a16z Podcast - a16z Podcast: Cryptocurrencies, App Coins, and Investing in Protocols

Episode Date: April 3, 2017

Most of us have probably heard of bitcoin and ethereum -- but did you know there were 15 new cryptocurrencies launched this past month alone? How then do we know which protocols to invest in -- not just as a developer or user, but as an investor? Because, let's face it, open source software and services need resources not just to survive but thrive. General partner Chris Dixon talks about this dynamic between open vs closed in this episode of the a16z Podcast in conversation with Sonal Chokshi and with Olaf Carlson-Wee, founder of (a16z investment) Polychain, a new kind of hedge fund that invests directly in cryptocurrencies at the protocol layer. But what does that actually mean? Instead of investing in the companies that are building on top of these protocols, Polychain invests in the protocols themselves -- in much the same way that you could have invested in domain names instead of early internet companies like Amazon in the early days (which most people actually didn't have access to do). Imagine if you could have bought equity in Linux! As people create application-specific tokens for these protocols (also known as “app coins”) to crowdfund and share equity in these networks, it's actually "bringing capitalism into open source" -- and could even one day lead to less centralized platforms and a web owned by users. It's also creating a whole new asset class... but whatever you do, do NOT try this at home! The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi, everyone. Welcome to the A6NZ podcast. I'm Sonal. I'm here today with Chris Dixon and Olaf Carson We, the founder of A6NZ investment polychain, which is a cryptocurrency hedger. fund. And we're talking today about what that means, both as an asset class and in terms of protocol development, and more broadly, what happens when you bring capitalism to open

source development and services. Okay, that's the intro. Welcome, guys. Oh, if you don't mind, people don't know what cryptocurrency hedge fund is, maybe you could explain what that is. Yeah, break it down, actually, for us. Yeah, absolutely. So, Polychain Capital manages a hedge fund that invests exclusively in cryptocurrencies. And by the way, are there a lot of cryptocurrencies? Because the only ones I know about like Bitcoin. So you've probably only heard. of Bitcoin. Maybe you've heard of Ethereum. There are hundreds of others. Like, oh, I remember hearing about Dogecoin and things like that. Does that count? Exactly. That counts. Exactly right. And new ones are launched all the time, much more than you might think. So in March alone,

there have been about 15 launches of new cryptocurrencies of new cryptocurrencies. Oh, holy shit. So instead of investing in companies that are building on top of these protocols, we invest directly into the protocols. So we take equity ownership of protocols instead of taking equity ownership of companies. Let's pause on that for a minute because that's so counterintuitive, honestly, because the whole thing we've been touting here and the whole community has been talking about for ages is how important, yes, that Bitcoin and blockchain and everything related to the cryptocurrencies, the protocol is obviously very important, but because of what it enables. So I'm very confused by this concept of investing in a protocol. Can you guys?

The way I think of it is, is like, imagine you were back in 1993 and the internet was starting. There were two ways you could have imagined investing in that. One was to invest a in companies like Amazon, and if you were fortunate enough to invest in Amazon, of course, that would be a phenomenal investment. A lot of people didn't have access to that or invested in companies that weren't as successful as Amazon. Another way to have sort of bet on the internet would have been to do something like buy domain names, which a lot of people did, actually. They called them domainers, and there were a bunch of people that saw the value there, and a lot of them bought, you know, whatever, pizza.com or something. And at the very beginning, he'd buy for

$8 or whatever the domain registration fee was. The aggregate value of like dot com domain names, today, you know, it's hard to add it up, but it's certainly in the many billions of dollars. Oh, my God. That's insane. You know, so just like, you know, a typical five-letter English word as an example.com is probably $500,000, $2 million. So, you know, you can just sort of go to the dictionary and figure out the total value. And so I think it's very analogous to that. What you have is people inventing these new protocols that have, you know, things like they could be for doing distributed storage or distributed payments or a bunch of different use cases. The difference now is that you could. invest, for example, directly in a company like Coinbase, which we here did, and actually OLAF used to work at Coinbase, or you can invest directly in the protocol. And so what OLAF is doing is essentially think of it as a bunch of new things like the internet getting started today, and they have the feature where you can just go buy domain names, and you're buying domain names in a sense, right? Yeah, in a sense. It's more of a pure play, is the way I like

