Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - William Mougayar: The Business of Decentralization

Episode Date: July 6, 2015

Peter Thiel argued in his book ‘Zero to One’ that the way to build a great and highly profitable company is to build a monopoly. But with decentralized technologies, there is a real question whether these monopolies can be built or whether the monopolies will end up being publicly owned goods (like Bitcoin) that can’t be monetized directly. William Mougayar, who is an experienced tech executive and angel investor, has been writing extensively about these issues and was one of the investors in OB1, the venture-backed company launched by the founders of the decentralized market place Open Bazaar. He joined us for a discussion of the cryptocurrency space, Ethereum, Open Bazaar and monetizing decentralized technologies. Topics covered in this episode: Bitcoin as the new, thin cloud His long-term predictions about where the space is going What kind of business models are the most promising Why he chose to invest in OB1, the company behind Open Bazaar What the state of Venture Capital in the cryptocurrency space is Episode links: Predictions in Cryptography, Blockchains and Consensus Protocols The Old Cloud is Dead, Welcome the New Cloud The Business Imperative Behind the Ethereum Vision An Operational Framework for DAOs Union Square Ventures: Introducing OB1 Peter Thiel: Competition is for Losers This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/086

This episode of Epicenter Bitcoin is brought you by Voltauro, the gold to Bitcoin Exchange. Trade gold to Bitcoin instantly and securely, starting at just one milligram. Go to Voltoro.com to deposits in Bitcoin and start trading today. And by Shapeshift. With no account or sign-up required, it's the easiest way to buy and sell gems, dash, new bits, Minero, and other leading cryptocurrencies. Go to Shapeshift. dot iota instantly convert your altcoins and to discover the future of cryptocurrency exchanges.

Hi, welcome to Epicenter Bitcoin, the show which talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sebastian Kutu. And my name is Brian Fabi and Prane. We're here today with William Mugayar. He is based in Toronto, and he's a very experienced technology executive. He's worked at HP, so Hewlett-Paker for a long time. he started or was CEO of a few tech startups.

And recently he's been an investor in some Bitcoin companies like Changed Tip and what we're going to talk about quite a bit today, OpenBazaar or OB1, the company behind OpenBazaar. And he's also an advisor to Ethereum. So he's quite involved in the space, especially from the perspective of a experienced guy and also an investor. So I'm super excited to have them on. Thanks for joining us today, William. Thank you.

Great to be here. So a question we often ask our guests. How did you get involved in Bitcoin or the cryptocurrency space? Yeah. Well, I was lucky that since I'm living in Toronto, I became involved actively when I heard of Vitalik, having started Ethereum. But even prior to that, I had been hanging around Fred Wilson's blog. for a while and he started to talk about Bitcoin back in 2013 and I was very intrigued about the topic and started to get involved with it towards the end of 2000, middle to end of

2013 so almost close to two years so far but I really became very excited because I saw a lot of similarities with what had happened with the internet back in 94, 95 and I had been there. I have been part of the internet evolution and how it unraveled in front of us from day one. I was involved at the time with an organization called CommerceNet, which was the equivalent of the Bitcoin Foundation today. So we were working on standards and advocacy and security and payments

in Canada and in the U.S. Commerce Net was based out of Silicon. in Valley in Palo Alto. So I've seen this movie before, more or less, and I am very, very excited about what Bitcoin will do for the next 10 years in terms of the impact it's going to have on the internet. Yeah, I mean, we often forget, I mean, Brian and I were both in our early 30s, and we were there when you were started, but weren't really old enough to really remember what was happening in reality. I have to object here.

I'm not 30 yet. Okay, so we're both turning so soon. But yeah, it's always interesting to have the perspective of someone who was there when they were about our age and how things were happening then. And so I'm curious about this Commerce Net organization. What were they doing specifically? It was pretty much the equivalent of the Bitcoin Foundation when it started. Basically, the intent was to work on standards, on education. So it's a bit, maybe a bit, the Coin Center and the Bitcoin Foundation.

So it was a lot of education. Payments, internet payments were very, very big at the time. Because just for memory's sake, now we take internet payments for granted. But I can tell you, for the first three years of the internet, the banks did not want to touch internet payments. If you wanted to do internet payments up until 97 or so, you had to jump through a lot of hoops. It was done with what was called Internet Gateways.

So you had to go through these outside servers that had the setups for doing Internet payments. And now we take it for granted. Obviously, we can pay for anything on the Internet. But that wasn't the case before. So that's what CommerceNet was working on and also working on use cases, working with small companies and large companies, and trying to explain how companies were adopting the Internet from an e-commerce perspective. So the genesis of CommerceNet, namely the name, was to promote commerce on the Internet from the early days because it was perceived to be one of the key applications. of the internet.

Do you see any similarities with some of the backlash that Bitcoin has gotten specifically in the press? These last, I mean, not so much now, but in the last few years with some of the same criticism that the internet was getting in the beginning? Definitely. I mean, the internet payments, the banks did not want to touch internet payments. It was this kind of thing that was not secure. They were saying they were not guaranteeing anything and there was a lot of backlash. Even there were talks about having internet tax, like adding a special tax on top of the internet in some countries, some governments, in the same way that some governments are thinking about adding a tax on Bitcoin. And these are some of the things that then went away.

they became non-issues. So definitely there are similarities, but we have to keep pushing ahead. I mean, this thing is not going to get built in two years or three years. As much as there is excitement in the space, and there was excitement in the Internet space in 94, 95, 96, 97. It took a long time.

