a16z Podcast - a16z Podcast: Why Crypto Tokens Matter

Episode Date: September 28, 2017

with Chris Dixon and Fred Ehrsam We’ve already talked about why bitcoin matters. But as the set of cryptocurrencies — and networks and “tokens” enabled by the underlying blockchain — grow (Ethereum being one of the fastest-growing ones), where do we go from here? How do we tease apart the signal from the noise, given all the buzz and critiques out there? In this episode of the a16z Podcast, general partner Chris Dixon and Fred Ehrsam (former Goldman Sachs trader and a co-founder of Coinbase) break down the fundamentals of it all — from incentives, developer communities, and protocols, to new models of governance and the tradeoffs between centralized and decentralized systems (including central planning vs. letting a thousand experiments bloom). And then, given all the hype out there right now around crypto tokens and “ICOs”, how do we tell the difference between what’s promising/legitimate vs. a red flag? How could we value tokens? And what does it mean for incumbents when all the value that was created in the previous paradigm is being commoditized by the new one, and that value creation now has to happen at some new layer? At the end of the day, the key word through it all is incentives. And it’s a testament to the power of getting incentive structures right that someone pseudonymously dropping a 9-page whitepaper onto the internet led to a $70 billion cryptocurrency, a whole ecosystem of companies and users, and the largest supercomputer network in the world. Then again… isn’t that how innovation happens? 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 A6 and Z podcast. I'm Sonal. There's a lot of talk about cryptocurrencies and tokens and ICOs out there. But beyond the hype, why does it all matter? It turns out the internet, believe it or not, give it. and all the things that are already built on top of it is just the beginning. And as we enter a new phase of blockchain-enabled innovation, there's a lot more to come. So in this hallway-style conversation, we break down the fundamentals you need to know on the topic. From incentives, networks, developer communities, and new models of governance, to the trade-offs between centralized and decentralized systems. And then we briefly touch on how to tell the difference between what's promising and

legitimate versus the red flag when it comes to ICOs, as well as valuing tokens. The two guests on this episode covering all of this are a general partner Chris Dixon, shared his thoughts about the topic on Medium, as well as on our podcast before. You can check out those episodes. And Fred Erism, who did computer science at Duke and undergrad, was a foreign exchange trader at Goldman Sachs in New York, and is a co-founder of Coinbase, which has now become the largest cryptocurrency company in the world. And he's on his own now, and you can check out his posts going deep on the topic on Medium as well. So let's go right into our favorite topic, which is what we talk about all the time, which is the cool stuff happening in

cryptocurrencies. So for people that are listening, and they've heard about Bitcoin and Ethereum, and a few other things. Why is this not just some crazy internet speculative thing? Like, why is this matter? It matters because I think for the first time we're embedding economics into the internet. Didn't we have credit card forms and what do you mean? We had economics. We have Amazon. We have et cetera. What does that mean? So we didn't. We didn't. We had what I would think about as indirect economics in the sense that you could pay for literal goods and services on the internet. But the building blocks of the internet themselves were not precisely programmed and parceled out into little units that you could pay for directly through the

protocol. And that's sort of what we're seeing with the dawn of Ethereum as a computational resource or file coin as sort of a global database resource. And there's the other aspect of it, which is they're more neutral and can make their way just into far more systems than a centralized company maybe ever could. One way I think of it is we had this significant design constraint, we meaning the internet community for building things, right, which is you basically had like two models. Like one was you do something as a nonprofit and it's a protocol. That's how protocols were designed in the past. And that was awesome in the beginning, right? You had, you know, academics and governments design the core protocols of the internet, TCP and HDP and HTML and and SMTP. And that

was great. But then if you kind of look at the next 20 years, like how many, how much more of that happened, right? And then you had these situations like the heart bleed bug and SSL. So SSL is a core cryptographic protocol. Every time you go to any website, you rely on it. It's what keeps your banking information in your email, private. You know, it turned out there was a half a developer working on that project on SSL, because protocols have been basically abandoned. There basically has been almost no, I mean, for all intents and purposes, there have been basically no protocol development since the beginning of the internet. Because there was no business behind it.

