Joey Krug, cofounder of Augur and co-chief investment officer at Pantera Capital, talks about what Augur is and is not, why it’s difficult to create new financial markets today and whether or not Augur markets could curb fake news. He explains why the teams burned its escape hatch key and whether he’s worried that Augur’s crowdsale would be considered an unregistered securities offering, plus answers whether he would benefit financially if assassination markets pop up on Augur. We also discuss what he sees happening in the market in his role as co-chief investment officer at Pantera Capital, what problems he think need to be resolved before Augur and dapps can take off, and which projects he believes have the greatest potential to democratize finance.
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Episode Links:
Joey Krug: https://twitter.com/joeykrug?lang=en
Augur: https://www.augur.net/
Pantera: https://www.panteracapital.com/
Joey on Unconfirmed: https://unconfirmed.libsyn.com/joey-krug-on-how-to-create-a-regular-cryptocurrency-ep022
Augur FAQ: https://www.augur.net/faq/
Predictions Global: https://predictions.global/
Assassination markets on Augur: https://www.coindesk.com/the-first-augur-assassination-markets-have-arrived/
SEC action against Sand Hill Exchange: https://www.sec.gov/news/pressrelease/2015-123.html
Listen to the Unchained interview with 0x: http://unchainedpodcast.co/will-warren-of-0x-on-why-decentralized-exchanges-are-the-future
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. Here’s a pause for the ads.
My guest today is Joey Krug, Co-Founder of Augur and Co-Chief Investment Officer of Pantera Capital. Welcome, Joey.
Joey Krug:
Thanks for having me.
Laura Shin:
I had known of you for a while before I realized how young you are, and so for listeners who don’t know tell us your background and how you got into crypto.
Joey Krug:
Sure, so my background is I really first got into crypto in 2011, I was in high school at the time, and just came across Bitcoin on this forum called Overclock.net and started mining a little bit. Back then, everybody was mining with graphics cards so I was doing the same thing and I quit after a few weeks because it was making my room really hot. It was in the summer and it was like 90 degrees in my room, and then, didn’t really do a whole lot with it again until 2014 or so when basically, I kind of saw how Bitcoin was becoming this sort of digital version of gold and that wasn’t really the sort of use case I was that interested in. I was more interested in the kind of disrupting the financial system side of things, and so in 2014, ended up starting Augur and for that basically, the idea was that it was a platform for prediction markets. The idea was you could essentially speculate on anything on Augur. It was one of the first projects on top of Ethereum. That’s kind of how I initially got into the space.
Laura Shin:
And at that point, you dropped out of college, correct.
Joey Krug:
Yeah, that’s right. I was studying computer science at Pomona in Southern California and dropped out that summer.
Laura Shin:
And then, I guess like a year or two later, you got a Thiel Fellowship as well, right.
Joey Krug:
Yep, that’s right.
Laura Shin:
And so how did you come up with the idea for Augur?
Joey Krug:
Well, so, prediction markets are really, you know, old idea. They’re basically kind of a generic sort of financial market and you can use them to create derivative markets so things like, you know what will the price of Ether be on a certain date. You could create things like put options or call options, and you can also create, you know, more traditional kind of betting markets to things like who will become president of the United States in 2020 or you know which horse will win a horse race, and the idea is an old idea, and it’s kind of rooted in economic theory, basically two different economists.
One is Friedrich Hayek who kind of came up with the idea and say that prices and markets are just information, so if you had more markets on more things, you would have kind of more useful information to go about your daily life, and the other idea is this idea called complete markets from these economists called Arrow and Debreu and their idea was basically that if you had markets on essentially anything, the economy would be more efficient because people can hedge against more specific risks and they could take more specific speculative positions. They actually won a Nobel Prize for that work, and that kind of vision was never really realized, and the reason is, in my opinion, it’s very difficult to create new financial markets today, so if you look at, you know, how hard it was to create a new book before the printing press came out. You had to have monks or scribes copy it down and you know each copy had a little bit lost in translation. That’s kind of how I view new financial _____ 00:03:21, new financial contracts today. The monks or scribes are basically investment banks like Goldman Sachs and you have them write up a contract and so there’s a big disincentive to experimentation because it’s just so expensive.
It costs millions of dollars to get anything off the ground and so with Augur, I kind of view it as a sort of…it’s like a tool. It’s like a printing press but for finance. So the idea is if you want to create a financial market on something and that market doesn’t exist, or it’s just expensive somewhere else, you can create it for, you know, 20 or 30 dollars on Augur and basically, its way cheaper to do that.
Laura Shin:
Interesting, so what is your background in finance or betting?
Joey Krug:
So I first got interested in betting when I was in middle school. I was essentially…you know I had this computer class that I’d always get done with early and was looking for something to do because it was the end of the day and I ended up basically betting on horse races, so there are, you know, overseas betting sites and I built, you know, some really simple models essentially in Excel and that’s kind of how I first got started betting. You know I initially started with 20 dollars, built it up to a few thousand, and then at that point, ended up getting into finance because I wanted to invest in something safer. Unfortunately, the year I decided to get interested in finance is 2008 so lost a bunch of money in the 2008 recession but that was a good, you know, learning experience.
