Y Combinator Startup Podcast - #70 - CoinList Cofounder Andy Bromberg and Ramon Recuero

Episode Date: April 18, 2018

Andy Bromberg is the cofounder and CEO of CoinList. Coinlist provides financial infrastructure for token creators and investors.Ramon Recuero is an engineer at YC. He's the author of the Decentralized Future Series, which you can read here.If you'd like to listen to more podcasts about crypto, here are episodes with Juan Benet (IPFS) and Dalton Caldwell (YC) and Olaf Carlson-Wee (Polychain Capital) and Aaron Harris (YC).The YC podcast is hosted by Craig Cannon.

Hey, how's it going? This is Craig Cannon and you're listening to Y Combinators podcast. Today's episode is with Andy Bromberg and Ramon Ruquero. Andy is the co-founder and CEO of CoinList, and CoinList provides financial infrastructure for token creators and investors. And Ramon is an engineer here at YC. All right, here we go. Let's just start, Andy, with a quick intro of who you are and what you're working on. Sure. So my name is Andy Bromberg. I run CoinList. Coinless is a platform where the best digital asset companies manage their token sales. And we're also where investors find high quality deals in the space. So we're working on helping with things like compliance, helping with things like

transaction processing for deals in the space. And then helping investors who are also our clients find these high quality deals and invest in them. So broadly we provide full services for sales like Filecoin and Blockstack and props and manage their sale on the platform. And then our investors see the deals. And then separately, we just run compliance for a lot of sales as well. well. So helping them with know your customer, anti-money laundering investor accreditation, which we could get into, but the nitty-gritty technical stuff you got to do if you're selling

10. Okay, cool. Yeah. And Ramon, for people who don't know you, what are you working on? Yeah, I work for YC and before I had my own company and I work in video games for Singa for a while. Cool. All right. You want to start it off? Yeah. So let's assume that we're starting a project. So how should we think about this new mode of fundraising? What kind of project could be perfect for a token sell versus going through an angel or through an incubator. Right. So really interesting. Most projects, not a good fit for this funding model.

And we see a lot. You know, CoinList has done three publicly on the platform so far. We've gotten over 900 inbound. So most projects are not really high quality and not doing an ICO for the right reasons. So when we think about the right reasons, for me it really comes down to one of a couple use cases. One is raising money for protocols that need to be distributed.

So Filecoin is a great example of that from Protocol Labs, which is a YC company. And there, I think the insight is that historically protocols have only been funded by governments, academic coalitions, sometimes really huge companies, because they're just expensive to develop. When you're developing something that foundational, it's too costly for a startup to develop, typically. And so the ICO model, giving stakeholders a stake in that protocol on that network, is actually the first time that we've head away for new protocols to emerge and be funded for small teams with great ideas. And what that's enabling is this world of competitive protocols, where instead of one just being the king by default, because it's the only one

that's capitalized well enough, now we can have competitive protocols going back and forth. So protocols is one example. The second is projects that have a disproportionate advantage by having early users be stakeholders on the network. So I'll break that down a little bit. The idea there is that if you can give the earliest users of a platform some upside if the project's successful, that's in theory good for every project, right? If any company gave their early users some equity, if that was easier, then maybe that'd be good. But we really think ICOs are good for ones where there's a disproportionate impact there.

So one example might be if you had some sort of tokenized or distributed tour, right, anonymous routing system, where if there aren't enough users on the platform, it just doesn't work. It actually, it's just not anonymous or pseudonymous. It fails its mission. So the idea there is if you could give those users an early incentive, then perhaps that would be incentivized to grow the network faster, get to that critical point where it tips over and becomes useful much faster and then be able to grow from there. And then the last category I'll mention is we're early on this one, but separate from those two securities tokens, so asset-backed tokens that are taking an existing asset and tokenizing them, that's appealing, but almost a totally different category from the first one. We could talk more about the difference between those. And then the last thing I'll say there is, I imagine we're going to find a ton more use cases for ICOs. We're basically a year into the market right now.

It's really young. And so those first two categories for the more technical ones than the asset-backed ones are the ones that we find appealing so far. But there's going to be way more beyond that as this market evolves. So you guys have supported three out of 900 projects that have come through. What are the criteria that you're looking at? Why do you pick those? Yeah. It's a number of things.

So first of all, I think we're looking at the team and the team quality and the technical details is the team of a history of shipping product. They built something meaningful before. So a lot of the same things you'd look for initially. in a venture capital investment, right? You know, does the product make sense? You know, have they put enough work in already? Does it seem like it has a real chance for success? So all of those components.

But then with the ICO market, what's different from all the things you'd evaluate in the venture capital market, you know, so traditionally team product and market, the next step is a layer on top of that because this is different. And the components there that I think are important that aren't as crucial in the venture capital world are one, the actual structure of the sale. And when I say structure, I mean two things. I mean legal structure. And then how the sale is actually structured in terms of the economics of the sale. In venture, both of those components are important, but kind of nailed down at this

point. Things, you don't really see a lot of weird stuff happening there. But because the ICO market's so young, figuring out how to structure these legally and then figuring out, you know, what's the pricing mechanism for the sale? How do people get in? You know, who do you decide? How do you decide who and all of that, that becomes important to evaluate in the token industry. And again, we imagine it'll become a little bit more standardized over time, but it's early there. But then the second piece, which is, I think, a little bit unique to tokens is what we'd call the token economic model. When you have a token and people are investing in the token, you need the value of

the token to have a chance of going up, right? Otherwise, why would you support this investment? Right. And so there's this question of under what conditions will value actually accrue to the token. How can you make it so that the token is actually worth something? And there's a lot of theories out there. Another thing we could dive really deep into on how to value these tokens. But we look at some of these systems for tokens.

