In this hilarious skeptics’ episode, Meltem Demirors, chief strategy officer of CoinShares, and Jill Carlson, an independent consultant, explain why they think crypto needs fewer moral arguments and more empirical evidence, and how there’s too much focus on financial engineering, but not enough focus on winning hearts and minds. They also explain why people are not machines where “you put in a token and get out an action,” what the “shitcoin waterfall” is, and why cryptoeconomics isn’t anything new. Plus, they give their tips for working in the space.
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Episode links:
Meltem on Twitter: https://twitter.com/melt_dem
On Medium: https://medium.com/@Melt_Dem
Jill on Twitter: https://twitter.com/_jillruth
AirTM: https://www.airtm.io
Fat protocols thesis: http://www.usv.com/blog/fat-protocols
Amber Baldet’s tweet about the finger guns guy: https://twitter.com/amberbaldet/status/1006286345122275331
Meltem’s tips on working in crypto: https://medium.com/@Melt_Dem/so-you-want-to-work-in-crypto-57961ca074c4
Jill’s tips on working for yourself: https://medium.com/@jillcarlson/working-alone-165ababeafc2
Transcript
Laura Shin
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop into iTunes to give us a top rating or review. That helps other listeners find the show.
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Laura Shin:
Today’s show is a skeptics’ episode, part two, and my guests are Meltem Demirors, Chief Strategy Officer for CoinShares, and Jill Carlson, an independent consultant. Welcome, Meltem and Jill.
Jill Carlson:
Thanks, Laura. Great to be here.
Meltem Demirors:
Hi, Laura. Hi, Jill.
Laura Shin:
For listeners who didn’t catch my first skeptics’ episode with Preston Burn and Angela Welch, I urge you all to check it out. I’ll link to it in the show notes. This crypto downturn has sparked some hilarious commentary on Twitter from Meltem and Jill, so I figured it was a good time for a second skeptics’ episode, and just a heads-up for all you listeners, this show may contain explicit language. Meltem, you were, I guess, on the podcast previously, but for those who haven’t heard that episode, and also because the crypto space moves so fast, and you’ve been up to new things, why don’t you tell us about your background and what you do in the space.
Meltem Demirors:
Absolutely, I’d love to, and thanks for having me again, Laura, and thanks for coming up with the skeptics’ episode. I guess I’m proud to be a skeptic, alongside my good friend Jill. So, I got into crypto through Bitcoin. I went down the proverbial Bitcoin rabbit hole, as so many of us did in 2012. I actually got into Bitcoin because I started using it, and as I started using it, I was really blown away by the implications that open permissionless financial mechanisms and financial systems could have for people all over the world. I was in graduate school, at MIT at the time, getting my MBA and studying Fintech and quantitative finance, and as I was leaving graduate school, I thought about going and working at a Fintech startup or in venture, and that just really didn’t seem as interesting as crypto. I met Barry Silbert, who was starting to work on this idea called Digital Currency Group.
We teamed up, spent three years there helping to build and grow that company, the portfolio of companies in the cryptocurrency and blockchain technology space that we invested in, left in January to invest on my own, via a personal-investing vehicle called Athena Capital, which now has two dozen portfolio companies, which I’m really excited about, and in May, I joined CoinShares, which is a digital asset management firm, to focus on bringing new products and services to the crypto asset management space, primarily focusing on financial management practices and treasury services for crypto firms and ICOs. So, that’s me.
Laura Shin:
Yeah, and the CEO of that company, Danny Masters, actually was also a previous guest on the podcast, although he spoke about the topic of the Bitcoin ETF, which just feels like ages ago in the crypto space. As we all know, it did not get approval from the SEC, so I don’t know if people will want to go back and listen to that show, but I should have him back on the show, because he’s actually a super-interesting guy. So, Jill, let’s turn to you. You were also a previous guest on my other podcast, Unconfirmed, but we actually didn’t dive too deeply into your background. So, why don’t you tell us how you got into crypto and what you do in the space?
Jill Carlson:
Yeah, and thanks again, Laura, for having us on. I started out my career on Wall Street, where I was trading emerging markets’ debt, and unlike Meltem, I didn’t get into crypto by using it myself, but I got into it through some friends of mine who were also working on Wall Street but who were based down in Argentina, which was a regime that had capital controls and all kinds of very restricted economic policies in place at the time, and they were the ones who were using Bitcoin, this is back in 2013, and they, of course, called me up and were very excited to tell me all about it, how they could get their money offshore for the first time and get what felt closer to dollar exposure for them for the first time in about a decade, and that was kind of the lightning bolt moment for me, where I first understood, you know, okay, there’s actually a compelling use case to this thing I’ve been hearing about.
At the time, you know, it was just starting to creep into the mainstream media. So, bought some at the time, rode the wave up in 2013, felt like a huge genius for about six months, and then felt like a total idiot in 2014 when that first hype cycle got washed out, but it was really that experience, actually, of losing money that made me kind of go back to the books and say, okay, I actually have no idea what I invested in here, let me learn some more about it. That’s when I fell down, as Meltem calls it, the proverbial rabbit hole. I was applying to graduate school at the time to study political economics, and by the time I got there, I was absolutely hellbent on writing my dissertation, doing research on Bitcoin, instead of the somewhat dry economic research I had applied to do, wound up doing that. Following that, I got a job at a startup in the Bay Area, working on kind of the enterprise blockchain side of things, Chain, for those of you who might be familiar with it, and then I’ve spent the last year freelancing, working independently. I started out helping out some friends who had just run an ICO and have gone on to work with a whole bunch of companies in the space on kind of the business strategy side of things.
Laura Shin:
So, this is going to be a super-broad question, but I know you guys have so many interesting thoughts on what’s going on in the space now, but I just want to start with kind of like a high-level overview from each of you of what your main takes are in terms of like what is going right and what’s going wrong in crypto.
Meltem Demirors:
Well, I can kick that off, and Jill, you can chime in.
Laura Shin:
Take it away.
Meltem Demirors:
I know you’re not shy. So, I think the biggest problems are focused really on moving beyond speculation into actual utilization, and to me, there’s also a lot going on around winning hearts and minds that just hasn’t started to happen yet. So, the thing that I just see that I’m concerned about is the need for actual proof of product-market fit. So, we all talk about how amazing Bitcoin is, how amazing Ethereum is, how amazing all of these protocols are and how they’re going to change the world, but we’ve seen zero actual adoption, outside of speculation. I think the usage numbers on DApps are extremely low right now, and while I think everyone fully appreciates this technology is experimental, I think the amount of money that people are raising, this idea of “fat protocols” and the need to incentivize developers is something that’s gotten completely out of control and completely bastardized to a degree where it’s really, really just disgusting.
