#510: Jesse Walden on the Ownership Economy

Jesse Walden is an investor at Variant Fund and previously worked on the crypto team at Andreessen Horowitz. In this conversation, we discuss the ownership economy, NFTs, social money, piracy, Compound, Uniswap, and locked value. ======================= Public Rec is the first to bring tailored sizing to leisurewear so that you don’t have to choose between comfort and style. They make leisurewear in waist and inseam sizes because they believe comfort starts with a better fit. And when things fit better, they look better. No tailors. No settling. No stress. Comfort and style, all in one. Check out publicrec.com/pomp and use POMP10 at checkout for 10% off your order. Step into a better fit today with Public Rec. ======================= OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under 2 minutes, and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry (0.1%). Visit www.okcoin.com/pomp and open your account today. ======================= LMAX Digital is the leading institutional crypto currency exchange with current average daily columes of $2bn. Built on proven, trusted LMAX Group trading technology, LMAX Digital delivers a market-leading solution for trading and custodial services for the most liquid crypto currencies. Trading with all the largest institutions globally, LMAX Digital is a primary price discovery venue, streaming real-time market data to the industry’s leading indices and analytics platforms, enhancing the quality of market information available to investors and enabling a credible overview of the spot crypto currency market. Learn more at lmaxdigital.com/pomp =======================

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

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Jesse Walden is an investor at Varian Fund and previously worked on the crypto team at Andreessen Horowitz. In this conversation, we discuss the ownership economy, NFTs, social money, piracy, compound, Uniswap, and locked value. I really enjoyed this conversation with Jesse, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is a new sponsor, so pay attention. Public Rec. They are first to bring tailored sizing to leisure wear, so you don't have to choose between comfort and style. I'm literally wearing their clothes right now, and I am

• 0:44Anthony Pompliano?

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• 1:26Anthony Pompliano?

  fit today with Public Rec. If it's good enough for me, it's good enough for you. Go check it out. Look good, feel good, get paid good. Publicrec.com/pomp, use code POMP10 at checkout for 10% off your order. Public Rec. Next up is OKCoin. Crypto moves fast, and many crypto-focused companies can't keep up. Crypto exchanges that cut through the noise are the ones that give you access, wherever you are in the world, to the cutting-edge public projects emerging in the new asset class. If you're looking for an industry leader that gives you access to a huge variety of crypto assets, tools, and services, I personally recommend OKX. I've been working with them for a long time. They are fantastic. Whether that's access to a wide variety of new crypto asset

• 2:10Anthony Pompliano?

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• 2:51Anthony Pompliano?

  with almost 40 different fiat currencies. Shout out to all the international listeners. So head on over and open an account at OKX.com/pomp. That's spelled O-K-E-X.com/pomp. Again, OKX.com/pomp. Lastly, LMAX Digital. Bang, bang. Listen up. LMAX Digital is the leading institutional cryptocurrency exchange, which offers clients a regulated, transparent, and secure trading environment. OKX, that's for the retail traders. LMAX Digital, all institutions, baby. With an average of $2 billion traded per day, LMAX Digital counts all of the largest global crypto trading institutions as its clients.

• 3:34Anthony Pompliano?

  LMAX Digital is the go-to institutional exchange. Leveraging the LMAX Group's proven low-latency technology and liquidity relationships, LMAX Digital offers the market-leading solution for crypto trading and custodial services. As a primary price-discovery venue, LMAX Digital provides streaming, real-time market data to the industry's leading indices and analytics platforms, enhancing the quality of market information available to investors. Trade like an institution with LMAX Digital. Learn more at LMAXDigital.com/pomp. LMAX Digital, the number one player when it comes to the institutional world. If you're trading for an institution, you better be using LMAX Digital. Go to LMAXDigital.com/pomp. Tell them I sent you in.

• 4:20Anthony Pompliano?

  You might get a little discount, a little bit of a treat, LMAXdigital.com/pomp. All right, let's get into this episode with Jesse. I hope you guys enjoy this one.

• 4:27Speaker 02

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 4:52Anthony Pompliano?

  All right, guys. Bang, bang. I've got a special treat for you today. I've got Jesse here from Variant. Thank you so much for doing this.

• 4:59Speaker 03

  Yeah, thanks for having me.

• 5:00Anthony Pompliano?

  I feel like you have taken the world by storm, but before we get into what you're doing now, let's just go back in time and go through your background. Where'd you grow up and how did you get into investing?

• 5:11Speaker 03

  Yeah, so I grew up in New York, went to high school on Long Island, went to college in Canada.

• 5:21Speaker 03

  I think relevant detail of my early years was in high school, I got pretty involved with piracy, much more than your average teenager in the early 2000s. Thanks to a friend of mine, I sort of like found my way into this community of people who are uploading the files that everyone else was downloading. And for me, that was exciting because I got access to the Jay-Z album before everyone else. I was burning copies of it and selling them to my friends to pay for my DSO modem. And like, it was just amazing to have access to all this content at a time when YouTube didn't exist. Facebook didn't exist. There was no SoundCloud, Spotify, et cetera. Meanwhile, here was literally every piece of audio, video, software, video games, et cetera,

• 6:06Speaker 03

  on these exclusive FTP servers that were highly organized and incentivized communities, not that similar from the way crypto communities function today. And that was a formative experience for me because it sort of highlighted how media was going to propagate on the internet in the future, in the very near future. So like four years later, I'm in college. Wasn't the best of students, was too busy throwing parties. And then concerts and and and then using these new technology platforms that that were sort of coming up at that time to distribute media flyers, music that, you know, of the artists that were were performing at these shows. And so I I'd say the straight line through my career is I've always been fascinated with how

• 6:49Speaker 03

  media propagates online, how the value of that media is captured, which in the piracy era was was not happening at all. And then in the in the sort of platform era started to get captured more and more by platforms.