Laura Shin:
And so just from your personal interest in that, that was how you came across…across those ideas by those economists and then, you know, connected that with what you were doing in Bitcoin and decided to launch Augur.
Joey Krug:
Yeah, so the, you know, interest in economics and stuff that was back, you know, when I was in middle school and then ended up, you know, started working on Augur like during or after my freshman year of college, so there was a, you know, gap in time where I wasn’t really doing anything actively in finance, but yeah, those are kind of the original reasons why I started to get excited about it.
Laura Shin:
How does Augur work? Describe it for listeners who might not be familiar with it.
Joey Krug:
Sure, so the way it works essentially is you have, you know, these programs on Ethereum that store the money and so say you’re basically betting whether, you know, Trump will win in the 2020 election in the US, and so in this scenario, there’s two possible outcomes, yes or no, just to keep it simple and if the current price of yes is 55 cent per share that basically means the market thinks there’s a 55 percent chance that Trump will win, and if you want to participate in that market, what you can do is say okay, I want to buy Trump at 55 cents per share. If he wins, you end up getting a dollar, so you basically made 45 cents profit. If he loses, you end up losing your 55 cents and so it’s really simple and straightforward. Basically, the way it works is, you know, funds are deposited into these programs, the trading takes place on these smart contracts, and then at the end of it, a payoff happens according to what actually happened in the real world.
Laura Shin:
And how do you determine what the truth is, or what actually happened on the platform?
Joey Krug:
Yeah, so in Augur the way…you know the way the outcomes are determined is basically is there’s this big system of people, we call them reporters and it’s a distributive group of people and they collectively kind of say what happened, so from a practical standpoint, the way it works is initially, just one person submits a report so they may say, you know, Trump won the election. However, let’s say they are dishonest and they said that he didn’t win even though he did. Then what happens is the system has a dispute period where anyone can dispute it and these disputes are essentially crowdfunded, so people keep disputing back and forth until eventually, either the market resolves and one side kind of gives up or the network can actually fork or split into two networks similar to other blockchain forks, except in Augur, you know, your fork, you know for essentially reality.
Laura Shin:
You launched Augur live on July 9. Since then, what kinds of activity have you been seeing and what markets have surprised you?
Joey Krug:
Yeah, so there’s been…you know on the activity side of things, what we’ve seen is lots of people creating markets but you know a lot of those markets don’t necessarily have liquidity on them to definitely follow the power _____ 00:07:34 distribution where the liquidity’s actually landed. So the most popular markets tend to be things right now like essentially derivatives on the Ethereum price and you know I hate that makes sense because right now, every market is denominated in Ether, so you need Ether to trade in things, and Ether’s a pretty volatile asset so it doesn’t really make sense right now to use Augur for something like say sports betting when you have, you know, 5 percent _____ 00:08:00 volatility in Ether’s price. Whereas, using it for a derivative contract that involves Ether itself makes perfect sense. That’s kind of what we’ve seen but there’s about a thousand markets that have been created on Augur.
Laura Shin:
I did see also I think the most popular one is about the price of Bitcoin.
Joey Krug:
Yeah. Yeah, I could see that.
Laura Shin:
What markets have surprised you?
Joey Krug:
I mean the most surprising ones have really just been kind of how creative people have been with creating markets, so like some people have actually figured out ways to construct like put call spreads on top of Augur, which is a pretty complicated financial instrument and so what’s really interesting about that to me is it shows kind of the power of prediction markets in general where you can take these kind of very basic fundamental simple tools and use them to build something that’s kind of quite complicated that exists in the regular world.
Laura Shin:
So if Augur becomes wildly used, how will the world and the lives of everyday people look different a few years from now?
Joey Krug:
Yeah, so the main differences are right now, if you want to get information about something, some future event that may or may not happen, your best bet is to essentially look at either polls, in the case of elections, or to read kind of commentary, in the case of things that are, you know, harder to decipher than elections, and I think you’d be thinking about Augur from like an average, you know, consumer standpoint, one really useful thing would be, you know we kind of view it as like long-term as sort of a search engine for the future, so if you look at like Predictions.global, which is a website somebody built on top of Augur, you can look at all the markets and see kind of what they’re forecasting and that can be essentially anything. It could be something kind of boring like, you know, flood or drought risk but it can also be something more interesting like what are the odds the US and North Korea sign a deal requiring North Korea to, you know, give up nuclear weapons or something, so you can have markets on essentially anything, and right now, when we go about our daily lives, we have pretty good predictions about things like the weather but we don’t have that great predictions about other things, and if you look at financial markets today, they’re primarily on, you know the prices of companies that I think they can be expanded to be a lot more than just that.
Laura Shin:
You’ve talked before about how Augur will enable trading in markets that are too small for financial institutions to make markets in, like for instance, how many inches of rain will fall in a region of the world that’s not important to most people but to the farmers that live there, so if that market is that small, how could this market be popular enough at all even amongst the crowd on a platform like Augur for it to make sense to create a market in on Augur?
