Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Kyle Samani & Tushar Jain: Multicoin – Emerging Frameworks for Cryptoasset Investing

Episode Date: February 21, 2018

That decentralized networks represent a massive investment opportunity is no longer a controversial view. In the last year alone, over 200 funds dedicated to investing in cryptoassets have been created. But the principles and frameworks to understand this new world are still in its infancy. One fund at the forefront of advancing this understanding has been Multicoin Capital. Their Founders Kyle Samani and Tushar Jain joined us to discuss some of the concepts they use to invest in decentralized networks. Topics covered in this episode: Google Glass and the origin story of Multicoin Capital Why the most used smart contract platform will produce the winning store of value Why they are bearish on Bitcoin Why money is best thought of as an adjective not a noun Differentiating between work, payment and burn-and-mint tokens Why work tokens capture network value better than payment tokens The future of Multicoin Episode links: Multicoin Capital Website New Models for Utility Tokens Blockchains: A New Social Order The Smart Contract Network Fallacy The Opportunity for Interoperable Chains of Chains Multicoin Capital Podcast This episode is hosted by Brian Fabian Crain and Meher Roy. Show notes and listening options: epicenter.tv/223

This is Epicenter Episode 223 with guests Kyle Samangi and Tushar Jane. Hello and welcome to the epicenter the show which talks about to technologies, projects and startups driving decentralization and a global blockchain revolution. My name is Brian Fabian Crane. And I am Meher Roy. Today we'll converse with Kyle Samani and Tushar Jane who are the co-founders of Multi-Coin Capital, a thesis-driven crypto hedge fund. Multi-coin capital has become well-known in this space for a lot of blogs that they write and these blogs have insightful ideas. Kyle and Tusha, welcome to the show.

Thanks for having us, Maher. We're big fans of Epicenter and really excited to be on here with you. Hey, Mahair and Brian, super excited to be on. Cool. So, as usual, before we start discussing Multicoin, tell us a bit about. your background and how you got to be involved in the cryptocurrency space starting with kyle yeah so i started programming and getting into technology when i was pretty young probably around 10 or 11 years old uh i went to n yu to study finance thinking i wanted to go work on wall street

within my first kind of year of college i realized that was not my passion and that i wanted to be working in technology uh after after college i ended up coming back home to austin which is where i'm originally from and working at a health IT company for a couple years along with tushar he was at the same company after about a year i got frustrated and left and in may of 2013 started my first company called pristine pristine built software for google glass for use by surgeons yes that google glass that one i was at the glass hole running around um built that company up uh grew it to a few million revenue uh raise national capital kind of did the start startup thing. Then Google pulled the plug on Google Glass, at which point I had a lot of problems.

I ultimately ended up pivoting the company, leaving the company, and the company got sold. I found myself unemployed in January of 2016 and didn't know what to do with myself. I discovered this thing called Ethereum in March of 2016. I was particularly drawn to Ethereum because no one could pull the rug out from under me after my experience with Google and glass and experiencing the pain of the platform kind of disappearing under your legs, I was particularly drawn to the whole decentralized thing. So that's kind of how I got into crypto. Tuchar and I have known each other since college.

We met there. We're best friends. And we kind of got into crypto together. I'll let him tell his story. Cool. Thanks, Kyle. Yeah, so my background is more in the finance world. I also studied finance at NYU.

I was an investment banker very briefly. briefly at Credit Suisse covering healthcare. Realized that the investment banking world was not for me. I didn't really enjoy it very much. So I decided to leave that and actually move to Austin about six years ago. And Kyle had convinced me to come to Austin and join the healthcare IT company where he was working. That company was called VersaSuite. It was an electronic medical record provider.

And after working there for about a year, I realized that I was much more interested in the data that was being created out of these electronic medical record systems than I was in the software itself. So I left in 2013 to found a company called Epatient Finder where we used data science techniques to match patients with clinical trials based on their electronic medical record data. That's actually a really interesting data science problem because the data points that are collected in your day-to-day doctor's visits are different. than the data points that are necessary to determine your eligibility for a clinical trial. So that was a lot of fun.

We did pretty well, raised some venture capital, had about 2 million patients interacting with the system, et cetera. And in the meantime, I heard about this thing called Bitcoin back in 2013. And I bought a couple, literally just two. I wish I'd bought more. I think everyone does. And I bought these two Bitcoin thinking of it as a tuition check, really. I wanted to have some skin in the game, so I would go and learn a little bit more about the technology.

And as I learned more about the technology of Bitcoin, it was very interesting, but I really saw it as being inherently limited because it could only do one thing. The idea was a huge idea to have digital peer-to-peer money, but it wasn't from a technological perspective as interesting to me at the time. and only in 2016 when I saw the Ethereum white paper and saw how this blockchain or distributed ledger technology could really enable the world to move towards a more decentralized paradigm where all of these businesses that have a rent-seeking middleman are extracted, that I got much more interested in crypto, started investing really heavily in 2016. And in 2017, Kyle and I got together and realized that this was absolutely going to be a world-changing transition and that we needed to be a part of it. So once you decided you wanted to move into the crypto space, why did you decide to start a fund as opposed to a startup or something else? So maybe use some of your medical tech background that you both have. If you think about like white collar jobs, there's like broadly speaking two major capital. categories of white-collar job operator and allocator.

Tushar and I have both done the operator thing. And we've learned a lot from that experience, but I personally find my interest and passion has always been in just synthesizing tremendous amounts of information and then figuring out kind of like what to do around it. That aligns more to an allocator skill set than an operator skill set. Tushar leans more operator than I do. I like to, basically, if you could just give me books to like read all day

and then write about it, like I would love. that job. And that aligns towards the kind of allocator skill set. And I'm also happened to be relatively extroverted, which is good for just meeting people and talking to people. So when we thought about what are we going to do in crypto, we thought about building versus investing. And we, for me, certainly, I lean towards the allocator side. I think Deshaar leans that way as well, although he has more operator tendencies than I do. Yeah. To add to that, I mean, once I really started to wrap my mind around crypto, I realized it was combining my four absolute favorite things in the world, which are going to be cutting-edge technology, new financial models, a healthy dose of

economic models, and also top that off with a bunch of game theory and understanding how the various incentives play out amongst the network participants. So it was the most intellectually fascinating thing that I've ever done. And so being an allocator, and running a fund allows us to get a lot more breath in terms of being able to go look at every single project out there. You know, full-time job is literally go and do research and understand how everything out there works and be on the cutting edge of how all of the projects operate and how everyone is thinking versus being a creator kind of is limiting to your own scope and going deeper. And at least for me personally, I was much more interested in going wide right now.

and going deep in the future. In what way could you see yourself going deep in the future? I won't rule anything out, but it would be pretty cool to help move the crypto ecosystem forward in more ways than just investing. So on your website, you position yourself as a thesis-driven crypto fund. What is your thesis? That's a great question.

