Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Olaf Carlson-Wee: Polychain Capital – The Rise of Protocol Tokens

Episode Date: March 7, 2017

Writing his college thesis on Bitcoin in 2012 and becoming Coinbase’s first employee in 2013, Olaf Carlson-Wee has been at the forefront of cryptocurrency for many years. Recently, he left Coinbase to start Polychain Capital, a hedge fund focused solely on investing in cryptocurrencies and protocol tokens. Olaf joined us to discuss his journey in the industry and the investment thesis behing Polychain. Topics covered in this episode: How Olaf Carlson-Wee became Coinbase’s first employee The investment thesis behind Polychain Capital Why protocol tokens represent a huge investment opportunity The current state of tokensales Why the blockchain crowdfunding campaigns will start resembling VC deal structure His view on the state of the Bitcoin network and community Episode links: Polychain Capital Beyond Bitcoin: The future of cryptocurrencies - The Signal Bitcoin Will Never Be a Currency—It's Something Way Weirder | WIRED The Golden Age Of Open Protocols – AVC Blockchain Tokens and the dawn of the Decentralized Business Model Fat Protocols | Union Square Ventures a16z and USV invest $10m in new digital asset hedge fund The future is a decentralized internet | TechCrunch This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/173

This is Epicenter. Episode 173 with guest Olaf Carlson Wee. This episode of Epicenter is brought you by Jax. Jax is the user-friendly wallet that works across all your devices and handles both Bitcoin and Ether. Go to JAAWX.I.O and embrace the future of cryptocurrency wallets. Hi, welcome to Epicenter, the show which talks about the technologies, projects, and startups driving decentralization and the global blockchain revolution. My name is Sebastian Kutu. And my name is Brianne, Brianne. We're here today. with Olaf Carlson Wee.

He is the founder of Polar Chain and he was also the first employee at Coinbase. So he's been in the space for quite a long time. And Polichane, for those who haven't seen the news, it has been covered quite a few times recently. It's kind of a new hedge fund or investment fund that's investing in different ICOs and different tokens. So kind of this new beast of venture capital hedge fund type institution. So thanks so much for coming on, Olaf. Thanks for having me. So all of you've been in the blockchain, in the Bitcoin space for a very long time.

Do you mind sharing with us? Like, how do you originally hear about it and how did you get started in this whole field? Yeah, absolutely. So I heard about Bitcoin in mid-2011 and pretty much was immediately sort of enamored with the technology and kind of the prospects of a true programmatic, money source that was controlled basically by nodes on the internet instead of a centralized entity, which I think was obviously a completely new type of technology. So I became pretty convinced pretty quickly that this was the most important technology that I might see in my

lifetime. And so I started reading a lot about it. And that was kind of, yeah, summer of 2011, and I kind of went down the rabbit hole there and, you know, wired most of my meager life savings, being an indebted college student, to Japan, to purchase Bitcoin, buying Bitcoin with cash and all sorts of things like that. So I decided that I liked the concept so much and was so fascinated by it that I actually wanted to complete my undergraduate thesis on Bitcoin. So I was going into my senior year at university that fall of 2011. And I decided to complete my undergraduate thesis on cryptocurrency at that time. What were you majoring in? Sociology. Okay. Interesting. And what was the reception by your thesis supervisors and the

academics there on that topic? So it took a bit of convincing to say the least, I think. At that time, Bitcoin was incredibly nascent. So writing a research thesis, right, on something where there's clearly not a lot of research from the traditional academic world, at least, that definitely was a hard sell. But that said, I do think that my professors were able to wrap their heads around it and say, you know, this is obviously very interesting. So given that, we kind of grabbed some theory from other areas and from computer science and kind of applied that to Bitcoin. So what was the approach then? I mean, back in 2011, this was very much sort of economic, feud as an economical experience

or a computer science experiment. What was your approach from the sociological point of view? Yeah, I was thinking a lot about what are the implications if a, kind of non-state, non-bank-based internet value store, which can communicate between machines, were to grow in size by a million times. Really, what would be the implications there? And I think we've seen some of this played out. I think I was probably mostly wrong in 2011. I think the space has expanded a lot more quickly than I anticipated. But yeah, it was mostly kind of what are the implications for society and for individuals if that happens.

And then so you went on to live on Bitcoin purely for a little while. Can you tell us a bit about that experience? Yeah, absolutely. So when I joined Coinbase, I opted into being paid exclusively in Bitcoin. and I was paid in Bitcoin at Coinbase for three and a half years. So during that time, it really changes your mentality because it actually costs money then to exit Bitcoin and go to dollars. So your kind of default is Bitcoin. So during that time, as much as possible, I was trying to dog food the Coinbase product as well

and basically interact with our own merchant partners and like the Shift debit card. use my mobile Bitcoin Coinbase wallet and things like that. So during that time, I was paying my rent in Bitcoin, and I was purchasing a lot of my very large purchases, like planes, tickets, or, you know, hotel rooms with Bitcoin. Then over time, you know, it was paying my friends in Bitcoin when they would, you know, we got to some pizza or something. I would have them buy my slice, and then I would pay them.

it kind of peer to peer in Bitcoin. So I was trying to do that as much as possible. You know, I wasn't, you know, 100% on Bitcoin as in, you know, there were just pragmatic expenses like gasoline or healthcare or something like that that you just got to pay in dollars. So I was doing that as well. So you mentioned Coinbase. You joined, you were the first employee.

