Y Combinator Startup Podcast - #19 - Blockchain Investing - Olaf Carlson-Wee and Aaron Harris

Episode Date: July 19, 2017

Olaf Carlson-Wee is the founder and CEO of Polychain Capital.Aaron Harris is a Partner at YC.

Hey, this is Craig Cannon, and you're listening to Y Combinators podcast. Today's episode is with Aaron Harris, who's a partner of YC, and OLAF Carlson-Wee, who's the founder and CEO of PaulyChain Capital, a blockchain investing hedge fund. Olaf was also the first employee at Coinbase, and he was part of our first employee series, which you can check out on the YC block. All right, here we go. Hi, my name's Aaron Harris. I'm a partner here at Y Combinator, and I spent a lot of time thinking about FinTech and how technology is changing the way we use and move money. and how that plays into assets, banking systems, insurance systems, which all kind of comes together for a lot of people in cryptocurrency,

which is obviously this new, not super new, but fairly new in the context of money and financial systems, set of things. And I think there's a lot of misunderstanding about it, which is why I'm happy we're doing a bunch of podcasts talking to people who really get this stuff because I have a ton to learn. So, Olaf, I'm really super excited to talk to you about this because you get it way better than I do.

Yeah, so thanks for having me. My name's Olaf Carlson Wee. I'm the founder of Polychain Capital, which is the largest blockchain investing hedge fund in the world. Far before Polychain Capital, I found out about Bitcoin in the summer of 2011 and became extremely infatuated with this concept of digital assets. I decided to pen my undergraduate thesis on Bitcoin that year,

I think this was probably one of the first academic works on a cryptocurrency. After that, I joined Coinbase as the first employee. Coinbase was actually a Ycombinator company and is now raising money purportedly at over $1 billion valuation. I was at Coinbase for three and a half years, and during that time I was the head of risk. I was also paid exclusively in Bitcoin. From day one? Day one for the entirety of my time there. I was paid exclusively in Bitcoin.

So there were good times when that was a good decision and times when that was a bad decision. But I think net net it was right. And I left last summer to launch the polychain fund. So we launched with around $4 million under management. And now we have about $200 million under management. We have backing from Union Square Ventures and Drieson Horowitz, Sequoia and Founders Fund, among others. So somewhat unusual LP basin, we can get. into that a little bit. Are those funds functioning as straight LPs or are they investing in the

GP? They're straight LPs. Okay. So I worked for a hedge fund for a while. So I have a conception of how that looks in my head, the kind of things that you look at, but there are a lot of different kinds of hedge funds. There are macro hedge funds. There are long short funds. There are activist funds. What does it mean to be a hedge fund focused on the blockchain? Yeah. So a lot of those strategies you just stated could all apply to cryptocurrency assets. Some of them are mechanically much more difficult. So, for example, short positions in the space are difficult to achieve in a secure way. Also, for example, something as simple as margin trading can be hard to find for the right assets that you're trying to trade in. For us, we're sort of what I would call fundamental

investors in that we're long only with a long holding period. And I spend most of my time reading research papers about cryptocurrencies. How long of a holding period? So it really depends on how fast things grow. So we are rebalancing the portfolio roughly every 90 days. So the goal is to hold things that are good positions for years. But we may rebalance or sell down on those positions over time. Okay. So in terms of pace of movement, it kind of looks less like a hedge fund and more like, I think, how people would think about almost a mutual fund kind of thing. But I'm guessing hedge fund because it allows you a lot more flexibility in terms of what you're allowed to invest in in the strategies you can pursue. Yeah. So the tricky thing was I knew in my head what I wanted to do as far

as investing in these assets. And that it actually looks a little bit like a venture investment. in that you find things extremely early when they're still just a specification. So these protocol specifications are white papers are extremely detailed descriptions of exactly what a protocol will do. It's often very possible to understand a lot about what this will look like just from that specification. And I often feel comfortable investing if I meet the team and I read the specification and really like what they're doing. So that looks very much like a venture investment in that you're investing more on an idea than you are on proven data or numbers. But from there, these investments very quickly graduate into liquid markets.