It took about three years, at least, for everybody to start to understand the internet back in those days. And the internet was not as complex as Bitcoin is today. So I predict for sure we have another two years of education, of educating people about what Bitcoin is, what it can do, what the blockchains are. I mean, what's common is that they have multiple personality,

meaning that they are different things to different people. And if you ask anybody about what they are doing with the internet today, they'll each give you a different answer, depending if they use it for web content, or whether they are selling something on the internet, or whether they are using it for communication, and many different uses. Same thing with Bitcoin.

Right now, those that are involved in the Bitcoin space are very few. but each one will have a different use case for them. So what's common is that the narrative is very rich. The story is very interesting. And each one of us will find its own story about how we use Bitcoin and the blockchain in the same way that we have found our own story in how we use the internet.

And that's what's really exciting. But this thing is going to take time. I really, really would like people to realize that this thing is not going to get built in one or two years. And hopefully we'll talk about this later on in terms of whether there is a bubble or a crash. And what really brought the crash back in the year 2000 is people wanted to accelerate the Internet in terms of what it could do. You wanted to get that thing happening much faster. and then it showed up. And that's what crashed it.

So I hope that we keep our level, our heads on a level basis so that we don't hype things too much. I wanted to, you made this comparison with the Internet now a bunch of times. And I actually wanted to ask, you know, there have been all these different technological sort of revolutions and evolutions during the past decades, you know, there was the mobile rise of mobile smartphones, cloud computing, the social web, of course the internet itself. So do you think Bitcoin is most similar to the rise of the internet? Well, Bitcoin uses the internet, right? So it's a very important overlay. It's an overlay on the internet. And the property, and the property it has are multifaceted.

The genesis obviously is money. So this is a new component that we did not have before. There is a technology component with Bitcoin and the blockchain specifically. So Bitcoin is the currency components, so it's going to affect money. But the blockchain is a technology component. So there it's going to affect transformations. So the analogy is that back in the 90s as well, there was a big movement to do reengineering, if you remember. In 92 or so, Michael Hammer and James Champi were championing the causes of doing reengineering in big companies.

And the idea was you had to start by removing the old process. and rethinking everything that companies were doing because IT was this new enabler. So I hope that the blockchain is seen as an enabler of re-engineering and reimagining things for big companies and for small companies. So it takes a while to rethink. with new solutions in mind. Now, the way it starts usually is you start to do, you bring in a new technology and you start to do the same thing you were doing before

with a new technology without a lot of innovation. This is usually step one. But then later, as you get more experience, you start to say, well, let's rethink completely how we're doing something. And then let's start from scratch. And that's, I think, where the opportunity is, are going to be is in seeing new, totally new ways and like new companies, new behaviors. And I talked about that in one of my blog posts where looking, I tried to be a little bit

forward thinking in terms of where Bitcoin was taking us. And I put these activities into four buckets. The first bucket is in having new companies and new behaviors that we have not seen before. The second bucket is inside existing companies. So bringing the blockchain into existing companies and figuring out how it's going to change things inside. The outcome will be that industries will be changed. Some industries will be transformed.

That's the third component. And the fourth component is just seeing it as technology. So it is changing the technology stack that we are used to using. So there are many pieces in the in the blockchain, in the cryptocurrency space that are new pieces of the stack. If you're a developer, you're going to be familiarized now with things like distributed hash tables. What is that? Or IPFS.

I'm not going to go into the details. And distributed applications where the browser does different things than just running JavaScript. script. We can go into that later on if you want. But there's a new architecture that is a new paradigm, basically, if you're a developer. So you have to use new tools. In the same way that the web, even though it started as a content publishing platform, then with the advent of Java and other languages, then it became a development environment. So the blockchain is a development environment. The only difference is that it's still a bit early, it's a bit immature, and not all the pieces are there. So if you're developing for the blockchain, you still

have to put all the pieces together more or less on your own. And that's some of the challenges that we have today, if you're a developer, although it is getting better. So you've talked about this analogy that Bitcoin, you've written a blog post, that Bitcoin is like the new cloud. And you said that blockchain infrastructure doesn't replace cloud computing, but it sort of unbundle that democratizes it. Can you explain that? And can you also explain what some of the consequences of such an unbundling on democratization would be?

Yes, for sure. Well, when you look at the blockchain, the number one thing that comes to mind, people think of it as a distributed ledger, as a programmable ledger, which is fine. It is that. But what it is also is a big infrastructure. As we know, the infrastructure, meaning the computers, the machinery, the actual hardware for mining the, the, Bitcoin network, basically. There's a lot of computing power out there. There's more than 6,000 nodes right now around the world that surpass the performance of

supercomputers that exist today. So this infrastructure is like a cloud infrastructure. And it's, yes, it is validating the transactions. But it is also really running transactions. it is validating transactions. So in a way, it is like a cloud. You are running applications. You are running software on this network of computers that is global.

