On The Brink with Castle Island - Jesse Walden (Variant) on the Crypto Ownership Economy (EP.106)

Episode Date: July 27, 2020

Jesse Walden, founder of Variant joins the show. In this episode we discuss: Jesse's journey in the crypto industry, from founding Mediachain, to being an investor at A16Z, to founding Variant The crypto ownership economy and how Jesse sees the evolution of consumer software Crypto projects through the lens of contract theory   Learn more and follow Jesse at www.variant.fund and follow him on Twitter @Jessewldn

Today on the podcast, I sat down for a conversation with Jesse Walden, the founder of Variant, an early stage venture fund focused on investing in crypto networks and platforms building the ownership economy. I was excited to chat with Jesse because I think he's one of the sharpest and most original thinkers in our industry, and he has an expansive view of the potential of this technology. He also comes at this space from the perspective of both an entrepreneur who started a business in this industry with a company called Media Chain and an investor, having spent the last two years at Andreessen Horowitz before leaving to start variant. This was a fun episode.

We go into a lot of detail on Jesse's writing and his general thesis. So without further ado, here's our conversation with Jesse Walden. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.

You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin. Jesse, thanks so much for joining us today on the podcast. Yeah, great to be here. Thanks for having me. I'm really psyched to talk to you. Having new funds being launched in this category is really exciting and you're launching with a lot of fanfare. So excited to get into variant strategy and talk about how. how you're approaching this industry. But maybe as a jumping off point, could we just start off with a little bit of background on yourself

and your entrepreneurial experience, how you got in the space? I got into the space as an entrepreneur in 2014. That's the co-founder of a project called Media Chain Labs. And we had the goal of sort of doing what Bitcoin does for a digital financial asset for a different type of digital assets. So rather than a financial asset, we were focused on digital media assets. And when I say doing what Bitcoin does for a financial asset,

What I mean is enabling the owner of the asset to be in charge of that asset independent of any third party. And we wanted to do the same for creators of the world's images, videos, and songs to help them capture more of the value they create on the platforms that distribute their media. And so started that project in 2014. It was sort of very early days in the space, particularly for non-financial applications of this technology. It was sort of an interesting time where there were a couple of dominant narratives. There was the narrative that Bitcoin would be the blockchain to rule them all and everything would be built on top of Bitcoin. And the second narrative was that the interesting thing about this technology wasn't Bitcoin or cryptocurrencies or applications, but just the blockchain itself, which was much more to do with enterprise adoption. And at Media Chain, we kind of believe neither of these narratives because we're not building on top of Bitcoin and we weren't building for enterprise or building for developers.

But there just weren't a whole lot of developers in the space back. And the interest we were getting was coming from big enterprises, one of which was Spotify, who actually ended up acquiring Media Chain Labs early in 2017, sort of before the market mania. And so joined Spotify, led blockchain R&D there for the better part of 2017, but then ended up leaving to join Andreessen Harwitz as they launched a dedicated crypto fund because I wanted to get back to the space. Andresen Harwitz had been an investor in Media Chain, And so I had the relationship from that. And I wanted to just take a wider view of all the

exciting things that were starting to happen as of that year. Spent two and a half years at Indreason Horowitz and just recently spun out Variant to focus on early stage investing in the category. That's awesome. Well, I definitely want to hear more about the Andreessen experience and then starting variant. But we'd love to maybe ask a couple of questions about a media chain. The last time we spoke, I was telling you about how when I first started looking at the space, I was really obsessed with colored coins and kind of the open assets protocol. And this was before Ethereum launched and before the ERC20 standard was really taking hold. And so there was this school of thought, probably right around that private blockchain time that you were talking about,

that there was a belief that maybe colored coins would be the way that traditional securities moved around for a hot minute. That might have been a quick one or two month kind of fad. But what was the landscape like when you were starting media chain? I mean, this was before ERC20, I'd imagine. It was before Ethereum launched at all. So I, of course, was aware of Ethereum, read the white paper and it actually inspired a lot of ideas in Media Chain, but it didn't exist. And so the idea that you could easily create an ERC20 token or an NFT, that those ideas were not widely distributed, if understood at all at that point. And that said, there was the history of colored coins. There was proof of existence on top of Bitcoin. And those projects were definitely inspirational

to me and the team at Media Chain because we saw that you could represent sort of alternate types of assets on top of a blockchain and using the same, sort of public key cryptography that makes a Bitcoin attributable to its owner, you could attribute all kinds of other assets to their rightful owners. So it was definitely an inspiration and sort of got the juices flowing and thinking about how media might propagate. And I remember sort of one pivotal moment for the ideation of the project came when I read a blog post on Union Square Ventures blog. And they were talking about dark web marketplaces and how the seller's reputation would persist across marketplaces, even as they would get shut down by federal agencies. So marketplace would get

