Invest Like the Best with Patrick O'Shaughnessy - Hash Power – Ep. 3 - Funding, Forking, and a Creative Future

Episode Date: October 10, 2017

In episodes one and two of Hash Power, we explored blockchain technology and cryptocurrency investing. In this episode, we discuss the current and potential future states of the crypto world. We cover new forms of cooperation, regulation, security and storage, and why blockchains allow systems to evolve at such a rapid pace.  Be sure to listen until the end, where we close with some advice about conducting ourselves in a new world where creativity reigns and repetitive jobs disappear—a trend that may only accelerate thanks to blockchain technology and cryptocurrencies. Hash Power is presented by Fidelity Investments   For comprehensive show notes on this episode go to http://investorfieldguide.com/hashpower For more episodes go to InvestorFieldGuide.com/podcast. To get involved with Project Frontier, head to InvestorFieldGuide.com/frontier. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag    Show Notes 0:05 – Intro to episode 3 and what to expect  4:00 - Olaf Carlson-Wee, founder of Polychain, on how the funding and investing in cryptocurrencies could easily get out of hand  5:00 – How people are creating holding companies to fund cryptocurrencies protocols  6:45 – Decentralized Autonomous Organization (DAO) and how they will replace the aforementioned holding companies  8:32 – Could fully decentralized organizations replace other more traditional organizational structures, even outside of crypto currency  9:59 – How can DAO’s impact everyday lives  12:39 – Why your skills and accomplishments will become more important than who you are or where you are from             15:38 – Ready Player One: A Novel  16:09 - Naval Ravikant, CEO of Angellist, on the way humans cooperate and build new entities  17:51 – When people will demand oversight and regulation over crypto currency  20:42 - Peter Van Valkenburg, Director of Research at Coincenter on the current state of regulation  26:06 - Jameson Lopp on security needed to protect your cryptocurrency             26:22 - Glacierprotocol.org  27:51 - Ari Paul, co-founder of Blocktower, on how nail polish is used to protect their crypto wallet  30:03 – Juan Benet explains the Filecoin Protocol  35:52 - Muneeb Ali, co-founder of Blockstack, on how his team is plans to provide basic tools that will allow the broader developer community to build apps that the cryptocurrency population will use.  38:01 - Comparing blockstack to the analogy of creating a city  40:17 – How the blockstack token fits into everything  43:15 – Fred Ehrsam, co-founder of Coinbase, on forking in blockchains  47:52 – Naval Ravikant on how the idea of work will change in the future, and how that change helped to produce the idea of a blockchain in the first place.  49:31 – Why curiosity should govern what you do in life 53:22 - Naval’s framework for making money   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

In episodes one and two of Hashpower, we explored blockchain technology and cryptocurrency investing. In this episode, we discussed the current and potential future states of the crypto world. We cover new forms of cooperation, regulation, security and storage, and why blockchains allow systems to evolve at such a rapid pace. Be sure to listen until the end, where we close with some advice about conducting ourselves in a new world where creativity reigns and repetitive jobs disappear, a trend that may only accelerate thanks to blockchain technologies and cryptocurrencies. Once again, this episode is brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers.

Fidelity provides a comprehensive set of products and services to individual investors, employers, and financial advisory firms. For more information, please visit Fidelity.com. As I said in the first two episodes of Hashpower, nothing that you hear in this episode is investment advice. If you plan on deploying capital into crypto assets, you should spend months reading and exploring the topic first and consider the risks carefully. This past Thursday, as a result of this deep dive into cryptocurrencies, I had the chance to sit and have dinner with a group of investors and engineers who are leading blockchain development. This movement sometimes inspires an almost religious fervor in its supporters. And while I could sense passion in the discussion, what I noticed most was how deeply each and every person there had thought through the potential issues facing. blockchain in the future. No one there had any doubt that the impact of this new technology

will prove immense, but I was impressed with the realism and pragmatism on display. There were lively back-and-forth debates about complicated topics like blockchain governance, developer compensation, emergent technologies, and the velocity of cryptocurrencies and how it might affect their value. This movement is full of brilliant engineers, cryptographers, investors, economists, and thinkers. But if what I saw Thursday was any indication, it's also filled with new leaders. I've been blown away by the people you've heard so far on Hash Power and by those you'll hear from for the first time today. We hinted at how innovation in blockchain may happen faster than elsewhere. This is because of two phenomena, funding and forking. Forking is when a network splits

into two paths, like the recent schism of Bitcoin into Bitcoin and Bitcoin Cash. Forking allows a sub-community to alter a protocol and continue forward in a different direction, with new rules or features. Think of forks like genetic mutations in the evolutionary chain, experiments which will be tested in the real world and will thrive and survive or die. Funding is the second, the ability of developers to raise capital from a global investor base to build protocols. Initial coin offerings have been the story thus far of 2017, where teams use ICOs to raise funds by selling tokens. It's Kickstarter meets venture capital, meets speculation, all with little to no regulation. On the one hand, this could be a revolutionary way to fuel innovation. On the other,

it may be the single best way to defraud and scam investors we've seen in a long time. In 2016, startups raised an average of $1.14 million in their seed round. Some protocols dwarf that number. Tezos, a potential competitor to Ethereum, raised $232 million in just three days. But here's the thing. If you go to the Tezos website, the results of the fundraise are not displayed in U.S. Instead, it says that investors contributed 66,000 Bitcoin and 360,000 Ether. To discuss this fundraising trend, we begin this episode with my conversation with Olaf Carlson Wheat, the founder of Polly Chain, who describes how this all could get very wild. Yeah, so let's step back a tiny bit, and I'll give a little bit of background on some of this

technology and some trends happening in the space right now. And then I'm going to extrapolate that and assume it kind of plays out to the logical conclusion and see what happens. So a main one is that people are doing crowdfunding to launch new open source peer-to-peer protocols using cryptocurrency. So these are also called ICOs, our initial coin offerings in the media. These crowd funds are really fascinating because it allows people to use cryptocurrency technology to actually accelerate the development of cryptocurrency technology. So these crowd funds, in general, how this works is someone will. publish a sort of protocol specification. This looks sort of like a blueprint, but it's for a