And the implications are that it's a new architecture, basically. So the developers now have this new infrastructure. What's really interesting is that they don't have to set up servers. If you were to go to Amazon today, as easy as it is, you still have to set up a server. You have to open up an instance and configure it, and although it's easy, it'd be getting easier, but you still have to do that. With blockchain networks, whether it's a Bitcoin blockchain or another blockchain, the ones that are global specifically, you just worry about the application that you,

you are writing and you write it in a way that it's aware of the of the blockchain, it's aware of the network and you execute basically these little programs on on the blockchain in the form of smart contracts which are really business logic. So I'm saying this is a thin cloud because I don't want to give the illusion that this is going to replace the current cloud. I mean, you cannot write the enterprise. wide enterprise level types of applications, but there's a little programs. But it's a start.

It's okay to start with little programs, with little smart programs that does smart contracts that just do a little bit of logic. But at least they run it, they run it efficiently, and it comes back. And it's very cheap. We're talking in the sense kind of levels. Now, why do you think it is cheap? Because, I mean, Bitcoin is expensive, right? I mean, as far as I know, Ethereum is going to be very expensive, right, to run things on Ethereum.

Why do you say it would be cheap? Not necessarily. Maybe at the beginning it might be a little bit more expensive than it will be at the end. Because the cost is shared. It's like a crowd-funded, it's like a crowdsourced sharing of the infrastructure. overall the number is big to run the network but when you divide that up by the number of users that are on it we're talking into the cents into the sub-dollar level for running little things and the vision is that it should be it should be about the same as what you're paying for

internet access if you have a really good internet access you probably have to pay $50 per month, more or less, to $100, depending where you are in the world. But if you bring that down on a daily basis, you're paying $2 a day, more or less. So we're talking those kinds of levels. $2 a day. But $2 for what? For running programs that you would be responsible for that are providing value to you in the form of a business logic. the form of something that is of value to which the value is going to be more than what you're paying, of course.

So this is the way that I see this. I mean, correct me if I'm wrong, but what you're talking about when you talk about little programs, is basically decoupling what we now see as cloud solutions. So I would see this like this. So, for example, Dropbox. There are many components to what Dropbox offers. Dropbox offers different levels of, um, uh, of, uh, cloud storage size, like capacity, and then there's permissions, and then there's sharing,

and there's all these things. If you decouple that, then you would have, like, storage, sharing, permissions, perhaps the ability to view files in your browser. And these are all different components of that application. And perhaps in the future what we can envision is that rather than having one service, which is Dropbox, which had all these features, we would have all these decoupled features, and then perhaps you would have another feature, which is another Spark contract that you could plug into just the hosting component. And if you want to add sharing, you can also add that in there. Is that sort of what you're describing in terms of decoupling the cloud infrastructure

that we have now? Yeah, that's one way of to describe it. The other way to describe it is that it's like a form of SaaS. It's a software-as-a-service kind of utility. So imagine now if you can, if you are a bit of a business, you know, business user inside a company and you can run these smart contracts yourself without going to IT. So that's the other big implication of running little programs on the blockchain. It is eventually when we start to put these programs in the hands of business users

and make it as easy as opening a browser and launching something and then I think that's the big impact that is going to happen down the line and that's that's a big implication for company so I think the what I'm describing here is going to take a little bit from cloud computing uh types of budgets let's say and a little bit from the SaaS from running software as a service uh component so it's it's a new it's a new form of of running uh programs of running business logic between people, between companies. But it's really a micro-transaction. It's going to start, at least, the way we see it right now,

at the micro-transaction level, so by bits and pieces. And then what I'm really excited, what's really exciting is when we start to put this in the hands of business users. Because business users can take it in any way they want. They know their business. and they know their use cases, and that will empower them to really propagate this technology more globally. Our show today is brought to you by Voltura.com, the gold to Bitcoin Exchange. Now, when you live in Berlin or in France or in a lot of comfortable places like the US, etc.,

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It doesn't belong to Voltoro. It doesn't belong to some third party. You own the gold legally. So go to Voltoro.com and start training some gold today. And we'd just like to thank Voltoro for their support of Epicenter Bitcoin. So moving on to business models, this is something that we've discussed quite a bit. And we still can't really wrap our heads around how these things will be monetized. The very fact that, say, for example, Open Bazaar is decentralized, and we'll get to Open Bazaar in a second, but the very fact that it's decentralized, it's hard to see how you can, you know, as a company building this, have a business model around it.

Can you talk about what business models will look like in these decentralized app worlds and how they'll differ from existing business models in the tech space? Okay. One of the parameters that's changing here in the era of decentralization is that the centers are becoming, again, using that word thinner. The centers are going to control less, but they are going to empower more and they are going to get flattened. So which means that, you look at the Bitcoin network, which is the great example of distributed, of a distributed infrastructure. There is no center to Bitcoin. The only thing closest to a center is the five or so core developers that are really at the center of it. but everybody else that is contributing to Bitcoin is at the periphery is at the edge of the network. So innovation is really happening at the edge of the network, at the edge of those old centers.

