March 8, 2023

The Future Of Medicine Is Tokens

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During the bear market of last year, the outsiders concluded our industry is not producing products or services valuable to the physical world. Alas, all our effort, time, and dollars in crypto have been spent in vain.

We think this is a grave misconception. Crypto capital and blockchain infrastructure are now powering Decentralized Science (DeSci), which we define as a permissionless capital formation for scientific research.

In the past, we had trouble explaining these ideas to people in the medical field, and the consumer (patient) world alike. The following article is our thesis for this crypto vertical, but we also want it to provide a comprehensive overview for researchers and stakeholders that have not been involved with crypto so far of what the intersection between blockchain and science looks like.

In short, DeSci will accelerate research and funding of long-tail of therapeutics, upend the existing incentive systems between government and academia, financialize and provide broader access to an otherwise fairly closed asset class, and produce real-world outcomes that people are ready to pay for.

Funding the Unfunded

In biotech, typically there are two ends of the drug development spectrum: academia, where research and therapies originate from, and big pharma, where most of them end up because of sophisticated commercialization capabilities (manufacturing, marketing, and sales).

Public capital markets for biotech exist, but that path is much more opaque, as companies usually raise money while going through clinical trials and not having any revenue. The tried and true path is selling to big pharma, where outcomes usually exist in hundreds of millions of dollars, and occasionally billions. For big pharma, acquisitions are the only way to protect their revenue growth, since they lack innovation in new drugs and therapies, and existing patents expire after 20 years.

If big pharma scoops up the competition and has limited in-house R&D, where do most of the new medications come from? It’s the academic research at the government-financed academic labs that is at the heart of biotech progress. By 2018, more than one-half of the top 30 drugs were sourced from academia, including 6 of the top 10. As Elliot Hershberg & Dr. Jocelynn Pearl put it in their article Gassing the Miracle Machine:

“With an annual budget of around $45 billion, the National Institutes of Health (NIH) is the 800-pound gorilla of biomedical research funding. Other institutes like the National Science Foundation, which has an annual budget of roughly $8 billion, are also key funding bodies. These large governmental agencies dole out money to Principal Investigators (PIs) who apply for it through a variety of different grant mechanisms. The PIs are typically professors at research universities or medical schools who run labs. The actual research is carried out by grad students, temporary postdoctoral scholars (postdocs), and some professional staff, while the PI serves as the manager.”

The typical research cycle in the biotech industry looks like this:

  1. The University lab asks for a grant from the government;
  2. The lab gets a grant and runs initial research;
  3. If successful, the grant project results in a promising thesis which requires huge funding and lab capacity for further research;
  4. University doesn´t have commercial ambitions, so they work with early-stage biotech funds/accelerators that form startup teams to run further with the study;
  5. If startups succeed they exit to big pharma.

It’s easy to see why this top-down, slow model would produce subpar outcomes. The grant process is a huge bureaucracy. Anecdotal evidence suggests that scientists spend 80% of their time writing requests for grants, and only 20% being engaged in research.

The government has priorities too – it has directed capital in certain therapeutic areas and ignored others. Most of the time, this process is all about short-termism – optimizing for immediate results and going after low-hanging fruits that lead to only marginally better outcomes. These are the research areas that scientists are forced to lean into.

This system also does not reward negative findings (proving that things don’t work) or reproducibility of research (which is an essential criterion for establishing scientific knowledge and sadly has been replaced by peer review culture). It makes academics optimize for credentials and reputation, for everyone wants their lab to be well-funded and most prestigious in order to attract talent.

Today’s incentive system also led to stagnation of research and funding of rare diseases. We were promised cancer treatment, cell and gene therapies, and a cure for Alzheimer's decades ago. Somehow, these things are always around the corner for decades on end.

We acknowledge that the traditional model is economically sound – funding commercially-sensible research, having low R&D costs, and aiming for the broadest TAM. Yet, it disregards the fact that some capital exists which is willing to go against the tide and fund moonshot ideas, for whatever reason – in many cases, people with capital were intimately exposed to rare diseases, and want to help solve them.

