The Breakdown - Katherine Wu on What Gets Built Next in Crypto

Episode Date: December 29, 2021

This episode is sponsored by NYDIG. On this episode of “The Breakdown’s” “End of Year Extravaganza,” NLW is joined by Katherine Wu. Katherine invests in early-stage crypto companies with Coinbase Ventures.  Find our guest on Twitter: @katherineykwu Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our holiday theme music is “Spike The Eggnog” by Two Dudes. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Andriy Onufriyenko/Moment/Getty Images, modified by CoinDesk.

For a lot of builders who are like really drawn to the ethos of Web3, they just kind of look at like, okay, one of my building and like what layer one is best suited for one I'm building specifically. Do I care more about security today or do I care more about speed of settlement today? It is a little bit less of a ideological debate. I feel like sometimes I'm such a crypto boomer in the space where I'm like, oh, back in my day, like, we used to debate about this and that. And like, ha, ha, I wasn't even called defy and like, no one cares. You know, they're just like, okay, that doesn't.

have anything to do with what I want to build. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The Breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, December 29th, and today I am delighted to welcome back to the Breakdown, Catherine Wu. Some of you know Catherine Wu from her days, at Masari. Some of you know her from her incredible crypto legal annotations, which always blow up Twitter as soon as she drops them. Catherine these days is investing in early stage crypto companies

as an investor with Coinbase Ventures. Given that, we have a ton of context to discuss how this year has set the foundations for big changes in the crypto industry in the years to come. This is the perspective of someone who spends all day, every day hearing about the projects on the Bleeding Edge, and so I'm thrilled to have Catherine back on the show. All right, we are back with Catherine. Catherine, welcome back to the breakdown. Thank you. It's always so fun chatting with you.

I'm super excited. You obviously are going to have a kick-ass performance like you always do on this show. And I feel like this type of episode is super tailor-made for you. So let's just dive right in. And let's start with what you think the most important story or trend in crypto in 2021 was. So one of the trends that I've been most fascinated by, and I definitely don't think I could have predicted this by any means last year was actually this, this like, you know, X to earn model that I've seen a lot of projects to adopt. So whether it's like play to earn or like

used to earn or learn to earn, you know, whatever, I just keep seeing really fascinating models that actually put more focus on inclusivity more so today than I ever seen before. Now, of course, caveat that we still have a ton of work to do. But let's just, you know, pick one of the three that I mentioned earlier. I think one of the phenomenons that's been really interesting this year is the play-to-earn phenomenon. And obviously, you know, this kind of came out of this specific blockchain gaming thing called Axe Infinity. And they really adopted this like play-to-earn model. And what I think is really fascinating about that is, you know, what are the tensions I struggle with in crypto is this idea that you need more tokens to accumulate more tokens and more power. And that's like just a never-ending cycle, right?

And a lot of that is just entry fee. And it's really to do with how much fiat do you have to buy these assets, then you can then convert into more tokens, which I think goes back into this, like, kind of frustration that I think I've always had a lot of crypto models, which is that, like, at the end of the day, the barrier to entry is just too high, both on the capital front and the education front. So I think the focus of actually providing a feasible, like, play to earn or like some kind of token accumulation model where you don't have to put capital up front

or at least there are ways to kind of mitigate that is really insane and totally different from like the gatekeeping model that I think traditional companies really thrive on. And I think in crypto land, you know, the idea is that like the more tokens you put in the hands of more users, the more resilient your project is. And I think like seeing the trend of just like X, Y, Z to earn or like just trying to think of more ways to make your project more inclusive is really, really fascinating. And I think we can also, you know, I think spread that out to then, you know, the airdrops that we've seen this year and like really how much value is getting accrued actually to the hands of

the users. And we're sort of seeing it actually in a large scale this year more so before. So it's super interesting. So the biggest critique I feel like that people have on the X to earn models, you know, specifically this comes up with play to earn is that is effectively one of a long-term belief about motivation. And so in the game space, it's like how far does the earning incentive go versus it's a good game go, right? And I think you could apply that to a bunch of different of these extra earns. It sounds like you're kind of focused on a different piece of that almost, which is just the notion that a default part of protocols is giving people an on-ramp that doesn't involve previous capital. But how do you think about that sort of question of,

you know, the motivation of, you know, application X or Y being, you know, shifting from whatever the normal or intrinsic motivation of that application would be to a commerce model. Yeah, that's a good question. And I don't think we're anywhere near solving it yet. And maybe I'll answer in a roundabout way. And, you know, I don't, you know, unfortunately, I don't remember who tweeted about this. And I apologize for hijacking this idea. But, you know, I think the best way to actually think about this and understanding all of the imperfections that are in the play-to-earn model and a lot of the Web3 models we see today, which is that like, you know, in your traditional web tool, when I say that, I mean, just like, you know, your usual activity browsing the internet, using internet products, you are the product, right? And what I mean is that like you're the product because, you know, you're able to use Instagram for free because they can target ads to you, blah, blah, blah. Is that net good or bad? I'm not the arbitrator here, but just know that like you're the product, and therefore it's free and feels easy to use. So in Web3, it's kind of like there's some sort of gatekeeping model that kind of you have to get through.

