Adam Ludwin - A Sober View on Crypto - [Invest Like the Best, EP.66]

My guest this week is Adam Ludwin, the founder and CEO of Chain, a blockchain technology company targeted at large enterprises. Before shifting his career to focus solely on crypto, Adam was a venture capitalist focused on FinTech, which is how he came across the Bitcoin whitepaper earlier than most. I called this episode “a Sober View on Crypto” because Adam’s take is so balanced. He is certainly long crypto, both in his portfolio and career, but he is very skeptical of much of what is happening in the ecosystem today. For example, he offers the best reason I’ve heard for not launching an ICO or investing in them. If you haven’t read Adam’s widely shared open letter to Jamie Dimon, it has become a must-read piece for crypto-enthusiasts. Read it as soon as you can. I edited out an earlier chunk of our conversation as it was largely introductory. If you need a broader introduction to cryptocurrencies, I suggest starting with episode one of Hash Power and working your way forward. One key insight from Adam in our offline discussion what how cryptocurrencies function very much like equities or bonds. Just as equity financing enables the activity of joint stock corporations, cryptocurrencies enable activity in decentralized applications. We pick up our discussion with Adam discussing whether anyone really uses these decentralized apps today. Hash Power is presented by Fidelity Investments For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 2:35 - (First Question) – Will anyone use cryptocurrency in the real world at a large scale 3:43 – The idea of censorship resistance 12:29 – Will society be accepting of this technology 14:39 – Why decentralized apps can’t be acquired 18:24 – The idea of exponential vs linear improvements on a trend and if there are limits to the growth of decentralized technologies 23:26 – The struggle with early adaption of blockchain 25:41 – Best application for bitcoin, storing value 29:52 – Adam’s introduction to cryptoassets and how his thinking has evolved in the space 36:44 – In this hyper frothy market, is there a situation that makes an ICO exciting to Adam 43:51 – Even though it appears to be easy money, Adam explains why you shouldn’t just create an ICO 50:59 – A look at what Chain is doing and what Adam is excited about 53:23 – How does what Adam is working on help to improve the ledger of his clients 1:02:00 – Why you can easily be an early investor in crypto currency 1:04:27 – Kindest thing anyone has done for Adam Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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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• 0:32Patrick O'Shaughnessy?

  This episode of Invest Like the Best is brought to you by Paxos. I have personally interviewed Paxos' CEO Chad Cascarilla on this podcast before and am excited about how they're changing the crypto landscape. Whether you're a small fintech or a large financial institution, with Paxos Crypto Brokerage, you can offer your customers crypto buying, selling, transferring and more, all with Paxos' easy to integrate APIs. Paxos takes care of everything in the backend, from licensing and compliance to custody and exchange. You can start offering crypto to your customers within months. I've gotten to know Paxos over the years and have been personally impressed with their track record. With clients that include PayPal, Venmo, Revolut and Bank of America, they're the most trusted infrastructure provider for crypto and blockchain.

• 1:16Patrick O'Shaughnessy?

  I'm excited that more fintechs and banks are starting to offer crypto features and Paxos Crypto Brokerage is the best way to get to market quickly and safely. To learn more, visit Paxos.com/Patrick. That's P-A-X-O-S dot com forward slash Patrick.

• 1:35Patrick 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, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 1:56Speaker 03

  Patrick O'Neal is a Principal and Portfolio Manager at 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.

• 2:28Patrick O'Shaughnessy?

  My guest this week is Adam Ludwin, the founder and CEO of Chain, a blockchain technology company targeted at large enterprises. Before shifting his career to focus solely on crypto, Adam was a venture capitalist focused on fintech, which is how he came across the Bitcoin white paper earlier than most. I called this episode "A Sober View on Crypto" because Adam's take is so balanced. He's certainly long crypto, both in his portfolio and career, but he is very skeptical of much of what is happening today in the ecosystem. For example, he offers the best reason that I've heard for not launching an ICO or investing in them. If you haven't read Adam's widely shared open letter to Jamie Dimon, it has become a must-read piece for crypto enthusiasts. Read it as soon as you can. I edited out an earlier chunk of our conversation as it was largely introductory. If you need a broader introduction to cryptocurrencies,

• 3:12Patrick O'Shaughnessy?

  I suggest starting with episode one of Hash Power and working your way forward. Like the Hash Power documentary, this episode and other Hash Power singles are brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers, and financial advisory firms. For more information, please visit fidelity.com. One key insight from Adam in our offline discussion was how cryptocurrencies function very much like equities or bonds. Just as equity financing enables the activity of joint stock corporations, cryptocurrencies enable activity in decentralized applications. We pick up our discussion with Adam discussing whether anyone really uses these decentralized applications today.

• 4:06Speaker 04

  The big question in the market right now is, will anyone ever use these decentralized applications? Will anyone actually buy things with Bitcoin at scale? Will anyone actually do meaningful computation on Ethereum? Will traders begin to enter into high-value contracts and run them on Ethereum? Will people store files in Filecoin instead of in Dropbox? Instead of on S3 if you're a company? And so far, the evidence is that very few people are using these services. The shorthand of this is just to say, like, nobody's using Bitcoin. Everyone's investing in it, 100 billion market cap, but...

• 4:51Speaker 04

  You know, if you if you talk to 10 people who have purchased Bitcoin and ask them, how many of you have spent Bitcoin to buy something in the last week? Usually, the answer is zero. If you say the last year, maybe it's one or two. But that is the stated purpose of Bitcoin. The stated purpose in paragraph one or two in the first page is, this is a means to have commerce on the Internet be more seamless.

• 5:14Patrick O'Shaughnessy?

  So there is there's so much to explore in all of that. The first of which is the features of decentralized applications. And I think of application, like a lot of companies are just applications. Facebook's an application. The ways in which that might be better today or in 10 years versus a centralized version of the same thing. And in your piece, you highlight how really, if you boil it down today, and we can talk about 10 years from now as well, censorship resistance is the one sort of undeniable advantage that a decentralized app has over a centralized one. So can you please explain what censorship resistance is and why that's so important?

• 5:52Speaker 04

  Yeah, of course. So part of the reason no one's using these services. And again, I want to separate out for your listeners. When I say no one's using them, I don't mean that there's no trading activity. We all know there's tons of investment and speculation in the underlying crypto assets. But like I pointed out, those crypto assets serve and enable something new, which is decentralized apps. And very few people are using them. And the reason for that is that decentralized applications are just worse on virtually every dimension by virtue of their design than their centralized counterparts. It's much more efficient to store files in a centralized cloud like AWS than it is to try to parcel them out in a distributed way across a network of computers and then reassemble them

• 6:37Speaker 04

  and have a mechanism to order those transactions and maintain global state. And the same is true for a Bitcoin payment. We all know Bitcoin is sort of limited at roughly seven to 10 transactions per second. Visa on Christmas will do 60,000 transactions a second. So we've got a big gap there. And a lot of that gap Isn't closable in the sense that, well, it's just early and we'll get to bigger scale. A lot of that gap is the fundamental design of any decentralized system. And so we have sort of these performance and scalability and throughput questions. We also have usability questions.