Is that correct? What was it like when you, how do you end up joining? in Coinbase? Great question. So I was looking at the Bitcoin space very closely throughout 2012. And the Bitcoin price had sort of crashed, so to speak. I still felt like the technology was going to change the world. And there were not that many companies at that time.

There was not a lot of venture investment in companies. And a lot of the companies that did exist, I didn't see a great future for. having interacted with a lot of them, by purchasing Bitcoin, I didn't feel like there was a sophisticated player in the space yet. So Coinbase came out, and I was actually the 30th user of Coinbase. So I was very early to their website,

and I liked the product a lot. I basically thought that it was sophisticated, and it was easy. I didn't have to do it. anything complicated. And this is going to sound silly to listeners now, but I was able to purchase Bitcoin online. And that was something that Coinbase sort of uniquely enabled. And at that time, the easiest way to buy Bitcoin was really to go to a physical location with cash and purchase it from another person or deposit cash into someone's bank account. Now, with Coinbase, I was able to

purchase using a bank account just over my internet connection. And that is actually really hard from Coinbase's perspective to accept those payments via the internet. But they were able to do it. I received my Bitcoin, was able to transfer it off site. And basically, yeah, was sold. So I cold emailed jobs at Coinbase.com in about February 2013. And I received a reply from Fred, the co-founder in about 15 minutes and the rest is history I guess I went in and met Brian and Fred at the time they were working out of an apartment in Soma and had had maybe a seed round of funding about a 500,000 dollars or something like that I spoke to them for a very long time and I think there was a good fit I really liked them quite a bit and I thought

they had a very long-term vision you know for building sort of an empire which is what I wanted to be a part of. So joined Coinbase as the first employee and we raised that series A round of $5 million from Union Square Ventures probably two or three months later. And with regards to that vision and sort of the enthusiasm that you had back then, like many of us first coming into Bitcoin, we're pretty enthusiastic. Do you think that they've, over time, stayed true to that vision? Yeah, so not, you know, a ton of people know Brian from Coinbase really well. He is more dedicated to bringing cryptocurrency to everyone in the world than anyone I've ever met.

So I think that Brian being the CEO and founder, you know, and really being the person who is driving, the culture of the company, driving the vision of the company, he is extremely focused and dedicated on bringing this 100% to the mainstream and getting Bitcoin on every mobile phone in the world in everyone's pocket, whether they have a bank account or not, and really making sure that all of the tooling around cryptocurrency exists

so that people can really gain more freedom than they might have otherwise by being able to both potentially control their own finances as well as interact with new types of products that maybe weren't possible before cryptocurrency was created. So Coinbase has been going through a lot of changes too. I mean, the reason that they've become more interested in Ethereum, they launched the exchange. It seems like they are kind of getting interested in the whole token sales, ICO. Realm, what's your view of where the company is at and where it is going? So first, we actually had Vitalik come to the office and sort of tried to recruit him in 2013.

Turned out to be a great thing that he did not join us because I'm very happy that he went on to create Ethereum instead. But we read the white paper when that came out, kind of the day it came out. And I was kind of following the project the whole time. But it was really once that the network launched, that we started taking it more seriously. And during that time, I was in a role at Coinbase where I was doing work that was a bit more experimental.

And I got very, very interested in the Ethereum ecosystem and just what was possible with this Turing Complete scripting language. And I realized that it was really enabling a whole, suite of applications that were much easier to do with Ethereum or just straight impossible to do with Bitcoin. So, you know, really one of my last pushes at Coinbase was to get them to adopt Ethereum. This wasn't just me. I think Fred, the co-founder, was also very interested in this, a handful of other people on

the team. But I do think there were a handful of people at the company that were. really pushing at that. Once Coinbase adopted Ethereum, that's when I really realized that the timing and sort of just general market was ready for something like Polychain. And that was a lot of the inspiration for leaving Coinbase in order to start Polychain. But I think overall, you know, the Ethereum ecosystem is really active right now. And there's a lot of experimentation happening. there's a lot of interesting work happening in smart contracts and kind of experimental applications run through smart contracts.

So if you're in the crypto space and you're not paying attention to Ethereum, you're missing a lot of where the activity is. And so Coinbase, we've always been, you know, whether it's through our product, it's not usually through the products, but more of the team looking at that cutting edge. And I think in, you know, Ethereum and ICOs, and this kind of tokenization and Ethereum as a token platform. We've been thinking about that stuff a lot.

So, yeah, I think it takes a while sometimes for Coinbase is at a very massive scale. So to ship products to 5 million users safely is difficult. So internally, a lot of the discussion is usually months and months ahead of actual product launches. You mentioned, and, you know, we can. can probably come back this later on the show. But you mentioned that a lot of the actions is in the Ethereum space right now. And anyone not watching the Ethereum space is missing out on a lot. I'm curious. I'm, you know, I definitely agree with that. I mean, we were just at Edcon a few weeks ago here in Paris. And, you know, a lot of the enthusiasm around Ethereum sort of, you know,

echoes the enthusiasm that we've seen at a, you know, at the Bitcoin Foundation conference in Amsterdam or any other other conferences around that time. What are your feelings about the Bitcoin space right now where it's at as opposed to where it may have been a few years ago? You know, I think Bitcoin is really different in that because it doesn't really enable smart contracts, there isn't an interesting application layer that is on the protocol. it's really more about companies, you know, private companies building on top of Bitcoin. I think historically, Bitcoin companies have not been successful if you take like a large swath.