The sheer insanity of the ICO fundraises we’re seeing is just ridiculous. Did EOS need to raise 4 billion dollars with this really problematic structure they have? Did Telegram need to raise 1.7 billion dollars? Kik, which is the messaging app, they raised a bunch of money with their ICO, and now they’re not going to do any blockchain thing with it. Just these structures are so problematic. The disconnect between valuations and actual public markets is horrendous, and retail investors are the ones that are losing out, and so everyone loves to talk about how decentralization is democratizing access to finance when really it’s just the rich getting richer, and I’d love to talk a bit about the shitcoin waterfall, which is basically my thesis that I’m working on, backing up with research, around how capital really flows into ICOs early on, all of the “smart money,” or privileged insiders get access to these tokens at massive discounts and then there’s this massive waterfall, where they just dump further and further downstream and make lots of money while retail loses out, and then I think there’s just this massive disconnect between the way we speak about this technology.
We speak about it in terms of creating this new paradigm, in terms of creating new markets, new business models, but we’re still using old finance ideas to try to capitalize it, so crypto hedge funds, venture firms. Nothing that we’re doing on the capitalization side is really new, and to me that’s a massive missed opportunity to actually do something innovative, which is why I’m spending a lot of time at CoinShares thinking about new models to financially sort of motivate people but also to capitalize these ecosystems in a manner that’s actually compatible with the overall ethos of cryptocurrencies. So, I will leave it at that and pass it to Jill.
Jill Carlson:
Yeah, I mean, not to be boring, but I agree with a lot of what Meltem just said. I think that there is a dynamic at the moment in which the market is completely and utterly over its skis in terms of valuations. Yes, we’ve had a, whatever it is, 70-plus percent retracement on Ethereum and Bitcoin, things like this, but nonetheless, you know, looking at the valuations for these things, whether it’s the private deal flow that is going around or the public token markets, the valuations are just insane for the level of product-market fit that we have with any of this, and yes, it’s early days, yes, we’re building out the protocols. We’re a long way away from having good end-user products, but and it’s not just about usage of DApps. You know I would say that Bitcoin is an end-user product of blockchain technology that has been around for a decade, at this point, and who’s using it?
You know, okay, sure, people are using it as speculation. The odd person is using it to buy things off of the dark web, but you know you always hear, and I said this when I was last on, you always hear people say, oh, well, you know, for people in China trying to get their money offshore or for people in Venezuela using store of value. That’s not happening at scale, and so we have all of these hypotheses about where there might be product-market fit with this, but we’ve yet to see that really take off, and we have yet to see people, in earnest, working on it, because the lowest-hanging fruit and the way to be most successful and the way to capitalize on what’s going on is not to do the hard work of driving adoption. It’s to just write up a whitepaper and you know go pound some pavement around the angel-investing community of Silicon Valley and raise a 5 million dollar, you know, pre-ICO deal and then go out into the market and raise…whether it’s 200 million or 4 billion from the rest of the investing community for a token that may or may not have any utility to it.
And so, you know, I think that there is this notion, again, that well, you know, we’re in the early days, and right now these things are being targeted at developers. Developers are not the end user of your product. Maybe they’re the end user of the developer platform. They’re certainly the end user of something like Ethereum and obviously building out smart contracts and DApps, etcetera, but if it’s just developers all the way down, you don’t actually get anywhere. You don’t actually drive any fundamental value. You have to have end users of the DApp or of the token or of whatever it is that you’re creating, and right now we’re just a very long way away from that still.
Laura Shin:
Okay. Yeah. I agree with a lot of what you’re saying, and yet, at the same time, because of some pretty well-known theories around how new technologies develop, particularly, I’m thinking of Carlota Perez’s book, Technological Revolutions and Financial Capital, I do feel like this is not particular to the crypto space and that a lot of this is just the way a lot of these revolutions happen. So, do you guys agree with that or do you feel like this is different?
Jill Carlson:
I think…I’ll start. I think that that’s true. I think that this is part and parcel to the way that technological revolutions happen. I think that the magnitude of what we see going on is compounded by a few different factors, but the one that I’ll focus on here is just the market as a whole, where we’ve had this dynamic now for the last 10 years or so where central banks are just pumping liquidity into the market as a whole, and that has taken a search for yield to its logical conclusion, which includes, you know, people just throwing their money into cryptocurrencies and tokens that we’re not sure have any fundamental value to a degree that I don’t think that we would see otherwise. We might’ve seen this kind of hype bubble occur, but the magnitude of it is concerning to me.
Laura Shin:
Meltem?
Meltem Demirors:
And I’ll just echo what Jill said. I think we are in a market where everything feels overvalued. When we look at the Dow Jones, you know, we broke 25 thousand. People thought that would be the top, but we continue to run. We look at market…people are looking for momentum. People are looking for yield. People are looking for new opportunities and new strategies, and everything in our world right now is really…it feels overvalued, and so when you have this massive pile of money that’s been created, which, by the way, I love it when people say, oh, well, crypto, you’re just making magical internet money. Well, guess what governments do? They print magical paper money. So, I think the parallels are kind of interesting, but I do think the macro environment is something that we sometimes forget in the crypto space.
I think, overall, one of the biggest criticisms that I would levy against just the crypto ecosystem overall, myself included at times, and I think Jill and I often have conversations one-on-one, when we spend time together, where we try to help each other stay cognizant of this is we’re operating in a very localized context. There is a San Francisco crypto community that has its own kind of beliefs. It’s very tribal. There is a New York crypto community that’s very tribal and has its own beliefs. There is a Singapore community, Korea community, Berlin community, and there are all of these little sects and tribes in the crypto space, but I think what we always forget is there’s a global macro context to all of this, as well, and that’s what I think Jill is pointing out here in the broader context of what’s happening in financial markets, what’s happening in political markets, what’s happening socially in these countries, where you’re seeing a populist uprising.
