AI transcript
0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:19 For more details, please see A16Z.com/disclosures.
0:00:22 Welcome to the A16Z YouTube channel.
0:00:25 Today I’m here with Olaf from PolyGener, good friend of Olaf.
0:00:31 You’re both longtime cryptocurrency enthusiasts, maybe if you don’t mind, we’ll just go back
0:00:32 a little bit.
0:00:36 You were employee one at Coinbase back in what year was that?
0:00:37 2013.
0:00:38 Okay.
0:00:39 And I guess you got interested in crypto before that?
0:00:40 Yeah.
0:00:44 So I was in college when I got into Bitcoin and I wrote my undergraduate thesis on Bitcoin
0:00:45 in 2011.
0:00:48 And what first got you excited about it?
0:00:53 So when I first read about it, I thought there’s no way this is possible to have a native
0:00:56 internet money that isn’t controlled by any sort of central party.
0:00:58 So I found it fascinating on its face.
0:00:59 It’s just sort of technically–
0:01:00 Yeah.
0:01:06 But then once I dug into it, I kind of thought about the nth order implications and you realize
0:01:08 this is a huge deal.
0:01:12 It means that for the first time, you can have digital scarcity on the internet.
0:01:17 And of course, you could move to a global unified financial and monetary system that’s
0:01:23 outside the scope of any sort of sovereign state, political control, and is really opt
0:01:24 in by all the users.
0:01:28 So the general idea was just really fascinating to me.
0:01:32 And I really did right away sort of buy as much Bitcoin as I could.
0:01:36 But that was back when Bitcoin was kind of the dominant idea and everyone thought the
0:01:40 kind of main thing you could do with this kind of new architecture was digital money.
0:01:45 Since then, the kind of possibility space, at least to me, feels like it’s expanded dramatically.
0:01:46 Yes, it has.
0:01:52 And so to me, the big moment was when Ethereum launched.
0:01:58 For me, I started seeing– a big breakthrough in my head was when I realized that Ethereum
0:02:03 wallets were actually more like browsers than bank accounts.
0:02:07 And I started seeing some stuff get built on Ethereum that people in Bitcoin had tried
0:02:08 to do for a long time.
0:02:12 In Bitcoin, you only have one asset, which is Bitcoins.
0:02:15 People had tried to build other sorts of tokens or assets that would settle to the Bitcoin
0:02:16 blockchain.
0:02:19 And there were projects like Mastercoin, Counterparty–
0:02:20 We funded this project Lighthouse.
0:02:21 We helped–
0:02:22 Oh, yeah.
0:02:24 And that was basically decentralized crowdfunding.
0:02:25 Yeah.
0:02:26 There was crowdfunding on Bitcoin.
0:02:27 It was just very, very difficult.
0:02:37 I mean, Bitcoin has decided, perhaps correctly, to trade off the expressiveness of the programming
0:02:39 language for increased security.
0:02:43 So they have a very weak programming language– very deliberate, though– which provides,
0:02:48 I think, perhaps better security and kind of– it’s more conservative kind of development
0:02:49 plot path.
0:02:51 So as a result, it’s very hard to build crowdfunding.
0:02:56 And I remember when Ethereum came out, it was literally one of the 20 line pieces of
0:02:57 code on the home page with that.
0:03:02 And this is one of the things I think people really underestimate how much the developer
0:03:04 abstraction matters.
0:03:09 So it took Mike Hearn, something like eight months to build Lighthouse using Bitcoin scripting,
0:03:15 the Ethereum ERC20 system– you and I could practically do this on our cell phones now.
0:03:21 And that layer of abstraction opens up use cases that I think people underestimate how
0:03:22 big a deal it is.
0:03:24 Well, it’s the same with all computing.
0:03:30 You could have done– there were mobile phones that had GPS and cell phone connectivity
0:03:32 pre-iPhone.
0:03:35 But the iPhone made it so the app developer didn’t have to understand any of that stuff
0:03:36 worked.
0:03:41 You could focus on recruiting drivers and building a beautiful UI.
0:03:44 And to me, obviously, the iPhone– there’s a bunch of great things about the iPhone and
0:03:45 the Android and what made smart phones take off.
0:03:50 But a lot of it was that they figured out the right abstraction layer for the developers
0:03:56 so that you could get a million apps and a whole bunch of creativity that happened as
0:03:57 a result of that.
0:04:02 And I actually think we’re going to see the next wave of that now with WebAssembly or
0:04:08 Wasm because there have been problems with the Ethereum solidity language, huge security
0:04:09 problems.
0:04:13 And there’s not actually as much expressivity as people think there is.
0:04:16 It’s still limited to solidity.
0:04:20 Even one other language was basically found to be totally insecure.
0:04:29 So I think that these VM systems moving towards a Wasm compiler– and this is like Polkadot,
0:04:34 DFINITY, eWasm, so like Ethereum 2– I think it’s a really big deal.
0:04:37 So just to explain to people– so Bitcoin comes up with this new kind of architecture
0:04:42 that I think of as– I think it’s, frankly, mischaracterized today as ledger.
0:04:43 I think of it as a computing platform.
0:04:45 So what seems to be a computer and a ledger?
0:04:46 Ledger is more like a hard drive.
0:04:48 A computer is a hard drive plus a processor.
0:04:50 And Bitcoin has a processor.
0:04:54 It’s just a processor that has a limited– but deliberately limited in the applications
0:04:55 it can run.
0:05:00 And the main application it runs is the thing that moves Bitcoins around, right?
0:05:02 Ethereum says, hey, let’s take that processor and let’s expand it a lot.
0:05:06 But as you’re saying it does, they developed their own programming language solidity, which
0:05:10 is kind of JavaScript-like, but it’s kind of eccentric.
0:05:16 And just so people know, eWasm, so that’s WebAssembly, which is now baked into every browser.
0:05:23 And so it’s sort of– there are now billions of computers that run eWasm natively.
0:05:27 And it will soon become– there already is, and it’s going to continue to become the most
0:05:31 dominant kind of runtime environment for software in the world.
0:05:34 And what that means is now that all the blockchains are supporting eWasm, that means that all
0:05:40 of these compilers that are built from other programming languages, Python, Rust, whatever,
0:05:44 if you’re a favorite language, you already have– you get the piggyback off of all of
0:05:47 the tooling that’s been built over the last 20 years to the other programming languages.
0:05:52 So you make it a much more kind of familiar experience to developers.
0:05:56 And so instead of needing to learn solidity, which is, again, this custom language, it’s
0:06:02 a pretty new language, the scheme of things, you can use your off-the-shelf favorite programming
0:06:03 language.
0:06:06 To me, this is a similar step function that we saw from Bitcoin scripting.
0:06:08 Well, see, it’s not just the programming language then.
0:06:11 It’s also like– it’s like the great thing about Python is not just like there’s 10,000
0:06:13 GitHub projects, or I mean, there’s formal verification.
0:06:17 So just as an example, why does it take a long time to release an Ethereum project today?
0:06:21 I think at least half the development time probably is security audits, right?
0:06:25 And that’s because you’ve got this really kind of this new programming language, people
0:06:29 don’t fully understand it, there aren’t these kind of tools around it, and suddenly you
0:06:34 switch to something like Python, and you’ve got just like 20 years of whatever, 15 years
0:06:39 of incredible tools that are built around that environment.
0:06:40 Yeah, that’s exactly right.
0:06:48 And so to me, this is one way that we’re building useful abstractions to make this even easier
0:06:51 to ship like end user applications.
0:06:52 Yeah.
0:06:55 Yeah, I mean, the big thing’s happening now, so I guess kind of jumping forward.
0:06:58 So I think you and I probably see it similarly, there was kind of the first era, which was
0:07:01 Bitcoin, but it was sort of the main– the only thing really in that first era, one of
0:07:02 the only things.
0:07:06 Then there’s sort of the Ethereum era, which sort of takes this idea of digital money and
0:07:09 expands it to blockchain computers, right?
0:07:16 And now I think what we’re seeing over the next 12 months or so, maybe 12 to 24 months,
0:07:18 is the kind of the wave three happening, right?
0:07:24 Which is taking the ideas of Ethereum, upgrading the developer experience like you just discussed,
0:07:29 very importantly upgrading the scalability, which means multiple things, it means more.
0:07:34 It basically means what we call in traditional venture capital, scale out, not scale up.
0:07:38 So instead of getting scaled by adding more, a beefier computer, you can get scaled by
0:07:40 adding more computers to the network, right?
0:07:43 Which lets you kind of expand linearly with the demand.
0:07:47 And that requires what’s known as sharding or some sort of parallelism that lets you
0:07:48 run.
0:07:51 And that’s what a lot of these new projects, or they’re doing better developer experience
0:07:56 and things like WASM and just all the other tooling around it, they’re building parallelism
0:08:01 in from the start, right, as opposed to having to upgrade later.
0:08:04 And what else?
0:08:08 I think a third one for me is they’re often building the ability to upgrade the protocol
0:08:09 into the protocol.
0:08:10 Yep.
0:08:11 Yep.
0:08:13 So the kind of governance of the protocol itself and also the governance of the smart contracts
0:08:14 themselves.
0:08:15 Yes, exactly.
0:08:22 So to me, Bitcoin and Ethereum, and maybe very much intentionally, have not had formal
0:08:25 systems to upgrade themselves.
0:08:29 And that’s because it does open up a potential security threat to the system.
0:08:32 If it can upgrade, then who controls that upgrade process?
0:08:37 But if you can adequately design an upgrade process that is controlled by the same people
0:08:43 that already control the consensus layer, you know, it’s an equivalent threat as baking
0:08:46 a bad block or something like that.
0:08:51 So to me, you know, the ability to say, actually, there’s a better system, let’s upgrade and
0:08:55 move to that system in a coordinated manner.
0:08:56 You know, I think that’s really exciting.
0:09:02 That’s the way I think of that, is there’s always a trade-off between the security of
0:09:08 the system and the very promise of a blockchain computer to me is that it’s making a commitment
0:09:12 that the code will continue to run as designed, there’s sort of game theoretic guarantees.
0:09:15 And you want to, of course, maintaining that commitment is very, very important.
0:09:16 Yep.
0:09:22 But there’s a trade-off because software also, as we know from, you know, decades of experience,
0:09:29 A, has bugs that needs to be fixed, and B, benefits from, you know, from sort of iterative
0:09:30 upgrade cycles, right?
0:09:31 Yeah.
0:09:32 And so how do you balance those two things?
0:09:37 And so Bitcoin Ethereum kind of took the extreme kind of conservative route, which said the
0:09:40 only way to upgrade is to kind of get a whole bunch of people to just literally upgrade their
0:09:44 software simultaneously, which led to all these kind of offline things, including sort of
0:09:49 famously the Bitcoin Civil War and then the Ethereum fork, which was very contentious.
0:09:52 And so they were kind of built in a way to be very conservative with their governance
0:09:53 methods.
0:09:54 Exactly.
0:09:55 Yep.
0:09:56 And so how do you find the right balance?
0:10:03 And the people are experimenting and trying new systems to get a better balance.
0:10:09 So I think a big part of this is there are actors in the Bitcoin and Ethereum and other
0:10:16 crypto systems that are part of what defines like the reality of those systems.
0:10:21 And so you could call these node operators in Bitcoin, miners obviously have a role to
0:10:22 play in it.
0:10:26 In proof of stake protocols, it’s very much the token holders who are staking.
0:10:29 And we’ve seen really, really strong participation.
0:10:33 So in a lot of these delegated proof of stake protocols, you see, you know, 70, 80 percent
0:10:36 of token holders participating in consensus.
0:10:39 So they’re already defining what is the latest block in the blockchain.
0:10:43 They’re already defining the rules of that computer.
0:10:49 So in my mind, you know, how can we say we’re going to use a decentralized mechanism to
0:10:55 come to consensus about the computer state, but we’re going to also say it’s impossible
0:10:58 to come to a decision about how to change the rules of the computer.
0:11:02 So I’m very skeptical that we can’t achieve very secure on-chain governance.
0:11:04 I think we can.
0:11:09 And to me, it’s a very big deal because if you get governance right, in theory, everything
0:11:11 else should be a sort of waterfall down from that.
0:11:16 And you can do very exciting things that I think we haven’t done.
0:11:21 You know, I think a big problem for both Bitcoin and Ethereum has been funding of core protocol
0:11:22 development.
0:11:24 So application developers have found all sorts of ways to monetize.
0:11:28 You can go raise a VC round, you can do a token sale, you know, there’s lots of money
0:11:32 sloshing around in general if you’re building on top of these protocols.
0:11:36 But Ethereum has this weird problem where there’s probably 100x the number of developers
0:11:40 building apps on top as there are building core protocol stuff for Ethereum.
0:11:41 And so to me…
0:11:43 Well, that has to do with the history of Ethereum, right?
0:11:48 So there was a foundation which has a certain amount of money, but there was never kind
0:11:50 of a structure set up.
0:11:51 Yeah, there’s no structure.
0:11:52 And in reality…
0:11:54 Set up to continuously fund the development.
0:11:59 And in reality, there needs to be some sort of, basically like a tax system, where if
0:12:02 I contribute to the core protocol and create all of this value…
0:12:05 Well, it’s like what Zcash does, what they have inflation baked into the protocol and
0:12:07 some portion of that goes through…
0:12:13 Which is kind of crude, because their system is, you know, it’s designed around one team.
0:12:17 I don’t think it’s designed to last 100 years and its current implementation.
0:12:19 In their defense, I don’t think they do either.
0:12:20 Yeah, yeah.
0:12:23 I mean, I think that they think of it as a MVP to a better system.
0:12:24 Yeah, to a better system, yeah.
0:12:30 And so in my mind, the ability for developers to contribute new protocol suggestions and
0:12:33 basically add a build to them.
0:12:37 So then I could say, if this gets merged in and this actually becomes the new version
0:12:41 of the protocol, me and my development team are actually going to inflate a certain number
0:12:42 of coins.
0:12:43 They’re just going to be created.
