The Breakdown - Why Bitcoin Is Thriving, With Alyse Killeen

Episode Date: December 26, 2022

This episode is sponsored by Nexo.io, Circle and Kraken.   Today’s guest is Alyse Killeen, founder and general partner at Stillmark.    Find our guest on Twitter: @AlyseKilleen - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds and keeps innovating with products like the Nexo Wallet - a non-custodial smart wallet that allows you to create your Web3 identity. Get early access at nexo.io/wallet. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today's show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. Your account is covered by regular Proof of Reserves audits, industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com/breakdown. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our holiday theme music is "Spike The Eggnog" by Two Dudes. Music behind our sponsors today is “Glasgow” by Falls. Image credit: alashi/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

I think that there's been this sort of like reassurance that these values of due diligence and of verifying what you're told and of relying on software rules, but then questioning rulers are not deferring to people of authority has really served the Bitcoin space well. And so that's the silver lining here. But this year certainly had very intense competition for sort of worst lesson of the year unfortunately. Hopefully next year will be easier because we will have removed so many of these bad actors in 2022. 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

nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, December 26th, and today's guest is Elise Kaleen. Before we get into that interview, however, if you were enjoying The Breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, guys, well, Merry Christmas, for those of you who celebrate, or even who just enjoy the day off.

Today, I am delighted to welcome back to the breakdown, Elise Killeen. is the GP and managing partner of Stillmark, which is a venture fund that is totally focused on innovation within the Bitcoin ecosystem. Elise got into Bitcoin in 2013 and started investing in the broader Bitcoin ecosystem in 2014. In this conversation, we talk about the big themes that drove Stillmark's Bitcoin investing in 2022 and what she's looking forward to seeing built in 2023. I know you're going to like this one, so let's dive in. All right, Elise, welcome back to the breakdown.

It's great to have you again. great to see you. This is becoming an annual tradition, our end of year check-ins, which I love. I think it's a great chance to think about what was, but also about what next. And you and I have been chatting for a few minutes before the show. There's so much to dig into this year. But one of the things that makes you and Stomark unique relative to other players out there is long duration, acyclical focus on Bitcoin, i.e., Bitcoin retains its focus. throughout all cycles and regardless of what other people have been excited about. And so I think that

as this year closes, so many people are kind of returning to Bitcoin, coming back to sort of the fundamentals of what got them excited about this space. And I wanted to start by asking, how would you summarize Bitcoin's 2022? What was the year in 2022 for Bitcoin? That's a great question. So, 2022 was a year for builders for sure. And then it was also a year where folks were reminded often through painful events about the why Bitcoin has made the tradeoffs and choices that it has in terms of what it's building and where the focus of entrepreneurs in the spaces. And so to summarize that quickly, Bitcoin, the protocols are building to offer an alternative

to traditional financial rails and an alternative that is opt in and also opt out and that everyone has free and equal access to. And so that's what Bitcoin's doing. It's pretty similar but also incredibly ambitious. And so when we are making changes or maintaining the protocol, we're doing it as though it's an airplane in flight. So, you know, we're taking as minimal risk as possible to maximize benefits for the protocol and for users of the protocol,

while at the same time doing it in what's been, you know, sort of accused of being a boring way so that we can progress to this incredibly ambitious vision of being a way for the global economy to be fairly connected. So that's the first part of what happened in Bitcoin this year. And then the second part was just entrepreneurs thinking about how to expand Bitcoin's utility and make Bitcoin accessible and valuable for people most broadly. And then, of course, the broader crypto space, you know, face several reminders of the value in building something, you know, building boring tech.

And what boring has come to mean in the crypto space is less risk, less risky tech. What happens if you're purely focused on what you can achieve, while maintaining uptime dependability and, you know, sort of an environment in which trust is not necessary. So to me, that was 2022. Awesome. And so, you know, as you were investing this year, what were the themes within sort of the builders in Bitcoin that you noticed? Or were there kind of key themes that stood out?

Absolutely. So there's two areas that really had an opportunity to mature this year. and the first is lightning infrastructure. Stilmark was really heads down, especially towards the beginning of the year, in looking at what needed to be built in lightning, for lightning to grow up, really, to mature, to be something that could be relied on to provide enterprise-grade reliability in payments and in a future state, perhaps, but in a near-term future state.