protocol or a project. And then they will say, hey, if you want to donate to this project, I will in exchange give you tokens which power that protocol. The interesting thing here is right now to mechanically do these crowd funds. What people are doing is creating non-profit foundations or sort of holding companies like LLCs or C-Corps. These are often in Switzerland, Singapore, Hong Kong, often in sort of a jurisdiction that's often different from where the team is, mostly for legal compliance and tax purposes. So that kind of holding company, that connection to the kind of non-block chain real world is primarily so that the team can open a bank account and effectively cash out some of the cryptocurrency that they raised so that they can pay service

providers, pay salaries, and have a stable store of value. Because we've seen many times, times teams or companies raise money in cryptocurrency not properly hedge the financial risk and get either really lucky or have really unfortunate things happen for reasons basically unrelated to their execution, right? Just cryptocurrency volatility is massive. So one thing that I think is going to happen and we've seen it in small ways, but I think it's going to keep developing is as we get financial products, more advanced financial products built in a native blockchain environment. So this is stable coins. So coins that are basically pegged or follow or track something more stable like the US dollar or some other more stable currency or an asset like gold, say.

As well as when we just get a better suite of governance smart contracts, smart contracts here being the native pieces of bits and pieces of code that live in the Ethereum blockchain or other term incomplete blockchains like Tazos, when we see these things emerge, then instead of these nonprofit foundations, what we're going to see is people go to a full Dow when they fundraise. And a Dow, DAO, is a decentralized autonomous organization. The idea behind a Dow is that when you, like, for example, in this crowd fund or ICO context, when you initiate that crowd fund, what people send their cryptocurrency to is a smart contract that actually pools that cryptocurrency issues tokens, and then no one, no individual person has access to that cryptocurrency

that was raised. It's actually controlled by the token holders in a sort of voting mechanism. So then the people who crowdfunded the project actually vote on how to move the project forward and how to allocate funds that they contribute it. So you basically become like, it's almost like a shareholder, but you're not a shareholder in a company. You're like a shareholder in a decentralized protocol. And then this Dow structure basically takes this nonprofit foundation to the logical conclusion. Instead of having this kind of thinly tethered connection to the real world and to a real bank account, it's full crypto in that no assets ever leave the cryptocurrency sphere. There is no legal entity whatsoever.

And the entire project is driven forward instead of with paper legal contracts with full software contracts. So right now we're seeing this trend of, crowd funds reach sort of a crescendo. There's lots and lots of projects right now that are raising upwards of $20, $50, $100 million in these crowd funds. It's pretty astounding the amounts of money people are raising. And that money right now is sitting in these nonprofit foundations. I think over the course of the next couple years, we'll see that money live in smart contracts and be allocated by the votes and will of the token holders who were purchasing those tokens in exchange for the capital they put into those smart contracts. Do you think that there's an argument to be made

that a fully decentralized organization could possibly actually make better decisions or create something, company, whatever you want to call it, protocol that was better than the more traditional hierarchical, leadership-driven organizations? Yes. So this is actually a great question because this is probably phase two of this experimentation with DAWS. So the really interesting thing about this technology is you can now use software to code voting systems. So voting systems historically have been relatively simple, like the democracy system we have

in the United States is astoundingly simple. You basically vote, you vote for one candidate. You can't have weights, so you can't vote for multiple candidates and say, you know, I'm 60% confident in this one, 40% in this one. Like there's a lot of complex voting systems that can more effectively allow people to express their desires. Like you can have negative votes against people, all sorts of things like that. But in the, in the U.S. Democratic system, you basically have one vote. You cast it for a person, and if that person gets the most votes, they represent everyone and win. It's kind of the most naive system you almost could have. In this world of fast iteration, experimentation, and all open source software, you can actually start to codify these experimental governance and voting systems.

I'm just very excited, and I basically welcome an era of codified governance. It might end up over the very long term teaching us something about our more traditional systems that we have like the US Democratic voting system. I hate the notion of any utopia because of, again, what history tells us about them? But what is the sort of Goldilocks outcome here, the promise of the technology itself? So one of the things that I think makes this more approachable for people new to the idea of cryptocurrencies in general is like, okay, what might this mean for me? Like, what's going to be different or better about my life as a result of this, say five or ten years from now. The interesting thing about DAOs is that they can't really enter into traditional legal

contracts signed with an ink and paper, but they can enter into software-based or smart contracts. What this means is that for a regular person, someday, say, and this is a longer time scale, yeah, five, ten years out, you may be employed by a DAO. So you may actually get paid for the services you render to a global group of token holders who all are basically voting. voting on how to spend money stored in a software contract that lives in a blockchain. Now, this is where I like to talk about kind of the five or ten year plan here because it gets very sci-fi. So the, these concept of capital coordination over the internet using cryptocurrency becoming extraordinarily efficient, extremely globalized and open access and open

source. So like anyone can create the next Dow, like a 12-year-old can code. software and put it into the Ethereum blockchain. The idea of this kind of open access democratic or meritocratic system where capital coordination is very, very efficient. We've seen this with crowd sales. It's amazing how quickly teams can coordinate capital towards their project. They can launch a protocol specification and two weeks later they can have millions of dollars. It's much, much more efficient than what I would call, if I'm trying to be a little bit derogatory, maybe the kind of old boys club of Silicon Valley Venture Fundraising, where most of the battle is about who you know. I think that we are moving more towards a world where individual reputation on the

internet ends up being very, very important and much more important than in a kind of economic or material sense, like in terms of what kinds of jobs you have or how you might make a living. it becomes more important than your reputation with like the local community that you happened to be born into. You know, an interesting way this plays out is massively multiplayer online games. You'll find out that the clan leader was like 14 and he was in charge of a militia worth millions of dollars in real terms. There was this great story I read about a battle in Eve online that costs like, you know, I can't remember what it was, but maybe it was 700,000 real dollars were lost. And yeah, it turns out that the commander, you know, was 16 and had to skip school to do the battle.

And that kind of stuff, it's really meritocratic. If everyone would have been sitting in a room, he probably wouldn't have been the commander. You know, it would have been, well, he's only 16 and can we really trust him and everything. But in this kind of anonymous reputation-based online environment where he has an avatar and people say, hey, that guy's really reliable and makes good decisions, then it works. So I think that we are moving to a world where those kind of ideas about local geography, around racial identity, gender identity, age matter less relative to your positioning in online communities and your reputation within those online communities.