• 7:02Speaker 03

  And what I set out to do sort of after the my years in Montreal was set up an artist management company to help artists leverage these new tech platforms to reach their fans directly and capture more of the value for their business, you know, independent of the major label system. And so I worked with with a number of big independent artists.

• 7:25Speaker 03

  Solange Knowles, Blood Orange, Magical Clouds, to help them do this as much as possible. And through that, I became really sort of aware of the degree to which these platforms were coming to dominate the relationship between creators and their audience. And and also some some more, you know, less glamorous problems with the way royalties were administered in in the traditional sort of music business. And and then I learned about Bitcoin in 2013 or so, and that was, you know, the turning point for me where, you know, I read the White Paper and and to me, the most interesting thing was was not the financial side of it, though I thought that was cool and and still think it's really cool.

• 8:08Speaker 03

  But the fact that, you know, Bitcoin was this peer-to-peer network that was very similar in a lot of ways to the peer-to-peer piracy protocols that I was, you know, engaging with as a teenager. And I was like, this is kind of, you know, kind of like BitTorrent in a lot of ways, but it has something that BitTorrent lacked, and that is it has this identity system built into the protocol. And that's, you know, public-private key cryptography, which is what allows you to own your Bitcoin and have it be yours, independent of any third party. And I thought, That's really interesting. What if you could do the same for a different kind of digital asset instead of a, you know, a financial asset? What about a digital media asset like an image, a video or a song?

• 8:50Speaker 03

  If you could let the creator of that asset be discovered through the asset itself, they could capture much more of the value without having to depend on the platforms who intermediate that relationship today. And so that idea was the spark for a startup I co-founded in 2014 called Media Chain Labs, where we set out to do that. And I'll say, you know, in hindsight, we were, we were way too early. I think today, a lot of those ideas are being realized through NFTs, which we'll get into, but, but, um, so that's exciting. But back then, you know, Bitcoin was just coming into mainstream consciousness. It was, it was, it was too early to be exploring non-financial use cases. We had a, a good outcome in that we, we were acquired by Spotify and I ended up leading blockchain R and D there to help them sort of think about

• 9:35Speaker 03

  and solve some of the royalty administration problems that were sort of adjacent to what we were exploring. And, and then after Spotify, I joined Andreessen Horowitz and spent the better part of three years on their crypto investment team before spinning out Variant last year. So I'll, I'll pause there. That was, that was a lot.

• 9:54Anthony Pompliano?

  You, you get major props from coming on here and talking about Jay-Z right out of the jump. So, uh, so cool for that. The other thing is, uh, we're probably similar age, uh, or at least ballpark wise. And I remember being in, uh, in middle school or maybe even into high school and LimeWire was like, you know, really popular, but it was always like a Russian roulette. You didn't know if you're downloading a song or a virus and, uh, and sometimes you got both. So it always felt like your computer, you know, drastically slowed down. And I think there's a whole generation of kids who, uh, who kind of grew up on a lot of those platforms and, uh, you know, got a crash course in what, uh, what's going on today in the world. Talk a little bit about Variant and kind of what your goal is. I know that you guys have this idea of kind of, um, you know,

• 10:38Anthony Pompliano?

  being a community oriented fund that really wants to invest in these community owned networks. But like, what exactly does that mean?

• 10:46Speaker 03

  Yeah. So. It's related to our thesis, which I call the ownership economy thesis. And so one lens to view what's happening in crypto is that for the very first time, we have networks that are worth billions and billions of dollars that are completely built, operated, and owned by their users. Right? So with Bitcoin, of course, the first example, there is no Bitcoin company. It's just a permissionless network. Your users or your listeners know this really well. And I think that model that is at the core of success, the success of Bitcoin, is being adapted to other networks in completely different verticals.

• 11:31Speaker 03

  And this is playing out from an audience of users that's been fairly technical. Developers were the first to realize, hey, if I mine Bitcoin, I can earn Bitcoin and earn an ownership stake in the network. And so naturally, developers and technologists were the first to understand that. But increasingly, more and more mainstream audiences are realizing, hey, I can actually earn some of the value I contribute to the products and services I use every day. So there was Bitcoin, there's Ethereum. In DeFi, there's lots of networks today that are owned by their users. A couple of good examples are Uniswap and Compound, which are both financial marketplaces. I'll pick Uniswap as an example.

• 12:15Speaker 03

  It's an exchange, not unlike Coinbase, but where the users of the exchange are the ones earning the transaction fees in the marketplace in exchange for putting liquidity into the marketplace. So this ownership model is, in my view, the most market-driven way to build network effects for next-generation platforms. And it's what's driven the really rapid growth in Bitcoin and Ethereum and the like. So what we're investing in at Varian is founders who are building networks that have the objective of becoming community-owned, because we feel these types of networks will grow much faster and much larger than their web-two counterparts, which are largely owned by VCs.

• 13:00Speaker 03

  And that may sound counterintuitive, because we are a venture capital firm. Right? So how do we do business? Well, I think the strategy is...

• 13:10Speaker 03

  One of backing founders at the earliest possible stage. Because building one of these community-owned networks sort of requires a process that is, you know, I've referred to as progressive decentralization, where, you know, you still have to build something people want. People don't care to own something that they don't want to use or think is valuable. And so, you know, Satoshi put the white paper out, then he had to actually build, or they had to build the network, right? Someone has to do the work at the early days and someone has to fund that work, right? So that's where Variant Fund steps in, is to help founders get ideas off the ground, build a product that people want. Step two is, you know, find users for that product, find product-market fit, build a community. And then step three, start to figure out how to, you know,

• 13:55Speaker 03

  effectuate a distribution of ownership to that community, such that they're incentivized to continue to contribute and grow the network alongside the founders. And, and, and so that's what Variant sort of prides itself on doing, is helping founders get off the ground, build their community, and then actively participating in the networks that, that we invest in.

