Crypto Investors - Linda Xie and Avichal Garg

Let’s just start with quick intro.

So, Linda, after you.

Hi, I’m Linda. I’m co-founder of a crypto hedge fund called Scalar Capital. We focus on long-term investing in this space with a strong emphasis on privacy coins. Before that, I was a product manager at Coinbase; I joined pretty early on and have just been passionate about cryptocurrencies for a very long time.

Cool. Hey, I'm a virtual serial entrepreneur, part-time at YC. I'm in crypto since 2013, actively investing in currencies and various companies. This is where I spend a lot of my time thinking about the way things are going, what the future holds, and where we'll end up in the next 10 years because I think this is a pretty fascinating area.

Cool. Well, it sounds like you guys are the right people because we have a ton of crypto questions. Let's start with definitions. I know a lot of the listeners probably know or have a loose understanding of what blockchain and Bitcoin and all this stuff is, but just so we establish kind of a ground truth, Linda, why don't we start with you?

What is a blockchain?

A blockchain is essentially a decentralized public ledger where you can have a recording of all the transactions that have happened on it without having a centralized entity that's kind of dictating what happens or someone that can manipulate the data. All of this is just done in a decentralized fashion, so you don't have to trust who's actually controlling this data.

What are the other things that people ought to know?

I think it's important to separate cryptocurrency from new coins that have come out that people refer to as crypto assets because it's essentially more than just money at this point. Ethereum is a smart contracts platform; smart contracts are essentially, you can think of it just like a contract that is essentially just programmable logic. You essentially have a decentralized network of computers that's executing this logic without having to rely on a centralized source that can get shut down or manipulate the information or data. So a smart contract in itself is just really important. If you want to compare it to Bitcoin, just think of it as a bit more powerful than Bitcoin in that you can be a little bit more programmable.

Anything to add?

Yeah, the way I think that's great. I agree with everything Linda said so far. I think the way I think about it, there are like four core concepts. There's blockchain, which I think Linda covered well as a distributed ledger with a bunch of properties around who can read it and how you write to the ledger, and so on. I think there's this notion of consensus, which is how do we all agree on what gets written to the blockchain and what the universal truth is. There are different mechanisms to agree on the truth.

There's the idea of a token or token economics, which is how do we align the incentives of all the actors in the space. There are different mechanisms for aligning the incentives. Then, I think there's the smart contracting layer. Assume you have a ledger and you have tokens and people who are agreeing on the state of the universe. What degree of control and programmability do we give on top of that to the users of the blockchain or other programmers to do interesting things on top of that? This is where things like programmable money or distributed compute get really interesting. Those are kind of like the four things that I think about in this universe, and you can kind of mash them together in different ways in different chains.

Yeah, absolutely. So we should explain those. There are many use cases for distributed ledgers, for programmable money. Can we break those apart?

We had a ton of questions about it, but just from broad strokes, what are the use cases you guys see?

Especially whenever there's a middleman that's doing programming logic and saying if-then condition and is charging fees for that, you can replace them with a smart contract. So, there's plenty of use cases for that in the financial system, healthcare, legal system. I view that as really powerful for just automating things and allowing there to not be a centralized point of failure. I think that's one of the most important parts of what this produces.

Yeah. I think the way I think about it is there are kind of three buckets. There's programmable money, which has a lot of different facets. There's privacy; smart contracts can be used as escrow, and you could argue ICOs effectively are in escrow or you're locking up some sum, and then you can do something with it on the other side. Programmable money is like one bucket of use cases. Distributed compute is another bucket of use cases, like you can use all these computers around the world to execute code.

Then the third bucket is distributed apps, so things like prediction markets or distributed VPN networks. That's kind of the third bucket of use cases. I think pretty much everything I've seen so far falls into one of those three. Sometimes there's a little overlap; you could be kind of in two buckets, but at a high level, I think those are the three buckets I think about.

Cool, so to jump into a question from Twitter, JPS asks: What are the top use cases you guys think are going to go mainstream in three years?

Mainstream, maybe caveat it by like within this community.

Yeah, the two ones that I think will come in stronger are decentralized exchanges and probably gaming, something along the lines of collectibles.

So decentralized? Just define collectibles. Like what's an example of that that's been out in the world?

In the crypto community, there's been CryptoKitties. You can collect a unique digital cat on the blockchain, and that can never be destroyed. You own that permanently, and that just got really popular. People were kind of just collecting it like digital beanie babies in a way. You can breed them together and produce new unique cats, but people just love collecting things in general.

That's been very common with stamps, coins, and cars; people just love collecting. Now you have a society where you can collect everything in a digital manner, and you can freely trade this. That pairs well with decentralized exchange because, for context, I worked at a centralized exchange where you essentially have this exchange controlling user funds. Coinbase is really trustworthy, and I'm fine storing my funds on Coinbase, but there are a lot of centralized exchanges out there that have a risk of getting hacked or getting shut down by regulators running with user funds.

So there's risk on the custody side. There's also some barriers to entry if you live in a jurisdiction that something like Coinbase doesn't support or you don't have the right documentation. So, I'm really excited about decentralized exchanges because you can now have a bunch of people that can participate in these markets and trade anything they want.

Yeah, trade digital cats if they want, and it's really cool. More people could just participate in the network at this point.

Yeah, I think the same thing is true. Like, those are the use cases that happen in the next couple of years.