And what lightning needed to do in order to be suitable for, broad adoption in emerging markets, not just as sort of, you know, a tool or a toy for people in developed economies and people of privilege, but also to be something that could interact without friction in the daily lives of people in places like El Salvador or in Nigeria, in Kenya, in Ghana, places where we're really seeing incredible adoption. Now, the second thing that's happened that Stilmark has been paying attention to in 2022 is the maturation of the mining space. So there's been a lot of lessons learned through the mistakes of first movers that entrepreneurs can take advantage of and advancing their own understanding of the opportunity set and optimal

operations. And so we're, you know, we've been paying close attention to that. And what that really means is looking at mining software and also new founders taking different and unique shots, you know, on goal and what it means to really mine in an optimal way and in a sustainable way, how to diversify revenue and what geographies are suitable for mining. So mining, I would love your take on kind of where mining is as we close out this year. It seems like a pretty beleaguered space if you're just kind of watching headlines around the big public miners. It sees an accommodation of, you know, lower prices, you know, sustained competition, higher electricity costs, and then debt servicing from, you know, from previous cycles.

But what's your take on kind of where mining is and what's, you know, what's kind of likely to happen over the next, you know, a few months? So for the very mature businesses, the incumbent mining businesses, what we saw was a collision of events, right, including Black Swan. events like a war that created an increase in energy prices across the globe, really. So miners were exposed to that at the same time that they had taken on more debt than they could easily service and where they had paid perhaps less attention than they optimally would have in diversification of revenue. And so because Bitcoin goes through cycles and the price is volatile across, you know, what's historically been a four-year cycle anchored on Bitcoin's having events.

We know that Bitcoin mining, prop mining will be more profitable in certain years and less than others. And in order to stabilize a company's profitability in the meantime, diversification of revenue can be a tool. But it's something that takes time to do and perhaps is easier to do from the ground up. And so I think that's one of the lessons that folks paying attention to the mining space have really learned. And then as the broader ecosystem matures, of course, competition becomes more intense.

And so not making mistakes becomes more important. And, you know, as we know in tech, the same is true in mining is that it's easier to be to sort of pivot and to be flexible to external conditions when you're a smaller business. It's harder to do when when you're larger. And so you want to be really well positioned, you know, by the time you hit the public markets. And I think we're starting to see some of the pain and consequence of, you know, even the smallest mistakes as a result of having less flexibility to move when conditions get rough. And so that will be an opportunity for new miners and for software businesses as well that can create efficiencies for established miners.

Yeah, I was going to ask, you know, going into a little bit more detail around, what does sort of revenue diversification look like or what are the types of things that people are exploring around that? Well, so first off, I think proprietary mining matched with hosting is something that can be a smart and, you know, sort of straightforward way to diversify. And we have seen hosting become an important part of, you know, many businesses. And then there's sort of, you know, things like looking at what defines your unique, unique approach to mining and how to extend that. So as an example, Stillmark just did an investment in a young mining company called Gridless, which is based in Kenya. And Gridless is, Kenya, for those that don't know, has just an absolute abundant, almost, you know, sort of undefined amounts of sustainable energy that's unutilized or underutilized now.

And so that comes in the form of geothermal. It comes in the form of hydro-solar wind. There's lots of opportunities on the continent of Africa and Kenya specifically. And so perhaps there's a chance to get costs down to zero, to close to zero. And what you can do to diversify revenue once that's a part of your proprietary mining business is to look at monetizing end-of-life cycle machines. That can be something that can be offered to other mining enterprises that want to increase ROI on large expenditures for miners. And to do that, they need to find the lowest cost or zero

cost energy. And so that will be something that gridless and companies like it will be able to offer and also a manner for them to diversify their revenue. Yeah. One of the things that I think is so interesting about mining is that it's a great example, I think, of how different Bitcoin startups can be from sort of what we think of as normal software technology startups in a number of ways. But one being that it is so about accumulation of small edges and operational efficiencies, that it's a type of thing that rewards not. I mean, a lot of tech startups operate incredibly inefficiently, stupidly poorly, and just sort of catapult around until they either fail or they make it. And there's really not that opportunity in mining. It really is about

sort of accumulation of these small edges in some ways and finding new ways to do that. And it sounds like that, you know, while historically miners have known that in terms of cost of electricity and things like that, it's really sort of expanding to all aspects of the business model now. That's exactly right. And so maybe to use gridless as an example again, here's another edge that they have. In addition to Africa having abundant energy, there's also half the population 40 to 50% of the population that lives without access to electricity. Now, the reason why that is is because to find an anchor tenant or initial sustained and dependable offtake when a project is launched has been historically difficult.

