Unchained - Will Every Piece of Media Enter the Internet as an NFT? Variant Fund Says Yes - Ep.317

Starting point is 00:00:00 Hi, all, I have two really important announcements today. First, many of you have asked me how you can get a signed copy of the book. Here's how. First, pre-order the book, which you can do at Bitley-Slaught Clipopians. Second, make a social media post about the book that includes the pre-order link, Bitley slash Cryptopians, or you can link to the book on any bookseller of your choice. Third, send a copy of your receipt to hello at unchainedpodcast.com with a subject line signed bookplate. In the email, include a PDF of your receipt, a screenshot and a link to your social media post, and the address to which you'd like me to send the bookplate, plus the name of who you'd like me to dedicate the bookplate to. If you show a pre-order receipt that shows you bought more than one format of the book, such as an audiobook as well as the hardcover, you can get two signed book plates. Finally, as you'll hear it in the next announcement, I am also launching a premium subscription of my Bulletin newsletter.

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Starting point is 00:01:33 so we've decided to make the group a Discord. In addition, subscribers will get access to interviews with up-and-coming projects, which will be a more casual, shorter version of Unchained, consisting of the pre-interviews that I've long done for the show, but never before released. Subscribers will also have a say in which guests and topics are covered on Unchained itself. You'll also get to weigh in on what questions are asked, and we'll have access to subscriber-only chats with guests.

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Starting point is 00:03:04 can receive a po-up as well. All right. Thanks for listening to that long announcement, and now here is the show. Hi, everyone. Welcome to Unchained. You're a no-hype resource for all things crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the February 8th, 2022 episode of Unchained. This episode of Unchained is brought to you by Beefy Finance, the multi-chain yield optimizer.

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Starting point is 00:04:52 Today's guests are Lee Jen and Jesse Walden, co-founders and general partners at Variant Fund. Welcome, Lee and Jesse. Thanks so much for having us, Laura. It's great to be here. Yeah, thanks for having us. Variant's tagline is a first check crypto fund investing in the ownership economy.

Starting point is 00:05:10 Can you each talk about your background before crypto and how that led you to occupy this particular niche in crypto. And why do we start with Lee? Sure. So I guess where to begin? The high level is that I've been a consumer investor for a number of years. I started in consumer investing in 2016.

Starting point is 00:05:35 Before that, I used to be an operator working as a product manager in Silicon Valley. But essentially since 2016, I've been full-time in venture, investing in consumer platforms, marketplaces, social networks, etc. So that's the high level. And the through line of that entire experience has been really focusing on using technology as a tool to increase access and opportunity for people. So when I was working on marketplace investing, I think marketplaces are this really powerful democratizing force for work and dollars. Like, it doesn't matter where you're from or who you know, as long as you can join one of these platforms, you can connect to end consumers. And so that's been really the theme of my investing over the

Starting point is 00:06:24 past few years. I started my investing journey at A16C, which is where Jesse and I overlapped for a number of years. And that's also where I started investing against the thesis of the passion economy, which is the idea that new marketplaces and platforms would arise that would help people earn income independently on the internet. And as I invested in a lot of those businesses, including substack and Patreon and many others, I realized that there was a further step that we could go in terms of enabling that vision of allowing people to earn income freely on the internet. And that was through actual user ownership of the platforms themselves. So naturally, I began to invest more in Web3 platforms.

Starting point is 00:07:11 I found myself crossing paths a lot with Jesse when we were investing independently throughout 2020. We co-led a number of deals when I started a Tellier Ventures and he had started Variant and then ultimately decided that our two theses of the passion economy and the ownership economy were really two sides of the same coin and that by joining forces we could be a stronger team for really backing these types of platforms that were giving people an opportunity to achieve financial freedom on the internet. And Jesse, what about your background? Sure, yeah. So, yeah, I got into investing by way of building a startup in this space back in 2014. I co-founded a

Starting point is 00:08:00 project called Media Chain Labs. And what we were doing back then was trying to do what Bitcoin had done for digital assets, which is make them ownable independent of any third party, we wanted to do the same for a different kind of digital asset. Instead of a financial asset, we were focused on digital media assets like images, videos, and songs.

Starting point is 00:08:21 And so today, those ideas have been realized by NFTs. Back then, Ethereum didn't exist, the idea that you could easily create tokens that represent all kinds of different assets, including media, was not a widely distributed idea, but it was one we were exploring about seven years too early.

Starting point is 00:08:37 And that was sort of the era of enterprise blockchains, or blockchain, not Bitcoin, was sort of the narrative at the time. It's not the narrative that we believed we were building for developers like the developers who are working on NFTs today. But all the interest was coming from big companies. One of them was Spotify. They ended up acquiring media chain labs. And I led blockchain R&D there briefly before joining Andrews and Horowitz. Whereas we mentioned, we overlapped. I was on the crypto team and helped to launch the first crypto fund there.

Starting point is 00:09:05 And at that time, there was very little overlap between the crypto and consumer team because 2018, really until 2020, most of what was happening in crypto was developer facing. It was sort of an infrastructure buildout phase. And so I was focused on that and all similarly focused on a developer platform with my startup. But that sort of afforded me the privilege to sort of understand what it is that developers were doing in the space, sort of nights and weekends. And what I started to sort of zero in on was the fact that these developers were building networks that they actually owned in exchange for their contributions. And of course, Bitcoin and Ethereum are the best examples of this where they are multi-billion dollar networks built by developers and technologists who contributed to the code base and ran that code on machines all over the world.