shut down. A new one would pop up the next day, and all the sellers would be there with their reputation intact. And that was because their reputation was tied to their public key, as opposed to being tied to an account that the platform controlled. And I remember just getting sort of into the comments on that post and talking about how you could apply the same idea to information about media assets independent of the platforms that they are distributed on by using public key cryptography to attribute information about who made a thing or what it's about to a public key. And so I think that was sort of right around the time when it all came together, the inspiration of colored coins, proof of existence, and dark web marketplaces sort of congealed into the spark

that came media chain. I still find the idea just incredibly attractive. And I wonder if you have a point of view on if you were to start that business today, just given everything that's been built, all the infrastructure and tooling, what would look different? I mean, would this be something built on Ethereum? Would it be its own thing? How do you think about that? I'll frame it as a lesson learned. One of the major learnings from media chain was that we have this belief that the scarce thing on the internet was attention. And I think it largely is there's a fixed number of hours in the day for all the humans on the planet. So you can actually measure the available

supply of attention at any given time. And in the world of social media, of course, everyone's competing for that attention. And so we had the belief that because media assets like images, for example, get shared through copy, paste, drag and drop, they very easily lose attribution to their creator and therefore lose attention that they could be accruing. And we thought that if you could preserve attribution and preserve that flow of attention, that would be a strong enough incentive to bootstrap adoption of this new protocol, which essentially was for media attribution. where I think we were wrong is that attribution is not necessarily a strong enough incentive to bootstrap adoption of a new standard like Media Chain.

And instead, what I think I've learned is that markets drive new standards. And one of the sort of interesting ideas that sort of evolved since Media Chain is that of NFTs, non-fundable tokens on Ethereum, which is a standard that in many ways is sort of accomplishing a lot of the things Media Chain hoped to. NFT is a unique identifier for an asset. It could be an image, a video, a song. It could be a loan or any other asset, sort of similar to the idea of colored coins.

But there's a standard where you can hook that unique identifier to metadata or information about that asset. And that could be who made the image video or song or what it's about. So a lot of the ideas that we wanted to achieve with Media Chain can be realized through NFTs. And I think what's driven the NFT standard to the sort of very early success that it's had is the fact that the NFT standard was created

during the 2017 market boom where ICOs were going on. So people were starting to understand, oh, yeah, these digital tokens, they have value. I can make money from them. And that understanding was enough to drive the adoption of this standard for a unique ID and metadata hook to it. I think that a lot of the ideas in Mutin will get realized through NFTs or some standard like it. And it will be markets where it's financial scarcity, not attention scarcity, that's driving adoption. That's fascinating. I could definitely see that. So maybe transitioning over to the investor side. So you go to Andreessen Horowitz, it's obviously a great platform to launch out and start investing in this space. So talk a little bit maybe about your experience there and then the idea

for starting your own fund and maybe use that to dovetail into your thesis. What I can say about Andreessen is I think they're the first institutional firm to launch a dedicated crypto fund, and that's spearheaded by Chris Dixon and Katie Hahn, general partners there. Both of them have been involved in the space for a very long time. Chris has been investing in the space since 2013, I think. So, you know, it was sort of an incredible opportunity to work with people who are long-term committed and frankly rather visionary about where this space can go. I found the thesis there and resonated a ton. I was able to contribute to it as well. And so for me, joining was just an opportunity to take a very wide view of the space. And that's

what I did starting January 2018. And we invested in a lot of developer infrastructure supporting tooling and early applications like stable coins and things built on top of smart contract platforms. Two years into that infrastructure buildout, I started to think about increasingly more and more how this technology is going to touch end users. And again, that's sort of where I started with media chain. I was always interested in how this technology ultimately could impact consumer experiences, like the way we consume music and images and media and so on. As the infrastructure build out progressed, I started to get back to that and realized that in order for that to be realized,

a new generation of talent needs to get started in the space, and that talent probably needs to be a little bit more product focused. So while the last years have been lower-level infrastructure types building, we need to get more software folks who've shipped consumer products at scale into the space. And so with that in mind, I actually shifted focus from investing to building out this education program called A16 Z Crypto Startup School, which I managed earlier this year. And that program has the explicit goal of getting more entrepreneurs from traditional software

and Silicon Valley into crypto. And we ran that program with a group of 45 students, over 1,000 people applied. So it was a really great group of students. And then now that course lives online. the goal is eventually a million people can hopefully take the course and go on to start their next project. And Andreessen has raised a fund that's north of $500 million just dedicated to crypto. And their VC fund that does all stages, but one of their core strengths is they're really able to put a lot of capital to work and double down on things that are working with their support infrastructure.

