Naval Ravikant On How Crypto Is Squeezing VCs, Hindering Regulators And Bringing Users Choice

The executive chairman of AngelList and partner at crypto hedge fund MetaStable explains how blockchains are changing the entrepreneurship model, his philosophy for crypto investing, and what kind of threat crypto could someday pose to governments. We also dive into why blockchains represent a new form of governance, his philosophy for investing in tokens and why he believes there will only be five or fewer winners among the money-like tokens.

Show notes

Transcript

Laura Shin:

Hi, everyone. Welcome to Unchained, the podcast where we hear from innovators, pioneers, and thought leaders in the world of blockchain and cryptocurrency. I’m your host, Laura Shin, a senior editor at Forbes, covering all things crypto. If you love Unchained, please give the show a positive rating or review on iTunes. A huge percentage of people who listen to this show found it simply by searching their podcast app, and good ratings help bring it to the top of search results. Also, spread the word on Facebook, Twitter, or on your Slack and Telegram channels, and don’t forget to follow me on Twitter, @LauraShin.

This week’s episode is brought to you by ONRAMP. Your branding and website are the first things your users will see, and in the current Wild West of ICOs and blockchain startups, you need to stand out from the pack. ONRAMP is a full-service creative and design agency that will help amplify your brand with the perfect website, logo, collateral, or custom design project. Get big results in no time by visiting thinkonramp.com. Today’s guest is Naval Ravikant, Cofounder and Chairman of AngelList and partner at what might be the longest-running crypto hedge fund, MetaStable. Welcome, Naval.

Naval Ravikant:

Thank you. Thanks for having me. I guess you’re all out of pioneers and influencers, so here I am.

Laura Shin:

No. No. No. I literally was telling my Lyft driver, I was like this is the most important interview I’m going to do.

Naval Ravikant:

Today.

Laura Shin:

No. No. No, for this podcast. Please don’t be self-deprecating. Everybody knows that you…I mean everybody’s following you on Twitter. Everybody’s re-tweeting your tweets. So, let’s chat about what you’re up to. Last time you emailed me, it was to say you were no longer CEO of AngelList and you hadn’t been for a while, but in July, I interviewed you and I think you said you were, at least.

Naval Ravikant:

The title, I mean, I’m not big on titles. I started AngelList seven years ago. I’ve been running it in some form or another for those seven years. Today, I’m executive chairman. I have a couple of good CEOs for the different units, because AngelList has a bunch of different business units running it. So, I’m still day-to-day here at the office, and I still kind of do my thing. I just don’t have that many direct reports anymore, which is a relief to me after seven years. That’s all that is.

Laura Shin:

So, what percentage of your time do you spend here versus with MetaStable?

Naval Ravikant:

Physically, I’m at AngelList the whole time. MetaStable doesn’t even have an office.

Laura Shin:

Okay, but I mean just your time, what you’re doing.

Naval Ravikant:

I think mental bandwidth, it varies. Some weeks it’s 50/50. Some weeks it’s 70/30, AngelList. You know at MetaStable, honestly, my partner Lucas Ryan and Josh Seims do a lot of the heavy lifting. I’m just the face, so I do a lot of the talking.

Laura Shin:

Okay. Okay. So, it’s not like you’ve made some wholesale shift over to crypto?

Naval Ravikant:

I would say my mindshare is heavily crypto. So even on AngelList, I spent most of this year building CoinList, which is our legal, regulated, well-lit marketplace for ICOs that we started with Protocol Labs, and we spun that out as a separate entity, but I was basically playing the founder role on that, so I helped assemble the company, you know, raising some money, just kind of create the whole infrastructure for it and get some of the early customers and then recruit a team for it, a really capable team, and then handed it off.

Laura Shin:

Okay, and I know that CoinList also recently launched a sister company, Republic Crypto.

Naval Ravikant:

No, Republic’s been around for a while. So, Republic is an AngelList crowdfunding spin out. So, basically we had a bunch of AngelList alumni who left a few years ago and they started a crowdfunding company around Title III of the JOBS Act, and that was Republic, and recently, as you’ve seen with a lot of ICOs, they want to be legal, they want to be compliant with securities laws, and so they are doing that using CoinList, but that only allows it to sell to accredited investors.

They also want to be able to bring along the rest of the community, because community building is critical with coins and tokens, and so Republic is a crowdfunding site that is legal, and so Republic Crypto is its crypto arm that helps these ICOs also reach sort of more ordinary users but with regulations of controls around how much they can invest and the levels of disclosure and sophistication that’s required. So, yeah, so the AngelList family has gotten pretty big now. We have CoinList, we have Republic, we have Product Hunt, we have AngelList Talent, and of course we have AngelList Fundraising. So, at this point it looks more like an alphabet, you know, like a group of companies rather than a single company, and so I’m exec chairman of that group.

Laura Shin:

Okay, and for Republic, would the ICOs on that platform be limited to like one million or some small amount?

Naval Ravikant:

I think the base case, the easiest case, is one million, which is what’s in there by law, but Republic could also do things like Reg A+ offerings and other offerings that can open it up to more investors. It’s just that the disclosure, the diligence, the preparation, all that work goes up, so it just depends on how much you’re trying to raise and what the specific circumstances of your company are. Unfortunately, when it comes to securities law, nothing is simple. I can’t summarize it in a podcast, but if you’re interested, if any listener is interested, they should reach out to the Republic team or to the CoinList team.

Laura Shin:

Okay, so I want to establish everything that you’re doing across crypto. I kind of did a little bit of digging.

Naval Ravikant:

Yeah.

Laura Shin:

You’re on the board of the Zcash Foundation, you got into Crypto Index Fund, the HOLD 10, which I wrote about…I will put that in show notes for you guys.

Naval Ravikant:

Yeah. Right, Bitwise HOLD 10, yeah.

Laura Shin:

What? Oh yeah.

Naval Ravikant:

Bitwise, yeah, is the name of the company. HOLD 10 is the name of their fund. I’ve been pushing to call it the HODL 10.

Laura Shin:

I know. Me too.

Naval Ravikant:

That’s been a big debate. I love HODL.

Laura Shin:

I said that when I interviewed them.

Naval Ravikant:

Of course. Yeah.

Laura Shin:

I was like why don’t you do that, but I guess they wanted to be conservative.

Naval Ravikant:

I think they want to go very mainstream, right? The whole point of an index fund is making a low-cost vehicle available to lots of people, so, to the average Joe who may not know what HODL is, they might think it’s a HOLD misspelling.

Laura Shin:

Right. That is true, which it is.

Naval Ravikant:

Which it is, exactly.

Laura Shin:

Which is why we love it.

Naval Ravikant:

Yeah.

Laura Shin:

So, obviously, you’re also doing CoinList, Republic Crypto, and you’ve also invested in Filecoin, Blockstack…Ryan and Muneeb were actually in the podcast a few episodes back for listeners who want to learn about them. You invest in Basecoin, which is attempting to do a stable coin.

Naval Ravikant:

Yeah. Yeah.

Laura Shin:

You invested in Numerai?

Naval Ravikant:

Yeah, a tiny bit in Numerai, way back when, LedgerX, tiny bit, way back when, Siacoin, Kraken, Korbit. There’s about three more cooking right now that haven’t been announced, but I actually don’t do a whole lot in the private side of crypto. Most of my crypto investing is…certainly all the public coins, you know, the big coins, the Ethereums and those things, all go through MetaStable, and even the private investments, a lot of them go through MetaStable. I only do it personally, on top of MetaStable, if I want to put in more, basically.

Laura Shin:

So, is there any like particular philosophy or thesis that you’re following as you make these choices about what to get involved in?

Naval Ravikant:

Yeah, at least the moment, I definitely have a distinct point of view, which is that for the most part I’m looking at the money and money-like tokens, the things that can become a store of value, unit of account, medium of exchange, or power financial contracts, and I make that choice because I think those are the most near-term applications that are close to being fulfilled, and by close I mean 5 to 10 years, I don’t mean 2 years, and those are also the applications that are the largest markets, frankly. If you get to redefine what money is, that is a much larger _____ 00:07:26 shift of value than building an application.