• 7:22Speaker 04

  In order for me to, again, retain a decentralized model with Bitcoin, I've got to manage my own private keys. If I stick my private keys or my funds with an online wallet or an exchange, I'm back to PayPal. It's exactly the same, right? So I've re-centralized. Coinbase is an amazing company, but it's helpful to remember they're an app. When you log in to see your balance in Coinbase, you're not looking at the Bitcoin blockchain. You're looking at the reading from a Postgres table, a database table. So if you really want to spend Bitcoin and remain in a sort of decentralized mode, you've got to maintain your own private keys. And that's really hard to do. Even if you use a hardware wallet like a Trezor or Ledger,

• 8:04Speaker 04

  it's a lot more complicated than using, for example, like a password manager. And unlike a password, if you lose your private keys, you don't get to hit reset private key. Your money is gone. It's like losing the key to the safe deposit box that's holding your money. And there's no recourse. So all of that's to say decentralized apps are sort of worse on all these dimensions. Yes, they'll incrementally get better, but structurally they have these trade offs. And those trade offs are there intentionally and by design in order to get decentralization. And coming back to your question, the real value of decentralization is censorship resistance, which, which means that nobody can stop me

• 8:49Speaker 04

  from sending Bitcoin to someone in China. No one can stop you from taking this podcast and uploading it to Filecoin. Nobody can stop two traders on Wall Street from entering into a contract and having that contract be executed by Ethereum. And that's a very powerful idea that for the first time we have unstoppable software. There's no company that can kind of intercede. And now for most people, especially in the United States, that doesn't strike them as like, oh, finally.

• 9:26Patrick O'Shaughnessy?

  My problem solved.

• 9:27Speaker 04

  Yeah, I was really sick and tired of Venmo, you know, censoring my Starbucks transactions. I was really sick and tired of the Amazon cloud. Every time I tried to run a computation, they just said, sorry, you know, you're a funny looking guy and I just don't like, I'm not going to process. So for most people, this doesn't, this isn't a selling point. But there are, you know, at least two cohorts of people where it is a selling point. And the first cohort are people who are sort of off the grid, right? They don't have access to competently run centralized services.

• 10:00Patrick O'Shaughnessy?

  So be like the unbanked or something like that?

• 10:02Speaker 04

  Yes, the unbanked or people who are living under governments that are, for example, hyper inflating their currencies or where there aren't competitive market mechanisms that will give them better options or where they're trying to move money out of a place where there are tight capital controls. So leaving those sort of legal and moral arguments to the side, functionally, that's useful.

• 10:28Patrick O'Shaughnessy?

  That's a lot of people.

• 10:29Speaker 04

  It's a lot of people. So people that are sort of off the grid. The other cohort of people are people who want to be off the grid. They're here in New York City and anywhere else where you can access all the sort of traditional software from companies, payment systems, et cetera. But they want to be off the grid. And this is usually, you know, when you hear politicians or others talk about Bitcoin, they'll usually just say, you know, Bitcoin's great for criminals. And they're right, actually.

• 10:56Patrick O'Shaughnessy?

  Monero's even better.

• 10:57Speaker 04

  Right, and Monero and, and, and privacy coins are better. If you're trying to transact anonymously, if you're trying to buy something you shouldn't be buying, to date, the best way to do that was to show up with a briefcase of US government issued currency. Now, this, there's this alternative, and by the way, that still might be the best because there's some open questions about whether you'd really want to use a public blockchain to transact and illicit goods. But in practice, it doesn't take much sleuthing to find very robust dark web marketplaces that essentially denominate everything in Bitcoin. And so. People that want to be off the grid because they're buying something they shouldn't be buying

• 11:39Speaker 04

  because they they want to evade taxes because they they want to get money to a group that they shouldn't be getting money to. Those are, again, leaving the moral and legal arguments aside, functionally relevant for people. And this is what makes, I think, a lot of folks in the traditional banking world a little uneasy to say politely, or just dismissive of this whole asset class, because they will point at these examples and say, I told you so. Like, this is just, you know, this is just stuff for criminals. We have properly run services. Like, why do you need a censorship resistant network? And it's sort of hard to argue with that. At the same

• 12:20Speaker 04

  time, I pointed in my article to counter example, which was encrypted messaging, which is, you know, the ability to send a message to someone and ensure that there's no third party snooping in the middle. And encrypting your email was something that even five years ago was sort of the exclusive domain of hackers, spies, paranoics. Normal people didn't do that. But if you fast forward, post Edward Snowden, post WikiLeaks, post even, you know, Donald Trump and sort of a new world order that people aren't sure about yet, the number of people in the

• 13:01Speaker 04

  sort of Acela corridor between New York and Washington and out on in the Bay Area, who, if you just sort of glance over on a train or a plane and see them on Signal. Telegram. Telegram, exactly. Notice they're using WhatsApp, maybe because it's end to end encrypted, is remarkable. And so, something I always point out to skeptics around crypto assets is that it's fairly easy to predict how a technology will evolve. We know that public blockchains are structurally going to be difficult to scale, but they'll get a little bit more scalable. We know it's structurally difficult to have privacy at scale, but they'll become more private. We know the user experience isn't great. It'll get a little better. But we also know that

• 13:44Speaker 04

  structurally, it's going to be, these things are largely going to be relevant to folks off the grid who want to be off the grid, who want censorship resistance, who want more privacy, who want more anonymity, and so on. And so that's sort of easy to predict. What's hard to predict is how society is going to change to either be more accepting or less accepting of a technology. When you saw the first iPhone, it was sort of easy to predict that you would see people taking photos with it. It had a camera. It had a built-in camera app and photos like, okay, yes, I could see that cameras are gonna sort of slowly, that market's under threat now and that these mobile phones might really

• 14:28Speaker 04

  challenge the traditional camera market. That's sort of easy to predict. What was extremely hard to predict was Snapchat. That's because Snapchat wasn't, didn't emerge because of technology alone. It emerged because of the way young people engaged with technology, their reaction to oversharing, their desire to reclaim their privacy, et cetera. Those things are super hard to predict. So I think the smart money that's investing in crypto assets and betting on decentralized applications becoming used more and more, essentially what they're betting on is that there will be emergent phenomenon that are very hard to anticipate right now, when you

• 15:08Speaker 04

  look at the way the world is, that could, in ways it's hard to predict and hard to anticipate, embrace these technologies, embrace decentralization, and seek the sort of refuge from the more centralized systems. And in a way, this whole market, this whole arena of decentralized apps and crypto, crypto assets and cryptocurrencies is like an internet counterculture. It sort of started as like a bank counterculture, financial counterculture, and it's becoming, it's still that, but it's also an internet counterculture, taking aim at not only financial incumbents, but also now technology incumbents. And you hear a lot of people that are, that look at this sort of oligopoly, this sort

• 15:50Speaker 04

  of so-called FAANG stocks, Facebook, Apple, and Google, and so on. What's the N? Is it Netflix?

• 15:56Patrick O'Shaughnessy?

  It was Netflix, but it's that the acronym's changing.

• 15:58Speaker 04

  Yeah, we can't, we can't take Netflix out and still have a workable acronym. But anyway, you look at, you look at these incumbents and people go, wow, like, how will we ever have innovation again when they can just buy any company as soon as it's successful? Well, what's interesting about decentralized applications with respect to something like Facebook and Mark Zuckerberg in particular, is even though there are no killer dApps, you know, you've heard this term killer app? Instagram was like a killer app on mobile? Great. Zuckerberg swoops in, he buys Instagram threat, you know, neutralized and also new growth on mobile. Oculus Rift, looked like the killer app. Next platform is going to be virtual, virtual reality. Great, let's swoop in and go get the Oculus, go buy that.

