On The Brink with Castle Island - Matthew Le Merle on technology trends and the cryptoasset markets (EP.190)

Episode Date: March 10, 2021

Matthew Le Merle, Co-Founder and Managing Partner of Fifth Era and Blockchain Coinvestors joins the show. In this episode we discuss: Matthew's views on The Rise of Generation C and some of the trends he foresaw ten years ago Views on the GameStop / WSB saga and what this portends for the financial markets in the years to come The state of the cryptoasset market and the infrastructure that is being deployed in 2021 How he thinks about approaching this industry as a leading fund of funds   Learn more about Blockchain Coinvestors at their website and follow Matthew on Twitter @mlemerle   

Today on the podcast, I sat down for another conversation with Matthew Lemurrell, the co-founder and managing partner at Fifth Era in blockchain co-investors. Matthew is someone who's an original thinker, and I love catching up with them on just about every topic, not just the crypto industry, but society and technology trends more broadly. In this conversation, we discussed a range of topics, including a paper that Matthew co-authored about 10 years ago that I thought was particularly relevant to the events of the last few weeks with GameStop and Wall Street bets. I think you'll enjoy this one. So without further ado, here's my conversation with Matthew

Bumirl. 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 it 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 to Britain's ailing economy the new round of course, it did easy. 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.

Okay, I'm very excited to welcome back, Matthew LaMurall. Matthew, welcome back to the podcast. It feels like it's been a very long time since we've had you on. It was only a few months, but a lot has happened. So thank you for rejoining us on the break. Thanks a lot, Matt. It's great to be here. And as always, I'm very excited to be a Castle Island Fund One Fund Two investor.

you're doing great things and we're completely behind you. It's very exciting. Well, we're really excited about blockchain co-investors in the partnership. And there's a ton of things to talk about, including a paper that you wrote about 10 years ago, that a lot of it is coming true. But maybe before we get into any of that, could you just give a quick introduction on yourself and blockchain co-investors for folks? Yes, happy to. Allison and I live in Silicon Valley. We've been here 35 years. Fifth Era is our investment vehicle and blockchain co-investors. is the leading blockchain venture fund of funds.

But today we're going to talk, I think, about both the new world, where we are, for 20 years, we've been internet, fintech and blockchain investors, the latter beginning in 2013 or so. However, our first careers, we were management consulting partners. McKinsey, then together we helped run the Global Financial Services Group at Kani. And then I co-ramed the global digital practice. at Booz, and it's in that capacity that some of the things we're about to talk about were created and thought through. Well, that's a great background. So about 10 years ago, you co-authored this paper at Booz on the rise of Generation C, and you talked about what the world might look like in the year

2020. And it turns out in the year 2020, you were pretty prescient, actually. And so let's talk about this. So set it up for us. What is Generation C and what were you thinking 10 years ago? So thank you for asking. The white paper is available to anyone that wants to see it. Prediction is very difficult if you try and take a point future prediction. This is what will happen. The Bitcoin price on January the 1st, 2022 will be. But I think you can do a lot of good for yourself, especially if you're an investor, by thinking through tailwinds. What are the powerful forces that are driving us in a direction? And what are some of the inevitabilities that are embedded and a result of those tailwinds? And it was in that spirit that we did this work. It was led actually by the German

Booz team, and I was fortunate to be part of that team, Roman Fredericks and Michael Jensen and others. And essentially, what we did was we went out and interviewed a very large number of people who at the time were just entering university. They were people who were born into a connected digital world. So these people had had no experience of anything other than that world. And Nick, your own Nick, would be a great example. Ten years ago, he was 10 years younger. But he didn't know. He doesn't know what you and I know. He doesn't know that there were letters and post offices. And voicemail systems were on tape. or even telephones where you had to put your finger in a hole and rotate it to make it ring.

He doesn't know any of that, but it's more profound than that. It's not just about technology. What Nick doesn't also appreciate is the restrictions and the complications of the industrial era paradigm that we have in our heads. We have definitions of work and family and play, which he doesn't necessarily, share or understand. And it's very profound. So that's the nature of the research. And I know we're going to talk about some of the specifics. But the goal was to identify tailwinds. And I think we got more of the tailwinds right than wrong. And I do agree with your point. I also think this terrible pandemic has accelerated us at least five years into the future, maybe more. And that's what I guess

we're going to talk about now. I mean, there's so many of those things that I think five years from now will be gone. This morning, I actually had to go out with my wife and get a document notarized. And to me, it just felt like such an archaic thing to do is to go physically in person. So as you were talking, I'm thinking about an exercise that we did at Fidelity back in 2014 looking at trends and uncertainties. And it was called scenario planning, really not about predicting the future, but all about identifying some of the trends and some of the big questions that could inform what a scenario of what the future might look like. And so, Back then, we were talking about the emergence of a new front door to financial services and the

emergence of capital markets that just had less friction and allowed more peer-to-peer settlement. So maybe 10 years ago, talk a little bit about what you were discussing with this Generation C, and maybe we can use that as a dovetail into some of the societal things that we're seeing around things like GameStop. Yes, thanks, Matt. And by the way, I should give a nod there too. I was a senior partner of Monitor Group, so Michael Porter and Michael Jensen and people like this were my partners. But more importantly, the team that developed scenario planning at Shell, Peter Schwartz and Jay Ogilvy, they were my partners as well here on the West Coast.

