of a decentralized network. Then, I will discuss how this approach to investing fits in.

Decentralized network lifecycle

On its journey towards decentralization, a decentralized network will go through three high-level phases: the fundraising period, the bootstrapping period, and the…