Yeah, I think both of those will happen. The other big one I'd add basically is programmable money. I think the payment rails will all get built out, things like Lightning Network and Plasma or zero-fee payment networks that are coming. I think the merchant side of those things will continue to get better, so I think payments as a category will see growth. Privacy, as a subset of that, I think privacy tokens are actually a thing.

If you talk to a lot of people, hey, if XYZ thing went away, would you care about it? Like yeah, it would be kind of unfortunate if that went away or I lost a lot of money accepting the ICO. Then you talk to people, and you say, would you miss it if Monero went away? And I can't. Man, that would be really terrible because I actually use Monero to do something.

Hmm. So, I think the payment side of things is actually going to merge. Then, yeah, I agree. I think decentralized exchanges and collectibles are two early, real use cases that people actually care about.

And what about the decentralized apps that people are talking about and kind of dreaming about now? What’s the timeline on something like that?

I think probably... this is probably a place where we might differ. I think it's probably like seven to ten years out for most of these. I think we're really early in most of these cases. There might be one-off use cases like Orchid with VPN, where there’s a real problem being a distributed network and a decentralized network that can be censorship-resistant. So that's like a core feature of the network. Beyond that, I think it'll be a while. I think there will be some early use cases, but by and large, it's going to take several years.

Yeah, I generally agree. I think my time spans just a little bit shorter – maybe like three to five. But I think there's a lot of scaling issues that need to be solved before anything can go mainstream. But I'm generally pretty optimistic that there are a lot of really smart people working on that problem right now.

And be more specific on the technical side. What are the scaling issues?

Yeah, so with Ethereum, CryptoKitties itself was so popular that so many people were trying to use it. Bitcoin itself, so many people have been trying to use Bitcoin that the transaction fees have actually gotten pretty high. At some points, it was like an average of thirty dollars per transaction, which is parallel to a wire at that point.

So you have so many people... I mean, it’s a good problem: so many people want to use it, but it’s too expensive, and it starts getting really slow. And then, in Ethereum's case, I know there’s a lot of scaling work being done. So L4 is an organization that was funded by the Ethereum community grant to essentially work on some scaling solutions. There are a lot of different ones that they're tackling.

They're supposed to be working on state chains, which essentially — if I were to compare this — it's kind of just like a bar tab in a way. You essentially have all these offline transactions where people are just moving back and forth between each other, and you can update state and lay down logic, and then only when you want to finalize something, you can move it back to the main chain. So it’s just a bunch of off-chain transactions.

There's also Plasma, which Joseph Poon and Vitalik wrote about, where you essentially have blockchains within blockchains. You just have all this work being done on these blockchains within a main blockchain, and if you ever want to, because the idea is that you don't really care about what everyone else is doing; you only really care about what your transactions are all about.

So you’re like isolated in your own little blockchain, and only when something goes wrong do you ever have to leave that blockchain and go back to the main one and report something. So there are all kinds of things going on with this.

So just to understand that: by your own blockchain, are you meaning individual users or individual apps on a blockchain?

Both. I mean, essentially, you can just be isolated in your own world in whatever application or even individual use cases. This is very theoretical right now, but there’s work being done on it. There’s also TrueBit working on doing off-chain computations, so essentially, you don't want really complex computations on Ethereum blockchain.

You can maybe move that off and pay people for computational work to be done, and essentially the problem is that you have to verify that the work was done correctly. So they have a really cool concept where every once in a while, the network will do some wrong computation or something that's incorrect, and people who catch that error actually get compensated for that.

So you have this whole network where people are just constantly making sure that things are running correctly because if they catch something, they get a payout for it. So there's just a bunch of really cool work being done. So, I’m generally pretty optimistic about the ability to actually go mainstream.

Do you think that many of these apps that we're going to see are going to resemble things that are popular right now, or is this like very much like the beginning of the internet, and we had no idea what was coming? Will it look more like that than, you know, a dupe of what we have right now?

Yeah, I think that’s a great question. I think the early ideas will look like ports of stuff that we're used to. The early internet was kind of like the New York Times took the newspaper and literally like NYTimes.com headlines or images.

Yeah, it was the Newman-Charlie model; yeah, it looks like the newspaper right, just because it's like that's the easiest way to transport to a new platform, and we just couldn't predict it. Social media, actually, like Facebook and Twitter would be the actual media winners, or YouTube would be the actual media winners; it wouldn't be, you know, like CNN.

So I think it would have been really challenging to predict something like Airbnb, right? If you could have called that, then you know you would have done quite well as an investor. But also, you know, if you look at their early funding history, it was just really challenging for them because it's such an out-there idea.

But it was a native idea; it was a thing that made sense on the internet. I think the first set of ideas will essentially be ports, and there'll be people trying to sort of cargo cult — kind of like applications—over the idea. Then a couple of years into it, people who are sort of thinking about these things natively will start to play with ideas and say, “Oh, well, now you can do this thing that just wasn't possible before.”

Here's an idea: what do you know, if I push a button, a car can come to me instead of me going to someplace, right? Those ideas, I think it just takes a while for people to get used to it and for developers to play with the infrastructure and concepts, and just sort of poke around and play around and see what's possible.

Do you think it'll leapfrog by location in any way? For example, you know how LA was perfectly situated to have cars, but medieval European cities weren’t?