Starting point is 00:09:55 And in return, earned the network's native asset, a Bitcoin or an Ethereum for those contributions. And, you know, Chris Dixon, who is my partner in Andreessen, has this great saying that what developers and technologists do nights and weekends is what the rest of us will do in 10 years. And so I started to, you know, play out that scenario where, you know, what does it look like for consumers to own and operate the platforms that they use every day? And that was the spark for the ownership economy thesis that we mentioned and that we invest against here at Bariant. And so during that period where you guys were kind of focused on different areas, but then you gradually began to realize you were working kind of on different sides of the same coin. Like, tell me a little bit more about that process,

Starting point is 00:10:39 about how you realize that. Like, what were some of the either like key investments that made you realize that or like, how did that transition come about? Yeah, I can speak to it from my perspective. I think it's very interesting because I've had a number of conversations with lots of people about how they got into crypto. And I think the common theme is that there's no like there's no singular aha moment. Instead, it's a number of different realizations and introspection over probably like a number of different years that brings people into crypto. And for me, it was no different where, as I mentioned, ever since 2016 and basically for my entire career, I've been focused on technology as a tool to expand access. And I was

Starting point is 00:11:26 approaching that from lots of different angles. Initially, when I started investing in 2016, the trend at the time was to build Uber for X type of marketplaces, like Uber for grocery delivery, Uber for dry cleaning. There was a whole wave of new marketplaces that were trying to foster new jobs, but in an on-demand, very accessible, easy to use from the consumer side perspective. And so over the years, I had a number of realizations that gradually led me to where I am today. I would say that the thesis of the passion economy, as mentioned, was really rooted in how do we enable people to not just do really wrote task-based gig work, but to actually allow themselves to express their individuality, leverage their creative skills, leverage their

Starting point is 00:12:19 intellect and education in order to make money on the internet. And I wasn't prescriptive about the underlying technology that was needed to do that. And so as I started investing against that thesis, I started to see Web3 companies that were using crypto to enable that vision. So for instance, one of the first deals that we co-led together was actually Mirror, which is the crypto-based creative platform that enables people to publish on the internet and also do crowdfunding and a number of other interesting monetization mechanisms. And then I just continue to do more along those lines. I invested in foundation and then syndicate protocol and a number of other Web3 projects that were helping to realize the vision and the mission that I had. And I gradually,

Starting point is 00:13:17 had this realization that this is actually a very dynamic area of technology where people were not just earning income, but they were actually earning ownership in the underlying platforms. And that was so much more powerful for each of the participants than the former case where they were just earning income. I would say another big moment in my journey was a course that I taught in early 2020. I developed, designed and taught this cohort-based course for social media creators to help them learn how to become angel investors. I had this theory that some of the best investors of our generation were going to be content creators who had big audiences online and could represent built-in distribution for the startups that they were backing. And I also knew that these creators

Starting point is 00:14:09 contributed a ton of the value to these companies, yet we're seeing very little of it in return because they weren't owners of the actual company. And so I wanted to bridge that gap and bring them into my network, teach them how to invest, teach them what to look for, you know, how to parse consumer metrics and all of that. And the course was such an eye-opening experience for me because I realized that most of these creators were actually not accredited investors. Even though they had big social media followings, their financial status actually lagged behind their social capital, which was really interesting. They struggled to translate their social capital into financial capital. So a lot of them were not accredited and couldn't actually legally invest in these businesses.

Starting point is 00:14:57 And then if they were accredited, they were investing maybe $1,000, $2,000, something really small. and not getting as much ownership as I felt was fair in these platforms. They had to do an outlay of capital that they were really short on in order to become investors at all. So I felt like that dynamic was just inherently quite broken. And I felt like there were all these bottlenecks to them being able to participate in the ownership of these platforms. And so that naturally then led me to explore, well, what are the other ways that we can actually make creators and participants of these platforms owners? And obviously, tokens represent one such tool. And when you say that their social capital was far ahead of their financial capital, was that because of the platforms that like the platforms weren't compensating them enough?

Starting point is 00:15:57 Or like what was the issue there? Yeah, it was a mix of everything. So I would say like the status quo on a lot of these social media platforms is that the platforms don't compensate the creators directly. YouTube might be the only one that does any sort of revenue sharing with its creators. The other platforms, the dominant model as a creator is really to go outside of the platform and to seek revenue yourself, whether that's from brands or sponsors or from your fans directly, like setting up a Patreon. Patreon page. In most cases, these creators weren't being paid from the platforms. I would say that the second issue is that today, like our accredited investor regulations are really predicated on stability of income. And so a lot of these creators, they had shot to fame relatively quickly and they were earning a lot in the moment, but they didn't have necessarily two years of history of earnings. At that point in time, TikTok had been around in the U.S. for maybe two years total. And so a lot of these creators who are really famous just didn't have the history of earnings

Starting point is 00:17:10 that is needed in order to be accredited. Wow. And Jesse, do you want to talk a little bit also about, like, well, I have to just call out a tweet that you tweeted that I found fascinating, which was you said, music is the most criminally undervalued and under monetized media type relative to its consumption, which definitely seemed very spot on. And I wondered if you could talk a little bit about the problems that you saw in the music industry and how you think that the ownership economy slash Web3 can solve them. Sure.

Starting point is 00:17:46 Well, yeah, so the part I didn't mention about my background at the outset is before I got started in crypto, but as a founder, I was working in the music. industry as an artist manager. And I, so I was a founder of this management company. It was called Cool Managers. We used to wrap artists like Solange Nol's, Beyonce's sister, Blood Orange, Medical Clouds. And the goal of that management company was to help those artists use technology platforms, which were emerging around the time. This was sort of like, you know, 2010 or so. So Instagram and, you know, Facebook were sort of just, well, Instagram was just coming on the scene at that point. The goal was to help the artists use those platforms to reach their fans directly and run their business independent of sort of the major label infrastructure that was more traditionally leveraged by musicians.

Starting point is 00:18:37 And so that whole experience was illuminating because it on the one hand had a lot of promise, right? It seemed like we would get out from under the thumb of the major labels. There's three major labels. They determine how prior to the internet, determined how music got distributed, how it was monetized, what the artist deals looked like. and artists didn't have a lot of choice. So the promise was the platforms were going to disintermediate that, and they did to a large degree. But they also became the new intermediaries,

Starting point is 00:19:06 and to the points Lee was just speaking to, they became the sort of blockers for artists to reach their audience, monetize, and it was around the same time that I first learned about Bitcoin. I had no background in finance. And so the idea that there was this, you know, digital store of value, this financial asset was, was cool to me as a technologist, but I wasn't that interested in the sort of global macro implications of that at the time. What was interesting to me was that Bitcoin as a protocol was very similar to a lot of peer-to-peer protocols that came before it, like BitTorrent and, you know, FTP. And, you know, the way I got into music in the first place is through piracy. As a teenager in the early 2000s, I was using those peer-to-peer protocols to pirate all the world's music.