Next, the traditional model simply fails to push the boundaries of scientific discovery enough. By contrast, DeSci supports the long tail of therapeutics research where absolute TAM is not as outrageous but still leads to life-changing outcomes while preserving the required economics for investors.

The concept of “Gentlemen Science” existed from the 17th century onwards for a few hundred years. These men were financially independent individuals, who didn’t have affiliation with the state and sought to explore scientific discoveries without an imposed agenda. Charles Darwin, Nikola Tesla, Ben Franklin, Albert Einstein, Robert Boyle, and John Dalton were all gentlemen scientists. Academic science only took its current form in the 20th century with the rise of centralized funding mechanisms.

There is an argument to be made that all the meaningful discoveries that can be made by a single individual have already been accomplished, but this argument ignores the fact that gentlemen scientists were still capital-constrained on some level (they could afford to pursue their passion on their own agenda, but not with infinite optionality).

Capital formation is unconstrained in a borderless system like crypto. Therefore, DeSci looks to solve capital access problems for scientists and push forward the development of novel drugs for long-tail of medical conditions. On one side of the market, there are scientists looking to pursue a research project of their choice, while on the other side, there are Research Funding DAOs with pooled capital ready to fund their specific objectives (longevity, treatments for oncology, cardiovascular diseases, etc).

Virgin vs Chad - which one are you?

The thesis for DeSci has already been validated in the past – but in different forms. While the market is not always able to solve everyone’s problems, individuals are capable of course-correcting themselves and pursuing individual research of their conditions.

Consider the movement of biohacking on Reddit, where people collectively through trial and error contribute to a version of the open-source library for medical conditions and treatments.

Three Body Capital’s article summarizes biohacking well:

“The concept seems to have been around since as early as 1988, with even lab kits being on sale on eBay since 2005, and while the skeptics would say that this is the equivalent of playing with fire, experimenting with drugs on one’s own body, the very existence of such a reddit page and such communities underscores a fundamental problem in the pharma world”.

The DeSci Stack

Cherry Crypto has recently published an article on the DeSci stack, and it looks like this:

Source: Cherry Crypto

This stack is emerging, and its parts are fluid. We’d add that this architecture will become richer over time, as Research Funding DAO participants – scientists, investors, and other contributors – start differentiating themselves with on-chain attestations and verifiable profiles. Badges minted through Sismo could help the best DAOs in raising capital (“our DAO funded 20 scientists who were rejected by academia and subsequently became successful”) and subject-matter experts in establishing their reputation (after all, medicine requires specialization, and without any kind of reputation/believability measurement there’d be too much noise and no signal).

Next, we think zero-knowledge proofs should be part of this picture too, as privacy will be required over sensitive information pertaining to patients’ medical conditions. This information may or may not be on-chain, but if there is someone trying to raise capital in later stages based on results from clinical trials, then zero-knowledge tech would be valuable to those investing in intellectual property (IP) of such treatments.

Finding the patents and data you’re interested in will require curation and discovery. Application layer – marketplaces, publication gateways – will use indexing tools beneath them to surface the relevant information.

The hyper financialization layer could sit on top of this stack (or next to it) as IP-NFTs are composable tokens. There could be both collateralized lending against the IP (this is how DAOs could use leverage, or scientists get incremental runway until the next breakthrough), as well as prediction markets that’d suit the existing biotech hedge fund industry, where investors bet on binary outcomes of clinical trials.

We think hyper financialization of science is how the broad public will be onboarded to DeSci. Monetary incentives attached to good products have proved to be the best way of making people learn about new domains. This applies to sports betting, Airbnb and multiplication of homeownership, issuance of stock to employees at startups, Robinhood options trading and wallstreetbets – the list goes on.

While we foresee the risk that this will give ground to speculative frenzy and even deceitful behavior (like charlatans minting “IP” and dumping it on unsuspecting retail investors), no industry in the history of humankind has been able to escape this. Just like eBay has managed to curb and eliminate payment fraud of the early days, we think DeSci will have preventive mechanisms too. DAOs forming committees of verifiably reputable contributors to assess IP and perform due diligence is one example of this.