We’re seeing growing wealth inequality. At the same time, increasing numbers of people are being lifted out of poverty. More and more people are getting access to the internet. We’re seeing the democratization of access to all sorts of resources happening in different places around the world. I think these factors combined together have created a really interesting dynamic and we see these factors play out in the crypto community where our channel for discourse is Twitter. Our channel for information sharing is Medium. Our channel for engineering work, our channel for sharing technical innovation, is GitHub.
This idea that you can simply fork some code or simply write some lines of code on top of another protocol, IE Ethereum, to create a new smart contract and create, basically, money out of thin air, all of these factors together, I think, are creating this perfect storm, where we’ve created weapons of mass destruction when it comes to financial engineering, and to me, right now, the phase we’re in is a lot of the people that are in crypto right now are either from the tech community or from the finance community, and when you have finance people trying to grok tech and tech people trying to grok finance, the end result is going to be a whole lot of financial engineering.
So, as a result of that, I think what’s being reflected in the crypto community right now is largely focused on financial engineering, and I’ve talked about this a lot in terms of artificial supply constraints and artificial demand curation, which I think is really interesting, but I think for this to evolve, what we really need to think about is what is the social engineering that we need to do, what is the political engineering that we need to do, what is the actual sort of user behavior that we need to drive and change, and that, to me, is really a hearts and minds battle no one’s really talking about yet.
Laura Shin:
That’s really interesting. One thing, though, is that I know you guys do see that there is a solid use case, which is store of value, and where are you seeing that this really has the potential to take off? And I think, Jill, you mentioned that you are even putting in some work to try to make that happen.
Jill Carlson:
Yeah, so, not to sound like a broken record here, but I think that, in part, this is informed by my backstory of how I got into the space, where it was literally through some friends of mine living in Argentina, who were using Bitcoin to diversify out of the Argentine peso, which they’d previously been unable to do, and now in Argentina that’s not an issue anymore. They’ve had a change of president, etcetera, but in Venezuela, it is a very serious issue where they’re in real hyper-inflationary mode right now. We’re talking quintuple-digit percent inflation month-over-month. We’re talking people not being able to get just, you know, basic human goods, toilet paper.
We’re talking people literally resorting to the barter economy, actually, you know people bringing goods to exchange for services because it’s just, it’s futile to try and use their local currency, and so, yeah, I’ve basically taken the last couple of months to try and do a whole bunch of research about what is actually going on, on the ground there. There are some really interesting initiatives that a handful of companies and projects have undertaken to actually do the hard work of driving adoption, and I’ve teamed up with a friend of mine, Alejandro Machado and then also Zooko Wilcox and some others to start to do some research into how we, as a larger crypto community, can support these initiatives and also maybe do some work of our own and just how we can educate people in Venezuela and countries like Venezuela about the other options that are out there for them, if they do choose to diversify out of their local currency.
Laura Shin:
And have you come up with this? Have you come up with those strategies yet, or is it still something to be worked out?
Jill Carlson:
Working on it. It’s a very complicated issue, as you can imagine, you know not least of all because of the sort of dynamics of rules and regulations of dealing with countries like this, both on their local government side but also from the perspective of US sanctions, things like this, but you know I think that what we’ve concluded is that there is a need for these types of educational initiatives. As I said, there are some really interesting companies doing work on the ground, specifically in Venezuela, a company called Airtm has done a lot of work. They have about 20 thousand daily active users of their wallet verified in Venzuela today.
This is a cryptocurrency wallet sort of hybrid, integrates with some of the banking system, and so, you know, that’s really encouraging to see something like that, but there is definitely still, as I said, a gap in terms of educational initiatives, getting more people onboarded, ideally not just sort of the upper-middle class, too, that has access, of course, to more resources around these things but also, you know, actually working on the democratization of finance, which is something that everyone loves to use as a buzzword in this space, oh, we’re democratizing finance, we’re banking the unbanked. It’s like, well, are you, or are you just raising four billion dollars for your ICO, you know?
Meltem Demirors:
Wait, Jill, I want to piggyback off what Jill said, because I think Jill just raised some really important points here. So, to the point about actually doing research and gathering empirical evidence and using a more formulaic and methodical and data-driven approach, I think this is, to me, the next phase of spreading the virus, as people like to say.
Jill Carlson:
Pump it, Meltem, pump it.
Meltem Demirors:
There’s a lot of hand-waving that happens in crypto. There’s a lot of hand-waving that happens where people like to get on stages, and I love going to conferences where people will get on a stage, they’ll talk for 45 minutes, and all they do is speak in platitudes. Jill and I like to joke that we could literally write a Taleb book just using quotes from people’s talks or whitepapers, and I really think, in order for this technology to work, it has to do something that’s demonstrable, as Jill was saying, and so, to me, really the next phase of evolution and the next phase of really reaching a broader market is gathering some of that empirical evidence so that instead of standing on stages and hand-waving, we ensure that people actually back up the claims and statements they’re making with empirical evidence and also historical context. This is not new. Financial engineering is not a new thing. We’ve been doing it since the dawn of human history.
Jill Carlson:
Yeah. Oh, this is my favorite thing.
Meltem Demirors:
We’ve been doing it since…
Jill Carlson:
This is my favorite thing is when people tell me that, well, you know, with cryptocurrency now, there’s going to be no way to enforce capital controls, and like financial engineering to get around capital controls has existed since capital controls were developed as a policy. Like, there is nothing new under the sun.
Meltem Demirors:
Yeah, and you’re not going to do it with crypto.
Jill Carlson:
And this is, yeah, the usage…
Meltem Demirors:
You’re going to do it at Goldman and JPMorgan and Deutsche
Jill Carlson:
The usage of cryptocurrency to evade capital controls is not high at all. You know why? Because people do it through other means of financial engineering that is actually much easier for them to access still today.
Meltem Demirors:
Real estate.
Jill Carlson:
Absolutely.
Meltem Demirors:
Well, real estate is number one because you literally need…you know I have to get KYC-AML to send a 10-dollar transaction to someone. For real estate, there’s no KYC-AML. So, let me just finish this thread. So, I think empirical evidence is massive, and I think, again, we need to become more data driven so that we can actually have defensible arguments. The second component that I think is really important, which Jill was speaking about in regards to education and advocacy, to me, that really comes down to user experience, and it comes down to the way we communicate. The problem is, is that when people look at cryptocurrency, and this is my favorite game to play with my friends but also to play when I go to non-crypto events. I do spend a lot of time in other ecosystems.
