The Pomp Podcast - Max Mersch, General Partner at Fabric: Why Nobody is Paying Attention to Rising Surveillance States

Episode Date: April 22, 2019

Max Mersch is a General Partner at Fabric. In this conversation, Max and Anthony Pompliano discuss surveillance states, Web 3.0, what areas of crypto are over-hyped, and what areas people should be paying more attention to. ----- BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Max Merch is a general partner at Fabric. In this conversation, we discuss surveillance states, Web3, what areas of crypto are overhyped, and what areas people should be paying more attention to. I really enjoyed this conversation, and I hope you do as well. As many of you know, crypto investors store their digital assets on exchanges or in cold storage for long-term safekeeping. However, this strategy doesn't help them grow their investment holdings or build overall wealth. With the new BlockFi interest account, users can now securely store their Bitcoin or Ether at BlockFi and receive 6% annual interest paid monthly in cryptocurrency.

6% is an absurdly high rate. It's the best rate in the industry. I highly suggest you go check out BlockFi.com. slash Pomp. Again, that's BlockFi.com slash Pomp to sign up and start earning crypto today. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

I grew up in Luxembourg, so if you think about it, I probably grew up in a country that's most known for its banking system and being sort of the evil corporate nation-states. On the other hand, I also have a Romanian background, which is probably one of the countries that suffered the most from the communist regime for over 40 years. So that somewhat shaped my opinions into what matters and what doesn't matter in technology. I consider sort of the Romanian background. The communist regime started as something that almost seemed like an interesting, ideal states where everybody's equal, everybody

has equal opportunities. Very quickly, that platform risk sort of jumped in. People started getting their passports taken away. There was a surveillance state. The state effectively controlled your actions in the past and in the future. And that's one of the main drivers for which I think this is one of the most

interesting technologies. So sort of two early realizations in my life. First of all, I enjoyed more. I got more pleasure out of owning a part of a company or a piece of an adventure than any other sort of materialistic good. A lot of friends were buying watches, cars, clothes. Most interesting thing for me was buying

into crowdfunding rounds for a lot of early stage startups. Then that shifted to realizing that actually, if you can work with the entrepreneur and have a personal relationship with them as well, it's even 10 times better. So that was one of the very first realizations and sort of set out what I wanted to do. There's a second one which is slightly at odds with that,

which was that unfortunately, most of the technologies that we're building today all end up in some sort of panoptical society, which I heard the stories and lived through a family that lived through sort of the communist regime, which was not an ideal state at all. And what I mean by that is that you end up with a data economy where corporations give you a product for free and you become the product effectively by this. They sell on your data, they monetize on top of you.

And that's not a future that makes sense for me. At least if that's where technology brings us, then technology and the original dream of the Internet, which was supposed to connect us to open communications, to enable us to have interactions with people across the world without surveillance, then that dream has failed. And so that set out a pretty sort of easy or evident pathway into starting investing into the whole Web3 space. So I worked in a couple of venture funds

after an engineering degree from Imperial in London, was actually on the set out to join Jaguar for a while, but the prospect of working on the right front spring of a wheel for two years and then shifting on to the left front spring of that same Jaguar for another two years didn't quite make as much sense. And so, I joined a venture fund in Luxembourg called Magro Capital Partners. Thereafter, I joined eVentures based in Hamburg, spent a lot of time with some great people there, Christian Muehler, Jonathan Becker, looking at the blockchain space. At the time, it was almost like Bitcoin is dead. This underlying

blockchain technology is interesting. I think we all remember that sort of thread of thought. Luckily, not too many investments were made, and the investment thesis of most people have sort of shifted back. But that really started early on through the interest, but also the thinking around where value will accrue in the long term in this space. And then I joined OpenOcean, which

was a venture capital fund based out of Helsinki and within a London office. They basically are the team that built MySQL, one of the largest databases in the world, but also one of the very first and big open source successes in Europe. And so the nature of where the partners had come from seemed very appealing.

Where I met Richard, Richard Muirhead, who's a serial entrepreneur in the London office. And over time, we tried to make a few investments in space, but they didn't quite fit the investment thesis at OpenOcean. So we decided to branch out and create Fabric. And Fabric is effectively a venture capital fund, so a long-term fund, 10-year fund,

taking multi-year positions into decentralized networks and the Web3 space. We're quite agnostic to equity, tokens, SAFs, as long as, ultimately, we hold the asset that accrues value. Over time, we're seeing more and more early stage equity rounds that might or might not lead to a token in the long term. But that's sort of quite a flexible point for us. MARK MANDELBACHER- Where did the name Fabric come from?

CHRISTIAAN BRINKHOFF- That's a very good question. So Richard is convinced that he was sitting in a bar in Amsterdam and saw a shop called Fabric right in front of him, and that's where the idea came from. I am personally convinced that I came up with the idea as well. So we have somewhere a Slack message that we haven't been able to dig up yet because we haven't paid for Slack Pro yet

to be able to verify who actually came up with the name. But the idea of Fabric is that, first of all, we're building this mesh or this fabric which will underpin the Web3 wave, and we're backing those people that are building it. And it's effectively a support structure for the next wave of the internet, and that's what Fabric is somewhat supposed to imply.