And we don't have a singular thesis per se. Theses are really more like a product market fit or a market that is uniquely enabled by the benefits of crypto. So this distributed ledger technology has three inherent strengths from our analysis. One is that it is permissionless. Another is that it is decentralized and therefore censorship resistant. And the third is that it's trustless. and everything that we invest in needs one or more of those attributes in order to exist. If there is a project out there that does not need one of those three attributes,

then we think they should use a regular database and not go and mess around with distributed ledger technology. And so that's really one of the theses is making sure that whatever we invest in is uniquely enabled by crypto. and we have a handful of examples of specific markets where that is the case. So you guys started the fund in August 2017 about. Now, what we have seen, right, I remember we did an episode with Polly Chain. I don't remember when it was, but quite a while ago. Among the first, I think there was maybe MetaSable and Polly Chain, right, that were started in 2016, I think. And since then, we have seen an explosion of funds, right?

I don't know how many crypto hedge funds there are, but it's probably in the hundreds. How do you guys view this development? What was the market looking like when you guys started and how has it gone since? And how does that kind of affect your strategy? Yeah. So when we kind of made the decision in May of 17 to do this, you know, really still the only two funds of substance were polychain and metastable. And Pinterra, those three.

We did not foresee the number of funds growing this quickly. over the summer we started like talking to lawyers and getting all that stuff together kind of the initial fundraising by the time i remember i think it was like the day before the day after our fund went live Forbes put on an article saying 15 new crypto hedge funds are launching and i was like wow we are late to the party i forget who was in the list i think paulishana was in the list and metastable i forget who else i think now the official tally if you go on like some of the hedge fund databases i think it's something like 200 So it's grown a lot since then. I don't have like a super specific breakdown,

but I can tell you just kind of how would I see and feel from conversations with people in the ecosystem. My sense is a substantial majority of those funds are in New York, and they're run mostly by finance guys or derivatives traders. So these are guys building quantitative models. They're doing market making. They're running ARBs. They're relatively short-term focused.

Definitely not technology-oriented. I think that's a substantial. majority of the funds. Most of the funds on the West Coast are more run by tech people. They think more like venture capitalists than I do like a traditional hedge fund manager. So we've kind of seen that just major bifurcation happen. We have really, I think, carved out our own niche and we're super happy with it. And that's kind of as Tushar describes it, having venture capital economics with public market liquidity. I'll let him describe that. Yeah, for sure. So venture capital economics with public market liquidity is a really interesting

concept because the things that we invest in have the attributes of a venture capital investment in that they are really high risk investments. There are investments in early stage technology projects or companies that have potentially a lot of upside. And obviously, the venture capital portfolio is based on the fact that you can only lose one X your money and you can make 100x your money, and that's why VC is a profitable business at all. So we think that the fact that all of these assets are liquid really changes the game and actually makes it even more profitable because you can go and change your mind at any time. Unlike a typical VC who only gets to choose entry prices and doesn't get to choose when they want to exit or when they want to invest more,

we get to choose all of those things. So we can invest in something. and if we get new information that changes our mind and says, oh, actually, a competitor is going to beat us out. Or, oh, actually, this doesn't make a lot of sense. We don't think it's going to have the returns that we think. Then we can go and sell that asset. Or if we get information that makes us more bullish, we don't have to convince the founder or the CEO to go and take another round of capital.

We can just go buy some more and actually double down on our position. So we think that the public market liquidity really enables both risk mitigation as well as helps us generate more upside as investors when added on to the already quite lucrative venture capital economics. And to add a little bit more color there, if you look at a traditional venture capital portfolio, you have between 20 and 40 companies is pretty standard. The reason that's kind of the normal range is that, you know,

you want to catch a winner. And like if you only have five bets, it's just a low probability that one of those five ends up being a really big winner. The problem with venture capital, of course, is once you make the investment, the investment becomes illiquid and you've got to wait five, ten years to get it out. For us, because the investments are liquid, we believe that allows for more concentration. So rather than having 20 or 25 or 30 different assets in our portfolio, today we actually have under 10.

I think we have seven or eight at the moment. We consider core positions, and those comprise the vast majority of our portfolio. We have a handful of pre-ICO positions as well that comprise, I think, six or seven percent of our portfolio today. but the vast majority of our portfolio is liquid. The reasoning is if we have the conviction to invest in an asset, we're not expecting that there's something that comes out tomorrow that causes the asset to tank.

I mean, it's possible there's like a bug in Ethereum or Monero that like everything goes wrong. But in general, those are like very much edge case events that would cause an asset to crash like that dramatically relative to the rest of the market. And we're obviously very plugged in. We're full-time investors in the space. You know, everything we invest in, we make sure

we're close to the teams we work with. We make sure we're value of creative to them. And so we just have a sense for like the vision, what's going on, competitive dynamics, et cetera. And so if we change our minds about something like even if we're wrong and we're down 20 or 30 or 40 percent, we're not down 100 percent. And we expect that we will be able to get out before an asset actually goes to zero in the event of, you know, ultimately something goes towards failure.

So because of that, the fact that we can recycle capital, it allows us to be more concentrated and actually doubled and tripled and tripled on our winners. Could you also see yourselves going short at some point and in taking short positions? We are formally a long biased stage agnostic hedge fund. So our portfolio is generally long. We, you know, right now exploring derivatives using CBOE, CME, Ledger X as NASDAQ and that stuff comes online in the next few months. We'll be exploring those as well. So absolutely we will use derivatives.