Joey Krug:
Yeah, so on Augur, if you look at the cost to create a market, you have basically two different costs. One is you have this bond that you have to put up, basically, that if your market’s an invalid market or it’s a market kind of doesn’t make any sense or result is indeterminate, you’ll lose that bond. Right now, that’s around, you know, 25 to 30 dollars but you get that money back if your market is like a properly worded market. The other fee is, you know, the gas fees to create a market on Ethereum, which are probably, you know, a few dollars right now, so probably around 5 dollars and so if you look at that, you know your total costs, assuming you get the money back for that bond, is around 5 to 6 dollars, so it’s very, very cheap and so that’s kind of one barrier to entry that it lowers.
You can look at regular financial markets. It’s really hard to even experiment with them because if the start up costs to even create a market on something is millions of dollars. It’s a pretty large barrier to even experiment and see if there’s even an interest in a given type of market, and then in terms of the, you know people actually trading on something like that. Since the start up cost is so small, it’s probably fine if there’s some markets that only have, you know, a few thousand dollars of people trading on them back and forth because for them, it like makes sense.
Laura Shin:
That’s interesting, so even in markets that small where there’s only 100 people betting, there could still be useful information that comes out of it.
Joey Krug:
Yeah, that’s right and the reason is, you know, it only takes two opposite parties who want to place a bet at the same price for a market to be useful for somebody. In practice, of course though, you know you generally need at least a few dozen people before a market starts to make sense.
Laura Shin:
Interesting. Something else that I was interested in is whether or not prediction markets could help curb fake news. What do you think?
Joey Krug:
Well, I don’t think we can help that much with fake news because even fake news, there’s a lot of time people know it’s fake but they still share it anyway, but prediction markets are definitely a good way of putting your finger on a piece of information kind of in a really precise way. It’s like the way to think about it is if you disagree with what the market says, you can always bet against it and so there’s always financial incentive to basically correct the price or correct the odds.
Laura Shin:
And do you…but…I guess what I’m asking is, you know from the way that the Augur market is described and the incentives that reporters have, don’t you think that if someone was trying to say…I guess for instance, so like what if right after one of these big shootings like the Parkland High School shooting in Florida, you know there were those people saying oh, those “students” there, they’re paid actors, and so what if like right after the shooting, somebody created a market saying will actors be paid to act like, you know, distraught survivors at the shooting, you know then there are those people that keep insisting that they are paid actors. What if they were to somehow try to engage with the market and keep disputing the outcome? Would that then lead to a fork and like allow those people to kind of persist in their fake news universe, or how would that work, or is this scenario I’m painting not even possible?
Joey Krug:
Yeah, so it depends on how much they’re willing to lose money by kind of having that dogmatic, you know, incorrect view. People have brought up using the reporting system as a way to kind of have consensus on real world events for things besides Augur, so on like news events that’s actually a good example. People on Reddit have actually brought up using Augur reporting results as, you know, citation for Wikipedia articles, so you can imagine, you know, that in regular news, there’s not always the financial incentive to tell the truth but in reporting on Augur, at least you know in theory, the incentive to be honest.
Laura Shin:
And so then, I’m just curious, so in that scenario where you had this one minority that kept insisting, you know, that actually, the outcome was not X but Y then in the world of Augur, as long as they were a sizeable enough majority I guess, if they represented 2.5 percent of all Rep, then that would lead to a fork, so then there would be sort of like these two Augur universes, one with, you know, that is based on reality and one that’s based on fake news, and so then would…which is sort of like the internet now where there’s a world of the internet that’s based in reality and the version of the internet that is not, so just would that keep persisting where you would just have this other world where they would just keep reporting, you know, fake news and those would all the winning outcomes on that Augur platform.
Joey Krug:
Yeah, so on that one universe, you know, you could think of it as like a fake news universe. You know I don’t think people would actually use that that side of the platform because if you’re a trader or you’re a better, or you’re anyone who’s not, you know, profiting off of solely fake news, your financial incentive is to use the one that actually reflects reality. For those people, you know, that small minority could still maintain a kind of side group where fake news rules the markets. The problem with it though is fake news isn’t necessarily consistent in its fakeness, so even that universe, interestingly enough, would probably split over a bunch of disagreements, which is kind of part of the core concept of Augur is it’s easier to align on a truth then it is to align on some lie. That’s part of the reason why if you look at like how police examine criminals, they do cross examination to try to find inconsistencies and stories.
Laura Shin:
Interesting. Well, we’ll see what happens. Something that I wanted to ask you about also was this is a kind of I guess really the year and for the last year, it’s been like this where we’ve seen the SEC making a lot of moves in the crypto space and for the last several months, the SEC’s message has been that all ICOs are securities offerings, so do you ever worry that the Augur crowd sale in 2015 would also be considered an unregistered securities offering and worry about what that could mean for you.
