The Breakdown - Tom Shaughnessy & Jordan Clifford on Layer 1 Wars, Token Economics and A Shift to Applications

Episode Date: December 31, 2019

Tom Shaughnessy is a co-founder at Delphi Digital as well as the host of the Chain Reaction podcast. Jordan Clifford is managing director of Scalar Capital. In this end of year interview for The Breakdown, Tom argues that the big story of 2019 was actually the fact that it was all about quiet building. When it comes to 2020, however, watch out for fireworks. Tom predicts we’ll see a major increase in the layer 1 smart contract platform wars, as well as an increased in the perceived importance of token economic design. Jordan meanwhile argues that we’re likely to see a shift back to development at the application layer.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDisc. Welcome back to The Breakdown's end-of-year extravaganza, and today I'm excited to share this interview with Tom Shaughnessy. Tom is the co-founder of Delphi Digital, one of the best independent research houses in crypto, as well as the host of the Chain Reaction podcast. And part of why I was excited to bring Tom on is. is one, he thinks in a really broad way. He has to think in a really broad way, in fact, about the entire crypto landscape. And he also digs into details in his work, right?

He isn't just someone who kind of skips across the pond like a rock. He really goes deep on a huge number of different topics. So I was excited to see what he thinks the story of 2019 was and what he thinks about the go-forward. And in some ways, I think that the go-forward, his answers to those questions are the most interesting. He's really betting on a much more significant layer one platform war and a real return to a focus on token economics and token economic design. So it's a really interesting interview. I hope you enjoy it. And if you do, please subscribe so you catch all of these end of year breakdown episodes going through January 1st.

We will be back on January 2nd with our regularly scheduled breakdown episodes. Thanks, guys. And let's dive in. All right. Welcome back to another breakdown end of year micro interview. We've got Tom Shaughnessy, the infamous Tom Shanasi of Delphi Digital. Tom, what's going on, man? Nothing much. Thanks so much for having me, Narrative King. It's always great to chat with you. Yeah, no, it's, I'm looking forward to hearing your insights. This is one where, you know,

I think it's great to get so many different perspectives on this kind of year-end, year-looking-forward type of stuff. But I think I'm particularly excited for you because a lot of what you have to do sitting in the seat that you do is think on a kind of a high level about the big patterns, right, and understand what the trend lines are. So I'm particularly excited to dig in with you. And, you know, as we were just discussing, the basic gist of this is two questions, which can expand into as many as they want. But the first is, what do you think was the narrative or story of 2019? Yeah, that's a great question. It's a tough one looking back, right? I mean, I guess all the cuff, I would say that 2019 was a lot harder than people in the space expected. I think

people kind of expected a lot of things to come to fruition when in reality, I think all of the year was focused on teams being heads down, building, shipping code, and, you know, facing a lot of tough questions on their roadmaps, where they want to go, who they need to do that, and, you know, competition. So I think that there was a ton of dev activity in 2019. I, don't think it's reflected in the fundamentals yet. It's always like a lagging indicator there. But I think the narrative for 2019 was heads down in building. And I think a lot of that is going to change in 2020. But on 2019, I mean, you saw a lot of protocol level development, right? Ethereum with the phase zero launching recently. But I think the interesting thing is activity is

moving up the stack a bit. So a lot of the projects launched on Ethereum and other protocols as well are continuing to now iterate. So you see things like set protocol launching new token sets, MakerDAO launching multi-collateral dye, uniswops growth, and new projects like synthetics rolled out as well. So a lot of dev activity, a lot of interest, but I think 2019 was a lot harder than people thought. Yeah, I mean, it was really an interesting year.

I feel like there was almost this discordance too, particularly around the time that Bitcoin started to surge, kind of like the early middle to middle of the year. I remember Dovi-Wan at some point said that we were actually not in a bull market. We were now in a Bitcoin bull disguising an alt-coin bear, which I thought was a super interesting way to put it. And I think it's kind of like reflective a little bit of what you're saying where, you know, there are times this year where it felt like more should be happening, you know, than was reflected in, you know, at the easiest indicator of price, certainly, but even just in the sentiment that people had.