We're not like actively day trading derivatives. that's not our expertise or our forte. We are tech people first, but we can definitely use derivatives to hedge risk in certain ways. And we will do that. One of the unconventional views that you have espoused in public forums concerns the store of value market. So the key narrative in this market is like money is medium of exchange,

store of value and a unit of account. and there's this idea that the Bitcoin system and the Bitcoin token can just succeed as a store of value coin. And for a store of value coin, what is most critical is that a lot of people should accept it as a store of value. And that would create a network effect. You differ in this opinion, right, on how the store of market value will evolve. So tell us your thesis there. Yeah, so if we look at store value, medium of exchange, and unit of account, those are three kind of independent functions. They are related and they can impact each other in terms of how things play out in the real world.

If you look at the history of kind of time, there's different goods and services that have acted as different kind of different combinations of those three variables. I believe the network effect of money, meaning money being like general purpose currency, so it is a medium of exchange and a store value and unit of accounts. The network effect of that device or that asset, I believe is measured at n squared in terms of the number of users who use the system. In particular, the fact that it's a medium of exchange and that people will accept it is what gives it the network effect. The whole point of Facebook and phone calls and fax machines is that it's the people who are on the other side that make it valuable. a store value in it of itself is not creating a network effect. The medium exchange does. So when people talk about the network effect of Bitcoin being so high and so large that

nothing can ever pass it, hey, we have very substantial empirical proof today that that's wrong. Although Ethereum hasn't passed Bitcoin, the fact that Ethereum has even approached Bitcoin suggests that that narrative is fundamentally false. But then secondly, if Bitcoin exists basically as just digital gold and is in a vault somewhere and then like you take it out of the vault every so often, you know, you've got 10 Bitcoin and hey, I want to buy a house. So I withdraw one Bitcoin and buy a house.

And then I want to pay for my groceries and I withdraw, you know, five Satoshi's and pay for my groceries or like withdraw that. And then I have it in like like like coin or ether or whatever, you know, something else. And then pay that narrative to me does not imply a network effect of N squared for Bitcoin. That implies to me a network effect of log N. What matters if you are have Bitcoin and you want to withdraw it into some of the thing and then use that of the thing to pay for stuff is that you need to have liquidity to get your Bitcoin out of Bitcoin. So you need a marketplace where it's being traded. Fortunately, we already

have exchanges, Coinbase, you know, BitTex, Polonex, all these places. Daily volume on Bitcoin is like, I think Bitcoin to Fiat pairs is somewhere on the order of $10 to $15 billion per day. So I mean, there's real liquidity there. And so once you're out of that liquidity, then like, I don't see what the additional opportunity is for Bitcoin. And so the, my sense is the network effect for a pure store a value is closer to log n squared and that the network effect for something that becomes general purpose money where you both store it in your your wealth in it and you you spend it and other people on the other side take it that network effect ends up approaching something closer to n squared so i'm curious here maybe just just jump in here with a question so there's certainly this

idea that a lot of people have that in the future we will have millions billions of tokens and that there will be all these seamless decentralized exchanges or these basically protocols that allow you to exchange any token for any other tokens, you know, hopefully, you know, without friction and very cheap. So I have token A, you know, you only want token B, but, you know, I basically just pay that amount. It gets exchanged and to you. Wouldn't that kind of upset this n-square dynamic or medium-of-exchange if basically anything can become a medium-of-exchange? Let me reframe that for you a little bit and ask you look at it a little bit differently, because that's a very valid point. But let's say right now we could wave a magic wand and solve the scalability issues of Bitcoin, right?

And if we were able to do that, do you think that this world that you're describing where you have many different tokens serving as media of exchange would exist? probably not. Why would you go and turn your Bitcoin into like coin or, you know, Manero or Zcash or whatever to spend when Bitcoin itself could go and handle those transactions? This idea or this vision of the world where you have a separate store of value from a separate unit of or medium of exchange is really just a symptom of a backwards-looking technological view where if you look backwards at the technology and look at, like, oh, we haven't been able to solve scalability on blockchains yet,

then yes, you do need a separate store of value that has more security than the minimum of exchange. That makes sense. But there is nothing about scaling blockchains that is inherently unsolvable. This is a technical problem that I can say with extreme confidence will be solved. I can say with a little bit less confidence, but still strong confidence, it will be solved within the next five to ten years. So we're not talking about generations of time.

We're talking five to ten years where you will have a blockchain that scales to support all of the transactions that are needed. And so in that case, why would anyone have that extra layer of friction of, well, I pay you in coin X and I pay that person in coin Y, but I really store all my assets in coin A or in coin B. And that's just a lower friction version of the world that seems more likely to happen. To add on to that, right? So once you accept that, you know, we will have scalability and you, like, the store value and the

minimum exchange can technically do one thing. I know we're not there today, but if you take it for granted that that will become the case, which I think it will, then the next question from there is a balance sheet risk. So, right, like the problem is no one wants to have their wealth, like, stored in a thing that's like variable relative to all of the other things they commonly purchase. people in crypto complain that U.S. dollars are a terrible store value. And like on a long enough time horizon, and if you're like an Austrian economist, you're like, you know, these guys keep printing money and inflating my dollars. Like, I understand that view. It's technically correct.

But on a practical basis, turns out people like U.S. dollars, they work pretty well, especially if you live in Argentina or Venezuela or something. But even most people in the United States seem to be pretty happy with U.S. dollars. So, you know, although you have to call it 2% annual inflation, that's not that bad. And so people, you know, like having everything denominated in one currency, it means you don't have balance sheet risk of, oh, my God, my eggs tomorrow are worth two times the price they were today, or my gas is worth four X the price. Like there's real, like, when I say the network effect is n squared, it's because ever, like, it's not just that they literally accept the money on the other side and that they could then, like,

it's also that they denominate their wealth in that thing. And when everyone denominates their wealth in that thing, that's what makes the network effect. so powerful. So this is interesting because, Tusha, you basically made the point, if I got this correctly, right? So we're going to have blockchains that scale, you know, without almost, you know, for almost no limit or to extreme amounts, and I certainly agree. And then if you have a medium of exchange there, you know, that will be kind of universally

accepted and the kind of store values, almost a byproduct. And then Kyle, you made the point of the importance of stability for a certain. store of value. So would you say that if somebody creates a blockchain that scales and that somehow also as a stable coin, or maybe is some sort of stable coin, that that would then be, you know, likely the winner? Possibly. So I believe that money is an emergent phenomenon. And what that means is things become money by being used as money. Another way to look at it is don't look at something being money as a noun, look at money as an adjective. So some things are more money than other things, like the US dollar is more money than almost everything else. And, you know,