• 16:41Speaker 04

  So killer apps are acquirable because they're created by companies that have equity under them and have investors who want to return. Like, the whole model works. Even though there are really no killer dApps, again, through my definition of like, people using them, if one emerges, Facebook won't be able to buy it because by definition, won't be created by an acquirable company. If Mark Zuckerberg decided he wanted to buy Bitcoin today, that's just, the question doesn't even, it's sort of, you smile when you say it because it doesn't make sense, being buy, buy the whole project. Or if he said, oh, Ethereum, I want to go buy Ethereum. Like, you can buy some Ether, but you can't take over Ethereum. So, really, this presents a bit of a paradox to the sort of the software incumbents and

• 17:26Speaker 04

  the bank incumbents. Because even though they're not really threatened yet, the genie is out of the bottle, and if something does emerge that is used widely, there's nothing they can really do, short of, you know, maybe regulatory pressure to compete. And their best hope is that centralized services are, just continue to be so much better. And again, you know, even if decentralized services get better, decentralized apps get better, centralized apps are getting better as well. I mean, look at the new iPhone relative to the first one in 10 years, it's like, it's a miraculous improvement. So they're not going to stand still. So, the net of all this is just, nobody knows where it's all going. And I think if you look at the $200 billion market cap of all crypto assets, like, can

• 18:11Speaker 04

  you say, where does that valuation come from? The way I think of it is like, it's, first of all, it's probably coming from nowhere. Like, let's just start with like, it's Mr. Market and mania and all that is true, we should come back to that. But, maybe a more like, academic way to argue it would be to say, the 200 billion represents a small probability of a very large outcome. And the very large outcome is trillions of dollars of sort of economic value across major technology companies and major financial institutions disrupted. But the likelihood of that is still low, so people are sort of weighting it at, you know, 1 to 10%.

• 18:50Patrick O'Shaughnessy?

  Yeah.

• 18:50Speaker 04

  That's an academic way of sort of justifying, justifying.

• 18:53Patrick O'Shaughnessy?

  I think that's the right way to do it. And I want to use the, I like the camera idea and the iPhone. So I know a bit about, my mom's a photographer, so I know quite a bit about like resolution and camera technology, et cetera. And it's a perfect example of kind of overlaying a linear growth pattern with an exponential. And in the case of the iPhone or digital photos, more generally speaking, you kind of had this long period where it's getting exponentially better, but it's starting from such a low base that it looks like grainy, it's crappy, it's crappy, it's crappy. And then all of a sudden, there's just this like vertical line where all of a sudden digital photos are actually way better and more versatile and everything is better about, let's say, the user experience using a digital. Like my mom shoots only in digital now. She used to have these fancy portable live cameras and maybe still uses that a little

• 19:37Patrick O'Shaughnessy?

  bit, but probably 95% of her photos are digital. And that happened like instantly. And I think people always underestimate the exponential growth curve just because we're not, we're not, human beings just aren't well suited to understand it.

• 19:50Speaker 04

  Yeah.

• 19:50Patrick O'Shaughnessy?

  And you mentioned something earlier, and I just want to get kind of your specific thinking on it, which is there's something inherent about decentralized apps or blockchains that mean maybe there's a limit on that exponential, that there won't be that same vertical line. Because I hear the counterargument to some of what you've said would be, yeah, they all stink now and the user interface is terrible and it's hard to manage private keys. But all of those things are going to, in this kind of open permissionless innovation world, going to get exponentially better. And then, you know, one year, five years from now, you know, your Bitcoin as a payment network is going to be 10x better than Chase and then 100x better than Chase, whatever that might mean. So what do you think about that idea on exponentials versus kind of linear improvement from incumbents?

• 20:32Patrick O'Shaughnessy?

  And whether or not this is, there may be reasons why this isn't another example of that?

• 20:37Speaker 04

  It's a great question, and I'll start by saying it'd be foolish of me to sort of draw a really hard line in the sand and say never, because the history of technology is, you know, sort of Overwhelming never. Yeah, exactly. I think the greatest challenge for decentralized applications is that they're decentralized, which is to say that Bitcoin worked because it maintains global shared state, meaning every node on the network has a roughly consistent view with every other, updated every 10 minutes with every new block. And that's the only reason it works and maintains its competitive edge over

• 21:21Speaker 04

  competitive edge over something like PayPal on that dimension of censorship resistance. Most of the proposals that seek to make, let's just stay focused on Bitcoin for a moment, Bitcoin faster, more scalable, do so by, and more usable, do so by actually re-centralizing elements. So the so-called block size debate, where proponents of increasing the block size, meaning the number of transactions per batch that are validated and then distributed. And that argument is, the reason it's so contentious, is that it boils down to one side saying,

• 22:02Speaker 04

  let's have bigger blocks, even though the file size is bigger and therefore it will tend to benefit those that have better computers, faster internet connections, which will tend to centralize the network around them. It would be worth it because we'll be able to process more transactions on the network, versus the sort of purists that say that will defeat the whole purpose of Bitcoin. Because if it tends towards centralization, it won't be as good as pure centralized services, like a PayPal, like it just still won't be, it'll still be 10x slower, but we'll lose the one thing we have, which is censorship resistance.

• 22:43Speaker 04

  And ditto for, again, if you store your Bitcoin at an exchange, it makes it way more usable, way more user-friendly. But you don't have control over your funds anymore. That exchange has control. And we've seen extreme examples of this with Mt. Docks and other exchanges, Bitfinex and others that have been hacked and people just like lost money. Like you weren't taking control of your funds. We may see more subtle examples where exchanges are audited by the IRS and people find out, hey, I wasn't as off the grid as I thought I was. So the fundamental challenge is not that like we can't get higher performance, easier to use blockchains.

• 23:25Speaker 04

  It's that structurally, the way to do that are all centralized solutions. Now, again, the counterargument to that is like, well, Adam, like, you're not smart enough to see that we're going to be able to have our cake and eat it too. We're going to be, there are going to be technologies that will allow us to have, maintain censorship resistance, maintain decentralization, have these peer-to-peer networks, not compromise on that, and get 10x or 100x performance, 10x or 100x privacy, 10x or 100x usability. So far, it's too early to tell. Like, there are certainly not any compelling examples of where that's, we're seeing that today. But I'm sure this podcast won't age well.

• 24:07Speaker 04

  And when I listen to it in 10 years, I'll be like, wow, like, I was an idiot. I didn't see it. So it's very possible. I think to sort of sum up, the best argument for that is, you know, what you said, which is like, we just can't see yet the breakthroughs that will enable these networks to really just decimate the others. And that's possible. It's a similar argument, though, to those who say, even though no one's using DApps today, it's just because we haven't seen yet the kind of emergent phenomenon. And so, like, the only, like, argument you'll ever hear that's the sort of the bulls make repeatedly

• 24:49Speaker 04

  is this aversion of like, you just can't see it yet, argument, on both the technology and the societal use of them. Here's my problem with and what I struggle with. And by the way, I kind of agree with those arguments. So let me just tell you like what I struggle with though. Which is at the beginning of other kind of paradigm shifting technologies, like the internet itself, people actually were not making that argument. If you go back and you read magazine articles from 1991, 1992, 1993, where it was like just before the web, but people were like on BBS systems and connecting to Prodigy and CompuServe services like that. The question was only how big and what things we couldn't see.

