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Polychain Capital Coinbase Golem TezosTranscript
Laura Shin:
Hi, everyone. Welcome to Unchained, a podcast engineered by Fractal Recording and produced by me, your host, Laura Shin, a Forbes contributor covering blockchain, cryptocurrencies, and FinTech. Thanks for tuning in. If you’ve been enjoying this podcast, please tell others about the show. Share it on social media or with friends who you think may be interested. Also, if you rate, review, and subscribe to Unchained on iTunes or wherever you get your podcasts, that also helps get word out about the show.
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My guest today is Olaf Carlson-Wee, the Founder and CEO of Polychain Capital, a new hedge fund launched last fall that invests in blockchain-based digital assets. Olaf was also the first employee at Coinbase, the most popular US-based cryptocurrency exchange, where he started out doing customer service and eventually became head of risk. Welcome, Olaf.
Olaf Carlson-Wee:
Laura, thanks for having me.
Laura Shin:
Let’s start by having you describe what Polychain does.
Olaf Carlson-Wee:
Sure. So Polychain manages a hedge fund that invests exclusively in digital assets. So we invest exclusively in protocols, not companies, and we do this by investing in things that are made scarce through the blockchain.
Laura Shin:
And when you say protocols, not companies, can you define what those terms mean and what the differences are for listeners?
Olaf Carlson-Wee:
Yeah. Absolutely. So, in 2008, Satoshi Nakamoto, the creator of Bitcoin, solved an unsolved computer science problem called the Byzantine Generals’ Problem. By solving that, for the first time ever, Satoshi had created digital scarcity or scarcity in a digital environment. What this means is that, for the first time ever with the creation of Bitcoin, I can send you something over the internet, and you can be confident that I no longer have that thing.
This was an unprecedented breakthrough in computer science because, before, you could always copy / paste anything over the internet. Once he solved that and created Bitcoin, the protocol, many, many people have been iterating on Bitcoin ever since then and copy / pasting the code base because it’s all open source, changing variables, inventing new blockchains, all sorts of things. Now, for the first time, we’re seeing platforms that actually make it easy to launch new digital assets.
So creating a blockchain from the ground up is very hard. You need to deal with underlying consensus mechanisms, mining algorithms, you know, complicated attacks, both Distributed Denial of Service attacks and 51% attacks. However, if you can solve all those problems in a sort of abstract way, the blockchain itself, you can create a platform that makes it really easy for developers to launch their own scarce digital assets. So we can talk more about this, but that is what Ethereum is doing in the ecosystem.
Laura Shin:
So when you referenced all the different kinds of attacks and different technical difficulties, what you’re saying is that that’s kind of work that, if you were to do it from the ground up, takes a lot of effort, but that now platforms exist that sort of take care of that for you? Is that what you’re saying, and then people can launch these tokens, these assets?
Olaf Carlson-Wee:
Yes. Exactly right, and in addition, you know, the security of a blockchain is basically one to one with the market capitalization of that blockchain. So if you were starting a brand new blockchain and its market capitalization is very low, you basically have a very insecure network. So bootstrapping on top of that, an existing secure network that has solved all of the underlying consensus mechanisms and just focusing on the creation of the digital asset is a big breakthrough because it opens the door for a number of developers.
Laura Shin:
Okay, and I also want to ask you about the language that you’re using. A lot of people have talked about Bitcoin as a cryptocurrency, but you are using phrases like digital assets or blockchain-based assets. So, you know, why do you choose the terms that you use, and why not use something like cryptocurrency?
Olaf Carlson-Wee:
Yeah, so I feel pretty strongly about this. I think a lot of people got it in their mind that Bitcoin or cryptocurrency as a technology was basically limited to money or currency. Now, while that metaphor is perhaps useful to understand this, it’s ultimately not the full picture. So when you look at protocols like Ethereum, they actually are capable of so much more than just value creation and transfer. So, with Ethereum, you can have arbitrarily complex pieces of software encoded in the blockchain that don’t look anything like currencies that you would think of, like the dollar, or the renminbi, or anything like that. So, to me, there is really a breakthrough here in what a blockchain is capable of executing, and it’s not just payments and storage anymore.
Laura Shin:
And when you say that Ethereum makes things beyond just payments possible, what are some examples of those things, and then how does that relate to the choice of digital assets, as your term?
Olaf Carlson-Wee:
Yeah, so Ethereum has what’s called a Turing complete scripting language. So I’ll back up and explain that. So Bitcoin has a very narrow scripting language by design, and this was to prevent attacks against it, and a scripting language is essentially a programming language you use to interact with the protocol. So Bitcoin scripting language is very limited, and effectively, what it can do is store Bitcoin in an address and send it to another address.
