Chris Dixon - The Potential of Blockchain Technology - [Invest Like the Best, EP. 221]

My guest today is Chris Dixon, a general partner at Andreessen Horowitz. Chris is a prolific investor and thinker, having been an entrepreneur, angel investor, and is now focused on investing in the crypto and blockchain space for Andreessen. Our conversation focuses on Chris's overall thesis for investing in the cryptocurrency space, the opportunities and limitations of blockchain applications, and why this is the most interesting area for investing and building over the next ten years. What's exciting to me is blockchain technology's ability to help us re-imagine old business models and catapult them into the 21st century – and we cover a lot of them. I hope you enjoy my conversation with Chris Dixon. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ------ This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalyst has models on Coinbase, Roblox, Qualtrics and everything in between. Learn more and try Canalyst for yourself at canalyst.com/patrick. ------ This episode is brought to you by Tegus. Tegus has built the most extensive primary information platform available for investors. With Tegus, you can learn everything you’d want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Affirm, Teladoc, Roblox, or almost any company of interest. All you have to do is log in. Visit tegus.co/patrick to learn more. ------ Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:56] - [First question] - His overall crypto investing philosophy [00:06:37] - New opportunities presented by blockchain technology [00:15:31] - Permanent limitations and shortcomings of blockchains [00:18:32] - Evolution of DeFi and crypto currencies [00:21:11] - Whitepapers: Bitcoin, Ethereum, MakerDAO [00:22:08] - How to take out a loan using the Maker protocol [00:23:22] - Utility of Dai and stablecoins [00:29:14] - How the DeFi network will reinvent the future [00:39:53] - Uniswap, tokens, and fundamentally redefining leverage [00:36:29] - The Company: A Short History of a Revolutionary Idea [00:38:00] - Developer and entrepreneurial incentives for building blockchain technology [00:39:46] - BitClout, Rally and the early days of social tokens [00:46:38] - Demand curve and value creation efficiency in a digital creator economy [00:47:24] - NFTs and a Thousand True Fans [00:54:49] - Polkadot, Solana, Cosmos and programmable blockchains [00:58:03] - The most exciting moment for him in the last year [01:00:19] - Decentralized autonomous organizations [01:02:46] - The single thing that has him most excited about the future of this space [01:05:18] - The Next Big Thing Will Start Out Looking Like a Toy

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:44Patrick O'Shaughnessy?

  and CEO last year to pick his brain about SaaS businesses. Founded by a former buy-side analyst who encountered friction in sourcing, building and updating models, Canalyst is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models on virtually every investable public equity, Canalyst clients are able to react more quickly. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalyst has models on Coinbase, Roblox, Qualtrics and everything in between. Their pre-IPO models are built as soon as the S1 hits and include all segments, KPIs and non-GAAP figures. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout.

• 1:28Patrick O'Shaughnessy?

  Learn more and try Canalyst for yourself at canalyst.com/patrick. That's C-A-N-A-L-Y-S-T.com/patrick. If you're curious to hear more about Canalyst, stay tuned at the end of the episode where I talk to Canalyst CEO, Demir Hatt. This episode of Invest Like the Best is brought to you by Tegus. I started hearing about Tegus when several of my close professional investor friends sent me passages or ideas they'd found on the Tegus platform. Conducting effective primary research shouldn't take weeks, it should take hours. Searching for answers shouldn't be lengthy, cumbersome process. It should be easy and nearly immediate. Expert calls should not cost $1,000. Tegus solves these problems and makes primary research faster and Better for professional investors.

• 2:12Patrick O'Shaughnessy?

  Teigus has built the most extensive primary information platform available for all investors. With Teigus, you can learn everything you'd want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake, or almost any company of interest. All you have to do is log in. Still want to do your own calls? Teigus has a solution. Experts that are just as good or better than what you'd find on other networks for just $300 per call, not the $1,000 or more that others charge. If you're curious about Teigus, call the top performing investment manager you can think of. They're probably already a Teigus customer and they'll point you in the right direction. Because customers, myself included, love Teigus. Visit tegus.co/patrick to learn more.

• 2:58Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 3:25Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 3:50Patrick O'Shaughnessy?

  My guest today is Chris Dixon, a general partner at Andreessen Horowitz. Chris is a prolific investor and thinker, having been an entrepreneur, angel investor, and now focused on investing in crypto and blockchain at Andreessen Horowitz. Our conversation focuses on Chris's overall thesis for investing in the cryptocurrency space, the opportunities and limitations of blockchain applications, and why this is the most interesting area for investing and building over the next 10 years. We cover it all: base protocols, DeFi, NFTs, social coins, and the future of the internet. I hope you enjoy this wide-ranging and fascinating conversation with Chris Dixon.

• 4:28Patrick O'Shaughnessy?

  So Chris, I think the best place to begin probably would be for you to outline what I'll call your overall thesis or sort of philosophy of investing in the cryptocurrency space. You've been doing it for a long time. I think it's a comprehensive approach. You're not just attacking one part of the ecosystem. So maybe just frame this whole thing up for us to begin and then we'll dive into the details.

• 4:47Speaker 02

  If you kind of look back at the last, instead of the advent of computing in the World War II era, there's basically every 10 to 15 years is a new kind of major computing cycle. So you had early computing, you had mainframes, you had mini computers, PCs in the 1980s or so, internet developed, commercial internet in the 90s, mobile phones, late 2000s. It's sort of an obvious question, if you're in technology or investing like I am, is what's next? There's one possibility is sort of it's the end of those cycles, right? The sort of mature industry now. If you look at other industries, electricity and cars and other things like there was a period of rapid change and then at some point they stabilized. That's one hypothesis. I don't believe that, but that's one view you could have. Another view is maybe the next wave of

• 5:30Speaker 02

  computing is artificial intelligence or virtual reality. I personally, and we as a firm, are very excited about all of those categories. I believe personally that the most exciting new computing wave is blockchains and crypto. Been working in that area for a long time. I led our investment in Coinbase back in 2013 at Drayson Horowitz and did some other crypto-related investing. And then I'd say four or five years ago, decided to go full time into it, said this is the thing, this is what I want to do. We spun out a separate crypto fund. We're now in our second crypto fund, which I co-lead. We have a whole team kind of built around that and do that full time. And I do that because I believe that a blockchain, if you take something like Ethereum, Ethereum is a computer. It's a computer that happens to be instantiated by

• 6:15Speaker 02

  running on top of a network. There are things called miners and will soon be called validators in the new version of Ethereum, who are the actual computers, the physical computers that run the code. But the way that a blockchain works is those computers come together and create kind of a virtualized layer on top, which has new properties that prior kinds of computers didn't have and let you do new Things and new capabilities and basically unlock new things. I mean, people I'm sure have heard about things like cryptocurrency, which is one of the applications of a blockchain. NFTs, which people may have heard of now, are another one. I think there's a whole bunch of other really interesting things. Smart contracts, DeFi, DAOs, talk about all these things. And these are things you couldn't do for a variety of reasons, technical reasons you couldn't do on a traditional computing architecture.

• 7:00Speaker 02

  So I believe these are new computers and there's all sorts of interesting opportunities for both investors and entrepreneurs to, just like other computing waves, to invest in both the infrastructure and the application layer, to create new products, probably a lot of the things that are exciting. When we look back 10 years from now will be things I don't mention today, or no one's mentioned frankly. If you went back to buy analogy at, let's say this is 2008 and the iPhone just came out. And I sat there and said, what's going to be exciting about an iPhone? I probably would have analogized from the PC and I would have said, oh, you're gonna, stocks and weather and word processing. Who knew like ephemeral photo messaging and calling a taxi and stream of TikTok dance videos and all these things that actually happen were much harder to predict because

• 7:41Speaker 02

  tens of thousands of really smart entrepreneurs are always going to do a better job building the future than somebody like me pontificating. I'm sure there's a whole bunch of really exciting things you can do with these new computers. We've already seen a bunch of really exciting things and I think there'll be many more. That's kind of our broad, why we're so excited, why we're doing it. We think of it very much in this tradition of the internet, PCs, mobile phones. As opposed to when you read some of the press, they kind of put it more in the context of finance or something. There are financial aspects to it, but I think I believe at its core, it's a computing movement.

• 8:10Patrick O'Shaughnessy?

  I love the mobile analogy because if you think about what was new about this new computer platform that enabled some of these things that ended up being winning, like geolocation data is a great example, just taxis, like that enabled that. It was a new feature that didn't exist on prior computing platforms. What is the same thing for blockchains? What is the new enabling feature or features like geolocation that makes us exciting?

