Kyle Samani and Tushar Jain, cofounders of Multicoin Capital, dive deeply into their sometimes controversial and unpopular opinions on how the crypto revolution will play out. They describe why they don’t think the technology that a team develops early on will play nearly as big a role as some think, why there will be a spectrum of blockchains offering different features with different tradeoffs, and why they’re bearish on stablecoins. They discuss why they disagree on whether or not the Lightning Network is revolutionary (and therefore why they disagree on whether Bitcoin is failing). Samani and Jain also explain how they decide whether or not to invest in a token, their strategies for trading and why they don’t have to be invested in a project to help out.
Kyle Samani: @KyleSamani
Tushar Jain: @TusharJain_
A blog post that came out after we recorded in which Kyle expands on his contention that technical features will matter less in the long-term success of a network than people think: https://multicoin.capital/2018/04/25/good-artists-copy-great-artists-steal/
Kyle’s post on the outlook for coins for store of value, utility tokens and stablecoins: https://multicoin.capital/2018/03/15/paths-to-tens-of-trillions/
More Multicoin thinking around stablecoins: https://multicoin.capital/2018/01/17/an-overview-of-stablecoins/
Previous Unchained episode: Why It’s So Hard to Keep Stablecoins Stable: http://unchainedpodcast.co/why-its-so-hard-to-keep-stablecoins-stable
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Laura Shin: 00:01:25
Today’s guests are Kyle Samani and Tushar Jain. Co founders and managing partners of Multicoin Capital. Welcome Kyle into Tushar.
Kyle Samani: 00:01:33 Hey Laura, great to be on.
Tushar Jain: 00:01:35
Thanks for having us Laura. Really excited to be on the podcast. Big fan.
Laura Shin: 00:01:39
Tell me both how you got your start in crypto. Kyle, let’s start with you.
Kyle Samani: 00:01:46
Sure. So my first company, about five years ago, the company was building software for Google glass for use by surgeons. That was going quite well until google pulled the rug on Google glass, at which point I had a big problem on my hands. Ultimately, we ended up pivoting the company and the company was ultimately sold and I found myself unemployed in January of 2016. I spent about two months playing video games and then in March of 2016 I discovered this thing called Ethereum and I thought Ethereum was the coolest thing I’d ever seen. I was drawn to it in particular for two reasons. One was I felt the pain of platform risk after having built on Glass and experiencing the pain of Google pulling the rug out from under me. The idea of having a platform where no one could do that again to me was particularly compelling. And the second thing that drew me to it was the finance opportunities. At some point in 2016, I realized that every financial institution on the planet, is a giant smart contract. And when I realized that, I thought to myself, “Oh man, this technology is going to be really important.” I’ll let Tushar tell his side.
Tushar Jain: 00:02:51
I discovered crypto for the first time back in 2013 actually. I had also started a company around the same time that Kyle had. It was in healthcare IT. Unrelated to crypto. But, I heard about this thing called Bitcoin and I did a lot of research and bought a couple, literally two. I wish I’d bought more. I think we all do. But, I bought a couple as tuition, made sure I had some skin in the game and wanting to understand how it all worked. And after doing a good amount of research, I realized that the only app that you really needed Bitcoin for in 2013 was Silkroad and I didn’t really need Silkroad. So, I didn’t go much deeper at that time. I thought it was a really interesting idea. But I didn’t see the wider vision until Kyle actually shared the Ethereum white paper with me and told me about what Ethereum could enable that Bitcoin could not. And, in the meantime I had been working on building this marketplace network type business in healthcare IT. And I really saw the potential for these cryptographically bound networks to replace a lot of these traditional network businesses. And that’s what got me extremely excited because I saw that crypto was a new way fundamentally, of human economic activity. And we hadn’t had a new fundamental organization mechanisms since the advent of the publicly traded corporation back in the late 1400’s, early 1500’s.
Laura Shin: 00:04:23
Interesting. Yeah. I love these stories. And you guys know each other from NYU or something, right?
Kyle Samani: 00:04:29
Yeah, that’s correct. Tushar and I met at NYU, I think our first semester of college, maybe our second, pretty early. This was the 2008 timeframe and we became pretty close in our first two years of college and we’ve been best friends for eight or nine years now.
Laura Shin: 00:04:45
One thing I love about your story Kyle too, is that you’re the classic example that Chris Dixon of Andreessen Horowitz likes to talk about where he describes how he’s seen a lot of entrepreneurs who build on these closed wall gardens like Facebook and Google and then they get burned when those platforms end up shutting down services or pivoting their strategies and then those developers get cutoff. And I know he’s actually an individual investor in your fund along with Marc Andreessen, David Sacks. And, he says that he sees a lot of those same developers now building on blockchains where they can be compensated directly from the protocol where the data is open. So I’m curious, why did you guys decide to go the route of a crypto hedge fund rather than building a project in the space?
Kyle Samani: 00:05:34
It was January of 2016 and I was unemployed and I spend a lot of time doing soul searching. I was legally unemployed for about 18 months. During that time, I was slowly discovering crypto and I’ve kind of done one Rodeo as an entrepreneur and I spent a lot of time thinking, “what do I want to do with myself?” There are fundamentally two kind of white collar jobs. There are operators and there are allocators. And I thought to myself at the time that I wanted to be an allocator, if I could spend all day just reading, writing and thinking, I would. And, you know, in this time I was unemployed, I had literally nothing to do, no responsibilities. For days I would spend just lost in a book. Lost in some thing on the Internet. Thinking about stuff, writing about stuff and then I found crypto and it just sucked me into that particular vortex. And I felt like that was my calling was to do allocation rather than operating. So that’s really like why I wanted to be on the fund side of things.