So the business models, I mean, it's very difficult. I mean, at this point, it is difficult. I mean, I can talk in generic terms in terms of what the business models might be, they are going to be very peculiar to every particular situation that will apply what their business is all about

and they'll develop these business models themselves based on their business specifically. So first of all, there's one thing that is for sure is that the blockchain is technology. So there will be the equivalent of

software service services that will proliferate around the blockchain technology itself. So a lot of, there are a few companies today that are taking the approach that, hey, it's just software. So being just software, we can help you to develop solutions for it. we can help you to integrate the technology into what you're doing, and that's kind of the services model. So there's lots of that going on. But part of the technology is knowing where to place that technology.

It's the same as IT. I mean, IT on its own doesn't do too much unless you know exactly what kind of business it's going to enable. I think one way of looking at it, I don't know if he will agree with that, but if we just sort of focus on Bitcoin for a moment, right? Maybe one way that people have often thought about Bitcoin is like a Bitcoin is a little bit like owning a share of this big, decentralized, distributed enterprise project. So if that's the case and if that's true, then I guess one of the implications of that could be, if all these companies like Coinbase, Change, Ship, and so on, are building things that then enhance the value of, you know,

of this project, of this sort of decentralized enterprise. Well, of course, all the value they create, the question is, you know, does that go to the companies at the edge or does it go to the center and sort of that center's enterprise? And if the second is the case, does that mean they'll be left out and the sort of all the benefit goes to the Bitcoin holders and the companies don't manage to build profitable businesses around it. I think one area where we've seen this a little bit happening maybe

is payment processing because obviously a service like BitPay is super valuable for Bitcoin and it helps a lot with adoption and people can pay places and stuff. But do they have a business model? I mean, the problem is, right, If you have different companies competing there, you'll have a, they compete on price, and it may be very hard for them to make money in the long term. Yeah, I mean, I think here's how I would look at it.

There are three pieces to the marketplace. One is the infrastructure level. The second piece is the middleware services. And the third piece is the applications. It's the same thing as the Internet. So at the infrastructure level, you have the miners that are making money, that's fine. And then the middleware, payments, exchanges,

I mean, they are kind of a middleware because they're in the middle. Yeah, they'll make money as well because they have to take a cut on the transaction, perhaps, but it's a much smaller, it's a much smaller cut where there's the most excitement is at the application level. So what are the applications?

There, the field is wide open. and that's where the innovation is going to happen. But it kind of goes into stages. We have to have a solid infrastructure, and we have to have a rich choice of middleware services, of software, of building blocks, basically. And then it will make the life of the application, those that are building the applications much easier.

So back again to the business models, I think the value is going to be in, The bigger segment is going to be at the application level. When these middleware enabling technologies become a little bit more mature, then somebody can look at the music space or can look at the content space or can look at the e-commerce space. And then you take every industry one at the time, the financial services as well. Of course, it's a big one that has a lot of potential.

in using the blockchain. So there is going to be innovation in every particular segment, in every particular industry in applying the blockchain technology. The one common element is the issue of the trust of validation. So one of the innovations of the blockchain is that it lets you perform a validation or a trust without a particular intermediary. So it simplifies a settlement. It simplifies verifying that a transaction is going to the right person

without having somebody in the middle, verifying that. So generically speaking, a lot of intermediaries might be threatened by the blockchain if their job today involves something like a clearinghouse type of service or if it involves settlement. So one book that has gotten a lot of attention, I think, in the startup space was a book by Peter Thiel, who, among other things, founded, was one of the founders of PayPal called Zero the One. And in it he argued that sort of the only way to build a really profitable business, technology business, you know, is to build a monopoly, which then, you know, allows you to use your market

power to charge high prices, make a lot of money. And of course, if you look at the big technology successes like Facebook, Google, Amazon, eBay, etc., they all have been monopolies in the main area they make money, at least. So how is that going to work out in the decentralized space? Because I think there's a, first of all, people don't like monopolies at all in this area. And there's also the question whether they are compatible with the technology itself, because if you decentralize, where is the monopoly? Does that mean no money will be made? Or it will be much more distributed and small and not, no huge enterprises will be built?

Well, I think the monopoly is going to be in the form of a protocol. but it's not really a monopoly because it's going to be open. So there will be some open protocols, and the whole basis is openness now. So then Bitcoin is an open protocol. Anybody can fork it, right? Ethereum is an open protocol. Open bazaar is an open protocol.

Open assets is also an open API. So a lot of the technologies start, are starting to be as an open, starting with that openness in mind, and then what they do is they start to achieve some network effects. And the analogy here is that we want these protocols to be adopted. We want them to be globally adopted so that there are lots of users that are on these protocols. And in the same way that you then start to realize what the business model is,

once you have a lot of users, the same thing is going to happen. with the network effects. But I think the implications of what you're saying would be that there won't be these kind of massive companies like a Google or something, right? Because if the network effects are with the protocol and if nobody owns the protocol or if it's owned by a whole huge distributed group,

well, where's the company, right? It's still a little bit not clear how this whole thing is going to unravel. We can just speculate, but in an informed manner, I think there will be a lot of opportunities to build and to provide services on top of these protocols that are value-added services. And maybe there are new forms of intermediaries, for example, that get created on the protocol, that offer services that are needed that can benefit others. And maybe those services may not be as expensive as what the central kind of parts were doing before that.