They kind of then get leapfrogged and have the train infrastructure. Do you think that will happen with decentralized apps? So, say for instance, you know, in Africa, somewhere where money is not the same thing as it is here in terms of payment accessibility and most things, will they take off in different places first, or will that not be the case?

Personally, I never thought cryptocurrencies were going to take off in the US or anything at first. I think it's going to be in countries where people don't have bank accounts primarily, and they now need a method of actually storing their own funds, or countries where their currency is just getting inflated away, and the currency is not valuable.

So I find that in certain countries, the use cases of cryptocurrency actually matter more than in countries where there's a really strong financial infrastructure. So, yeah, it definitely varies in my case.

There’s also something like in China where you have all this censorship of using different applications; I could really see decentralized applications taking off in China.

Yeah, I just always wondered, is the Valley a good barometer of the popularity of cryptocurrency and decentralized apps, or is it not? That's what I've been wondering, and I take a question.

Yeah, in some sense, geography is just one specific way to say that there’s an underserved market. I think you will probably see things like the inspiration for new ideas tend to take hold in these underserved markets.

So geography is certainly one dimension, or you could have argued that college students were an underserved market when social networks emerged because they were all in one place. There was an opportunity for a new type of media to emerge. So, you know, I think there will be pockets, even in developed countries, there are pockets that are underserved.

So the question is really where are there underserved markets where the new infrastructure gives you some sort of fundamental advantage or some sort of new utility? Then there’s a kind of a related question, which is even if that’s where the inspiration for the idea comes from, how do the companies that build those products actually scale?

I think that’s actually a different dimension altogether. If you think about where the bottlenecks for actually building companies are, I think a lot of that is tribal knowledge that’s in people’s heads.

It’s like, what does it mean to have a fast-growing startup? So Coinbase, for example, is a YC company. It’s actually not a coincidence to me; it’s just like what it takes to actually build a fast-growing startup.

It turns out there’s a lot of traditional best practices about how you hire people, how you structure teams, and how you raise capital. A bunch of that stuff is that tribal knowledge is in people's heads in Silicon Valley.

So I think you could have the inspiration for ideas come from underserved markets, but I wouldn't be surprised if the really big winners in crypto actually center around Silicon Valley.

Oh, same way.

Yeah, I generally feel the same way. I mean, there are a lot of developers I hear about who are working on Ethereum applications in their spare time, and so you’re seeing a flock of talent from Silicon Valley into working in this space.

I think that’s where you’re going to see a lot of innovation. Although it is pretty nice to see that there are different hubs around the world of blockchain development.

There’s Berlin, and I know places in Argentina, and Switzerland is another area. It’s pretty cool to see more hubs pop up in the space.

Yeah, and how much do you think governance and regulation is going to affect those hubs? Does it ultimately mean just like there’s a certain density of people that can build this stuff; therefore, I’m moving there? Or are these tax incentives and different regulations actually going to move the market?

Yeah, I think it's really going to move the market. Right now, I think the U.S. is being smart and not trying to be overly restrictive because they know that it will push out a lot of the development.

Especially, let’s say you were to just really be harsh on people that were developing on these projects. I think that would easily just cause people to move elsewhere; you’re already seeing the tax incentives play out here.

People are registering in the Cayman Islands or Puerto Rico, starting a little hub of people buying houses and importing.

Yeah, yes! So you’re already seeing—I actually know people who are trying to move out of California especially because California has really high taxes.

Yeah, you see Nevada plates here all the time.

Yeah! And even when you have scenarios where people are like mining in China, and then also in China starts cracking down on mining, these miners have to move elsewhere, and you're seeing people move over to Washington because electricity is cheap.

There’s like this movement just based off cheap electricity as well. So, yeah, it’s pretty fascinating. I think the whole regulatory arbitrage angle to this stuff is pretty interesting.

How our governments... the game theory around how governments want to regulate this stuff is pretty interesting. I actually think that the U.S. government has been really, really smart about this and pretty measured and sophisticated because they understand there’s a lot of potential for innovation here and a lot of value to be created, and they don’t want to crush that.

I’ve been actually pretty impressed with how measured they've been. I mean, you look at something like the Bitcoin ETF paperwork that went in and all these people filing for it. I thought it was so clever the way that they essentially pushed back on that.

They didn’t actually reject the ETF proposals; they essentially convinced the people who had put in the ETF proposals to withdraw the proposal.

Yeah!

Which I thought was super clever! So, basically, back-channel—I don’t have any inside information, just to be clear—but my read on it was what they did was they went to the teams and said, “Hey, look, there are a lot of reasons we can't approve this right now. Maybe it was like, hey, we don’t want to inflate the bubble anymore or whatever else. Why don’t you withdraw them and let’s keep talking?”

Then that way, it wasn’t like the government rejected the ETF proposals. It was the ETF proposals we’re being withdrawn.

Yeah, absolutely the right way to do it! Right? If you’re like, “Hey, look, we’re gonna do this eventually; we just can’t do this right now,” but we don’t crush the market. We really don't want to pump up the market—really smart way to do it.

I think they’ve actually been pretty sophisticated—the regulators inside the SEC and the CFTC and so on have been actually pretty sophisticated in the way they’re handling this.

What about on the investor side? How do you guys feel about, you know, accredited investors getting involved in ICOs versus not accredited?

Yeah, I mean, that one's hard because I really believe in decentralized systems and everyone should have access to this. At the same time, if something straight up looks like a security token, and you're issuing it in the U.S., I think that it rightfully falls under the SEC regulation.