The exceptions I make, I do make an exception to certain apps that I think can be really large, like Filecoin is an example where file storage is a big business, but none of this is investment advice. You should not invest in any of this, like, my advice to people would be if they want to invest in this asset class, it’s crazy risky. Just buy a tiny amount in an index fund and be done with it. That’s the best thing you can do. Obviously, this asset class makes venture look like safe bonds and you know value equity. So, anyway, so going back to that, I invest in the money and money-like tokens that are safely large or things that I think can be platforms. That’s why I’m in Blockstack, that’s why I’m in Filecoin, because I think they can be large platforms, and I’m also an investor in Mesh, which, I just like what they’re doing.

Laura Shin:

And describe that for people.

Naval Ravikant:

Sorry, Orchid. They used to be called something else, but Orchid, which is doing some kind of a TOR/Incentivized VPN for the world, just because I think that real un-censorable VPNs are something the world needs, especially in a lot of countries. It’s something that crypto is uniquely well-suited for because they need to be decentralized by nature and even resistant to attacks by nation states, so I think that’s a good thing for humanity. It just needs to exist.

Laura Shin:

Yeah, well, I was reading your blog, and you basically dreamed that up in 2014, and I wondered if Steve Waterhouse, who’s the founder of Orchid, if he stole that from you or if you gave him the idea, or what happened there?

Naval Ravikant:

Well, in 2013, I got bitten by the Bitcoin bug, and you know the virus took hold, and I couldn’t think of anything other than this new model for how to create and deploy protocols and how to kind of administer and control large networks. So in my blog, which is startupboy.com, I wrote a few articles where I had some ideas about how else this could be used, and I missed some use cases and I picked out some good use cases, and they were sort of the obvious ones, and there were some that I put in there that still haven’t come true, like we need a very fast-clearing, low transaction fee coin that can be used for settlements between fast-moving anonymous real-world objects, like cars negotiating rights of way, for example. So, some of these don’t even exist yet, but I tried to get fanciful, and it’s the nature of futures, you’re going to get a few right, and then you take credit for everything that comes after it, and you get a few completely wrong, and you sweep those under the rug, but it’s all out there in the open. I put it down in writing, so it keeps me intellectually honest.

Laura Shin:

Yeah, and honestly, I mean, you know I got pitched so many things, but when I got the Orchid pitch, I was like oh this, this is interesting. Unfortunately, I didn’t get to write about it, but it’s the nature of covering this space, where there’s five million things going on all the time.

Naval Ravikant:

Right.

Laura Shin:

So, I’m kind of curious because you have this sort of long history in startups and in Silicon Valley, and things are shifting right now. So, I’m going to do a brief summary of your career. Feel free to correct me if I’m wrong in any of this, but you know, earlier you launched Epinions, and according to the San Jose Mercury News, your VCs and one of the cofounders convinced you and some of the other cofounders that the company was worthless. They engineered a merger and rebrand that went public, was later acquired by eBay by 600 million dollars, and you and those cofounders who felt that you had been sort of duped sued and later settled, and then that experience led you to become an expert in term sheet negotiation, which then led you to become a matchmaker, basically, for startups and investors, which led to AngelList, and obviously, you know, AngelList has been hugely successful, but here we see…but maybe, you tell me if you agree with this, that the startup model is getting upended, and here it is now, you’ve joined this firm, this crypto hedge fund, that is not even investing in startups at all but mostly in decentralized networks. So, I’m sort of interested to hear how you think this model of like VC-backed startups that eventually go public has evolved over time, how you would describe the current phase of where we’re at in that?

Naval Ravikant:

Yeah. It’s changed a lot, for sure. With AngelList, we tried to create a network to bring a lot of the startup deals online, get them access to more investors, get more investors around the world access to startups, and that’s worked relatively well. Today, I’d say about a quarter of the deals in the English-speaking world, mostly California and New York and Europe and Australia, are available on AngelList to a savvy investor. Also about half the companies, startup companies in the English-speaking world, are recruiting on AngelList, and there’s about a million candidates available on there. So, we’ve definitely had a big impact, but the real financing shifts for startups that’s happened is ICOs, and there we’ve created a new native token model, native to the internet, native to startups, that helps them get funded online. It’s still in very early phases, so it’s frothy, it’s full of fraud, it’s full of junk, so it’s not something that every startup can or should use.

It’s really designed for a small class of internet protocols that I think are being developed today that could not have been developed 20 years ago. The first generation of internet protocols, the HTTPs, TCP/IPs of the world, these are free open systems where nobody got paid for them, and they basically treat every resource in the protocol as too cheap to meter, but I think we’re now entering an age where we have a next generation of internet protocols that are starting to meter scarce objects, digital scarcity, and that could be money. Money is a digital object, but it’s scarce. Obviously, you don’t want to be able to just create it as you go. Bandwidth is another one. File storage may be another one. All of that’s debatable. It may turn out that energy is another one, etcetera.

So, whenever you have digital scarcity, blockchains are creating a new generation of internet protocols, and they come bundled with these tokens, which is how you keep track of who owes who what in this scarce environment. The tokens themselves then create a financing mechanism because they’re bearer assets where owning a token is all you need. You don’t need to register with a company or file with the SEC. They can be more freely traded all around the world. They get treated like cash or money, like instruments, and so startups have sort of created their own new financing mechanism that’s native to the internet and that can upend parts of VC, and where it’s happening is at the edges.

So, if you look today at, you know, 10, 15 years ago, if you wanted to raise VC financing, you went to Sand Hill Road or you went to a few firms in New York or Boston, your classic Series A, Series B, Series C, Series D, and maybe there was a little bit of angel investing right at the beginning, and then you rode this whole wave down until you got to go IPO 10 years later. Well, now the problem is the IP markets have closed. Post-Enron, they’re much tighter, much harder to go public, so people are starved for liquidity, and on the other side, seed investors, angel investors, AngelList, syndicates, micro funds, all of this has come up. So, you have a lot of seed money floating around, a lot more options there. You also have things like YCombinator and all the incubators.

Now you have SAFs for tokens, but you also have SAFEs for easy legal documents, so the early stage has gotten very rich, very vibrant, very innovative, and the very late stage has just been completely closed, and the VC model in the middle hasn’t changed. So, what’s happening now is the early stage is creeping up as the seed funds are raising more and more money and the seed rounds are getting larger. I was involved with a company that just closed a four million dollar seed round on a SAFE note, which is an absurd concept. You know 3 years ago, you couldn’t have done that, let alone 10 years ago, and then on the other side, the ICOs are letting open the liquidity valve and taking the place of some of what the IPOs used to do, and VCs are getting squeezed in the middle.

So, now if you’re a venture capitalist, you either have to participate in the seed round for one of these companies or the A, or you miss it because the next round is the ICO. There is no Series B or Series C. Now, obviously I’m only talking for a very small class of companies. These are, again, the protocol token companies, but people are definitely trying to expand the definition of what a protocol token company is and who should be using tokens, so I think the VC model really is in danger of getting squeezed down to a very, very small space.

Laura Shin:

Which is sort of exciting, honestly, in a certain way, although I’m sure some people…

Naval Ravikant:

It’s exciting. It’s scary. You know the VCs have developed norms over the decades that prevent them from getting squeezed or getting defrauded, although one could argue that there was a period of time when that power was used against entrepreneurs, because they got too good at it, so now the pendulum is swinging in the other direction, where an entrepreneur is far more likely to defraud a VC than the other way around. So, I think in the new model, ICO investors, seed investors, they need to learn some of the same norms and practices and defenses that sort of help balance the market out.

You know in biology terms, there is a predator/prey relationship, right, between these two characteristics, although there’s basically an evolutionary arms race, right? Every time the entrepreneurs get a new instrument, the VCs need to like evolve to make sure they don’t get taken advantage of, and vice versa, and historically the entrepreneurs were always at a huge disadvantage because the VCs do thousands of deals and they stick around for a long time. The entrepreneur shows up, signs their first term sheet, and they don’t know what they’re doing, but now the internet is leveling that great playing field. With the internet, people exchange information, incubators level the playing field. YC leveled the playing field a lot. AngelList levels the playing field.