Ethereum, however, with its Turing complete scripting language, means that it’s capable…the programming language you use to interact with Ethereum is capable of arbitrarily complex software, and it can hypothetically run any piece of software in the Ethereum scripting language. So what this means, you can build much more complicated financial contracts, and people in the Ethereum ecosystem refer to these as smart contracts, and they’re basically pieces of software that execute in the Ethereum blockchain.
A good example of this would be just a day or two ago, I was playing Blackjack against a smart contract. So, you know, every time I take a hit or want to shuffle the deck, I have to initiate a transaction and interact with the state of that contract and update that contract. That contract held Ether, and I could win real money from the contract or lose real money from that contract by betting against it. It was effectively playing the house in a game of Blackjack.
So when I think about that, me taking a hit in that game, now, that mechanically looks very much like a Bitcoin transaction. I’m paying a fee that goes to the miners in order for the miners to update the state of the ledger, but it really doesn’t look like a payment exactly, right? I’m really interacting with a piece of software and updating the current state of that software. So, to me, you know, taking a hit or shuffling the deck in a game of Blackjack against the smart contract, you know, the metaphor of money or currency doesn’t do that justice.
Laura Shin:
Okay, so we’re getting really deep now into kind of the details on all this, but I actually want to back up to talk a little bit more about the hedge fund, and then we’ll dive a little bit more into the digital assets aspect. So tell me about the hedge fund aspects. Who are your investors, and how much money have you raised?
Olaf Carlson-Wee:
Yeah, so we currently have about 15 million dollars under management. We’ve been live for a little bit under six months. We have backing from Andreessen Horowitz, Union Square Ventures, Pantera Capital, and a handful of other great investors. So I launched this fund in hopes of building the first fund that’s really a diversified portfolio of exclusively blockchain-based assets. I think so far, we’ve seen a really good response from the investment community of people who want a broad-based exposure to blockchain technology without having to invest in a single digital asset, like people have historically done by just buying Bitcoin.
Laura Shin:
So what I find so fascinating about your story in particular is that, in a way, much of your life I guess really as an adult has kind of tracked the evolution of cryptocurrency or digital assets. So can you tell us your story, and let’s just start with how you first heard about Bitcoin?
Olaf Carlson-Wee:
Okay. Yeah. We can go all the way back. So it was June 2011, and I was back from a summer vacation, and my friend told me, you need to read about this thing, Silk Road.
Laura Shin:
And you were in college or high school?
Olaf Carlson-Wee:
Yeah, this was the summer after my junior year in college. So I was going into my senior year, and my friend told me, you need to read this article about Silk Road. So Silk Road was an online drug marketplace, and so I read about it, and it was kind of a spicy, sensationalist article about this, and I realized, though, that there was really just one thing that they pretty casually mentioned. They said, oh, and by the way, in order to remit payment in this online drug marketplace, everyone uses this thing called Bitcoin, and I felt like that was the crux of the whole thing.
To me, there was something here that was making this possible, and it was this technology. So I quickly started reading about Bitcoin and went very deep down the rabbit hole that summer. So, that summer of 2011, I spent a huge amount of time on forums and in chat rooms learning about Bitcoin, learning about what it was capable of, buying Bitcoin. You know, I was an indebted college student, but I put most of my meager life savings into Bitcoin at that time, and then going into my senior year of college, I was trying to decide what to write my undergraduate thesis on that was kind of the culmination of all of my studies.
And I decided to write it on cryptocurrency. So this was in the fall of 2011, and at that time, there weren’t a lot of, you know, formal academic studies or inquiries into cryptocurrency at all. So I sort of had to convince my professors that this was a good idea, and I think there was some skepticism there, but I managed to sort of convince them that I should write it on this and sort of grabbed a lot of thinking from other fields in order to make sense of a research thesis on something that effectively had no formal research.
The other thing that was kind of funny about that is, during that whole time, from my discovery of Bitcoin to writing my thesis and kind of starting the early drafts, the Bitcoin price dropped from about 17 dollars to 2 dollars, and I mean, it’s a really massive drop. I mean, that’s a huge, huge percentage of value just disappearing, and a lot of articles were coming out at that time, and there was one particularly in Wired that said, you know, The Rise and Fall of Bitcoin, was the title, and it was about how Bitcoin was this fun little computer science experiment that failed.
And my professor showed that to me and said, you know, now that Bitcoin is dead, what are you going to write your thesis on, like, word for word, and I, you know, again, had to fall back into all these arguments about why it was theoretically interesting, and even if Bitcoin was the first cryptocurrency, it wouldn’t be the last and all sorts of things, but I kind of held on and kept going with it, and eventually, Bitcoin saw more adoption, and more people were using it and everything. So, yeah, it turned out that my stubbornness was good.
Laura Shin:
And why do you think you were so fascinated by it?
Olaf Carlson-Wee:
You know, when I first read about Bitcoin, I just pretty…you know, right away, I knew this is the most important technology that you’ve ever read about, and it’s happening right now. Like, it felt like, wow, this white paper came out, you know, just two years ago, and I felt like I was reading the white paper for the internet, you know? It just felt like this massive technological breakthrough, and it was so niche.
