Unchained - Joey Krug on How Augur Is Like Any Other Tool - Ep.79

Episode Date: August 28, 2018

Joey Krug, cofounder of Augur and co-chief investment officer at Pantera Capital, talks about what Augur is and is not, why it’s difficult to create new financial markets today and whether or not Augur markets could curb fake news. He explains why the teams burned its escape hatch key and whether he’s worried that Augur’s crowdsale would be considered an unregistered securities offering, plus answers whether he would benefit financially if assassination markets pop up on Augur. We also discuss what he sees happening in the market in his role as co-chief investment officer at Pantera Capital, what problems he think need to be resolved before Augur and dapps can take off, and which projects he believes have the greatest potential to democratize finance. Thank you to our sponsors! Start Engine: https://www.startengine.com/unchained The Sun Exchange: https://thesunexchange.com/ Episode Links: Joey Krug: https://twitter.com/joeykrug?lang=en Augur: https://www.augur.net/ Pantera: https://www.panteracapital.com/ Joey on Unconfirmed: https://unconfirmed.libsyn.com/joey-krug-on-how-to-create-a-regular-cryptocurrency-ep022 Augur FAQ: https://www.augur.net/faq/ Predictions Global: https://predictions.global/ Assassination markets on Augur: https://www.coindesk.com/the-first-augur-assassination-markets-have-arrived/ SEC action against Sand Hill Exchange: https://www.sec.gov/news/pressrelease/2015-123.html Listen to the Unchained interview with 0x: http://unchainedpodcast.co/will-warren-of-0x-on-why-decentralized-exchanges-are-the-future 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 in iTunes to give us a top rating overview. That helps other listeners find the show. StartEngine is a regulated ICO platform with a community of 155,000-plus registered users that's focused on issuing tokenized securities. Go to StartEngin.com slash Unchained for a 20% discount on setup services to launch. your regulated ICO. This is not legal advice. Sun Exchange is a solar power marketplace for the crypto economy. Sun Exchange members all over the world are earning cryptocurrency for helping to deliver solar power generation to businesses and communities in emerging markets. Visit thesunexchange.com to start earning solar powered money today. My guest today is Joey Krook, co-founder of Auger and co-chief investment officer of Pantera Capital. Welcome, Joey. Thanks for having me. I had known of you

for a while before I realized how young you are. And so for listeners who don't know, tell us your background in how you got into crypto. Sure. So my background is, you know, I really first got into crypto in 2011. I was in high school at the time and just came across Bitcoin on this form called overclock.net and started mining a little bit. Back then, it was everybody was mining with graphics cards. So I was doing the same thing. And I quit after a few weeks because it was making my room really hot. It was in the summer and it was like 90 degrees in my room. And then you didn't really do a whole lot with it again until 2014 or so when basically I kind of saw how Bitcoin was becoming this sort of digital version of gold. And that wasn't really the sort of use case I

was that interested in. I was more interested in the kind of disrupting the financial system side of things. And so in 2014, ended up starting Auger. And for that, basically, the idea was that it was a platform for prediction markets. The idea is you can essentially speculate on anything on Augern. It was one of the first projects on top of Ethereum. That's kind of how I initially got into the space. And at that point, you dropped out of college, correct? Yeah, that's right. I was studying computer science at Pomona in Southern California and dropped out that summer. And then, I guess like a year or two later, you got a Teal Fellowship as well, right? Yeah, that's right. And so how did you come up with the idea for Auger?

Well, so prediction markets are a really, you know, old idea. They're basically kind of a generic sort of financial market. And you can use them to create derivatives markets. So things like, you know, what will the price of Ether be on a certain date? You can create things like put options or call options. And you can also create, you know, more traditional kind of betting markets. So things I'm like who will become president of the United States in 2020 or, you know, which horse will win a horse race.

And so the idea is an old idea. and it's kind of rooted in economic theory, basically two different economists. One is Frederick Hayek, who kind of came up with the idea and said that prices and markets are just information. So if you had more markets on more things, you would have kind of more useful information to go about your daily life. And the other idea is this idea called complete markets from these economists called Arrow and DeBrow. And their idea was basically that if you had markets on essentially anything, the economy would be more efficient because people could hedge against more. more specific risks, and they could take more specific speculative positions. They actually won a Nobel Prize for that work. And that kind of vision was never really realized. And the reason is, in my opinion,

it's very difficult to create new financial markets today. So if you look at how hard it was to create a new book before the printing press came out, you had to have monks or scribes copy it down, and each copy had a little bit lost in translation. That's kind of how I view new financial instruments, new financial contracts today. The monks or scribes are basically investment banks like Goldman Sachs and you have them write up a contract. And so there's a big disincentive to experimentation because it's just so expensive. It costs millions of dollars to get anything off the ground.