So I believe in compliance, and that's actually something I really like about this protocol, Harbor Protocol, where essentially trying to make sure that the trading of tokens is compliant.

You can have some whitelist of just accredited investors that plug into the smart contract and essentially say you can only ever issue tokens to these investors, and there's maybe some holding requirement; you have to hold it for 90 days or something.

So the smart contract itself will have the logic that you can't actually trade these tokens. I do think that it's important to comply with this as long as it's very clear it's a security token, although I really think that there are plenty of cases where a governance token doesn't fall under that jurisdiction.

So it's really important to kind of make the distinction that not all tokens are the same.

Yeah, I agree with all that, and the risk really is that there’s a whole philosophical angle to this, right? To what degree should the government be involved in being somewhat paternal about protecting investors from themselves in some sense, right?

These distinctions are arbitrary; it's like if you have a certain amount of money, you get to sort of do anything you want, and if you don’t, then you don’t.

Right? So, and you know that's starting to change with crowdfunding regulations that have changed recently, and so there is some movement there.

Setting aside the philosophical parts of it, I think generally speaking, trying to prevent scammers in the ecosystem and trying to prevent people from kind of getting built and losing their money is important and good.

To the extent that the ecosystem can do that itself—things like Harbor, which I think is a pretty awesome project—I think to the extent that we can kind of make that easy for people to not lose their money or people inside the ecosystem calling out, “Okay, this is what I’ve been wondering.”

Because, you know, the ICO market has been rife with these, I mean, like—not necessarily scams, but sometimes straight-up scams, right?

And it's not actually good for anyone.

Yeah, I mean, maybe it's good for the one scammer who gets a bunch of money, yeah. But in the long run, it’s not good for anyone.

Yeah!

So, like, is this the only way? What other methods are being put in place to avoid these scams?

Yeah, I’m really helping people who are in the ecosystem are very aggressive about calling these things out and not supporting them.

I think ultimately if there are ways for people to call out these projects, and then those projects don’t receive any funding, that’s actually, you know, the economic incentives will play out in the right way.

I think people will get smarter about it; people will get more sophisticated about diligence, and investors can kind of help.

I think the people who actually are sophisticated, understand the technology, and have done diligence, and understand all these nuances, actually getting out there and saying like, “Hey, this is the real good stuff.”

Right? TrueBit is a super interesting project, you know? There’s real tech there, and the team is really smart and like so on, right?

Just like talking about it and saying, “By the way, this stuff over here, be careful.”

Right? I’m not calling anybody out, but like, you know, there’s stuff out there that if you just talk to people who are deep in it, you can sort of poke and prod and realize that it's a little bit more vaporware.

I think people just need to be more proactive about that.

Yeah! There was an interesting case where there was a project called Crypto All-Stars. It had collectibles of different crypto celebrities.

So there was like one, Funival, and Charlie. If you like verified on Twitter that you were actually them, the card owner essentially got four percent of the proceeds of the card, and then the creator of the project got four percent.

But anyways, this was like really, really popular, and people were trading this—it pretty much looked like a pyramid scheme in a way. Someone actually bought the website and bought it from the project owners, claiming they wanted to improve it, and they actually shut it down.

So, they like someone bought it, paid, what I think was like ten thousand dollars or something, and then just shut down the website and said like, “Hey, this is like straight up a scam, and like people are pumping the prices on Twitter, and people are gonna lose a bunch of money, so I'm not okay with this. I'm shutting it down.”

I thought that was like, though, I know—crazy!

Amazing!

Yeah!

So, things like that are happening as well, right? Like, it's probably like would behoove me to do some research on the beginning of the stock market because I imagine in the beginning, things were getting pumped in the same way.

Exactly! I mean, I think that is the root of a lot of this regulation is, yeah, a lot of people lost a lot of money, you know, 60, 70, 80 years ago, and so collectively we all decided, “Hey, it's probably better if we don’t let snake oil salesmen come in and just like take everyone’s money.”

It's like better for everybody.

Though, I think it’s fair to say, you know, maybe it... I think it’s always good to revisit things that have been around for 50 years and say which of these things actually apply today and how should we think about them and actually evolve them, yeah.

But, you know, even before, I guess, at that point, hopefully, I think there are people in a community that are good about calling these things out and stamping out the fraud before it really happens and too many people lose too much money.

And so, what for the people in the community – like the folks interested in starting companies – where do you think the opportunities are now?

Maybe the real question is where the opportunities four years from now that they should start working on right now?

You have a company; that’s a great question. What do you think?

There are so many applications that I feel like rely on some sort of identity and reputation system because, in the end, even if it’s a decentralized system, if you’re doing a decentralized marketplace, you still have to trust that the person you’re buying a good from is actually going to deliver it to you.

So I think it’s really important to have some reputation and identity system that carries with you as you use all these different applications. We’re still in the very early days of that.

So there are things like uPort and Civic, but they’re really rudimentary compared to the identity systems that exist in regular financial systems. I’d really like to see people work on that problem.

Another area is that a lot of projects talk about doing decentralized governance, and they say that they’re going to use the tokens to actually upgrade the protocol over time, but there’s so much research that needs to be done there.

I think there’s massive opportunity to really figure out what’s the best way to handle governance in a decentralized manner. I think that’s going to be massive potential.