Yeah, I definitely don't disagree with you. There was a lot going on, and teams did their best to kind of share that news, but it really wasn't too well reflected. But I think a lot of that is going to flow into 2020. And I don't want to jump on your questions, but I'd love to dive in there. Yeah, that's good. Perfect. You've segd yourself. What's what does 2020 look like? What are your predictions for the year to come? Yeah, so I have four main buckets I think I'm looking at for 2020, kind of off-the-cuff things. I'll go through each one kind of quickly, but they are the layer one war intensifies.

So, you know, you have 20 new layer ones launching. Some have launched. Some are expanding functionality. Real macro drivers. Ryan Zer covered this in his coin desk posts. But I think real macro drivers are going to start driving interest in the space, whereas in the past they were kind of an idea. Three, I think there's going to be a huge switch to a focus on real token economics

and value accrual. versus just tacking something on as a medium of exchange. I expect a lot of projects to redo their token econ or new projects to launch with drastically different at econ there. And then for just funding. So a lot of projects are closing shop or cutting back. You know, there's consensus news out. Circle has been in the news a lot.

And then projects need to focus on this too. So things like the Ethereum Foundation laid out their plans to spend $30 million. Teso is suspending a lot of money. and then you have sustainable projects like Decut and Dash and those that I think might be good, well-suited there to grow. But happy to dive into these if you'd like. Yeah, so let me actually kind of spit back something that I've been thinking about or noticing from a narrative perspective that I think dovetails with a couple of the things you just made as a way to get deeper into it. So one of the things that I find fascinating is that I feel like a lot of the 2019 narrative was, and probably appropriate so appropriately so, a little. bit of a narrative victory lap for the, for especially the Bitcoiners who were skeptical of a lot of

these projects, right? There was a strong, a lot of folks who felt like they, you know, were excited about all these different things, but they just kept them kept finding themselves coming back to Bitcoin, you know, and Bitcoin did what it always does and it just keeps building and building and building. And people weren't really like, this was not a good year if you had, this is not a good year to talk about token economics. It was not a good year to talk about tokens. It was not a good year to like, you know, with the possible exception of, you know, algorithmic stable coins and, you know, that whole slice of the world. But I feel like there are all these projects that have made it through that are, like, it's almost like there, there were these things that people had

theses about during the ICO era around how token, how tokens in the context of networks could change the way that the incentives were aligned in those networks and how you could coordinate behavior with those, that they never got to test because it was so warped so quickly by the funding use case of tokens, right? Which was so powerful and so disruptive to the models that we had. It feels to me, I've been noticing this more and more and more that it feels like there may be a kind of a narrative shift brewing, or at least a narrative insurgents, maybe not a shift because I think a lot of people will reject it, but a narrative insurgents around the idea that it is time and it is safe to experiment with tokens again and to be public about how people are

experimenting with tokens again and what tokens might be able to do and and kind of those whole world that has been, I think, pretty subaltern for pretty much all of 2019. Yeah, those are really good points to unpack. I mean, to the first part of your question, I mean, when you're in kind of a low in the market, there's always that flight to safety to Bitcoin mentally. And the other factor there is you're in a world of a lot of tokens that don't make sense, right? So it's kind of two factors pushing people to Bitcoin. And I think everybody should realize that if Bitcoin wins, we all win, right?

So there's no, you know, you can have, you can like Bitcoin and like other things as well, as long as you realize that, you know, if Bitcoin does well, we all do well, right. And then to your other question on the tokens, you're totally right. Tokens were built originally to fundraise. And a lot of the work was spent on the tech, on the projects themselves, the protocols, to really drive interest on that developer level, but they weren't built for real value accrual and to drive legitimate incentives.