Laura Shin:

Yeah, but one thing that I’m wondering is in a way it is disruptive, and yet at the same time I feel like a lot of the people that are able to invest in these ICOs are people like VCs, people who have money, particularly, you know, something like CoinList that does restrict it to accredited investors. So, is it really that disruptive?

Naval Ravikant:

Oh, even with CoinList restrictions, I would guess 90 percent plus of the capital is coming from non-VCs.

Laura Shin:

Well, okay, but I mean let’s just talk about disruption in terms of like who has money and who’s able to get in on these deals.

Naval Ravikant:

Sure. Well, okay, so let’s talk about it in two forms. One is new players. I would argue 90 percent plus of the money is coming from new players. Second is on the terms. The terms it’s coming on is very company friendly, so now the company can put hundreds of investors into a round, whereas before they would’ve had one lead VC and a few angels, and the third is actually when the company’s blockchains go live and the tokens turn into a real use case, where it’s being used for a real network, then retail investors can go in on these secondary exchanges, like a Coinbase or a Gemini or a Kraken, and they can buy stuff there too. So, it is opening up. I’m not saying it’s perfect. It’s not going to happen overnight.

Also, as we can see, like, you know, when we’ve opened up the market from just VCs to ICOs, the valuations and the pricing has literally increased 10X. It’s gone insane. So, it’s not clear you want to increase it that much, that fast, while the norms aren’t in place because you have companies that probably couldn’t raise 5 million bucks through the venture circuit that are suddenly raising 50 million in ICOs, and that’s not a good thing. So, the market needs to settle out. There needs to be a little bit of a crash. There needs to be a little bit of a comeuppance for some of these investments, and then I think it’ll become more rational. It’s the nature of technology that there’s always an exuberance, there’s always a bubble, there’s always a crash, and we just have to go through that cycle here too.

Laura Shin:

And can you imagine, right now, any mechanisms that would sort of both help keep the democratizing aspect as well as sort of rein in some of these wild valuations we’re seeing?

Naval Ravikant:

I think there just needs to be a market correction for a lot of the junk. So, you know, a lot of the poorly thought through projects are going to fail to ship product, or they’re going to ship product and it’s not going to amount to anything, or people are going to figure out that, oh, the decentralized version of this is an even worse idea than the centralized version was, so if the centralized version didn’t work, why is the decentralized interesting? So, people will figure that out. The investors will sell those tokens. The market will crash. There will be the inevitable cry for the government to step in and do something, and I think that’s the critical time period. If the government doesn’t step in and do something, I think it’s actually a little better because then the market will correct and will learn.

If the government does step in and do something, you know, “something,” then you get another set of rules that you’re applying a hundred years from now that no longer apply. Meanwhile, most of the capital formation flees overseas. So, I think it depends. There’s probably a happy medium, but the medium isn’t in the middle. It’s probably more in the favor of just letting the market play out and correct itself out. To some extent, when you look at early investors in Bitcoin and Ethereum, they’ve collectively made over a hundred billion dollars, and to them that’s almost, you know, returns on investment, so it’s money that they came in and they sort of created out of thin air. So, to them, spending…

Laura Shin:

Yeah, but what about all the people that bought, I mean, name any of the other hundreds of altcoins, you know what I mean?

Naval Ravikant:

Yeah.

Laura Shin:

Like, it’s easy to say for those, just…

Naval Ravikant:

I sincerely hope that anyone who’s buying especially the altcoins is doing it with an extremely small percentage of their net worth, so they won’t lose sleep at night if it goes away. Anyone who’s putting in a meaningful amount could be in for a really rude surprise. At the end of the day, in an open market, you can’t protect everybody. The price of protecting is basically killing the market and turning it back into a crony capitalist system or turning it into a highly restricted system. So, you can’t have it both ways. You can’t have it open and democratized while at the same time having, you know, nannying and babysitting. So, you got to pick one or the other.

Laura Shin:

Yeah, but I do feel like there must be some way to combine the two, you know, to do both. I don’t know if we…

Naval Ravikant:

I think that’s the middle the SEC tries to walk, but this one is tougher because these are global markets. So, even if you stop a US citizen, you say, hey, you can’t trade this token, they can just go anonymously and do it somewhere overseas. These are purely digital assets, and I think one important thing to realize here is that we’ve always had strong financial regulations, but we have no speech regulations. Speech is free because we’re a free society, and we’re not going to do away with free speech because it’s the fundamental basis for a free society, but now money is just code, and code is just speech, so money and speech are actually the same thing. So, you’re trying to keep…speech is free, and you’re trying to restrict the flow of money, and the two of those just can’t go together.

Laura Shin:

And what do you mean by that when you say like money is a form of speech? I don’t really know what that means.

Naval Ravikant:

Well, so, in this case, what Bitcoin did was it turned code into money, right? So, Bitcoin is pure code. There’s no paper. There’s no guns. There’s no federal government. It’s just pure code, so to stop Bitcoin, you got to stop code, and code is actually just speech. It’s just a bunch of numbers and letters that I write down that a computer interprets. So, you have to stop me from writing those numbers or letters down in a certain sequence and conveying them to other people to stop them from loading it on a computer somewhere in the world to stop that somebody else from then turning that into money. So, you can’t control the way money flows unless you can stop the developers from writing the code and from talking to each other and from thinking, and the regime that could do that would probably be one of the most evil regimes on the planet, not a society that I think any of us would want to live in.

So, essentially, by turning speech into code or just writing into code that computers can interpret and then turning code into money that computers can exchange, you can’t stop money from moving around anymore. This is what China’s figuring out. This is why they had to shut down all the exchanges, because they had huge capital flight issues, because they’re trying to control the ingress and egress of money in China, but you can’t do that unless your firewall policy can filter out all the traffic that looks like money, and it’s really hard to recognize what it is because it’s all encrypted to begin with. So, there’s all these 0s and 1s flowing by on the wire, and you’re trying to figure out which one is someone talking on WeChat and which one is money, really hard problem.

Laura Shin:

So, yeah, that’s one thing…I mean obviously, I mean, there are so many theories about like why China did the crackdown that it did, but obviously capital flight is one. Other people are saying that they want to do their own cryptocurrency, but I think one thing that I’ve looked into that confuses me still is I just wonder why they haven’t shut down the Bitcoin mining. Do you have a theory about that?

Naval Ravikant:

Why they have or have not?

Laura Shin:

Have not.

Naval Ravikant:

Well, Bitcoin mining, the miners are a very small set of people who are very well-known to the government. So, if they’re concerned about capital flight, they can literally just watch those few actors, whereas if there’s general trading going on in the exchanges, and it’s very frothy, then you have to basically monitor the exchanges. Of course, I think it’s extremely heavy-handed that they shut down the exchanges. I think it’ll backfire because what’s going to happen is sites, like local Bitcoins and crypto and crypto exchanges are going to capture just the excess, and it’s going to go offline where they won’t be able to track it.

My sense is it was…and this is just a pure guess, I have no insider information, but sense is it was done for capital flight reasons, and with the miners, you can just track the capital flight, so it’s much easier to control. I think in the medium term, they do know they have to re-enable it. They have to re-enable it because this is very much the future of internet protocols, and they can’t miss out on the next generation of internet protocols. This is also the beginning of digital commodities, and when it came to physical commodities, they went out there and tried to accumulate as many of them as possible, so this should be no different. So, I think it’s more likely that they would nationalize the miners than they shut down the miners.

Laura Shin:

Interesting. Okay. We’re getting a little bit further away from where I wanted to go, but I actually just wanted to go back to this tension about like protecting investors but also, you know, letting innovation go. I know that you were involved in getting the JOBS Act passed. Those are the crowdfunding rules that enabled everyday people to invest in…

Naval Ravikant:

Yeah, actually, it’s less well known, JOBS Act really enabled ICOs in one critical way. Before the JOBS Act, it was completely illegal to solicit the public, publicly, for investment, even to accrediteds. You literally could only go through words of mouth and closed networks like AngelList and YC. You could not, for example, you know, announce in a press release that you’re raising money, even from accrediteds. In the JOBS Act, Title II of the JOBS Act allowed something called general solicitation, and that seemed like it was going to be a big deal, but it wasn’t, so in 2013 when that was announced, we had AngelList enable general solicitation, a lot of fanfare around it. Nobody used it, so we thought it was dead on arrival, until the ICOs showed up, and the ICOs rely on it.