And so with Auger, I kind of view it as a sort of, it's like a tool. It's like a printing press, but for finance. So the idea is if you want to create a financial market on something, and that market doesn't exist or it's just expensive somewhere else, you can create it for, you know, 20 or $30 on auger. And basically it's way cheaper to do that. Interesting. So what is your background in finance or betting? So I first got interested in betting when I was in middle school. I was essentially, you know, had this computer class I'd always get done with early and was looking for something to do because it was the end of the day. And I ended up basically betting on horse races.

So they're overseas betting sites. And I built some really simple models, essentially, in Excel. And that's kind of how I first got started betting. Initially started with $20, built it up to a few thousand. And then at that point, ended up getting into finance because I wanted to invest in something safer. Unfortunately, the year I decided to get interested in finance was 2008. So lost so much money in the 2008 recession. But that was a good learning experience.

And so just from your personal interest in that, that was how you came across, across those ideas by those economists and then, you know, connected that with what you were doing in Bitcoin and decided to launch Auger? Yeah. So the, you know, interest in economics and stuff, that was, that was back, you know, when I was in middle school and then ended up, you know, starting working on Auger, like during or after my freshman year of college. So there was a gap in time where I wasn't really doing anything actively in finance. But yeah, those are kind of the original reasons why I started to get excited about it. How does Auger work? Describe it for listeners who might not be familiar with it. Sure. So the way it works essentially is you have these programs on Ethereum that store the money. And so say you're basically betting on whether Trump will win the 2020 election in the U.S. And so in this scenario, there's two possible outcomes, yes or no, just to keep it simple.

And if the current price of yes is 55 cents per share, that basically means the market thinks there's a 55% chance that Trump will win. And if you want to participate in that market, what you can do is you can say, okay, I want to buy Trump at 55 cents per share. If he wins, you end up getting a dollar back. So you basically made 45 cents profit. If he loses, you end up losing your 55 cents. And so it's really simple and straightforward. Basically, the way it works is, you know, funds are deposited into these programs. The trading takes place on these smart contracts.

And then at the end of it, a payout happens according to what actually happened in the real world. And how do you determine what the truth is or what actually happened on the platform? Yeah. So in Auger, the way the outcomes are determined is basically there's this big system of people we call reporters. And it's a distributed group of people. And they collectively kind of say what happened. So from a practical standpoint, the way it works is initially just one person submits a report. So they may say, you know, Trump won the election. However, let's say they are dishonest and they said that he didn't win, even though he did.

Then what happens is the system has a dispute period where anyone can dispute it. And these disputes are essentially crowdfunded. So people keep disputing back and forth until eventually either the market resolves and one side kind of gives up or the network can actually fork or split into two networks, similar to other blockchain forks, except in Auger, you know, your fork, you know, for essentially reality. You launched Auger Live on July 9th. Since then, what kinds of activity have you been seeing and what markets have surprised you? Yeah, so there's been, you know, on the activity side of things,

what we've seen is lots of people creating markets, but, you know, a lot of those markets don't necessarily have liquidity on them. It's definitely followed the power law distribution where the liquidity is actually landed. So the most popular markets tend to be things right now, like essentially derivatives on the Ethereum price. And I think that makes sense because right now every market is denominated in Ether. So you need Ether to trade in things. And Ether is a pretty volatile asset. So it doesn't really make sense right now to use Auger for something like, say, sports betting

when you have 5% daily volatility in Ether's price. Whereas using it for a derivative contract that involves Ether itself makes perfect sense. That's kind of what we've seen, but there's about a thousand markets that have been created on auger. I did see also, I think the most popular one is about the price of Bitcoin. Yeah, yeah, I could see that. What markets have surprised you? I mean, the most surprising ones have really just been kind of how creative people have been with creating markets. So like some people have actually figured out ways to construct like put-call spreads on top of auger,

which is a pretty complicated financial instrument. And so what's really interesting about that to me is it shows kind of the power of prediction markets in general where you can take these kind of very basic fundamental simple tools and use them to build something that's kind of quite complicated that exists in the regular world. So if Auger becomes widely used, how will the world and the lives of everyday people look different a few years from now? Yeah. So the main differences are right now, if you want to get information, about something, some future event that may or may not happen, your best bet is to essentially look at either polls in the case of elections or to read kind of commentary in the case of things

that are, you know, harder to decipher than elections. And I think if you think about Auger from like an average, you know, consumer standpoint, one really useful thing will be, you know, we kind of view it as like long term, a sort of a search engine for the future. So if you look at like predictions.global, which is a website somebody built on top of Auger, you can look at all the markets and see kind of what they're forecasting. And that can be essentially anything. It can be something kind of boring like, you know, flood or drought risk. But it can also be something more interesting, like what are the odds the U.S. and North Korea

sign a deal requiring North Korea to, you know, give up nuclear weapons or something. So you can have markets on essentially anything. And right now, when we go about our daily lives, we have pretty good predictions about things like the weather. But we don't have that greater predictions about other things. And if you look at financial markets today, they're primarily on the prices of companies, but I think they can be expanded to be a lot more than just that. You've talked before about how Auger will enable trading in markets that are too small