Like, no one knew about this yet, and so, to me, there was just this massive potential to see this technology kind of transform the world and to get in on something like this very, very, very early, before, you know, even my computer science professors had heard of this thing. So, to me, this prospect of programmatic finance or rather, like, running the financial systems of the world through software versus through centralized clearinghouses, and banks, and all sorts of things like that has massive implications.
And it always felt like the natural path that these things will take. Just like the internet has sort of disintermediated endless industries, you know, media distribution, and e-commerce, and all sorts of things like that. It felt right that finance and associated industries would also be automated through software.
Laura Shin:
So walk us through then how you went from writing your senior thesis on Bitcoin…and I know there were some other topics in there, to being hired at Coinbase.
Olaf Carlson-Wee:
Yeah, so once I graduated, this was May of 2012, the Bitcoin industry, so to speak, was basically nonexistent. There was maybe a couple of services out there. These were bootstrapped businesses that by, you know, my examination did not look that legit. I think that I was right. In the end, these companies turned out to be Mt. Gox, BitInstant, you know, companies that have shut down for one reason or another since then, but I was looking at the space really closely. So Coinbase launched, and I was actually the 30th user on Coinbase.
So I was, you know, looking at these services right away when they were coming out, and Coinbase had a really amazing feature that sounds silly now, which was that it allowed you to buy Bitcoin on the internet. So you’d think that a peer-to-peer electronic cash system, it would be easy to get that on the internet, but there’s this massive problem with buying Bitcoin on the internet, which is that if you pay with, like, a credit card, or PayPal, or something like that, and someone gives you Bitcoin, you can then go charge back your payments, and they can’t get back their Bitcoin.
So Bitcoin is like cash. Once I give it to you, you have it, and I can’t get it back, whereas credit cards, and PayPal, and ACH transfers, all sorts of things like that are all reversible. So fraud, when buying Bitcoin, is a massive, massive problem for the person selling that Bitcoin. So Coinbase offered purchases of Bitcoin through a bank transfer. Again, this sounds so simple, like I can’t believe no one had done that yet. It is a very hard problem to solve.
Laura Shin:
And how had you been buying your Bitcoin before that?
Olaf Carlson-Wee:
Cash. Cash.
Laura Shin:
What did that transaction look like?
Olaf Carlson-Wee:
So, you know, I was using a service that was run by someone who later worked at Coinbase. So it was kind of funny that way, but it was a service where I would go to the account and say I wanted to make a cash deposit of, let’s say, 300 dollars. It would tell me to deposit 300 dollars and 17 cents or some other weird amount of change to a very specific account and routing number in cash at my bank. So I would go to the bank, and I would have cash and 17 cents and say, I would like to deposit the money here into this account, and they’d say, okay, great, and then I would go home.
And on the back end, they were using that weird amount of change to match up a cash deposit against their internal database or which account, you know, deposited that cash to their bank account directly. Yeah, really this was built with duct tape, you know, and then by the time I’d get home, though, the Bitcoin would be in my account because the cash transfer is instant and irreversible, and then I would transfer that Bitcoin off to my own hardware. So it was relatively seamless, you know, but in retrospect, this was a very primitive mechanism to purchase Bitcoin.
Laura Shin:
I love it. It reminds me of those transactions that you sometimes have to do now to use other financial services where they want to connect to your bank account, and then the way that they confirm that they got the right account is they put random amounts of cents into your account, you know, like 7-cent deposit and a 50-cent deposit, and then they ask you to report back on what the amount was, but anyway, so finish your story about, you know, how you ended up at Coinbase.
Olaf Carlson-Wee:
Okay, so, after that, you know, I was traveling a little bit and kind of thinking a lot about Bitcoin, and this is throughout the latter half of 2012, and then I saw Coinbase just growing, and growing, and growing. I was a very active user of Coinbase, purchasing Bitcoin through the bank account mechanism, and I decided, you know what, this looks like the company, you know, the one that really has the vision to bring this to the masses, and actually has a good service, and isn’t built with duct tape. So I was staying on a friend’s couch in Oakland. This friend actually now works at Coinbase.
So it’s sort of how this happens, but I was staying on a friend’s couch in Oakland, and I just cold emailed jobs at Coinbase, and I attached my thesis on cryptocurrency and said, you know, I’m willing to do anything. I just want to join a growing company in this space, and Fred replied back…Fred, the co-founder of Coinbase, replied back in maybe 30 minutes and instantly wanted to get on Skype, and I realized that this was going to happen really quickly. Like, you know, we were going to either do this or not very, very quickly.