to think about it. So instead of investing on the application layer, which you're taking a bet on a specific team, a specific business model, a specific... So that's like Amazon, Yahoo, those are the application layer of internet. Exactly. And we're betting a layer below that. I think in this space, disproportionate value accrues to that protocol level. So even if you look empirically at, say, Bitcoin, the seed investors in Coinbase have done very well on that investment. But when they made that investment, Bitcoin was at about $5. Yeah. And they would have done effectively just as well by simply buying Bitcoin. You look at the Ethereum ecosystem, there's been very little venture funding in

to Ethereum companies, Ethereum here being an alternative blockchain to Bitcoin. But Ether itself has grown in value by over 100x since it was created. In addition, the crowd sales where people are actually raising money for application-specific cryptocurrencies. That's like app coins, right? Like app coins or app tokens. Those token launches on top of Ethereum have raised over $300 million. Can you talk about that for a minute? Because I'm actually just trying to understand what the hell an app coin is in the first place. When a lot of people think about Bitcoin, coin, they think about money or currency. They think about this broad-based way to generate value and transfer value. Really what's happening now is people are creating, I like to call them application

specific tokens. And these are basically a monetary layer added on top of a specific type of application. They'll give you a concrete example. There's a project called Gallum. Like named after the Lord of the Rings character? I don't know how they got the name. Sorry, I had my Gollum impression. Yeah, they maybe did. So, Gallum is a peer-to-peer marketplace for computers. This means that instead of shutting my computer at night, I can rent out the CPU and GPU cycles to some developer in South Africa or Japan or something. And all those payments happen in these Gallum network tokens. So that Gallum network token is not really money in a sense. It's really meant to just add a monetary layer to this one specific peer-to-peer network. And so when you're buying

that token, you are buying either the ability to rent out CPU or GPU cycles. But you can also look at it as owning equity in this peer-to-peer protocol. Oh, that's fascinating. So when we, you know, hold something like Gollum tokens, we're really betting that this peer-to-peer protocol for computation will grow. Now, the interesting thing about these projects in this ecosystem is that there literally aren't companies. So suppose you liked this Gallum protocol and you wanted to invest, like Andreessen Horwitz

investing companies, there's really no vehicle. You can't invest in Gollum because it's a project, not a company. It literally doesn't exist. So the only means to gain exposure to this new ecosystem is to buy cryptographic tokens or cryptic currencies. If you rewind, like it would have been awesome. You know, like Linux started in whatever the early 90s. You know, there's a foundation. There's no company.

At the time, it was a hobbyist project. Today, it's 99% of the computers in the world. I mean, it's, you know, it's Android. It's everything in the data center. It's, you know, et cetera. So like... So you're saying if there was a way to invest in, like, the company Linux. It would have been a, would have, you know, if you could have invested in something.

something that had some correlation to the adoption of Linux, it would have been one of the all-time great investments. Yeah. Are there any other benefits to people investing in these at the protocol layer, the way you're describing? Because, I mean, I don't take this the wrong way. It's just benefiting off it monetarily. Like, is there any other benefit to the ecosystem?

Well, no, I mean, the flip side of it is you go look at, like, Linux and all these other open source projects. They had to run around raising money or look at, look at, I mean, in fact, Linux has a huge number of corporate partnerships. Look at the heartbleed air bug. Right. So this is a fundamental flaw in SSL that was discovered, I think, a year ago. Yeah. And if you look at it, like the foundation that's this nonprofit foundation that supports SSL,

which is the core kind of encryption protocol of the Internet. And I think their budget is like $500,000 a year or something. Yeah, and they have to go. And they have to go every year and do like what nonprofits do. And so we've basically, you know, we've got all these funding models in Silicon Valley for companies. But these companies are mostly built on these open protocols. And these open protocols are neglect. and the developers are forced to kind of go around and kind of beg for money.