And meanwhile, you had Facebook, you know, has internet advertising and Google is internet advertising and Amazon has transactions. And they've gotten these massive flywheels going where they take all this money in and then reinvested in technology. And so all of the smart developers and the energy and the money has gone into the, these highly centralized systems. Meanwhile, you've got a whole group of developers who have been frankly kind of abused by platforms for a decade. You just arbitrarily get banned, you know, or if you're lucky, you get to pay them 30 percent, right? So there's a, there's a deeply

unhappy group of developers all over the world who want a new way to do things. And it's coincided with this new way to design and monetize and protocols. As a developer, do I want to build on a centralized platform? All of a sudden, you realize that there's probably a ceiling on your head or a guillotine over your neck, depending on how you view it. Whereas in a decentralized protocol, since it's this big mutually owned entity, nobody can really come along and shut you off or limit your growth. Well, the other thing is funny because people talk about, you know, how Bitcoin was created during the financial crisis. I also think, you know, there's another crisis happened around that time, which is the developer crisis. There was a real reckoning that

happened in the developer community. And there's a generation, I think, like the new generation of developers is not going to fall for the same traps that they fall for. fell for in the past. Full me once. I would argue that almost every developer platform, and by platform, I mean a sort of network where developers come together with users. And so that goes back to, you know, Windows is a platform, obviously, you know, iOS, iPhone is a platform, Android's a platform, Twitter was a platform, Facebook was a platform at one point.

Almost every platform has been characterized by massive kind of intra-platform battles, right? And so, you know, Microsoft notoriously fought against Netscape. Every time Apple gives a keynote, there's always this list of which startups they killed. It's just a long, long history of it. And so one of the other exciting things in the kind of cryptocurrency movement is it's a new way to potentially build networks where all the participants of the network have in line incentives and don't need to go kill each other. That really is the key word in the whole thing is incentives. What are the incentives of the various actors in the networks? And this gets into the frame of reference that most blockchain-based people think about.

about, which is what are the incentive structures that you set forth and what is the likely emergent behavior that will result from that. The primary example being Satoshi comes along in 2009 drops a nine page white paper, which is effectively an incentive structure, into the world. And years later, we have a $70 billion cryptocurrency, a whole ecosystem of companies, users, and investors involved, and the largest supercomputer. network in the world by four orders of magnitude. So it just goes to show how powerful incentive structures are, and one that is really well

engineered can just create massive amounts of emergent behavior that are almost hard to fathom at the beginning. It's because when you layer in these incentives where the user, and the incentives, by the way, are incentives not just for the developers building the project like the way they are to start up. One of the brilliant things here is there's a whole new set of incentives that are given to so-called miners who are the early kind of server. providers in the network and then also users of the network, right? But yeah, these set of

incentives, it appears so far, can make these new networks grow at a rate that we haven't seen before. I think how quickly Ethereum grew is another example of that. That's right. One of the ideas that you turned me onto very early, which I think is perhaps the most important idea of the entire thing, is you now are incentivizing all potential users of a potential protocol or application to join the thing early. If you look at all the value that's really accrued over the last 15 years, the vast majority of it has come from companies who have effectively built proprietary databases with strong network effects around them. So we now live in this world where there's massively consolidating power. And one of the great, I think, promises of the whole

token movement in cryptocurrency is that for the first time, you can overcome the chicken and the egg problem as it relates to network effects. The good news is once you're critical mass, they're awesome, right? Right. The bad news is until you're critical mass, they're terrible. Like, a dating site with one person is like the worst website in the world, right? A dating site with a million people is hopefully a better website. But how do you get to that point?

And I'll just tell you from my personal experience, having been once an entrepreneur and now an investor, like 99% of the networks that are attempted fail in the bootstrap phase, right? And to get over it, you go back and you ask, you know, Brian Chesky and, you know, the founders of eBay and all these other companies. And they always have these heroic tales of how they, you know, through sheer force of will or clever tricks or money or whatever the thing might have been, they somehow got through it. But there's like 15 of them on the internet that are like scaled networks. And there's 10,000 others that are probably really useful and would be helpful to the world that never got through the bootstrap. Right. And so one thing that cryptocurrency does potentially is it's like a universal solution to the bootstrap problem. We call it a chicken egg problem, which is you incentivize the early user. when there's not enough network value, you give them financial value. And then eventually you give them less financial value because they get network value. It's kind of like joining a startup early where you get more equity by taking more risk, except it applies to all the users of a potential application. So if you imagine a graph where on the X axis it's the number of users on a network and on the

y axis it's the utility, if you're the first person on the network, the value is effectively zero. and then as more people join the network, the value goes up drastically. And there is a risk-reward thing there, just like startups, where it's possible that network won't work. But if it does, then you stand to gain quite a bit. And so goes this sort of emergent behavior of people who are now all of a sudden much more willing to either contribute to or use these networks in a much earlier stage, even if they might have less absolute utility at the beginning. The beautiful thing, too, is that if it works, that it's not just the employees who benefit from this appreciation right as the users. And then those people also play a role in the governance of the network. I find it personally quite frustrating to read some of the news reports.