Laura Shin:
Yeah, and just for listeners who aren’t familiar, that’s Fred Ehrsam, who actually also recently left Coinbase and says that he’s not sure what he’s going to do, but may do something in the Ethereum space. So talk a little bit about what jobs you had while you were at Coinbase.
Olaf Carlson-Wee:
Oh, man, so this is a laundry list. So, when I started, I was doing front-line customer support. Every single time someone emailed support at Coinbase, I was the one who was replying. So I did that by myself until we had 250 thousand users. So this was a marathon, and I was also automating a lot. So, you know, when you had keywords in your subject line, I had a tool which would look at those keywords.
And if it knew, like, probabilistically what kind of ticket that was based on those keywords, it would wait one hour, and then you would get an automated reply from someone named Roger _____ 00:21:19, and once that reply went out, if that person then replied again, you would always get a manual response. So, like, my assumption was that if Roger was wrong about the canned response that it sent out and the user re-replied and said that didn’t help my problem, then you’d always get a manual answer.
But I think something like at least half of the tickets were getting an automated, canned reply delayed for one hour, which actually solved most of the problems, because a lot of routine tickets have very similar language and a very similar, you know, simple, canned solution. So I was doing a lot of hacks like that that really aren’t leading to a great customer experience, frankly, but you need to scale at that stage, and we had grown…when I joined, we were at about 50 thousand users, and we had grown to 250 thousand over the course of maybe four months.
So we had gone up in number of users by 500 percent in four months. So it was a really hyper-scaling moment at that point. I then hired a distributed team of people to do customer support, and this was a very interesting thing. So we were really struggling to find someone who could help me with customer support at Coinbase because a lot of the problems were really technical, and there was a lot of money on the line. So finding bugs quickly was my job.
You know, we didn’t have necessarily a huge QA team or something to make sure everything was working properly, and the main way we would hear about something breaking was a customer support ticket, and catching bugs quickly at that time, you know, could make a huge financial difference, and these bugs are really serious. It’s not like a UI bug. You know, there were problems with funds flows between a bank account and our Bitcoin address or things like that. So there were these big problems with fund flows and everything sometimes.
Laura Shin:
And actually, well, can you explain what that…when you say funds flows, you mean that you weren’t receiving funds, but you were having to deliver Bitcoin? Is that an example?
Olaf Carlson-Wee:
Yeah, all sorts of things like that. So matching a Bitcoin payment to a bank payment, making sure that everyone’s deliveries are timely, making sure that our anti-fraud algorithm wasn’t catching the wrong people and was catching the right people. There were just all sorts of complicated things going on. So, you know, basically, the needs for a support person were actually really, really intense. This was not like your casual person who was working at a phone center. They really needed to understand Bitcoin, the payment mechanism we were using, all that kind of stuff.
Laura Shin:
And actually, also let’s situate this in time when you started, and you said that Coinbase had about 50 thousand users, and then within a few months was at 250 thousand. When were you hired there?
Olaf Carlson-Wee:
That was March 2013 I believe.
Laura Shin:
Oh, okay. So keep going. So you were looking for, you know, support.
Olaf Carlson-Wee:
Yeah. So I was looking for support. This was later that summer, and we couldn’t find anyone. So what I did…and this was really a last ditch effort. This was not like the go-to plan from the beginning. I made what we called internally the Bitcoin SAT, and this was like a quiz with a bunch of complicated Bitcoin questions, and I posted it on all the major Bitcoin forums. So this is like Reddit, and Bitcoin Talk, and things like that.
And I said if you get a perfect score on this test, the Bitcoin SAT, you will get an interview, and so, you know, it was really desperate, and we had an absolutely resounding response from the community, and something like 250 people took this Bitcoin SAT, and a lot of people did really well on it, and I was very surprised. It was a very complicated test.
So I started doing, you know, 4 or 5 interviews every single day, and just the caliber of people I was talking to was amazingly high. So I still remember one of the first interviews I did was with Josh, who’s now the director of customer support at Coinbase. Now, this is three plus years later. He was one of my first interviews, and he had a master’s degree in computer science and was an absolute expert at Bitcoin and just a really, really competent guy.
And I said, okay, if you have a master’s in computer science, why do you want to do a customer support job? And he said, you know, I live in New Caledonia, which is like this island in the middle of the Pacific Ocean sort of a thousand miles off the coast of New Zealand, and it’s just an absolutely weird place to be located, but it was great because now there’s a perfect fit. We can have this remote workforce all paid exclusively in Bitcoin and all working on customer support for Coinbase.
So fast-forward a few months, and I had a 43-person distributed team working for me, all doing customer support, anti-fraud investigations, some of our early compliance investigations, you know, merchant onboarding, all sorts of stuff, and so this was really the team that was making sure that the company’s operating every day, and at this point, we had over a million users, and it was really a massive team that was almost exclusively hired through that Bitcoin SAT posted on the forums.
Laura Shin:
That’s really interesting, and that guy Josh, is he still based in New Caledonia?