• 8:32Speaker 02

  Fundamentally, what blockchain lets you do is it lets you write code that can make strong commitments about how it will behave in the future. To give you an example, the most obvious one is Bitcoin. So Bitcoin, to the extent it has value, that is enabled by the scarcity of Bitcoins. There will only ever be 21 million Bitcoins. That property of saying there's only going to be 21 million is guaranteed by the blockchain. It's not guaranteed by the creators of Bitcoin. It's not guaranteed by the developers of Bitcoin, by Satoshi Nakamoto. It's guaranteed by the very network architecture. That never existed before. Before, if Google said, "I'm going to have Google Coin," and Google Coin will only have 21 million coins, they could just change that. Every server that runs at Facebook and Google and Amazon, that's just controlled by some

• 9:15Speaker 02

  person ultimately, and that person can change the rules. And by the way, and it has all sorts of consequences, including the fact that no one has ever created a digital currency prior to Bitcoin that anyone really at large believed in. And that's part of why they didn't believe in it, because they said, "Oh, you'll just change the rules." Why would I believe that this is really fundamentally scarce? Bitcoin guarantees that if you own a Bitcoin and you have the private key, it's your Bitcoin. It guarantees there's only 21 million Bitcoins that'll ever exist. It guarantees you can't double-spend a Bitcoin. It makes various guarantees that are essential to that system, those coins having value. But that's only one of the things you can guarantee. You can do other things. Like you can guarantee if you own a good, an NFT, if I go and buy this digital good, this piece of art, this Top Shot basketball card, I truly own it.

• 9:59Speaker 02

  It doesn't matter if the company behind it changes their mind. It doesn't matter if, whatever. They can't go and change the take rate, or charge you more rent, or take it away from you, or have a new season where it goes away. Ask anyone who buys virtual goods and video games, and they'll all tell you stories about how things changed, and they faded out this thing, or the game went away, or whatever. Here, it's a very different thing, where the user controls it, and that's guaranteed by the blockchain. Another thing you can do with, I call it computers that can make commitments, a blockchain, is you can make commitments to developers. If you kind of go back in the history of tech, you can ask questions like, "Why was the web so successful?" One of the reasons the web, the early web, 90s web, the internet... Why was it so successful? One reason it was so successful, it was built on open protocols. It made implicitly commitments to developers.

• 10:44Speaker 02

  If you're Google and you wrote Sergey and Larry creating their search engine knew that the protocols they were building on wouldn't change the rules and say, you know what? We're gonna demote you or charge you more. You couldn't because it were open protocols. Because it were open protocols, it was a level playing field upon which entrepreneurs could build. There was a massive wave of innovation, investment, et cetera, right? Because people knew this was like a level playing field. It's kind of analogous to you're more likely to invest in a country like the United States where you feel like there's a consistent rule of law than you are in a, let's call it a, you know, developing country with a dictatorship where they might just privatize the assets. It's just a basic rule of economics that people are more willing to invest and spend time on and money on platforms or countries or whatever your analogy is where there's predictable rules. So the web had predictable rules.

• 11:28Speaker 02

  Fast forward, you talk to Zynga, talk to all the different people who built things on top of Twitter. There's been a 15 year period where Fortnite, for example, which is not available in the iOS App Store today and having a big public battle over it because of the way that Apple charges for things and all of their kind of capricious rules and whimsically banning people and all sorts of other things that Apple does. There's a long, long history of platforms changing the rules, changing the take rates, changing the APIs, et cetera. With blockchain, it's like the web was. It's a predictable, consistent set of rules that simply can't change. We like to say, instead of don't be evil, it's can't be evil. It cannot change the rules. By the way, related to that is it can't change the rules on users. So we're seeing, for example, a wave of social networks built on blockchains now

• 12:11Speaker 02

  where the rules around moderation, deplatforming, all these other things are baked into the system. They're baked into the code and they have governance built in from day one. They have moderation built in and it's done in a democratic, open way. You may think that's a good or bad feature. I would argue that. Almost anything is better than an opaque group of product managers in San Francisco making those rules. I think clearly when you need moderation on social networks, as an example, I don't think that the current way to do it is a very good way to do it. I think most people probably agree with that when they think about it. The fundamental thing that blockchain can do is you can make commitments. Those commitments can be around the scarcity of a currency. They can be around the properties of an NFT or a digital good that you own. They can be commitments to developers that say, we're going to have a level playing field you can build on. And they

• 12:56Speaker 02

  can be all sorts of other new things. Every day we see interesting new things, like there's sort of this emerging area called DAOs, which are decentralized autonomous organizations, which essentially are taking advantage of these features of blockchains where you can make commitments and essentially building a set of smart contracts that kind of looks like a Delaware C corp, like a traditional company, but one that exists solely in software. And it makes commitments, if you're a member of that corporation, quote unquote, that DAO, that you have certain rights and certain responsibilities. And the code guarantees it. That's a very new concept. Another brand new thing a blockchain can do is it can actually, a piece of code, this is very hard to grok at first, is that a piece of code can actually have money, contain money, and hold money. The code itself, it's not a bank, it's not a proxy, it's not a pointer to money. If

• 13:39Speaker 02

  you hold money at Chase, the code doesn't hold the money. The code holds a number, and the money is held somewhere else. It's held at a bank. Code before blockchains could not hold money. There's a protocol called Compound, as an example, which is a lending protocol built on Ethereum. It's in this category people call DeFi, decentralized finance. And that protocol, I haven't checked the stats today, I think it's something like $10 billion, is held by the code. The people that created Compound could go away tomorrow. They could disappear. The code will still run. The code itself has money. And by the way, the code doesn't have the money. It also is doing this very interesting thing in the case of Compound, where it's basically a money market kind of protocol, where you can either lend money to the protocol or borrow money from the protocol. And it dynamically sets the supply and demand, the interest rates and things like that. But the code itself does it. That's a very interesting new concept. That's this area called DeFi,

• 14:23Speaker 02

  which I'm sure we'll talk about today. And by the way, to the mobile analogy, one of the things, when you look at the history of computing, whenever a new computing platform comes out, there are new things they can do. And there are also severe weaknesses to those new computers. So let's take early mobile phones. Maybe who of your listeners had the first iPhone? I had an iPhone from the first day it came out. I'm one of these people that does that. For three years, I carried around two phones because my Verizon flip phone actually was able to connect to the cellular network and my iPhone always dropped it. But I love my iPhone. People forget this now, but it's kind of funny. I actually have my original iPhone. It was, looked like a postage stamp. It was tiny. It disconnected from cellular constantly. I don't know. It had like four apps, YouTube Maps, like something else. It was nothing like today. I mean, it was nothing like today, but it was like this magical Star Trek computer you carried around in your pocket.

• 15:09Speaker 02

  And it was beautiful and it looked amazing and it this new touch interface. And then, of course, what happened is you got this flywheel that started where Silicon Valley developers and entrepreneurs, people all over the world, whatever, started building cool apps for it. That in turn meant they sold more iPhones, which gave Apple more money to reinvest and the whole supply chain to reinvest. The chips got better and the cameras got better and all these other things. And so that, of course, those kind of shortcomings got taken care of. Meanwhile, still going back to 2008, you had this computer that was a supercomputer. It was sitting in your pocket. It had, as you mentioned, GPS. It had a camera built in, had touch interface, and it had all these new properties. But to really understand the iPhone 2008, you had to fast forward and you had to imagine two things. You had to imagine the weaknesses of the computer got mitigated. It got faster, the connectivity got better, et cetera.

• 15:53Speaker 02

  And then you had to imagine what's actually harder to imagine, which is entrepreneurs will take these new features like GPS and come up with crazy new ideas that have a big impact on the world, like Uber and Lyft, for example. I would argue if you ranked, and I was there, I remember this very clearly. If you took a smart person in 2009 and asked them or 2010 and asked them to rank all the different things you might do someday with GPS chip. Most people would not have had calling a car as the killer app. There were all sorts of other things people would have had. The point just being it's hard to predict, but entrepreneurs will eventually figure it out. And the key, I think, when you're investing is focusing on the things that are novel and new about it. If you look at the things that are popular on the iPhone today, they're either generally one of two things.

• 16:35Speaker 02

  They're either things that existed before the iPhone, Facebook and Amazon, right? Those are still very popular applications on the iPhone. Or frankly, they're things that take advantage of the new capabilities that didn't exist before. Snapchat, ephemeral messaging, the phone, Instagram and Snapchat, right? It's having a camera with you at all times. And a very personal consumption experience of the photos right on your phone, Uber and Lyft, et cetera, like all these things you just simply couldn't. So I think the same thing will happen with blockchain, right? You'll have things that kind of poured over from the old world, but then you'll have all these new wave of stuff that didn't exist before.

• 17:03Patrick O'Shaughnessy?

  So there's this unique set of new features that blockchains offer, but even if you look at phones, even in their advanced state, there are still limitations to the platform. Like you're not training AI models, you're doing that in a data center still. So like every new platform also has limitations. What are the limitations today? And maybe that might be permanent in the same way of blockchains.