Yeah, just taking some notes, I just came up with five that I think are probably—if you’re a founder out there—like a wish list.

Everything Linda talked about before is basically scaling solutions. There’s a lot of actual infrastructure work to be done just around making this stuff actually more scalable.

I think everybody pretty much agrees that there are not enough people actually working at that layer of the problem, and we could use a lot more great developers poking around there.

I think even more broadly speaking, there are components of infrastructure that are missing. So I think identity as a component of infrastructure is interesting.

I think things like Oracles are interesting. There’s this general idea of how do we know what’s true and what’s not true, and there are potentially shared datasets that people would want to cross projects or cross-chain projects.

I would bucket all that kind of stuff inside infrastructure. There’s financial infrastructure and financial tooling. A lot of the early use cases are basically payment-oriented or money-oriented, and so there’s much stuff to do there.

I think there’s a lot of dev tooling to be built. It’s just like the actual production of smart contracts. How do you test this stuff? How do you deploy it? There’s a lot of work to do.

And then a lot of things, I think the early use cases will probably be somewhat trivial and fun. Gaming and collectibles and things like that will be pretty interesting.

Maybe it's truly native stuff, like CryptoKitties. Maybe it's markets to buy and sell those kinds of assets.

Maybe it's games from traditional gaming companies sitting on top of crypto somehow to do digital assets inside the game or cross-game digital assets.

I think a lot of the really sort of fun, trivial stuff that can take advantage of the new technology will be a way to bootstrap in.

I mean, arguably, I snuck in somebody earlier today about, you know, in some sense, ICOs are kind of the gaming use case, right? It’s kind of like a game, and it’s gambling use case. That’s actually kind of what’s happening, as people are just gambling with real money.

Yeah! And so it kind of makes sense, right? That would take off — it kind of matches the pattern of what you see with early adoption of technologies.

Yet again, gambling is an early adopter!

Oh, for sure!

Yeah! I mean, is there a porn crypto thing?

Yes, actually. It's really popular and uses some really cool technology, so it’s really great!

Yeah? What’s it doing?

I think it's like webcams where people can just pay in crypto to watch them, but they use state channel technology; it’s like cutting-edge technology in Ethereum, which is pretty incredible.

Yeah!

One of the more awkward things I guess with all the early adopter use cases too is you want to like understand them but you don’t want to go like super deep and you know in the ecosystem; you don’t necessarily want to be known as the chain’s penny stock.

Yeah, that’s true!

Yeah, I haven’t really...

But it was like, “Oh, yeah, somebody’s doing that.” I don’t actually know; anybody’s really dug into it, right?

Yeah! Especially if you don’t massively cash in, you’re like this Bitcoin guy, yeah, I’m just kind of around.

Yeah, fair enough!

So what about the ICOs? I mean, ICOs have been gigantic, right? People have raised hundreds of millions of dollars?

Yeah, I think it was six billion last year, right?

Yeah, six. Six, I think it was six billion.

Yeah, well, it was the largest one so far.

Yeah, I think they’re up to a billion. I think probably they’re like two billion now.

Jeez!

Yeah. Yeah, so this fundamentally shifts the paradigm for fundraising.

So we’ve kind of gone from zero miles an hour to 120 miles an hour in this conversation.

But for people who don't fully understand when someone raises a billion dollars straight up, hey, what are these expectations for this company?

What are people buying?

That's a great question!

It depends on, you know, there’s a great amount of variation there too.

I mean, yes, or Bank or Filecoin/Protocol Labs or Tezos, I mean, I think across the board people try to do a lot of different models. Everything from you’re buying a utility token which is ultimately going to be used for some sort of functional utility inside the network as part of a product.

Yeah, to hey, literally, you’re giving money to a foundation that's like—literally—it's a donation to a foundation and you have no expectation of anything in return.

It’s like if you read the docs, that’s actually what you did; you donated to a foundation.

So it’s actually pretty broad spectrum. And so there's no universal answer to that.

I actually think it will be interesting to see what happens on the regulatory side of that, I think, in the next, you know, 12 months as some of these things come to fruition where people don’t actually deliver on projects.

I think it's a big open question of what actually happens and which of these things are okay and which of them are not.

Yeah, what's crazy is like, there’s, I mean, you can’t even possibly spend that much money on developing applications!

Like I disagree; someone's gonna spend the money! Oh my god!

But like people now have so much excess capital that they’re giving it to crypto funds and being like, you manage this capital, and now they’re like an LP.

So it’s like so crazy! Some of these projects have become funds of funds.

Yeah, and in some cases, you could argue you know what? Like I think if the Ethereum Community Fund is doing an interesting job here. We're saying hey look Ethereum is actually a really good system; we want to encourage development in the ecosystem.

Let’s invest in teams and companies doing really interesting work that may be under-invested in, like a lot of infrastructure stuff that’s just under-invested in.

So it’s like let’s give developers an incentive to pay attention there.

But yeah, in certain other cases, it’s just like, hey, we raised 200 million dollars, and by the way, that 5x, so now we have a billion dollars, and we’re not actually equipped to handle a billion dollars; we really only need it 25 million dollars to build the thing.

So what are we gonna do with 975 million dollars?

Right?

I mean, you also have to be a money manager!

And that’s right, founders are like, “How much is liquid? How much is 200? How much do I pay people?”