One column, they'll say we're very frustrated with how Facebook handled the election. And on the other column, they'll say, wow, cryptocurrencies, this terrible thing that Silicon Valley is doing. And not realizing that the whole point of decentralization and cryptocurrencies, and the entire movement that we're talking about here is precisely to address these kinds of grievances that people have with platforms. And like, that's the whole point of this movement. And actually, a lot of, by the way, the cryptocurrency movement, it's not a coincidence, isn't coming from Silicon Valley. It's coming from other places. It's got very important social and economic and broader kind of sidal implications. I mean, one really interesting thing to think about is in the quote unquote,

real world, we don't get to try that many economic or governance models, right? Like, it's not so often a new government pops up or a new central bank pops up. You can view each token as basically creating its own little central bank and its own little government. And there are already over a thousand tokens. So in some ways, what we're doing is we're creating a giant experimenting ground for all sorts of different monetary policies and all sorts of different governance schemes. So it's like specifically, Tezos as an example, right? Yeah. So for those who aren't familiar, Tezos is a new blockchain that looks somewhat similar to Ethereum in that it allows you to run little bits of code on the blockchain referred to as smart contracts. But the main new feature

that Tezos is creating is this idea of a self-amending ledger, which is a fancy way of saying that the rules of Tezos, the protocol itself, can be modified. In other words, the users and token holders of Tezos, can vote to change. Tezos itself as time goes on. And the reason this is interesting is it provides this unique evolutionary mechanism within Tezos, if you view it as sort of an organism where it can evolve and adapt over time based on what Tezos users think would be most useful for Tezos. Through this mechanism, you can imagine developers being able to contribute improvements to the Tezos protocol and getting paid quite substantially for it.

Because like if you look at the specific challenges that Ethereum has, you know, around scaling and sharding and the other thing, there's plenty of people. Like I was just talking to people at Stanford and they're all like experts on this. And like they have no financial. Like they weren't earlier holders of Ethereum. And yeah, sure they could pay them or something else. But these are people that are in high demand and can work on a lot of different projects. So let's, if you take Ethereum as an example, it's roughly a $25 billion cryptocurrency, if you're to come out and submit an improvement like sharding, for example, a working implementation, it could easily raise the value of the network 10 or 20%. which we're talking two and a half to five billion dollars. That's a really big potential bounty. So then the question becomes, well, how do you match that potential value creation with the incentives to actually go and do the thing? And that's where I think more innovation needs to happen. What if you could offer even half of the perceived value of one of these improvements? So in this case, let's say you're to offer about $1.25 billion to somebody to come along and improve the protocol, all of a sudden, everybody wins, even though the size of the bounty just seems enormous, right? The interesting thing about Tezos is the way they proposed doing this is through token inflation.

You submit a pull request to the Tezos code base with a bill attached to it, and the way you get paid is some new tokens are created and they're sent to you. It's kind of like a new employee joining a company where everybody's stock gets diluted a little bit, but it improves the overall value for everyone. Yeah. Let's talk a little about staking. I've heard this concept of staking coming up a lot more. The most obvious place it shows up is Ethereum's moved from proof of work to proof of stake. It seems to unlock greater areas of the design space. You know, like there's new things that can be designed.

You can add negative incentives in a way that you couldn't before as an example. Right. So it's generally a mechanism to punish bad behavior that is seen as out of consensus or untruthful with the rest of the network. And that's obviously really important because you need to punish. malicious behavior. Email is a great example where you don't have negative incentives. And so therefore, you have this deteriorating spiral of just, it costs zero to send an email. You just go out and send a billion of them.

You know, luckily, Spanfields had gotten a little bit better, but still, it's a problem. If you had, if every time you opened an email account, you had to stake something and whenever you sent a spam email, you lost something, that would dramatically change the spam emails. It's called overnight, probably. Yeah, probably overnight, yeah. Okay, so let's talk about centralized versus decentralized. Let's talk about pros and cons. Sure.