And I saw sort of an opening in the market where we both believe that there's this next wave of talent that's going to come into the space and starting to come in. And with Variant, I'm hoping to focus on the earliest possible stages. So typically earlier than Andreessen would go. And given that sort of complementary dynamic, I felt confident in spinning out and did so with the support of the team at A16Z. It's a great thesis. I think it's really well articulated in your debut blog post for variant, which is ownership

economy, crypto, and the next frontier of consumer software, which I definitely want to get into. Maybe going, just spending a second or two on that infrastructure phase, when you look at it, I'm focused a little bit more on probably the financial market infrastructure, so looking at things like custody and trading technology and how these platforms connect to legacy financial services. But maybe one thing that is a big overlap is just key management. If you're looking at developer tooling, that's obviously a big focus area as well. And just the ability for users to participate in these networks in a way that they're actually

being self-sovereign in holding their data, their money, their NFTs, whatever it may be. where are we with that in terms of progression in this industry? Are things getting better? I would say I'm a little bit less sort of idealistic about key management and self-sovereignty. I think key management obviously is a problem that needs to be solved for consumer adoption. And my belief is that in order for this technology to reach billions of end users, there probably needs to be some layer of abstraction that makes the experience of owning a crypto asset interacting with an application based on a blockchain as easy and sort of accessible as a web to log on. And if you look at Coinbase, which has done exactly that for Bitcoin and Ethereum,

that's, I would say, the core of their successor. It certainly was their early value proposition was we abstract all the complexity of interacting with these systems. You just have a username and password. And so I'm comfortable with that model because the nature of crypto networks is that users can always export their data. They can always export their Bitcoin from Coinbase to a third. party or to a solution that they control. And that's just not the case with sort of legacy web two

platforms. So there's just this inherent self-sovereignty built into these networks, even if there's an abstraction that makes it easier for end users to interact. Now, in terms of like where we're at with getting that abstraction right, I think today there are solutions in market that do this for a broader range of use cases, not only buying Bitcoin or trading crypto assets, but also interacting with crypto-native applications. And these solutions didn't exist even 18 months ago. So it is a major leap forward in terms of potential adoption. And you're starting to see developers integrate these solutions now,

such that you can have an interaction with a consumer-facing application built on a blockchain that you don't need to know is on a blockchain. You don't need to custody keys for. So I think that's a really important development that can help usher in more developers to get started because they can start to stop worrying about the complexity of the user experience. We're recording this podcast a few days after the big Twitter hack, and it really makes you think about some of these projects that are being attempted are really about restoring

the ability for users to own their social graph and to sort of port that from system to system. That obviously doesn't work great if you're losing the keys all the time. So there's kind of a natural tradeoff there between being able to hit a password recovery button and then having your kind of self-sovereignty over your data. But until we get to that point, I think we're just going to have more and more of these security breaches. Absolutely. And so there's probably some happy medium where there's potentially some third party that's default custodying access to keys that control accounts. But there's maybe some fail safes where for certain types of transactions or certain types of interactions and applications that are of high value or suspicious, you have some second and third authentication factors that maybe you do have more control over.

But for the day-to-day interactions, you don't want to be digging up a 24-word, pneumonic phrase or piece of paper that you store under your mattress. So some third-party solution is probably fine. It's like having a high security vault versus having a checking account that you keep a few bucks in to transact in daily. That makes sense. So if you're a developer, I mean, you're interacting with quite a few developers that are not in the crypto space just by virtue of being involved in the startup school,

in the networks that you travel in. How did developers sort of perceive this space as they're on the outside looking in and thinking about getting involved in early stage startup or starting a company in the crypto space? I think there's been a lot of obfuscation, honestly, for many developers in traditional big tech or Silicon Valley. And that's because if you just had enough time at your day job to follow the headlines of what's going on in crypto, you know, you'd see things like the Twitter hack or the countless other sort of like regulatory issues or whatever.

You just see a lot of bad headlines constantly. So that gets in the way of understanding the real technology and the opportunity. I think that's starting to change. That was the motivation for crypto startup school. There's a lot of really great educational resources out there. And now there's this critical thing that's happening, which is you are seeing startups and their founders go on to produce products that real people are using at scale. And some of those products are running this playbook of progressive decentralization,

which we can get into. But in short, the idea is that these founders are building. products, building user base around the product, and then effectuating a distribution of ownership or control over those products to the actual users. And one way to sum this up is that what's happening is these early founders are actually able to exit to their community. And that early liquidity and sort of the value that's created by distributing ownership to users and incentivizing them to contribute, I think it's starting to become a best practice that's attracting more and more new founders to the space because they're seeing, hey, there's this new way to do things.

There's a new way to make money as a founder. And it's a way to do so that's aligned with the users of my product. And that's a pretty compelling economic argument. It's a pretty compelling sort of emotional or intellectual argument as well for why you should get started in this space. So I think that's accelerating the rush in. So let's dive into that. I think this is fascinating.

And you wrote a whole blog post about this last week about ownership economy and sort of this next frontier. So maybe let's just start by defining it. What is the ownership economy within the context of crypto assets? And then how is this being put into the wild by entrepreneurs right now? The ownership economy concept is really to do with the idea that the evolution of software over the last 20 years in the internet era is one that can be defined by increasing levels of user participation.

