Unchained - CoinFund's Jake Brukhman and Multicoin's Tushar Jain on Generalized Mining - Ep.92

Episode Date: November 13, 2018

Jake Brukhman of CoinFund and Tushar Jain of Multicoin Capital discuss a new trend among crypto funds: generalized mining, also called mining 2.0, in which investors participate in the networks in order to seed activity on them. For instance, an investor might offer disk space on a file storage network or provide capital on a decentralized lending network. They explain why it makes more sense to do this in the early days of a network than when it's matured, whether this will lead away from a peer-to-peer vision for crypto toward more professionalization and how this affects the basic premise of the fat protocols thesis. We also discuss how this impacts how crypto funds hire, do their accounting and reporting and structure their LP agreements. Thank you to our sponsors! Abra: Click this special link for a free $25 in Bitcoin! https://www.abra.com/unchained Altlending: https://altlending.com WeTrust: WeTrust: Donate in crypto and have your donation matched by WeTrust through Giving Tuesday, November 27! http://wetrust.io/unchained Episode links: Jake Brukhman: https://twitter.com/jbrukh?lang=en CoinFund: https://coinfund.io Tushar Jain: https://twitter.com/TusharJain_ Multicoin Capital: https://multicoin.capital Jake's post on crypto borrowing: https://blog.coinfund.io/crypto-borrowing-and-staking-networks-e7d2d64a81a4 Tushar's post on generalized mining: https://multicoin.capital/2018/10/23/the-evolving-role-of-crypto-investors/ Jake on LivePeer as a case study: https://blog.coinfund.io/livepeer-cryptoeconomics-as-a-case-study-of-active-participation-in-decentralized-networks-19a932415e0e Unchained episode with MakerDAO: http://unchainedpodcast.co/why-its-so-hard-to-keep-stablecoins-stable Unconfirmed episode with Rune Christensen of MakerDAO: http://unconfirmed.libsyn.com/rune-christensen-of-makerdao-on-its-15-million-from-andreessen-horowitz-ep039 Initial witness offerings, by Jake's partner Alexsandr Bulkin: https://blog.coinfund.io/iwos-with-adapt-a-creative-technological-solution-to-a-regulatory-problem-513b0bc811ff Jake's post on fat protocols not being an investment thesis: https://blog.coinfund.io/fat-protocols-are-not-an-investment-thesis-17c8837c2734 Unchained interview with Joel Monegro, the author of the fat protocols thesis: http://unchainedpodcast.co/placeholders-joel-monegro-on-the-fat-protocols-thesis-today-ep65 Videos that Jake mentions at the end of the show: Generalized Mining, An Introduction & Primer by Jake Brukhman, CEO of CoinFund: https://youtu.be/ceex9CN2YZU Panel #1: Supply Side Services | Generalized Mining and The Third-Party Economy: https://youtu.be/Cr6H2FcidjY Panel # 2: New Role of Crypto Investors | Generalized Mining and The Third-Party Economy:  https://youtu.be/zakQc07GRXA Panel #3: Staking Economic Design |  Generalized Mining and The Third-Party Economy:  https://youtu.be/ydViUpTZens Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to go as a top rating or review. That helps other listeners find the show. WeTrust is a new fundraising platform that allows you to donate crypto to nonprofits. WeTrust will match your donation through Giving Tuesday on November 27th. Go to we trust.io slash unchained to make you. your donation. The future of lending is here. Altlending enables companies to leverage their Bitcoin or Ethereum assets to borrow U.S. dollars. To learn more, go to altlending.com and use promo code unchained for offer details for an interest-free month. Crypto-collateralized, altlending.com. Abra is the easiest way to invest in crypto. Their all-in-one exchange and wallet provides access to 28 cryptocurrencies, and Bit10, the only crypto index product available to everyone. everywhere. Get started with $25 in Bitcoin at Abra.com slash unchained. The topic for today's show is a new trend that some people are calling it generalized mining,

others calling it Mining 2.0. Here to discuss are Jake Bruchman, founder, CEO and managing director of coin fund, and Tashar Jane, managing partner of multi-coin capital. Welcome, Jake and Tushar. Hi, Laura. Thank you. Thank you for having me. Hi, Laura. Hi, hi, Jake. I'm really excited to talk about this with you guys today. This is going to be a fun conversation. Thanks for having me on Laura, big fan of the podcast. Jake, since you haven't been on the show before, let's start with you.

What's your background and what does coin fund do? Sure. My background is in mathematics and computer science. Spent about five years in the hedge fund world in New York. On the financial technology side, I was then a technical product manager and engineer at Amazon for about two years working on ATTEC. products and then a CTO of a fintech startup called Triton Research, where we did a lot of very interesting financial analysis on private technology companies. I learned about Bitcoin in

2011 and have been sort of in the space ever since. And when I saw, you know, the Ethereum white paper that really made a lot of sense to me. And coin fund was formed around the concept of building portfolios to diversify digital assets. So coin fund, launched in July of 2015 as one of the first crypto asset focused funds in the U.S. And Tushar, although you were previously on the show with your partner, Kyle Simani, why don't you briefly tell us how you got into crypto and what Multicoin does? Absolutely. So multi-coin is a thesis-driven crypto fund. I got into crypto actually through a similar story to Jake, where Ethereum was really what drew me in to,

to the crypto world. I had seen Bitcoin before and Bitcoin was interesting to me, but the scope of Bitcoin was just so limited. And Ethereum to me was a much more ambitious vision. And I saw new ways to coordinate human economic activity that weren't possible before. And I knew that I had to be in this space once I fully understood the implications of what this technology could enable. So back in 2017, early 2017, my partner, Kyle, and I decided to launch multi-coin capital. And we went live last year. A slew of crypto hedge funds launched in 2017, but I know several of them are now just calling themselves crypto funds since they don't really act like traditional hedge funds. Jake, I noticed you've been using that phrase crypto fund as well. Why? Like, what's the job of

being a partner at a crypto fund really like? And how does that differ from managing a traditional hedge fund? Yeah. Thanks, Laura. I mean, I think that running a crypto fund is actually quite a bit different than, you know, running a hedge fund or running a VC fund. I think crypto funds, you know, tend to be sort of structured in the vocation that one participates in when working at a crypto fund has to be tailored to the asset class. And you have a really interesting asset class here. You have an asset class of digital assets, first and foremost. their liquidity profiles are quite different than what you would see in, you know, venture capital, private equity kind of markets.