Starting point is 00:19:58 And that's how I became such a huge music fan in the first place. And so when I read the Bitcoin white paper and realized this is very similar to BitToran in a lot of ways, it's a peer-to-peer protocol. It immediately clicked that there was one thing that was different about it and that was really important. And that was Bitcoin as a protocol has this identity and attribution system built into it, such that you know that Laura's Bitcoin is, in fact, Laura's, and when she sends me one, I have one more and she has one less. And that kind of attribution system was fundamentally missing from BitTorrent, where you didn't know who created any of the files in the network.

Starting point is 00:20:37 You were just downloading stuff that was out there. There was no identity for any of the participants, no means to communicate with other participants and protocol. And Bitcoin changed that. You didn't know their real name, but you know. knew who's Bitcoin belong to whom. And I thought, cool, what if you could take that primitive and apply it to a different kind of asset, apply it to a digital media asset? You could know who the creator was. And then that creator could monetize their work directly without having

Starting point is 00:21:06 to depend on the platform to intermediate that relationship. So that was sort of the straight line from artist management to getting involved in crypto world. And it was the spark for my startup. And then that idea just started to snowball. I started to realize we're all creators online. Everyone who posts content to social media is creating something of value to the platform. It's not just musicians and artists in the traditional sense. We're all creators. But there's never been a way for everyone with an internet connection to participate in the value they're creating for these platforms.

Starting point is 00:21:42 And that's to do with a lot of the reasons we touched on, but also the fact that, you know, The concepts of employee stock options, for example, which is one way that ownership of these platforms is distributed to contributors, those stock options are limited to people who can work for the company based in the U.S. Who have the means to parse the legal documents and then sort of receive those shares and then later, execute them on the stock exchange. It's a very cumbersome system. It's very costly to maintain. And it doesn't scale to everyone on the Internet.

Starting point is 00:22:17 So as I got further and further in as a crypto world, I realized tokens are this internet-native way of distributing value. It's akin to the way the internet protocol itself turned all the world's information into packets. Tokens are a way to turn all the world's value into an internet-native vehicle that can move just like packets instantly to anyone, anywhere in the world. And it's starting to click for me, this is how we distribute the ownership value of these platforms to anyone with an internet connection, who's able to participate. And that was sort of the spark for our thesis and sort of, you know, my motivation in the space. And it's very much aligned with, you know, where I started my professional career, which is trying to help creators capture more of the value that they create. So we'll definitely talk more about how these different crypto networks enable these user owners.

Starting point is 00:23:08 But let's also first just touch on NFTs, which to my mind, and you can, you know, agree or disagree, are maybe the first building block of this ownership economy. And last year, obviously, was kind of the first full year, I guess I would say, of like real traction with NFTs. And actually, so at the time that we're recording, the month of January hasn't quite finished yet. So I'm not sure where we'll end up. But already, it looks to me like OpenC is going to surpass $6 billion in trading, which is by far its highest volume month ever. So let's just talk a little bit about like where you think NFTs are going and then what stage of the cycle we are right now in their development.

Starting point is 00:23:53 Sure. I'll start with the second question, which is, you know, I think we're very, very early in where this is going. And that's because I believe, and I published an essay about this in early 2021, I believe NFTs are going to be this sort of default port of entry for every single piece of media on the internet. it's just it's it's it's the natural tendency of what this technology wants which is you know NFT is a metaphor I've used to describe what they are in very simple terms is it's sort of like taking a file and uploading it to the blockchain that's that's technically incorrect but it's a good sort of metaphor to just you know talk about abstractly what we're doing by uploading a file to the blockchain you make it sort of tamper proof and you make it ownable like just like you can own a bitconer own an Ethereum, you can own a non-fungible token, an NFT, that corresponds to, you know,

Starting point is 00:24:48 any kind of file, any piece of media that you want attributed and ownable. And the benefit of doing this is you can make money from selling it, selling ownership, just like you can make money from selling, you know, personal item or a house or any piece of property that you own in the physical world. So, you know, that's what's pulling creators towards NFTs is historically they haven't been able to do that. You can't sell, you know, a JPEG on Facebook. But now you can, you can monetize your media directly by selling it to a fan. And it's more than just sort of, you know, patronage, which is something that's kind of familiar in Web 2. It's, it's a model that I call patronage

Starting point is 00:25:28 plus, which is, you know, a fan of your work can support you by buying it from you. But they, they too can also benefit from the possible appreciation of value of that work by reselling in the future. And that's a function of, you know, a property rights system that is internet native. And it's a function of the traditional art market too, right? If you have property rights, collector can buy an artist's work whom they like. And if that artist goes on to become world famous, that collector can resell it at a profit. And the possibility of being able to profit from your work is a really great incentive to become a patron in the first place. So my view is, you know, that's another reason NFTs, you know, will become a port of entry because the

Starting point is 00:26:14 collector is the buy side of the market. It's better for them too. And thirdly, it's, it's better for developers than legacy models for an important reason. For example, if you, if you were a developer and you built on top of sort of legacy social media platform like Facebook or Instagram, you know, on top of their APIs and you built something of value, there was a very good chance that Facebook would say, wait a minute, you can't capture the value. the thing that you made that's awesome. We need to capture it and we're going to shut off your API access. We can do that because we're Facebook.