Open source software is probably the biggest surprise success story in the history of software period. It's today responsible for powering trillions of dollars of value, all the mobile phones, all the PCs, servers, all the devices, all the software applications built on those devices use open source software components. And the key thing about open source software is that it's contributed by independent participants all over the world for free. It's crowdsourced. And so it's pretty amazing what crowdsourcing can accomplish. And then if you go a layer up the stack from the software to the applications built with that open source software, and you look at platforms like Airbnb and Uber and Wikipedia and Facebook and Twitter. There, you see the same phenomenon

playing out again, where all the content and the products of those marketplaces and networks are, again, crowdsourced from their users. Now, with crypto tokens, we had this sort of protocol breakthrough where crypto tokens are like packets for value. We can now distribute packets of value in the way that BitTorin enabled us to distribute packets of information, which is to anyone anywhere in the world without an intermediary. And the result has been a sort of unearthing of a new model for building internet products that are not only crowdsourcing code or crowdsourcing content or products from their users, but are actually crowdsourcing the operation of the network or platform itself from the users directly. And the reason we're able to do this, take this sort of next

logical step from code to products and content to actual operations of the network is because crypto tokens can be used as an incentive, an economic incentive to solicit those contributions from a global talent pool of independent participants all over the world. And if you think about it, this ownership economy idea is what is at the core of the success of Bitcoin and Ethereum to date, which are the first examples of networks that are entirely owned and operated by their community of users. And of course, those early community members were largely developers and technologists, people who understood these tokens could be a really powerful economic incentive. But now this same idea of user ownership over the products and services that they use or

contribute to every day is starting to play out across less technical, more consumer-facing verticals from finance to social. And that's really what I'm excited about and what I think the opportunity is for the next generation of founders. I find the, to be so fascinating. There's so many areas to take follow-up questions here. But I guess one thing that comes to mind as I read the blog post and I think more about it is how big could this be in terms of at what level of the stack do you imagine that these networks will exist? Will these be platforms that billions of users use every day that are kind of collaboratively owned or will this be sort of the plumbing that those type of networks are built on top of? So would it be like Twitter

or would it be something Twitter is built on top of maybe is a better way to phrase that? Honestly, I think it can be both. And so I think there's maybe sort of like a fat head and a long tail to this type of thing. Take Bitcoin, for example. Bitcoin has a non-sovereign store of value. I think that's an opportunity that I'm sure you'd agree is massive. And Bitcoin only works if it's user-owned and operated, meaning it's decentralized. There's not one party controlling the system.

And the users still have some degree of control over the outcomes of the network. that's a massive opportunity and it's sort of the fat head. I would say similarly platforms like Ethereum on top of which many of these next generation applications are being built could also be very, very fathead and that this is infrastructure to power the next generation of application. So you could think of a comparable being Amazon AWS, for example. But then I think the applications themselves can also be really big or really small. And that's one of the cool things about this model is you can have a network as big as Twitter or as big as Facebook that is user-owned and operated. And the network effects of this network would be to do with the fact that the users

are able to earn more of the value that they contribute. So there's a new way to bootstrap and drive adoption of these platforms. Because of that new model for network effects, the theory is these networks can grow large, potentially even larger than Twitter and Facebook did because at some point in Twitter and Facebook's growth trajectory, they started to become misaligned with their users and really extract all the value from the eyeballs on the platform. If the users actually own the network, there's an argument that the networks can be bigger due to the fact that they're better aligned with their users over time. Now, the other end of the spectrum is really long-tale opportunities. And I think that's a really interesting thing to note as

well, because historically, it's been really difficult to get small sort of community-powered networks off the ground because there's no funding available for those types of networks. They don't offer venture scale returns. So if you want to build a really niche application, how do you get it funded? That's been the problem. Well, now, because you can distribute value at much lower cost, I think you can end up in a world where you do have really niche platforms that cater to very specific communities, and those platforms can be sustainable by virtue of taking funding directly from their users and sharing the value that is contributed in a more cooperative fashion. That's really interesting. One of the things that comes to mind is you're saying that is just the speed of innovation and how these platforms will compete with their more centralized competitors.

And so if you think about Facebook, Zuckerberg can decide on a Sunday that he wants to buy Instagram and they'll have that product in market pretty quickly. Similarly, once Instagram is already acquired, they can copy Snapchat stories and be pretty quick there. Do you think that these decentralized networks have the mechanisms in order to push product at that? type of pace? I think it's definitely one of the key challenges. So there's no question that when you have decision by committee as opposed to unilateral decision by Zuckerberg, you're going to inevitably have a slowdown in the pace of decision making. And so I think the way that these networks can address that problem is by looking at historical examples or traditional examples of community-owned organizations and how they've scaled up decision-making. So one good analog here,

I think are cooperatives and mutuals, which are member-owned organizations. They're not too dissimilar from corporations in that cooperatives and mutuals tend to have a traditional management team aboard. The key difference is that the management team is only accountable to the members, and their job is not to maximize profits necessarily, but rather just to serve the best interests of the members, however, the members define that best interest. And so I think crypto networks can similarly scale up decision-making. and sort of have teams that ship great product through management hierarchy.