• 17:23Speaker 02

  The obvious one is performance. So if you go try to buy an NFT today on a, we're investors in OpenSea as an example, which is a big NFT marketplace, or you go try to create one, you'll have these things called gas fees. And the gas fees are, can be quite expensive, like $10 or something to do a transaction. And those gas fees essentially are paying for the overhead of running all these computers. So a blockchain inherently by design takes a performance hit versus a non-blockchain computer. And why is that? Because the very architecture of a blockchain is the core concept is you don't trust a single computer because a single computer can turn evil. And so what you do is you create this game theoretic mechanism, it's called a consensus mechanism, where all those individual computers, any one of which could turn evil, come together

• 18:04Speaker 02

  every 10 seconds, depends on the system, but let's say 10 seconds, and they vote on the state of the overall system. And the system is designed using game theory in a way that the system as a whole is resilient to any significant portion of the individual computers turning evil. It's a little bit like Adam Smith and free markets or something like private advice leads to fellow virtue. You get a whole bunch of computers acting together, each one has a certain incentive system, even if some of them turn evil, the net effect of the overall system is, it stays kind of good and consistent. That just requires overhead because you're using a whole bunch of computers to act like one computer. That takes a performance hit. Today, it takes a pretty heavy performance hit, and I think it will always take a performance hit. I don't think there's ever a world where you'd want to have everything on a blockchain. If you want to go and do a web two

• 18:48Speaker 02

  like action, like you want to go read a piece of text or download a graphic or something, the current architecture is the right way to do it. I think there will be very, and it's something we're exploring now and a lot of entrepreneurs we've worked with are exploring. There'll be very interesting hybrid architectures. You'll use the blockchain, a code on a blockchain can hold money. At the part of the application where you're holding the money, you'd use blockchain. At the part of the application where you're just displaying images, you don't use a blockchain. And there's interesting hybrid architectures that people are exploring. It's not going to like replace Google or Amazon Web Services or something like traditional infrastructure. I think it complements it. A separate question is, what does the world look like at some point in the future? There's also like, what will the next decade of the most exciting and valuable startups?

• 19:32Speaker 02

  What will they be focusing on? And I believe most of them will be blockchain oriented, same way that most are mobile oriented. By the way, it's very analogous to mobile today. I'm speaking to you on a desktop computer. There was a period in like 2012, I people thought like computers are going to go away or something. I remember Steve Jobs had that great quote where he said, computers are like trucks. You're always going to have trucks. You're going to have cars and you're going to have trucks, both kinds of cars and, and you're always going to have trucks. It was a great analogy, right? Because we think of desktop computing now as kind of more of around like the workday and mobile sort of the evening or something. It'll be some kind of split like that with blockchains and non-blockchains, I think.

• 20:05Patrick O'Shaughnessy?

  I'd love to kind of go into important evolution of functions that are actually being built and performed on top of blockchain. So everyone listening at this point is familiar with Bitcoins. Some probably large percentage are familiar with Ethereum. And then beyond that, I don't want to take anything for granted. There's, I think, a tendency to think about this as cryptocurrencies with the finance connotations of that. How do you think about what the stages of evolution have been, starting with Bitcoin through to today?

• 20:32Speaker 02

  It goes to the history of this space, right? Obviously, it all started with Bitcoin. So this was now 12 plus years ago. Ethereum, I think it was launched 2015, it was announced 2014. Up until then, you had Bitcoin, you had a few forks of Bitcoin that were just kind of like. Variants on the same things, Dogecoin, Litecoin, et cetera. And the basic application at that point was what Bitcoin is today, right? A censorship-resistant store of value. It's a sort of a digital gold, if you will. Bitcoin stayed very consistent in that way. There were people, I was sort of one of them, that wanted Bitcoin, the core Bitcoin, to evolve and to, for example, have a more advanced programming language to enable things like NFTs. I mean, if you actually go back and look at it, like, a lot of how, actually, the origins of Ethereum.

• 21:13Speaker 02

  But I remember the first time I met Vitalik, it was 2013, and he was basically trying to build NFTs. It was called colored coins, they were on top of Bitcoin. For a variety of reasons, this is, I won't go into this whole thing, but there was sort of this schism in the Bitcoin world that led to this forks and other things. Essentially, it was around this question around the vision for what Bitcoin should be. Basically, the people that wanted to be kind of digital gold won that battle, and the people that wanted it to be more programmable and had divisions of things like NFTs, DeFi, went over to the Ethereum world. Philosophically, Bitcoin is very, very conservative for a very good reason, which is it's all about trust and security, reliability, and therefore, from a development point of view, they're conservative. They don't add that much, they don't change it that much. It has a limited programming language, but it's extremely limited, and that's on purpose for security reasons.

• 21:57Speaker 02

  And that's fine. Ethereum's the opposite. Ethereum is very completely expressive language, it's very similar to JavaScript, the most popular language in the world. You can write really a broad range of applications. They're doing a complete overhaul of the system, so you may hear about the environmental impact of what's called proof-of-work mining, which is what Ethereum uses today. They're switching to proof-of-stake, this is a dramatic change in the system, and that will happen probably in the next 12 months. We'll answer all of the questions around the people that are concerned about the environmental impact, and also it'll improve the performance of the system and security and a bunch of other things. This is a completely radically different approach to software development, more Silicon Valley-like, frankly, much more rapid. And so that's Ethereum. And then what happened in Ethereum, there started to be this, let's say, 2016 through 20,

• 22:39Speaker 02

  a lot of really interesting experiments run that led to this area called DeFi. The most important early one was something called MakerDAO. And MakerDAO, it's a fascinating system. If people here are interested, I would say that the first three white papers to read in crypto would be, you obviously have to read the Bitcoin paper, the Ethereum white paper is fascinating. I think the third one I would recommend is Maker. Maker is a system, complex, but two parts. One part of it is a lending platform, so you can go to this smart contract, and you can basically borrow money. And then the output of that borrowing are these things called DAI, which are crypto assets that are pegged to the US dollar. And it's this very complicated system that people were very skeptical of at the beginning of like, because it's like you have to borrow money and then it outputs these

• 23:22Speaker 02

  things called DAI and these DIs are meant to be pegged to the dollar, but it's not backed by any fiat. There's no bank involved. It's all just crypto stuff. And everyone was, a lot of people, and including like economists, think that this never worked. It's now worked for four years, very reliably at scale. There's tens of billions of dollars passing through it at all times.

• 23:40Patrick O'Shaughnessy?

  How does the lending work? So if I want to get a loan from a bank, I either prove that I'm going to do something interesting with the money, that there's some like repayment or underwriting or asset backing, or what does the protocol want?

• 23:51Speaker 02

  The short answer is today, all of the DeFi lending is over collateralized. What that means is you go and you can, there's various assets it will accept. You can say, I have a bunch of Ethereum and I don't want to sell that Ethereum, but I can take that Ethereum, I can give it to the protocol as collateral and it will then give me DAI that I can go and spend and use. So it's similar to like a house. You take your house, you go to the bank, it's asset backed, and then you get dollars out and you go spend them. There are now a lot of really interesting companies doing under collateralized loans or credit scores and things like that. That hasn't happened yet at scale, but that may be the next wave. So all of them today are essentially asset backed with crypto assets.

• 24:28Patrick O'Shaughnessy?

  So if I take DAI out, why would I want to do that? Like, why would I want DAI instead of whatever I put in there?

• 24:34Speaker 02

  Some of it's trading. Essentially, it's a way to get leverage trading. They'll already have Ethereum, they'll get the DAI and they'll buy more Ethereum or something else or whatever. So some of it's trading. I know a lot of crypto people who just never want to sell their crypto and they use the DAI for spending money. You can convert DAI to US dollars, do all sorts of things. A lot of crypto things accept DAI. There's that aspect to it, of just like, it's dollars.

• 24:54Patrick O'Shaughnessy?

  Sounds like there was another side of maker as well. So there's the lending portion.

• 24:58Speaker 02

  Well, there's a lending and then it outputs these stable coins. And this was a brand new idea. So I would argue that Bitcoin has worked well as a store of value in the sense that there's more and more people in the world that believe in it as a store of value. It has, I think, performed well as a store of value. And this is more and more data analysis that it's being used in countries with hyperinflation and unstable currencies. That's the good side of Bitcoin. I think Bitcoin has not lived up to some expectations in terms of a payment mechanism. It's not used very widely for payments and that has to do with the fees and I think also the volatility, both good and bad. The merchant doesn't want to take Bitcoin and have it drop. On the flip side, a lot of people that hold Bitcoin believe it's going to go up and don't want to spend it. One of the cool things with Maker is it outputs this stable thing. It's like a dollar and there's billions of these now floating around the internet.

• 25:40Speaker 02

  These DAI, I think it's just past three billion in issuance a couple of days ago. So there's three billion of them and used in a lot of different countries now, especially in those countries with high transflation. These are like these digital dollars. They're untethered. What's amazing about DAI is it's a little bit like sending a photo. I text you a photo. There's no web service associated with that photo. It's a pure file. DAI is like that. DAI is I can just send you a dollar. So a computer can send a computer, you can have machine payments, you can have individuals pay. It's like this brand new thing that didn't exist before. And so that's one of the interesting side effects of Maker. So then Maker kind of inspired, just going back to the history of crypto, right? This inspired a whole nother wave of startups. People are interested to go to DeFi Pulse, which is kind of the place you go to, probably the best site for tracking the metrics.

