Unchained - Multicoin on the 1 Thing Crypto Teams Miss in Their Quests for Success

Episode Date: May 1, 2018

Kyle Samani and Tushar Jain, cofounders of Multicoin Capital, dive deeply into their sometimes controversial and unpopular opinions on how the crypto revolution will play out. They describe why they don't think the technology that a team develops early on will play nearly as big a role as some think, why there will be a spectrum of blockchains offering different features with different tradeoffs, and why they're bearish on stablecoins. They discuss why they disagree on whether or not the Lightning Network is revolutionary (and therefore why they disagree on whether Bitcoin is failing). Samani and Jain also explain how they decide whether or not to invest in a token, their strategies for trading and why they don't have to be invested in a project to help out. Multicoin: https://multicoin.capital/ Kyle Samani: @KyleSamani Tushar Jain: @TusharJain_ A blog post that came out after we recorded in which Kyle expands on his contention that technical features will matter less in the long-term success of a network than people think: https://multicoin.capital/2018/04/25/good-artists-copy-great-artists-steal/ Kyle's post on the outlook for coins for store of value, utility tokens and stablecoins: https://multicoin.capital/2018/03/15/paths-to-tens-of-trillions/ More Multicoin thinking around stablecoins: https://multicoin.capital/2018/01/17/an-overview-of-stablecoins/ Previous Unchained episode: Why It's So Hard to Keep Stablecoins Stable: http://unchainedpodcast.co/why-its-so-hard-to-keep-stablecoins-stable Thank you to our sponsors: Bitwise: https://www.bitwiseinvestments.com/unchained Keepkey: https://www.keepkey.com/ Preciate: https://preciate.org/recognize Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, welcome to Unchained, the podcast where we hear from innovators, pioneers, and thought leaders in the world of blockchain and cryptocurrency. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to give us a top rating and review that helps other listeners find the show. And be sure to follow me on Twitter at Laura Shin. Unchained is sponsored by Precate. Founded by Ed Stevens, Precate is building the most valuable relationships on Earth. In each episode of Unchained, Appreciate Sponsorsorsorses. the recognition of an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out. This episode is brought to you by BitWise. Last year, BitWise created the world's first cryptocurrency index fund. The BitWise Hold 10, which holds the top 10 cryptocurrencies and rebalances monthly.

The fund has several hundred LPs and is currently accepting accredited investors. To learn more and invest in the BitWise Cryptocurrency Index Fund, visit WB, www.bitwiseinvestments.com slash unchained. Today's episode is brought to you by KeepKee, the easy, safe, and simple way to protect your Bitcoin, Ether, Lightcoin, and many other digital assets. There's no time like the present to protect yourself from hackers, malware, and viruses. Rest easy knowing that your digital assets are protected. Visit KeepKee.com to order your secure hardware wallet today.

Today's guests are Kyle Simani and Tushar Jane, co-founders and managing partners of multi-coin capital. Welcome, Kyle and Tashar. Hey, Laura, great to be on. Thanks for having us, Laura. Really excited to be on the podcast, a big fan. Tell me both how you got your start and crypto. Kyle, let's start with you.

Sure. So sort of my first company about five years ago. The company was building software for Google Glass for use by surgeons. That was going quite well until Google pulled the rug on Google Glass, at which point I had a big problem on my hands. ultimately ended up pivoting the company and the company was ultimately sold. And I found myself unemployed in January of 2016. I spent about two months playing video games.

And then in March of 2016, I discovered this thing called Ethereum. And I thought Ethereum was the coolest thing I'd ever seen. I was drawn to it in particular for two reasons. One was I felt the pain of platform risk after having built on glass and experiencing the pain of Google pulling the road out from under me. The idea of having a platform, you know, where no one could do that. That began to me was particularly compelling. And the second thing that drew me to it was the finance opportunities.

At some point in 2016, I realized that every financial institution on the planet is a giant smart contract. And when I realized that, I thought to myself, oh, man, this technology is going to be really important. I'll let Tusha kind of tell his side. Yeah. I discovered crypto for the first time back in 2013, actually. I had also started a company around the same time that Kyle had, there's a healthcare IT, unrelated to crypto, but I heard about this thing called Bitcoin,

and I did a lot of research and bought a couple, literally two, which I'd bought more. I think we all do, but I bought a couple as tuition, make sure I had some skin in the game, and wanted to understand how it all worked. And after doing a good amount of research, I realized the only app that you really needed Bitcoin for in 2013 was Silk Road, and I didn't really need Silk Road.

So I didn't go much deeper at that time. I thought it was a really interesting idea, but I didn't see the broader vision until Kyle actually shared the Ethereum white paper with me and told me about what Ethereum could enable that Bitcoin could not. And in the meantime, I had been working on building this marketplace network-type business in healthcare IT, and I really saw the potential for these cryptographically bound networks to replace a lot of these traditional network businesses. And that's what got me extremely excited because I saw that crypto was a new way fundamentally of organizing human economic activity. And we hadn't had a new

fundamental organization mechanisms since the advent of the publicly traded corporation back in the late 1400s, early 1500s. Interesting. Yeah, I love these stories. And you guys know each other from NYU or something, right? Yeah, that's correct. So Tushar and I met at NYU in our, I think our first semester of college, maybe our second, but pretty early. That's this 2008, I'm afraid. We became pretty close in our first two years of college. And we've been best friends for eight or nine years now. One thing I love about your story, Kyle, too, is that you're the classic example that Chris Dixon of Andrews. Horowitz likes to talk about where he describes how he's seen a lot of entrepreneurs who build on these closed wall gardens like Facebook and Google. And then they get burned when those platforms end up shutting down services or pivoting their strategies and then those developers get cut off.