This can be achieved by having the owners of the network, the token holders, or whatever the implementation details may be, delegate their decision-making authority to management. Now, in the case that management is not serving their best interest, the users have recourse here, which is that they can undelegate, they can sell their tokens and leave, they can fork the network, and that recourse is not something that users have to the same extent in traditional platforms like Facebook and Twitter where Zuckerberg has all the control. So I think there's a way to get the best of both worlds, both user control and effective decision making that allows you to ship product at scale. I like that framing. I mean, if you think about how large some of these

cooperatives are just in the traditional world, you have a company like Vanguard, which just look at the performance of that institution as a cooperatively owned kind of member institution versus some of its active management peers in the past years, these things can get quite large by their own standards. They're definitely the minority today, but there are a lot of examples. Vanguard is one. REI is another multi-billion dollar cooperative. Land of Lakes, the Dairy Cooperative is also multi-multi billion dollars.

So these things can get very, very large and still work effectively. One of the fascinating things about crypto is that in addition to doing the cooperative, you're effectively introducing a new monetary asset to the platform. So one of the things I often wrestle with is, can a group of developers effectively set a monetary policy that can stay in place for 100 years. Are we going to end up in a situation where 20 years from now, the next generation is going to say,

well, I like this concept a lot, but we're going to fork it and come up with our own monetary policy because we just can't make enough money if we use this existing platform now. How do these systems stay flexible? Again, I think this is one thing where sort of the governance of the system

becomes really important. So I definitely agree with your view. It's really hard to design a system where all the inputs to the system are predetermined at the outset, especially in the world of startups where you constantly have to adapt to new information and learnings. You need to be able to iterate on these systems and do so rather quickly. And so I do think that fixed monetary policy is likely not the best sort of culture to have

when you're trying to build an application that's really complex. If you're trying to build a non-sovereign store value like Bitcoin, maybe it is the best monetary policy so long as it's sustainable with the market dynamics at play in Bitcoin's case. But for an application that's as dynamic or complex as something like Facebook, you need to be able to shift value around meritocratically to the contributors that are just contributing it. And that's going to change over time. You're going to have different needs at different points as the network scales up. And so you have to be able to adapt that policy and effectuate a meritocratic distribution of value. Yeah, it's really a social contract that you're making

with users sort of at the outset of the network. Here's how it's going to operate or here are the parameters. And that might be a good dovetail. You wrote this really compelling blog post back in August of 2019 on contracts. So it's called Incomplete Contracts and Scaling Crypto. And you looked at various projects through that lens of contract theory and sort of what guarantees these projects are making. So maybe talk more about how you view the various projects if you think that there's an

emerging approach here and just what you were trying to get at with that blog post. I was inspired to write this post hearing Albert Wenger recite this quote that all but the simplest contracts are incomplete. And the gist of what he's getting at there, or that quote rather, is that, again, it's really hard to define all the inputs necessary to maintain a system over time because you don't have all the information that you're going to get when that system's out in the wild. And in the world of contracts, this comes to roost when the plumber that you've contracted to fix your bathroom suddenly dies. Well, what happens to the contract that you had with them in that instance? The contract doesn't specify anything. So you have to sort of go out of band and sort of renegotiate or figure out some alternate solution to see that contract through to the end under those circumstances.

In the crypto world, there are projects that strive to be complete contracts in the sense that they strive to anticipate a system that can withstand any possible new information or new input. And I would argue Bitcoin is one of those systems. Another today is something like a uniswap on Ethereum. And these are systems that generally they design incentives into their system to keep the system operational, irrespective of what may come in the world. So Bitcoin is designed to keep going no matter what happens. And generally, I think these types of systems can work under, there's a lot of design space where they can work, but they will tend to be for very simple applications. That's why I think you don't see a whole lot of innovation on top of Bitcoin.

Not to say there's none, but there's not the richest developer ecosystem on top of Bitcoin. That's because it's intentionally constrained because it's trying to be a very complete contract specified all the possible outcomes for this very simple system. Now, the other end of the spectrum is contracts that are necessarily incomplete. And that's where I think you'll see more of the interesting design space get explored because you can build more complex applications. with the assumption and the culture that things are going to change over time, and these systems will have to adapt to new information. And so examples in that camp, I think the one that I gave in that blog post is MakerDAO stablecoin, which uses governance, ongoing inputs from humans to react to all the sort of changing market

conditions in order to keep their stable coin peg to the dollar. So that's sort of, I think, a useful framework on how to think about the crypto space. There are projects that strive to be complete and minimize governance as much as possible. And then there's projects that aim to tackle complexity through governance and ongoing decision-making. Yeah, I find it a really compelling way to frame the discussion. And you could look at complete contracts and use Bitcoin as an example. And just the instantiation of the 21 million hard cap has really put a social consensus layer on top of the protocol to the point where I think it was 2012 or 2013 when there was actually, a fork gone bad where there was an inflation bug. There was just broad consensus to patch it and

move on. And no one argued, hey, we should have 122 billion Bitcoin or whatever there was in that bug. That complete contract nature really brought it back to the fore. But to your point, it's really hard to develop these beyond just a very simple, straightforward set of parameters. And the other thing is that with some of these incomplete contract platforms, I think you just have a lot of human intervention. And the human intervention part makes it really sticky from the perspective of securities regulations right now. You're building these platforms and you're saying, well, there's going to be a set of developers that have an ability to make changes here. We're going to have some sort of a vote. These things start to look and feel kind of like equity.