And so because these things are liquidly traded on an order book, unlike a venture firm, you really have to balance those positions. You can't just sort of wait for the IPO, so to speak. So because of that, I knew we needed to manage liquidity, and I knew we needed to have really good risk management around our positions because we have months-to-month volatility, unlike private equity or venture fund, which can just kind of sit on positions forever. But I wanted to take this long-term investing approach that a venture fund would,

where a lot of your success is defined by very, very big winners and positions that rise substantially in value. So we invest in things at a really early stage. We form really good relationships with entrepreneurs. I'm really proud of a lot of the people we've backed. and then, you know, hope to hold those positions for years as those things grow. So can you dig into the technical aspect of what you're actually looking for when you're reading the white papers? Yeah. So when we're reading these protocol specifications or white papers, we're looking for basically a novel concept or novel idea. So this could be a new application of existing technology. This could be an application of technology that hadn't been tried in a cryptocurrency framework before.

this could be just a kind of new game theoretic model that no one had ever designed before that allows for kind of a novel incentive system or incentive structure, new consensus systems, new, just kind of like anything in this category of enabling new behaviors. So, you know, there's a lot of technologies out there that are forks of existing technologies. So they'll fork Bitcoin into something very, very similar. that's usually not very interesting for us. We really like things that are sort of written from the ground up. So like Ethereum was not a fork of Bitcoin.

Ethereum was written from the ground up. Tezos, whose crowd sale actually ends today, is also written from the ground up. It is not a fork of Ethereum, even though it has a Turing complete scripting language like Ethereum. And so when you're vetting a team, given that there are very few, you know, cryptocurrencies with a long track record,

are you looking for like how many times they've committed to evaluate them or like what are you looking for? Yeah, we definitely look at the code base. I think a lot of it though, you know, just pragmatically speaking, like we can't review every line of code in a new blockchain, right? That's, we do require all our investments to get security audits from, you know, outside third parties. But even that, right, these are often experimental technologies and they may be broken

in unforeseen ways. So there are what I would call unknown, unknown. here. There are things that you kind of don't know that you don't know. That said, I think that I have a long history of kind of like at Coinbase. I did probably about 500 interviews. I'm very used to talking with technical people and getting a sense of their subject matter expertise. I also really feel comfortable betting on people if they have a great idea. So I think that it's like seed investing, right? A lot of the time you meet a really great entrepreneur. They have a really great idea, and that's basically what you're investing in. So there's a dividing line or a

difference between the technology being interesting, right, and being fundamentally new in some way, and there being a use for that technology down the road. And sometimes the uses are completely opaque because we don't know what the technology is going to do to the world, right? The things that you invest in that do best actually change the world and create the conditions for which they will be successful. How do you evaluate that set of things or how do you think about that set of things? Yeah. So the interesting thing here is that most of what we're investing in today are protocol

or infrastructure layer things that really aren't meant to be end user applications. Most of what we're investing in are really almost like developer tools to be used for end user applications. So a lot of what we're thinking about is what's going to enable developers more than what is going to be interesting for users. But in that case, the developers are your users. So I think it comes back to the same question of, you know, do you have a view of what the world looks like in five or 10 years? The things that developers will need to be able to do that guide your thoughts on, okay, this

is not only an interesting technology, this is a cool thing, but it will allow this piece of the future that I believe of. Yeah. So it's so early in the development of what I would call Web 3 or this kind of user-owned decentralized web that oftentimes right now to me, it's pretty clear which things are really needed and which components of this kind of infrastructure layer are obvious value add to developers. What are those? So, you know, for example, a project like Filecoin, which is launching pretty soon, created by Juan Bonae, who actually was also YCE alum. Filecoin is basically decentralized server client architecture.

So a file coin is an incentive layer for the IPFS server system. So IPFS, instead of being location-based addressing, like IP addresses, it's actually content-based addressing. So when you click a link in the IPFS network, instead of being routed to a specific server, you're routed to the nearest server that has a specific piece of content. What that means is that you can have a totally decentralized architecture where you have redundant hosting from many nodes across the network, and you pay file coin in order to submit requests to those nodes. So it's like a distributed server architecture. Right now you see a lot of distributed services, say OpenBazaar. OpenBazaar is a peer-to-peer marketplace, sort of like a peer-to-peer eBay. Well, OpenBazaar right now, as a user, you actually have to be a peer-to-peer marketplace, sort of like a peer-to-peer eBay. Well, OpenBazaar right now, as a user, you actually have to to download an application like a DMG to your computer and run it locally and basically run a node in the network. This is not a great user experience. This means that in Web 3, you'd have to

download a new application, sort of like it is on mobile, instead of being able to just go to a URL in the browser. With the IPFS network in place and Filecoin, which basically adds high uptime and fast bandwidth and resiliency to the IPFS network because it adds this incentive layer. IPFS is mostly hobbyists right now before that file coin incentive layer gets added. Then when you visit OpenBazaar in the browser, you know, you can have a better user experience and it's it's like a more clean experience of this Web 3. So Filecoin to me becomes a sort of clear infrastructural component that's just a huge missing layer here right now. So does that mean that the basically there's like

The use case for IPFS and Filecoin is predicated on OpenBazaar being a thing, or something like OpenBazaar. There will be other things. Is the argument then, okay, an open bizarre is fundamentally a better solution to the problem of buying and selling things than today's centralized systems like eBay. Do you have to believe that to be true, or is there some other world in which, no, these things actually exist side by side? Some people use one. some people use the other and because the economy is just so damn big and this thing is just, it's all just going to get bigger. There's two winners.