Joey Krug:
I think if you look at, you know, Augur in particular and some of the more recent statements by the SEC, you know they talk about this kind of concept of sufficient decentralization and if you look at Augur, you know I myself don’t really have any control over the network beyond the fact that, you know I can sit here on a podcast and talk about it but I can’t actually exert any sort of control on it. I could, for instance, publish and code and you know maybe people will switch over to it or maybe they won’t. It’s similar to a position that, you know, a core developer or someone like at Bitcoin or Ethereum is that they need to look at Augur’s token particular in order to earn money from the markets and the system. You have to be, you know, actively participating in the reporting system, which is I think one thing that makes it different from most other projects in the crypto space where, you know, to actually get the cash flow I guess is the way to put it, you have to participate in the system.
Laura Shin:
So we’re going to talk more about decentralization and these issues in a moment but first, I’d like to take a quick break for our fabulous sponsors. Here’s a pause for the ads.
I’m speaking with Joey Krug of Augur and Pantera Capital. So you mentioned that you don’t have control over Augur, but you were one of the co-founders or are one of the co-founders and you designed it, and coded it and launched it. Some token projects have this kill switch that gives the developers power over the project in case of, you know, potentially catastrophic incidents and you guys burned yours two weeks after Augur went live. Was that the intention there to kind of give yourselves cover and say like oh, now it’s decentralized, we can’t control it?
Joey Krug:
Well so the concept of kill switch is, you know they traditionally been called escape hatches in like back _____ 00:18:39 literature. I think people are kind of mislead about what they actually enable, so if you look at an escape hatch, what it enables is kind of pausing of all contract functions and it allows people to withdraw their money from the contracts but it doesn’t prevent someone from just re-uploading the same copy of those contracts without the kill switch or without the escape hatch, and the main reason they have these sorts of things, you know at least from a computer science standpoint is very early on, you want to make sure that there’s at least not some huge, obvious, critical vulnerability that was missed by auditors and so you kind of have the benefit of being able to pause things, let people withdraw and then migrate over to a new version of the system.
At some point though, you want to basically get rid of that feature because as the system grows, you can use that feature for malicious uses, so if you look at Augur in way the escape hatch worked, when you pause the system, there’s no way to, you know, return the money to people in a 100 percent way. The way the original Augur protocol did it was it returned the money at the latest odds that each market traded at and so there’s definitely a bunch of use cases where that key could get stolen or you know somebody can malicious press that button and screw over a lot of the traders in the system, so once that we thought it was _____ 00:19:58, you know decently secured, there were no major vulnerabilities happen the first two weeks, we basically decided to get rid of that functionality and that way, you know, we can’t really pause the system and if, you know, there is some vulnerability found, essentially what would happen is people would kind of have to hard fork over to a new system.
Laura Shin:
And who would manage that hard fork?
Joey Krug:
Well, so the way a hard fork, you know, for smart contracts works is we haven’t really seen this that much but basically what would happen is somebody would upload, you know, new smart contracts. It could be developers. It could be essentially anyone that’s trivial to verify that those are the smart contracts they claim to uploaded are the ones that they actually uploaded and then after that point, it becomes a problem of convincing people to use it, so it the case where there’s like a vulnerability found from a security standpoint, I think, you know, doing a hard fork, getting people to migrate over to a new version where it’s fixed would be pretty straightforward because there’s not a good reason to stay on the old vulnerable one. However, if you’re doing things like, you know, feature upgrades, it’s a lot harder to get people to move over and we’ve seen this actually with Bitcoin where there hasn’t been a huge amount of upgrades to it that require hard forks because people are not really willing to do that.
Laura Shin:
So but in terms of like making decisions like that, it would be the forecast foundation?
Joey Krug:
So it’s kind of unclear at this point how hard forks would happen because none have happened yet or really anything on the decentralized app player on top of Ethereum. I imagine they would have it in a similar fashion to how hard forks happen on the protocol layer so the closest analogy to look at would be look at how hard forks happen on Ethereum itself and basically there what you have is kind of a community-driven process where people debate what sort of things should be in the hard fork or what shouldn’t and then after the community kind of comes to a consensus on it, eventually, a new version is released and people decided whether to use it. In the case of, you know, Ethereum right now, people have gone with most of the hard forks. They can also decide to reject it. In the case of…if you look at, you know the DAO fork. Some people rejected that and stayed on Ethereum classic. The same thing could certainly happen to Augur where you have people on the old version, some people on a new version.
Laura Shin:
And when you say a new version is released and people can decide whether to use it or not. Who is releasing it?
Joey Krug:
So in terms of who releases it, you know in practice, it would probably be, you know, people working on the Augur protocol would push a new version of it to get out and then people would decide whether to use that or not. In theory, anyone can do that.
Laura Shin:
So it sounds like it could be you.
Joey Krug:
Yeah, that’s exactly right. Yeah, so people have actually already proposed kind of hard fork updates to Augur that are separate from the current _____ 00:22:47, so for instance, some people have proposed versions that kind of allow for more easy…easier censorship of markets. Some people have also proposed versions where you modify the reporting system quite a bit and actually remove fees entirely. That’s all part of early stage stuff.