And more than anything else, the technology, you know, around digital assets and things like Ethereum and Bitcoin and decentralized networks in general is pretty advanced and requires some, you know, probably pretty deep knowledge. So the approach that we have, you know, taken at Coin Fund is that we're pretty multidisciplinary. We bring together computer science, math, as well as financial experience and experience on Wall Street and investing to try to make sense of the space. And then when the fund manages assets, I think it's a bit of a hybrid between, you know, typically what people do in venture capital where they evaluate early stage teams and kind of make long-term bets on the products that they're building. and then, you know, also managing a portfolio of highly liquid assets that trade on 24-hour markets. So I think, you know, crypto funds kind of combine those two disciplines and really require a lot of different skills to make sense of the space.

And, Tushar, how would you compare and contrast them? Yeah, I think Jake's completely right here. Crypto fund has caught on as a term because I think this is a new type of asset management firm. We are combining venture capital type diligence and venture capital type effort and work. We're working with the teams to help make them successful, which is more akin to a VC firm than a traditional hedge fund. However, we do operate in public markets and we need to be able to leverage liquidity in order to earn the best returns possible. So we are also somewhat like a hedge fund in that regard. And then there are other aspects of what we do, which are something brand new, which are very crypto-native, which I think is what we're going to talk about today, around how we can help the portfolio teams in this very blockchain-native or crypto-native way with these different tactics.

And I think all of those combined together is what makes us a crypto fund and not just a VC fund or not just a hedge fund. Yeah, that is the perfect segue to talking about generalized mining. Why don't you guys describe for me all the ways in which crypto funds can support decentralized projects and then explain what generalized mining is and how that fits in this larger universe? You know, just stepping back for a second and just thinking about this concept of what does generalized mining mean? Let me just say the following. So I think over time, what we're seeing is more and more decentralized networks being built in the world, right? So around 2015, the decentralized networks that we were very familiar with were cryptocurrency networks like Bitcoin, maybe asset issuance networks like counterparty or Nxti or BitShairs. And then Ethereum came along and

created a decentralized network, which enabled Turing complete smart contracts and kind of of subsumed, you know, the previous two. The world that we live in in 2018 is a little bit more advanced, right? So we see a proliferation of decentralized networks, and it feels like they're poised to proliferate further. And the applications of those networks are actually quite diverse, right? So today we not only see smart contract platforms and cryptocurrencies, we also see decentralized networks for storage, for computation. We see social media networks implemented as decentralized networks, such as in the case of SteamIt. We see different decentralized networks for various kinds of computational services like LivePear, which does video transcoding.

We see financial services like lending protocols and exchange protocols. And the picture that begins to emerge is that, you know, in this world of very decentralized networks that have very specific applications and very specific domains, it turns out they're not companies. They don't, you know, typically have a management team. These are public networks. And yet they need, you know, a variety of supply side kind of services to function, right? So in, in Bitcoin, those services are provided by miners and the service that they're providing. providing is transaction validation, right? Same in Ethereum.

When you go over to a social media network like Steam It, you have people creating content, and then you have other people or even bots curating that content. When you're in a storage network, you have people providing storage, and that could be from their laptop. It could be from a data center. When you're in some kind of decentralized finance network, like a lending network, then you need parties to come into that network and provide capital and so on and so forth. And so the number of roles in decentralized network seems to be growing over time.

You know, we used to have miners and users, but then in proof of stake, we have validators and users and now a new kind of role called a delegator, which could be a user, but could be a speculator or investor, or just someone interested in securing the network. You know, when you go to a network like LivePier, out of the gate, you have five roles, you know, and that includes kind of miners, it includes transcoders. It might include software nodes that are orchestrators for the hardware nodes to support the scalability of that network and so on and so forth. And so when we get to this concept of generalized mining, the way that I think about it is there is a world of opportunities there in decentralized networks, that would allow third parties to come in and provide these kinds of vital, you know, supply-side services in exchange for compensation that's allocated by the network. And those are financial opportunities. They're an opportunity to make a return. I think they're slightly different return opportunities than if you were just investing in a blockchain startup or some kind of decentralized network token because they have different economics.

And this space of generalized mining opportunities is also, you know, it's very diverse and different kind of players in the space fit better into different areas of, you know, of that set of opportunities. Yeah. And to just dive a little bit deeper there, the way that I like to explain this generalized mining role is that we are investors in these crypto networks. These are early stage projects. And by being participants in these networks, either on the supply or the demand side, and occasionally acting in ways that may not seem economically rational in a vacuum, but are economically rational if you consider the entirety of the portfolio, we are able to help increase the chances that our portfolio company's network effects actually catch on. right so jake talks a bit about live peer um and i think live peer is a fantastic example right

with live peer as a decentralized video transcoding network it has a classic chicken or egg problem and if we as investors can bring the chicken then that can help solve the chicken or egg problem um and that's what i think um at least from multi coin is the intention behind generalized mining or this evolving role of crypto investors is to use not only our capital, but our technical know-how and our other resources in order to accelerate the network effects of these projects that were invested in. So I agree with, I agree with Tashar, and it's in the context of this world, it's really interesting to think about, you know, what is the role of specifically funds kind of within the set of these opportunities.