Starting point is 00:26:45 But the thing about these files on the blockchain is nobody can shut off the blockchain. So developers can continue to build new experiences around this media that's getting uploaded to the chain. I like to think of it as sort of like a universal media library. That's what we used to call the startup I was building media chain. Our goal was to build a universal media library where all the world's media would be openly accessible for anyone. to consume, just like it is in Web 2, you can find any image and any song out there on

Starting point is 00:27:14 the internet. But critically, developers could build on top of this media library and sort of extend it, create new experiences for us to consume media, to remix it. And nobody would be able to stop them from doing it just like no one can turn off the Bitcoin or Ethereum network. So for all those reasons that creators, collectors, developers can all sort of make more money and innovate permissionlessly in this new environment, I think, you know, NFTs will like become the port of entry for every single piece of media on the internet. So that's where we're going. And I should, the last thing I'll say is, you know, I've been talking about media in a very sort of traditional way, images, video, songs.

Starting point is 00:28:01 I think there's also going to be sort of another dimension to this, which is these aren't just images, video, songs. They're programmable assets. So they're more than just the media itself. You can program them to do things like share revenue that is between two creators that collaborate that can be programmed into the asset itself. You can program a piece of artwork that's responsive to whom has collected it because it can be aware of that.

Starting point is 00:28:26 And so I think there will also be sort of net new media types created on this new platform or the medium is sort of the message. And that's really exciting. And we're in the very early innings of that. And I did want to ask you, actually, because I don't know if this is what you mean when you say like NFTs will be the port of entry, but I know that you've said like on other interviews that you think every photo somebody

Starting point is 00:28:50 makes on their iPhone will be introduced to the world as an NFT. And I was just thinking, you know, obviously like my friends and I or my family and I, like we'll share photos all the time. So are you saying that every time my country, create one of these, I'm going to make it as an NFT because I don't know who's going to buy that, or is it just, I'll give the NFT to like, you know, my mom or my, my friend or whatever. Like, like, yeah, I was kind of skeptical of the 100% of all the, I was a little bit like, really? Yeah, so, okay, so first, it's important to distinguish that, you know, the photo, like the JPEG,

Starting point is 00:29:26 it still exists and you can still like text it to your friends and your family and whatever. like the JPEG it can be infinitely reproduced just like today you don't think twice about copy pasting it into an iMess and sending it but that that can be true and it can all simultaneously be true that that original photo the as soon as you take it it's registered on the blockchain and that registration says lorishan took this photo on this date and it's hers and that's what is you know, what's actually uploaded to the blockchain when I, when I say, you know, NFTs or files on the blockchain, it's not that the image itself is going onto the chain, rather it's the registration that this is yours, you created it. And you're saying this is, this is the, you know,

Starting point is 00:30:14 canonical representation of this idea. So like to make this more concrete, it's helpful to think of like the Mona Lisa, where, you know, the Mona Lisa has been infinitely reproduced all over the world. It's on postcards, T-shirts. And then, there's the canonical Mona Lisa, the one that's hanging in the Louvre, right? And that's the one that's valuable. Owning the Mona Lisa, you can't really put a price on it. It's not for sale, as far as I know. But you can imagine it'd be extremely valuable if it went to auction in spite of the fact

Starting point is 00:30:45 that it's reproduced everywhere. And I think you could even extend that argument to say that the more something is reproduced, the more value in owning the original. And that's why, you know, JPEGs being copy-pasted and shared all over the internet is compatible with the idea that you can own the original one that Laura signed in the corner and said, this is, this is mine. And that's, you know, the distinction of why I think, you know, every image will ultimately be registered this way. It's an option on it becoming valuable. What if your photo goes viral becomes a huge meme that someone wants to own? You should have the option to monetize that,

Starting point is 00:31:19 and you should have that as a default. Okay. And then just because obviously I'm literally thinking about the exact photos that I take. And I'm a little bit like, I definitely wouldn't want all of this registered on the blockchain. But so I was just wondering, would it be like default private where like if later on I wanted it, you know, because like I can't imagine the data is just going to be public, right? Because it just makes me think of, yeah, like Torbear's secret network where he was like, blockchains will eventually be default private. And so when you were talking about that, I was like, oh, well, hopefully if all my photos

Starting point is 00:31:52 on the blockchain, I would like them to be all private. Yeah, so, yes, I think you will have like options here for sure. I think as we go, like, right as it seems today, like if you look at on-chain at the data that, you know, associated with an NFT, what's actually there is a representation of the image, but not the image itself. It's a hash of the image. So the hash is derived from the zeros and ones of the image file. if you change one pixel, you get a different hash. So that's how you can sort of authenticate, you know, is this NFT?

Starting point is 00:32:31 Does it correspond with this image or this idea? It's based on the zeros and ones in the data, but it's not the image itself. So there's one layer of sort of abstraction there. But in the future, I think there will be totally private ways to prove that this was your file without revealing anything about the file itself, not even its fingerprint or hash. So that's like a, there's this whole exciting field of zero knowledge proofs that will allow you to make these sort of claims without revealing any private data. And I think that will become a big part of an NFT world for sure. And again, one, I feel badly because we're talking about images, video songs, but so much of the innovation happening in NFTs is, again, it's like around game assets and like new kinds of, you know, collectible, you know, worlds that people were building where there's these character universes like, you know, of kind of like Pokemon, but where, you know, there's this like internet scale collector base

Starting point is 00:33:25 and people contributing to develop the story for that character universe, not as opposed to some studio. So there's lots of like net new things enabled. It's not just like buying and selling art. It's a, it's a brand new medium for expression and monetizing that expression. And so it's, it's much, much bigger than, you know, suburbies or whatever. Can I just add something here, by the way? Yeah. Yeah. I, so I told you. agree with everything that Jesse mentioned and the fact that I think we're very much in the early days of the development of what we'll see NFTs eventually get used for. I think backing up from the specifics, I think it's helpful to think of NFTs as the first instance in which we

Starting point is 00:34:08 could actually own digital goods, digital goods that have ownership and verifiable scarcity. And why that's important to frame it as digital goods is because we are surrounded by physical goods in the real world that are also non-fungible. Like everything in this room, everything around us, like what I'm wearing, these are all physical goods that I also own. And so from a user perspective, that analogy is important because then you can think of like, well, what are all of the possible digital goods that people might want to own online in the future with NFTs?