• 25:31Speaker 04

  But a lot of what people were excited about were things that they were already doing then. So for example, there were already chat rooms and message boards. There were sports scores. There were stocks, stock quotes. There was news. There were funny cat pictures. And there was email. There was file sharing. It was kind of janky and weird to use and kind of like complicated and nerdy. But for those that were using essentially the early internet and the early web, it was undeniably exciting and real. And you could point to those things. And the question was just like, are quote unquote, normal people going to want to do these things? And the answer, of course, was yes. But, but no one was saying like, look at all these networks of computers.

• 26:12Speaker 04

  We have no idea what to do with them, but maybe something will emerge. That wasn't, that wasn't the argument.

• 26:19Patrick O'Shaughnessy?

  The kind of solution in search of a problem.

• 26:20Speaker 04

  That's right. And the same was true of like PCs a decade earlier. There were killer apps from the beginning. Word processing, spreadsheets, more advanced computations and calculations. So-called microcomputers, later personal computers had killer apps from the beginning. And so what I struggle with is I don't see like the seeds of that outside of the sort of off the grid, wannabe off the grid cohorts. And that's the part I struggle with. I worry that if we never get there, this will, we'll look back in 10 years and be like, oh, I was right. Because the seeds of those killer apps weren't there in the beginning. But again, I struggle with it. I'm genuinely torn and the reason I'm, I continue to be long crypto assets is you want,

• 27:04Speaker 04

  you probably want to, you know, make a bet. Because it's very, it's so hard to predict and the medium of money and assets hasn't changed that dramatically.

• 27:13Patrick O'Shaughnessy?

  What about the arguments that for one maybe killer app or killer DAP, which is this kind of digital gold, non-seizable store of value idea for Bitcoin specifically, where I don't like shoehorning old stuff into this new paradigm, but it's just, it's an easy way to think about it. So if people, if some chunk of the multi-trillion dollar gold market likes gold, because they think it's something that will persist as valuable and they're super skeptic, they hate governments and you know, they're hardcore libertarians or whatever, those are their motivations. There's a demand for that sort of asset. And then physical gold bullion, which is what the hardcore people will tell you, you need to own versus like a GLD ETF. Is expensive to store, it's incredibly hard to move, it's a pain in the ass, it's centralized in many ways.

• 27:56Patrick O'Shaughnessy?

  Like if you have it in a bank vault, like someone can seize it from you.

• 27:59Speaker 04

  Even a depository receipt on a gold bar is not good enough, right? Because if that warehouse or that manager goes under, that warehouse receipt just becomes a claim on their debt.

• 28:12Patrick O'Shaughnessy?

  Right, it's an IOU.

• 28:12Speaker 04

  Yeah, it's an IOU, so.

• 28:14Patrick O'Shaughnessy?

  So what do you think about that as a killer app?

• 28:16Speaker 04

  I like it. I think it's the best argument for why Bitcoin is valuable and interesting, although it's sort of circular, like Bitcoin is a store of value because it's store of value and the price goes up, therefore it's a store of value. If Bitcoin.

• 28:27Patrick O'Shaughnessy?

  Very reflexive.

• 28:28Speaker 04

  Yeah, if Bitcoin kept going, like, people make the store of value argument during bull markets, when the price of Bitcoin is high and you don't hear them very often when the price of Bitcoin is low. Like if you, if a bunch of people listen to your podcast, buy Bitcoin, and then in a year from now, if there's a correction or sooner and it's down 80%, and they're like, wait, I thought you said it's a store of value. So store of value is like a fuzzy term, but at the same time, it's the one that I use to sort of explain to kind of friends and family, right when I'm beginning to explain Bitcoin to someone, what's interesting about it. And it is, even though the original intent of Bitcoin was to be a mechanism

• 29:11Speaker 04

  for more seamless commerce on the internet, that's a stated goal in the paper. In practice, it's being used mostly as a store, to your point, as a store of value, which is mostly.

• 29:25Speaker 04

  A way to view Bitcoin as digital gold. And like gold, like, you know, you can have all these justifications for why it's valuable, but it's largely just everyone believes it's valuable and therefore it is. And like gold, if I said, why is gold worth $1,000 an ounce? What is the price of gold right now?

• 29:43Patrick O'Shaughnessy?

  I don't even know.

• 29:43Speaker 04

  I don't even know. Let's pretend it's $1,000 an ounce.

• 29:46Patrick O'Shaughnessy?

  Although it says something that you and I could probably both quote Bitcoin's price this morning, but not gold.

• 29:50Speaker 04

  No way. Yeah, 100%. So why is, why is gold worth whatever it's worth or priced?

• 29:56Patrick O'Shaughnessy?

  Let's say it's 5, 6 trillion overall.

• 29:58Speaker 04

  The answer is, there is no answer. The answer is like, first day of economics class, supply and demand.

• 30:04Patrick O'Shaughnessy?

  Some other people think there is.

• 30:05Speaker 04

  Yeah. It's like, so it's all demand driven. There's, there's sort of arguably this, or not arguably, there's a scarce supply of gold. And so the price is driven entirely by demand. That demand is driven entirely by, I think largely like it's a fear index. And it's, it's a lot of these macro arguments around inflation and nation state sustainability of, of, of different things. And so that, that's why people buy into gold. And I think Bitcoin is very similar. I think a lot of the gold bug mentality, a lot of the anti-state mentality carries over and is prominent within the Bitcoin community. And so I think, yeah, I think it's, it's certainly a store of value over a short amount of time.

• 30:46Speaker 04

  If I needed to get $100,000 of value to Venezuela today, Bitcoin would probably be my best way to do that. It may go up or down 10 or 15%, but I can write that off as a fee.

• 31:02Patrick O'Shaughnessy?

  Right.

• 31:02Speaker 04

  And I might make money, or the recipient might make money on the transaction.

• 31:06Patrick O'Shaughnessy?

  Yeah.

• 31:07Speaker 04

  So as, as a settlement intermediary, let's say, you know, buying $100,000 of Bitcoin, sending it to Venezuela, they sell it. It's certainly a store of value over that, you know, transactional period and certainly a better mechanism to get, get that money than sending gold bars.

• 31:23Patrick O'Shaughnessy?

  Yeah, the other thing that I've seen, and again, like, sitting in the US seems like the worst seat for all this stuff because we've got it so good, right? Things are easy for us to do all the kinds of things that I think people want to do with their money.

• 31:34Speaker 04

  Yeah.

• 31:34Patrick O'Shaughnessy?

  The remittance or sending of money to hard to reach places where, you know, the bank system is a complete nightmare. You know, I talked about China recently in an episode where I know a guy that does this all the time. Like, for him, he would, if he was sitting here, he'd say, no, like, there is a killer app. I want my dad to get some money in China.

• 31:49Speaker 04

  Yeah.

• 31:49Patrick O'Shaughnessy?

  And he's gonna have it in 10 minutes. And before that was a week in a huge hassle.

• 31:53Speaker 04

  Yes.

• 31:54Patrick O'Shaughnessy?

  So there does seem to be, like, some emergent use cases, but it brings me back to your point around the investing side of all this. And you said, you know, you're still long crypto assets, probably for some of the reasons that you talked about. Maybe you mentioned, I always love the origin stories with everyone with this space, with this asset class. How you first came across it, how you got involved, and how that thinking has evolved kind of through today? Like, as you look at it today, you know, you earn money, there's money, you're a capital allocator like anybody else, you choose what to do with it. How is that thinking about whether or not to include crypto assets as an asset class, let's say, in your own portfolio, evolved from your first exposure to it?