And maybe they have a really great team. Maybe they have a market that's really interesting. Maybe they've built some real technology. But then we get to the token and either it doesn't feel like value is going to accrue or it feels like the model's broken somehow and either good actors aren't incentivized enough to do what they have to do on the network or bad actors are overly incentivized to do bad things to the network. And so digging in on that model is such a new concept that I think that'll be a really big piece of, you know, more and more people are becoming experts on that. Yeah. We're so early. And the, I think the best

experts I've seen are either traditional economists who have looked at, you know, game theory, economic incentives. That's really what this is at its core. Or actually from the gaming industry. Because what are games but, you know, a system of incentives in getting people to do certain actions? And so thinking about game economies and how those are designed, I think we're going to see people move over from that industry into this token economic evaluation. Cool. Let's go back a little bit to something you said before. You mentioned that, and I agree that this is great for projects like Wikipedia or Linux that are foundational and traditionally have been underfunded. You see that Wikipedia is always asking for donations because they don't have enough money to come. continue. So if I'm starting a project like that, how do you take on the recent statement by the

SEC chairman that most tokens are securities instead of, and he hasn't seen any utility token per se? Yeah. So I'll tweak that a little bit. And I should caveat that this is not legal advice and everyone should get good counsel and talk to your lawyers. But so, you know, my reading of of Chairman Jay Clayton, the SEC Commissioner and Chairman, his remarks over the past couple months has been that he hasn't seen an ICO, an initial offering of a coin that wasn't a sale of securities. And I think there's nuance there. He's not saying that the tokens will always be securities.

He's saying that the initial offering is securities. And without getting two in the weeds on the securities law here, there's this thing called the Howie Test, which is a test in the United States of whether something's an investment contractor security. And I think what he's saying is at the time of the offering, these things are going to be securities because one of the components of the Howie test is, is this project dependent on the efforts of a single company, a single entity? And if it is, it's probably a security. There's other factors you have to consider, but it's probably a security. And at the time of the offering, when the offering's happening, almost certainly it's going to be dependent on the efforts of a

single company. And so it's probably a security at that point. But our belief and what's, being sorted out right now, I think, publicly and, and, you know, trying to be sorted out with the SEC and with these projects is, is it possible for something to convert from being a security at one point to a non-security at some point? And if so, where's that line and how do you determine that? So what we see is this idea that, yeah, it looks like these offerings are going to be offerings of securities. And that's fine. You know, we think a lot about how to sell securities to certain sets of investors. There are other ways to sell securities to different sets of investors. And we may just need to deal with the pain of the pain of the. And we may just need to deal with the pain of the. that. But it's in the interest of protecting investors and in the interest of protecting the innovation that's happening in the space. And at some point, we will figure out where that line is and how these things can be non-securities at some point and be used way more freely and traded more freely among all users and investors. And where's the current thought on that conversion, if ever it's going to happen? Yeah. Yeah. I think there's not a really clear guidance. The How we test is a facts and circumstances based analysis. That's the term you'll always hear from

from lawyers and from the SEC as facts and circumstances. And so there's there's facts about what the thing is and how it works. And there's circumstances of its current state. And so there's no, at least right now, there's no bright line. But, you know, when it fails the prongs of the Howey test is when it, if you pass the howie test, you're a security. If you fail, you're a non-security. So counterintratively, we want people to fail of this test.

So when it fails the Howie test at some point, when it fails these prongs and that's when it'll become a non-security. But the way to get there isn't, you know, someone sitting in a room and saying like, yeah, I'm feeling like this isn't a security now. You go to great counsel who has deep securities law experience and you say, how about now? Yeah. And they do legal analysis on it. And they come to you and they say, here's our memo. We think this thing is now not a security.

It may have been before. It's now not a security. And then you can try and operate with that assumption. Okay. So in this line of reasoning, the saft that coin list has used for block stack and file, it could be a security at the beginning and then when the token is released, that would transition into a utility? So the idea is that the SAF, the simple agreement for future tokens, which was developed by protocol labs and Cooley, is a security. So it's a, in the same way, the YC safe is a security.

It's a security. You're selling a promise of something in the future as issued by a single company. The idea is that at some point, when the network's live and perhaps in the things not considered a security anymore by legal counsel, at that point, saft holders, will redeem four tokens, and those tokens will be non-securities. The SAFT will always have been a security, but the tokens that get outputted at some point are non-securities. That's the theory behind what the SAF is and how it functions. Okay. And so to go back a little bit on the point about sales, what does the test do you guys run? Like, okay, this seems like legit sale and maybe give an example of like, I don't know about this other scenario. Right. So for us, it's actually

this formal legal diligence process as a result of how we're structured to make sure we're in compliance. We have what's called a registered investment advisory entity. And Coinless doesn't invest in these projects, but we make an investment decision and recommend the investment to investors that are clients of ours. So there's actually a formal process we have internally that involves a technical advisory committee, so some of the top developers in the space, a market advisory committee, so some of the top investors and luminaries in the space. giving us feedback on the project. And then on top of that deep legal diligence.