Laura Shin: 00:06:34
What you described is not that different from journalism. So if this doesn’t work out, you can also join this field. [laughing] Cost benefit analysis, no… But anyway, something I’m also curious about is, at this point in time, obviously it’s quite unclear how any of these crypto assets will gain mass adoption. And you guys have so many great blog posts where you kind of theorize how this might happen, but why don’t you just describe for me right now how you’re thinking about what these paths to wider adoption could be and then how you factor those thoughts into your investment choices?
Tushar Jain: 00:07:16
I think something that is critically undervalued in the crypto space right now is distribution and I don’t mean distribution amongst people who are already in crypto. I mean distribution to the blue ocean of people who have not yet actually interacted with any cryptocurrencies or protocols. And the reason for that is fundamentally because everything is open source. And, these two are intricately related because what that means is that there is no IP, there is no protected technology whatsoever. And it means that the investments that another team makes into advancing their technology can be borrowed by your team. And whoever gets the most network effects for some of these protocols that do have strong network effects will end up actually dominating from an economic perspective. So the focus on go-to-market I think is actually the best signal for a team that understands the competitive dynamics of the crypto ecosystem and understands what it takes to actually win in this open source world.
Laura Shin: 00:08:28
That’s interesting because it’s sort of like saying, “Oh, maybe Zcash is sort of specialized around privacy and the technology. But since Ethereum is adopting Zk-SNARKs and they’re sort of like more broad, they’re adopting the tech for a whole bunch of use cases and so that is more likely to gain wider adoption?
Tushar Jain: 00:09:13
I agree with the Zcash example, and I’ll get to that, but let me give you an easier one. So an easier one is, as I’m sure a lot of your listeners are aware, there are a lot of competing stable coin projects out there right now. There’s things like Basecoin, Saga, there’s a bunch of lower profile ones that are still either in stealth or just haven’t made a lot of noise yet, and stable coins is something that we’re really interested in as a firm. Multicoin Capital is interested in stable coins. However, when we talk to these entrepreneurs who are watching stable coin networks, while we do care about the stability mechanism, that’s not where we’re focusing because we understand that the dominant stable coins, if stable coins do end up being an important part of the ecosystem. The dominant stable coin will adopt the best stability mechanics from every other stable coin experiment that has been run.
Tushar Jain: 00:10:08
So, what we really focus on when looking at stable coin projects is what is the go-to-market strategy? How will you get consumer adoption and how easily can you adopt the best mechanics from everyone else who’s experimenting in this space? This is the beauty of open source, right, is that everyone is always developing the latest and greatest. So if you can kind of abstract away from that and realize that distribution is what is going to decide which stable coin wins, then it makes sense for the team to focus on that.
Laura Shin: 00:10:42
So what do you think are the best distribution strategies? We had this year, 2017 where everyone was like, “The initial coin offering is the way to bootstrap your network and it’s way to get the early adopters incentivized to proselytize the network to other people.” And yet, I didn’t really know how well that’s working out. So I’m kinda curious what do you think are the best ways to get broad distribution?
Kyle Samani: 00:11:10
It varies widely depending on the kind of application you’re building. Let’s take FunFair as example. So the FunFair team, Jonathan, David and those guys, they are hiring a salesforce. Well, they’ve already hired a sales force and they are calling up casinos and other casino operators and basically pitching them on the value of the platform and they have to go through the standard enterprise sales process. That kind of general go-to-market is not applicable for all cryptocurrencies. Honestly, every foundation doesn’t need to do something like that. But there’s a lot of interesting products like FunFair where you need to be able to run an enterprise sales organization. And enterprise sales is largely a science. Although I have a tech background, I ran a sales org. at Pristine. I have some sense for how to run an enterprise sales org. and like that’s 90% science and 10% art. There’s a process to do this and in addition it requires extreme discipline in hiring people who know how to do that. And I find in crypto, there’s just way too many tech tech people and not nearly enough go-to-market people. If you’re going to build a developer tool for developers to build on, like you should go hire the best developer relations people out of Twilio and out of Mailchimp and those kinds of places. And, I just don’t see that kind of strong focus that I would like to see when I think about, how do you get this thing from 5,000 or 10,000 users to 10 million users? They need to be thinking about 100x growth and how do you get there?
Laura Shin: 00:12:38
This is so interesting because essentially what you’re arguing is that the tech matters less in the beginning because ultimately at the start, what matters is just getting people to use whatever you’re offering and then because these are all open source, as you go on and get wider adoption, then you can just add in the technology that actually makes your product better. Is that a good summary?
Tushar Jain: 00:13:05
It is. And really it comes from our approach as fund managers is to identify asymmetries, right? We need to see where the risk and return is asymmetric and this is actually an example of an asymmetric strategy for competing in this market is, “Well if we have something that’s fundamentally different.” Which is that all the technology is open source. So what does that change about how we compete in this market and a lot of teams are going about competition in the same way that they have in traditional tech companies, but we think that that’s fundamentally wrong or it’s not the right strategy and it’s not the dominant strategy from a game theory perspective and at the end of the day show me the incentives and I’ll show you the outcome. So I think that’s a quote from someone else.
Laura Shin: 00:13:56
When I asked you earlier how you’re factoring this into your investment choices, essentially your maybe then looking for teams who have more of that business savvy?