Jill Carlson:
No, you don’t.
Meltem Demirors:
And I always like to ask people, well…I do, actually. I have a life, kind of. So, I like to ask people what do you think of crypto, and this is actually my favorite game to play with some of my friends who work in media and work in sports and industries that are totally separate from crypto, and I’ll show them something. I’ll be like, well, what’s a Cardano, what’s a Tron, what does this mean? And the way they view crypto is it’s this really inaccessible, confusing thing, and I think people in the industry deliberately try to use really big words, try to overcomplicate concepts that are really quite simple in order to make themselves seem like visionaries or to make it seem somehow more challenging than it is. We need new language and we need new ways of communicating about this technology.
We shouldn’t have to launch into a 40-minute primer on how blockchain works when we talk to people about cryptocurrencies. That’s not how we talk about the internet. It’s not how we talk about apps. It’s not how we talk about anything, really. So I think, again, there’s this mass effort where we focus so much on developers and incentivizing developers and this idea of fat protocols and incentives for developers that we’ve completely forgotten about communities and users. Blockchain protocols, at their core, are networks, and networks, at their core, are about strong communities. It’s about people collaborating in physical and digital and virtual space. It’s people sharing a set of values and people sharing goals, and in order for community to form, you have to really think about communicating. You have to think about messaging. You have to think about creating purpose, and to me, the hardest battle to fight is hearts and minds. It’s the battle we’re losing because no one trusts anyone in crypto.
No one trusts anything they hear because so many people have gotten burned. So many projects have defrauded people. So many projects and entrepreneurs have abused trust. There have been many, many broad-scale, systemic violations of trust, and they continue to happen repeatedly, and these abuses of trust are sometimes even perpetuated or propped up through social signaling and virtue signaling from Silicon Valley elites and venture capitalist elites and hedge fund elites, and it just further perpetuates mistrust of the financial system, and I think crypto has actually ended up becoming the very thing that we railed against when we started building Bitcoin.
Jill Carlson:
To jump in there, you’re touching on, I think, the great irony of this whole space, which is that if you think about what a blockchain is, fundamentally it’s relying on incentives, it’s relying on economic incentives, and it’s relying on people to behave as rational, economic actors, right, and I think that people who work in this space and have worked in this space for a while have this bias where they want to believe that everyone is a rational economic actor, where they want to believe that you can just use a token to bootstrap community, because people will have skin in the game, it’s all of these Taleb-isms, as we’ve talked about many times, and you know, oh, if you give them a token, then they’re going to be invested in the community and they’re going to want to develop the platform, they’re going to want to use the platform, but it’s not as simple as that.
People are not just these machines where you put in a token and you get out an action. You know, okay, yes, to a degree people tend to be rational, you know, en masse, but people also have hearts and minds, as you were saying. You need to be able to communicate with them, you need to be able to sell them on things, and you can’t just rely on this rational actor theory to get the behavior that you want out of your ecosystem or your community or the people as a whole.
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Yeah. Let’s take a pause right here. We’re going to discuss some of the ironies of the blockchain space, EOS, security tokens, fat protocols, and more, but first I’d like to take a quick break to tell you about our fabulous sponsors.
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Laura Shin:
I’m speaking with Meltem Demirors and Jill Carlson. So, let’s talk about this irony of the crypto space, sort of recreating the old one. Meltem, you tweeted new money, just like the old money, but with different rich guys in charge, yeah, awesome, neat-o. I’m curious to hear your take on what we’re seeing play out so far, which is pretty much, as you put it…
Meltem Demirors:
Laura, do you read all my tweets?
Laura Shin:
I wish…
Jill Carlson:
Neat-o.
Laura Shin:
I wish. I seriously was obsessed with your Twitter feed.
Jill Carlson:
I love it.
Laura Shin:
As I was putting this together, but I agree with you that, you know, so far what we are seeing in the space is that it’s similar to the old financial system, which is that mostly men, primarily white and Asian men, are getting rich on this new form of money, and so, and yet, at the same time, this technology has the potential to be democratizing. So, what do you think can be done to remedy that?
Meltem Demirors:
Sure. So, I think there are two key things that I’m really spending a lot of time thinking about. I think the first is, is that the crypto community really needs to stop making moral arguments to defend itself. I think this is the biggest damaging thing about crypto is we try to come from a morally superior place. We try to take this moral high ground when we talk about Bitcoin and cryptocurrency, using words like decentralization and censorship resistance, and I think one of the criticisms I’ve gotten when I talk about crypto, and I think I’m fairly transparent and honest when I speak, but maybe I’m not, is that we sound like we’re living in a dystopian Ayn Rand novel, and really we don’t come from a moral high ground.
We see what’s happening where people are pumping and dumping, people are shilling, people are using deliberate misinformation to raise capital from unknowing, uneducated investors, and we’re engaging in a lot of behavior that could be classified as predatory or “immoral,” and so I think we need to stop using moral arguments and start using empirical evidence and data-driven arguments to help people understand why cryptocurrencies matter. I think that’s probably my number one biggest thing is that stuff…
Laura Shin:
But when you say…
Meltem Demirors:
And I think the second piece…
Laura Shin:
When you keep saying this about how we’re not using empirical arguments, what are some kind of…because a lot of times I think actually what you’re referring to, maybe, are theses, where it’s like, you know, because this hasn’t been built out and it’s currently being built, people are theorizing about what the future will look like. So, what are some examples of, you know, statements that people make or theories that they have that you feel like should be backed up by empirical evidence?
Jill Carlson:
Fat protocols, fat protocols.
Laura Shin:
But when he made that argument, he…and by the way, for listeners who don’t know this, it was a thesis that was put out by Joel Monegro, who is now with Placeholder Ventures. He wrote this blog post when he was at Union Square Ventures, but I did a great episode with him and you guys should go back and listen to it, and I will link to it in the show notes. However, the thing is that when he wrote that, he actually did use some empirical evidence, which was he said, hey, for most periods in Bitcoin’s history, if you had invested the same amount of money in Coinbase versus Bitcoin, you would’ve come out ahead if you had invested in Bitcoin. So, I do think there was something empirical there that he used.
Jill Carlson:
Can I jump in there?
Laura Shin:
Yeah.