So one thing that becomes, you know, really apparent is that a lot of staking networks today are coming out onto the market, and they create an opportunity to help secure the network in exchange for sort of a return stream, right? And as a fund, you know, if you're holding digital assets and there's an opportunity to kind of make a return that's there, it's a very compelling opportunity for funds, and it also comes with some competitive pressure, right? So if like some fund adopts that strategy as a, you know, competitive way of making returns, that might create some pressure on other funds to do the same. And there's probably a lot of other reasons why, you know, a fund might want

to participate here. You know, they're, you know, if you're a good crypto fund, you should be invested, as to Sharr alludes to, and in the long-term success of your portfolio companies. And if there's a way that you as an investor can add value to the network that your portfolio company is building, then that seems to be a compelling reason to engage that network. And I'll give you a quick example. You know, if you look at layer two networks, layer two payment networks kind of work on hubs today, right? And the capitalization of a hub also determines the throughput of that network. And so the more hubs you have, the more capital is.

locked up in those hubs providing throughput, kind of the more successful your network is poised to be because you're helping to build the network effects of those payments, right? And if you as a fund who's invested in one of these projects can add that value, that becomes incredibly valuable and measurable for the portfolio company. Yeah, I think something that interests me is earlier, you were also mentioning that some of the other ways you guys can invest in these projects are through equity or investing in the tokens directly. So how do you compare with this kind of service with those types of support? So, Laura, that's a really interesting question. It's something that we think a lot about both from the investor perspective in terms of, you know, where should we allocate

capital and also from the perspective of how can we best support our investments. We believe that most of the value that's created using this technology will be captured in tokens, not in the equity of corporations. There is a significant opportunity for these companies to emerge that build services on top of this technology. However, given how the value capture works and where, the customer relationship really is, and we're talking a little bit about aggregation theory here, we expect that almost all of the value ends up being captured in the protocol itself or the token of the

protocol itself. So this actually presents another opportunity for good crypto investors, because in order to help increase the chances of the protocol being successful, it can be a good decision to actually invest in a company that's building on that protocol, even if all things considered, the protocol token itself presents a better risk-adjusted return than the equity of that company. And it would in many cases do so, because if the company is successful, it just drives most of the value back right into the protocol. But once again, we have a chicken egg type problem. The protocol can only be successful if many companies build on top of it. And so it can be worth it to fund those companies, kind of like a VC would save capital for a

follow-on investment in future rounds. I think, you know, it makes sense for crypto investors to reserve capital in the same way to invest in companies or other projects within that ecosystem that help support their initial investment. Yeah, I just realized that actually what this is, is it's investing in tokens and then putting work into the network. And it sort of tracks, I guess, traditional VC where, well, depending on which firm you're talking about, they would invest and then do a lot of work to help that startup. But here, it's more measurable and it's like, actually, and it's more technical. Is that a good way to think of it? Yeah, I think so. I would say so. Yeah. And actually, just a quick question. I want to.

I don't know. How did you come with this term generalized mining? I think some others call it Mining 2.0. Are there any other terms? Yeah, there's a bunch of people kind of discussing this idea. I think, you know, in the forefront of most people's minds today are staking networks like Cosmos and Tezos. And so a lot of companies tend to think of this vocation as, oh, we're going to stake tokens and we're going to make a return. To me, it's a little bit of a, you know, the opportunity set is a little bit more broad than that, right? So you have some opportunities that are very hardware intensive, right? This is like classical mining. This is providing storage. This is providing computation or building out data centers for various computational services. These opportunities are very hardware

intensive and, you know, they need that economy is of scale and they need that large capital. I think in the middle of the opportunity space is a lot of these staking opportunities, right? And this is where a new network comes up. The team provides some software that third parties can run, such as node software. And then that node comprises the network, right, in exchange and compensating those third parties with digital assets from the network. And I think on the other side of the spectrum, you have things that are, you know, a little bit more interesting in the sense that they are a little bit more proprietary. So these are things like

market-making algorithms, trading algorithms. These are things like maybe creating a machine learning algorithm to curate content on a social media network like Steam It and then performing better than others because your algorithm happens to be more advanced or something like that. Or if you think about the kind of services that are required by, you know, MakerDAO when they liquidate CDPs, right? They need third parties to sort of make an arbitrage decision about whether it would make sense to bid for a CDP and get it liquidated and then make a little bit of a return on that. And so what you're telling me is it sounds like generalized mining does not, it's not limited to only proof of stake systems. You can have this with a proof of work system or any type of

consensus algorithm and it includes not only hardware plays, but also software. Is that a good summary? Yeah, I definitely agree with that. You know, people have called this also supply-side services or network service provision. And generally, you know, I define this space as kind of any supply-side service provided by a third party to a decentralized network in exchange for kind of compensation, usually, but not always in digital assets, allocated, you know, by the network to that third party. So this is, you know, most of the time, a sort of on-protocol activity. It's available globally, because these networks are globally available in public.

You know, and they present a variety of different return opportunities. The scorebed app here with trusted stats in real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking... Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions. That's not really what I do.

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Choose news, not noise. CBC News. So then, because one question I was going to ask you is whether the goal was to accumulate more tokens or earn a return or simply grow the value of each token. But it sounds like it's kind of all three. Well, I think, you know, if you take a look at, let's take staking as an example, right? If you, you know, if you take a look at most staking opportunities today, this is an opportunity to take some tokens to, you know, usually lock them up in some way in a, in a decentralized network. There may be risks associated with that.