Starting point is 00:34:42 And you can decompose on the consumer side, the rationale for why people desire ownership. There's a bunch of reasons why we want to own things offline that also translate to online. So in the real world, the reasons why we want to buy things and own them is for investment. Like we buy things because we think the price will go up, buy things for status, like buying something showcases something about me to everyone else who can see that I own this thing. Another reason why we buy things is for community. Like having a thing gets me access to this. group of like-minded people, like having a Tesla automatically enters me into a community of

Starting point is 00:35:23 people who also love Tesla. And then I think the biggest reason why people own things offline is for utility. Like we consume goods because they actually bring value to our lives. They do certain jobs in the Clay Christians and framework. There's a job to be done for every object that we surround ourselves with. And transposing that to the online world of NFTs, I think we're still really early because the types of consumer motivations that NFTs tap into are still really scratching the surface of those different rationales where today NFT purchases are very much driven. I think a lot of the market is driven by investment and by status and less so driven by community or utility. There's almost like very, there's very little utility

Starting point is 00:36:08 with NFTs today, but utility is the main driver of why we purchase goods offline. And so it's natural to envision that in the future, we're also going to buy digital goods for the utility that they bring us in all of these different applications and online worlds that we spend a lot of time in. Yeah, yeah, that's such a good point. And it goes to, you know, what Jesse was saying about the gaming. Because obviously, like with Axi Infinity, certain of the axes are like better than others or things like that. or, well, I mean, E&S, Ethereum name service, domain names are like an obvious example. Or these like token gated discords are another example where, you know, you need those NFTs in order to gain membership to this club. But so we're going to talk a little bit more about the different types of NFTs,

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Starting point is 00:40:37 So actually, before we go into some of the kind of like different variations and also, frankly, into more of a discussion around than how the nature of work will change, I did want to make sure to touch on music NFTs a little bit more. Jesse, I, you know, have, I obviously have, you know, asked you about your background here. And I've just been hearing from so many people that they feel like this is the year that music NFTs will take off because for the last several months, at least, JPEG has been like another word for NFT. And I'm like, well, it's not only that. So what's,

Starting point is 00:41:12 yeah, a conception of like what music NFTs will be and what they'll look like? Yeah, I'm realizing I totally failed to answer you earlier when you asked about music NFT is I launched it to my background and then NFTs more broadly. But yeah, so I I am super excited about music and FTs. I think it's very similar to what we saw play out in 2020, 2021, which was that it started with digital art, and then it became profile picks and digital collectibles that were mostly visual in nature really took off

Starting point is 00:41:46 and started to grab sort of eye-popping numbers on primary and secondary markets. I think that culminated with people selling a piece of digital art for $69 million at suburbies. And what's important about to like, you know, notice there is it was a very reflexive sort of cycle where, you know, initially, you know, there was a headline, an artist sold a meme for like a million dollars and people were like, oh my God, what?

Starting point is 00:42:14 No, that sounded crazy because no one had ever sold memes for that kind of money because, you know, it wasn't possible before. But that, that headline was, you know, very reflective in that it then solicited more creators to jump into the market and, you know, list their stuff for sale as NFTs. And in turn, like, more collectors came to the market and that just really snowballed. And as you started out by saying, like, OpenC is now doing $6 billion a volume in a month. I think the same thing is very likely to happen for other verticals, not, you know, just visual, but other verticals where there's a large sort of, you know, audience for the work.

Starting point is 00:42:49 And music, as you quoted me earlier, music is like criminally undervalued for the relative to the consumption, right? Like people are listening to music all day and at work and at night to, you know, relieve stress, whatever. We all enjoy music and consume it kind of like from a faucet, from streaming services. It's always on. But yet we, you know, we only are showing out at most $10 a month for streaming services. And many people are not paying anything. It's free and ad-supported. It's really difficult for recording artists to make a living from that model. So I think the same sort of phenomena is likely to play out here where what I expect we'll see in the coming year is you will see an artist release their music as an NFT and you will see a headline

Starting point is 00:43:38 about it's selling for an outrageous amount of money and people will balk at that because they're not accustomed to seeing music transacted and at that scale just like digital art was was not transacted at those prices prior to NFTs and that will kick off the same reflective cycle that ultimately sort of reorients people's view towards the value of music and wherein it becomes a collectible item that people want to own. You can imagine Kanye West, for example, dropping his next album where each song is available to buy as an NFT, and I bet there's a collector out there that's going to pay top dollar.

Starting point is 00:44:14 So that's what I think will ultimately happen. I think this is really good for artists because it allows you to monetize your true fans and allow them to sort of become patrons outside of the cookie cutter mold of platforms like Spotify where you pay this fixed $10 a month no matter what you consume. Here in this model, you can pay whatever you think it's worth to be the collector, the biggest fan of an artist. And I think that will be really, really good for musicians. Yeah, something else that just fascinated me was I saw when NAS did his drop on Royal.

Starting point is 00:44:48 what the NFTs were the like 50% of the future the amount that he was going to earn from the streams of those songs. And, you know, I mean, who knows how much that could be? Like, it just seems really interesting because it kind of makes the buyer more like a business partner or something. Yeah, what was your thought on that? Because like the idea of just like releasing each song as an NFT is maybe like very obvious or something. but like that was a really creative twist, I thought. Yeah, so it's cool. And it's actually not a new idea.

Starting point is 00:45:23 There's David Bowie in the 80s created what he called the Bowie Bond, which was actually a very similar idea. It was a way for his fans who invest in the future publishing royalties for the songs that he wrote. And I forget where they traded, but, you know, he was the first artist to like financialize his fandom in this way. And what Nas just did with NFTs is the same idea, just sort of a new vehicle for it, which is, you know, an asset that's on chain, but linked to the publishing royalties off-chain.