There's been $1.4 billion from venture investors invested in Bitcoin companies. And I think I can count on one hand the companies that really have objectively sort of performed well. and maybe I can count them on one finger even if we're talking about Coinbase. So I think, you know, there has been not as much adoption in a lot of the areas people originally thought there might be, like say e-commerce, you know, merchant payments, even remittances, peer-to-peer remittances, for example, I don't think have moved very quickly. So all of that combined with, you know, a sort of toxic meltdown within the community around debates, around the best way to scale the protocol, to me, has created a vacuum for actually something like Ethereum to come in and offer what I view as a lot more innovation where it's not just competing with existing business models. it's not a better remittance or a better bank transfer.

It's actually enabling new behaviors that were not possible before. When I'm playing blackjack against a smart contract, that's new to me. That's interesting. And to me, I see that as kind of the tip of the iceberg, right? And, you know, this blackjack game might be a prototype. It's slow. It's maybe a little buggy. But it is enabling something that just simply was not possible before.

And that's why it's so interesting to me. So I think the Bitcoin space is, despite the price rising, I think it's stagnating a little bit. And I think Bitcoin is increasingly becoming mostly sort of an e-gold or store value. And like, you know, developments like the Bitcoin ETF, if that were to be passed, would sort of solidify that a bit more. So I think Bitcoin is very interesting still as E-Golm. and as a store of value, because I don't mean to belittle that. That is a massive use case. But, you know, I'm increasingly becoming skeptical of short or midterm Bitcoin empowering

a lot of the original use cases that people imagined. Yeah, I totally agree. I mean, it definitely has sort of solidified its position as equal. Now, it's unclear where that will go now with all these debates around block size and what having just the inability for the community, I think, just to come to consensus around like these massive issues. You know, and that on top of sort of Bitcoin's inability to build these other, you know, interesting applications that we're now seeing with Ethereum or, you know, other types of

protocols. So, I mean, I'm still optimistic that, you know, that, you know, the Bitcoin protocol will last and will hold this position as with the leading, you know, cryptocurrency for, for, you know, payments. Now whether those will, whether it will enable micropayments or not is one question, you know, whether it'll be like a micropayment enabling platform or simply doing settlements and as an e-gold. But, but yeah, I do also have reservations like yourself and I think I think Brian probably a similar views. What's been interesting is that I've been recently was tweeting a bunch of times which

credit is like huge discussions and one of the things that was what was interesting when you know when I got into Bitcoin it was like mid 2013 and then people were saying like oh Bitcoin is you know you can do transfer right like for basically nothing to anybody in the world and it arrives instantly, right? And then people are always saying, oh, the credit cards are so expensive and they're ripping people off, et cetera. And now you're having these discussions. And people are like, no, it was never supposed to be cheap. That's what I find so fascinating about this whole debate. I was watching that whole Twitter storm. And to see people totally dismiss the instant micropayment, you know, buying coffee with Bitcoin use case, when those same people probably

though three years ago were touting that as a major functionality and feature is just, it's incredible to me. Well, and I mean, I think there's a couple of things there. One is there's, there's, I think genuinely perhaps unforeseen concerns around the scaling of the technology. So I think a lot of the people saying this is going to be better than Western Union, this is going to be micropayments, I think we, you know, some people weren't really thinking about how scaling would be addressed because, you know, even to reach a global scale, you need to move to these layer two networks like Lightning, like the Lightning Network. So I think Lightning Network will work eventually. the thing is that there's a huge amount of cognitive dissonance, right?

When you signed up for this project, you invested money in this project, et cetera, that says, oh, we're building a global electronic cash network, and suddenly it costs a dollar to send a payment on that network, and it didn't used to. I think there's a lot of cognitive dissonance where you want to kind of justify it or say that it's all going to as planned, when I think the reality is no one is happy, right, that it costs a dollar instead of a penny

to, you know, initiate a Bitcoin transaction. But, you know, I think it's just something we need to deal with and to kind of accept the reality of instead of trying to redefine the goalposts, right, and change in our heads what the goal actually was. So, yeah, I definitely think that. Yeah, and another thing that some guy was arguing was that, oh, usability, right? Because he was like, oh, it was never supposed to be more user-friendly than fiat currencies. Like, there's no chance that cryptocurrency can ever be more use-friendly in fiat currency.

What? And I also remember, right, like 2013, people would always show, like, look, if you want to book a flight with a credit card, you have to give all this information, address, et cetera. Yeah. How easy is it with Bitcoin, the scanner QR, Now people are saying, no, no, it's not supposed to be user-friendly. Moving the goalposts, yeah. So, yeah, you said you recently left Coinbase to start Polchain.

What is Paul Chain? And what's its structure like? Yeah, so Polychain manages a hedge fund that invests exclusively in protocols. So we don't hold shares of any companies. we only invest in, you know, cryptocurrencies, blockchain-based assets, and other kind of protocol tokens. And when you say a hedge fund, for people who aren't familiar with that, how does the hedge fund work? Yeah, so basically a hedge fund has a number of partners that all pool money, and then a manager

basically invest that money on behalf of all of the partners. And so that manager generally has very unique strategy that's sort of uncorrelated with the market or, you know, is a better, it's better at generating alpha or value than something like passively investing in the S&P or passively, in this case, maybe passively buying Bitcoin. And I mean, we're going to get a little bit more into the needy, ingredient of the investment strategy. But I guess to contextualize this a little bit, right, one of the challenges, and we've had conversations, I think, also with investors about this a long time ago, is that VCs, for example, aren't allowed really, or at least for the most part, to invest in these assets, right? So it's kind of this space also where institutional investors, existing institutional investors, can't really compete. I think institutional investors, you know, then there's a lot of different groups of institutional investors. So there's venture investors, there's family offices, there's institutions and endowments. And these are all really different groups of people that actually have very different