Laura Shin:

Okay. Okay.

Naval Ravikant:

And then Title III of the JOBS Act enables crowdfunding, which is what I think you’re referring to, where small-dollar investors can invest in early-stage companies.

Laura Shin:

Yeah. Well, so, one thing that I found a little bit curious, when I was just thinking about your history, was, you know, you worked on this funding mechanism that would open up investment to the crowd, but then with the ICOs, one of the first things you did was CoinList, which is, you know, for wealthy investors, and I just wondered.

Naval Ravikant:

Well, CoinList plus Republic, together, can hit the whole market, so because of the way the regulations are written, unfortunately, the current law assumes that if you have a million dollar net worth, you’re a genius, and if you have lower than a million dollars, you’re a fool. So, you fall into two completely different regulatory frameworks. So, we have to have two different entities, but between those two entities, you can do a full ICO to accrediteds and non-accrediteds. That’s the law. I don’t make it up. I don’t think it’s necessarily rational or reasonable. If it were up to me, it would be more of a sophistication test, and it would be a smooth gradient rather than a binary cutoff between one million, above and below, but that’s just the way the law is written.

Laura Shin:

Well, I wondered, actually, if you…because you were involved in lobbying for that and kind of helping to formulate that regulation, so I wondered if you had any ideas about how they might do things better?

Naval Ravikant:

Yeah. The current regulatory infrastructure is just a giant mess of individual regulations that have been piled on since the 1930s, so over the last 80-something years, and it’s the infrastructure that Wall Street runs on, which is the most powerful lobby in the world and doesn’t want anything to change. So, just getting the JOBS Act through was a miracle because it really did seem to some elements on Wall Street like it was a threat, it was a bypass around their chokehold on capital formation and capital distribution.

So, I wouldn’t expect a lot of regulatory relief. I think what we can hope for is enforcement relief, maybe a little bit of enlightened non-regulation of crypto, just like there was non-regulation of the internet in the early days, so a little hands-off, and then most importantly global competition, because there are other countries in the world that down own the reserve currency of the world, that don’t have strong financial infrastructure, that would like to be able to play in the next generation of financial infrastructure. So, I think that will help people keep each other honest.

Laura Shin:

Okay, so you’re not thinking about getting in the lobbying game again?

Naval Ravikant:

God no.

Laura Shin:

Okay.

Naval Ravikant:

It’s exhausting.

Laura Shin:

Okay. Okay.

Naval Ravikant:

I mean I do a little bit behind the scenes here and there, like there’s this whole stock options thing in the Senate recently, so we weighed in on that. I’ve definitely been talking to and help educating some people on Capitol Hill about crypto and you know what the kind of enlightened regulation there is, and we’ve responded to information requests from the SEC as they…they’re actually very up to speed, so they’re quite knowledgeable about it, but they come in and they ask us for data. So, I participate in all of that, but I’m not going to go out there and lobby Congress again.

Laura Shin:

Okay. All right. Well, we’re going to talk about what a blockchain feature looks like and how Naval assesses tokens, but first I’d like to take a quick break to tell you about our fabulous sponsor, ONRAMP.

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I’m speaking with Naval Ravikant, Partner at MetaStable and Chairman of AngelList. So, let’s talk about how you evaluate tokens. Do you have any kind of step-by-step process when you get a pitch or hear about a token? Like, what do you look for first, what do you look for next, what factors make you realize it’s not worth researching further?

Naval Ravikant:

Yeah. First, I was saying to my partner, Lucas, which it’s a little glib, but it’s a way of telling you that even though I think I’m fairly sophisticated in this space, it’s very, very difficult to evaluate anything. Lucas and Josh, actually, in many cases, when the code is available or when the technology’s available, they’ll audit the source code, they’ll review the bios of the developers, they’ll track down their histories, and really try and do a level of technical due diligence that I think is critical in this space, even to an extent that it’s not in venture. In venture, if someone comes to you and says, you know, I’m a professor at so-and-so and I’ve written this code on VR headgear, it’s enough to use the application or use the prototype, whereas here I think you actually have to go in and review the source code. It’s just another level.

Laura Shin:

And what are you looking for? Like, what would be red flags in the code?

Naval Ravikant:

Well, the number of people in the world who are qualified to develop an internet protocol, it probably numbers in the hundreds. It’s not in the hundreds of thousands, so you have to basically make sure they know what they’re doing in terms of distributed systems engineering, encryption, protocol design, cryptography, all of that stuff, so you’re looking for technical competence, you’re looking for good design, you’re looking for having though through all the various holes, you’re looking for experience, and then there are outright frauds in the space where these white papers look really good, but there are backdoors in the code. So, Lucas used to make a living beforehand by cleaning bug bounties but finding holes in coins or bugs in coins, so he also looks at those kinds of things.

So, for example, you know, we looked at the Parity Wallet stuff a while back, and Lucas concluded that it was just too dicey. The code was just too complicated and they were trying to do too much, so he didn’t identify a specific hole, but he said this is the kind of thing that has holes, so we can’t trust this, so we have to be very conservative on the technology side. At a market level, we look to see is there a big enough market for this, is this trying to be a money-like token, is it really bringing novel technology, how is it priced, and you know right now I’m probably getting hit with like 10 ICO deals a day, and 9 out of the 10 are actually pretty easy to dismiss because very often they’re just companies that don’t need a token, were not interested in blockchains or cryptography until suddenly the ICO boom started, or they’re ideas that often didn’t work as a centralized company, so why would they work as a decentralized, so, and a lot of them don’t need a token in the middle, or they don’t need their particular token in the middle.

They would be better off especially because all the winning cases here are open-source software. Somebody’s just going to fork them, remove their proprietary token, and insert a Bitcoin or an Ethereum or maybe a version of a proprietary token that gives .1 percent to the developers instead of 10 or 100 percent to the developers. So, I think a lot of it is just outright greed, and so those ones are easier to dismiss. Then I think there’s a category that are interesting but probably too early, where people are trying to build, you know, next generation marketplaces or broad applications, almost platform-like applications, but I think we’re still at the infrastructure layer, so I tend to dismiss most of those. I think they might be fine investments for other people, but I have a strong viewpoint that we’re still in the infrastructure phase here, so I tend to remove a bunch of those.

Laura Shin:

So, that’s sort of like choosing not to invest in Webvan but later investing in Instacart, something like that?

Naval Ravikant:

Something like that, hopefully. That would be good if that works out. There’s also a number of these that are what I consider asset tokens, where they’re not really a protocol, where you have some digital thing you’re moving around underneath. It’s actually rather mapping some asset in the real world, like a piece of real estate or a car or a share in a real-world company. I also think those are less interesting because it’s not fully digital. It’s not fully protocol native. It requires external enforcement by legal authorities, and as such it’s basically a security by another name. So, those ones, also less interested in and tend to dismiss, and then when you get into what I consider to be the protocol tokens and especially the gold standard of the money-like protocol tokens, the bar there is really high because there’s only going to be 1 to 5 winners in that entire space, so the technology has to be…

Laura Shin:

Wait, why do you think that?

Naval Ravikant:

Money has a very powerful network effect to it. One way to look at it is, you know, if we didn’t have geographic national boundaries, we’d probably only have the US dollar or the equivalent for the entire world. We wouldn’t have thousands of currencies. The currencies only exist because of national borders. Money is like language. It’s something that’s intrinsic to the human species. We want it to be as open as possible, and the world tends towards one. Now, within money itself, there are different use cases. There’s store of value, like gold, there’s unit of account, like what we use dollars for today, and there’s medium of exchange, where we actually currently use digital packets that represent US dollars or digital signatures to represent US dollars, and the next money could be all three of those things in one.