• 26:21Speaker 02

  Many tens of billions of dollars of value, lots of activity, a whole ecosystem around it. It's a very, very active area of software development. It's global. It's really cool. It's global. We don't even ask people anymore where they're located physically when we talk to them for investment. It's kind of a outdated question at this point. Almost every team is distributed. The innovation is coming out of everywhere around the world. So anyways, that's DeFi.

• 26:46Patrick O'Shaughnessy?

  I want to dig in on a few aspects of DeFi. So as you think about the future of it, let's just take lending. Lending is one of these core functions of finance that is really important. It seems like we're still in the infrastructure phase of all this. And that I guess the ultimate promise would be new unlock of sorts of like financial interactions between people, between computers. How do you think about the potential and the future of what this may unlock? Recognizing I'm sort of asking that oh eight iPhone question here and we don't necessarily know, but why is it remain interesting for the future and all this stuff on chain?

• 27:18Speaker 02

  So let's just take lending as an example. Like to me, the promise of DeFi and lending is the same promise of the internet in a lot of other industries where you essentially disintermediation. Think about the process now. You want to open a restaurant down the street from me. You're a restaurateur. You go to Citibank, you fill out a bunch of forms. They don't know who you are. They have no idea whether there's like demand for a restaurant in that area and they don't know you and God knows how long that process takes. Meanwhile, I'm three blocks away from that restaurant. I want a new restaurant, but there's no way to kind of measure that demand signal. I go to Citibank, I lend them my money, put it in a savings account. I get what 0% interest or close to zero or something, right? That restaurant may or may not get approved in some really frankly archaic old fashioned

• 28:00Speaker 02

  process months later and then pay some huge interest rate and who knows how much of that delta between the zero I'm getting and the whatever they're paying. Some of that's going to the profit of the banks. It's certainly not in an era where we have huge numbers of demand signals. There's all sorts of signals you could imagine collecting that would tell you that my neighborhood would like a new Thai restaurant or something. None of that information is going into that system. The ability to send bits instantly around the world to do all these kinds of modern things. Almost none of that is being used. You can go on these job websites. They literally are still being using Cobol and I'm not exaggerating. Cobol is a language from 50 years ago. An incredibly archaic system. So it's about

• 28:43Speaker 02

  modernizing. It's about disintermediating. It's about reducing all of these layers of fees in the middle. It's about transparency. Who knows what the state of that system is? I think you can make a strong argument that a lot of what happened in 2008 with mortgage loans and things was around just this incredible complexity and opacity of the system. Everything in DeFi, everything on blockchains is open. It's all publicly available. It's actually a very hard unsolved problem is how to make it private. The idea that people use blockchains, by the way, as an aside for money laundering and other things is basically absurd because it's literally the worst possible way to do it because everything is public and everything's exposed. The flip side of that, the good side of that in DeFi is you can go, it's all open. You can go see the whole state of the system. You can go measure. Is their system,

• 29:28Speaker 02

  is the system at risk? Is this and that? Everything's open, right? So I think the promise, modernizing, using all the right demand signals, respecting people's privacy. The other thing with blockchains, there's no identity on a block. You choose to have an identity. You choose, and you have an identity when you go to something like Coinbase and you KYC and things like this, but you can let people say, here's my credit score, here's this, but I choose to reveal this to you. Users have the power and the choice of what to reveal. I think the promise is modernizing the system. By the way, I didn't mention security. Blockchains are just, they don't rely on, it's a different method of security, which is the current model of security for the whole world, including SaaS software and everything else, is essentially put the gold in the middle of the village and then have big walls around the village and hope nobody breaks in. How well does that work? Everything in the world's been hacked at this point. It's not a good system. The way

• 30:12Speaker 02

  blockchains approach it is the way it should be approached. Everything uses encryption for authentication. Why would you want the system? I think one of them is for the economics of the system, which is. Remove all these different layers of fees in the middle. A second reason is, I think it's a better security model. A third reason is a better model for transparency throughout the system and letting people kind of see what's going on. Another reason is what we call kind of composability, which is, and one of the cool things happening in DeFi is that each of these protocols I mentioned is an open system that other people can build on top of. And the systems can't by design block other people from building on top of them. People call it money Legos sometimes, like Compound is one Lego, Maker is one Lego. And as an example, there's a system called Urn, which is kind of a meta system, like kind of almost like an ETF in the traditional world.

• 30:57Speaker 02

  It's built on top of these protocols and you can lend money to Urn and it will automatically figure out which sub protocol to lend to, as an example. So this is very interesting. So I'd say sort of transparency, better economics, better developer experience, its ability to have kind of this ecosystem effect. There's all sorts of reasons why I think this would be a much better system.

• 31:15Patrick O'Shaughnessy?

  I would love to hear a bit, maybe even taking an example, like Uniswap is one that is completely fascinating to me for a couple of reasons. I'd love you to describe like why it's interesting and what it does, but also the lesson it gives us in the leverage inherent in crypto and from like a return standpoint, building something of value. X lines of code written by a small team or one person sometimes that can have these enormous impacts and outcomes. That also seems to be this march of technology that smaller and smaller groups can have bigger and bigger impact. So tell us the story of Uniswap, why that in the sort of DeFi world is so interesting and is a project worth considering?

• 31:50Speaker 02

  Yeah, so Uniswap actually came from a Vitalik, the main creators of Ethereum had a blog post where he speculated about a better way to do an exchange without an order book. Sort of like the New York Stock Exchange, but instead of using an order book where different parties come together and give bids and ask things like this. What if he did what he called an automated market maker? Essentially, it's a smart contract that you imagine a price, a sort of a demand curve for trading between two assets. So the dollar versus Apple stock or something. Basically, as somebody buys it, the system automatically increases the price a little bit. And if they sell it, it decreases it. And it always sets the price such that it's sort of optimal according to various inputs and things.

• 32:30Speaker 02

  This young guy Hayden Adams, who's the founder of Uniswap, had read that post and knew Vitalik and built it on the side as a solidity contract, which means sort of Ethereum program. Did that about three or four years ago and it started getting popular, built out the team a little bit. We invested, it's now up to maybe 10 people. He's still really small. One important thing to say is that, fast forward, you can go type Uniswap stats in the Google, you'll see. It's now, that system is over tens of billions in volume. It's approaching Coinbase, Binance levels of volume. One really fascinating thing about Uniswap is there's no servers, there's no AWS. This is funny, I was just talking to an experienced tech exec the other day and there's no servers. It's never been down, there's no server. What do you mean there's no server? It runs on the Ethereum blockchain. It's a piece of software on the Ethereum blockchain.

• 33:16Speaker 02

  That's it. The team, again, going back, they could Avenger style disappear off the face of the earth. Uniswap will keep running in perpetuity, doesn't matter. It's this thing out there in the ether that's running on top of the Ethereum blockchain all over the world. Anyone can write software for it, anyone can interact with it. Thousands of websites that have front ends to it, there's wallets that are associated with it. It's like this piece of the internet. That's what's one of the cool things about these. When I was talking to you earlier about DeFi, think of these protocols as like a new capability of the internet itself. It's the kind of the best way to think of it as opposed to a company or an application built on top of it. So we're really extending the core infrastructure. An analogy I would use, think about the real world, like in a city, you have sort of public and private infrastructure in cities.

• 33:59Speaker 02

  You take New York City, right? You have, the streets are public, the sidewalks are public, the parks are public. But maybe like a restaurant is private, an office is private, a home is private. And the two reinforce each other. The fact that you have a public sidewalk creates street traffic, which then helps the entrepreneur. And if that was a private sidewalk that had a toll on it, that entrepreneur wouldn't want to build there because maybe someone would charge a lot of money. And the park makes people want to go to the city and that brings more money in, that helps businesses. And the two kind of this mutual reinforcing between the public and the private. As opposed to an airport restaurant, I think we all know they aren't as good as the New York restaurants or something, or a theme park or something. Where it's all private and you have, it's all private, it's all controlled by one. A lot of the internet now is like the theme park, right? It's Facebook, it's. Twitter, it's controlled by one person.

• 34:43Speaker 02

  This is why I would argue there's all these spam and Russian bots and all these other kinds of issues people have, because it's just like one company and they have to fix it all themselves. They don't get the benefit of the ecosystem. You go back and you look at when we had spam and email, email was a public, open protocol. Anyone could build anti-spam solutions. And what happened when there was a spam problem 20 years ago is there was a huge wave of startups and they fixed it. Postini and Brightmail and Postini's got acquired by Google. You had this, all these people building on this public infrastructure. So what we have going on in like crypto now is you have this kind of return to the public infrastructure. So Uniswap is a piece of, it's like a park. It's a city street. Anyone has it. The people that created it don't control anymore. They just released a V3. The way it works is like a new version. The new version is just like another park. And you can choose to go to the park, but V2 and V1, they're still out there and they're run forever.

• 35:28Speaker 02

  They can't even move them if they want it to. It's this crazy new kind of way of thinking about it. So Uniswap's interesting on a number of levels. It's a great personal story, just about like a founder story and it's really interesting entrepreneurship story. It's interesting because it's this big new piece of public infrastructure. It's emblematic of this new architecture. I want to say one really other cool thing, which is they created a token about seven months ago. And, and the way that works is the token, if you have some of the tokens, the collective token holders control the system. So they have what's called a governance system. And whenever they decide on like if they want to do changes or improvements or whatever, people who hold the tokens vote on that. We hold some tokens and we vote on it. For example, we actually delegate a lot of our tokens to, you can delegate your votes. We delegate, we have a whole program where we delegate to different like student groups.