So doing things like bad actor checks on the projects themselves, doing things like, you know, understanding how they operate, how the company operates, how it's built out. And then really writing an investment memo and digging in on the project itself on some of the facets that we mentioned before and coming out with a recommendation. And it goes to our internal investment committee. They come out and they say, hey, we're good to go. We're not good to go. And at that point, we can promote the sale and show the sale to the investment.

that are clients of ours on the platform. Separate from that, we have a whole separate compliance service that will provide to people that even if they don't pass that or even if they don't want to go through that process, we can still help them with this compliance piece. And so even though we've only run three of these publicly and shown them on the platform, you know, there are 20-ish live right now that are using our compliance solution in the back end. And then do they move into an evaluation area? Like, are you providing guidance there as well?

We informally help these companies figure out their sales structure if we're going to work with them. We want to be helpful to our partners. But ultimately, it's not our decision. And that's part of the investment process, the investment advisory diligence process is understanding how they're value. We can't make an investment recommendation without knowing what the price is. So that's part of the process. We'll go back and forth of them on that and help them sort that out based on best practices and how the market's evolving. Yeah.

And as for the next step there, once the due diligence is done and you say, okay, this is a very project. What are the options that a great protocol has? Because I know there are different regulations like red D, red A, which ones? Right. So, so this is under the assumption that you're considered to be selling a security, which again, we believe all of these are, or all of them have been thus far. So there's a number of, when you sell a security to investors, you have two options. And the second option is a million sub options. One is register the security with the SEC. So that's like when someone files publicly, right? They say, I'm registering this with the SEC, and we're selling the security. The second is to use an exemption. The SEC hasn't taken,

hasn't accepted any securities registration so far. We don't expect them to. That's not the path any of these sales have taken, but that's fine. A legitimate second option is exempting. And just to give a sense there, when we do venture capital investments, we often exempt them. So this is well understood. You're allowed to exempt these things instead of registering them. There are a bunch of exemptions for selling securities. And it's actually probably instructing to run through a few of the ones that are being used a lot right now and we see as interesting. So the one that coinless deals with the most is what's called Reg D 506C. And this is selling to only accredited investors.

So people with the specific criteria isn't working getting into, but significant net worth or income who are considered sophisticated investors. And you're allowed to sell to them with certain restrictions and limits. But that's what we do for the most part. So the file coin and block stack and prop sales that were helped by coin list were all reg D 506C offerings. And part of that is you need to check these people's accreditation status. You need to get evidence of net worth or income. That's something that we help with.

So that's one. Another is what's called Reg D 506B. So on before that, and that's for very small private sales where you have an existing relationship. The issuers an existing relationship with the investors. And at that point, you can have the investors attest that they're accredited as opposed to providing all this evidence. It's a little bit easier, but it's way more restrictive in terms of how many investors you can have in. And of course, you can't do it publicly. So part of 506C

is general solicitations saying publicly, you know, this sale's happening. Five or six B, you can't do that. It's only private people you have a relationship with. Outside of that, there's a bunch more. So there's reg CF crowdfunding regulation, which came in after the Jobs Act in 2012. And that is actually allowing you to sell to unaccredited investors. But there's a similar. Similarly, a bunch of restrictions on that. You can only raise $1.07 million with Reg. CF right now, although that may change soon. So that's similar to Republic. That's what Republic is a sister company of ours.

And they do reg CF offerings. So they sell to unaccredited investors. They have actually a whole Republic crypto division now that is doing just these crypto deals. So for example, with the prop sale, sometimes you can get the benefits more than one of these. For props, we sold. a bunch of props to investors using coinless. And then separately, Republic sold a million dollars worth to unaccredited investors. So you got both those user sets.

On top of that, just a couple of those that are worth mentioning, reg S is another exemption that you can use to sell to international investors. So no U.S. investors. There's geographic restrictions on how it's transferred and all of that. But you then have to comply with those country's securities laws as opposed to the U.S. So you don't need to check them to U.S. accreditation standards. you can check them against that country where the investor's from. Well, let's go a little bit deeper on that.

Because I know like with crypto stuff, like the international things are like, you know, are you in Switzerland or Gibraltar or wherever? Like, where are things going in the future? I know right now it seems completely fragmented. Everyone's operating at a different pace with different regulations. Where do you see things going? I think we're really going to have different projects do different things. And one of the beautiful things about crypto is that it's global.

It's distributed. Yeah. Right. And that's both. I think just practically true, a lot of way more big projects for the stage we're at are around the world as opposed to being, you know, right in the U.S. as compared to other industries. That's, that's really interesting. But it's also, I think, a philosophical thing that crypto is distributed by its nature. And so people, you know, take that to its fullest extent and distribute themselves. There are advantages and disadvantages to each of these jurisdictions. And I'll probably say this 40 times on this podcast. We are so early in the industry that most of these countries have. not really nailed down exactly how these things are going to be treated. Some of them need to clarify those securities laws as a result of this. And so we're going to see a lot of things shift. I really believe that the U.S. is going to do the right thing. The regulators have been

incredibly thoughtful so far. They've taken their time and understanding the space. They're now starting to make statements. But what we love to hear from them and what they're saying is we're going to apply existing regulation to this. They're not trying to write a whole new book of laws on how to govern ICOs, not interesting to them, not interesting to us. What the answer is is security's law, commodities law, currency law, pretty well-lit, well-understood areas of the law. There's some edge cases around crypto that we need to figure out exactly how to apply them. So that's the challenging part, this question of, you know, when does something transition to being a utility? But we'll get there. And so I think we'll still see a ton of sales happening in the U.S. And at the end of the day,

just practically, if you want to run big token sales, there's a lot of capital in the US. There's a lot of money here. Yeah. And if you're selling to US investors, even if you're, even if you're not in the US, you got to comply with US securities law. So at the end of the day, I think a lot of projects will be headquartered in the US or even if they're not, they'll sell to US investors. They'll need to abide by these laws. Right. But there are certainly advantages to being in other jurisdictions as well for all sorts of reasons from regulatory to even just where the talent is in some cases. Yeah. Yeah. One other point there is that many networks assume that the only path is to do a token sell, but there are other distribution.