Laura Shin:
The FAQ on Augur says that it’s not a prediction market itself, but just a protocol that enables people to make markets and so that you guys, Augur, cannot control what markets people create or any other actions they take on the platform and this, you know I’m not a lawyer but the research I’ve done it seems like this comports with a section of the Communications Decency Act that says providers or platforms are not liable for content by others, but it actually turns out that there is an exception for criminal activity, so I’m just making up this hypothetical scenario, but let’s say somebody created an assassination market on Augur and then that…the target of, you know, that assassination market was actually assassinated and somehow investigators linked the killing to the market. If the prosecutors went after you for creating the platform, how would you defend yourself?
Joey Krug:
Well, I think that question’s a bit like asking, you know, somebody who invented the hammer or the printing press. You know what happens if someone takes a hammer and uses it for something bad, or what happens if somebody uses the printing press to write, you know, a book like _____ 00:24:16, and so I think like all sorts of tools you can use them in very positive ways and you can use them in very negative ways. When you’re inventing a new form of tool, kind of for instance _____ 00:24:27 to use, what you have to weigh is basically whether you believe that the positive benefits outweigh the negative, the negative use cases or even the negative externalities of those positive benefits and so you know looking at something like Augur, if you look at the volume that’s taken place on it and what people are actually trading on today, you know, 99.999 percent of it is either derivatives contracts, you know some of its sports. If you look at like the World Cup markets, you know, there was somebody who created an assassination market that expired I think in July and it had about 50 dollars traded on it and about 300 dollars in open orders and above that weren’t filled, and so I think from that standpoint, you know I believe that Augur is going to create more good in the world than bad.
From a, you know, legal standpoint of what does it mean to be a creator of this sort of protocol, you know I think if you look at the communications act, in the 90s it was passed, is primarily intended for people who are actually operating these sort of platforms on the internet, so you know hosting a site, running things, whereas I view Augur more similar to something like Ethereum or even Bit Torrent, where you know we can definitely push new versions of the UI, but people need to decide to run it on their own machine or not, but we don’t actually host the software and run it ourselves, and so from that sort of standpoint, I think if you’re thinking of creating a market on Augur, you should pay attention to the rules and regulations and your jurisdiction, and there’s already people who are creating for-profit entities on top of Augur to do exactly that and they’re basically getting licensed and you know their respective jurisdictions whether that’s Malta or the UK versus like creating a market in the United States I don’t think make that much sense because there’s just so many legal hurdles to doing that.
You know, only this past summer has sports betting been legalized on a federal level, but you still have 50 states to deal with, and in terms of my kind of positioning on Augur itself and creating a tool like that, I view it as mostly as a free speech issue, so I think you have basically if you look at code, it’s been protected as free speech under the Supreme Court and there’s also this concept of what I call a compelled speech and that’s the idea that, you know if someone were to try to go after us and say hey, like you should make these certain markets not exist. One, there’s not really a functional way to do that. You know maybe we could add a thing that hides them in the UI but you can always access them on Ethereum _____ 00:26:55 where they actually censor Ethereum itself, but even a thing of preventing them in the UI I think would fall under compelled speech laws, which has also been protected under the Supreme Court. You can’t force someone to say something. That said, all this stuff is new kind of _____ 00:27:10. It’s very similar I think to the kind of early days of the PAP file train revolution like we saw with, you know, products like Bit Torrent.
Laura Shin:
So in your answer you talked about how you do, you know recommend that users comply with the laws in their jurisdictions, so do you ever worry at all about maybe aiding and abetting liability on, you know for yourself with respect to any of those laws in any jurisdiction?
Joey Krug:
Can you clarify the question?
Laura Shin:
Like do you worry that you might have liability for aiding and abetting, whether it’s for, you know, laws against murder for hire or something like that.
Joey Krug:
Well, so I think from a liability standpoint, you know I’m definitely not encouraging that sort of behavior and you know just because something is possible doesn’t mean that you’re necessarily aiding and doing it anymore than the person who created a hammer, aided and someone who broke into a window with it.
Laura Shin:
Okay and I was also curious in your answer where you spoke about consulting services for people who are making markets. I wasn’t aware that was happening. It sounds like already there’s consulting services popping up for people who want to create markets to make sure that they can comply with the laws and jurisdiction.
Joey Krug:
I didn’t mean consulting services. I mean those sorts of things do exist. Gaming consultants have been around for decades doing exactly that, but what I meant was people are creating for-profit companies on top of Augur that are going to create markets and those companies are going to be licensed in their respective jurisdictions.
Laura Shin:
Oh, interesting but then how do they enforce that the participants are people who can participate in that jurisdiction you know how can they restrict it to that jurisdiction?
Joey Krug:
Yeah. A simple way to do it just you know geo fence your site. It’s the most multi ______ 00:29:07 for-profit thing on top of Augur are probably still going to run centralized websites. They’re just using Augur because they don’t have to deal with settlement, resolving markets, processing trades, things like that so it’s mostly a cost savings and so they’re still going to run this stuff through centralized websites so you just IP fence or geo fence those people out. You know there’s always the possibility that somebody could come, you know, basically through the back door essentially. In this case, you know using Ethereum like an API or manual level, you know, doing something through my Ether Wallet to trade with you, but there’s also ways to get around that, like for instance, you could run all trading through a state channel where your users have to sign up through your website to take part to trade against you.