Olaf Carlson-Wee:
No, he relocated to San Francisco to take the job as director of customer support.
Laura Shin:
Oh, wow, and when you said that everyone was paid in Bitcoin, why? Why was that?
Olaf Carlson-Wee:
Because we had people working from, you know, 12 different countries or something like that, so we were dealing with a lot of different currencies. It just was easiest, basically. Like, we were actually using Bitcoin because it was useful.
Laura Shin:
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I’m speaking with Olaf Carlson-Wee, Founder and CEO of Polychain Capital, a new hedge fund that invests in blockchain assets. So you were talking about, you know, how you had this huge team for customer support, but I know that eventually, you went on to other jobs. What were some of those other ones?
Olaf Carlson-Wee:
Yeah, so, you know, that was only the first year at Coinbase out of three and a half years, so it was quite a journey. So then I was the head of risk. So I really focused in on anti-fraud and user account security issues. So this is people buying Bitcoin with stolen identities. So if someone gains access to your online banking, someone gains access to your credit card and they purchase Bitcoin with that. So, in those cases, Coinbase is actually on the hook for the loss.
So it’s a massive, complicated problem that’s all machine learning based combined with manual examinations. In addition, you know, people are trying to hack users’ Coinbase accounts all the time. So just like you might get your email account hacked, you can get your Coinbase account hacked, but you know, you lose your Bitcoin potentially in your account. Now, we at that time didn’t have as great of account security mechanisms as then, over the course of the next year and a half, we built some really, really great things.
And now I think that Coinbase accounts are very, very secure. I actually think they’re much more secure than most online banking accounts. So that was really a big push over the next year and a half, and really, my final job at Coinbase at that point, I kind of built these two pillars of the company, kind of the operations side and then the anti-fraud side, and Brian Fred gave me kind of a free ticket to work on whatever I wanted, and so it was at that time that I got very deep into the Ethereum ecosystem.
This was the fall of 2015 and early 2016, and the development around Ethereum was just pretty mind-boggling to me, and it was during that time that we were seeing the absolute first kind of experimental token launches where people were actually building digital assets on top of Ethereum and launching them by selling them to people, which basically raises money, much in the way that you might raise money in a Series A round, except that you’re funding a peer-to-peer open source protocol instead of a private company, which is a totally unprecedented effect.
So I started seeing that, and really, in a way, giving me that free ticket to work on whatever I wanted got me so into what was happening in the ecosystem, that I knew I needed to leave and actually start Polychain, start my own company, which kind of invests in the future of that space.
Laura Shin:
So the thing about this trend that you decided to pursue is that there was a sort of similar trend previously where we saw the proliferation of alt coins, which were generally somewhat trivial tweaks on Bitcoin. So what’s so different about this new trend that you’re seeing in these digital assets?
Olaf Carlson-Wee:
Yeah, so there’s really two things. One is that now it’s much easier to create digital assets. Like I said before, Ethereum acts as a platform for developers to launch their own digital assets. The other thing is that people are actually raising money to fund the protocol through the creation of these tokens or digital assets. So you’re seeing economic effects that you’d usually see in a private venture round for a private company being kind of open.
So anyone can participate in the funding round, and it’s funding an open source, peer-to-peer project that, oftentimes, the funders really just want to see exist in the world. The main, like, meta effect that is happening for me is monetized peer-to-peer networks. So, historically, peer-to-peer protocols have never had a monetary layer attached, and so these are things like the torrent protocol or the Tor protocol, and that’s file sharing and kind of online packet routing, and these are two different protocols that never, you know, added payments, and for that reason, were run sort of altruistically.
Like, the people who are contributing to the network are also the people consuming from it, and in general, no one’s doing it for money. Now, now that we’re adding digital assets into the mix and monetizing peer-to-peer effects, you get, for the first time ever, asymmetrical peer-to-peer networks, and what I mean by that is where one side of the peer-to-peer network is extracting and the other side is contributing. So this has never really been monetized so, like, you can have a peer-to-peer marketplace.
Let me give you a pragmatic example. There’s a project that I’m excited about. This is digital asset built on Ethereum called Golem, and Golem is a peer-to-peer marketplace for computation. What this means is that instead of me shutting my computer at night, I can rent out the CPU and GPU cycles to developers, and this developer might be at another continent and they’re training a machine learning algorithm, or rendering animation, or something like that.
So this marketplace is between people with cycles to offer and sell and the people who are buying those cycles. So that’s what I mean by it’s an asymmetrical peer-to-peer network, but the effect that this has is sort of like an Airbnb effect on Amazon Web Services or Microsoft Azure, where these are the centralized hubs that developers traditionally have to go rent out in order to get these cycles and run complex computations.
And now, instead of having to rely on these centralized hubs, you can go out to a grid network of volunteers all just receiving smaller amounts of money. So I think that something like Golem, by adding a monetary layer to this peer-to-peer network, is creating something new and potentially massively disruptive.