for financial institutions to make markets in, like, for instance, how many inches of rain will fall in a region of the world that's not important to most people, but to the farmers that live there. So if that market is that small, how could this market be popular? enough at all, even amongst the crowd on a platform like Auger for it to make sense to create a market in on Auger? Yeah, so on Auger, if you look at the cost to create a market, you have basically two different costs. One is you have this bond that you have to put up, basically that if your market's an invalid market, or it's a market kind of doesn't make any sense or result

as indeterminate, you'll lose that bond. Right now, that's around, you know, $25 to $30. But you get that money back if your market is like a properly worded market. The other fee is, gas fees to create a market on Ethereum, which are probably, you know, a few dollars right now. It's probably around $5. And so if you look at that, you know, your total cost, assuming you get the money back for that bond is around $5 to $6. So it's very, very cheap. And so that's kind of one barrier to entry that it lowers.

If you look at regular financial markets, it's really hard to even experiment with them because if the startup costs to even create a market on something is millions of dollars, it makes it's a pretty large barrier to even experimenting in. if there's even interest in a given type of market. And then in terms of the, you know, people actually trading on something like that, since the startup cost is so small, it's perfectly fine if there's some markets that only have, you know, a few thousand dollars in people trading on them back and forth, because for them, it might make sense. That's interesting. So even in markets that small where there's only 100 people betting, there could still be useful information

that comes out of it? Yeah, that's right. And the reason is, you know, it only takes, two opposite parties who want to place a bet at the same price for a market to be useful for somebody. In practice, of course, though, you know, you generally need at least a few dozen people before a market starts to make sense. Interesting. Something else that I was interested in is whether or not prediction markets could help curb fake news. What do you think? Well, I don't think they can help that much with fake news because even fake news a lot of the time people know it's fake, but they still share it anyway. But prediction markets are definitely a good way of putting

your finger on a piece of information kind of in a really precise way. So, like, the way to think about it is, if you disagree with what the market says, you can always bet against it. And so there's always financial incentive to basically correct the price or correct the odds. But I guess what I'm asking is, you know, from the way that the augur market is described and the incentives that reporters have, don't you think that if someone, you're was trying to say, I guess for instance, so like what if, what if right after one of these big shootings like that, the Parkland High School shooting in Florida, you know, there were those people saying, oh, those quote unquote students, they're paid actors. And so what if like right after the shooting

somebody created a market saying, will actors be paid to act like, you know, distraught survivors of this shooting? You, you know, then there are those people that keep insisting that they are paid actors, what if they were to somehow try to engage in the market and keep disputing the outcome, would that then lead to a fork and allow those people to kind of persist in their fake news universe? Or how would that work? Or is this scenario like not even possible? Yeah, so it depends on how much they're willing to lose money by kind of having that dogmatic, you know, incorrect view.

people have brought up using their reporting system as a way to kind of have consensus on real-world events for things besides Auger. So on like news events, that's actually a good example. People on Reddit have actually brought up using Auger reporting results as, you know, citation for Wikipedia articles. So you can imagine, you know, that in regular news, there's not always the financial incentive to tell the truth. But in reporting on Auger, at least, you know, in theory, the incentive should be to be honest. And so then I'm just curious, so in that scenario where you had this one minority that kept insisting, you know, that actually the outcome was not X but Y, then in the world of Auger, as long as they were a sizable enough majority, I guess, if they represented 2.5% of all rep, then that would lead to a fork. So then there would be sort of like these two auger universes, one with, you know, that is based on reality and one that's based on fake news. And so then would, which is sort of like the internet now where there's a world of the internet that's based on reality, the other version of the internet that is not.

So just would that keep persisting where you would just have this other world where they would just keep reporting, you know, fake news? And those would be all the winning outcomes on that auger platform? Yeah. So on that one universe, you know, you could think of it as like a fake news universe. You know, I don't think people would actually use that side of the platform because if you're a trader or you're a better or you're anyone who's not, you know, profiting off of solely fake news, your financial incentive is to use the one that actually reflects reality. But those people, you know, that small minority could still maintain their kind of side group where fake news rules the markets. The problem with it, though, is fake news isn't necessarily consistent in its fakeness. So even that universe, interestingly enough, would probably split over a bunch of disagreements,

which is part of the core concept of auger is it's easier to align on a truth than it is to align on some sort of lie. That's part of the reason why if you look at how police examine criminals, they do cross-examination to try to find inconsistencies and stories. Interesting. Well, we'll see what happens. something that I wanted to ask you about also is this is kind of I guess really the year. And for the last year it's been like this where we've seen the SEC making a lot of moves in the crypto space. And for the last several months, the SEC's message has been that all ICOs are securities offerings. So do you ever worry that the auger crowd sale in 2015 would also be considered an unregistered securities offering and worry about what that could. mean for you? Well, so I think if you look at, you know, Auger in particular and some of the more recent statements by the SEC, you know, they've talked about this kind of concept of sufficient decentralization. And if you look at Auger, you know, I myself don't really have any control over the network beyond the fact that, you know, I can, you know, sit here on a podcast and talk about it, but I can't actually exert any sort of control on it.