0:12:46 It’s like dilution, basically, for the existing holders, and they’re going to be rewarded
0:12:47 to us.
0:12:51 And because this is a long-term iterative game between all the token holders and the developers
0:12:54 who are going to contribute code to the protocol, it’s actually in the token holder’s best
0:13:01 interest to pay them and say, “Okay, we’re going to pay you guys what I accept as an
0:13:02 Ethereum holder.”
0:13:04 Like a 1% dilution to ship Ethereum 2?
0:13:06 Absolutely, right?
0:13:07 It’s a no-brainer too.
0:13:13 And so if you could create 1% of the Ethereum tokens and grant those to the development
0:13:17 team, today that’s like, what, $200 million?
0:13:18 It’s a large amount.
0:13:23 What do you say to the skeptics who think that proof-of-stake governance will devolve
0:13:29 into either like a blue talkercy on one hand or the big investors or whatever, whatever
0:13:35 type of talkercy, kind of control for their own interests, or alternatively are vulnerable
0:13:38 to bribery attacks and other kinds of…
0:13:44 Yeah, so I just think that we have relatively at scale proof-of-stake systems today.
0:13:47 This argument seemed better 12 months ago before Tezos and Cosmos.
0:13:48 Yeah, that’s my thing.
0:13:51 It’s like, you see Tezos and Cosmos, it’s like, if you can get away with these attacks,
0:13:54 there are $100 million bounties to go through them.
0:13:55 The biggest bug bounties?
0:13:58 Yeah, I’m a big believer in economic incentives for these bug bounties.
0:14:03 I mean, if you can attack Tezos and break consensus and get bad blocks through it…
0:14:06 I haven’t followed the Tezos stuff, I’m sure there are people trying to attack it.
0:14:08 Oh, I’m sure there are.
0:14:11 And I’m just like there’s people trying to attack Bitcoin all the time, right?
0:14:13 And these are highly adversarial environments.
0:14:18 But in my view, proof-of-stake to me has a few features that I really like about it.
0:14:25 So one, you have node operator and miner type participants and token holders.
0:14:30 And in the Bitcoin system, we’ve actually seen cases where these parties don’t have
0:14:37 the best interests in mind, like there’s not a perfect overlap for their interests.
0:14:40 And so in a way, you could argue there’s like a check and balance or something like that.
0:14:43 But in a system like Tezos or Cosmos, those are the same people, right?
0:14:45 So the token holders are the validators.
0:14:49 And I think that just means in general, there’s going to be a better alignment of interests
0:14:53 between the block producers and the token holders.
0:14:59 The second thing is that if you attack a proof-of-stake network, mitigation of the attack after it
0:15:01 happens is significantly easier.
0:15:07 So if you come in with 51% of the coins, and in most proof-of-stake, it’s actually 34%
0:15:11 of the coins is enough to attack, and you start doing bad things, right?
0:15:14 Bad blocks and stuff like that.
0:15:18 The minority people here can really just hard fork the chain and delete your coins and keep
0:15:19 going.
0:15:26 However, the reason they can do that is because that attacker’s validation was intra-protocols,
0:15:30 like within the protocol, so you can delete their stuff and move forward.
0:15:36 If you do that with hardware and proof-of-work systems, you actually have to change the hashing
0:15:40 algorithm for the entire proof-of-work chain and burn everything to the ground, like for
0:15:42 the good guys and the bad guys.
0:15:46 Because you have to fork so that the hardware is now bad for everyone.
0:15:50 And so you have to basically punish the good guys and the bad guys to mitigate a proof-of-work
0:15:51 system.
0:15:54 So in a proof-of-work system, summarize that, in a proof-of-work system, the worst-case
0:15:57 scenario is your attack doesn’t work.
0:16:01 And a proof-of-stake system, the worst-case scenario is you lose all of your– not only
0:16:04 your attack doesn’t work, but you also lose your entire life savings in that protocol.
0:16:05 Yes, exactly.
0:16:08 So it’s a much more punitive measure.
0:16:13 Well, it’s disproportionately punitive to the bad guy in proof-of-stake.
0:16:17 By the way, and so I would add also the other thing about proof– I mean, there’s also the
0:16:18 energy use.
0:16:19 Oh, well, yeah.
0:16:20 Yeah.
0:16:21 It doesn’t– Bitcoin mining destroys all this– waste all this energy.
0:16:22 It deliberately does.
0:16:23 But it’s still bad.
0:16:27 Also, very– for me, it’s a critical thing is– you’re talking about developer experience
0:16:29 and user experience.
0:16:34 You just simply can’t have sub-second transaction finality in a proof-of-work system.
0:16:38 So Bitcoin, you really need to wait– each block is 10 minutes, and it has to do with
0:16:43 the coordination among the network and the network propagation latency and things.
0:16:44 But also, it’s a probabilistic method.
0:16:47 So you really have to wait probably 60 minutes, if not longer.
0:16:50 And from a user experience point of view, if I send you– and it’s the same with the
0:16:51 theorem today, it’s proof-of-work.
0:16:55 And you go, if you download Quid, Miss Wallet, and you try to use some of these apps, there’s
0:17:00 a lot of really cool apps as early, but you’ve got to wait 30 seconds after you click a button.
0:17:02 That’s not a modern user experience.
0:17:05 And the only way we’re going to get to modern user experience is through these proof-of-stake
0:17:06 systems.
0:17:09 They have all these different methods that get much faster transactions.
0:17:11 So just, I think, a whole bunch of reasons why.
0:17:15 For example, with sharding, no one that I’ve ever heard of knows how to do sharding in
0:17:16 proof-of-work.
0:17:20 So a pairless of scaling, all these other things we’re talking about require a mistake.
0:17:24 There’s a reason that every– I think 2017 was a major year of fundraising, and 2019
0:17:25 is a major year of launches.
0:17:30 And there’s a reason that every blockchain that’s launching today is mostly using proof-of-stake.
0:17:32 I mean, with the exception of Grin and things like this, right?
0:17:33 Yeah.
0:17:38 But those are all just simple transactional– they don’t have smart contracts, they don’t
0:17:41 have really scaling solutions.
0:17:47 Evolution is not– is very much focused on private payments and scalable payments.
0:17:52 It’s not trying to open up a suite of new applications that were not possible with bolder protocols.
0:17:54 Which to me is the really exciting thing.
0:17:59 What is possible that we haven’t seen happening today?
0:18:03 Because even the Ethereum developers, when they shipped the protocol in 2015, I don’t
0:18:07 think any of them could have conceived of the whole ICO wave.
0:18:14 And that was like 18 months away, and it was still hard to see that that was coming.
0:18:17 To me, this is what makes computing interesting, right?
0:18:18 Is there’s this interplay.
0:18:23 If you go look at the PC, the internet, smartphones, I think we’re going to see– it’s a crypto,
0:18:27 I think we’re going to see it with VR in a couple– this year, in a couple years.
0:18:30 There’s this interplay where you get– the platforms get better.
0:18:32 In this case, we’re talking about Layer 1 smart contract platforms, right?
0:18:36 Which are the ones we’re talking about that are coming out over the next 12 to 18 months.
0:18:40 And those are kind of the equivalent of the Apple II or the iPhone or whatever in this
0:18:41 world.
0:18:42 To me, that’s cool.
0:18:43 That’s great.
0:18:44 And we’re into that, right?
0:18:47 But the really cool part is all of the crazy stuff that people– no one imagined– it’s
0:18:50 really funny if you go back and look at the early Apple II ads.
0:18:53 So Apple II came out in ’77, PCs didn’t really take off for six years.
0:18:56 And for those six-year peer people, we’re trying to figure out what do you do with these
0:18:57 things.
0:18:58 And all the old ads are really funny.
0:19:01 They always have people at the kitchen table doing their recipes, and computer companies
0:19:02 didn’t really know.
0:19:05 But then the developers came along and invented word processing spreadsheets.
0:19:06 All this other cool stuff.
0:19:09 And so that to me is what’s really– like, right now, we’re seeing a little bit on the
0:19:10 application side.
0:19:14 But it’s limited because the platforms, the Layer 1 smart contract platforms, just aren’t
0:19:15 there.
0:19:16 Right?
0:19:17 So we can’t– I mean, we’re seeing cool stuff.
0:19:21 We’ll talk about it today, like in DeFi, for example, in terms of finance, where maybe
0:19:24 the performance parameters are looser and things.
0:19:26 They don’t need the kind of performance you need for other things.
0:19:30 But what’s really going to get exciting to me is that period of, like, hopefully a year
0:19:34 or two from now when we’ve got a great platform, and then we just see this explosion of creativity.
0:19:38 Yeah, well, and the big thing is people need to untether themselves from thinking only
0:19:42 in terms of efficiency improvements of existing processes.
0:19:46 So like early use cases for Bitcoin that people talked about a lot is basically cost savings
0:19:52 of remittance or cost savings of micropayments or something like that.
0:19:57 But that’s really looking at existing use cases and applications that– like a recipe
0:19:59 book and saying, oh, let’s put this on the computer.
0:20:01 That’s how it always happens, by the way.
0:20:04 Like, you look at early web, and they took magazines, or they put brochures, and they
0:20:05 put them on the web.
0:20:06 But that’s just how people think.
0:20:09 And then it took people 10 years to realize, wait, this is a two-way medium.
0:20:10 Yeah, there’s all these–
0:20:12 You could generate a content in YouTube and Facebook.
0:20:16 So what I really care about are what are going to be the native apps that are only possible
0:20:17 with blockchains.
0:20:23 And also, the other thing is people are very caught on the Web2 model.
0:20:27 People are talking about daily active users, but of financial products.
0:20:28 It’s just an odd thing.
0:20:31 They’re like, are you a daily active user of your mortgage?
0:20:32 Yeah.
0:20:33 Right?
0:20:34 It’s like the wrong framework.
0:20:35 It’s just the wrong question.
0:20:36 Right?
0:20:37 But to me, I think we need to–
0:20:42 Well, the reason everyone was so focused on DAUs for Web2 was because the main business
0:20:46 model was advertising, and that was proven– so it was a proxy for what the business model
0:20:47 was.
0:20:50 But ultimately, if you have a business model that is not dependent on DAUs, that’s not
0:20:51 your main metric.
0:20:52 Yeah, exactly.
0:20:59 To me, I just think we’re going to see this iteration and explosion of basically financial
0:21:03 services and finance, but at the speed of open source software development, which is
0:21:04 really, really fast.
0:21:10 And it’s highly iterative, and it’s like a big shared open code repository that people
0:21:11 are building on.
0:21:15 So to me, the innovation here is going to be very, very fast.
0:21:18 I mean, it already has been, but it will continue to be.
0:21:25 And the thing I look forward to is what’s going to happen that is sort of unimaginable
0:21:30 today, and sort of by definition wasn’t possible with the old architecture.
0:21:34 I think, to me, one of the– there are many kind of cool sci-fi things in crypto.
0:21:41 I think one of the coolest things is the idea of a kind of code software that has agency
0:21:43 or sort of autonomous software.
0:21:49 So you think about maker today or compound, and this idea that the code itself actually
0:21:54 controls money and has business processes and logic, and it’s not the code that’s run
0:21:59 by– it’s not like code– Google code controls stuff, too, or PayPal does, but it’s not really
0:22:00 the code that does it.
0:22:04 They’re just the instruments through which the management of that company executes their
0:22:05 will.
0:22:09 Here, the code itself actually is autonomous and is no longer controlled.
0:22:14 This is the sort of idea, to me, the key idea of a blockchain is that the code continues
0:22:19 to run as designed, and it has sort of game theoretic guarantees that it will.
0:22:24 And that gives code this autonomous– I use autonomous not in the sense of AI autonomous,
0:22:28 but in the sense of having agency and self-control and runs forever.
0:22:33 As we speak right now, these contracts on Ethereum are running and doing things and distributing
0:22:36 money or collecting money or running other business logic.
0:22:42 A rough but potentially useful analogy is thinking about the corporate structure.
0:22:46 So the idea of a corporation, in theory, is that it kind of runs forever.
0:22:50 And management can turn over, and there’s different types of capital formation to keep
0:22:52 it funding and everything.
0:22:57 And it’s all through legal contracts in certain regions, right?
0:23:01 So the corporation, as a legal entity, is always sort of registered with the state in
0:23:06 a specific geographic region, and it’s all papered through legal contracts.
0:23:11 But could a system like that that coordinates capital from many, many different people and
0:23:16 outlives any of the individual people, could that move to a pure software system, using,
0:23:19 as you said, sort of autonomous software?
0:23:23 Instead of these legal contracts that are based in specific geographic regions, can
0:23:26 it be sort of sovereign to the internet?
0:23:32 These are the types of ideas that– it sounds crazy today, but when you think about this
0:23:38 sort of history of the corporation and the liquid stock markets that we have, all these
0:23:42 concepts that we think of as– they’ve been around forever, they’re really only about
0:23:44 100 years old or something like that.
0:23:47 To me, then, an obvious question is, why would you want that?
0:23:51 And to me, the answers are– one is very important you mentioned before is open source, the fact
0:23:56 that all of these things we’re discussing, they’re all available by definition.
0:23:58 They have to be, if they’re on Ethereum, they have to be open.
0:24:01 You can go read the GitHub code, if you can’t do it yourself, you can have somebody else
0:24:03 do it, so it’s completely open.
0:24:09 But then another very important feature is this, what we call compositionality or composability,
0:24:14 is the idea that you can have one organization here and I can take that and I can build another
0:24:17 one on top of it that references it.
0:24:20 And I know I can do– and that’s– the only reason I can do that is a couple of things.
0:24:23 One is it software that you can actually call the functions and things like that, and it’s
0:24:25 open source and so I can audit it and trust it.
0:24:30 But the third thing is because the code itself sort of exists on its own, I know I can build
0:24:33 on top of it and the code will continue to operate that way, and there won’t be some
0:24:38 whimsical change in business strategy by the owners of the code, right?
0:24:39 Exactly.
