Bankless - 90 - 5 Mental Models for Web3 | Chris Dixon

Episode Date: November 1, 2021

Chris Dixon is a general partner at a16z, and gives Bankless listeners a masterclass in understanding the Web3 Metaverse in this episode. There are five essential mental models to understanding why Web3 matters, and they overlap often throughout the course of the conversation. Web3 has begun to impact all corners of digital culture, from media to finance, art and gaming, and even identity. Mental models allow for digestible thinking patterns to understand and predict the world, and Chris lays out how these new digital primitives are changing everything. ✨ EPISODE DEBRIEF ✨ https://shows.banklesshq.com/p/exclusive-debrief-5-mental-models  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ 📣 DHARMA | Trade on Polygon! https://bankless.cc/dharma  ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini​  💧LIDO | DECENTRALIZED STAKING https://bankless.cc/Lido  👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave  🦄 UNISWAP | DECENTRALIZED FUNDING https://bankless.cc/UniGrants  ------ Topics Covered: 0:00 Intro 8:00 Chris Dixon 12:09 Mental Models 16:29 Unpacking the Internet 25:43 Corporations vs Networks 30:17 Why Web3 Matters 35:30 Compete or Collaborate 43:25 Tokens are a New Digital Primitive 49:00 Users & Websites 54:45 Primitive NFTs 1:01:00 Take Rate is Opportunity 1:05:27 Culture & Ownership 1:11:07 Networks Becoming Economies 1:21:25 Power to the Users 1:28:48 It’s Just a Toy 1:37:20 a16z in 2021 1:42:10 Regulatory Landscape 1:45:58 2022 Predictions 1:49:23 Closing & Disclaimers ------ Resources: Chris on Twitter: https://twitter.com/cdixon?s=20  Why Web3 Matters: https://twitter.com/cdixon/status/1442201621266534402?s=20  Why Decentralization Matters: https://cdixon.org/2018/02/18/why-decentralization-matters  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front front front the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, I felt like this was a masterclass, a master class in Web 3, a master class in crypto. We had Chris Dixon on the podcast. We went through five mental models that are essential listing material. Essential understanding, I think, if you're on the crypto journey and you're trying to understand everything that's going on in this new era of transformation. What were some of your thoughts and takeaways from this episode? I particularly enjoyed how all these mental models bled into one.

And you can definitely hear Chris's dream of consciousness, his train of thought as to how he came about these mental models. And each one of these mental models is both a tweet thread and also a post on Chris's website. So you can follow along on his website as well if you want to do that. And we go through just the gamut of why Web 3 actually gets the designation of three, the primitives behind the establishment of Web 3 tokens as a digital primitive, as a digital version of a new website. Also, the difference between what Chris calls the take rate or basically the fees that platforms charge and how the lowering of a take weight rate in Web 3 turns from revenue into economies and extrapolation on that. And then, of course, the famous all innovations start out as

a toy and how the early blockchain just mimics the same sort of early innovations that we've seen across other investment paradigms that we've seen in the past. And so really just a comprehensive lesson on both what is Web3, why is it valuable, and also how to invest as well. Yeah, it really covered everything. And Chris is like he knows what he's doing in this space. And like he knows what he's doing when it comes to venture. And he's seen so many of these patterns play out before. And now he's like applying these patterns to crypto. I've got to say there are different lenses through which you can view crypto. You know, one popular lens is some people only see crypto as sort of a money solution, right?

Kind of the money lens of crypto. Others think about like, you know, bank lists being like defy sort of movement. Others think that this is a Web 3 big disruption to tech incumbents. You know, still others think about the Metaverse. I think like we probably view it as all of those things simultaneously at once. And I do think that the term Web 3 has increasingly had validation over the past year or so. I think some people were jaded, myself included, were a little bit jaded with the term coming out of 2017, 2018, where it seemed like all of these nebulous ICO concepts and startups that were going to create a new decentralized internet were emerging,

but actually didn't really deliver much. And so the money narrative, I think at that time, seemed strongest and firmest. And that's why I think we saw defy sort of arise out of that. And I was a proponent of that. And if someone asked me in 2018, 2019, what is Web 3? And be like, I don't really know what you mean by Web 3 because it hasn't been developed. I like the ideas of self-sovereignty. And obviously, I think there's potential in disrupting some.

But people were talking about like, yeah, let's create a decentralized social media platform I'm on the 15 transaction per second Ethereum instance. And it's just like, no, that's not going to happen right now. That's not going to happen first. So all of this to say, Chris has a very web-3-centric lens, but that lens on the world and how it's going to impact both tech, music industries, gaming industries, all sorts of consumer product industries,

all of these different industries has received a massive amount of validation over the past 12 months ago. And even since we last spoke, which is really cool. And we bring all of that into the conversation today. At the tail end of the bear market, there was definitely that difference between like there's defy and then there's Web3 and these things are not the same.

And I think the way that Chris frames what Web3 is really, I think vindicate some of the early ideas of what Defi was. Defi is really about lowering the costs of performing financial transactions with other people. But Chris would say this is creating a platform, a network with a lower take rate. And so he's really just talking about the extrapolation from Web 1 to Web 2 to Web 3 as who is providing the services and who gets to capture the wealth. And Chris's version of Web 3 is much more in line with Web 1 in that individuals and communities crop up, make value, and share value amongst themselves.

And then also the difference now is that these Web 3 platforms can also provide services towards the rest of the whole entire world without having a central operator take what Chris says is upwards of larger than. 50% of the value that's created. Instead, we have something like 0 to 10% of the value that's created is collected by these Web3 protocols. So guys, we go through that. We go through the five mental models. It's just a toy. Web3. Tokens are the new websites. Your take rate is my opportunity. Networks become economies. And then we conclude with what A16Z is doing in the space, a look at regulatory. And then Chris gives us some fantastic parting wisdom. So make sure

you stay tuned to the end. Supercycle, does he believe in that? Or maybe something little bit different, maybe a riff on that. And of course, if you are a premium subscriber, make sure you tune into the debrief that David and I will do with our thoughts and reflections on this episode. We record those after the episode for all of our bankless premium subscribers available on the premium feed. So without further ado, we want to thank the sponsors that made this episode possible. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system, where trades are matched with other humans,

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is now accepting applications for grants. We have been saying this for a while and we'll say it again. Dow's have money and they are in need of labor. If you think that you have something to contribute to the Uniswap Dow, apply for a grant to Uniswap. Just look at the size of the Uniswap treasury. It's almost $3 billion. This mountain of capital is looking for labor. Do you have something of value to contribute to the Uniswap Dow?

No matter how big or small your idea is, you can apply for a UniGrant at Unigrant. And help steer Uniswap in the direction that you think it should go. That's exactly what we did to get Uniswap to be a sponsor for bankless, and you can do the same for your project. Thank you, Uniswap, for sponsoring bankless. The era of proof of stake is upon us. Proof of stake systems like Ethereum, Terra, and Solana allow the industry to move away from the hot, loud, and wasteful proof of work systems and return back to a cottage industry of individual stakers and individual validators.

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Simply go to Lido.fI, choose which assets you want to stake, and deposit them to the Lido validating network. Lido is working to make sure proof of stake stays as decentralized as possible, and it's committed to decentralizing its own validating network to eventually become a completely permissionless protocol. So if you want to stake your ETH, Tara, or Seoul, and get liquidity on your stake, go to Lido.fI to get started. Bankless Nation, we are super excited to introduce you to our next guest. He needs no introduction. He's been on bankless before. This is Chris Dixon. He's a partner at A16Z, where he leads crypto investing. Last time we spoke to Chris was January 2021, if I'm recalling correctly.

So that's like roughly 10 years ago, I think, in crypto times. How are you doing, Chris? It's great to have you back on fake. I'm great. I'm great. Thanks for having you. It's good to see you guys. Yeah.

It's been a while, but you haven't aged a day, even though it's been like a very long time in crypto years. I hope you're... Was that meme? It's like the interstellar meme or it's like, you know, four hours down here. He's on the gravity planet. 20 years up there. Yeah.

Fantastic movie, by the way. All right. So, guys, just for... Was it that recent? I actually thought it was, wasn't it DFI Summer? I thought it was over a year ago. Anyways, maybe not. It was just after DFi Summer.

It was toward at the end of DFi Summer. It was before NFT mania, let's see, if we're doing charting this encrypted. Just after DFI summer, things were in kind of a lull, before Eith went on a tear, Bitcoin had just done okay. NFTs were barely a thing.

There was no such thing as crypto gaming. Let's see what else happened. I mean, so many other things, too. It's been such an event year. All right. Well, let's talk about this because actually for the listeners, we wanted to start this episode maybe a little bit differently than our others. We wanted to make this kind of a canonical bankless episode. I mean, we're going to discuss A16Z and what you're doing in crypto because we can't not. You guys just raised a casual, you know, $2.2 billion, I think back in June. So we're definitely

going to discuss that. It's probably going to be near the end. But really where we wanted to turn your brain at first is for the listener, Chris is not only a brilliant investor. He's a master of mental models. David and I love mental models on bankless. We think these are like shortcuts for understanding how to approach the space. It's a way to connect the dots. It's the fastest way possible to connect the dots. And like for those of you who aren't familiar with mental models, first of all, I bet you are familiar with mental models because you use them all the time in your day, day life. But it's just a framework that you can carry with you to help explain something, help explain how the world works. And in crypto, we think this is the fastest way to get you from like

zero to 60 on a subject because it's like compressed information. Okay? This is like a ZK roll up for your mind. So we love mental models. And we're actually going to spend the first part of this going through a number of mental models that Chris has helped develop for this industry to help individuals understand it. David, you look like you want to say something about mental bottles. I know you love them too.

Yeah, absolutely. Just in time for Thanksgiving and Christmas for you to sharpen your sticks and take them home to your families to explain what the hell. how this whole crypto thing is. Yeah, they're going to be asking you at the Thanksgiving get together. What's going on in crypto these days? You know that. So we're going to dive into five mental models today. I'm just going to list them off. And then we're going to get Chris's brain on each of the. The first is a mental model that I call, it's just a toy. Okay? Why new technologies are dismissed. We'll touch on that. The second is Web 3. How do crypto people have the audacity to call

this thing Web 3? We just created a whole new era of the internet. We've got to talk about that as a mental model. The third is tokens as the new websites. Hmm, interesting. The fourth is, this is a Bezos quote, your take rate is my opportunity. What do we mean about that in the context of the transition from Web 2 to Web 3? The fifth is networks becoming economies. That is a paradigm shift. So those are the five models. But before we get into the models, Chris, you're a master of mental models. Thank you. Why do you like them so much? What's the value of a mental model? Yeah, I think that I think it's a little bit sort of like all of what scientists do, for example, or anyone trying to predict the future, right? You need to, the world is so complex, you know, 8 billion people, you know, economics, physics, biology.

It's way too complex for anyone to understand. And so what you do, I think when you try to predict the future, and this would apply if you were a scientist, it applies if you're an investor. it applies if you're an entrepreneur or anyone who's sort of concerned with, you know, thinking about how do these really complex systems evolve. You need simplifications. You need ways to kind of take very complex things and distill them and find patterns. And so to me, that's what these mental models are. And they come from, you know, they come from, as with anyone who works full-time and working,

you know, in the space for eight years and basically full-time in crypto for five years. and my whole career in technology. And this is sort of, you know, these are the models I've sort of, I've developed to help to help my own thinking and my own investing. And also, you know, I think as part of kind of our philosophy of investing and working with entrepreneurs, we'd like to also share these with the world. And look, it's partly, I think it's partly to hopefully it's a resource for people. but I also think, you know, in the end, our job is to be the place that entrepreneurs want to go to work with.