And I know he's actually an individual investor in your fund along with Mark Andreessen, David Sachs. And he says that he sees a lot of those same developers now building on blockchains where they can be compensated directly from the protocol, where the data is open. So I'm curious, why did you guys decide to go the route of a crypto hedge fund rather than building a project in the space? You know, after I left Christine, it was January of 2016, and I was unemployed. I spent a lot of kind of time doing soul searching over 2016. I was legally unemployed for about 18 months. During that time, I was slowly discovering crypto. and, you know, I've got to have done one rodeo as an entrepreneur,

and I spent a lot of time thinking, you know, like, what do I want to do with myself? They're fundamentally two kind of white-collar jobs. They're operators and their allocators. And I had thought to myself at the time that I wanted to be an allocator. If I could spend all day just reading, writing, and thinking, I would. And, you know, and this time I was unemployed, I had literally nothing to do, no responsibilities. I, like, found myself, I spent days. I just spend lost in a book,

lost thinking through stuff on the internet, thinking about stuff, writing about stuff. And like that when I cut as, then I found crypto and it just sucked me into that particular vortex. And I felt like that was my calling was to do allocation rather than operating. So that that's really like why I wanted to be on the fun side of things. What you described is not that different from journalism. So if this doesn't work out, you can also join this field.

I'm sure. you're like, hmm, cost benefit analysis, no. But anyway, something I'm also curious about is, you know, at this point in time, obviously it's quite unclear how any of these crypto assets will gain mass adoption. And you guys have so many great blog posts where you kind of theorize how this might happen. But why don't you just describe for me right now how you're thinking about what these paths to wider adoption could be, and then how you factor those thoughts into your investment choices? I think something that is critically undervalued in the crypto space right now is distribution. And I don't mean distribution amongst people who are already in crypto.

I mean distribution to the blue ocean of people who have not yet actually interacted with any cryptocurrencies or protocols. And the reason for that, is fundamentally because everything is open source. And these two are intricately related, because what that means is that there is no IP, there is no protected technology whatsoever. And it means that the investments that another team makes into advancing their technology can be borrowed by your team.

And whoever gets the most network effects for some of these protocols that do have strong network effects will end up actually dominating from the economic perspective. So the focus on go-to market, I think, is actually the best signal for a team that understands the competitive dynamics of the crypto ecosystem and understands what it takes to actually win in this open source world. That's interesting because it's sort of like saying, oh, maybe Zcash is sort of specialized around privacy, but since Ethereum is adopting ZK Snarks,

and they're more focused on, well, no, actually, yeah, so how do you, sorry, I don't know how I'm going to finish this thought because, so like, I guess, so what you're saying is maybe in that example, Zcash is like focused on the technology, but Ethereum is more, maybe not like only focusing on the technology, but they're sort of like more broad in that they're adopting a whole bunch of use cases. And so that is more likely to gain wider. adoption? Let me give you, I agree with the Zcatch example, and I'll get to that, but let me give you an easier one. So an easier one is, as I'm sure a lot of your listeners are aware, there are a lot of competing stablecoin projects out there right now. There's, you have things like Facecoin, you have things like Maker, you have things like Saga, and there's a bunch of lower profile ones that are still either in stealth or just haven't made a lot of noise yet. And Staplecoins is something that we're really interested in. As a firm, multi-coint, Capital is interested in stablecoins. However, when we talk to these entrepreneurs who are

launching stablecoin networks, while we do care about the stability mechanism, that's not where we're focusing because we understand that the dominant stable coin, if stablecoins do end up being an important part of the ecosystem, the dominant stable coin will adopt the best stability mechanics from every other stable coin experiment that has been run. So, What we really focus on when looking at stablecoin projects is what is the go-to market strategy, how will you get consumer adoption, and how easily can you adopt the best mechanics from everyone else who's experimenting in this space? This is the beauty of open source, right, is that everyone is always developing in the latest

and greatest. So if you can, if you can kind of abstract away from that and realize that distribution is what is going to decide which table coin wins, then it makes sense for the team to focus on that. And so what do you think are the best distribution strategies? We had this year 2017 where everyone was like, the initial coin offering is the way to bootstrap your network. And it's a way to get the early adopters incentivized to kind of proselytize the network to other people. And yet, I don't really know how well that's working out. So I'm kind of curious, what do you think are the best ways to?

to get broad distribution. Yes. I mean, I think it varies very widely, depending on the kind of application you're building. So, right, like, let's take Funfair as an example. So the Funfair team, you know, Jazz and David and those guys, I mean, they're hiring in Salesforce. Well, they've already hired a Salesforce. And they are calling up casinos and other, you know, casino operators and basically

pitching them on the value of the platform. And they have to go through like the standard enterprise sales process. And obviously that kind of general go to market is not applicable for all cryptocry currencies. Obviously, Ethereum Foundation doesn't need to do something like that. But there's a lot of interesting projects like Funfair where you need to be able to run an enterprise sales organization. And there is a enterprise sales is largely a science. Although I have a tech background, like I ran the sales org at Pristine. Like I have some sense for how to run an enterprise sales org. And like that's 90% science, 10% art. There's a process to do this. And it just requires extreme

discipline in hiring people who like know how to do that. And I find a. crypto, there's just way too many tech, tech people, and not nearly enough go-to-market people. If you're going to build a developer tool for developers to build on, like, you should go hire the best developer relations people out of Twilio and out of MailChimp and, you know, those kinds of places and Centigrate and those kinds of, right? And like, I just don't see that kind of strong focus that I would like to see what I think about, you know, how do you get this thing from a 5,000 users or 10,000 users to 10 million users, right like they need to be thinking about 100x growth and like how do you get there this is so

interesting because essentially what you're arguing is that the tech matters less in the beginning because ultimately at the start what matters is just getting people to use whatever you're offering and then because these are all open source as you go on and get wider adoption then you can just add in the technology that actually makes your your product better is that a good Summary? It is. And really, it comes from our approach as fund managers is to identify asymmetries, right? We need to see where the risk in return is asymmetric. And this is actually an example of an asymmetric strategy for competing in this market is, well, we have something that's fundamentally different, which is that all the technology is open source. So what does that change about how we compete

in this market. And a lot of teams are going about competition in the same way that they have in traditional tech companies. But we think that that's fundamentally wrong. It's not the right strategy. It's not the dominant strategy from a game theory perspective. And at the end of the day, show me the incentives and I'll show you the outcome. So I think that's a misquote from someone. When I asked you earlier how you're factoring this into your investment choices, essentially you're maybe then looking for teams who have more of that business savvy? I mean, it sounds really that like the founding team needs to have a strong go-to-market, but like they need to have at least some planned thought, thought about it seriously.