Yeah. So I think that over the long term, it's possible a lot of Web3 services will compete on costs structures with centralized services like, say, eBay. But that's actually less interesting to me. What's interesting is what these kind of Web3 services do that a normal web service could not do. because the eBay experience is actually pretty solid for buyers and sellers. It's all smooth. I buy stuff on eBay.

I think the fees they charge are reasonable given they have like services. They, you know, value add services like dispute arbitration. Because all those sorts of things are kind of then independent on something like the OpenBissar platform. But I do think there are going to be Web3 apps that really are uniquely enabling behavior. So types of things that we really can't get out of Web 2.0 or like the centralized web. And this is a hand-wavy answer, but I do have this intuitive feeling that we actually don't really know what a lot of those use cases are. And what we're talking about is services for things like DAOs, a DAO here being a decentralized autonomous organization that's basically a pooling of capital on the blockchain. When you think about a Dow pool of capital, I don't think it can realistically engage in traditional legal arrangements,

but it can enter into smart contract or like software-based legal arrangements. So I actually think that you'll see more and more kind of services for Dow's, with Dow's here being just basically global pools of capital that exist only in the blockchain and not an illegal entity. So these are the types of things. they sound a little bit sci-fi right now. But I think in five years, we could see some massive, massive, kind of, you know,

it's like in the early internet, I think it was hard to imagine Facebook, right? And I think there's this video I've seen of Mark Andresen explaining Netscape in like 1994. And an audience member says, what are some websites you think are interesting? He really stumbles. Like, he really struggles to,

answer the question. And he kind of comes back to, well, this is really great technology. I know cool things are going to happen. Today, I don't really know what to point to. And I feel like pointing to things that are ostensibly better versions of the centralized web or efficiency gains on the centralized web is sort of the easy path. It's kind of like, oh, let's take something like a library and put it on the internet. The kind of layer two or like native internet application is Wikipedia, right? Which you couldn't really have in a non-internet environment. So I think we're going to, at the beginning, be comparing or trying to port rather web

two things onto this Web3 or decentralized user-owned web, but that over time will find those Web3 native applications. And those are the things that I really care about. Even though right now they do sound somewhat sci-fi, and I think it's very unclear what they look like. Yeah, I think there's kind of this. The way that I've tried to think about it, and I'd love to know if this is wrong, because it probably is, is that the argument being made now is sort of that there's this protean mass of things happening. It's sort of like the primordial goop from which life originated.

And the blockchain technologies being built now are the early amino assets, right? We don't know what's going to happen. And it's entirely possible the whole thing's going to go to zero, right? That nothing will happen out of this attempt. but if you own a piece of the right amino acids, essentially those are going to create something like something is going to happen when you have enough creative energy focused on a small enough surface area that we will see.

But yeah, but even like in addition to like some people making money, like I think it makes sense now to talk about what we were talking about before we started, which is like what are people not understanding in like what's covered? How is cryptocurrency portrayed in the media? and then what are things that people are essentially getting wrong or not covering that are hurting people from understanding like the creative power that they might be able to have?

Yeah. So this makes me think of something that I saw Naval Ravikant, who's a backer of mine, tweet. And he's a great thinker in the kind of cryptocurrency space. And he said something along the lines of, you know, Bitcoin is, you know, the largest fear of of kings and those in power across the world dressed up as a get rich quick scheme. You know, something along those lines. And I really do think this idea that in the mainstream kind of cultural consciousness, cryptocurrencies I think mostly are perceived as a get rich quick scheme.

And I actually think it's kind of an amazing bootstrapping mechanism to get a lot of speculation into the space, liquid markets, incentives for developers, and ultimately people building on these technologies. So I'm actually not necessarily against, per se, a lot of the speculation happening. However, I do think the mainstream media mostly views these as financial markets that are novel rather than novel technologies, if that makes sense. What are the key understandings that people don't get? Yeah. So, I mean, I think that these technologies are complicated.

So I think a lot of people were reeling to understand Bitcoin and just the premise of a blockchain. and like right when they thought they may be understood it, all of a sudden everyone's talking about Ethereum. And now they're trying to wrap their head around atturing complete language which can actually execute arbitrarily complex software in the blockchain. And all of a sudden, this concept of money or currency is a very limited metaphor for what these things are doing. And kind of, you know, what we're going to see is right

when you're kind of starting to understand Ethereum and ERC 20 tokens, which are digital assets built on top of Ethereum, that don't have their own blockchain, but are kind of secured by the Ethereum network. And it all is kind of an order of magnitude more complex than Bitcoin. We're now going to see just even more complicated things happening. We're going to see Tazos, which has on-chain governance, where it's an inward-looking protocol that can actually use protocol rules to change itself.