at first to actually make it kind of feel like a seamless free experience. And so the gatekeeping thing a lot of the times is in the form of the tokens. And so like the motivation around like what's actually behind this like, you know, token gated thing, whether it's a game or community, whatever it is. Like there does have to be some kind of gate first. And what I'm saying is that like, I think it is really nice that the gate isn't just like, can you buy your way past the gate? Like there are actually things you can do to get yourself past the gate. Now actually what's behind the gate. Like, I think there's a lot of ways to iterate. You know, it could be a really fun game. It could be a not so fun game. Whatever your motivations are, my point is that, like, actually in order to get through

that gate, no longer requires just a ton of capital up front anymore. Yeah, I think it's super interesting. I think that it's, that's actually kind of a, a fascinating piece of this to focus on and hone in on versus sort of just some of those longer term questions. That there's, there's a something here that has implications that maybe are broader than just AXE or even the game space. that are worth considering. Let's talk about what's something that happened this year that you never would have predicted. You know, one of the things that I think is really interesting that happened this year is kind of this, you know, finally solidifying the idea of ownership in the intangibles, i.e. the things that exist in the digital realm or like things you can touch. And I think

we've always had like an abstract idea, but I think this is really one of the narratives that's really dominated this year. You know, so I was thinking like, you know, when I, actually when we both, because we kind came into crypto at the same time, when we both came into crypto full time, the industry truly was too early to be able to experiment the way that we have in 2021, right? Like, there just simply weren't enough infrastructure to do things like, you know, easily create and deploy an ERC 721 contract, which is an NFD token standard. In fact, that didn't even come around until a few years ago.

Or to cast governance votes, by the way of, you know, voting on chain. or at least there was no user-friendly way to do so. So the industry back then was really mature enough to support all of this new innovation that we're seeing today. But, you know, of course, I think it was also because of that, you know, particularly in the post-ICO boom, there was like this really depressing barricle. But it was really like the infrastructure period, right? So like 2018 and 2019, and the focus was actually on building things like, you know,

the more kind of maybe like boring but really important foundational stuff, like layer two scaling solutions or like permanent and decentralized data storages. or more secure ways to store and manage digital assets. And so fast forward to 2021, like what's something I could have never predicted, it's actually this insane explosion in the innovation around the application layer. And I think a lot of that is, you know, we've read a lot in the headlines about the great resignation of 2021. And that's like fueled by the global pandemic.

And we're seeing people who are quitting their jobs in unprecedented rates as we start to also rethink our own relationships with work. And the mass sort of stay-at-home time has also force us to all to re-examine our relationships with the things that we create and own. So I think in hindsight, looking back this year, I think it's really this realization that kind of brought us all online to look for these outlets, whether it's creative or it's financial or it's looking for a sense of belonging, all to pursue online. And that's paired with, right, the growth of the underlying crypto infrastructure layer. And all of a sudden becomes

possible to actually create and explore application layers within crypto. And I think like there's so many factors, both kind of like within crypto and also like global macro wise, that has led to this movement and this explosion of the app layer that I don't even think I foresaw, you know, going into this year. I think that's interesting. I mean, not to put words in your mouth, but I wonder to what extent is a way to rephrase that, I guess, that this is the year that it was plausible for this sort of rebranding of crypto to what. Web3 because there was a sufficient, like Web3 actually being the application layer that's crypto powered, but is its own thing. And if that's the case, what do you think of, what do you

think of the state of Web 3? Have you been surprised by that rebrand? Do you think it makes sense? And then maybe from there, depending on where we want to take it, we can talk about Jack Dorsey. Oh, God. I'd really rather not have him angrily tweet at me. But, you know, I think Web 3, like Web 3 started off as like just a meme and then it got adopted by like a couple different like layer one protocols. And I think like, you know, it kind of makes sense this year because I think Web 3 would it really, it's just an umbrella term for for everything in crypto. Right. It's like a really easy term to talk about like both cryptocurrencies. So like maybe, you know, when we think about digital gold or like stable. like cryptocurrencies, it also encapsulates, like, the hardware stuff, NFT, defied, Metaverse, like governance tokens. It's just a catch-all term for like all things. Crypto.

