ID Theory (Incentive Design Theory) is an investment firm with a difference. Founded by crypto natives, the fund’s investment thesis expands beyond pure capital appreciation, seeking out additional returns from the incentivisation structures embedded within decentralised networks.
The company is the product of two crypto investors James Brodie and Graham Stanton that began personally investing in the space in 2013. Five years later they founded ID Theory to bring their knowledge to bear for others like them. I spoke to James to find out more.
‘Our intent with ID Theory was to create a fully regulated and compliant investment vehicle that would leverage additional features of the underlying assets such as staking, on-chain governance and voting, and liquidity mining or ‘yield farming’, to name a few’
‘Through the journey of setting up ID Theory and looking at the competitive landscape, it became quite obvious to us rather early on that there was a much greater opportunity than we had originally envisaged’
Crypto and game theory go hand in hand. Many protocols are embedded with incentives, or gamified, to encourage participation and some can be quite profitable.
Proof-of-stake (POS) chains require token holders to stake or ‘lock’ them as collateral, which secures the network and verifies transactions. Staking earns participants a cut of the transaction fees as well as protocol rewards. Ethereum, the second largest crypto, will be transitioning to POS next year, and there are countless others that can already yield passive income such as Tezos, Polkadot and Cosmos.
Individual projects can also bring additional rewards for example, contributing bandwidth to decentralised computing projects as in the case of iExec (CPU cycles) or Arweave (file storage).
But the biggest development in incentive design is now taking place in decentralized finance (DeFi) and the subsequent decentralized autonomous organisations (DAOs) that are arising within the ecosystem. James commented,‘These structures coordinate cooperation from diverse stakeholder groups and reward them for appropriate participation in the network.
Contributions go into a capital pool and governance is by proportional representation where holders vote as to how that capital is deployed. It’s not like an ICO were people are speculating, it’s a coalescing of like minds with shared goals pushing forward with the same objectives and that’s really powerful’
James explained that it’s the retail investors that will drive this new wave of DeFi/DAO developments, investing into projects that align with their agendas and principles.
‘Participation is the thing that is going to create a massive amount of value when combined with incentive design – networks can now capture the value they create,
which wasn’t really possible in the ICO phase. This value accrues to the underlying cryptoassets of these networks, and in our view these assets represent the greatest investable opportunities’
To learn more about ID Theory see https://idtheory.io