And then most importantly, be willing to hire people who have done it at analogous, you know, relevant companies. There's a lot of great technology teams from crypto that have raised tens of hundreds of millions of dollars. And like they're hiring their friend who like is a, who like, is a, who, like, makes marketing brochures. And they're like, oh, look, we're doing marketing now. And I'm like, no, like, that's not what world-class marketing looks like.

Go hire a true VP of marketing who's done three series A stage startups in a relevant field, irrelevant fields. That person is going to be expensive and, like, hire them and bring them on board. And then that person is going to need to build a team. Like, just the level of caliber of, like, disciplined and focus on systematically thinking about, like, how do I get my next, not just 10,000 users, but like, set it at basic school, how do I get the next million users, the next five million users? And like that doesn't happen by accident.

That doesn't happen with haphazard, like building some brochures and like hand-to-hending having some community events. There needs to be a real systematic thorough process to build scalable growth. Yeah. And just to add on to that, there's this idea in the space of build it and they will come. And it makes sense when you consider the makeup of a lot of the teams is very engineering heavy. And there's this precedent where Bitcoin was built. And people came.

Ethereum was built and people came. There wasn't a real marketing push by some organization that helped make those things happen. But that is not how it's going to play out for almost anyone else in the space. They need to actually go to market. They can't expect the market to come to them. Okay. Yeah. Just because now it's much more competitive, obviously, than it was.

What else is part of your process for determining whether or not a token? merits inclusion in your portfolio? There's a few questions that we like to ask ourselves as a part of our process. The first is how is this project uniquely enabled by blockchain? Blockchain technology has three fundamental strength, and that's going to be the censorship-resistant nature, the permissionless nature, and then the trustless nature of blockchains. If you don't need to use one of those three attributes,

then you're better off using a centralized database. A blockchain is extremely inefficient compared to a regular database if you don't need one of those three features. So that's the first question that we asked. And 99% of things that were pitched actually end up failing at that level. Then the next question that we ask that we find is also extremely valuable is, can we fork this token out of the protocol? And by that, what I mean is, is the token actually necessary for the functioning of this protocol? And if it's not necessary for the functioning of the protocol, and there are a lot of these types of tokens right now, it may have some value in the short term for speculative purposes, but the reality is that someone will go in and fork out your token. Take your open source product.

let's say, you know, it provides some service, distributed compute, for example, and they'll fork out your token and they'll say, instead of paying with your specific proprietary payment token, we will take all of your open source technology and just allow people to pay with E, or allow people to pay with a stable coin or pay with Bitcoin or whatever other asset. And they have an incentive to do so because they can find ways to profit from that by either shorting the token or, having some other interesting profit motives. So we really see that as being an inevitable transition because if you think about it, no one will ever fork a proprietary payment token into a service that already works without that proprietary payment token. It's like entropy. It only goes in one direction. Okay. And one other thing I was wondering about is since your investment is more liquid than it would be if you were a traditional venture fund, how much commitment and help are you giving to the protocols you invest in?

Like, are you committing to any sort of lockup for yourselves, or do you just sell the tokens the second they go on the public market or some portion of them? And how much do you plan to help these teams if your investment is intended more for the short term? The ScoreBet app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking. Nah, no more statistically speaking. want hot takes. I want knee-jerk reactions. That's not really what I do. Is that because you don't have any knees? Or? The score bet. Trusted sports content, seamless sports betting. Download

today. 19 plus Ontario only. If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conixontario.ca. With Amex Platinum, $400 in annual credits for travel and dining means you not only satisfy your travel bug, but your taste buds too. That's the powerful backing of Amex. Conditions apply. Yeah, so we, it sounds counterintuitive, but we can do kind of both at the same time. So there are a lot of teams, right now our portfolio has, I think, five or six assets in it in the liquid portion of our portfolio. Our illiquid investments are, I think we have seven or eight more that are illiquid right now.

But we only have five that are liquid. But there's far more than five credible teams that have a liquid token that does something. that could be valuable or interesting in the future. The fact that we don't own it right now can be a reflection of many things. It can be a reflection of the current market cycle, which is very obvious to the case. It can be a reflection of lack of short-term catalysts. It can also be a reflection of there are so many other better short-term catalysts for other assets. So, right, like the fact that we don't own a token at the current moment does not necessarily reflect our opinion that we don't think the token will accrue value in the long run,

which is there's all these other variables that could be prioritized over that fact. one of the, it's our major sources of Alpha we deliver to our investors, we believe, is being plugged into the ecosystem and having a level of depth of knowledge and understanding that you can't get from just being a surface level player. We make it part of the reason we write so much and publish a most research is to help teams understand the kinds of things we're thinking about and ultimately helping them think through those types of decisions. We help that teams very actively with connections in the space, with recruiting, kind of with everything we really can. And we're happy to do that even if we're not necessarily invested at the current moment because we may want to be invested in the future. And like we want to make sure that we have those, you know, just the depth of knowledge around to make sure we're doing that. Not everything has to be, how does I make money off of this in the next 24 hours?

Like there's real fundamental long term value creation here. And that just takes time. So you don't commit to any sort of lockup, it sounds like. Actually, I wanted to address that specific question. we do not go invest in an illiquid stage and then sell immediately afterwards. We do have internal policies against that. We're not going in, buying in a discount and selling at the ICO. That's not who we are.