So it's hard to predict the demand and who will be able to pay for electricity from day one. And so projects aren't getting funded. And gridless by acting as an anchor tenant has some. an edge here. They can develop this sort of flywheel effect. They can come in get access to really cheap energy by being in an anchor tenant to get capital unlocked and new energy online. And that new energy online, of course, means more opportunity for grid list to mine or to, as I mentioned before, to host these end-of-life cycle miners. And so there's this really nice cyclical effect where Bitcoin is doing more here than just offering a business opportunity for miners. But it's also offering an

opportunity for energy investors in Africa to find an anchor tenant so they can justify the return on their investment in bringing new energy online to ultimately in the end serve households that are currently off the grid. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight. Nexo is a company that has never put the safety of clients' funds in question. With over 50 global licenses, $775 million in insurance, and a real-time audit of custodial assets. Nexo sets an example for security standards in the industry. Apart from keeping their 5 million clients safe, Nexo has kept building. They've just announced their non-custodial smart wallet. Visit nexo.io. That's nexo.io and sign up today. This episode is brought to you by Circle, the sole

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for advanced traders. Spot trade, margin trade, and stake, all from a single interface. With customization tools, unlike any other, Cracken Pro lets you set up your trading interface in the exact way you want. It's all backed by Cracken's industry leading security and award-winning client engagement teams that are available for support 24-7. No matter how you like to trade, Cracken Pro is built to make it happen. Visit pro.cratkin.com or download the Cracken Pro app on Google Play or the Apple App Store today. So Eric Hursman, who's one of the co-founders of Gridless, is someone I've known for, I guess, going on 15 years now. I met him.

He was a TED fellow. He found it something called Ushahidi, which is a crowdsource mapping platform for incidents of violence around the world. And he was doing that at the same time as I was basically working on post-conflict issues, sort of very aligned. And I think, you know, one of the things that sort of validates your point about where these opportunities and edges are coming from, as well as, this return to thinking about Bitcoin and the fundamentals of why people came into this industry, I think in a year where we've had a lot of disillusionment with people who talked a big game about impacting the world around them, seeing people who have sort of been involved in finding ways to benefit their community and find kind of small to medium to large wins for people

who have very few advantages relative to everyone else. Them finding their way into Bitcoin, I think, is very exciting to me. I think it's an energy and a mindset and a perspective that I that I hope continues to grow within this community. Yes. So, you know, these folks are not inexperienced founders. So they, these are, you know, real deal software and hardware experienced founders that saw a problem in their home country and recognize Bitcoin as a solution to that. And, you know, maybe I should have said that that's part of what defines 2022. But I think we could say that is true of every year. We're all still learning about Bitcoin. And we're all still learning about really what Satoshi did in introducing Bitcoin and

discovering Bitcoin, right? And part of what he did, I think, is bring greater, is bring electricity to households in Africa. And, you know, I learned that really through gridless and through this very, you know, well, I think between the team, they probably have 50 or 60. years of a three-person co-founding team, 50 or 60 years of experience in building and scaling businesses in the region. And one of the edges that we haven't talked about yet that they've developed from that is their incredibly robust network of people like you, but also people in country that are sort of there to help gridless succeed. And so there will be, you know, I think there'll be some interesting diversification of business model that their network

fordson as well. So it's a really bullish opportunity. I think that you know that it was one that Block and Jack Dorsey came in with us on. And so, you know, Eric has continued to build the network in a way that I hope facilitates gridless as really good work of both mining and helping to electrify Africa. Yeah. I mean, listen, there's that we could, I'll, there's a lot to get to. So I'll, I'll move us off here. But I will only say that to the extent that people are looking for, for answers to why Bitcoin. And to the extent that this can really provide a business model that incentivizes electrification off grid, this is a problem that the quote unquote social entrepreneurship sector has worked on for 20 years with grants and double bottom line capital and triple

bottom line capital and ESG funds and all these sort of things. And, you know, it's just, it always sort of has that air of it's a social impact problem versus it's just a big, business opportunity. And I think it'll be very exciting and interesting to see whether Bitcoin can be a missing piece of the puzzle as it comes to the economic incentives that align things. Yeah. Now we're going to try capitalism, right? Let's see if capitalism can solve the problem. So the other thing I said that we were focused on this year was lightning. Yeah, I wanted to ask you sort of, you know, what specifically on the infrastructure front, the lightning infrastructure front has been happening? What's important? And kind of what do you see