• 14:13Anthony Pompliano?

  Got it. And so when you talk about these networks, maybe give us an example of something you guys have invested in that you can really kind of showcase what it means from, you know, ideation of, hey, we should go build this to where it is today.

• 14:25Speaker 03

  Yeah, I think, I think a really good example is, is Compound. So I, I also mentioned Uniswap earlier, I think they're another, but I'll, I'll talk about Compound here. So Compound is a money marketplace. It's built on Ethereum. You know, it enables lenders and borrowers to find one another and sort of, you know, exchange digital assets through a, an automated process where you, you know, if you're a lender, you can lend your stuff out without having to, you know, interface with the counterparty. And as a borrower, you, you come in fully collateralized and are able to instantly borrow any assets that are sort of on, on the money market at a, at a rate determined by available supply and demand.

• 15:05Speaker 03

  Compound started, I think, late 2017, early 2018. The founder's name is Robert Leschner. And he had this, you know, this vision for this marketplace and raised an early round of funding. This is before Variant existed. But raised a small round of funding, built a team, built the product, and found some early product-market fit in that, you know, they found lenders and borrowers and they grew this sort of marketplace volume. And the business model for this marketplace is not, you know, something new or unfamiliar. It's a rake on transactions that are, you know, happening through the marketplace. What's different about Compound is what happens with that fee stream.

• 15:47Speaker 03

  And so after, you know, clear signs of product-market fit and growth, Compound said, you know what, this thing is better if we get out of the way and turn ownership over to the participants in the marketplace who are driving the value of the thing. And so what they did is they launched a token, a comp token, and they distributed it directly to the users who are providing liquidity to the money market. So these are the users that make the marketplace valuable, the ones that are driving the fees in the marketplace. And those users were able to earn comp tokens, which in turn govern the marketplace itself, including governing what happens with the fee stream.

• 16:29Speaker 03

  Now, Compound is still a very early, you know, early project. It today has over 10 billion in volume locked inside the money market. So it's quite significant at this point. But like most startups, you know, that fee stream is not being distributed out to shareholders. It's being sort of reinvested in growth. And so that's a really good example, I think, where distributing ownership to the users of the product is a really strong incentive to get them to actually use the thing. And that's why Compound has seen such rapid growth over the last few years, going from effectively zero to 10 billion in volume.

• 17:06Anthony Pompliano?

  So when you think about this locked value, I think there's a lot of people who either are new to crypto, are coming out of kind of the Bitcoin world, they keep hearing, especially in the decentralized finance world, like locked value, locked value. Explain exactly what locked value is and then why you think that's important.

• 17:20Speaker 03

  Yeah, so I'll start by saying, I think locked value isn't actually the best metric for DeFi. A lot of people refer to it as like the holy grail, but the reason it's a little misleading is that locked value of crypto assets changes with the value of those crypto assets. So in a market that's pretty volatile, where you know, you have Bitcoin and ETH going up at a rapid clip, it's not the best measure of growth in these marketplaces, because if Bitcoin 5X's and you've got, you know, a million dollars of Bitcoin in the wrapped Bitcoin in the Compound protocol, you now have 5 million without any new users putting more capital in, right? So TVL is a little bit misleading, but what

• 18:01Speaker 03

  it refers to is the value in the marketplace that is available to trade with. So in the case of Compound, which is a money marketplace, it refers specifically to the amount of capital that one can borrow from the money market. In the case of Uniswap, which is an exchange, it refers to like liquidity on the order book per se, right? So it's just a measure of like available liquidity in these various financial marketplaces. I think, you know, a better metric to track real growth is to look at the number of unique users and sort of the median, you know, contribution that they're making in terms, in dollar amounts,

• 18:44Speaker 03

  right? So that you don't want to look at like, you don't want to like factor in the dollar volatility of the crypto asset, you want to look, sorry, I said dollar amounts, I meant, look at the crypto amounts in these marketplaces and then the number of unique users that are putting in, you know, whatever the median is.

• 19:04Anthony Pompliano?

  Got it. And so when people think through this, walk through maybe the relationship between like the comp token, right, with the usage in the system. So if there's no value that is being dispersed out yet to kind of these token holders, what is the logic behind why the token would go up, down, or stay, you know, kind of stable in price? And I think some people probably inaccurately think of it just as like, oh, it's a stock, which, you know, maybe there's some element of that, but that's not kind of the full story. So just describe a little bit how you think about like the price of the token and that's relationship with the success or failure of any certain project or community.

• 19:43Speaker 03

  Yeah, so I think there's, there's definitely an apt parallel to stocks in that, you know, shareholders govern the corporations that they own. Similarly, you know, token holders in these community-owned networks govern the network. And that's, you know, so that's the similarity. I'd say what's a little bit different is the fact that tokens and shares don't have the same sort of legal standing like that, you know, the, the, there's a lot of sort of new territory that needs to be explored and built up in the crypto space when it comes to governance. And now, the, the, why would these things have value? I think that question is answered by,

• 20:25Speaker 03

  you know, one reason at the base case is like, there are a lot of developers building on top of these open protocols. It's important to keep in mind that, you know, Compound runs on Ethereum. That means it can't be shut off unless you shut off the whole Ethereum network, right? So that gives developers confidence building on top of it because, you know, developers have learned the hard way that if you build on top of closed networks, like if you build on top of Facebook, or if you build on top of, you know, Coinbase, or, or, you know, Robinhood users learn the hard way. If you, if you use Robinhood, they can just shut you off, right? So what's different about a network like Compound is it runs on Ethereum. That means it's running on machines all over the world. And even if one of those machines is shut off, another one picks

