Brave Browser : Disrupting Digital Advertising (An Investment Memo)

The native utility token of the Brave browser often gets overlooked in today’s DeFi dominant crypto investing landscape; read on to learn more about what makes it a good investment

6/27/2021: A snip from Brave search engine’s first result for “Basic Attention Token”, powered by a neat CoinGecko integration

HQ : San Francisco | Employees: 144 | CEO: Brendan Eich | Symbol: BAT

Market Cap: $803m | Token Price: ~53c | Circ. Supply: 1.5b

1. TL;DR

Basic Attention Token is an ERC-20 token powering the Brave browser and its network of users, content-creators, advertisers and publishers. Brave has not only created a privacy web browser that is user-friendly and crypto-native, but a decentralized ad exchange that incentivizes all of its participants, and poses a credible disruption threat to the massive digital advertising industry. Brave rewards its users for viewing ads (with the option to opt-out of ads completely), increases yield for publishers, and generates better return for advertisers. In this Investment Memo, I outline how Brave successfully achieves these outcomes through its browser and decentralized ad-exchange model, and why these outcomes provide the Basic Attention Token its utility.

2. Challenge

There are three main problems with the digital advertising industry that Brave wants to tackle:

• Users: Users are subject to third-party data trackers, malvertisements (fraudulent ads that can potentially lead to scams, virus infections and ransomware), increased load times (from ads dynamically loading on Javascript after bouncing back and forth between several ad-intermediaries), increased mobile data usage (given how much data ads consume), and slow loading times. This makes users download ad-blockers (per Statista, ~27% of Internet users in the U.S. utilized some form of ad-blocking in 2020). These problems don’t affect the users alone, as they flow into the value-chain of the entire digital ad ecosystem.
• Advertisers: The loss of ~27% of ad viewers to ad-blockers is only the first problem advertisers have to face. Per the below infographic, we can also see that there are a multitude of third parties connecting the marketer to the user, making it incredibly challenging for advertising teams to budget marketing spend, forecast ROI, and attribute user conversions. It is also a well known fact that users tend to develop “banner blindness” (neurons learning to ignore ad slots), hence advertisers’ messages effectively don’t reach the end user in some cases.

• Publishers: Besides losing valuable advertising revenue to the above intermediaries in the ad-ecosystem, publishers face direct reputational damage when malvertisements spread to loyal readers from ad-exchanges, without any help from the exchanges in figuring out the source of the malvertisements. There is also no way to currently create monetary exchange between publishers and users in a way that’s decentralized and non-recurring (subscriptions commit users to a publisher in a more rigid way than occasional tipping, and require the use of a credit card)

3. Business Model: Grounded in Privacy

Brave tackles these challenges through the following components:

• Privacy Browser: Released in 2019 and built on chromium, Brave is an almost identical copy of Chrome (and even runs all of Chrome’s extensions). The Brave team did not want to reinvent the wheel on browser design as Google had already excelled there. Instead, they chose to focus on a critical but often overlooked component of any browser: ad scripts. By disabling all ad-scripts, and blocking all invasive ads, Brave stripped Chrome of all heavy duty programmatic ads. This implies watching Youtube without ads and no ad pop-ups. This makes Brave almost 3x faster in several instances, as web pages do not need to load or wait for programmatic ads. Besides ad blocking, Brave has a native search engine built completely on its own index and is now in beta (“Brave Search”), and an up-and-coming DeFi wallet and DEX aggregator. Brave boasted 32.4m MAUs in May 2021, up from 30m MAUs in April (Brave Transparency Report) and on track to achieve a goal of 50m MAUs by end of the year. Having used Brave for almost 4 months now, I can confidently say it is my browser of choice.
• User Attention on Blockchain: Brave keeps track of user attention in an anonymous way by storing data in a distributed ledger, where each user’s dedicated attention towards websites gets ranked and tracked. Attention is calculated based on several attention metrics, such as incremental duration and pixels in view in proportion to relevant content, prior to engagement with the ad (the Brave team updates the metrics used in this calculation based on research and continuous discussions with other advertisers). Brave does not sell user data to advertisers, and advertisements are shown to an aggregate set of users based on their attention / browsing activity, without any individual or third party tracking. Users get rewarded in basic attention tokens for viewing ads, which in their current state, appear in three forms:

1) High quality, sponsored images on the Brave home screen (the screen users see when they first open up Brave browser) in front of millions of Brave users

2) Push notifications that appear on the bottom RHS of the screen. Rate throttled to a max of 5/hour currently, and users can choose how many they want to see and get rewarded accordingly