mechanisms like airdrops, for example. What do you think about that? I love air drops. I'm obsessed with air drops. Can you define that? Yeah. So an air drop, well, I'm going to loosely define it because people are sorting out how to do it right now. An air drop is a mechanism to give users tokens without them paying for those tokens, usually around the launch of a network or early on a network's lifecycle. A couple points to make here. One, air drops are not a way to skip security. law. So if your token is still a security, which many of these are, you can't air drop tokens to everyone. That's actually considered, and again, not legal advice, you should talk to counsel, but considered a securities offering. And the case law for that dates back to the dot com boom,

interestingly, when companies were giving away shares. Oh, wow. And the SEC said, hey, you can't give away shares. That's security's offering because the user, the person's exchanging some information. They're giving maybe their email address or their address or some information. You're giving them securities. That's a security's offering. You got to abide by securities law. So you can't just airdrop. That's not a way to skip the issues with securities law. But to give some examples of air drops, because I think it's a really powerful concept and taking a step back for a minute, ICOs have kind of coupled together two ideas, fundraising for an underlying company and distribution of the token to early users. And we're trying to do both

of ICOs. But it turns out that maybe the investors in a sale aren't the same people as the users. So the idea that maybe we could decouple those a little bit in some cases and have a sale to investors and then an airdrop to users makes a lot of sense. So I break air drops down into three categories. One is what I would call like broader universal airdrops. So the way this works is that and Amisa Go is an example of this. The way this works is that you take an existing blockchain, so Ethereum, and you just give every. everyone on that, who has a balance on that blockchain, who has some of that token, your tokens. And you could do it in different distribution.

You could do it so everyone gets one token. You could do it so they get it proportional to how much they have. You could use all sorts of functions there. But the idea is just broad distribution, right? Give everyone who has this. And this is interesting. We've never really been able to do this before. Give someone a product because, you know, we haven't been able to know how to reach people, right?

If I wanted to just give everyone a phone, how do I give people a phone? How do I know where to find them? But because these addresses are public, you can just air dropping. And it goes back to what you said before about aligning the incentives and then everyone has skin in the game because if I get these free tokens and they are valuable, incentivize to grow the network. Absolutely. And then the two other categories that I break air drops down into is one based on off chain data and one based on on chain data. So what I mean by that is off-chain would be if I have an existing service with users,

and I just want to give those users tokens. So this is not, I know something about these users, not because of some blockchain status, but just because I know something about them. They're my users. So Numerize an example of this distributed network for data scientists to solve these financial problems and make predictions about the market. They gave their users tokens. They just gave it to them.

or recently they actually just announced that they're going to give all Kaggle users tokens. So they're using off-chain data to give tokens to people. The last category in one that I think is really interesting and hasn't been done much, if at all, yet, is using on-chain data. So what I mean by that is these blockchains are public. You can see the transactions. And you can't necessarily link them to real-world identities. So, you know, gibberish Ethereum address. You don't know it's me.

But you can get data out of that. we've got this whole ledger of transactions. And so the idea there is by analyzing that, you can pick out which addresses to give tokens to. So an example might be if I was going to start Auger, let's say, a prediction market platform already exists. But if I was starting Auger, maybe I would go to the Ethereum blockchain and I would look at, I would do transaction analysis and figure out which addresses, which users were transacting frequently with. Ethereum gambling sites. Right? So there's a bunch of gambling sites.

You can spend ether, gamble. Funner. Yeah, sure. So you can, I could look at that. Because those addresses are known. I know which addresses belong to the gambling platforms. So I could see users that are transacting a ton with those. Those are likely gamblers.

I'm building a prediction market. It seems like there's a nice Venn diagram overlap in those users. And then I could just give those users tokens immediately. So this is the idea that you can bootstrap network effects off of existing. Because all their transactions are public is a really cool idea. It hasn't been explored a lot yet. But I think we're going to see more on-chain analysis for deciding who to give tokens. That is super interesting.

And going back to getting things rolling, like really getting the ball rolling with your company, you mentioned big money before. Some of these companies, $100 million, $200 million, $200 million, $300 million. Someone asks kind of the inverted question, which is the Fintech Hub asks, Is there going to be a liquidity crunch for post-ICO companies? Yeah. It's such a different model, right? The way these things are developing is changing constantly.