Teams didn't think about things like a token accruing value or going beyond a medium of exchange token or why they're even using a medium of exchange unique token in the first place. So I think we've seen some teams roll out new token econ for their token itself, and I think a lot of teams are going to be focusing on this in 2020. And, you know, as a tangent right now, I mean, I just bought a helium node. I was tweeting about it a couple of days ago, but, you know, there's new ways to explore tokens in that sense

where something like helium is basically bootstrapping an entire network without having to spend a dollar on CAPX really for network CAPX, because people are buying nodes running the network and earning token. So it's kind of a way to mix a physical device with token. And, you know, bootstrap a network, which I think is pretty powerful. Do you think for people to take this kind of like tokens 2.0 or whatever this ends up being seriously, it has to be divorced from the fundraising use case, at least on some level? Yeah, it's tough because you're trying to fix projects. The ones that have the money or the resources to fix their projects are generally the

ones that had a lot of interest raising money or raise a lot of money, right? So it's a careful gray, nuanced area where teams have to say, you know, look, our token may have been used to fundraise, but there's no reason why we can't be innovative and we can't fix it or enhance it as long as we're honest with our stakeholders. We do it in the open. And however their governance process works, they go through that process. Amazing. Well, I do have a feeling that this is something that we're going to be talking about a lot this

year, but I want to finish up and maybe coming back to, I think it was your second point, second prediction, which was about actually seeing macro drivers matter in more than just a narrative way, you could say. Right. Like, this has been a question throughout the year, especially like there was one week this year, I think, when Trump was tweeting at Powell. I mean, I guess that was every week. And, you know, everything looked like trash except Bitcoin surged.

And we had like, I don't know, six shows on CNBC and Bloomberg and whatever, be like, is Bitcoin a safe haven asset now? And I feel like that was a big question throughout the year is like, is Bitcoin a macro asset, right? We even did a podcast on this with with CoinDesk for their Invest New York event. So I'm interested in this, in kind of your prediction number two around seeing macro drivers actually start to matter for the crypto industry. Yeah, it's a good question. I mean, I kind of put it in two baskets. So macro to crypto, right? So like, what's the landscape for the high level competitive nature of these. protocols themselves, right? I mean, I've been covering this crypto evolution idea for a while,

but, you know, as of a month or two ago and then looking ahead the next 20 months, there's dozens of new layer ones launching with varying amounts of funding and dev activity. I'm definitely of the belief that the majority of them will fail because it's just too hard to build a community, build network effects, build a moat, things that go beyond just launching an MVP or a main net. And I think Interop can help connect all these things and grow the pie. I'm not against that. But I do think that a majority of them will end up failing. So then on the other side, you have normal finance macro, right? I'm not a macro guy, to be honest, but Ryan's Post and my partner Kevin's ideas here kind of got it in my head that a lot of the drivers on a macro standpoint for Bitcoin and crypto in the past have been ideas like Greece's default or the 09 recession. Like it never actually flew. Didn't actually drive inflows to crypto in a massive sense, kind of outside of China. I think that as the world continues to worsen on a health standpoint, an economic standpoint, there's now an actual vehicle for people and enough knowledge for people to then take their money and say, hey, you know,

I don't care about my government's decisions or the central bank's decisions or inflation's killing me or student loan debt is a huge burden. Let's allocate to something safer. And now I think that there's a realistic idea that this can actually happen. So I think the macro drivers go from being an idea to being a reality, especially if we go into another recession, which, you know, 10, 11 years later, it's kind of like we're due for one at this point. Totally. Yeah, I think this is one of the most interesting questions to me. It's something that I kind of just, I spent a lot of time thinking about and watching. But like you, I'm not sure. I feel like the folks who are the clearest or maybe let's put it this way, the folks who are the most

sure about what's going to happen next when it comes to the macro environments tend to be the ones that I'm the most skeptical of as well. But anyways, Tom, listen, I really appreciate all of your insights. I love getting to talk with you and sharing all the ideas going on over there with the crew here. So thank you so much for your time. Yeah, Nathaniel, thanks so much, man. You make it easy with your weekly wrap up. I look forward to that every week, especially the gifts and the images. And thanks so much for giving that as a resource to the community because we're all better for it. Appreciate it, bud. All right. Happy 2019. Happy 2020. All right. I am here with Jordan Clifford from Scalar Capital. Jordan, thank you so much for joining today. Well, thanks for

having me. So I guess before we dive in, just tell me about your year. I've seen you prolifically writing, tweet storming. It seems like you're investing, but just can't help me be thinking about the big issues going on in the space, which is super cool for me as someone who curates a lot of content and is always looking for people digging into ideas.