• 21:10Speaker 03

  up the slack and the system keeps going. So developers have confidence building on top. Now, they're only confident to the degree that the underlying isn't going to get yanked from underneath them. And so one of the reasons these comp tokens may have value is if a developer builds a valuable service on top with its own business model, they may want to have a say in how the underlying is governed and therefore the governance rights in and of themselves could be valuable. The other reason that I think is a little further out is the idea that these marketplaces do generate cash flows, right? Like Compound is a money market and there are transaction fees in the market. Currently, those fees just accrue to a treasury that's being reinvested in growth. But at some point, governance could decide, you know what, this

• 21:55Speaker 03

  fee stream should be distributed to the user. So it's a claim on those cash flows. And that's where the stock connection, I think, is most at.

• 22:03Anthony Pompliano?

  Got it. And so what do you think is like the downside in terms of, it's very obvious why community-owned networks would be valuable for the users. It's also pretty obvious why through financial incentives, you could really bootstrap kind of the network effect. What's the downside to shifting to this decentralized version of some of these products or services?

• 22:23Speaker 03

  Well, I think the foremost one is it's really hard to design a product that people want by committee, right? You know, the best startups have strong sort of leadership, strong product vision, and they iterate quickly, they move quickly. You know, once they're in the public markets as a traditional company, you know, you're beholden to shareholders and what they want. And, you know, that can pull you in a number of directions. It can slow you down. It can force you to optimize for short-term profits over long-term growth. And so I think that's one of the potential downsides that founders need to think about when they're going through this process of progressive decentralization and turning over ownership to users. You don't want to do it too soon. That's what happened in 2017

• 23:07Speaker 03

  when there were all these ICOs. They kind of had the right idea where they're like, you know, we should give our users ownership and then they'll be incentivized to try our thing. The problem was they hadn't built the thing yet. And so they got hamstrung by having to build a product by community consensus as opposed to having a founder sort of drive the initial product vision, build the thing, and then effectuate distribution to the actual users once they already are using the product. So I think that's one downside. I think another is that, you know, Products do need to continue to evolve. So this is just an extension of the prior point. Once you're community owned, your decision-making process is beholden to governance, right?

• 23:50Speaker 03

  And so how do you remain competitive? I think a good sort of lesson the founders can look to is, you know, Visa actually started as a cooperative. And that, you know, a bunch of banks came together, pooled money, built this network and grew the network effects of the payment system really quickly because they all had skin in the game to do so. But as it grew and competition got more fierce, you know, Mastercard came in, American Express. Visa converted from a cooperative to a for-profit entity because they could raise more capital through that structure. And ultimately, you know, that's what they felt they needed to do in order to remain competitive versus the others who had raised considerable amounts and were moving quickly.

• 24:35Speaker 03

  So I think that's something to just keep in mind is that you need to remain nimble even once in the public markets, even with user ownership, in order to remain competitive. I'm optimistic that because crypto tokens allow you to distribute value very granularly and programmably so, like in an automated fashion, we'll be able to, you know, to make cooperatives a lot more efficient, you know, like a lot more automated than they've been in the past and thus a lot more competitive. So I think this market can, you know, this market structure can scale.

• 25:06Anthony Pompliano?

  What do you think about the difference between equity and tokens as you deploy capital? Right. So you mentioned that your venture capital fund, and I'll kind of put that in air quotes because I think people think generally like, hey, you go buy equity, you guys are buying tokens. One, are you buying equity as well? And then two, how do you think about if faced with, hey, I could buy equity or a token? Is there a framework or like a pros and cons that you think through as to which you would rather own?

• 25:29Speaker 03

  Yeah, totally. So I think there, there is a sort of best practice funding structure in the space. And I think this is something that the folks at A16Z have worked on a lot. And a lot of the deals I worked on there were structured this way. Similarly, at Variant, most of the deals we do are structured as equity with a warrant for tokens. And, and so there's really two separate components here. The reason, you know, so I'll start by saying a lot of the companies that we invest in, they do have a very specific goal, which is to become a decentralized network coordinated by a token, just like Bitcoin and Ethereum and so on.

• 26:07Speaker 03

  So the expectation is that a lot of the value of what's being built will ultimately accrue to the token. But in the short term, the reason we're buying equity is that equity allows for, it's the most flexible instrument for aligning incentives between investors and entrepreneurs. And at the earliest stages of a company, flexibility is paramount because things change. Like founders need to be able to pivot if the idea or the market moves in a direction they weren't anticipating. And so equity aligns investors with the founders should they decide, hey, you know, that network we said we were going to build, it doesn't make sense in the market today, we're doing something different. Equity preserves the alignment.

• 26:51Speaker 03

  In 2017, a lot of investors were buying SAFs, which were a promise for tokens in the future. The problem that can occur with that structure is a team is sort of committing in advance to say, we're building a network with this specific token. And maybe that doesn't make sense as the market evolves, right? So it doesn't allow for the flexibility that's important to early-stage startups. So that's why we do equity. And then the warrant for tokens, essentially what it says is, if you do end up building a network that is coordinated by a token, at the time you launch the network, hopefully that network is sufficiently decentralized so that the token is no longer a security.

• 27:33Speaker 03

  And at that point, this warrant gets exercised and the investors get their sort of pro-rata share of the tokens in alignment with the founders. And critical thing there is that the network does need to be sufficiently decentralized at that point, which typically means that a lot of the tokens aren't just going to founders and investors, but are also going to the actual users who are operating the network on a go-forward basis.