Laura Shin:
Let’s explain a little bit more in depth how this works, because for something like Golem, I know that they have created their own GNT. They call it Golem Network Token, but you know, as you talked about, a lot of these are built on Ethereum, which has its own currency, which is Ether. So why is it that these networks are creating their own tokens as opposed to just using Ether for payments or another cryptocurrency?
Olaf Carlson-Wee:
Yeah, so it’s mostly not for hard technological reasons, but rather what I would call kind of game theoretic reasons. Like, you want to align incentives. So it allows holders of GNT, or Golem Tokens, to be exposed very narrowly to the growth of the Golem network. So these tokens are also tied to governance, right? So when you’re trying to decide the direction of the protocol to take, these tokens can actually be used for voting on that network.
Additionally, you know, as an investor, you can invest very specifically on that network, not on the larger Ethereum network, and as the founders of the protocol, you have sort of equity incentives, right? So the founders of Golem, if they built that with Ether and it becomes very successful, the value of Ether might rise 10 or 15 percent, but if they create these Golem Network Tokens and the network is successful, the value of its Golem Tokens will rise maybe 100 or 1,000X, right? It will become much, much more valuable from where it started.
So, to me, it aligns incentives better, and it supplies a better governance mechanism. So sort of a crude metaphor is that just because I have US dollars, right, doesn’t mean I should be able to vote at a Google shareholder meeting. Just because, you know, the stock is denominated in dollars doesn’t mean I sort of have those rights, and so there are some similarities between being an equity owner in a private company. You want to issue your own stock so you have kind of narrow network effects around your project.
Laura Shin:
Okay, so I actually want to go back to just explicate for people who maybe…because I know that you’re steeped in this every day and that you sort of very quickly talked about something that, you know, I think maybe the listeners really need to understand, which is that by creating this software that is creating these new tokens, these developers can now raise millions of dollars sort of out of thin air almost.
Obviously, they have to put forth what the value proposition is and make all the effort to create the network, and to create a utility in the network, and a reason to want to use the network, but you know, as you mentioned, essentially, they don’t really need to raise money from VCs anymore, and they can just create these tokens and do a big crowd sale and then suddenly have, you know, a few million dollars.
But the thing is, that because of just how appealing that sounds to, as I said, sort of create money out of thin air, you’re also seeing a lot of maybe less legitimate new tokens being offered, potentially scams. So, for you, as somebody who’s running this hedge fund that is investing in a number of these digital assets, how do you decide which ones are legitimate and which ones are worthy of investing in?
Olaf Carlson-Wee:
Yeah, so this is the beauty of this space, is that it’s totally permission-less innovation. So anyone in the world can create a token and say, hey, I’m building this new project. I think that’s great. It also means there’s a lot of noise, and just finding the signal in that noise is my job. So we look at a lot of things. So we read white papers religiously and make sure that the way the protocol is specified actually makes sense.
We will look at the GitHub repository to kind of check out the code base and make sure that makes sense, as well as the GitHub forks and stars and kind of the developer ecosystem around that to see how that’s emerging. We also will always talk to the founding teams, particularly the technical architects on those teams, to make sure that the way they’re thinking about their protocol makes sense and that they’re the right people to, you know, work on this for many years.
Laura Shin:
So you don’t have a computer science background, or at least you’re not a programmer. So, you know, how do you do that kind of technical review, and then also can you explain, when you said you follow the GitHub forks and stars, what that means?
Olaf Carlson-Wee:
Yeah, so I have a team of people that help me with the technical review. I feel very good about reading even the more hardcore white papers. I think when it gets to the byte code on say, you know, is this new scripting language actually legitimate, that’s where I would reach out for help, and I have a team of advisors and investors that can kind of help me there, and then the GitHub forks and stars, what that basically means is in this open source environment, that is other developers interacting with this open source code base. So a fork means, okay, I copied it. Now I’m going to tweak some things. So it’s like a developer kind of messing around with the protocol to see if they can tweak it in a good way, or maybe they’re building an application on top of it that uses that protocol. So, yeah, it’s basically we’re measuring always the developer ecosystem around these.
Laura Shin:
And what does the developer ecosystem mean to you? Like, when you see that developers seem to be tinkering with someone, what does that signify?
Olaf Carlson-Wee:
So, you know, most of what we’re investing in right now are underlying protocols, or what I might called middleware, and I think Golem is maybe a good example of that. So I don’t really see Golem being used by “regular people” in the way that an end user application is meant to be…you know, you sign up and interact with this app, right? It’s really tools for developers so they can build end user applications that are really meant to be, like, for the masses, and so, in that case, really the users are developers. Like, to me, Ethereum is a tool for developers. So looking at the developer ecosystem is basically us measuring the success of this project. Like, are there a lot of developers hooking into this and trying to build things on top of it?