• 36:12Patrick O'Shaughnessy?

  It's like proxies and stocks or something, yeah.

• 36:13Speaker 02

  Yeah, yeah. And we try to do it in a way that like kind of is more inclusive. Anyways, so when they did their token, and the token has value, which is set by the market, it's traded. When they did their token drop seven months ago, they decided to issue 14% of the tokens to the people that had used the protocol over the last two years. What's cool about blockchains, as I mentioned before, is everything's public. So they just literally run a query on the blockchain and said, any address it's used, it gets a certain number, I think it was 400 Uniswap tokens, anyone who's ever used it. If you fast forward today, 400 Uniswap tokens is $11,000 in value. And that was to, I forgot how many there were, but it was a huge number of users. And in fact, there were all these great stories. There was a class, a computer science class in India that had used Uniswap seven months ago.

• 36:57Speaker 02

  And even at the time, which is actually a lower dollar value, it paid for the student's tuition. This called an airdrop, I call it. So it's sort of analogous to, imagine if you had like Uber or Twitter and the system, instead of being owned by Jack Dorsey and the other public shareholders or whatever, it was owned by the users. And they did this retroactive airdrop years after they were launched, all the people that had created the system, and those people got those tokens. That was just such a cool new thing. I feel like that's been dramatically underappreciated, reported. It's a radical new way to create software and to have people own software. I think an important financial innovation. I would argue that we finally discovered what actually a friend of mine calls the native asset class of information networks, like that's what tokens are. I think if you look at a lot of the issues people have now with social networks, with

• 37:41Speaker 02

  deplatforming and the control they have and the economic disparities and all sorts of other societal strife we have now around technology. I would argue a lot of it comes from a mismatch between the nature of these networks and the nature of this legacy corporate structures that govern these networks. And we have these corporate structures that were really built, if you've got to go back, there's a great book called The Company. It's like the history of the limited liability corporation. It really developed in the 1830s-ish and on with the rise of railroads. Before that, you basically had partnerships and so you had full liabilities. You'd only do business with your family members because if anyone, if you accidentally had someone die or something, you would all go to jail. And so you wouldn't want to give money to some stranger because your liability went beyond the money, right? It went, what, anything bad they did, right?

• 38:26Speaker 02

  And in fact, you needed like an act of parliament to go and have limited liability. It was very controversial, but then you had these massive capex projects like railroads. It just simply required greater capital aggregation. There was more and more pressure to have limited liability corps. And that was, I think you could argue limited liability corps were one of the great technology inventions. Of the 19th century. Yeah. But look, I think it's run its, I believe it's mostly run its course. It's not really working very well for a whole bunch of reasons, including the fact that you've got, you get, you end up with very, very concentrated wealth on these networks. You end up with a, most importantly, I think, a misalignment between the network participants and the network owners and the complements, the network, people building around it. There's all sorts of weird incentives that pop up that lead to strife and other kinds of things.

• 39:09Speaker 02

  And what's so beautiful about tokens is you can design these very granular systems where people get rewarded tokens for using the system, for building software on the system. You can align the incentives of all these different parties to all want to make the network grow and to all work together in tandem. And that's where we're seeing these experiments at. So I think Uniswap is very interesting also from that perspective, just as an experiment in a new way to govern software.

• 39:32Patrick O'Shaughnessy?

  If you think about the incentives of a love the community ownership concept, what better way to line incentives than that? If you think about developer or entrepreneurial incentives in this system, to say a few words about that, so maybe we could take Hayden at Uniswap or something. He's building something out in the open. People build startups because of the prospect of great upside if they succeed. There is no corporation. There is no equity here. Talk about the various ways in which crypto networks or blockchains reward, can or should reward developers to incentivize innovation.

• 40:07Speaker 02

  Goes back to Bitcoin where Satoshi, I mean, we don't know who Satoshi is, but I think it's something like 5% or some significant portion of Bitcoins are owned by Satoshi, or at least the original person created the system. All of the stuff I'm saying, you can have community ownership, you can have network alignment, users can own part of the system. It's completely consistent with capitalism and with the creators and developers owning parts. And that's the way it works. So like Hayden has his tokens, he has Uniswap tokens. All of the entrepreneurs that we work with have tokens in the system they create, but it's just a different model. It's kind of analogous to something like real estate. Like if you go read about just the way they used to build cities and things, a lot of times what happened is the developer would go and try to create potentially a network. Try to create, get restaurants, get houses, get businesses. And the way they'd make money is they owned a chunk of the land. And as that network grew.

• 40:51Speaker 02

  More people came on, came there, the value of the land would go up. Sort of similar to that. They just own a chunk of the network of the tokens. So it's very much community owned and operated networks, but that's completely compatible with rewarding the people that took early risk. And the investors like us, these things like Compound and Uniswap, for example, like, let's say Compound is an example. They worked on it for two or three years before they launched it. I mean, that had to build a big team and so they need financing. They need venture capital and there needs to be a way to incentivize the investors and the founders.

• 41:22Patrick O'Shaughnessy?

  The word that a friend used to describe this project yesterday was profane, which I think is such an interesting word. This project Bitclout, it received a lot of attention and profane is kind of an interesting descriptor of what it's doing. Could you describe that one? Cause I think it's so tangible that it might help the audience understand something unique going on here. That just feels like both natural, but also really out there.

• 41:46Speaker 02

  Yeah. Well, so I think BitClout is in this broader category of straddling multiple categories. It's in this broader category of what I would call social tokens. So social tokens, there's other ones and we're investors in a bunch of them. BitClout, Rally, Roll. The idea is to have a token associated with either a person or a community associated with a person. So the way I think of it is the internet now is consists of big networks like Twitter and Facebook, but really like millions of smaller networks. Twitch streamers and YouTube influencers and like, there's all of these new sub networks and they're essentially united by people with a set of interests. Who are excited by that, maybe the influencer or creator or whatever, but also presumably have a set of common beliefs and goals and things like this.

• 42:31Speaker 02

  And so maybe talk about Rally, which I think highlights this in a clearer way. The way it works in Rally is like a Twitch streamer, for example, can have their own token. So they can have, if I were a Twitch streamer, you know, Chris Dixon coin or something like this. And then that token can be used for multiple things. It can be used as like a little in-network currency. If people want to donate to each other, for example, or the creator wants to sell things, they can sell physical merchandise. They can create NFTs and sell those. It can also be used for access. So if you go to Rally, like a bunch of. These tokens are used for like behind the scenes Discord, behind the scenes shows, and you have to have a certain number of the coins to get access to those. The other interesting thing is it can be used for another purpose, which is for investment.

• 43:13Speaker 02

  You have people that that may want to buy the coins, not necessarily because they themselves are fans, but because they believe this is, let's say, an up and coming band. It's a little bit, I think analogous in this way to if you talk about NFTs, like NBA Top Shot is this very popular NFT collecting game. And same with baseball cards and traditional collecting, right? You have multiple motivations. You have some people that are buying the card because they love it and they want to hold it. And you have other people who are more investment oriented. But the different interests play well together. Because what happens is if you have an up and coming band at first, maybe somebody who's more of like a investor type will go and invest in the band and try to kind of hope that the the token goes up, which then injects more money into the system, which then helps like, let's say, fund the musician.

• 43:57Speaker 02

  And the musician can then, instead of relying on a record label, can then have money to go create music and quit their job. And then that in turn makes them more successful, right? So you get this kind of nice flywheel effect. I think the social token content is very early right now. But I think, I believe, if you ask me like, what's the next thing that could really get big in crypto? I think it's, that would be high on my list, the way that NFTs were high on my list before and now have gotten big. It's kind of analogous, by the way, a lot of this comes from video games. I think video games, particularly like the most advanced ones like Fortnite and Roblox, I think they're on the cutting edge of design patterns that will be adopted much more broadly on the internet and much more broadly in the media world. What they realized a long time ago is that if you go back and and 20 years ago, right?

• 44:41Speaker 02

  What was the business model of video games? You buy a CD, so you play Madden or whatever. Later on, you could download it and pay for it. But the modern games now, like the games are free. You can play Fortnite for free. League of Legends is free. Roblox is free. Fortnite is completely free. And not only that, some people for a while were saying, oh, it's free, but you have to pay for multiplayer. Fortnite multiplayer is free too. And you can play the whole thing. You can be the best in the world. You can play all day, completely free, right? What do you pay for? You pay for skins, emotes, like basically virtual goods. But that's the modern model of these video games. And they have in them, they have two things. They have their own currency. So like Fortnite has B-bucks. And then they have digital goods you can buy with that currency. I think that model will be replicated throughout the internet. And this will be the model that you use as a podcaster, as a

• 45:26Speaker 02

  Influencer as a streamer, whatever it might be, musician, they'll have their own little currency and they'll have their own set of their digital goods, NFTs, and some will be physical and some will be virtual. And that model, there's nothing magical about video games that makes that business model work. People are very engaged with Fortnite. If you talk to people to play it, they love it. But people are very engaged with music too. They're very engaged with books too. I think the problem with these other forms of media so far is they've had this pre-internet business model, which is they said, okay, before the internet, how do you do it? You just charge for the thing. Now, I think what they're going to start to realize, it's actually a better model to give away the base layer content, the music, the book, or whatever, and charge for complimentary things on top of it. Not such as video games have done this for years, right? It's productivity software, Dropbox, Figma.