0:24:45 Which to me, I guess, and this is informed partly through my experience in non-crypto-tech,
0:24:50 is just so much– there’s so many issues created around platforms and around trusting platforms.
0:24:54 And so you think about Zynga building on Facebook and the hundreds of entrepreneurs who tried
0:25:00 to build on top of Twitter and just like, it would have been so cool if, to me, if Twitter
0:25:04 were this sort of open protocol the way SMTP email is, and you could have– someone could
0:25:11 build the superhuman of Twitter as opposed to– and the anti– people are complaining
0:25:12 about spam on Twitter.
0:25:15 Why isn’t there a third party marketplace with spam filters the way there is with email
0:25:16 clients?
0:25:17 It used to be.
0:25:21 And just all the kind of cool stuff that you get– and you see in the open source world
0:25:23 now where it’s like Lego bricks and you’re building these buildings out of the different
0:25:27 bricks, and every piece of code is a new Lego brick, and then you get this kind of combinatorial
0:25:28 explosion of innovation.
0:25:29 Yeah.
0:25:33 Well, and this is– I think a lot of people get caught up or confused on this.
0:25:35 Decentralization is not an ideological thing.
0:25:39 It’s an architecture to support that permission-less building.
0:25:42 This is why the internet was so big.
0:25:46 If there was like an intranet and Microsoft owned it, like Microsoft MSN and Microsoft
0:25:51 Net back in the day, we would never have seen Amazon, Google, and all these companies grow
0:25:53 like they have.
0:25:58 So to me, that decentralized architecture of all these systems, it’s not like an ideological
0:25:59 thing.
0:26:02 It’s really just an architecture that allows developers to build anything they want.
0:26:07 And as you said, it’s all sort of permanent, and it’s like if every data structure on the
0:26:10 entire internet was open and had an open API.
0:26:15 We’ve seen the power of the kind of composability in the open source world now in the traditional
0:26:19 open source world, meaning like Linux, and Apache, and all this other stuff.
0:26:21 That has been a phenomenal success.
0:26:23 90 plus percent of the software in the world today is open source.
0:26:27 Every, you know, the bulk of the software on your iOS phone, the bulk of your software
0:26:29 on your Android phone, every data center.
0:26:30 Why is open source done so well?
0:26:32 Because you can remix it, right?
0:26:34 You can take the piece of code and you can do stuff with it.
0:26:37 And it just gets this, you know, it starts off, and you go back to like when Linux came
0:26:41 out in like whatever early 90s, it was definitely worse than Windows, but then it just followed
0:26:47 this much faster like innovation curve because of this fact that you can compose these Lego
0:26:48 bricks together.
0:26:51 And you had just anyone in the world who can come contribute, some smart person in some
0:26:55 random place can see some bug and fix it, just like all those effects.
0:27:01 And now, but the problem was open source still depended on the goodwill or this financial
0:27:04 interest of somebody to actually run the code.
0:27:07 And that’s of course where AWS and Google Cloud stepped in, like we’re going to actually
0:27:10 run it because open source was just code, right?
0:27:16 And whereas blockchains are code instantiated, right, it’s code that’s running, and it doesn’t
0:27:20 depend on the kindness of strangers or capitalists to run it.
0:27:23 And therefore can’t be usurped in the same way, and it’s just much more powerful because
0:27:27 it keeps state and has data and has computing ability and just all these other things that
0:27:28 open source didn’t have.
0:27:32 So to me, it’s like the best of those two worlds is like all the power of a modern computer
0:27:36 and then the, and then the composability that made open source successful.
0:27:37 Yep.
0:27:38 Yep.
0:27:44 And I do think that people underestimate just the scope of types of applications that will
0:27:46 come out of this.
0:27:52 I think that this idea of a global unified internet money is one of the basics and it’s
0:27:54 a very, very big deal.
0:28:01 And if we do have these sort of decentralized autonomous corporations or something, they’re
0:28:05 going to be using the internet money in order to communicate among each other and create
0:28:08 financial contracts and things like that.
0:28:14 But this is why this is such an exciting area because it just feels like the possibilities
0:28:15 are sort of limitless.
0:28:19 So let’s talk about the kind of the state of the world right now too.
0:28:24 So I think the New York Times just talked about how they think the crypto is over and
0:28:27 there’s all these sort of negative articles about it.
0:28:28 As you fuel.
0:28:29 Yeah.
0:28:30 I’ve been reading these since.
0:28:31 I’ve been reading these for almost 10 years.
0:28:36 I’ve been reading these about the internet too for even longer and technology for longer.
0:28:44 But there has been a price downturn, I don’t know, maybe some of the excitement is down
0:28:45 or something.
0:28:46 I don’t know.
0:28:49 But so kind of like it’s what I’m getting at is where are we in the in the life cycle
0:28:50 of this kind of.
0:28:51 Yeah.
0:28:58 So I do think that 2017 was a year of new financial instruments and it was actually I think a
0:29:03 lot of people underestimate how small of an amount of money was available 2016 and before
0:29:04 that.
0:29:05 Yeah.
0:29:06 For cryptocurrency and blockchains.
0:29:09 The whole universe was just pretty small.
0:29:13 You know, there was no billion dollar company anywhere.
0:29:16 It was really just a sort of nichey thing.
0:29:19 And for that reason, there just wasn’t a lot of capital available.
0:29:22 Now the people that were very excited though about cryptocurrency were the people using
0:29:23 cryptocurrency.
0:29:27 But I do think that we saw a huge amount of funding and projects that had been in the
0:29:29 works for many, many years.
0:29:33 How to funding this file coin taso stuff like that.
0:29:39 And so then, you know, I think 2019 is turning out to be the year of launches.
0:29:44 You’ve just seen these hugely ambitious projects actually get to across the finish line.
0:29:47 And Cosmos is a great example launched just about a month ago.
0:29:53 And it’s sort of the first system we’ve ever seen that will allow cross blockchain interaction.
0:29:58 So we’ve always had these kind of siloed logic and state in say Ethereum.
0:30:03 And now you could have smart contracts or tokens on Ethereum transfer like to other
0:30:04 blockchains potentially.
0:30:08 It also gives you a scaling story because you can have multiple blockchains.
0:30:10 So it’s almost kind of like sharding, right?
0:30:11 You have different blockchains that contract to it.
0:30:12 Sort of.
0:30:14 I think we think of it as heterogeneous shards as opposed to homogeneous shards.
0:30:17 So each shard can have run its own language and its own environment.
0:30:18 That’s exactly right.
0:30:22 And so the development momentum feels very strong to me and we’re going to see a lot
0:30:24 of very, very exciting launches in 2019.
0:30:27 However, I think that will be to very little fanfare.
0:30:31 It’s kind of like Ethereum launched in, you know, the middle of crypto winter in 2015
0:30:32 and nobody cared.
0:30:36 You know, it’s not like Ethereum launching was a year of time.
0:30:39 And it’s not like you’re going to launch it and it’s going to be an overnight success.
0:30:41 You need to then, I think of this as a two-step go to market.
0:30:44 So the first step is getting developers, right?
0:30:47 And so, and you got to build that community and they got to build tools and you got to
0:30:50 build like, you just think about all the stuff that we take for granted probably in the Ethereum
0:30:55 world of like, you know, wallets and, you know, IDEs and debuggers and just like, you
0:31:00 know, ether scan and just like the whole, like cashing, you know, alchemy stuff, cashing
0:31:01 tools or whatever.
0:31:02 There’s a whole set of infrastructure.
0:31:03 Right.
0:31:04 So that’s got to get built.
0:31:05 You’ve got to get people fired up.
0:31:06 You’ve got to have like hackathons.
0:31:11 You’ve got to, people got to learn the, you know, due tutorial, just a whole set of things
0:31:12 that have to happen.
0:31:16 And so even when you launch these, these new layer ones, I think it’s probably, I don’t
0:31:20 know, at least 12 months, probably before you see like higher quality applications coming
0:31:21 out.
0:31:25 The other thing about, about, as you know, with these, with these, because the code is
0:31:27 autonomous, because once you write it, it’s out there.
0:31:31 You really have to get the security right and some of that, those improvements will come
0:31:34 through better programming languages and tools, but it also just takes longer.
0:31:37 I think here people compare it to kind of hardware development versus software development.
0:31:41 Like you can’t, if you build faulty hardware, you have to recall it physically.
0:31:42 Yeah.
0:31:43 Yeah.
0:31:44 You know, faulty SaaS software.
0:31:47 You can fix a few things and deploy.
0:31:48 And so it just takes a while.
0:31:53 So, so I think, yeah, I do, I share your feeling that this will be your launches.
0:31:57 However, it will be more of a developer kind of phenomenon than a user phenomenon.
0:32:03 I do think it’ll take, yeah, 12 months, as you said, before we see a lot of the ways
0:32:06 that these will be used in surprising manners, right?
0:32:11 I do think that Ethereum was very exciting when it came out, but I really do think even
0:32:17 the people that built Ethereum didn’t, couldn’t properly predict exactly how it would be used.
0:32:20 And these, these use cases are like 18 months down the line.
0:32:22 It’s not that far around the corner.
0:32:27 This is one thing I love about cryptocurrency is if you miss like three months, you’re already
0:32:32 behind on, on the scope of, of kind of what is possible and, and what is happening.
0:32:36 So when you talk about applications, so what are you, so like, I think the thing that’s
0:32:40 working the most probably on Ethereum today is, is DeFi, decentralized finance, right?
0:32:44 And I know, let’s, maybe let’s talk a little bit about that and what you’re excited about
0:32:46 and then like other, other types of applications.
0:32:52 So I do think that one of the very big things being built on Ethereum that’s exciting are
0:32:54 stablecoins.
0:32:59 And particularly for me, it’s crypto collateralized stablecoins where the, the stablecoin that’s
0:33:03 pegged to say the dollar or, but it really couldn’t be anything, any asset that’s not
0:33:04 endogenous to the blockchain.
0:33:10 So it could be Google stock or it could be S&P 500, it could be a bond, whatever, whatever
0:33:11 it might be.
0:33:17 The backing for that value is a smart contract that’s holding, you know, Ethereum compatible
0:33:19 assets.
0:33:21 And this is like the MakerDAO system.
0:33:25 I think it’s a really, really big deal because a lot of the use cases that people originally
0:33:30 envisioned for cryptocurrencies related to financial services or payments had this significant
0:33:32 problem, which is just the volatility.
0:33:37 So even e-commerce with something as volatile as Bitcoin, you said like the one hour you
0:33:41 wait until you have to actually close and receive those bitcoins.
0:33:44 I mean, margin on e-commerce often is pretty low, right?
0:33:49 You might be getting four or 5%, but the volatility in an hour in Bitcoin can be more than that.
0:33:55 So I do think that these stablecoins are critical for other types of applications.
0:34:01 And so the auger prediction market, you know, other, even just like token trading, you know,
0:34:05 what is the base pair you’re trading against in a decentralized exchange?
0:34:08 Is it Ether against some other coin?
0:34:11 I think also like you just think about lending, for example, like people don’t, you know,
0:34:17 if you’re buying a house in dollars, you want your stablecoin pegged to dollars.
0:34:21 And the stablecoin can actually then act as collateral in other types of use cases.
0:34:25 So I do think that stablecoins are like a critical building.
0:34:30 The other thing about MakerDAO that’s interesting is just how it’s a very interesting kind of
0:34:35 economic structure for how they enforce the peg and how they kind of incentivize the ecosystem.
0:34:38 And the fact that that runs in a smart contract which holds a significant amount of money is
0:34:47 just a real, I think to me, a testament to the power of the Ethereum design and the
0:34:49 sort of what smart contract platforms can do.
0:34:58 It’s one of many examples, but it’s got more traction, I think people realize, as in it’s
0:35:03 about 2% of all Ether is held in the MakerDAO contract.
0:35:06 And now that’s hard capped by the protocol.
0:35:08 So they could take off that cap.
0:35:13 And when I say they, I mean actually the MKR holders who vote on these changes.
0:35:19 And so if they wanted to potentially massively increase the amount of Ether locked in that
0:35:21 contract, they really could.
0:35:27 Now I do think it almost starts to create systemic risk at around, say, 5% of all Ether.
0:35:31 I mean for the Ethereum protocol, for the MakerDAO protocol, so you don’t want half
0:35:35 of all Ether held in this thing, but in just sheer dollar terms, you know, there’s hundreds
0:35:42 of millions of dollars locked in this protocol that people are basically using to get a loan.
0:35:47 And so it’s, while these DeFi things are very, very hard to use, it’s kind of a disaster
0:35:48 from a UX perspective.
0:35:52 You have to download all the software, you have to have Ether, you know, and you have
0:35:56 to click through a million different things and have a mental model for what you’re doing.
0:36:02 You have to be, I mean, it’s just a testament to how hardcore the enthusiasts are that…
0:36:03 Yeah, exactly.
0:36:07 And you know, I think a lot of them are arbitrageers and folks like that that are just doing kind
0:36:09 of profit seeking behavior.
0:36:14 But it’s, yeah, I mean, to me, we are seeing kind of the early success of some of these
0:36:17 low level stablecoin systems.
0:36:22 And I think that stablecoins are going to be a critical part of the recipe for a lot of
0:36:25 more abstracted, higher level use cases.
0:36:30 I think of it as, our friend Boloji has a kind of framework I like, which is, you know,
0:36:36 he would say, I think, is that the idea that you’d buy a cup of coffee using a cryptocurrency
0:36:39 is sort of one of the least interesting use cases.
0:36:43 And he has this kind of model where it’s kind of U-shaped where it’s, on the one hand, there’s
0:36:47 about a billion and a half people that have smartphones but are unbanked, are not part
0:36:49 of the internet economy.
0:36:54 And for those people, it’s very interesting to have a digitally native currency, right?
0:36:58 And architecturally, it makes a lot of sense because one of the key features of cryptocurrencies,
0:37:03 it’s a bearer instrument, meaning the recipient can verify that they got paid using just sort
0:37:07 of math on the internet and not having to rely on a bank or some third party and therefore
0:37:10 doesn’t need an ID and doesn’t have fraud risk and everything else.