And I think a lot of entrepreneurs appreciate that if you kind of help them along in their entrepreneurial journey, they think that's valuable. Yeah. So I think it's fundamentally about understanding and predicting the world. And one of the things I find so fascinating about the space that we work in, Web3 Crypto, is it's just sort of, of endlessly interesting. Like, you know, that meme where the guy's lying in bed and he's like, she's like, what are you thinking about? I'm thinking.

For me, for me, I am, I find that this is the one topic in my life where I have never run out of interesting things to think about. Like, I'm, I'm never bored because. Wait, really? Like more so than like, I mean, you were here for the early days of the internet too or like the early days of the internet too. Yeah, I don't know. I think it's more.

I think it's more. Maybe it's because I'm in the middle of it more. But I think that this, this. this, you know, because this, like, think about it, it, think about, like, for example, like, we have different practice areas in our, in our, in our, in our crypto group, right? And I think, like, at least three different areas. So we have infrastructure, defy and sort of NFTs gaming and then maybe a fourth area of sort of emerging areas. And, you know, in the infrastructure one, like, you get all of computer science in there. It's a fascinating area.

My partner, Lee, kind of leads that effort, but I, I sort of, you know, moonlight doing that. And it's just endlessly interesting. Like, now we're getting deep into kind of ZK stuff and cryptography and, you know, spent years on kind of the various kind of scaling kind of concerns. So that's just endlessly interesting. It's computer science. But you're also reasoning about, you know, what applications, what people use these things for. And then you have the whole community aspect, right, of like a blockchain is not just a computer. It is a computer in the sense that it runs code and stores information, but it's also a community in a network, right? So you have this human aspect to it. You have economics. You have game theory. I don't think, and then you go to NFTs and you

have all of that plus culture plus media plus gaming right and then you go to defy and you have all of that plus finance and you know yield farming and dgens and just all this like fascinating kind of cultural stuff so i just think it like there's like 10 for me at least it's feel i feel like the 10 things i've been interested in my life like programming economics game theory culture you know it all kind of comes together and this is like the this is like the great big most fascinating thing ever yeah that's my of you. I mean, that's, that's why I'm so fired up about it. I'm sure you, I expect them to be preaching to the choir here, but, but, uh, and so yeah, so I spend a lot of time, you know, I spend most of my time meeting with entrepreneurs and, and learning from them. And then I spend sort of

the rest of my time beyond, I mean, I do have a personal life and everything else, but like, so I don't want to make it sound like I only work, but I do work a lot. But, but I spend the rest of my time kind of processing all that information and trying to come up with ways to understand it. And that's, I think that's where a lot of these mental models come from. Chris, how has your relationship with mental models progressed throughout your time unpacking the internet? You are an internet veteran. You've kind of seen it blossom in from all of its forms. How have you used mental models and how have your mental models developed from Web 1 to Web 2?

And then also, how has Web 3 really changed the game with, like, needing mental models? Yeah, a great question. I mean, I think the last time I was really excited about the Internet was 2009 to 11, I'd say, which to me was the golden period of mobile. And that was a really exciting time. I think one of the fascinating things about that, there were a bunch of interesting things. It was, you know, it's interesting. First of all, it was really underestimated.

It seems like today, you know, the iPhone came out in 2007, the App Store in 2008, and it's very easy to tell a story that it was just sort of, okay, mobile's the thing, and that's it. It wasn't the case. So, like, a very important moment was Facebook's mobile pivot in 2012. So 2012 was really, in my mind, 2012 was the year, that the tech world realized that mobile is not the secondary computing platform, it's the primary computing platform. So people knew it was a thing and it was important and it was growing.

But to the extent to specifically touch-based smartphones, like, you know, there were many cell phones, but there was a lot of controversy as to whether they were, look, they were really expensive. Go look at that Steve, the infamous Steve Balmer video about the iPhone and no one's going to buy it. It's so expensive. The idea of people paying $1,000. for a phone just seemed kind of crazy. Of course, what they weren't thinking through was, I think what they underestimated is, first, it's not a phone. It's a supercomputer. Internet connects a supercomputer, which is worth a thousand dollars. And secondly, and this is the

hardest, this is the most important thing with computing, new computing waves is, is, there was this exponential improvement curve that it went on. Okay. And it, it was partly the phone itself. If you take a phone today, an iPhone today and compare it to an iPhone 2011, it's gotten much, much better, right, just in terms of the performance and the camera. But what's really gotten better are the applications, right? Now you go on and you have just an endless stream of entertainment. You have the smartest people in the world on Twitter. You have, you know, TikTok dance videos. You have femoral messaging. You've got a million games. It's a, you know, it's a giant, rich ecosystem, right? And so it just got, and those two things, this is one of the things that happens in computing waves.

And by the way, I'll get back to crypto. I believe we might be in that golden period now. that's one reason I'm so in in blockchain crypto web three. In the really good golden period, you get this feedback loop. So you've got the application developers coming in and doing cool new stuff, which in turn drives more users and money into the infrastructure layer, meaning like the phone or the blockchain. And that gets better. And as that gets better, that unlocks.

So that unlocks new applications. We're already seeing this, I'm sure, like in, for example, in the L2 world, right? Now that you've got real Ethereum L2s, you're now going to have a new class of applications. now that you've got other L1s that are built for like gaming use cases, an example, that's going to unlock a whole other range of kind of games as an example or NFT use cases. Anyways, so that, you know, so going back, that was a very exciting time. And what was so fun about it is you had this new thing in your pocket, is this GPS connected smartphone with a camera.

What are you going to do with it, right? That's the creative thing. So, you know, Travis says, hey, I think that the cool thing. to do would be to build a worldwide network of, you know, Uber network and ride sharing, and you can click a button and this thing magically shows up, right? Instagram says, you know, I think that now this is going to change. There were photo sharing sites before, but they were like these snapfish, like get your family photos printed kind of thing.

This is going to change kind of the way that people consume, create and consume photography, media, video, and so forth, right? So new, this very creative period of people thinking of new use cases. And so, and the early web had this kind of thing too. The Internet, I think, has kind of had four important distinct phases. There was Web 1 where, you know, there's sort of this explosion of stuff in the 90s. And the key feature there, it was governed by open protocols, which meant that because Sergey and Larry and other entrepreneur, you know, all the kind of main, you know, Pierre Omadar, eBay, Google, Amazon, because they were open protocols, they knew they could build. internet services that they would truly own and control, that no one could kind of rug pull them,

the way that you get rug pulled on the platform on the iPhone or on Facebook or something. But that first wave, those applications were what I call skeuomorphic. They took kind of things that were from the offline world like magazines and put them on the internet. And so a lot of the websites were just kind of one way. You were just reading stuff. And then there was this next period in 2000s where a new wave of entrepreneurs came along. And they said, wait a second. No, these are computers.

And you can read and write and put code and do all sorts of other things. And that's when you had first this kind of early phase where you had, you probably never heard of them, but things like Flickr and Delicious and Six Degrees, early social networking. And there was kind of people, you know, they were kind of the, they were building kind of the early primitives and the early ideas. And then you had Mark Zuckerberg and Ev Williams and Jack Dorsey and other people take those and package them up really beautifully. And boom, that was Web 2. and then Web 2 got accelerated by mobile, which was sort of another layer of interesting stuff that happened on top. And then I think we had a period of just kind of incumbent domination

between 2012 and 20 or something, you know, where Apple and Google, these companies get bigger and bigger. And the Internet is now at a precarious point where it could turn into kind of TV where you have like four channels like CBS and NBC, like TV in the 70s or something.

I think we'd all agree would be a bad. I hope you're like. Well, that's what the, That's what the great cause that we're all fighting for here is to keep the internet open and interesting and not like that, right? But then, yeah, and then you had this, as you both well know, you had this kind of counter trend that began to develop, obviously, originally with Satoshi. And then I think very importantly with Vitalik and Ethereum. And then I think that's led to really kind of an explosion and these feedback loops that I've described before, an explosion of innovation. And now I think we could be in that moment, that golden period moment.

I remember very much in mobile. Like I was there. We knew mobile was a big deal. But it's very hard to know when you're in a process. Is it linear or exponential? Because you're sitting on one point and you don't really know how fast it's going. Have there been some things, Chris, where you thought they were exponential and they turned out to be linear? Yeah.

That's a good point. I mean, look, I started a machine learning company in 2008. And I was clearly too early on that. It was called Hunch. It was acquired by eBay in 2011. And if you'd ask me, in 2008, I said, this is going to be the thing. It's going to change the world. AI is finally at a point where it's really going to happen. AI had like a 50-year period of kind of false starts.

Going back to Alan Turing, who predicted that I forget exactly, but someone would pass a Turing test, would trick, would be able to simulate, act like a human. I think he said within 30 years or something, way overly optimistic. The field was seen as kind of a disappointment. And I believed that people were underestimating. And so I created this company and we had this recommendation technology AI stuff. And I think I was right.

I just unfortunately was too early. And, you know, as they say in venture, too early is the same as being wrong. So I guess I was wrong. But I think that there's certainly technology kind of trends that people get excited about that don't fully pan out. A lot of times though, I think it's too early. I think VR is a good example where I think, you know, we invested. I led our investment in Oculus in 2013 and I thought it was three years away. I think it's actually right around the corner right now.

I think it's about to really kind of get really big and it's finally there and people are underestimating it, but it took longer. So usually my, at least my mistake, like before I went and started a crypto fund, I did a kind of full personal audit of all of the things I believed in whether I've been right or wrong to really kind of see if I'm, you know, how highly convicted I am. And I came to the conclusion that along the thread of software and computer science, which is what I've always been interested in, like internet and software, pretty much everything that a lot of smart people got excited about has happened. It's only been a question of time. I have this blog post, what the smartest people do on the weekend, everyone else will do in 10 years.

And I think it's, I think that's been universally true for the last 50 years in software, that the things that, you know, the Steve Jobs and the Wozniak going to the Homebrew Computer Club and like, all the smartest computer science nerds in California in the 1970s were right. And the people at the big companies who bet against PCs were wrong. That's happened over and over. It happened with the Internet. It happened with open source software. And I think it's going to happen here as well. And Chris, I think that's one of the big mental models that you've communicated is this

web one, web two, web three. And all these denominations of the web are just mental models, right? each one is its own mental model. And you talked about like, well, wouldn't that just be terrible if the internet just collapsed onto like four channels, the YouTube channel, the Facebook channel, the Instagram channel, and the Twitter channel. Which is kind of where we're getting close to. Absolutely.

Right. And so as a veteran of the Web 1 era, how do you see Web 3 reinstantiating some of the cool things and that we liked about Web 1? Yeah. Well, I think a big part is having credibly neutral platforms. upon which to build. So if you build an application on top of Ethereum, whether it be a game or something,

NFT experience or a Defi protocol, you do not have to worry about the protocol deciding to kick you off later or charge you 30% of your take rate or whatever happens on these other kinds of platforms. And so you know that you can invest and spend your life as an entrepreneur betting on that platform and building around it. In the same way in the Web 1, you knew that you could do that on HTTP and SMTP.