anything that you're using for barter in some sort of barter economy is less money than something like the US dollar, which hopefully will be replaced by a crypto that is even more money than the US dollar because it's global, et cetera. Right. So when you start to look at at it this way, you'll see that once something starts being used for transactions, because it has good attributes, it has the attributes of good money, then it actually becomes more widely used. And like Kyle mentioned, the network effect of something that serves all three purposes of money is n squared. And so that will actually quickly start to grow in value and attract more people to it. That's just how network effects end up playing out. So I would say that if we saw a

blockchain that scaled and had the principles of sound money. A stable coin might be that. Perhaps depending on, you know, an individual's view on economics, they might not think that a stable coin is actually sound money. They might want it to actually be deflationary, which a lot of people in the crypto world seem to like. But I would expect that a blockchain that has the right amount of security and the right amount of scalability and also has the decentralization to make it trustless really comes out and is also able to be used as money that we will see that actually end up winning. So how is this reflected in your multi-coins trading kind of strategy and thesis and positions today? I mean, it sounds like you guys aren't very bullish on Bitcoin.

So you're kind of like looking out for what are the new protocols, new technologies coming up that will most likely take on that kind of position? Yeah. So today I spend a substantial majority of my time kind of thinking about that issue. To tie this back to your stablecoin's point, there's kind of three, I think, fundamental hypotheses for what becomes the mega winner or mega winners in crypto, like the things that are measured, not even in the single digit trillions, but in the double digit trillions. And those could be the one hypothesis is the store value. So just like Bitcoin, Bitcoin Cash, Manaro Z Cash, those are kind of the four major contenders on that front. The other major hypothesis is the smart contract platforms become the stores of value because they're the most useful, because you need the native token of the platform to power all the transactions. There's going to be all these useful daps on top of them. And so the utility creates value.

and basically it transforms from a mender good to a like just full-blown store value. That's the second hypothesis. And then the third hypothesis is basically a stable coin is of the killer app. It turns out that like the big problem for crypto all along has been price stability. And that if you could just get price stability and decentralization, like once you have a stable coin, then you could, you know, you could easily layer a smart contract platform on top of it that wouldn't be too difficult to do at some point down the line.

So you could see that path potentially happening as well. Right now, if you told me to pick a lot, one of those paths and bet my my fortune on it, I would say pick number two, which is just smart contract platforms in general. And so I spent a lot of my energy today evaluating those, working with those teams, understanding pros, cons, tradeoffs, and then understanding how their ecosystems are developing, what's being built on them, what are the challenges are building on them, right, and understanding how value will accrue in those ecosystems.

But to be clear, we do have bets on the traditional store value bets. We have some Bitcoin, although it's a very small allocation and stable coins. We've talked about them publicly a lot with a space we're super interested in. The other way to look at it is like we're looking at the portfolio probabilistically, right, and trying to see what do we think has the best chance of winning. We do currently hold a view that the token that is most likely to become money or, you know, digital peer-to-peer cash effectively, is going to be the native token of a smart contract platform. that becomes dominant.

We are in the very early stages right now where, like, this is still up in the air. However, I do expect that once we have a dominant smart contract platform, that there will be a lot of social inertia behind that token being money, and social inertia will carry the day. So we'll see how that plays out. And I don't know that stability relative to a fiat currency is going to be a killer app for that platform. I think that's a helpful transition maybe. But stability relative to a fiat currency,

just use the fiat currency. The whole point of using cryptographically bound protocols to define money is to not allow politicians to go and control your money. So if you want to peg your stable coin to the US dollar, then use the US dollar. So you mentioned, like, we can think of this as a tree, right? So there's three branches, so one branch is,

like things that are trying to be money or stores of value, Bitcoin, Bitcoin, Cash. Second is, second pass could be smart contract, native tokens like Ether, Neo. One of these could become the store of value. And the third branch is perhaps people do succeed in building a Black Swan resistant stable coin. Zooming in on the second pass, what do you think of Ether's chances to become a store of value. If you told me to pick one crypto today and come back in 10 years, I would pick Ether. My sense is the probability that Ether is kind of the big winner, is call it 10 to 20%, like somewhere that range. So I think a very substantial minority percentage. But like they are clearly the leader.

It is theirs to lose. There are lots of ways they can lose, but is theirs to lose. So I assign that probability somewhere in the order of 10 to 20%. And then everything else I assigned basically zero or near zero. That is just the unknown, you know, saying today, like, oh, well, affinity is the hot new thing and it's going to change the world. Like, that's, that's lunacy to say that. I personally think Bitcoin has gone the wrong way. Bitcoin cash has a chance. Maybe I would assign maybe some substantial probability to Bitcoin cash. The other smart contract platforms, I mean, really haven't launched in the substantial capacity. So it's, again, assigning, you know, probabilities that are substantially larger than zero is,

is not really justifiable. Yeah, and one of the things that we do well at Multicoin is we disagree with each other sometimes. So, like, I am more bullish on Bitcoin than Kyle is. I am more bullish on the Lightning Network, et cetera. And it's important within a firm to have different points of view. So that way you don't just create your own echo chamber. I do want to add to that that, like, there is a substantial chance in my mind that Bitcoin could win just because it is the shelling point of it was the first blockchain that actually worked and really has lasted all this time and it's very stable.

And if they solve their scaling problems, they have a fair shot at it. So I wouldn't put that probability at zero. Let's just say. So this is a matter of extensive debate within the firm. So I'd like to combine many of your views together into a question. So one of your views is moneyness is an emergent property. Second view is, um, distort. store of value is going to be tied to whatever wins the medium of exchange. Now, if you combine these two things with the Ethereum's transition to proof of stake, my question is going to be whether if you combine these three things, you end up with something that's not so good. That's sort of illogical at some level. So the nature of proof of stake

is if you have a coin like ether that's in proof of stake and there are validators that are bonding this proof of this coin in order to validate. Then it's likely that a majority of the coin supply will end up bonded and stationary. And the greater the fraction of coins that are bonded and stationary, the more secure is the proof of stake system. So the designers of Ethereum would want, say, 60% of future Ether to be locked down. But if coin is locked down, it doesn't behave well,