Yeah, that makes a ton of sense. Then obviously your background, right, is like the quintessential background for seeing the value that something like this can bring, right? I think a lot of people in the United States, for example, they don't, they haven't lived a life that they've seen the negative impacts of the internet, right, that the kind of most negative impact is probably,

hey, somebody tried to meddle in our election, or, you know, look, there's hate on the internet, which look, is not a good thing, but the idea of true surveillance, the things that a government can do to oppress people is kind of another degree of bad shit, frankly. Maybe talk a little bit about, you know, what is some of that stuff that's actually done, right?

I think people hear like, oh, the surveillance state, like go through a little bit of like, what does that actually mean in countries outside the United States? Yeah, absolutely. And I, well, I come close to knowing what it actually does. I didn't actually live through it. I grew up in Luxembourg,

so that was quite a cozy place to live up, to grow up. but I grew up with the stories of my family who obviously lived through that. So a bit of background, grandparents, university professors, writers, who obviously as intellectuals were considered to be enemies of the state, my mother as well. And so they lived through a regime where their neighbors were reporting on them because the state had something on them or they depended on them or they would pay them. And when the communist regime in Romania fell in 1989, a few years later they released all of the papers that the government had on individuals.

And my grandfather got a stack of about 500 pages of reports from neighbors, friends that had been reporting that he'd been, I don't know, eating chicken soup for lunch or that his daughter was speaking French on the phone. And it doesn't hit one as hard when you think about it from an external perspective. But when you know that a state that doesn't necessarily want the best for you is constantly watching you and knows every step you take on a daily basis, that's scary. And there's some really interesting philosophers who have written about it, whether you take Foucault or Bentham wrote about the idea of a panoptical prison where you have a single

guard in the middle that is in a glass tower and can observe every single inmate, but none of the inmates know whether they're being watched or not. And that creates an effect where the fear of being watched and not knowing whether you're being watched or not is actually enough of a power to affect your human behavior. And so that's one of the big pieces that Foucault put out. And when you portray that back into what happened in a lot of these surveillance states, you had this government, which was all powerful because they didn't have to watch you, but they knew that you were afraid of the fact that maybe they are watching you. And that affects everything. That affects from how you're speaking, who you're talking to.

And then it goes a lot further where they took away passports. So family didn't have their passports taken away for a pretty long time until the regime fell. I couldn't travel. You depend on the state for food rations, for food stamps. Across the board, it's a very difficult place to live in. And one of the main realizations is that, well, one might think about the different regimes, but quite often they start as an almost attractive sort of vision that one can sell. They get in power somehow.

They get in power somehow. And then they lure you in with something that might look like an interesting sort of movement to be a part of. And very quickly, because of how human nature behaves and because some of these people are absolutely despicable people, they turn it into a terrible state to live in. And so that's why I think some of the Web3 ideas are so interesting, because you shift away from this idea

that, oh, we won't be evil to, oh, you just can't be evil, no matter what you try to do. And I think that's one of the aspects that resonates the most with me, where I don't quite want to equate the tech giants of today with some of the most horrendous government entities that have existed over the past century. But Chris Dixon has a really good post about this,

where most platforms are in a sort of attract, attract, attract mode early on to get that critical velocity in terms of users. And once they have them, they obviously try to extract stuff. And then that switch happens. And all of a sudden, the user is dependent on the state or dependent on the platform.

And you can't really move away from it, or very difficultly. And they have full power of what they do to you. They can sell on your data. They can charge increased prices. They can block off your API access if you're a developer working on top of another platform. And that radically changes lives. And people, obviously, if you're a sort of corporate shareholder, you're happy because they're higher profits or they have more control or they have more stickiness amongst their users. But it's a radically bigger problem than that.

It's sort of a human problem. Do you think that, so let's take, let's go away from the social networks for a second and let's go to like a Netflix, right? So Netflix announces, hey, we're going to increase prices and there's relatively no impact on the business, right? In terms of people leaving or not even really an uproar, right? I would argue that in that scenario, what they're doing is they were actually underpriced, right? And there was a lot of price insensitivity. And now Netflix is getting closer to price equilibrium, right? Price discovery.

I don't think that's a very controversial idea. No, that's perfectly fine. And generally, I think if you're paying for a service, it means you probably like it. And you're happy to pay for it. And yeah, we have at home a Netflix subscription. and when they increased the price, it made no difference to us because the value we get out of Netflix, we consider it to be significantly larger. My bigger problem sits with companies and business models, if you will,

that sit on the idea of, hey, here's something for free. Here is something that everybody else is doing, so you should be doing it as well. And that grows with sort of network effects, and it grows quite exponentially. And then once they have had that growth and sort of locked you in, then they say, oh, by the way, your data, we're going to sell that on. Oh, by the way, your sort of location tracking. yeah some companies are interesting in that and because we don't charge you we're gonna have to sell that on as well um and very quickly you get to a point and sort of it's small erosions one

after another but quickly you get to a point where not only do they know you better than you might know yourself but they might be able to predict better what you could do in the future um because you're you're acting as an emotional human being and they have a rational sort of data-driven approach to it it's this whole idea somebody said to me one time uh no one would sign up for any social network whether it's twitter facebook you know instagram whatever um if on the front page it said, you know, give us your email and we're going to sell it to all these people, you know, sign up and we're going to track everywhere you go, right? Like if all of the disclosures were kind of on the homepage, no one would sign up. And that's probably the reason for which

disclosures are 59 pages of small text to really disincentivize anyone from reading them. Well, and also I would argue that not only are they presented in an interesting way, right, or a hard to comprehend way, but also a lot of that stuff, to your point, comes later on, right? Nobody, I don't know of a single social network or social product where people said, hey, on the day we start, we're going to do X, Y, or Z, right? And the other thing too is, you know, I always push back on people who say that Facebook sells data, right? They don't sell your personal data in the sense that people think, right? It's not like, hey, somebody, you know, an academic comes or research comes to say, give me the data on max.

