Y Combinator Startup Podcast - #74 - Linda Xie and Avichal Garg

Episode Date: May 2, 2018

Linda Xie is the cofounder of Scalar Capital, a cryptoasset fund. Before that she was a Product Manager at Coinbase (YC S12).Avichal Garg is a Managing Partner at Electric Capital, a value fund for digital assets. He’s also an Expert at YC. Prior to that he was the Director of Product Management at Facebook.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 Linda Shia and Avichel Garden. Linda is the co-founder of Scalar Capital, which is a crypto asset fund, and before that, she was a product manager at Coinbase, which was part of the summer 2012 YC batch. Avichel, who's been on the podcast before, is a managing partner at Electric Capital. They're a value fund for digital assets. He's also an expert here at YC, and prior to that, he was the director of product. management at Facebook. All right, here we go. Let's just start with quick intro. So Linda, after you. Hi, I'm Linda. I'm co-founder of a crypto hedge fund called Scalar Capital. We focus on long-term investing in the space with a strong emphasis on privacy coins. And then before that,

I was a product manager at Coinbase, joined pretty early on and just been passionate about cryptocurrencies for a very long time. Cool. Hey, I'm Avichel. Serial entrepreneur, part-time at YC. I'm in Crypto. since 2013, actively invest in currencies and various companies. And this is where I spend a lot of my time thinking about the way things are going and what the future holds and where we'll end up in the next 10 years. Because I think this is a pretty fascinating area. Cool. Well, it sounds like you guys are the right people because we have a ton of crypto questions.

And let's start with definitions. I know a lot of the listeners probably know or have a loose understanding of what blockchain, what Bitcoin, all of this stuff is. but just so we establish kind of a ground truth, Linda, why don't we start with you? What is a blockchain? A blockchain is essentially a decentralized public ledger where you can have a recording of all the transactions that have happened on it without having a centralized entity that's kind of dictating what happens or someone that can manipulate the data. And all of this is just done in a decentralized fashion. So you don't have to trust who's actually controlling this data.

What are the other things that people ought to know? I think that so it's important to separate like a cryptocurrency from, new coins that have come out that are essentially people refer them as crypto assets because it's essentially more than just money at this point. So Ethereum's a smart contracts platform. And smart contracts are essentially, you can think of it just like a contract that is essentially just programmable logic where you essentially have a decentralized network of computers that's executing this logic without having to rely on a centralized source that can get shut down or manipulate the information or data. So a smart contract in itself is just really important. And you can kind of

if you want to compare it to Bitcoin, just think of it as a bit more powerful than Bitcoin and that you can be a little bit more programmable. Anything to add? Yeah, the way, I think that's great. I agree with everything Linda said so far. I think the way I think about it, there's like four core concepts. There's blockchain, which I think Linda covered well as distributed ledger, and that has a bunch of properties around who can read it and how you write to the ledger and so on.

I think there's this notion of consensus, which is how do we all agree on what gets written to the blockchain and what the universal true. truth is and there are different mechanisms to agree on the truth. There's the idea of a token or token economics, which is how do we align the incentives of all the actors in the space? And there are different mechanisms to aligning the incentives. And then I think there's the smart contracting layer, which is assume you have a ledger and you have tokens and people who are agreeing on the state of the universe. What degree of control and programmability do we give on top of that to the users of the blockchain or the programmers to do interesting things on top of that, which is I think

where things like programmable money or distributed compute get really interesting. Those are kind of like the four things that I think about in this universe. And you can kind of mash them together in different ways and different chains mash them together in different ways. Yeah, absolutely. So we should explain those. There are many use cases for distributed ledgers, for programmable money, all of these things. Let's break those apart.

And we had a ton of questions about it. But just from broad strokes, what are the use cases you guys see? Essentially, whenever there's a middleman that's doing programs, programming logic and saying if then condition and is charging fees for that, you can replace them with a smart contract. So there's plenty of use cases for that in the financial system, healthcare, legal system. So I view that is really powerful of just automating things and allowing there to not be a centralized point of failure. And I think that's one of the most important parts of what this produces. Yeah. I think at a high level, the way I think about it is

there are kind of three buckets. There are, there's essentially programmable money, and there's a bunch of different facets of that. There's privacy or there's smart contracts get me used as escrow, and you could argue ICOs effectively are in escrow, you're like locking up some, some EF, and then you can do something with it on the other side. So it's kind of like programmable money is like one bucket of use cases. Distributed compute is another bucket of use cases.

Like you can use all these computers all around the world to execute code. And then the third bucket is distributed apps. So things like prediction markets, or, you know, distributed VPN networks. And that's kind of the third bucket of use cases. And I think pretty much everything I've seen so far falls into one of those three. And sometimes there's a little bit of an overlap.

You could be kind of in two buckets. But at high level, I think those are the three buckets I think about. Cool. And so to jump into a question from Twitter, JPS, what are the top use cases you guys think are going to go mainstream in three years? And mainstream may be caveated by like within this community. But yeah.

Yeah, the two ones that I think will go mainstream are decentralized exchange. and probably gaming something along the lines of collectibles. So decentralized exchange. Can you just define collectibles? Like what's an example of that that's been out in the world right now? So out in the world in the crypto community, there's been crypto kitties. So you can collect a unique digital cat on the blockchain. And so that can never be destroyed.