• 28:01Anthony Pompliano?

  Makes a lot of sense. I want to switch gears and talk about what seems to be like the topic de jour, which is NFTs, non-fungible tokens. Last year, I think it was September, I wrote this thing publicly just saying, hey, look, I think digital art is going to be bigger than traditional art. It's very similar to kind of Bitcoin versus gold. The digital version is going to be bigger than the analog version. That may seem crazy today, but like, you know, see in 20 years and we'll see what happens type situation. As you can imagine, literally got laughed out of the room. Fast forward to today, and I'm actually even thinking to myself, well, wait a second, like, maybe I was archaic in my thinking of just comparing digital art to traditional art, because it seems like NFTs are taking on a life of its own.

• 28:44Anthony Pompliano?

  There's all these different implementations, like it's much, much bigger than just digital art. So what is your kind of, you know, thought process, and maybe at a high level, just like when you think of NFTs today, why do you think that is interesting or valuable?

• 28:58Speaker 03

  Yeah, so I think, I think of NFTs sort of, you know, through the lens of the ownership economy thesis, right? So again, the idea that, you know, in the future, the next big products on the internet are going to be built, operated and owned by the users. And, you know, when you think about media on the internet today, you know, every day, billions of images, videos, songs are shared on social media platforms. What's interesting about what's actually happening there is, is, you know, creators of those media files, they're essentially uploading the files to Facebook, to Twitter, to Instagram. And what's happening is they're copying and pasting the file from their computer to the servers of those companies. And along with the file, they also copy and paste ownership of the file itself.

• 29:41Speaker 03

  And that, that's because somewhere along the way, in the terms of service, you know, you agreed, when I upload stuff, you guys can monetize it how you see fit, right? So that's what's allowed the platforms that are dominant today to capture so much of the value that their users create. What's different about NFTs is it sort of inverts the ownership model of media where it allows creators to own their media in the same way they can own a Bitcoin. You can now own like a digital media asset. In the same way you own a digital currency asset. And that is directly without any third party in between. And so as a result, creators are going to start to capture much more value directly by, people buying their work.

• 30:23Speaker 03

  And so I think the reason why you gravitate towards digital art is it's the most obvious example. It functions sort of similar to the way the traditional art market works. But that's just never been possible on the internet to date where everyone rents access to Spotify, rents access to Patreon. Now you're actually able to own content from the creators that you like. And that's kind of important because it aligns incentives between creators and collectors where if you actually own a collector's work or a creator's work, you're kind of incentivized to help them grow their profile. You want to see them succeed because that has direct consequences for the value of the work that you own, which you can later resell.

• 31:06Speaker 03

  So I sort of refer to this as this concept as patronage plus where in the internet to date, you've been able to patronize creators and pay them a monthly subscription on Substack or Patreon. But you've not been able to actually realize any financial benefit from doing so. And it's not the case that everyone is in it to make money, but it's certainly the prospect of being able to profit from patronizing an artist is a strong incentive to become a patron in the first place. And that's why I think we're going to start seeing this market grow really, really quickly because it aligns incentives between creators and their audience in a better way than web two platforms have been able to.

• 31:51Speaker 03

  And beyond art, I think this medium opens up to every piece of media on the internet. It's memes, it's digital assets for games, it's collectibles like NBA Top Shot. I used to collect basketball cards as a kid. So the fact that these are digital is amazing and that means you can do more with them, right? So critical thing is unlike paintings, unlike basketball cards or like toy figures, these are programmable. Assets and they're assets that live on open blockchains that anyone can program. So just like anyone can build on top of the Bitcoin network. Anyone can build on top of an NFT on an open blockchain and give it more utility.

• 32:35Speaker 03

  Right. So a developer can build an application that where I can bring my digital art to it and display it, or I can bring my game asset from game to game and have it function in different ways that make it more valuable. So today, the baseline is I collect this stuff because I like it. I think it's interesting. I think it's valuable. I might be able to resell it for more. Tomorrow, it's I collect this stuff because it's mine and developers are building stuff to make it more util, you know, have more utility and and, you know, more interesting. And so developers are going to have to start catering to users and creators to get them to mint stuff and and bring their stuff to the platform as opposed to platforms today locking

• 33:19Speaker 03

  your stuff in for them to monetize. And I think that's, you know, that inversion is is pretty powerful.

• 33:25Anthony Pompliano?

  So let's start with kind of the equivalent of digital art, right? Kind of the the easiest thing for people to wrap their head around. Uh, when I first saw this, it was very obvious, like one, the programmability. So I can have sound, I can have motion, I can like do all these things that you can't do with just a painting, right? The other piece was from like a user experience standpoint, so I can like take it with me virtually, right? I don't have to physically carry the painting around, like very, very simple stuff. When I display it, I can literally have that picture on the wall rather than it be static. And the only way to change is to literally take it down and put another one. I could have it changed by the hour, by the season, by the lighting in the room. Like, there's all these things that you can do with the display of it and and kind of have the the variation. But what really started to fascinate me was if you look at the traditional art market with

• 34:10Anthony Pompliano?

  like a Sotheby's or something, they bring all these people together for these auctions. Now, what you can basically do is take a digital file, you can literally auction it off to anyone in the world and you can send it to them almost immediately. And just like an open decentralized protocol like Bitcoin or Ethereum allows people to access financial services as long as they have an internet connection, it felt like it was going to Democratize or really break down a lot of walls to quote-unquote "the art market", right? But I think your point of like, okay, that's like step one. That's the easiest thing to wrap your head around. Maybe give us an example of like, what's the furthest out from that that you've seen with NFTs? Like in terms of an implementation of the technology where you're like, this kind of gives you a peek around the corner

• 34:51Anthony Pompliano?

  as to what somebody may be able to do in the future and they're kind of just touching on it now.