as a medium of exchange because token velocity then is very low. The rate at which the money flows through the economy becomes very low, whereas for medium of exchange you want the token velocity to be higher. And then if a proof of stake system isn't going to succeed at medium of exchange, since money-ness is an emergent property that emerges out of medium of exchange, a proof of stake coin ought not to win the moneyness or store of value market. How do you reconcile all of these three things? So let me just ask you to dive a little bit deeper into that scenario that you constructed. Why would the fact that 60% of ether are staked in this scenario that you created actually

affect the velocity of the remaining 40% of ether? If you just see the velocity of that remaining 40% go back and increase significantly so that the velocity of the total system stays at, let's say, you know, five or somewhere between five and 10, which is the range of velocity for the U.S. dollar for the past 20 years or so, then it seems like that would solve that problem. I find most of the, like, economic counterarguments against proof of stake to be very theoretical in nature and not, like, as useful to think, practically. If you think about a network here, right, we've got an open trustless network and like anyone can be a validator kind of a thing. Like someone has to be the validator and they need to be compensated for doing that. They're fundamentally two ways to compensate them for doing this. Either you have transaction fees or you just inflate the money supply and pay the people, you know, pay the validators with inflation. Like those are the only two choices.

Iona has their idea for like you do your proof of work thing that like, like, I don't know. I'm super skeptical of. I, you know, really the only two, like, conceptually viable models we have today are inflate or transaction fees. Bitcoin today is, you know, inflating and, like, there's some transaction fee bonus on the side. Ether's doing the same thing. I see no reason why that harmony can't just continue to coexist forever. And even if you get scalability high enough, there's even a world where transaction fees go to zero, like, and you just pay with inflation. The EOS, that is the system by design.

it just takes that to its logical conclusion. And I don't see anything fundamentally wrong with that. To add to that real quick, actually, I saw Brian, you tweeted something about transaction fees recently on Twitter, and I thought that was really interesting. And I added a little bit to it. But I strongly believe that a inflation-based model wins because the fees that are invisible to the user are much more palatable to the user. and because we believe that money is an emergent phenomenon,

I believe that the protocol that enables a predictable amount of inflation. I'm not saying crazy inflation. I'm not saying go and put the central bank in charge of it or anything like that. But a predictable amount of inflation in order to pay the validators for the security of the network actually ends up winning because now people are less hesitant to actually use that asset as money versus right now every time, like, if I wanted to use Bitcoin on BitPay to like buy something, even with like $4 fees, that means I'm never going to go and buy a t-shirt or, you know, pay for lunch with it, etc. So we really need to see zero transaction fees.

I think that is the logical conclusion. Once we see zero transaction fees, you will see that emergent phenomena effect of money kick in. And the only way to pay for that and still have a secure network is to have inflation. Yeah, maybe let me briefly explain, kind of refer to, you know, what you mentioned. And I totally agree, especially with the store of value use case, the inflation makes so much sense, right? Because let's say you have Bitcoin and then people say, oh, it's become a store of value, you don't have to use it, you huddle it, and it just sits there. But that really means that you have people who may have, let's say somebody has a million dollars in Bitcoin, they never use the coin. They sit in their wallet for like a year.

They have paid absolutely nothing towards, I mean in a world where you don't have inflationary or block reward anymore. They've paid absolutely nothing towards securing your network. So you have this really unstable situation where on the one hand, your transactions have to become so expensive to pay for all the people not using it and the people not using a free ride on the rest.

So it seems like a very ugly system. And I agree in general, in the long run, what makes most sense, to me is that you have networks where you basically paid for the whole security through inflation, and transaction fees are really just anti-spam and spam prevention, right? So you're just trying to create people from creating this crazy tax on the network by sending pointless transactions, but otherwise they should be, you know, near zero. Yes, the anti-spam mechanic is actually really valuable, and I am confident that there will be an

anti-span mechanic in any future blockchain that ends up winning this use case. There are a number of other ways to do that as well, where perhaps you know, you have significant capacity enough to absorb standard daily global transactions. But if you start to get beyond a certain threshold, you start to implement certain either fees or prioritization for transactions. So you can also prevent spam attacks by identifying them and deprioritizing them rather than necessarily charging a fee. Like, for example, when you look at your email inbox, you probably have very little spam in there, actually. At least those spam emails that, like, everyone was so familiar with 15 years ago. And the reason for that is not because they charge people to send emails now.

It's because Google, primarily, I would say Google, because that's my email experience. I'm sure the other providers have gotten good at this too, but Google has gotten phenomenally good at identifying what is spam and what is not. And they deprioritize it. They go and put it in that spam inbox. So there's no reason to suspect that if we were able to do that with email, that we will not be able to do that with transactions on a blockchain. Yeah, I mean, this is the whole thing of like AI and you might call it censorship and like maybe it is censorship, but like miners today already have the right to censor blocks. We see some miners mine empty blocks. Like fundamentally, if you have like miners mining things, then miners can censor things.

And if miners come to the conclusion that they can run some AI algorithm into tech spam and then filter those spam transactions. and just not do them, then they will. And like, maybe there are some minors that say, no, I'll take the fees and do it. And that's their prerogative. They can do that. And, like, I expect over a long enough period of time, like, every minor is ultimately sovereign. And so he or she can, like, choose to censor those transactions however they wish. And if it turns out that all the people who are producing blocks at some point come to

consensus about some algorithm that, like, censor spam transactions, then, like, sorry, spammers. Yeah. Although I feel if excluded spammers, I wouldn't call it a permissionless system anymore. So the other piece that I'd like to explore in this idea that Ether could be a store of value in the future is, in your other blogs, you mention this other concept which is called the Smart Contract Network Effects Policy. The idea here is that evolution of blockchain technology is proceeding in a way that the notion of, one particular blockchain or the other blockchain mattering to the user is going away. All the user is going to see is token and that token can move across different chains.

Chains can also anchor their security to other chains, which means there might not be any advantage left on the infrastructure level itself for a particular token. On the other side, a lot of different programming languages for, smart contracts are emerging, a lot of ways of making smart contracts are emerging. So perhaps smart contract platforms are going to be like programming languages. There's going to be many winners and many different use cases in these many winners. There might not be one dominant smart contract platform.