I could, for instance, publish some code and, you know, maybe people will switch over to it or maybe they won't. It's similar to a position that a core developer of someone like Bitcoin or Ethereum is in. Then if you look at Auger's token in particular, in order to earn money from the markets in the system, you have to be actively participating in the reporting system, which is, I think, one thing that makes it different from most other projects in the crypto space, where, you know, to actually get the cash flow, I guess is the way to put it. You have to participate in the system. So we're going to talk more about decentralization and these issues in a moment. But first I'd like to take a quick break for our fabulous sponsors.

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If your company wants to launch a security token offering, just go to startengine.com slash unchained for a free consultation and a 20% discount on future regulated ICO setup services. That's startengin.com slash unchained. This is not legal advice. I'm speaking with Joey Krug of Auger and Pantera Capital. So you mentioned that you don't have control over Auger, but you were one of the co-founders or are one of the co-founders, and you designed it and coded it and launched it. Some token projects have this kill switch that gives the developers power over the project in case of, you know, potentially catastrophic incidents. And you guys burned yours two weeks after Auger went live.

Was that the intention there to kind of give yourself? cover and say like, oh, not it's to centralize, we can't control it? Well, so the concept of kill switches, you know, they traditionally have been called escape hatches in like the academic literature. I think people are kind of missed a lot about what they actually enable enable. So if you look at an escape hatch, what it enables is kind of pausing of all contract functions and it allows people to withdraw their money from the contracts. But it doesn't prevent someone from just re-uploading the same copy of those contracts without the kill switch or without the escape hatch. And the main reason to have these sorts of things, at least from a computer

science standpoint, is very early on you want to make sure that there's at least not some huge obvious critical vulnerability that was missed by auditors. And so you kind of have the benefit of being able to pause things, let people withdraw, and then migrate over to a new version of the system. At some point, though, you want to basically get rid of that feature because as a system grows, you can use that feature for malicious uses. So if you look at Auger and the way the escape hatch worked, when you pause the system, there's no way to, you know, return the money to people in a 100% fair way. The way the original Auger protocol did it was it returned the money at the latest odds that each market traded at. And so there's definitely a bunch of use cases where that key

could get stolen or, you know, somebody can maliciously press that button and screw over a lot of the traders in the system. So once that we thought it was seemed, you know, decently secured, there were no major vulnerabilities sound in the first two weeks. We basically decided to get better that functionality. And that way, you know, we can't really pause the system. And if, you know, there is some vulnerability found, essentially what would happen is people would have to kind of hard fork over to a new system. And who would manage that hard fork? Well, so the way, well, way a hard fork, for smart contracts works. We haven't really seen this that much,

but basically what would happen is somebody would upload your new smart contracts. It could be developers. It could be essentially anyone. It's trivial to verify that those are the, like the smart contracts they claimed uprooted are the ones that they actually uploaded. And then after that point,

it becomes a problem of convincing people to use it. So in the case where there's like a vulnerability found from a security standpoint, I think, you know, doing a hard for getting people to migrate over to a new version where it's fixed would be pretty straightforward because there's not a good reason to stay on the old vulnerable one. However, if you're doing things like, you know, feature upgrades, it's a lot harder to get people to move over. We've seen this actually with Bitcoin,

where there hasn't been a huge amount of upgrades to it that require hard forks because people are not really willing to do that. So, but like in terms of making decisions like that, it would be the forecast foundation? So it's kind of unclear at this point how hard forks would happen because none have happened yet for really anything on the decentralized app player on top of Ethereum. I imagine they would happen in a similar fashion to how hard forks happen on the protocol layer. So the closest analogy to look at would be to look at how hard forks happen on Ethereum itself. And basically there what you have is kind of a community-driven process where he will debate what sort of things should be in the hard fork or what shouldn't. And then after the community kind of comes

to a consensus on it, eventually a new version is released, and people decide whether to use it. In the case of, you know, Ethereum right now, people have gone with most of the hard forks. They can also decide to reject it. In the case, if you look at, you know, the Dow fork, some of you would have rejected that state on Ethereum Classic. The same thing could certainly happen to augur. You have people on an old version, some people on a new version. And when you say a new version is released and people can decide whether to use it or not, who is releasing it? So in terms of who releases it, you know, in practice, it would probably be, you know, people working on the Auger protocol would push a new version of it to GitHub and then people would decide whether to use that or not.