Kyle Samani: 00:14:07
I mean it sounds really like the founding team needs to have a strong go-to-market, but they need to have at least some plan or thought about it seriously. And then most importantly, be willing to hire people who have done it as analogous to the relevant companies. There’s a lot of great technology teams in crypto that have raised tens if not hundreds of millions of dollars. And like they’re hiring their friend who makes marketing brochures and they’re like, “Oh look, we’re doing marketing now.” And I’m like, “No, that’s not what world class marketing looks like.” Go hire a true VP of marketing who’s done three series A stage startups in the relevant field or relevant fields. That person is going to be expensive and hire them and bring them on board. And, that person’s going to need to build a team. Just the level of caliber of the discipline and focus on systematically thinking about like, “How do I get my next, not just 10,000 users but an ambitious goal, “how do I get the next million users, the next 5 million users.” And, that doesn’t happen by accident. That doesn’t happen with haphazard. Like building some brochures and like handing them out at community events. There needs to be a real systematic, thorough process to build scalable growth.
Tushar Jain: 00:15:14
Yeah. Just to add onto that, there’s this idea in this space of build it and they will come and it makes sense when you consider the makeup of a lot of the teams is very engineering heavy. And there’s this precedent where Bitcoin was built and people came. Ethereum was built and people came. There wasn’t a real marketing push by some organization that helped make those things happen. But, that is not how it’s going to play out for almost anyone else in this space. They need to actually go to market. They can’t expect the market to come to them.
Laura Shin: 00:15:53 Just because now it’s much more competitive obviously than it was. What else is part of your process for determining whether or not a token merits inclusion in your portfolio?
Tushar Jain: 00:16:02
There’s a few questions that we like to ask ourselves as a part of our process. The first is how is this project to uniquely enabled by blockchain? Blockchain technology has three fundamental strengths and that’s going to be the censorship resistant nature. The permissionless nature and then the trustless nature of blockchains. If you don’t need to use one of those three attributes, then you’re better off using a centralized database. A blockchain is extremely inefficient compared to a regular database if you don’t need one of those three features. so that’s the first question that we asked and 99% of things that we are pitched actually end up failing at that level. Then the next question that we asked that we find is also extremely valuable is can we fork this token out of the protocol and by that what I mean is, “Is the token actually necessary for the functioning of this protocol?” And, if it’s not necessary for the functioning of the protocol, and there were a lot of these types of tokens right now, it may have some value in the short term for speculative purposes, but the reality is that someone will go in and work out your token, take your open source product. Let’s say, it provides some service, distributed compute, for example. And fork out your token and they’ll say, “Instead of paying with your specific proprietary payment token, we will take all of your open source ecology and just allow people to pay with ETH. Let people pay with a stable coin or pay with bitcoin or whatever other asset. And, they have an incentive to do so because they can find ways to profit from that by either shorting the token or having some other interesting profit motives. So, we really see that as being an inevitable transition. Because, if you think about it, no one will ever fork a proprietary payment token into a service that already works without their proprietary payment token. It’s like entropy. It only goes in one direction.
Laura Shin: 00:18:14
And one other thing I was wondering about is since your investment is more liquid than it would be if it were a traditional venture fund, how much commitment and help are you giving to the protocols you invest in? Like are you committing to any sort of lock up for yourselves or do you just sell the tokens the second they go on the public market or some portion of them? And, how much do you plan to help these teams if your investment is intended more for the short term?
Kyle Samani: 00:18:44
Yeah, it sounds counter intuitive, but we can do both at the same time. So, right now our portfolio has I think five or six assets in it. In the liquid portion of our portfolio. Our illiquid investments, I think we have seven or eight more that are illiquid right now. But, we only have five that are liquid. There are far more than five incredible teams that have a liquid token that does something that could be valuable or interesting in the future. The fact that we don’t own it right now can be a reflection of many things. It can be a reflection of our current market cycle, which is very obviously the case. It can be a reflection of lack of short term catalysts. It can also be a reflection of there are so many other better shorterm catalyst for other assets. The fact that we don’t own a token at the current moment does not necessarily reflect our opinion that we don’t think that token will accrue value in the long run. It is that there’s all these other variables that could be prioritized over that fact. One of our major sources of Alpha we deliver to our investors we believe is being plugged into the ecosystem and having a level of depth of knowledge and understanding that you can’t get from just being a surface level player. Part of the reason we write so much and published research is to help teams understand the kinds of things we’re thinking about and ultimately helping them think through those types of decisions. We help, that team very actively with connections in the space, with recruiting, kind of with everything we really can. And, we’re happy to do that even if we’re not necessarily invested the current moment because we may want to be invested in the future and like we want to make sure that we have either just the depth of knowledge around to make sure we’re doing that. Not everything has to be how did I make money off of this in the next 24 hours. There’s real fundamental longterm value creation here and that just takes time.
Laura Shin: 00:20:22
So you don’t commit to any sort of lockup. It sounds like?
Tushar Jain: 00:20:25
Actually I want to kinda address that specific question. We do not go invest in an illiquid stage and then sell immediately afterwards. We do have internal policies against that. We’re not going in buying at a discount and selling at the ICO. That’s not who we are. That’s not who were ever going to be. For these investments that we’re making, we do have a commitment to helping the team, especially the early stage investments that we make. However, if we do purchase a token on the public liquid markets then we are not subject to a lock up.
Laura Shin: 00:21:01
I see. But then at that point, are you talking with the team? I mean, it sounds like just because you’re invested, like maybe you would want to help them or is it just more like a short term play where you’re in a buy at that time on the public markets because you think it is smart at that moment, but then you know, maybe later you might exit without even talking with them? Or how, how much do you treat it more like venture investing I guess is what I’m wondering?
Kyle Samani: 00:21:29
I mean we will help the teams even if we don’t have the tokens. We do this all the time with lots of high profile projects around the space. Help them with reviewing materials, communications, strategy, economics, wherever we can be helpful. We really strive to be… thats how to earn brand. That’s how we learn. Those kinds of things. Just because we don’t own a token at the current moment doesn’t mean we don’t support the project. It just means that there are other priorities in our current portfolio or it could be that we are in a bear market. Which actually turns out we’re in a bear market right now. So, the fact that we don’t own a token does not indicate we don’t believe in the project, it just indicates we are in a bear market. Right. Its kind of an oxymoron, but we can both support a project, go out of our way with our time and energy to do so and not own any of the token. And those two things can coexist.