• 34:57Speaker 03

  Yeah, there's, there's so much on it. The space is moving so quickly. So I'll give you-

• 35:01Anthony Pompliano?

  I feel like I'm talking to the experts, so come on.

• 35:04Speaker 03

  Yeah, I'll give you, I'll give you a few different examples. So one is on the, on the financial side of things. I think there's, you know, to your point, in the traditional art world, you know, there's a lot of gatekeepers. There's galleries, right? There's, there's auction houses and there's, there's a lot of insiders who have all the information today, right?

• 35:24Speaker 03

  In, you know, the internet blows those kinds of institutions wide open. It's no different for, for art. What you're starting to see is all kinds of like different financial marketplaces emerge for these assets. And again, these are marketplaces that allow the creators and the collectors to capture more of the value. For example, really base case example is it is possible to specify in an NFT, when, when the creator minces it, that they should get a royalty in perpetuity whenever it's resold. So that, that is a very basic thing that you can do with programmable art today that you, you know, you can't do with legacy art, or you could, but it'd be really hard to track down all those secondary sales and, and, and get the payments that you're, you're owed, right?

• 36:08Speaker 03

  So that's very easy to automate and programmable and happening right now.

• 36:13Speaker 03

  I think, you know, another financial example is there's people packaging up these, these, these digital art objects into indices. And so like, if you're not, you know, if you want exposure to digital art, but you don't, you're not a expert curator yourself, well, you can rely on someone else who is and easily invest in, in an index. And so play that out like 10 years, right? We're going to have all kinds of financial marketplaces around all kinds of creative work that just didn't make sense in the legacy world because it was too cumbersome, too, you know, fragmented to, to, to, to invest in. So that's the finance side. I think on the, on the more creative side of things.

• 36:52Speaker 03

  Today, there's lots of game developers building cool games that are sort of crypto-native. And to be fair, the big game companies haven't caught on to this yet. And a lot of the games, as a result, are sort of like janky. They're kind of fun for people who are way down the rabbit hole. But they show a promise, which is today you can bring your game asset from one game to another. You can't do that with Fortnite skins. They lock you in, you buy your skins. You might sell them in a sketchy way on a secondary marketplace, but then Fortnite doesn't see any of the benefit of that. So the cool thing about these crypto-native game assets is they're portable and developers can bring new meaning to them by programming new experiences on top.

• 37:36Speaker 03

  There's lots of examples of people buying a game asset, then bringing it to a virtual world where they hang out with friends and they sort of put it on display. And so in a world where AR and VR are more common in our daily lives, you're going to see a lot more of this. And users are going to come to demand that portability that comes from true digital ownership. And further, developers, the big game studios are going to realize that we can actually make more money by leaning into this. Because again, we can capture a portion of the resale value that's happening in sketchy ways outside of our platform today. I think bottom line, the way I'd sum it all up is free market economies are the best engine of growth. We don't have free market economies in the digital world today because we live inside of these big platforms.

• 38:21Speaker 03

  We live inside of Facebook, or in the case of gaming, Fortnite. What blockchains bring to the table is a sort of property rights system that functions more like the traditional physical world or countries that have strong property rights anyway. And it brings that to the digital world. And I think that's going to be an engine of growth, unlike anything we've seen in the internet to date.

• 38:42Anthony Pompliano?

  Yeah. What is, when you think through this, where does the platforms that end up being valuable? Is it the artist ends up being kind of the most valuable component? Is it the platform that helps to mint the NFTs? Is it the exchanges? Is this all centralized infrastructure? Is it decentralized infrastructure? Like, I think people are very focused on, if you take like Top Shot as an example, right? You've got a centralized entity that's actually creating these in partnership. They've done a licensing deal for intellectual property. Like, it feels very similar to, you know, what Disney would do, right? Or some other centralized entity. But then the actual end product is a completely different thing, right?

• 39:24Anthony Pompliano?

  In terms of this NFT and kind of the interest and the digitization that we're seeing there. So how do you see centralization, decentralization? And where do you see value accruing kind of in the overall ecosystem?

• 39:35Speaker 03

  Yeah, it's a great question. And, you know, to be honest, I've got some ideas. They're early ideas. It's not totally crystal clear yet, but I'll give my early thoughts. So I think, you know, what's captured value in the crypto space to date is, you know, blockchains themselves that are the property right systems, right? Like Bitcoin, Ethereum, most valuable networks. So I think the blockchains where these assets are issued will continue to benefit from increased, you know, property being issued and tracked on the chain. Another area that's captured a lot of value in crypto to date, independent of NFTs, are wallets, things like Coinbase and hardware wallets and the like, the places where people store the value that lives on the blockchain.

• 40:19Speaker 03

  So I think wallets may end up having an important role to play with NFTs too, because, you know, they solve the problem of, hey, where's my stuff? Well, it's, you know, it's in my wallet. And that's where you go to view your NFTs. Maybe it's where you go to trade them. And maybe there's a good business model there, just being close to the end user. So that's a more traditional one. I think some new areas that are sort of net new to NFTs are DAOs or, you know, collectively owned groups that curate these items, right? So in a world where Every image, every video, every song is issued as an NFT. It then becomes a question of what is valuable?