Most of these companies are trying to raise enough that they never have to raise again. Right. And part of the idea there is, and this just requires, I think, a mindset shift and how these businesses are run. These companies, in their ideal form don't make money from transactions on. the network, right? The big piece of this is removal of rent-seeking middlemen in the process. So a lot of these companies' business model is actually more like an investment company. They own a bunch of the tokens. They do work just as a contributor to the network to try to make the network worth more so that the value of their stake increases. But they're not,

there's nothing coming in. It's just they have a bunch of tokens and the value should increase over time. So the idea is that they raise enough to get the network out into the wild and built by them, built by other people, contributing to it, it's totally open. And increasing the value of their stake, the investors are investing and increasingly are getting locked up for some time period. You want long-term support from your investors. So maybe they don't get their tokens for 12 months or 18 months or some investing schedule or maybe it's way longer. It's years and years. And so, you know, I think the idea of a liquidity crunch is interesting, but I struggle to find out how exactly it applies. Right. Yeah. Because,

You know, the companies, again, ideally should it work, raise the money, start building it, get it out into the wild, and then just keep building it because they want their value to increase. The investors are holding for some period of time, but way shorter than how long they hold for startups, right? Which, I mean, you drop box IPO today or 11 years later after the check. One way to think about it is that for a company, when their goal is to maximize the value for their shareholders. But if you're a company that are starting a network, then your goal ideally is to take the company out, right? So then you are just one more participant in the network with hopefully a lot of tokens. Because do you think that a lot of networks are going to suffer from not having enough tokens to support the underlying protocol?

As in the company building the network or the network itself? Yeah, the company building the network that years on, you know, three or four years, they didn't design the token economics, right? I think, well, I think they, I think actually the inverse is true. I think a lot of companies have too much of these networks. And it's going to really hurt the incentives for other people to contribute. And what's going to happen is these networks are going to get forked. So if you're sitting there and there's a really cool, amazing technology built, this technology is open source by nature, right? So if I'm sitting there and say there's an amazing bandwidth sharing tokenized network.

And the team's great. Technology is awesome. It's like really getting going. But the team owns 50% of the network. I sit there and I say, well, that seems wrong. And I'm going to build a great team. We're going to fork this network. We're going to do a great public push to make people aware of that.

And we're going to reduce the team stake down to 10%, 5%, 1%. Who knows where these things end up? Will the market push it to 0%. Well, so I, I don't, this is, you know, I think the market, this is what I love about the token market as a whole. It is the purest form of markets, right? It's all open. People can make decisions.

Zero percent I don't see because I do think that there is value to strong core contributor teams, right? Having a set of core contributors that are building the protocol, and they're not the only ones that don't have, you know, special rights or anything like that, but, but they're core in building the protocol, I think the market will want to reward that. And so when I think about that, you know, you can, you see maybe an amazing team with a 10% stake, a solid team with a 5% stake, you know, a weak team with a 0% stake, and no team with a 0% stake. I think you end up with starting with a great team, but perhaps over time as the network value increases, the incentives change such that maybe a great team is willing to do 5% or a great team is willing to do 2%. And you may see a lot of forks on the way down. I certainly think the intuition's right. I agree with that that it drives down over time, but I don't think it drives to zero. Okay.

And it's really interesting because mentioned this network's on a lot of the percentage of these teams on a bigger percentage of the network. What's the role of the investor like crypto funds that are getting early placing a lot of capital there and then getting a huge chunk of a network that is supposed to be owned by all the participants? Yeah, I think the role of the investors is to get the network started, right? Same as an early stage company. and seed investors. It's to be helpful, get them relationships they need, help them build the team, do all of those components.

I think it's the exact same situation. If the market decides at some point that too much is owned by certain parties, it may get forked. We're going to see a lot more governance struggles over these networks as they go live. The thing to remember here is a lot of this, and again, we're early in the market. But a lot of this is so theoretical. There's not a lot of networks that are live and being used right now. So there's no real incentive for governance struggles, for for, I mean, what are you forking? There's not much to do.

And we've seen a few, obviously, the Bitcoin forks, Ethereum forks, but there's not a lot that are live. As more networks go live, which I think is going to happen this year as the ICOs of 2017 start to go live, we will see a lot more battles over this. And it might be that if investors own a huge stake in the network doesn't think that's right, they may try and fork it. But the piece to remember there too is you still need to have a team behind it. focused on building the protocol. And so if the best team is building it and investors own some percentage, that may be worth it to stick with the investors owning that percentage. If it means that you still get to keep the team there working on making it the best

possible protocol. So another question from Twitter related to this, Jordan Jackson asked, do you think there will basically be one dominant protocol for each of these categories? You know, it's like hosting, payments, whatever it might be. I believe that I believe a couple things. one is that, I believe a lot of things. Related to this question, related to this question, a couple things.

So one is that I do believe that at any given time there's probably one, but it goes back to this market's point. It is such a free market here that there will be constant competition, whether it's from a fork, whether it's from a new protocol.

And so I don't think we're going to get to a place where there's a dominant one and then we're just in stasis. and nothing ever changes. I do think that there will be constant competition. Things will pop up and things will go down. And at any given time, there'll probably be a couple that are competing for that title.

But it does feel like there's going to be consolidation. Interoperability is a huge issue. The other belief I have, and this is one that I'm strong belief weekly held, I think we're early enough that we don't know how it's going to play out. I lean towards fewer but more just, generalized protocols with platforms, networks, capabilities, technologies to allow for inter-protocolatoperability. So what I mean by that is different protocols of different advantages.

So we could build a generalized one that's to oversimplify a little bit really fast, or one that's slow but highly programmable, right? Or they might have all sorts of different advantages. And the idea that we could then use layers on top of these protocols to link them together and there's a number of projects out there. So Pocod or Cosmos that allow for these inter-protocol interoperability is interesting to me. Because there would be a real pain in managing a wallet that had a thousand cryptocurrencies, one for every single use case I have, right?