Which then, I think that Linda's point is okay, well, we probably don’t want to be money managers; so let’s go find a money manager and are handing their money over to people to be money managers.

Yeah, crazy!

So, on the founder side, what are you guys saying to people that are honestly considering an ICO, and they’ve passed the threshold where you’re like, “Okay, this actually makes sense”—you’re not just generating some pyramid scheme; you’re not just trying to grab money—and there’s a real reason to do it?

What do you tell them?

So very, very few times is it reasonable, in my opinion, to do a token sale.

There are a lot of really great projects that can do decentralized applications or create their own blockchain, but they don’t actually need to do a token sale; they can just go the traditional equity route.

And we’ve seen that with some projects like Dharma and dYdX.

So I actually recommend a lot of projects to go that route because you don’t necessarily want to tack on a token that you don’t know is actually going to make sense.

It creates additional friction to the network as well, and there’s still regulatory uncertainty as to how this is supposed to be handled.

So if someone still really wants to do a token sale, I recommend that they work with lawyers that really understand the space. Don’t try to be cheap with the lawyers.

I’ve heard people be like, “Oh, I found some discount lawyer who’s willing to do this token sale for really cheap,” and I’m like, “No! You want to make sure people have expertise around this and can guide you through things.”

But I generally also say—no one’s listened to me on this—but I think they should raise a series because there's no need that you have to raise all that money up front.

Let’s say you really wanted to raise all that money up front; you should probably like lock it up for some time, and as you hit certain milestones, the funds then release because sitting on like 200 million dollars can also kind of hurt incentives of the team being like, “Oh, we just have a bunch of money; we can just spend crazy!”

So I think that the incentives really change, and the last thing which people have listened to me on is the vesting schedule of tokens.

So it’s really important to just kind of look like a traditional company in that sense. You want to make sure employees aren't just gonna leave and cash out their tokens right when the tokens happen.

On the flip side, for investors, you want to make sure they’re aligned with you as well.

Early on, a lot of projects didn’t have a vesting schedule or lock-up for these investors, and the investors just came in and flipped their coins.

They got their discount like twenty to thirty percent, and then during the actual token sale, they just sold everything, and they’re no longer investors.

So it really changes incentives, so it’s so important to think through how your token model actually works and what the governance of it is essentially.

Do you recommend your vesting for employees the same deal?

Yeah, that’s pretty much what I’ve been doing, so for like a one-year lock-up, a one-year lock-up for your investing schedule—that's what I’ve been recommending.

But I mean, yeah, it’s pretty tried-and-true! I mean, I think a lot of these things like vesting or being thoughtful about when you raise money and how you raise money, they’re tried-and-true for a reason, right?

They’re actually—underlying it all, there’s a group of humans that get in a room or get in a telegram group and write some code, and those human dynamics haven’t really changed.

So things like vesting are importantly the best practice, I think we’ve figured that out over the last 20 years—the some of these things are really good! So, I think there are places where you might want to reconsider them in your new world.

Like how much where's the value accrue? Is it equity or tokens?

Are your employees vesting equity or vesting tokens?

So there are some interesting questions there, but I think some of these foundational concepts—like vesting—they exist for a reason, and I think they’re best practice for a reason.

I think a lot of teams should be adopting these things if they haven’t already.

Yeah! I mean, it's tricky. Like again, when you get a bunch of humans in a room, they create games, and if you raise a billion, I'm gonna raise a billion one!

Yeah, that's the game!

Yeah, unfortunately!

So to like kind of boil it down, you’re saying to founders like, “Listen, you don’t necessarily have to do a token sale,”

Yeah! Because it's not required. So, if you’re a founder and you’re interested in crypto, you can get in, but you don’t have to do this, right?

And so when it comes back to that, like, are you saying to them, you know, apply to an accelerator or go and raise money traditionally? What are you recommending them to do in that path?

Yeah, I think what it comes down to is just like outside of crypto and startup world at this point, there are a lot of places to get money.

And I know it's different if you're in different parts of the world; some places have more investor depth and investor liquidity than other places.

But you know, there are a lot of ways to raise money, and so you really want to be thoughtful about who you're raising money from and what value they bring to your company.

Yeah, you could do the ICO and get a bunch of people to send you some ETH, but what happens if things don’t go well, right?

Or you know those are the kinds of projects I think that, you know, your retail investor raises up their hand and says, “That person stole my money,” meanwhile, they’re always great investors like Linda who have actually been at companies and started companies and helped scale companies.

And that’s actually who you want involved, right?

That’s actually who can help you over the next three, four, or five years as you build your company.

So I think what we’re gonna see is a lot of people returning to that idea of, “Oh well, I could get money from five different places; who can actually add value to my company for the next three to five years and help me build this company?”

So I think we’ll see that sort of re-emerge, where people actually add value in the early stages.

You know, that could be an accelerator; that could be an early stage investor; that could be somebody who was early in crypto, made a bunch of money, but actually is very sophisticated about how they think about crypto.

There are a lot of those people out there too! So it’s not to say, you know, people who haven't previously been in the ecosystem are not value-add.

I think there are actually a lot of people who are crypto-native in some sense who really understand this stuff, right?

And have been in it for years, who are very smart and very thoughtful, and you want them involved.

It’s about how do you find people who can add value and get them involved in your company and be smart and thoughtful about that?

Yeah! Yeah, that’s so true.

Just because when these projects are doing token sales, they’re distributing their tokens to thousands of people.