And something like Tazos can actually build pools of capital and incentivize developers to build on the protocol. and then sort of dilute every holder of the TASO's tokens in order to reward those developers. And so now you have a protocol that incentivizes development of itself. And this is all like on a native protocol layer. A lot of these things, you know, that's like an amazing recursive feedback loop where the protocol actually builds itself in a strange way. But a lot of these things are going to be, again, another order of magnitude harder to wrap your head around, like things like Dow's, which I actually think are going to grow a lot over the next year or two.

So I think that technology is always going to be basically a step ahead of the cultural understanding of the technology. And I think that's okay. I don't expect everyone to spend their days reading these protocol specifications and trying to really wrap their head around it. But I think that if you don't like dive into the technology and how it works, you can just ultimately never really have a deep understanding of this. So this kind of is related to one of the questions someone sent in for you on Twitter. So this is from John Light. And he writes, most, maybe all app coin tokens are simply used to pay for some resource like

compute, hard drive space, energy, etc. Why is a new token needed in these cases? And why can't we already use existing highly liquid tokens like Bitcoin to pay for these? Yeah. So I think it's actually a. create question from John, who I actually know in real life. So I think that the, the disagreement that I would have is that a lot of people view tokens from a purely, from a pure technology perspective. So they think, you know, we can do this with Bitcoin and like the Lightning Network on Bitcoin or

something like that, which is a high throughput layer 2 network. So why would we create a new token? And I think there is no strong reason from a technology standpoint. You could use Bitcoin for a lot of these different services, or rather ether, for a lot of these different services. However, when you create a native token, you create a very different set of incentives. So for the developers who are building that network, you create a real narrow incentive around that application or around that token, right, so that it's not just tied to the larger value of Ethereum, which if they kind of contribute this great application on top of Ethereum, ether might grow in value by 5 or 10%, but that's not really a great outcome for that founder or developer. In addition, the early backers of that application or token,

that's kind of this app coin, as John put it, aren't, if they're just, you know, contributing to this product or service with ether, they really don't have this embedded incentive effect for that network to grow. So tokens in this sense are really more of an incentive structuring or like a kind of game theory hack right to get really powerful network effects around a specific application. So this is kind of a rough metaphor. But ostensibly, you know, in the United States, we all sort of benefit from the strength of the U.S. dollar. But when I create a new company, right, I create shares specific to that company. Because although even though, you know, I might help the U.S. economy and thus help the U.S. dollar

or kind of the underlying network, as you might think about that, I want narrow network effects around what I'm building. And so I want my early backers or investors to have upside relative to my specific application, not just to the strength of the U.S. dollar. So it's a little bit of a rough metaphor. I don't think it's perfect, but I do think that tokens provide really narrow network effects and narrow incentive effects, and that's what's so important about them.

It's not really a technological reason, but rather a sort of game theoretic reason. Okay. So there are two arguments baked into that that I'm not sure how to think about, one of which is the incentive structure question itself, And a lot of the underlying message here is that money is at the end of the day the best incentive that you can give people to develop something. And I think there are very different opinions on this question.

And I know people who are motivated by money and people who aren't. And some of those people on either side have achieved great things in life, both for themselves and for the human race. So that's sort of the first thing. Like, is this the right path to say, hey, we're going to break everything down, everything that, that all this fundamental technology should be motivated around money. The second question that I have is around this idea of empowering the collective, right, to develop new things and sort of this mass creativity versus focused creativity. And I don't know that these are in direct opposition to one another,

but one of the things you get with a central authority that does something and says, hey, you're worth this much, you're worth that much. There's always going to be problems with the distribution of incentive there. But the thing that you get on the other side is focus of intent, which sometimes is bad when it heads in the wrong direction, and sometimes it's good ones in sort of a positive direction. The Manhattan Project is like directed focus on like, hey, here's the thing that we all need to do, all you great scientists. Yes, there are subgroups within that, but here's what we're going to do. So I'm curious how you think of both of those things.

like in terms of how they incentivize positive growth, I guess, and if those are the right ways to think about it or if there's another way that I should look at this. So I think, you know, I think we're seeing for the first time capitalism and like money incentives being built into open source projects, which I don't think we've ever seen before. I always cringe a little bit inside when I see the Wikipedia banner that sort of like, please donate $2.