I go to CVS and buy something. I pay with one token. I go this, pay with another. Seems very unlikely. So the idea that we'll have a few generalized ones. But I find it hard to believe we get to one whole. And there are some people that believe there will only ever be one. Right. I find that hard to believe that we'll get to a place where all those components can be satisfied.

Because it does feel like there are just some real limitations on the tradeoffs between those different components. Some are more distributed, some are less, faster, slower, secure, not secure, all these different components. So I think there'll be a bunch, but not a million and then they'll be interoperable between them. And in this train of thought, do you agree with the theory of the Fatt Protocol that they're thrown out a lot in crypto that most of the value is going to accrue to the base layer that can be Ethereum and every string of thought. that is on top is going to get less and less of that value. I do generally agree with that. With, I guess, a twist in that I think there's a world where some closer to the application layer things do well, but as securities.

This is a little bit of a wonky point. But I'm not the only person who's had this idea. There's a few people thinking about it. But an interesting concept around what I'm calling index tokens right now, although it's not a great name. If anyone has a better one, please tweet at me and let me know. But the idea is that there's a, we don't have to have a no middleman world. If some protocols take some fees for being helpful or some, you know, slightly closer, some more, some higher up protocols, take some fees. It may not be the end of the world if it's the best option.

And I think there's kind of a knee-jerk reaction of like, no middle-middle then that's crypto. Ideally, I think we get to that place, but there's some that could be worth it. So, you know, if we were to be designing a solution that did something for protocols, so let's say we built a tokenized network that made protocols more secure, right? Or encrypted protocols transactions, something like that. So it's helping protocols. So it's sitting on top, right? perhaps that layer, that token, that network could take fees from those protocols per transaction, right? And so maybe the network chooses to pay, you know, so much it's helping Ethereum. So they pay so many ether to that, to that, you know, layer on top per transaction. What would be interesting there is that that token would then be an index across all the projects that it's helping, right?

Ethereum is paying with some ether, Bitcoin's paying with some Bitcoin. Filecoin's paying with some file coin. And it all goes into this thing. And then that one has its own token. But the token doesn't isn't used on the network. It just represents this pool of assets that are being accrued for the network. That thing, again, not a lawyer, but it's probably a security. It's an investment, right?

You're saying this is. But values accruing to that token possibly in a very meaningful way. The more projects that get on it, the more it's worth. And so this token all of a sudden has value. So maybe the protocols are accruing a ton of value because they're being used and the values occurring to that. But maybe there's this layer on top that is also gaining value as the protocols do, right? As Ethereum gets more transactions, it's paying more fees to this network. Still worth it.

But that now is occurring a ton of value as well. So I am a believer in the fat protocols, but I think we'll see more layers on top of it as well. Let's talk a little bit about the end user layer. So it has been like nine years since the Bitcoin white paper was published. But, you know, many people say fairly that we have really final end consumer cases that are in use right now. But what is your answer to that? So nine years since Bitcoin, absolutely. But it hasn't been that long for other tokens.

And I think Bitcoin's use case for my perspective is a store of value. It's a digital gold. I think it's doing that. So there's an end user use case. But that's the one for Bitcoin, I think. These new ones are so young. I think we had a period of experimentation a few years ago where a few came out, obviously, Ethereum and some others.

But it was so early we were figuring out how these token economic models work, we still are. But the ICO market and this wave of new tokens, it's really just 2017. And really just kind of mid to late 2017. And so without trying to make excuses for the industry, if you're doing a sale in 2017 and you're building something meaningful based on the results of that sale. You know, it takes 9, 12, 15, 18, 24 months. We're just now getting to the point where that time period is being hit. So I do think the next, call it 12 months will be a real trial period for these networks

that are just now going live post-ICO after some time to build and actually make that meaningful technology. So, you know, without wanting to, without meaning to weasel out of the question and say there's nothing, because I agree that there are not a lot of real end-user use cases out there right now. I just think we're just now getting into the time where that's going to happen. Krista Kittis, how many do you own? Right. I can't answer any questions about what I own.

But I'm a big, big fan. And actually, that's one that is worth mentioning, I think. Collectibles. Collectibles. So collectibles are interesting because they're, the collectibles protocol, the technology behind it, the ERC 721, which is the component added to Ethereum to allow for collectibles, or at least the first one. Very technically challenging. Cryptokides team built that.

And that's really impressive. But then building a collectible on top of it, just a raw collectible with no kind of interaction mechanics, is actually not that hard. That's technically challenging, but not. You don't need to build a whole new protocol. And so I think we will see a lot of value in collectibles accrue because those can just be spun out really quickly. Yeah. Then you get into more interesting mechanics around collectibles interacting with each other. Can you build a game where the collectibles?

That's challenging to build. But I do think what CryptoKee showed us is you can put something out there that in the distributed blockchain world that doesn't need to have pure technical value to the end users. You can just build a really great product and people want to use it. And I say this all the time. Most people don't care about how websites work. They don't care. It's not an important part. Like, I mean, it's important in how it functions.

is important in like being secure and all that stuff. But at the end of the day, like how many people know how Facebook functions? No. And I think to that point, we are just now entering a time of, you know, what I call the professionalization of the space. But more people with expertise building businesses, more people with expertise shipping products coming into the space. So far, it's been so beautifully driven by pure technology.

Let's build these deep protocols, the infrastructure layer that needs to exist. That has to continue forever. and it will continue forever. But we're just now getting to a place where the user bases are big enough, the incentives are strong enough that real product builders, real product people are coming in and thinking about how to build it. And I'd argue the CryptoKedy's team, Axiom Zen team, that's a great example. They build products.