So yeah, I do think that part of that too is that this is super global. So the other people that someone's working with in those kind of virtual worlds might be scattered all around the world and connected with the only friction being the latency of the internet infrastructure itself. And so with that kind of geographically dispersed organization, I do think that violence against that group, like on the ground boots, becomes very hard. It's basically like, who do you target? Suppose there was one of these DAOs to go back to the cryptocurrency governance example. And some government didn't like what a DAO was doing. Literally, what would you do. There's no individual person who has control. It's a pure software system. And the people who are

token holders, there may be tens of thousands, hundreds of thousands of them scattered globally whose identities are not, you know, formally embedded in that system. It's all reputation based and it could be based on full pseudonyms in the way that in those massively multiplayer online games, in general, it's full pseudonyms. Like no one actually knows how old anyone is or what race someone is or anything like that. So yeah, I tend to think that this decentralization will lead to a more peaceful world. I also think that, you know, this is going to be a slow process. That pendulum swinging towards centralized power was over the course of probably millennia, basically since Sumar and the first civilization and agriculture and everything.

I think the pendulum was slowly swinging towards centralized power. So if we're swinging the other way, it's going to be over a shorter time horizon, but it's still going to be over a very long time. I do think, though, that cryptocurrency protocols are actually, after the internet itself, the most important technology as part of that pendulum swinging towards decentralization. If you were thinking of the best-selling sci-fi novel Ready Player 1 during that conversation, you are not alone. A Dow is a wild idea.

But if you think the video game example is silly, remember that Vitalik Buterin created Ethereum when he was 19 years old. It is currently worth $28 billion. But I always try to heed the lessons of history. Inventions like the joint stock corporation significantly change the way humans cooperate and build. Maybe we won't call them DOWs, but some new form of coordination may emerge that has a similar impact on our future. Naval Ravikant, CEO of Angelist, helps us put this all in more perspective. Yeah, so this is a very tricky topic.

On the one hand, the good news is now you can raise money for a crypto token protocol project from any way. in the world, you can raise it from all over the world, you can raise it from all kinds of investors, and that token will be liquid immediately. In other words, there's only secondary markets and buyers and sellers for it. And because of that, the market of potential investors suddenly goes up 10x or 100x and you get permissionless fundraising. And there's more models in terms of how you can design the tokens, how value can accrue to them, how you can trade them, what different layers and stacks you can build. So all of a sudden, you have permissionless innovation in finance, except you don't really, because there's still nation-state.

with laws and investor protection laws. So half the times you're breaking the law, and this kind of thing attracts massive scammers, all kinds of irrational and irresponsible behavior. So we kind of went through the boom phase where you had developers with just white papers and pretty bad white papers and no real potential, raising hundreds of millions of dollars

from unsophisticated investors from around the globe. We're going to lose it. On the other hand, you've had people who have made $100 billion investing in Bitcoin and Ethereum in the first place, so at least the original set made money. And you also do start to break Silicon Valley's chokehold upon the world. I mean, why should Silicon Valley be the only place where everybody gets to innovate?

It's not because we're any better here. It's not because the infrastructure here is so amazing. Silicon Valley simply gets to innovate because it has kind of this critical mass of investors and companies. And now you can open that up and take that to the Internet. So that's a wonderful thing. The entire rest of the world, except for Silicon Valley, should be rooting for the ICO token model. The problem is along the way, it's going to have lots of fraud and lots of scams. And it's going to take a couple of years before people lose enough money that they become a lot more careful and to start demanding oversight and governance and rules and smaller financing and structured and trenching.

Basically, you have to give the Internet a chance to rebuild the entire venture capital industry through the same painful lessons, but learning them much, much faster. And my guess is it's actually doable. I think if we left the Internet Wild West, a lot of what happened is a fool in the money or soon parted. So a lot of people who are in a lot of scams will lose money, which is terrible. But actually, fine, because they also made a ton of money with Bitcoin and Ethereum along the way. And most of them are just gambling their Bitcoin Ethereum winnings. They'll learn very fast.

They'll become very skeptical. And my guess is two years from now, an initial coin offering will be a lot more careful. They'll have to do full disclosures. They're going to have governance. They're going to have some reputable people involved. They'll probably raise much smaller amounts of capital. They'll have checkpoints and milestones, invest. they'll have investor activist boards, et cetera, et cetera.

But the industry needs time to figure that out. The mistake would be for the regulators to come in too heavy-handed and basically snuff out all the innovation. They won't snuff it out. It'll just go to another country. It'll just go overseas. It'll go anonymous. It'll disappear into the Internet.

It's the nature of these Internet things that once the cat's out of the bag, it doesn't disappear. It just changes form. So you could try and drive it underground, but I think that would be a huge error. Because I think that Silicon Valley model of funding, at least for protocols, maybe not in other areas, but at least for protocols, the Silicon Value model of funding is on its way out.

So the question is, does the rest of the world want its share or not? And if I was a regulator or a politician or a financier anywhere else in the world, I want to access, I would look at token innovation as a great thing. But in the short to medium term, they do have to worry about are people getting outright scammed? So I think that the financial regulators do have a burden where they have to go after, scammers, they have to force full disclosure, and they probably have to, I mean, they have to enforce the security laws that are on the book. The SEC, for example, doesn't write the laws. It is enforce them. So they have to enforce the laws. But on the other hand, they do have

to give enough flexibility and leeway that this new form of financing can fully develop, and it doesn't just go underground or overseas, which are real possibilities. If Naval is right, the future will be somewhere between the cypherpunk libertarian ideal and the status quo. We may see a long period of regulation, consolidation and reform. But hopefully the global crowdfunding model survives in some form, because the more open and fair the network of capital, the more potential there will be for discovery and growth. Two lingering issues for me as a crypto outsider were regulation and security. Whether cryptocurrencies will be lightly or heavily regulated is an important unknown.