So thank you for mentioning them, and they should also be recognized in this. But anyhow, so we began trying to understand how innovation and technology were going to be used in different ways. So that's where we began. And so we did begin asking questions like, if you've always been connected and if you've always had a mobile device, how does that change your behaviors? But the big so what was not the devices. It was the beliefs and the value system. And I'm going to give you a couple of examples that are very specific. But the definition of work for you is not the same as the definition of work for someone who is born into this new world,

this digital future that Alice and I called the Fifth Era. It's a very different definition of work. So we grew up in the industrial era paradigm where we have an employer. That employer employs us for many years. We go to a place of work. We work for probably eight hours a day or more, 40 hours a week, sometimes more. We have a certain number of weeks per year of vacation. We have to apply for it and plan it and so on. And I keep on going. This next generation, the digital generation doesn't really think of work that way. They think of work as being something that they will participate, but they want to do it on their own terms. They're very happy to parallel process and moonlight. They are very comfortable with virtual work and that whole idea.

So this pandemic has actually shoved the whole world into where they wanted it to go. I think it's fair to say that in many employee populations, the younger people who had wanted more virtual freedom and the established paradigms were holding them back. You just saw, I think it was Goldman Sachs that said they need everyone back in the office. But what changed in this pandemic is that we now have a global proof that virtual work not only works, but it may actually work better in many industries and for many people. So we've got to a tipping point in the dialogue before it was resisted by establishing corporations. I remember when Marissa Meyer took over Yahoo and she said, everyone's got to come back

to the office. And that paradigm is sort of broken now. There's more proof that a distributed, diverse, virtual employee base can actually outperform than there is that argues the other way in many industries. So that's an example. But I'll give you a different example, which is also very profound friends. And we talk about this in the book. If I ask people of your and my generation, how many friends do we have? We'll think about that and process it and maybe we'll give an answer. Let's say it's 50. And then we'll sort of say, well, how often do you meet those people? And we'll have an answer. And we might say, well, I try and see all 50 of them every couple of months. And we'll say, well, what do you talk about with them? And we'll give an answer. And then if I say,

well, how many of them have you never met in person? We'll laugh and we'll say, what a ridiculous question. How could you ever have a friend that you've never met in person? Well, here's the key point. When you survey the digital natives and you ask them exactly the same questions, how many friends do you have? They actually say they have more than we have. If you say, how often do you communicate with them? They communicate more than we do with them. If you say, what do you share with those people? They actually share more than we do. They share their fears and their concerns and other things. And if you say, how many of them have you never met in person, they don't view it as a ridiculous question. And in fact, some of their very good friends who

they speak to regularly and who they share their inner feelings with, the people they've never physically met. This means that these are two examples where what's really happening is the digitization of society is actually shifting the underlying assumptions upon which our paradigms, our thought processes are built to the point where it's actually possible to have a completely different paradigm that is fully operational and actually meets the use case better than the industrial era paradigm. And in a minute we'll talk about investing, and I think that's happening in investing too. It's fascinating because some things change and some things don't.

You could go back hundreds of years and there's a notion of a family and having a friend group that you meet in person. But outside of the family, you think about the fabric that holds people together and certainly religion over many, many years has been a fabric that knits people together, eventually had the advent of the corporation and work was a big thing that holds people together. Now with the advent of the internet and with cryptocurrencies, it's almost that ideas are what are holding people together in the digital sense. And you can see this progressing even more in an era with virtual reality.

But the idea of Bitcoin, the idea of Ethereum, these almost become religious organizing principles that in some ways maybe are replacing the corporation or religion as a kind of a fabric. And I think there are some really interesting questions around that organizing. fabric as it relates to investing, not only in cryptocurrencies, but in things like public equities, where I was looking at the GameStop Wall Street Betts saga and really thinking that it was really just a religious movement at some level with people that are organizing around an idea. I'm curious what you think of that. I want to unbundled that a bit.