0:37:13 So that’s sort of the one end where the stuff is so powerful.
0:37:17 And then the other end is kind of the high end of the software developers and you now
0:37:21 have programmable money, programmable loans, all these kind of cool new things you can
0:37:24 do on the innovation side.
0:37:30 I think of it as like what if, here’s a sort of metaphor, but the fact that photos are
0:37:35 just a file format that you can send to people, allowed people to invent Facebook and Instagram,
0:37:39 and if instead, this is again a metaphor, but if instead you had to kind of get permission
0:37:44 every time you sent a photo, if it was a service and not a file format, like there would have
0:37:48 been way less innovation around kind of media over the last 20 years and now what if money
0:37:52 is a file format, it’s just a string of bits, it’s just a string of bits, it’s no longer
0:37:55 a web service that’s connected to PayPal or Visa or something and they can’t take their
0:37:58 money and screw it up or do whatever they want and it make you get permission and make
0:38:03 you get, you know, and disenfranchise a billion and a half people and everything else, like
0:38:07 now it’s just bits and like what can you do, it’s a very powerful concept.
0:38:15 It is and I do think that, you know, an interesting feature of cryptocurrencies for me is that
0:38:19 the people that become knowledgeable about cryptocurrencies, I would say about 95% of
0:38:25 them or more, think it’s a good idea once you become knowledgeable about it.
0:38:31 And so to me, a lot of this is just an education process of like how do we get more and more
0:38:37 people to recognize why cryptocurrencies have this extremely unique value?
0:38:41 It’s the most misunderstood, I feel like tech is often misunderstood, but this is by far
0:38:45 the most, at least that I’ve worked in by far the most, the delta between the reality and
0:38:50 the perception and partly it’s self inflicted wound because of the kind of early crypto
0:38:53 movement and it was, you know, a lot of kind of political anarchist types got into it
0:38:58 and things, but it’s that’s lingered and it’s just really misunderstood and it’s very
0:38:59 where I agree with you.
0:39:02 I have this, I have this a go over and over again, especially people that are technical,
0:39:06 you give them like the Ethereum white paper, the Filecoin white paper, whatever, you know,
0:39:10 just a bunch of the Bitcoin white paper and they come back and they’re like, oh my God,
0:39:12 this is totally different than what people described to me and what I read about.
0:39:13 Exactly.
0:39:21 It’s because it’s easy to pay attention to the bad actors and prices and stuff when
0:39:28 in reality, the kind of fundamental development, yeah, like you said, from Bitcoin to this
0:39:32 more general computer to the more advanced applications that, again, like Filecoin being
0:39:39 this low level building block that’s going to enable all sorts of new behaviors because
0:39:44 just thinking about Filecoin, like, how am I supposed to build any sort of decentralized
0:39:47 application if I can’t do file storage, right?
0:39:51 It’s kind of this basic building block, but I can’t build Twitter the protocol or Uber
0:39:55 the protocol to compete with the centralized web platform unless I have a decentralized
0:39:59 file architecture underneath it, which today is not really possible.
0:40:05 And so these low level systems, it’s really remarkable the rippling implications of what
0:40:10 will become possible. And I do think that the number one barrier is just very simply
0:40:11 education.
0:40:17 This is an esoteric and complex area and there’s also a huge amount of smoke and mirrors, right?
0:40:22 I do think that there are, have always been in the crypto space, it’s international and
0:40:28 it’s permissionless. So there’s just a lot of crazy behaviors and crazy characters and
0:40:30 it’s easy to focus on that stuff.
0:40:35 That’s actually one of the good things about the price downturn is I think it’s cleaned
0:40:41 up a lot of that and sort of put the focus back on innovation and technology.
0:40:49 Yeah, I agree. I think that the sort of builders of all this stuff never really stop, but they’re
0:40:56 also not who the media necessarily pays attention to. I think that the media tends to be a reflection
0:41:00 of the investors and the investors tend to be really short sighted and focus very much
0:41:04 on month to month or even day to day type volatility.
0:41:11 So one interesting trend is what we call vertically integrated applications and something we’ve
0:41:16 been talking about. And I think the way I think about it is sometimes when you don’t
0:41:26 have the full kind of tech stack built out, sometimes for a project to kind of get adoption,
0:41:31 they need to build more themselves. So like a good historical example is Blackberry, they
0:41:37 come up with an email smartphone in 2003 and at the time you just didn’t have sort of a
0:41:40 great smartphone platform like the iPhone, you didn’t have great connectivity, you didn’t
0:41:43 have great backend. So they built the whole thing. They built this hardware, they built
0:41:47 the software, they built the network, they built the backend and they were able to kind
0:41:51 of get kind of, I think it was like pull the future forward. Eventually you could do this
0:41:54 by building an app on the iPhone, but like at the time you couldn’t, so they had to build
0:41:58 it all. And I think we’re seeing some of that pattern now because we don’t have all the
0:42:05 layers kind of at the ideal state now, particularly like the layer one smart contract platform
0:42:08 we were talking about earlier, just we don’t have kind of a great scalable everything else.
0:42:16 But the, I mean the old wisdom was sort of build a low level, you know, extensible protocol
0:42:21 and developers will come and build all the useful apps. And I think a great example of
0:42:26 that was the Zero X protocol system, which is like token trading on Ethereum using a
0:42:31 smart contract. So they said, we’re not going to own sort of the end user interface, we’re
0:42:36 going to build a low level system and then different people are going to come build web
0:42:40 interfaces. I think the newer generation of the smart contract developers, we’ve seen
0:42:44 say we’re going to build that low level protocol, but we’re also going to own the user interface
0:42:49 and kind of build that full stack experience. And that vertical integration as you put it,
0:42:54 I think is potentially going to be a catalyst for a lot of the stuff to move a little bit
0:43:02 faster than it has historically. And so there’s the project Sello that’s working on first
0:43:09 a kind of low level stablecoin designed for payments and remittances, as well as an Android
0:43:14 kind of mobile first application designed for folks that don’t have access to traditional
0:43:18 banking or financial services. And so by owning kind of both pieces, they can kind of iterate
0:43:24 a bit faster and potentially understand the full scope of how the customers is using this
0:43:29 platform. And provide kind of a modern user user experience
0:43:33 that you would hope for from a non kind of blockchain app and they’ll provide kind of
0:43:37 a similar user experience. But then also I think have the kind of the what I think is
0:43:43 the modern crypto business model of, you know, they own some of the coins and they ultimately
0:43:49 want to see the tokens appreciate and don’t need to and therefore okay with other people,
0:43:52 for example, starting to build their own apps and like and supplanting their app, they don’t
0:43:57 need to control the end to end thing all the way in the future because they have this business
0:44:01 model that’s aligned with the community, it’s this fighting the community of the model
0:44:06 where like the more you give away, the better you do for yourself, which is obviously in
0:44:09 web two, it was kind of own everything and fight.
0:44:12 So it’s interesting because it’s start at the model is sort of start web to like just
0:44:16 to get the user experience right, but then but then have the business model that’s sort
0:44:21 of web three and therefore let you have this great property of grow the pie not fight over
0:44:27 the pie. Yeah, exactly. Okay, so that’s that’s and then and then I guess one of the thing
0:44:34 we haven’t covered is we talked about payments, we talked about centralized finance. We talked
0:44:38 a little bit about like file coin and kind of what I would call incentivized infrastructure
0:44:43 like kind of new infrastructure that has incentives built in. What are some of the areas that that
0:44:49 you know kind of application areas. I mean, one thing with with these crypto protocols
0:44:55 is you can build markets for anything. And so anything today that’s sort of a one to
0:45:00 one service with for example, in the case of file coin, Amazon Web Services, Microsoft
0:45:05 Azure, whatever, Google Cloud, you can turn that into a competitive marketplace that sort
0:45:10 of unifies all of these. And so while file coin builds this competitive spot market for
0:45:14 file storage, you could have a similar thing for many of these kind of low level computer
0:45:20 resources. So you could do that for compute. You could do that. I think AI data would be
0:45:26 very interesting one. Yeah, a genetic data. Right. So then you could even where is the
0:45:29 AI like it seems to me a critical question of the next 10 years is where is AI data live?
0:45:34 Does it live in Google and Amazon servers? Or is it an open protocol where you know anyone
0:45:38 can access it and there’s some incentive model for providing it and forgetting it. One interesting
0:45:44 intersection is homomorphic encryption, which allows you to train a machine learning system
0:45:47 based on data that you actually don’t know the plain text. So you only see the encrypted
0:45:54 version. It allows people to say, okay, I’m going to share the data from my Tesla or my
0:45:59 smartphone with a major corporation and get paid for that data. And that corporation will
0:46:03 actually never learn the data but can still train the machine learning algorithm. It’s
0:46:10 a bit abstract and I think it’s early on that type of use case, but it’s potentially very
0:46:14 transformative. I think also, you know, you could architect social networks, marketplaces
0:46:17 like ride sharing, all of this stuff could be architected using these methods and I think
0:46:21 there would be benefits to all sorts of community members, kind of stakeholders, including the
0:46:26 drivers and riders. And so that’s a separate, maybe a longer conversation. Yeah. Yeah. Yeah.
0:46:32 Yeah. I do think the value accrual when these things succeed go to the entire large and
0:46:37 they’re governed by the larger bases, by, you know, by instead of basically an extractive
0:46:42 corporation that owns the platform and at the end of the day has some level of an adversarial
0:46:48 relationship with its users. Yeah. I mean, it’s today, yes, Facebook loves its users,
0:46:54 but also it wants to put as many ads in front of the users as it possibly can, which actually
0:47:00 disrupt the user experience. So it’s, yeah, it’s an odd relationship, I think that these
0:47:04 Web2 platforms have with their user bases. I think another interesting area is, it’s
0:47:09 kind of out of fashion at the moment, but I think it will come back as NFTs or, you
0:47:15 know, digital goods. It’s always been, you know, there was a whole, I don’t know if you
0:47:19 were around for this, but the, during when World of Warcraft was a big deal, there was
0:47:24 this whole kind of underground market called farming. So people wanted to, instead of having
0:47:28 to, you know, earn your way up to level 70, people wanted to buy their way and there was
0:47:32 this whole thing where like people would, there’s this, these off, off-game X protocol
0:47:37 websites where you could go do this and it was a big deal. And so a similar idea is to
0:47:41 sort of take that and legitimate it and say, hey, you can earn, you know, in a game or
0:47:45 in a virtual world or in some other kind of experience, you know, what if there are goods
0:47:49 that the user can actually own and take from one game to another and buy and sell them
0:47:53 and you add economic incentives and you can make a living doing this and you can actually
0:47:56 own these things in a way that you can’t today. Today you’re really just kind of borrowing
0:48:00 them and these games will come and go and they’ll, you’ll spend all this time earning
0:48:04 stuff and it’ll all then disappear or you’ll forget about it. And this is just a much kind
0:48:08 of more, it’s much more like the offline world, like when you get stuff, you keep it and people,
0:48:11 and people that’s really popular in the offline world and I think it will be popular in the
0:48:12 online world too.
0:48:17 Oh, I mean, the rippling implications of it are, are, are big too. So if you can own your
0:48:22 avatar and you can own the avatar sword and shield and everything, other, like we said
0:48:25 earlier, everything here is interoperable. It’s like an open API. So any developer can
0:48:31 then build an expansion pack or a mod on the game. It turns like the modding community
0:48:37 around various games into like a real economic system. And so then you could actually imagine
0:48:43 like in the longer term, it’s almost like, think about every like rupee you’ve ever
0:48:48 earned in a game or every bit of gold. Imagine if that was actually all unified among like
0:48:52 almost every game, right? And there were like secondary markets between one game and another
0:48:58 game and you could actually maybe bring your avatar from one game to another game. There’s
0:49:05 just, you know, it’s almost like turning the universe of video games into Minecraft, right?
0:49:12 Obviously, that’s a sort of far future, but I do think this, this open and interoperable
0:49:14 low level systems do enable that type of thing.
0:49:17 Also, the other cool thing is with, with the economic incentives, you suddenly, for example,
0:49:22 you could imagine funding your game instead of going to Activision and asking them for
0:49:27 money, you can fund your game by pre-selling some of the goods. You could have third party
0:49:32 creators who earn living, some person, you know, whatever with the smartphone is designing
0:49:35 virtual goods and selling them and earning a living that way.
0:49:40 Well, and one of the most successful categories on Kickstarter is kickstarting video games,
0:49:44 because, you know, gamers are hardcore and they want to support independent developers.
0:49:48 Now imagine if you could take that from, I’m just going to buy your game, I’m actually
0:49:54 going to invest in your game, right? It’s way more powerful, and it aligns the interest
0:49:59 between the gamers and the indie developers. So to me, yeah, that could be a very big trend.
0:50:04 And we have seen some level of that, and I think one of the problems was, you know, when
0:50:08 you can pre-sell these game items, you get this investor community rather than the gaming
0:50:14 community interested. And so I do think it’s important to, you know, make sure that it’s
0:50:19 not, it’s like, it’s people who actually want to play the game, right, that are sort
0:50:24 of buying those game items. But I do think that that interoperability of avatars and
0:50:27 items and levels and stuff like that is, is a big deal.
0:50:30 Yeah. Right, awesome. Thanks, thanks a lot for being here.
0:50:31 Yeah, thanks for having me, Chris.
0:50:40 [BLANK_AUDIO]
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:19 For more details, please see A16Z.com/disclosures.
0:00:22 Welcome to the A16Z YouTube channel.
0:00:25 Today I’m here with Olaf from PolyGener, good friend of Olaf.
0:00:31 You’re both longtime cryptocurrency enthusiasts, maybe if you don’t mind, we’ll just go back
0:00:32 a little bit.
0:00:36 You were employee one at Coinbase back in what year was that?
0:00:37 2013.
0:00:38 Okay.