I first asked Peter von Volkenberg, the director of research at Coin Center and a leading lawyer in the field, to describe the current state of regulation. The first thing to point out is there's no central bureau of cryptocurrency regulation. Every regulator is going to come to this for a different purpose because we have activities-based regulations. So money transmission regulators who tend to be at the state government level, not the federal government level, have come to this because, oh, there are companies out there like Coinbase that look kind of like PayPal, but they're moving people's bitcoins instead of their dollars. Are they a money transmitter? Do we need to regulate them? That

conversation is maybe, you know, baseball inning wise, maybe we're in the third or the fourth. It's still pretty early in the game. And actually, things are going reasonably well. America has some problems here because we have this 53 state and territory regulatory structure where Coinbase will have to get a whole bunch of licenses and also explain to a whole bunch of state regulators who may not be particularly focused on technology. They're focused on, like, Western Union and those kinds of businesses. They'll have to explain to them what Bitcoin is, and that's a difficult conversation. And then they'll have to plead for them to take them seriously and give them a license. So that's moving slowly, but it is moving. Then for other regulators, so for anti-money laundering regulation,

you have FinCEN, a division of the Department of Treasury, that wants money services businesses, which include people who are categorized as money transmitters, but also include other types of financial institutions. They need to go and register with them and do suspicious activity reporting and KYC all of their customers and basically spy on their users is one way to less charitably put it. That moved a little bit faster. quite frankly. FinCent in 2013 came out with guidance that said, look, if you're an exchanger or an administrator of a digital currency, you need to act like a bank, basically, and spy on your users. There are still some complicated questions that remain. So maybe we're in the like seventh or the eighth inning as far as

anti-money laundering regulations. The biggest complication is what if you're not an exchange like Coinbase? What if you're creating a new token? What if you're going to have an ICO? I hate the term ICA, but what if you're going to sell the token and then be done with it, wash your hands of it? You're not like a financial intermediary where money flows through you from one person to another. You invented a new digital asset and you gave it away or you sold it. Are you a money services business? Are you subject to financial surveillance regulation? Did you need to KIC all your buyers? Do you need to file suspicious activity reports? Our strong opinion is that that shouldn't be the case because we should have a constitutional right to privacy over our financial data. We don't.

because we hand it off to intermediaries. We hand it off to third parties. And so our constitutional rights under the Fourth Amendment against warrantless search are abrogated because we've given up our reasonable expectation of privacy when we've given up our data to a company like Bank of America. And that's fine. But this is not a situation where we're giving up our data or our information to an intermediary. This is a situation where we're transacting peer to peer with another company or person. And so deputizing that company or person to spy on us because we're involved in a face-to-face transaction rather than using them as an intermediary is a little Orwellian and I think unconstitutional. But all that said, I'm an advocate. That's what I do. This is a gray area of the law.

And it's unclear whether someone who's doing a token sale should be treated or must be treated as a financial institution. So we're maybe in the eighth inning, but the ninth inning is going to be very exciting because this is a big open question as far as financial surveillance regulation. And then probably really early in the game for securities regulation of these new token sales. It's pretty clear that Bitcoin is not going to be labeled a security, though anything is possible, I suppose. But it doesn't have a good fit for the Howie test for what is an investment contract because there's no investment of money. People obtain it by mining, not through a big opening sale or something like that. There's no common enterprise because there's so many different corporations and businesses that are working on Bitcoin.

They're not really in league with each other. It's more like the gold industry writ large rather than one gold mining concern. But with a more centralized developed new thing, and centralized is a hard word here because these are open source softwares and the networks will only work if unaffiliated parties run them. But for something where there's really one small group of people promoting it, developing it, running it, and where there's no real use value to the thing yet, it's really just a speculative marker for the future value of this common enterprise, that's a good fit. it for a security. And I think personally, although the SEC has been silent as far as any official

response on this question, but I think personally a good number of the token sales out there fit the bill for securities being issued. And none of those token sales are registering with the SEC. So I think we're going to see some interesting moments in that baseball game. And it's still early. As I thought through cryptocurrency investing in ownership, the potential for new regulation was one key concern. Security was the other. Hash power is well-timed as the world is still considering the fallout of the recent hack of Equifax, which revealed personal information on more than 100 million people across the country. Nick Zabo famously says that trusted third parties are security holes. But frankly, I like not having to worry about

the safety of my money. I sleep well knowing that Bank of America and other custodians will protect it, or at least I think so. The storage of crypto wealth is daunting. Here are Jameson Lopp, a prominent thinker and engineer in the Bitcoin world, and Ari Paul discussing the challenges of security and the extreme measures some are taking to protect their crypto fortunes. What's the most extreme form of security that you've come across? I recommend that if people really want to get into the highly paranoid cold storage practices to check out the Glacier Protocol, and that's just at glacier protocol.org, but when you really get to the extreme of handling millions or hundreds of millions of dollars

worth of cryptographic assets, you start to see people and enterprises using dedicated rooms that are like a Faraday cage so that there can be no electromagnetic interference or spying of what happens inside of that room. And then inside of the room will be a computer that has never touched the Internet in its entire life. And you'll go in and have multiple security officers who have, you know, multiple security officers who have their own hardware key fobs who have to essentially do multi-signature signing off to unlock cold storage assets. You can kind of think of it as protocols that are very similar to what

gets used by the Patriot missile operators, where you have to have multiple people turning the keys at the same time in order to authenticate a particularly sensitive operation. So you really have to start worrying about new types of attacks that an average person would not worry about. And that's where you get into the more costly type of paranoia because when you're dealing with $100 million, all of a sudden it makes sense for an attacker to spend a million dollars to try to intercept whatever you're doing. So quickly tell us how nail polish figures into your security plan. So for your cold storage, the weak point is a hardware key logger. So you have an air gap device, basically a laptop that has never touched the internet. You need to get code onto that device to create public private key pairs for whatever cryptocurrency you want. Once you've done that,

you can encrypt the device, you can encrypt the private keys, and that encryption is as strong as the Bitcoin network's encryption. So that's safe. So whenever you're thinking about security, you want to think about what is the weak point, how does this fail? And the answer is that someone gets a hardware key logger onto that device. What that literally means is, let's say you have this air gap device in a bank vault. And so when accesses the bank vault, they open up the laptop and they install into the motherboard a key logger. So how do we prevent that? Because the device is encrypted, that itself is not the threat. The threat is that I don't know they've done that. And then I enter my password into that device. And then they have the password and they can decrypt whatever content we