We recently published The Fappening, where we argued for value accruing to the application layer, and specifically the superapp (which became a trendy term since). We do not anticipate DeSci projects themselves to become superapps as they’re described today, but we still think that DeSci value won’t accrue to the infrastructure layer. As we wrote in our thesis:

“As a crypto-native application, deployment across every reasonable base layer and seamless bridging effectively create extreme fungibility of the blockspace - commoditization. Optimal pathing for best execution can naturally occur with users not even knowing about the track their execution took. It should go without saying this does have limits. It relies on the assumption that the chains you deployed on are of reasonable enough quality (security).

In this sense, different blockchains provide services to the superapp. Furthermore, an appchain is simply another higher control venue for execution.”

The picks-and-shovels is a lazy approach by design, but it’s unacceptably lazy in an industry with as high information asymmetry as biotech’s. At its core, DeSci allows buying and selling of medical IP on-chain using crypto capital. It’s not a computationally-intensive exercise. What participants in this system demand is the integrity of storage and data availability. In some ways, acquiring IP is akin to buying ETH on-chain and letting it rest in your cold wallet for the next decade.

The Capital Stack

We think the monetary value of DeSci will accrue towards:

  • Holders of valuable IP – scientists and Research Funding DAOs like VitaDAO;

  • Big pharma companies who commercialize the IP;

  • Vertical NFT marketplaces that facilitate the trade of IP, and provide valuable services to users – Molecule.

To illustrate the first two points, consider what we discussed earlier: the big pharma companies are the most likely exit scenario for biotech startups, for big pharma needs to continuously do deals to secure future revenue.

The man said it himself

We think there is a symbiotic relationship between big pharma and Research Funding DAOs. The former can participate on both ends of the spectrum – both as suppliers and acquirers of IP.

The scientist is the originator of IP. The end-buyer is the pharma company, but commercial value accrues back to everyone who owns fractions of IP / royalties.

Big pharma is the originator of IP. The end-buyer is another pharma company, but commercial value accrues back to everyone who owns fractions of IP / royalties.

To illustrate why this idea is practical – Pfizer has invested in VitaDAO, focusing on longevity research:

Pfizer is buying tokens and voting on-chain while you were proclaiming the death of both

With over 9000 contributors, researchers, and enthusiasts, VitaDAO not only offers capital but also incubation and network access – which could be a superior value proposition to alternative sources of capital. Scientists frequently lack business and commercial acumen, and this is why DAOs can be so much more than a simple intermediary who buys the IP and flips it to someone else later (even though that’s how we’ve shown DAOs in our simple graphs earlier). Also, this wide network of scouts should provide an uncorrelated pipeline of deals not available to early-stage biotech venture funds, and a thorough, community-driven due diligence process observable publicly.

The critical piece in this ecosystem is the IP-NFT itself. Molecule uses the ERC-1155 token standard to represent legal rights to IP and research and development data. These NFTs can also be fractioned for distributed ownership, licensing, governance, and have composability with DeFi.

By now you might be thinking – permissionless capital raising for novel therapies makes sense, but why does it need to be an NFT?

Well – why not? The scientific knowledge today is guarded behind paywalls and in private databases, and not accessible for tinkering. Open access to science thanks to the transparency of blockchains is a net good. To see today’s hypocrisy, consider the following paragraph from Sarah Hamburg’s article A Guide to DeSci, the Latest Web3 Movement:

“Open Science initiatives have had far-reaching effects, including mandates by the National Institutes of Health and other funding sources to publish open-access findings. But the extent to which science has improved as a result is a matter of debate. For example, journals responded to these mandates with pay-to-publish business models. Now, instead of paying to read other people’s studies, publicly funded scientists pay to publish their own research (Nature charges over $11,000 per paper). Some academics have argued that open access mandates increasingly concentrate power in the hands of major publishers.”

Next, the traditional funding model which we discussed earlier is not the best setup for scientists-to-be-entrepreneurs. If you’re part of the university lab, and the team is spun out to seek venture funding/incubation for R&D, the “founding” team has little to no incentives to make it their lifetime project. The university gets compensation for the IP transfer plus some small future royalties, and the core team doesn’t own the captable like they would in the example of a software startup.