You own that permanently. And so that just got really popular. People were kind of just collecting it like just digital beanie babies in a way. And you can breathe them together and produce new unique cats. But people just love collecting things. in general. I mean, that's a, that's been very common with like stamps and coins and cars. Like, people just love collecting. And now, and you have a society where you can just collect everything in a digital manner and you can freely trade this. And so that pairs well to me with

decentralized exchange because, so for context, I worked at a centralized exchange where you essentially have this exchange controlling user funds. And so Coinbase is really trustworthy and I'm fine storing my funds on Coinbase. But there are a lot of centralized exchange. out there that have risk of getting hacked or getting shunt up in regulators running with user funds. So there's risk on the custody side. There's also some barriers to entry if you live in a jurisdiction that just something like Coinbase doesn't support or you don't have the right documentation. So I'm really excited about decentralized exchange because you can now have a bunch of people that can participate in these markets and trade anything they want, trade digital cats

if they want. And it's really cool. And so more people can just participate in the network at this point. Do you think the same thing is true? Are those of the use cases that happen in the next couple years? Yeah, I think both of those will happen. The two others I'd add, or the big one, the other big one I'd add basically is programmable money. I think the payment rails will all get built out, things like Lightning Network and Plasma or zero-fee payment networks that are coming up. And I think the merchant side of those things will continue to get better.

And so I think payments as a category stuff will happen. And then kind of privacy is a subset of that too. I think privacy tokens are actually a thing. If you talk to a lot of people, hey, if XYZ thing went away, would you care about it? They're like, yeah, it would be kind of unfortunate if that went away or it lose a lot of money because I was in the ICO. And then you talk to people and say, well, would you miss it if Monaro went away? And they're like, oh, man, that would be really terrible because I actually use Monaro to do something. So I think the payment side of things was actually going to emerge.

And then, yeah, I agree. I think decentralized exchanges and collectibles are too early, like real use cases that people are. are actually using. And what about the decentralized apps that people are talking about and kind of dreaming about now? What's the timeline on something like that? I think probably this is probably a place where we might differ. I think it's probably like seven to ten years out for most of these. I think we're really, really early in most of these cases. There might be one-off use cases like Orchid with VPN where that's like a real problem and being a distributed network and a decentralized network can be censorship resistant. And so that's like a core feature of the network.

Beyond that, I think it'll be a while. I think there will be some early use cases, but by and large, it's going to take several years. Yeah, I generally agree. I think my time's fan is just a little bit short, maybe like three to five. But I think that there's a lot of scaling issues that need to be solved before anything can go mainstream. But I'm generally pretty optimistic that there's a lot of really smart people working on that problem right now. And be more specific. On the technical side, what are the scaling issues? Yeah. So with Ethereum, CryptoKitties itself, was so popular. So many people are trying to use it. Bitcoin itself, so many people have been actually trying to use Bitcoin that the transaction fees have actually gotten pretty high. And at some

points, it was like average $30 per transaction fee, which is like parallel to a wire at that point. So you have so many people, it's, I mean, it's a good problem. So many people want to use it, but it's too expensive and it starts getting really slow. And then in Ethereum's case, I know there's a lot of scaling work being done. So L4 is an organization that was funded by the Ethereum Community Grant to essentially work on some scaling solutions. There's a lot of different ones that they're tackling. They're specifically working on state channels, which essentially you can kind of, if I were to compare this, it's kind of just like a bar tab in a way where you essentially

have all these like offline transactions where people are just like moving back and forth between each other. And you can update, you can update state. And essentially you can update logic. And then only when you want to finalize something, you can move it back to the main chain. So it's just a bunch of off-chain transactions. There's also Plasma, which is Joseph Poon and Vitalik wrote about, which essentially you have blockchains within blockchains.

And so you just have all this work being done on these like blockchains within a main blockchain. And if you ever want to, because the idea is that you don't really care about what everyone else is doing. You only really care about what your transactions are all about. So you're like isolated in your own little blockchain. And only when something goes wrong, do you ever have to like leave that blockchain and like go back to the main one?

report something strong. So there's all kinds of like things going on with this. So just to understand that like by your own blockchain, are you meaning individual users or individual apps on a blockchain? Both. I mean, essentially you can just be isolated in your own world in whatever application or even individual use cases. So this is very theoretical right now, but there's like work being done on it. There's also true bits working on doing off-chain computation. So essentially you don't want really complex computation on Ethereum blockchain, you essentially can maybe move that off and pay people for computational to be done. And essentially, the problem is that you have to verify that the work was done correctly.

So they have a really, really cool concept where you essentially have forced, you force errors in the network. So you essentially, every once in a while, the network will do some wrong computation and something that is incorrect. And people who catch that error actually get compensated. for that. So you have this whole network where people are just constantly making sure that things are running correctly because if they catch something, they get a payout for it. So there's just a bunch of really cool work being done out. So I'm generally pretty optimistic at the ability to actually

go mainstream. And do you think that many of these apps that we're going to see are going to resemble things that are popular right now? Or is this sort of like very much like the beginning of the internet and we had no idea what was coming and it'll look more like that than a dupe of what we have right now. Yeah, I think it'll be, that's a great question. I think the early ideas will look like ports of stuff that we're used to. Just like the early internet was kind of like the New York Times took the newspaper and literally like NYTimes.com. The headlines were images. Yeah, it looked like the text was an image. Totally. It looked like the newspaper, right? It's just because it's like, that's the easiest way to transport to a new platform. And we just

couldn't have predicted social media that actually like Facebook and Twitter would be the actual media winners or YouTube would be the actual media winner. It wouldn't be, you know, like CNN. And so I think, and I think it would have been really challenging to predict something like Airbnb. If you could have called that, then, you know, well, you have done quite well as an investor. But also, you know, Airbnb, if you look at their early funding history, it was just really challenging for them because it was such an out there idea. But it was a native idea, right? It was a thing that made sense on the internet. So I think the first set of ideas will be essentially ports and there'll be people trying to sort of cargo cult kind of map the ideas over.