What they do- No researcher probably cares enough for that. But they care about an aggregate about a population. Exactly. So they're doing that type of stuff in terms of aggregate, anonymized, that. But they're also doing is they're doing targeting, right? And the reason why I think the difference is so important

is selling my data, right, to your point is, I don't know if it's really that important to 99% of people who go buy it, right? Maybe there's somebody who's trying to hurt me or something that could buy it and it would be powerful. but the targeting to me is there's a psychological component of it changes the content you see right it uh it um kind of inhibits or uh acts on what you do in the real world right it convinces you to go places or buy things or interact with people like that the repercussions of that i think

is not well studied and frankly not well understood yeah and especially if you if you take it to a to a political level, where, I mean, as trying to be intellectually honest with ourselves, generally, we try to get out of our echo chambers, which I suffer quite a bit with Twitter, where it seems that everybody has similar interests to me, but getting the other side of the table is always important. And if you live on social media, and you get all of your information from social media, you obviously get targeted into these echo chambers, specifically the ones that either sort of corporates or social media platforms or buyers of their ad targeting systems want you to be in. And that creates, well, I think it creates a lot of the problems that we've had

with political ecosystem recently, which is not necessarily that the wrong side won. You might have whatever opinion you might have on that, whether it's Brexit, whether it's Macron, whether it's Trump and Clinton. But the whole problem is that the large majority of the campaigns were driven by fear. So they were driven by what you don't want. I'm pretty certain that in the US, the large majority of Trump voters were voting against Clinton and the large majority of Clinton voters were voting against Trump. In the UK, we've had the same thing with Brexit, where I think a lot of people who voted in favor of Brexit were basically voting against the European Union. And there were evil people in Brussels and Luxembourg who were dictating what they could and couldn't

do. Equally, with Macron in France, Macron came a bit out of nowhere and got a fair bit of popularity. But he ultimately won because people rallied against Marine Le Pen, which was sort of the far right candidate. And when you have that targeting that is so specific, and you have someone who is digitally native and can actually sort of use that to their advantage, it changes politics, which is probably the biggest stage in the world. And the part that has really shocked me, I think, is how effective some candidates are compared to everyone else. So in the U.S., if you take, you know, one person on each side of the aisle, you've got President Trump and then you've got AOC, right? And both of them have a skill at using these platforms and tools that

most of their peers don't have. And, you know, look, again, it's people on both sides of the they can do all this and what um what surprised me is how well received it is by the audience right to somebody like you and i who you know it's our job to understand technology how people use it etc it's very obvious right look you're using things to go viral and you're spreading a message it's you know propaganda from one category it's marketing from the other category right? But I'm shocked at how few of their contemporaries have picked up on what's happening and figured out how to do it themselves. And it brings this question of like, are digital natives, right? Even though, you know, take Trump is a little bit older, obviously,

but people who understand how to use these tools, are they at such an advantage that nobody else can catch up, right? If you look at sort of the hearings that they had with Mark Zuckerberg, It was impressive to hear to the extent to which some of the members did not necessarily understand how the Facebook technology works at the highest level. And so, indeed, there is a huge advantage to being able to use the digital route, whether it's in politics, whether it's in economics, whether it's in business. You see a lot of companies that have sprung out of basically their marketing campaigns. I mean, you've mentioned on the podcast recently, I believe, that you're a marketing or an advertising business that is monetizing via an investment fund. And that resonated a lot because ultimately what you're doing is you're gaining attention and you are indeed making the best investments because of that attention. You tweeted yesterday or two days ago, so I'm looking to make a seed investment.

What do you recommend I should look at? And all of a sudden you had over 500 recommendations to look at. If people talk about proprietary deal flow when you're fundraising, what better proprietary deal flow will you have than that? It is. So it's now up over, for those that didn't see it, I tweeted and said, I'm looking to make a pre-seed investment. Basically, you know, what company should I look at or what company should I invest in? And it's now over 1,500 different companies were recommended. There you go.

I checked yesterday. It was 500. Yeah. Well, so here's the crazy part is I think there will be five or less that are things that we are excited about and want to invest in. Right? So it's a very small number. But to your point, we found out of those 1,500, there's probably 1,000 we didn't know about. Right. And it's just that we're talking about a global world where there's people in every corner building companies and nobody knows about them.