If there might not be one dominant smart contract platform, in that world, Ether does not have any particular advantage. And if Ether does not have any particular advantage, why ought it to have a special position in the store of value market? Yeah. So the general case for when I said earlier, if I only pick one crypto and come back in 10 years, and I pick Ether, my reason is that I think ether is the highest probability of Ethereum of being the most useful chain and that ultimately value will accrue, people will assign value because they want their value in that chain and that token. The kind of thesis of the smart contract network effect fallacy is all of the technical things that make a network effect the case in called traditional technologies, by and large are not relevant,

the fact that everything is open source, the fact that you can have synthetic tokens and move them across chains, the fact that you can anchor chains into one another for security purposes, all of these kinds of things do commoditize the chains themselves. you can still never commoditize the notion of balance sheet risk and like people wanting to accept it and store it as their like their fundamental store value so that is a real network effect and like that's intrinsic to like moneyness and that's not in any way tied to technology specifically when I think about like all the smart contract so I think that's a very theoretical and like abstract view of the space and I think on a long enough time scale the

kind of hypothesis presented in the smart contract network effect fallacy will play out. I think we're like at least five years away from from that happening in any substance. What's very clearly happening today is we have a Cambrian explosion of ideas of how to scale Spark Contract Platforms, the kinds of features we're going to offer developers, all that stuff. Like there's a massive Cambrian explosion. You've got Cosmos and those guys saying, hey, there's going to be 50 bazillion chains and every chain's going to be sovereign and they can talk. You've got EOS saying, guys, this is all too hard to scale.

We over decentralized. Let's re-centralize a little bit. And that, like, solves our engineering problems. You've got Ethereum, you know, and Pocodot and Affinity basically saying, hey, we can shard these things. Look at our new novel consensus models. We can get to fast consensus, shard these things, and communicate across change and have pooled security and kind of have the best of all the worlds.

Like, right now there's a lot of ideas being thrown around. These ideas are, like, some level, they're all competitive, and in other ways, they're adjacent, in some ways they're kind of fluid. You could totally see a world where EOS is massively successful from some class of application and EOS plugs into Cosmos, and that Cosmos is plugged into some Pocod chain, and that Pocodilet chain has like 50 pair of chains in it. Like, that's totally possible where we end up in this really interesting mesh hybrid thing. In fact, that probably, to me, seems probable over the next five years that we get these like really interesting heterogeneous networks but that on a long enough time scale the gravity will

once like all I'd say once all the questions are answered how do you architect these things how do they work like how does all this stuff kind of come together and and once like there's no I say substantial technical risk and like the system as a whole then you'll start to see convergence around well what's the one I just want to keep my money in what's the one that everyone else just wants to keep their money in. And that would be the network effect of the moneyness. Cool. Fantastic.

I think that was a really compelling view of how this ecosystem could evolve. And, yeah, I can totally see that. Now, I want to jump to a blog post, you guys or you wrote, Kyle, that is really interesting. It just came out. And you're differentiating there between different types of tokens. So you're talking about basically kind of a payment token. You're talking about a work token and a burn and mint token.

And the kind of very different dynamics that those tokens have. So can you, first of all, just like briefly define what those are and then how they affect, the different models kind of affect how they values or how they would be valued. Yeah. And so just for some context on this. So, you know, obviously I talked a lot of entrepreneurs in the space. And right, everyone's coming to me saying, oh, look. I have a new token and like basically my token is used to pay for my service. And all of these

tokens have kind of this problem that I call it the velocity problem, which I've written, I think I wrote about it in November or December of 2017. The loss problem basically says if you just have a proprietary payment currency, then like the money supply will turn over so at some point will turn over so fast that value in itself will not accrue to the token. So that's kind of the hypothesis. I call the velocity problem. So a lot of more people agree with me. A couple people agree with me. I have pretty high conviction that that will be a problem that will stifle value capture for basically all payment tokens. So I got really frustrated because I just kept getting pitch interesting things. Like they sounded cool, but I was like, guys, I can't make money.

I'm an investor. I'm a fiduciary to my investors. And like, I need to see how this thing will actually capture value. And for basically everything I looked at for the number of months, I was just like they all have the same problem. And a handful of teams I spoke to had, like, presented interesting ideas to solve the problem. And I kind of thought more about it and eventually kind of came up with some more coherent theses around how entrepreneurs in general can try and solve the velocity problem. And that's what's reflected in the post I published a few days ago. That post is called New Models for Utility Tokens.

So one model is, you know, right now all these utility tokens are, and specifically I'm referring to utility tokens. So I'm not referring to Manero or Zcash or Bitcoin. Those are general purpose stores of value. I'm also not referring to the native tokens of smart contract platforms. I'm referring to things like Civic, ZeroX, Basic Addengen token, Raden, like these kind of, Golem, these kinds of things that are like functional utility tokens. So if you look at these tokens, they're all payment tokens and the velocity just kind of accelerates towards infinity if these things become successful. So one model, maintains that those tokens should stay payment tokens, but introduces this interesting burn and mint equilibrium mechanic so that even as

usage grows exponentially, price, like the system will capture price. Well, the price of the token will increase and then the system will actually capture value. And that model is called the burn and mint equilibrium model. The basic idea in this model is every time I want to pay for a service, let's say I'm paying like a zero X relayer, for example, for like facilitating some trade. Instead of paying them the ZRX fees that I would have otherwise paid them, I actually take those ZRX fees and I burn them. You literally burn the tokens. And then you say you send a notice to the blockchain and say, hey, I burn this money. Here's proof that I burn this money. And I burned this money in the name of that relayer, whoever that relayer might be. So you have that dynamic running completely. So people are just constantly burning money every which way and the system is deflationary.

then completely independently of that, you have the system mince tokens on some predefined schedule. It could just be a flat number. It could be a schedule that has some curve or some growth curve to it or something. But it just prints a fixed number of tokens per day, per month, per hour, per block, whatever, some time frequency. And then the idea is that for each time frequency that goes by, each time period that goes by, you as a service provider in that network, if you've got tokens burned in your name, let's say all of the token, that got burned in the last 24 hours were burned in my name, then I give the right to claim 1% of all the newly minted tokens that are minted at the end of this 24-hour period. And so what this system does, it sounds a little bit convoluted and it is a little bit

inorganic, but what the system does is it solves the velocity problem. Because if, let's say you're minting 10,000 tokens per month and let's say people are burning 15,000 tokens per month as a result of using the system, well, at some point that's going to create, supply will be decreasing, and that will create upwards price pressure. And as the price of the system goes up, then the number of tokens, right, if the underlying cost of the service is denominated in US dollars, then that means now for one token, you can do more of the same service. Like, you get this fundamental equilibrium and will come into play. And so that's the idea of the burn and mint equilibrium model. It's a little bit hard to kind of follow verbally. But if you

check out the post, it walks through it, provide some examples and stuff. The really, important thing about the burn and mid model is that if it basically guarantees that on a long enough time scale, and I don't think it needs to be that long. We're not talking years. I mean, even on the order of months, if the system, if demand organic demand for the service is growing and people are using the thing more, price will go up because you are creating a lot, figuring out a way to capture value in the system itself. So that's number one. The other model I propose is what we call work tokens. Work tokens are a fundamentally different way to think about tokens. Work tokens are not used as payment in the system.