Yeah. And then a couple years into it, people who are sort of thinking about, these things natively will start to play with ideas and say, oh, well, now you can do this thing that just wasn't possible before and here's an idea. And what do you know if I push a button, a car can come to me instead of me going to someplace, right? And so those ideas, I think it just takes a while for people to get used to it and for developers to play with the infrastructure and the concepts and just sort of like poke around and play around and see what's possible. Do you think it'll leapfrog by location in any way? So for example, you know, how L.A. was

perfectly situated to have cars, but, you know, medieval European cities weren't. Yeah. And so they kind of then get leapfrogged and have the train infrastructure. Do you think that will happen with, you know, a decentralized app? Say, for instance, you know, in Africa somewhere where like, you know, money is not the same thing as it is here in terms of like payment accessibility and most things. Will they take off in different places first or will that not be the case? Personally, I never thought cryptocurrencies were going to take off in the U.S. or anything at first. I think it's going to be in countries where people don't have bank accounts primarily and they need a method of actually storing their own funds or countries where the currency is just

getting inflated away and so the currency is not valuable. So I find that like in certain countries the use cases of cryptocurrency actually matter more than in countries where there's really strong financial infrastructure. So yeah, it definitely varies in my case. And so there's also something like in China where you have all this censorship of using different applications, I could really see decentralized applications taking off in China. Yeah. Yeah.

I just always wondered, like, is the Valley a good barometer of the popularity of cryptocurrency and decentralized apps, or is it not? That's what I've been wondering. That's a good question. Yeah, in some sense, geography is just one, as like one specific way to say that there's an underserved market. Yeah. And I think you will probably see things, like the inspiration for new ideas does tend to take hold in these underserved markets. And so geography is certainly one dimension. or you could have argued that, you know, college students were an underserved market

when it came to social networks, and it was just like they were all in one place. There was like an opportunity for a new type of media to emerge. And so, you know, I think there will be pockets. Even in developed countries, there are pockets that are underserved? And so the question is really, where are there underserved markets, where the new infrastructure gives you some sort of fundamental advantage or some sort of new utility? And then there's kind of a related question, which is even if that's worth the inspiration for the idea comes from, how do the companies that build those products actually scale,

which I think is actually a different dimension altogether. And so if you think about where the bottlenecks for actually building companies are, I think a lot of that is tribal knowledge that's in people's heads. It's like what does it mean to have like a fast-growing startup? So Coinbase, for example, is a YC company, right? It's actually not a coincidence to me. It's just like what it takes to actually build a fast-growing startup. It turns out there's a lot of traditional like best practices about how you hire people

and how you structure teams and how you raise capital. And like a bunch of that stuff is like that tribal knowledge is in people's heads in Silicon Valley. And so I think you could have the inspiration for ideas come from underserved markets. But I wouldn't be surprised if the really big winners in crypto actually sort of re-centralized around Silicon Valley. Feel the same way? Yeah, I generally feel the same way. I mean, there's a lot of developers that I hear about are working on Ethereum applications in their spare time. And so you're seeing a flock of developer talent from Silicon Valley into working in this space.

And I think that that's where you're going to see a lot of innovation, although it is pretty nice to see that there are like different hubs around the world of blockchain development. So there's like Berlin and I know places in Argentina and Switzerland is another area. So like it's pretty cool to see like more hubs pop up in the space. Yeah. And how much do you think governance and regulation is going to affect those hubs? Like does it ultimately mean just like there's a certain density of people that can build this stuff? Therefore I'm moving there. Or are these tax incentives, different regulations?

is actually going to move the market? Yeah, I think it's really going to move the market. So right now I think the U.S. is being smart and not trying to be overly restrictive because they'll know that it will push out a lot of the development, especially, let's say if you were to just really be harsh on people that were developing on these projects, and I think that that would easily just cause people just move elsewhere. You're already seeing the tax incentives play out here. So people are registering in Cayman Islands.

Or Puerto Rico. Puerto Rico, yeah. Yeah, people are like moving to Puerto Rico and starting a little like, hub over there. I've heard of people buying houses in Puerto Rico. Yeah, yeah. So you're already seeing, I actually know a few people that are trying to move out of California, especially because California has really high taxes. Yeah. Well, you see Nevada plates here all the time. And that's what's going on. People have been doing it for a while. Yeah. Yeah. And even like when you have scenarios where people are like mining in China and then all of a sudden China starts cracking down on mining,

these miners have to move elsewhere. And you're seeing like people move over to Washington because electricity is cheap. So there's like this like movement. just based off cheap electricity as well. So it's kind of crazy. Yeah, it's pretty fascinating. I think, I mean, the whole regulatory arbitrage angle to this stuff is pretty fascinating. It's just how are governments, the game theory around how governments want to regulate this stuff is pretty interesting. I actually think the U.S. government has been really, really smart about this and pretty measured and sophisticated.

Because I think they understand there's a lot of potential for innovation here and a lot of value to be created. And they don't want to crush that. And I've been actually pretty impressed with how measured they've been. I mean, you look at something like the BTC, the Bitcoin ETF paperwork that went in and all these people filing for it. I thought it was so clever the way that they essentially pushed back on that. So they didn't actually reject the ETF proposals. They essentially convinced the people who'd put in the ETF proposals to withdraw the proposals. Really?