So pros to centralization are you can potentially have more control over a process. Thus, if you're developing a single product or in a single line, that development probably happens more effectively. Also from a computation or efficiency standpoint side, you can always do things more efficiently centralized. The performance is always better. Yeah, the performance is better. The downsides are in a centralized process, you only really get to try one path. For example, there's only one. Facebook. In other words, there's one big proprietary database, and they are taking that thing as a company, generally speaking, in one direction, absent some A-B testing here or there, perhaps. You can't try five versions of Facebook at the same time, which could yield very interesting results. And as we've seen in a capitalist society like the United States, it turns out that

when you try a bunch of different experiments, you get a bunch of really valuable things that happened that you might not have expected originally. You're making the analogy to a centrally planned government, ec economy versus a decentralized capitalist, market economy versus a sort of a centralized economy. Exactly. The second part, going back to what we talked about earlier, is a lot more people are more likely to be willing to use a decentralized protocol or system. So in the same way that PayPal could never really become the money of the Internet, but cryptocurrencies theoretically could, or in the same way that developers are now, quite scared of building on the Twitter or the Facebook API, but everyone uses SMTP or HTTP or TCPIP as these common protocols. Then if everybody's using the same standard, there's a strong network effect in that it enables much more powerful communication, much broader communication.

One criticism you hear of decentralized systems is less performant, the user interfaces aren't as good, etc. I would personally argue the performance and the usability critiques of decentralized systems is a red herring. Because you need to look at these things as dynamic systems that evolve over time. Yes, the centralized systems will start off on day one

having clunkier interfaces and slower performance, but they have the benefit of having all the developers on top of them. The same thing happened by the internet versus AOL. AOL had much slicker interface

and more perform in the beginning. The internet was clunky and weird and slower and all these other things, but you had all the developers building stuff on top. I think the big advantage if you look at the SMT is you can build a business on email.

In fact, there have been thousands of startups that have been successful that have built businesses on top of email compliance and anti-spam and email inboxes and Microsoft has a huge email server business. And like, there's a lot of interesting businesses built on email. You could argue Gmail's gotten so powerful, so big at this point that maybe they've actually re-centralized SMTP to some extent.

So maybe that's a counterargument. But generally, the difference SMT is you can leave, you can exit. As a developer, you can exit. As a user, you can exit. And that keeps the platform in check, right? Like, it doesn't matter if you can export your data from Facebook. All your friends are on Facebook. It's a network effect.

That game is over. There will be new games. If you had to make a bet, would you bet that a centralized kind of Web 2.0 company doing a particular thing, like creating a social network, we think Facebook as an example, would win or lose in a race versus a decentralized set of protocols that was trying to accomplish the same thing? If they were both starting from scratch? Because now today, obviously, these centralized platforms have a ton of money and resources and other things. Okay, well, let's even assume the current head start that Web 2.0 company is a very interesting question. It's a very asymmetric race. On the one hand, you have money and like people focus on a team sitting in the same office, you know, with a line mission and everything else. On the other side, you have the power of nights and weekends versus nine to five. Like people going to work, showing up at their office, you get an organized army that marches together that like is told what to do that has funding and resources. They have better monitors and better computers and better servers. and all these other kinds of things, right? And then you have this kind of rag-tag weekend militia,

and there's a lot more of them, by the way. The militia is much, much bigger. The nights and weekends programmers, the people that built Linux, the people that built a lot of the internet, the people that built Wikipedia, you know, all these people that built all the open-source projects. There's probably 10 million really, really smart developers, right?

And so to me it's kind of a question if you want to bet on kind of the British marching straight along or like the rag-tag militia fighting against the history of this is very clear. and the side of the nights and weekends for the last 30 years, that's been the best predictor of the future. That's where I bet. That's how I make my investments. That's where I spend my time. I have this blog post, what the smartest people do on the weekend is everyone else to do it work in 10 years. And I think it's been one of the most predictive heuristics in technology. Yeah. You can almost view it. And you could probably guess as to where the higher intrinsic motivation levels are.

It's motivations. It's also time horizon. When you're a company, no matter how visionary you are, I mean, I think Zuckerberg and Larry Page, they're extremely visionary and they're extremely long-term thinking. But ultimately, they do try to manage probably to a two-to-five-year horizon or something, right? Where if people on the weekends and nights and research labs, they think they think of about 10 years longer. And this is where some of the innovator's dilemma stems from, where if something is crazy enough, it's too much of a risk, it's too big of a brand risk. It might not produce revenue in the short term, whatever it might be. It's less and less and less likely to be tried. So as a result, you try less things.