needs and different legal obligations and things like that. So I think we focus a lot in the crypto world on venture capital, but venture capital is actually a pretty small portion of just kind of the overall investable money that people are trying to deploy. I think if you have very high conviction as a manager of one of these firms, in general it is possible to go to your partners or your LPs, the limited partners, and convince them that this is such a big opportunity that we're actually going to participate here. And I think it's perhaps somewhat unusual

for venture investors to become partners in a fund. But that's what has happened with PollyChain because there's high conviction here. And Pollychain, as you said, can be sort of an avenue for these investors to gain exposure to the, asset class without having to purchase them directly. So when you say that Polychain will invest in protocols, give us some examples of types of

protocols that you may invest in and types of technologies that you wouldn't invest in. Yeah, absolutely. So I can only talk about investments we've made that are public. But, you know, in the portfolio, we, of course, hold the much larger cap thing. like Bitcoin and Ethereum, we also are invested in a lot of smaller, more emerging protocols. So, for example, MKR or Maker is a ERC20 token on top of Ethereum that we made sort of a public investment in. We're also invested in things that aren't built on Ethereum. So for example, Tazos, which is also a Turing complete blockchain like Ethereum, but it has some really

interesting qualities that differentiate it, and I think provide some usefulness outside of what Ethereum does. So it's really all over the place. Anything that is based on the blockchain, we can invest in anything that's kind of an open source protocol. You'll invest in like low-level protocols like Ethereum, but also, out-level protocols. applications built on top of those protocols. Yeah. Well, and we, yeah, anything that sort of is, is, because I, you know, even those higher

level protocols, I guess I use the word protocol a little loosely here. But yeah, we'll invest in application specific tokens as well as low level protocols. Okay. So you mentioned before that you were, just to revisit very briefly what we were talking before, that you were raising, some money was coming from VCs that essentially use PULChain as a sort of avenue to invest in tokens. So how much, you know, what's the size of your fund now and where would you like to take that? And do you think much of it is going to come from VCs who are interested in this space? Or are you more, what kind of investors are you looking for? Yeah.

So we currently have 15 million under management, a 15 million U.S. dollars. I think this fund will be capped at some level. It's hard to say exactly because as the space expands, it actually becomes possible to manage more and more money. But in this case, you know, a lot of funds, hedge funds, will grow to billions of dollars. With the current size of the space, this fund's strategy would not scale to that. So this fund will be capped at some level. I think most of the investors that are going to invest in the polychain fund are not VCs.

And like I said, most startups are familiar exclusively with venture investors, but I'm actually, I work a lot more closely with fund allocators. So these are in general family offices. So a family office is basically a very, a micro-investment firm set up by a high-net-worth individual to manage their assets. And family offices don't have the kind of resources in general that a venture investor does. So family offices don't take seats on boards.

They generally don't want voting rights. They want to be passive investors. So family offices are some of the most common partners in hedge funds. They're some of the most common fund allocators, especially for emerging funds. You know, once we have, say, a two-year track record, At that point, we can start talking to more large-scale allocators. And these are things like endowments or foundations managing money.

But generally speaking, venture investors are actually not who we're talking to because venture investors aren't usually who can allocate to funds. Yeah, I mean, of course, there's also a little bit of a bizarre situation with a venture investor because they're getting money from somebody else and then they take their like fee for making the right allocations, but then they give it to you and you invested and you take another fee, right? So it's hard to justify that even. Yep, exactly.

Let's take a short break to talk about Jax. Jax is your wallet, your complete user interface to cover all your blockchain needs. I've been using it and I've been loving it. Now, Jack supports a lot of different cryptocurrencies. You suppose Bitcoin, Ether, Lytecone, Ethereum Classic, Zcash, Augurrp, and they're adding many more, keep responding to users' needs. Now, with Jacks, a nice thing is that you can manage all of those coins within a single wallet, and you are in control of your own private keys,

they're not on their server, and there's a single 12-word seed that you can use to back up your wallet, all your coins, and sync them across different devices. Talking about devices, they're on pretty much any device that you can think of. You can get it on PC, Mac, Linux, you can get it on smartphones like apps, Android and Apple and iPhone, you can get it on tablets or even browser extensions for Chrome and Firefox. And on top of that, in Jax, you can actually exchange to different cryptocurrencies for each other because they've integrated a shape shift.

And more partnerships and integrations are coming down the line in 2017 that are going to make Jax even better. So Jax is really making blockchain and cryptocurrency accessible for the masses, easy to use for the masses. Make sure to get your own Jacks wallet at Jax.I.O. Or you can get it from any of the app stores you are using. We'd like to thank Jax for their supportive epicenter. How would you summarize the investment thesis of Polichane? So really broadly speaking, and I think many listeners might kind of agree with this assessment. So the market capitalization of all blockchain-based assets has grown precipitously.

So when I wrote my undergraduate thesis and published that, I think, you know, early 2012, the market capitalization was $50 million of basically all blockchain-based assets. And now it's closer to $25 billion, or, you know, a 500x increase in value. And that's been fantastic growth over the last five years. but I think that we will continue to see immense growth in this space. So someday I believe that there will be trillions of dollars stored in blockchain-based assets. And some of this will be sort of native or endogenous to the blockchain. Some of this will be real-world or more traditional types of assets encoded into the blockchain.