Jill Carlson:
Yeah. So, that’s exactly the example he used was Coinbase versus Bitcoin. That is a hundred percent empirically true. Now, at the time that he wrote it, I believe this was way back in like 2013, ’14, initially, correct me if I’m wrong, but at the time he wrote it…
Laura Shin:
No, I think it was 2016, maybe.
Jill Carlson:
Oh, was it that recent? Oh my god.
Laura Shin:
Yeah.
Jill Carlson:
Crypto years. It’s like dog years. So even in 2016, though, at the time that he wrote it, that sort of made sense as the two things that you would compare returns on, Bitcoin versus Coinbase. The way that people tend to use the fat protocol argument today is to justify the token, the shitcoin, that they’re building on top of Ethereum, to say that, well, you know, some of the value is going to accrue to this token. It’s not just going to…or it’s going to accrue to the token, it’s not just going to accrue to sort of the rest of the services and things being built around it. Now, if you’re building a protocol like Bitcoin where you actually need the token as the incentive mechanism to make the whole thing work, for sure, that makes sense to me because your end-user product is Bitcoin.
If you’re building a decentralized application and then just wedging a token into it that’s actually going to be harmful to user experience and that is not a fundamental part of the mechanism design of it, then you’re going to have a much harder time convincing me that you need that token. If you’re building Coinbase and you’re wedging Coinbase token into it, then you’re going to have the same problem as if you just issued Coinbase equity versus Bitcoin. You know you’re not creating something that has some fundamental inherent value outside of the good or service that you’re providing to the end user. It’s kind of a false dichotomy that people have created out of fat protocol theory now.
Laura Shin:
And are there any particular shitcoins that you feel like really exemplify this?
Jill Carlson:
Oh, god, don’t make me name names. I like to stay friends with everyone. This is my problem.
Meltem Demirors:
But I think…so there’s an element to what we’re saying here. So, look, it is easy to sit on the sidelines and criticize, right? So, I do want to include this caveat. So, Jill and I have been working in this space for a fairly reasonable amount of time. I spent a lot of time working with these projects and I fully appreciate how challenging it is to do something new, and I don’t think either of us are saying there isn’t value in experimentation and coming out with new ideas, and I don’t want this to feel like an ad-hominem attack against people who are trying to bring new ideas to the forefront. I just think that we, as a community, have to do a better job asking questions. No one seems to question anything, and that’s really what bothers me is I’ve seen perfectly smart, rational people that I respect, who’ve been successful in other industries, come to crypto and it’s like something in their brain just stops working, and they start spouting off these random phrases that are meaningless without really understanding what they’re saying.
So, I think really what we’re advocating for is not a complete dismissal of people trying to bring new ideas or people trying to articulate things in new ways into this ecosystem. I think we just need to see people starting to think more rationally and people starting to present arguments that are defensible, and if this is experimentation, let’s run it like an experiment. Typically, what happens in an experiment is you form a hypothesis, you come up with outcomes that would either reject or support your hypothesis, you run those experiments, and then you share the results with the broader scientific community, and then other people take that thread forward and continue to refine the hypothesis. In crypto, we’ve rejected all of that.
It’s like the dumb leading the blind, and somehow this has become accepted. I think that our industry would be much more successful and be taken much more seriously if we just applied better experimentation practices to what we’re doing, and I just, there’s such a big opportunity here, and I’d hate to see us throwing it all away just because people are trying to optimize for personal gain, either through wealth creation, through accrual of some form of power or social signaling, or through “crypto fame,” because people will tell me all the time, like, oh, I’m crypto famous, and I’m like that’s…
Jill Carlson:
Who says that?
Meltem Demirors:
That’s not something to strive for.
Laura Shin:
What? Oh my god.
Jill Carlson:
Okay, that’s coming from Meltem, though, who tells me, yo, someone came up to me in the West Village the other day.
Meltem Demirors:
Someone did…somebody ran across the street, and it was like, oh my god, you’re Meltem, and I was like this is so sad. Like, I’m a nobody.
Jill Carlson:
My favorite one is Amber Baldet’s. Someone gave her finger guns and was like, hey, blockchain.
Laura Shin:
That’s right.
Jill Carlson:
But sorry, to return to the point here…
Meltem Demirors:
That’s amazing.
Jill Carlson:
I think that, you know, one of the really interesting things about crypto and one of the things that does make it so much fun to work in is that it’s so multidisciplinary. You have people with hard finance Wall Street backgrounds in the space. You have the VC philosopher-king thought leaders of Silicon Valley. You have the hardcore academics who are trying to do some of the rigorous research that Meltem is talking about, both on the economics side, the legal side, and then, of course, the actual technical distributed systems and cryptography side. You have the people who got into it because they were trying to buy drugs on the internet in 2011 and woke up one day in 2017 a very rich man. You have this very wide, diverse spectrum, or woman.
Meltem Demirors:
Or woman. You know drug users can be women.
Jill Carlson:
A handful of them, yeah, but you have this very wide spectrum of people and actors, and I think that, you know, one observation is that the VC kind of philosopher king and queen community tend to be some of the loudest voices, and that is the community that is spouting off hypotheses on Medium, which, again, as Meltem said, do have value. I think that where the frustration comes in is probably from the Wall Street crowd and those of us who have some degree of academic background in the space who are craving something a little bit more empirical to sink their teeth into, and you know that work is important, as well, but I will say, just to try and balance out the conversation a little bit, I don’t think that you can just put all stock in whatever numbers you can come up with.
Speaking as someone who tried to do some empirical research on the usage of Bitcoin…this is back in 2015, when I was doing my master’s thesis on this, it’s really hard to get data. It’s really, really hard to get empirical data, and Meltem, I know that you’re, as someone who’s doing work on this right now, you know this as well. So, it’s not, I think, for total lack of trying. It’s not for just total navel-gazery that we’re talking about. I think that there are just fundamental challenges in such a nascent space to have, you know, concrete data points to be able to point to for any of these things.
Meltem Demirors:
But Jill, I don’t think that’s defensible because this community is so collaborative. What I’ve found, the reason I use Twitter so much is because it’s a really great place to crowdsource ideas.
Jill Carlson:
It’s so good. Yeah.
Meltem Demirors:
For example, one of the ideas I was looking into was the circularity of capital or this idea that, you know, we have investors investing in VC, who then invest in cryptocurrencies, and those cryptocurrency projects then invest in ICOs, and those ICOs invest in VCs, and this massive circling capital.