• 40:59Speaker 03

  And that's the role that galleries play in the art market is filtering through the noise and creating the context that makes these assets valuable. And I think we'll see a similar kind of curatorial layer emerge in the NFT world. But instead of it being Sotheby's or Christie's that are sort of gatekeeping what is and isn't valuable, you'll have groups of people like subreddits coming together to say, we want to collectively pool value on the internet and buy that thing because we think it's valuable. And so one way to access the value in this space may be to not access directly,

• 41:37Speaker 03

  but access through an index that is curated by this community of people online who have a specific view. And by the way, I think you can extrapolate that out to all investing in this space, not just NFT investing. It may be the case that Variant Fund III is not a venture fund run by me, but something that is actually community owned, if the SEC would let us do that. So those are some early ideas. I think just maybe one last one in where NFTs will capture value. I mean, I didn't mention it specifically, but it's the assets themselves, right? And that's, you know, that's, content is king. It's remained kind of true.

• 42:19Speaker 03

  You know, in spite of the internet, if you make something that people love and want to own, you know, you can capture value that way. So for creators, you know, that's, I think that's the big upside of this model that doesn't exist in Web 2 today.

• 42:34Anthony Pompliano?

  I'm cheering for you. I hope you figure out how to do Fund III as a community organization. That'd be awesome. Before we get into the rapid fire questions to end this, last thing I want to talk about is kind of social money. And it's something that when you said earlier about like the idea of creators launching these NFTs and value almost accruing as a creator or an individual becomes more popular, more valuable, however you want to kind of measure it, it feels like there's some movement. In this social money space, it hasn't really kind of taken off. It hasn't reached kind of any level of mainstream adoption from what I've take, uh, from what I've noticed. But like, what are your thoughts there? And is that something that would be competitive, uh, kind of with NFT? Is that a complimentary thing?

• 43:15Anthony Pompliano?

  I- is it binary? Like, hey, one of them wins, one of them doesn't. Just how do you kind of, uh, view social money in comparison to everything else we've talked about today?

• 43:22Speaker 03

  Yeah, yeah. So, so maybe I'll start out with the definition because I think it means different things to different people. So, the way I think about social money is it's, it's, it's a person sort of issuing a token, um, that represents, you know, themselves, right? So like Pompcoin would be, would be an example of social money. Now, the question is, what is the value of, of Pompcoin? And then it's, you know, I think it's whatever value you give to it, right? Maybe it's access to spend an hour with you, cost 10 Pompcoin or something like that. So it's, it's a really interesting idea that I, I think is, there's a lot of fertile ground for experimentation there, right? Cause like there's, again, it's all about aligning incentives between creators and, and their audience.

• 44:04Speaker 03

  That's what NFTs do. You know, you buy, you buy something from a creator, now you own it, you can resell it if their profile grows at a, at a profit, right? So the, the alignment of incentives is what's driving the growth in this ecosystem. Social tokens offer that same promise. The, the question that I think is still open-ended for, for a lot of projects that are experimenting here is what is uniquely enabled by owning social money? Like what does the token actually unlock in terms of, you know, uh, an interaction or, or value?

• 44:36Speaker 03

  And, and so we haven't seen anyone quite nail it yet. Some folks are saying it should be a financial relationship, like kind of similar to the, the concept of an ISA, an income sharing agreement where essentially I'm backing you as a creator, I get a cut of, of all your revenue streams. So not unlike a, a, a record deal or, you know, a, a, a, you know, a sports contract or something like that, right? But, you know, that has lots of, you know, implications that are legal and, um, and, and so we haven't seen a, a ton of experimentation on the financial side. Other folks come at it from, um, More the angle of like, it's the new fan club, right? Like, you used to buy, you used to buy a membership to an artist fan club. It would get you merch, it would get you access to backstage at the show.

• 45:20Speaker 03

  And social money is the way to do that. It's just a fan club with a, with a floating market price, which again, gives you that incentive alignment that makes your fans into super fans.

• 45:31Speaker 03

  I don't think this idea is mutually exclusive with the concept of NFTs. In fact, I think it's quite complementary. Like, you could imagine that owners of your social money get first dibs to buy a, you know, an NFT that you issue, or the other way around. Holders of your NFT are given some social money, you know, because they're already your biggest fans, they bought your work, right? And then they get access to whatever the social tokens enable. So I think we will see the confluence of these two things come together. But the reason I think NFTs are having their moment first is that the interaction model between creator and audience is, is well understood. I'm buying your work. That's something like, we understand really well. Whereas the social money interactions are sort of new and unfamiliar.

• 46:13Speaker 03

  And so they, there's got to be a lot more experiments run before something catches.

• 46:17Anthony Pompliano?

  Yeah, makes sense. Well, is there any area of kind of this community on networks or NFTs? Where you're like, hey, no one's talking about this yet, but a year from now, that's going to be the, the thing everyone's paying attention to? Almost like the most underestimated aspect?

• 46:30Speaker 03

  Yeah, I mean, I think, I think we haven't really explored the, what I call composability of, of NFTs, which is an idea we've touched on, you know, in, in the conversation thus far. It's, it's this idea that these assets are portable and you can bring them with you to new contexts. I think that's, that's, we're in this sort of early eruption, you know, phase of, of the hype cycle, where it's all about getting into the market, speculating, buying, and the prices of these assets are going crazy. CryptoPunks, which is sort of the first crypto collectible NFT is issued on Ethereum back in 2017. They're, they're selling for like millions of dollars right now. So we're in this frenzy phase.

• 47:12Speaker 03

  Inevitably, there's going to be a cool off period, like any market cycle. And During that cool off period, I think is when you're going to start to see developers go back to the drawing board and be like, what can we do that's net new? And that that's when I think you're going to start to see the the composability of these assets really emerge where developers start to say, hey, those CryptoPunks, we just built this new experience on top of them. And I think that will dominate the conversation going forward. It's it's who's building the coolest experience around NFTs to give these assets more value, more meaning and drive the next cycle down the line.

• 47:46Anthony Pompliano?