So we're talking about an area that is extremely nascent and I believe will grow substantially over the next, say, five or ten years. That's pretty easy to see. I think a lot of people see that. More specifically, though, how do you invest once you see that? So we're very much interested in what I would call sort of the decentralized or the Web 3 internet stack. So when you think about Twitter the protocol competing with Twitter the company, you know,

that's really exciting to me. And kind of a peer-to-peer sensorless version of Twitter is really exciting to me. That's totally global and not run by a specific company, but rather is just completely a protocol. Now, the issue there, though, is that Twitter, the company and the platform is built on a massive stack of web technologies that are often sort of invisible to the end user. So this is like HTTP and kind of being in the browser. This is SSL so that your traffic's encrypted. This is just kind of your server stack.

So you're interacting with like a Twitter data center. You also have a stable login and identity and reputation on Twitter. All of these are components of this internet stack. that was built long before Twitter, and that Twitter sort of had to combine in modular pieces in order to get the Twitter platform into place. So I think it's a little early right now for something like Twitter the Protocol.

The reason being that we need things like IPFS and Filecoin, things like Gollum, you know, which is a computational marketplace, things like Uport and kind of identity and reputation systems. We need projects like MetaMask that enable you to interact with smart contracts in the browser. You really need these kind of low-level infrastructure and kind of middleware layer to rebuild that whole web, you know, the decentralized stack or the Web3 stack, which kind of mimics a lot of the centralized web stack. And you need to be able to combine all of that stack in kind of modular parts,

in order to get the more emergent behavior like Twitter the protocol. So to us, you know, projects that are enabling that distributed or decentralized web stack are very, very interesting. Yeah, I totally agree with that. I mean, one of the things that I often say to people when comparing, you know, traditional web stacks to these decentralized technology stack is, you know, you can look at just about any type of application that we built a web stacks, say in e-commerce website, and, you know, you have an array of stacks, right? So you can build e-commerce websites on like Magento,

PhB, MySQL, Apache, Linux. You know, you can do it like maybe on like an ASP stack. And, you know, there's stacks that are there and are validated and tested and they're, you know, they work and people use them massively. But in the blockchain space, you know, there are applications, there are use cases. There are types of things that people are doing. But these stacks are not well-defined, interoperable, like the different layers are not always super interoperable together, and a lot of the technologies are still kind of in a very nascent state. So I'm really interested in seeing those stacks starting to form and, you know, these technologies coming together around specific use cases and people pointing to those as, you know,

as sort of, you know, references and how you build a certain type of app on a blockchain. Do you see some of that starting to emerge? You know, are there applications where you can see, you know, sort of stacks emerging? Yeah, and I, you know, I almost wouldn't call them applications because I think applications sort of assumes a, what I would call like an average or normal end user. I think we're looking at right now more like middleware. So for example, something like Gollum, which is a peer-to-peer marketplace for computation, powered by an ERC-20 token on Ethereum called GNT or Gollum network token,

I think that Gollum, to me, won't really be used by sort of normal people. I view Gollum as being a developer tool so that a developer can build an emergent kind of end-user application. And I think, you know, Filecoin, which powers IPFS or the interplanetary file system, which is a distributed server architecture, I think similarly, you know, I see IPFS really being a tool for developers to build more complicated emergent applications. So I think we're seeing that kind of middleware layer. You know, and you're seeing that on the, not just on the kind of Web3 side, but also on the financial side. So I think Maker Dow or MKR, you know, the ultimate goal of that project is to build a stable cryptocurrency that's fully decentralized. And that to me is sort of the equivalent of the kind of financial middleware. So a stable coin in itself isn't necessarily the end application.

It's really that the stable coin stays stable while you're in escrow waiting for an e-commerce purchase to complete. Or while you're giving out a loan, right, that the actual asset you loan isn't changing in value for the duration of that loan. So to me, I view a stable coin also sort of as that kind of lower level or middleware layer that enables more advanced end-user applications like peer-to-peer loans, peer credit, things like that. Yeah, okay, that makes sense. So then the stack could be composed of, you know, different front-end applications, front-end tools, some storage, you know, a coin, you know,

smart contracting language. And then with that you can build, you know, perhaps some sort of application like, I don't know, a fidelity point system or like an e-commerce payment system or something like that. You wrote somewhere, I read that you wrote that we're moving towards a system where smart contracts are like Lego pieces. And in this, you know, if you sort of take this idea of, you know, stacks, you know, what type of pieces then could we see emerging within, you know, those different application types?

Yeah. So, and the context there was we were talking about the Dow and kind of, you know, what went wrong there. And I think part of it was, and like the first person that really talked to me about this, El-Ewen. eloquently was Nikolai, who's the lead developer behind Maker. I think, you know, thinking about the architecture of smart contracts is really important. And so when you're building a traditional web application, you generally want to architect these days, the kind of most premier way to do this is a service-oriented architecture or SOA. And this is where, you know, your architecture of your application isn't,

on one monolithic code base, but is rather on different modular parts that each serve a very precise function, but that can all interact. This means that if one modular piece fails, like maybe only your site's API goes down, but the web interface stays up for all your users. So this is the benefit of a service-oriented architecture is that you don't get catastrophic system-wide failure. You know, an individual piece can be upgraded or fail or things like that without bringing down the whole system. So when we're thinking about how to build really complex smart contract-based applications, like, for example, a user-controlled and owned venture firm, which is what the Dow was trying to do. I don't think on principle that that is an untenable idea.