In theory, though, anyone can do that. So it sounds like it could be you. Yeah, that's exactly right. Yeah, so people have actually already proposed kind of hard fork updates to Auger that are separate from the current dev team. So, for instance, some people have proposed versions that kind of allow for more easier censorship of markets. Some people will also propose versions where you modify the reporting system quite a bit and actually remove fees entirely. That's all kind of early stage stuff. The FAQ on Auger says that it's not a prediction of market itself, but just a protocol that enables people to make markets.

and so that you guys, Auger, cannot control what markets people create or any other actions they take on the platform. And this, you know, I'm not a lawyer, but from the research I've done, it seems like this comports with a section of the Communications Decency Act that says providers or platforms are not liable for content by others. But it actually turns out that there's an exemption for criminal activity. So I'm just making up this hypothetical scenario, but let's say somebody created an assassination market and auger. And then that the target of, you know, that assassination market was actually assassinated and somehow investigators linked the killing to the market. If the prosecutors went after you for creating the platform, how would you defend yourself?

Well, I think that question's a bit like asking, you know, somebody who invented the hammer or the printing press, you know, what happens if someone takes a hammer? and uses it for something bad, or what happens if somebody uses the printing press to write a book like Mind Comp. And so I think like all sorts of tools, you can use them in a very positive ways, and you can use them in very negative ways.

When you're inventing a new form of tool, kind of for society to use, what you have to weigh is basically whether you believe that the positive benefits outweigh the negative use cases or even the negative externalities of those positive benefits. And so, you know, looking at something like Auger, if you look at the volume that's taken place on it and what people are actually trading on today, you know, 99.999% of it is either derivatives contracts.

You know, some of it's sports. If you look at like the World Cup markets, you know, there was somebody who created an assassination market that expired at the end of July and it had about $50 traded on it and about $300 in open orders on the book that weren't. fulfilled. And so I think from that standpoint, you know, I believe that Auger is going to create more good in the world than bad. From a, you know, legal standpoint of what does it mean to be the creator of this sort of protocol? You know, I think if you look at the Communications Act in the 90s that was passed, it was primarily intended for people who were actually operating these sort of platforms on the internet. So, you know, hosting a site, running things. Whereas I view as Auger more similar to something like Ethereum or even BitTorrent, where, you know, we can definitely push new versions of the UI that people can either decide to run on their own machine or not,

but we don't actually host the software and run it ourselves. And so from that sort of standpoint, I think if you're thinking of creating a market on Auger, you should pay attention to the rules and regulations in your jurisdiction. And there's already people who are creating for-profit entities on top of Auger to do exactly that. And they're basically getting licensed in their respective jurisdictions, whether that's Malta or the UK, versus like creating a market in the United States. I don't think makes that much sense because there's just so many legal hurdles to doing that. You know, only this past summer has sports betting been legalized on a federal level,

but you still have 50 states to deal with. And in terms of my kind of positioning on Auger itself and creating the tool like that, I view it as mostly as a free speech issue. So I think you have basically, if you look at code, it's been protected as free speech under the Supreme Court. And there's also this concept of what I call compelled speech. And that's the idea that, you know, if someone were to try to go after us and say, hey, like, you should make these certain markets not exist. One, there's not really a functional way to do that.

You know, maybe we could add a thing that hides them in the UI, but you could always access them on Ethereum unless Myers were to actually censor Ethereum itself. But even the thing of preventing them in the UI, I think would fall under compelled speech laws, which has also been protected under the Supreme Court. You can't force someone to say something. That said, all this stuff is new kind of novel ground. It's very similar, I think, to the kind of early days of the P.D.P. FileStraing revolution like we saw with, you know, projects like BitTorrent.

So in your answer, you talked about how you do, you know, recommend that users comply with the laws and their jurisdictions. So do you ever worry at all about maybe aiding and abetting liability on, you know, for yourself with respect to any of those laws? in any jurisdiction? Can you clarify the question? Like, do you worry that you might have liability for aiding and abetting, whether it's for, you know, laws against murder for hire or something like that? Well, so I think, I think from a liability standpoint, you know, I'm definitely not encouraging that sort of behavior. And, you know, just because something is possible doesn't mean that you're necessarily aiding and doing it any more than that the person who created a hammer or aided in, you know, someone who broke into a window with it.

Okay. And I was also curious in your answer where you spoke about consulting services for people who are making markets. I wasn't aware that was happening. It sounds like already there's consulting services popping up for people who want to create markets to make sure that they can comply with the laws in their jurisdiction. I didn't mean consulting services. I mean, those sorts of things do exist. Gaming consultants have been around for decades, doing exactly that. But what I meant was people are creating for-profit companies on top of auger that are going to create markets.

And those companies are getting licensed in their respective jurisdictions. Oh, interesting. But then how do they enforce that the participants are people who can participate in that jurisdiction? You know, how can they restrict it to that jurisdiction? Yeah, a simple way to do it is just, you know, geo-fence your site. So most people creating for-profit things on top of Auger are probably still going to run centralized websites.