That's not who we're ever going to be. For these investments that we're making, we do have a commitment to helping the team, especially the early stage investments that we make. However, if we do purchase a token on the public liquid markets, then we are not subject to a lockup. I see. But then at that point, are you talking with the team? I mean, it sounds like just because you're invested, like maybe you would want to help them,

or is it just more like a short-term play where you're going to buy at that time on the public markets because you think it is smart at that moment, but then, you know, maybe later you might exit without even talking with them? Or how much do you treat it more like venture investing, I guess, is what I'm wondering? I mean, we, like, we will help the teams, even if we don't own the tokens. And like, we do this all the time with lots of the high profile projects around the space, help them with reviewing materials, communications, strategy, economics, wherever we can be helpful. We really strive to be. That's how to earn brand.

That's how we learn, those kinds of things. Just because we don't own a token at the current moment doesn't mean we don't support the project. It just means that there are other priorities in our current. in our current portfolio, or it could just mean we're in a bare market, which actually turns out we're in a bare market right now. So the fact that we don't own a token does not indicate we don't believe in a project. It just indicates we're in a bare market, right? And so it's a kind of oxymoron, but we can both support a project, go out of our way with our time and energy to do so and not own any of the token. And those two things can coexist. Yeah, well, I wanted to ask you

about the downturn? How have you guys been weathering it? I wrote this article last summer about all the new crypto hedge funds popping up and the beginning of it was like, there are sophisticated and unsophisticated people getting into this space. And then the intro ends with, I guess we'll see how many of them survive a downturn. And as we have seen in the news, some of them are already closing up shop. So how have you guys been? What's your strategy been during this time? We have done quite well for the downturn. can't talk about performance numbers publicly because of SEC restrictions on that kind of a thing. But as a hedge fund, we do have the ability to short various assets. And we have made use of that

ability over the past few months. Oh, that's interesting. But is that with projects that you support? No, those are more general beta shorts. So we're not going out and shorting. projects that we do support, especially not only from a just support reason, but also from a logistical reason where it is, while we do have the ability to go and short some things, we cannot go and short everything. You have to actually secure a borrow in order to execute a short. Securing a borrow against a less liquid token is difficult. Typically, once you leave the top five, it becomes extremely expensive or just difficult to do. And how much do you have in asset center management now?

50 and change. So I'm curious, how do you deploy a meaningful amount in small, early stage projects, especially because, I mean, maybe you guys see a lot more interesting projects than I do that are that are in early stage. But sometimes I just look at all these pitches. and I'm like, no, no, no. So I'm curious, how are you meaningfully deploying $50 million in this market right now? Yeah, so our portfolio is two pieces, the liquid portion and the illiquid portion.

Our liquid portion of our portfolio is about 90% of our global assets. So if you say 50 million, that means 45 million is liquid. And no more than 5 million or so will be illiquid. So when we think about the early stage projects, right, our typical check size is between 250K and a million for these kinds of early stage deals. And that reflects the fact that we've got about $5 million to play with right now in the early stage market opportunity. Deploying $5 million into multiple deals is pretty straightforward even in the early

stage of the pre-ICO stuff. So for the remaining 45, that's liquid and deploying 45 across the whole range of liquid assets is a pretty straightforward endeavor. You can deploy $45 million in 24,000. to 48 hours. It doesn't take very long to deploy that much capital in an intelligent way without too much slippage. And how do you measure success? Are you benchmarking against Bitcoin or Ether or the U.S. dollar? The fund is denominating U.S. dollars. So our goal is to deliver investors' returns denominated in U.S. dollars. And internally, we do look at things like Bitcoin,

like Ether, like the whole 10 index in order to have internal benchmarks. Who are your investors and have they changed over time in any fashion? Like are you detecting any trends and who was interested in investing in crypto last summer as opposed to now? Yeah, there's definitely a shift in the market. So, I mean, when we got started, most of our investors were, you know, angel investors were invest in technology companies. And then a lot of like the early crypto whales. That was our primary capital base to get started. Over the last few months, we've started to get a lot more inbound interest from venture capital funds,

from general partners who run hedge funds, like traditional public long, short equity hedge funds. So lots of those guys are investors with us now, guys and gals. And we're now starting to see a lot more interest from family offices and from endowments and foundations. That pool is the most progressive 1% of those pools is looking now actively. Some of them have already deployed. A lot of them are saying, okay, crypto is real.

We need to figure out our strategy. that process of figuring out the strategy for a lot of these organizations will take three to six months. So a lot of them are figuring that out now. Some of them are starting to deploy. And so the capital base of our fund is changing. And that's a reflection of the capital base of the market as a whole changing. Great. We're going to discuss the competition shaping up amongst smart contract platforms, Bitcoin, governance, and more. But first I'd like to take a quick break to tell you about our fabulous sponsors, starting with Preachate. Today, thanks to Samantha Bell, Appreciate is recognizing an Australian,

Ross Hill. Ross is an early advocate and advisor on blockchain tech, whose thoughtful knowledge sharing has helped many get involved with crypto. He has offered relevant links and ideas, answered questions,

and improved people's lives. Kudos to you for sharing knowledge, Ross. Appreciate welcomes unchained listeners to nominate a friend, just as Samantha nominated Ross to get props on a future episode of Unchained. Just go to appreciate.org slash recognize.

Looking for a new job? Appreciate is hiring a senior product lead, iOS developers, and UX designers. If you believe in design thinking, love the idea of building the most valuable relationships on earth and are located in Dallas or San Francisco. Just join Appreciate. Learn more at appreciate.org slash careers. Cryptocurrency is vibrant and exciting, but it's not without its share of bad actors. Exchanges and personal accounts can get hacked.

Computers can be infected with malware. Left unprotected? your digital wealth is up for grabs. Don't let yourself be a victim. Keep Key is the safest and simplest way to protect your Bitcoin, ether, light coin, and other tokenized assets. This hardware wallet is a separate device that you control. Brought to you by the pioneering team at Shapeshift.