0:00:39 And I guess you got interested in crypto before that?
0:00:40 Yeah.
0:00:44 So I was in college when I got into Bitcoin and I wrote my undergraduate thesis on Bitcoin
0:00:45 in 2011.
0:00:48 And what first got you excited about it?
0:00:53 So when I first read about it, I thought there’s no way this is possible to have a native
0:00:56 internet money that isn’t controlled by any sort of central party.
0:00:58 So I found it fascinating on its face.
0:00:59 It’s just sort of technically–
0:01:00 Yeah.
0:01:06 But then once I dug into it, I kind of thought about the nth order implications and you realize
0:01:08 this is a huge deal.
0:01:12 It means that for the first time, you can have digital scarcity on the internet.
0:01:17 And of course, you could move to a global unified financial and monetary system that’s
0:01:23 outside the scope of any sort of sovereign state, political control, and is really opt
0:01:24 in by all the users.
0:01:28 So the general idea was just really fascinating to me.
0:01:32 And I really did right away sort of buy as much Bitcoin as I could.
0:01:36 But that was back when Bitcoin was kind of the dominant idea and everyone thought the
0:01:40 kind of main thing you could do with this kind of new architecture was digital money.
0:01:45 Since then, the kind of possibility space, at least to me, feels like it’s expanded dramatically.
0:01:46 Yes, it has.
0:01:52 And so to me, the big moment was when Ethereum launched.
0:01:58 For me, I started seeing– a big breakthrough in my head was when I realized that Ethereum
0:02:03 wallets were actually more like browsers than bank accounts.
0:02:07 And I started seeing some stuff get built on Ethereum that people in Bitcoin had tried
0:02:08 to do for a long time.
0:02:12 In Bitcoin, you only have one asset, which is Bitcoins.
0:02:15 People had tried to build other sorts of tokens or assets that would settle to the Bitcoin
0:02:16 blockchain.
0:02:19 And there were projects like Mastercoin, Counterparty–
0:02:20 We funded this project Lighthouse.
0:02:21 We helped–
0:02:22 Oh, yeah.
0:02:24 And that was basically decentralized crowdfunding.
0:02:25 Yeah.
0:02:26 There was crowdfunding on Bitcoin.
0:02:27 It was just very, very difficult.
0:02:37 I mean, Bitcoin has decided, perhaps correctly, to trade off the expressiveness of the programming
0:02:39 language for increased security.
0:02:43 So they have a very weak programming language– very deliberate, though– which provides,
0:02:48 I think, perhaps better security and kind of– it’s more conservative kind of development
0:02:49 plot path.
0:02:51 So as a result, it’s very hard to build crowdfunding.
0:02:56 And I remember when Ethereum came out, it was literally one of the 20 line pieces of
0:02:57 code on the home page with that.
0:03:02 And this is one of the things I think people really underestimate how much the developer
0:03:04 abstraction matters.
0:03:09 So it took Mike Hearn, something like eight months to build Lighthouse using Bitcoin scripting,
0:03:15 the Ethereum ERC20 system– you and I could practically do this on our cell phones now.
0:03:21 And that layer of abstraction opens up use cases that I think people underestimate how
0:03:22 big a deal it is.
0:03:24 Well, it’s the same with all computing.
0:03:30 You could have done– there were mobile phones that had GPS and cell phone connectivity
0:03:32 pre-iPhone.
0:03:35 But the iPhone made it so the app developer didn’t have to understand any of that stuff
0:03:36 worked.
0:03:41 You could focus on recruiting drivers and building a beautiful UI.
0:03:44 And to me, obviously, the iPhone– there’s a bunch of great things about the iPhone and
0:03:45 the Android and what made smart phones take off.
0:03:50 But a lot of it was that they figured out the right abstraction layer for the developers
0:03:56 so that you could get a million apps and a whole bunch of creativity that happened as
0:03:57 a result of that.
0:04:02 And I actually think we’re going to see the next wave of that now with WebAssembly or
0:04:08 Wasm because there have been problems with the Ethereum solidity language, huge security
0:04:09 problems.
0:04:13 And there’s not actually as much expressivity as people think there is.
0:04:16 It’s still limited to solidity.
0:04:20 Even one other language was basically found to be totally insecure.
0:04:29 So I think that these VM systems moving towards a Wasm compiler– and this is like Polkadot,
0:04:34 DFINITY, eWasm, so like Ethereum 2– I think it’s a really big deal.
0:04:37 So just to explain to people– so Bitcoin comes up with this new kind of architecture
0:04:42 that I think of as– I think it’s, frankly, mischaracterized today as ledger.
0:04:43 I think of it as a computing platform.
0:04:45 So what seems to be a computer and a ledger?
0:04:46 Ledger is more like a hard drive.
0:04:48 A computer is a hard drive plus a processor.
0:04:50 And Bitcoin has a processor.
0:04:54 It’s just a processor that has a limited– but deliberately limited in the applications
0:04:55 it can run.
0:05:00 And the main application it runs is the thing that moves Bitcoins around, right?
0:05:02 Ethereum says, hey, let’s take that processor and let’s expand it a lot.
0:05:06 But as you’re saying it does, they developed their own programming language solidity, which
0:05:10 is kind of JavaScript-like, but it’s kind of eccentric.
0:05:16 And just so people know, eWasm, so that’s WebAssembly, which is now baked into every browser.
0:05:23 And so it’s sort of– there are now billions of computers that run eWasm natively.
0:05:27 And it will soon become– there already is, and it’s going to continue to become the most
0:05:31 dominant kind of runtime environment for software in the world.
0:05:34 And what that means is now that all the blockchains are supporting eWasm, that means that all
0:05:40 of these compilers that are built from other programming languages, Python, Rust, whatever,
0:05:44 if you’re a favorite language, you already have– you get the piggyback off of all of
0:05:47 the tooling that’s been built over the last 20 years to the other programming languages.
0:05:52 So you make it a much more kind of familiar experience to developers.
0:05:56 And so instead of needing to learn solidity, which is, again, this custom language, it’s
0:06:02 a pretty new language, the scheme of things, you can use your off-the-shelf favorite programming
0:06:03 language.
0:06:06 To me, this is a similar step function that we saw from Bitcoin scripting.
0:06:08 Well, see, it’s not just the programming language then.
0:06:11 It’s also like– it’s like the great thing about Python is not just like there’s 10,000
0:06:13 GitHub projects, or I mean, there’s formal verification.
0:06:17 So just as an example, why does it take a long time to release an Ethereum project today?
0:06:21 I think at least half the development time probably is security audits, right?
0:06:25 And that’s because you’ve got this really kind of this new programming language, people
0:06:29 don’t fully understand it, there aren’t these kind of tools around it, and suddenly you
0:06:34 switch to something like Python, and you’ve got just like 20 years of whatever, 15 years
0:06:39 of incredible tools that are built around that environment.
0:06:40 Yeah, that’s exactly right.
0:06:48 And so to me, this is one way that we’re building useful abstractions to make this even easier
0:06:51 to ship like end user applications.
0:06:52 Yeah.
0:06:55 Yeah, I mean, the big thing’s happening now, so I guess kind of jumping forward.
0:06:58 So I think you and I probably see it similarly, there was kind of the first era, which was
0:07:01 Bitcoin, but it was sort of the main– the only thing really in that first era, one of
0:07:02 the only things.
0:07:06 Then there’s sort of the Ethereum era, which sort of takes this idea of digital money and
0:07:09 expands it to blockchain computers, right?
0:07:16 And now I think what we’re seeing over the next 12 months or so, maybe 12 to 24 months,
0:07:18 is the kind of the wave three happening, right?
0:07:24 Which is taking the ideas of Ethereum, upgrading the developer experience like you just discussed,
0:07:29 very importantly upgrading the scalability, which means multiple things, it means more.
0:07:34 It basically means what we call in traditional venture capital, scale out, not scale up.
0:07:38 So instead of getting scaled by adding more, a beefier computer, you can get scaled by
0:07:40 adding more computers to the network, right?
0:07:43 Which lets you kind of expand linearly with the demand.
0:07:47 And that requires what’s known as sharding or some sort of parallelism that lets you
0:07:48 run.
0:07:51 And that’s what a lot of these new projects, or they’re doing better developer experience
0:07:56 and things like WASM and just all the other tooling around it, they’re building parallelism
0:08:01 in from the start, right, as opposed to having to upgrade later.
0:08:04 And what else?
0:08:08 I think a third one for me is they’re often building the ability to upgrade the protocol
0:08:09 into the protocol.
0:08:10 Yep.
0:08:11 Yep.
0:08:13 So the kind of governance of the protocol itself and also the governance of the smart contracts
0:08:14 themselves.
0:08:15 Yes, exactly.
0:08:22 So to me, Bitcoin and Ethereum, and maybe very much intentionally, have not had formal
0:08:25 systems to upgrade themselves.
0:08:29 And that’s because it does open up a potential security threat to the system.
0:08:32 If it can upgrade, then who controls that upgrade process?
0:08:37 But if you can adequately design an upgrade process that is controlled by the same people
0:08:43 that already control the consensus layer, you know, it’s an equivalent threat as baking
0:08:46 a bad block or something like that.
0:08:51 So to me, you know, the ability to say, actually, there’s a better system, let’s upgrade and
0:08:55 move to that system in a coordinated manner.
0:08:56 You know, I think that’s really exciting.
0:09:02 That’s the way I think of that, is there’s always a trade-off between the security of
0:09:08 the system and the very promise of a blockchain computer to me is that it’s making a commitment
0:09:12 that the code will continue to run as designed, there’s sort of game theoretic guarantees.
0:09:15 And you want to, of course, maintaining that commitment is very, very important.
0:09:16 Yep.
0:09:22 But there’s a trade-off because software also, as we know from, you know, decades of experience,
0:09:29 A, has bugs that needs to be fixed, and B, benefits from, you know, from sort of iterative
0:09:30 upgrade cycles, right?
0:09:31 Yeah.
0:09:32 And so how do you balance those two things?
0:09:37 And so Bitcoin Ethereum kind of took the extreme kind of conservative route, which said the
0:09:40 only way to upgrade is to kind of get a whole bunch of people to just literally upgrade their
0:09:44 software simultaneously, which led to all these kind of offline things, including sort of
0:09:49 famously the Bitcoin Civil War and then the Ethereum fork, which was very contentious.
0:09:52 And so they were kind of built in a way to be very conservative with their governance
0:09:53 methods.
0:09:54 Exactly.
0:09:55 Yep.
0:09:56 And so how do you find the right balance?
0:10:03 And the people are experimenting and trying new systems to get a better balance.
0:10:09 So I think a big part of this is there are actors in the Bitcoin and Ethereum and other
0:10:16 crypto systems that are part of what defines like the reality of those systems.
0:10:21 And so you could call these node operators in Bitcoin, miners obviously have a role to
0:10:22 play in it.
0:10:26 In proof of stake protocols, it’s very much the token holders who are staking.
0:10:29 And we’ve seen really, really strong participation.
0:10:33 So in a lot of these delegated proof of stake protocols, you see, you know, 70, 80 percent
0:10:36 of token holders participating in consensus.
0:10:39 So they’re already defining what is the latest block in the blockchain.
0:10:43 They’re already defining the rules of that computer.
0:10:49 So in my mind, you know, how can we say we’re going to use a decentralized mechanism to
0:10:55 come to consensus about the computer state, but we’re going to also say it’s impossible
0:10:58 to come to a decision about how to change the rules of the computer.
0:11:02 So I’m very skeptical that we can’t achieve very secure on-chain governance.
0:11:04 I think we can.
0:11:09 And to me, it’s a very big deal because if you get governance right, in theory, everything
0:11:11 else should be a sort of waterfall down from that.
0:11:16 And you can do very exciting things that I think we haven’t done.
0:11:21 You know, I think a big problem for both Bitcoin and Ethereum has been funding of core protocol
0:11:22 development.
0:11:24 So application developers have found all sorts of ways to monetize.
0:11:28 You can go raise a VC round, you can do a token sale, you know, there’s lots of money
0:11:32 sloshing around in general if you’re building on top of these protocols.
0:11:36 But Ethereum has this weird problem where there’s probably 100x the number of developers
0:11:40 building apps on top as there are building core protocol stuff for Ethereum.
0:11:41 And so to me…
0:11:43 Well, that has to do with the history of Ethereum, right?
0:11:48 So there was a foundation which has a certain amount of money, but there was never kind
0:11:50 of a structure set up.
0:11:51 Yeah, there’s no structure.
0:11:52 And in reality…
0:11:54 Set up to continuously fund the development.
0:11:59 And in reality, there needs to be some sort of, basically like a tax system, where if
0:12:02 I contribute to the core protocol and create all of this value…
0:12:05 Well, it’s like what Zcash does, what they have inflation baked into the protocol and
0:12:07 some portion of that goes through…
0:12:13 Which is kind of crude, because their system is, you know, it’s designed around one team.
0:12:17 I don’t think it’s designed to last 100 years and its current implementation.
0:12:19 In their defense, I don’t think they do either.
0:12:20 Yeah, yeah.
0:12:23 I mean, I think that they think of it as a MVP to a better system.
0:12:24 Yeah, to a better system, yeah.
0:12:30 And so in my mind, the ability for developers to contribute new protocol suggestions and
0:12:33 basically add a build to them.
0:12:37 So then I could say, if this gets merged in and this actually becomes the new version
0:12:41 of the protocol, me and my development team are actually going to inflate a certain number
0:12:42 of coins.
0:12:43 They’re just going to be created.
0:12:46 It’s like dilution, basically, for the existing holders, and they’re going to be rewarded
0:12:47 to us.
0:12:51 And because this is a long-term iterative game between all the token holders and the developers
0:12:54 who are going to contribute code to the protocol, it’s actually in the token holder’s best
0:13:01 interest to pay them and say, “Okay, we’re going to pay you guys what I accept as an
0:13:02 Ethereum holder.”
0:13:04 Like a 1% dilution to ship Ethereum 2?