They're just using Auger because they don't have to deal with settlement, resolving markets, processing trades, things like that. So it's mostly a cost savings. And so they're still going to run this stuff through centralized websites. So you're just IP fence or geo-fence, those people out. There's always the possibility that somebody could come, you know, basically through the back door, essentially. In this case, you know, using Ethereum on like an API or, you know, or manual level, you know, doing something through like my ether wallet to trade with you. But there's also ways to get around that. Like, for instance, you could run all trading through

a state channel where your users have to sign up through your website to take part, trade against you. The way that you've designed, Acker, you do not identify users. Why did you decide to design it that way? That wasn't really a consideration in the design, to be honest. It was more just kind of how did you build this from a technical standpoint so that it actually works. And using Ethereum ended up being, I think, in my opinion, the best way to actually do that. Ethereum itself happens to be pseudonymous. It definitely doesn't mean that you can't identify users, though. For instance, if you look at an Ethereum address, for instance, every market has a market creator. It'd be very trivial to transform their Ethereum address

back to their real identity by tracing which exchange they sent money through. And most the exchange end points in the space or KYC, even those, you know, assassination markets that the media has kind of went crazy about over the past few weeks have also been funded by KYC'd accounts from exchanges. So just going back to the question about the assassination market, so I totally understand about how you view this as a tool like a hammer or, I guess, like any other internet protocol. But I just wonder, you know, in this case where if someone does. use auger for criminal activity and in general usage of the market drives up the value of rep

that does benefit you financially which is different from a kind of other ways that you know creators of tools you know might might say oh well you know criminal activity on what using that tool isn't really related to me but in in you know with something like rep and auger um there would maybe be a financial benefit to you. So how do you feel about that? Well, so if you look at, you know, those sorts of markets, Auger does have the ability built in to resolve them as invalid. And in that scenario, there's essentially zero financial incentive to kind of do what everyone's talking about. And so basically, in that scenario, what ends up happening is the people who created those markets essentially lose money. And people who traded it in them essentially lose

out to arbitrages. And so in that scenario, I, you know, I don't see any problem with it because you're basically removing the financial incentive. If, you know, people on the system start to resolve those markets, you know, accurately. And so they're not trying to basically prohibit them, then that would be, you know, more concerning that that hasn't happened at this point. And just to go back, as you can see, I have a lot of regulatory questions because I do wonder, this is such a new animal. I wonder how the regulators will react, but we do have some history to look at. So are users able to speculate on what the stock of a private company will be worth if it goes public? Because there was an exchange, and it was a blockchain-based exchange called Sandhill Exchange,

that enabled those types of bets, but it was shut down by the SEC. see. So I wondered how Auger differed in this regard. Well, so for that, I definitely would encourage you to read the FAQ. But in general, Auger itself doesn't operate those markets. And we don't process the trades. You don't store customer funds. And we don't create those markets, which is the even more important thing. So if you look at, you know, most rules surrounding market operation, they surround creating and kind of operating the markets themselves. And so I don't know if there are any markets on that on augur in specific at the moment. I haven't checked for that specific use case.

But in theory, someone could use it to create those. And from a regulatory standpoint, I think it falls kind of on the onus of the market creator. If you look at something like BitTorrent, it kind of falls under the onus of the tracker sites and the people actually hosting those files to make sure that they're not hosting some sort of legal service. For markets on, you know, private company startups, I think that's a really interesting use case. I've been talking to some people who are interested in doing it in actually a regulatory compliant fashion, you know, obviously not in the U.S., because it's really hard to do as that sort of stuff in the U.S., but it's stuff that you could do much more easily in, you know,

jurisdictions like the U.K. or Malta. Interesting. So as you can see through this discussion, we've been talking about how the technology can be used for both good and bad. Are there ways that you in particular are thinking about trying to influence the usage of the technology more for good than for bad? Well, so, yeah, I think the main thing with something like this is it's hard to know, you know, what people are going to use it for, just because it's such a generic sort of set of financial primitives. Like, it's literally a way to it's literally a protocol for escrowing funds, processing trades back and forth, and then processing, you know, resolution of those markets.

And so the sort of things you can use it for kind of really varying, you know, in terms of what I think is most interesting, I think the sort of information gathering style markets are the most interesting ones as to things on like political events, you know, things that allow people to hedge against various risks, things like that. And so if anybody's interested in creating something like that, I'd be happy to chat about it. Basically, just because I think those are kind of the most sort of beneficial use cases for society in general. That said, the cool thing about Auger is you don't have to look at all the markets. It's kind of like Google.