And I think maybe crypto, yeah, I think it's just, I don't know how it came about. I mean, all things in crypto just comes so organically. Like who started the GM good morning thing? I have no idea. Like, why is everybody saying wag me? Like I read a fundraising announcement yesterday that was like, we're announcing our Series C wag me around. And I was like, why is this making its way through mainstream?

I have no idea. But I think Web3 has become more so this movement of ownership, of reexamining our relationship with the things we own that maybe you can't touch and our relationship with work. I think it's just a really amazing catch-all term for both crypto ideology and also crypto innovations. Nidig sponsors this podcast and they're helping CFOs, traders, and risk managers safely and securely integrate Bitcoin into their operations. Learn more about what NIDIG does and how they do it at NIDIG.com slash NLW. That's NYDIIG.com slash NLW.

Where do you think Bitcoin fits in all this? And obviously, you've been in this space for a really long time. You've seen the ins and outs. You like me have never been particularly keen on the sort of existential battles between different communities. But, you know, obviously this has been a significant year for Bitcoin as well. Do you see it as evolving in some way that is separate from the rest of Web3? Or is it still kind of.

part of the same space? I think there are probably like two ways to look at it. I mean, number one is, you know, Bitcoin, I think, will always be king and that, like, it's always going to be, like, digital gold. It's always going to be, I think, at this point, like hard asset. And part of it was that, like, Bitcoin was never invented to do all this, like, smart contract, computing platform stuff. And if you really want to stretch it, like, a lot of people argue that, like,

technically Bitcoin is the first version of real defy. and that it's a whole financial system you can opt out of and kind of participate in that's non-sovereign backed. And I don't think Bitcoin will ever, ever lose that. And in fact, I think over the years, it's only gotten stronger as an alternative asset, a non-sovereign asset. I think all the stuff that we're seeing that's like exciting and like application layer focus is kind of because they're built on top of base layers that are kind of optimized

to get built on top of. So it really is comparing apples to oranges. and the progress we're seeing in just Bitcoin adoption is insane. You know, like having whole countries adopt them as legal sovereign currencies is crazy. Having companies buy them on treasury is insane. So I don't think it's like one or the other. And it definitely is a world where we can have both Bitcoin and all the various innovations exist at the same time. I guess building on that question, how do you think about the emergence of layer one alternatives to Ethereum or just projects that are.

are specifically designed to be built upon, as you said, and are making perhaps different tradeoffs around things like decentralization than their peers or competitors. How has this year shifted the way that you view the landscape of protocols that want to be built on top of and what the future looks like? Yeah, the everlasting layer one debate. You know what's really interesting is, again, with the explosion of, you know, NFTs and Dow's and kind of things that I think are more easy to grasp. We've had a lot of newcomers in the space. And at the end of the day, you know, the people who are coming into crypto to build in 2021, like they don't really care about these like tired layer one debates. That's the honest truth. Like for a lot of builders who are like really

drawn to the ethos of Web3, they just kind of look at like, okay, one of my building and like what layer one is best suited for one I'm building specifically. Do I care more about security today or do I care more about speed of settlement today. It is a little bit less of a ideological debate. I feel like sometimes I'm such a crypto boomer in the space where I'm like, oh, back in my day, like, we used to debate about this and that. And like, ha, ha, I wasn't even called defy. And like, no one cares. You know, they're just like, okay, that doesn't have anything to do with what I want to build. And, you know, entrepreneurs today have more options than ever before when they do want to build a kind of, you know, Web 3 company or an application on whatever base layer, you know,

they really just have to think about what's right for them and choose from there. And I think, you know, it goes back to what I was saying earlier about the growth that we've seen and just, you know, building hardcore infrastructure for the past couple of years and what that's led to today in terms of options to even build within crypto. It's super, super fascinating. I'm always caught between the no one gives a shit just build kind of argument, which I find highly compelling. And also the, I'm glad some folks are willing to have the like the battle about the underlying prioritization within the protocols. It's almost like these things become slightly different in some ways and they intersect when they need to, you know.

But it does feel to me healthier to have a landscape where different applications can choose between different prioritizations. but who knows? It's been fascinated to watch. I think the introduction certainly of all these new L1s has brought up a bunch of really interesting questions about those prioritizations, but I'm sure that's going to continue to play out next year. Totally. And by the way, like a lot of these are just launching this year, right? A lot of the companies that are building on, they're brand new. So, like, I'm sure there will be problems that arise. And, you know, we have options, but we also still need to do a lot of work on education. And I think, like, that goes into kind of making it informed decision even for entrepreneurs who do want to build in crypto and want to decide, like,

where do I want to go first and what are the hurdles that face me? And I think, like, having that sort of informed decision just comes with, you know, A, having more time. Like, a lot of layer ones haven't even had enough time really, like, on main net, having things built on top of it. And the thing is, like, things will break. And it's just a matter of, like, how much they break and is it solvable? What's something that you're paying attention to that you're surprised more people aren't talking about, thinking about or paying attention to? Ooh. I'm paying a lot of attention to DOWs, particularly in recent months because it's actually been really loud.