Starting point is 00:45:54 So my personal view on this is like, I think it's great. I think this will exist. And ultimately, I think all sort of traditional assets will be traded on chain because it's just a more efficient sort of 24-7 global way to do it. But it's also a little bit skemorphic, right? It's, you know, copyright and the whole concept of artist royalties is an idea that belongs to nation states, right? So like, you know, Nause's royalties in the U.S. are administered by ASCAP.

Starting point is 00:46:23 And in Canada, they're administered by SOCAN and so on. There's different agencies all over the world. It's kind of a really difficult problem to get them all in sync and communicating with the owner of the NFT on chain. I am more excited about sort of internet native royalties that are possible because of the, you know, the paradigm of smart contracts where, you know, I can sell, an NFT where any secondary resale of that NFT has a royalty baked into the creator or to the first collector, for example, all that can be programmed into the asset itself. And that's completely

Starting point is 00:46:58 distinct from the world of copyright, which again is sort of a nation state construct as opposed to an internet native construct. So I'm much more excited about artists exploring that and how they can sort of leverage the sort of native transactions happening on chain to benefit their fans. And so we're starting to see that happen too where we're investors in a startup called Bonfire, which gives tools for creators to create Dow's with their fans, where essentially their fans can own an NFT alongside the creator and help them monetize it and benefit from, you know, the revenue that comes in from, you know, from the creator's work. So it's sort of like the same concept, but with internet native royalties.

Starting point is 00:47:48 So, Lee, I wanted to ask you about some writings that you've done on what you call, like, how income insecurity and job insecurity in the gig economy is like something similar that creators face and how you feel like Web3 slash these user owner network, can help address issues like that as well as even things like economic inequality. So how do you see that happening? Right. So a theme of some of my writing from last year has really been about the parallels between the creator economy and the gig economy. In the gig economy, obviously, I think we've all been exposed now to the downsides and the impact that they've had on their workers in terms of

Starting point is 00:48:36 mental health and income instability, how they can be deplatformed at any moment and their livelihood essentially taken away in an instant without any recourse. And I think a lot of those negative effects of the gig economy also apply to the Web 2 creator economy as it exists on the large social networking platforms. The parallels are very clear to me in terms of the creators being behold into these platforms, being able to be de-platformed at a moment's notice without any explanation and without any recourse, thereby stripping them of their livelihood. They also, similarly to gig workers, don't own their customer relationships. They're intermediated by the platform. And so if they, you know, if they get banned or de-platform, there's no way to reach their end

Starting point is 00:49:28 consumers anymore. They also don't control their own monetization. They don't get to turn. to determine their own pricing, as we had mentioned before, the platform is really dictating unilaterally how it earns revenue, what portion of that gets shared or not, with the actual creators themselves. And so I think the creator economy is becoming gigafide in that way, even though I think the popular narrative tends to be, at least as espoused by these platforms that these creators are being empowered. I think there's actually a lot of negative trends that we're seeing. And this has come to bear in the fact that we're seeing an increasing number of creators going on strike and actually organizing themselves and employing some of the

Starting point is 00:50:15 tactics of the labor movement to actually try and campaign for better platform policies and product design. And so where this then intersects with Web3 and leads to a vision for what can be improved in a healthier creator economy is basically to remedy all of those things. To check the power that these Web 2 platforms hold, we need to have creators having a seat at the table in terms of how these products are governed, how monetization works, how the product roadmap is designed, and also to give them ownership of their end customer relationship such that they are essentially in control of their destiny rather than being beholden to one given corporation. So let's talk maybe about some of these criticisms of Web3,

Starting point is 00:51:08 because I'm sure you have seen Jack Dorsey, the former CEO of Twitter, now the CEO of Block. He says that actually, you know, Web 3 is something that's really VC owned, so it's not truly decentralized. Of course, you two are both VC's investing in Web3. So what is you, your response to that take? Chris Dixon, obviously, we both work with that Andreessen and had a great response, which is he pulled up the sort of ownership of Jack's Square Inc. And it showed, you know, the bulk of holders are certainly not users. They're like large financial institutions. And so, you know, that's not to say, I'm not trying to make a direct, you know, Web 2 versus Web 3 comparison here, but I think certainly I'm very confident saying

Starting point is 00:51:56 Web 3 offers users the opportunity to participate in the platforms and the products and services they use every day. That is certainly a new, that new thing that was not possible in Web 2 until companies went public and once they did large financial institutions typically bought up most of them. So I would say that is directionally a lot better in align with what Lee was just talking about in terms of giving more meritocratic or equal opportunity to participants to get involved at an early state. That doesn't mean, though, that, you know, VCs are not involved. Obviously, we're here investing in the space, and that's because these projects need to start somewhere, right? I wrote an essay about progressive decentralization, which sort of describes

Starting point is 00:52:43 a playbook for founders building in the space, wherein it's still really important to build a product that people want and that's useful. And typically, you know, building a product is not something you want to do with a lot of people shouting over each other in terms of, you know, their strong opinions of what the product should be. You need sort of an opinionated leader to come in and say, this is how it should work. Even Bitcoin had Satoshi with the white paper that described how the system would work, right? And so you start with an idea or product.

Starting point is 00:53:11 And then you build a community of users around the product. And then finally, you effectuate a distribution of ownership to the users through a token. And that is how users come to own these platforms. In order to get from step one to step three, founders need capital to hire people to build out the initial product, build the community. And that's where the role for DC is comes in. But typically when we invest in a startup in this space, we own a minority of the company and we own even less of the eventual token that they might produce.

Starting point is 00:53:43 And in fact, we go so far to say that in a lot of our deal documents, that the founders and the investors of the company should own a minority of all the tokens that come into an existence to ensure that the network is sufficiently decentralized and actually owned by the contributors who are, you know, who are contributing as it grows. And one framework to think about this is we can compare some traditional VC to crypto VC. In traditional VC, a company will raise seed round, A, B, C, D, EFG round, and each round is more and more dilutive to the original founders and the early investors. And that dilution is sort of taken on because it's seen as a way to grow the pie for everyone, like more capital in the door or more growth. In crypto, what happens is typically projects will raise a seed round, and then maybe they'll go on to raise a series A round.