• 32:31Speaker 04

  I had a good friend of mine who ran a security company, not securities, but like, information security company in 2011. Send me the Bitcoin white paper, and he sent it to me because I was a venture capitalist at a firm down the street from here that invested a lot in fintech. So, a firm called RRE Ventures backed companies like Venmo, Wisdom Tree, which is ETF guys, Braintree, OnDeck Capital, peer-to-peer. So, you know, I was exposed and seeing all these fintech projects. And my friend said, hey, you're, you know, you're working in this fintech, early-stage investing firm. What do you think of this new kind of fintech idea of Bitcoin?

• 33:12Speaker 04

  And I read the paper, and what struck me immediately was it was nothing like any of the fintech we were investing in. Fintech, quote-unquote, pre-crypto era.

• 33:26Speaker 04

  Was really like top of the stack of the financial industry. The basic premise of most fintech was it's hard to use your bank account. It's hard to use your brokerage account.

• 33:37Patrick O'Shaughnessy?

  Cumber some, everything's cumbersome.

• 33:38Speaker 04

  It's cumbersome. We're in the era of the iPhone and the web and social networking. We'll build something that feels as good as your iPhone. That's for your financial life. That's Venmo, that's Wealthfront, et cetera. And that's what fintech has been. It's been this thin layer of UI that is more user friendly and sits at the top of the existing financial stack. But underneath that is all the same old payment rails, banking infrastructure and forms of money.

• 34:09Patrick O'Shaughnessy?

  Swift network.

• 34:10Speaker 04

  And Swift network and ACH and everything else. Bitcoin was like, look, we already have the internet. What's the least we can add to it to like get to money and payment system? It's like a very thin layer at the bottom of the stack. Or really, it's a new stack. It's like a big reset button and says, okay, start over, new stack. And that was like mind shifting. It was also mind shifting because I read the Bitcoin paper. I had never heard of it. It wasn't in the news. And so I was sitting there like, what is this? Like, is this like an entrepreneur somewhere? Like, who's this Satoshi guy? Am I going to fly to Japan and meet him and try to like invest in his series A? That's where my head was at. And so I started to like ask around in New York, like who's heard of Bitcoin? Who's thinking about Bitcoin?

• 34:54Speaker 04

  There's another VC called Fred Wilson, who's at Union Square Ventures. I had co-invested in another company with him at a board meeting, asked him, what do you think of Bitcoin? He's like, oh, I'm really interested in Bitcoin. So we started talking. We hosted an event at his office with like the 12 people we could find who had ever heard of Bitcoin. Three of them were like in New York. One of them was, you know, from the government, you know, some clandestine government agency who was like doing early research, couple guys from Stripe. And we just sat around all, you know, for like four or five hours with Fred and Albert and a dozen of us talking about cryptocurrencies and trying to figure out with our traditional VC hats on, like, is this investable? How do we commercialize this?

• 35:39Speaker 04

  And realizing by the end of it, it's just an entirely new ballgame and new rules and the way you make money here is not the way you traditionally made money in VC. And so that was sort of my introduction. And I started to think pretty much exclusively about cryptocurrencies while at RRE and meeting all the companies and getting to know, for example, like Coinbase, when they were just coming out of Y Combinator and trying to wrap my head around what the opportunity set is. And ultimately decided this was a big enough thing that I should spend all my time on it. Like, I didn't want to just spend part of my time and invest in it. I wanted to spend all my time on it. And that's ultimately what led to Chain. So, fast forward to the present day.

• 36:21Speaker 04

  In certain ways, my thinking hasn't changed that much in that I still think you ultimately play this market by buying and holding the crypto assets that have differentiation, that enable some service that you could see or imagine people using. And I think Bitcoin is still, obviously, the best example of that. To your point earlier, that, yeah, international so-called wire transfers are really difficult and expensive. And Bitcoin's much better for that. And your friend in China is a great example. Store value, an index against, or a hedge against inflation and other things. So, that's a good bet.

• 37:01Speaker 04

  Ethereum, I think, is a good bet because it enables this emergent behavior more than Bitcoin. Bitcoin's not really a platform. It is what it is. Ethereum is a platform. It's, again, it gives you a lot of optionality on what could emerge. Zcash, another one that I'm an investor in the company and also in the asset there because, you know, if you look at what makes Bitcoin appealing, it's, you know, again, it comes back to censorship resistance. A big piece of that is anonymity and approaching kind of the ability to transact not only trustlessly but invisibly. And you can't do that on Bitcoin. You can with Zcash.

• 37:41Speaker 04

  And that, it sounds like, again, it sounds like a spy tool or something, but privacy with respect to transactions you might have with counterparties is extremely relevant in virtually every capital markets transaction. Dark pools are obviously the latest mainstream example of that. Finding differentiated projects that are real, which is increasingly becoming very hard to do with the ridiculous amount of noise and baloney, basically like in the ICO market with everyone rushing in. So we could talk about that or take another direction.

• 38:15Patrick O'Shaughnessy?

  So you had a line, probably my favorite, like might have a single sentence in the paper about ICOs, which is, I read it and I'm thinking to myself like, man, is that correct and terrifying? Which was, nobody, virtually nobody, is buying a coin in an ICO because they want to use it to access the DAP, to access the service. It gets back to your point around, no one's actually using the majority of this stuff. They're speculating on the value of the coin because maybe it turns into something. But nobody is buying a Filecoin today because they think that next week they're going to spend Filecoin to store something. I shouldn't say nobody, right? I'm not the deep expert here. But certainly across the majority of these, these are white papers and simple ideas.

• 38:58Patrick O'Shaughnessy?

  That's, you know, I'm trained as an investor to always avoid investing in hope because people overprice hope and they overprice potential and they underprice real things that are not exciting. An ICO is like the, maybe the most extreme example that we're going to see of this in our lifetimes. So maybe I'll ask the question, having said all that, is there any circumstance in which an ICO would be interesting to you in this kind of hyper frothy, clearly 99% speculative market?

• 39:27Speaker 04

  So Ethereum was an ICO.

• 39:29Patrick O'Shaughnessy?

  Sure.

• 39:29Speaker 04

  Which, you know, they only raised $18 million or something along those lines. And that was an example of

• 39:36Patrick O'Shaughnessy?

  A really good investment.

• 39:37Speaker 04

  A good investment and an example of a project which, just look at the pattern there. You had Vitalik and a handful of others who had a vision that was differentiated from Bitcoin, that was informed by their work on other so-called meta-protocols, attempts to layer in other assets on top of Bitcoin through the op return of Bitcoin and realizing that's not going to cut it. We need a whole different model, solving some really interesting problems. Charting a course to get to greater scalability with proof of stake, with sharding techniques, et cetera. And someone who was creating a model that was internally consistent.

• 40:19Speaker 04

  What I mean by that is Vitalik was trying to bootstrap a decentralized application called Ethereum. A lot of ICOs are trying to shoehorn a token into a normal company. So that's the first red flag on any of these. But, you know, I think Ethereum is a good example of an ICO worth participating in. But recently, it's become very, very hard to justify investing in ICOs for a couple of reasons. First is the ICO is not usually the initial offering anymore. For projects like Filecoin and Blockstack and others, there are often several rounds that happen before the ICO.

• 40:59Patrick O'Shaughnessy?

  This would be like the SFT agreements or something.