  Yeah, that's really, really fascinating. I got three questions to you and you'll get to ask me one to finish up. First question, what's the most important book that you've ever read?

• 47:55Speaker 03

  Interesting. So I'm going to go with Protocol. So this is a this is a book about how control exists in the internet era in spite of the fact that the the protocols are all open. And I think it's it's an instructive read for anyone building in the crypto space today, given everyone's, you know, values are about decentralization and permissionlessness. It's it's instructive how the same ideals were present in the Web one movement and we didn't quite get there in Web two. And so for for people building in Web three, I think it's it's a it's a really important read to make sure we get it right this time.

• 48:30Anthony Pompliano?

  I have not read that. I'm going to read that one this weekend. That's a fantastic suggestion. Second one comes from our friends over at Eight Sleep. I sleep eight hours or six hours a night, was absolutely demolishing my body. In crypto, 24/7, 365 market doesn't help, but now I've been sleeping on their thermal regulated bed and it's fantastic. Sleep really cold and get eight, nine hours and feel amazing. What's your sleep schedule and how has that changed over time?

• 48:56Speaker 03

  It's not, I'll tell you, it's not good. And that's it's for all the reasons you mentioned, especially right now in the in the NFT hype cycle. So, I mean, I definitely strive to get eight hours. I've been doing far less today. You know, I'm working on it is what I'll say.

• 49:13Anthony Pompliano?

  It's a, there's lots of people I know that recently left finance and have gone into crypto and some are trading, some are doing whatever. And they're just like, you don't realize how nice it is to have hours of operations as a human, right? The machines, they don't care, but from humans, like when the market closes, everyone takes a deep breath here, that none of that happens, right?

• 49:32Speaker 03

  Yeah. And this and the space is just moving so fast that, you know, I think unfortunately, it's it's only humans that can keep up with all the new ideas to, you know, to write them the programs that machines run to keep up with the market.

• 49:44Anthony Pompliano?

  Absolutely. Last question for you is aliens. Are you a believer or a non-believer?

• 49:50Speaker 03

  You know, I'd say I would put myself in the believer camp. It just seems it's too big out there for there not to be anything else out there.

• 49:57Anthony Pompliano?

  Yeah, I'm in the they're probably out there and they just being some sort of intelligent life form, but probably too far away will never come in contact, unfortunately. And so, you know, it's a fun intellectual exercise, but probably a worthless one in terms of preparing for them or anything like that.

• 50:15Speaker 03

  Right.

• 50:17Anthony Pompliano?

  What a what question you have for me to finish up?

• 50:20Speaker 03

  I guess I'm curious, what what's your taste in digital art? What do you look for in in assets you collect?

• 50:28Anthony Pompliano?

  So I read this book Boom, which a couple of guys sent me and basically goes back and looks at the like legacy art world and just kind of the history of it through kind of the 20th century. And yeah, I guess 20th century. And really what you find out is like, it's all stories, right? Like, what makes a van go more expensive or valuable than something else? Like, it is the story. And so you got to be careful because that's like the fine line between like the charlatans of the world and then actually like the true value in the world. But when you start to understand like the market structure and how important the auction houses were, it's actually picking winners in the art world. I think we're going to see kind of a recreation of that. I actually don't think it's going to be auction houses,

• 51:10Anthony Pompliano?

  like it'll be some other form of that. But ultimately, when I look at art, I'm in the camp of like, I couldn't tell you what's good art and bad art if you should be five pieces in the legacy world. It's like, which one's the most expensive? I just don't know, right? I don't have that eye. I don't I don't have kind of that that artistic inclination. And so instead, what I think of it as is it's much more like a startup, right? Is if you kind of look at it and you say, hey, what is the story behind this? What is kind of that directional arrow of progress, like the equivalent of that for the art world? That's basically the decisions that I make. And then the other piece of it, too, I think is that there's this idea in startups of like, things in motion stay in motion. And so when you see kind of momentum, like, you should go pay attention. I think the same

• 51:53Anthony Pompliano?

  Happens with artists, right? So when you see an artist start to sell a couple of pieces and it's very obvious like, hey, this artist is gaining more and more traction. Traction is really a sign for the community. It's really for audience, right? And like, like you're basically increasing the demand side of the equation. And so if you have, you know, relatively fixed supply from an artist and you've got an increasing demand for that artist, like obviously, if you're just looking at it as a pure financial investment, like the price of those assets are going to go up over time. And so I just kind of, you know, chalk it up and say, look, I'm figuring out alongside everybody else, but that's, you know, a couple of the frameworks that I've been using.

• 52:26Speaker 03

  Yeah, that makes sense. And I think, I think it speaks to something important about crypto markets, art market, traditional art markets and digital art markets. They're all reflexive markets, right? So, you know, you know, that's better than anyone. But the, the more that sort of insiders talk about the value of the thing and the more value they trade in, in internal to one, one another, the more outsiders look at that and say, oh, look at all that value. Those guys are crazy. What, what's going on? The more they pay attention and then that's what pulls the outsiders in. And so these reflexive markets just compound and, and that's what drives activity in, in the space.

• 52:59Anthony Pompliano?

  I, I couldn't agree more. Where can we send people to find you on the internet or find out more about the work you're doing at Variant?

• 53:05Speaker 03

  It's just variant.fund.

• 53:08Anthony Pompliano?

  Simple. You, you, uh, you are a man of very little, uh, little words on that one. So variant.fund, uh, Jesse, listen, thank you so much for doing this. I think people are really, really going to learn a lot from this and you guys are on the cutting edge a lot that's going on in this industry. So congrats on all the success and just keep going. Watch this again in the future.

• 53:26Speaker 03

  Cool. Thanks so much for having me. It was fun.