I'm going to sort of unbundle it in three ways. The first way is you started talking about in the past. And I want to be very clear about this. Most of the... the paradigm that you and I grew up with is actually a recent invention. It's an industrial era invention. It's no more than 200 years old. Almost everything are definitions of work, our definitions of politics, the way we do things societally are relatively new inventions. And even though it's not well documented pre, say, the mercantile period,

pre like the 14th century, there isn't a lot of documentation. I think we have a lot of evidence that the things that we take for granted that are part of our paradigm and our mindset weren't actually true more than 200 years ago. So I'm saying that first, Matt, because don't fall into the trap of believing that what we've grown up with is inevitable in the only way to do it. In fact, it's a recent invention. The second point is religion, meaning, communities and governments. groups and how they operate. I think that the theory of scientific revolutions and paradigm shifts is basically that a small number of maverick outliers begin to throw crap at the established

paradigm and they actually fail and they fail repeatedly until a critical mass of observations appear that the dominant paradigm needs to change and you get to a tipping point, a catastrophic tipping point and the paradigm shifts. Okay. And so the world is flat for sure for a very long time. And people get killed and lynched for saying that it's round and the heavens are not above. And eventually the tipping point occurs and most of the world says it's round. Now, there are a few people that still say it's flat. But why is this important?

Because in that process, in that journey, when you're a maverick and the world, against you, you have to ally with other people and you've got to be really passionate because you are pushing a big rock uphill. And I don't think it's so much religion, but I do think it's passion, purpose, meaning, and a few people like you who believe in it too. And those people then do look as if they are sort of fundamentalists and extremists, particularly through the lens. of the mass. As we as the mass look at those outliers and say, those are the crazy ones. It's Steve Jobs. Those are the crazy ones who are willing to believe they can change the world. And it's true. I mean, Elon Musk, it wasn't so long ago when he said we're going to Mars

and we all laughed. Now the SpaceX rocket takes off and lands and it looks just like Arthur, Clark and Robert Heinland told us it would look like. So can he, he, make that rocket go to Mars, I'm more inclined to think he's going to be proven right than that I will be proven wrong. I think we will have a man mission to Mars in my lifetime, but it's because of that maverick who is trying to make it happen. And most of us are sort of more likely to be naysos. So I wanted to say that too. I think it doesn't have to be that you're part of a religious movement. I think it's an inevitability that to change the dominant paradigm, you have to be a very aggressive, forceful, passionate, energetic person,

and you're going to be hanging out with similar people, and you will look a little bit crazy to the mass. That's the other point I wanted to make that. That's fascinating. Maybe build on that a little bit in terms of what we saw recently with GameStop, and some of maybe the tools that are at young people's disposal here to invest in what this looks like and what your takeaway was. Yes, thanks, Matt.

So we've talked a little bit about how this generation has a different mindset and is willing to break the old paradigm. And in fact, has to because we are moving out of the industrial era and we're moving into a fully digitally connected world, a fifth era. And we do need to cross that bridge. And we do need people pulling us into the future because most of us lean back into the past. In terms of tools, and then the research we did around that is still available. and I think it's very helpful. Now, I've been a video game investor for 20 years and have backed MMRPs, massive multiplayer role-playing games,

first-person shooters, virtual worlds, and a host of other things. And in doing so, I began to appreciate that there were also new tools and skill sets being created along the way. And I'll give you some examples. Those tools are meat and potatoes, if that's the right phrase, to Nick Carter. I mean, he grew up with them and he probably, I don't know Nick Carter that well, but I'm betting he hung out in Roomscape and he traded golden cloaks with the best of them and got rid of the PKK out in the wilderness, the people killers in the wilderness. And he used new tools

to do it. So let's just talk for a moment about some of the tools. So one of the tools is massive multi-playing, which is to say there are hundreds or even thousands of you playing together. and you are actually connected in real time. You can communicate in real time with a very large community of people, and you can organize action together simultaneously. Now, there are other tools at your disposal. There are things like virtual currencies and micro-transactions and scarce goods, virtual goods, that you can buy and sell.

And because real value is changing hands, even though for my generation, it's odd to think that the golden cloak in runescape or world of Warcraft can have such a high value, because it's a digital good that I could repeat at infinitum. The fact that it is deemed to be scarce creates status and meaning, and the status and meaning is very valuable. So the actual bits and bites of the golden cloak are not valuable. It's not like we crushed lapis lazuli and put it into the oil paint, and it's really a valuable paint and Leonardo da Vinci painted something. The actual virtual good is not valuable, but the status and meaning are. Well, because of all of that, there are many of them,

they communicate, they care about the value of the status, the goods are available, and they can buy and sell them in a virtual world. What then also happened is other people figured out how to game that. And so people created bots that could play the games. They figured out how to create large networks of slave accounts that they could make do their bidding. They created out-of-game virtual experiences and places where you could go and buy and sell for real money, the in-game items. They became masters at scamming and fishing and social engineering, the other players in the game. So that was PKing. I'm going to get the newbie, Matt, and I'm going to drag him out into the woods, kill him and steal all his virtual goods. So there's an awful lot. There's new behaviors,