Laura Shin:
The way that you’ve designed Augur, you do not identify users. Why did you decide to design it that way?
Joey Krug:
That wasn’t really a consideration in the design to be honest. It was more just kind of how would you build this from a tactical standpoint so that it actually works and using Ethereum ended up being I think in my opinion the best way to actually do that. Ethereum itself happens to be, you know, pseudonymous. It definitely doesn’t mean you can’t identify users though. For instance, if you look at an Ethereum address, for instance, every market has a market creator. It’d be very trivial to transform their Ethereum address back to the real identity by tracing which exchange they sent money through and most the exchange endpoints in this space are KYC even those, you know, assassination markets that the media kind of went crazy about over the past few weeks have also been funded by KYC accounts from exchanges.
Laura Shin:
So just going back to the question about the assassination market, so I totally understand about how you view this as a tool like a hammer or I guess like any other internet protocol, but I just wonder, you know, in this case where if someone does use Augur for criminal activity and in general you said that the market dries up the value of Rep that does benefit you financially, which is different from a kind of other ways that, you know, creators of tools, you know, might say oh well, you know criminal activity using that tool isn’t really related to me but in, you know with something like Rep in Augur there would maybe be a financial benefit to you, so how do you feel about that?
Joey Krug:
Well, so if you look at, you know, those sorts of markets, Augur does have the ability built in to resolve them as invalid and in that scenario, there’s essentially zero financial incentive to kind of do what everyone’s talking about and so basically in that scenario, what ends up happening is the people who created those markets essentially lose money and people who traded in them essentially lose out to arbitragers and so in that scenario, you know I don’t see any problem with it because you’re basically removing the financial incentive. If, you know, people in the system start to resolve those markets, you know, accurately and so they’re not trying to basically prohibit them than that would be, you know, more concerning but that hasn’t happened at this point.
Laura Shin:
And just go back, as you can see, I have a lot of regulatory questions because I do wonder this is such a new animal, I wonder how the regulators will react but we do have some history to look at, so are users able to speculate on what the stock of a private company will be worth if it goes public because there was an exchange and it was a blockchain base exchange called Sand Hill Exchange that enabled those types of bets but it was shut down by the SEC so I wondered how Augur differed in this regard.
Joey Krug:
Well, so for that I definitely would encourage you to read the FAQ, but in general, Augur itself doesn’t operate those markets and we don’t process the trades, we don’t store customer funds, and we don’t create those markets, which is an even more important thing, so if you look at most rules surrounding market operation, they surround creating and kind of operating the markets themselves, and so I don’t know if there are any markets on Augur in specific at the moment. I haven’t checked for that specific use case but you know in theory, someone could use it to create those and from a regulatory standpoint, you know I think it falls kind of on the onus of the market creator. If you look at something like Bit Torrent, it kind of falls under the onus of the tracker sites and the people actually hosting those files to make sure that they’re not, you know, hosting some sort of illegal service. For markets on, you know, private company start ups, I think that’s a really interesting use case. I’ve been talking to some people who are interested in doing it in actually a regulatory compliant fashion. You know obviously, not in the US because it’s really hard to use that sort of stuff in the US but it’s stuff that you could do much more easily in, you know, jurisdictions like the UK or Malta.
Laura Shin:
Interesting, so as you can see, through this especially, we’ve been talking about how the technology can be used for both good and bad. Are there ways that you in particular are thinking about trying to influence the usage of the technology more for good than for bad?
Joey Krug:
Well, so I think the main thing with something like this is it’s hard to know, you know what people are going to use it for. Just because it’s such a generic sort of set up for financial primitives, like it’s literally a way to…it’s literally a protocol for S growing funds, processing trades back and forth, and then processing, you know, resolution of those markets, and so the sort of things you can use it for are kind of really varying, you know in terms of what I think is most interesting. I think the sort of information gathering style markets are the most interesting ones. That’s the things on like political events, you know things that allow people to _____ 00:35:18 against various risks, things like that and so if anybody’s interested in, you know creating something like that, I’d be happy to chat about it. Basically, it’s because I think those are kind of the most sort of beneficial use cases for society in general. That said the cool thing about Augur is you don’t have to look at all the markets. It’s kind of like Google. You don’t have to search for everything on Google. Once when you’ve used Google, you can just look at the stuff that you care about and find interesting.
Laura Shin:
Yeah and how will you, you know I heard you talking before and I sort of referenced this example about this market could be useful to farmers in some remote region of the world. How would you reach them, or how would you reach the people that would care about that kind of market?