Laura Shin: 00:22:21
Yeah. Well I wanted to ask you about the downturn. How have you guys been weathering it? I wrote this article last summer about all the new crypto hedge funds popping up. And, the beginning of it was like, “There are sophisticated and unsophisticated people getting into this space.” And then the intro ends with, “I guess we’ll see how many of them survive a downturn.” And as we have seen in the news, some of them are already closing up shop. So how have you guys been? What’s your strategy been during this time?
Tushar Jain: 00:22:49
We have done quite well through the downturn. We can’t talk about performance numbers publicly because of SEC restrictions on that kind of a thing. But as a hedge fund, we do have the ability to short various assets and we have made use of that ability over the past few months.
Laura Shin: 00:23:09
Oh, that’s interesting. But is that with projects that you support?
Tushar Jain: 00:23:14
No, those are more general data shorts. So we’re not going out and shorting projects that we do support, especially not only from a just support reason, but also from a logistical reason. While we do have the ability to go in short some things, we cannot go in short everything. To actually secure a borrow in order to execute a short, like you are going to borrow against a less liquid token, it’s difficult. Typically once you leave the top five, it becomes extremely expensive or just difficult to do.
Laura Shin: 00:23:55 And how much do you have in asset under management now?
Kyle Samani: 00:23:55 Fifty and change.
Laura Shin: 00:24:00
So I’m curious, how do you deploy a meaningful amount in small early stage projects? Especially because, I mean maybe you guys see a lot more, a lot more interesting projects than I do that are interesting that are in early stage. But sometimes I just look at all these pitches and I’m like, no, no, no. So I’m curious how, how are you meaningfully deploying $50 million in this market right now?
Kyle Samani: 00:24:26
Yeah, so our portfolio is two pieces. The liquid portion and the illiquid portion. Our liquid portion of our portfolio, is about 90%. So if you say 50 million, that means $45. Million is liquid and no more than 5 million or so will be illiquid. So when we think about the early stage projects by our typical check size is between $250K and a million for these kinds of early stage deals. That reflects the fact that we’ve got about $5 million to play with right now in the early stage market opportunity. To deploy $5,000,000 into multiple deals is pretty straightforward even in the early stage of the Pre-ICO stuff. So for the remaining 45 that’s liquid and deploying 45 across the whole range of liquid assets is a pretty straightforward endeavor. You can deploy $45 million in 24 to 48 hours. It doesn’t take very long to deploy that much capital in an intelligent way without too much slippage.
Laura Shin: 00:25:22
And how do you measure success? Are you benchmarking against Bitcoin or Ether or the US dollar?
Tushar Jain: 00:25:29
The fund is denominated in US dollars. So our goal is to deliver investors returns denominated in US dollars. Internally, we do look at things like Bitcoin, Ether, like the whole 10 index, in order to have internal benchmarks.
Laura Shin: 00:25:46
Who are your investors and have they changed over time in any fashion? Like are you detecting any trends in who was interested in investing in crypto last summer as opposed to now?
Kyle Samani: 00:25:57
Yeah, there’s definitely a shift in the market. So I mean, when we started our, most of our investors were angel investors who wanted to invest in technology companies and then a lot of the early crypto wales. That was our capital base to get started. Over the last few months, we’ve started to get a lot more inbound interest from venture capital funds. From general partners who run hedge funds, traditional public long short equity hedge funds. So lots of those guys are investing with us now, guys and gals. And, we’re now starting to see a lot more interest from family offices and endowments and foundations. The most progressive one percent of those pools is looking now actively. Some of them have already deployed, a lot of them are saying, “Okay, crypto is real. We need to figure our strategy.” That process of figuring out the strategy for a lot of these organizations will take three to six months. So a lot of them are figuring that out now. Some of them are starting to deploy and so the capital base of our fund is changing and that’s a reflection of the capital base of the market as a whole changing.
Laura Shin: 00:27:01
Great. We’re going to discuss the competition shaping up amongst smart contract platforms, Bitcoin, governance, and more. But first I’d like to take a quick break to tell you about our fabulous sponsors starting with Preciate.
Today, thanks to Samantha Bell, Preciate is recognizing an Australian, Ross Hill. Ross is an early advocate and advisor on blockchain tech whose thoughtful knowledge sharing has helped many get involved with crypto. He’s offered relevant links and ideas, answered questions and improved people’s lives. Kudos to you for sharing knowledge, Ross. Preciate welcomes Unchained listeners to nominate a friend just as Samantha nominated Ross. To get props in a future episode of Unchained, just go to preciate.org/recognize. Looking for a new job? Preciate is hiring a senior product lead, IOS developers and UX designers. If you believe in design thinking, love the idea of building the most valuable relationships on earth and are located in Dallas or San Francisco, just join preciate. Learn more at preciate.org/careers.
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Laura Shin: 00:29:51
A big competition is taking shape between smart contract platforms such as Ethereum, EOS, Dfinity, Tezos, Cardano, and others. How do you think this race will be decided? And do you think there’s room for just one or multiple?
Kyle Samani: 00:30:06
So the smart contract platforms space is the area that I find most interesting in all of crypto. It is where I spend most of my intellectual energy and time. So, if you think about the smart contract platforms, features like privacy for example, Zk-SNARKs, or consensus protocols even, like those are fundamentally copyable features between these systems. But there are some system, like some decisions that you make in the design of these systems that like you can’t have it both ways. They’re just fundamental compromises, trade offs. We’ve identified somewhere between 8-10 variables kind of on the spectrum of just fundamental design decisions where there’s tradeoffs in these principles. So these would be things like latency, things like throughput, things like degrees of privacy, things like governance and tightly coupled versus loosely governance, expressivity of programmability, formula, verification ability. So these are some of those kind of key variables.