• 46:11Speaker 02

  Every SaaS company now almost has a premium model. Software figured it out a while ago. The internet is the ultimate viral distribution machine. If you lock up your stuff, you don't get to take advantage of that. The right business model on the internet is to find some balance between abundance and scarcity. You want something that's abundant that goes viral. The internet likes to share, it likes to remix. Nintendo, they were the kind of the most traditional video game company. They fought streaming for a long time. They had all sorts of restrictions on Twitch streaming and stuff. They finally realized, we gotta let this happen. The marketing benefits outweigh the risk of copyright violation. They sell more games than ever. It doesn't hurt. In fact, it's better. You get billions of people doing it, right? So like, those insights, this is what's really going on, I think, with NFTs and social tokens, as you've mentioned.

• 46:54Speaker 02

  Social tokens are the V-box, NFTs are the skins. These things that have become, have been working incredibly well for video. And by the way, let's just, video games, $140 billion industry, music is something like 20. If you look at it, video, there's a great chart, Matthew Ball has, a very smart media blogger, among other things, where he shows that every time there's a new wave of technology, the video game industry has grown dramatically. They embrace it. Whereas like, music, I think, is only just now caught up to the pre-internet levels of market size. It's insane. The music is such an incredibly popular, it's probably the most popular medium in terms of enthusiasm and engagement and. The fact that they aren't the biggest revenue generating form of media is just, I think it's

• 47:36Speaker 02

  just completely due to the fact that there's just been no change whatsoever over the course of the internet and their business model. The business model essentially is lock everything down and rely on copyright, which, you know, is their right to do. I just think it's not the right way to do it. If you look at like these recent like NFT drops, the one Blouge did, even if you assume it's a bubble and everything else, like it's give it a haircut by 99%. It's still the greatest business model change ever in the history of music. Anyways, I think of social tokens as more broadly in this kind of social tokens, NFTs, and it's essentially the insights from the video game world and the software world now propagating out to the rest of the world.

• 48:10Patrick O'Shaughnessy?

  There's one feature of what you just said that I'd love you to explain in a little more detail. I love this. I've been thinking about this a while, this like free to play video game, NFT, maybe social coins and other examples is very analogous. And that the reason that it's so interesting, going back to your analogy of the disintermediation of the restaurant and the bank and the person that wants the restaurant, now they can connect. So that's like a binary connection. But then there's also a matter of degree. So there's a demand curve for a creator and the model like video games used to be you charge everyone 60, like you charge the person that plays it for 100,000 hours 60 and you charge the person that plays it for 30 minutes 60. Can you talk about demand curve, consumer surplus, value creation, value consumption,

• 48:52Patrick O'Shaughnessy?

  value exchange, and why that curve now might be more efficient?

• 48:56Speaker 02

  For those interested, I wrote a blog post recently where I actually had some graphs kind of trying to demonstrate this called NFTs and a thousand true fans on our website. In that blog post, I refer back to this famous blog post by Kevin Kelly, who's a co-founder of Wired, he's a brilliant guy, who had written this blog post, I don't know, 15 years ago or something called Thousand True Fans. And his insight was that the internet should allow creators to find what he called a thousand true fans, a thousand people who just absolutely love everything. Presumably you have this on your podcast, right? You have. Casual listeners, you have people that listen only when there's certain people on the episode. You have medium people and then you probably have, I assume you have just sort of power users who love everything and email you all the time. And if you had a T-shirt or whatever, anything else, they'll just buy it.

• 49:38Speaker 02

  They'll drive and they'll see it. If you give a talk, they'll go, and that was Kevin's idea is that with the internet, you can find those thousand people. And you don't have to go through the record labels and do mass marketing and all these other things. You can just go find those people. And that sort of didn't happen until recently, I think. And I think it was because I believe we took kind of a detour through basically these new middlemen popped up, who were these big social networks? Who then said, no, we're going to have that business model of advertising and algorithmic feeds and all sorts of other things, which took you back to the pre-thousand true fans thing. Now I think we have a real resurgence of Kevin's ideas, but outside of crypto, let's take Substack as an example. So Substack is a email newsletter platform. What you're seeing is more and more writers and journalists and things are leaving traditional companies and they're going on Substack.

• 50:20Speaker 02

  And Substack that you can just go and subscribe to people and pay like, let's say $10 a month. The interesting thing with Substack is you have a bunch of people who are making real money, many hundreds of thousands, sometimes millions of dollars, who are writers who, according to a lot of popular mythology today, the internet has bad for them and they shouldn't be making this more. They can't make this much money. In fact, they do. And what's interesting with Substack, you have like, let's say Glenn Greenwald, right? So he's got, I don't know, let's just say a million Twitter followers. And I don't know how many Substack followers he has, but two orders of magnitude smaller. Let's say it's 5,000, 10,000, 20,000. I don't know what it is, but it's not millions, right? And so yet he's making that much money. What that shows is how powerful it is when you can kind of cream skim and get the people that really love you and give them a business model that they like.

• 51:04Speaker 02

  And I think part of it, by the way, is feeling a patronage. They can directly give it to you. They're not giving it to Twitter. They're giving it to Glenn, right? They love Glenn and they want to give him money. The early signs are it's remarkable, Substack is a good example of when you give people the right tools, this power of this kind of thousand true fans kind of concept. I think that's what we're seeing with NFTs today. I think that if you look at some of these, the Blau thing, a bunch of other, we're investors in something called Foundation, which is kind of a crypto art platform. You see more and more, you see these really cool cases where people are able to finally, like I, this is one guy, it's S. Parth, who I've actually bought, I did a bunch on his stuff and I bought one recently finally. He's a video game artist who, I'd played these video games. I never knew who the person behind the scenes was making.

• 51:47Speaker 02

  So for me, the first kind of revelation was, wow, that's cool. I can actually learn who does all this stuff. Cause right now it's just this. It's halo, like you don't get to see who makes all the pieces of it, right? The second thing is like, I'm interacting directly with them. Like, the first time I bid on something on his, he DM'd me on Twitter and followed me and we started talking and we talked a bunch now and we're kind of friendly. And for me, it's fun because like I do venture capital and I don't get to talk to video game artists normally and it's like, it's like a cool thing and I'm a fan. Obviously, it's a financial aspect to him, but maybe it's kind of interesting too for him, I don't know. And he can set, he has some things that are more expensive, there are a couple of these, it's priced in Ethereum and he has other things that are cheaper. And maybe people like me who are super fans who buy the most expensive ones, other people buy, to your point about the demand curve, what's cool is there are people that just want to look at it and don't want to pay and that's fine.

• 52:31Speaker 02

  They can just go download the graphic and do whatever they want with it. There's people who are willing to pay a little bit and there's people like me, maybe who are willing to pay more. And by the way, like Foundation takes the small, like 10% fee, he gets 90%. So he gets dramatically more than he would in any other method if he'd gone through a publisher or something like this. So it just really kind of transforms the economics for creators. One way to look at it is, oh my god, what the press is saying is like, this is a bubble. I don't know, or it's sort of in a more like it's a bubble or sort of a more cynical way. I see it as just right sizing the other forms of media to the way video games are. 10 years ago, people might have been shocked at the numbers of video games, I think everyone's gotten used to it now. Fortnite makes 3 billion a year and whatever, 2.5 billion in profit or whatever the numbers, I don't know, it's like numbers. People are buying virtual goods and it just seems normal now.

• 53:15Speaker 02

  I think of it as that model is now propagating out and it's right sizing these other forms of media to what they should be. They should be enjoying the same kind of success as video games do. There's nothing magical about the fact that one experience, people are running around like shooting stuff and the other experience, socializing with artists. The level of enthusiasm is just as high, the demand is just as high, the supply is just as scarce, like why, you just didn't have the right model before, I think. Look, it'll go through waves, all of crypto has these ups and downs. Because you have these feedback loops that push both ways and so I'm sure there'll be like an NFT winter or something at some point. I think the broad, long secular trend is that we now have, because a couple of things that this model from video games is propagating out and we now are finally realizing 2,000 True Fans vision.