I think it's technically possible. It's just a question of how to architect that so that it's kind of the safest. And I think the Lego piece's metaphor resonates with me because each smart contract can perform a very specific function, can be extremely battle tested, you know, both in the field as well as by security researchers. It can be very carefully audited and just used widely such that we can feel confident that that very specific, small, modular smart contract works. And from there, smart contracts can be combined to build more complicated emergent behavior,

sort of like Lego pieces. Each individual piece is very simple, but when you combine them, of course, you get sort of very quickly and exponentially rising number of possible combinations. So I think that's probably where smart contracts, will go in the future, is it kind of more modular set of very well-battle-tested contracts.

But we'll see. I think these things are so emergent. It's hard to know sometimes. There's been a lot of this kind of fundamental technology built in the past, right? That powers the Internet, HTTP, SMTP, et cetera. And it seems like the pattern in the past was that those protocols weren't monetized, but that then on top of it, you know, people will build Gmail and Google and Twitter and all of those. things, and those would turn out to be big businesses. So here, right, when we're looking at what

you were talking about now, those would be projects that are kind of more building, replacing these fundamental protocol layers. And then, you know, you pointed out that, okay, once those pieces are in place, it would be possible to build, you know, decentralized Gmail, decentralized Twitter, etc. do you think that in the end we will though see a kind of a shift of where the money is made and the value is created towards the protocol? Or do you also feel like that the biggest returns in the end will be on the level of these applications that we'll be built on top? But it's just, you know, it's too early right now. So I have a pretty strong opinion on this. I really do think that in this space, the value will be created at the protocol.

level and not at the application layer. I don't think this is an entirely new idea. If you look historically, the best bet in the entire Bitcoin space was Bitcoin, the protocol, not any of the specific companies built on top. Even Coinbase, which save for the seed round investors in Coinbase, that has been an absolutely fabulous return. But when they did that seed round, Bitcoin was about $5. And if they would have purchased Bitcoin, I think they would see pretty similar fabulous return. So to me, this isn't a totally new idea. And the best investment in the Ethereum ecosystem obviously is ether, or has been ether historically, more so than it was any investment in any private company built on Ethereum. So I think this is starting to be empirically true.

I think looking forward, when you can bet on the protocol, because all applications built on top of the protocol, require you to actually utilize that protocol, I think this means that really disproportionate value goes to that protocol layer more so than the applications built on top of it. And Union Square Ventures, who's one of PaulyChains investors, they have a strong thesis around this as well.

and Joel Monegro, who works at USV and is a great thinker in this space, wrote a post about this called FAP Protocols, and this is about how value in this space is created more so at the protocol layer than the application layer. And what I would suggest is if you look back in time at sort of the emergence of just the normal web, the normal Internet, we might think of the best investments as Google, Facebook, book, Amazon, things like that, I would challenge that if it were possible to own, say, 1% of the TCPIP protocol, that that actually would have been the best investment you could have made because the TCP protocol or the SMTP protocol or whatever it is grows in use

for each application built on top. So, you know, that protocol, it basically becomes more and more valuable with each individual application that's built on top of it. So to me, being able to buy ether and invest in the protocol of Ethereum, and basically being, you know, what is essentially an equity owner in Ethereum is extremely powerful. If any of these networks or protocols becomes ubiquitous on the Internet, like I believe, say Ethereum could be, the upside of that investment is asking. astronomical. So even if that probability is viewed as very low, I think things like Ethereum are a fabulous bet, even if you're extremely skeptical, because the upside is so great. Cool. Excellent. I think

that was well put. Now, let's move to one of the topics that's probably on many people's mind, which is the topic of crowd sales and what's often called ICOs. So those have been really taking off. I think I saw some stats that in the last, was it six months or something, there was as much money invested in the whole blockchain space through ICOs as was through traditional VC. And that, you know, probably, or maybe this was for last year and that this year, you know, it's a good chance is even going to overtake that. What's your view of the current state of this ICO and crowd sale wave? So on a very high level, I think it's incredibly interesting that we are seeing what I would

call a handful of unprecedented effects. And I'll say what I think those are. So one is that, broadly speaking, we are seeing open source founders. So founders of peer-to-peer open-source protocols are able to raise. money just to develop their protocol. I think this is absolutely amazing because open source has always been built usually for ideological reasons and it never really has been monetized in this way where you have a great idea, you have an excellent white paper, you assemble an excellent team and now you can actually be monetized to actually build that protocol, build that

period of peer network. That's never really happened before. Additionally, the fact that these teams can take an equity stake in their networks and actually hold some of the tokens for themselves and gain the upside that looks sort of like a startup founder. When you start a company, you're usually the largest equity owner in that company. And if you can make that company a hundred times larger, you know, the value of that equity goes up by a hundred times. And I think that we're seeing that effect, that kind of economic incentive mechanism from startups be mimicked by open source founders. And I think that's also a sort of unprecedented effect. One, that these projects can get money, and two, that the creators are really incentivized financially

to build a successful project. On the flip side of that, and these kind of crowd sales, is that the users of the network are the equity owners of the network. So, you know, when you're on Twitter or you're on Facebook or you're on Uber or Airbnb, Etsy, Tumblr, whatever, you're contributing to that platform, but you do not own that platform. Somebody else owns it and ultimately is extracting value from all of the interactions between the people on that platform. In the case of these peer-to-peer models, the users are the equity owners, and when you contribute value, in a sense, you also gain a piece of that value based on your equity ownership.