What this provides is it now kind of brings capitalism into protocol development. Yeah, exactly. So we've already seen the creators of many of these open source protocols make lots of money on this. I mean, the creator of Bitcoin, whoever he or she or they are, has, you know, over a billion dollars in Bitcoin. So I think we're already seeing this play out a little bit. And it creates the same economic incentives for these projects. that you might get as a startup. So when you look at, you know, taking Gollum's crowd sale as an example, when they launched this Gollum token network, they raised $9 million in 19 minutes. They now have

$9 million cash to hire developers, pay for offices, things like that. And that looks very much like a series A round of fundraising. They also kept an 18% equity ownership in the network they're building. So they have the same kind of economic model that you might see at a startup like Coinbase, where as an employee, you have equity and you have salary. And now you have, quote, shareholders in that network as well. And so the thing is that it creates this economic incentive model for founders of open source protocols in a way that has never existed before. Absolutely unprecedented. The flip side of that, as you pointed out, is that now the users of the Gallum network or any of these peer-to-peer networks, and then there are so many of these launching, it's pretty incredible.

They are the equity holders, right? So when you look at centralized web platforms the last 15 years, all the major web services, you know, Twitter, Facebook, Uber, Etsy, eBay, whatever it might be. It's basically a company that built a platform, all of the value for users on that platform comes from other users. Yeah. You know, when- It's peer-to-peer network, but there's a central network, but somebody owns it. And these are the networks that nobody owns.

Just like nobody owns the internet, nobody owns email. these are networks where the value, instead of accruing to a central entity, actually accrues back to the users. And the thing is that this creates a really, really strong network effects among the user base. So you can see in Bitcoin's sort of fanatics of Bitcoin. I was once one of these. I think even I would admit I was one. Yeah. And you don't see that sort of fanaticism around users of Facebook or users of Uber.

Even the power users, like they like the product, but whatever. people in Bitcoin are fanatics, and it's because they not only gain value in a more traditional sense of network effects when the user base grows, they also actually gain wealth from that user base growing. And so this idea of users owning the networks that they participate in on the internet, I think is extremely powerful. I think another sort of broad historical way to look at it is if you look at the protocols we use today, so emails SMTP, you know, the internet is TCPIP, HTTP, you know, HTML, etc. These were all developed 20 plus years ago, right? There's very few protocols that we used today that were developed in the last 20 years I can think of. I mean, maybe BitTorrent or something. But like, for the most part, like, you know, that sort of niche.

And so, and those were specifically developed by, you know, academia and government-funded projects. And so you had kind of this golden era of protocols. And that was funded by governments and academics. And that was great. And back then, just to remind people, that was a time when you actually needed those entities only to be able to, to fund those. Well, there was, yeah, because there was no, there was no capitalist sort of economic motive at the time. Then, of course, the internet bubble happened, the capitalism moved in. And what you've seen since that period is, as Olaf was saying, like a dramatic kind of centralization

of power in private companies, which, you know, and a dramatic drop off in the rate of kind of open protocol development. Yeah. I mean, so you're saying there's only been like one or two in the last years. Like one of the big battles, you know, like RSS is a good example where that was a, that was a more recent protocol, which was sort of an open social protocol, which last decade, sort of in the, in the, you know, 2000s had made a run and got popular for a while and could have been a real rival to these closed social platforms like Facebook and Twitter. It unfortunately lost. I mean, it's still used the fringes here, but it basically lost. I mean, so basically open. It's not the central feed the way that social media has become the feed. There was a battle last

decade. People might not have been aware of it, but there was a battle between open and closed and social and closed one, right? I mean, there was actually. a bunch. There was a whole way of companies that were trying doing the alternative Facebooks and the alternative. I was involved in some. I'm invested in some. Closed one and open loss, unfortunately. I think for the benefit of the world. Anyways, whatever, your political views on that, it's clearly closed one. There's a lot of different theories. But one obvious one is just they had all the money. They had all the people. They had all the developers. I would also like to add that the other reason for the theory is that they also had a centralized model of coordination, which meant a better

user experience than a bunch of other features. You can kind of create that. You have a great user experience with email. Gmail is a great user experience. And it's been, built on Open Protocols. I would disagree with you. I think that open pro, like, web browsing is a great user experience. It's an open protocol. Like, my view, people can disagree on this. I think it's because that's where all the money and all the energy and everything else. They had the better business model. They, meaning closed, had the better business model for the last 15 years. Now. That closed camp. Okay. Yeah. Now Open is developing its own kind of business model around this, which I think is going to shift a lot more energy, I hope, and money and funding and a whole