KeepKee works with a wallet software on your computer to manage your private keys and transactions. Your device is pin protected, which renders it useless even if it falls into the wrong hands. Its large display lets you carefully view and approve every transaction. And if your Keep Key is ever lost or stolen, you can safely recover your device without compromising its private keys. The bottom line, you'll sleep easier, knowing that your digital wealth is safe and secure. Visit Keepkey.com to order yours today. Works on PC, Mac, Linux,

and Android. BitWise is the creator of the world's first cryptocurrency index fund, the BitWise Hold 10. The fund holds the top 10 cryptocurrencies by five-year diluted market cap, rebalt. is monthly and takes care of secure storage and taxes. It's an easy, secure way for long-term investors to get diversified exposure. Bitwise is backed by Kossela Ventures, General Catalyst, blockchain capital, Naval Ravacant, and several others. They're a trusted partner to individual investors, wealth managers, family offices, and large institutions who are navigating the crypto space. The fund has several hundred LPs and is currently accepting accredited investors. To learn more about the Bitwise cryptocurrency index fund or download research, visit www.w.com

slash unchained. A big competition is taking shape between smart contract platforms such as Ethereum, Eos, DFINITY, TASOS, Cardano, and others. How do you think this race will be decided? And do you think there's room for just one or multiple? So the smart contract platform space is the area that I find most interesting in all of crypto. That's where I spend most of my intellectual energy in time. So if you think about these smart contract platforms, like there's features like privacy, for example, like ZK Snarks or like contentist protocols even,

like those are fundamentally copyable features between these systems. But there are some systems, like some decisions that you make in design of these systems that like you can't have it both ways. So they're just fundamental compromises and tradeoffs. We've identified somewhere between 8 and 10, variables kind of on this spectrum of like just fundamental design decisions where there's tradeoffs in these principles. So these would include things like latency, things like throughput, things like degrees of

privacy, things like governance, tightly coupled versus loosely governance, expressivity of programmability, formal verification ability. These are some of those kind of key variables. When we look at smart contract platforms, we basically ask ourselves like, okay, each of these team has a hypothesis given this n-dimensional set of trade-offs. Given this n-dimensional trade-off space, each of these teams is putting forward a hypothesis of why they think the set of trade-offs they're making is going to accrue some local maximum of value.

We believe there will be multiple local maxima value. Some of those local maxima will be larger than others. Right now, basically, kind of sort of only one local maxima has really been explored in a meaningful way. And that's the local maxima that both Bitcoin and Ethereum occupants. that's hyper-focused on decentralization, decentralization, decentralization, a block production specifically

at the expensive scalability. And there are other teams who have fundamentally different views at every layer around flexibility and scalability and security and all kinds of other things. And these teams are all exploring as other variables.

We're super excited about kind of seeing Ethereum is the only game in town right now and we're super excited to see other people come to market with a fundamentally different worldview, and we expect there will be multiple winners. Interesting. And just so I understand how you're defining local maxima, that's like an area of priority? Specifically referring to capturing value, right? So you're getting this n-dimensional tradeout space

call it. There's eight, maybe ten variables, depending on how you count. And these variables are like, there's pushes and pulls between them on different kinds of ways, depending on the different kinds of technologies used, and depending on just your political or ideological beliefs about how these systems should be designed and what they should prioritize. So given that, right, you've got all these variables. There's not a great way to visualize this in three-dimensional space. So I call it n-dimensional space. But like given how you prioritize those different variables, we believe that like at certain

sets of tradeoffs between those variables, there will be some local accrual of value, sustainable value. Let me give you some examples that might make this a bit easier to wrap your mind around. I think this is an extremely powerful framework that can help. People really evaluate various smart contract platforms as well as other projects in the space. And this kind of links back to what we talked about earlier, which is that open source changes everything about how competition works in crypto. And going back to that idea of open source means that your features don't matter. You have no IP.

Any features that you come up with will be copied by your competitors. So a really easy example of that is Ethereum had come up with this idea for the Ethereum name service. The Ethereum name service is kind of like the DNS or domain name service where you don't type IP addresses to go to a website. You type in a human readable name. Well, if there a name service was intended to provide that same feature where instead of sending funds to a specific Ethereum address, you would send it to a human readable version.

And this is a really interesting feature, but EOS also has that same feature. And other competing platforms like DFINITY or TASO either have that feature or will adopt that feature. That's not going to differentiate your platform. What will differentiate your platform are things that fundamentally cannot be easily changed. So while Ethereum is prioritizing decentralization of block production over scalability, EOS is actually prioritizing scalability over decentralization of block production. And along just this one variable, or this one range from completely centralized and extremely scalable to completely decentralized and very difficult to scale, what Kyle is saying in terms of local maxima is we can see along, if we just simplify to this one dimension, that there will be value that's accruing on the totally decentralized end. And that's the Bitcoin or the Monero end or the Ethereum end where you really need censorship or

as a core feature. And then there is also going to be value accruing at other points along this spectrum. And using EOS as an example, EOS's idea is that it's decentralized enough. It's platform grade censorship resistant, not sovereign grade, sensitive system and since it's decentralized enough, it means that it's somewhere in the middle on this dimension that I'm talking about. And so it could capture value there too. And now if we expand that.

model out to not just be one dimension, but end dimensional space, like I was mentioning, then you can see there will be different places in that end dimensional space that actually end up capturing value. And I think comparing Ethereum to EOS is an easier way to kind of internalize that idea. And just so I'm clear, I don't know as much about EOS, but as far as I understand, there's only something like 21 block producers? That's correct. Yes, that's correct. I guess like in this moment in time when crypto is so small, I could see how that might have an appeal. But I do think at a certain point, if crypto gets big enough, it could actually pose a threat to nation states. And so maybe in that environment, that kind of blockchain might not have as much appeal.