It's very, very different to, I think a very formative moment in my experience, I don't know if you were both in tech then, was the Facebook Twitter API massacre, essentially, which is there were all of these, there was a huge wave of people that built startups on Facebook and Twitter, and they were all just summarily kind of shut off. I had a lot of friends who had startups that were built. built on the Twitter API. Twitter was a, Twitter was an ecosystem.

It was a developer platform for many years. Yes, it had users using it directly, but it actually didn't even have an app for a long time. It was all third-party apps. And those were all companies. Those were people who spent their lives on it. And Twitter did, by the way, I don't blame, I'm friends with some of these people at these Web 2 companies.

I don't think they have any ill intent. I think the problem is the model. Right. The model is. Importantly, to put these into crypto terms, the lack of immutability of the Web 2 model. And the lack of immutable, meaning they can change the, like I like to say in Web 3, it can't be evil. In Web 2, it's don't be evil.

So Web 2, you're depending on the kind of the good intentions of the founders. Part of it's architectural, right? You don't have a blockchain. You don't have like a code that locks them into it. If you build an Ethereum, the code is locking you into certain commitments. If you build a smart contract, it's there, it's immutable, everything else. But it's also just the model of, like, if you're, maybe if you're, maybe if you're, maybe if you're, you're an ultra founder, Jack Dorsey or something, you can resist this. But for almost everybody else,

you ultimately report to shareholders. And those shareholders want you to maximize profits. And that, I believe, is fundamentally inconsistent with maximizing the health of the networks built on top. I think that networks, I think that corporations and networks are fundamentally misaligned. The corporation is going to want to grab more and more of the money and close off the network. When the network, what the network wants, what the people on the network want is they want, is they want open this and low take rates and open permissionless access. Okay. And those two things are fundamentally misaligned. In the last 10 years, we've seen how that misalignment plays out. And I think a lot of the reason people are unhappy on these networks is they feel this viscerally. A lot of these creators

who are early to build YouTube up are now, you know, at the whims of the algorithm, at the whims of the company. They get demonetized. They get the take rates changed. And they feel viscerally, they were part of this network creation. And they should have. have been part of the now of the governance and economics of the network, but they aren't. And as you know, Web 3, using tokens and all of these other kinds of new primitives that we have with Web 3, we can now fix that. And we can build networks where there isn't a corporation that needs to increase the take rate and shut down access, where the network can flourish, where the users on the network and the developers on the network can participate

in the value creation and the governance of those networks. My Fred Brad Burnham, he's a co-founder of Union Square Ventures, has a phrase that we finally discovered the native asset class of information networks, tokens. Wow. We were mismatching this other asset class, the Delaware Seacorp, with networks, and that created all this endless strife.

And we now have a way to fix that. This is super cool. And I think this is basically what we've been getting into, if listeners aren't aware, is your first mental model, which is the mental model of Web3. And like the question of, yeah, how do these crypto people have the audacity to like label this new crypto thing that they're working on an entirely new era of the internet, right? Like some people don't understand that because it's so early in the journey, right? So, but you're saying Web3 is basically, it's this internet that's owned by the builder and users.

and it's orchestrated with tokens. And it's a less predatory relationship between the platform and users, right? Because in the Web 2 model, the platform of the users with growth comes this extraction from the users of an individual platform or a network. And Web 3, I guess it's more of a symbiotic type relationship.

Do you think it's still audacious to call this thing Web 3, or do you feel like this is right on still? I think it's right on. I think in terms of the audacity of it, you know, time will tell. I very publicly have put these out there and have we put a lot of money on the line. And I, you know, if we're wrong, we'll lose a lot of money and we'll be, you know, we'll be look silly. And so, you know, we definitely have skin in the game and I definitely believe this. I'm 100% sure we won't be wrong. This is definitely right. And look, there's a descriptive aspect to this. I think there's a real movement going on. But there's also a prescriptive aspect, which is I want to put up the bat signal. I want to put up. the bat signal and say if you're at Google or at Amazon and you believe the internet can be a better better place than it is today and you don't want to spend your life, you know, on ad targeting, there's an alternative. And you can come, you can come start a company. And, you know, we're always wanting to meet entrepreneurs and potentially fund them or you can come join a company. We have 100, probably thousands of openings in our portfolio. And so, you know, these things,

I remember the Web 2 thing thing. It's not, it's not just, you know, It's a participatory process. And the key thing now, I believe, is getting more talented people into the space. Most of the discussions I do, why the audience I'm imagining today when I'm speaking to, are people who are curious about the space could contribute something, whether it be design, engineering, some other business operations function, whatever it might be. I want them to hear this and know that we want you to come join us. We're welcoming and we need you.

This is not going to happen with my blog post, right? And it's going to happen because thousands of entrepreneurs and tens of thousands of people working with them build great products that billions of people want to use. Would you go so far, Chris, as to say Web 2 has peaked? It's kind of done. Now it's on the decline and now this is all about Web 3? That's a great question. Look, I think it's nuanced. So Web2 defined as the big companies, their market caps are high.

They're doing very well economically. I don't know. I don't know anyone who works. I do know people who work at these companies. None of them seem very inspired. They all seem, you know, they've gotten very corporate. Only one of the big companies is led by a founder anymore. I don't think, I have trouble thinking of, I guess I would ask you,

is there a product that, let's say, Google has launched in the last. 10 years that you find exciting. No, I use many of their products, right? But there's nothing new. I bet they're all, but they're all from the 2000s. Yeah. Maps, search. And they're not exciting.

What in the last decade? Apple, I would say, I get AirPods. I like AirPods. AirPods are great. But I mean, this is a company that had a run of literally in its eight year period, the iPod, the iPhone, the iPad. That was whatever, 2001 to nine. and since then it's been the AirPods.

They have $2 trillion. Like, what's going on? Bell Labs, when they had a monopoly, like, they created the transistor, Unix, the C programming language, you know, probably a whole long list of things I don't remember. So, you know, are they doing, like, I know Zuckerberg is controversial. The thing yesterday, they're spending $10 billion on VR. It's something new at least. He's doing, in my mind, like, I know he's controversial and everything else.

Yeah, what else would you do if you're like a billionaire, founder. Like, you should be making big, bold bets, right? So I don't know how much innovation. I don't feel like they're doing much innovation. I just, I mean, just literally count up the products. Like, are there. So, Chris, let's assume that's true. Like, so let's assume there's no innovation. Let's assume Web 2 has peaked for a minute. I mean, it's not no innovation. It's, but it's top of the S curve. It's incremental. It's incremental. Like, the phones do get a little bit bad. I just got the new iPhone. Like, I use these products. I think they make very good hardware. Do camera better. But it feels very incremental. Like I used to watch every Apple keynote. Like, like,

It was like the Super Bowl. Same. Right now. I haven't, now I haven't watched them in seven years. It's like, it's okay. They have another can't. It's like fourth camera or whatever. Better camera, better battery, faster chip.

That's about it. Well, so I'm curious about this. Where are the bold bets? Like, where are the bold bets with all that money and all those resources? If let's say for a minute that many Web 2 companies become sort of, uh, maybe incumbents or they sort of miss this Web3 phrase. Do you think it's likely that they'll miss this Web3 things? Yes, I do?

What I'm actually wondering is, do you think that Web 2 will, um, see Web 3 as competitors? Do you think they'll be completely asleep at the wheel and miss it? Or do you think they'll start to collaborate? What's been interesting since last time we spoke is like little glimpses, you know, Twitter talking about adding NFT features. It's really cool. It's what we want. I want a verified blue check mark for my NFT Twitter. Thank you very much. It sounds like that's what they're building, TikTok doing some things in the NFT minting space. So like they're, but do you think that's going to get that trend is going to continue? The Web 3 starts to, Web 2 starts to work with Web 3? or do you think they're just going to get their lunch eating?

I hope so. I mean, look, I hope so. I think my guess is it'll be different with founder-led companies, that the founder-led companies, they've seen this pattern before. They've seen these things people have dismissed as a toy that come from below that seem silly, that get called a scam, and they realize it's not. And so it doesn't surprise me to Twitter and Square and Facebook and, you know, Instagram, which of course is done by Facebook, are on the leading edge of this.

I think we'll see a lot of those folks add things like with NFT features. I think it'll get really interesting. So the soft underbelly of Web 2 is not, I don't, I think the adoption pattern, like for Web 2, the adoption pattern was get a whole bunch of users, this is sort of Ben Thompson's kind of theory, aggregation theory, get 100 million users and then layer on monetization. I think Web 3 is going to be the opposite, which is the way it's going to start with the creators. And the soft underbelly of Web 2 is that the take rates are anywhere from zero. to, you know, like 50%.

So if you are a, and by the way, this forget about putting crypto aside for a second. Are you familiar with Substack? So Substack, right? It's a newsletter platform that it's very interesting because you have these writers. So all the writers have been told for 20 years. The Internet is bad for you. The Internet destroys your business.

You can't make money as a writer online. You have to go do all those other stuff. And maybe you'll scrape by. Maybe if we're really lucky, you get to work at, you know, of the New York Times or something. But in general, it's just, it's not a real career and you have to do something else. And these writers go on substack and there's a whole bunch of writers making a million dollars a year. And this is like, whoa, narrative violation. We were told you can't do that, right? It's not, the problem is not the internet. The problem is web two. The problem is we put in between

the writers and their audience algorithmic feeds and, you know, and ads. And that was not a good, and companies that decided to take almost all the money, right? So Spotify, the statistic I just, I like is that they, I think it's on their website. They have eight million artists and of that only $14,000 and $50,000 a year or more. So make sort of the average American living. So $14,000 out of $8 million. They put them on their website. They think it's a good thing.

Like, think about how engaged people are with music, how much they love music, right? A lot of what's going on with NFTs, it's the substack effect. It's now I can finally, you know, blowd does an NFT drop and makes $11 million. Because now as a music fan, I'm sure, music, people are incredibly passionate about music. I would guess that you each have musicians that you love, and you'd love to patronize and you'd love to support, and you'd love to join their community, or maybe you are in their community,

but you'd love to do, you know, you would add into your participation various monetary things. We see this effect offline, by the way. Musicians make a lot of money on offline merchandise. This is just sort of, you know, this is just a way to sell direct. NFTs in many ways you can see it's just digital merchandise, right? At least for musicians, it's one way to look at it. It's finally you have to have something to sell on the Internet

that doesn't require going through an intermediary and having banner ads and all sorts of other things. I mean, this could be like the native tokens. You said it's sort of the native asset of networks. This could be the native asset of, you know, tokens could be the native asset for creators, too, and for communities and for fans. Sorry, yeah, that's what I think there will be. I think they will be.

And I think what we'll start to see is more and more creators realize this and realize they can opt out of the Web 2 monetization. They may still use Web 2 as a way to kind of aggregate fans. But as they start to opt out and they say, hey, you know what, I don't need YouTube's, you know, advertising banner ads. I can just use YouTube as a way to kind of get a bunch of fit. This is what happens to substack. These authors, they get their audience on Twitter. And then they put a link that says, you know, if you want to support me, you go to Substack.

And what that in ad-based models, that never worked because you needed to get like the entire audience to move over. In these kind of cream skimming models, which is NFTs and Substack, where you just try to get sort of the, the biggest fans, the thousand truest fans to pay you money. In the cream skimming model, you can just, you can use Twitter to aggregate a million people. And if a thousand come over and sign up for your substack and pay you whatever, $10 a month, you've got a living, right? And that's going to happen more and more with NFTs. So meanwhile, if bankless listeners can go over to our substack and sign up for bankless, we would greatly appreciate it.