And they said, the infrastructure exists now. We see a use case. Let's build a great product. And we're going to see a lot more of that over the coming months. So another question from Twitter. Johannes asked, what are your recommendations for how someone ought to think about implementing and onboarding users to a protocol, or something like CryptoKitties, whose primary users are non-technical. So in that case, right, you're like, you're talking about like Metamask, you're doing

all this stuff. What do you guys think? I think it's just a function of needing better products. And so, you know, one really good example of this, it's actually, it's an interesting question because it's almost not a blockchain question. Right. It's in the same way. Yeah. It feels like asking like, how do you onboard someone? to, you know, a social graph and connect with other nodes. And the answer is like, you build Facebook and you let me click an ad friend button. And that's me onboard into a social graph. And so the UIs, you know, aren't really there yet.

One example that I thought was really impressive is for an Airdrop, a company called Bloom, which is a decentralized credit scoring application protocol. They did an airdrop in partnership with Earn.com to airdrop a bunch of Bloom tokens to users. And they just did a great job building this product. Air drops are hard. You have to use MetaMask or some other wallet, sending the Ethereum address, this, that, the other thing. And they just built a beautiful process where you basically just had to click a bunch of times.

And you said, I want this. And then it redirected and something else popped up and said, this is the button you want to click. Here's what it does. Right. And click that. Sure, it was still, you know, a long process. But that's just a function of, you know, the ecosystem being young and the tools not being developed fully yet.

But they made it really easy. explanations, click buttons. And at the end of the day, the answer to that question, which is a very good one, how do you onboard users to the protocol if the users are non-technical, is make it obvious what is happening and make it easy to click buttons and type things and have that happen. Building UIs and building the technology to support that. Because it comes back to what are you using the blockchain for?

For example, in the case of crypto-kitties, you're just proving scarcity. You have this unique kitty that nobody else has it. But the user doesn't care about anything else, metamask. So I think even what Coinbase did, that is just. you own the private keys so the user doesn't need to deal with metamass on all this. You can just, that can be a really interesting approach. I think more projects we're going to see taken. Totally agree with that.

Yeah. And actually, on the Coinbase side, do you see index funds becoming like the default way of investing? Yeah, it depends on what you mean by defaults because I think there's a lot of different potential parties here. So one note, and I'll get back to the core question, is a tiny percentage of the money in crypto is professionally managed right now. So depending on who you ask, you know, about 10% of capital and crypto is professionally managed by professional investors. When you look at a developed market, like the U.S. equities market or any other major market, that number is 95, 96, 97, 99% professionally managed. So for those people, you know, largely index funds won't be the answer, although in some cases

they'll make significant investments in index funds. But this, the amount of professional investment as a percentage of the total capital, I think is going to increase dramatically, and we've got a long way to go. And part of that, as an aside, contributes to the volatility. Professional investors tend to, in most cases, help manage volatility for an asset class because they're professional investors. And I think a lot of the volatility comes from the fact that it's minimally professionally managed right now.

For retail investors, I think that we will get to a place where indexes, we're funds are really significant investments for retail investors. But in these early days, before the market really matures, people like making their crypto investments, right? They like thinking, it's fun, it's gambling. I want to buy Bitcoin. Yeah, it's gambling. It's speculation on which ones are going to win. But when people are making investments, I do think that they enjoy it at this early stage. So I think that we'll see a significant inflow to the index funds. There'll be some very successful index fund products that come out. But I'm not convinced that right now it'll end up being a massive percentage in the same way it is in the in the u.s. equities markets do you have a default

asset allocation that you recommend to people uh i don't make investment recommendations but but i do think that broadly um as with any asset class it's smart to uh first of all we're very early in the ecosystem for the millionth time uh invest money you're willing to burn you know like investing in seed rounds and startups if not even more risky yeah invest money that you are willing to just have disappear don't over index into this. And then, you know, once you do, I think, as with everything, a pretty traditional strategy is of the money you're willing to burn, you know, most of it, you may want to put in the the stronger, more established ones.

It's all early now, but breaking down kind of into the stronger, more established ones makes sense. And then if you want to, throw some bets into things that you're interested in or you have some insight into and dig in on those spaces. But, you know, I think it makes sense people to invest in projects they understand. And so aside from kind of core investments in the space or indexing into the space, you know, ones you understand is always a good bet. Well, ones you understand, that's like should be exploded out as well, right? So if you're, I mean, if you're in retail non-technical investor, how do you come to understand some of these white papers?

Yeah. I think, I hope we're moving away from just white papers. So a white paper is really kind of an overloaded term. And it's just become this de facto thing in the crypto industry. I think the best projects are moving generally. They may have a white paper, but they're moving away. What a white paper originally was is a reasonably technical explanation of how the system works. Some people want to really understand that.

And if we were making an investment here in a big data company, maybe there's some investors that really have the capability and ability to understand the deep technical piece of how some set of algorithms works. And maybe they do their diligence on that. But plenty of people invest in, you know, very technical companies without understanding exactly how the system works. And I don't think that's wrong. I think that's okay. As long as someone's doing their diligence and then you're doing the diligence on things that you care about for investments. Because everyone will have different weightings.