bunch of other things, back to the forces of Open have a new set of new arsenal. And it actually happens worth on multiple levels. They have a new funding mechanism, which is the app coins. They have just new infrastructure, which is things like, you know, kind of the blockchain mining infrastructure, which is the first time we've seen an example of, we've had open source software. We've never had open services. So these are services, OPEX, running. So basically, it's effectively, it's a public AWS is what you should think of as the minor network. So minors is this thing, which, you know, if you read the New York Times, they're like, oh, it's a waste of energy, like, okay, but it's actually running this public, and it's like

saying a public park is a waste of space or something. It's a public, it's public infrastructure that can be used for all sorts of things. Without the coordination of a central authority. No, there's no central authority, no central owner. And to the extent there are owners, they're the protocol token owners and individuals, and no central point of control, no choke point, no, no one can pull the, no one can say they can't just cut you off the way that, like, you know, certain social networks cut off developers. As a developer, you can now invest in this. You can build things on top of Ethereum with the

knowledge that no one can, you know, Vitalik, who's the kind of the, you know, the leader of Ethereum, can't pull the rug out from under you, even if you wanted to. It's self-sustaining. So clearly the reason that Open might be winning, besides the fact of your argument that this capital is rushing in and all these other things. How do we solve the problem of trust without having a central authority in the middle? The brilliant thing about these systems is the premise is that you do not trust any individual party. Trust no one. Yeah, you trust no one. You, if you're a very paranoid person, these systems make great sense because you assume that there are all sorts of bad people out there trying

to steal, trying to dupe the network, trying to convince the network that they have a valid transaction when they don't or things like that. But when you have this decentralized sort of swarm incentive structure, and this is what's created. say through Bitcoin mining, you create this protocol that actually incentivizes very precise human action. And then without a centralized kind of top-down hierarchy, but instead a sort of swarm of naturally incentivized economic actors, you can create an amazingly precise organization through this kind of decentralized incentives. Let's quickly break down why those people are incentivized. It's because they're getting something out of this network.

Yeah, exactly. Past efforts failed because no one had incentive to contribute resource. And, you know, the contributors to Linux had to monetize in all sorts of, you know, other supplementary ways. But they're actually building Linux and growing the Linux user base didn't really make them any money directly. Right. Now, as a lead developer behind one of these blockchain-based protocols, you can actually make money every single time a new user signs up and is interacting with this blockchain. So this incentive structure, as you put it, is very important. because it leads to this organic growth that's completely decentralized, completely trustless. It's totally permissionless. Nobody owns the blockchain, just like nobody owns the internet.

So you cannot shut down anyone. Anyone can participate in any way that they want. And it's for that reason, to me, an open and free system. How do you know which protocol? And I think this is important because we all heard about Bitcoin, but as you mentioned, there's Ethereum. And apparently there's like 15 more of this new ones this month. How do you know which? ones matter? And how did it affect what you're trying to do? Yeah, I mean, this is what I spend all of my time doing. So we think a lot about basically technologies that are enhancing what these protocols are capable of. Ethereum is a great example. Bitcoin has a kind of programming language that allows you to interact with the protocol. It's called a scripting language.

And Bitcoin's scripting language is really limited. It was designed this way intentionally so that people couldn't kind of screw up the protocol in the early days. Now, the creator of Ethereum, Vitalibouty and the great team behind him, has created a programming language that is Turing complete. What Turing completeness means is you can basically build anything. So any computer science language that is Turing complete can build anything that any other Turing complete language can build. What does that mean? It means that if you can build an application in one language, you can also build it in any other Turing complete language. What this pragmatically means is that you can write arbitrarily complex software and have it execute in the Ethereum blockchain much in the way that a Bitcoin transaction.

would execute in the Bitcoin blockchain. So you can build all sorts of more advanced features in Ethereum that are simply not possible with Bitcoin. And, you know, Ethereum's language, it has solidity, which is like JavaScript and Serpent, which is like Python, whereas Bitcoin is more like bytecode. It's almost like assembly, very, very low level. Solidity is very similar to JavaScript. Yes.

It's a very accessible language. So if you're familiar with basic, you know, web scripting, you can kind of write an Ethereum contract. So people may have heard of Bitcoin and Ethereum. Can you talk, and you mentioned Gollum, can you talk about some of the other coins you're excited? So I can cover, you know, both application-specific tokens as well as new blockchains that are kind of, you know, meant for developers to build these applications on top. So one underlying blockchain that I'm excited about is called Tezos. Tezos is interesting because it uses a proof of stake consensus mechanism instead of mining or proof of work.