Work tokens, instead think of them as a right to perform work for the network. Kind of like a taxi medallion kind of a thing. And so the kind of first pioneer of work tokens is probably Auger. A more recent example that I'm also privy to is Keep. And the idea in these models is Keep is a little bit easier to understand. So Keep is a platform for multi-party computation. Basically just think of it as people running out their computers and doing some very interesting technical stuff with their computers.

the idea is that you can any one anywhere in the world can rent out a Keep computer that can do some interesting privacy computation stuff. So the idea with Keep is, instead of paying for the service and Keep tokens, if you want to be a Node operator in the Keep Network and run those computations on behalf of whoever, you have to buy the Keep tokens.

You have to stake the Keep tokens. Then as new jobs come in, as new people all of the world, say, hey, I need to run a job at the Keep Network. Then basically, the system looks at the total number of Keep tokens that are staked by Node operators, it looks at the number of Keep tokens that you have, and you get assigned that probability of getting assigned the next new job in the ecosystem, in the system. And so new jobs come in, you get a proportional number of those jobs, and then you run the job, and then you get

paid in some other token. It doesn't really matter what token you're paid in. In the case of Keep, keep is an ERC20 token, and I believe payment will be in Ether. Since the vast majority of, you know, new tokens today are ERC20 tokens. It seems reasonable that most work token models, you know, of the person being the service provider will be paid probably in ether. And then the cool thing about this is, A, it actually makes ether more money, as we were talking about earlier. But coming back to valuation models,

it actually then becomes very easy to value Keep tokens. Keep tokens just become now valued using a pretty traditional net present value model where you can value the Keep token as a function of cash flows being paid to the node operator. And so you can have just very rational buyers buying Keep tokens and earning yield on the Keep tokens and on the hardware they have sitting around.

The work model works very well for basically any commodity type service. So you're selling hard drive space. You're selling like LivePier. You're selling transcoding services. You're selling bandwidth. Like any of those types of things, the work tokens work fantastically for. If you're going to host any sort of distributed application, like high-performance distributed application or something, it would work great for those.

And then like there's people now playing with work tokens as well for even human jobs. So like I know Gems is doing this, for example. I'm sure there are others where the idea is it's like it's kind of like upwork where you just say, hey, you know, I want to do a job, pay five bucks, whatever, I'll do the job, 10 bucks. And to do that, I will stake some of my own money. And then like, that's my opinion on it at risk, right? And so if I don't do the job as advertised, then I will be penalized. And so all of these work token models have that model of like you stake your tokens.

You take on some risk. If you fail to perform the job, as you said you would, then you get penned. So you have accountability and then if you do the job correctly, you get rewarded and you can value that as a function of cash flows. The really design goal for both of these models is if you adopt either of these models, there should be linear or even perhaps super linear relationship between organic usage of the system and price appreciation of the token. And like I think that's a very profound thing. You know, we have all of these entrepreneurs running around asking people for millions of investors are expecting a return.

Given that's the case, you need to design the system, the token, to actually capture value and appreciate in price, rather than simply just having a velocity that trends towards infinity, even if the underlying service is very successful. Cool. No, I think that's a really great mental model to think through that. Now, the payment tokens don't fare very favorably in this model. Do you think there are use cases where, like, that makes sense? So do you think there should be in general a kind of trend towards, you know,

either these work tokens or these burn and mint tokens? I think something that needs to be taken into account for these payment tokens is that if all it does is it's a proprietary payment currency, can it be forked out very easily, right? And in the model that Kyle is describing, especially like the Taxi Medallion model, the tokens cannot be forked out very easily because, you actually need them as a part of the incentive structure of the protocol. You need something to punish bad behavior on part of suppliers to that protocol. With the burn and mint equilibrium, that is more vulnerable to that type of actual forking out.

So, like, there is a chance that you see a lot more of these proprietary payment currencies get forked out because that is a more stable from a game theory perspective. more stable equilibrium where you will never see a proprietary payment currency forked in to something. Right. So I actually think that the idea of proprietary payment currencies is going to go away almost entirely and that there will be other valuable tokens. I'm no, you know, Maximus sitting here saying that there's only one token that will have any value. I think that many tokens will have a lot of value.

But the idea of a proprietary payment currency is just, not sustainable from a game theory perspective on forking. So the proprietary payment currencies, what are good examples of projects that have such a system? So the most obvious examples are probably Raiden and Golem to come to mind, but there are certainly others. I mean, most utility tokens are just payments. They say they are governance tokens. Some of them, that's like, it's not incorrect and like there may be some governance stuff that happens. but assigning substantial value, there is no good formula at all.

And the value in and of itself is actually, like, you can question it very substantially, that it's even should be above zero. So, yeah, it's a very hard problem. It's really hard to ascribe value to governance functions when forking exists, right? Yes, on-chain governance could be valuable. but any conversation about the value of on-chain governance or the value of tokens as playing a role in on-chain governance needs to remember that off-chain governance will never go away. We always have the opportunity to coordinate off-chain and fork the protocol. And so that puts an inherent cap on the governance value of any of these proprietary payment tokens.