The interesting thing about the decentralized paradigm is the ability to try many things as opposed to just one path. It would be the equivalent of being able to take Facebook, copy all of their source code, copy their entire database, and try five different versions in parallel. Some of those will work, some might not. You take the ones that work the most, and then you split them again. It's kind of like evolution. In these token mechanisms, things are inherently more chaotic because they're decentralized. in the same way that things in free market system are more chaotic than essentially planned system. The thing you're betting on, though, is trying more paths.

You learn pretty quickly, especially with the length of the feedback loops and the token ecosystem being so short, what paths are worth exploring, which ones aren't, and then you just continue consolidating resources and splitting out again from the things that do work. This is what's made me the most happy about in the last year in cryptocurrency, as opposed to 2014 and 15, which were pretty, pretty wintery. And it's not the prices. People say, oh, the Bitcoin is down, now they're up. And it's not, to me, it's not that.

It's exactly what you're describing. It's the rate at which there's experiments getting run. I'm assuming that we'll develop better and better ways over time to both fund decentralized innovation and to foster it in a less chaotic way. Namely, we'll go from assembling on Bitcoin.org and R-slash-Etherium to better-threaded gethub repos or who knows what the next advancement will be. You're spot on that perhaps the leading indicator of the whole industry is developer activity and experimentation. You know, back in 2014, one of the main graphs we would look at at Coinbase is GitHub repos that are referencing Bitcoin. And one of the really interesting things now is to look at the rate of repos that

reference Ethereum. Amazing experimentation was happening again. All of a sudden, just the space of possibilities and the excitement. And to use some of your phrasing, the toying around just increased drastically. Well, Ethereum did so many different things. Like, one, it showed that you could just simply have another scaled network, right? I think a lot of people just assumed it was going to be one network to rule them all, network effects, et cetera, et cetera. So it showed just like an existence proof that you could do another network. Number two, it's got a full, you know, turn complete, essentially JavaScript, solidity, programming language, right? So it lets you build apps. It's got this whole kind of platform aspect to it.

which Bitcoin sort of had in the beginning but never really developed with the scripting language. And then not only do you have apps on top of Ethereum, but then it also inspired all these other new token networks. So it was almost like three axes of like innovation going on at once. It was more that for the sort of a paradigm. Yeah, I think of it as the movement forked between kind of what I would call is the financial oriented people, the people that want to create a new system of money when that's where Bitcoin resides and the people that want to do more what we're talking about, which is create

decentralized systems. Right, which is why I think this space is so unique and multidisciplinary, right, where if you are just a typical financier or Wall Street person, increasing the number of lenses through which you can view it drastically increases your understanding and appreciation for the power of the system. In other words, you need to understand it as currency and that's one way to model fundamentally what these things might be worth and how certain aspects of the system flow. But if that's your only lens, then you view it just as money and you don't get some of the intrinsic value or why this could become a new kind of global computational platform or infrastructure. I think what they are missing is that a lot of what's going on here is new internet. You know, it's sort of redesigning the architecture of the internet in a way that allows for the participants of the internet to own a piece of those of those networks and ultimately those networks will have value and those resources will have value, and that any critique of the value of that should probably start with

an understanding of what is being built, right? And what is being built requires understanding how the internet works, both from a technical level and a cultural level. And then there's the stuff that we're talking about, which is creating a network and token and you use that token. So let's talk about the, there's all this talk about ICOs, which I don't like that word, but it's the word people are using. So let's talk a little about what's going on now. Yeah. So everyone's coming out of the woodwork, selling a token, because they, think there's free money to be had. Just like startups, there's a small percentage that are legit and really worth funding, and there's a whole glut of projects that unfortunately are not

and probably won't go anywhere. Or on the other case, scammers are entering the space. I mean, it's just gotten, yeah. It's worth talking through what are the fundamental components or signs of something that has the initial signs of being promising or at least somewhat legitimate as an effort versus red flags? On the red flag side, a couple of things come to mind. One or tokens which we would refer to as rent-seeking, meaning they extract value from the transactions that occur through the network to the token holders or some third party where in some ways part of the token movement is that you eliminate the middleman, and that's just totally unnecessary. A second is raising money purely for another investment vehicle, which itself

is centralized. There's no reason you need a token for that. If the token gets dividend, in proportion to the company's profits. That's almost textbook security, right? And so that's also something that should be done in the traditional way. Other favorites are releasing a white paper that is actually just a marketing brochure. It has nothing to do with the technical specifications of a protocol, which is what a token does. It powers a new protocol of code.