have. So that device that's in a bank vault that's rented under a shell LLC name, we put it in a tamper evident bag, and that's wrapped in tamper evident tape. And then here's kind of the fun part, NSA best practice, you splatter it with glitter nail polish and take a picture. And the idea here is that maybe someone can buy the same tamper evident bag, the same tamper evident tape. Maybe they can get the same nail polish, but they can't, it's at least very difficult to recreate the same splatter pattern in a way that comparing two pictures you wouldn't notice. So if we access our air gap device and we notice that something is a miss, anything, we just destroy the device. Because all of the relevant information is encrypted and stored redundantly. So the key thing is if someone access to the device,

we're fine. We just need to know it. Regulations is a slow process and securing our crypto assets may be a hurdle, but we are still seeing enormous amounts of capital raise to fund new protocols. The largest fund raise to date with an ICO value of $262 million is for the Filecoin project, led by Juan Bennett. Juan is on the front line dealing with interesting issues. I began by asking him to explain the Filecoin protocol, but he also highlights how odd a situation he faces with investors. As he points out, the value of file coins should be rooted in their use case, but given the state of the cryptocurrency market, a large part may also be based on the potential for storing and moving value. The idea of file coin is you have a network of

participants where some set of those participants are storage providers, people with a lot of hard drive space and so on. To be individuals or companies, right? So it turns out that there's massive amounts of storage out there in the world that is completely unused. I've seen figures of, you know, between 40 and 60% of the storage worldwide is not used. So we could drop the price of storage dramatically. We could put all the storage to use. So this ecosystem right now, there is a market, of course, like there's a market of cloud storage, but that market is very inefficient in that it mostly deals with like people have to do contracts and agreements, and like you have to like hire a company and like you now hired a company and you're giving them

your data and so on. It's not really an algorithmic market. And so the idea of how can it's turn that entire ecosystem into an algorithm market where my computer, if it needs to store files, just kind of hires the network and it attaches money with the files that I want to store and pays a set of providers that I may or may not want to choose. Sometimes I want to choose them and kind of choose some specific guarantees. In some cases, I don't want to choose them. I want to get the cheapest price or get some combination of features there. And the way we can do that, the way we can mediate this whole exchange,

is with an asset, with a cryptographic asset. So that's what a file point token is. You use it in order to pay for the files being stored, and you use it to transact in the file point network. You know, it can also do payments and it can also do contracts and so on, like Ethereum and Bitcoin, but this is kind of like a side effect

of all of that code being available and easy is to use. The main purpose of the platform network is to do these transactions, these file transactions. So our perspective is that, you know, we live in a world where computing is one of the core critical things

that we do. And cloud computing specifically, like the idea that you're going to store your data not in your own hard drives, but in other people's hard drives that, you know, they're providing as a service is like a very natural one. Like you want specialization of labor in the computing industry. And the best way to do that is by having a really fast market where anybody that has large amounts of storage can sell it at, you know, really great price points. And the way to do that most effectively is with a protocol like, like Buffman, that involves

a blockchain, involves this creation of an asset that can mediate the exchanges here, in this network. At the very beginning, the filecoin network is going to be much smaller than than it will be in the future. So the people participating at the beginning will be dealing and transacting with falcon in a certain rate. Maybe it might cost, say, one file coin today to store a gigabyte for a year or whatever. And then the next year, it might cost, you know, a quarter of a plot point to store a gigabyte for a year. And so because, you know, the network has grown in size. Maybe there's just more people in general using cloud computing or, you know, cloud storage. and also there could be speculation involved

that actually increases the price. So one interesting thing to note here is Filecoin, just like Ethereum and Bitcoin, just has this same store of value perspective in that if people agree that it's worth something and agree to hold it and they think that it's an appreciating time, then a lot of people are encouraged to hold it. A lot of investors ask to me, like,

well, how do you value an asset like Falcon? How can you try and value some of these tokens? And my answer is always, well, look, you first of all have to look at the actual value of the network is providing. Like, what is the underlying thing that this is mediating? And in our case, that's cloud storage. And this is like, try and estimate kind of like, what are the market caps of companies that are doing this kind of service and so on?

Think about, is this technology going to add or increase to that? Is it going to make it grow at a faster rate? So consider that. What kind of market share could you envision this kind of network gaining? And then what kind of new things are going to be possible here that are going to just potentially create an introduce a new layer value? But then additional to that, you have to consider what is the sort of value component here? Is this an asset that is useful to transact in and use to pay each other and so on? That adds a yet another component.

And so, you know, something like Bacon or Ethereum are like really valuable right now. And a lot of that is coming from from people perceiving this as a useful store of value and a useful way to store an asset. Valuing networks like this, you have to like decompose it into the underlying different components. And so there's the underlying cloud storage part. There's the new things that are going to happen. there is the store of value perspective. There's like the speculation side of things of like being able to trade on it really quickly

and that in itself adds some value to approve. A lot of tokens have massive valuations that kind of don't track with what the underlying value they're supposed to provide is. And I think some of that is real and there is utility to having these much more liquid tokens and you could use them as a store of value to some extent. And I think a lot of that is just hype right now. You have to pick these things really well. And with a lot of money, there's always like, that's always going to be.

attract either less good teams or even bad actors in some cases where, you know, some projects are either not going to be that good or just not going to be real. Like, we've already seen a number of scams and we're probably going to see a lot more. And so people that are considering, you know, investing in these tokens have to think very carefully about and diligently in them and understanding, you know, who is a team? Is this like an actually really strong, solid team that can deliver on what they're proposing? How are they going to maneuver and adjust to like changes in the market and changes in the world and changing technology, and then look hard of the technology itself and try to gain a sense

of like, is this thing actually valuable? This remains the trickiest part of cryptocurrency participation. How to disentangle the actual value being created from wild speculation. It's good to know that key creators are thinking about this too. If Juan is building a storage function for the decentralized internet, Munib Ali is doing his part building the plumbing of Web 3.0. Munib is the co-founder of Blockstack, which is labeled as a new internet for decentralized. apps. He describes how he and his team plan to provide the basic tools which allow a broader

developer community to build the apps that the general populace will actually use. Union Square Ventures have this investment thesis of data getting unbundled. So it's not just data, it's also like really big apps getting unbundled, like the case of insurance being provided by Airbnb versus insurance being a market where you might get a better price and better service because there's free market competition there. So when you see these big apps getting unbundled or all the data that they were keeping for the users getting unbundled,

you'll see an ecosystem of developers coming in and actually building new features or building new apps or coming up with new ways of actually interacting with this data that single company never would have been able to think about. The analogy here would be, imagine if you,

were trying to create a new city. Initially, maybe there are some developers who would come in. Land is extremely cheap. And they're trying to build certain basic facilities without their work, that land is worth almost nothing. So I think of the initial developers as like those people who basically take it from nothing to something. And they are building the foundations. They're building the roads. They're building all the pipes. And then other types of people start coming in. like maybe someone would make investments in some commercial real estate and start opening some shops there which would attract some residents. So these are the users and developers who are building applications, at least in the case of block stack.