It could be a different one for each of those three things, or it could be that we have a basket of things for each one, and it’s not clear yet. Nobody really knows whether it’s going to be 1 or 3 or 20 or 100, but it’s more likely going to be in the 1 to 5, 1 to 10 range. So, now you’re basically saying, okay, there’s hundreds of, still, business plans to do these. There’s only going to be 1, maybe 2 winners, so you really, really have to have a very, very high technical bar for what you think is going to do well, and today the default use case is…the default case is probably going to be some combination of the top 20 cryptocurrencies, so to get in there and unseat one of those, you’re going to have to come up with a pretty fundamental innovation.

Laura Shin:

And is that why you’ve invested in Basecoin and Zcash? Like, it sounds like maybe you think that a stable coin will definitely work in a privacy coin and…

Naval Ravikant:

Yeah, a stable coin is one of those coins that sort of needs to exist. I don’t necessarily recommend Basecoin. I think there’s going to be dozens of players in the space, of which none might win, but if one does win, then a stable coin is great because it allows you to actually do real-world transactions without the price moving on you, and one of the problems today as a user or as a merchant is Bitcoin and other coins are just too volatile. When something can go up or down 10 percent in a day, you can’t use that to run your business. You have to get in and out of that as quickly as possible, which incurs transaction fees and has storage costs and all those kinds of things. A stable coin, in theory, could hold its peg, like the US dollar stays within a very tight range, over a long enough period of time that people can actually post prices in the coin, and they can actually transact in that coin.

Laura Shin:

Well, one interesting thing that I thought when I was reading the Basecoin whitepaper was that, because, you know, I understood this part about how they were sort of incentivizing…I forget the name of the group, because there were like three people…there were the bond people, and then there was the actual coin, and then there was the third, where you’re incentivized to sell _____ 00:36:40. So, anyway.

Naval Ravikant:

Right. Yeah, the bondholders, yeah, that’s a convoluted scheme. Yeah.

Laura Shin:

Yeah, I forgot the name of that group, but the point is just that I was kind of like, well, their upside is only going to be limited to a certain percentage, so I was like why would anybody speculate on this when they could speculate on like Bitcoin and Ether, and you know, and then I just wondered, like, is this going to be that popular, and anyway, I just, because I feel like speculation is what’s fueling everything right now, and I just was like if somebody’s being really rational, they’re not going to be like, oh, I’m going to get all in on this, because they’re going to realize that their profits are going to be pretty limited, so.

Naval Ravikant:

Right, but their downside is limited too, and the profits may be relatively not guaranteed but maybe a lot more predictable. So, it’s like if you look in the bond market versus the stock market. Stocks, on average, make a lot more money than bonds, but bonds are “safer,” and you’re guaranteed your coupon over some period of time at very low risk of complete default, whereas equity, the chance of a total wipeout is actually pretty high. So, equity ends up being more risk capital, bond ends up being more safe capital, and most of the money in the world goes into bonds, credit markets, not into equity markets.

Laura Shin:

Right.

Naval Ravikant:

So, you could argue the same kind of thing here, but a lot of it depends on the exact parameters, and you’re right that in the crypto markets, it’s driven mostly by extreme thrill seeking, money-making speculation, so it wouldn’t be the same kind of investor that necessarily invests in both coins.

Laura Shin:

Yeah. Yeah. Well, we’ll see how well that one does. So, one other thing is that I’ve seen in other interviews you’ve talked about like with startups about how timing is extremely is important, and a lot of that’s due to luck, so I don’t know if maybe you referenced this a little bit earlier when we spoke, but do you have any particular types of tokens now that you think have a bigger chance of being lucky, you know, like are there any that you feel are kind of in that sweet spot of really needing…or the space really needing them and then also the technology being pretty ready for them?

Naval Ravikant:

Yeah, I think we’re still in the infrastructure phase. Even the two biggest coins, Bitcoin and Ethereum, have not yet figured out how to scale properly. They have not yet figured out how to decentralize properly. Ethereum is still controlled by a very small number of developers, like very small, you can count them on one hand, and Bitcoin is controlled by a relatively small number of developers, you know, probably like three dozen, and a small number of miners who are concentrated heavily in China, and a small number of exchanges that get to set policy on what do you call the coin?

So, we are not actually in the decentralized future yet, and these platforms can’t actually handle applications and scale them yet. That said, we are making rapid progress, so given that, I think that investing in apps is just early. It’s okay for entrepreneurs to start building them, and there are probably a few that may break out early, like, for example, you know, if you look at the first generation of the web, almost everything from the 1998, 1999 dotcom boom is gone. We don’t use it today, but there are notable exceptions, like Amazon and Google, right, the big five.

So, two of the big five companies were born during that time period, and Apple was sort of reborn during that time period as an infrastructure provider to a lot of those companies. So, I think you have to basically realize that the entrepreneurs who are playing right now are playing an extremely high-risk game. They may form the big five, but most of them are going to end up like the dotcom companies, the Pets.com and the Webvans. So, for me, at least as an investor, I look much more at the infrastructure phase rather than the app development and the deployment phase, which will, I think, come later.

Laura Shin:

And then earlier when you were talking about how Bitcoin and Ethereum haven’t really kind of figured out a good governance model for a decentralized network, do you have any particular idea in mind of how you think governance should work for these decentralized networks?

Naval Ravikant:

Well, they’re not really fully decentralized yet, but they’re already more decentralized than anything that has come before them, and the thing that really makes it possible is that even though Ethereum is only controlled by a small handful of developers, those developers can’t just do whatever they want because it’s open source code. It can fork very easily. If they do something unpopular, the users can literally pick up the code and the network and leave. So, that creates a level of honesty that just doesn’t exist. Imagine if you and I had the ability to press a button and teleport our entire lives from the United States to any other country that we wanted, and that was true of any citizen of any country in the world. Countries would still have control over their geographic boundaries and their borders and the laws within the borders, but they would just behave extremely differently.

It’s also the difference being when you’re casually dating somebody versus when you’re married to somebody. Right, when you’re casually dating them, they have to be on their best behavior, otherwise either party can walk out, but when you’re married, then people kind of tend to revert to sort of not their worst selves but their normal selves and because they know they have lock in. So, at the end of the day, because cryptocurrencies can fork, because the users can leave, because the users can sell your currency and buy another one, it just forces you to behave at a level that’s not true with other code and other infrastructure. For example, there was a woman recently who was banned by  Uber and Lyft because she went on some screed against them online, and I’m sure…I think what she did was probably reprehensible, but the idea of being banned by Uber and Lyft, that’s pretty insane because it’s not like you really have a third option.

What are you going to do in San Francisco, sit on the phone for 20 minutes and wait for a taxi? So, those companies have a lot of control. In crypto land, nobody has that much control. If they try to do anything that the community doesn’t accept, the community’s gone, and I think that right there, that right to exit, creates better governance than almost any other system that we’ve ever had. Now, on top of that, you can layer on additional better governance. Like, Bitcoin has this concept of there’s the users, there’s the miners, and there’s the developers, right? A soft analogy to that would be there’s a judicial system, there’s the executive system, and there’s the legislative system in the United States. So, you do get some division of power, but it can be better. Bitcoin’s had a really hard time agreeing on anything new moving forward, which many people would argue is a source of strength because it’s trying to be an immutable store of value, and eventually…

Laura Shin:

And what do you think?

Naval Ravikant:

I actually think it’s better for Bitcoin to be extremely conservative. Bitcoin is where you put your money and hope that nobody can touch it, nobody. That includes the government. That includes Chinese miners. That includes US developers. So, if Bitcoin is going to make a mistake, I would rather that it err on the side of not changing quickly enough rather than changing too fast, because as a user, now, that may not be what’s best for Bitcoin necessarily, but as a user, I have other options. I also have Ethereum, which changes a lot faster, moves fast and break things, but on the other hand, because of that mentality, isn’t really interested in protecting an investment. It’s interested in creating an ecosystem of services on top, and so that’s probably where I’m more likely to want to run my business, and then something like Zcash and Monero are much more focused on privacy, and if I care about privacy, they’re going to defend, protect, and encode it at a level that the other big two are not.