Kyle Samani: 00:31:02
When we’re looking at smart contract platforms, we basically ask ourselves like, “Given this end dimensional set of tradeoff space. Each of these teams is putting forward hypothesis of why they think the set of trade offs they are making is going to accrue some local maxima of value. We believe there will be multiple local maxima value. Some of those local maxima will be larger than others. Right now. basically, kind of, sort of only one local maxima has really been explored in a meaningful way. And that’s the local maxima that both Bitcoin and Ethereum occupied that hyperfocused on decentralization, decentralization, decentralization of block production, specifically at the expense of scalability. And there are other teams who have fundamentally different views at every layer around flexibility and scalability and security and all kinds of other things. And these teams are all exploring those other variables. We are super excited about kind of seeing… Ethereum was the only game in town right now. And we’re super excited to see other people come to market with a fundamentally different world view and we expect there will be multiple winners.
Laura Shin: 00:32:11
Interesting. And just so I understand how you’re defining local maxima, that’s like an area of priority?
Kyle Samani: 00:32:18
Specifically, we’re referring to capturing value, right? So you get an end dimensional tradeoff space, call it, there’s 8, maybe 10 variables depending on how you count. And these variables are like there’s pushes and pulls between them on different kinds of ways depending on the different kinds of technologies used and depending on your political or ideological beliefs about how these systems should be designed and what they should prioritize. So given that, right? You’ve got all these variables, there’s not a great way to visualize this, its a three dimensional space. So I call it end dimensional space. But given how you prioritize those different variables, we believe that like at certain sets of tradeoffs between those variables, there will be some local accrual of value, substantial value.
Tushar Jain: 00:32:56
Let me give you some examples that might make this a bit easier to wrap your mind around. I think this is an extremely powerful framework that can help people really evaluate various smart contract platforms as well as other projects in this space. And this kind of links back to what we talked about earlier, which is that open source changes everything about how competition works in crypto. And going back to that idea of open source means that your features don’t matter. You have no IP. Any features that you come up with will be copied by your competitors. So a really easy example of that is Ethereum had come up with this idea for the Ethereum name service. It’s kind of like the DNS or domain name service where you don’t type Ip addresses to go to a website, you type in a human readable name. Well, Ethereum name service was intended to provide that same feature where instead of sending funds to a specific Ethereum address, you would send it to a human readable version and this is a really interesting feature, but EOS also has that same feature and other competing platforms like Dfinity or Tezos, either have that feature, will adopt that feature. That’s not going to differentiate your platform. What will differentiate your platform are things that fundamentally cannot be easily changed. So while Ethereum is prioritizing decentralization of block production over scalability, EOS is actually prioritizing scalability over decentralization of block production. And, along just this one variable or this one range from completely centralized and extremely scalable to completely decentralize and very difficult to scale. What Kyle is saying in terms of local maxima is we can see along if we just simplified to this one dimension that there will be value that’s accruing on the totally decentralized end and that’s the Bitcoin or the Monero end or the Ethereum end where you really need censorship resistance as a core feature. And, then there is also going to be value accruing at other points along the spectrum. And, using EOS as an example, EOS’s idea is that it’s decentralized enough. It’s platform grade censorship resistant, not sovereign grid censorship resistant and since it’s decentralized enough it means that it’s somewhere in the middle on this dimension that I’m talking about. And so it could capture value there too. And now if we expand that model out to not just be one dimension but end dimensional space like Kyle was mentioning, then you can see there will be different places in that end dimensional space that actually ended up capturing value. And I think comparing Ethereum to EOS is an easier way to kind of internalize that idea.
Laura Shin: 00:35:50
And just so I’m clear, I don’t know as much about EOS but as far as I understand there’s only something like 21 block producers?
Kyle Samani: 00:35:50 That’s correct.
Laura Shin: 00:36:01
I guess like in this moment in time when crypto is so small, I could see how that might have an appeal, but I do think at a certain point if crypto gets big enough it could actually pose a threat to nation states. And so maybe in that environment that kind of blockchain might not have as much appeal. So what do you think of that?
Tushar Jain: 00:36:22
Yeah, that’s completely fair. And actually, that is the goal of diversifying your investments across these different possible value accrual, local maxima in this end, dimensional tradeoff space is well, some things are going to need to be fully decentralized and if that is actually what ends up capturing most of the value, we as fund managers need to look at the world probabilistically. And so we assign some probability to that happening or that’s that version in the world existing in the future. Or, there’s a version of the world where, actually we care less about sovereign resistance and we care more about platform grade censorship resistance where having a neutral back end that a bunch of decentralized applications can build on is valuable. And, especially for certain use cases like tokenized securities, you do not need censorship resistance, tokenized securities, because at the end of the day, securities are dependent on the legal system in the jurisdiction in which they were issued. They are worthless otherwise. So having censorship resistant tokenized securities is kind of an oxymoron. You don’t need it. Right. So there are other functions that something like an EOS can serve that Bitcoin can’t or where the decentralization of Ethereum is not necessary.
Laura Shin: 00:37:51
And are there particular areas within those local maxima that you think will generate more value than others?
Kyle Samani: 00:37:59
Yeah, so the only thing we can say with I think a high degree of confidence based on empirical data is that there will be a local maxima of value if you’ve tried to decentralize block production. And the basic idea is that no matter what happens, the governments can’t stop it. They can’t play with the money supply. They can’t cancel transactions, those kinds of things. So there’s real value in optimizing in that extreme and Bitcoin and Ethereum tend to do that. It seems very obvious to me that as a result of that, these guys, they’re leaving a lot of other opportunities open for innovation. EOS is the easy example here to use. There are a lot of applications that just need a shared open neutral database that is designed to comply with all laws and all the different jurisdictions.