The fractionalization of ERC-1155 helps address this. Scientists who raise capital on-chain and sell their IP will be able to retain the economic interest in the treatment throughout its entire cycle.

More broadly, we think the blockchain-centric funding model brings much more than traditional crowdfunding (aka Kickstarter):

  • The former allows parties to organize and form DAOs which take the other side of the funding, and provide valuable things like incubation and network access, whereas traditional crowdfunding has much fewer coordination capabilities for investors;
  • The blockchain allows establishing verifiable credentials for the participants;
  • NFT model is much more liquid - it’s fractionable, composable with DeFi, and can easily be traded on a secondary marketplace.

Permissionless capital formation and superior incentive design will lead to an abundance of idiosyncratic ideas coming to market, and a few of them becoming a raging success. Marketplaces will facilitate this exchange of capital and ideas.

Speaking of marketplaces, eBay and Craigslist started as horizontal marketplaces in the 1990s, where sellers could list any type of item (or even service). But as digital economies grew and consumers started expressing their consumption preferences for specific goods and brands, this gave way to the growth of vertical marketplaces. They optimize for superior item discovery, and quality assurance, and entail a brand of their own (“I buy all my luxury bags on RealReal, and find chic home decor times on 1stdibs!”)

Do these look like eBay listings to you, anon?

The reasons behind this change are simple. Vertical marketplaces can offer more to their users than horizontal ones, and this leads to stickier metrics (retention, engagement, etc). The implication is that every $ spent on customer acquisition has the potential to have a much higher ROI than the $ spent by a horizontal marketplace. In web3 we’re seeing not only the verticalization of marketplaces but also the verticalization of the internet.

If we’re right about NFTs becoming something grander than JPEG collectibles then Opensea cannot accommodate every community and every idea. We propose that Molecule becomes the vertical marketplace of not only scientific but all kinds of IP. This will be a platform where buyers have some assurances over the IP transacted, and where sellers want to list their IP, for they know that the liquidity on Molecule is most readily available (every DAO and every degen bids there!) On top of that, Molecule would also become an open-sourced library of scientific research – non-existent today – which improves the transactional experience of Molecule, as more users are drawn into the ecosystem through information discovery.

On-chain pharma capitalist of the next bull market

Besides a handful of clinical-stage companies in the public market, investing in early-stage therapeutics is inaccessible to the zeeprime. Putting the medical IP on-chain, and creating a transactional venue (Molecule) is close enough to launching an entirely new asset class. Investing in early-stage research and/or at the drug level (not pipeline) was not accessible before. If this commands incremental capital flowing into the ecosystem, then the marketplace is best positioned to capture the value of those dollars.

New Market for Science

DeSci is the wedge between (hyper)financilization and pharma. Capital is cyclical, risk-taking, and adaptive, for it’s always profit-oriented. Traditional medical R&D, as we described, is slow, bureaucratic, marginal, and optimized for peer reviews. Combining the two, we hope, will lead to idiosyncratic outcomes.

As Taylor Pearson says in his brilliant article – markets are eating the world. Markets expand into new domains of society when the cost of transacting goes down. Transacting consists of triangulation, transfer, and trust. As the costs of these collapsed, society progressed from the Neolithic Age into Industrial, then Computing, and now entered the Blockchain Era.

We conclude that DeSci lowers transaction costs across all three dimensions:

  • Triangulation: open access to scientific patents and publications allows market participants to find and measure the quality much easier compared to (traditionally) gated access to knowledge;
  • Transfer: transacting IP in the form of NFTs reduces the complexity and cost of the equivalent procedure in the physical world (e.g. putting IP into an SPV and selling shares of it), while matchmaking between investors and entrepreneurs is improved (unorthodox research is matched with appropriate investors);
  • Trust: credibly neutral blockchains like Ethereum and storage solutions reduce the trust assumptions involved in transacting.

These forces will give birth to a new liberal market, and unbundle the monopoly today’s governments hold over the direction of scientific innovation.

Disclosure: Zee Prime has invested in Molecule and Sismo