And I can't help but think there's a world where Wikipedia was like incentivized with the token and Jimmy Wales for his contribution to the world actually captured a huge amount of value in that he created a lot of value but he didn't capture a lot of value obviously like having to go out hat in hand for $2 donations. Whereas I think that what we're seeing now with open source projects is the creators of something like, Ethereum, they're creating a huge amount of value for the world and they're also capturing that value. And I think that value capture is a, and that kind of adding this kind of capitalist for-profit mentality to open source will absolutely accelerate development in this ecosystem. I just think there, I don't have any question in my mind that monetary incentives drive growth and drive people to work on a project. you know everyone you know or most most you know united people in the united states like have a job and they

mostly do that for the money at the end of the day that's like a big driver or incentive no matter how much someone is passionate about something if you pulled out all the money from it um it would be very hard for them to continue doing that in most cases so i think um adding monetary incentives to this um while it does uh draw in a sort of different group of people in some ways than you'd find in traditional open source communities like hacking on the Linux kernel or something. I do think that it ultimately will dramatically increase the pace of development here. Okay. And then what about this question about sort of focused effort versus distributed effort in terms of creativity and like what should get built? Yeah. So I, you know,

I have a kind of open market view on this. In this, in the that if you build something great, then a lot of attention and capital and users will be pushed to what you build. So I don't know if I have a feeling of like should or like a kind of moral sense about what should exist. But I do think that there's massive opportunity right now in that when people do have a massive breakthrough, the speed at which capital is coordinating to back their efforts is absolutely astounding. And I think it's something that is unprecedented. We've never seen before in the world. I think that VCs and early seed investors have always had this somewhat unique access to these early stage projects through their network or something like that. And I think that

in Silicon Valley, we take for granted that smart people with a good idea get funded. Now we're seeing that on a global scale, and we're seeing these things happen much faster, and we're seeing huge amounts of capital be coordinated by just pure incentives around projects. So it's early days, and it's hard for me to tell this sort of crowd sale or so-called ICO fundraising how this will play out, but I do think over the long term, we're actually only seeing the very, very beginning of this, even though crowd sales are now raising more money. than seed round deals in dollar terms, which is kind of astounding. I mean, this whole concept of a crowd sales is maybe two years old and really in the mainstream

spotlight about six months old. And yet it's already sort of surpassed seed round financing in dollar terms. And I think we're in sort of a hypey moment right now, but over the long term, I think this trend is very real in here to stay. So I completely agree the speed with which this has happened and the amounts of money getting diverted to it are mind boggling. Has the distribution of capital into the ICOs matched your model of innovative technology? No.

So what's actually driving? How off is it? I, you know, it's kind of like a dartboard. It's like a 50% hit. It's what you'd expect. It's like a 50% hit, right? So like, you know, for example, Tezos, it's, you know, I've talked about Tezos a lot. It's well known that we were their first backer and kind of largest backer, you know, long before they were known as a public project.

They've now raised what I think is the largest crowd sale of all time, over $200 million. And so in that sense, I think the market got it right. I think it's one of the most exciting crowd sales, maybe the most exciting crowd sale that's happened. And it also got sort of the most money ever. So to me, it's like, okay, the market was right, maybe on accident, but the market was right there. There are other projects. I don't want to bad mouth anyone specifically, but there are lots of other projects that have raised huge amounts of money and I've had huge amounts of hype with very little, real

progress beyond sort of an idea. You know, Tezos, like the white paper was written in 2014. If you go back and read that, it's amazing how accurately it predicted the future and a lot of problems that would face major blockchain projects like Bitcoin. And, you know, a lot of the new projects, it's like they're rushing to create a lot of hype very quickly and raise capital. And it ultimately feels like they're using it more like a fundraising round and a way to amass capital than a means of distributing tokens and building a really powerful user base and network effect, which I think the power of these crowd sales is that. Yes. Yes.

the, yes, you can raise money this way, but in a sense, crowd sales were originally a solution to token distribution problem. If you go back in time, before people did crowd sales en masse, there was a project called counterparty that did a proof of burn. And what this meant was they raised Bitcoin and provably destroyed the Bitcoin. And this was just a means of distributing the token. And they didn't hold that money, which now. feels like almost a little silly. It's like, wow, you should have just held that money and used it to fund development, which is what projects are doing now. But it's like this was actually first envisioned as a means of distributing tokens. And I think at a latter stage envisioned as a means of fundraising. And so I think that a lot of these projects that are structuring crowd sales also in ways that incentivize a kind of first come first serve mass rush for the doors. basically that all the excess value between the cap on the crowd sale and the eventual market price goes to traders or like what I would maybe call ticket scalpers rather than developers or like authentic backers or users.

So there is a question from Twitter again related to this. So Jesse Jumpcutt asks protocols like Ethereum are exciting for developers, investors, but not seeing much excitement from actual users using the apps. What do you think? Yeah, I think it's accurate that right now we're absolutely still in a speculative phase more than anything. I think this is true, by the way, of Bitcoin and Ethereum as well, not just kind of crowd sales. But that said, I think a lot of these services, speculation actually is very important to drive those eventual network effects. So there's two reasons for this.