People care more about the team, market product, or the technology. And that's totally okay. So I do think these protocols should publish white papers or something like it. But that should be a deeply technical exploration of exactly what it is. they're building. And you shouldn't have to assume as an investor that you need to read and understand that. You should be able to invest in something without understanding what, you know, proof of space time is for file coin. That's a crazy technical concept. And I didn't make that up. That is actually what it is called. So probably cool. Yeah. So, so I think they'll start to release more,

we'll see investors get more sophisticated about doing their diligence. And we'll see companies get more sophisticated about what they disclose and what materials they put out. And there'll be a happy medium where, you know, investors can get the information they need without needing to understand, you know, write how the protocol works. Yeah, at that point, I totally agree. I think a startup fundamentals as saying the team, the market always apply. But then I hope we see more working networks before they try the token sell to do a token sell. So the network is already working.

And then you don't have just a white paper. You have a white paper and a working network. And especially for products that are more end-user applications, you know, the user, as we talked before, he doesn't need to know how it works. But if it's something that you care about, yeah, and it's working already, you may believe in the project. Yeah, absolutely. And then what about the people who want to join these teams?

Like, how are they, what are your thoughts around, like, vetting a project as an employee? Yeah. I think it goes back to some of the things that I said earlier about how, you know, how Coinlist evaluates these projects. Yeah. There's a lot of components that are the same as evaluating any other company, right? So it's not like a whole new world. It's, I mean, it's the same company.

Yeah. So evaluate those things. But then layer on top of that some of the token specific pieces. And again, there are not a lot of people that are experts on the token specific pieces so far, you know, structuring these different things and the token economics. So ask smart people, right? In the same way that if you're a non-technical person going to join a deep learning startup, ask some technical friends. You know, what are the merits of this? Is it interesting?

ask some investors in the project. Have those conversations. And be intentional about finding out things about the team and the product and the history and all of that. But a lot of that you can do on your own if you have good intuitions there. Spend more time with external sources evaluating the token economics, maybe the technical details. That's not something you understand, the history of the team and digging in on that. But at the end of the day, there are people join companies whose technology and products they don't fully understand all the time. It's necessary.

Yeah. And I think it's a lot of the same mechanics there. And how did you get interested in the space? I got interested in the space from a professor of mine university, apologies for one of us on who now runs urn.com. And he was a professor. And a number of us took this class at Stanford called startup engineering. And he developed a relationship with him.

And after the class ended, he told a bunch of us, Bitcoin, it's a great thing. And, you know, we looked at him. We're like, this is sleep school by Bitcoin. Magic internet money. Like, I don't think this is a real thing. But he convinced a few of us to buy just a couple. And then we ended up as a result of that actually starting the Stanford Bitcoin group. This was back in 2012, 2013.

And we did some really cool stuff. We did research on, you know, some. the economic impacts of Bitcoin. So this was around when the Cyprus economic collapse happened. So how could crypto have helped that? We did some, built some really cool projects in the space and did a lot of evangelism. Ran up and down Sandhill Road pitching Bitcoin to investors. Not we didn't want to raise money. We're just saying you should be interested in Bitcoin. How did that work at that time? This is a toss up. There were some people that got it, some that didn't. You know, we may have needed to hone our pitching skills a little more. But, you know, it's interesting now to see some of those people we

talk to and how they're thinking is evolved on the space. So there were kind of seven of us in that group, most of whom are now still in crypto. And, you know, we did a lot of cool stuff there. And, you know, my interest evolved from then. I guess my last question is, if you weren't working on Coinless, what would you be working on? That is a really hard question. Part of what I love about Coinlist and I think what wouldn't form that decision is supporting, building tools for or services for the companies that are building great protocols in this space, right? I don't have a protocol in my head that needs to be started and tokenized and built out. There are some great protocol teams.

It is very early. And so, you know, what I love is this idea of supporting this ecosystem and bringing value to the people that do have these brilliant ideas. And rather than going in and adding skills to a single project, because I like a lot of them. I would much rather say, how can I help all of these projects? And so it would be something else, kind of services or tool-oriented,

picks and shovels for the token industry. Because I fundamentally believe in what's happening in a meaningful way and want to support it. But what I would say is for other people thinking about the space, especially for people that are not deep in crypto already, these projects need you. Like they have every role open. They're figuring out how to run.

these new types of businesses, whether you're technical or a marketer or sales or operations or anything else, these companies need you and going out and finding a team that you identify with as with any startup, but also a use case that you understand, again, you don't understand the technology, but something you believe in, whether that's file coin. Sure. File storage. I mean, this is, they are potentially solving a massive problem here and introducing a whole new economic model or any of these other projects.

It is, it is worthwhile. and they need help from, you know, people that are coming from outside crypto. So it's an exciting time in the industry. Yeah, there's a lot of energy in the space. It reminds me a little bit of the early time of a startup before the dot-com boom. You can see the same kind of. Yeah, on that energy and also one of the things that's so attractive about the space is just the number of A players coming into the space. The brain power concentrated here is when I say here, I mean in the industry, but it's worldwide, is so high and so much fun that you get to work with such brilliant people excited about.

making a meaningful change in the way that companies, projects, technologies are built in the future that I think it's just hard to find in any other. And it's a network effect as well. The best people are going to attract greatest people. That's exactly right. Yeah. Totally. All right, man.

Well, thanks for coming in. Thanks for having me. Thank you. All right. Thanks for listening. So as always, you can find the transcript and the video at blog. combinator.com. And if you have a second, it would be awesome to give us a rating and review wherever you find

your podcast. See you next time. Thank you.