You don't have to search for everything on Google at once when you use Google. You can just look at the stuff that you care about and find interesting. Yeah, and how will you, you know, I heard you talking before, and I sort of referenced this example about, how this market could be useful to farmers in some remote region of the world. How would you reach them or how would you reach the people that would care about that kind of market? Well, so you basically need a couple of different problems to be solved before it makes sense to use auger for anything, especially, you know, use case like that. And so those problems boil down to essentially two core things. One is fees are very high right now. And two is the user experience.

is very poor. And so if you look at the fee angle, if you're paying 15% in fees, if you add everything up from getting fiat into crypto, dealing with volatility of crypto, dealing with all the fees for trading on Ethereum, dealing with the fees on Augre itself, add all that up, and it becomes quite expensive. So that's one problem. But then the other problem is the UIUX, and that includes things, in my opinion, like making it easy for people who aren't familiar with crypto to use it. And ideally, the kind of long-term state you want this tech to be in is an area where people don't necessarily even need to understand crypto or know that it's crypto or know that it's using the blockchain for it to be useful for them. I think on the fee side of things, we'll see some

pretty strong improvements over the next six to 12 months as things like, you know, MakerDAOs die become more popular. And as we see exchanges like BACT launched, which have much lower trading fees. on the UIUX side, it's really just kind of another thing that improves with the maturation of the tech. Part of the UIUX issues are due to the fact that it's so unscable, that time is really high to do anything. Like, you want to run longer. It takes, you know, an hour to sync the thing. And that really needs to be down to, you know, a few seconds. But those are all problems that are solvable, but it's going to take, you know, a few years.

Yeah, I was going to ask you, because I noticed in the last 24 hours, there were just 39 transatliform. transactions, but it sounds like the way to foster the growth of this network is actually to resolve some of these other issues, which actually maybe in some cases are more problems with Ethereum than with Ocker itself. Yes, some of them definitely are. But that doesn't mean there's not, that doesn't mean there's nothing you can do, I guess, is the way to put it. Like, you know, we could write, you know, free open source tools that allow you to run markets and state channels and thus solve the transaction fee problem and the speed problem. And that's, you know, something that I've been looking at actively.

I think it's really interesting. And I've been talking to a few people in this open source community about. It's just stuff that, you know, takes time. It kind of, it just got out the door about a month ago. And, you know, we've been working on improvements to it, but it all takes time. Let's talk about your work at Pintera as co-chief investment officer. What's your investment thesis or strategy there? Yeah, so our investment thesis, so we're focused solely on,

blockchain tech and cryptocurrencies. And the sort of things we're looking for are things that either disintermediate, you know, existing markets or basically create new financial markets for things that people may not have considered to be markets in the past. So in the first scenario, you know, you have things like Auger or things like Ethereum that basically served to cut out middlemen. And then on the second scenario, you have things like Filecoin where today there's not really a sort of marketplace for files toward, but there will be in the future.

And I was curious to know you've been there for, I think, a little over a year. How has the market changed in that time? And in particular, what do you see happening to valuations in the space? Yeah. So the market about a year ago was much more retail driven. So there were a lot more, you know, people in the market at any given point in time, and a lot more people buying, you know, new cryptocurrencies or ICOs at any given point in time. nowadays the market's more kind of VC driven in the sense that most of these ICO deals are

happening in the private markets and not really so much in the public markets anymore. And I think that's because projects are starting to sell things basically on, you know, SaaS with a year lockup. And then after that, then, you know, it can be traded because they're trying to do things basically reacting to the kind of, you know, news that has come out of the SEC. in terms of valuations, I think valuations in the public markets have obviously come down quite a bit. Valuations in the private markets, people are starting to become more valuation sensitive, but they're still investing in things at pretty crazy valuations, in my opinion.

Yeah, I know that some teams are able to ratchet their valuations 100x between rounds, even before they've launched. How do you think they're able to do that? Well, I think, you know, I've seen that a few times and passed on the second rounds. And the reason they're able to do that is they raise, you know, a relatively small amount by kind of a name brand, well-known, you know, Silicon Valley investor. And then raised the second round at, you know, 50X that valuation. And the second round they raise from, you know, a bunch of overseas Chinese investors who, you know, don't really know what they're doing. And that's kind of why you see those disparities. I don't think that's a good thing or a healthy thing for the market, though.

I think it takes advantage of people, which I don't like. Interesting. Yeah, well, speaking of the way this market is working, so I saw that you mentioned somewhere that one of your motivations for building auger was democratizing access to finance. But I was noticing that in one of the most recent investor letters from Pantera, that amongst the more recent funds, which, so I'm just leaving aside the Bitcoin fund, which launched in 2013 and is up like 11,000% or something.

Among the more recent funds that are actually up, because one of them was actually down 24%. Both of those are ones where you guys get tokens at a discount. So in this case where your returns in some way is predicated on getting early access to the tokens, how do you reconcile that with this ideal of democratized access to finance? Yes, good question. So I think if you look at, I mean, part of it honestly, I think is due to the regulatory environment in the U.S. a year ago that there was that democratized access to lots of projects. Now, a lot of them I would never invest it in. I thought we're at crazy valuations. But there definitely was, you know, what I consider to be democratized access to at least funding projects. But when I say democratized access to finance, I don't really necessarily mean funding kind of early stage startup. What I actually mean by that, I think that's a very small part of finance, even from the number standpoint, venture capital is a very small part of finance, despite how big it seems if you're in Silicon Valley.