So what do you think of that? Yeah, that's completely fair. And actually, that is the goal of diversifying your investments across these different possible value accrual local maxima in this end-dimensional trade-off space is, well, some things are going to need to be fully decentralized. And if that's actually what ends up capturing most of the value, we as fund managers need to look at the world probabilistically. And so we assign some probability to that happening or that's that version of the world existing in the future. Or there's a version of the world where, you know, actually we care less about sovereign resistance and we care more about platform grade censorship resistance. Where having a neutral back end that a bunch of decentralized applications can build on is valuable. And especially for certain use cases like tokenized securities, you do not need censorship.

resistant tokenized securities because at the end of the day, securities are dependent on the legal system in the jurisdiction in which they were issued. They're worthless otherwise. So having censorship resistant tokenized securities is kind of an oxymoron. You don't need it. So there are other places, like other functions that something like an EOS can serve that Bitcoin can't or Ethereum is like the decentralization of Ethereum is not. necessary. And are there particular areas within those local maxima that you think will generate more value than others? Yeah. So, I mean, like, the only thing we can say with, I think, a high degree of confidence based on empirical data is that maximizing there will be a local maxima value

if the, if you try to just decentralize that block production. And the basic idea is, right, like, no matter what happens, the government can't stop it. And like, they can't inflate, you know, play with the money supply. They can't sense of transactions, those kinds of things. So there's real value at optimizing at that extreme, and Bitcoin and Ethereum tend to do that. It seems very obvious to me that as a result of that, like these guys, they're leaving a lot of other opportunities open for innovation. EOS is the easy example here to use. There are a lot of applications that just need a shared open neutral database that is designed to comply with all laws and all jurisdictions. To that end, you're just thinking about the US is a constitution.

that constitution is set and voted on by the block producers. The block producers are voted in by people who own the tokens. So it's basically representative democracy. And every single transaction to be valid in the EOS system, you actually have to take a hash of the constitution and submit that hash of the constitution with your transaction. Otherwise, it will not be valid. And so my point in all this is saying is like, EOS is trying to actually be compliant and supportive of laws around the world.

And there is a tremendous number of applications that that's what they need. If you're running an advertising exchange, like on blockchain, like this is perfect for you. I mean, look at what Facebook is doing with the GPDR right now, right? Like these people are complying with laws and the purpose of them is not to say, hey, screw the government, we're going to do whatever we want, but to actually be able to comply with laws and deliver real world applications for real people that do that. Another very obvious example is gaming. So we've spoken to dozens of teams building games in the space.

And a lot of the teams at first explored Ethereum as the back end. for their games, and they all came to the conclusion that the Ethereum is not workable because they're just throughput issues. You know, guys who build games are used to building systems that process thousands of transactions per second. And so all the game people, especially because they're not totally people who have a background in economics or monetary policy, they look at Ethereum and they're like, this is a child's toy.

You know, they want real systems that they can build real world applications on. And so a lot of teams building games, for example, right now are gravitating towards EFs. So our point is, we're using a three, but I was not to say there's only two options. It's just that that's probably the most stark, yeah, clear visible line between these systems. If you look at Cadena, right, Cadena is one of their cool things. And Cadena is that the smart contracts are intended to human readable. So you can have non-technical business users read a smart contract.

Maybe it turns out there's a massive sector of global commerce where people want to be able to read contracts before signing them and committing to them programmatically and cryptographically. If you think there's some probability that that future vision of the world plays out, then Kedana becomes very interesting. And again, that's just playing on a totally different spectrum, a totally different kind of set of tradeoffs in the design space of these systems. So we're not at this point, it's very premature to like, say, with any degree of confidence where all those local maxima will accrue. It's very obvious that there's a local maxima at maximal decentralization. It's very obvious there's a local maxima at platform grade, platform grade censorship resistance versus sovereign grade censorship resistance. There will be lots of other local maxima, and we are exploring those every day.

And to be really clear to the listeners here, the idea behind this is to give everyone a framework that they can use to evaluate these layer one protocols. We're not recommending any of these investments, and we do update our views. pretty frequently as we get new information. So I want to make sure that listeners know that we're not saying that EOS is better than Ethereum. That's not how I want that to be interpreted. They are choosing different tradeoffs and they will address different markets. But the important thing here is really the framework of how to think about competition between these layer one protocols. I think something that's interesting to me is that I almost want to say that this is a little bit

contradictory of where we started the conversation where you were talking about how the network effect is really going to decide things and that the bigger networks can always adopt the better technologies later on after they get all the users. And then at this point in the conversation, it feels like you're saying that there's going to be a whole bunch of different chains, all with different users who want the chains for different things. Are these actually opposing or do they coexist somehow? Let me reconcile those for you. That's a really good point.

And the way that those two views actually coexist is that we're talking about different things in those two views. When we're talking about it's all about go-to market and everyone will copy everyone else's technology, there we're really talking about features. We're talking about specific user experience. elements or just other types of features that are valuable. But when we're talking about different chains offering different solutions, we're talking about tradeoffs. So no matter what EOS develops and how much of it, Ethereum copies, it's extremely, extremely unlikely that Ethereum will ever copy the delegated proof and stake consensus mechanism of EOS. That's just not

going to happen to them. It's too centralized. It's It's kind of like the light side of the force and the dark side of the force when you talk to people at the Ethereum Foundation. So you're not going to see a system like Ethereum go and choose the different tradeoffs that a competing system like DFINITY or EOS or TAS has chosen, but you will see the copying of features. And when you look at the app layer, build one layer above this level one platform layer, that's where that feature copying. becomes even more cutthroat. And you'll see that same differentiation by choice of tradeoffs, even at that app layer. So this helps us, this understanding of both of these points of view of, you know, how does open source change investing really helps us understand which attributes of a project are

actually truly differentiated or will cause it to be differentiated from its competitors and which we won't. And then that's really informative in our investing decisions. Something else that's interesting to me about this conversation is that I think this is the first time where I haven't heard Kyle be completely all in bullish on Ethereum. Because I had actually previously written this question, noting that Kyle had said that all the developers have left Bitcoin for Ethereum. Well, I don't mean this in a literal sense that the Bitcoin developers have left for Ethereum. just he was talking about developers generally saying that many of them have left Bitcoin for Ethereum.