So, I think, in general, it’s good to have a diversity of coins with different governance models, different philosophies, different communities, and as a user, I can just go in and out of whichever one I need, when I need it. Within a given community, they get extremely acrimonious, and there’s a lot of fighting, mostly by the hodlers because they just want to maximize value and survivability, and they have very different viewpoints on why that currency exists, but as a user, I want there to be a thousand different currencies with a thousand different governance models and a thousand different etcetera, etceteras. So, I think Bitcoin kind of is doing what Bitcoin does.

Laura Shin:

In another video that you’ve done, you talked about how you thought back when the internet started that it would be a democratizing force, it would take out the middleman, but now we’ve got like Facebook, Amazon, Twitter, Google, and you called them our new overlords. Do you think we’ve run, again, that risk of missing out on this democratizing opportunity that blockchain technology offers?

Naval Ravikant:

Yeah, I was always…I love the internet, I love computers, I grew up on the internet, and to me the big promise of the internet was getting rid of the chokehold that Microsoft and Intel had over the tech industry or that other companies have over our lives. The internet is fundamentally a democratizing force, and what it did do was it got rid of a lot of chokeholds like, you know, the New York Times is not what it used to be. Hollywood studios don’t have the power that they used to have. Even the US Government kind of doesn’t have the same power over certain things that it used to have. The banks don’t have the same power they used to have. VCs don’t have the same power they used to have. So, it did help democratize certain things, but it created these very thin, broad new overlords that Ben Thompson from Stratechery calls the aggregators, but you know you just look at the big five, you look at how concentrated power is in the hands of an Amazon, Google, a Facebook, a Twitter, a Microsoft, or even Uber.

These companies essentially run natural monopolies, beneficial monopolies that help the consumer. They’re not jacking up prices on us. They’re actually doing quite the opposite. What they’re doing is they’re lowering prices on us and they’re squeezing suppliers on the back end, but we still end up going through one company, and whatever its politics are, whatever its power structure is, that’s what we’re beholden to. Like, if you look at Twitter, Twitter could be the greatest force for freedom in human history. You can have one person broadcast, censorship-free, to the entire world, but Twitter doesn’t run as a censorship-free platform, nor is it available in certain countries. If it were built on a blockchain, Twitter would be available in every country. It would be very hard to repress, and you couldn’t shut down any speech, and I think something like that needs to exist. So, the good news is, I think, blockchains, with blockchains, the long arc of the internet is bending back towards decentralization, and I think we’re actually going to have…a next generation of companies will be created that will be far more decentralized and have much smaller choke points than the current set do.

Laura Shin:

And so you really don’t worry that we will end up just with new, different, you know, blockchain-based overlords?

Naval Ravikant:

I don’t because I think blockchains are inherently decentralized. It’s in their core infrastructure. You can’t change it without ripping it out. To give an example, Vinay Gupta recently went off on this giant screed against Gab. Gab is this Twitter-like competitor that has a lot of, you know, the right wingers that have been thrown off of Twitter on it. Gab’s been looking for a new home to build where it won’t get censored, so Gab wants to build on top of Ethereum and do an ICO, and Vinay, who was involved early on with the Ethereum foundation and Ethereum development, went off on this giant screed about how, Gab, you’re not allowed here, we will stop you, we don’t want you or your people building on top of Ethereum, and you know it’s interesting to watch.

One of the…I don’t know if he’s a founder, but one of the early people in Ethereum sort of tries so hard to stop something and basically have no effect. Vitalik, the lead developer, basically said, no, we’re not going to stop anyone. In fact, if you go to the home page for Ethereum, it says build unstoppable applications. Even Vitalik couldn’t even do it if he wanted to, because Ethereum would basically just kick him out. The community jumped all over Vinay and told him to get lost.

They said you don’t speak for us. And I don’t even think it’s possible, even if all the developers and a large chunk of the community wanted to stop them, Gab would just fork it, like happened with Ethereum Classic, and would build on top of Ethereum Classic. So, these really are unstoppable sort of networks, and it means that you can’t have censorship and you can’t have central control beyond the level that’s encoded into the system, and if someone doesn’t like the level that’s encoded in the system, they can always fork it, or they can go to hundreds of competing cryptocurrencies.

Laura Shin:

Well, so, speaking of control, you also said in another video that blockchains make individuals sovereign and put them in power, but I think the other thing that happens at that point is that then it gives people another thing to manage, and I just wonder, like, if I even think about managing my own private keys or my identity or whatever, it just, it feels like another burden, another thing to worry about. Do you think people really do want to manage their own personal data?

Naval Ravikant:

I think most people don’t want to, but they want to have a choice of who manages it for them. So, in today’s model, with the way the world works, is if I need a bank, it has to be one of the Federal Reserve regulated member banks, and there’s just very little innovation or competition between them. If I have my identity, Experian, TransUnion, and Equifax manage it whether I like it or not, and we saw how well that worked out in the Experian hack.

So, I just don’t have any choices, whereas in a blockchain-based model, I can choose. If I want to manage my own identity, I can. If I want to put it on Civic or Blockstack or a different blockchain, I can. If I want to have a third party that I trust, there can be a thousand different third parties competing for the right to help me manage it, and they can have different security models, different pricing, different policies in how they issue identity data to the various people and take responsibility for it. So, what, at the end of the day, all this boils down to not that this isn’t necessarily better but that it gives you freedom of choice across the board, the freedom to…

Laura Shin:

So, even though that’s a little bit more centralized in a certain way, at least people are choosing that? Is that…?

Naval Ravikant:

Exactly. Like with Facebook, I don’t really have a choice. If I want to be in the same network as all my friends and family, I got to go on Facebook, and only Facebook can operate that network. Only Facebook has access to that data. A Facebook that’s built in the blockchain, there’d be hundreds of thousands of companies, any one of which I could say, okay, you are my manager of my social network profile and data, the others aren’t, and well, you’re misbehaving or you’re selling my data for ads, I’m switching away from you, so, and now you have reputations, you have choice. I mean, look, what separates capitalism from communism is outcome. It’s not intentions. Communism probably has better intentions. What separates them is choice.

In capitalism, I can choose my vendors. I can choose to lead. I am a consumer, and by having the choice, I’m in charge, whereas in communism, because I have no choice, I become a vassal. So, the same thing happens in blockchain land versus classic internet land or classic financial infrastructure land. Classic model, I have no choice. There’s 1 or 2 or 3 monopolists or federally appointed oligopolists who get to run my entire life, whereas in a blockchain world, the data’s in the blockchain. It’s ultimately controlled by me, and I can cryptographically lock and unlock it for different entities based on how well they are serving me, and if they’re not serving me well, I can always do it myself, worst case, or if I don’t want to do that, I can lock them all out and choose the friendliest one of the lot.

Laura Shin:

So, in a way, it’s like if you do use a centralized service when it comes to any of these blockchain-based networks, then, first of all, it’s your choice, but then also there could be many more of them than there were previously, so.

Naval Ravikant:

And my data’s portable. In blockchains, one of the key differences between blockchain-based protocols and the first generation of internet protocols is in a blockchain-based protocol, it holds state. My data is held in the network, so I can take my data with me, whereas good luck exporting your data out of Facebook in such a way that if there was even a competitor that has survived, that a competitor could use it.

Laura Shin:

Okay, so I want to go back to the governance question. Do you have any particular model in mind of how you think decentralized networks should make decisions?

Naval Ravikant:

The decision-making model for the decentralist blockchains comes straight out of the open-source movement, so it’s around commit access and consensus and draft and request and the ability to fork. That’s sort of the best model that we’ve found, to date, for these code-based systems. The new constituencies that have been added are the users and the investors, right, and of course miners. So, those constituencies didn’t exist in the open-source movement. So, miners, the way that they vote on governance is basically built into each protocol. The way the users vote and the way that the investors vote is investors vote by buying and selling. The way the users vote is by adopting, not adopting. All of these can be improved. So, for example, you could see that future wallets would allow users to actually vote on the future of their currency through the wallet.