Joey Krug:
Well, so you basically need a couple of different problems to be solved before it makes sense to use Augur for anything especially, you know a use case like that and so those problems boil down to essentially two core things. One is fees are very high right now and two, the user experience is very poor, and so if you look at the fee angle, if you’re paying, you know, 15 percent in fees, if you add everything up from getting Fiat into crypto, dealing with volatility with crypto, dealing with all the fees for trading on Ethereum, dealing with the fees on Augur itself, add all that up and it becomes quite expensive. That’s one problem.
Another problem is the UI/UX and that includes things in my opinion like making it easy for people who aren’t familiar with crypto to use it and ideally, the kind of long-term state you want this tech to be in is an area where people don’t necessarily even need to understand crypto or know that it’s crypto or know that it’s using the blockchain for it to be useful for them. I think on the fee side of things, we’ll some pretty strong improvement over the six to 12 months as things like you know MakerDAO DIA become more popular, and as we see exchanges like that launch, which have much lower trading fees. On the UI/UX side, it’s really just kind of another thing that improves with the maturation of the tech. Part of the UI/UX issues are due to the fact that it’s so unscalable that time is really high to do anything, like if you want run on Augur, it takes, you know, an hour to sync the thing and that really needs to be down to, you know, a few seconds, but those are all problems that are solvable but it’s going to take, you know, a few years.
Laura Shin:
Yeah, I was going to ask you because I noticed in the last 24 hours, there were just 39 transactions but it sounds like the way to foster the growth of this network is actually to resolve some of these other issues, which actually maybe in some cases are more problems with Ethereum than with Augur itself.
Joey Krug:
Yes. Some of them definitely are, but it doesn’t mean there’s not…that doesn’t mean there’s nothing you can do I guess is the way to put it, like you know we can write, you know, free open-source tools that allow you to run markets in state channels and thus solve the transaction fee problem and speed problem, and that’s, you know, something that I’ve been looking at actively. I think it’s really interesting and I’ve been talking to a few people in an open source community about it’s just stuff that, you know, takes time you just got out the door about a month ago and you know we’ve been working on improvements to it but it all takes time.
Laura Shin:
Let’s talk about your work at Pantera as Co-Chief Investment Officer. What’s your investment thesis or strategy there?
Joey Krug:
Yeah, so our investment thesis, so we’re focused solely on blockchain tech and crypto currencies and the sort of things we’re looking for are things that either disintermediate, you know existing markets or basically create new financial markets for things that people may not have considered to be markets in the past. So in the first scenario, you know you have things like Augur and things like Ethereum. They basically serve to cut out middlemen and then on the second scenario, you have things like Filecoin where today there’s not really a sort of marketplace for files to wipe but there will be in the future.
Laura Shin:
And I was curious to know, you’ve been there for I think a little over a year. How has the market changed in that time and in particular, what do you see happening to valuations in the space?
Joey Krug:
Yeah, so the market about a year ago was much more retail driven so there were a lot more people in the market at any given point in time and a lot more people buying, you know, new crypto currencies or ICOs at any given point in time. Now days, the market’s more kind of VC driven in the sense that most of these ICOs deals are happening in the private markets and not really so much in the public markets anymore, and I think that’s because _____ 00:39:55 are starting to sell things basically on, you know, SAFS with a year lock up and then after that then you know it could be traded because they’re trying to do things basically reacting to the kind of, you know, news that’s come out of the SEC.
In terms of valuations, I think valuations in public markets have obviously come down quite a bit. Valuations in the private markets, people are starting to become more valuation sensitive but they’re still, you know, investing in things pretty crazy valuations in my opinion.
Laura Shin:
Yeah. I know that some teams are able to ratchet their valuations 100X between rounds even before they’ve launched. How do you think they’re able to do that?
Joey Krug:
Well, I think, you know I’ve seen that a few times in past on the second rounds and the reason they’re able to do that is they raise, you know, relatively small amount like kind of a name brand, well known, you know, Silicon Valley investor and then raise the second round at, you know, 50X that valuation and the second round they raise from, you know, a bunch of overseas Chinese investors who, you know, don’t really know what they’re doing and that’s why you kind of see those disparities. I don’t think that’s a good thing or a healthy thing for the market though. I think it takes advantage of people, which I don’t like.
Laura Shin:
Interesting. Yeah, well speaking of the way this market is working, so I saw that you mentioned somewhere that one of your motivations for building Augur was democratizing access to finance but I was noticing that in one of the most recent investor letters from Pantera that amongst the more recent funds, which so I’m just leaving aside the Bitcoin fund, which launched in 2013 and is up like 11,000 percent or something. Among the more recent funds that are actually up because one of them was actually down 24 percent. Both of those are ones where you guys get tokens at a discount, so in this case, where your returns in some way is, you know, predicated on getting early access to the tokens. How do you reconcile that with this ideal of democratized access to finance?