0:13:06 Absolutely, right?
0:13:07 It’s a no-brainer too.
0:13:13 And so if you could create 1% of the Ethereum tokens and grant those to the development
0:13:17 team, today that’s like, what, $200 million?
0:13:18 It’s a large amount.
0:13:23 What do you say to the skeptics who think that proof-of-stake governance will devolve
0:13:29 into either like a blue talkercy on one hand or the big investors or whatever, whatever
0:13:35 type of talkercy, kind of control for their own interests, or alternatively are vulnerable
0:13:38 to bribery attacks and other kinds of…
0:13:44 Yeah, so I just think that we have relatively at scale proof-of-stake systems today.
0:13:47 This argument seemed better 12 months ago before Tezos and Cosmos.
0:13:48 Yeah, that’s my thing.
0:13:51 It’s like, you see Tezos and Cosmos, it’s like, if you can get away with these attacks,
0:13:54 there are $100 million bounties to go through them.
0:13:55 The biggest bug bounties?
0:13:58 Yeah, I’m a big believer in economic incentives for these bug bounties.
0:14:03 I mean, if you can attack Tezos and break consensus and get bad blocks through it…
0:14:06 I haven’t followed the Tezos stuff, I’m sure there are people trying to attack it.
0:14:08 Oh, I’m sure there are.
0:14:11 And I’m just like there’s people trying to attack Bitcoin all the time, right?
0:14:13 And these are highly adversarial environments.
0:14:18 But in my view, proof-of-stake to me has a few features that I really like about it.
0:14:25 So one, you have node operator and miner type participants and token holders.
0:14:30 And in the Bitcoin system, we’ve actually seen cases where these parties don’t have
0:14:37 the best interests in mind, like there’s not a perfect overlap for their interests.
0:14:40 And so in a way, you could argue there’s like a check and balance or something like that.
0:14:43 But in a system like Tezos or Cosmos, those are the same people, right?
0:14:45 So the token holders are the validators.
0:14:49 And I think that just means in general, there’s going to be a better alignment of interests
0:14:53 between the block producers and the token holders.
0:14:59 The second thing is that if you attack a proof-of-stake network, mitigation of the attack after it
0:15:01 happens is significantly easier.
0:15:07 So if you come in with 51% of the coins, and in most proof-of-stake, it’s actually 34%
0:15:11 of the coins is enough to attack, and you start doing bad things, right?
0:15:14 Bad blocks and stuff like that.
0:15:18 The minority people here can really just hard fork the chain and delete your coins and keep
0:15:19 going.
0:15:26 However, the reason they can do that is because that attacker’s validation was intra-protocols,
0:15:30 like within the protocol, so you can delete their stuff and move forward.
0:15:36 If you do that with hardware and proof-of-work systems, you actually have to change the hashing
0:15:40 algorithm for the entire proof-of-work chain and burn everything to the ground, like for
0:15:42 the good guys and the bad guys.
0:15:46 Because you have to fork so that the hardware is now bad for everyone.
0:15:50 And so you have to basically punish the good guys and the bad guys to mitigate a proof-of-work
0:15:51 system.
0:15:54 So in a proof-of-work system, summarize that, in a proof-of-work system, the worst-case
0:15:57 scenario is your attack doesn’t work.
0:16:01 And a proof-of-stake system, the worst-case scenario is you lose all of your– not only
0:16:04 your attack doesn’t work, but you also lose your entire life savings in that protocol.
0:16:05 Yes, exactly.
0:16:08 So it’s a much more punitive measure.
0:16:13 Well, it’s disproportionately punitive to the bad guy in proof-of-stake.
0:16:17 By the way, and so I would add also the other thing about proof– I mean, there’s also the
0:16:18 energy use.
0:16:19 Oh, well, yeah.
0:16:20 Yeah.
0:16:21 It doesn’t– Bitcoin mining destroys all this– waste all this energy.
0:16:22 It deliberately does.
0:16:23 But it’s still bad.
0:16:27 Also, very– for me, it’s a critical thing is– you’re talking about developer experience
0:16:29 and user experience.
0:16:34 You just simply can’t have sub-second transaction finality in a proof-of-work system.
0:16:38 So Bitcoin, you really need to wait– each block is 10 minutes, and it has to do with
0:16:43 the coordination among the network and the network propagation latency and things.
0:16:44 But also, it’s a probabilistic method.
0:16:47 So you really have to wait probably 60 minutes, if not longer.
0:16:50 And from a user experience point of view, if I send you– and it’s the same with the
0:16:51 theorem today, it’s proof-of-work.
0:16:55 And you go, if you download Quid, Miss Wallet, and you try to use some of these apps, there’s
0:17:00 a lot of really cool apps as early, but you’ve got to wait 30 seconds after you click a button.
0:17:02 That’s not a modern user experience.
0:17:05 And the only way we’re going to get to modern user experience is through these proof-of-stake
0:17:06 systems.
0:17:09 They have all these different methods that get much faster transactions.
0:17:11 So just, I think, a whole bunch of reasons why.
0:17:15 For example, with sharding, no one that I’ve ever heard of knows how to do sharding in
0:17:16 proof-of-work.
0:17:20 So a pairless of scaling, all these other things we’re talking about require a mistake.
0:17:24 There’s a reason that every– I think 2017 was a major year of fundraising, and 2019
0:17:25 is a major year of launches.
0:17:30 And there’s a reason that every blockchain that’s launching today is mostly using proof-of-stake.
0:17:32 I mean, with the exception of Grin and things like this, right?
0:17:33 Yeah.
0:17:38 But those are all just simple transactional– they don’t have smart contracts, they don’t
0:17:41 have really scaling solutions.
0:17:47 Evolution is not– is very much focused on private payments and scalable payments.
0:17:52 It’s not trying to open up a suite of new applications that were not possible with bolder protocols.
0:17:54 Which to me is the really exciting thing.
0:17:59 What is possible that we haven’t seen happening today?
0:18:03 Because even the Ethereum developers, when they shipped the protocol in 2015, I don’t
0:18:07 think any of them could have conceived of the whole ICO wave.
0:18:14 And that was like 18 months away, and it was still hard to see that that was coming.
0:18:17 To me, this is what makes computing interesting, right?
0:18:18 Is there’s this interplay.
0:18:23 If you go look at the PC, the internet, smartphones, I think we’re going to see– it’s a crypto,
0:18:27 I think we’re going to see it with VR in a couple– this year, in a couple years.
0:18:30 There’s this interplay where you get– the platforms get better.
0:18:32 In this case, we’re talking about Layer 1 smart contract platforms, right?
0:18:36 Which are the ones we’re talking about that are coming out over the next 12 to 18 months.
0:18:40 And those are kind of the equivalent of the Apple II or the iPhone or whatever in this
0:18:41 world.
0:18:42 To me, that’s cool.
0:18:43 That’s great.
0:18:44 And we’re into that, right?
0:18:47 But the really cool part is all of the crazy stuff that people– no one imagined– it’s
0:18:50 really funny if you go back and look at the early Apple II ads.
0:18:53 So Apple II came out in ’77, PCs didn’t really take off for six years.
0:18:56 And for those six-year peer people, we’re trying to figure out what do you do with these
0:18:57 things.
0:18:58 And all the old ads are really funny.
0:19:01 They always have people at the kitchen table doing their recipes, and computer companies
0:19:02 didn’t really know.
0:19:05 But then the developers came along and invented word processing spreadsheets.
0:19:06 All this other cool stuff.
0:19:09 And so that to me is what’s really– like, right now, we’re seeing a little bit on the
0:19:10 application side.
0:19:14 But it’s limited because the platforms, the Layer 1 smart contract platforms, just aren’t
0:19:15 there.
0:19:16 Right?
0:19:17 So we can’t– I mean, we’re seeing cool stuff.
0:19:21 We’ll talk about it today, like in DeFi, for example, in terms of finance, where maybe
0:19:24 the performance parameters are looser and things.
0:19:26 They don’t need the kind of performance you need for other things.
0:19:30 But what’s really going to get exciting to me is that period of, like, hopefully a year
0:19:34 or two from now when we’ve got a great platform, and then we just see this explosion of creativity.
0:19:38 Yeah, well, and the big thing is people need to untether themselves from thinking only
0:19:42 in terms of efficiency improvements of existing processes.
0:19:46 So like early use cases for Bitcoin that people talked about a lot is basically cost savings
0:19:52 of remittance or cost savings of micropayments or something like that.
0:19:57 But that’s really looking at existing use cases and applications that– like a recipe
0:19:59 book and saying, oh, let’s put this on the computer.
0:20:01 That’s how it always happens, by the way.
0:20:04 Like, you look at early web, and they took magazines, or they put brochures, and they
0:20:05 put them on the web.
0:20:06 But that’s just how people think.
0:20:09 And then it took people 10 years to realize, wait, this is a two-way medium.
0:20:10 Yeah, there’s all these–
0:20:12 You could generate a content in YouTube and Facebook.
0:20:16 So what I really care about are what are going to be the native apps that are only possible
0:20:17 with blockchains.
0:20:23 And also, the other thing is people are very caught on the Web2 model.
0:20:27 People are talking about daily active users, but of financial products.
0:20:28 It’s just an odd thing.
0:20:31 They’re like, are you a daily active user of your mortgage?
0:20:32 Yeah.
0:20:33 Right?
0:20:34 It’s like the wrong framework.
0:20:35 It’s just the wrong question.
0:20:36 Right?
0:20:37 But to me, I think we need to–
0:20:42 Well, the reason everyone was so focused on DAUs for Web2 was because the main business
0:20:46 model was advertising, and that was proven– so it was a proxy for what the business model
0:20:47 was.
0:20:50 But ultimately, if you have a business model that is not dependent on DAUs, that’s not
0:20:51 your main metric.
0:20:52 Yeah, exactly.
0:20:59 To me, I just think we’re going to see this iteration and explosion of basically financial
0:21:03 services and finance, but at the speed of open source software development, which is
0:21:04 really, really fast.
0:21:10 And it’s highly iterative, and it’s like a big shared open code repository that people
0:21:11 are building on.
0:21:15 So to me, the innovation here is going to be very, very fast.
0:21:18 I mean, it already has been, but it will continue to be.
0:21:25 And the thing I look forward to is what’s going to happen that is sort of unimaginable
0:21:30 today, and sort of by definition wasn’t possible with the old architecture.
0:21:34 I think, to me, one of the– there are many kind of cool sci-fi things in crypto.
0:21:41 I think one of the coolest things is the idea of a kind of code software that has agency
0:21:43 or sort of autonomous software.
0:21:49 So you think about maker today or compound, and this idea that the code itself actually
0:21:54 controls money and has business processes and logic, and it’s not the code that’s run
0:21:59 by– it’s not like code– Google code controls stuff, too, or PayPal does, but it’s not really
0:22:00 the code that does it.
0:22:04 They’re just the instruments through which the management of that company executes their
0:22:05 will.
0:22:09 Here, the code itself actually is autonomous and is no longer controlled.
0:22:14 This is the sort of idea, to me, the key idea of a blockchain is that the code continues
0:22:19 to run as designed, and it has sort of game theoretic guarantees that it will.
0:22:24 And that gives code this autonomous– I use autonomous not in the sense of AI autonomous,
0:22:28 but in the sense of having agency and self-control and runs forever.
0:22:33 As we speak right now, these contracts on Ethereum are running and doing things and distributing
0:22:36 money or collecting money or running other business logic.
0:22:42 A rough but potentially useful analogy is thinking about the corporate structure.
0:22:46 So the idea of a corporation, in theory, is that it kind of runs forever.
0:22:50 And management can turn over, and there’s different types of capital formation to keep
0:22:52 it funding and everything.
0:22:57 And it’s all through legal contracts in certain regions, right?
0:23:01 So the corporation, as a legal entity, is always sort of registered with the state in
0:23:06 a specific geographic region, and it’s all papered through legal contracts.
0:23:11 But could a system like that that coordinates capital from many, many different people and
0:23:16 outlives any of the individual people, could that move to a pure software system, using,
0:23:19 as you said, sort of autonomous software?
0:23:23 Instead of these legal contracts that are based in specific geographic regions, can
0:23:26 it be sort of sovereign to the internet?
0:23:32 These are the types of ideas that– it sounds crazy today, but when you think about this
0:23:38 sort of history of the corporation and the liquid stock markets that we have, all these
0:23:42 concepts that we think of as– they’ve been around forever, they’re really only about
0:23:44 100 years old or something like that.
0:23:47 To me, then, an obvious question is, why would you want that?
0:23:51 And to me, the answers are– one is very important you mentioned before is open source, the fact
0:23:56 that all of these things we’re discussing, they’re all available by definition.
0:23:58 They have to be, if they’re on Ethereum, they have to be open.
0:24:01 You can go read the GitHub code, if you can’t do it yourself, you can have somebody else
0:24:03 do it, so it’s completely open.
0:24:09 But then another very important feature is this, what we call compositionality or composability,
0:24:14 is the idea that you can have one organization here and I can take that and I can build another
0:24:17 one on top of it that references it.
0:24:20 And I know I can do– and that’s– the only reason I can do that is a couple of things.
0:24:23 One is it software that you can actually call the functions and things like that, and it’s
0:24:25 open source and so I can audit it and trust it.
0:24:30 But the third thing is because the code itself sort of exists on its own, I know I can build
0:24:33 on top of it and the code will continue to operate that way, and there won’t be some
0:24:38 whimsical change in business strategy by the owners of the code, right?
0:24:39 Exactly.
0:24:45 Which to me, I guess, and this is informed partly through my experience in non-crypto-tech,
0:24:50 is just so much– there’s so many issues created around platforms and around trusting platforms.
0:24:54 And so you think about Zynga building on Facebook and the hundreds of entrepreneurs who tried
0:25:00 to build on top of Twitter and just like, it would have been so cool if, to me, if Twitter
0:25:04 were this sort of open protocol the way SMTP email is, and you could have– someone could
0:25:11 build the superhuman of Twitter as opposed to– and the anti– people are complaining
0:25:12 about spam on Twitter.