• 54:00Speaker 02

  I think it's going to be a 20-year golden period renaissance for creative people. It should be. One other thing on the NFT platforms, these things are getting to a pretty big scale, like OpenSea's, it's all public data, by the way. It's at over a billion dollar run rate. This is a website, by the way, that doesn't take fiat money, it's only Ethereum, same with Foundation. Billion dollar run, a foundation's public too. It's it's only a couple of months old. It's many hundreds of millions of dollars run rate. It doesn't take that many people to make those numbers. This, by the way, this is very true of video games too. If you talk to people that make video games, typical number is like point five percent of the user base pays for eighty percent of the virtual goods or something. It's going to be the same thing here, by the way. It's going to be

• 54:38Speaker 02

  this very small percentage of people who are super enthusiastic. That's enough to make a giant industry. I mean, if OpenSea's at a billion dollar run rate, we only, you know, a hundred times this, it's the video game industry. It's not that far away. And given that we're three months into like the modern NFT era, and if you actually look at the numbers, Top Shot is, we're investors, it's NBA Top Shot, it's an NFT game, basketball trading card game. It's done four hundred and fifty million total sales, who's primary and secondary. And it's on the order, I think, I think they've had one point three million total accounts created, but of that, maybe two hundred thousand or so are sort of active. When you get rid of all these middlemen and you have like a real business model that's selling something and not like advertising and everything else,

• 55:19Speaker 02

  you don't need that many people to have just like dramatically transform the economics of these industries. You can reach eight billion people now. You can create a piece of art, you can write up some poetry, you can create some music, almost instantly, eight billion people, whatever, how many, five billion smartphones, they'll say, but we'll approach eight billion at some point, can instantly get it. And if a thousand of those people really love it, you've got a business model for your creative activity. It's an amazing thing. And I think what you're going to see, right, is I think we're already seeing it. I use go to Foundation today. I mentioned the, just because I'm just a personal fan of it. Every day and you see like the quality of the art dramatically improving because you have all these people who just, you're a designer, you're a graphic computer artist, a digital artist. What is your day job? Your day job is like doing fonts for like some

• 56:05Patrick O'Shaughnessy?

  Someone you don't know or care about.

• 56:06Speaker 02

  Sugar drink or something. Yeah. And so now this is what's really cool, right? You're going to have this flywheel effect where those people are going to be like, wait a second, I don't have to do font creation for sugar drinks or something, or maybe they do that part time or something, but I can actually spend more time doing the thing I love.

• 56:21Patrick O'Shaughnessy?

  One of the things that I found interesting when I asked people like, what are the most interesting projects? Polkadot and Soldano came up a lot, which I think of as Ethereum competitors, basically. Dylan Field from Figma has this great line, which is that Ethereum has a sort of anti-network effect. As it gets more popular, the performance of it gets worse, or gas fees go up, or whatever. How do you think about something like Polkadot or Soldano? Are these interesting projects to you? Is this a segment, back to the core stuff? Are you tracking that as well?

• 56:48Speaker 02

  Some people will call them ETH killers. I don't think them is ETH killers. So I would call them other programmable blockchains, and they includes Polkadot, Solana, Cosmos, Near, Avalanche, Definity. There's a whole bunch. And we're investors in some, we're not investors in some, but a bunch of them are really good. I would argue, remember the beginning, we were talking about how blockchains do take a big performance hit? Right now, it's really expensive to do many Ethereum transactions. Look, Ethereum's going to do all sorts of things to improve the system. I think demand is going to outstrip supply, even with all of the important things that they're going to do, including sharding, and proof of stake, and all these things on the Ethereum roadmap. There's all these sort of layer two things on Ethereum. I think all of that will happen. It will all improve the supply side, and I think still demand will outstrip it. By the way, this is true

• 57:31Speaker 02

  of internet bandwidth, it's true of CPU power, it's true of GPU power. Every good computing resource in the world, in the history, has had demand outstrip supply. That's going to happen with programmable blockchains. So one narrative you hear is like, these things are competing. I don't think they're competing. I think the only way that we're going to have a world with billions of people interacting with blockchain applications every day, which I believe will be the world in 10 years, is you're going to have a fabric, a layer, a series of these blockchains, which will all interoperate. Each one will focus on different quote-unquote workloads. As an example, we're investors in Dapper Labs, which makes Topshop, they have their own blockchain optimized for NFTs and gaming called Flow. Imagine a world where you're playing a game, it has virtual goods, and those virtual goods are interacting with Flow. But then, some of your virtual goods get really valuable. You

• 58:16Speaker 02

  say, you know what? I want to put these in the bank, quote-unquote. So you move them over to Ethereum, using a trustless bridge, which is a way for NFTs and cryptocurrencies to move across blockchains. And maybe I pay a little bit of higher fee on Ethereum, because Ethereum makes a difference at a trade-offs. It's trading off performance for higher security. Ethereum is built like Bitcoin to be kind of resistant, like even most countries couldn't attack these systems and take them down. Like, they're really, really resilient. A gaming blockchain like Flow might be designed not to withstand a nation-state attack, but to withstand hacker attack and sort of more routine attacks. I think you'll have, in the same way on my computer, I have a CPU and a GPU, and the GPU handles Polygon. By the way, every data center is like this. You have many different systems which handle different workloads. This is a common pattern in computing.

• 58:59Speaker 02

  I think all the things you mentioned, those are all high-quality projects, which are bets on this future of blockchain-enabled applications. And I think you're going to need many of these blockchains. There's 10 really credible programmable blockchains out there, and they all make kind of different design trade-offs. There's like 15 things you want from a programmable blockchain. You know, you want performance, you want security, you want something we call composability, which is like each application to interact with other applications. You want a good developer experience, like what's the programming language, what's the programming model? They all make different trade-offs. And some of those trade-offs are right for certain applications, and some are right for others.

• 59:35Patrick O'Shaughnessy?

  If you think back over the last year, which has been a particularly exciting time in this space, what individual moment has been the most exciting for you personally?

• 59:44Speaker 02

  It has been a good year. By the way, the main reason it's been a good year is so many things have launched. So there was this long incubation period. We'd invested in a bunch of stuff in 17, 18, 2017, 18, and like, a lot of it, these are hard systems to build. I mean, like, I think the NFT thing in particular really kind of blowing up in the last few months. I think it's just incredibly important because, for me, it's the first thing, DeFi is great and it's really important, but it's still like a million people, if you look at the stats. It's about a million people use these things, right? If we can get something like NFTs that go to like 100 million people, that will have all sorts of secondary benefits, including, one, it will feed back into the infrastructure layer. It creates all sorts of incentives to then build out the Layer 1 blockchain

• 1:00:28Speaker 02

  layer, which in turn will enable a whole new set of applications like social networks and other kinds of things. Two, it's going to bring, really importantly, I hope, bring a whole new set of entrepreneurs to the space. We have a shortage of entrepreneurs, if any entrepreneurs are listening. I've never been in a space where there's so few, there's so much opportunity. There's plenty of money, plenty of opportunity, plenty of great ideas. We need more entrepreneurs. We need more developers. We need more people. It's a really small, shockingly small community. When you actually look at the number of people like building stuff. And I'm already starting to see it. I get emails and texts now from people that just have never had an interest in the space. Who are like, wait, now I finally have an interest in space and I want to go do something. And like, I kind of get it. And you have all these people, like I have relatives and things who've never had any interest in stuff.

• 1:01:11Speaker 02

  And they're like, how do I use MetaMask? What are the gas fees? If we can get this to really go to mainstream like that and get those people in the fold. These tech things aren't straight lines.

• 1:01:21Patrick O'Shaughnessy?

  Slowly then suddenly, yeah.

• 1:01:23Speaker 02

  Yeah. And so like, we got to kind of ladder up. The beautiful thing that NFTs are just so simple and elegant. It's a digital good, it's controversial and people are debating it and all these other things. But I think a lot of people get it right away. Just today, I was trying to explain the DeFi stuff and it's harder to explain. And blockchains and DeFi, there's a lot to explain and it's sort of abstract to people. Finally have something that's really tangible and now you're on EtherScan and you're looking at the history of it. And you're like, okay, now I get it. To me, that's been a kind of special thing and I hope it continues.

• 1:01:51Patrick O'Shaughnessy?

  Last question for you is maybe the most interesting and wild topic. What you mentioned a little bit earlier, which is DAOs, decentralized autonomous organizations. What the hell does that mean? What might it make possible?