You know, there's technology risk. There's obsolescence risk. And of course, there's also sometimes risks on the protocol itself in terms of slashing. But in return, what you get is a rate of return on your tokens in a token denominated way. So you might make 5% a year in tokens. You might make about 20% a year. I think most of the opportunities there tend to fall into that range. And then you ask yourself as an investor, well, am I relying on the kind of token denominated?

return to say whether this was a good opportunity, or am I really looking at the Fiat denominated return of my tokens, right? And I think today, you know, the still the Fiat denominated volatility of tokens is much, much higher than the 5 to 20 percent token denominated return of these opportunities. And so when someone goes into a staking opportunity, I think today what they're saying is that we're still betting on the success and growth of this network. This is still an investment decision for me, but by participating in this staking opportunity, I'm actually increasing and maximizing my exposure to this investment opportunity that I have decided upon.

So then with the returns from generalized mining, how do you think they would compare to either a traditional VC or just passively investing in tokens. Yeah. Well, I think, again, so the staking opportunities, you know, they have a certain profile where they have a certain rate of return and maybe a certain set of risks. If you go over into kind of other opportunities and one one that comes to mind is, you know, the Live Pier Merkle Mine, for example, the Live Pier Merkle Mine was essentially a decentralized airdrop where, you know, software miners were incentivized to redeem anirdrop LPT, which is

life peer tokens, to 2.6 million Ethereum addresses. And when participating in that kind of opportunity, what you're doing as a miner is that you're helping the live peer network in a very early stage of its life cycle. You're, you're basically, you're helping the, you know, the the distribution of the token. And in doing so, you're earning LPT, and so you're taking a position in a token that really isn't quite out on the market today. There's very few venues where trades today,

and there's very little liquidity. And that's fine because this is an early stage of the network. But the return opportunity there is similar to what you would get if you were an early stage investor in LivePier, right, like in the sense that if the token goes 10x, then you have acquired ownership of the token, you know, in a similar way to those early investors. But instead of participating in the round, you have used technology to gain network ownership. Interesting. Oh, yeah, Tishar.

I think these examples really help illustrate some of the generalized mining opportunities. But I think this can be expanded beyond that to not only include. these opportunities where there are in protocol rewards. And so, you know, something like the Live Pier Merkel mine, that was economically rational in a vacuum. Like, it was reasonable for someone to go and participate in that process, regardless of what their opinion of LivePier was or if they were trying to, you know, help support the network. I really think of another example to illustrate, like, where investors can,

use this generalized mining tactic as part of a broader strategy of supporting their investments. And an easy one is thinking of something like Filecoin, where Filecoin once again has a chicken or egg problem upon launch. And there are some in-protical ways to reward suppliers of bandwidth or suppliers of storage on the network, even if that storage isn't being used. But it can be very economically rational for an investor who owns a large amount of file coin to go and bring a lot of storage to the network in the early days, even when there isn't enough demand for it to be utilized, even if provisioning that storage to network at that point in time costs the investor money, because if they can then help increase the chances that a new customer will come on to

live here and really kickstart those network effects, I think it's, it's worth it, even if it's not economically rational. And so I do think it's worth differentiating between those two categories of generalized mining, one where there is an in-protocol incentive. And if you're not doing it, you're leaving money on the table. If you're not staking your TASOS, you're literally leaving money on the table that is yours by rights. However, something like this Falkoan example isn't something where you're leaving money on the table. It's where you're going above and beyond to help your investment.

Yeah, and Tushar published a great post on this, you know, using that kind of loss leading example. And I think the other example you guys had, Tashar was like maker CDPs, right? So we can talk a little bit about that. Maybe to introduce the concept, you know, maker CDPs, or I should say, die doesn't have any particular reason why, you know, third parties issue it. Right? So if there's a lot of demand for, for die stable coin, for whatever reason, there's kind of like, no immediate economic reason for people to lock up collateral at risk in a CDP in order to issue dye. But in the same way that, you know, as Tushar points out, like, you know, a fund can kind of loss lead

and participate in a network at an initial loss, sort of looking at the long-term view, you know, in that same way, like funds can go in and, for example, create more, more die supply to support that demand. Is that a correct assessment of that, Tushar? Absolutely. I actually think the maker example is absolutely perfect because of exactly the dynamics that you've described. And an investor in the maker system has a huge incentive to go and actually create more dye. So they would have to lock up ether. They have to pay the interest rate to create die. So they're going out of pocket to create the stable coin that they don't actually need in that scenario. But if they then release them, that stable coin on to the market, now there's more die available. And that makes it more likely that exchanges will offer trading pairs against die. I mean, right now, die has something like 60 million in market cap and Tether has something like 2 billion. It's going to be really difficult for any exchanges to support meaningful trading pairs against die if there's only $60 million worth

of die out there. There's just not enough. And so for investors and Maker who want to increase the probability that dye becomes the, you know, collateralized, decentralized, stable coin of choice, it makes sense to go lock up $100 million in ether or $200 million in ether and go create more die, especially as multi-collateral die comes out and you can lock up, you know, different types of assets to create more die. We're going to discuss when it makes sense for funds to offer generalized mining services and more. But first, I'd like to take a quick break for our fabulous sponsors.

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I'm speaking with Jake Brockman of Coin Fund and to Charging of Multi-Coin Capital. So the example that you guys have been giving for the advantages that generalized mining provides tend to be around when projects are in their early stages. So is that the only time that it makes sense when you want to get a portfolio project off the ground? Or would you continue to offer generalized mining services even for mature projects? So I think this is mostly helpful for early stage projects. The thing with mining is that it's supposed to be a relatively permissionless activity, if not completely permissionless, and that anyone can do it. And that's true of actual mining, like Bitcoin versus these generalized mining tactics that we're talking about,

whether that's supplying on file coin or creating die, et cetera, anyone should be able to do them. And so what that means is over time, as competitors enter, you know, because there is literally no barrier to entry, there should be no additional margins on that for the economically rational generalized mining, the ones where you are, you know, actually earning a profit. The investments into protocols that are followed by supporting the protocol, that can exist longer into the protocol's life cycle. But if at the, you know, medium stage or late stage maturity of the protocol, it's still reliant on investors, goodwill to support the protocol and make sure that, you know, there is enough supply or demand

on the network, then the protocol has failed. And the economics didn't work out. And so it doesn't make sense in that case either. So I think in both the case where this generalized mining is driven by profit within that specific tactic, or if generalized mining is driven by profit across the portfolio, it really is only reasonable to do in the early days and maybe like the middle days at the longest. I agree with Tashar. I think, you know, most of the opportunities that we see today in generalized mining are kind of opportunities in early stages of networks.