Right. It's literally people are DMing me and saying, hey, you know, I work in a WeWork in whatever city in the world and I haven't told anyone what I'm building yet. I'd love for you to take a look. Pretty cool. The flip side of that is how do you synthesize all that information? right and the curation game thereafter exactly you've got the funnel open you've got the attention where if you sort of transcribe that to a political game you've got the eyeballs of the population looking at you then it's up to you to convince them it's up to you and your investor role to curate and find the right ones yep but if you don't have that sort of funnel open in the first place uh then you're not going to get there and there's an element to like for an investor you like take that scenario right so i've got to look through 1500 companies and try

to find the ones that i like when you're a voter there's only two or three candidates right so so there's much more kind of tribalism in the sense that you only got three positions and most people uh have been convinced that it is unpatriotic to not vote right in the sense that if you don't like any of the three candidates absolving from voting is not appropriate and what that does is then it forces you to vote against somebody right because who do i not like the most out of these two or three okay i'm gonna vote for the other side right so in luxembourg uh given it's such a small country, actually, the vote is an obligation, a legal obligation. So it's not even about being patriotic. But to the point of you end up voting against someone instead of for someone, that

pushes the messaging into a certain direction. And it pushes the messaging into the direction of defamation, of attacks, of insults, which moves away from the sort of anonymous political discourse that we used to have in the past. And the thing that worries me there is if you look at sort of Hannah Arendt mentioned in one of her books, which I find is a fascinating idea, is that the main premise for a totalitarian regime, whether it be on the left or on the right, is the moment when people mix up reality and fantasy. And unfortunately, once you're getting into a defamation game, especially with these mass channels of social media or of news, which 10, 20 years ago were able to reach an order of magnitude less people at half the speed,

um you you move towards actually sort of blurring those lines between reality and fantasy and that's it's a massive problem we'll starting now with sort of fake stories but very quickly we'll get into deep fake videos where you'll not be able to tell the difference between a fake video of obama saying something versus the real one absolutely yeah look the um the deep fake stuff is uh is fascinating because it's not just audio it's not just video um it's a whole bunch of this stuff. And, uh, the part that, um, you know, I, I keep going back to is if you have any amount of content on the internet, right? I mean, whether it's writing your voice video at some point that is going to be able to be manipulated. And the part that I think scares me is less like

go to a court of law, right? Because in a court of law, there's going to be experts and there's gonna be technology that validates or doesn't validate it's more of the like social discourse right that spends 30 seconds glances over it sees it yeah it looks good enough checks out i believe yeah and it's your friend who's mad that you said something right there's no court of law there's no technology validation right it's just oh that guy's an asshole now because i can't believe he said that it's fake video exactly right it can be on a friendship it can be on a small business can be a large business it can it really relationships like you know romantic relationships all this stuff like that there will be serious uh ripple effects from the

ability to create fake content um and again it's we know it's going to be a problem we probably can't stop it right uh and the part to me that is really interesting is while we are accelerating technology we spend 90 plus percent of our intellectual horsepower accelerating that technology and we spend very very little of it trying to understand the impacts on society yeah right and we kind of just deal with that later exactly I mean that's being sort of the move fast break things theory of Silicon Valley but to the point of what we can do actually against call it deep take videos I think part of it is that historically you couldn't really replicate my speech

because it was live online indeed you can replicate it you can create a copy you can slightly modify it you can create 100 copies you can flood someone with them. And so the idea of digital scarcity comes in. What if I put up a video and I sign it with my private keys? And all of a sudden, that video is unique. And unless a video of me is signed with my private keys, it doesn't come from me. So once sort of the UX problem goes away from that, I see a future where with digital scarcity, you're able to actually have much better control around these fake videos, fake audio, fake text, et cetera. Absolutely. How does your guys' investment thesis play into all this? So let's talk about what you

guys are excited about investing in thematically. And then we could talk about some of the nuances. Yeah, so the way we see the Web3 ecosystem is, well, we call it Web3 as a whole, but I think there's three core theses that are sort of playing out. There's the sound money thesis, which I'm a big fan of. I think Bitcoin got us pretty much all into the space in the first place. But it's not really the space of venture fund anymore because Bitcoin is a large market cap. It's also a liquid market cap. You don't really get a relationship with the team because, well, who knows who Satoshi is, but also. And there's a whole bunch of different contributors to it.

And so the other two that we probably spend most of our time on is, on one side, you've got sort of the Web3 thesis. And on one side, you've got the digital asset thesis. On the digital asset front, I have no doubt that we'll agree on this. But I don't see a future where there is not a digital version of every single physical good out there.

Because if you can have a version which is, first of all, software, so it's infinitely programmable. It's divisible. It has a much higher liquidity pool. It's easily transferable across the globe. It just makes sense that every single good will be digitized at some point. And then what you open up with that

is this whole open finance stack where not only can you create and custody assets for much cheaper, but also you can transfer them across the globe, and you can build applications on top of that. So if you think about what MakerDAO has done today, you can open a CDP, put some ETH in, and get a loan programmatically without having to interface with any human at any point in time.

But in the future, when they go to multilateral DAI, what if you can tokenize your invoice or you can tokenize your house? All of a sudden, you can lock that up in your CDP. And then you can unlock working capital with your unpaid invoice. And that sort of unlocks a huge amount of different workflows and work capital

that is just locked up in today's economy. So that's sort of one of them. And the second one is sort of the Web3 thesis, which is that if you think back to how the web grew, Web 1.0 was largely focused on e-commerce. It was desktop first, and it was very heavily dependent on expensive infrastructure that was custom built and dedicated

for each individual business. And so that slowly shifted to Web 2.0 when you had a few things that weren't included. You had the social layer, which meant that people could trust each other. Recommendations became possible. And so you were able to interact with people across the globe via trusted intermediaries,

but you were not limited to the people around you that you trusted. Secondly, there was the mobile with the introduction of the iPhone mainly, but the mobile revolution, which meant that instead of sitting on your desktop a couple of hours a day, all of a sudden you had your phone in your pocket pretty much every hour of the day.