So the flip side of that is things to look for that are positive is there's actual running code as an example, or at least live code or at least a very technical white paper that describes the code. A team that could plausibly write such code. A team with a strong software background. One thing I should say is that all of these things that we're discussing here, cryptocurrencies, ICOs are very complicated, very fraught with risk. It's very early. I strongly recommend that people do a lot of work if they think about buying any of these things

and treat it as an investment that could go to zero, like a venture investment. And so tread very carefully. We're not in any way suggesting that people should buy any of these things, even though we're excited about them. So what else? Like what are the other? Yeah, well, one is maybe matching the stage of the industry with the ambitions of the project. So at the moment, I think we're largely in the infrastructure building stage.

And if you look at what Ethereum is capable of in terms of just throughput of the network, it can't handle more than about 20-ish transactions a second right now, which means that you're about 20,000 X off being able to run Facebook on the chain. So as a result, it's probably a lot more valuable and relevant to build infrastructure components that lets people scale that and build apps in the future rather than trying to build Facebook right now. I would assign a higher likelihood of success to systems and infrastructure rather than I'm building a massive user-facing app. To the use the analogy of the internet, we're building optical switching and, you know, web servers and all sorts of other

infrastructure. There's a reason it took, you know, it took 20 years to get to Facebook. You had to have AWS and you had to have all these other kinds of layers of infrastructure. A mistake that's often made in paradigm shifts is we try to shoehorn ideas from the existing world into the new paradigm because all we know is the existing world. The whole reason the new paradigm is interesting is because it lets you do new stuff, not old stuff. So one of the biggest things I look for, if not the biggest thing, is does this feel like a uniquely enabled behavior by the blockchain? Is it de novo native to the blockchain? Or is it a port from a non-block chain thing? The car is being dragged by a horse. It's like Barnes & Noble.com, not Amazon. Right? It's kind of

the analogy I like to use. It's always the one that goes kind of all in, burns the boats, does it fresh, designs it exactly the right way from first principles, is not encumbered by the legacy infrastructure. So I think about that a lot. There's always this, there's always this tendency to want to do the hybrid thing because it seems easier and it seems more familiar. But the hybrids never, like you look back at the internet, like the hybrid stuff never worked. There's always the pure all in on the internet, first principles, redesign it. It's things like Stripe. Hey, what would be like if we made like the most awesome payment system for developers and we designed it from scratch. Yeah. And it's always going to be better that way than, hey, let's take our existing

bank assets and let's, you know, hire a few programmers on the side and like make it internet like, you know? One thing I think is really interesting to look at is the top 50 sites on the internet today. Guess how many of them were made by companies that existed before the internet was popularized? I mean, I don't know. What's the answer? It's two. MSN.com and Microsoft.com, both by Microsoft. Every other site is made by a company that was native to the new paradigm, i.e. started after the internet was created. I think the best example of this is thinking, okay, well, the value of PayPal is X, thus Bitcoin should at least be worth Y, or, you know, Uber is worth X, so a decentralized Uber token should at least be worth Y, or something of this nature.

I think subconsciously, most people think about the value of tokens like equity. And if you're to say that directly to them, they may not say, oh, yeah, I think a token is equivalent to equity. but that's just how we're used to interacting with most of the financial world today. But it turns out that tokens don't really function like equity at all. The key difference is that equity represents rights to a future cash flow in a company, namely a company where you sell some products, you sell them for more than it costs you to produce them, you got to profit out the other side and that gets distributed to shareholders. Yeah, so when I think about the future value, I mean, right now,