And that's partially because, you know, most decentralized networks are in very early stages today. You know, I think like as time goes on, I think we'll see a lot more networks. We'll see sort of less volatility, kind of in the Fiat denominated sense of these tokens. I think we're going to see a lot of opportunities within decentralized finance to actually create portfolios and positions in these things that are less volatile. I'll give you a quick example, right. If you're a staking company and you want to maybe build an initial stake of tokens to get into a network,

like LivePier might be an example, they have 15 validators. You need to cross a certain threshold of LPT ownership in order to become an active validator on the network today. Well, what you might do is you might go to a decentralized lending protocol that lends out LPT, and you might borrow that, borrow LPT from that protocol, use that to make a token denominated return and then return the borrowed LPT.

And so what you've just done is you have created kind of a way to neutralize your exposure to LPT and just sort of get that token denominated return. There are other strategies, for example, periodic liquidation of those returns that further lowers the Fiat denominated volatility. And that might be an uncorrelated kind of source of returns for your fund. In the long term, I really see people, you know, maybe building out different kinds of portfolios of these opportunities. And I think they also have different risk profiles. If you're doing hardware mining, for example, like Bitcoin, you're putting out a lot of capital and it's

relatively safe, you know, within the space of opportunities. And you're making a kind of a smaller return. And then on the other side of the spectrum, you might be not putting in so much capital. You might be putting in some software into a network and you're betting on the success of that network, but the return could look more like a VC style return or something like that. And the combination of those things into a portfolio, I think, kind of creates a differentiator for funds, you know, especially as you look at a lot of funds going long-term long on many of these opportunities or just signing equity deals or just signing SAFs. You know, and so it's an interesting sort of direction to explore in terms of making crypto.

the portfolios more diversified and safe. One other thing I wanted to ask about was, Jake, your co-founder, Alexander Bulkin, propose something called an initial witness offering. And when I read about it, it seemed to me that it kind of worked in conjunction with generalized mining. Would you agree? And if so, describe how it works and how that connects with generalized mining. I'm not an expert on the witness offering.

There is a post by Alex there, which you guys can. read. But I think like the motivation there is is essentially trying to understand how, you know, a decentralized network can be sort of brought up and put into production using decentralized tools and in a way that, you know, that tends to be, I guess, like more compatible with the regulatory environment that we have. And I think part of it is, you know, we've seen echoes of this throughout, throughout blockchain, right? So you've seen, you know, fully mined assets, for example, like Bitcoin or Steam. Not a lot of people know that, actually. Steam never had an ICO. Like, Steam tokens have always been mined directly from the network. And the witness offering,

you know, kind of takes a similar approach to, you know, bringing up the life cycle of these, of these networks and getting them out. And the way that it's a, you know, the way that I think it touches generalized mining is like a network that takes on the strategy creates, again, opportunities for third parties to come in to mine or to validate transactions and thus help to issue the asset. Yeah. So one thing that I'm curious about is does this kind of take this vision of peer-to-peer crypto networks and mean that it's just going to be more professionalized, where it'll be more challenging for everyday people to contribute to these networks? I mean, I think it's actually quite the opposite.

Right? Like the way the technology is heading, it's, you know, you see, you know, better and better tools that enable kind of normal people to interact with networks. Like you see Web3 enabled browsers. That's one thing. You see a blockchain sort of networks that can use, you know, different kinds of technologies like ZK Starks, for example, you know, to make the blockchain so small, it can fit on your phone. And that actually democratizes the ability of, you know, normal people to just have a, have a node that's running with them at all times and creates a much more decentralized network than what you see in, you know, in Bitcoin where kind of a handful of miners control the entire network. And also hardware wallets, I think, you know, still in early stages here, but I kind of like looking forward a couple of years, you know, you can imagine waving your iPhone in front of some kind of decentralized. application and being able to, you know, make a payment. And so it becomes even easier that it is today with hardware wallets to interact with them. So overall, I think the trend is actually to put blockchains in the hands of, of more people, I would say. Tuchar, what do you think? And I wanted to ask, actually, just to add one thing for context. I guess another reason I ask this is because

your former research analyst Miles Snyder left multi-coin to launch an EOS block producer called Aurora EOS. So, yeah, I just want to get a sense of, like, how much of this is more professionalization versus, like, actually furthering the decentralized model. I think it's both. I think it's more professional. And I think I might disagree here slightly with Jake that I don't think that everyday people should be running a node. It just, like, doesn't add much value. And, like, everyone having their own full node sounds more decentralized, but it's not because they're just trusting the developers of the software, right? The centralization point just moves along that value stack somewhere else. And so I think that having more professionalization actually leads to more decentralization

because you have professionals who are qualified to be engaged in the network, who can actually add real value to the network because they are working on the network. all day, every day. I think the key for decentralization here is that those professionals are independent and are not all working for the same company or the same, you know, handful of companies that they are, you know, distributed around the world and are independently making their own decisions, et cetera. But I think having professionals and incentivizing professionals to add value to your network is the right path, trying to win over the average layperson into adding value to, you know, your decentralized video transcoding network or your layer two plasma chain solution is unlikely to me.