And so you were interacting with Web2 at a much higher frequency. And certainly there was the cloud aspect, which meant that actually spinning up a business from a developer perspective or a founder perspective became a lot cheaper, because you didn't need to have that dedicated infrastructure. You could iterate very quickly, experiment, and that's how a lot of these businesses came to fruition.

And it's the combination of those three pillars or layers that led to have the likes of Ubers and Airbnbs of today, which, if you think back 10 years ago or 15 years ago, it would have been incredible or unbelievable that you could convince someone to get into a stranger's car simply because you pulled out an application on your phone and called for them. And we believe that the next wave of Web3

will largely be built on three similar layers. One of them is this proliferation of edge computing is the computing stack has been pushed out to the very limits of the edge. This IoT device is on a farm in Kansas. It's on your health tracking device. It's indeed on your phone, your car, your house. And so the amount of data points that

are generated by these IoT devices has sprung up massively. It's an order of magnitude higher. And on the opposite side of that, you've got machine learning algorithms and a renaissance of AI, which means that actually some of these machine learning algorithms are able to do efficient things with the data, finally.

And between that, you've got this fabric or a mesh, which is a decentralized data structure, which means that you don't have tech giants today that silo all their data and effectively are the only ones to benefit from it. But instead, you're able to bring in the long tail of data generators, which are able to monetize and sell their data onto some of these machine learning algorithms

or data scientists. And this can be humans, machines, animals in the future. And that, first of all, unlocks a huge amount of value in terms of what becomes possible to interact, who can interact in this economy. But also, it really fundamentally shifts the power structure.

From what I mentioned earlier, it moves you from these tech giants that are promising that they won't be evil to all of a sudden, you've got this peer-to-peer architecture, which just fundamentally can't be evil. And so that's one of the main thesis around which we've built a fund. We think that early on, we'll mostly

be focused on developers. Right now, the developer tool stack is probably one of the ones that's getting the most attraction. Over time, we'll move into open finance, starting to take off as well. The health care space is prone to have a huge amount of personal data that you don't want to have

sort of siloed in with tech giants, but rather you want to be able to monetize that yourself, or not even monetize it at all, but keep it private, and only selectively share certain data points when you go see a certain doctor, but not leave that data with them. The supply chain space, the automotive space, especially the autonomous automotive space,

they're all prone to really benefit from these new shared data structures. MARK MIRCHANDANI- How much of what you're excited about in the Web 3.0 world is Web 2.0 things that are kind of updated or modernized versus these are brand new solutions in tech that did not exist in Web 2.0, but they're solving some of the same problems.

They're attacking from a different avenue that just looks different. I mean, it's a really interesting question. And ultimately, I think we'll always end up taking the steps of, well, just like the very first applications of digital was to digitize the New York Times. And that was an interesting thing to do,

but it didn't fundamentally change the world. So I think it's important to take a step back and look at sort of the history of business models that have evolved via Web 2.0 and try to draw some analogies to Web 3.0 as well and see where they might take us. If you look at Web 2.0, some of the very early business models that arose were in these digitizing content, which seemed simple, might make it slightly more distributable,

get a higher reader base, and so it was interesting. But ultimately, the businesses that really took off were business models that were not really imaginable before. if you consider open source, open source is contributing about $400 billion worth of value to the economy on a yearly basis. If you follow the certain reports, if you consider the sharing economy,

it would never have been possible to even imagine that you might share your apartment with a random stranger because you let them in via an application. Even the SaaS economy, it was never imaginable that you could spring up your cloud-based infrastructure on demand and grow your business or grow your infrastructure with your business.

And so a lot of these evolved from positions that seemed to be impossible at the first steps, and now they've become evident. And if you trace back now as to where the early Web3 business models lie, the very first one, I guess, was issuing your own asset in a sort of currency asset type. So Bitcoin being the first one, at some point Ethereum followed Monero, Zcash, et cetera.

And then some of the business models that were built on top of that, you had the block streams of the world and consensus of the world who said, OK, we're going to hold a bunch of the native assets. Block stream holds a bunch of Bitcoin, a bunch of ether and we're just going to make the network more valuable and so our business model is not revenue generating but rather it's just the appreciation of value of that native asset that

we hold and then you had a business model on top of that which said hey this asset is super volatile why don't we tax volatility and that sort of exchanges the custodians um that enabled that and took fees sort of in traditional business models and then we started exploring what's possible outside of currency um very first sort of utility token models which i'm not a big fan of the word utility token but it's just been aggregated into that with repayment tokens um where people said hey we're going to create a two-sided marketplace um and uh that's going to be on a peer-to-peer basis people will be able to interact with us but they need to use our currency uh to be able to trade between themselves um there's a lot of fair criticisms of that people

try to apply sort of mv equals pq as an equation of exchange to value that fundamentally i don't think that really applies first of all it's a 110 year old equation um or a sort of ident economic identity but also you've got people like milton friedman saying that actually the v part of of mv equals pq is just a fudge factor to make the equation work. And so when people criticize the velocity problem, it's not really that applicable. And ultimately, I think a lot of projects

have realized that there is no rational reason for value to accrue to such payment tokens right now, or at least it hasn't played out yet. And so people are moving away from that. One of the most interesting areas for business models that I think fundamentally changes the game are work tokens, where you can consider them to be sort of supply-side focused models.