3) Publisher-ads: Verified publishers can post ads on their websites, similar to the Google display network (e.g banner ads)

• Advertisers: As mentioned above, advertisers get an innovative channel to reach out to an audience that values their privacy. All machine learning to match users to the right ads happens locally on each users’ machine, without any data sharing with third parties. Without the clutter of ads everywhere, users are able to give their focused attention to ads that interest them. Meanwhile, advertisers are able to connect more directly with the user, and measure ROI effectively. Brands like Verizon have advertised on Brave and seen impressive results on ad campaigns, such as 23.8m views and an 8% blended CTR on their “Pay it forward” ad campaign
• Publishers: Content creators and publishers who decide to get verified on Brave get paid from their most active users (as measured by each users’ attention on the website) in BAT. For most users, an “auto-contribute” feature automatically tips each users’ favorite verified publishers and content creators at the end of each month based on this attention allocation. Since users are not taking out their credit card to pay for content, and rather spending a % of rewards received from their daily browsing activities, they are more likely to opt-in to auto-contribute, and / or tip based on their own preferences. Verified publishers can also run ad banners on their websites and earn revenue, similar to the Google Display Network.

• Revenue model: Advertisers on Brave need to either pay Brave in BAT, or ask Brave to make BAT purchases for them. The BAT collected in this process is split between Brave, users and publishers depending on the ad format:

1. User Ads: User ads are delivered directly to the user via a system notification at specific moments in the user’s browsing experience. If the user clicks on the notification, the ad landing page opens in a new browser tab. Users earn 70% of ad revenue for user ads (Brave takes a 30% cut)2
2. Publisher-integrated Ads: Publisher ads are viewed by the user on or in association with publisher content: e.g., a banner ad on a website. Publishers must first be verified with Brave and then opt into having banner ads appear on their content. Publishers will earn 70% of ad revenue, and users 15% (Brave takes a 15% cut)
3. New Tab Sponsorship Ads: NTS Ads are high quality brand sponsorships that appear as beautiful background images on Brave’s New Tab page. Users earn 70% of the ad revenue (Brave takes a 30% cut)

Given the three ad formats, it is hard to estimate Brave’s overall “take rate” on ad-spend is. However, taking a <=30% cut and giving back up to 70% of ad revenue to the users who pay attention to these ads is something that has never been done before in an industry where middle-men take up a lion’s share of the ad-revenue and users’ are not paid for their data. On that note, let’s move on to the team that has made all this possible, and has a clear vision for the future of Brave and crypto-economic digital advertising.

Team

Taking a look at a few key team members and their backgrounds shows why Brave has been able to succeed in its vision and execution:

• Brendan Eich: Founder and CEO at Brave. Brendan created Javascript and also co-founded Mozilla Firefox, where he served as both CTO and CEO. Having developed Javascript and worked on Mozilla, Brendan realizes first-hand the relationship between programmatic ads using Javascript, and their negative impact on the web browsing experience
• Brian Bondy: Co-Founder and CTO at Brave, and previously held several software development positions at Mozilla and Khan Academy.
• Ben Livshits: Chief Scientist at Brave, previously a professor at Imperial College of London, and Ph.D (Computer Science — National Science Fellow) from Stanford.

Token Utility (Thesis)

Improvements in Brave browsers’ features should provide utility to BAT, or else it would not make for a good investment. The following is a summary of token utility:

• Users:

1. Rewarded in BAT for viewing different ad formats
2. Can tip their favorite content creators and auto-contribute to publishers based on their attention
3. Brave DEX: Brave will be launching a native decentralized exchange aggregator in the coming months, and users holding BAT will get discounts on the transaction fees

• Advertisers:

1. As Brave onboards more users, more advertisers want to get on the platform
2. Advertisers need to pay in BAT (or pay Brave in USD who then goes out and purchases BAT). More ad-demand = more BAT purchased from the open market and then rewarded to users / publishers / Brave

• Publishers:

1. More users (and ideally a more diversified user base) implies content creators and publishers can expect to get tipped more
2. Publishers can also run more publisher verified ads and generate revenue from them (while generating revenue for users who view these ads).

To summarize, Brave’s strategy of focusing on Browser improvements first makes sense as the utility waterfall begins at the user level. More users means more advertisers and publishers on the platform, which means more ad revenue for Brave and its users (and subsequently, for Brave verified publishers). More Publishers means more ad channels for advertisers, which attracts even more advertisers. Hence, growth in user base is key to the success of BAT and Brave. This user growth is possible through a well laid-out roadmap that attracts users, while building better decentralized ad-channels for advertisers and publishers.