I just think you're going to have a lot of difficulty convincing them, educating them, and motivating them to do so. However, those opportunities can be extremely attractive for small professional organizations where, you know, you can start up something with one, to maybe three people and be a generalized miner on a variety of these various networks and earn a decent return doing so. But that's not necessarily amateur or regular consumer adoption. That's really, you know, small professional team adoption. And we did talk about how early, you know, this means that you guys will or anybody who's participating in generalized mining will have.

kind of more of an influence on the network simply because it is small. So over time, how would you phase that out to make the network more decentralized? So I think it, that's a really interesting question. How do you phase out the influence of the early team and the early investors who own a large amount of the protocol? I think there are going to be a number of experiments done on this. And we're going to see. the results. I can speculate. I have some ideas on how this might play out, but I don't think, this is proven yet. We haven't seen many examples of projects go from the centralized launch to a decentralized governance or ownership of the project, which, by the way, as an aside,

I think it's a good thing. I think in the early days, you want to be centralized for agility. Otherwise, you will be out-competed by someone who, by a protocol that is a little more centralized, that does then further decentralize. I think some of the tactics that can be used to further decentralize a network are perhaps agreements by early investors or founders to actually sell some amount of their stake at some point. It's not just a lockup, but also something like the opposite of a lockup, saying, you know, if you're an early investor in this project, not only will you hold for at the first, you know, one or two years, those are kind of normal lockups that we see. But also,

since you bought 5% of the total network, you know, you're a larger early stage investor, you also promise that after five years, you will start liquidating your stake according to some, you know, schedule. And that way you can help decrease the ownership centralization of the network as it gets to the maturity stages. You can also have commitments from the team ahead of time saying, you know, like, we are going to work on this in this very centralized, agile manner for the first X months or X years. But after that, we are going to transition governance over to this foundation that will hire, you know, other developers or fund other developers and other small teams in order to further the protocol. And so through those types of

mechanisms, I think you will see the outsized influence of early insiders diminish as projects get more mature because it's just necessary. It'll be a good long-term selfish decision by those investors or by those founders to include these types of clauses that tie their hands because this then gives users of the network the confidence that, you know, there is a clear path towards decentralization. Something else I was wondering about was for so long, everybody was following the so-called fat protocol thesis, where the theory was that value in this decentralized world would accrue at the protocol layer as opposed to the app layer. And then recent, I feel like, you know, there's, I mean, because everything is theoretical, obviously as time goes on, the thinking around these things shifts.

And one good example of that is that USB, which had initially published the fat protocols thesis, they also recently published a new blog post about how it's not only infrastructure that needs to be built at first and that the development of these things goes between infrastructure and apps, because the fat protocol thesis led everybody to be like, I've only want to invest in infrastructure. So I'm just curious, how does now this theory about generalized mining, how does it Does that fit in with this, the evolution of thinking about investing in decentralized networks? Yeah. So I actually wrote a post, Laura, last year called Fat Protocols are not an investment thesis,

where I tried to challenge a little bit this idea that you can use a blanket heuristic to see how value accrues in decentralized networks and tokens, right? And, you know, I think by and large, it was an important post to sort of get people thinking along the lines of like, well, how does value actually accrue and where does it accrue? And what is the mechanism by which it accrues? But I think because the design space of digital assets and the networks around them is so vast, ultimately, you need to examine opportunities case by case. And, you know, in my post, I kind of go through a couple of examples where, you know, here value may not accrue in the protocol token or not completely be reflected in the value of the protocol token. And there's a lot of counter examples that you can draw sort of on an individualized basis to demonstrate that it's not really, you know, quite so simple. And so kind of based on those ideas, right, like you might think, yes, if I have a protocol that gets big, that, you know, and I own the token and the token accrues the value of that protocol, that might be a good investment.

But then you also have to consider the fact that, you know, this is not the times of TCIP where you essentially had TCPIP and one other competitor. This is like hundreds of competing protocols who are vying for the same or overlapping markets, right? And so the investment profile for protocol investing is actually kind of similar to sort of startup investing. there's certainly, you know, very interesting opportunities in middleware, right? When I say middleware, I mean kind of digital assets that are poised to be network agnostic.

And where we've seen the most of this, you know, so far, I would say is probably stable coins. You see a number of stable coins launching on Ethereum, but also simultaneously launching their protocols on other networks like EOS, for example. And finally, you know, I think a number of VCs. and investors in the space kind of over the last year have also come around to the idea that we wrote about of investing in DAPS. You know, a lot of people had said, well, you know, we've got to build the lower layers of the stack first and invest in DAPS later. But it's also interesting to consider, you know, companies like KIC or you now, who are

kind of traditional companies with amazing teams with a lot of experience shipping software. and hundreds of millions of users, right, and taking on some kind of blockchain strategy with a token and trying to accrue value in that token with an audience of people that, you know, they've already kind of converted into their products. And I think that that's an interesting opportunity that a lot of investors have come around to. And finally, there's also opportunities, like, outside of the decentralization stack that I think are really important to the space. And these are, you know, fundraising platforms and banking services and secondary market platforms. that help get investment capital into the decentralization stack, that help to, you know, enable

teams to operate and create great products, whereas it's generally been pretty hard for teams who are, you know, fundraising and crypto currency, for example, to get bank accounts and things like that. Generalized mining, I think, forces the person or the group that's evaluating that opportunity to understand how value accrual works, and it's sort of motivating them to be a lot more specific than just kind of this fat protocol heuristic. And I think that's a good thing. And in many ways, it will, I think it will actually support the idea that that value accrues oftentimes in these sort of like lower level, you know, lower level assets, but not always. So that's sort of my take on it.