So definitely there's going to be a more wider distribution of opportunities. at the edges of the network, at the peripheries of the network. And it is still not clear whether that will create a lot of small companies that are multiplied, basically, or whether it will create bigger giants, big giants like the Google and the Facebooks that we know. But definitely, it is starting right now with the openness in mind and with trying to do. reach as many people as possible globally and then we'll see what happens. So you've been an advisor as well to Ethereum. Tell us what excites you about that project. Okay, so it's been a long time in the making obviously as you as you know.

What's really exciting about Ethereum is they it's different than Bitcoin as a as a blockchain. So that's kind of where people get hung up and initially and they tried to compare it to Bitcoin. I mean, Bitcoin itself, just to put that aside, Bitcoin is a very tough act to follow. People look at it and they say, oh, it's a network. It's an open source. I get users.

I have a cryptocurrency. Fine. I can do the same thing. And then it becomes like Bitcoin. But it's not very easy to copy the Bitcoin model. It's got a long lead ahead of, any other blockchains out there. But the Ethereum approach has been different in that,

first of all, the consensus model they are arriving at is going to be a proof of state instead of proof of work. So the implication is a technical implication is that the mining will not be as expensive and that anybody on the network could be a node to power the running of the blockchain. They would like to do proof of stake, right?

It will be proof of work and they would work, you know, maybe at the latest stage you'll switch to that. It's moving, it's moving fairly decisively towards the proof of stake as a deployment option. So I'm talking long term. Yeah. The other big difference is that the currency itself, they don't call it a currency. It is a cryptocurrency if you kind of technically call it that way. But it's like fuel. It is fuel that runs the smart contracts,

which are those little business logic applications that run on the blockchain. So Ethereum is 100% optimized from day one to have programs run on the blockchain. So that is a very important difference as well from Bitcoin and the Bitcoin blockchain where, yes, you can run smart contracts on the Bitcoin blockchain, but it takes a little bit more to make that happen. So Ethereum is really enabling a new architecture, a new development architecture, which we're calling Web 3 architecture,

where at the first level, the browser is a special purpose browser that contains the beginnings of what we call the DAPs, the distributed applications. And then the second element is the blockchain, and the third element is the virtual machine, which is really the network, the whole network of computers

that are validating the transactions. So when you put this together, you have a new 3-tier architecture that allows developers to develop the distributed applications, which are taking a lot of different segments and then innovating specifically. So we will see different types of applications

like crowdfunding or stamping of origin for products or prediction markets and financial derivatives and so on. So pretty much any application that you can think of probably will have a smart contract DAP equivalent that could be built on the Ethereum platform. So Ethereum is really a development environment. It's a development platform that brings a new paradigm

to how applications are written. And it runs on its own blockchain, the Ethereum blockchain, but it will also be interoperable. with other blockchains in terms of passing values back and forth. So it's not going to be on its own as an island. And that's how I see things in the future as well. Blockchains will talk to each other. I was going to ask you about that.

So this one thing I've been thinking about a lot lately is, I mean, what was so great about the web is that you had one protocol, HTTP, where you have browsers that are all compatible and you can build all these applications with HTTP, I mean, over HTTP, what seems to be happening with all these blockchain technologies is we'll have multiple protocols, of Bitcoin, you have Ethereum,

you may have bizarre, like some other blockchains may also come up. So I'm not sure how that's going to play out in the future. Like, it seems like perhaps we'll be coming more to an app-based model where each app will be speaking specifically to one protocol or maybe, who knows, maybe like you mentioned, if all these protocols can talk to each other, we can have like one type of browser or one type, specific type of software,

whether it be a mobile app or a desktop app that can talk to all these blockchains at the same time. Yeah, I definitely mean, that's where it's going to have to go that way. If you think about the sidechains project, it is a form of interoperability with the Bitcoin blockchain. So they kind of freeze the value, the bitcoins, and then they do some work on the side chain, and then they bring it back. So that is a form of interoperability. And we can see more of that that's going to happen. It could be at the cryptocurrency level, so it could be just an exchange. So I perform something in Ethereum with Ether, and then there's a value that I go and exchange it into Bitcoins.

Or it could be at the file level. There is maybe some data that is then kind of transacted upon into one blockchain, but then it gets passed to another blockchain or it could be a file. So there will be different levels of interoperabilities between the different platforms that the blockchains are powering. Today's show is brought to you by your friends at ShapeShift. Shift is the fast and easy way to trade alt coins and they now support over 30 of the most popular alt coins including Dash, Swarm, Piercoin, Vertcoin, Dogecoin, gems and so many others.