going into 2023 is the key thing that people are working on in that space? There's a lot going on. So there's not going to be one key thing. But the lightning stack that Stillmark has backed, including in 2022, consists of lightning labs, voltage and emboss technologies, so who have all had really big announcements this year. Lightning Labs, to start off with, took feedback gained in 2021 from developing markets, El Salvador and those several that I mentioned in Africa. to learn more about how emerging markets users would want to use lightning, where they would find the value, and what Lightning Labs could do to create more sort of use case application for, you know, folks of lower socioeconomic status.

And from that, Terra was introduced this year. It's now out in TestNet. And what Terra does is allow for stable coins to be transacted peer-to-peer instantly, essentially for free, on the Lightning Network. And what that practically means is that a household in El Salvador that doesn't have a debit card, that the banks haven't granted a credit card to, can now engage with the global economy through their Lightning wallet, but using USD. So without exposure to Bitcoin's volatility.

And if you're making a couple hundred dollars a month and your expenses are also a couple hundred dollars a month, you don't have the luxury of being able to tolerate Bitcoin's volatility. that doesn't mean that free peer-to-peer global transfers are not valuable to your family. And Lightning Labs said, we think that we can do this. We believe that these people deserve access to the ability to engage in the global economy. And so 2022 was in large part, at least from the Lightning perspective, about Terra and about what we would be able to do if you could get dollars on the Lightning Network. And so TestNet launched recently and is in the hands.

of developers, Lightning Labs is taking in feedback and developers are figuring out, you know, what sort of tool this will be for them. We've also backed Voltage, which is essentially AWS of the Lightning Network. And what Voltage has done is really explored ways for the Lightning Network to be made more easy for folks that want to be actively engaged. So if you want to run a node, if you want to use pool, Lightning Labs pool to access greater liquidity, all of that, voltage is resourcing people in that way. So it's a, it's a, you know, a source for developers and for users broadly. And then what Amboss is, really is it's sort of the, it's the social network and data space and visualization of the Lightning Network. And so this stack all together helps

advanced Lightning Network to a place where we can send transactions with 99.999% reliability of receipt. And that's where we really need to get to in order for Lightning Network to be a viable option versus Visa or MasterCard. And I think we're well on the way there. And a lot of that work was done this year. Amazing. Seemingly, there's been a huge sort of influx of, you know, not just you should put attention to the tooling that needs to be built on top of it, the infrastructure that needs to be built on top of it. And a lot of it is, in this way, sort of driven by the real lived experience of people using it versus just theoreticals, if you will. That's exactly right. And what's especially cool is that because of the type of technology this is, a lot of the real

users using this are people of lower socioeconomic status and those in emerging markets. And other technologies, especially thin tech technologies, have been based on, around the experiences and use cases of Silicon Valley and people that sort of don't need a new financial tool necessarily. Like it's fun. But here we're in a space where we have an opportunity for this technology to be shaped by people who are going to depend on it. Love it.

Well, listen, I love that you're out there funding this stuff. I love that you're sort of helping the entrepreneurs who are building this drive things forward. I want to close out the last few minutes with sort of a quick hits through. So the big picture questions of the industry. So we can go as deep as you want or they can be just a single line. And these are kind of, I'm asking everyone just to get people's take on things. So we'll start a little blurry or kind of less fun, but then we'll end it up in a good place. So first question is, what's the worst thing that happened in crypto this year?

And if you need to, you feel free to rank order. There's a lot of competition for the worst thing that happened in crypto this year. I'll have a better answer for that in five years. You know, it was really disappointing was to see how little use people made of the privilege they had. So, for instance, the three AC guys that somehow are under the delusion that the FTX debacle is going to absolve them of the first. fraud that they committed, you know, the three AC guys came from as privileged a place as one can come from. And as a result of that, we're able to raise and sort of accumulate billions of dollars of wealth or fund assets to set on fire, right? And to sort of lie to the folks that were

lending them money and to other business relationships, including apparently in their relationships with founders, startups that they had backed or smaller firms that they had backed. You know, we always like to see people living to their full potential and to advancing the spaces that they operate in. And that's what venture capital is, right? It's sort of backing people that have a vision and want to, you know, leverage their own talents and the resources they were able to accumulate to push culture forward. And instead, a lot of what we saw this year in the crypto and the crypto trading space was folks that were thinking about how to use their privilege