And I know you also have some interesting views on how the, this trend fits in with the shift toward scaling via layer two and state channels. Can you talk about that? Sure. I mean, I think it's going to be a while before we see, you know, a lot of layer two technologies out of production and actually supporting real world apps. There's just a few examples of that today. You know, one example is Funfair. Another example is Spank Chain that actually have layer two products in production, things like non-custodial hubs and and pay. channel. We're sort of still waiting for generalized state channel frameworks and things like that, but I do think that we'll have some examples of that in the coming six to 12 months. But as it relates to value accrual, you know, it's interesting to think about, for example, you know, if you take a look, if you compare lightning network above Bitcoin and maybe a generalized state channel

network above Ethereum, right? So in Bitcoin, you're going to be locking up some collateral on layer one so that you can transact in layer two. And sort of the amount that you can transact is directly proportional to the amount that you lock up and you're actually taking out units out of circulation. And it's interesting, like, how does that dynamic impact kind of the Bitcoin layer underneath? Well, it seems like, you know, you lower the circulating supply,

so that's good for price. But at the same time, you're collapsing a lot of transactions that maybe would have been on chain into just two, right, into the transaction that opens the channel, the payment channel and the transaction that closes it. So does that result in, you know, a decrease in transactions on that network? Or does the growth achieved by, you know,

having a layer two payment system above Bitcoin actually outpaces that? And it's an interesting question. Now, when you go on to, you know, kind of state, generalized state channel networks on Ethereum, then you realize that, you know, because you're actually instantiating smart contracts in these state channels off the main chain, you're probably implementing some kind of business model using those contracts, right? So if you're like playing chess games for money and the, you know, the provider is taking a fee or something like that, it turns out you're taking away all of those transactions from the layer one. And you're, you know, you're protecting

potentially, you know, not sharing the same amount of value that accrues in these off-chain applications with the base layer. And the question really becomes on a case-by-case basis is, like, how does this impact, let's say, the price of ether underneath, if that makes sense? And so generalized mining sort of solves a certain problem in the sense that you can still accrue value from the scaling of the network, even if that value isn't necessarily accruing at layer one? Well, I think in the case of layer two specifically, right, if you sort of look at the landscape of what's happening, let's say, in state channel networks today, you have on the order of 15, 20 projects that are working on this stuff, maybe like half or most of them are open

source, so you're not really getting a lot of equity opportunities to invest in those teams. There are some. Out of those 15, 16 projects, only three of them have tokens. So if you're taking a really sort of VC lens when you're approaching investment, you're not going to find a lot of equity there, and you're probably not going to find a lot of tokens in those networks. And so if a layer two network takes off and is really valuable, but that network, doesn't have a token, the question is, how do you get the exposure to that growth? And sort of the, I think the best answer to that in today's environment is, well, it makes sense to run, you know, some kind of node on this, some kind of infrastructure on this network, right?

So if you're running a hub directly on the network, then you can capture that growth by providing network effect, providing the ability of many different people to transact through your hub. And so, of course, you're taking a, you know, transaction fee on that and you're making money. But if you're sort of equity focused or token focused, I think you'll find it a lot harder to get that direct exposure to that growth. And plus, you'll have to contend with the fact that there's actually many competing payment networks in that layer. Now, a lot of founders who are building these things are actually saying, you know what, in order to monetize this for myself, I'm going to build some applications on top,

and those applications are going to have token investment opportunities or they're going to have equity investment opportunities. And that's great. I think it's just going to come down a little bit down the line from now. And when you're evaluating, let's say, an equity opportunity in, I guess you would call that like layer three or something like that, right? You not only have to evaluate the application that's being built and on its own merits, but you also have to ask yourself,

am I making the right underlying network investment decision? Because if I invest in this application on this network, but then some other network becomes the dominant network, did I make the best investment there? And so it becomes like a lot trickier to reason about tokens and equity in layer two, rather than just saying, hey, maybe I'll just run five different kinds of hubs, watchers, or dispute resolvers on layer two.

and then try to get exposure that way and try to sort of diversify and, you know, make bets that maybe a few of these networks will become really big later. Jake, I think you said something really interesting earlier where you were talking about how some of these layer two solutions can go across chains. And so I think that also presents, you know, another interesting opportunity for investors who are, you know, looking to invest in things other than, you know, you know, the base layer protocol is, I think this lowers the risk, where if your product is really compelling and you built it on Ethereum for now, but as it turns out, you know, one of these next-gen, like smart contract platforms ends up actually fulfilling the vision and becoming the dominant smart contract platform, well, if you can transfer over the state and the code base of the of whatever the product is, whatever the DAP or smart contract,

is onto this other platform, well, then you're not really exposed to the risk as either a founder or an investor of the underlying platform. And so I think that's another opportunity where, you know, the risk return calculation needs to be reexamined from first principles rather than necessarily, you know, looking at this the same way that it has been looked at in the past. Yeah, so exactly. And thank you for bringing that up. And, you, know, one way to just characterize that is sort of products that have interoperability with their base layers, right? So these might be interoperability platforms like Pocodot or, you know, in some sense,

like what Cosmos is building. It might be what Chris Berniske likes to call middleware protocols, right? So these might be like stable coin protocols that live kind of in the middle of the stack. And the point here is precisely that, right? Like these kinds of interoperable mechanisms live high. in the stack than the layer or then the base layers, right? And that's another reason why, you know, you can imagine a bet on sort of the middle of the stack being a little bit safer than bets on fat protocols like all the way at the bottom

of the stack, if that makes sense. Because, you know, if you have an interoperability platform that has 100 networks interoperating on it, but then one of those networks fails, that's not going to be, you know, as bad as a few were like all in on that one network that failed, right? Absolutely. You create diversification. I think the diversification is really interesting here, but then if you contrast that with the fat protocol thesis, which, you know, I'll stand up and say, I think I'm one of the