Yeah, which I thought was super clever. So they basically back channeled. I think I don't have any inside information, just to be clear. But my read on it was what they did was they went to the teams and said, hey, look, there are a lot of reasons we can't approve this right now. Maybe it was like, hey, we don't want to inflict the bubble anymore or, you know, whatever else. Why don't you withdraw them and let's keep talking? And then that way it wasn't like the government rejected the ETF proposals. It was the ETF proposals are being withdrawn, which is absolutely the right way to do it.

If you're like, hey, look, we're going to do this eventually. We just can't do this right now. We don't want to crush the market. We also don't want to pump up the market. Really smart way to do it. And so they've actually, I think, been pretty sophisticated. Like the regulators inside the SEC and the CFTC and so on, they're actually pretty sophisticated in the way they're handling this. And what about on the investor side? How do you guys feel about, you know, accredited investors getting involved in ICOs versus non-accredited?

Yeah, I mean, that one's hard because I really believe in decentralized systems and everyone should have access to this. But at the same time, if something straight up looks like a security token and you're issuing it in the U.S., I think that rightfully falls under the SEC regulation. So I do believe in compliance, and that's actually something I really like about this new protocol, Harbor protocol, where they're essentially trying to make sure that the trading of tokens is compliance. So you can have some white list of just accredited investors that plug into the smart contract and essentially say that you can only ever issue tokens to these investors. And there's maybe some holding requirement. You have to hold it for 90 days or something.

So the smart contract itself will have the logic that you can't actually trade these tokens. So I do think that it's important to be complying with this as long as it's very clear it's a security token. Although I really think that there are plenty of cases where like a governance token doesn't fall under that jurisdiction. So it's really important to kind of like make the distinction that not all tokens are the same. Yeah, agree with all that. The risk really is that I mean, there's a whole like philosophical angle to this, right, which is to what degree should the government be involved in being somewhat paternal about protecting investors from themselves in some sense, right? And these distinctions are arbitrary as like if you have a certain amount of money,

you get to sort of do whatever you want. And if you don't, then you don't, right? So, and, you know, that's starting to change with crowdfunding regulations that have changed recently. And so there is some movement there. So setting aside the kind of philosophical parts of it, I think generally speaking, trying to prevent scammers in the ecosystem and trying to prevent people from kind of getting built and losing their money, I think. think is important and good. And to the extent that the ecosystem can do that itself, things like Harbor, which I think is pretty awesome as a project, I think to the extent that we can kind of make that easy for people to not lose their money or people inside the ecosystem calling out,

like, hey, this is what I've been wondering, right? Yeah, like, because, you know, the ICO market has been rife with these, yeah, I mean, like, not necessarily scams, but sometimes straight up, scams, right? And it's not actually good for anyone. Yeah. I mean, maybe it's good for the one scammer who gets a bunch of money. But in the long run, it's not good for anyone. Yeah, I agree. Yeah. So is this the only, what other methods are being put in place to avoid these scams? Yeah, I'm really hoping people who are in the ecosystem are very aggressive about calling these things out and not supporting them. And I think, ultimately, if there are ways for people to call out these projects and then those projects don't receive any funding, that's actually, you know,

like the economic incentives will kind of play out in the right way. Yeah. And so I think, you know, people will get smarter about it. People will get more sophisticated about diligence. And investors can kind of help. I think the people who actually are sophisticated and understand the technology and have done diligence and understand how product development works and understand all of these nuances, I think actually getting out there and saying like, hey, this is the real good stuff.

Right. Like Trubit, super interesting project. You know, like, and there's real tech there and the team is really smart and like so on, right? And just like talking about it and saying, by the way, this stuff over here, be careful. Right. And I don't want to call anybody out. But, like, you know, there's stuff out there that if you just talk to people who are deep in it,

you can sort of like poke and prod and realize that it's a little bit more vaporware. I think people just need to be more proactive about that. Yeah, there was an interesting case where there was a project called Crypto All-Stars where essentially you had collectibles of different crypto celebrities. So there was like one for Naval and Charlie. And so if you like verified on Twitter that you were actually them, the card owner, you essentially got four. percent of the proceeds of the card. And then the creative of the project got 4%.

But anyways, this was like really, really popular when people were trading this. And it pretty much like look like a pyramid scheme in a way. And someone actually bought the website and bought it from the project owners and claiming they wanted to improve it. And they actually shut it down. And so they like someone bought it paid. I think it was like $10,000 or something like that. And then just shut down the website and said like, hey, this is like straight up a scam.

and like people are pumping the prices on Twitter and people are going to lose a bunch of money. So I'm not okay with this. I'm shutting it down. So I thought that was like kind of crazy. It's amazing. Yeah. Yeah. So things like that are happening as well.

Right. And it probably like would behoove me to do some research on the beginning of the stock market because I imagine in the beginning things were getting pumped in the same way. Yeah, exactly. I mean, I think that's that is the root of a lot of this regulation. Yeah. A lot of people lost a lot of money, you know, 60, 70, 80 years ago. And so collectively we all decided, hey, it's probably better if we don't let snake oil salesmen come in and just like take everybody's money.

It's like better for everybody. Though I think it's fair to say, you know, maybe I think it's always good to revisit things that have been around for, you know, 50 years and say which of these things actually apply today and how should we think about them and how should we evolve them. Yeah. But, you know, even before I get to that point, hopefully I think there are people in the community that are good about calling these things out and stamping out the fraud before it really happened. It's too big and too many people lose too much money. And so for the people in the community, like the folks interested in starting companies, where do you think the opportunities are now? And then maybe the real question is, where are the opportunities four years from now that they should start working on right now?