And you don't want that if you're designing one of these public protocols. How do you kind of weigh those tradeoffs? So just very quickly back on the point of the Bitcoin inflation bug, I think that's a great example of where Bitcoin aimed to be complete. It aimed to have this 21 million hard cap and have all the code sort of express the law of that contract and have that function in perpetuity. But then there was this bug. And so the bug actually exposed that the Bitcoin contract was actually incomplete because they didn't get everything right. And then you're right that through the social consensus around 21 million, it was quickly patched. And then everyone could go back to thinking, yeah, the Bitcoin code, the Bitcoin contract is now complete again. That's why I say there's projects that strive to be

complete and there's projects that readily accept the fact that they're incomplete. In fact, there's probably no project that's truly complete, no matter how hard they strive, but there's sort of different social consensus around projects that do take that approach. Definitely. Now, I guess back to your more recent question, you're right that for projects that are incomplete and depend on ongoing human input, as I said earlier, the best way I can think of to scale up that human input is through some sort of management hierarchy or team that's responsible for decision making. And that does raise some concern about securities regulation because securities law is, I'm sure listeners of your podcast will be very familiar with the Howie Test.

And particularly one prong of the Howie Test is that if an asset depends on the efforts of others in order for value to be realized, then it's likely a security. So it's a little bit tricky to navigate this. And I think the projects that are doing this successfully today are making the claim that they don't actually depend on the efforts of others. There's a sufficient number of participants able to participate in decision making. And therefore, there is no single efforts of others. There is no entity that could be considered the sort of issuer of a security. And I think that may be true for some projects, for others. It's a bit of a stretch of the imagination. So I'm not a legal expert, but this is something that I've spent some time on. And I think

there may be an alternate path, which again, coming back to the topic we touched on earlier, is the membership model that cooperatives and mutuals have employed for their membership. So membership in Vanguard or your membership to REI is not considered a security. And there's a lot of case law supporting that. And this is true in spite of the fact that your membership to REI entitles you to a dividend from the company's profits at the end of the year. The reason I think it's not considered a security is that there's not a robust secondary market for cooperative and mutual membership. You can't just trade it freely on an exchange. You can trade it

with other members. You can call up the membership department and say, hey, I want to redeem my membership for the dividend now. So it does have a fair market value and that can be established through a market, but there's not a permissionless and open public market for those assets. So one compromise that may be tenable for projects to explore with their counsel is whether their ownership stakes in their networks could be considered a cooperative or mutual if they restricted trading to the in-group of other members, where membership is sort of qualified by a real participation in the product or service. That'd be really interesting in the context of getting out some of the more kind of get-rich, quick scheme elements of this industry, taking away that incentive to just pump and dump and exit.

Yeah, absolutely. I think there's a way here to align your real active users with the long-term ownership of value the network and potentially do so in a way that sort of restricts the short-term thinking that's, I think, plagued a lot of ICO projects and now is sort of finding its way into defy with a lot of the sort of ownership rewards that are being distributed to short-term users. And there are a few projects exploring this model. One that I'm aware of is Nexus Mutual, which is an insurance product built on Ethereum. They currently insure other defy protocols and deposits into those protocols, but they plan to expand from there to other kinds of insurance. And what's interesting is they are actually a UK-based mutual whose membership is coordinated by a token.

And so they adhere to the sort of constraints I described where there is a liquid market for NXM, their membership token. But in order to participate as a member, you need to KYC, so identify yourself, and you can only trade against the other members. Now, what's cool about smart contracts is that doesn't mean that you need to find a counterparty to your trade or find another human. member that's willing to buy your membership, you can trade against a automated market maker, which is a smart contract on Ethereum that, again, is whitelisted to participants who are also members. So think of it kind of like a vending machine where you can just put your token in and get out the value of your membership. And that value comes from the other members, but without you having to contact or interact with them directly. That's fascinating. A lot of these projects are built on top of

Ethereum, but let's spend a minute or two just talking about Ethereum itself. How do you, you view Ethereum through the lens of contract theory? And what comes to mind is that if you look at it through the lens of a complete contract, well, the monetary policy is really not complete. Maybe let's start there. What I would say is it's becoming more complete by the day. It definitely didn't start complete. And that's because from the very early days of Ethereum, there was always this plan to shift from proof of work to proof of the stake. And with that sort of changed the monetary policy of the network. Now I think we're getting pretty close to that inflection point where that's likely going to happen within the next six months. And the monetary policy for the network going forward

is actually getting more and more similar to Bitcoin and that issuance of new Ethereum is going to decline rapidly. You're going to see a more fixed monetary policy and lower rate of inflation. Now, that's not to say that that's forever going to be the case. I think Ethereum has been more adaptable to change than the Bitcoin community has been. And you saw that first with the Dow Hard Fork, which was a very quick community fix to a massive, failure of complete contracts. But I think increasingly Ethereum is ossifying and becoming more and more complete and harder and harder to change. And that, I think, is probably a good thing for a smart contract platform because you now have this very robust ecosystem of developers

building on top of Ethereum. And one of the reasons that they're building there is because they can trust that the computation done on the Ethereum network is going to be done as specified just as they programmed their application to run, the Ethereum network should run it. And so, that trust gets violated if there is massive changes to the protocol that we're unanticipated or sort of not widely understood by the community. So ossification for smart contract platforms, I think is a good thing because it invites more developers to build on top with the confidence that the rug is not going to get pulled from underneath them.