Laura Shin:
Because of where you stand in the industry, I imagine you see a lot of these digital asset investment opportunities, but then you probably pass on a very high percentage of them. What are the main reasons you tend to pass?
Olaf Carlson-Wee:
Oh, man, there are so many reasons we might pass. I think right now, one of the big issues is that a lot of people want to create a digital token in order to raise money, but that token doesn’t make sense for the project they’re building. So, in general, I think a good rule of thumb…and this is something that Fred, the co-founder of Coinbase, really said first. Was that if you are building network effects, then a token can make sense, but if you’re not building network effects, a token probably doesn’t make sense.
And I think that, in general, this has remained true for the projects I see. So people are creating tokens for things and digital assets for things that don’t really have network effects and aren’t trying to build network effect, in which case, you, actually, as a buyer of the token, the project could succeed and the value of that token might not increase at all. So, you know, Polychain, we’re investors, right, and when we’re buying these digital assets, we of course are trying to create returns for our investors.
So we need to invest in things where we believe that the growth of that network will be one to one with the price increase of this token or digital asset. We can’t invest in a digital asset that, you know, is maybe only very loosely tied to the success of the network. So I think that’s probably the number one error we’re seeing right now.
Laura Shin:
And aside from Golem, what are some other digital assets that you’re excited by right now?
Olaf Carlson-Wee:
So Golem is very much on this kind of Ethereum digital asset…it’s an application-specific token, is what I call it. So, once again, Golem is not meant to be used as general purpose money or currency, but really for this computational marketplace. Another example of non-digital asset on Ethereum, but rather a whole new blockchain is Tezos. So Tezos is like Ethereum in that it has this Turing complete scripting language that’s capable of running arbitrarily complex software.
But Tezos’ scripting language has sort of different semantic qualities in it, and the main difference is that when you write smart contracts or these pieces of software with Tezos, you can formally verify those contracts, and formal verification is a process whereby you essentially mathematically prove that the contract does what it’s intended to do. So it makes it easier to write a bug-free piece of software, and when you’re writing financial contracts, ensuring that there are no bugs is very important.
Laura Shin:
That could prevent things like what happened last summer with the DAO, which raised 150 million dollars, but then sort of collapsed when someone or a team of people managed to pilfer, like, about 50 million from it?
Olaf Carlson-Wee:
Yes. Exactly right. In addition, Tezos is a proof of stake blockchain. This means that it’s one coin equals one vote on kind of consensus. So instead of having miners, the token holders are actually doing the consensus, and finally, it has protocol-level voting on decision-making. So governance has historically been a very complex problem in these ecosystems. In Bitcoin, it has manifested as a multi-year debate about how to best scale the protocol, of which there are big disagreements and no clear governance.
Like, there’s no clear mechanism whereby to decide what to do, and it has basically resulted in an analysis paralysis where the disagreements mean that neither side wins. In Ethereum after that hack, there was this decision to fork the protocol and actually sort of undo what that attacker did through a fork, and again, a very vocal minority of people opposed this, and there was really no mechanism to determine, you know, how to move forward.
In Tezos, you can actually have one coin equals one vote and have, essentially, votes on how to move forward, and the protocol will automatically upgrade or fork based on how those votes are tallied. So, for the first time ever, I think you have built-in governance at the protocol level not based on sort of these vague relationships between developers, miners, users, exchanges, but rather, you know, codified governance. So we think that’s a really interesting experiment. I think it’s something to definitely watch over the next year or so once Tezos is launched.
Laura Shin:
Do you worry about legal or regulatory issues hurting your investments?
Olaf Carlson-Wee:
Yes, a little. So I think the regulatory risk here is there, right? I think there’s unclear regulation around a lot of these types of things, just like I think there’s still somewhat unclear regulation around certain things in Bitcoin. Now, that said, I do think that open source and peer-to-peer has historically been extremely resilient. So, for example, you know, file sharing and the file sharing protocols that are used, like the torrent protocol, have been extremely resilient to attempts at any individual geographic region attempting to squash that activity.
This truly is a global phenomena, and there are no clear legal jurisdictions in which most of this is taking place. It’s really all happening on the internet, and the digital assets that, you know, Polychain is holding, these really aren’t domiciled in any geographic location. They really, truly kind of exist on the internet. So, to me, you know, we’re seeing what is a truly global and internet-based phenomena more than we’re seeing a phenomena based on any specific geographic region.
And for that reason, legal frameworks are based on geographies in the physical world, not based on relationships over the internet. So I think that the regulatory space here is very complex for that reason. If any individual country makes laws around this, it’s very unclear, you know, what that applies to if this project’s on the internet and nothing’s based in the United States, and no developers are located in the United States, or things like that.