new skills, new tools, and whole new paradigms of things like virtual goods. Well, all of that learning, and it's 10 to 15 years of learning, but in the case of Nick Carter, it's all of his life. He began when he was eight, and he still probably. gaming. In that time frame, he mastered a lot of skills and tools which traditional financial markets aren't able to do. So even the traders on Wall Street who may be connected through compliance approaches and methodologies, they may be connected to other traders. They still have great restrictions on how the degree to which they can work together, the degree to which they can organize themselves simultaneously, let alone even the notion that they would have slave accounts

and bots and other things that they would focus on the task at hand. And so we've seen this, I guess, in a non-financial context first, in terms of some of these things you're talking about the slave accounts and really manipulating the way that people feel on the internet, so to speak. To me, the most fascinating thing about the GameStop saga was there was almost like a cheat code that was disdive. here in a gamified way that I would argue changes market structure here to some extent from the perspective of short sellers in the sense that it introduces this risk that I don't think was priced in around just people forming coalitions to short squeeze people.

Do you think that this is an enduring phenomenon? Well, it's much more than an enduring phenomenon. It is the new paradigm, but we're just seeing the beginnings of it. So before I go there, I'm glad you said we saw it elsewhere first, but actually I don't think we saw it first in fake news and the potential manipulation of voting. I think this has been around for a while. I was very, very struck just after the Facebook IPO, and it was sort of lost in the small print, but Facebook after the IPO announced that they were closing down tens of millions of accounts that they were deeming as not real. accounts. And I asked myself, and I still ask myself the question, who created those accounts and why? And there's no question those accounts were created by people that wanted to impact and affect

the network and possibly also click fraud and driving monetization of the advertising model and other things. I don't know for sure. So Arab Spring, Iranian demonstrations, Hong Kong. Hong Kong demonstrations, do we think that this is all just the wisdom of the crowd and organic uprisings of disconnected endpoints coming together through social media? I think we'd be naive to think that. I think America is the world's leading technology capable country. And I would think that if the Russians can manipulate social graphs and networks, we can probably do a great job too. Well, why am I saying that? Because when you see something that looks

strange like the price of game stop, I think you have to ask yourself not just superficially how and why did it happen, but behind the scenes, and I'm not a conspiracy theorist, but behind the scenes, what would be other motivations that would have people use new tools to affect these results. So that's one point, and you've already mentioned one of them, there might be people that wanted to give it to the short hedge funds and orchestrated an approach that sucked in a lot of other traders and investors. But if you wanted to orchestrate a large-scale short squeeze, using the tools that you did and used to create pump and dumps and short squeezes in World of Warcraft and Roomscape, and now you're going to apply them into real

stock markets and exchanges, I think that you would be able to have quite an impact. And part of it is because some of the things that are embedded in our traditional public equities markets are themselves crazy, such as, just to give you some examples, price is set on the marginal trade and it's not dollar weighted, or the Dow Jones Industrial is a straight average of the prices of its constituent parts and has nothing to do with their relative value, or that intrinsic value is calculated on discounted cash flow when terminal values are meaningless if the company is about to be dramatically impacted by new technology. So it isn't just that new skills, new values, new tools are being applied by a generation that are masters in them.

it's also that the old paradigm is fundamentally flawed and needs to change anyhow, and now these things are hitting each other. And so now we get specifically to GameStop, and you sort of say, well, hang in a second. The other thing is we interpret things through the lenses that we put on our faces. You're wearing glasses right now, Matt, and you have a certain prescription. Well, if I'm a Wall Street trader, I care about price and value. maximization, that's the lens I wear. So through that lens, GameStop is simply absurd. But if I grew up with GameStop as a kid and it was the Mecca, it was the place I went to get all my entertainment

and experiences, I bought my CDs and I bought my DVDs there, it is the most important place of my teenage years. And I don't want GameStop to die. Through those lenses, the price is not the point. And that would be the equivalent of some New York hedge fund manager throws hundreds of millions of dollars to keep the museums alive because as a kid, his father took, or his mother or her mother took them to the museum. It's like there's no value maximization strategy to philanthropy around museums. So why should there be a price maximization and value maximization strategy around Gainsstop if the connected generation love Gainsop and they don't want it to die? So that's a different lens. That is not a price maximization lens. Now let's get to the people that

wanted to stiff the shorts. And I'm not saying this is true. But if you were Elon Musk and you'd suffered terribly at the hands of the shorters and every day you got up and read the newspapers and they're throwing all of this stuff at you that your price should go down. And one day you were to wake up and say, I need to engineer a way for those guys to lose a lot of money. And you called up your buddies and you sort of said, how can we make them hurt? And a bunch of you said, well, why don't we create a short squeeze using technology-enabled social tools that allow large populations of people to work together, just like we used to do in our virtual games?

Well, it might play out exactly like GameStop. So I said a lot there, but what I'm trying to explain is that we're in a period of transition, and the future is going to be owned by the digital natives, and the established ways and paradigms of the industrial era will change. And Wall Street is going to experience that because by definition, every money, every asset will be digital. And that is not about the SEC.