• 41:01Speaker 04

  That's right. And private, you know, traditional VCs are getting in these sort of discounted rounds or, you know, high net worth folks are getting in. So, so you have to sort of start with like, what's the valuation I'm buying in? So that's one, one challenge. The other thing is when you buy into an ICO, oftentimes you're not, you're, you don't even own the token yet. Tezos is a good example of this. People that funded Tezos funded a Swiss foundation. They didn't put in Bitcoin and get back a token. By the way, the same was true of Ethereum. You didn't get Ethereum at the, and so it's actually not the initial coin offering. It's actually a bit of a misnomer. It's the initial promise to get a coin later offering.

• 41:43Speaker 04

  And so it's, again, it's very hard to justify the risk of what could go wrong between when I fund and when the coin is actually issued. And also it's hard to justify when it feels like most of these new tokens are created by teams who are trying to justify the need for one in an effort to just raise capital that is neither equity nor debt, which is very attractive, obviously, as a seller, as an issuer. But coming back to your, to sort of your comment, yeah, I really. The biggest thing I struggle with is that teams are getting a false signal that people want their service. They're telling themselves, oh, everyone's buying my token. They must

• 42:25Speaker 04

  really want my upcoming service. And the harsh reality is like, nobody cares for the most part about your DAP.

• 42:31Patrick O'Shaughnessy?

  Right.

• 42:32Speaker 04

  And you probably know that, too.

• 42:33Patrick O'Shaughnessy?

  They want a 10x return in 10 weeks.

• 42:35Speaker 04

  There's this really like, great phrase that Marc Andreessen invented called product market fit in the startup world. And product market fit is just a fancy way of saying that you've got a product that people want.

• 42:46Patrick O'Shaughnessy?

  Yeah.

• 42:47Speaker 04

  And Y Combinator has this great saying, which is like, you walk into their space, and it's like everywhere. It just says, build something people want. And the reality of these token sales is that they do have a kind of product market fit. The market are people who want to get rich quick, and the product is a way to potentially get rich quick. But they don't have the sort of traditional startup type of product market fit, which is, people actually want to use, whether it's Filecoin, or Steam, or Ethereum, for their stated purpose. So my investment approach to all of this is, first of all, like, follow Warren Buffett's advice, like, only invest in things you understand. So if you don't

• 43:29Speaker 04

  understand what the thing is, like, avoid it. My best example of that, by the way, is there was a token called Bancor. And there's an FAQ section. And FAQs are frequently asked questions. And this project raised $150 million. And so I was putting a presentation together, and I was like, what the heck is Bancor again? I gotta like, remind myself, because they just raised 150 million, and someone's gonna probably ask me. So I go to their frequently asked questions. The number one question listed is, and I quote, "Why is there a double coincidence of wants problem and asset exchange?" So like, your face shows you don't know what that means. I don't know what it means. We're both kind

• 44:11Speaker 04

  of like, in this world of finance and blockchains, and we don't even know what the question means. I guarantee nobody buying the token knows what that question means. And this is like, the frequently asked questions. So there's almost this perverse thing happening where, because nobody understood Bitcoin or Ethereum,

• 44:27Speaker 04

  And therefore, they passed on it. And then those turned out to be huge winners. There's almost this like thing where people are like, well, the more complicated it is, the less I understand it, the more it's likely to be something real. So people are checking their judgment at the door. And again, like issuers are playing on this or preying on this and creating projects that are just confusing or sort of obfuscating so that you you sort of feel dumb and you're like, well, I just probably is not smart enough to understand it. So I'm just going to put money in. So anyway, build something people want, product market fit. I don't think a lot of people want the underlying services. And I think there's a lot of shoehorning of projects and sort of these very long-winded

• 45:08Speaker 04

  justifications for why a token should exist for a web browser or a mobile messaging app or something else where it really is hard to justify.

• 45:16Patrick O'Shaughnessy?

  So there's a couple of sides to this, and I'd love your opinion on the issuer side. So we talked about why maybe it makes no sense to buy ICOs. And there's a moral aspect to this, which we can get into as well. Your point about there's no recourse like debt or equity, you don't technically owe anyone anything by raising fiat currency via an ICO to fund some the development of some project. But as I study, you know, market history, there's a guy named Henry Singleton, for example, who was, you know, perhaps other than Buffett, the greatest investor ever that no one knows about. And his brilliance was recognizing the hyper under or overvaluation of his own stock and using that to his advantage. So he would often issue equity, sell new equity when it was trading at 30 times earnings

• 45:59Patrick O'Shaughnessy?

  or something, and the market was really hot on his company. He would buy it back when it was trading at eight times earnings. And through this kind of capital allocation, he did extremely well. The question then is, if I'm, I actually have a friend who's considering this, who I won't name, but is incredibly bright guy, incredibly morally sound, I mean, just a fantastic guy. And his, his thinking is, well, why would I go raise venture capital and sell equity when I could digitize this kind of exciting project I'm working on, raise an ICO, maybe raise $10 million instead of 2 million in a seed round? Why would I not do that? Why would I not take advantage of this? So what do you think about that?

• 46:34Speaker 04

  Yeah, I think there are. So his instinct is what you are seeing play out in the market. People are going, I would be stupid not to take advantage of this. I would be stupid not to take advantage of the fact that if I have a credible enough team and concept, I could raise 50, 70, 100 million dollars, which by the way- Give up no equity. Is not dilutive. It's not debt. I don't have to pay anyone back. They're only buying it because they anticipate it will appreciate. And I can get liquid on it. I can hold on

• 47:14Speaker 04

  to 10% of this and exit before my project starts. Usually the exit comes at the end why it's called exit. With ICO, you exit before you start, which is amazing. And so a lot of people and a lot of smart people are looking at that and going, hmm, like if there's a hundred dollars on the ground and nobody's picking it up, like I'm not gonna like not pick that up. Okay. So here's why you shouldn't pick up the hundred dollar bill. Here's why you shouldn't ICO. There's a term in investing, especially in like private equity called like the winner's curse. And it's usually used to mean that a bunch of

• 47:54Speaker 04

  bidders for an asset, whoever wins, there's a bunch of bidders, whoever wins, sort of has the winner's curse. They won because they paid the highest price. That's not what I mean by the winner's curse here. The winner's curse means if you are lucky enough to do your ICO during this period of time, raise 50, 70, whatever million dollars, you're gonna feel great for a short amount of time. Then what's gonna happen? Here's the, here's the argument that is the self-interested reason not to do it. Not even the moral, like you're kind of a jerk for like- You're an ass. Yeah, fully exploiting the greater fool's theory. But here's the self-interested reason not to. If you raise a significant amount of money, you're talking probably about somewhere between 10 to 50,000 people who are gonna be buying your token. The

• 48:39Speaker 04

  market's gonna correct or crash. Like it's inevitable.

• 48:45Speaker 04

  And what do you think is going to happen to you and your project? When thousands and thousands of angry Redditors start to email you, start to call you, start to show up at your house, start to write you angry letters in goat blood? Which will happen and is already happening. I have friends that are sitting inside several of these ICOs. And we haven't had a correction. The markets just continue to go up. And already the amount of, you know, there's a, there's an active percentage of token investors who are incredibly aggravating to them. And this is where the, either the token hasn't launched, or it's launched and it's gone up a little bit.

• 49:29Speaker 04

  And if you look at like Charlie Lee, the inventor of Litecoin, and just like the amount of grief he gets, just for being like the inventor or something on Twitter. And just ask yourself like, is it worth it to have like 10,000 people and an angry mob following me around for the rest of my life?