There's a two-sided market. We want apps to attract users, but then developers want to see a certain amount of users so that they can use those apps. So it's like really creating an ecosystem, creating a thriving city, that if this works out and you end up creating a city like LA or New York, then everyone who was part of that process who was there early would get to benefit proportionally as well. But because it's an ongoing process,

you can join this ecosystem anytime you want, and not that just the really early people ended up making all of the profit. This is one of my favorite analogies that I've heard, which is this idea of a new city. And it's a good way to have you describe what in the, that analogy block stack represents. So is it is it the basic land and plumbing? Like how far down

the stack is it? And what specifically is it that you're building that's different than the infrastructure that everyone's already familiar with, the internet that already exists? A lot of the work that we've been doing has actually been solving a lot of the underlying hard challenges. So when we were raising our last round of funding, we basically had reached a stage where we could say that we have what you can think of as an operating system and that operating system kind of like takes care of most of the complexity. Just like imagine that if you are installing an app on your computer, that app developer never has to worry about how to talk to your speakers or how to talk to your hard drive or how to talk to the camera. The operating system just takes care of all those things

for all of the applications, right? So if you install another app and that app needs access to the camera, they don't need to write that logic themselves. They would basically offload that functionality to the operating system. So what we have done is that we have created this like decentralized internet

and the software that we have for our stack that takes care of all of the basic things that app developers need for building their applications so that they don't have to reinvent the wheel over and over and over again. They don't have to interact directly with blockchains, they don't have to reinvent a username system. Like basically every user can create their own identity, their own username, and then use it

with any application that they want to use it on. So it actually reduces the workload for app developers because now they don't have to redo a lot of the same functionality like, hey, how do I manage user accounts? How do I keep a database of like their username and their passwords and how How do I store data for my users? Because we have a storage system where users just plug in their private storage once, and apps can just write data to that. How does the block stack token fit into all this?

Earlier, I mentioned that the token is associated with some scarce resource on the network. In the case of Bitcoin, that resource is actually the currency that the token represents. I mean, currency has to be scarce almost by definition. on Ethereum, that token is associated with computation. So if you have the token, you actually can spend it and make the Ethereum network do some computations for you. So the scarce resource on Ethereum is actually compute power. On Blockstack, the scarce resource is actually digital property.

So the token can be converted into digital property, and that property can take the shape of a domain name, that they are scarce, and you're registering a domain name on the system. It could also be that you want to register your app. So imagine like an app store from like Apple or Google Play, and it's a scarce resource. If you want to publish your app, you want to register something there,

you would need the Block Sack token for it. And you can extend that to like software licenses, software packages that people just want to distribute, traditional software packages. But for us, they're all different types of digital property, and that's the scarce resource that the token is attached. So we will basically end up, like I gave this operating system analogy, but that operating system is actually more like iOS, where Apple was building that and Apple was working with a lot of developers who would build apps on this new platform, this new operating system, and then users were getting introduced to the platform as well. So on Blockstack, the software is open source, but the token is the mechanism through which, instead of, in the analogy of Apple, developers would have to go to Apple and make an account.

then they can publish an app if Apple approves the app. In BlockSag, developers would have to get a hold of the token and then spend the token to register their app. Similarly, users to onboard, they would need to get the token and then register their username, make their profile, so that they can now start using the app there. Juan, Muneeb, and others are rebuilding the internet as we know it. Whether their particular protocols emerge as the winners is a big unknown,

but it's wild to think that this is all happening quietly behind the scenes. Muneb's key point resonates with me. I've started websites and this podcast with very little effort thanks to the tools available. Like so many others, I experiment and stick with what works. That's made possible because of incredible internet infrastructure. Developers provide the rest of us with leverage. It may take years, but the tools we need are being built now. Hashpower started because I was interested in the potential of cryptocurrencies as an asset class.

Like any other schmuck, I saw that Bitcoin and Ether had given some investors a 100, return or higher and became intrigued. But now I am far more intrigued by the bigger picture. Listeners will know that I'm a huge fan of bottom-up evolutionary processes. Fred Ersum, co-founder of Coinbase, begins to wrap things up by explaining why this is so powerful in the context of blockchains. You might describe a fork as sort of a parallel universe or an alternate reality, perhaps, where at one point in time they were the same thing in either two or maybe even more or different things. Basically, if you think about blockchains as metaphorically similar to organisms. Organisms evolved over time by having some DNA and then some changes, some random

mutations are slowly introduced to that DNA over time. And as a result, you try a bunch of different subtypes of that organism over time. Some work really well. They live on. They continue to evolve. Some die. So you get this constantly adapted behavior and these things become stronger and stronger. And they obviously co-evolve with their environment too. So it's not just in isolation. And that's what's really exciting about these blockchain-based protocols is not only can anyone create them or access them, but they evolve just like organisms in the same way, where anyone can fork them, you know, analogous to a sort of a mutation in the DNA. And as a result, you get to try all these different subtypes of one general idea quite quickly.