Especially if you did some heavy marketing around that, you end up getting this like pump-and-dump kind of crowd, and all they’re doing is saying like, “When moon? When the bell rings?” they just want things listed at the price to pump.

Yeah! And then if you look at those Slack groups, it’s just like mayhem.

They’re just...they’re not adding any value; they’re creating tons of distraction for the founders.

So I think it’s so important to have value-add investors and not just try to make money really, really quick or something.

I mean, I think you see the micro-example in Silicon Valley already. Right?

If you’re a big hot company, you can raise from anyone.

Yeah!

It’s just about finding the smartest money.

Yeah!

Until you see that in a larger scale here—it’s like zillions of dollars floating around!

Yeah, how do I actually think in the last three months in particular? I don’t know if you’re seeing this, but it seems like we have moved back into that world where the really good teams in crypto and a lot of the teams that have a lot of early momentum are going out and seeking out the high-value investors again and saying like, “Hey, I don’t want to do a public sale; I actually want to find people who can add value to the company and be thoughtful about it.”

So, I mean, I think we might look at this historically, you know, in five years we might look back and say, “Oh, that was a funny six-month window in time!”

Yeah. I kind of like basically getting back to the basic principles.

I saw some stat a while back that was saying like nowadays, 60% of the funds raised in a general token sale is actually raised in the presale round.

So it’s really shifted the momentum so far just in a year since the beginning of the year!

Yeah!

Yeah! Cool!

Yeah, things move so fast in this space!

All right, so let’s go into some of the questions from Twitter.

King Croesus asks: So what are your thoughts on optional versus mandatory privacy in transactions?

Yes, I have a lot of thoughts on that.

So I essentially think that it needs to be mandatory privacy if you’re going to actually have a privacy coin.

If it’s ever optional, you get looked at if you’re starting to use a privacy feature. Like, why are you using this privacy feature? Do you have something to hide?

First of all, it paints a target on your back.

Second of all—so for context, I did blockchain tracing when I was at Vast—and Bitcoin is very easy to trace, and a lot of people give information away about other people.

So even if you’re being really smart and someone transacts with you, they give away information about you, and that can happen in a scenario where you only have a small subset that’s actually being private and the rest of the users on the network are being public.

They can give that information away. So I think it’s really important to just have mandatory privacy, and that's something I really love about Monero; all transactions are private by default, and I think that’s absolutely crucial.

Yeah, I feel—sorry! I think mandatory is already gone; I think it creates some interesting challenges though.

I think that’s a harder pill for regulators to swallow, generally speaking.

I heard this great story where in the early days of the internet, you know, like SSL/HTTPS is now a standard thing, right?

It’s on by default in a lot of cases, but actually, the Netscape team had to fight to make that a thing that was possible inside the browser because the government was worried about like, “Why do you need to encrypt your transactions? Like, why are you doing something illegal?”

Like why shouldn't we have this be public?

It turned out that one of the selling points was commerce.

It's like you don’t want to send your credit card number over the wire unencrypted.

So the fact that there were like real legitimate use cases allowed things like SSL to emerge; it’s like, “Oh, yeah, we should actually allow that.”

And so that I think is actually the challenge for the space—philosophically, I agree with Linda, which I do.

But the onus is on us to demonstrate all the use cases where default privacy is really important.

I think things like, “Hey, look, if people do start to get paid in crypto for their job, well, you kind of don’t want everybody to know how much you make and who’s paying you.” That’s like a reasonable thing.

I think it’s even more interesting if you start talking about, well, let’s say you have a particular sexual orientation and you live in a community that doesn’t really support that, and you’re donating to a charity that does.

Like, do you really want people to be able to sniff that out?

You take an even more extreme view when you say, well, if you live in a country where the government is not, you know, you might trust the U.S. government—there might be other governments that you don’t trust.

Well, do you want, even if that’s not your government, do you want that government to be able to sniff out your transactions on a public blockchain?

Right!

And so I think being really concrete about it—it's not just a philosophical thing, though I do agree with the philosophy 100%.

There are practical consequences to this stuff that will make it possible, I think, for regulators to understand why it’s so important that it be on by default.

Yeah, absolutely! And also, there is this concept of selective transparency; both Monero and Zcash have this view key where you can share it to someone to now view your transactions, really.

So this you could share with auditors if you want to be compliant, or if a charity just wants to display those transactions, they can share their view key to everyone in the world.

So the idea is that it really much mirrors the traditional financial system; we don’t broadcast everything to the world, but we download our bank account statement and give it to someone when they need to see it.

So I don’t think it is far off from what we’re just used to.

Agreed!

Yeah!

So just default private, and then if you need to be public, then yes!

Yeah, cool! So transitioning from that into another governmental-related question, Cláudio asks, “How do you see the U.S. government, or do you see the U.S. government launching their own cryptocurrency backed by gold?”

Yeah, I have very strong thoughts about this. So the specific incarnation I think backed by gold we can sort of set that aside for a second.

In general, I hear a lot of people talking about how governments might regulate crypto or ban crypto, and there is some risk of that. I think the bigger and scarier potential risk is that governments fully embrace crypto in the wrong way.

Hmm!

And so kind of back to this idea of privacy, right? Like do you really want a government that you may not trust to have full visibility into everything that you are spending money on every day?

And every transaction and every person that you’re transacting with, right? That has like a very, you know, there’s like fundamental human rights to privacy sorts of aspects to that.