0:25:15 Why isn’t there a third party marketplace with spam filters the way there is with email
0:25:16 clients?
0:25:17 It used to be.
0:25:21 And just all the kind of cool stuff that you get– and you see in the open source world
0:25:23 now where it’s like Lego bricks and you’re building these buildings out of the different
0:25:27 bricks, and every piece of code is a new Lego brick, and then you get this kind of combinatorial
0:25:28 explosion of innovation.
0:25:29 Yeah.
0:25:33 Well, and this is– I think a lot of people get caught up or confused on this.
0:25:35 Decentralization is not an ideological thing.
0:25:39 It’s an architecture to support that permission-less building.
0:25:42 This is why the internet was so big.
0:25:46 If there was like an intranet and Microsoft owned it, like Microsoft MSN and Microsoft
0:25:51 Net back in the day, we would never have seen Amazon, Google, and all these companies grow
0:25:53 like they have.
0:25:58 So to me, that decentralized architecture of all these systems, it’s not like an ideological
0:25:59 thing.
0:26:02 It’s really just an architecture that allows developers to build anything they want.
0:26:07 And as you said, it’s all sort of permanent, and it’s like if every data structure on the
0:26:10 entire internet was open and had an open API.
0:26:15 We’ve seen the power of the kind of composability in the open source world now in the traditional
0:26:19 open source world, meaning like Linux, and Apache, and all this other stuff.
0:26:21 That has been a phenomenal success.
0:26:23 90 plus percent of the software in the world today is open source.
0:26:27 Every, you know, the bulk of the software on your iOS phone, the bulk of your software
0:26:29 on your Android phone, every data center.
0:26:30 Why is open source done so well?
0:26:32 Because you can remix it, right?
0:26:34 You can take the piece of code and you can do stuff with it.
0:26:37 And it just gets this, you know, it starts off, and you go back to like when Linux came
0:26:41 out in like whatever early 90s, it was definitely worse than Windows, but then it just followed
0:26:47 this much faster like innovation curve because of this fact that you can compose these Lego
0:26:48 bricks together.
0:26:51 And you had just anyone in the world who can come contribute, some smart person in some
0:26:55 random place can see some bug and fix it, just like all those effects.
0:27:01 And now, but the problem was open source still depended on the goodwill or this financial
0:27:04 interest of somebody to actually run the code.
0:27:07 And that’s of course where AWS and Google Cloud stepped in, like we’re going to actually
0:27:10 run it because open source was just code, right?
0:27:16 And whereas blockchains are code instantiated, right, it’s code that’s running, and it doesn’t
0:27:20 depend on the kindness of strangers or capitalists to run it.
0:27:23 And therefore can’t be usurped in the same way, and it’s just much more powerful because
0:27:27 it keeps state and has data and has computing ability and just all these other things that
0:27:28 open source didn’t have.
0:27:32 So to me, it’s like the best of those two worlds is like all the power of a modern computer
0:27:36 and then the, and then the composability that made open source successful.
0:27:37 Yep.
0:27:38 Yep.
0:27:44 And I do think that people underestimate just the scope of types of applications that will
0:27:46 come out of this.
0:27:52 I think that this idea of a global unified internet money is one of the basics and it’s
0:27:54 a very, very big deal.
0:28:01 And if we do have these sort of decentralized autonomous corporations or something, they’re
0:28:05 going to be using the internet money in order to communicate among each other and create
0:28:08 financial contracts and things like that.
0:28:14 But this is why this is such an exciting area because it just feels like the possibilities
0:28:15 are sort of limitless.
0:28:19 So let’s talk about the kind of the state of the world right now too.
0:28:24 So I think the New York Times just talked about how they think the crypto is over and
0:28:27 there’s all these sort of negative articles about it.
0:28:28 As you fuel.
0:28:29 Yeah.
0:28:30 I’ve been reading these since.
0:28:31 I’ve been reading these for almost 10 years.
0:28:36 I’ve been reading these about the internet too for even longer and technology for longer.
0:28:44 But there has been a price downturn, I don’t know, maybe some of the excitement is down
0:28:45 or something.
0:28:46 I don’t know.
0:28:49 But so kind of like it’s what I’m getting at is where are we in the in the life cycle
0:28:50 of this kind of.
0:28:51 Yeah.
0:28:58 So I do think that 2017 was a year of new financial instruments and it was actually I think a
0:29:03 lot of people underestimate how small of an amount of money was available 2016 and before
0:29:04 that.
0:29:05 Yeah.
0:29:06 For cryptocurrency and blockchains.
0:29:09 The whole universe was just pretty small.
0:29:13 You know, there was no billion dollar company anywhere.
0:29:16 It was really just a sort of nichey thing.
0:29:19 And for that reason, there just wasn’t a lot of capital available.
0:29:22 Now the people that were very excited though about cryptocurrency were the people using
0:29:23 cryptocurrency.
0:29:27 But I do think that we saw a huge amount of funding and projects that had been in the
0:29:29 works for many, many years.
0:29:33 How to funding this file coin taso stuff like that.
0:29:39 And so then, you know, I think 2019 is turning out to be the year of launches.
0:29:44 You’ve just seen these hugely ambitious projects actually get to across the finish line.
0:29:47 And Cosmos is a great example launched just about a month ago.
0:29:53 And it’s sort of the first system we’ve ever seen that will allow cross blockchain interaction.
0:29:58 So we’ve always had these kind of siloed logic and state in say Ethereum.
0:30:03 And now you could have smart contracts or tokens on Ethereum transfer like to other
0:30:04 blockchains potentially.
0:30:08 It also gives you a scaling story because you can have multiple blockchains.
0:30:10 So it’s almost kind of like sharding, right?
0:30:11 You have different blockchains that contract to it.
0:30:12 Sort of.
0:30:14 I think we think of it as heterogeneous shards as opposed to homogeneous shards.
0:30:17 So each shard can have run its own language and its own environment.
0:30:18 That’s exactly right.
0:30:22 And so the development momentum feels very strong to me and we’re going to see a lot
0:30:24 of very, very exciting launches in 2019.
0:30:27 However, I think that will be to very little fanfare.
0:30:31 It’s kind of like Ethereum launched in, you know, the middle of crypto winter in 2015
0:30:32 and nobody cared.
0:30:36 You know, it’s not like Ethereum launching was a year of time.
0:30:39 And it’s not like you’re going to launch it and it’s going to be an overnight success.
0:30:41 You need to then, I think of this as a two-step go to market.
0:30:44 So the first step is getting developers, right?
0:30:47 And so, and you got to build that community and they got to build tools and you got to
0:30:50 build like, you just think about all the stuff that we take for granted probably in the Ethereum
0:30:55 world of like, you know, wallets and, you know, IDEs and debuggers and just like, you
0:31:00 know, ether scan and just like the whole, like cashing, you know, alchemy stuff, cashing
0:31:01 tools or whatever.
0:31:02 There’s a whole set of infrastructure.
0:31:03 Right.
0:31:04 So that’s got to get built.
0:31:05 You’ve got to get people fired up.
0:31:06 You’ve got to have like hackathons.
0:31:11 You’ve got to, people got to learn the, you know, due tutorial, just a whole set of things
0:31:12 that have to happen.
0:31:16 And so even when you launch these, these new layer ones, I think it’s probably, I don’t
0:31:20 know, at least 12 months, probably before you see like higher quality applications coming
0:31:21 out.
0:31:25 The other thing about, about, as you know, with these, with these, because the code is
0:31:27 autonomous, because once you write it, it’s out there.
0:31:31 You really have to get the security right and some of that, those improvements will come
0:31:34 through better programming languages and tools, but it also just takes longer.
0:31:37 I think here people compare it to kind of hardware development versus software development.
0:31:41 Like you can’t, if you build faulty hardware, you have to recall it physically.
0:31:42 Yeah.
0:31:43 Yeah.
0:31:44 You know, faulty SaaS software.
0:31:47 You can fix a few things and deploy.
0:31:48 And so it just takes a while.
0:31:53 So, so I think, yeah, I do, I share your feeling that this will be your launches.
0:31:57 However, it will be more of a developer kind of phenomenon than a user phenomenon.
0:32:03 I do think it’ll take, yeah, 12 months, as you said, before we see a lot of the ways
0:32:06 that these will be used in surprising manners, right?
0:32:11 I do think that Ethereum was very exciting when it came out, but I really do think even
0:32:17 the people that built Ethereum didn’t, couldn’t properly predict exactly how it would be used.
0:32:20 And these, these use cases are like 18 months down the line.
0:32:22 It’s not that far around the corner.
0:32:27 This is one thing I love about cryptocurrency is if you miss like three months, you’re already
0:32:32 behind on, on the scope of, of kind of what is possible and, and what is happening.
0:32:36 So when you talk about applications, so what are you, so like, I think the thing that’s
0:32:40 working the most probably on Ethereum today is, is DeFi, decentralized finance, right?
0:32:44 And I know, let’s, maybe let’s talk a little bit about that and what you’re excited about
0:32:46 and then like other, other types of applications.
0:32:52 So I do think that one of the very big things being built on Ethereum that’s exciting are
0:32:54 stablecoins.
0:32:59 And particularly for me, it’s crypto collateralized stablecoins where the, the stablecoin that’s
0:33:03 pegged to say the dollar or, but it really couldn’t be anything, any asset that’s not
0:33:04 endogenous to the blockchain.
0:33:10 So it could be Google stock or it could be S&P 500, it could be a bond, whatever, whatever
0:33:11 it might be.
0:33:17 The backing for that value is a smart contract that’s holding, you know, Ethereum compatible
0:33:19 assets.
0:33:21 And this is like the MakerDAO system.
0:33:25 I think it’s a really, really big deal because a lot of the use cases that people originally
0:33:30 envisioned for cryptocurrencies related to financial services or payments had this significant
0:33:32 problem, which is just the volatility.
0:33:37 So even e-commerce with something as volatile as Bitcoin, you said like the one hour you
0:33:41 wait until you have to actually close and receive those bitcoins.
0:33:44 I mean, margin on e-commerce often is pretty low, right?
0:33:49 You might be getting four or 5%, but the volatility in an hour in Bitcoin can be more than that.
0:33:55 So I do think that these stablecoins are critical for other types of applications.
0:34:01 And so the auger prediction market, you know, other, even just like token trading, you know,
0:34:05 what is the base pair you’re trading against in a decentralized exchange?
0:34:08 Is it Ether against some other coin?
0:34:11 I think also like you just think about lending, for example, like people don’t, you know,
0:34:17 if you’re buying a house in dollars, you want your stablecoin pegged to dollars.
0:34:21 And the stablecoin can actually then act as collateral in other types of use cases.
0:34:25 So I do think that stablecoins are like a critical building.
0:34:30 The other thing about MakerDAO that’s interesting is just how it’s a very interesting kind of
0:34:35 economic structure for how they enforce the peg and how they kind of incentivize the ecosystem.
0:34:38 And the fact that that runs in a smart contract which holds a significant amount of money is
0:34:47 just a real, I think to me, a testament to the power of the Ethereum design and the
0:34:49 sort of what smart contract platforms can do.
0:34:58 It’s one of many examples, but it’s got more traction, I think people realize, as in it’s
0:35:03 about 2% of all Ether is held in the MakerDAO contract.
0:35:06 And now that’s hard capped by the protocol.
0:35:08 So they could take off that cap.
0:35:13 And when I say they, I mean actually the MKR holders who vote on these changes.
0:35:19 And so if they wanted to potentially massively increase the amount of Ether locked in that
0:35:21 contract, they really could.
0:35:27 Now I do think it almost starts to create systemic risk at around, say, 5% of all Ether.
0:35:31 I mean for the Ethereum protocol, for the MakerDAO protocol, so you don’t want half
0:35:35 of all Ether held in this thing, but in just sheer dollar terms, you know, there’s hundreds
0:35:42 of millions of dollars locked in this protocol that people are basically using to get a loan.
0:35:47 And so it’s, while these DeFi things are very, very hard to use, it’s kind of a disaster
0:35:48 from a UX perspective.
0:35:52 You have to download all the software, you have to have Ether, you know, and you have
0:35:56 to click through a million different things and have a mental model for what you’re doing.
0:36:02 You have to be, I mean, it’s just a testament to how hardcore the enthusiasts are that…
0:36:03 Yeah, exactly.
0:36:07 And you know, I think a lot of them are arbitrageers and folks like that that are just doing kind
0:36:09 of profit seeking behavior.
0:36:14 But it’s, yeah, I mean, to me, we are seeing kind of the early success of some of these
0:36:17 low level stablecoin systems.
0:36:22 And I think that stablecoins are going to be a critical part of the recipe for a lot of
0:36:25 more abstracted, higher level use cases.
0:36:30 I think of it as, our friend Boloji has a kind of framework I like, which is, you know,
0:36:36 he would say, I think, is that the idea that you’d buy a cup of coffee using a cryptocurrency
0:36:39 is sort of one of the least interesting use cases.
0:36:43 And he has this kind of model where it’s kind of U-shaped where it’s, on the one hand, there’s
0:36:47 about a billion and a half people that have smartphones but are unbanked, are not part
0:36:49 of the internet economy.
0:36:54 And for those people, it’s very interesting to have a digitally native currency, right?
0:36:58 And architecturally, it makes a lot of sense because one of the key features of cryptocurrencies,
0:37:03 it’s a bearer instrument, meaning the recipient can verify that they got paid using just sort
0:37:07 of math on the internet and not having to rely on a bank or some third party and therefore
0:37:10 doesn’t need an ID and doesn’t have fraud risk and everything else.
0:37:13 So that’s sort of the one end where the stuff is so powerful.
0:37:17 And then the other end is kind of the high end of the software developers and you now
0:37:21 have programmable money, programmable loans, all these kind of cool new things you can
0:37:24 do on the innovation side.