MARK MANDELMANN- Explain what those are. CHRIS BANESKER- So taking an analogy, maybe the easiest way is to consider them like a taxi medallion, given we are in New York after all right now. You hold a taxi medallion, you get the right to drive a taxi, and you get revenues. Those revenues are paid to you in dollars

or whatever currency, stable coin you might want. But you're not being paid in that native asset. And so that native asset is purely focused on coordinating the supply side of a network. And so you've got networks like KeepNetwork, like Augur, and like Zeppelin, who are focused on providing certain services where people can then come into the network, use them, pay in dollars.

And the reason for which they accrue value is that as more and more people start using the network, there's more and more revenues flowing to all of these holders of these assets. And so given there's limited supply of these assets, people will buy them and their value should go up theoretically or in a rational manner. And now we've got this whole staking economy that's building up around that, where people are buying these assets, staking them to get part of the block rewards, but also part of the fees. And the reason we're so excited about them is not only do they have a very rational value

a cruel mechanism, where you can see, OK, it's not a central company that's getting all these revenues, but the collective of all these asset holders, which are providing work to the network, are getting a certain amount of fees paid out to them. And you can probably build your valuation model based on a DCF on that model. But also, it's actually a fantastic coordination tool.

And it will only really work if it provides better or cheaper service than centralized entities do. But if you consider Filecoin, for example, they're unlocking all of this free space that is sitting idle on your computer, on my computer, on my phone, that was just never used before. And so given that it's not being used for anything else,

I can massively undercut any centralized entity that is paying for every single gigabyte that they provide. And so the coordination mechanism coupled with the fact that you have a clear revenue stream for all of these token holders makes a lot of sense from a business model perspective. And going forward, we'll see a huge amount of other experimentation.

If you think about governance tokens, if you think in terms of business models, about providing UX and UI to some of these networks. I mean, so Augur went live a few months ago as one of the sort of first networks to actually go live. Very quickly, you have business building on top of that. You have Vail, you have Flux in Europe, you have Gesser in Europe,

who are building the interface to be able to interact with this network. And they will try to extract some small fee, but they are providing a lot of value to the user. And the thought process here is, take like a Vail, et cetera, is the network, the infrastructure that's built there, the mechanism is applicable in many different use cases

to different audiences. And what these people are building on top of those networks is very targeted interfaces for a specific use case to a specific audience, right? It's almost like the network itself, the product market fit is found through an interface, right? And those interfaces being built on top then have to find the product market fit

between like the network and the user, right? It's almost like a user network fit, I guess, is found by building a specific interface. MARK MANDELMANN- Yeah, absolutely. If you take the case of Augur, you might have users who just want to bid on sports gaming because they can't free other means. You might have other users who want

to hedge against currency risk. And so obviously, they're very different users. And so you'll have different platforms that will build up a sort of front end on top of the network for those different users. But also, the other thing it does is for the user, it really removes the platform risk. Because if I have a large sort of hedge on currency

on your network and i've placed that via veil but all of a sudden veil shuts down well i can probably retrieve that via guesser i can go straight to auger and interact with that and so it removes the risk that the company that you're interacting with uh is able to shut you down as a business it's super interesting what areas of uh crypto do you think people are not talking about but should be paying more attention to not talking about should be paying more attention i think a really interesting topic that is starting to creep into conversation and is it's actually a pretty controversial one when you sort of see the conversations going on about it, but is the idea of sustainability of open source software development. And given most of crypto is

so, well, I should say all, I would like to say all, but unfortunately not, of crypto is open source. It's a big problem. So a lot of people come from it with the Bitcoin angle, where one of the core characteristics is it's immutability. There are 21, there will be 21 million Bitcoin and that will never change. And there are questions of what happens once the block block reward dies out. Will transaction fees be high enough to incentivize miners to come provide hash power to secure the network? That will happen far enough down the line.

But a more urgent or imminent conversation is around Ethereum. There is a lot of discussion around ERC 1789 by Kevin Iwaki from Gitcoin. I actually put that out recently of, how do you incentivize the core developers? Because right now, 100% of block reward goes to miners. Why is there not 20% of that that goes to core developers

are actually creating the network. It just makes sense. People are maintaining the network, they get paid. People are creating or developing or improving the network, they should also get paid. And there's a few projects that are trying to solve that. Gitcoin is one. There's Moloch DAO by Amin.

There's a company called OS Coin that we actually invested in. It's a fantastic team. Lyft Eris and Alexi, who are thinking about it on a broader scale, but building a decentralized GitHub. So you remove the platform dependence from GitHub. But you also have an incentivization layer on top of it, where based off of the dependencies of different GitHub repositories or open source software

projects, they get paid out as part of the block reward. And there are some incredible stats around that, where 65% of all open source projects are maintained by one or two people. 94% of, actually, developers are using open source software. So you've got this whole economy. Our entire economy is built on open source software, from the Facebooks, to the Googles,

to the Amazons of the world. They're all using open-source software, and yet a lot of these projects, 93% of NPM packages have one maintainer. And this is one maintainer who's not being paid, who's doing it as a hobby, and they might very well quit the next day because they're getting harassed by online communities. And so, finding a sustainable model to support these maintainers, I think, is one of the most important problems that not enough people are talking about. Absolutely. What do you think is an overhyped area of crypto? Like, something that everyone is talking about that they should shut up about. Overhyped area of crypto.

