The Bicameral Thesis Pt 2: A Redistribution of Trust and a Rush of Value to the World bicameral.ventures Follow Dec 28, 2018 · 7 min read

Welcome back!! In part 1 we explored the journey from the beginning of commerce, where physical frictions dominated, to our current world where physical frictions are secondary in scale to so called trust frictions. Trust frictions are the risk of bad actors or bad products and whereas physical frictions produce operational expenses, if you end up on the wrong side of a trust friction, it is a capital event. The less natural trust or the more expensive trust is to accumulate, the more capital is required to plug that gap. Capital is expensive and so the more capital required the higher the natural level of prices and the more scale required to effectively run an enterprise.

Because individual entrepreneurs often aren’t able to acquire enough capital to offset these trust risks themselves, they turn to Centralized Trust Proxiers (“CTPs”) like banks or advertising companies to backstop these risks for a fee and turn capital events back into operational events. Early versions of CTPs relied on webs of personal relationships to proxy trust (banking families, international fashion houses), but these lose their efficacy as they scale. The model then evolved to webs of data-driven archetypes (Google, Facebook), which can scale infinitely but the trust proxy is only as strong as the data collection and processing models. The sprint now is towards something we called the Archetype of 1, which is a complete digital representation of your inherent and accumulated data that allows offline trust to be replicated online. However who controls and monetizes this “online trust” is the subject of the most important debate of our time. Which brings us to the world we have today as defined by 10 characteristics:

1. A fully digital world where frictions are almost entirely trust based and focused around bad actors and bad products 2. CTPs have evolved their competitive moat from having the best web of personal relationships to having the best web of behavioural archetypes 3. Capital requirements are a key driver of scale and trust frictions are a key driver of capital requirements 4. Reducing capital requirements by reducing trust frictions leads to rational reductions in scale requirements and ability for smaller companies and individuals to compete; decentralization isn’t the goal itself but a rational byproduct of reduced capital requirements 5. More granular archetypes created by better data lead to a reduction in trust frictions and the ability to operate at reduced scale 6. However there are some limits to this reduction in scale as there are still risks unrelated to bad product and bad actors that require capital (eg. Earthquake) 7. Better data and better data processing has led to an influx of entrepreneurs and products chasing more granular and better defined archetypes that previously were uneconomic 8. CTP’s goal is to create an “Archetype of 1” which they control and allows for perfect trust in a hypergranular archetype that is purely based on an individual instead of a group 9. Many many others share this goal, but want the archetype to be controlled by the person it represents and to be completely anonymous 10. There are still substantial roadblocks to creating the Archetype of 1

Now let’s make this real in Part 2. What are the real world ways that value is created in this trust vs. capital paradigm? What are the business models that are moving this rational decentralization needle forward? How does blockchain explicitly fit into this framework? How can blockchain be both “trustless” and reduce trust frictions? How is Bicameral investing to both create and capture value as this needle moves?

Let’s give credit where credit is due. Blockchain enabled models are a quantum leap forward in many respects, but this path is already being blazed by many projects in the fintech and data space. Let’s go back to our Trust vs. Capital graph from part 1.

Value is created along this scale when trust can be better proxied without an offsetting increase in cost, capital required can be reduced and equal profitability can be maintained at a net lower level of prices. Specifically, we believe there are four key actions that drive value creation along this scale:

1. If you can generate a greater amount of data on existing archetypes for the same cost 2. If you can generate new data from new sources to increase the granularity of existing archetypes or create new archetypes 3. If you can better understand existing data on existing archetypes with new analytic techniques or processing power 4. If you can gain greater trust in the veracity of existing data on existing archetypes

Let’s look at a few non-blockchain examples of people who are using data to lower bad actor and bad product trust frictions and free-up capital required in their business model:

Essentially the entire fintech business model has been around leveraging technology and data to offer hypergranular services to subsets of bank customers that previously were uneconomic as a standalone and needed to be bundled up within a bank to get the scale needed to service them.

However as great as these models are, there are still infrastructure layer trust challenges that will keep them requiring a certain level of capital in today’s mutable digital world. How can I validate that this action really happened? How can I make it cost effective to acquire real-time data? How can I automate payment and settlement with my bank for simple transactions? How can I communicate to data-creators what actions make for valuable data? Where do I store this data safely and compliantly?

And this is where we believe that the game dun changed when blockchain gets layered in. Let’s look at the best examples of projects that are supercharging the ability to move this trust needle further down the line and free up capital across all kinds of verticals (you may recognize a few of these as Bicameral specials!):

A common thread running through the above is the “automatic” nature of payments. To be clear this isn’t automatic in the sense that there is an obligation to pay that is automatically created that some back office guy (or girl!) at Company A needs to click a button which sends a request to their bank who wires money to an intermediary bank who then wires it to your bank and settles in t+5. That’s “automatic” on the front end with a huge, expensive and mostly manual process on the back end that places trust in any number of parties along the route.

Blockchain “automatic” payments are exactly that, real-time, dirt cheap, global and entirely un-reliant on trust in anyone! As much as blockchain moves the needle on the Trust vs. Capital chart, it also adds an entirely new dimension of value creation to the chart by reducing the infrastructure trust required to just complete agreed upon transactions. To put it differently you need less trust at every cost curve when you can trust the transaction itself rather than needing to trust the counterparties.

You hear the word “trustless” a lot when it comes to blockchain, obviously in reference to this type of infrastructure trust that can be removed, but we think that’s an incomplete description.

Blockchain is in fact a redistributor of trust. Eliminating the “least valuable” trust when it is mechanical and automatable and enhancing the most valuable trust when it is complicated, evolving and relationship based. The best projects, and the ones we look to invest in, are the ones that take the most advantage of this redistribution and free up the most capital from the system!

In our third and (maybe?) final part, we’ll look at some thoughts on how this newly released value may accrue to various stakeholders and how Bicameral tailors our investment vehicles to both support and profit from this unleashing!

Alex McDougall

Bicameral CIO

About Bicameral Ventures

Bicameral Ventures is an innovative Venture Capital fund which both raises and deploys capital directly in cryptocurrency and invests in early stage projects leveraging the Aion interoperability blockchain platform. Bicameral Ventures was co-founded by Kesem Frank, co-founder of Aion and Nuco Inc. and Alex McDougall, fintech and M&A investment banking veteran with Bank of Montreal Capital Markets.

www.BicameralVentures.com

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