To have a company. That's a great question. What do you think? I mean, there's so many applications that I feel like rely on some sort of identity and reputation system because in the end, like, even if it's a decentralized system, like, if you're doing a decentralized marketplace, you still have to trust that the person you're buying a good friend is actually going to deliver to you. So I think it's really important to have, like, some reputation and identity system that carries with you as you use all these different applications. And we're still

the very early days of that. So there's, like, things like you port and civic, but they're really rudimentary compared to the identity systems that exist in, like, regular financial systems. So I'd really like to see people work on that problem. And another area is that a lot of projects talk about doing decentralized governance. And they say that they're going to use the tokens to actually upgrade the protocol over time. But there's so much research that needs to be done there. So I think there's massive opportunity to really figure out what's the best way to handle governance and decentralized manner. I think that that's going to be a massive potential.

I was just taking some notes. I just came up with five that I think are probably worth exploring. So if you're a founder out there and you're like, hey, what should I be thinking about? One, crypto puppies. That exists already. That's a great idea. So I think the first Linda talked about before is basically scaling solutions. There's a lot of actually info work to be done just around making this stuff actually more scalable.

And I think everybody pretty much is an agreement that they're just not enough people actually working at that layer of the problem. and we could use a lot more great developers poking around there. I think even more broadly speaking that, I think there are components of infrastructure that are missing, and so I think identity as a component of infrastructure is interesting. I think things like oracles are interesting. I think just this general idea of like how do we know what's true and what's not true, and there are potentially shared data sets that people would want to cross projects or cross-chain projects.

I would bucket all that kind of stuff inside infrastructure. I think there's financial infrastructure and financial. financial tooling. Like a lot of the early use cases are basically payment oriented or money oriented. And so there's much of stuff to do there. I think there's a lot of dev tooling to be built. So it's just like the actual production of a smart contract. How do you test this stuff? How do you deploy it? There's a lot of work to do there. And then like a lot of things, I think the early use cases will probably be somewhat trivial and fun. And so I think gaming and collectibles and things like that will be pretty interesting. And maybe it's truly native stuff like CryptoKitties. Maybe it's

markets to buy and sell those kinds of assets. Maybe it's games from, you know, traditional gaming companies sitting on top of crypto somehow to do digital assets inside the game or cross-game digital assets. So I think a lot of the like really sort of fun, trivial stuff that can take advantage of the new technology will be a way to bootstrap in. I mean, arguably, I was talking to somebody earlier today about, you know, in some sense, ICOs are kind of the gaming use case, right? It's kind of like a gambling. It's a gambling use case, right? And like, that's actually kind of what's happening is people are just gambling. It's real money. And so it kind of makes sense, right, that that would take off is like it kind of matches the pattern

of what you see with early adoption technologies. Yet again, like gambling is an early adopter, right? Oh, for sure. Yeah. I mean, is there a porn crypto thing yet? I'm sure there is. I don't. Yeah. And there's spank chain, which is actually really popular. And uses really cool technology. So it's pretty great. What is it doing? So I think it's like webcam. where people can just pay spank coin or something to them. But they use like state channel technology. It's like cutting edge technology in Ethereum, which is pretty incredible. Yeah.

One of the more awkward things, I guess, with all the early adopter use cases, too, is you want to like understand them, but you don't want to go like super deep. You don't want to like in the ecosystem. You don't necessarily want to be known as the like spank chain expert. Yeah, that's true. Yeah, I haven't really seen it. Nobody's like really dug into it. But I was like, oh, yeah, somebody's doing this.

I don't actually know anybody who's really dug into it too deep place. Especially if you don't massively cash in as like the spank chain guy, then you're like, I'm just kind of around. Yeah, that's right. Fair enough. So what about the actual, ICOs have been gigantic, right? People have raised hundreds of millions of dollars. Billions.

Yeah, I think it was six billion last year is the number I read. Yeah. And then this year, three billion alone. Yeah. What was the largest one so far? It's probably EEOs. Yeah, it's probably EOS. I think they're up to a billion.

I think probably... They're like $2 billion now. Jeez. Yeah. Unbelievable. Yeah. So this like fundamentally shifts the paradigm for fundraising. So we, I mean, we've kind of like gone from zero miles an hour to 120 miles an hour in this conversation.

But like for people who don't fully understand when someone raises a billion dollars straight up. Like what are these, what are the expectations for this company? Like what are people buying? That's a great question. It depends on on, you know, I think there's. There's actually a great amount of variation there, too. I mean, it's, you know, EOS or Bancor or Filecoin slash protocol labs or Tezos. I mean, I think across the board, people would try a lot of different models, everything from you're buying a utility token, which is ultimately going to be used for some sort of functional utility inside the network as part of a product.

Yeah. To, hey, literally, you're giving money to a foundation. That's like literally, it's a donation to a foundation. and you have no expectation of anything in return. It's like if you read the docs, that's actually what you did. You donate it to a foundation. So it's actually a pretty broad spectrum, and so there's no universal answer to that.

And I actually think it will be interesting to see what happens on the regulatory side. On that, I think, in the next 12 months, as some of these things come to fruition where people don't actually deliver on projects. You know, I think it's a big open question of what actually happens and which of these things are okay and which of them are not. Yeah, what's crazy is like there's, I mean, you can't even possibly spend that much money on developing applications. I disagree.

I guarantee you someone's going to spend the money. Oh, my God. I just can't even believe. But, like, people now have so much excess capital that they're giving it to crypto funds and being like, hey, manage this capital. And now they're like an LP. So it's like so crazy. Yeah.