But I actually wanted to ask him about this because, so Kyle, I just was curious about this contention and I looked at the GitHub repositories for Bitcoin and Ethereum. And in the last 30 days, Bitcoin has had quite a bit more activity, actually, than Ethereum. For instance, it has had 66 active pull requests as opposed to 16 active pull requests on Ethereum. And then there are 48 active issues on Bitcoin as opposed to 18 active issues on Ethereum. So why do you keep saying that all these developers have left Bitcoin for Ethereum? Sorry. So when I say developers have left Bitcoin for Ethereum, what I'm referring to is not core level protocol developers. I think it is correct statement that more developers are currently actively developing the Bitcoin protocol than the Ethereum protocol.

That needs to be caveat by saying that there are multiple Ethereum. implementation is there's really only one Bitcoin implementation. So when you say you're looking at Ethereum, I'm assuming you're looking at Geth, which is the version of Ethereum and Go. But there are multiple other versions, and a lot of those developers are working on only one version. So I would caveat

that one note. But when I say the developers have left Bitcoin for Ethereum, what I really mean are the people building on top of Bitcoin and Ethereum. There's a difference of probably two orders of magnitude and perhaps even three orders of magnitude difference between the number of people building things on top of Ethereum versus the number

people building things on top of Bitcoin. And how are you judging that? How are you figuring that out? I mean, I don't have a perfect, precise measurement I can look at. I can just tell you, like, based on collectively all of the, like, various data points I see. So this would be obviously pictures that come into us through our websites. This would be going to meetups. This would be just looking at, like, listening to the communities on Reddit, on Twitter, across all of these places collectively.

I mean, Bitcoin today is basically there's a couple of core level innovations going on. like lightning is being developed, like they're working on some novel, like, you know, shore signatures and a couple of other signature aggregation things. But like, like, there's just not that much changing in Bitcoin. And then if you look at Ethereum, the number and pace of things changing both at the protocol layer and on top of the protocol, it was just massive difference. And I know you're critical of the Lightning Network on Bitcoin. Why?

So the reason I'm critical of Lightning is like it re-centralizes Bitcoin. So if you look at the diagrams today of Lightning Network, look at the network topology of who has open channels with other people. It looks like a hub and spoke model today. And this is at like basically, you know, alpha scale or maybe beta scale of usage. There is basically no viable game plan to get Lightning to actually be a decentralized network in a meaningful way. Or excuse me, a distributed network in a meaningful way. It's going to be this hub and smoke model.

And so if you as a user are connected to a single hub and that hub is your single point of access to connect commerce or other people. The whole point of these systems is to not be decentralized and to not have a single party who can censor your transactions. And I just fundamentally like lightning violates that core principle in a way that I think doesn't, is in a long term corrosive to the vision for Bitcoin. I think if you want to solve scalability, you know, I'm not saying all there two solutions are bad.

I'm saying giving up on layer one scalability for layer two scalability. I find that to be the ultimate capitulation of not being willing to innovate and try to solve hard computer science problems at layer one. And one other thing I wanted to ask you about your views on Bitcoin is that I know you think that Bitcoin has largely failed because of debacles in its governance. But at the same time, you also have tweeted that focusing on governance is a poor use of resources. So why, if you think that governance problems can cause a network to fail, why do you think it's not that important to focus on it? Yeah, so I think these should be taken views at different points in time for the different levels of maturity of the projects I'm referring to. In the case of Bitcoin, my belief of the failure of the Bitcoin's governance is that the team, my view that Bitcoin is failing is a view of basically evolve or die. And Bitcoin basically refuses to evolve.

There's plenty of people who will say that's false and look at all this innovation, yada, yada. I'm not saying they're not doing anything. I'm just saying if you look at the level of technical ambition of Bitcoin versus basically any other serious Ler1 protocol, it's not really in the same ballpark. Other teams are trying to solve fundamental computer science problems like solving the scalability trilemma. It's kind of the very obvious example here. But there are many others. And Bitcoin has literally given up on that and just said, no, we're just going to. to do layer two and centralize everything on these hubs for Lightning Network.

And I just think I think that's the ultimate wrong view. The implicit governance of Bitcoin is such that the Bitcoin core development team in practice controls the roadmap of the system. And it took even the miners after fighting for two years to finally develop a way to fork off and go to Bitcoin cash. My view of governance in the case of Bitcoin is that you just have this, like people say it's decentralized. And I mean, you could argue mine decentralization or not is a separate question.

but there's no question that the Bitcoin Core Development Group, which is a very small number of people. I think it's four or five people who control the actually merging commits into the GitHub. Those people control the Bitcoin. And I believe their views on how to build the future of money, I believe are fundamentally incorrect. And that's why I said I believe Bitcoin is failing because it just doesn't make sense to me, that the future is digital gold and not digital cash that can be used for all kinds of other things. And, Tushar, I know that you somewhat disagree with Kyle's views here. What are your views on Bitcoin?

Bitcoin is a interesting discussion point within the firm. And actually, this is one of the things that we pride ourselves as a firm on, is being able to have productive disagreements and discussions around those. I find Lightning Network to be far more compelling than Kyle does for a couple reasons. One is I do see that there is real value to complete, decentralization and the ability to run a full node for anyone who wants to. I don't know that this is definitely the right answer. So I can't say with complete conviction that, yes, one megabyte blocks forever. But I do think that if we can solve scalability with a second layer solution,

then we have solved the scalability trotelima between layer one and layer two, where you do have decentralized block production. You do have a secure network and you do have scalability. So it's going to be interesting to see how the Lightning Network's evolution actually plays out. There are some really difficult technical challenges with getting a global scale Lightning Network implementation, some of which are just not solved yet, such as how do you route money through the system. but there is a real chance that this is a plausible solution. And as fund managers, their job is to look at the world probabilistically, right? And there's a real probability that lightning works in the way that's been advertised.