What this means is that the actual... Keep a stake. Yes, the actual holders of the coin act as the miners. So they are the ones actually validating transactions. The really interesting thing about TASO's proof of stake system is that the governance is also pushed to the coin holders at the protocol level. What this means is that instead of governance, and by governance, I basically mean decisions about how to upgrade the protocol, instead of those happening in a room full of developers or conversations with miners that are these conversations, are very opaque, and they don't happen at the protocol level. They happen outside the protocol. In Tezos, all of those governance decisions happen at the protocol level. People effectively

vote with their coins and the protocol will change based on what those coin holders want. It's not unlike a stockholder of a company. Exactly. Exactly. Exactly. You own more equity if you own more stock. Yes, exactly. Therefore, more coin is more ownership. It's a much more democratic system where the holders of the coin actually have say and how the protocol moves very directly. So that's an example of a more underlying blockchain that's really designed for developers to plug into in order to build kind of application-specific tokens. What are some of the applications that could be built on top of TASOS? So TASOS is very similar in some ways to Ethereum in that it has this Turing complete scripting language. So again, it's unlimited.

You know, anything that you can imagine is possible effectively. Oh, wow. Okay. So thinking about a more application-specific token, one that I'm interested in is... And by the way, so I just interrupt you for a second. When you keep referencing application-specific tokens, that's your version of saying app coins, which is a shorthand that everyone else uses. I would say no one has standardized on the...

Yeah, no one has standardized. I like to be very precise in my language just because the Nielman culture is all over the place. Yeah, there's no real... Well, it's usually a good sign. And it's a sign of a fertile, creative release. Yeah, exactly. So if no one knows what to call something, it means it's new. That's right.

So in its fertile days, you're saying application specific tokens, which can also be app coin. Interchangeable. So, you know, an interesting, you know, token that I'm, that I like is called Maker or MKR. So Maker is really a sort of whole governance and insurance system for a, for a separate. Bitcoin coin that is pegged to the USD dollar value. So volatile, you're going to have to break that down because I actually don't even understand. Well, I don't even understand it, too, because I thought part of the whole point of all of this was not to peg it to like things like the US dollar is old. So this is actually, you can view that as a feature or a buck.

These coins are traditionally very volatile and it's because there's speculation and trading and things like that. Now, for certain applications, this causes problems. Suppose you're holding money in escrow or your fundraising on the blockchain. you know, you're taking in money that could change in value, sometimes aggressively over, over days or weeks. So I think there is a need for a stable coin. And basically the idea is a coin that doesn't change in value. Now, the naive way to do this is to put $10 million in a bank account, issue $10 million stable coins and say, hey, it's backed and it's pegged to the dollar. But that doesn't really work because now there's a bank account and someone has control

of that bank account and there's a legal entity. And it's just not how blockchains work. There's all sorts of flaws there. So you have to have a stable coin that. that's actually endogenous to the blockchain and actually creates that stability through incentive mechanisms that are on the blockchain. What the maker system is attempting to do, and I view it as hugely ambitious with, you know, likely a high chance of failure, but if they can pull it off, it's massive. And it's basically a system of smart contracts, smart contracts here being the pieces of code in the Ethereum blockchain that are a bit more complicated than just transactions.

It's kind of a patchwork of smart contracts to create a stable coin. And this coin then is paid to the dollar value. And so then you can do transactions on the blockchain that you know will hold the value as well as at least the dollar holds its value. You can't invest in these things right now without a mechanism like polychain. Yeah. So this is the great thing to me is that anyone in the world can go by Maker. And these coins often have venture style returns if you pick the right ones. But they're available to anyone in the world.

Amazon, as Chris pointed out earlier, was available to a very elite group of venture capitalists. And it's kind of a club of who you know, right? And now intelligent 12-year-olds can go invest. So you're saying that's where the democratization comes in. There's a bunch of exchanges that are what they call crypto to crypto exchanges. So usually what you have to do is you go to Coinbase and convert your dollars, your fiat, into something like Bitcoin, and then you can go to these other exchanges and trade from Bitcoin into Maker or whatever. And now, you know, probably the most liquid exchange for Maker is a smart contract-based exchange. So we're getting even more abstracted from centralized services.