Some of these projects have become funds of funds. Yeah. Really? I didn't just reinvest in the ecosystem. Yeah. And in some cases, you could argue, you know what? Like I think the Ethereum Community Fund is doing an interesting job here where they're saying, hey, look, Ethereum is actually a real ecosystem.

We want to encourage development in the ecosystem. Let's invest in teams and companies doing really interesting work that may be underinvested in. Like I think a lot of infrastructure stuff is just underinvested in. So let's give developers an incentive to pay attention there. But yeah, in certain other cases, it's just like, hey, we raised $200 million. And by the way, that $5xed, so now we have a billion dollars. And we're not actually equipped to handle a billion dollars. We really only needed $25 million to build the thing.

So what are we going to do with $975 million? Right. And so then you also have to be a money manager as the founder. So there's like how much is liquid, how much is crypto, how much do I pay people? Yeah, which then I think to Linda's point is, okay, well, we probably don't want to be money manager. So let's go find a money manager. And then they're handing their money over to people to be money managers. Man, that's insane. That's crazy. So on the founder side, what are you guys saying to people that are honestly considering an ICO and they've passed the threshold where you're like, okay, this actually makes sense. You're not just like generating some pyramid scheme. You're not just trying to grab money. and there's a real reason to do it. What do you tell them? So very, very few times, is it reasonable, in my opinion, to do a token sale? There's a lot of really great projects that can do decentralized applications or create

their own blockchain or whatever, but they don't actually need to do a token sale. They can just go traditional equity route. And have you seen that with some projects like Dharma and D-Y-D-X? So I actually recommend a lot of projects to go that route because you don't necessarily want to tack on a token that you don't know is actually going to make sense. It creates additional friction to the network as well. And there's still regulatory uncertainty as how this is supposed to be handled. So if someone still really wants to do a token sale, I recommend that they work with lawyers

that really understand this space. Don't try to be cheap with the lawyers. I've heard people be like, oh, I found some like discount lawyer who's willing to do this token sale for really cheap. And I'm like, no, like you want to make sure people have expertise around this and can guide you through things. But I generally also say like, and no one's listened to me on this. I think they should raise in series.

Like there's no need that you have to raise all that money up front. Let's say you really wanted to raise all that money up front. You should probably like lock it up for some time. And as you hit certain milestones, the funds then release. Because it can also, just sitting on like $200 million can also kind of hurt incentives of the team being like, oh, we just have a bunch of money. Like we can just spend like crazy. So I think that the incentives really change. And the last thing which people have listened to me on is the vesting schedule of the besting schedule

of tokens. So it's really important to just kind of look like a traditional company in that sense is you want to make sure employees aren't just going to leave and cash out their tokens right when the token sale happens. And on the flip side, for investors, you want to make sure that they're aligned with you as well. Early on, a lot of projects didn't have a vesting schedule or lockup for these investors. And the investors just came in and flipped their coins. They got their discount like 20 to 30 percent. And then during the actual token sale, they just sold everything. and they're no longer investors. So it really changes incentives.

So it's so important to think through how your token model actually works and what are the like, what's the governance of it essentially. Do you recommend for your vesting for employees? Like same deal? Yeah, that's pretty much what I've been doing. So for like one year lockup for your-on-year lock-up for your investing schedule. That's what I've been recommending. But I mean, yeah, it's pretty tried and true.

I mean, I think a lot of these things like vesting or, you know, being thoughtful about when you raise money and how you're, raise money. They're tried and true for a reason, right? They're actually like underlying it all is there's a group of humans that get in a room or get in a, you know, telegram group and write some code. And those human dynamics haven't really changed. And so things like vesting are important. I think we figured that out over the last 20 years that some of these things are really good. Now, I think there are there places where you might want to like reconsider them in, you know, like in this new world, like, you know, how much, where is the value accrue? Is it equity or

tokens. So are your employees vesting equity or are they vesting tokens? So they're like some interesting questions there, but I think some of these foundational concepts like vesting, they exist for a reason, and I think they're best practice for a reason. And I think a lot of teams should be adopting these things if they haven't already. Yeah, I mean, it's tricky. Like, again, when you get a bunch of humans in a room, they create games. And like, if you raise a billion, I'm going to raise a billion one. And like, that's the game. Yeah. Unfortunately. So to like kind of boil it down, you're saying to founders, like, listen, you don't necessarily have to do a token sale. Like, it's not required.

So if you're a founder and you're interested in crypto, you can get in, but you don't have to do this. Yeah, right? And so when it comes back to that, like, are you saying to them, you know, apply to an accelerator or go and raise money traditionally? Like, what are you recommending them to do in that path? Yeah, I think what it comes down to is just like outside of crypto and the startup world at this point, there are a lot of places to get money. And I know it's different if you're in different parts of the world. in some places have more investor depth and investor liquidity than other places. But, you know, there are a lot of ways to raise money.

And so you really want to be thoughtful about who you're raising money from and what value they bring to your company. And, yeah, you could do the ICO and get a bunch of people to send you some ETH, but what happens if things don't go well, right? Those are the kinds of projects I think that, you know, your retail investor raises up their hand and says that person stole my money. Meanwhile, there are all these great investors like Linda who have actually been at companies and started companies and helped scale companies.

And that's actually who you want involved, right? That's actually who can help you over the next three, four, five years as you build your company. So I think what we're going to see is a lot of people returning to that idea of, oh, well, I could get money from five different places, who can actually add value to my company for the next three to five years and help me build this company? And so I think we'll see that sort of re-aggregation towards people who actually add value in the early stages. So, you know, that could be an accelerator. That could be an early stage investor.