Yeah, absolutely. It's been kind of a wild year for crypto. Kind of quiet on the mainstream front, but behind the scenes, there's been a lot of developments, a lot of new projects kind of spinning up. And yeah, we've just really been trying to keep her heads up and looking around for all the newest ideas coming out.

And at the same time, kind of helping digest all the all the happenings of crypto and producing content so people can kind of get their bearings. Amazing. Well, yeah, there definitely is. So, I mean, that's a perfect segue into the one of two questions. Like I've told folks before, this is like a, it's a micro interview, end of year's style. And so the first question is just, what do you think? was the narrative or the story of 2019.

What was the most important narrative of this past year? Yeah. So I think the most exciting narrative was really Defi. You're probably going to find that come up and up on a lot of these interviews. But Defi actually, for the first time, I think we've seen some product market fit for some of what we're building. You know, there's a group of people who are really into speculation. It's still fairly niche. But they want to bet on crypto and they want to bet big.

They want to borrow. They want to use every advantage they can to make a bigger bet. At the same time, you have kind of a risk, more risk-averse population who has stable coins or maybe even crypto, and they want to earn yield. They're not really interested in leverage, but they are interested in just earning income on the assets they have. So matching the yield seekers with the leverage seekers in a decentralized way gets me really excited because this is for the first time something that's uniquely enabled. by crypto. These are crypto asset protocols, DFI protocols, and that's decentralized finance in case you hadn't heard. And the decentralized finance protocols are allowing people to interact with each other without middlemen. You know, they're with the caveat that some of these

smart contracts do have administrator privileges, but that's slowly being, you know, kind of eaten away and we're going to replace those kind of administrator functions with more governance functions as we go on. But I think the proof is in the pudding that, you know, for the first time, we have actual use cases that are enabled and exciting to see. I think one of the things that's interesting is if you kind of take a recent historical view and look at just how much has changed around DFI between this time last year, or even especially like 18 months ago, maybe more than like 12 months ago, right? We're coming off of the ICO movement.

And really this whole idea of open finance or decentralized finance, which is still jostling around for figuring out what it was going to call it. I feel like in some ways, was it was starting to kind of take energy away. And a lot of folks who had been in and around Ethereum were like, listen, the money stuff was, was right. It was right to spend time and energy there. It's just we had to think about it a little bit differently compared to now where it is just, it's such a, I feel like now, DFI is, it's a narrative unto itself that is

kind of beyond chains in some way. I was talking to Camila Rousseau about this and just even on, on the podcast that are recorded today for the regular breakdown of looking at some Bitcoin, uh, Bitcoin based, you know, defy chains or what the possibilities there might be. It really has been a hugely important part of this year just in terms of where, where time and attention and resources have gone. Yeah, absolutely. I mean, the number of success stories is pretty exciting to see like compound is, you know, breaking, breaking new records.

Maker has recently switched to Maker multi-collateral die. So that's really exciting. And I'm especially really excited about being able to use Bitcoin in some of these Defi protocols. Things like Rap Bitcoin, still pretty small, but maybe TBTC or some other new solutions

to have Bitcoin-packed assets on Ethereum in these protocols can really make a difference and unlock new possibilities, new ways to leverage these capital that's kind of sitting idly on these networks now. So it does feel, I mean, just based on that, it sounds like you are kind of in this camp of decentralized finance as a concept is a concept into itself, right? It's bigger than any one chain, even though it obviously has grown up in the Ethereum community.