Laura Shin:
You’re holding 15 million dollars worth of Bitcoin, Either, and other obscure cryptocurrencies. How do you keep your private keys, which hold all this money, which, you know, keep the money secure…how do you keep all those secure?
Olaf Carlson-Wee:
Yeah, so we use industry standard offline, or cold storage is the other term for that. So in a cold storage architecture, what you do is you actually get an offline computer that has never touched the internet and never will touch the internet, and you actually generate keys on that computer. These are cryptographic keys that actually store the cryptocurrency. Then you can create backups of those keys.
So these backups can be on flash drives, on physical pieces of paper. Again, none of this ever touching the internet. You can secure those backups in very secure locations, like bank safe deposit boxes or things like that, and then, at that point, you can actually send cryptocurrency to that computer. So this is the interesting thing about this with cryptocurrency that’s sort of counterintuitive, is you can send cryptocurrency effectively from an online exchange to a piece of paper.
And really, what’s on that piece of paper is access to that cryptocurrency in the ledger which is stored on the internet. So it’s very easy, actually, to move from an online environment to a 100 percent air gapped or offline environment. What this means is that any sort of attack vector targeting this cryptocurrency needs to occur 100 percent offline or 100 percent off the internet, and this is by far the most important step you can take when securing cryptocurrency, is to move to 100 percent offline storage.
Laura Shin:
Okay, let’s talk about how you got these big VC firms, Andreessen Horowitz and Union Square Ventures, to invest in Polychain. First of all, how does a venture fund invest in a hedge fund, and why were they interested in investing?
Olaf Carlson-Wee:
Yeah, so you’ve said the right thing, which is that it’s very unusual for a venture fund like Andreessen or Union Square Ventures to invest in a hedge fund, like, as an LP in another fund, but this is a very unique asset class. So if you look at the numbers here, just to back up for a second, Bitcoin companies raised about 1.4 billion dollars in venture financing. Ethereum companies, by comparison, have raised an absolutely…you know, rounds to zero kind of amount of money.
But Ethereum digital assets built on the platform have raised something like 300 million dollars, you know, orders of magnitude more than private companies building on Ethereum have raised. So there’s definitely a lot of activity happening here, but out of that 300 million dollars, basically, none of that money was venture. Really, most of that money was sort of, you know, “regular people” from around the world that want a stake in these projects and to support this certain open source ecosystem that they’re investing in.
So, to me, you know, gaining access to these digital asset and protocol-based ecosystem means that you either have to go do it yourself or you can invest in something like Polychain. So explaining to your investors when you’re a sort of traditional venture firm that you are going to purchase cryptographic tokens I think is very hard, but investing in another fund, while that’s still hard, actually makes a lot more sense, and so these firms, Andreessen and Union Square, had high conviction, and this was actually the best avenue for them to gain exposure.
They also know that monitoring the space and reading these white papers, talking to the developers, and sort of understanding the whole ecosystem is a full-time job and more. So by putting that on me, they don’t need to have, you know, a whole team of people just looking exclusively at this ecosystem, and it’s also a very specialized skillset that can kind of look at these various investment opportunities and discern which ones are really the most valuable.
Laura Shin:
Well, we’re running out of time, which is so sad because there’s so much more I could’ve asked you about, but sort of quickly, because I can reference this in the show notes, I wrote a story about you. I forget if it was…was it a year ago or two years ago? About how you were earning and spending all your money in cryptocurrency and I can link to that in the show notes, but can you just tell us briefly if you’re still doing that?
Olaf Carlson-Wee:
Yeah, so, actually, creating Polychain has complicated the living on Bitcoin experiment that I was doing for so long because I put 100 percent of my cryptocurrency holdings into the Polychain fund. So this means, you know, I don’t have cryptocurrency sitting around in personal wallets, and I have maybe 100 bucks that I can send to friends or something, but if I want to purchase, like, a plane ticket, or a hotel, or something like that, I really do need to do that in dollars now because I put all of my meaningful cryptocurrency holdings into the fund. So, actually, starting Polychain really broke my living on Bitcoin experiment.
Laura Shin:
Well, that’s very ironic, but definitely a good reason. So where can people learn more about your work and get in touch with you?
Olaf Carlson-Wee:
If you go to the website Polychain.Capital, you can actually read about a one-sentence blurb about what we do, which is much less informative than I hope this podcast has been, and then my contact information is there, as well.
Laura Shin:
Great. Well, thank you for coming on the show.
Olaf Carlson-Wee:
Yeah, thank you very much for having me, Laura.
Laura Shin:
Thanks for joining us today. If you’re interested in learning more about Olaf’s work with cryptocurrencies, check out the show notes which are available on my Forbes page, Forbes.com/sites/LauraShin. Thanks so much for tuning into Unchained, which comes out every other Tuesday. Please share the podcast with friends and on social media, and remember to review, rate, and subscribe to it in iTunes or your preferred platform. Thanks again for listening.