That is an inevitability. It's a great point. There's a lot to what you said there. One thing that comes to mind is all of this transition is happening in a world where the platforms themselves are becoming less powerful. And what I mean by that is we have seen Donald Trump was de-platformed by Twitter. We had all sorts of de-platformings around the GameStop issue and even halting of trading and the Reddit forum was paused momentarily. But the technology, and maybe this dovetails a little bit into crypto assets, the technology is emerging to actually have

platforms that are censorship resistant for speech. And so in the old days, it would have been really hard to establish one of these forums and short selling squeezes. Think about the days before the internet. It's just this wouldn't get published. Newsletters would be shut down at the printing press. So right now with things like IPFS and crypto asset networks, it becomes very difficult to censor. And I guess there's a double-edged sword to that because there's going to be an awful lot of fake information and outright harmful information that also is allowed to flourish. But what are your thoughts just on the ability to grow these communities in a platform-resistant way?

These are very difficult questions. For me to answer that question, I normally like to go into the past, and I begin with the pastist prologue. So you and I know that William Randolph Hurst became one of the most wealthy people in the world because he controlled the media and the press, and he built San Simeon, and he had created a huge empire, because back then, the president. the press was very influential, and if you controlled the press, you controlled messages, and powerful people would pay you a lot, even if it was just in advertising for you to assist them tell your message. So this is not a new phenomenon. Today we sit at a moment when communication has to some extent been democratized and technology enabled. It is easier to spread information. Does that mean that it is easier to spread? false information, yes, in volume terms, but then it's also possible to spread real information

more easily in volume terms. I don't think the actual dynamic of there's real truth and there's false information is any different than it's always been. I think you could go pick a newspaper of 100 years ago and you'd still find a lot of opinion and you'd find things that were true and things that were not true in retrospect. So I don't think that the centre of gravity necessarily has shifted, but the volume has. The challenge is the good actors and the bad actors are both becoming technology enabled.

So to your point, and obviously good and bad is a subjective concept and again has to be seen through the lens of the viewer. So growing up in England, I thought the IRA were terrorists. When I came to America, everyone told me there were freedom fighters, and I really found that quite challenging. And I know you're from the northeast, and you may have some Irish heritage, and you may view them very differently than I did.

And that's okay. But why am I going down this path? Because now you've asked me a complicated question. You've said, is the volume of information and the volume of force information a challenge? How do we make some people's information sensor resistance, whilst at the same time, I do actually want to censor the bad guys, my bad guys, but my bad guys might be your good guys. So we've got that tension.

Who are we going to censor and why? And I do think some things should be censored. And society has things that are legal and illegal. So we are supposed to be censoring the illegal, but we shouldn't be censoring the legal, but your legal might be my illegal if I'm trying to, you're the USA. And if that wasn't enough, bad guys tend to be. be better at technology than good guys. We consistently see that. The leading edge of innovation is also often used by the bad guys to turbo charge their efforts. And that is something that

worries me a lot, not just in the context of fake news and the manipulation of voting or prices on stock markets. It also worries me because there are bad guys who don't actually care about the operation of the platform. Most bad guys who want to steal money still need the system to work, because if it doesn't work, there's no money in it and they can't steal it. There are actually nihilists and anarchists that would just as soon blow up everything we have. And I'm seeing the incredible acceleration of breaches and spams and social engineering and fishing, beginning to be turbocharged with technology. And I'm not sure we're going to win the race. So now I go, way back to your question that, which is, yes, I think that the blockchain movement is building a set

of tools that we're going to need in the future. We're going to need them just to be operationally viable. Things like immutability, identity, the ability to know what's true and what's not, are tools that we're going to have to have or we won't even have the level of technology enablement that we have today. We'll go backward. Systems will fail. We won't be able to rely upon the internet at all. Global positioning systems will crash and burn and we'll head backwards. So I actually, I think the blockchain, whether you want to protect, in a libertarian mindset, if you want to protect everyone to be able to say whatever they want to say, you would use these tools.

But I think more profoundly, every citizen is going to want their government to use these tools. We're beginning to appreciate that. I think you're right. I think there's also a massive opportunity here for. for entrepreneurs in the coming years, if you think about these platforms as being as kind of dumb and open as possible at the base layer, where anyone is free to participate and anyone can append data to these platforms, then there is a business opportunity in my mind around just becoming the,

almost the algorithm that is trustworthy that people can subscribe to. So you could imagine a version of Twitter where I am paying to see a set of curated content that you have put forth as the developer of an algorithm that is in the public domain and your algorithm will take away all of the things I don't want to see. You'll take away the child pornography and all the bad things that I don't want to see. I think that that is a potential good outcome here. Now I guess the devil is in the details on actually being able to implement something like that higher up the stack versus at that platform level. I'm agreeing with you. I think all innovation and all technology, as I've already said, is a double-edged sword,

and it can cut in both directions. But these technologies, the technologies of immutability, transparency, privacy, at scale, these are technologies that the goods of society and culture are going to rely upon going forward. We have to have them to protect the things we want to have. It is true that always new technology can be used for bads as well. But I think here the goods will far outweigh. And so if we go all the way back to digital monies and digital assets, it's an inevitability. It makes no sense that half the world's assets are paper-based, most of the real estate. You went to a notary. I mean, you just look at the number of pieces of paper you sign. You didn't need any of that. That could have all been technology enabled. It's a holdover a legacy

of the past. Settlement systems, the DTCCC, T Plus 2, these are holdovers of a paper-based world that we haven't yet completely fixed. And by the time you get to private investments and funds were 100% paper-based coins. I was having an interesting conversation with someone who was berating that Bitcoin uses energy.