Roadmap

Brave continuously launches new features and iterates on its browser through community feedback, with Brave Search being the latest feature to currently be in public beta. Below are some crucial features and feature improvements that I am most excited about:

• Brave Wallet:UI/UX improvements to current Brave wallet, allowing for NFT and DeFi use cases. Onboards millions of users interested in DeFi to the Brave ecosystem
• DEX aggregator: According to Brave’s “Roadmap 2.0”, Brave is launching a native DEX aggregator to increase the utility of the Brave wallet, give BAT holders discounts on token swaps, and eventually allow for cross-chain swaps
• Brave Search: Currently in beta, Brave still has a long way to go in search since they built this feature using a completely independent search index (i.e not a layer on top of Google or Bing). Although not yet comparable to Google Search in terms of search accuracy, Brave improves continuously through it’s users search behavior. Secondly, search users can turn on a toggle that allows Brave to anonymously retrieve results from Google search to continuously learn from user behavior in addition to the existing machine learning from Brave Search, and further improve their search index over time.
• Brave also wants to eventually introduce opt-in ads within Brave Search, and is working on creating a method to anonymously serve ads to users within Brave Search. This will take time, but again, this is something that has never been attempted before and should meaningfully add to Brave’s digital ad ecosystem. Try out Brave Search!: https://search.brave.com/
• Themis: Brave’s research team dedicated to finding more ways to shift ad confirmation events on-chain (to anonymously confirm ad events rather than rely on a centralized ad confirmation protocol)

Valuation

In my limited experience, valuing crypto currencies is a novel challenge (which makes it all the more interesting). In this section, I try to scope out BAT’s valuation relative to itself in the past given the improvement in its fundamentals and the recent price correction:

• User Growth: Since Jan 2019, MAU and DAU count is consistently rising at an average of ~6.8% month over month, representing a very high R-squared value of ~.99. At this rate, Brave is on track to finish 2021 with ~50m MAUs and ~17m DAUs. See below for predicted user growth (credit to Brave Cafe’s Twitter admin):

• Ad Campaigns: Ad campaigns are the source of revenue for Brave. Given Brave’s variable pricing structure for ad campaigns, it is hard to put an avg. dollar value to each ad campaign (hence revenue estimation is challenging). But assuming this structure remains constant, Brave active ad campaigns have been increasing over time (up ~8x since May 2020), which implies Brave’s revenue share has gone up significantly in the past one year.
• Something noteworthy is that with the eventual addition of opt-in Brave search-ads, ad campaigns should grow much faster (as was the case with Google Search when it integrated ads) given search ads are a very large, yet unexplored market for Brave.

• Relative price performance: BAT is down ~66% from its all time high of $1.62. Even if BAT takes 1–2 years to reach its all time high (which could be possible given fundamentals are improving and team is constantly building and iterating on community feedback), it could represent an almost 3x return on invested capital
• DeFi = Crypto: Today, a lot of cryptocurrencies that are extremely valuable are either smart contract enabled blockchains, or smart contracts that represent major DeFi protocols. Granted DeFi is a primary use case of blockchains today, this will not hold true in the next 10 years as blockchains disrupt other industries besides Finance. Digital advertising is one of these industries. This represents an opportunity as most investors currently overlook non-DeFi tokens.
• Competition / Catalysts: When Google announced in 2020 that it will do away with third-party cookies by the end of 2022, everyone was pleasantly surprised at the tech giant’s decision to uphold user privacy. But this timing did seem unreasonable given the decision did not align with Google’s business model, and also because it would require a complete rethinking of how Google will serve ads precisely without violating user privacy. This inconsistency was validated a couple of days ago, when Google announced that the cookie phase out won’t happen till the end of 2023!. This spells out opportunity for Brave because:

1. This shows that Google views privacy advertising as an important investment for the future, and wants to spend time doing it right
2. Provides Brave even more time to continue shipping out a comprehensive ad ecosystem that caters to user privacy
3. Brave is nimble with <150 employees, and has always been focused on user privacy, which makes me confident that they can continue executing on their mission while Google plays catch-up

Source: Brave’s “Why not Both” NFT

Conclusion

Brave is a one of a kind web browser and creates economic value for digital advertisers, internet users and publishers through the BAT token. I am confident that more internet users will come to value their privacy in the coming years, and that the development of Web 3.0 is in its early innings, with lots of room to grow. In this growth phase, I view Brave as a key component of Web 3.0 privacy infrastructure, and look forward to seeing it evolve into its mature form.