Starting point is 00:54:37 But then they'll go through this process of progressive decentralization, where they exit to the community of users. And in so doing, roughly like 50 or 60% of the tokens in the network will end up in the user's hands. And that is very dilutive to the rowing cap table. But again, that dilution is taken on for the same reason. It's seen as a way to grow the pie because if your users are aligned with the success of the platform, we assume that you can build a network that grows much bigger, much faster,

Starting point is 00:55:04 because the users are economically aligned to see it succeed. So the whole thesis has predicated on this idea that if the users own the network, it's a better outcome for everyone. That doesn't mean there's no role for investors rolling on. And that's why I think Jack's criticisms are, you know, frankly a little un-newance. What is the ideal allocation then to VCs when you say it should be a minority? Like, what do you generally recommend? I mean, I think there's a spectrum for different kinds of projects. But typically what we see is the users owning the majority of the network, which implies more than 50%. And, you know, in terms of how networks are governed, that's a critical threshold, right? Because you want the networks to remain aligned with users over time to the extent, you know, that, you know, you don't want to, I think a network

Starting point is 00:55:54 is kind of dead on arrival if DCs or even DCs plus the early team own cumulably more than 50% of the network out of the gate. So that's what we sort of, every investment we make, we aspire to have the users of the platform own more than 50% because that's how the network, many of these networks are governed by their tokens. So typically for the deals that you do, you recommend that you and the early team, I guess, own 50% and then the users own 50%.

Starting point is 00:56:26 Yeah, or sometimes even less, depending on the project. Again, like the whole theory here is that these networks benefit from their users contributing to the platform and the incentive for them to contribute is that they own it. And so for some projects, it can make sense for the users to own the vast majority of it. And for early investors to own 20% because the network is so dependent on their contributions out of the game.

Starting point is 00:56:48 Okay, let's actually also discuss one other criticism, which was the Signal, former CEO, again, these people like both left their jobs around the same time. A former CEO of Signal took Web3 to tasks for not actually being decentralized. And he wrote an essay where he talked about how he said, He created this NFT and he designed it so that it would appear different depending on where you looked at it from. And when you looked at it in your own wallet, it turned into a poop emoji, NFT. And he says that then OpenC removed it from its platform. And then he was shocked to find that in his own wallet, it appeared as if he didn't own it.

Starting point is 00:57:30 And I guess that's because like Metamask calls the OpenC API. So he concludes that, you know, Web3 is actually sent. So what's your response to that? Yeah, I'm happy to take this and we feel free to weigh in two, but it's very early in the infrastructure build out of Web3. So today it's true, you know, OpenC is the big player in NFTs and Metamask integrates their API. And that's why Moxie, you know, saw his NFT go missing in his wallet, even though on chain, he did actually still own it and it just wasn't being shown to him in his wallet because OpenC had removed it from their API. So the issue here is there are centralized players in the mix. There's the blockchain, which is decentralized.

Starting point is 00:58:15 And then on top of the blockchain, there's sort of infrastructure built out. The key thing to note is like this is how the early internet sort of web one was built too. We had open protocols like IP and email is built on top of an open protocol, IMAP and SMTP. And then there's services built on top of those open protocols like Gmail. And Gmail provides a great service, which is, you know, it's filters for spam. It lets you search your inbox really well. And so people use Gmail. But the thing that's critical is, like, Google can't abscond with email protocol and say,

Starting point is 00:58:46 you know what, we're not interoperating with this protocol anymore. It's only Gmail because effectively they'd be cutting off all their users from contacting their friends who are not using Gmail. And there's just not, you know, that's not a benefit to users. That would be some value destructive for them. So their protocols sort of force the platforms to play on. the protocols terms. And I think like, you know, OpenC today has outsized influence because they're the biggest player in the market, but that's a function of just them being so early. I think as we,

Starting point is 00:59:18 as we sort of scale the ecosystem, there will be more players. And if OpenC has competition, and, you know, the competition is not shutting off that, you know, Moxie's an NFT because it's a poop emoji or whatever, OpenC will have a harder time doing it. They'll be forced by competition to sort of, you know, honor the protocol and interoperate with it as specified. So I think what Moxie is describing is sort of a short-term phenomena in the build-out that we're sort of undertaking, which is going to take years to mature. So this might be a bigger hurdle. Right now, it looks like Web3 is also sort of losing kind of the PR battle amongst kind

Starting point is 01:00:02 of normies or non-Crypto people. we've seen different gaming platforms when they announced NFTs, they experienced a big backlash. We saw Discord when they kind of hinted at an Ethereum integration, big backlash. They even backtracked. BTS, the K-pop group, I think, saw big backlash when they announced NFTs. So why do you think this is happening and how do you think people like you can overcome this PR issue? Yeah, we were just discussing this topic this morning.

Starting point is 01:00:35 as a team internally and kind of like just, yeah, reflecting on it, discussing what could be done. I think as for the underlying reasons, to me, what it's reflective of is a lot of latent resentment broadly in the world and in this country around income inequality and financial disparities. I think that a lot of what people see publicly around NFTs, a lot of the headlines that they see, a lot of the very vocal news on Twitter and elsewhere is really around like the huge headline numbers of sales or how much people bought their profile picture for. And in a world in which the wealth gap is becoming wider and wider, I think that kind of news can be really distasteful and cause people to feel. this mix of like sadness, jealousy, resentment, unfairness, because they are not personally benefiting from that. And it feels like inherently unfair that someone who lucked into just purchasing one of these, you know, JPEGs as they would say like early on is now a multimillionaire. Whereas they who,

Starting point is 01:01:51 you know, this person who has been working for 30 years couldn't possibly earn the income that would be equivalent to that one stroke of luck. There is something kind of unfair and luck based in that. And I think compounded with that issue is the fact that there have been, unfortunately, like, scams happening in the NFT space. There are people who are creating these collections, promising all of these things and built out in terms of product, which then never comes. And so they are able to realize that chunk of revenue at the beginning, from selling out of their mint, and then they don't uphold their promise. And so over a large number of cases of these instances, I do think that for a lot of normal

Starting point is 01:02:41 people, it's easy to look at that and say, like, wow, like on one hand, like people are getting mega rich. And two, there's all these scams. Like people who are winning are doing so at the expense of other people who are losing. and that obviously brings up a ton of emotionality. So I think all of that is happening right now and probably the way that social platforms and the news is incentivized to sensationalize stories

Starting point is 01:03:10 also doesn't help with that and help get people exposed to the full nuance picture of everything that's going on in the NFT landscape. And I think ultimately how we get out of this and how we ultimately change the tide on the popular sentiment around NFTs is just to continue building, to focus on building end user applications that actually deliver them value in their lives. Going back to what we said around why people would want to purchase things, a large motivation for buying things in general is just utility, having it benefit your life in some way.