So one is that a network effect, building a network effect, has traditionally been this chicken and egg problem. That's like if I'm the first user on Instagram, it's not a very good service, right? But if I'm the 10 millionth user on Instagram, maybe it's pretty good. And if I'm like the billionth user on Instagram, maybe it's great, right? But it really depends on amassing a crowd of people all at once in order to kind of get off the ground. And Instagram had a very big launch day, and I think it's one of the reasons the service has been. successful over time. So by driving in a lot of early people just through speculation, I think you sort of kind of bootstrap that network effect in a little bit more of like a raw way,

where you have this whole speculator base that in the future, many of them will become users. And there's this concept in Bitcoin that I think is sort of new to this asset. class where you see in Bitcoin a lot of people speculating on Bitcoin and also using Bitcoin. And they're like a holder user. They're not, they're speculating yes and they have, you know, an unhealthy percentage of their life savings in cryptocurrency. But they're also really fascinated by the technology and actually experiment a lot with different things and want to spend Bitcoin whenever they can. So I think, you know, you bootstrap network effects with speculators. and then over time, the network becomes authentically valuable in the way that traditional networks like Instagram become valuable.

And then you kind of move from 95% speculation to 5% speculation over, say, 10 years of something becoming useful. The second thing is that a lot of these services depend on a market price and liquidity in order to function. So going back to something like Filecoin, with Fire. If I'm hosting a node in the IPFS network, and I need to actually, you know, host, you know, host all of these various servers for, you know, the backend servers for services like OpenBazaar shops, right? I need to know what kind of like fixed cost can I put into this and how much money can I expect to receive from this. And if file coins don't have a clear price in like USD where most of my fixed costs are going to be denominated with a relatively liquid market where I know if I earn my file coin, I can sell it reliably. It's very hard to know how much to invest into this. And it's very hard to incentivize nodes to create high uptime, resilient, high bandwidth nodes in these various networks.

And this is like Bitcoin mining, you know, it's very hard to incentivize someone to mine Bitcoin until they know how much. Bitcoin is worth, right? And then once you have these liquid open markets, that was a really big part of what pushed Bitcoin to become successful. Because before that, miners really couldn't, they couldn't liquidate Bitcoin and mining was sort of a hobbyist thing. No one was really going to invest money in mining when there is no clear outcome in terms of what it's worth in dollars. And because many of these services, as they reach scale, rely on professional operators, like, like node operators or miners or validators, keepers, whatever you want to call, these participants in the network that actually support the network. It's very, very important that they have a liquid

price and liquid markets so they can invest in their businesses, basically. For something like Tesos, which has now, you know, had over $200 million in funds raised, how much of that or how much money do you think they actually need or actually makes sense? And I'm just using them as an example for the development of the company itself underlying the protocol. Yeah, absolutely. So, and so, and to be clear, there's just a nonprofit foundation in Switzerland, similar to the structure of the Ethereum Foundation for Tazos. So I think in the old model of venture funding and thinking about how much cash does a company need, to execute on the Tezos vision, they absolutely don't need $200 million. They're a really smart team, and they just don't need that to execute some level of the vision.

Now, that said, the market is pricing Tezos at $200 million, basically market capitalization. So a lot of people have called for teams to kind of cap their crowd sales. But the thing is that's tricky about that model is that when you cap a crowd sale at, say, 20 million, which maybe in venture terms is more like the amount, something like TASO would raise. Now the market is going to take the value to $200 million because that just is the market demand for this product, right? But that means $180 million of excess value basically goes to these traders or like ticket scalpers. And it's the same reason that like some Britney Spears concert sells out so quickly on Ticketmaster. It's not authentic users.

It's people like coming in for a trade. They're going to buy it quickly and then resell it. And this has two negative effects. One is that a huge amount of value, actually more value than is captured by the developer team is captured by basically traders. And I see no reason why that value shouldn't be captured by the developer team. I would much rather have Tazos have $200 million than $20 million. I don't know why that $180 million should go to traders. The second aspect of that is that you actually hurt your authentic users who want to be either like a long-term holder and follow

the project or like a developer who wants to tinker with the Tazos tokens. You know, you you exclude them from the crowd sale because the traders are sitting there ready to make the click on the first second. They might have co-located nodes around the world to participate on the first block. It's just hard to compete with as a kind of regular user. So while I do think that these kind of an uncapped sale like Tazos raised more money than the team strictly needs to execute the short-term or mid-term vision, I do think that that value is going to go somewhere. and I would rather have it go to the developer team than traders. But isn't that true at $200 million as it is true at $20 million,