I think there's probably like the prices are very speculative, let's put it that way, like the prices of cryptocurrencies. Sure, just like anything. Yeah, I don't know if I, and they may be too higher. A lot of it's speculation, right? Like where, how do you think about the kind of long term value? A lot of my thinking has been influenced by a guy named Chris Berniske, um, who used to work at Ark Invest, which is a wall street firm and has been doing a lot of work, putting together more rigorous financial models, uh, for cryptocurrencies. You go through and you really kind of model out in detail, you know, if file coin got to scale and you were using file coins to transact and the storage market were this big and people were willing to pay this much in Fiat and like,

how would that, you know, translate into the value of the token? So he's done some great work on that. This is where tokens are fundamentally different where, in my opinion, the best tokens and the ones that really follow the token model most truly are not rent seeking. They take a cut of all the transactions that go through the platform, for example. Just because you happen to own a token, doesn't mean you're entitled to money on a process over here that, in fact, you didn't really do any work to earn. Upon closer examination, tokens more closely resemble currencies where you look at some kind of monetary theory equation like mv equals pq, and it turns out that the important things to look at are not the right to a future stream of cash flows, rather it's the

money supply, it's the velocity of money, it's the average price of goods or services in the economy, and it's the number of goods or services in the economy that are sold. It might be the money supply is how many file coin are outstanding. The velocity is every year, how often does the whole money supply turn over? The price of goods and services in the economy could be, well, how much does it cost to store one gigabyte of data? And then the last part of the equation is, well, how many times are people actually buying storage for one gigabyte? Yeah, you can model out, and I've seen actually pretty interesting attempts to do so. You sort of make a bunch of assumptions you obviously have to do because it's speculative.

I would say, I would argue, though, that there are really kind of two things going on right now, at least two, and that there's sort of the Bitcoin side of the world, which is more about kind of creating a store of value, replace some kind of digital money. It almost resembles more of a commodity, and you might think of the value more like a commodity, and it has certain attributes, like you can send it all over the world. and it's censorship resistant and a bunch of other things and there's some value to that and that will be modeled in the way you're describing. My personal nomenclature,

like I think of in the first bucket, the commodity bucket, there's Bitcoin, there's Monaro and Zcash, maybe dash. And then there's this other thing which is kind of the networks, call them fat protocols,

call them tokens. There's this whole other sort of, which is you're creating these systems where it's a network resource and I think you'd have a different valuation model for that. Yeah. I would argue the equation

actually that underlies both of them are the same, though. I think the commodity angle is useful from a mental model perspective. I mean, there's literally the concept of gas and Ethereum, where it's how much resource does it cost to run the machine. So in the same way, you pour gas into a car to make it run, you need to supply some ether in the form of gas to run a computation on Ethereum.

So from that perspective, commodities make sense. The flip side of that is usually commodities are sort of a use-it-and-lose-it thing. There are actually some cryptocurrencies that do that. There's this concept of proof of burn, and that's another thing that people are playing with. But the most common model tends to be you spend a cryptocurrency and it's not burned. It just goes on to someone else, kind of like money. I guess I think of it is. In software, software is the ability to encode any idea into machinery. And so there's no reason why software couldn't encode, you know, you couldn't encode both ideas of equity, commodities, money, and new. things we'd never thought of. The limit is just sort of what people can think of. This is also why the traditional models of innovation, like the Carlotta Perez model, don't really work in software worlds, because in software, it's bound only by the ability of people to kind of come up with new, interesting ideas. And one pseudonyminous person can come up with a short white paper

and, you know, change the trajectory of the whole thing. That's certainly true on the development side. I think what Carlotta Perez might argue back is that that describes more of how long does it take for the idea to spread through a population that needs to adopt it. And maybe the interesting thing that you're pointing out here is that just like the protocols of the internet, it may turn out that a lot of these underlying blockchain and token mechanisms start to become the infrastructure for a lot of the stuff that we use every day. And in the same way on the funding side, we'll go from this kind of crazy token crowd sale where we sell everything to better figuring out how to reward people who do

work or the concept we were talking about before, which is everybody puts up a little bit of their own money through inflation and dilution to pay for new innovations. You know, we've had so many years of improving the theory of the firm, of the centralized company. We've had very few years and very, very little effort on how do we actually do things better in a decentralized way on the internet. So I think there's a long way to go there and a lot of efficiency gain to be had. The big challenge and opportunity, for incumbents, whether it's a bank or one of the big Silicon Valley companies, is to adapt their business accordingly. And although margins and revenue opportunities in the old

paradigm often compress, the opportunity set keeps getting bigger. And the surest way to fail is to assume it's a zero-sum game. It does not have to be a zero-sum game. And this is true of all technological paradigm shifts where there's a commodification of all the value creation. that happened in the last paradigm. So now value creation has to happen at some new layer. You just have to have an open mind.