And just for the fun of it, I took out my pocket and I had a couple of coins in it. And I said, let's talk about this course. and it's mined wherever it's mined in Africa somewhere and smelted and processed and put into bars and ship around the world and re-melted and then the coins are created and they're wrapped and they're shipped and they're unwrapped and they're handed out and then they're collected back in and washed and wrapped and shrink the gain and it goes on and on and that's for a penny a cent and you sort of say did anyone ever calculate the energy usage of the entire life cycle of assent and why do we see still have sense. I mean, it makes no sense that we have sense. So a lot's going to change. And the good news is that you and I and a lot of other blockchain DCs are backing the infrastructure companies that are building the new platforms. And the platforms have to be built, whether it's Bitcoin or whether it's the digital dollar in yuan. It's basically the same infrastructure.

I totally agree. And that's a good transition to since the last time we spoke so much. has happened just in this industry writ large. You've had publicly traded companies now buying Bitcoin. You've had really just an explosion in Defi. And obviously, the infrastructure that you just alluded to is now being publicly built. We kind of both knew it was being built, but it is more publicly being built by big financial firms, technology companies and startups. And so be curious your views on a couple of those things. Maybe we could start with just the Bitcoin on the balance sheet trade that micro strategy and Square and others have popularized. I confess the pace of this actually caught me off guard. I was expecting this eventually, but maybe not as quickly as we saw it. So that last

observation is very important, and it is a cliche, right, which is it's whoever said it. We overestimate change in the short term and we underestimate it in the long term. And the tipping point, the inflection point, is very hard to call. And that's one of the challenges for all VCs. It's the crossing the chasm challenge, which is you've got a clear view. You've actually got the right answer, but you're just too early and the inflection point doesn't pick up fast enough. Well, clearly, blockchain, Bitcoin, and digital monies are reaching that, well, they're already on the inflection point. And I'm agreeing with you that we were a little bit taken by surprise, but you always are. Because the rate of change suddenly changes so quick when you go from the long

ramp to the sudden geometric inflection point. Suddenly things change very fast. And that, by the way, goes all the way back to paradigm shift. The world tends to change in chaotic ways. It is very hard to predict. And we did divine, you divined, because you threw 100% of your working career behind these trends, so did I. So we did divine the direction of the tailwinds. The precise timing of the inflection points was hard to see. We are so far off the peak of this curve. So you'll hear that, but let's just go back through the basics. The basics is 99% of corporations in the world have no crypto or Bitcoin involvement or exposure. According to Bitwise, where you and I are both investors, I think they say 83 or 85% of advisors have never touched anything to do with crypto,

and only like 8% or 9% of them have helped a client get in to bit of this, which is another way of saying 90 plus percent of family officers and high net worth individuals have no exposure. At the national level, most countries are only still in the exploration phase of this topic. There's only a handful like Estonia or something, and China, of course, that have really done anything meaningful. So the weight of the capital, of the world has not yet begun to appear. And what's very interesting about Bitcoin, of course,

is the scarcity is engineered in and the monetary policy doesn't allow for the printing of additional units. So this is definitely a very asymmetrical problem. The demand is going to go up and the supply cannot. And I'm not an economist. I'm a geographer. But Allison, my wife is an economist and she'd say there's only one thing that can happen and that's price has to go up. Absolutely. One things I'd be curious to your point of view on is just the custody infrastructure landscape right now. So when I was at Fidelity, there was a decision made to build custody infrastructure. And I can tell you that it wasn't something that was built in a year. It was a very long, very well thought out infrastructure build. And it's in market now. It's obviously a great

product. If you take a look around at the custodian banks, the broker dealers, and the technology firms, it's fairly obvious to me that all of them will have to have some sort of a custody play, whether they build it or partner or buy it, because it's more than just Bitcoin. It's any cryptographically secured asset or record. You will need this key management infrastructure. And if you look around, there aren't that many chips left on the table to buy in my estimation. And so you're going to be in a situation where this is almost a speculative attack on infrastructure where in my mind you're going to see a lot of big firms really start to scramble here in either overpay for something or throw a lot of resources at building something that takes a while to build.