Starting point is 01:03:47 So I think the way that we get through this is really just to continue building and iterating on applications and use cases that are going to actually make people's lives better on a mass scale. Jesse, did you want to add anything on that? Yeah, I think one other dimension of criticism of NFTs in particular has been the sort of environmental impact of blockchains broadly. And I have talked about this before, I think, on another podcast, but I find that it's a worthy critique because it's true that Bitcoin and Ethereum, which are both proof of war, blockchains today, are very energy consumptive. So it's a question worth asking. But I think a lot of the sort of mainstream critiques are really unnuanced in how far people have probed into, you know, how bad for the environment the blockchain is. that back these NOTs actually are. And I'll admit, I'm not an expert here myself, but I think, you know, often the comparisons

Starting point is 01:04:51 are, you know, the amount of energy consumption relative to a small country. But what you don't see are comparisons of, you know, how much energy does a blockchain consume versus, for example, like the global banking system and all the bank branches and all the lights and those branches, right? And, you know, if you start to sum up, like, you know, energy consumption of the financial system or energy consumption of, for example, all the free ports that store physical artworks and all the jet planes that fly to Art Basel every year to collect, you know, multi-million dollar works, then the conversation is more complicated and harder to, you know, to measure,

Starting point is 01:05:28 frankly. I'm of the view that long run, the technology is moving away from proof of work, Ethereum plans to move to proof of stake, which will be far less energy consumptive. And, you know, if you compare that future to all the, you know, the consumption and emissions from the physical art market or the, you know, the physical financial system, it starts to become clear that this is actually a lot more energy efficient. But of course, you know, it's hard to fit all that into 140 characters. And so that nuance is lost. And so, unfortunately, there is this perception that NFTs are like extremely destructive for the environment. And that's, stopped a lot of artists from engaging without, you know, digging further. And I think that's something we need to overcome. All right. Well, there's so much more that I could unpack with you both, but we're just going to have to jump to my last question here, which is, obviously, we're still

Starting point is 01:06:25 at the beginning of 2022. You know, after everything that happened with NFTs last year, and even, you know, we started to see a lot with Dow's, I was curious for your predictions as to what we'll see in those areas and in general in the ownership economy this coming year? So I think that, as I mentioned, a big part of how I got to being a crypto investor is through the future of work angle and interest in how people are going to be able to access income and wealth permissionlessly. And so I think that's going to be a huge area of development in the future. Like we're still very, very early in terms of how many people globally, are earning income through crypto, members of different Dows, collecting NFTs. And I think those

Starting point is 01:07:14 figures are only going to grow in the coming years. A stat that I oftentimes cite to support this is the fact that in surveys of Americans, usually upwards of 70% of people will say that they want to be self-employed. 70% of Americans want to be self-employed. The actual number of Americans who are self-employed is far, far below that. And it actually doesn't change that much over time. So about 30% of Americans are actually self-employed. And that gap between that 30 and that 70 is not changing that much year over year. And what that tells me is, really, there's this underlying desire to be self-directed, to have freedom, to be autonomous, to be able to do work on their own terms, but the Lyft, historically, in terms of actually starting a small business,

Starting point is 01:08:07 quitting your job, becoming an entrepreneur, setting up a company, figuring out how to do marketing and acquire customers, that is too high of a barrier to entry for most people to actually realize those goals. And to me, the really exciting element of crypto is that people can kind of gradually transition in through participating in some of these networks and starting to earn and ramp up their involvement over time. So one can start as, for example, a Dow member, then over time start contributing, then become a core contributor, and earn ownership in the actual Dow itself over time. And so I think it's actually a much more accessible path to that dream of earning income in a self-directed way that most Americans have than what has historically

Starting point is 01:08:58 been available to them. Yeah, you probably don't know this, but I did a TEDx talk back in 2018, and this was the exact topic of my talk because I, yeah, I have always liked working for myself and I don't do very well if I were. I mean, I do fine. They like me as a worker, but like I personally don't feel fulfilled working for other people. So when I learned about crypto and understood that this could be in effect, like I got very excited. Because I do feel like I know so many people who would like to work for themselves who don't for various reasons, mostly have. having to do with security and like, especially in the U.S., like, everybody is like, what do you do for health insurance? So, yeah, that's definitely one of the things I'm most excited about with crypto. Okay, well, this has been so fun chatting with both of you. Where can people learn more about each of you and Variant? On our website, variant.fun, and we're both on Twitter.

Starting point is 01:09:54 You can append our Twitter is to the end of the... We'll put them in the show notes, but you can just say what they're. are if you want. Sure. Yeah, mine is kind of tricky. It's Jesse W.LDN, which is my last name, Waldem, and no vowels. I'm L-GIN-18 on Twitter. And then I also publish a lot on my newsletter, Lee.com. Perfect. All right. Thank you both so much for coming on Unchained. Thanks so much for having us. Thank you for having us. Thanks so much for joining us today. To learn more about Lee, Jesse, and Variant Fund, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony

Starting point is 01:10:31 Youen, Daniel Ness, Mark Murdoch, Shishonk, and CLK transcription. Thanks for listening.

Unchained - Will Every Piece of Media Enter the Internet as an NFT? Variant Fund Says Yes - Ep.317

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