So, well, I think prices on a day-to-day basis. And obviously, we have a different perspective given we're taking a venture capital approach. And so, all investments we make are with a multi-year outlook. But on a day-to-day basis, I think prices are unfortunately the most talked about aspect. It's easiest to measure, right? It's easiest to measure. Is it the best one? I don't know.

I mean, prices have been down a huge amount this year. If you consider what is actually going on in the ecosystem, what development is going on, it's all sort of to the top right. If you look at sort of Ethereum addresses, there are 60 million Ethereum addresses. to 30 million added in the past year. So they have doubled. If you look at unspent transaction outputs on Bitcoin, they're at the all-time high now, again, after the peak in January 2018.

If you look at solidity developers on Ethereum, you've got Zeppelin OS. They've reached over 500,000 downloads of Open Zeppelin. Truffle and Ganache have over a million downloads. If you look at Maker, which is actually probably one of the few projects that have hit product market fit in some shape or form, they've issued more loans than LendingClub

did in five years in their first year. And interestingly, if you look at the dates, you have got that chart, which goes from 0 to 200 million. And that chart starts on January 2018, which is the very peak of the bubble. So the price has gone downwards from there. And all of a sudden, you've got this product which just takes off from that point in time.

And so I think a lot of the developments are super positive, even if you look at corporates. Samsung is now going to be issuing their key management service to all of their S10 phones. That's, what, 10 to 50 million people that will have key management built into their phones. You've got JP Morgan, which is launching their own coin. Whatever you might think about what the JP Morgan coin might

be worth, we don't even know how it's going to be, what exactly it will do in the end. But that's a stamp of approval from a bank where the CEO a few years ago was saying that Bitcoin was doomed to fail and we would never touch it. All of a sudden, you've got them issuing their own decentralized currency. And so from that perspective, I think

there's a huge amount of positive developments. And yet people are talking about price, which has indeed been down. I guess the past few months have been the first two positive months in a row since June last year. But still, I wish we talked more about technical development and less about price. MARK MIRCHANDANI- Absolutely.

Before I wrap up, I was asked a rapid fire set of questions. What do you think is the most important company in crypto? MARK MIRCHANDANI- It's an important company. MARK MIRCHANDANI- Other than Fabric, of course. MARK MIRCHANDANI- I wouldn't even claim that. Probably consensus and parity. MARK MIRCHANDANI- OK, why those two? MARK MIRCHANDANI- I think, so again, just sort of coming

back to the idea of pricing, I'm sure a lot of people probably think Coinbase and Binance the most important companies in crypto. They're great because they bring access to the volatility and people can trade on it, but they're not fundamentally doing as much work as ConsenSys and Parity in developing the underlying technology. My view is somewhat focused on Ethereum, and I admit that, but Parity has done a huge amount, and we are investors in Polkadot, so that's full disclosure there, but Parity has done a huge amount of work for the Ethereum ecosystem. They built one of the first clients, they've built a lot of solutions early on,

and they've been doing that relentlessly for the past couple of years. ConsenSys have built a majority of tools that we use on a day-to-day basis on sort of the Ethereum network, if you consider it's in through our truffling in Ganesh, which most of the Ethereum ecosystem is built upon, has been built by consensus. And Joe Lubin has put a tremendous amount of work and capital into this space, and I don't think that gets recognized enough. What do you feel is the one regulation you would change or improve if you could? I think there could be a lot more clarity on regulation. It's an interesting comparison between the US and Europe.

In the US, you've got the SEC and CFTC that are pushing things forward slowly. In Europe, you've got a bunch of nation states that want to become the hotspot for crypto, just like Switzerland and Luxembourg were the hotspot for banking. A lot of smaller countries are realizing that there's a big opportunity to be

the most crypto-friendly ecosystem for founders to come launch in. So you've got Malta, you've got Gibraltar, you've got Switzerland, which have all issued very clear statements in terms of regulation of what is a security, what isn't a security, how you can launch a network. And equally, you've got some of the bigger countries, France, the minister of the economy, Bruno Le Maire has mentioned that he wants France to be sort of the hotspot in Europe for crypto.

Britain has made some pretty clear advancements to creating a crypto task force to provide clarity on what assets are securities, what assets are not securities, how they're taxed, etc. So all of these things seem like they're moving in the right direction because of that competitive nature. It feels like it's slightly slower because they know they have no competition. If you're based in the U.S., you're going to be launching in the U.S. anyways. And so they can take their time.

And I think that's slightly hampering the U.S. because founders are not certain what they can launch, what they can't launch. And they might move away from the U.S. over time. And we'll see how that plays out. But I think a lot of clarity would be much better. Makes sense. Yeah. What's the most important book you've ever read?

I'd probably go with Milan Kundera, L'Insupportable Légèreté de Lettres in French. So it's the under. What was that? In translation, it's The Unbearable Lightness of Being. Okay, explain. I'm not a big fan of the business books, so it's none of that. It's a Czech writer who moved away because of the communist regime there, moved to France, started writing in French.

But there's two core ideas which I think really matter or stand out to me in that book. One of them is that he negates on Nietzsche's idea of the eternal return. I think we constantly live our lives comparing to what it could have been if I had done that, what would have happened, should have, could have, would have type mentality. And he sort of pushes back on that, is that there is no eternal return.