And then said another way, would you agree that that ossification also promotes more maybe confidence in the native asset as a store of value? And so maybe promotes more of a group think around, hey, this thing's going to be valuable in the future. So I should build on it and hold it. Definitely. I think they're sort of self-reflexive in nature. And on the one hand, you have this sort of the prong of it I just mentioned, which is developers feeling confident the platform is going to continue to run their application as specified. And so that's one incentive to build.

It's one developers understand really well because they built on top of platforms like Facebook and Twitter that changed the rules on them, shut off their APIs and killed their application. So that's a really important value proposition and not want to be understated. But then the second point that you mentioned, which is that Ethereum's monetary policy, which is what guarantees the trust developers have in the platform, creates this reflexive incentive to contribute, which is that developers actually own a piece of the Ethereum network. And so if they build on top of it, they'll be beneficiaries of the value that they contribute and all others in the ecosystem contribute.

And furthermore, the more that Ethereum, asset is understood as sort of this store of value, the more useful it can become in financial applications that depend on a collateral that's going to be around and not disappear. So there's this very reflexive nature to it. I think it's a sort of compounding cycle where new developers come in, build applications that drives the value of ETH because more people who believe in the activity on top. And then the fact that that ETH has value creates more utility in the applications developers are building in the cycle repeats. Yeah, very virtuous cycle there. For sure, Sure. I want to stay on Ethereum for a second to just talk a little bit about how you frame

Defi. I was having a conversation with another fund manager a couple weeks ago, and he said something that stuck with me just around, if you had disappeared for two months and you hadn't been paying attention to Defi and then you came back, even as someone who's deep in the space, it is almost unrecognizable. It is just moving so fast. Yet at the same time, I find that people that are not in our industry really have maybe very low awareness of what's going on and sort of why it matters. So how do you sort of bridge that gap and how do you explain Defi to folks that aren't living and breathing this every day? And we'd love to hear your sort of views on the path forward for Defi. I think the comment about disappearing for two months and waking up and seeing

all this infrastructure being built, it definitely rings true to me, even as someone following the space closely day to day, because again, the progress has been amazing. But I think the reason not many more people are paying attention is because Defi hasn't really crossed the chasm yet at all. in that there's not billions of users. Your average internet users never interacted with crypto still to date. And so Defi is currently in the state where it's serving this very small cohort of users who are primarily using it to speculate on crypto assets themselves. So it's very different from traditional financial infrastructure,

which in theory at least is meant to serve the real economy of goods and services. Defi is still serving a speculative economy of crypto assets to date. Now, that's not a knock at D5 because speculation is important. It's what drives innovation and is frankly responsible for this infrastructure existing in the first place. So we're bootstrapping a sort of parallel financial system. And it's important because at some point, there will be a real economy of real goods and services running on top of crypto rails. And those will be the user-owned applications, user-owned networks and marketplaces that drive the ownership economy. and the assets from those networks will play really nicely in Defi.

Every application built on these new rails will have sort of open API access to an entirely new financial system that is orders of magnitude more efficient, more transparent, and easier to program than the legacy financial ecosystem. What gets me really excited about Defi is the prospect that the ownership economy is going to pull Defi forward across the chasm to billions of end users. But I think that's sort of a long-term vision. In the more short-term, I think Defi can continue to grow just servicing the sort of speculative cohort of today bedroom hedge fund managers and eventually Wall Street hedge fund managers, too. It will scale up and serve the more sophisticated financial types ahead of end users getting involved.

This is something that I struggle with explaining to folks, maybe because I don't have a full understanding of it, but I think there's this big temptation to look at new technologies through the lens of past technologies. And to look at, for example, defy and say, here's a peer-to-peer trading type of platform, and we're just going to start to see trading firms interacting peer-to-peer without exchanges or something like that. But maybe that's the same as looking at the internet and saying, hey, this is just a more efficient way to read the newspaper every morning.

That might be one use case, but it's very likely that there will be these new kind of ownership economy platforms, as you describe them, that actually end up being the big thing as opposed to just porting a use case over. Yeah, exactly. I strongly agree with that sentiment. To me, most of Defi today is very skemorphic in that we are sort of just reinventing financial products like derivatives and options and so on.