What I actually mean by that is opening up access to new markets and really enabling people to be able to trade on markets that they don't have access to in their local jurisdictions. So what I'm primarily excited for is, you know, things like derivatives on top of, you know, Ethereum, people being able to trade on more and more assets. classes or at least synthetic versions of those asset classes. That said, I do think it would be great if, you know, access to startup investing was more democratized. But it's hard because of, you know, accredited investor rules that even kind of add, in my opinion, an unnecessary barrier to entry to investing in early stage startups. Because I think if you look at the financial markets

today, you can be a non-accredited investor and buy a pink sheet stock on the OTC markets that has a 97% chance of failing, but you can't co-invest in a startup, you know, through a syndicate that's co-investing with Founders Fund, which obviously has a lower chance of failing than a random pink sheet stock. And so I think there's some kind of, you know, issues with that that I hope, you know, are resolved in the future. And so obviously the investment strategy at Pantaran, pretty much any other of these, venture capital and hedge fund investors in the crypto space is getting early and everything.

But because everybody always is talking about democratizing finance, I was just curious, are there any particular projects that you've invested in that you are particularly excited about in terms of their potential to democratize finance? Yeah, absolutely. So, you know, projects, so these centralized exchanges are a big category in that. So things like zero-x, Khyber, basically the idea of, you know, right now they're not scalable and they're expensive to trade on. But when you're making an investment as a venture-style investor,

you have to look out on the exponential curve a few years. I think a few years from now, this tech's going to be super scalable, and those transaction fees will be much lower than regular centralized exchanges where you're paying 25 basis points per trade. And so that's one area, do centralized exchanges. Another one is, you know, the concept of kind of stable coins. As we start to see more exchanges building fiat on-ramps for crypto, eventually people in countries with really poor currencies will be able to actually just get into stable coins and hold those instead.

And then stable coins are also really useful because if you're doing any sort of financial application on something like Ethereum, you can't have the volatility of ether. It's just something that you can't really deal with from a risk risk management standpoint. Besides that, I think other projects would be things like Filecoin basically creating a financial. market where there previously wasn't one, making it, you know, much cheaper to access file storage. I'm also interested in some of the art projects, like projects that are trying to disintermediate the art auction houses, which charge about 40% in fees. And then the other problem with art is if you wanted to buy like, you know, $50 worth of a Picasso painting, well, obviously you can't do that today because you either have to buy the full painting and be super rich or just nothing

at all. And so doing things like securitizing assets like that. So, product, like Harbor, I think are also really interesting to me in terms of democratizing access to things in investment classes that, you know, the average consumer wouldn't have had access to in the past. You touched on staple coins, and I've heard you speak before about how there previously, at least, and even probably now, that there was a big need for stable coins in general in the crypto space. And of course, now there's a ton of projects, both live and also in development. What other big needs right now do you see in this space and where do you see a lot of activity? Yeah.

So, I mean, besides stablecoins, I think the other big areas are, you know, really just making a tax scale is a big area that there could be a lot more work on. Tons of people are working on it right now, but it's still just a really large set of problems that need to be kind of surpassed. Besides that, I still think the Fiat-on-Ramp problem is still a very large, relevant one, which is why we've invested in, you know, exchanges all over the world, making it easier to get access to crypto is, I think, another kind of big piece because if you can't get your dollars or yen or whatever it may be into crypto,

you can't really get access to this, you know, quote-unquote democratized financial system anyways. And so that's a big barrier. If you look at, you know, companies like Coinbase, you know, the fee to buy Bitcoin on Coinbase is you're paying 4% for a debit transaction, 1 and a half percent for an ACH. And the interesting irony is if you go through GDAX, which is kind of the more institutional side, your ACH fee is zero.

But the average consumer doesn't know, you know, to go through GDAX. And so I think just basically seeing more people kind of competing in that space and seeing more attempts to drive the cost down for getting Fiat on into crypto is another big area. Okay, well, great. For people who are interested in learning more about you and Auger and Pantara, where should they go?

Yeah, I'm on Twitter. My username just at Joey Krube. Or you can just shoot me an email Joey at Pintera Capital.com or Joey at augur.com or Joey at auger.com. Perfect. Well, thanks so much for coming on Unchained. Yeah, thanks for having me. Thanks so much for joining us today. To learn more about Joey, Auger, and Pintera Capital, check out the show notes inside your podcast episode.

New episodes of Unchained Kama every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you liked 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. Unchain is produced by me, Laura Shin, with help from Raylene Gallup Polly, Frasio recording, Jenny Josephson, Rahul Sinkireti, and Daniel Nuss. Thanks for listening.