And I don't think people aren't paying attention to it. But we're just actually so, so early. And I think what a lot of people are paying attention to in Dowland is the idea of a Dow, but not the logistics of a Dow. Because, you know, I think the idea of a Dow is really amazing. Like, it allows you to really, I mean, it isn't kind of umbrella terms in terms of like a new way of organization and structure among different stakeholders working towards the same mission, right? And we saw a couple of experiments this year that's really showed us the power of the crowd and the power of like pulled capital from the crowd. and I think Constitution Dow is a perfect example of it. But I think where I'm a little bit, I don't want to say pessimistic, but maybe just kind of like waiting it out is I think we're going to see some really ugly fallouts.

And while the idea is amazing and I really love the movement around it, the logistics of a Dow and like just how early it is. So, so early. And I think the fallouts are going to be ugly. So some of it will obviously be, I think, centered around like human problems and human coordination. But a lot of it will just kind of flush out basic traditional core. corporate issues. Like, oh, like, why does proxy voting rules exist? Or, like, why are their disclosure frameworks and rules? Or even just, like, go to old fashion transparency and information sharing among decision makers and their stakeholders. Although, the difference here,

of course, is that your stakeholders are in the thousands. And so, you know, the thing is, like, as we move towards, like, a token governed world, and maybe that's, like, Dow's are part of that, we will still have decisions made behind closed doors, but it certainly shouldn't feel as clicky as it does today. Like, I think there's kind of a clear in crowd as early folks with the most amount of tokens. But I don't think any of that is unsolvable. I actually think that, like, we'll see a lot of those issues get flushed out even more in the coming year.

What are the biggest risks to the crypto industry next year? Oh, gosh. There's a couple. I would say the two forces are external. So externally, the risks are, you know, regulation, like, particularly in the U.S., what it means for builders here, what it means for things that are getting launched here. And I think that's, like, always been an existential external risk within crypto and crypto builders. But the internal risk is actually where I think is a little bit more concerning and toxic. So, like, for example, like, I think in terms of, like, we'll see some ugly governance-based fallouts that,

might shake people's confidence to participate in something similar again. Or I think, you know, NFTs right now obviously very, very hot. And, you know, you hear about people who are new to crypto who like start getting really into it. They get hacked. Or like, that's not like the project's fault, but it definitely is, like I said, again, a user like education problem. I actually think the risks come internally are from like, you know, coordination problems or like, you know, when decisions are made out in the open and gets really, really ugly. Or maybe just people who, you know, kind of go all in and then realize that, like, they never did enough due diligence and end up, you know, losing all their money or whatever

because, you know, there's an education problem. So I think the risks actually come from, like, internally within the industry. And I just think, and I've always been, like, really loud about this, that, like, we just need to do more work to educate more people, to give the pros and cons, and to make things just more understandable because everyone's experimenting and everything's going to break, but just break it in a way that's foreseeable instead of just like, you know, being totally caught, like, off guard. What's one prediction that you have for next year? I hate making predictions because I just don't think I'm that good at predicting things.

I think we'll continue to see interest in Web3 just because we're seeing so much capital. kind of locked up in the in the form of funds that are just ready to deploy. We're seeing so much talent continuously coming in to build. So I do think that like even if crypto markets to get hit, like there's a lot of projects that actually have enough cushion. There's enough funds that are ready to deploy that we can maybe actually work through it. And I'm kind of hoping that like we get to see another kind of like heads down infrastructure building time again because I actually do think that like even though all

the excitement around application layer stuff is exciting and it's amazing and shows you a glimpse of like what the future can be. The foundational layer is still like very, very wobbly. So it's not so much a prediction, I guess, but more like what I hope will happen. Awesome. Well, Catherine, it's always awesome to get your insights, excited that you are here that you're investing in the next generation of these companies and projects. And until next time, thank you for sharing all your ideas. And I hope you have a very happy holidays. Happy holidays to you as well. And thank you for having me on. Just wanted to wrap quickly and say another big thank you to Catherine for coming on the show. I always appreciate her insights and I'm so glad she's willing to take the time to share them with us.

Until tomorrow, guys, be safe and take care of each other. Peace.