So this idea of founders of open source and peer-to-peer protocols being able to monetize their networks to have an equity stake in their network, and also for that network to be owned by the users, all of these, in my mind, are pretty much unprecedented effects. And the fact that Ethereum has been become really a platform for the launch of digital assets through the ERC20 standard so that developers can focus just on their specific application

that this token is powering instead of having to rebuild mining algorithms, consensus mechanisms, and the whole kind of blockchain stack and getting to scale so that your blockchain is secure, the fact that all of that is abstracted away by Ethereum and that developers can just focus on the actual digital asset and the mechanics of that digital asset is amazing. So to me, you know, on a really high level, I think we're seeing a lot of trends here with crowd sales that are very big and very important to look at

carefully. Now, all of that said, I think these specific mechanisms we're seeing often play out in the space right now are pretty basic, as in there's a reason venture capital works the way it does and has kind of emerged the way it does. So, for example, when you raise money for a company, you don't take one big lump sum and then, you know, use that money forever. You raise a seed round, a series A round, series B round, and you kind of take capital. at different amounts of capital at different stages of your company that makes sense.

And you get diluted in different amounts based on those kinds of round of funding and everything. So right now I think with ICOs, we're not quite there. We're mostly in like a, you know, hey, I'm launching, I'm raising money and it's a done deal. And so I think we're actually going to see

the ecosystem move more towards the structures that traditional venture financing created because I think they were created for a pretty good reason. But yeah, I am, as you can probably tell, I'm obviously very excited about the prospects of monetizing peer-to-peer networks and really rewarding the creators of those peer-to-peer networks. Yeah, no, I think you're pointing out very well, and I think you're totally right to that raising in different stages and not selling all the tokens kind of in one go is going to be quite important for projects. And I wouldn't be surprised if we're going to see some challenges for projects

down the line that, you know, that waste all that money at once. I mean, I think even Ethereum, they got kind of lucky with the Ether price just taking off at the right time, but otherwise the Ethereum Foundation would have run out of money at this point. So given that, what is your thing? Because, you know, looking at this from, you could look at these projects and you see the amount of money they're raising and they kind of stage they're at. And often, you know, if they went to a VC, they probably wouldn't be far enough and they probably wouldn't be able to raise significant amounts of money. Often they might say, okay, we're going to maybe invest in a seat round kind of company. but now they're raising maybe 10 million or something.

Do you think that there is a problem of just too much money going into these projects and them being overvalued? So I have a couple thoughts there. So one is that I think it's great that these projects are being opened up to people outside of venture capital. And I think that it's fantastic that startup style returns have been given to regular people. people. Like purchasers of Bitcoin from the early days, purchases of ether in, say, the crowd sale of Ethereum, have seen fantastic returns, and they were not venture investors.

So right now, just in a macro environment, we're in a place where, you know, venture is limited to a kind of elite group of people that all have to be accredited investors or qualified clients and basically have stringent net worth requirements. Most of these requirements were put in place after the Great Depression in like the 30s. So to me, that limits all the best investment opportunities, or rather the highest potential upside investment opportunities, to a very exclusive and elite group of people. Instead, with these token sales, it kind of democratizes that access and gives anyone access to these very early stage projects. So maybe what we're seeing is that there's more market demand for these early stage projects than people thought.

And when you open that up to anyone that actually, it's sort of like a Kickstarter-style fundraise where you can raise a little bit from a lot of different people instead of, you know, a couple huge checks from one or two venture investors. So maybe there's just more money on the sidelines for early-stage projects than people realized. The second thing, though, is I do think specifically for some of the projects in the space, there is, in my view, a bit of irrational exuberance, I would call it, around some of these token launches. Now, that said, I think individuals can disagree with the market, but I do trust that the market is efficient in some way. So the amount of money being put in here,

you know, who knows, basically. Maybe some of these projects end up being 1,000x returns. And in that case, the maybe seemingly high valuation at this early stage for a lot of these projects maybe was justified because there was sort of a unicorn, so to speak, among them. Yeah, so around this idea of irrational exuberance around some of these projects, And I do agree that some projects, we see all this money flowing in and there's nothing really behind it or perhaps, you know, technically it's not on solid. The projects aren't being built on solid ground or that kind of thing. Do you think that, you know, at some point we may see some sort of a crowd sale bubble that could affect negatively the price of the underlying assets like Bitcoin and Ether?

If there is a crowd sale bubble, I think, or maybe already past the peak. you know, with the Dow and a lot of projects late last year. So, you know, I think it's possible. At the same time, though, I think this kind of crowdfunding mechanism is here to stay. And even if there are kind of waxes and wanes or swings in the activity, I think NetNet, that irrational exuberance is maybe it's often the signal of a larger trend. So you could argue say that in Bitcoin in 2013,

when the price went to 1,000, that that was really irrational exuberance. But now I think we see in hindsight that a lot of those people maybe were right, it's just the timing was maybe off a little bit. And people were seeing something really big that just wasn't quite production ready that year, but was maybe production ready

two or three years out. So yeah, I think we could see swings, but I think that this idea of token launching and raising money through tokens is here to stay. You mentioned the DAO. From an investor perspective, what effect do you think that may have on their desire to invest in, you know, in these tokens and future crowd sales? So the Dow was extraordinarily intellectually interested. in that I do think that future DAOs will work and will be a very important part of this ecosystem. So I think the unfortunate part of that effect is that it made people skeptical of the concept of IDOW when I actually think that that's a very important concept. and a Dow just quickly being a decentralized autonomous organization.