The exchange itself is decentralized. Yeah, the exchange itself lives in the Ethereum blockchain. That's really, really interesting. Just to take a real-world example, it'd be like completely removing NASDAQ and Dow Jones and letting people just... It's like a decentralized NASDAQ, exactly right. So this is a whole new asset class you're describing? If you can invest in it directly or go through a hedge fund or why does... I mean, I understand the broad argument that we're bringing capitalism to open source,

which has been, as you guys have observed, traditionally very under-resourced. So I buy that argument. I don't get why there's a hedge fund in this space. Yep, that's a great question. So as you've probably picked up based on this conversation, this space is very esoteric. Yeah. And it's hard to understand a lot of these underlying protocols. Yeah.

You don't want to actually be a 12-year-old just throwing a dart in the dark. Well, what's interesting is... I should probably say, like, just for our listeners, we don't recommend, unless you really know what you're doing, you should not go buy these things. Do not try this at home? Do your aim and Bitcoin have gone up a lot, but there's a lot of these things that have gone down in value. And it's very likely that an average person who's not spending all day on these things will lose their money. So if you're listening to this, we are definitely not recommending. Do not try this at home.

We get that message loud and clear. I just want to make a point, though, that that's also true of the regular stock market. Oh, I agree with that, by the way. Most people should not be investing in individual stock. They should buy an ETFs. I mean, and someday, hopefully there'll be a crypto ETF. they could buy too, but for now they should stay away unless you really know what you're doing. I completely agree. So, yeah, I think as an asset class, the thing that's so interesting

is that you have units of protocols that you can invest in. There's equity ownership in open source projects. So to go back to this Maker project, when we wanted to do a deal with Maker and purchase some of these tokens, there was no legal entity behind them. It's a pure open source project, and there was no bank account they had. So there was no way we could send them money. So we actually had to send them Ethereum, this cryptocurrency, in order to receive MKR, this other kind of crypto token. And that's how the deal was done. There was no bank account anywhere involved in this process. And so it really is a brand new asset class in that. Also, just when you look historically, this is uncorrelated with oil, gold,

emerging market currencies, the equity markets, bonds, it's really just uncorrelated with everything else. And it's because it's a totally new phenomenon. That's so fascinating. Okay, so going back to the protocols, you describe Gallum, you describe Maker. What are some of the other interesting ones? And how do you tell what's interesting? I mean, I know we're saying, don't try this at home, but just how do you tell? So what we do is we read white papers religiously. So these white papers are formal specifications of how the protocol should work. Yeah, I mean, Takoshi Nakamoto wrote the original white paper. Exactly.

There's a totalic's famous Ethereum white paper. They all start off as beautiful white paper. They specify how the protocol should work. And then we want to talk to the founding team. So we'll talk to the developers and make sure that they have a good sense of actually how to build this. But what we're interested in more broadly is a stack of technologies that can recreate a lot of the centralized services we see on the web today, but in a decentralized manner. So when you look at, we talked about earlier, these centralized platforms that connect to different people, they're built on a massive stack of web technologies. And so they have like the DNS system, which maps.com domain names into IP addresses. And they have a server client architecture that they're built on. So we need to recreate all of those slices of that centralized web stack in order to build Twitter the protocol and Uber the protocol that can actually compete with these centralized companies. So right now, a lot of what we're interested, is those kind of low levels of the decentralized internet stack.

So the fundamental building blocks that allow you to repeat this like AWS, everything that you can do that launches and spawns the next generation of great companies. So there are projects related to Ethereum, you know, IPFS or the interplanetary file system, which has kind of a silly name, but is actually a really sophisticated piece of technology to build a decentralized server architecture. Yeah. There's also Swarm, which is a kind of a similar project on Ethereum that helps you build decentralized. apps. Like the domain name system or DNS, there's ENS, the Ethereum name system that maps dot ETH Ethereum domain names to smart contract cryptographic addresses. You know, this whole underlying stack of technologies needs to be in place before a lot of these application-specific tootigans that are more user-facing, like normal person facing,