I'd be curious your perspective. I'm with you, Matt. So the first point is the demand for custody is going to go through the roof and secure, reliance, compliance, custody will be required globally. Now, as you know, I'm vice-chairman of S-Fox, the leading independent crypto-briam broker, and I'm also a chairman of the Universal Protocol Alliance, which is Bittrex, Ledger, Serticay, Uphold, Trobeo and others. And at both places, we worry a lot about this topic. In the case of S-Fox, they've been building their own custody solution since 2014, seven years now. It's been a ton of work, and they're constantly

reiterating it to keep ahead of the bad actors and the bad practices. What makes this really, really challenging is the things that I clearly express my fear and concern around earlier on on this podcast, which is the vulnerabilities in systems are nowhere more apparent than the interfaces between players and processes. And so the very best hackers and scammers infiltrate the interstasy, where players hand off things. And that's true whether they're doing it through physical social engineering and other things

or whether they're using computers to enable it. So as soon as you have situations where you have a process broken into parts, so maybe you have a custody solution, a trading solution, a settlement system, an accounting and reporting system. And as soon as those parts are in separate hands, you have multiple points of vulnerability.

And that worries me a lot. And then what worries me even more is that I'm beginning to see the rise of crypto custodians that are actually outsourcing all of their technology and process. Very large ones in New York and on the East Coast. And that is tantamount to you as a customer trusting your car keys to someone that doesn't know how to drive. You, Matt, show up in your, I'm going to guess what? you have now. Your Tesla, that's probably not a good example. Well, as you know, I had a bike,

but it was stolen. That's right. That's right. So you show up in your Prius and you give the keys to the driver, to the valet, and the valet's never driven a car before and they get into your car and off they go. And they're going to have an accident. So you trust your custody solution to a custodian who's outsourcing custody to a third party. And there's going to be an interface between them and the custodian, but they don't actually know what reliable crypto custody is. It's going to have a problem associated with it. And I worry a lot about that because we've just spent eight years

trying to prove that we're ready for institutional capital and clients and money. And if someone were to right now hack Tesla's $1.5 billion, it's game over for corporate treasuries for several years. That'll cool off for a bit. It's frustrating to me to see for the past five years, many of the top global custody banks have been too busy with their private blockchain POCs versus building out some of this infrastructure. And I hope they get there.

I'm sure they'll be forced to. The other thing I have to say there, by the way, is that custody is a problem for banks and they understand it well. But the difference is, obviously, these are bearer instruments. And in that context, cash $100 bills is a bit easier to protect than $1.5 billion of bearer tokens that could all be moved in a heartbeat. At least $100 bills, you've got some cameras watching the ATM as the bad guys trying to pull it out of the wall.

It's harder for the bad guys to get $1.5 billion in a single heist. Definitely. What's your take on what's going on right now in the world of defy? Obviously, this is an explosive growth sector. The amount of talent that's flowing into it is mind-boggling to me. And clearly, there's just a ton of innovation. And it's great. How do you frame this for someone that might not be full-time in crypto?

And I'm also curious your view on how this shakes out under the new SEC chair. So again, you just said three questions in one. So in the long future, defy and things like NFTs are the future in the long future. But because going back to where we began, the digital natives don't want to disintermediate the players they don't like and don't trust. And they want to do more peer-to-peer and they think that the technologies are ready for that. And they grew up that way. Yes, it's true that Roonscape was built by Jagex in Cambridge.

But at the same time, they didn't really get in the way of you playing. It was just Nick, Matt, Matthew and 100 other people in our clan went off and had fun. We didn't need intermediaries. We did have a central entity that created the game and made the economy work. So going back to the point, when the digital natives think about defy and they think about non-fungible tokens and when they think about peer-to-peer, that's what they want. And they want it mobile first, fully integrated. And they don't want, if you will, the compartmentalization of products, services and players

that we have today, which is a holdover from the past because in the past, not only was it hard to do everything, it was hard to be able to do all financial products or indeed all products, but also regularly we broke those things up for various reasons, some good and some simply a response to the times. So that's the long future. The long future is, yes, defy technology enabled financial services of all sorts and novel new things. things like scarce virtual goods in NFT formats, that's the long future. As we stand here today, I don't really feel most of it's ready for prime time. So notwithstanding the fact we are investors, proud investors in AVE and Uniswop and Compound and OX. And thank you, Castle Island,

for enabling some of that. We're proud investors behind those projects and those teams, but there are simply too many scams and too many crashes and too many vulnerabilities today. I want them to succeed and we want to channel resources and capital and help to them, but I think that they're not really quite ready to be used by everyone. And they will be. So again, it's no different than General Motors killed the electrical vehicle because the electric vehicle in 1990 wasn't quite right. the problem was they overshot, so they carried on trying to kill it for another 20 years, and in the process, they missed the whole game. That's what's happening here right now.