Jill Carlson:
Endless recursion.
Meltem Demirors:
And so, but again, like, but I put a tweet out there and I said, hey, I’m looking into this, I think this is really interesting, are there analogs to what happened in the tech IPO bubble in the 2000s, and I got a lot of great link-backs. People sent over some research studies, but I do think that there is this great mechanism we’ve created. We created this awesome, super-vibrant, sometimes slightly toxic Twitter community in crypto that’s like an amazing crowdsourcing mechanism, and I have found that if I’m trying to work on a specific research hypothesis, I can quite easily reach out to people either on Telegram or on Twitter or even write about it on Medium and get data.
I just, I think the problem is, is that we have been drinking our own Kool-Aid for so long, and because we had this massive bull run last year, people confused getting lucky with getting it right, and there are certain things we’ve gotten right, but there’s a whole lot we’re getting wrong. We need to keep asking better questions, and I think, as a whole, we have stopped asking questions because we’ve started believing our own hype, and that is really, really dangerous, just so dangerous.
Laura Shin:
Yeah, and I’ve seen you both, on Twitter, be critical of cryptoeconomics and say it’s not even a thing. I actually disagree with you on this, so I was curious to know why you don’t think it’s a thing.
Meltem Demirors:
Well, on the cryptoeconomics front, here’s my issue with it. Everyone loves to talk about tokenomics, and again, it goes back to incentives and fat protocols and incentivizing developers and ecosystems. Number one, saying, oh, ecosystem growth is a really esoteric metric, like let’s specify that a bit, saying decentralization is really esoteric. Let’s specify that a bit, and I’ve talked about that a lot in my writing, and I think Jackson Palmer, who created Dogecoin, has done a great job with his website, arewedecentralizedyet.com, where he points out all of the different metrics we could use as a proxy for decentralization and how not decentralized things are.
But I think that the broader issue here is, look, we’ve spent decades working on understanding debt financing, we spent decades on working on understanding equity financing, and in both of these models, when you raise debt capital, you get assets on your balance sheet, on one side, on the left-hand side of your ledger, and on the right-hand side you have a debt to someone that you have to repay. There’s a liability. When you do equity financing, same thing, you get assets, but the equity in your company is owned by other people. In token financing, what we’re doing is we’re creating assets on the left-hand side of the balance sheet, and we’re doing it in the form of not only treasury capital or assets that are raised but also in the form of our own tokens, because we keep a portion of the supply, and there’s no offsetting liability on the other side of the ledger, and that doesn’t work. You can’t print money out of thin air.
Laura Shin:
Central banks do it.
Meltem Demirors:
When people are capitalizing these projects…but we’re not central banks, and again, I think it doesn’t mean that it’s going to be liability or equity. I just would love to see more critical thinking about how we develop the practice of token financing, and the conversations people have are completely irrational and they’re pseudo-intellectual. Let’s take it back to the practicalities of how firms function. Firms have accountants. They pay taxes. Firms have internal reporting. Like, we need to spend time on the nuts and bolts of how companies work and how firms’ communities work. You can’t just create money out of thin air in perpetuity. That’s not going to work. We don’t have militaries. We don’t have a nation state.
Jill Carlson:
Laura, I want to see if I can convince you…sorry, go ahead, Meltem.
Meltem Demirors:
I’m finished. Rant over.
Jill Carlson:
I want to see if I can convince you about the cryptoeconomics, tokenomics debate of whether this is a real thing, because I think what Meltem is saying in all of this is that there’s nothing new under the sun. Financial engineering has been around forever. I would argue what we’re calling cryptoeconomics has also been around as…what it is, is mechanism design. There’s a field of economics and game theory called mechanism design. It’s an engineering approach to designing economic mechanisms or incentives toward desired objectives, thank you, Wikipedia, and that’s all it is. That’s all that tokenomics is.
Laura Shin:
Right, and I’m not saying that like this kind of thing didn’t exist before.
Jill Carlson:
You know what we’re seeing is…
Laura Shin:
Obviously, it did. I mean economics and incentives existed before. What I’m saying is that now you can create little systems that are kind of built around one service, right? Maybe it’s like file storage, let’s say, and you can have this token at the center that if you design it correctly should enable groups of people that are not otherwise organized to put work into the system that will enable this service to be offered, and some people will maybe make money from it, other people will use it, and so then you have this like little economy that’s been created, and there is no corporation at the center, and which is a new and unique thing, and so in that regard, I feel like that’s new.
Jill Carlson:
Yes.
Laura Shin:
I’m not saying that, you know, mechanism design isn’t new.
Jill Carlson:
I would say our ability to experiment with mechanism design is absolutely new in this way that, you know, you can watch these things play out in real time, see what works, see what doesn’t, see what fails disastrously, and you know we can, for the first time, absolutely create systems that leverage mechanism design in our real lives in a new way, but it’s a little bit akin to the Law of the Horse, and the Law of the Horse was a term that was used to kind of rail against the idea of having law of the internet or cyber-law in…I think it was like the mid…it must’ve been the mid-90s, and the idea was, you know, if you had all of these laws in place and then suddenly like horses came along, you wouldn’t…and you have all of these cases dealing with horses and people stealing horses and racing horses and so on, like, you don’t suddenly say, oh, well now we need to have the Law of the Horse.
You say, okay, well we have these existing laws that are our principles and framework, now we just need to apply them here, and my biggest point with this is not to sort of myopically nitpick here about the way that we talk about these things, but I think it comes back to what Meltem was saying earlier on, you know, maybe 10 minutes ago or so, about winning hearts and minds and the way that we communicate with people about this, because that does matter, and if we choose, as a community, to come up with all-new terms for things that already exist in one form or another, it’s going to make it that much harder for people to enter the space, and you know that would be my argument for why we really need to come up with ways to talk about this in frameworks that are already existing.
Laura Shin:
Okay, we’re going to enter this lightning round, sort of, because we have so little time and there were so many other things I want to ask you guys about. So, let’s start, very quickly, with EOS. You, Jill, you called their four billion dollar fundraise sheer insanity. Why?