So, very much like you have elections, you could have your wallet basically say, hey, this month, these three currencies that you hold are making decisions on these three things. Here’s what people that you trust in the community or follow on Twitter are saying, how do you want to vote? You can have a voting mechanism built directly into the wallet. You could imagine something similar for the miners in the software that they run. For investors, especially the ones who are speculating and buying into ICOs, you know, against all odds, they actually need to have much stronger governance. They need to be able to say, well, you know what, okay, we’re putting 50 million into this ICO project, but we’re not going to just give you all 50 million bucks immediately.

It gets locked up into a contract where it gets released in milestones, every 5 million bucks, every 3 months, and there’s a vote based by on the wallets and the different holders as to whether we release it to you or not based on have you been hitting the milestones and have you been performing? That’s the simplest level, but you can imagine many, many more layers of governance. So, I think we will get more sophisticated about these things over time, but it’s going to take years to evolve, and my fear is it’ll be a boom/bust cycle and then a crackdown, which doesn’t give it a chance to evolve, but that’s the way it should work.

Laura Shin:

Well, how much bigger do you think this bubble’s going to go?

Naval Ravikant:

It can go a lot bigger. I mean the amount of money in the space is still small. The dotcom bubble was 1.7 trillion, and that was restricted just to the United States, and that was just accredited investors, and that was 20 years ago, so you take all those factors into account, and this one can go a lot bigger. Custody’s been a big problem in this space. How do you hold onto your private keys, as you were saying earlier? So, I think that is starting to get solved. I think within a year to a year and a half, you’re going to see a lot of very serious solutions in the custody space, and at that point, you’re going to see a wall of money coming in from endowments and sovereign wealth funds and larger players.

But even now, you know, at the beginning of this year, I only know of two crypto hedge funds, Polychain and MetaStable, and even Polychain, I think, is only about a year old, and there were a couple that were sort of just in Bitcoin, like Pantera and Grayscale and so on. Now, there’s probably a hundred, so the number of crypto hedge funds has gone through the roof, and I think there are all these big boy hedge fund managers sitting in Connecticut, or wherever their fancy estates are, saying wait a minute, you’re making these returns, and you’re getting this money, and you’re an amateur, I’m going to enter this space too. So, we’re going to see a lot more of those people flooding in. So, I think the amount of money that can flood in the market still is enormous.

Laura Shin:

And so it sounds like you think that regulatory action will only really happen when there is some kind of correction?

Naval Ravikant:

Well, I think the SEC is already taking regulatory action against the obvious frauds, but I think the way most money is lost in markets is not in fraud. It’s actually just lost through poor investments. It’s just these are legitimate people who are trying legitimate things and just weren’t very good, or they were at the wrong time, or they didn’t get very far. So, that’s how the majority of the money gets lost, and I think that’s going to happen, and there’s nothing the SEC can do about that. That’s just the market needs to develop a taste and a nose for whatever their investment is, and that takes time.

Laura Shin:

And so let’s talk about power and how this is disruptive to those in power. What kind of threat or disruption do you think that this poses to governments?

Naval Ravikant:

I think the most interesting thing about cryptocurrencies is, if you step back for a second, the history of the human race is a history of networks, and humans are the winning species compared to other species because we have the ability to cooperate across genetic boundaries, right? You’re probably, what, Chinese by origin?

Laura Shin:

Korean.

Naval Ravikant:

Korean, okay, I’m Indian by origin. My wife is actually Korean by origin. We can communicate. We can cooperate. We can relate. We can intermarry. These are the kinds of things that other species just don’t do. They literally only cooperate within genetic boundaries, within the ant hive, within the beehive, within the very small tribe, and humans can do this because we stitch together networks by telling each other stories, and the story of networks is the history of the human race. The United States is a network. Forbes is a network. AngelList is a network. The US dollar is a network. The English language is a network.

So, we create these networks, and generally you have to have some way, especially networks that are allocating scarce resources, of adjudicating and running the network, and historically the oldest form of government that did that was you had a king in power who was basically whoever the most brutal person was, the biggest tyrant, they got to be in charge, or eventually the king got attacked by the mini-kings, the aristocracy, and they then forced them to share power. So, you also have networks that are run by elites, like the medical system or the legal system or even kind of the US Republic is run more by elites than it is by a president or a dictator.

You also can run a network by putting a corporation in charge, and the corporation can punish cheaters, like Uber riders who aren’t paying or who keep calling cars and cancelling them, but then the corporation can end up as a monopolist, just like the king can end up as a tyrant, or the elites can end up as an aristocracy. You can also have one person, one vote, a Democratic or a Communist network, but then you end up with a tragedy of the commons or mob justice. So, humans have always been trying to figure out how to govern large groups of humans, punish cheaters, and reward the people who are contributing, and the best network that we’ve created in the last few hundred years to do this kind of thing are markets. So, markets are open like democracies or commons. They allow anybody to participate, but you have to vote with money, so there’s at least some merit-based system, but it’s a money merit-based system.

Blockchains extend that concept of market into managing all kinds of networks that before would’ve needed a central corporation or a central individual in charge, and I think that’s incredibly interesting. In a blockchain-based network, I can get rewarded for contributing whatever the network needs. So, if it’s a network that’s allocating bandwidth to people, if I create and allocate bandwidth into the system as a miner, I get rewarded by coin from that network, and nobody’s in charge. There’s no central authority who then takes charge of the whole thing, takes a 50 percent tax, and starts kicking out people that they don’t like.

So, I think humans have literally created a new form of governance. It is a sixth form of governance in addition to the five that came before them, and that’s the kind of thing that only happens once every few hundred to every few thousand years. That’s fundamental. So, that’s going to upend every power structure that exists. There are corporations…it’s not going to upend the existing corporations, but there are new networks that will be deployed that would’ve needed a central corporation that will now instead use a blockchain.

There are new groups of people who are making rules amongst themselves and adjudicating themselves who might’ve needed an elite to do it, who will now use a blockchain-based solution. There are new open systems that would’ve suffered from the tragedy of the commons that won’t because they’ll use a blockchain-based system. Will we get so far as to have a government run on a blockchain? I don’t know, maybe in my children’s children’s lifetime, but that’s a long ways out, but along the way, I think we are going to see some of the fundamental functions of government. We’ll see that they’re more efficiently done using a blockchain. For example, a blockchain-based voting system would be essentially as cheating proof as you can create a system.

You could audit exactly that everybody got to vote, everybody who voted was entitled to vote, was registered to vote, but you don’t get to see what their actual vote is, and it’s done in a cryptographically secure way such that there’s no Diebold, no corporation at the center that owns the voting machines. There’s no Republicans or Democrats sitting there and counting the votes and throwing out the third-party votes or things like that. So, that is an example of a piece of infrastructure or government that is probably better done through a blockchain than by the government itself. Now, of course, governments don’t want to give up power, so that’s going to be a struggle in the process, but I think we are going to see blockchains remake parts of government, and eventually, maybe hundreds of years from now, you could actually see them replace a lot of government.

Laura Shin:

Well, going back to your description about the election or your example, do you imagine that that would happen in an election that’s run by the government, where they’re choosing to create a blockchain-based election, or are you imagining it decentralized?

Naval Ravikant:

My guess is what’ll happen, like always, the government’s always the final adopter of any technology solution. They’re never the first adopter. They’re the last adopter. Just take a look at the DMV and the post office if you have any doubt about that. So, the way it’s more likely to work is that small private organizations that do have internal elections but are worried about cheating, are worried about, you know, there are some very opposing groups on each side. You would see them adopt a blockchain-based solution first, and it’s probably brand new private organizations that are just starting up that are saying hey, there’s this…and of course the infrastructure will need to exist.

So, we’re still in the infrastructure development phase, but five years from now, if you’re starting a group that needs to have an election, like let’s say you’re electing a college president, right, on campus, and there’s like the left wing and the right wing on campus, and they’re really opposed to each other, nobody trusts each other, some clever student is going to say, well, I’m just going to use this off-the-shelf, blockchain-based voting mechanism that this now-defunct company built, and you know with their ICO money, and it’s open source. Anyone can audit it. It’s running on the Ethereum blockchain, so it’s completely cryptographically secure. Any student can vote.