There is no hundreds, thousands, or millions of sort of parallel realities where you can compare to. The moment something happens, you should forget about it. It sort of loses its importance because it's done and you should move on to the next thing. And the second aspect that I really like about that book and sort of has shaped my view quite a bit is on a political nature,

is that it's sort of three different characters that are living through life in Czechoslovakia during a communist regime. And all of them come to the same realization that the political party is very rarely or almost never in favor of the individual. They always try to subvert you via the same means, whether they be on the left or on the right.

And ultimately, they push you to take actions based off of what you don't like and what you dislike and sort of what we discussed earlier on. And I think, unfortunately, a lot of that is playing out today. And I think a lot of literature has been a really good predictor of that. So other books like that, the Dallas of 1984 by Orwell, Actually, a recent one that we gifted out to a few of our close friends was On Tyranny by Miles Snyder, which is sort of 20 lessons from the 20th century, mainly focused on the communist and Nazi regimes.

I'm reading it right now. It's actually fascinating. It's incredible how many parallels there are to today. Yeah, absolutely. Speaking of parallels, parallel universes, aliens, real or not? we were introduced by Richard Burton I hope Richard Burton will introduce me to a whole bunch of other aliens

he claims they are real and they live on Earth in terms of parallel universes I think the probabilistic chance that there are no aliens is infinitely small the question of whether we want to meet them yet I think probably not why not

well partly due to the fact that I watched Life with J.K. Hill and Hal recently and they have this small character called calvin which is turns into this horrible monster um and so that changes my mind but um because we we can barely deal with ourselves on planet earth uh as a single human society um i don't want to have to think about how we will deal with people who have different or people or aliens who have different views and different mannerisms and maybe overwhelmingly more power than us i think that makes sense and it's also uh we don't know what we don't know, right?

We have to figure our stuff out on ourselves here first before we start exploring the rest. I think space travel is extremely exciting and what will come out of it will maybe lead to technical innovations that we couldn't even imagine, but I think we should be careful about it. Would you rather go to space

or go to the depths of the ocean? Neither, if possible. Generally, both of them include sort of small capsules and long travel time. um i'm not a big fan of small spaces um and so you're more religious like i got a good life let me just hang out here on the crust of the earth um but if um if i had to pick one probably that's a space uh that's of the ocean that's the ocean over space you probably sort of float back up at some point uh whereas in space you might float away and never come back to it's a good point

like whether you're alive or not probably doesn't matter as much as like at least on the on the the ocean they've got a a set area to look for you exactly all right that makes sense what uh what one question you have for me to uh to close it out um so i think you've probably spent a lot of time just like us trying to convince people who don't necessarily believe in the space yet or don't see that it's it's value accrual or don't see its its merits what is the one narrative that you've seen work best across the board for sort of people who haven't been down yeah so i'll separate this into public and private markets public being on liquid crypto uh the narrative there is just we're talking about non-correlated or low correlation assets that have an asymmetric

return profile so whether you believe in uh these assets being valid or not whenever you have those uh criteria or aspects to an asset uh if you believe in modern portfolio theory and you put those assets into that portfolio there's benefits that come with it right and so i'm kind of making the what I call the investors investment argument of like, if you are a pure investor and you look at unemotional decisions around assets, emotion can be both bullish and bearish. Right. And so just the non-correlation and the asymmetric return profile, I think really resonates with investors. And then in the private markets, I look, somebody told me very on when I started investing, follow the talent. Just if you follow the talent, they'll lead you to the holy world,

it's a holy grail and uh and every time i've ever done that we have been very happy with the result and when i've strayed from that we have not been happy with the result right so so there's this element of like it is more true than even you you admit to yourself once you know that um and the argument i make is look the smartest people in the world are rushing in to build this and capital is following them and anytime you have that you know just density of intellectual capital going somewhere and also the financial capital following that that momentum is very hard to overcome um or break away from and and so uh we think that there's a lot of innovation a lot of value that's going to be built here and it just is that intellectual financial capital that that

kind of is the um that the tailwind if you will that that really pushes us forward got it i thought it's that little experimentation will not lead to nothing yeah and and it also you notice i didn't have to say anything about crypto or blockchain or bitcoin or any of that stuff and and you know look, we get into the weeds with plenty of investors, but I do think those two narratives or stories around, look, this is true of every asset, right? It doesn't matter. You could take Bitcoin out and put rocks, right? And if it's not correlated and asymmetric, we would be saying the same thing, right? If you look at private markets and anytime you can see a single vertical in the private markets where tons of innovation is happening because talent is coming in and

capital is coming in, we would say the same thing, right? And so it removes the emotional attachment and the part that I've been impressed with is the investors who can keep a sober mindset and be realistic and somewhat grounded end up be going from I don't even understand this stuff is it real to oh well let's do that framework I really believe and they lean in very hard very quickly and so it's been pretty cool to see that kind of flip that switch for a couple of investors and hopefully there'll be plenty more it's a man on a mission to make more fits listen we are all we are all doing this together but uh it is uh it is fun and uh look you are uh you're on another

side of the world that frankly uh there's probably not as many people uh being as loud about this as as in the united states and in north america um so uh so i'm incredibly impressed with what you guys are doing and i'll have to do this again to catch up after uh if you guys can make some more progress i'm looking forward to it thank you One more word from our sponsor, BlockFi. Their new interest account allows you to securely deposit your Bitcoin or Ether at BlockFi and receive 6% annual interest paid monthly in cryptocurrency. This rate actually compounds, so you receive a 6.2% APY,

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