So let's move to one last topic that you guys brought up, which is the topic of, you know, competition. between network and what kind of creates the sustainable mode and advantage for a network. Of course, we have the situation now that with all these blockchain networks being public networks and thus the IP and the source code, you know, being open source, right? You can't really have this IP patent advantage that maybe traditionally was often used. So what do you think are the key determinants that makes you say, okay, this network has a sustainable advantage, it will be able to, you know, retain its position? Or what are some factors that make you think, okay, this will kind of suffer under competition? That's a really good question. And it's

another way to look at, you know, the forking the token away is just, well, how do you look at competition in the space and understand how the inherent things about the crypto ecosystem affect competition. I think that one of the key things is that everything is open source. So because everything is open source, you can have what I just talked about in forked tokens away, but also you can have other implications of open source, like there is no proprietary IP. Everything is public. A good example of that is Zcash has a technology called CK Snarks.

It's a very powerful technology that enables you to do zero knowledge proofs for blockchain. But while that is extremely valuable and we have a lot of respect for the Zcash team, who have some of the best cryptographers in the world for continuing to push limits on this technology, what we do know is that Vatolic has publicly committed to bringing ZK Snarks over to Ethereum. So that does defeat the main fundamental value proposition for Zcash both as a token and an independent blockchain. You can't invest in something because it has this proprietary. dietary technology because it's going to get absorbed into everything else. So really one possible way to actually stay competitive that's not based on technology

is choosing a different point within the trade-off sphere or the plane of trade-offs. So if you choose a different trade-off like EOS is choosing a different trade-off from Ethereum on scalability, you will see that EOS is choosing to centralize a bit more. And they're saying that decentralization is only valuable to a point after that. Decentralization for the sake of decentralization is no longer valuable. And this is something that Ethereum could go and copy, but they won't. Ethereum is very much committed to that specific point on the tradeoff space that they have. They do believe that decentralization is more valuable than Dan Larimer and the EOS team believe.

And so that's something that is not going to be taken by a competitor. And that is one really valuable way to differentiate yourself. That's super interesting, right? So in any market, if you can write down a trade-off space, so in this particular market, it might be like decentralization, speed of transactions, and scalability, then there might be different points of operation on this triangle. and different platforms might occupy different points

and have a sustainable network and competitive advantage because they are occupying that particular point. So perhaps in the future, in the decentralized exchange market or in any other market, you might be able to sketch these trade-off points, identify projects that are headed towards a unique trade-off point and invest in exactly those projects because their trade-off point is unique. Yes, exactly. And Kyle mentioned earlier that we are investing pretty heavily in the smart contract platform space because we think that it has the best chance of capturing the value of money

or being the digital money. And the way that we're diversifying our investments in that space is looking at different places on the tradeoff space that different smart contract platforms are occupying, identifying based on. on our knowledge and our analysis, which of those trade-off points are actually interesting or that we think we'll have a chance at capturing all of the value. But then, of course, thinking about the world probabilistically and spreading out the investments across multiple different places on that trade-off space where we think that have a chance to capture significant value. We can't sit here and tell you that we know exactly what the right answer is.

I don't think anyone can, but we can tell you that it is extremely difficult to go and steer Ethereum very quickly because it's a high inertia system. And so Ethereum is not going to now suddenly adopt this piece from EOS or you're not going to see EOS adopt concepts from Cosmos or tendermint about how the security can be actually just. it's a different security model from pool security, right? So I think that this directly educates our investing philosophy as well. We kind of towards the end of our episode, but I'd love to hear from you guys. How do you see multi-cane evolving over the next two years? Or maybe longer time horizon.

So our immediate priority is, well, let's take a step back to kind of look where we came from. We spent a year and changed kind of to the two of our close friends, just kind of like reading about crypto, learning, diving into it, investing in it, did that for a while. Not very organized, made decision in May of 17th to launch a fund. So getting more organized, Fundment Live on August 1st. We launched the fund with like $3 million. Today we're managing about 50. So we've grown really quickly.

We've been very fortunate to bring on some awesome investors around us. We have seven employees now and growing to 12 here in the pretty near future. So it's kind of how we got here. As we look ahead for the company and for the firm, our obviously fundamental priority is maximize returns for our LPs and kind of the context of our strategy. But within building the firm, we're really just trying to build like a world-class organization and grow up.

So we were very scrappy in the early days. Like we didn't have an office for a while. we now we're in a co-working space, we're finally getting an office. We're, you know, upgrading law firms, like from small law firm to large law firm. We're doing, like, just getting from kind of the, like, we got off the ground to like, how do we build a large, you know, multi-hundred million hedge fund and, like, absent some sort of crisis in the market, that should happen in the pretty near future. And so our, like, immediate priority right now is, like, growing the firm up from scrappy guys running around who, no crypto stuff to, like, full-fledged world-class

hedge fund, learning from the guys in equities and credit markets and Derrida's markets in traditional hedge fund world. There's a lot of things they don't get about crypto. That's fine. But there's a lot of things they know about how to run a hedge fund, how to run an asset management firm, how to think about risk and these kinds of things. And so we've taken our forte, which has been great, which has been, you know, really deep understanding of protocols, technologies, working with engineers, these kinds of things,

crypto economic models, all that stuff. And now we're saying, okay, well, if we're going to do this at, you know, Tenek, our current scale, we need to bring in all this other expertise around us. And so we're really growing the firm right now to get from C to like operational hedge fund. That's our priority and make money. Yeah. And if I could use this opportunity to encourage any of your listeners who want to be employed in the crypto space, please check out our careers page.

We are hiring. We're looking for world-class talent. and would love to have fellow epicenter fans working at the firm because obviously we're big fans. Cool, awesome. Well, thanks so much, guys. It was a real great pleasure to have you on. Also, great pleasure to read all your amazing blog posts.

I hope as you grow the firm, you'll still have time for that. And, of course, we'll put a lot of links to those in the show notes. If people want to read up on them, which I highly recommend, then they'll know where to do so. So thanks so much for coming on. Awesome. Thank you, Brian. Thank you, Maher. Appreciate it.

And thanks for having this. Hey guys, this was awesome. Brian Meher. This was great. Looking forward to being in touch. And thanks so much for our listener for once again tuning in. We put out new episodes of Episandar every, well, every some point in the week. And you can super have to the show on iTunes, SoundCloud, your favorite podcast app,

or watch the videos on YouTube.com slash episode of Bitcoin. We're also just trying out to try out to the show on iTunes, SoundCloud, SoundCloud, SoundCloud, trying out to start this new Gitter community for Epicenter listeners. So if you want to check that out, that's on Epicenter TV slash Gitter. And yeah, if you want to support show, you can leave us an iTunes review as well. Thanks so much and we look forward to being back next week.