And it turns out that since blockchains are software, they tend to operate more at the speed of software than the millions and millions of years we've needed for evolution of organic organisms. One may be practical way to think about this is I think that through blockchains, we will be able to try hundreds, if not thousands of times more types of economic and governance systems than we have in the last hundred years of the quote-unquote real world. There's a guy Brad Burnham who co-founded Union Square Ventures, who said something to me once that is really, stuck with me, which is basically that market structure is the highest point of leverage that he can think of. In other words, the way in which a market is constructed really determines all of the behavior that emerges out of it. For example, if we look out the window here, how much of the world looks the way it does because we live in a capitalist and a, in the current form we have,

democratic government and society. I would argue a very, very large percentage of it, right? So the bill of rights is one of the first incentive structures to act in. Or the enforcement mechanisms if you don't abide by the Bill of Rights or the law is set forward by the government, right? So to answer your question, I guess one thing I think about is I do think that blockchains, quite literally, we will live in a blockchain-based reality in the future in one form or another. So I think there is a rare kind of moment we have here in history where we're experiencing what I feel to be a very important paradigm shift. And there are very times short windows of opportunity in these paradigm shifts

to define how these underlying structures really work. In other words, at the beginning of the web, there was sort of a short period of time where a lot of base protocols were defined, and then a bunch of stuff got built on top of that, and all of a sudden it became really, really hard to change the underlying infrastructure. And as a result, the web kind of looks the way it does today, where hyperlinks link a bunch of stuff together. It turns out there's a bunch of spam email because there are no economic incentives at the beginning of the web to prevent it and banner ads, which Mark Andreessen would say is the original sin of the internet, right? All this stuff. I try to think about what are the incentives of these networks and what are the best ways to

program them? Because I think, generally speaking, when a new technology comes out, it tends to be more technologists who are the ones driving the change. Generally, it's some nerds who sat around and said, hey, wouldn't this be cool? And before you know it, you have this like super powerful tool, right? I mean, this has happened with many new technologies in the past. So I guess one thing I try to do is try to be thoughtful about what is the reality we're creating for ourselves, whether we fully realize all the implications or not yet. So how to end this stage of our exploration?

Naval Ravicon has been a key guide for us throughout hash power thanks to his clean descriptions and overviews of difficult concepts. Most of us, myself included, will have to remain fairly passive observers of this huge technological movement. But that begs the question, what should we do next? Right in the middle of our conversation on blockchains, Naval and I spent some time talking about work itself. This is a perfect place to close because it's relevant to us all, and it's the sort of framework

that produces ideas like blockchains in the first place. I urge you to use Naval's framework as a means to evaluate your career, what you are good at, and what brings you joy? I have a very young child. I expect that my child will not get a university degree, or at least not in a classic sense of having to go spend four years at a university and get a stamp. I expect that he won't have a concept of a single career. I expect that he probably won't have a normal job.

He'll be paid much more for his output. Because in knowledge work, which is what most work is these days, in knowledge work, if you do a great job versus a good job versus an okay job, the difference to your employer in terms of what it's worth is 0x 10x 100x. We're used to tracking 9 to 5 because if someone's cutting down wood, you watch them cut out of the wood. They work for eight hours, give or take, they've cut down roughly the same amount of wood.

However, if they're sitting in front of a computer and they're writing code or they're preparing a presentation or they're coming up with a new product or brand strategy, you know, they're writing an advertising campaign. If they write the right ad slogan, you might have a $100 million product in your hand. They write the wrong ad slogan. you may have a $10 product in your hands, or you might have a money losing product in your hands. So it's more and more work is going creative.

And as it goes creative, you can't track the inputs. You have to track the outputs. Almost everybody these days who makes a lot of money doing something, they're essentially doing some kind of creative work that society does not yet know how to train people to do or how to replicate. Creative work by its nature is easily leveraged. So it's a force multiplied. And it's something that's very hard to train people how to do.

if I can train you how to do something, I don't have to pay you a lot because I can just replace you you anytime I want. On the other hand, if you're a genius at something, you're doing something that I don't even know how the heck you do it, but you're creating new things. I have to pay you what your work. So can you touch on that idea and kind of why you think, if you do think, curiosity should govern a lot of what people do versus, say, trying to fit within some widget system? I am in the blockchains and cryptocurrencies because they're intellectually fascinating to me. I mean, yeah, maybe it might make some money along the way, but that's, It's not my primary driver.

Actually, given how early I got into blockchain, I didn't buy that many coins because it's not the token part that's interesting to me. It's far more interesting to me to think about the repercussions and to understand the technology and to follow the code essentially down the rabbit hole. I think I got into it because of intellectual curiosity. And so the nice thing about that is, one, that's its own reward. Even if I don't make any money, it's its own reward. Second, that means I got into it before it was hot before everybody was getting into it. The returns are gone by the time everybody else gets into it. And these days, the markets move very, very quickly.

If you can figure out something that society will want before society itself and mass figures it out, that's when you get paid. And your only chance of doing that is if you're intellectually curious. And intellectual curiosity is different for everybody. So I cannot prescribe it to anybody. I can't say get into drones or get into VR because I don't know what's going to be hot and what's not. In the moment I can tell you it's hot and I can make you the convincing argument that

it's hot, then at the same time, millions of other people are convinced that it's hot, and by the time you get there, it's going to be too crowded. So the only way to really succeed at an extreme level, if you care about that, and to enjoy yourself along the way, is to just go deep into something. And the nice thing about technology industry, and by technology, I mean the broad tech industry, I include biology, technology, healthcare technology, all kinds of things, is if you get obsessive about something that you are convinced is the future, and you're just into it for its own reward and merit.

First, you're going to outwork everybody else at it because you'll be reading about it for fun when everybody else is doing it for work. And then second, you'll stick with it long enough for it to materialize when everybody else will give up. And third, when people show up, you'll just be the expert just because you'll have thought about it at a different level.

And then you'll get paid. Now, it's obviously risky, so you don't do this purely for career reasons. But I've at least found that a long-term basis that following my own intellectual curiosity has paid me better than trying to do what I thought would make me money. I think most of life these days, because now we operate in a world where there are 7 billion people, and we have access to almost all of them, and we have access to all

these countries and all these markets and all these societies and all these nation states. We're no longer living in tribes of 150 people with very limited opportunity. Because we have access to everything, I would say that there's no point in trying to imitate anybody else. There's no point in trying to pick up skills from somebody else. What you really want to do is just figure out what you are uniquely the best in the world that because you just love it, and then just find out who or what needs that the most. And by the way, I think that even applies in dating and marriage and relationships and working and colleagues. It applies in many aspects of life. Rather than trying to change ourselves to fit into the mold or wherever we happen to be, we should be more open to

exploring and finding the place where we fit in perfectly and they're missing us. I grew up pretty poor household. I wanted to make money. It was really important to me. probably too important. At a time when I said to a friend of mine, I said, I would sell sewage or apple cores to make money. And luckily, it didn't turn out that way because that would have been miserable and everything else. I wouldn't have done it. I wouldn't have stuck with it. But maybe because there's someone out there who loves apples, right? And that person would have built the best apple farms that have obsessed over apples and they would have easily outcompeted me because I would have just finished for the money. It would be a terrible existence the entire way for me.