Yeah. And one other thing is that Bitcoin has that first mover advantage and the brand name recognition, which goes back to kind of that earlier thesis point that you guys were talking about with, you know, looking for a coin that has distribution and network effects. But I actually don't want to belabor this because I want to move on and ask you something else. Tashar, you tweeted that public pre-product ICOs pose too much regulatory, pose too much risk from a regulatory perspective. But at the same time, you also mentioned earlier that you have illiquid tokens. So how are you managing regulatory risk right now?

We are really cognizant of the regulatory risk. For us, investing in pre-product investments, we are investing in those as an credit investor effectively and with all of the proper exemptions filed with the SEC. So we do not want to invest in anything that we think has a real chance of being an unregistered securities offering. Being compliant is one of our core values. We talked about stable coins in the beginning of this conversation and talked about how they can fill perhaps a need right now in the space, which has to do with the volatility of pricing.

And I know a lot of people think that that maybe has been part of the reason that crypto hasn't gotten adoption is because the prices don't remain stable. So people don't want to spend an asset that could go up. But at the same time, I once was talking with Kyle. And this was after the news about base coin, one of the stable coins came out. And it's actually, I mean, there's different ways to structure stable coin for listeners who didn't listen to the episode with Maker Dow and Philip Rosdale who did Second Life, but is now doing a project called High Fidelity. We talked about the different challenges in keeping a stable coin stable in the different ways that some of these projects are going about it. and base coin is doing it in a way where they're not actually backing up their coin with collateral.

But I wasn't sure, Kyle, if your bearish stance had to do with just that way of setting up a stable coin, or if you think all stable coins are not necessary and will go up in flames. My sense is that on a long enough time scale, there probably won't be a decentralized open stablecoin, at least not one that's an algorithm central bank. I think that's some confidence in that, but again, like low overall conviction. We today at Multicoin don't have any stable coin investments. We have evaluated lots of them and continue to evaluate them, despite the fact that I think in the long run that they probably won't work, at least not ones in the scenery shares model of the world, and that's kind of base coin is the quintessential example. That doesn't mean we don't want to invest in them. A, to learn, B, because we can generate

financial return before that timescale. And so we're super interested in the space. I think it's one of the most compelling opportunities in crypto. And it's okay to invest in things that you think have long term like challenges, but like as long as you're cognizant of those challenges and price the risk accordingly, then that's totally fine. last question for you guys i know you have written a ton and your twitter feeds and blog posts are seriously just like candy for anybody who's gone down the crypto rabbit hole they're they're awesome i highly recommend that readers check them out but i just want to ask you before we go what for each of you what is your most controversial position in the crypto space what is my most

i mean i'll say bitcoin is failing that one seems to that one seems the people that one seems the make people unhappy. Okay, Tishar, what about you? Let's see. I would say, look, I am amongst, at least within multi-coin, I am the least bullish on stable coins. I do not think that stable coins are going to work. I don't think they're necessary as a large-scale project.

And the reason is, I think that we will see central banks issue fiat on the blockchain. and that's going to eat the market for stable coins from the bottom up. It's an inferior product from a lot of economic perspectives where it is still, you know, just the up currency. But it'll also be eaten from the top down as the various assets like Bitcoin or ether become much larger and therefore become less volatile. So I see stable coins as being eaten from the bottom up and from the top down. I don't know if that's that controversial in the broader crypto world, but it's definitely a controversial position within the firm.

Yeah, we'll see. I asked Rune Christensen of Maker Dow about this, and he was like, because I said, oh, the second that a central bank issues a currency on the blockchain, then aren't you out of business? And he was like, no, no, no, because this is decentralized and that's centralized. So we'll see. But if you're pegging to something that centralized, like, so if you peg your state, you. table coin to the U.S. dollar, then you don't have your own monetary policy. You are just using the Federal Reserve's monetary policy. Yeah, yeah, yeah, but I don't think they're, I don't think they're, fixed. Yeah, I don't think they're fixed on that forever. He was saying it could, they could change it to, I forget, it's CPI, something like, it's basically the cost of a basket of goods. Yeah. Yeah, the SDR. Well, once again, that's still centralized, where what defines the, um, CPI is the federal government.

The United States federal government defines CPI. And what defines the SDR is it's a combination of currencies like the U.S. dollar, the pound, the euro, et cetera. So you're still coming back to that centralization. And if you try and peg it directly to a basket of goods without using the CPI, now you're subject to the Oracle problem of how do you determine the price of goods? They differ between different countries and you're trying to solve this global problem. And there's just been no credible solution presented yet.

Yeah, yeah, I agree. I mean, there's a lot of questions there. But I do, I frankly find all the stable coin project super interesting, if only because, yes, there's so many ways you could imagine that they would fail. Well, it's been so great having you both on the show. Where can people learn more about multi-coin? So yeah, you guys should definitely follow us on Twitter, as Laura mentioned. We share our very colorful opinions rather frequently. I'm on Twitter at Kyle Samani, K-Y-L-E, S-A-N-I. And then you should also check out our website, which is a website is multi-coin.com. We publish all of our thoughts and research there. We try and publish things every week or two. My Twitter is T-S-R-J-J-N underscore.

T-R-J-J-A-N-U-S-T-R-G-A-N underscore. Great. Well, thanks both of you for coming on Unchained. Thanks, Laura. Thank you, Laura. Thanks so much for joining us today. To learn more about Kyle and Tashar, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin, with help from Elaine Zelvie, Fractual, According, Jenny Josephson and Daniel Nuss. Thanks for listening.

Thank you.