Chris, you'll love this, actually. So I think subdoc is a perfect example because it's one of these bridge companies. It's a bridge in the creator economy between like Web 2 and Web 3, right, but it's like not fully tokenized, but like bankless got its start on substack in 2020. We started with just like, actually 2020, 2019 for two years ago. And we started with like just a handful on Twitter, as you said, right? We just hit 100,000 subscribers just like in the past week. And what's interesting, we love substack because it's a direct relationship with our community. And it also strikes me that, you know, the substack model is not kind of the, it's like the bridge company.

It's still in the old world. Imagine if you could like supercharge a substack. What does a substack look like that's a bit more decentralized and a bit more tokenized, you know? Like something like a mirror is interesting in doing things like this. It's like these bridge companies are going to be very important as well. No, I think that's right. Yeah, go ahead. I think substack, Patreon, Kickstarter back in the day are all kind of early precursors.

But the strong form, as you say, would be to have the subscription maybe was an NFT or some other kind of thing. and you give governance rights and economic rights and a whole bunch of other kind of things. But I think, yeah, I think they're right. I think these bridging companies are very important culturally because they kind of provide a easier on-ramp for understanding the effects here. And so, yeah, you were asking,

just to answer your question before, will Web 2 respond to Web 3? I think when they start to see the creators taper off and opt out of some of their programs because that's their soft underbelly. They're very good. They're very strong on the network effects on the user side, Like I talk about Web3 all the time.

It would be hard for me to leave Twitter because I have a lot of followers. There's been a lot of years doing it. Right. It's hard. And they don't let you leave. Substack, by the way, very importantly lets you leave. You can export? First thing I check when I signed up for Subtext, can I export my email list?

Right. You can take your network with you. Right. And that's a very important thing. I wouldn't use any trust starting a new site unless you can take your network with you. But anyway, so I think that'll be interesting if that starts to happen and you start to see. Because these, these, the Web2 models are all big built around this kind of everyone's locked in. And we have these permanent network.

effects. And so if you start to see any chips of that armor, that's going to be alarming to them. And how they respond, you know, the right way to respond hopefully is embrace the future. It's, you know, the way that Bill Gates finally did a, you know, five alarm fire and built an explorer, right? When the internet was coming along, he missed it at first, but to his credit, recovered very quickly. And so I think that's the right way to do it. But we'll see. I think that the, I think you'll see a big difference with the founder led companies, is my guess. because the ones that aren't founder-led, it's very hard. They form a committee.

They study the issue. They have to go kind of get consensus. It's very hard for a non-founder-led company to do non-consensus big bets. Chris, in your article, you talk about the role of tokens when it comes to these Web3 networks. And you say this line, tokens push ownership and control to the margins, which should come with a lot of contrast to these Web2 worlds where it's very, very top-down updates to the way that these platform works. And then we've also seen this like revolution in air drops and also earning by using as an instrument, a tool. How do these tokens actually allow us to build this web three world?

Yeah, I think tokens. So the way I define Web3 is an internet owned by users and builders orchestrated by tokens. So tokens to me are kind of the key new concept, the new primitive, as we say. There's two basic types of tokens. There's fungible and non-fungible NFTs. So when I say token, it could be one of the other. tokens are besides domain names, which is sort of the one thing you could own in Web 1, they're the first thing on the internet where a user can actually own something and truly own it

in the sense that no one can take it away. The key idea with a token, it's in your wallet, and your wallet is a private key and a public key. By the way, by this definition, Bitcoin is a token, of course, as well. And of course, it was the pioneer of this model. And those tokens are, it's a very general concept. This is one of the mental models you mentioned, the tweets, storms I've written. We're on to mental model number two for the listeners, by the way. So, yeah, well, so tokens are like web pages in the sense that they're, they're very, very general, general primitive.

So when the web's, the first websites came along, they, you know, they had certain personality. They had pictures on them. They had, they had text. and people said, oh, I see it's like a magazine, right? But then over time, and the other thing, by the way, the web page can have is can have pictures and text and can have code, right? And over time, developers iterated and built more and more new ideas and new kind of types of things, types of websites.

And so today you have, you know, social networking, you have very elaborate SaaS software, you have spreadsheets, Google Docs. And today we can see, we can appreciate kind of when we use the web, how general, general concept website is. So when we talk about tokens, when they start off, for example, with NFTs, people see board apes and crypto punks and they say, oh, it's sort of like art or something or it's sort of like right click and save JPEG. I believe instead it's a much more general concept and we're going to see people iterate on it. And so, for example, in gaming, we're seeing a lot of crypto web three gaming now. you're going to see tokens represent game objects as an example, which have real utility. And so maybe it's a magical sword, but it has certain properties.

And the user can take that sword and take it out of the game into another game. And I think over time, users are going to expect that they have their kind of permanent inventory. Today, you go and you play a game. I play Clash Royale a lot of if you play games, I've spent probably too much money on that game. And then when I stop playing it, it's all gone, right? And we just sort of get used to this idea that you're basically going in and renting the, renting the goods and then giving them up. People will, I think, over time, say, why is that?

Like, in the real world, that's not how it works. Like, you don't go to a, you know, when I go to a restaurant, I don't have to put on a new set of clothing and then give it back at the end or something, right? Like, you have your permanent stuff in the real world. People, that's a very popular concept in the real world to own stuff. We just never had it until tokens on the Internet. Now we have a notion of owning stuff. That's what tokens are.

And so they can be fungible tend to be money like things like ether or Bitcoin or something. And non-fungible are sort of everything else. And as a friend, Roham, our friend at Dapper Labs, likes to say most of the world is non-fundgible. So he, you know, you can debate this, but he believes sort of non-fungible will be, in the end, be sort of 95% of the tokens in the world, just simply because it'll look like the real world where you have, you know, I'm sitting here. I have a computer. That's an object. I have a Pepsi. That's an object.

And we had money too. I have fungible stuff too. but it's not the kind of majority of the world. So what tokens allow is just this concept of digital ownership. And it can be a thing, it can be a piece of media, it can be a game utility, it could be something fashionable, it can be an avatar, it can be code. I think we're about to see a whole bunch of new iteration on the idea of like having programmable NFTs, an example.

It could be a ticket. It could be access to something in the real world. It could be a behind the scenes, you know, pass for a Discord. It can be anything. The key thing is you can now own it. It's not, the user, it flips the model where the user has the object and the application or website is asked to interact with that object as opposed to the application or website creating the whole world and

expecting the user to adapt to it. It's a user-centric new way to think about the internet. I want to double click on that right there. So I have trustless date as my Twitter handle, but I don't own that. Jack Dorsey just lets me borrow that and he can like pull it back for me whenever I want. And by the way, he may. I think at some point, I would not be surprised to see Web 2 start deplatforming Web 3. Oh, by the way. Jack Dorsey, please don't de-platform me from Twitter. They can, they just, it's just one day it'll just disappear.

Oh, no. Okay, so, but that, I want to unpack about how this actually changes the relationship between a user and a website. When I go to Twitter, I'm not bringing along my personal belongings. I don't even own my own Twitter account. Twitter just lets me borrow this trustless state Twitter account from them. Meanwhile, in Web3, I have a bunch of these objects in my inventory, and I go to these websites, and I bring along my objects and say, hey, website, look at these objects that I have.

How does this change the relationship between website and user? It significantly, it shifts power towards the user, right? So if I go, and you know this as an active user, so I have, I'm sure you have yours, I have Cidixen.eathe, and I have an avatar associated with it. And when I go, first of all, the login experience, most, you know, login experience is magical. I think you need to really try it to see it. But I go to OpenC and then I go to Rainbow and I see my name and my, you know, my ETH handle and all my other inventory. And they're just providing kind of a view for it, like a way to view it.

But they don't own the, they don't own the actual data, right? And what that means is they have to, they have to play much more nicely because they don't have that much. Twitter doesn't care. They can do whatever they want. They don't have that much control. No, they don't. It just weakens it. It weakens the, so you will have centralized services in the mix.

And look, it'll be reflected in take rates, like OpenC, like we're big investors in OpenC, full disclosure. And I know there's some controversy in the decentralized world. But look, I do think there's a role for centralized services. And they charge two and a half percent, right, which is in Stark. I mean, the lowest web two take rate is Apple at 30 percent. YouTube is 50 percent. And Instagram, Twitter, and Facebook give zero, i.e., they charge 100 percent. Right.

So I think, Chris, can you just define take rates really quick? In any kind of marketplace, there's just what does the house take? What percentage does the service provider, the intermediary, what percentage do they take? And like, I believe that, like, I'm capitalist. I think there's a role for marketplaces in the world and marketplaces should get paid. I think a healthy take rate is something like 2.5%. Right. I think an unhealthy take rate is, you know, when you have 100%, which is Twitter, Instagram, Facebook, and 50% YouTube and 30% Apple for doing very little in the case of Apple, like that to me is a sign of basically a monopoly.

That's not a healthy take rate. What's super interesting about OpenC is like a very low take rate at the same time. You're a capitalist, you're investing, obviously with the expectation of future returns. It's like OpenC's got to be one of the fastest growing companies in existence. And certainly it's been the breakout of the year. So that take rate has not impacted their ability to grow. There just seems to be something about this Web 3 world where you get such accelerated growth that I don't know. that I've ever seen. Maybe this happened in the mobile world in that era. And maybe it happened

in early days Facebook. But like, we haven't seen it since those two previous areas of the internet. And look, go, go, I don't know if you ever read S-1s. So when a, you know, when a company files to go public, there's the S-1, which is the financial statement. Go look at the last two years of tech S-1s. And look at the, look at the budget for sales and marketing. It is, in most cases, is the by far the biggest expense. We basically all of the entire tech world today is, spends the majority of their money on sales and marketing. And that could be everything from if your consumer company, you're buying Facebook ads, if your enterprise company, you're buying, you know, you have a big expensive Salesforce. To my knowledge, like, coin, no, almost no crypto

company has ever spent money on marketing. Actually, they, by the way, the web two platforms banned all crypto ads, which is probably actually a favor, but so they wouldn't get on the sugar high. But so, But to my knowledge, think about Bitcoin. This is Bitcoin is a canonical example, right? Bitcoin, of course, doesn't spend any, there is no Bitcoin company. They don't spend money on marketing. But they've got an army of how many 100 million people who write millions of, you know, medium posts and tweets and, you know, all of these evangelists. It's, it's a religion. Okay. And so I think the, so why, why has crypto grown so quickly without any marketing? Because people feel skin in the game. They feel ownership. And that, that causes them to go evangelists. And it's a very, very powerful force. And so I think the trade as an investor, yes, we will get lower take rates, but we will have much bigger markets. And that will, I think those two will balance out. And it's a perfectly, you know, it'll be, it'll be, it's a perfectly good place to invest in. But we can do it in a way that's, that is a much, much broader, bigger market and have platforms that that have far smaller take rates. It's sort of what happened with, you know, Craigslist is a good example, I think, which. is just a giant market, you know, huge amount of volume goes through there. They take very little. I think they only charge in certain categories in relatively low percentage. And they made that calculation. They said, you know what, let's just make it so popular and so good. It'll grow so fast. And they spend no money on marketing. And it's just all profit because that's it. Just like it's that website. That's what to do. Like they literally, I don't think they have any staff hardly outside the website. So it's just a different way to run one of these things, right? Whereas Google, I think, is up to 120. 20,000 people. It's just a different way to think about the world, right? So I think, I think in this world, you have two kind of things. You have the protocols or the NFTs. And then you have, I think you'll have things like, I believe there is a role for Coinbase's and open seas, kind of a layer of

some centralized services with low take rates that provide kind of an on-ramp. Because it's, you do need sort of, you do these sort of on-ramp experiences, right? It's very hard if you don't have some kind of website and things for new people to come on and, you know, kind of join. Chris, you've already unpacked this a little bit, but I want to approach this subject a little bit more directly. In this mental model, you talked about how some of the early websites were just, like, digital internet versions of a magazine or a newspaper. It's like you could read the newspaper or you could go on to the website and read the same newspaper there before they really learn to be a little bit more interactive and engaging and actually have like an actual, like,

what we know as a website today. And today, in the world of NFTs, we have like comically known as JPEG NFTs. Yeah. Do you kind of think that's following the same pattern as like this whole, this whole JPEG NFT phenomenon is the internet trying to just replicate a magazine on a website? I think it's probably, I mean, like I'm a fan of, you know, of a lot of these NFTs and the crypto punks and board apes and things like that. So I'm a fan of them.