And instead of sort of encoding them in legal contracts, we're encoding them in software. That's step one, and the early internet was the same way. But probably the breakthrough innovation will come from some combinatorial innovation to do with these new pipes and a sort of new economy that's built on them that results in financial products that we couldn't imagine at the outside of the infrastructure. That's what I'm most excited about. And in terms of investing in

the space, I'd say what I look for is protocols, marketplaces, financial infrastructure that's general enough to serve those new use cases when they come. I'd contrast the generality against very sophisticated and specialized financial products to do with crypto speculation itself. Those are a little bit less interesting to me personally, one, because I'm not a finance guy and it just doesn't get my juices flowing, but also because I think they serve a smaller addressable market in the long term. And so you've recently raised this fund and now you're going to start deploying it. And so what are the types of categories and companies and projects that you're most excited about investing in?

In terms of categories, I'd say I'm pretty broad in that I do think the ownership economy thesis can play out across many different verticals. And I alluded earlier that it's, of course, playing out in developer emphasis. structural like Ethereum. It's playing out in payments with networks like SELO that are trying to make US dollars accessible with a network that's user-owned and operated. In finance, you're seeing it in D-5 with compound balancer, many other D-5 protocols starting to distribute ownership to their users. One of the experiments that I think is really interesting, and it's actually being run by sort of an incumbent, is Reddit is distributing ownership over various subreddits

to the users that contribute to them. They're doing this with tokens. The users don't need to know that this is happening on Ethereum or that these are crypto tokens, all they need to know is that their contributions, whether that's moderating a subreddit or contributing content, are being rewarded economically with these community currencies that have value and that they're redeemable for premium features in the Reddit app. And so that's a way to experience ownership that happens to be implemented as tokens, but where users don't need to know or care that that's the case. And I think that in general, crypto will be successful when the majority of users have no idea that it's crypto. All they know is, hey, I like using this platform because it rewards me

economically or it's better aligned with me in terms of governance or the control I have over the platform. And so this ownership is really a design space that new product thinkers can explore where ownership can be manifested in economic terms, governance terms, new forms of social capital. And I think that what interests me most are product-driven founders that understand that intuitively and are making ownership a keystone of their product experience. That's well set. I like that. So maybe just transitioning to kind of a few closing questions here.

Curious, if you have a book that you recommend, you find yourself recommending the most, are there any books maybe as a follow-up that have been especially influential in the way that you see crypto? There's the master switch by Tim Wu is one that's definitely been influential to me. And it sort of goes to the history of innovations and information technology, I should say, and specifically talks a lot about how bottom up versus top-down innovation, bundling and unbundling. And I think there's a lot of lessons to draw from the history that apply to crypto, where we're now sort of in this mature phase of the internet. There's a handful of monopolies

that control most of the information technology we use. And here comes this new technology that is forcing a bottom-up, unbundling of the products and services we interact with every day. So that's one I'd definitely recommend. Another is a little bit lesser known, a little bit weirder. So maybe just more of an atmospheric inspiration, more than a pragmatic one. And that is, it's called protocol. I think the subhead is how control exists after decentralization. And I think it's a warning for what happens on the other end of this next wave of unbundling

that crypto is going to force. So it talks about how the internet was meant to be this democratizing force. But as Timu talks about, there's the next wave of unbundling that crypto is going to force. this constant pendulum of consolidation and unbundling, and control can still exist even with the best intentions to unbundle and decentralize all the things. So I think that's a very good compliment to the Tim Wu book, The Master Switch. Protocol. Yeah, it's just called Protocol. It's got a very cool cover. I'll have to check that out. I really like the Master Switch, and it reminds me of also just large organizations, how they're constantly centralizing and decentralizing as well.

terrific book. And then what resources do you find yourself recommending to people that say, hey, I want to learn more about blockchain and crypto. What are the few things I should read or pay attention to? So I'm definitely a bit bias here because I did put together the A16C crypto startup school. So I would highly recommend that. I think it's a great place to start. The goal, again, is to help the next generation of entrepreneurs sort of get up to speed and more quickly navigate the idea maze towards starting a project in the space. freely available online on the A6NZ website. Also there, you'll find a couple other documents that are helpful. There's the A6NZ Crypto Canon, which has a lot of long form reading. There's the A6 and Z glossary, which is for people really at the outset just looking for basic definitions of all the

jargon people in this space use. So there's a lot of resources there, and so credit goes to making that all available. And what else? I think there's also a great organization called She-256, which is specifically focused on helping more women get started in this space. And they, too, have put out a lot of great educational materials, and they have a really great network. So I'd strongly recommend that for folks who might be intimidated by what is still not a great gender balance in the space, but one that's getting better. Definitely.

Those are two great resources. Well, Jesse, this is super exciting. I'm excited that you're up and officially public about being in business here. And I think it's going to be really exciting to see some of your first investments here. So where can entrepreneurs and people that want to learn more about Variant get in touch and follow your work? The website is Variant.fund and on Twitter at Variant Fund. And I'll be continuing to publish on my own website, which is just Jesse Walden.com. That's awesome.

Well, thanks so much for joining today on the pod. All right. Thanks for having you, Matt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.V.C. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.