few people who, you know, is willing to still defend the fat protocols thesis. I think it's actually correct. I think that the vast majority of the value that is created through this blockchain ecosystem is going to be captured in some base layer protocols. I don't know exactly how many, but my guess is it's going to be a power law type distribution. And the largest one will be a smart contract platform just for security model reasons, right? If you have something built on top of this platform that's more valuable than the platform, well, now it can justify an attacker to go and attack the base layer platform in order to get value on that layer two solution

or whatever was built on top of the platform. And so I think the base layer protocols actually present a more concentrated, riskier bet that has a potentially much higher return than his middleware type solutions, which can skate across protocols if necessary. They can interoperate across protocols if necessary, but they don't have the same level of potential to have the huge, mega outcomes that a base layer protocol does. Yeah, that actually goes to that question I asked early on when I was asking you guys to compare this against things like just investing in the tokens

directly, because I just think you, I agree with you that I do think it seems like the ROI here might be less. However, what the sort of like the way in which it's not less is that because it will help the network grow, then perhaps. the value of the token would grow or would ensure that the investment that you made in the token would succeed, something like that, or help ensure. We're actually running out of time. So I just want to ask you a few last quick questions. When VCs began investing in tokens, a lot of them had to change their LP agreements. Do you guys need to do that at all in order to make this work? Not for us. We are a crypto-native fund. So we launched with

our LPA being amenable to us owning tokens. And Jake, did you guys? Yeah. So again, when we were kind of bringing up coin fund, you know, we made sure that our agreement was sort of in balance with the kind of investments that we would make. And so in general, I think we're very, very flexible in how we can invest. You know, we can make equity investments. We can sign SAFs or safe notes or convertible notes as well as invest in tokens.

As of this year, you know, we have some additions to our corporate structure that allow us to engage networks directly as well. And so with both of you now getting into generalized mining as a part of your strategy, how does that affect the way that you hire or other sorts of administrative or technical or strategic decisions you guys make as a fund? From our point of view, you know, we have a full-time principal engineer named Jason on our staff, who is kind of in charge of looking across these sorts of opportunities. Both me and my co-founder, Alex Balkin, we are technologists and engineers, and so we participate in that process. And generally, I think that, you know, this creates kind of an onus on funds to be a little bit more technologically enabled. And so I think more technical hires are probably key to this. And then in addition to just participating in the opportunities, there's also a bunch of accounting considerations and tax considerations

and working through sort of the reporting of what these activities that the fund has been engaged in are. And that creates additional sort of motivations for hires. I would imagine actually maybe from a tax perspective, it's more advantageous because if you're, at least in the case where you're sort of like earning the tokens, then, or not earning, but like, hmm, no, no, maybe it only applies if you're mining them and they're being minted at that moment. Because I was just thinking about how if you purchase them and then you later sell them, then there's two tax events. But at least in the case of mining, I think where they're being minted at that moment, there's only one tax event,

which happens when you sell. So can you just talk a little bit more about the differences in taxes here? Yeah. I think generalized mining actually introduces some more complexities on taxes because of UBTI issues, which some funds and LPs have some restrictions around. And so what is UBTI? UBTI is unrelated taxable business income. So if you are a tax exempt investor, whether that's some sort of foundation or trust or some other type of setup. And I am not a tax attorney. So, you know, to all the listeners, please consult your tax attorney. But there are some restrictions around earning effectively operational income from an investment.

And for tax exempt investors that, you know, don't pay capital gains taxes, you know, earning UBTI can actually pierce that and cause them to have to pay taxes. This is most relevant to the layperson through like investing in their IRA where, you know, you have some level of restriction on the amount of UBTI you're allowed to have in your IRA before you have to file like tons more tax paperwork. So I think generalized mining adds some more complexity there. But at the end of the day, I think it's worth it. And, you know, going back to my earlier point of, I think generally.

generalized mining is best executed by small professional organizations and not necessarily by lay people, that means that the resources to actually account for all of this in compliance with all the relevant regulatory and tax law is actually much more plausible than, you know, someone who's a hobbyist going and doing this on their own, where, you know, it may not be really economically rational for them to do so once they take the accounting and tax prep work into account. Interesting. Well, I guess we'll see how all this plays out. Thank you guys both so much for coming on the show to discuss. We could keep going. There's just so much material here. But we're running out of time. So where can people learn more about you and your companies?

For us, we have a website, coinfund.io. You can check out that and has a description of our team and and sort of broader investment thesis. On the generalized mining stuff, we actually just ran a very successful meetup over at DevCon and Prague, where Multi-Coin Capital also participated. And we'll be releasing the video of that shortly, and hopefully that gives some more material to this discussion. Great.

DeShaar. And you can find out more about Multi-Coin Capital on our website as well. It's Multi-Coin. Capital. And we have a good number of posts on there. And actually, there's one that Jake referred to earlier that I released a couple of weeks ago called the evolving role of crypto investors, which specifically covers some of the topics that we've discussed today on this podcast. And I think if you're still interested in want to dive deeper, we will be releasing videos from the multi-coin summit where we had a panel called the evolving role of crypto investors, where Jake's partner, Alex, also participated. So there's a lot of interesting content there to dig deeper and learn more about this topic. Great. I will link to all this in the show notes. Thanks you guys for coming on Unchained.

Thank you, Laura, for having us. Thank you, Laura. Thanks so much for joining us today. To learn more about Jake and Tushar, check out the show notes inside your podcast player. New episodes of Unchained come out every Tuesday. If you have until ready, rate review and subscribe on Apple Podcasts. If you like this, episode, share it with your friends on Facebook, Twitter, or LinkedIn. And if you're not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Rayleigh Gallup Polly, Fractual Recording, Jenny Josephson, and Daniel Nuss. Thanks for listening.