Joey Krug:
Yeah, that’s a good question, so I think if you look at…I mean part of it honestly, I think is due to the regulatory environment in the US. A year ago, there was that democratized access to lots of private _____ 00:42:15. Now a lot of them I would never invested in _____ 00:42:17 crazy valuations but there definitely was you know what I considered to be democratized access to these funding projects, but when I say democratized access to finance I really necessarily mean funding kind of early stage start ups. What I actually mean by that, I think that’s a very small part of finance even from the numbers standpoint. Venture capital is very small part of finance despite how big it seems, if you’re in Silicon Valley. What I actually mean by that is, you know, opening up access to new markets and really enabling people to be able to trade on markets that they don’t have access to in their local jurisdictions, so like what I’m primarily excited for is, you know, things like derivatives on top of, you know, Ethereum, people being able to trade on more and more asset classes or at least synthetic versions of those asset classes.
That said, I do think it would be great if, you know, access to start up investment weren’t democratized but it’s hard because of, you know, credit investor rules that even kind of add, in my opinion, an unnecessary barrier to entry to investing in early stage start ups because I think if you look at the financial markets today, you can be a non-accredited investor and buy pink sheet stock on the OTC markets that has a 97 percent chance of failing but you can’t co-invest in a start up, you know, through a syndicate that’s co-investing with founder’s fund, which obviously has a lower chance at failing than the random pink sheet stock, and so I think there’s some kind of, you know, issues with that that I hope are, you know, resolved in the future.
Laura Shin:
And so obviously, the investment strategy _____ 00:43:49 pretty much any other of these venture capital and hedge fund investors _____ 00:43:55 space is you need to get in early and everything, but because everybody always is talking about democratizing finance, I was just curious, are there any particular projects that you’ve invested in that you are particularly excited about in terms of their potential to democratized finance?
Joey Krug:
Yeah, absolutely, so you know projects…so these decentralized exchanges are a big category in that things like 0x, Kyber, basically the idea of, you know right now they’re not scalable and they’re expensive to trade on, but when you’re making an investment as a venture style investor, you have to look out on the exponential curve a few years. I think a few years from now this tech’s going to be super scalable and those transaction fees will be much lower than regular centralized exchanges where you’re paying 25 basis points per trade and that’s one area of decentralized exchanges.
Another one is you know, the concept of kind of scalable coins, actually start to see more exchanges building in the Fiat, on ramps or crypto. Eventually, people in countries with, you know, really poor currencies will be able to actually just get into stable coins and hold those instead, and then stable coins are also really useful because if you’re doing any sort of financial application on something like Ethereum, you can’t have, you know, _____ 00:45:06 of Ether. You know it’s just something that you can’t really like deal with from a risk management standpoint.
Besides that, you know I think other projects could be things like you know Filecoin. Basically creating a financial market where there previously wasn’t one. Making it, you know, much cheaper to access file storage. Also interested in some of the art projects like projects that are trying to disintermediate the art auction houses, which charge about 40 percent in fees and then another problem with art is if you wanted to buy like, you know, 50 dollars worth of a Picasso painting, well, obviously, you can’t do that today because either you’re going to have to buy the full painting and be super rich or just nothing at all, and so doing things like securitizing assets like that so projects like Harbor I think are also really interesting to me in terms of democratizing access to things that…access to things in investment classes that, you know, the average consumer wouldn’t have had access to in the past.
Laura Shin:
You touched on stable coins and I’ve heard you speak before about how they’re, previously at least and even probably now that there was a big need for stable coins in general in the crypto space and of course, now there’s a ton of projects both live and also in development. What other big needs right now do you see in the space and where do you see a lot of activity?
Joey Krug:
Yeah, so I mean besides stable coins, I think the other big areas are, you know, really just making the tech scale is a big area that there could be a lot more work on. Tons of people are working on it right now but it’s still just a really large set of problems that need to be kind of surpassed. Besides that I still think the Fiat, on-ramp problem is still a very large relevant one, which is why we’ve invested in, you know, exchanges all over the world making it easier to get access to crypto is I think another kind of big piece because if you can’t get your dollars or yen or whatever it may be into crypto, you can’t really get access to this, you know, “democratized _____ 00:47:02” anyways and so that’s a big barrier. If you look at, you know, companies like Coinbase, you know the fee to buy Bitcoin on Coinbase is you’re paying 4 percent for a debit transaction, 1 ½ percent for an ACH, and the interesting irony is if you go through GDAX, which kind of a more institutional side, your ACH fee is zero, but the average consumer doesn’t know to go through GDAX and so I think just basically seeing more people kind of competing in that space and seeing attempts to drive the cost down for getting Fiat on into cryptos is another big area.
Laura Shin:
Okay, well, great. For people who are interested in learning more about you and Augur and Pantera, where should they go?
Joey Krug:
Yeah. I’m on Twitter. My user name is just @joeykrug or you can just shoot me an email, joey@panteracapital.com or joey@augur.net.
Laura Shin:
Perfect. Well, thanks so much for coming on Unchained.
Joey Krug:
Yeah, thanks for having me.
Laura Shin:
Thanks so much for joining us today. To learn more about Joey, Augur and Pantera Capital 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, share it with your friends on Facebook, Twitter or LinkedIn, and if you’re not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check out and subscribe now. Unchained is produced by me, Laura Shin with help from Elaine Zelby, Factual Recording, Jennie Josephson, Rahul Singireddy and Daniel Nuss. Thanks for listening.