I do think it's probably, we're probably very early in the evolution, right? Most of the stuff now is either kind of one of one. crypto art. So we're examples in investors in foundation, which does that. Super Rare does that. Or it's the PFP, the avatar kind of stuff. But we're seeing some really interesting new things. I'm sure you've followed the loot stuff that Dom Hoffman did. I think is fascinating. And that, you know, a couple of interesting things he does. You know, one is the, you know, it's sort of the composability. It's the first loot drop is just the inventories of these imagined characters. And he's, it's almost, my analogy, is if Ernest Hemingway just released the first page of his book and then had the audience

write the rest or something right. It's very provocative to like leave the rest undone. And it really emphasizes. Yeah. Have you guys ever read that book Stone Soup? Oh, yeah. He keeps putting stuff in the like, stuff in the soup. And yeah.

Yeah. Yeah. Basically, he gets this entire town. So he starts with a stone and everyone contributes like carrots and vegetables and pretty soon like he created soup out of the stone, but he only brought the stone. Yeah. That's good. That's a good analogy.

You know, my partner, Eddie Lazarin, he's got this great framework where he says that when you create, make something into an NFT, you do two things. You financialize it can now be traded, but you also make it composable. And the financialization has gotten all the attention. But the compose, I think one of the cool things about loot is it's trying to emphasize this other aspect of it, which is a composability. And if you follow the synthetic loot and more loot, which are both attempts, so synthetic loot is another version of loot where every single public key wallet, it gets a synthetic loot. And then more loot is one where the supply is by design huge. And the idea with those two is to kind of tier it. So loot is rare, looks rare, is, you know, and, and the price goes up. But then it makes it less accessible. And so then synthetic loot and

more loot are meant to be for new people to come in and be able to play the game. Right. So Dom's doing part of that also is a very interesting experiment between kind of the tradeoffs of financialization and accessibility. Topshot has a similar thing where there's these, there's rare cards that are sort of meant to be collectibles and hopefully, you know, go up in value. And then there's common cards where, you know, so kids can come on and get a card for $5 and play games and do other things. So I think I'm just giving you an example of like, we're so early in the design space. I think one of like one of the negatives of crypto puns is they're so expensive. Like we want and it's, it's neat and it creates a culture and I'm a big fan.

But we also want to figure out how do we scale this to a billion people and make sure it's accessible and make sure, you know, people are enjoying themselves and feeling skin in the game and ownership. And so I think that, for example, is a very interesting problem that people are working on. One of the things that really gives me a lot of encouragement. So we have a – I tweeted about this yesterday, but we have a games group at our firm that's not, you know, they're not crypto. They're just sort of traditional games. And they invest in really top game developers who come out of – places like Riot and Valve and Epic, which are kind of the best game companies, talent companies in the world.

And I think it was about four months ago, it was after Axi blew up, just every single meeting they have now involves NFTs. It's like we've, we've funded. I was going to say, I'm betting they have some crazy promo right now, but they also, these people are really good designers.

I've seen this stuff and it's a, it's another level. Like, it's going to be awesome. I think people don't even, I think people that, yeah, I think that it's kind of like when I was describing the web and web two and how it took 10 years for people to really iterate and go beyond the magazine phase.

I think it might be happening a lot faster now. And that's one of the indicators is seeing how talented these people are and how sophisticated. And by the way, games people get crypto very quickly. Dow, oh, it's a guild. Oh, they're used to in-game economies. They get it instantly. It's not a big learning curve. And so that's very exciting.

It's sort of the next, you know, the mind virus has now leapt out of, out of containment into the next place. Well, I mean, think about this, too. It's like, you know, it's speaking of how fast this could happen, like Web 2 didn't have Web 2 to propagate itself. That's right. That's right. That's right. That's right. So we just propagate on Twitter and Discord and, like, all of these, YouTube, all of these various channels.

That's a great point. That's a great point. That's why these, by the way, these analogies, historical analogies are always imperfect because it's just different. right? And by the way, a big thing with Web 1 is the band, it was broadband. But you literally had to have companies like Verizon and Comcasts like dig holes and everything else to get to the point where you could have YouTube. We don't have that issue now. We have the hardware is all built out, the wireless, you know, phones. And we have Web 2. Gemini is the world's most trusted cryptocurrency exchange. I've been a customer of Gemini since I first got into crypto in 2017. And it's been my main

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back into AVE. With AVE, users can do this in one seamless transaction, saving you time and gas costs. Check out the power of AVE at AVE.com. That's AAVEE.com. So we talked about Web3, how crypto has the audacity to call it Web3. We talked about tokens as the new websites. This is the new digital primitive. This is like the website of Web3, these things called tokens. Just touch really briefly. I know we touched upon it, but like the idea of your take rate is my opportunity. Okay. This is a Bezos quote. He was talking in terms of like, I guess Web 1, Amazon, how he was going to like beat his e-commerce competitors and the brick and mortars of the world. How does that apply to Web 3 versus like Web 2? You wrote a whole thread on that. Yeah. So Bezos's insight,

right, was that he had a different cost structure than the, his competitors who were, who had physical retail locations and other kinds of things. And he could take that different cost structure and lower his prices and, you know, and take their market from them. And so his famous quote, yeah, your your take rate, your, your margin, I think he said. Your margin, yeah. So my version of it was your take rate, which is sort of the marketplace version of that. And it's to say, you know, so Axi Infinity, we're investors in Axi Infinity. They have this giant economy. I think they're at something in the order of, 1.8 million users and I think, I forgot the, I tweeted the other day, I think it was 2 billion,

three billion in total GMB volume. And the last, you know, whatever it was been since launch. And they, but it's very different, right? So when Epic, when Fortnite makes 3 million, it means people spent 3 million and sent it to Fortnite, sent it to Epic, the company. When Axi does it, they don't, they take a tax. I don't know what it is. It's like 3% or something.

It's for some low take rate. Maybe 4.7%. Is that right? Yeah, sorry. I don't know. My partner, Ariel is on the board. I'm so, she's noticed in the details. I'm not as close to it. But, but, yeah, so they take, let's say, what is it, 4.7%. And but the other 95% goes from one player to another player. And that, of course, for the recipient is awesome. And so you have this huge community. I think a lot of it's in the Philippines that is making a living, playing this game. And so the, kind of the insight is that the AXY founders had is we can, instead of having the be sort of a command economy where everything is coming to us, we'll make it peer to peer. And one set of users can be, can kind of, who have more time than money can do this kind of work to earn money. And the other set of users who have more money than time can pay for it. So we actually recently just had a

conversation with Ariana Simpson from A16. Z. Yeah. And we talked about how all games platforms, all games, ultimately become economies. And it's this, the existence of an economy where so much value can be shared peer to peer generates this flywheel of economic resources that actually a low take rate, if it was 100% of a take rate, you would just kill the economy. But if it's a low take rate, you actually encourage the economy to grow. That's right. And you get these secondary effects, right, which is, so one of the really fascinating things

about AXE is not available in the app stores. because they ban all of the Web3 stuff. And so they have grown to that level that quickly because people, what I was talking about before is skin in the game. It's feeling like true owners. It's feeling like they can really participate in it. And the low take rate is a key part of that, right? Is that they are making most of the money.

Apparently, SLP, the token, has become, I had dinner with Gabby the other day. I interviewed Gabby from YG is amazing. He said that SLP is so prevalent in. the Philippines now that it's like you'll see I think you tweeting one out today it's like Craigslist ads price and SLP it's become it's become a medium of exchange it's actually literally become a local money it's incredible yes so so what do you think's going to happen here one of the quotes in that thread you said this trends continues is web three startups begin to eat into the margin of web two incumbents the higher the take rate the more

vulnerable the incumbent right and so this applies to like web two companies it also applies to the gaming industry, it also probably applies to the music industry. But like, so how does this shake out? Does Web3 go and start to disrupt all of these various industries? I think so. I think it will, I think that the most vulnerable will be the ones that monetize the worst today. So I think music's a great example.

And in fact, we, we had never, I had never in my career, I think, invested in a music startup. And I think I can say this. We haven't announced which ones, but we've invested into crypto music related things in the last two months. Wow. And that's because, so the reason I never invested before, I had friends who did. So, for example, I had a friend who started, if you remember, Turntable FM.

I remember that. But it was a really cool app that was kind of music, avatar experience, anyone can get up on stage and DJ, and you'd listen to it in the background, just a kind of little community. And he, I saw him years later, and he'd given up because the music labels just wouldn't, they just wouldn't give him the licensing. He tried to pay them. He tried to cut deals. They just don't want to. They're basically law firms at this point.

And they don't want to do anything new or creative. They just want to kind of extract money from their catalog. And so as a VC and an entrepreneur, you just sort of, you know what? This is Death Valley. Like you can't go there because they just won't. You just need the music rights and they won't give them to you. And it's just not going to work. And of course, Spotify did well.

And they were the one exception. But what's beautiful now is the musicians can go direct. So like when Blow did his drop, his NFT drop, and made $11 million. dollars. You don't need the labels or Spotify or anything else. It's just it's just the musician and their fans. It's a direct, it's the substack thing we were talking about earlier. And there's all sorts of interesting new ways. So I think the way, I believe the way it's going to shake out is music will be free. There will not be people charging for, in the same way that games are free today. The games industry figured it's out a long time ago. So in the games

industry, the dominant model is what Fortnite does, what League of Legends does, right? The game is completely free. You can play every feature of the game for free. They charge by, they realize it's better to give that away. Let people mod it. Let them stream it. Let them do whatever they want. The Internet is a giant copy machine. Let the Internet do what it's good at.

It's good at propagating cool stuff, right? Among other things. Let it, let it do its thing on my game and then monetize something else. In the case of those games, they monetize cosmetic goods, mostly, virtual goods. I think it's the same thing's going to happen. I'm pretty sure it's going to happen with music. Music will just be free, let it spread, let it get remixed, let it. let it get modded, do whatever you want, and I'm going to compliment the adjacency,

which is the adjacent layer of the stack, which is the ownership of the NFTs and all the kind of status flexing and behind the scenes access and a whole bunch of other kind of cool things that people will design around the music in the same way that that was a dominant model in gaming. And if you look, actually I did that in one of the tweet storms, gaming has consistently grown every year. Every time the new tech gaming has grown, gaming is a $140 billion industry. Music has shrunk and it's been flat and now it's like $20 billion. So it's a seventh of the size of gaming, which doesn't make any sense when you think about how popular it is and how much people love music, the reason it's been stuck there is there's been no innovation. And once the music

industry is allowed to embrace new technology, as I think they may be about to be, they will grow along with gaming and they will embrace the same things. You know, Nintendo for a long time, Nintendo had a very kind of retro view of the internet and they fought streaming for a very long time because they said that's illegal copyright infringement. Eventually they realized, you know, it sounds funny, but it's like, hey, you know, you've got to pay to see Mario jump. You can't just get it for free. And so they fought it.