So I think this idea of conferring voting rights and fund allocation based on the community for a very specific purpose actually has its use cases potentially and is a very big idea. I think it's the classic example of something that's uniquely enabled by this technology and really wasn't possible before. Now, that said, I think there was obviously way too much money dumped into the Dow for where it was as a project. And I think that that should have been like a tiny experiment that got a little bit out of hand. So to me, yeah, it may be correctly tempered investors' interests and showed them you can't just dump money into anything. to actually, you know, still have a very critical lens when you're examining these projects.

But at the same time, you know, I get partially why that happened. It's just because the Dow was so intellectually interesting that it was hard not to participate for some people because they felt like, oh, I, you know, I want to be part of the future, essentially, even though from an investor perspective, as in was the Dow going to make spectacular venture returns? probably not. And I think a lot of people probably need that. Yeah, I mean, I see where you're coming from. On the other hand, I think to an investor to properly evaluate and assess whether or not a project is technically viable, which, you know, for all intents and purposes, the Dow crash or hack was a technical issue. I think to most people who invested in it or even observers of

the space, there was really no way of knowing that that would happen. Do you think, you think, think that perhaps this has instilled some sort of skeptics perhaps instilled some skepticism for investors to you know maybe invest in some really interesting projects but because they don't have the ability or the experience to examine them technically may handle the space with regards to you know raising sort of you know venture money and like money from not from within the space but yeah like investor money. Yeah. I think if it created any skepticism, it's healthy skepticism.

I think it's really important to that people understand what they're investing in, which I think in the case of the Dow, a lot of people really didn't. And maybe didn't understand the risk, right? Any investment and anything in this ecosystem is extraordinarily risky, and, you know, including Ethereum, including Bitcoin. So I think that a lot of people maybe forget that. Do you think that investors really get how risky it is? I mean, because there's obviously sort of the speculative risk and that sort of stuff.

But do people, when you really start looking into these technologies, even as observers of the space, like, you know, we can, we can say that these are not battleground-tested technologies. Like, you know, we're not really sure what's going to happen when the theory moves to of stake. Like these, there's enormous risk around all these projects

that we sort of take for granted. But do you think people really comprehend the amount of risk? I think so. I mean, I don't know. I think some people do.

Others maybe not. I, you know, I think that the upside is so large and that's one thing that everyone gets. That on some level the risk assessment

is, like it still makes sense to invest in some of these things even if you think there's a 1% chance of success because the upside is more than 100x in which case if as an investment, you know, that's a good investment.

So I think, you know, and you could even say that about ether itself that, you know, I consider Ethereum very risky. Obviously I'm very excited about Ethereum. I think Ethereum, the upside on the market cap is massive, and I think the probability of failure is pretty high too. So, you know, knowing there's a lot of risk doesn't mean you shouldn't invest. But yeah, I think it's across the board people's different assessment there.

So before we wrap up here, I wanted to ask you about, yeah, so about Bitcoin and Ether, these underlying assets. Recently, you know, we've seen the price of Bitcoin come up to the levels that it was back in early 2014 and even higher. And also we've seen the price of Ethereum of ether come up to sort of like $20. Right now, there's a lot of speculation around, you know, these underlying technologies. And that's what's driving the price up. When we see more and more apps being developed on the core protocols, what do you think will drive the price of these core tokens in the future?

I mean, just more use cases for real consumers, like real people that aren't kind of weird crypto geeks, I think that's going to be the key driver is. If we can see something like Twitter the protocol get really big, you know, because users are remunerated, in a creative way, and suddenly you get money for retweets, and some 14-year-old makes million dollars. That's big, right?

So I think it's going to need to, at the end of the day, of course, be kind of scaled end-user applications. In the meantime, though, it's mostly people betting on the future and betting on that future sort of speculatively based on progress in the ecosystem and increasing that probability of those. user applications emerging. I think it's hard to know exactly what drives all these prices, but I think it's often just people realizing how big the potential is here. Well, Olaf,

thanks so much for coming on and sharing a bit about Pauly Chain and Eurovision today. It was super interesting talking with you, and I'm excited to see where the fund goes and where this whole space goes as well. I mean, I think you are also at the very, very beginning of what's probably going to be a whole wave of investment funds that are going to pursue similar strategies like you. So that's extremely exciting to learn about it. Yeah. And thanks for having me. And yeah, I do think that the space is seeing unprecedented growth right now. So I'm sure there will be many other funds doing what I'm doing. Cool. So there are quite a few resources. I mean, Olaf's articles and some other articles

and some of the concepts we've talked about. So we'll link to those. in the show notes. Now, just one piece of information for our listeners as well. So we have, you probably notice, we have often been releasing episodes on Tuesday instead of Monday like we used to. So we are moving to releasing them on Tuesday, basically always. And we think we should be able to release them on time. That way, almost always.

I'm sure sometimes it will be Wednesday still. But so, yeah, so keep a look out for the episodes on Tuesday. And yeah, with that, we are at the end of our shows. Thanks so much for tuning in once again. We are part of the Lester Bitcoin Network. So you can find this show and other shows on LysopiCorps.com. And, yeah, thanks so much. If you want to support the show, then please leave us an iTunes review.

And we look forward to being back next week.