Kyle Samani: 00:38:44
To that end, interesting enough, EOS has as a constitution. That constitution is set and voted on by the block producers. The block producers are voted in by people who own the tokens. So it’s going to have basically a representative democracy and every single transaction to be valid in the EOS system, you actually have to take a hash of the constitution and submit that hash of the constitution with you transaction or otherwise, it will not be valid. And so, my point in all this is that EOS is trying to actually be compliant and supportive of laws around the world and there’s a tremendous number of applications that that’s what they need. If you’re running an advertising exchange like on a blockchain like this is perfect for you, Look at what Facebook is doing with the GDPR right now, right? Like these people are complying with laws and the purpose of them is not to say, “Hey, screw the government. We’re going to do whatever we want.” But to actually be able to comply with laws and deliver real world applications to real people that do that. I’m know another very obvious example is gaming. So we’ve spoken to dozens of teams building games and in the space and all of the team at first explored Etherium as the backend for their games and they all came to the conclusion that Ethereum was not workable because they’re just throughput issues. Guys who build games are used to building systems and process thousands of transactions per second and so all the game people especially because they’re not going to be people who have a background in economics, monetary policy, they look at the Ethereum and they’re like, this is a child’s toy. They want real systems that they can build real world applications on. So a lot of teams building games, for example right now are gravitating towards EOS. So our point is like, we’re using Ethereum and EOS not to say there are no other two options. It’s just those are probably the most stark, yet clear, visible line between these systems. If you look at Kadena, one of the cool things in Kadena is that the smart contracts are intended to be human readable. So you can have non technical business users read the smart contract Maybe it turns out there’s a massive sector of global commerce where people want to be able to read contract before signing them and committing to them programmatically, cryptographically. If you think there’s some probability of that future vision of the world plays out. Then Kadena becomes very interesting and they’re just playing on a totally different spectrum. Totally different kind of set of trade offs in the design space of these systems. So, we’re not… at this point, it’s very premature to like say with any degree of confidence where all those local maxima will accrue. It’s very obvious that there is a local maxima, at maximal decentralization. It’s very obvious there’s a local maxima at platform grades censorship resistance versus sovereign grade censorship resistance. There will be lots of other local maxima and we are exploring those everyday.
Tushar Jain: 00:41:21
And to be really clear to the listeners here, the idea behind this is to give everyone a framework that they can use to evaluate these layer one protocols. We’re not recommending any of these investments and we do update our views pretty frequently as we get new information, so I want to make sure that that listeners know that we’re not saying that EOS is better than Ethereum. That’s not how I want that to be interpreted. They are choosing different tradeoffs and they will address different markets, but the important thing here is really the framework of how to think about competition between these layer one protocols.
Laura Shin: 00:41:58
I think something that’s interesting to me is that I almost want to say that this is a little bit contradictory of where we started the conversation where you were talking about how the network effect is really going to decide things and that the bigger networks can always adopt the better technologies later on after they get all the users and then at this point in the conversation, it feels like you’re saying that there’s going to be a whole bunch of different chains all with different users who want the chains for different things. Are these actually opposing or do they coexist somehow?
Tushar Jain: 00:42:33
Yeah. Let me reconcile those for you. That’s a really good point, and the way that those two views actually coexist is that we’re talking about different things in those two views. When we’re talking about, it’s all about go-to-market and everyone will copy and everyone else’s technology. There we are really talking about the features. We’re talking about specific user experience elements or just other types of features that are valuable, but when we’re talking about different chains offering different solutions, we’re talking about tradeoffs. So no matter what EOS develops and how much of it Ethereum copies, it’s extremely unlikely that Ethereum will ever copy the delegated proof of stake consensus mechanism of EOS. That’s just not gonna happen. To them, it’s too centralized. It’s kinda like, the light side of the force and dark side of the force. So, you’re not going to see a system like Ethereum going choose the different tradeoffs that a competing system like Dfinity or EOS or Tezos have chosen, but you will see the copying of features. And, when you look at the APP layer. One layer above this level one platform layer, that’s where that feature copying becomes even more cutthroat. And you’ll see that same differentiation by choice of tradeoffs even at that APP layer. So this helps us, this understanding of both of these points of view of how does open source change investing really helps us understand which attributes of a project are actually truly differentiated or will cause it to be differentiated from its competitors and which won’t. And that’s really informative in our investing decisions.
Laura Shin: 00:44:36
Something else that’s interesting to me about this conversation is that I think this is the first time where I haven’t heard Kyle be completely all in bullish on Ethereum because I had actually previously written this question noting that Kyle had said that all the developers have left Bitcoin for Ethereum. Well, I don’t mean this in a literal sense that the Bitcoin developers have left for Ethereum, but it just, he was talking about developers generally saying that many of them have left Bitcoin for Ethereum. But, I actually wanted to ask him about this because. So, Kyle, I just was curious about this contention and I looked at the GitHub repositories for Bitcoin and Etherium. And in the last 30 days, Bitcoin has had quite a bit more activity actually than Ethereum. For instance, it has had 66 active pull requests as opposed to 16 active pull requests on Ethereum. And then there are 48 active issues on Bitcoin as opposed to 18 active issues on Etherium. So why do you keep saying that all these developers have left Bitcoin for Ethereum?