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actually able to buy equity in ShapeShift unless you're American. And you can check that out if you're interested at Banktothefuture.com. That's BNK, do thefuture.com. We'll put a link in the show notes. So thanks so much for their support. And you can give it a try and trade some altcoins, trade some coins, trade some coins on Shapeshift.I.O. So one of the main reasons why we wanted to get you on is because you are one of the

investors, along with in recent Horowitz and you know, Union Scare Ventures, I think, two of the best known venture capital firms in the world, in the company OB-1, which was started by the guys, the main guys behind Open Bazaar, so Brian Hoffman, whom we've had on the show as well. And I think this is really interesting because, as far as I know, this is the first VC investment in a protocol, sort of, that, again, be monetized directly, you know, it's not owned, it doesn't have like a token like ether that hopefully will appreciate if the platform gets used. So it's really unclear where the business

model is. Can you talk a little bit about why you decided to invest in OB1 and where do you see the potential here? Sure. I mean, it's not an obvious answer, obviously. I had been aware of OpenBazaar almost from the day one where when they started as you know the history of the open bazaar is that it started as a as a hackathon winner at the Toronto Bitcoin conference more than a year ago here in in Toronto just where I am right now and I was actually in that room when they presented back in April of 2014 that was a near at the time with AirBits. But their genesis was a dark market kind of application.

A few weeks later, Brian Hoffman saw that and decided to fork it, but give it a very different departure from the dark market roots that it had. And the vision of Open Bazaar is to really empower peer-to-peer commerce without any intermediaries in the middle. So the idea is that anyone should be able to conduct commerce to buy and sell products, services, digital goods as well, without having any intermediaries in the middle, either slowing things down or taking transaction fees or not adding any value. So that is really the vision of Open Bazaar. So we were attracted by their vision. We were attracted by the team, the quality of the team that had that vision. And it turned out that they came together because several of them had been having the same ideas in their minds.

And they came together as a meeting of the minds. And they were both. Not both. They were like four of them initially three or four. They all had the same similar visions. And Brian Hoffman, the leader of the project, put all. of that together and they turned it into an open source project and they started to add value to it and where it is today is very different from its roots. One of the key contributions that

they added that they came up with is adding what is called the recurgent contracts and recardian contracts are really agreements is really a way to say a legal agreement and how we're going to put them in code and how we're going to enforce them. So what they did is they attached to multi-sig aspects of Bitcoin and they tentated to a legal agreement process, the regarding contracts. And that then allows any two parties to conduct commerce

according to rules that they both understand, Yeah, I mean, we will link to our episode on Open Mazar and the show notes, I think, where we talked in depth about that. But what we didn't talk about there and there and what we would love to talk about with you especially is the idea of, you know, where's the business model? So I'm quoting here. I read a blog post before from Brad Burnham, who is a VC at Union Square Rancher, is one of the other investors. and so he wrote, because the marketplace is defined by a protocol and distributed across every participant server,

the hosting costs are shared, and there's no way for a central authority to leverage network effect, market power, to extract rent from participants. That's sort of the fundamental challenge about OpenBazaar. So what do you see as the potential ways for that company, OB1, to become a profitable large company

so that you will see a return as an investor? I don't have a clear answer, to be honest. We went with the investment with our eyes open, obviously, and we would love for them to be able to deploy that protocol, if nothing else. But the way that they've structured the company is with the formation of OB1. and OB1 is the for-profit company that will provide services that will run on the OpenBazaar protocol. So OpenBazaar is the open source protocol. Currently, it is being managed by the same team that also is part of OB1.

So our investment is really an OB1 from a legal perspective. I'm on the board of directors of OB1, not of OB1. Open Bazaar. Open Bazaar in its mature stage, it's going to be an open source protocol that eventually will be turned to the community. I mean, the community has a lot of say in determining the future of Open Bazaar as a protocol. What the team at OB1 is doing is kind of leading it and managing it and making sure that it's going to happen according to the milestones according to the timeline, according to the results that are required to kind of move that protocol forward.

If I may paraphrase, I don't know if this is the way, but this is sort of, I guess, how I think you guys are thinking about this and correct me if I'm wrong. But right, of course, the Open Bazaar guys will be in a great position in some way, right? If Open Bazaar becomes very successful, because, first of all, they have a great weight in the community, they're known, have a weight in the development of the protocol, and they will presumably also have the deepest knowledge of the technology, so perhaps see the first to see the business opportunities where one can build money. So, in that way, maybe it makes sense to invest in them if they can later leverage that position, that influence, and that knowledge to build

profitable things, right, even if it's not clear today what those will be. I mean, one area that they've said they are interested in entering is being, like in the area of escrow services. So when you do commerce between two parties with nobody in the middle, I mean, it's kind of, it's not exactly 100% correct. I mean, there will be a new form of intermediary in the form of, an escrow agent in the middle in terms of if there is a dispute resolution or it could be a requirement. So there could be a possibility where they would offer escrow services as a new form of intermediary.

But the fees that will be taken there are kind of minimal, are not going to be similar to the take rates that the central e-commerce marketplaces are taking today in the forms of the eBay and the Etsy's and the Amazon's and the ones we know about. So that's one way of thinking about it. I mean, there will be services on top of the protocol that will be developed that will be innovated upon. And that could be one logical way for them to be taking part of where some revenue might

come from. I'm curious, were there any parallels like this at the beginning of the internet where you had one company, so standing behind a protocol and developing it and with time losing their monopoly as everybody adopted the protocol? Did that sort of thing happen 20 years ago? That's a good question. I have to think a little bit more. Maybe, maybe, maybe at one point, Netscape, if you recall, Netscape is a company that became what, when Mark Andreessen developed the web browser, as we know it today, in the form that we know it today,

and it became Netscape. And, I mean, they were the best, they were the browser that had the most market share at one point in time. And then they started to develop software services in addition to the browser itself. So they had server, they had commerce servers, they had content servers. They had transaction servers. They had payment servers. So at one point, it looked like that maybe they were the only game in town.