• 49:47Patrick O'Shaughnessy?

  Karma gets into ICOs too.

• 49:49Speaker 04

  Yeah, that's right. So I think it's hard to see that right now. And we haven't seen it, we didn't see it in the prior crash because in the prior crash, we didn't really have ICOs, we had these altcoins. And there weren't like hundreds of thousands, if not low millions of sort of retail, normal people putting money in, but we have that now. And so I think you're going to have like, I just don't think you want to have that angry mob following you around the rest of your life. And I think some of those angry mobs are going to turn into class action lawsuits. And some of these projects are going to be made examples of. And I leave that for the end of my point because I don't think the risk is like, oh, the SEC and the IRS and whatever, and you're going to go to jail.

• 50:30Speaker 04

  Like, I don't think, I think for the most part, you can do these in a way where you're insulated from that because you do it above board. At the same time, like after every crash, whenever there's pain, there's this inevitable pattern in every other market history, you know, any other market crash in history where some people get made examples of. And so you always have to keep that in the back of your mind too. But I think for all of those reasons. You should really only do a token if you are trying to create a decentralized application that needs one, because most of these projects that are doing ICOs don't need a token. At best, they need like a virtual currency, like Facebook points, or like Starbucks

• 51:12Speaker 04

  points, or, or at best, they just, what they're seeking is just modern payment system, like a modern payment rail. They're not actually trying to instantiate it, adapt. So I think the same rule of like, only invest in things you understand from the buy side, applies to the sell side, the issuer side, like only create a token if you understand fundamentally, like why you need one. Don't get trapped by this siren song of all this money, because people are going to regret it later, for sure. The, the last thing, my co-founder Devon said something to me yesterday that was really interesting, which was, he thinks that there will never be an example of a company that ICOs that is later acquired, or has an IPO.

• 51:55Speaker 04

  Like, he doesn't think it's ever gonna happen. I think that's probably right. I don't think Facebook wants to acquire your company and inherit those 10,000 angry reditors. And I don't think an investment bank is gonna take any company public that has that kind of hair on the, on the deal. So I think, again, you gotta think long and hard, like, this is your shot. If you wanna take it, go for it, get the money, great. Be ready to live with the consequences, and ask yourself, is it worth it? Is, is it worth it in the end, or not?

• 52:29Patrick O'Shaughnessy?

  We've come a long way without actually talking about what you do day to day. So it would be great to, to hear about, with all this very early experience, last question or two here, about what Chain is doing and working on, and by extension, I guess that means, what are you excited about? You're still spending all your time in this space, like you decided to, six years ago. What does that look like today?

• 52:48Speaker 04

  So Chain operates in the half of the market we have spent zero time on.

• 52:53Patrick O'Shaughnessy?

  Right.

• 52:53Speaker 04

  Which is fun for me, because I spend all my time talking about that half of the market as my day job. So I, when I do a podcast, I love to talk about other things.

• 53:01Patrick O'Shaughnessy?

  The other way, yeah.

• 53:02Speaker 04

  Yeah. So, we have Products that are essentially modern ledger software, not for accounting purposes, but for tracking and managing financial instruments inside of traditional financial applications. So another way to say that more simply is like we're building modern financial databases. We have databases for, we have many, many different flavors of databases for different use cases in the world today. A ledger is essentially a database for money. And the breakthroughs that are coming out of the Bitcoin cryptocurrency crypto asset world

• 53:42Speaker 04

  around how to create secure, append-only authenticated logs of transactions. Those breakthroughs are very applicable to the financial infrastructure that sits within a bank, sits within Visa, sits within NASDAQ, sits under Venmo, sits under Coinbase. All of those services have internal ledger systems that are benefiting from the same cryptography at the R and D level that is enabling decentralized applications. That cryptography can be employed to just create a more secure and flexible data structure that can manage the transactions across payments, across capital markets, insurance, et cetera.

• 54:25Speaker 04

  And that, that market is often referred to as sort of the so-called blockchain market, enterprise blockchain, private blockchain, permissioned blockchain. We really don't use those terms anymore, partially because blockchain sort of is very suggestive of decentralization, multiple nodes, different organizations transacting. And a lot of our software is used simply as an internal database managing within a single org.

• 54:55Patrick O'Shaughnessy?

  So what's the step forward? One of the things that's, I've gone the deepest on and had the most fun exploring is encryption technology. And obviously that's a key part of what you're talking about. So, and what appealed to me about it was how defensive it is. Like most, a lot of technologies or weapons, technologies are very offensive, allow you to be offensive in what you're trying to do, whereas cryptography is very defensive. So talk about, what is the step function? What, what is, what you're working on do to significantly improve? Maybe it's via encryption or something, the ledgers of some of these examples like the NASDAQ or something?

• 55:26Speaker 04

  Yeah, sure. So let's talk about. I like that framing, defensive, and how does that give you some unique value prop in your financial database? So, a lot of our customers are fintechs that want to, that are already using the cloud for basically everything, and want to run their ledger in the cloud as well. The challenge, of course, is that the data in the ledger is some of the most sensitive data you will have in an organization. And so, we offer a cloud ledger called Sequence. And, part of the reason it's getting adopted by fintechs is for the defensive properties that the cryptography gives you. So specifically, what I mean is, Sequence can run the ledger for your mobile wallet,

• 56:10Speaker 04

  or for your fundraising site, or for your ride-sharing app. So, ride-sharing is a fun example. Drivers are accumulating balances, riders might have credits or points, all of that's got to sit in some ledger. Database, yeah. Right, database, plus a lot of other things that sort of sum up to your ledger infrastructure. And, to date, you've kind of had to build that and keep it in a fortress inside your four walls. So, cryptography gives you two things now that allows you to move that to the cloud, which is, which is sort of the value prop of Sequence. The first thing is, even though we're running and managing the ledger for you, the ride-sharing service has to sign every transaction with their private keys that sit within their walls.

• 56:52Speaker 04

  So, the amount that they have to manage goes down like 100x to this very thin thing, which is just the private key. And so, we cannot add or change the ledger at all, because we don't have the transaction signing keys, you do. So, we can take the burden of managing the ledger, without also taking over the control to transact. And so, it's a huge cost savings, a huge efficiency gain. The second thing we can do with cryptography, you use the word encryption. So, what the example I just gave is just about digital signatures, which is one piece of cryptography. Encryption's the next piece, which is, you're running your ledger in the cloud, okay, but... What happens if that data gets leaked?

• 57:34Speaker 04

  What happens if a rogue employee wants to look at your, you know, the balances of, of drivers? What happens if we just want to snoop around and see your data? Well, we can now with more advanced techniques encrypt the data that is in the ledger. Not only the data at rest, which is sort of the standard thing you'd do, but encrypt it such that we can still do computations over that data, but we can't even, we can't see what the data is when we look at it. And that's an area called confidential computing. And it's, it's the frontier that all the cloud vendors, the Azure's, AWS's, Google Cloud, Oracle, they're all working on this, as are we. So that we can say to financial institutions,

• 58:19Speaker 04

  you can now, you're already using the cloud for CRM, you're already using the cloud for communications technologies, you're already, you know, using it for file storage. Now you can move your ledgers, all your balances, all your transaction processing to the cloud. Because again, A, we can't transact unless you sign off. And B, we can't even see the data. So even if there was a leak in a worst case scenario, it's all encrypted. So those are two examples of when you get down to the root kind of R and D level, it's the same R and D that's enabling technologies like Zcash, like Ethereum, like Bitcoin, digital signatures, zero knowledge proofs, et cetera.