Then like very practically, you know, if your government can do it, odds are other governments can do it.

Sorts of downstream consequences.

And so, you know, increasingly I think governments are getting—stuff in a way that they think about technology and adopting technology and using technology.

So I think the bigger risk is actually what Cláudio is calling out. It's governments being really smart about adopting this in a way that makes, in my opinion, the wrong trade-offs between security versus privacy.

And I think there’s just not enough—there’s not enough people.

I think we’re so many people are worried about governments banning the stuff that we’re not looking at the other side of it nearly as deeply of what happens if a government fully embraces it.

But does it in the wrong way, or what if a government that you may not trust, even if you trust your government, embraces it in the wrong way?

Is there a positive outcome in which a government embraces it and creates, for example, a U.S. coin, whatever it might be—Trump coin—where it's actually not a negative thing?

Or that we move from the dollar to U.S. coin?

It is possible.

A lot! I think absolutely!

I mean, that’s what’s—one of the great things, I think, about crypto is it is global, and I think there are all sorts of opportunities for governments, especially smaller and more nimble governments, who are willing to adopt this stuff.

I think Estonia has done a great job of pioneering some of this stuff, and I think Singapore is poking around with this, so there are definitely places—between voting or making it easy to file your taxes to making the banking system more efficient—there are lots of places I think where large existing institutions could adopt this, and that’d be great.

You know, even making stable coins—like, you know, maybe some government should just say, “Hey, look, we have five hundred billion dollars and you trust us, and we’re going to stable coins, and now actually crypto can be a real thing.”

So I think there are lots of positive ways governments could play in the space as well, and hopefully some.

Yeah!

Yeah, Dubai has been pretty good about that; they said that like all visa applications and some other documents would be on the blockchain by 2020.

So it’s like they ended up like it’s gonna save them over a billion dollars a year and just be more efficient.

So they’ve been pioneers in the space, and I know Consensus, the company, works really closely with them.

And then now, yeah!

I quickly agree with everything you said.

What’s crazy is Venezuela already issued their own!

Yeah!

Which they claim, they are five billion dollars worth in the presale, but they haven’t proved it.

But what’s crazy is that there are all these sanctions against Venezuela, and now there’s this foreign capital coming in, apparently to fund this.

And so you run into all these issues where now you’re supporting a sanctioned country financially, and that’ll be really interesting to watch how that plays out, right?

Well, I mean, you see every day how little the average, you know, normal person cares about these sanctions between borders.

So buying something in Venezuela or Mexico or it doesn’t matter!

All right, another question Naveen Mishra asked: What would be the best onboarding ramps for adoption, and what roles will Oracles have in decision-making in the future?

So best onboarding ramps for adoption?

I mean, honestly, I think it’s something like Coinbase. They do a really good job of just linking up your bank account and just purchasing cryptocurrencies.

So I think that just having a nice user experience there is really important.

I think the more interesting thing for me is what role will Oracles have in the decision-making process.

So I’m fascinated with this idea of decentralized Oracles. You could essentially have a system like Augur, which is a prediction market platform where anyone can create a prediction market on it.

And the past issue with prediction markets is they often get shut down by regulators just because it’s kind of closer to gambling.

But in prediction markets on top of Augur, no one can shut this down.

You can really have these markets operate.

People can start creating markets where essentially you measure the citizens’ happiness; you measure GDP; you measure all these different statistics of a country.

You can have people betting on the outcome of whether or not a different policy is going to increase or decrease these statistics, and from there, policymakers can now start making their decisions based off the outcome of this.

And that’s called Free Turkey, and I just think that's so cool because people are actually putting their money where their mouth is at this point.

So, like, they might say one thing, “Oh yeah, I really support this policy,” but if they’re actually betting on it, then that’s a stronger signal.

So I think that’s going to be something that is totally new that these systems are able to produce.

So yeah, the only thing I had on the onboarding piece of it is I suspect that the way most people will get on boarded will either be very directly—like Coinbase.

It’s like they know what they’re getting into—they’re buying into a crypto—or it’s gonna be totally opaque to them.

They’re actually not gonna realize at all that what they’re doing is interacting with blockchain and crypto.

They’re just doing a thing that you couldn’t do before!

Right? And it’s just gonna—so it’s gonna be so sideways that people just won’t realize that’s actually what’s happening.

And I suspect those native use cases will be that way.

And so I think, you know, it’s an interesting question of what percentage of people on board it into the space do it very directly through something like Coinbase, or they just happen to do a thing, and that happens to sit on top of crypto.

Kinda reminds me of, you know, several years ago—we used to talk about mobile companies. So right now, we talk about clear, definitive ways, and at some point in the next five years, it’s not going to be that your crypto companies, that you offer some value to the people who use your product.

And it just so happens that you sit on top of blockchain and you’re using economics or whatever.

And so I think that will actually be how a lot of this stuff goes mainstream, is in a way that people don’t even associate directly with crypto necessarily.

Yeah, I think I would bet a hundred percent on that.

Because if you ask the average person, like, “So what language is Facebook?” and “What’s a language? Why do I care about this?”

You see it when people pitch their companies.

They’re like, “We have the fastest implementation of Python you’ve ever seen!”

No one cares!

Yeah, good point!

Awesome! Well, thanks for coming in, guys! This has been really great!

Yeah, thanks!