0:37:30 I think of it as like what if, here’s a sort of metaphor, but the fact that photos are
0:37:35 just a file format that you can send to people, allowed people to invent Facebook and Instagram,
0:37:39 and if instead, this is again a metaphor, but if instead you had to kind of get permission
0:37:44 every time you sent a photo, if it was a service and not a file format, like there would have
0:37:48 been way less innovation around kind of media over the last 20 years and now what if money
0:37:52 is a file format, it’s just a string of bits, it’s just a string of bits, it’s no longer
0:37:55 a web service that’s connected to PayPal or Visa or something and they can’t take their
0:37:58 money and screw it up or do whatever they want and it make you get permission and make
0:38:03 you get, you know, and disenfranchise a billion and a half people and everything else, like
0:38:07 now it’s just bits and like what can you do, it’s a very powerful concept.
0:38:15 It is and I do think that, you know, an interesting feature of cryptocurrencies for me is that
0:38:19 the people that become knowledgeable about cryptocurrencies, I would say about 95% of
0:38:25 them or more, think it’s a good idea once you become knowledgeable about it.
0:38:31 And so to me, a lot of this is just an education process of like how do we get more and more
0:38:37 people to recognize why cryptocurrencies have this extremely unique value?
0:38:41 It’s the most misunderstood, I feel like tech is often misunderstood, but this is by far
0:38:45 the most, at least that I’ve worked in by far the most, the delta between the reality and
0:38:50 the perception and partly it’s self inflicted wound because of the kind of early crypto
0:38:53 movement and it was, you know, a lot of kind of political anarchist types got into it
0:38:58 and things, but it’s that’s lingered and it’s just really misunderstood and it’s very
0:38:59 where I agree with you.
0:39:02 I have this, I have this a go over and over again, especially people that are technical,
0:39:06 you give them like the Ethereum white paper, the Filecoin white paper, whatever, you know,
0:39:10 just a bunch of the Bitcoin white paper and they come back and they’re like, oh my God,
0:39:12 this is totally different than what people described to me and what I read about.
0:39:13 Exactly.
0:39:21 It’s because it’s easy to pay attention to the bad actors and prices and stuff when
0:39:28 in reality, the kind of fundamental development, yeah, like you said, from Bitcoin to this
0:39:32 more general computer to the more advanced applications that, again, like Filecoin being
0:39:39 this low level building block that’s going to enable all sorts of new behaviors because
0:39:44 just thinking about Filecoin, like, how am I supposed to build any sort of decentralized
0:39:47 application if I can’t do file storage, right?
0:39:51 It’s kind of this basic building block, but I can’t build Twitter the protocol or Uber
0:39:55 the protocol to compete with the centralized web platform unless I have a decentralized
0:39:59 file architecture underneath it, which today is not really possible.
0:40:05 And so these low level systems, it’s really remarkable the rippling implications of what
0:40:10 will become possible. And I do think that the number one barrier is just very simply
0:40:11 education.
0:40:17 This is an esoteric and complex area and there’s also a huge amount of smoke and mirrors, right?
0:40:22 I do think that there are, have always been in the crypto space, it’s international and
0:40:28 it’s permissionless. So there’s just a lot of crazy behaviors and crazy characters and
0:40:30 it’s easy to focus on that stuff.
0:40:35 That’s actually one of the good things about the price downturn is I think it’s cleaned
0:40:41 up a lot of that and sort of put the focus back on innovation and technology.
0:40:49 Yeah, I agree. I think that the sort of builders of all this stuff never really stop, but they’re
0:40:56 also not who the media necessarily pays attention to. I think that the media tends to be a reflection
0:41:00 of the investors and the investors tend to be really short sighted and focus very much
0:41:04 on month to month or even day to day type volatility.
0:41:11 So one interesting trend is what we call vertically integrated applications and something we’ve
0:41:16 been talking about. And I think the way I think about it is sometimes when you don’t
0:41:26 have the full kind of tech stack built out, sometimes for a project to kind of get adoption,
0:41:31 they need to build more themselves. So like a good historical example is Blackberry, they
0:41:37 come up with an email smartphone in 2003 and at the time you just didn’t have sort of a
0:41:40 great smartphone platform like the iPhone, you didn’t have great connectivity, you didn’t
0:41:43 have great backend. So they built the whole thing. They built this hardware, they built
0:41:47 the software, they built the network, they built the backend and they were able to kind
0:41:51 of get kind of, I think it was like pull the future forward. Eventually you could do this
0:41:54 by building an app on the iPhone, but like at the time you couldn’t, so they had to build
0:41:58 it all. And I think we’re seeing some of that pattern now because we don’t have all the
0:42:05 layers kind of at the ideal state now, particularly like the layer one smart contract platform
0:42:08 we were talking about earlier, just we don’t have kind of a great scalable everything else.
0:42:16 But the, I mean the old wisdom was sort of build a low level, you know, extensible protocol
0:42:21 and developers will come and build all the useful apps. And I think a great example of
0:42:26 that was the Zero X protocol system, which is like token trading on Ethereum using a
0:42:31 smart contract. So they said, we’re not going to own sort of the end user interface, we’re
0:42:36 going to build a low level system and then different people are going to come build web
0:42:40 interfaces. I think the newer generation of the smart contract developers, we’ve seen
0:42:44 say we’re going to build that low level protocol, but we’re also going to own the user interface
0:42:49 and kind of build that full stack experience. And that vertical integration as you put it,
0:42:54 I think is potentially going to be a catalyst for a lot of the stuff to move a little bit
0:43:02 faster than it has historically. And so there’s the project Sello that’s working on first
0:43:09 a kind of low level stablecoin designed for payments and remittances, as well as an Android
0:43:14 kind of mobile first application designed for folks that don’t have access to traditional
0:43:18 banking or financial services. And so by owning kind of both pieces, they can kind of iterate
0:43:24 a bit faster and potentially understand the full scope of how the customers is using this
0:43:29 platform. And provide kind of a modern user user experience
0:43:33 that you would hope for from a non kind of blockchain app and they’ll provide kind of
0:43:37 a similar user experience. But then also I think have the kind of the what I think is
0:43:43 the modern crypto business model of, you know, they own some of the coins and they ultimately
0:43:49 want to see the tokens appreciate and don’t need to and therefore okay with other people,
0:43:52 for example, starting to build their own apps and like and supplanting their app, they don’t
0:43:57 need to control the end to end thing all the way in the future because they have this business
0:44:01 model that’s aligned with the community, it’s this fighting the community of the model
0:44:06 where like the more you give away, the better you do for yourself, which is obviously in
0:44:09 web two, it was kind of own everything and fight.
0:44:12 So it’s interesting because it’s start at the model is sort of start web to like just
0:44:16 to get the user experience right, but then but then have the business model that’s sort
0:44:21 of web three and therefore let you have this great property of grow the pie not fight over
0:44:27 the pie. Yeah, exactly. Okay, so that’s that’s and then and then I guess one of the thing
0:44:34 we haven’t covered is we talked about payments, we talked about centralized finance. We talked
0:44:38 a little bit about like file coin and kind of what I would call incentivized infrastructure
0:44:43 like kind of new infrastructure that has incentives built in. What are some of the areas that that
0:44:49 you know kind of application areas. I mean, one thing with with these crypto protocols
0:44:55 is you can build markets for anything. And so anything today that’s sort of a one to
0:45:00 one service with for example, in the case of file coin, Amazon Web Services, Microsoft
0:45:05 Azure, whatever, Google Cloud, you can turn that into a competitive marketplace that sort
0:45:10 of unifies all of these. And so while file coin builds this competitive spot market for
0:45:14 file storage, you could have a similar thing for many of these kind of low level computer
0:45:20 resources. So you could do that for compute. You could do that. I think AI data would be
0:45:26 very interesting one. Yeah, a genetic data. Right. So then you could even where is the
0:45:29 AI like it seems to me a critical question of the next 10 years is where is AI data live?
0:45:34 Does it live in Google and Amazon servers? Or is it an open protocol where you know anyone
0:45:38 can access it and there’s some incentive model for providing it and forgetting it. One interesting
0:45:44 intersection is homomorphic encryption, which allows you to train a machine learning system
0:45:47 based on data that you actually don’t know the plain text. So you only see the encrypted
0:45:54 version. It allows people to say, okay, I’m going to share the data from my Tesla or my
0:45:59 smartphone with a major corporation and get paid for that data. And that corporation will
0:46:03 actually never learn the data but can still train the machine learning algorithm. It’s
0:46:10 a bit abstract and I think it’s early on that type of use case, but it’s potentially very
0:46:14 transformative. I think also, you know, you could architect social networks, marketplaces
0:46:17 like ride sharing, all of this stuff could be architected using these methods and I think
0:46:21 there would be benefits to all sorts of community members, kind of stakeholders, including the
0:46:26 drivers and riders. And so that’s a separate, maybe a longer conversation. Yeah. Yeah. Yeah.
0:46:32 Yeah. I do think the value accrual when these things succeed go to the entire large and
0:46:37 they’re governed by the larger bases, by, you know, by instead of basically an extractive
0:46:42 corporation that owns the platform and at the end of the day has some level of an adversarial
0:46:48 relationship with its users. Yeah. I mean, it’s today, yes, Facebook loves its users,
0:46:54 but also it wants to put as many ads in front of the users as it possibly can, which actually
0:47:00 disrupt the user experience. So it’s, yeah, it’s an odd relationship, I think that these
0:47:04 Web2 platforms have with their user bases. I think another interesting area is, it’s
0:47:09 kind of out of fashion at the moment, but I think it will come back as NFTs or, you
0:47:15 know, digital goods. It’s always been, you know, there was a whole, I don’t know if you
0:47:19 were around for this, but the, during when World of Warcraft was a big deal, there was
0:47:24 this whole kind of underground market called farming. So people wanted to, instead of having
0:47:28 to, you know, earn your way up to level 70, people wanted to buy their way and there was
0:47:32 this whole thing where like people would, there’s this, these off, off-game X protocol
0:47:37 websites where you could go do this and it was a big deal. And so a similar idea is to
0:47:41 sort of take that and legitimate it and say, hey, you can earn, you know, in a game or
0:47:45 in a virtual world or in some other kind of experience, you know, what if there are goods
0:47:49 that the user can actually own and take from one game to another and buy and sell them
0:47:53 and you add economic incentives and you can make a living doing this and you can actually
0:47:56 own these things in a way that you can’t today. Today you’re really just kind of borrowing
0:48:00 them and these games will come and go and they’ll, you’ll spend all this time earning
0:48:04 stuff and it’ll all then disappear or you’ll forget about it. And this is just a much kind
0:48:08 of more, it’s much more like the offline world, like when you get stuff, you keep it and people,
0:48:11 and people that’s really popular in the offline world and I think it will be popular in the
0:48:12 online world too.
0:48:17 Oh, I mean, the rippling implications of it are, are, are big too. So if you can own your
0:48:22 avatar and you can own the avatar sword and shield and everything, other, like we said
0:48:25 earlier, everything here is interoperable. It’s like an open API. So any developer can
0:48:31 then build an expansion pack or a mod on the game. It turns like the modding community
0:48:37 around various games into like a real economic system. And so then you could actually imagine
0:48:43 like in the longer term, it’s almost like, think about every like rupee you’ve ever
0:48:48 earned in a game or every bit of gold. Imagine if that was actually all unified among like
0:48:52 almost every game, right? And there were like secondary markets between one game and another
0:48:58 game and you could actually maybe bring your avatar from one game to another game. There’s
0:49:05 just, you know, it’s almost like turning the universe of video games into Minecraft, right?
0:49:12 Obviously, that’s a sort of far future, but I do think this, this open and interoperable
0:49:14 low level systems do enable that type of thing.
0:49:17 Also, the other cool thing is with, with the economic incentives, you suddenly, for example,
0:49:22 you could imagine funding your game instead of going to Activision and asking them for
0:49:27 money, you can fund your game by pre-selling some of the goods. You could have third party
0:49:32 creators who earn living, some person, you know, whatever with the smartphone is designing
0:49:35 virtual goods and selling them and earning a living that way.
0:49:40 Well, and one of the most successful categories on Kickstarter is kickstarting video games,
0:49:44 because, you know, gamers are hardcore and they want to support independent developers.
0:49:48 Now imagine if you could take that from, I’m just going to buy your game, I’m actually
0:49:54 going to invest in your game, right? It’s way more powerful, and it aligns the interest
0:49:59 between the gamers and the indie developers. So to me, yeah, that could be a very big trend.
0:50:04 And we have seen some level of that, and I think one of the problems was, you know, when
0:50:08 you can pre-sell these game items, you get this investor community rather than the gaming
0:50:14 community interested. And so I do think it’s important to, you know, make sure that it’s
0:50:19 not, it’s like, it’s people who actually want to play the game, right, that are sort
0:50:24 of buying those game items. But I do think that that interoperability of avatars and
0:50:27 items and levels and stuff like that is, is a big deal.
0:50:30 Yeah. Right, awesome. Thanks, thanks a lot for being here.
0:50:31 Yeah, thanks for having me, Chris.
0:50:40 [BLANK_AUDIO]
In a followup to one of our most popular podcast episodes which originally aired in April 2017 (https://a16z.com/2017/04/03/cryptocurrencies-protocols-appcoins/), a16z Crypto Fund General Partner Chris Dixon returns to talk with Olaf Carlson-Wee of Polychain Capital in a free-wheeling conversation about the seven major trends they see happening in blockchain computing now as we shift from basic protocol design to pragmatic product launches:
- Improving developer productivity
- Scaling out versus scaling up
- On-chain governance
- Proof of Stake Networks, and especially their resilience to attacks
- 2017: year of of fund raising, 2019: year of launches
- Autonomous and re-mixable code
- Killer apps: distributed finance and beyond
This conversation was originally recorded for our YouTube channel: https://www.youtube.com/c/a16zvideos
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates.This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investor or prospective investor, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund which should be read in their entirety.)Past performance is not indicative of future results. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Please see a16z.com/disclosures for additional important information.