But the reality is that that became fragmented afterwards. I'm not able to think of, I mean, maybe one way to think about is TCPIP. Like at the technical protocol level, yeah, we have protocols that are standards. if you think of maybe not directly internet related but local area networks at some point

there were like 3COM and there was Novell again this goes back more than 20 years ago and it looked like there was a battle but then it became a non-issue and eventually a protocol should be neutral a protocol should be available for everybody

and that's the only one way that it's going to propagate. And the value becomes on top of the protocol is what you add in addition to what the protocol offers. So, I mean, HTTP is a protocol. And so it's, I don't, I cannot see a direct parallel where a protocol was commercialized. That way with venture capital, perhaps. Maybe it was commercialized by government grants or by donations to have it developed.

So that's the only thing I can think about. But certainly it makes things interesting. It makes things more interesting. So speaking of VC, what is the current state of VC funding right now in the cryptocurrency space, in your opinion? It's still timid, I would say. It is still timid. It is not totally on fire, I would say. I see a lot of proposals.

Is it not on fire or is it not anymore on fire? No, it's not on fire in terms of... I'll tell you where there's one area where it's a bit problematic, is that some of the valuations at the seed level are a little bit high, a little bit too high for me at least, and are a little bit high as well for the market in general. So you think valuations in the Bitcoin space are high compared to startups in general, early stage startups?

I'm seeing the whole gamut. I'm seeing some reasonable ones, and I'm seeing ones that are coming with evaluations in the close to $10 million, for a seat stage investment with two people, with the technology that they don't have yet, with a lot of questions, with a lot of uncertainties, which is fine, but really with a very immature product, with a lot to build upon, and they think they want to have $10 million

as an early, early... But isn't that just a bunch of people who don't have a clue of the market and have a slightly exaggerated opinion of their own self-worth? Or, I mean, I presume those people aren't getting funded by anyone. I'm seeing the whole range. I'm seeing some really smart people that, I don't know, have been told that they can get $10 million for evaluation from day one. And they only have to raise half a million, let's say, only give up 5% of the company.

but that kind of investment is only going to appeal to maybe a few angel investors that are willing to take a bet and putting $25,000 or $50,000. But then it makes it more difficult for this particular entrepreneur because they have to go and raise money from 10 or 15 people. I would rather have companies be more reasonable have valuations in the range of three, four, five million, even six million dollars and that opens up the opportunities

to micro-VCs or VCs or angels that are a little bit more level-headed that know that there is a certain return that is expected that if you only give me 5% of your company, I'm not going to be as interested as if you give me 10 or 50 or 20%. So obviously one of the things that gets a lot of attention in the press and I think also, of course, in the Bitcoin community is the price

and the cryptocurrency community is the Bitcoin price and as we all know, the Bitcoin price has not been doing super well, especially if we compare it to November, December, 2013. So how has that affected the ability of cryptocurrency start-ups to raise financing? I think it's becoming a neutral effect right now. What I really find interesting still is the price is reacting more to still, still, still, to speculative parameters.

I'm asking about the ability to get funding, not the price. Yes, okay. it's a neutral it's a neutral point right now it did not enter at least in my record it did not enter the the equation in the last two deals that I was involved in with the that are Bitcoin and blockchain related it's really it's really a non-issue right now I mean if if the volatility would be much higher it might be an issue but at the end of the day what you're investing in at least what I invest in is is the potential of the business model the potential of the technology

so I look at the blockchain as a technology as an enabling technology and I look at what it's going to enable on the in the business sense so are you seeing what what types of companies are you seeing VCs interested in investing in and what companies are you particularly well what types of companies are you particular investment? I think it's going to start to get down to the industry level. So you're going to take every industry is going to have perhaps five or 10 companies that will take a shot at changing that industry or will take a shot at providing solutions

for that industry. So we're going to see some vertical industry-specific. solutions and we're also going to see horizontal plays like content. The content space is one aspect right now where take digital assets or content ownership. It's a very natural application of the blockchain to be able to peg, to attach an ownership of a digital asset or a physical asset on the blockchain so that you can transact with it. I mean, I agree about the industry,

what you mentioned about disrupting industries. I feel like right now there's sort of a shift from, like in the last year we've seen a lot of startups getting in the sort of consumer space, pushing for adoption of Bitcoin, wallets, this type of stuff. And now there seems to be some sort of a shift towards more these ledgers, blockchain technologies for finance, etc. Is this something that you've noticed as well? Yeah, I was going to talk about the financial services.