to sort of conduct fraud on a massive scale. This happens in other spaces too, but crypto seems to welcome them in, and that was disappointing to see. Now, on the flip side, to make this positive, Stillmark has the luxury of operating in the Bitcoin space, which we consider very different from crypto. And one of the things that Bitcoiners are

maligned for, but that really protects us is this approach that we take of don't trust verify. And so, you know, Stillmark has been able, fortunately, to avoid exposure to all of these sorts of things, direct exposure at least, and also in the portfolio. And I think that there's been this sort of like reassurance that these values of due diligence and of verifying what you're told and of relying on software rules, but then questioning rulers or not deferring to, you know, to people of authority has really served the Bitcoin space well. And so that's the silver lining here.

But this year certainly had very intense competition for sort of, you know, worst lesson of the year, unfortunately. Hopefully next year will be easier because we will have removed so many of these bad actors in 2022. Yeah. So it seems like we did a pretty good job of starting the process, at least, of cleaning house. So all right, next question, which is kind of a two-parter. What's something that people talked too much about and what's something that people didn't talk enough about? Well, people don't talk enough about lightning.

So that's, you know, an opportunity for investors focused on the space. But certainly that didn't get enough attention this year. What did people talk too much about? I mean, all of the odd gambling stuff that were have fancy names for in the crypto space so as to forget that it's gambling. So, you know, I had to answer a lot of questions about defy that was really trading a very long-tail assets or sort of like meme stocks presented as tokens and explain why we weren't doing that this year. So I certainly had to spend way too much time talking about that in 2022. And I'll have to spend less time on that in 2023 because we, you know, the market showed why that was not, you know, sort of the thing to be focused on. 2023 is going to show, I think, even more than 2022 did why lightning is, you know, something that didn't get enough attention, has never.

Amazing. And then that's sort of you're jumping into my next question, too, is, you know, If you had one wish for the industry, what would it be? And what does a successful 2020 look like for Bitcoin? A successful 2020 for Bitcoin just looks like founders and open source developers continue to keeping their head down to be focused on what they're working on by filtering out noise. And I think that if we continue to be good at sort of keeping distraction out, then that's

a success. And every year, for every year for Bitcoin has been a really incredible success. It's been so much of a success that we forget what that looks like. So just at the most basic level, that looks like the network being up. So uptime. Bitcoin has 99.999% uptime since launch, which is incredible. It looks like no breaches at the protocol, that Bitcoin's core protocol level. And then it looks like the network continuing to be dependable.

Have the rules changed? Can you put your money in and out? You know, if you state to eat this year, can you take it out? It's not a question in Bitcoin because we don't, you know, play silly games when silly prizes, I think is the saying. So anyhow, for Bitcoin, a successful year is doing what it did last year, the year before and the 10 years before that, which is about having the same rules, that's dependability, being a sustaining network that's uptime, and then being a secure network. you know, we're pretty simple over here. And then if we want to go beyond that success to something more, it's about Bitcoin and the hands of more people and with a broader utility space. And those are some of the things that we talked about earlier in this discussion. So that's marching ahead quickly as well. I think those are very, very reasonable wishes. At least always awesome to have you on the show. Really appreciate your perspective. And looking forward to a very different and hopefully

even more productive 2023. Likewise. Have a wonderful holiday. Thank you for having me. All right, guys. Back to NLW here. Reflecting on that conversation, I think one of the things that stands out

is just how important aligned capital is to the development of any industry. Part of the reason that investors like Stillmark are really, really relevant is that as entrepreneurs are making decisions

about where they're going to spend their limited time and where they're going to spend their limited focus, realistically, where capital is available drives a big part of those decisions. If investors only want to fund new base layer chains because they can turn a quick buck on them, then guess what gets funded? And entrepreneurs being smart figure that out, and that's what they go spend their resources on. Now, given all that,

one of my hopes for 2023 is that there is more aligned capital for Bitcoin-specific companies. When it comes to having real impact in the world, there are many, many more companies like Gridless out there, and that could be out there, finding ways to experiment. with inserting Bitcoin into local ecosystems to solve economic and other types of problems. I am thrilled to see more venture funding flowing to those companies, and we'll do what we can here at the breakdown to help try to raise their profile as we come across them. For now, I want to say thanks again to my sponsors, nexo.io, circle and crackin. And thanks to you guys for listening.

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