And then eventually they realized, wait, why we shouldn't fight it? It just makes our games more popular. And we sell more games, right? And I think people will realize that with all other forms of media. The model is not to like create fake scarcity on this giant, you know, meme propagation machine, i.e. the internet. The model is to let the internet do its thing and charge for something else. scarce like NFTs. Yeah, this is so incredible because of course with the NFT space,

non-fuggeable space, this is all net new functionality that just wasn't previously possible. That's what this new token primitive provides. So let's get to maybe the fourth mental model here, which I think relates to everything we've talked about so far. And this is the idea of networks becoming economies. And just like my teeing up of this is I feel like in the Web2 era, we really learned about the power of networks, right? This is like the social network era. So we had mental models. Reed Hoffman talked about blitzscaling, right? We got to understand growth via Metcalf's law, right? Sort of this network virality type of growth model. But now what you're talking about in this thread is we're not just, we don't just have networks. We can actually

upgrade those networks and turn them into economies. So networks become economies. What do you mean by that. Yeah. So, so I would start by saying that the internet is a network of networks. So on top of the internet, we have other networks such as Facebook, Twitter, every Discord server, every subreddit. There are millions of networks. And we basically spent, this is a little bit to your point. You said we already have Web 2. We can build Web 3 on top of it, right? We spent the last 20 years, we, the world, building millions of networks, Airbnb's a network, Uber's a network, right? These are all network. So they've got all these networks built out. And we're nose in these networks and maybe you've got your, you know, your Twitter account and you've got your followers and you've got

TikTok and you've got YouTube or whatever you have, substack. But, you know, the only business model that we had layered on top of that, for the most part, we're advertising and with a few other exceptions. We now have a way to take those networks, which and let value flow through them freely. And that value is our tokens, right? And, and, and, you know, and, and, and, And what that means is that instead of, you know, it's the things we talked about before, the creator can, who has built this audience on Twitter and is used to only being able to make money by maybe tweeting out a link to, you know, her show or Spotify account can now let this thing that was previously an information network only, her Twitter following, become also a value network. It'll be also a network through which NFTs and tokens and other things can flow. So I think of it as, yeah, I mean, I think of a marketplace is a certain type of network where in addition to information flowing through it, there's also value flowing through it.

I think if the listener kind of uses their imagination, you can really start to feel the economy side of even the Web 2 platforms these days. Like Facebook and the way that it, you know, information flows and, energy flows through Facebook. Well, what happens if all that information flow that is being routed through Facebook also has a value layer that can go along inside of it? And same thing with, like, Spotify. You see all of your friends, the music rises to the top. There can be value associated with these information networks that already exist.

Yeah, and you're right. You see some of it today. You'll see people on their Facebook account or on some other, you know, hey, I'm tweeting out something I'm trying to sell, you know, my old sofa, right? So people will use them somewhat as marketplaces. but it's not a native experience, right? You click on it and you've got to go to another website and you've got to put in your credit card

and your social security number and all this kind of legacy stuff and it's not a closed loop and it's not. And as a result, like the conversion rates are really low. This is why the industry kind of settled on advertising because advertising is digitally native at least, right? It's the full closed loop. The advertiser comes on.

There's an auction. It's targeted. The whole kind of money flow is done in a purely digital way. And so it just works a lot better than when you have these non-digitally native payment system, which I consider the kind of the whole existing legacy payment system that way, just the numbers don't end up working, and so you get very little value flowing through it as a result.

There are exceptions. You know, the, even then, like, the exception I was going to say is like somebody who built their business on Instagram, you know, linking to their Shopify account. It's sort of an exception, but, you know, the way Instagram's built is you will build up an organic audience, and then they'll start to throttle your reach. You hear us all the time. And they do that deliberately so that they can get you to buy ads, to get back to the reach you had. And so that's their very clever way of just kind of increasing their take rate, even on the

organic side. So there is value through it, but it's also, to the extent, even if there is value, it's just the Web 2 companies have gotten so good at extraction, either direct extractions or paid ads or indirect through throttling organic reach and forcing you to get paid ads to get back to that audience. Yeah. So, I mean, it's a, look, it's a complicated nuance, nuance topic. And I was trying to distill it into a tweet storm, but there's a lot of aspects to it. You know, it's super striking to me is like that when you think about, you think about economies very

differently than networks, right? Networks you might think about, you know, revenue, for example, but like economies, like the, the Axi economy, you think in different metrics. You think it may be GDP. Yeah. How many people am I employing this economy? And I think that's a paradigm shift. I think another paradigm shift is in your tweet thread.

You talked about the way this would develop. And there's two kind of analogies that jumped out. This idea of a real world bizarre rather than maybe like a department store is kind of the example. Or the idea that this would develop more like a city rather than a theme park. And why do you think that these networks, I suppose, these economic networks will be structured in those ways. They'll start to resemble things that are a bit more, I guess,

organic, bottom-up, bizarre-like, rather than cathedral-like. No, that's a great. And I was thinking of the cathedral and the bazaar, if you're familiar with that. I'm a big fan of open source and that culture and have tracked it for a long time.

And that was, of course, a famous, it was by Eric Raymond's essay about the difference between kind of the open source bottoms up method and the top-down method. I think, by the way, there are places in life where you want top-down. So, for example,

probably you needed a company like Apple to build the iPhone. It's very hard for a community to come together and do, you know, that type of high cap-ex, factories, supply chains, all these other kinds of things. The, in software, and I think particularly the Internet, I believe the bottoms up approach is going to be a lead to a much richer, more interesting, more diverse, and more equitable Internet. And the analogy I would use is to like New York City versus Disneyland or something, right? So Disneyland is a command centralized economy. in New York City is much more kind of organically developed. And so in New York, you think about there's a great, some crypto people like Jane Jacobs.

She's just amazing author who wrote about kind of the life of cities and has this amazing first chapter in this book where she's talking about just a city block and all the different things you have on a healthy block. And a healthy block, you have a sidewalk, you have restaurants, you have residences, you have barbershops, She has this concept that, like, you feel like it's a better block when there's more eyes on the street. When you feel like you're, you feel safe to walk if you're a tourist. And, like, tourists instantly know that feels like a good block. And then more people come. And then more people come and they want to walk on the block. And then more restaurants open up and more barbershops open up.

And the real estate values go up, right? And it's just kind of network effect of the city block. It was a really beautiful passage because that's also, like, that's a microcosm of the broader city, right? The broader city, that's what you do to create a healthy city. And but the interesting thing she talked about it was this, it was this, it was this, first of all, it's a bottoms up process, right? There wasn't somebody who was like the commissioner saying, we need more eyes on that street, right?

There are commissioners in there, but what they do is they say, okay, we need some public space here. You know, the sidewalk is public. This part is private. And this part has a park. And then you let the bottoms up kind of this ecosystem develop. And in a healthy city, you have different things. You have private businesses and you have public resources.

if it weren't for the public sidewalk, the restaurant, if the sidewalk were owned by some company, the restaurant wouldn't feel comfortable opening their business behind that sidewalk, knowing someone could charge a toll or something, right? You need that to be public. And the same way, you need the open protocols to be public to have the business build on top of it, right? And so you want the two. And if everything was privately controlled, it would end up being like Disneyland and sterile and boring. If everything was publicly controlled, I don't think you'd have the kind of diverse innovation

that entrepreneurs bring. So there's a balance. I believe the internet has fallen out of balance, and it's now the sort of four Disneyland's. And we need to bring it back. Ethereum, on the other hand, is a great example where, to me, it feels like a city. It's a very kind of beautiful community that people are building interesting things on top, many different layers. A lot of the blockchain world is like that. Ethereum is probably the most, the healthiest.

By the way, if you're going to pick a place to live, you've got to actually live your life. If you'd rather live in a real city than in Disneyland. I'm in New York right now, and I'm here for a reason, which is I love New York. And like it's endlessly, by the way, one thing I love in New York is I love walking around the streets. It's just like it's just, I like seeing people. I like seeing stuff. I like seeing. And I feel like that that.

And I used to like the internet in the same way. It was like, let me just go, you know, this used to be this phrase, surf the web, right? It sounds kind of silly now or something. But like it was called that because you'd sort of like bounce around and find all this weird stuff. Rabbit holes. back then had like yeah they had like they had like cool it's great now like on my twitter mentions it's all like crazy avatars I'm like finally the internet's like interesting weird again like all these analogs way more fun it's just like fun and interesting again too I mean like that's

that's not like a scientific statement obviously but just my anecdotal experience is it's like I actually like enjoy going on the internet and seeing like weird interesting stuff again in a way I didn't in the same way that I do when I walk around New York and I'm you know I don't go to Disneyland I don't want to go to the vibe is cool once again Chris, I want to pull out two previous aspects from other mental models and bring them into this whole networks become economies, conversations. Two things that you said is that tokens inside of a user's inventory pushes power towards the user. And for me, the user is the person walking around the streets with a bunch of tokens in their pockets and a bunch of businesses clamoring to get their hands on some of the user's tokens. So I want to put that frame of reference into your mind, but also this whole concept of bazaars, not department stores, and take rates that aren't top-down determined.

There's an interaction there behind all these companies that are lining the streets of the city that have this free market capitalism trying to get the tokens that the users, the pedestrians are walking around that they have contained. So when this economy actually blossoms and we have power and the control of the user, how do you think that develops, like, going forward? Are the businesses different than the businesses today? Yeah. So we have all these businesses, then we have all these users that have their own property rights in these networks. And now we have these, you know, instead of Web2 companies that are, have top-down controls as to what the prices should be. We have these infinite economies that can create any sort of business mechanism unleashed from the control of these Web2 platforms. When it comes to just innovation, business development, and also consumer.

protections. How do you think all these dynamics kind of play into one another? That's a good question. So it's very, very open-ended. So go ahead and take with that what you will. Yeah. So I think, I think ideally we end up with a world where the user has significantly more power than today because the switching costs are much lower. The switching costs are going to, from OpenC to whatever, some other competitor, they're much lower because you can take your wallet and your identity with you versus Twitter where you can. You're stuck there, right? And so I think that we're going to see a massive shift kind of towards the edges of the network. Vitalik has his great quote, which is, you know, all of so many technology innovations shift

power to the center, including, I think, AI. AI is going to make kind of big incumbent companies more powerful and workers of the edges kind of disenfranchise. Blockchains are the opposite. They hollow out the middle and they push stuff out to the outside, right? So, you know, your show is not called New Bank. It's called Bankless, right? Like you're getting rid of the bank and you still get the functionality of a bank, but the

Users now have control and power, right? And you don't have that thing in the middle with taking stuff. So I hope that's number one. I hope the other thing, and this is not obvious, this is we have work to do. I hope it's all interoperable, right? I hope these are not islands, these economies. And I think this is, people talk about the metaverse and, you know, Facebook working on their version of it. And I think to me, probably the big question, if, you know, when this kind of metaverse develops,

which I sort of think of as this interconnected virtual world where you, you know, you work and you play and maybe there's three-dimensional VR interfaces and who knows what. Is it controlled by I.O.I., you know, the Ready Player One company and they have everything, or is it, you know, is it more like the web where there's just anyone can add on another world or room and they all interoperate and the powers and the users, you know. And that's a big open question. I think that we're trending in the right way, but, you know, It's still early. In terms of like consumer protections and things, I mean, I think, I don't know if you want to talk about kind of regulatory stuff, but the, I think we have very extensive consumer protection, commodities, laws, a whole bunch of other things in this, you know, in the U.S.