can really flourish. So we're investing in a lot of these things that are part of the low levels of that internet stack, as well as what I might call the middleware. So, something like Gollum, for example, is a computing platform on top of Ethereum, but even Gollum is a product for developers. It's not really meant for normal people. But using, say, Gollum and, say, Filecoin, which powers the IPFS system, developers can build more complicated emergent applications. Right. I mean, in Gollum's case, you're essentially reallocating GPU resources that are unused. Yes, exactly. Right. And so you can do all kinds of things. Yeah. And so then, you know, it's too early still, in my opinion, for really viral end user app coins or app tokens. So I think that's a lot of what we're thinking about is what

technologies will enable that. And that's what we want to invest in right. Okay. So assuming that this becomes a real asset class, that we really are bringing capitalism to open source and all the wonderful mechanisms that come with it, what are some of the challenges and obstacles that have to be overcome? These are brand new technologies. So these aren't facing just a market challenge. These are hard technology challenges. As in no one knew. that something like Ethereum was possible. It's not that it was just a matter of time, right? We're actually creating things that previously did not exist, and some of the things will fail because they are literally impossible. So these are hard technology challenges, where you're actually

sometimes making a bet on something that it could turn out is not even really feasible. I think we need literally thousands of brilliant technologists around the world to come together in order to build this decentralized web stack. That's a massive challenge. Luckily, I do think that the space because of groups like Polychain is seeing more and more capital available to build these great projects. So I do view it just as a matter of time until these things very quickly become, kind of, you know, or rather are building the next era of the internet. I have to ask a tough question, which is, you know, there's so many stories in the media and in the developer communities around forks and conflicts and frankly open source is a bunch of people working together

At the end of the day, we can talk about technology, but it's humans coordinating to work and develop code and for building something. Are there any challenges that are unique to this world that aren't playing? Because I think of having a manager. By the way, there are no politics or disagreements at media companies. Yeah. Let me just say that is absolutely not true. Or any other private corporation.

Large groups of people have politics and disagreements. Yeah. And I think the only difference is that the arguments happen in public. that corporate board might have just as large an argument, and one side fails, but the shareholders never hear about that. You're right. You're very right. In this case, these are literally on public forums, on mailing lists that anyone has access

to, IRC channels that anyone can join. I have to ask one more question, though, around like resolution, conflict resolution. Because when I think of a centralized, how does conflict resolution? Like, if you let's see you have a group of people trying to design the front. It's all built into the protocol. So like in Bitcoin, there's the miners through their hashing power, vote, essentially vote on what solution they believe in. Mm-hmm. And then, and, you know, some of the things that we're investing in are alternative governance mechanisms.

Oh, that's fascinating. Like that project, Tezos, I mentioned, allows one coin, one vote, kind of democracy-style voting on how the protocol should upgrade. So what comes next? If this becomes an asset class, there should be more players like this in this space and a lot more activity. What does that mean? Like, what comes after this? I think we'll see a lot of competition as other people kind of catch on that this is a new and growing asset class. Don't get mad if this podcast makes that happen. That's totally fine. By the time there's lots of competition, that means that the Polychain Fund has done well. But the long-term vision for me that really matters is a web that is owned by the users of the web.

So, you know, I think there's massive problems around privacy and data mining and sort of pseudo monopolies that exist on the web today. And I think right now we're seeing a wave of technologies that could swing the pendulum all the way in the other direction. you really own your data, you decide what to share with services, and those services are ultimately peer-to-peer protocols that are owned by the users. So all of the wealth that's been generated by venture capitalists and entrepreneurs of centralized companies, I think will get pushed back to everyday investors who have access to all of these things and that all the value that accrues will go to the early adopters and users of those platforms and protocols, instead of to the people that kind of own these web platforms.

Part of this is that it's going to have emergent behaviors that show up, that we have no way to predict. Is there anything that you can anticipate, though, that might happen after that reality hits us? Yeah, it's very easy to compare what's happening right now to the centralized web platforms because it's what we know. But just in the way that the Internet was not simply a digital library, you know, it actually enabled much, much more than that. I anticipate that these protocols and economic incentive structures that create sort of swarm intelligence will generate things that we could never have imagined.

Just like the Internet generated behaviors we never could have imagined. It might sound a little hand wavy, but I do think the biggest things that come out of this, right now no one has ever conceived. That's amazing. Well, Olaf, thank you for joining the A6 and Z podcast. Thanks, guys. Yeah, thanks for having me. Yeah, thank you.