Jill Carlson:
There’s no way that we look back on this in 10 years and be like, oh, yeah, four billion, that was totally reasonable for EOS, wish I’d gotten in then. There is just no way, and the thing that I really want to highlight here is it was Nick Carter who pointed it out to me that we have no way of knowing that EOS has not been contributing to their own ICO, which would mean that they would be sending themselves ETH into their ICO. They would be receiving those ETH themselves, and then they would be also issuing EOS to themselves, thereby self-dealing, and you could say this of many ICOs, but we have no audits. We have no frameworks in place to be able to check in on any of these dynamics. It’s hugely problematic.
Meltem Demirors:
Problem number two with EOS, 25 cents of every dollar invested is being invested in venture capital, where the GP or the LP, the general partner or the limited partner who participates in the profits of that venture investing activity is EOS, its investors, or its affiliates. It doesn’t benefit the community in any way other than “network effects,” so very problematic in my view.
Laura Shin:
Well, okay, yeah. I definitely see that. Okay, Meltem, at the very beginning of this conversation, you mentioned the shitcoin waterfall but did not go into detail on it. I want to hear what that is.
Meltem Demirors:
Okay, shitcoin waterfall, very simple idea. I’m actually working on creating a beautiful interactive graphic which I hope to share with everyone. The way it basically works is team gets together, they pull in some crypto. “Influencers,” go around to crypto VCs and hedge funds to collect some big names. The do a pre-pre-ICO raise, raise 5 to 10 million, as Jill said, massive discount to the ICOs, to the early investors. Next round they do, after doing a little bit more work and writing a little bit more whitepaper in LaTeX fonts, which is the font that people use in whitepapers, is they go to a bigger group of investors that are less educated. They now mark their tokens at 10X, 20X, sometimes even 100X, in the case of DFINITY, sell it to more investors.
Now they’re ready to go with their big ICO, do big marketing, community building “effort.” They sell to the general public or an even larger audience of qualified investors or accredited investors, and everyone who’s already invested gets in at a massive discount. Then the token starts trading. There’s liquidity. Everyone dumps. I’ve looked at 30 different ICOs that have happened over the last three months at the token issuance. Within the first seven days, 80 percent of all tokens purchased in the ICO were traded, in most of them, so the velocity of this stuff is really high.
Everyone dumps to capitalize on the post-ICO liquidity pump, and then the people who are left holding the bags are retail plebes or uneducated retail investors, people who got hyped about the coin who are now stuck, you know, having given their capital back to all of the investors that had way more information. So, basically, the idea is that every buyer in the crypto market who buys a shitcoin is buying it because they believe there’s someone dumber or less informed than them who will be the buyer of last resort of their bags or their token. The question is, if we’re in the market we’re in right now, who is that buyer of last resort for some of this stuff? I think that’s going to be tested very soon, once we have a continued bear market. If we have another bull market, I think we’ll see this continue for quite some time. That’s the shitcoin waterfall.
Laura Shin:
Yeah, there’s another crypto podcast that I listen to. I will not name it. Unfortunately, I know they maybe listen to my show, but they do joke about this kind of thing because I think they buy some of these shitcoins, and they fully admit that, you know, that’s what they’re waiting to do is to just sell it to somebody stupider than them.
Meltem Demirors:
I don’t think that’s funny. I mean, look, it happens in every financial market, right? Right, like the unwashed masses are always the buyers of last resort, and there are tons of financial institutions and very wealthy people who are now respected who built their entire fortune off of doing things like this. This is financial engineering at its finest. I just think the challenge is, is again, if this is what we’re doing, we can’t use moral arguments and a moral high ground to try to claim that cryptocurrencies are this divine, beautiful, perfectly designed social mechanism then.
Laura Shin:
Yeah, and I agree with you, it’s not funny, which is why I didn’t want to name the podcast here, which I feel bad about because they’re, you know, it’s entertaining in other ways, but yeah, I don’t condone that kind of activity. So, Jill, I know you’re critical of security tokens, which are like blockchain tradable versions of traditional equities.
Jill Carlson:
No, no, Meltem is critical of…yeah.
Laura Shin:
Oh, Meltem is.
Jill Carlson:
I actually think they’re pretty interesting, but…
Laura Shin:
Oh, okay, so why don’t you make the case for and then Meltem can make the case against.
Meltem Demirors:
I love you, Jill.
Jill Carlson:
Come at me. Come at me, Meltem.
Meltem Demirors:
Oh, anything offensive I’m about to say, I want to preface it by saying I love you, Jill.
Jill Carlson:
So, look, I think that there is a case to be made that blockchain as financial infrastructure is interesting. I think that, you know, a lot of people, this is the reason they got into it with Bitcoin is it is a new model of custody, it is a new model of who you have to trust, which third parties or groups of third parties you have to trust. I think that old-school Wall Street systems are overdue for a rehaul. I think that there are lots of problems in place there. I think that if you look at traditional Wall Street Fintech, you’re already seeing, in different ways that don’t have to do with decentralization, but you’re seeing a move towards more peer-to-peer trading and securities issuance and all of these kinds of trends that map actually quite nicely to trends that you see happening in the blockchain space.
Now, we’ve seen one cycle of kind of attempts at this. A company I used to work at, I think, is doing the best job of any of the companies in the space, attempting to do kind of the enterprise Wall Street blockchain play, but there are tons of others, R3, etcetera, who have made a foray into this, and I think that securities tokens are going to wind up being kind of the next generation of enterprise blockchain for Wall Street. What does it look like not to issue new assets on new infrastructure but to issue old assets on new infrastructure, and I think that’ll actually create really interesting things for Wall Street and the dynamic at play there, but I do…I will say, I will caveat, I think that we’re many years away from seeing that become a reality in force.
Laura Shin:
Meltem?
Jill Carlson:
Come at me, Meltem. Let’s go.
Meltem Demirors:
All right. Hold on, let me crack my knuckles and gear up here. Okay. So, I was actually having a talk with one of my research interns about this, this morning. He’s working on an analysis of ICOs versus STOs, so initial coin offerings versus security token offerings, so ICO versus STO, and the key differentiator, look, I think one of the things that enables people to raise ICOs at a really high valuation is this really esoteric concept of network value and building community and ecosystem, etcetera. With an STO security token, that incentive doesn’t exist. Unfortunately, the form and function that these security token offerings will take is that they’ll only be able to be offered to accredited or qualified investors. Likely, many of them will not be offered in the United States, and so this whole idea of decentralization and democratizing access to finance will be largely a play for people who are rich.