Kyle Samani: 00:45:43
Sorry. So when I said Bitcoin developers had left for Ethereum, what I’m referring to is not core level protocol developers. I think it is correct, this correct statement that more developers are currently actively developing the Bitcoin protocol, than the Ethereum protocol. That needs to be caveated by saying that there are multiple Ethereum implementations. There’s really only one Bitcoin implementation. So when you say you’re looking at Ethereum, I’m assuming you’re looking at Geth which is the version of Ethereum written in Go, but there are multiple other versions and a lot of those developers are working on only one version. So I would caveat that one note. But when I say that developers have left Bitcoin for Ethereum, what I really mean are the people building on top of Bitcoin and Ethereum. There is a difference of probably two orders of magnitude and perhaps even three orders of magnitude difference between the number of people building things on top of Ethereum versus the number of people building things on top of Bitcoin.
Laura Shin: 00:46:34
And how are you judging that? How are you figuring that out?
Kyle Samani: 00:46:37
I mean, I don’t have a perfect precise measurement. I can look at it. I can just tell you like based on collectively all of the various data points I see. So this would be obviously pictures that come into us through our website. This would be going to meet ups. This would be just looking at like listening to the communities on Reddit, on Twitter, across all of these places collectively. I mean Bitcoin today is basically there’s a couple of core level innovations going on. Like lightning is being developed like they’re working on some novel shore signatures and a couple of other signature aggregation things, but there’s just not that much changing in Bitcoin. And then even looking at Ethereum, the number and pace of things changing both at the protocol layer and on top of the protocol, is just a massive difference.
Laura Shin: 00:46:37
I know your are critical of the Lightning Network on Bitcoin. Why?
Kyle Samani: 00:47:26
So the reason I’m critical of Lightening is it recentralizes Bitcoin. So if you look at the diagrams today of lightning network. If you look at the network topology of like who has open channels with other people. It looks like a hub and spoke model. Today and this is at like basically Alpha scale and maybe Beta scale in its usage. There is basically no viable game plan to get lightning to actually be a decentralized network in a meaningful way. Sorry a distributed network in a meaningful way. It’s going to be this hub and spoke model. And so if you as a user are connected to a single hub and that hub is your single point of access to conduct commerce with other people. Like the whole point of these systems is to not be centralized and then not have a single party who can censor your transactions. And, I just fundamentally think lightning violates that core principle in a way that I think in the longterm is corrosive to the vision of Bitcoin. I think if you want to solve scalability, I’m not saying all layer two solutions are bad. I’m saying giving up on layer one scalability for layer two scalability. I find that to be like the ultimate capitulation of not willing to innovate and try to solve hard computer science problems at layer one.
Laura Shin: 00:48:38
And one other thing I wanted to ask you about your views on Bitcoin is that I know you think that Bitcoin has largely failed because of debacles in its governance, but at the same time you also have tweeted that focusing on governance is a poor use of resources. So why, if you think that governance problems can cause a network to fail, why do you think it’s not that important to focus on it?
Kyle Samani: 00:49:04
Yeah, so I think these should be taken at different views of different points in time for the different levels of maturity of the project I’m referring to and the case of Bitcoin. My belief of the failure of the Bitcoin’s governance is that the team… My view that Bitcoin is failing is a view of basically evolve or die. And Bitcoin basically refuses to evolve. There’s plenty of people who will say, that’s false and look at all this innovation, Yada, Yada, Yada. I’m not saying they’re not doing anything, I’m just saying if you look at the level of technical ambition of Bitcoin versus basically any other serious layer one protocol. It’s not really in the same ballpark. Other teams that are trying to solve fundamental computer science problems like [ scalability trilema?]. It’s kind of very obvious example here, but there are many others. And, Bitcoin has literally given up on that and just said, “No, we’re just going to do layer two and centralize everything on these hubs for lightning network.” And I think that’s the ultimate wrong view. The implicit governance of Bitcoin is such that the Bitcoin core development team in practice controls the roadmap of the system. And it took even the miners after fighting for two years to finally develop a way just o the fork off and go to Bitcoin Cash. My view of governance when looking at Bitcoin, is that you’ve just had this, like people say it’s decentralized and you could argue mining centralization or not is a separate question. But like there’s no question that the Bitcoin core development group, which is a very small number of people, I think it’s four or five people who control the actually merging commitments to GitHub. Those people control the Bitcoin and I believe their views on how to build like the future of money I believe are fundamentally incorrect. And that’s why I said I believe Bitcoin is failing because it just doesn’t make sense to me that the future is digital gold and not digital cash that can be used for all kinds of other things.
Laura Shin: 00:50:48
And Tushar, I know that you somewhat disagree with Kyle’s views here. What are your views on Bitcoin?
Tushar Jain: 00:50:57
Bitcoin is an interesting discussion point within the firm and actually this is one of the things that we pride ourselves as a firm on is being able to have productive disagreements and discussions around those. I find Lighting Network to be far more compelling than Kyle does for a couple reasons. One is I do see that there is real value to complete decentralization and the ability to run a full node for anyone who wants to. I don’t know that this is definitely the right answer, so I can’t say with complete conviction that yes, one megabyte blocks forever. Um, but I do think that if we can solve scalability with a second layer solution, then we have solved the scalability trilema between layer one and layer two, where you do have decentralized block production, you do have a secure network and you do have scalability. So it’s going to be interesting to see how the lightning networks evolution actually plays out. There are some really difficult technical challenges with getting a global scale lighting network implementation. Some of which are just not solved yet. Such as how do you route money through the system, but there is a real chance that this is a plausible solution. And as fund managers, their job is to look at the world probabilistically, right? There’s a real probability that Lightning works in the way that’s been advertised.