So big established financial institutions are poo-pooing defy, let alone NFTs. The reality is they will be ready for prime time, probably in a relatively short order, three years, five years, seven years, I don't know, because that's the challenge of prediction. You don't know if it's three, five or seven years, but they will be ready. and at that point, suddenly we'll get this inflection point in the curve and the big established institutions that weren't ready will be left way behind. That's my view. I agree with that. And I would add just follow the talent. And there is a ton of talent. And so this is an industry where I agree that this might not be this wave where some of the stuff gets figured out. And there's

big open questions around the SEC's posture towards token distributions and things like this. But this is not somewhere where I'd want to be intellectually short as a category. Yes. But you just said something, Matt, that I fundamentally disagree with. I don't think there's a lot of talents. I once did a project for HP, Hewlett-Packard, and what we were doing was we were applying the social graph to their entire developer community

to try and figure out which computer engineers and developers were hubs of information, be who were users of those hubs. And just to keep it really short, what we discovered was what I call the Alpha Engineers. There's a very small number of Alpha Engineers, even in a very large development organization, who really know what they're doing. And most engineers rely upon those people. By the time you get to something like the Bitcoin developer community or the Ethereum developer community,

not only is the number of people working on are actually quite small, typically in the hundreds, obviously Ethereum is larger because they have the projects building on top of Ethereum. But not only are there relatively a small number of computer scientists and engineers who really get this and are masters of it, but they are also quite concentrated. And I'm very struck by that, because if you go through the top 50 crypto assets by value right now, we have dead protocols on the top 50 list where there are no developers working on them at all. We sure do. And it's a great point. There's a kind of categories of talent, I guess, is a better way to say it. There are maybe 10 people in the world that are all-stars at working on Bitcoin consensus critical code. There's only one Greg Maxwell or Andrew Poelstra in the world. I guess in Defi, you have the advantage of building on an existing platform with Ethereum, but it's a point well taken. And certainly if you look at just the talent to deploy some of these consensus. is critical items. There's a shortage, I would argue.

Well, so it's part of the reason why I'm a fund of funds and you are a direct VC. For Allison and I, we got started starting about 2000. Well, we started hearing about Bitcoin about 2012. At the time, I was doing a lot of the strategy around PayPal's digital wallet. And I was also doing some work at HP, actually, about where they called it Blade Computing, which was basically distributed computing. and I started hearing about this new thing, and I didn't know what it was. Alison, who is also my wife, she was running a managing partner of Belvedere Capital, a private equity firm focused on banking and payments.

And she started getting the inbound, people sort of saying there's this new thing called Bitcoin. So we looked into it in 2013, and by 14, because we're internet and fintech investors, I think the light bulb was going on. Allison at that point became chairman of the advisory board at blockchain capital, where she still is. And we love Bart, Brad, and Stevens and Spencer. You've co-invested with them a number of times, I know. So we got involved with them as LPs. And at that point, Alison, I put these dots together and we said, look, this is a global phenomena. It's the second shoe dropping on the internet that we have. It's the digitization of all monies and assets. We know it's inevitable.

We actually think the entrepreneurs will be few in number that really know how to do this. We, Alice and I, we don't have either the scope or the capability to find those people. And so our strategy was we're going to find other people to find those people. And so we are a fund of funds. We're an investor in 20 blockchain VCs globally, North America, Europe, and Asia. And all I need is that Matt and Nick can find 20 or 30 of those people in their sphere. and Brad and Spencer can do the same in their sphere, and Deng and Michelle and Sonny at Hashke

can do the same in their sphere in Asia, and so on. Richard and Max at Fabric Ventures in London can do the same. And that way I'm getting global coverage, and that's basically what we're doing. But the reason I'm highlighting this point is I'm also trying to speak to those people. If you are one of those exceptionally talented engineers

who really understand this body of technology, go and find those local VCs. And Castle Island is clearly one of the best because you're going to need them to partner with you. And I say they, it's not just Castle Island, but whoever your local equivalent of Castle Island is, the quicker you find them, the better. And the reason for that is we're moving into the inflection point. It's becoming more competitive. The blockchain businesses and projects are scaling up.

And you're entering a new era of competition that will make it a lot harder to do this by yourself. That's an awesome place to leave it, Matthew. Where can we send people to follow you on the internet and learn more about Fifth Era and Blockchain Co-Investers? Just put a dot com on the end of either of those. Fifth Era.com or blockchain co-investors.com. That's amazing. Well, I'm looking forward to having you back on the podcast next time.

This has been a lot of fun. I feel like we could have gone on for another hour. But thank you so much for joining. Thanks to you, Matt. And say hello to Nick. We love Castle Island and we're looking forward to being in Fun 3 as well. Thanks, Matthew. Thanks for listening to another episode of On the Brink with Castle Island.

To find out more about Castle Island, visit castle island. Visit castle island.vc. To listen to all of our podcast episodes, please go to On thebrink dashpodcast.com or just click on the tab in our website. Thanks for listening.