And most of the investing we do is in the U.S. And we'd like to see most of this innovation happen in the U.S. and companies pay taxes and hire people and everything else. And, yeah, yeah. I was mainly referring to consumer protections by free market competition. as in if somebody is gouging the consumer. Well, I think that's a big thing. I think there's two ways to control kind of big companies that act in predatory ways. One is to try to regulate them directly through monopoly law and things like that, which

I think we're about to see some of that happen. I don't think that will work very well. If you've sliced up Facebook into four different social networks or three different or however many it is, I don't think that's going to change the power dynamics. You might, I think smarter in a regulation, like forcing them to externalize the network, to really let you leave the network and take your, followers with you and support open protocols, maybe it could work. I don't know, I don't see headed in that way. The other way to control these companies is to, is to provide competition and to

provide a new model where the user has power and has lower switching costs. And don't let it happen again, that users are locked in, that they're locked in and that they're, you know, that they're dependent on these intermediaries. And that's obviously what we're trying to work towards. Do you know what I feel like has been the common thread throughout all these mental models and all this discussion is the threat of property rights, self-sovereign property rights. What's super interesting to me is like, of course, if we live in this world of four Disneyland's on the internet, like, of course we can't get something organic like a New York City out of it. Why? I mean, because I can't go set up a marketplace in Disneyland. I don't own it. If I go to Disneyland, I'm just renting the space and it's all Disneyland material. It's like, so I'm not going to set up a shop. I'm not going to build my home. I'm not going to build any property on Disneyland's because I don't own it. I don't have property rights. That, it appears to me as the common thread through this whole. thing is like somehow in this Web 3 experience that we've just we've just created we've unleashed property rights it's a very it's that's exactly right and it's very interesting it's a

it's a kind of mind-bending thing to imagine but imagine we lived in the real world forget about the internet and we had no concept of property rights everything was rented from four you know big and large i.i pick your four dystopian companies and then one day somebody came along and you know, through the sledgehammer, through the Apple ad in 1984, and we had property rights, you know, at the beginning, and you suddenly could own something. And at the beginning, you would probably have some of the behavior we're seeing now, like in the NFT world, like of speculation and sort of degen and all this other stuff, right? Oh, my God, I can own something. Oh, I'm going to own that. You want to own that. You want to own that. Like, I own the better thing or something.

You know, it's could be kind of a little bit. We're in that phase now, right? Where it's like, people are like the people. Very reflexive. Yeah, it's very reflexive. You know, there's some silliness going on as there always is. But it's, but that's not loose sight of the big picture, which is like, yes, we just took the most important invention of the 20th slash 21st century to internet and added property rights to it. It's a big deal. And it's going to take a long time to really kind of play out. And there will be, you know, there will be bad ideas. There'll be abuses. But overall, I think it's going to be a fantastically positive development. It is a big deal. And David and I have argued that it's actually fundamental. If we're going to create

something like the Metaverse, which again, no one wants a Disneyland version of the Metaverse, which is just like Facebook or one conglomerate controlling. There's a risk of it. There's a real risk of it. But like if we have property rights, then maybe we won't fall prey to that. I want to end with maybe the, we'll talk about A16Z as well, but like the last mental model to covers, maybe this idea that a lot of people get tripped up on, I think is one of your core mental models where they just dismiss crypto far too early.

It's just a toy mental model or trap, let's say, that they, fall into. So you wrote this tweet thread I thought was brilliant. And it really covers what people say about a new technology. And I think people are still saying this about crypto right now. When it's janky, when the UX sucks, when it's all brand new, they say three things. Number one, they say it's just a toy. Number two, they say it's too expensive. And number three, they say it doesn't solve any real problem. So can you talk about those traps? Why do people always fall into them? Yeah, it's a great question. So the, and I think each is probably a different pattern, and it depends on the technology.

So as an example, it's too expensive, tends to apply to hardware. And so, you know, Tesla would be an obvious example, where you just, it's just simply, the nature of hardware I've been involved with a few hardware companies is when you're at subscale, you just pay a lot more for supplies and assembly and everything else. And so as you sell more units, the price can drop dramatically. I mean, you go to the Best Buy Now and you look at the TVs, it's incredible, right? the cost of TVs and how good they've gotten is a good example. What do you think about Blockspace, though? Do you think that's an example?

Like some people are like gas fees are too high? Yes, for sure, for sure. We're going to see a lot of, we can talk about that more, but I think we're going to see a lot of, you know, optimism, arbitram, Polygon, Phantom, other L-1s. That said, I think that I would predict that Blockspace is going to be, that demand is going to outstrip supply for a very long time. I think the price is, more supply coming on will be great and we'll moderate it. But I think block space is the best product to be selling in the 2020s. It's like, it's a great product.

People forget it's a product. People forget that that's why blockchains exist is actually to sell blocks space. I believe people will tell you, I believe block space is a good business in 2020 to 2020. So we will be investing a lot. But like obviously we want the supply to grow and we want the price to go down. We want this to be an accessible technology. accessible right now, some of the gas fees. So, you know, we want to be inclusive. But I think it'll probably also be a thing where you pay different levels for different levels of security, maybe.

Maybe there's other L1s where, you know, you're paying lower prices. And then you say, I got a lot, I got a lot here. I want to take it over to Ethereum, which is sort of Ethereum L1 is sort of the premium thing. Anyway, so that's stuff that's too expensive. Then there's stuff that starts out of like toys. This is really, this is really Clay Christensen. So he has a great book called Innovator's dilemma where he talks about this, this common pattern where a new technology will come out. and it will just be kind of crappy, like the PC early on. PC, when it first came out, and I guess it was the late 70s, but I like to say, I think the Apple 2 was like 83 or something.

You know, it had no, very few apps, a couple of games. I don't even think they had a word processor then. And the, you know, it was like you had to assemble it and just the whole, you know, just it was kind of a ridiculous product, yet it sold like crazy. It was $5,000 in today's dollars when it came out. Wow. Incredibly, also expensive and a toy, both, the double whammy. But what happened is, you know, first Moore's Law.

Right? Just all the hardware got exponentially better. So they were riding Moore's Law. And they were riding another exponential growth curve, which as application developers came on and they invented the spreadsheet and the word processor and desktop publishing and games and just all the things that happened, right? And all of a sudden, buying an Apple 2 in 1987 was a very, very different value proposition than buying one in 1983.

And so, you know, so that's what things that look like toy. I think, you know, Skype, when Skype first came out, it was this thing that you had to have a microphone. People didn't have mics built into the PCs. back then and it was janky and drop calls, but it was free. And you could call your family in India and talk for free, right? So it's sort of amazing, but you go back and read that kind of stuff around it. The telephone is the most canonical example. So when a telephone, so when the telephone came out, Alexander Graham Bell invented the telephone at the time the telegraph business was in common

business. And the telegraph business, basically they served the railroad. So they were, they would, railroad would come. Railroads were the enterprise, their enterprise customers of that era. they paid a lot of money. And they said, we want to say, hey, this, you know, this, we have this much lumber at this depot. Send that over telegraph over here. And we'll pay you a lot of money to do it because it helps us manage our inventory. Telephone comes along.

It can only go like 500 feet. Sounds like crap. And like, why would you want voice when you want to send lumber prices? So Western Union. Because they were thinking like, what are, but this is a clever thing with Clay Christensen's framework. He's not saying these managers are idiots. He's saying the opposite.

They're very smart. They go. They talk to their. customers. At that time, the customers were the railroads. They asked them what they want, and they said, we don't want voice. The short distance voice, we want to know how much lumber to send, right? And so, but what they underestimated was, first of all, the phone got much, much better very, very quickly, right? And he could go long distances and everything else, the quality got better. And then, you know, app developers, quote unquote, people came along and said, hey, I want to talk

to somebody. I want to, like, the consumer market opened up. It was a business market before that. It suddenly was consumer. And so it came from below. And so Western Union very famously passed on all They could have bought the patents very cheaply at the phone. They did say it had no value and they passed on it. That's probably the most famous kind of example of that pattern. I think we're seeing it now to some extent also in crypto where you know, you have these like Web3, you know, Metamask, everything else. And it's, you know, if you're a Google Facebook product manager and you're used to these

ultra slick mobile experiences, two clicks, you know, it looks janky. What is this? It's developed. Actually, I would argue that that's an amazing. the positively positive signal for us, the fact that it is so janky, and yet there's 10 million people, you know, active users of Metamask. Totally. People are sort of clamoring, you know, willing to go through all the pain to get it. but but I think that's happening to some extent here and then yeah the last of the three kind of mistakes we'll make about technology is what problem does it solve and I think

what problems it solve is a very it's just a very to think that a new technology needs to immediately solve a problem I mean what what what problem did Facebook solve at first creating a giant social group they didn't solve a problem it created a new set of behaviors and opportunities computer computers are the most obvious example like no computer by itself solves any problem. The computer creates a design canvas upon which entrepreneurs and developers can create applications, which then can sometimes solve problems. Although did the spreadsheet solve a problem? Kind of. But at the time, people didn't really have it. It was more that they just enabled them to do kind of more advanced business calculations,

right? Like the businesses were running perfectly fine before that. And they were doing accounting before that, long before that. So the computer unlocked a new design space, but it was a two It's like a multi-step process, right? Not all innovation is sort of a direct short line. The thing that bugs me about what problems it solve, it assumes innovation is just like one direct, simple thing, as opposed to a multi-step kind of community process, which the biggest things follow these kind of much more kind of circuitous roots,

I would argue. So, yeah, that tweets are just meant to show that, look, I've made all these mistakes myself. I'm just, by the way, I mean, I'm not saying this to say that, I think they're all very natural mistakes. And I've made them myself. I think I've learned over time, having gotten, you know, kind of my ass kicked a bunch of times on bad decisions and investing in other things like that, that I take a closer look. Like, hey, when I say it's a toy or, hey, it's too expensive.

Like, what's the price curve? And it's too expensive. Hey, it's a toy. What's the improvement curve? The toy will get better. Too expensive. What's the price curve? Will it go down?

It doesn't solve a problem. Okay. But does it inspire other people to build things on top of it that in turn can solve problems? So ask that next question. That's kind of my takeaway. That's what I've learned. Dig deeper. Ask the next question and don't kind of write things off too soon.

This is one of my favorite mental models of all time because it applies just to every new technology. So you'll use it in crypto, but then you'll use it in every subclass of crypto, right? Whether it's crypto gaming, whether it's anything in crypto, you'll continue to use it. And people say the same thing. Like NFTs, DFI, it's just like a toy. It's toy finance. And they say it's too expensive. They ask you what problems it solves.

and they don't realize that this is just an unlock for developers and others in the ecosystem to build new things. Chris, I think we're almost about time. Do you have a few more minutes? Yeah, I can go a few more minutes. Okay, cool. So let's maybe end by talking about A16. So as I said, it's been about 10 years since we last spoke, at least in the crypto timeline, right? How is 2021 playing out?