• 1:02:02Speaker 02

  So there was a really cool thing that happened the other day, which is Uniswap had a V3 launch video that paid for this brilliant digital artist who handles people pleaser. She created this really cool unicorn digital art thing for their launch. And then she sold it as an NFT later on where the proceeds went to charity. The cool thing is it was bought, I think it was hundreds of thousands of dollars. I don't remember the amount, for a lot of money by a DAO. What is a DAO? So basically a bunch of people on the internet got together and said, hey, we should get together and pool our money together and buy that NFT. And they did it just using, the DAO is just a set of smart contracts on Ethereum. So there's no company either, but the smart contracts enforce the deal. So the smart contracts say, you put money in and then together we're going to use that money

• 1:02:46Speaker 02

  and we're going to go buy this NFT. You can add on to it, by the way, things like anyone who puts money in gets a token out and so they can own a piece of the DAO, sort of like a company. You can add any logic you want. It's just code. But that was just an example. Like, you think about what happened with stuff on GameStop and Reddit. That was a group of people getting together and just sort of ad hoc deciding to go and buy the stock. What if there was a set of code that let them come up with rules? It said, hey, if you join this group, and this buying group is this piece of code, and you can join this and you get a token or something to show that you joined, and then you can vote using that token on what the group does, but we're all going to do it together. So it's this way to kind of enforce this collective action together, which is what a company is. This is just a modern way to do it using code. It's very early, but like that example where that

• 1:03:29Speaker 02

  those people got together, and it's very likely in that case that you wouldn't have had nearly as much money go to charity, and the people kind of come together and do that if you didn't have that DAO. I think that someday a DAO might just, maybe they'll buy a basketball team. It's like the Green Bay Packers, I think, are they the ones that are owned by the people in the city or something? Well, they sold the bricks, yeah. Look, I think that the GameStop thing might just be marrying the coal mine. DAOs are the way to kind of really scale that collective action out, so that people can do all sorts of interesting things. You could argue a lot of problems in the world are collective action problems. Things around, you know, I don't know, energy consumption, and I don't know, tragedy, the commons, things with public infrastructure. There's just a whole bunch of things where like, if you had new ways to coordinate groups of people, coordinate money, coordinate effort and activities. Anyways, that's what DAOs are. So DAOs are sort of ad hoc,

• 1:04:14Speaker 02

  software-based organizations on the internet using blockchains.

• 1:04:18Patrick O'Shaughnessy?

  Is it an oversimplification to think of a DAO as like a natural successor to the LLC, that it's really a capital formation vehicle?

• 1:04:25Speaker 02

  No, that's exactly how I think of it. It's how you do it in a, in a modern internet software world. Capital and labor and effort, I mean, all these things. So I think it's a great way to future to organize open source projects. Like, hey, let's come together. Hey, we want to have a mobile phone that's built by the community and owned by the community and not owned by Apple. How are we going to finance that? How are we going to build that? How are we going to come together and coordinate that? How are we going to govern that? You can do that, people around the world who don't know each other and don't need to know each other, because the trust is coordinated through software.

• 1:04:56Patrick O'Shaughnessy?

  What in closing has is a single thing that has you most excited about the future of this space?

• 1:05:03Speaker 02

  What I was talking about before, I think this idea that the idea that this is a new way to finance creative activity. By the way, I define that very broadly. I mean, that's there's a traditional creative things of writing and art, you know, visual art and music, but there's also writing code, open source code. I mean, open source code has a real issue right now with Amazon and AWS and all these other services eating up all of the profits and things. People creating videos, people doing podcasting. These questions around like if AI comes along and takes over many jobs that are currently done by office workers, are people going to lie around and do nothing? And is it going to be this sort of dystopian? Was that movie Wally, the big and large or whatever that company is, you know, is it going to be like that?

• 1:05:47Speaker 02

  Or is it going to be this creative renaissance where you have millions of people creating movies and podcasts? And I think a lot of that comes down to whether there's an economic model for it. I think that's one of the most important thing. I mean, like, there's plenty of important things in the world. And I'm not saying it's the only one, but I think in terms of the future of the internet, it's a very important one. I think another, what's the structure of the internet? Is it going to be four companies? Is it going to be like TV was where there's like four big channels? And they control everything and we spend the next 50 years with congressional hearings about trying to rein them in and regulate them. And or is it going to go back to kind of its roots? Is it going to send the power out to the edges? I think it's not overstating it to say that the internet is the most important invention of the 21st century or 20th 21st century.

• 1:06:28Speaker 02

  And the questions that we're discussing today are about how is that system governed? And how does the money flow and the power flow through that system? So I think when you phrase it that way, there's probably no more important question than like how power and money works on the internet. What are the capital structures? What's the market structure? What's the economic models? They'll start off small and silly. I wrote this blog post, I guess a decade ago called The Next Big Thing Starts Out Looking Like A Toy. I was sort of making the observation that so many technologies through history kind of start off looking kind of silly. It's like a game or T art or whatever, but then it gets better and better and grows. The early telephone. Barely worked and went less than a mile and you know, but these things get better and you have to project out how they grow. I think that's what this is really about. It's

• 1:07:13Speaker 02

  about power and money on the internet. Who has that? How is it governed? How is it controlled? How does the money flow? What's the economic model? Those are really important questions. This is why crypto and blockchains matter.

• 1:07:24Patrick O'Shaughnessy?

  You were one of the first people to introduce me to this whole world, one of the people I've relied upon to learn about it from afar, and I've so enjoyed the conversation today. Thanks so much for your time, Chris.

• 1:07:33Speaker 02

  Thank you. Appreciate it.

• 1:07:35Patrick O'Shaughnessy?

  This episode was brought to you by Canalist. In this four-part mini-series, I sit down with Canalist co-founder and CEO Damir Hatt to learn about the origins of Canalist, the problems it solves for professional investors, and what the future of Canalist looks like. In this week's episode, Damir and I discuss how Canalist builds its models, the fixed versus variable parts of its models, and how it seamlessly works with the current workflows in Excel. How does the fixed part of this work? So somebody's got to do the work. The first 80% of the exercise is being done by you and your team. What does that look like? Is it humans? Is it software and quantitative systems? Is it some combination? How and why should a buy-side analyst feel confident that the 80% is being done incredibly well?

• 1:08:16Speaker 03

  Great question. Yeah, I mean, we started out human because that's all we had. And actually, where it started was way before there was a Canalist, there was my co-founder James, building a model a day from filings on a new company he wanted to learn because he was watching his positions on one screen and was acrobat on the one screen and Excel on the third one, and then off he went. So we started out manually and we realized extremely early on that no one was ever going to use this or adopt it in any way unless the data was unimpeachably good. Like, it was extremely accurate. And so what we did was all we could do with human resources, which is we did everything twice and then made sure that it dished out perfectly. And basically, where it's evolved to now is the business is around

• 1:08:57Speaker 03

  150 people. About half of those, or just over half of those, are on our research team. They build and update everything primarily manually. But then what we've also evolved into now is we have built, we would confidently say, the majority of what one might build to automate this work. We've built it as a check against the humans rather than vice versa. And I think a big part of where our data accuracy came from is the fact that when you model, you actually have to think about the business and things have to work in the forward periods. It's amazing how often that helps you identify historical errors.

• 1:09:31Patrick O'Shaughnessy?

  Another important thing is like how this actually feels to the customer. So people do this in Excel almost entirely. Like, I'm not familiar with many people building company models that don't do it in Excel. It is the one tool to rule them all. How do you make sure that what you do doesn't interrupt the normal workflow of the user, the analyst or the PM in this case? What have you learned about meeting customers where they are as you build the product?

• 1:09:55Speaker 03

  It was not even a deliberate choice. It was just sort of an initial requirement. I came in as the B two B tech software person. And first thing I said to James was, I said, oh, you know what? This is great. We're going to put it on a web portal and we're going to make it really dynamic and slick. And he said, no, it has to be back compatible to Excel oh seven. And I have to be able to hit F two and trace everything back. So I wasn't going to have a co-founder if that wasn't part of the solution. Our design principle inside analyst for the product is to get out of the way. And what that means is people are looking to refine a piece of their process. No one's looking to do investment research a completely new way. And I think embracing the fact that we serve an extremely sophisticated clientele.

• 1:10:39Speaker 03

  Folks know how to pick stocks that go up or pick stocks that go down. If that's what they're trying to do, they have great businesses. They've got great skill sets. They've got a ton of experience. There's a bunch of other inputs. At the end of the day, we're solving for modeling and then solving for fundamental data and actuals as reported, which is important. But there's a whole bunch of other research that is happening that we're not going to affect. And we just need to be able to slot into somebody's process. And I think the opportunity cost of. Switching and of learning how to model a different way hypothetically is just too high of a bar. So I mean, we have to go and say that way that you do this part of your work, here's like an insanely easier and actually higher quality, more efficient way to do it.

• 1:11:21Patrick O'Shaughnessy?

  So just say a little bit more about the literal way this works in Excel. We talked about, you know, you meeting the customer where they are, but what does that mean in a literal sense? Like if I've got, which I do right now, have a company model open on my screen, like where does Catalyst start integrating with Excel? And how do you think about that?

• 1:11:38Speaker 03

  In the most literal sense, what we've now enabled clients to do is you pull a Catalyst model, you can add charts, add tabs, re-drive things, change values, reformat it, do virtually anything. And Excel's a pretty capable tool. Next earnings season, you've now got a button in your Excel toolbar where you click update and actually the update will roll in the updated actuals from next earnings season, but will preserve all of your changes, will leave your re-drive as it is, and will give you actually like a full top to bottom model down comp of where you were, where the actuals landed. So that's sort of like right where the rubber hits the road. We started with Excel models and then eventually kind of tooling around it. And now we're inside Excel helping you again

• 1:12:23Speaker 03

  where you do all of your work. And so that Excel add-in and the updater process, that's been transformational for our clients, have sent us love letters basically saying that if you save somebody five or 10 hours in between earnings seasons, that's one thing. If you save them five hours on the third Thursday of earnings when they really need them, that's a ton of value.

• 1:12:43Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.