You log in with your student ID, using your private key, so it can’t be faked. We can show which students voted, and each student can audit their vote and make sure their vote was counted using zero-knowledge proofs, but your vote doesn’t actually get revealed, so your vote is completely private, and then we can know beyond a shadow of a doubt that these were the exact vote outcomes. That seems like a much better solution. So, I could see small private organizations adopting it, and then it grows and grows and grows and grows until one day all the voters look at each other and say why are we using this antique system for the big one, when for all the little ones, we’re using this better system?

It’s sort of like how when the iPhone first came out, corporate America was still all using blackberries and continued to use blackberries for a while, until finally the CEO, who had an iPhone at home and a blackberry at work, and the CFO, who had an iPhone at home and a blackberry at work, went to the IT person and said what the heck are you doing, it’s time to get with the modern world, I don’t care what you think about the security, I don’t care what you think about your apps and your provisioning and all the stuff that you use to defend your job, just switch over to the iPhone already, I don’t care how it happens. That happened, right?

Laura Shin:

Right.

Naval Ravikant:

So, that same kind of technology adoption cycle needs to happen on blockchains, but that takes decades. It’s not an overnight thing.

Laura Shin:

So, what are some like upcoming trends that you think we’re going to see in crypto, in the short-term future?

Naval Ravikant:

I always find it’s much easier to predict long term than short term because short term has to do with the vagrancies of humans, and long term, you can focus much more on the math and the protocol and the logic of it. If I had to guess, I think there’s a wall of Wall Street money coming in, like a lot of Wall Street money coming in. This is more a hope than a prediction, but I am hoping that some of the top 20 currencies that are not that high quality do get recognized as such and more of the money gets concentrated into the good currencies. I hope that a lot more goes into development, especially for high-quality protocol engineers.

You have brilliant people sitting at Stanford, MIT, Johns Hopkins, you know, and even lesser-known universities and places around the world, and these crypto-economists and crypto-technologists, these people are worth their weight in gold, and they should be financed such that they can do fundamental good research into governance and scaling. I hope the scaling gets much more addressed. That’s a big one Ethereum’s trying to do is proof of stake and shorting to get scaling going. Bitcoin, now that it’s rejected 2x, needs to get its Lightning layer deployed and actually functional so that the fees can come down and the wait times can come down. I think it would be great if governments started basically putting moratoriums around crypto regulation, just like they did around internet regulation in the early days, to give it a chance to blossom.

You know I don’t think New York’s BitLicense helped anybody, and it’s not a surprise that that came out of the state where all of Wall Street is, so I get that the lobbyists there, you know, have a certain agenda, but nevertheless it’s sort of shortsighted of New York to say, hey, you know, we took over finance 1.0, but we’re going to throw finance 2.0 out the door and hope it doesn’t happen somewhere else, right? That’s just not likely to be the case.

Laura Shin:

Right.

Naval Ravikant:

New York does not dictate the state of financial innovation for the entire planet. If anything, it’s just ensuring it’s going to end up like Detroit, hollowed out as the industry moves on, so I’m hoping that some of these things will come to pass. I hope, also, we’ll just get better at things like custody, so the average user doesn’t have to worry about their private keys. We’ll get better about education, so, you know, your average person isn’t running around and buying an ICO, but rather they’re trying to figure out what the high-quality ones are, or they’re using an index, or they’re just realizing the inherently highly volatile nature of these assets, and they’re holding small amounts through good custodians. I think there’s going to be a lot of good technology development. In the last two years, when the hardware wallets got really good, for example, more than two years ago, you didn’t even have that solution, right? It wasn’t very good. It didn’t work well.

So, I think we’ll continue to see some stuff like that. I think everyone’s still waiting for end-user use cases where cryptocurrencies are better than existing currencies. We still haven’t seen a lot of those. It’s been a little surprising to me. I would’ve guessed that something like the collapse of the Venezuelan bolivar, you know, would have led people to adopt cryptocurrencies there, but the infrastructure just hasn’t been in place. Your average Android phone or iPhone is still not geared up to be a good crypto-to-crypto platform, but maybe in 1 or 2 years from now, it’ll be good enough that people will actually start transacting in crypto in places where the local currency essentially no longer works.

Laura Shin:

And do you have any like big thoughts that are floating around your head around crypto that you’ve just been thinking about recently that we didn’t discuss?

Naval Ravikant:

You know one thing I’ve been coming around to is it’s taking a lot longer to solve even the basics, like how do you scale Bitcoin, how do you build a secure multisig wallet on Ethereum, etcetera, you know, and you’re having really large changes like the Chinese government shutting down all crypto exchanges or Bitcoin Cash coming up and competing with Bitcoin. It might be more centralized or less centralized depending on it. So, crypto is, if anything, becoming more volatile, not less volatile, and so in that world, I think the right answer to where crypto heads from an end-user perspective will be that we may end up stopping to talk about is Bitcoin going to win or is Ethereum going to win or is Monero going to win or is Zcash going to win?

And we may end up focusing much more on having baskets of crypto, and it didn’t work with currencies because it’s very hard for me to go down to the local store and say here’s a basket of the top 50 currencies of the world, right, because they don’t know how to handle Zimbabwe dollars, and they don’t know how to handle Mexican pesos and all that stuff, and they’re limited by governments, but it’s the nature of crypto that these things are completely electronic. The wallets are completely in software. So, if, for example, we could somehow agree every year these are the top 10 crypto assets right now, and they’re relatively stable and relatively high quality, and they all have different governance mechanisms, different levels of decentralization, different threat models, and different adoption models, that you could then say, okay, I’m going to give you top 10 basket, I’m going to buy it from you, I’m going to sell it from you, I’m going to hold the top 10 basket, and you could almost start using it as a currency.

There’s no fundamental law of software that says that it has to be one cryptocurrency at a time. So, I think we may just get more comfortable with baskets, and I know this was tried in the real world with European Union originally had, before the Euro, they had a special Euro basket instrument that comprised all the Euro currencies, but it was a temporary thing, but it did work, or the IMF has SDR, special drawing rights, or XDRs, they also call them, which are sort of a basket kind of currency instrument, but I think we may actually see in the crypto world, in the software world, that we create real baskets that can actually be used for real cases, and they’re safer than any of the underlying cryptocurrencies. So, if there’s a big hack on a single exchange or if the governance model of one currency collapses or its encryption gets broken or there’s a bug in the software that turns out to be a scam, you know, you lose 10 percent at worst. You don’t lose the whole thing.

Laura Shin:

It’s almost like using a mutual fund or something as your currency.

Naval Ravikant:

That’s right, yeah.

Laura Shin:

Something like that, yeah.

Naval Ravikant:

Yeah. It could happen in crypto land, so it’s just an idle thought. I don’t know what the odds are, but it’s fun to think about.

Laura Shin:

Well, maybe you can find some entrepreneurs who are going to create that. All right, I’m going to ask you a personal question. It’s one of my last questions, so if you run me out the door, then I’ve at least got my interview.

Naval Ravikant:

Sure.

Laura Shin:

What percentage of your net worth is in cryptocurrency?

Naval Ravikant:

I got to run you out the door. No, I don’t talk about private crypto holdings. I don’t even hold them personally.

Laura Shin:

Okay. Yeah. No. I figured you were not going to answer that one.

Naval Ravikant:

I trust them to Olaf and Lucas. It’s not my…

Laura Shin:

Okay. Okay. All right. Well, this has been a great discussion. How can people get in touch with you?

Naval Ravikant:

I’m on Twitter as @Naval. That’s the best way.

Laura Shin:

Okay. All right. Well, thank you, so much, for coming on the show.

Naval Ravikant:

Thank you for having me.

Laura Shin:

Thanks, so much, for joining today’s episode with Naval Ravikant. To learn more about Naval and to find previous episodes of the show with other innovators in the blockchain and crypto space, check out my Forbes page, Forbes.com/sites/LauraShin. Also, be sure to follow me on Twitter @LauraShin. New episodes of Unchained come out every other Tuesday. If you haven’t already, rate, review, and subscribe on iTunes or wherever you get your 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 and Fractal Recording. Thanks for listening.