Yeah, absolutely. I definitely think so. I think there's many ways to link chains. You know, you can do cross-chain atomic swap type things. You can also have, you know, assets that are pegged to each other via various different incentives or, you know, kind of networks that perform work to, uh, to do that sort of thing. Like the TVTC is an example of that. But yeah, absolutely. I mean, defy that this, this concept of, you know, doing banking without institutions and doing it with protocols is one of the fundamental, you know, value props behind crypto,

in my opinion. Um, amazing. Well, so then let's, uh, so defy is obviously, uh, you're, you're right. It's definitely one of the big things that comes up when I'm asking about narratives of 2019. But what do you think about when you look out at 2020? What's a prediction that you have or what's something that you anticipate happening? Yeah, that's something I think a lot about. It's really hard to see around the corner in crypto.

You know, things happen so fast. And, you know, we really are at the mercy of forces bigger than ourselves, whether it's the geopolitical climate, the macro economy. But one thing I am really excited about is kind of a moving beyond this infrastructure. I think we're going to start to see a bit more applications being developed. You know, right now, many, many teams, many people have taken their crack at layer one protocols trying to come up with more expressability, more scalability, more decentralization, more privacy. That's awesome. I'm so happy that there's like so many protocols and so many attempts at that.

But I think that that's still just infrastructure. layer stuff and really it's hard for anybody other than developers to get excited about the nuance there. I think what we really need to see from this industry and from crypto is more applications and more design and more interfaces, user interfaces developed for regular people, lay people. Lay people don't want to, don't care about a state channel. They don't care about a layer two. All they care about is, you know, sending money, interacting with cool people online, maybe performing some work and getting paid,

playing games and having goods within the game be exchangeable or valuable. These are the kinds of things that normal people, mainstream people are going to care about. And while we're still kind of on layer one, like sorting out the technical details, we really aren't going to make too much progress within the mainstream. So I think we need to have more memes, more applications, more things that people can relate to.

And that's going to take a lot of designers, application developers, entrepreneurs. And I think we're kind of ready to get that phase started. I think 2020 will just be kind of scratching the iceberg still, tip of the iceberg, but it's got to start. And we've got to have some examples and we've got to kind of move in that direction if we're ever going to see crypto really go where it can. Are there any projects that you would point to as exemplary of that kind of getting back

to focus on the application layer? I mean, in some ways it's like we, it got all. muddied and jumbled, right, in some ways when it was kind of just tokenized everything. And there wasn't really clear breakdowns between application layers and infrastructure layers. And I think we've got a little bit sorted out over that over the last two years or so. But who would you point to as kind of, you know, focusing on or I guess, yeah, like I said, exemplary of that, you know, a return to an application layer type of development. Sure.

So admittedly bias, and I do have a position in this. But, you know, Auger rep is one thing that we're keenly looking forward to. You know, they've been around a long time. They have a protocol that's working now. The user interface still could use some iteration, but also the fact that you have to use ETH right now is a bit of a detriment to many people. So I think that the Auger 2.0, where they have actual stable points that you can use, and I presume, as well, some design iteration, could be a big catalyst for people to actually

kind of use this to do some wagering or prediction market participation, you know, depending on the jurisdiction, your end, choose your terminology carefully. But, no, I think that Augers is an exciting example of that. There are others. Nothing I'm, you know, really prepared to go into, but I am excited to see kind of what comes out next year. Yeah, I'm certainly, I mean, it's interesting. I'm always kind of keeping an eye on the spaces. I find myself, for me, like whenever I sit back and get really, you know, kind of introspective about what gets me excited about the space, it tends to be on the more big systems changing stuff. But then I'll catch, you know, like God's Unchained or a company like that, you know,

doing something really interesting and different and kind of like zone in for a little bit. So I think it'll be really interesting to see if kind of what you're talking about comes to bear in terms of just more people creating more applications that people, you know, you know, have a chance to interact with and get excited about. Yeah, absolutely. It really is going to be exciting to see what happens. And then, of course, I already remiss to admit the Bitcoin halving. I think that that is absolutely going to cause a dislocation in the market and, you know,

cause us to find a new level. That's my prediction, not financial advice. You know, who knows what's actually going to happen. But I do think that that's an exciting event for crypto as well. Amazing. Well, Jordan, thank you so much for taking the time. and I look forward to more of your writing and tweeting for the next year. Thanks so much, Nathaniel.