I'm going to issue a warning here. The warning is really it's going to be up to the financial services companies and the banks themselves to figure out how to use the blockchain. Most of the companies that are developing solutions for them, honestly don't have a clue about how a bank runs or how financial services is running. I mean, they are trying to understand it. But the reality is that the innovations is going to come when people from that industry start to really, really, really understand the potential of the blockchain in terms of what

it enables. Because only they understand their business and only then they can figure out how to apply this technology to enable something new. Now, there will be some exceptions of new players that will come up with something innovative

but trying to displace the existing incumbents in the financial services space is going to be very difficult. You cannot take them head on. The innovation unfortunately has to come from within So what I'm going to be spending a lot of my time is educating the financial services executives on the potential of this technology.

The same thing was happening with the Internet. For the first few years, a lot of the CIOs did not even understand totally the impact of the Internet. And it took them a while to figure it out. The same thing is happening today. It's one thing to have a little project in one part of the Internet. of the bank with five people to understand, that try to understand the blockchain. And then if you go down the levels, and then you ask the CEO what they understand, of what the blockchain does, there's a big gap in between having somebody having a project

using the blockchain and having the CEO and the executives at the very top, believing that this is a very innovative and very enabling technology that's going to change things. Yes, I mean, similarly to how e-commerce, at first was just like one little pet project and then after a while, companies started having e-commerce as sort of a global omnichannel

strategy within the strategy of the business, I think, is what is a similar analogy, right? Yeah, definitely. I mean, there's one exception, maybe. I'm not providing her any promotion

this is an endorsement. You have Blythe Masters who came from the industry and now has joined the digital assets holding. So that is a person that understands the financial industry.

And if she can really, really understand the blockchain capabilities, then there could be some interesting solutions coming out of it. So I think it's something that I wrote in the, when I wrote paper, the Ethereum paper, explaining the business value and the business imperative.

And I said there is the onus is really on the business people to understand what the blockchain technology can do. The blockchain innovators and the blockchain developers on their own cannot make that change happen. So the business people have to kind of meet them halfway through as much as experts they can be and the development side, they do not understand the business problems, challenges, opportunities that somebody has on the business side. Today's magic word is commerce, C-O-M-M-E-R-C-E.

Head over to let's-talk-Bitcoin.com to sign in, enter the magic word, and claim you're part of the listener reward. You mentioned Blythe Masters and, you know, they just purchased HyperLedger, whom we've also had on on the podcast. And we just said an episode with Tim Swanson about this idea of permission blockchain with Hyperledge is also a company in that space. And that always creates a lot of controversy

and people criticize us and wish that we get cancer in the comments and things like that for bringing these topics up. So I'm curious about you. What do you think, especially when we talk about financial services, big banks adopting this kind of technology, will they use Bitcoin and the Bitcoin blockchain, or will they do their own things with, you know, operating their own consensus systems?

I think it's going to be all over the gamut. Here's one difference that I see between what happened 20 years ago and now. 20 years ago, the banks were a bit conservative. They were fairly conservative. They waited. They waited. And then when they had to do it, they did it. because it took them a while to understand it.

And if you look back in retrospect, the banks did not make any mistakes back then. And still to today, they did not innovate too much. I mean, what's the biggest innovation we have that combines banking and the Internet today? It's having our bank account on the smartphone

or having online banking. It's not a huge innovation. It's really going from paper to seeing transactions online. So I would be critical. of the banks so far with the internet. However, what I'm seeing today is that the banks have an intent to try a few things.

So what I would predict is that they will make some mistakes. I have a feeling it is not totally factual, but it's kind of putting some bits and pieces together from what I'm seeing. This time they are not going to be afraid to making some mistakes and trying a few things. And that's why you're seeing,

you're going to see a lot of pilots, a lot of projects with a smaller scope, which might fail, by the way, which is fine. But hopefully they'll learn from these failures. And there, some of them will be inside the banks, like back-end, this is perhaps, and some of them will be between the banks. I think there's a big kind of open space

between the banks in terms of clearing funds, settlements, everything in the middle that has a clearinghouse kind of label on it is really up to grabs because clearing houses are an intermediary and the blockchain threatens intermediaries in the same way that the internet has threatened intermediaries and it has created new intermediaries as a return, Amazon being one in your intermediary and others. So it's going to be a long road.

I mean, we're not going to see all of that unravel next year. Okay. Yeah, well, I think we were sort of up with our time and at the end of our episode. But William, thanks so much for joining us. Also, what we will do, of course, is link to your blog in the show notes and link to your blog posts

because you've written quite extensively on this topic and you're right regularly on this topic. So I think for anybody who's interested, they can read your posts and also get in touch, I think, with you. So yeah, thanks so much for coming on. I think talking about these really important issues. Thank you for having me. Bye-bye.

And of course, thanks to our listener for joining us. So we put out new episodes of Epstein and Bitcoin every Monday. You can subscribe to the show in iTunes on TauCloud or on your phone. favorite podcast app. And you can also watch a video which we put out on YouTube and that's an epicenter BTC. And if you're loyalist and like the show, then do us a favor and leave us an iTunes from you. We haven't asked for that for a while and you haven't left one for a while, but so we'll ask again now and please do so we appreciate that. And of course, send us a tip if you want to. So thanks so much and until next time.

Thank you.