That could be somebody who was early in crypto and made a bunch of money, but actually is very sophisticated about how they think about crypto. Right. A lot of those people out there, too. So it's not to say, you know, people who haven't previously been in the ecosystem or not value add. I think there are actually a lot of people who are crypto-native in some sense who really understand this stuff. Right. And I've been in it for years who are very smart and very thoughtful and you want them involved. And so it's really about how do you find people who can add value.

and get them involved in your company and being smart and thoughtful about that. Yeah. Yeah, that's so true just because when these projects are doing token sales, they're distributing their tokens to thousands of people. And especially if you did some heavy marketing around that, you end up getting this like pump and dump kind of crowd. And all they're doing is saying like when moon, when Poloniacs. Like they just want things listed in the price to pump.

And then if you look at those Slack groups, it's just like mayhem. They're just, they're not adding any value. They're creating tons of distraction for the founders. And so I think it's so important to have value-out investors. and not just try to make money really, really quick or something. I mean, I think you see the micro example in Silicon Valley already, right? Like, if you're a big quotes hot company, you can raise from anyone. It's just about finding the smartest money.

And so you see that in a larger scale here. It's like billions of dollars floating around. Yeah, 100%. And I actually think in the last three months in particular, I don't know if you're saying this, but it seems like we have moved back into that world where the really, really good teams in crypto and a lot of the teams that have a lot of early momentum. are going out and seeking out the high value investors again and saying like, hey, I don't want to do a public sale.

I actually want to find people who can add value to the company and be thoughtful about it. So, I mean, I think we might look at this historically, you know, in five years I might look back and say, oh, that was a funny six-month window in time. And it kind of like reverted to the mean, basically. Yeah. We came back to the basic principles.

I saw some stat on that. I was saying, like, nowadays, 60% of the funds raised in a general token sale is actually raised in the pre-sale round. So it's really shipped the momentum. so far. Just in a year. The last few months, yeah. Since the beginning of the year. Yeah.

Yeah. Cool. Yeah, things move so fast in the space. All right, so let's go into some of the questions from Twitter. King Croesus asks, so what are your thoughts on optional versus mandatory privacy in transactions? Yes, have a lot of thoughts on that. So I essentially think that it needs to be mandatory privacy if you're going to actually have a privacy coin. If it's ever, if it's ever optional, you get looked at if you're starting to use a privacy feature. Like, why are you using this privacy feature? Do you have something to hide? So first of all, it like paints a target on your back. Second of all, so for context, I did, I did blockchain tracing when I was at Coinbase. And so

Bitcoin is very easy to trace. And a lot of people give information away about other people. So even if you're being really smart and someone transacts with you, they give away information about you. And so that can happen in a scenario where you only have a small subset that's actually being private. And the rest of the users on the network are being public, they can give that information away. So I think it's really important to just have mandatory privacy. And that's something I really love about Monero. They have all transactions are private by default. And I think that's absolutely crucial. Yeah, philosophically, I agree. I think mandatory is the way to go. I think it creates some interesting challenges, though. I think

that's a harder pill for regulators to swallow, generally speaking. I heard this great story where in the early days of the internet, you know, like SSL, HDPS is now like a standard thing. right? And it's on by default in a lot of cases. But actually the Netscape team had to fight to make that a thing that was possible inside the browser because the government was worried about why do you need to encrypt your transactions? Like, you know, are you doing something illegal? Like, why shouldn't we have this be public? And it turned out that one of the selling points was commerce. It's like you don't want to send your credit card number over the wire unencrypted. And so the fact that there were like real legitimate use cases allowed things like SSL to emerge

is like, oh, yeah, we should actually allow that. And so that, that I think is actually the challenge for the space is, if philosophically you agree with Linda, which I do, I think then the onus is on us to demonstrate all of the use cases where default privacy is really important. And I think things like, hey, look, if people do start to get paid in crypto for their job, well, you kind of don't want everybody to know how much money you make and who's paying you. That's like, that's reasonable. I think it gets even more interesting if you start talking about, well, let's say you have a particular sexual orientation and you live in a community that doesn't really support that. And you're donating to a charity that does. Like, do you really want people to be able to sniff that out? Or you take it even more extreme. And you say, well, if you live in a country where the government is not, you know, you might trust the U.S. government. There might be other governments that you don't trust. Well, do you want, even if that's not your government, do you want that government to be able to sniff out your transactions on a public blockchain?

Right. And so I think being really concrete about it's not, it's not just a philosophical thing, though I do agree with the philosophy 100%. There are like really practical consequences to this stuff. We'll make it possible, I think, for regulators to understand why it's so important that it be on by default. Yeah, absolutely. And also there is this concept of selective transparency in both Monero and Zcash. So you could essentially have this view key where you can share with someone to now view your transactions. That's your point. So this you could share with auditors if you want to be. compliant or if a charity just wants to display their transactions, they can share their view key to everyone in the world. So the idea is that it really much just mirrors the traditional financial system. We don't broadcast everything to the world, but we download our bank account statement and give it to someone when they need to see it. So I don't think like it is far off

from what we're just used to right now. Yeah, agreed. Yeah. So just default private and then if you need to be public on anything. Yeah. Cool. So transitioning from that into another governmental related question. Claudio asked, how do you see the U.S. government, or do you see the U.S. government launching their own cryptocurrency backed by gold? Yeah, I have very strong thoughts about this. So the specific incarnation, I think, backed by gold, we can sort of set that aside for a second. In general, I think I hear a lot of people talking about how governments might regulate crypto or ban crypto. And there is some risk of that. I think the bigger and scarier potential risk is that governments fully embrace crypto in the wrong way. And so kind of back to this