Is it playing out the way you expected? Like, what's changed in the world of A16Z? I know you guys raised a big fund. Has the crypto fund eaten any of the other groups within A16? So what's happening there? Yeah, I think that I think my sense is throughout the sort of venture world that people are taking Web3 crypto more seriously. I've seen news articles that some of our competitors, for example, who have previously shunned crypto have now gotten religion. So that's good.

I think that's good. We welcome competition. And also, frankly, like, that's, I always knew, like the path of. victory, of course, would involve, like, more people participating this. And so, and that includes both entrepreneurs and investors. So that's good. And yeah, there's definitely been more interest throughout our firm. I think, particularly on like fintech, consumer and gaming, I think people, you know, I think people start to see, I think, like, I think NFTs, I think that the kind of evolution I think of it is. So we had the kind of early history of Bitcoin Ethereum. And then we had

a lot of infrastructure stuff, a lot of our investments in like 2017, 18, we're infrastructure. And then and then D5, of course, right, we're investors in uniswap and compound and maker and all of that. And that was great too. But, you know, defy, finance is just a narrower set of, there's a smaller set of people that are interested in finance versus NFTs, which is sort of in gaming, which is kind of all of culture. By the way, I think they're all going to reinforce each other. Like, I think of the way that we get defy to the next level is by bringing 100 million people in through gaming and NFTs and those people are going to naturally want to save their money in defy. And so I think they're all like kind of closely connected and reinforcing. But I do think that when you sort of talk to an average person, you know, walking down the street in New York City, something like an NFT or a game is kind of more accessible to them.

And so that's affected the venture world for sure. Yeah, we raise a new fund. We've hired, we've hired a bunch of people with becoming a meme on Twitter. We actually only have, I think we have 30 or so full-time people on the crypto team. So it is larger. The meme's a little overblown maybe. But what's the meme? I'm curious.

I haven't seen this. Oh, it's like everyone's joking. They joined A16C. I'm going to tweet that out right after this recording. We had like a week, I think, where we hired someone like every day. And then I think it turned into a meme. It was funny. So I think we're about 30 something.

And then we have like about 10 or so advisors and others. So there's, I have to count it up exactly. But it's a great team. And, you know, we really try to kind of cover different practice areas. I mentioned before of like NFTs, gaming, DFI. You know, this last week we announced Element Finance, which is, the DeFi protocol. And so we're still trying to, you know, be very active that we're doing, like I mentioned

before, a bunch of infrastructure stuff. I think we've got to continue to kind of invest at all layers. So I think, you know, as I mentioned before, like I think ZK stuff, for example, might be a really interesting kind of future infrastructure area. Your partner came on, Ariana Simpson. We talked about this a little bit early on the show, and she gave a take that I wanted to see if you agree with or not. She said that all crypto funds will just become funds and all non-crypto funds are just

going to turn into crypto funds eventually, kind of in the same way that once upon a time we had internet funds and now all of a sudden we just have like what is now the S&P 500. I think that's right. How do you feel about that take? I think that's right. Well, I think, look, I think the way I think about it is that if we're right, if I think the three of us probably agree on this, if we all, if we're right that future internet products are created in the web three mold and they, and the value accrual happens through

tokens. then the rest of the world is going to want to, they're going to want to follow that. They're going to want to follow where that value on the Internet is created. And if it's, I believe most of the value in the future of the Internet will be created through tokens. And I think a corollary to that would be most financial institutions interested in Internet value creation will want to buy tokens. And so I think it will spread not only from the venture side, but I think that that's how also the broader institutional side, the banks and the hedge funds and all sorts of other.

folks like that. So yeah, I mean, look, I think, I do think there's, look, I think it'll be a much slower to affect enterprise software. And I mean, enterprise software, I think it's like 15% of enterprises use SaaS software today and the rest is still on premise. So it's just a slower moving area. We have a bio fund. I think that's, you know, I think they actually did do one crypto bio thing.

It's kind of a folding at home incentivized mining thing. It's cool. But I think, you know, some of that stuff will be kind of slower. But I think in the kind of mainstream consumer world, I think it's, you know, it's going to all, I think it's going to all blend together. I agree with the area. So apart with A16C, then, like, what's changed do you think from a regulatory landscape perspective? I know A16C has been involved, like you guys put out a policy agenda a couple weeks ago, which, like, I do feel like are lawmakers and those in government, at least in the U.S., they do need some guidance on this because I haven't seen much coherence and, like, a framework coming out of that area. But like, what's changed, do you think, in the past year or so since we talked?

Well, I mean, the big thing is the administration changed. And this administration seems to be less friendly to crypto and blockchain stuff. You know, I think, I think there's, the way I kind of think about this is there's many, many kind of layers to this. There's specific kind of, you know, legal and regulatory kind of tactical level stuff. And we have now at our, at ACCNC crypto, 10 people who work on that. like we're very heavily invest in that area. You know, the first thing we do when we make an investment is we help them find general counsel and kind of help them with legal stuff.

So there's that layer. And then I think there's another layer, which is kind of the broader, the comms, let's call it the comms layer or something, which is explaining this to the world. Because I think a lot of these regulatory kinds of questions are tied up with this other question, which is, you know, I think a lot of people don't believe that there's positive societal benefit in crypto. They see this idea that it's about. making money and tech pros and you know a lot and that's due to a lot of the coverage which

I don't think was fair coverage I don't think it's accurate it's not my experience at all in the space I doubt it's your experience but that's the impression people have and you know it's kind of number go up culture not innovation culture I believe that that I believe it's innovation culture I believe as the things we talked about today that this will provide for example a new and important way for creators to monetize on the internet. And I think, you know, I think when we can show, I think it's very important that we show that, because it's one thing for me to sit here on a podcast and say that. It's another thing, if we can go and point to 20 musicians or a thousand musicians or ideally a million musicians

whose lives have been changed. So I see that as fundamentally the key question here is we, it's incumbent, I think we need to help, we need to explain things better. I tried to do my part with these Twitter threads and then podcasts and things like that. You guys do a big part of it. And so as a community, we need to just explain, I think, these concepts better and why it's good for society to have to have this technology. And then I think we need to prove it. We need to put, we need to prove it by having examples to point to where people are being helped, right? And so that's what I'm very focused on from that. You know, I think, like, ultimately, there were regulatory questions around ride sharing. There were regulatory questions around Airbnb.

be. I think what ultimately convinced people that there should be regulation, of course, but there should be regulation that allows those companies to exist, is they saw the value. They saw the value as a rider. You can click a button, ride an Uber. They saw the value they knew a driver who made a living that way. And so that's the ultimate path to acceptance of technology is to prove to the world it has societal value. And that, we have to do that. We, the community. I think. think. And we need to do it, you know, I think the sooner the better. I think it's something that needs to happen in the next probably year or two. And I think the good news is I think it's happening very rapidly. Well said. I mean, as we've always said on bank lists, this is a battle

for hearts and minds. We have to build it. We have to prove the utility and they'll come after this. Chris, this has been a fantastic discussion. Thanks so much for joining us. I guess maybe. Yeah, no, thank you both. Thank you both for having me and all the work you do. Last question for you, too, is like, leave us with one thing. What do you think people should be ready for in in 2022. Do you think this is, you know, do you think we're headed for another bear market? Do you think we're, you know, going to continue to explode up? Do you have like any, any ideas to leave us with? I would say, so Eddie and I wrote this blog post about this, if folks are interested, but I think there's a very important distinction to make is between

a product winter and financial winter. The prices could go down 90%. They could go, who knows. I have no idea. I don't have tried to predict this, frankly. You've done them before. And like, And I have no idea. And I would act as if that were the case. If, you know, I don't give financial advice. Disclosure, this is not financial advice. But if I did, I would say, like, act as if everything's going to get down 90%. There's a different, I think much more important cycle is the product cycle. Okay. And these are kind of independent. And on the product cycle, I'm very, very bullish because I see the products in the pipeline. And yet it's two things. I see the products in the pipeline. And there's a lot of really good people entering. Like the level has gone way, way up of entrepreneurs. is the kind of quality, number one. And number two, because so much infrastructure is built out, the kind of clock speed now is much, much faster. You know, like people on Twitter, they're like, you know, NFTs are over and they're boring. And then three days later, and great new project launches, right? And you're going to see that like every week now. I remember in 2019,

there was a financial winter in crypto. You guys were there. But the thing that bug me was not that. It was the product winter. I mean, there were just so few product launches. It's true. Right. There's like a product launch every three days now. that I don't think is stopping. Like, I think that would take a lot to stop. And that's the really important one, I think. The other one, look, the other stuff will go up and down and who knows and, you know, global macro economics, inflation.

I have no idea. I'm not, that's not my job. Like, I don't, I don't try to predict that. But the product cycle, I do try to predict. And the product cycle, I'm feeling, I've never felt better. I think the quality of people coming in, I get an email. I said this in a truth today, and it's true. I get an email like a day from a very high quality entrepreneur saying,

I went down the rabbit hole. And I, you know, I used to think you were crazy, Chris. And now I'm like, oh my God, this is like the greatest thing ever. This happens a lot. And I think a lot of those people will stay, you know, regardless of prices. We have talked a lot in the crypto space about the super cycle. Maybe this is the cycle where crypto prices just go up twice without going down. TBD on whether that's even financially possible or not.

Sometimes it's just too hard to make that much money that quickly. But it sounds like what you're saying, Chris, is that you definitely believe in the super cycle in terms of product development. Yeah, I think the price. product cycle is a key thing. I think that if you go back, I wrote a blog post about, actually, this may be a good tweet storm, but I wrote a blog post once where I analyzed it kind of when companies were founded, when iconic companies were founded in correlation to NASDAQ. And it's just uncorrelated. Wow. It's just, yeah. So it's just like, that'd be actually a good tweet storm. I should do that.

But it's just not correlated. And so like there will be, I guarantee you. So what I keeps me up at night is like, look at my job is like, I want to make sure we have the next open seat. The next new swap. We have like, what will it be? And how do we stay close to the, I, What I try to do is I say, I don't look at the prices. I stay close to the entrepreneurs. I'm like, where is the energy moving? You know, where is like the world spirit moving? What's the new area?

And how do we kind of make sure we're in there? And if we do that and I think this is generally true in innovative markets. If you follow that energy and you have a long-term perspective, I think it generally works out. Super cool. Well, folks, we're going to have to leave it here. Chris, it has been an absolute pleasure. We've covered so much five mental models for you. and got an update on A16Z regulatory environment.

You left us with some words of wisdom. Thank you so much for joining us today. Thank you both. Thank you both for having me and for all the great work you do for the community. Absolutely. Wouldn't be anywhere else. Everything else is boring once you see crypto, as we discussed earlier. Action items for you guys.

I know bankless listeners are right along with us in feeling that as well. We'll throw up some links to the five mental models we discuss. Those will be linked in the show notes. Also, of course, if you like this episode, if you like bankless, don't forget to do something about it. Like the podcast. Subscribe. Five-star reviews on Apple iTunes.

Pick one. This is not the scalability Trilemma. You can pick more than two. You can do all three at once if you'd like. Of course, risks and disclaimers, none of this has been financial advice. ETH is risky. Defi is risky. So our NFTs, this entire Web3 thing we're embarking on is risky.

You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. but thanks for joining us on the bankless journey.