the order of magnitude is different, but you could still have traders or financial buyers, speculators, buying $190 million worth of the offering versus, you know, $18 million of the $20 million in either scenario. So you could still have the vast majority owned by speculators, which might leave too little there for the developers. Well, and so I think long-term speculators are maybe okay. Like a group like Polly Chain that buys Tazos and intends to hold it for a very long time,

that's a little bit, that's a different group than what I'm talking about, which is that they're very narrowly looking to basically arbitrage between the capped crowd sale limit and the eventual market price. But sorry, and I'm just pushing on this because I don't, I get that the size of the number is different, but there's nothing, is there something about, let me ask. Is there something about the way the crowd sale was conducted that stopped even short-term speculators from running it? Okay. So because the TASO's crowd sale was uncapped, so there was no limit on the amount it could raise. That's why it raised $200 million.

They put no limit, which means that the crowd sale participants put in their capital, it's $200 million. Hypothetically, when Tazos goes live and is traded on markets, it should trade it like $200 million, right? There is no like free trade or like upside between the crowd sale and between being listed on on liquid markets. Where when you do a capped crowd sale, where the and, you know, cap crowd sale and the cap is below the eventual market capitalization once it reaches liquid markets, every single person that gets in on the crowd sales eventually is basically getting a free winning trade, right? And that creates bad incentives for people that have no interest in the project. They don't know what the technology is. they're not a long-term holder, they're not a user or anything, to come in and purchase the crowd sale

and then just sell it like literally days later. I see. So when does Tezos go to liquid market state? Tezos probably will in about three to four months. Okay. That's not that. I agree that eliminates day trading. But three to four months is not a long-term positive holder.

Like if you look at this, so if you are, so you're polychain, right? If there are other hedge funds out there that are looking at these things and they say, yeah, you know what, three to four months hold time. You already have a 90 day hold time, right? Or 90 day rebalancing time. Like that is within, very much within the window of rebalance or speculation. So I love this idea that's saying, okay, no, this is going to incentivize the right kind of users to come in. But it feels as if you really wanted to do that, you'd actually want the liquid point to be something along the lines of a year or two or three or four years out, at which point a couple things happen.

One, there'll be enough development on the protocol to make it really usable. And it'll start the second order effect of people building things on top of the protocol. And at that point, you go liquid. The financial speculators are washed out of that market because they're not waiting three years, right? But the developers who are really long-term minded, right, are happy to hold for three years. And if it's 200 million great, if it's 20 million great, if it's a, A billion.

Great. So why not do that? Why not say, look, we're going to turn this into a liquid market in three years? So part of the reason is it just, it doesn't take three years to develop the protocol. So it'd be like an artificial hold. Also, the space changes so quickly. Like keep in mind, Ethereum was launched less than two years ago. Like, did not exist two years ago today.

Like just absolutely did not exist. mean that it, you know, that kind of like artificial hold period, I think, is maybe like too long. The other thing is that I think it can be a little dangerous from an execution perspective, and we've seen these problems with Kickstarter, for example, where if you raise a bunch of money like without building anything and you say we're going to use the money to build something, sometimes you can't execute and it results in a really bad outcome, right? Whereas if they raise money from only sophisticated investors that understand the risk, like a group like Polychain, which TASOS did before the crowd sale, then the crowd sale really

acts as a distribution and launch more than it is a fundraising event to build the protocol, if that makes sense. The other thing is that these protocols are actively maintained and developed for years and years and years. So the launch moment, while not arbitrary, obviously that's super important. It's just the beginning of a very long future of adding features and efficiency improvements and all the rest. Okay. So then Jesse, Jesse Jumpcutt, asked another question just about protocols in general. Which ones are you excited about? So I'm very excited about zero X. Zero X is a decentralized exchange and order book that lives in an Ethereum smart contract.

So the idea is, like my former employer, Coinbase, runs a cryptocurrency exchange, right? But you have to go to the centralized exchange, you know, sign up, create an account. There are some restrictions on like where you're based in the world, all sorts of other things like that. And there's just like high friction. And then you have to, you know, deposit money and trade on a traditional centralized exchange. And then there's also historically big counterparty risk here, like Mount Gawks, which was hacked. A lot of other exchanges, I won't name names, have been hacked. And so it's actually sort of dangerous to hold your funds on a centralized exchange. In some cases, I think Coinbase is the best in the world at security. But when I look at

zero X, it lives in a smart contract. So it allows you to basically, instantaneously trade between Ethereum and tokens or tokens for other tokens natively in this Ethereum Smart contract. And because this is Ethereum Smart contract is just like a piece of software, the ZeroX exchange capability can be built into any application built on Ethereum. So like if you're using some casino game that takes specific types of tokens in Ethereum and you like run out of those tokens, You could natively within the app use the zero X protocol to exchange ether for tokens.