idea of privacy, right? Like, do you really want a government that you may not trust to have full visibility into everything that you are spending money on every day and every transaction and every person that you're transacting with, right? That has like very, you know, there's like fundamental human right to privacy sorts of aspects to that. And then like very practical, you know, if your government can do it, odds are other governments can do it. sorts of downstream consequences. And so, you know, increasingly, I think governments are getting sophisticated in the way that they think about technology and adopting technology and using technology. So I think the bigger risk is actually what Claudio is calling out is governments being really

smart about adopting this in a way that makes, in my opinion, the wrong tradeoffs between sort of security versus privacy. And I think there's just not enough people, I think so many people are worried about governments banning this stuff that we're not looking at the other side of it nearly as deeply of what happens if a government fully embraces it but does it in the wrong way or what if a government that you may not trust even if you trust your government if another government that you don't trust embraces it in the wrong way is there a positive outcome in which a government embraces it creates for example u.s. coin whatever it might be trump coin yeah where it's actually not not a negative thing where like you we move from the dollar

to US coin or whatever it is. Possible? Yeah, a lot. I think absolutely. I mean, that's one of the great things I think about crypto is it is global. And I think there are all sorts of opportunities for governments that are especially smaller and more nimble and willing to adopt this stuff. I think Estonia has done a great job of pioneering some of this stuff.

I think Singapore is poking around with this. So there are definitely places between voting or making it easy to file your taxes to, you know, making the banking system more efficient. There are lots of places, I think, where large existing institutions could adopt this, and that would be great. Or even making stable coins. Maybe some government should just say, hey, look, we have $500 billion and you can trust us, and we're just going to issue stable coins, and now actually crypto can be a real thing.

So I think there are lots of positive ways governments could play in the space as well, and hopefully some will. Yeah, Dubai has been pretty good about that. They said that, like all visa applications and some other documents would be on the blockchain. by year 2020. So it ended up, like, it's going to save them over a billion dollars a year and just being more efficient. So they've been pioneers in the space.

And I know consensus, the company works really closely with them. And then, yeah, I completely agree with everything you said. What's crazy is Venezuela already issued their own. Oh, the petrodollary. Yeah, which they claim $5 billion was raised in the pre-sale, but they haven't proved it. But what's crazy is that there's all these sanctions against Venezuela, and now there's this foreign capital coming in, apparently, to fund this. And so you run into all these issues where, like, now you're supporting a sanctioned country financially. And so that'll be really

interesting to watch how that plays out. Right. Well, I mean, you see every day how little the average, you know, normal person cares about these sanctions between borders. So it's like, I don't know, I'll buy something in Venezuela or Mexico or it doesn't matter. Yeah. Yeah. Yeah, it's fascinating. All right. Another question. Neveen Mishra asked, What would be the best onboarding ramps for adoption and what roles will oracles have in decision making in the future? So best onboarding ramps for adoption? I mean, honestly, I think it's something like Coinbase. They do a really good job of just linking up your bank account and just purchasing cryptocurrencies.

So I think that just having a nice user experience there is really important. I think the more interesting thing for me is what role will oracles have in the decision making process? So I'm fascinated with this idea of decentralized Oracle. so you could essentially have a system like auger, which is a prediction market platform, where anyone can create a prediction market on it. And the past issue with prediction markets is they often get shut down by regulators just because it's kind of closer to gambling. But in prediction markets on top of auger, no one can shut this down. So you can really have these markets operate. And so people can start creating markets where essentially you measure the

citizens' happiness, you measure GDP, you measure all these different statistics. of a different of a country and you can have people betting on the outcome of whether or not a different policy is going to increase or decrease um these statistics and from there policy makers can now start making their decisions based off the outcome of this and that's called food tarkey and i just think that is so cool because it people are actually putting their money where their mouth is at this point so like they might say one thing like yeah i really support this policy but if they're actually betting on it then that's that's more i think a stronger signal so i i i think that that's going to be something that is totally new that these systems aren't able to produce.

Yeah. The only thing I'd add on the onboarding piece of it is I suspect that the way most people will get onboarded will either be very directly like Coinbase. It's like they know what they're getting into, they're buying into a crypto, or it's going to be totally opaque to them. They're actually not going to realize at all that what they're doing is interacting with blockchain and crypto. They're just doing a thing that you couldn't do before. Right. And it's just going to be so, it's going to be so sideways and that people just won't realize that that's actually what's happening. And I suspect those native use cases will be that way.

And so I think, you know, it's an interesting question of what percentage of people onboarded into the space do it very directly through something like Coinbase or they just happen to do a thing and that happens to sit on top of crypto. It kind of reminds me of, you know, like several years ago, we used to talk about mobile companies. So right now we talk about crypto companies. And in some point in like the next five years, it's not going to be that you're a crypto company. that you offer some value to the people who use your product, and it just so happens that you sit on top of blockchain or use crypto economics or whatever. And so I think that will actually be how a lot of the stuff goes mainstream

is in a way that people don't even associate directly with crypto necessarily. Yeah. I think I would bet 100% on that because if you ask the average person like, so what language is Facebook in? You're like, what? What's a language? Why do I care about this? And you see when people pitching their companies,

they're like, we have the fastest, implementation of Python you've ever seen. No one cares. No user cares. Yeah, that's right. Yeah, good point. Awesome. Well, thanks for coming in, guys.

This has been really great. Yeah. Thanks for having us. All right. Thanks for listening. So, as always, you can find the transcript and the video at blog. dot ycombinator.com. And if you have a second, it would be awesome to give us a rating and review wherever

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