So I was obsessed with just making sure that I got to make some money because I just had zero. So I did get very analytical about the whole thing. And I had a framework back when I was like, it's 15 years old. And I haven't really revisited the framework. So I'm sure it's terrible now. But the three things that I came up with was I said, to make money, you need specific knowledge, you need leverage and you need accountability. And what I mean by those three is, let me start with the simpler ones. Leverage is just you need a force multiplier. Like Archimedes said, give me a lever long enough and a place to stand and I will move the earth. And leverage means that, you know, when I'm sleeping, there are 100 people working for me. When I'm sleeping, there's a thousand servers

and data centers working for me. When I'm sleeping, there's $10 million worth of capital being deployed that's going into investments working for me. Those are examples of leverage. The reason why computing and books make so many people rich is because there are forms of leverage that are permissionless, going back to the idea of permission networks, which is not, I can write a piece of code, releases the internet. If it's a useful piece of code, I can make a lot of money off of it because it's leverage. The code is working for me while I'm not. So to make money, you need leverage. No one gets rich running out their own time. The second piece you need accountability. You need accountability because if you're not want to put your name on it,

if people can't identify that you did it, they're not going to pay you for it. So the more faceless, the more widget-like, the more of a large team you're disappearing into, the less credit you get and without the credit, you're not going to get paid. That said, the credit comes with risk. Accountability's not free. You're sticking your neck out there. It's why sales guys often, or sales gals, make more than engineers because they're sticking their necks out there. Some days they don't eat. Some days they eat well. And then the last piece is actually the hardest, which is specific knowledge. Specific knowledge is the knowledge that you have that lets you do something that other people do not know how to do and cannot be trained to do. If I can train you how to do something, give you a

certificate, now you are suddenly replaceable. And I'm never going to have to pay you more than that exact job is worth. And that job is always competitive. And I'm always training other people that do it. so you're never going to get rich off of it. So then I was stuck with a problem at a young age. I was like, okay, leverage. I got to go into computers and tech, which I loved anyway, so that was easy because that's a free-formal leverage. Accountability means take risks, take responsibility, stick your neck out there, do things,

promise things to people that they don't think are doable and deliver them. That's that I can do. But the last piece was the heart of specific knowledge. What knowledge do I specifically have that nobody else does? And the only way to build specific knowledge is you just have to love something. something. And if you love doing something, you're going to put in the hours. And it took me decades to figure out what my specific knowledge was. But it turns out, looking back in time, I now realize what my specific knowledge was. I didn't even know it at the time. But I was obsessed

with a couple of things as a kid. I loved to read and I loved to read all kinds of stuff, including junk. But when I got into a topic, I would just dive down and read into it. So that helps me speed on new technologies and new spaces very, very fast. I played a lot of war games as a kid, which makes me actually pretty good at kind of broad strategy. And I used to play a lot of role playing games. I used to talk, which was just talk, by the way. I used to get together with other kids just talk, talk, talk, talk, talk. So I'm a good talking, right?

So the combination of being good at reading, good at talking, and good a strategy, actually, and liking computers puts me into the tech strategy business. And that's kind of where I meandered my way to. And now I found even within that the pieces of it that I like to do and I'm good at, turns that I'm not good at managing people. I tried to do that for a long time because I thought, with the form of leverage. I thought I could learn it. I'd be trained I'd do it. Turns out, I'm terrible at it because I never liked it in the first place. I'm not a people person.

I don't like to hang around lots of people. So you kind of have to know your strengths and your weaknesses and double down, double down, double down on your strengths and then find the career in which those strengths really matter. And there's always one out there for you. One of my favorite modern philosophers James Karse wrote, there are at least two kinds of games. One could be called finite, the other infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play. Most people play that first kind of game, but the second is far more fun. Naval's advice is to find a deep personal curiosity, because insatiable curiosity usually leads

to specific knowledge. Specific knowledge paired with leverage and accountability is as clean a formula as I can think of for leading an interesting life. The dinner I mentioned at the beginning of this episode was a microcosm of the entire experience producing these episodes. It's quite a thing being the dumbest, person in a room of people trying to literally change the digital future. As we normals go about our days, there is something fascinating brewing under the surface that could upend and reshape industries in the decades to come. I'll be honest, it's been hard to maintain my skepticism through this process. I think skepticism is still the right stance when approaching the particulars.

Most ICOs are nonsense. Expecting exceptional risk-adjusted returns is dangerous, and so on. But when it comes to general skepticism, I've had most of my questions answered. It's only fair to tell you what I've been doing with my money after all this research. I've heard a joke that putting a small percentage of your portfolio in crypto is like the millennials Pascal's wager. If we are wrong, very little damage is done, but if crypto takes off and grows 100 times from here, we achieve the investment equivalent of Nirvana. I have invested money as a limited partner with Block Tower Capital, run by Ari Paul and Matthew Gets, because they've been my primary teachers and there's no doubt the market is inefficient for now. I also own Bitcoin stored on a Treasur hardware wallet. Combined, these investments represent a small percentage of my portfolio.

As a whole, my portfolio remains dedicated to an investment strategy that is antithetical to cryptocurrency investing, namely buying very out-of-favor companies with decent fundamentals and improving price action. I view my cryptocurrency investing as an excuse to keep learning and stay involved in the technological movement, which I intend to do. I finish Hash Power with more questions than I started with, but with at least a firm understanding of why this technology may end up being so important to us all. Thank you for coming along on the ride with me, and thank you to all the brilliant thinkers

and creators who have served as our guides. This has been one hell of an exploration.