It should take one block, which in Ethereum is 17 seconds. You now have your new set of tokens and you can trade more or, you know, play on this casino game or something. So this idea of zero X and their exchange protocol being actually baked into every DAP or decentralized app that's built on the Ethereum protocol is really amazing to me. So it just will facilitate this extremely fluid exchange of token for token. And the ability to go from ether to other token and token to another token is going to become very, very fluid. It's going to be baked into the user experience and it's going to take like 17 seconds without needing to sign up for centralized service or take on any of the counterparty

risk that you take on holding your funds on a centralized exchange. So Xerox I'm very excited about, I'm also really excited about making. Maker. Maker is pretty complicated if this already wasn't all too complicated. So Maker is trying to create a stable coin. So this coin is pegged to the IMF currency basket, which is trying to, itself is trying to be like a steady basket of stable fiat currencies. Maker is creating a token, ERC 20, Ethereum token called the die. The die is pegged to this currency basket. And there's kind of market mechanisms that make the die either harder or easier to create based on how its market price is pegged to this currency basket. So basically, if it becomes,

if it goes off the peg, it becomes harder or easier to issue die in order to keep it to that peg. And what you do when you issue die is you actually collateralize other Ethereum compatible assets, so Ether or Ethereum tokens in a smart contract in a value that exceeds the die you're creating. So if you want to create $1 worth of dye, you collateralize like a $1.50 worth of ether, right? And so it's like the die is basically backed by collateral that's held in smart contracts as Ethereum compatible assets. What this is getting at, this is all, I know that's lot at once. What this is getting at is a decentralized stable coin. So a coin that is volatility free, but isn't backed by like a centralized bank account, which is a huge weakness

from a compliance hacking perspective, from so many different perspectives. And so now if Maker works, basically die issuance has an interest rate. And that interest rate gets paid to Maker holders. Maker holders also determine through a Dow structure, so like decentralized voting structure, what the interest rate and collateral requirements are to create DAI. So the MakerDAO, which is the kind of decentralized organization that decides those things, is like a crypto central bank for this decentralized stable coin. And I just find that concept totally fascinating. Now, this project is very experimental, amazing team behind this.

But this is the type of thing that I think we will see emerge over the next few years is like volatility-free crypto coins. And I think that's huge because if you're going to see a lot of other applications work like Auger's prediction markets or OpenBazaar, just e-commerce markets, you need a stable store of value. I mean, you could bet in an auger prediction market and be really. right, but then actually lose money because of volatility, right? And that's, it's a horrible experience or, you know, bad user experience. It's going to really limit the ability for those

markets to gain adoption. And even for something like OpenBazaar, where your money might be held in escrow for a couple days, you might end up paying a lot more or less than you thought or earning a lot more or less than you thought from an e-commerce, which has very narrow margins, right? You're talking about three, four percent margins in e-commerce. So to me, something like Stablecoin and the Maker Project is really exciting. as well. So yeah, those are a couple. Yeah. Are there other concerns you advise people to think about whether they're going to put money in? I'm thinking chiefly on the regulatory side right now, but both people developing tokens and putting money into tokens. So I would urge anyone who wants to

invest in tokens to know what they're investing in and really do their research and understand that this is a basically experimental and highly volatile market. So don't, you know, do anything unless you know what you're doing, basically. For people that are creating these things, this is a much longer conversation around, you know, do you create a sort of parent entity like a nonprofit foundation? Where is that foundation located globally? The main places that are turning out to be friendly, either from a regulatory and or tax, perspective here are Switzerland, the Cayman Islands, Hong Kong, Singapore, to an extent,

Gibraltar. And then, you know, there's a handful of teams experimenting with other locales as well. And I think, you know, we have yet to see how that sort of plays out. I think that is, yeah, it's a longer conversation. It definitely is. Okay. If someone wants to dig deeper, what should they, are there blogs you read or what do you recommend? Yeah, the problem is that just not that many people have even gone through that process, like, you know, and not that many people have gone through it in a really legitimate way. I think that the IPFS team is a really great resource here. So insofar as Juan or Jesse from that team has written blog posts or like the Coin List project,

which is a partnership between IPFS and Angel List, I think there may be thinking about this the most careful. especially from a U.S. centric perspective as well. Thank you so much all off. This was super fascinating. Yeah, thanks, guys. I can't believe that the hour's already up. Okay.

Well, yeah, thanks for chatting. Okay, thanks for listening. So as always, you can read the transcript or watch the video at blog.w.ycommodator.com. And don't forget to rate the show and subscribe. All right. See you next time.