• 58:59Speaker 04

  So it's taking the same low level breakthroughs and the crypto asset half of the market is assembling them to enable a new form of software. Our company is assembling them to enable a new medium for existing assets to transact more securely and much more efficiently in a sort of a digital native way with modern software. And neither, we don't think one is better than the other, it's just that's what our company does. And in a way, I'll give one more analogy real quick. Your listeners that were kind of paying attention to technology in the 90s will remember there was this meme going around, which was, you know, Linux on the desktop. Linux on the desktop was This idea that Linux had this early success in servers.

• 59:45Speaker 04

  And at the same time, Microsoft had this monopoly on the desktop with Windows. And people, you know, Microsoft was public enemy number one by the late 90s and the early 2000s. People wanted to take down their operating system monopoly. And so at that time, there was this chorus of opinion that the way it was going to happen was getting Linux to be the desktop operating system for people. And that we'll just create a user-friendly version like Red Hat. And then that will disrupt Microsoft. Of course, that didn't happen because disruption doesn't work that way. You don't aim for the system or aim for the man and disrupt the man. Like disruption follows delight. You have to delight people, create something that's better.

• 1:00:30Speaker 04

  The sum of all those users changes the world. And so Linux on the desktop just never happened because there's just fewer apps, less user-friendly, etc. Until, of course, it did and no one noticed. And what I mean is, you know, Steve Jobs got fired from Apple, started Next. Next was a computing company that had a Unix core, I believe it was a BSD core. That company was acquired by Apple and Next became the foundation of macOS 10. And macOS 10 was Unix. And so if you have a MacBook or any Apple computer, you are now running Unix on the desktop. It's not Linux technically, but it's the same idea, Unix on the desktop. If you have an iPhone and you're running iOS, iOS is a Unix-based operating system.

• 1:01:15Speaker 04

  If you have an Android, Android was a company acquired by Google that was originally a Linux operating system for cameras that then they acquired and made the core of their mobile OS. So Android is Linux. So virtually, you know, Chromebooks are Linux. So like virtually every desktop is now Unix and Linux. But it didn't happen in this sort of direct assault. It happened because it was a better internals that enabled companies to create better products, which delighted users, which ultimately led to these transformations. And so chains, sort of the way we think about how these cryptographic breakthroughs are going to transform

• 1:02:00Speaker 04

  is more along those lines, that by creating better internals underneath a Venmo, a Lyft.

• 1:02:10Speaker 04

  A JP Morgan Chase that that will enable better products to be created, that more people will use, that will ultimately transform and move us off of a lot of these archaic financial infrastructure that we see out there that is holding us. ACH and SWIFT is really, so really quick example, you know, Visa is launching a competitor to SWIFT. I think they're actually, I think there's a blog post today on their blog about the latest on that launch that's built entirely on our platform. And it's only possible for Visa to launch this competitor to SWIFT because of the internals. And more businesses will transact over Visa's new network in a day than people sending Bitcoin transactions

• 1:02:53Speaker 04

  over the last year. It's just factually going to happen. So it's sort of, I think it's not, again, not going to be one or the other. I think they're both going to transform, but from different directions. But it's certainly, in my view, inevitable that these sort of cryptographic breakthroughs now being applied to financial services are going to have big changes. And you, as an investor, you should try to figure out how to be long this trend. Because like other frontier industries, whether it's AI, or machine learning, or VR, drones, it's not exactly clear how it all gets commercialized. But it's pretty inevitable that it's, these are the sort of foundational, the seeds of where sort of the economy and the markets are going.

• 1:03:31Patrick O'Shaughnessy?

  I have one last question, which will be very quick, but I love that as a way to wrap up on blockchains, which is, or crypto assets, which is, if you believe that drones are the future, it's very hard to just generally make a bet on that. You know, you would need to probably get, you know, early-stage access to be an equity investor in a drone company or something like that. And then picking the right drone company is extremely hard. And what's always been interesting to me about crypto assets is, to a greater extent, maybe this isn't foolproof, but you can kind of buy or make a bet on this being, in a small probability, but this being like the thing that fuels the future of this general technology, which is just fascinating.

• 1:04:08Speaker 04

  No, that's a, that's a great point. And you can just build on it real quick, which is, most new, so that's 100% right, super compelling, also risky. You see the sort of the downside of that with people sort of being tricked in all these ICOs. But what's so interesting about crypto assets is that

• 1:04:28Speaker 04

  We're seeing like a leapfrogging effect, just like you see like mobile phones in Africa, like leapfrogged landlines. The same is happening in this market. Like, we're leapfrogging all the traditional capital market infrastructure and process in this new asset class. So normally, a new financial product first is created and sold to a small club around Wall Street, and eventually ends up in the hands of retail investors, and then the correction happens, right? Here, it's actually going the other direction. It's already, you know, crypto assets and Bitcoin has been started at the fringe. Now, there are these sort of huge numbers of people that are participating, largely individuals and retail investors,

• 1:05:10Speaker 04

  joining something like Coinbase. And it's the institutional investors who are now

• 1:05:14Patrick O'Shaughnessy?

  Last.

• 1:05:15Speaker 04

  Last, and looking at it and going, huh. And so it would be a very funny reversal, if the institutional guys all jump in, and then there's the crash. It'd be sort of like sweet, you know, karma, going back all the way to 2007 and 2008, which was the seeds of Bitcoin itself, right? So Bitcoin emerged out of the ashes of the financial crisis. In fact, the very first Bitcoin transaction had metadata linking to a

• 1:05:40Patrick O'Shaughnessy?

  Banks issue second bailout.

• 1:05:42Speaker 04

  That's right.

• 1:05:43Patrick O'Shaughnessy?

  Is in the genesis block.

• 1:05:44Speaker 04

  Exactly. So, yeah, I think the 10-year anniversary of Bitcoin, which is coming up next year, is going to be one of the most interesting years at the interplay of Bitcoin and the sort of broader financial markets. So anyway, yeah, it's fascinating.

• 1:05:58Patrick O'Shaughnessy?

  Last question I always ask everyone, which is, what is the kindest thing that anyone's ever done for you?

• 1:06:03Speaker 04

  Wow. I would say, wow, that is amazing. I wish I had prepared, but I guess it's better I haven't. I'm gonna have to say, my mind immediately went to like all the mentors I've had in my life, who just helped me at different stages, which they didn't need to do, to teach me something, or to help me meet someone that landed me a job, or that landed me somewhere. But I actually think I have to go all the way back to my parents and say, my parents just telling me, you've got to follow whatever, wherever your curiosity takes you. And just do your best and we'll be proud of you and that's all we want from you. I think that freedom, but also belief in me sort of served me really well.

• 1:06:47Speaker 04

  So I gotta, I gotta go with that.

• 1:06:49Speaker 05

  Well, it's amazing answer. I honestly have to say, I don't say this often, this is one of the best conversations I've had.

• 1:06:55Speaker 04

  Thank you.

• 1:06:55Speaker 05

  So I really appreciate your time and I hope to see you again soon.

• 1:06:58Speaker 04

  Yeah, absolutely. Appreciate you having me. This was a lot of fun.

• 1:07:03Speaker 05

  Hey everyone, Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter @Patrick_OShag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.