Laura Shin: 00:52:31
Yeah. And one other thing is that Bitcoin has that first mover advantage and the brand name recognition, which goes back to that earlier thesis point that you guys were talking about with, looking for a coin that has distribution and network effects. But I actually don’t want to be labor this because I want to move on and ask you something else. Tushar, you tweeted that public pre-product ICO posts, too much risk from a regulatory perspective. But at the same time you also mentioned earlier that you have illiquid tokens. So how are you managing regulatory risk right now?
Tushar Jain: 00:53:10
We are really cognizant of the regulatory risks for us investing in pre product investments. We are investing in those as an accredited investor effectively and with all of the proper exemptions filed with the SEC. So, we do not want to invest in anything that we think has a real chance for being an unregistered securities offering. Being complaint is one of our core values.
Laura Shin: 00:53:40
We talked about stable coins in the beginning of this conversation and talked about how they can fill perhaps a need right now in this space, which has to do with the volatility of pricing and I know a lot of people think that that maybe has been part of the reason that crypto hasn’t gotten adoption is because the prices don’t remain stable so people don’t want to spend an asset that could go up. But at the same time I once was talking with Kyle and this was after the news about Basecoin. One of the stable coins came out and it’s actually. I mean there’s different ways to structure a stable coin for listeners who didn’t listen to the episode with MakerDAO and and Philip Rosedale who did Second Life but is now doing a project called High Fidelity. We talked about the different challenges and keeping a stable coin stable and the different ways that some of these projects are going about it and Basecoin is doing it in a way where they’re not actually backing up their coin with collateral. But I wasn’t sure. Kyle, if you’re bearish stance had to do with just that way of setting up a stable coin or if you think all stable coins are not necessary and will go up in flames?
Kyle Samani: 00:55:01
My sense is that on a long enough time scale, there probably won’t be a decentralized, open, stable coin. At least not one that’s an algorithmic central bank. I think I have some confidence in that. But again, no overall conviction. We today at Multicoin don’t have any stable in investments. We have evaluated lots of them and continue to evaluate them. Despite the fact that I think in the long run that they probably won’t work, at least not ones in the Seigniorage shares model of the world. And, Basecoin is the quintessential example. That doesn’t mean we don’t want to invest in them. A: to learn. B: because we can generate financial return before that timescale. So we’re super interested in this space. I think it’s one of the most compelling opportunities in crypto and it’s okay to invest in some things that you think that has longterm challenges, but as long as you’re cognizant of those challenges and price the risk accordingly, then that’s totally fine.
Laura Shin: 00:55:57
Last question for you guys. I know you have written a ton and your Twitter feeds and blog posts are seriously, just like candy for anybody who has gone down the crypto rabbit hole. They’re awesome. I highly recommend that readers check them out. But, I just want to ask you before we go, for each of you, what is your most controversial position in the crypto space?
Kyle Samani: 00:56:22
I mean, I’ll say, “Bitcoin is failing.” [laughing] That one seems to make people unhappy.
Laura Shin: 00:56:31
Okay. Tushar, what about you?
Tushar Jain: 00:56:32
Let’s see. I would say, I am amongst, at least within Multicoin. I am the least bullish on stable coins. I do not think that stable coins are going to work. I don’t think they’re necessary as a large scale project. And the reason is I think that we will see central banks issue fiat on the blockchain and that’s going to eat the market for stable coins from the bottom up. It’s an inferior product from a lot of economic perspectives where it is still just the currency, but it’ll also be even from the top down as the various assets like bitcoin or ether become much larger and therefore become less volatile. So I see stable coins is being eaten from the bottom up and from the top down. I don’t know if that’s controversial in the broader crypto world, but it’s definitely a controversial position within [unaudible].
Laura Shin: 00:57:30
Yeah. We’ll see. I asked Rune Christiansen of MakerDAO about this. I, I said, “Oh, the second that a central bank issues a currency on the blockchain then aren’t you out of business?” And he was like, “No, no, no, because this is decentralized and that centralized.” So we’ll see.
Tushar Jain: 00:57:51
But if you are pegging to something that’s centralized. So if you peg your stable coin to the US dollar, then you don’t have your own monetary policy. You were just using the Federal Reserve monetary policy.
Laura Shin: 00:58:05
Yeah. I don’t think they’re fixed on that forever. He was saying if they could change it to, I forget, it’s CPI… or something like… it’s basically the cost of a basket of goods.
Tushar Jain: 00:58:17
Yeah. The SDR. Well, once again that’s still centralized where what defines the CPI is the federal government, the United States government defined CPI and what defines the SDR is it’s a combination of currencies like the US dollar and the pound, the euro, et cetera. So you’re still coming back to that centralization and if you try and peg it directly to a basket of goods without using the CPI. Now you’re subject to the Oracle problem of how you determine the price of goods. They differ between different countries and you’re trying to solve this global problem and there’s just been no credible solution presented yet.
Laura Shin: 00:58:54
Yeah, yeah, I agree. I mean there’s a lot of questions there, but I do. I frankly find all the stable coin project super interesting if only because yes, there’s so many ways you could imagine that they would fail. Well, it’s been so great having you both on the show. Where can people learn more about Multicoin?
Kyle Samani: 00:59:14
Yeah, you guys should follow us on Twitter, as Laura mentioned. We share our very colorful opinions rather frequently. And I’m on twitter @kylesamani. Also, check out our website which is multicoin.capital. We publish all of our thoughts and research there. We try and publish things every week or two.
Tushar Jain: 00:59:14
My Twitter is TusharJain_
Laura Shin: 00:59:41
Great. Well thanks both of you for coming on Unchained. Thanks so much for joining us today. To learn more about Kyle and Tushar, check out the show notes inside your podcast episodes. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review and subscribe on Apple podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin. With help from Elaine Zelby, Fractal Recordings, Jennie Josephson and Daniel Nuss. Thanks for listening.