It really won’t be accessible to many people. I think the second thing is because you don’t have the network effects, because you don’t have this community idea, because you don’t have this ecosystem value concept that factors into valuation, a lot of the premium will get squeezed out of security tokens. Really, the premium that will be left is the liquidity-based premium, which, again, if you’re a private investor and you’re used to investing in a liquid private security, liquid private placements, a liquid private offering, the idea that you can now have more liquidity, you don’t have to wait 2-to-3 years for your banker at Goldman Sachs or JPMorgan Chase to find someone to buy you out of, say, a commercial real-estate trust or some investment you made into some esoteric project that doesn’t really align with your investment mandate anymore. That could potentially be interesting, but I think, again, to me, this is doing same old finance, just with a different substrate, and so I find it fundamentally uninteresting. I also think that you don’t need a blockchain to issue security tokens.
You really don’t. You can just use a Google spreadsheet. Like, I really don’t think there’s much that’s innovative about taking a security and tokenizing it. Now, do I think there’s money in it? Absolutely. Will I be participating in helping people create security tokens? Probably. Do I see any problems with it, structurally? No. Do I think it’s interesting or innovative in any way? Not really. Do I think it’s sexy? Absolutely not. Will I be spending a lot of time thinking about it? Probably not. So, just being completely realistic, I think this is more let’s use crypto and blockchain as a buzzword to market old finance, doing it the same old way, just with new shit shoved into the middle, and that’s fine. Look, I’m not trying to jam on anyone who’s trying to make a dollar. Everyone’s got to eat. Everyone’s got to make a living. I just find it fundamentally uninteresting.
Jill Carlson:
I’ll take this up with you offline.
Laura Shin:
I think I have to take the Goldilocks position because I basically agree that it’s definitely not as sexy as kind of the more utility token model, which will power sort of like these big, decentralized networks that offer services that are now offered by companies, but I do think that there is some merit in making tokens tradable 24/7, 365, or not tokens, securities, and also in enabling certain types of securities that are not possible now.
Jill Carlson:
Guys, I don’t know what you’re talking about. Wall Street’s back office is so sexy. I can’t even tell you. Get involved. Get involved.
Meltem Demirors:
Jill, I will be bringing you a shirt in San Francisco that says Shitcoin Minimalist on it.
Jill Carlson:
Oh good.
Meltem Demirors:
So, this is our new phrase, Laura, and we’re not Bitcoin maximalists. We’re Shitcoin minimalists.
Laura Shin:
I like that. I like that.
Meltem Demirors:
Which I think kind of works.
Laura Shin:
So, you actually referenced working in the space, and I actually kind of wanted to leave on that note because both of you have written about either freelancing or working in crypto, and I actually get a lot of people who just randomly message me and say, like, oh, you know, I listen to your podcast, I’m interested in working in the space. So, what job advice would you guys have for people who either want to work in the space or want to work on a decentralized project?
Meltem Demirors:
I just wrote a blog post about this on, lo and behold, Medium, where it’s called so you want to work in crypto. There’s a lot of great advice in there about how to get involved, what channels to use, how to search for jobs. I’ll let Jill reflect on this some more, but I think finding a job in the crypto ecosystem has never been easier. The advice I always give people is just get engaged, comment on things, follow people on Twitter, be in the places online and offline, in physical space, where people are hanging out, and just contribute your time, your energy, your thoughts, and I think people really respond to that well, but Jill, I’m sure you have a lot of ideas here.
Jill Carlson:
I would also just say just start reaching out to people. You know find people on Twitter or Medium or whatever, find a way to get in touch with them and just cold-call and just say, hey, I’m really excited about this topic that you wrote about or that you seem to think a lot about or that your company is building, can we chat, because, you know, we’ve been pretty negative, I think, about a lot of what goes on the crypto space over the last hour, but the thing that I love is that people are just so excited. Like, you can’t get people to shut up about it, you know? You go out to drink with people…in any other industry, after-work drinks constitute of like a little bit of office place banter and then, you know, talking about other things going on in your life.
In crypto, people will not shut up about it, and they will be excited to get on the phone with you or exchange emails and exchange ideas, and you know I’ve got to credit a lot of people who took my cold calls a few years ago, when I was first getting into the space, and even Meltem, you, to a degree. You know when I was a little bit more green, a few years ago, you know, taking me out for drinks and chatting about a lot of these things that were, at the time, even more experimental than they are now but that we were both really excited about, and just start getting to know people. It’s awesome. It’s great in here. Come on in. Dive in. The water’s fine.
Laura Shin:
Yes, I totally agree with you. All right. So, for both of you, where can people learn more about you and your work?
Jill Carlson:
The best place for me is Twitter. @_jillruth is my Twitter handle. That’s also the only thing that I sometimes reply to on DMs. LinkedIn has become a crypto bucket shop, so don’t try to find me there.
Laura Shin:
Meltem?
Meltem Demirors:
I’m on Twitter, like Jill, so I’m Melt_Dem. I also spend a lot of time on Medium, writing, and then under the CoinShares handle, you’ll find me as well, and I do try to answer DMs. So long as they’re not too creepy, I think I’m usually responsive. I’ve gotten some really funny ones, and then, I think, generally at crypto events, I like to hang out and learn what people are working on, and I try to be as helpful as I can. So, if you see me out at a conference or at a meetup or at a crypto event, I would love to chat. I always like it when people tell me what they’re working on or if they have ideas, and then, yeah, just engage me in dialogue. I love arguing with people, conflict…
Jill Carlson:
Or just accost her on the streets of the West Village.
Meltem Demirors:
Yeah, I spend time in the West Village in New York, so if you’d like to accost me while I’m getting my morning coffee, feel free.
Laura Shin:
Okay. Okay. Great. Well, let us know if that happens. All right, well, thanks to both of you for coming on Unchained.
Meltem Demirors:
Thanks, Laura.
Jill Carlson:
Thanks, Laura. This was awesome.
Meltem Demirors:
Bye, Jill.
Laura Shin:
Oh my god, I cannot. All right. Thanks, so much, for joining us today. To learn more about Meltem and Jill, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review, and subscribe on Apple Podcasts. If you liked this episode…oh my god, I’m still laughing, share it with your friends on Facebook, Twitter, and LinkedIn, and if you’re not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Elaine Zelby, Fractal Recordings, Jennie Josephson, Rahul Singireddy and Daniel Nuss. Thanks for listening.
