Olaf Carlson-Wee, the founder and CEO of Polychain Capital, goes deep into yield farming, fair launches and how decentralization will upend the traditional notion of the corporation. In this episode, he talks about:
- when it makes sense for a team to introduce a liquidity mining scheme, and when it doesn’t
- the difference between yield farming and ICOs when it comes to investing
- his thoughts on YFI, as well as YAM, and the pace at which unaudited DeFi projects are
- moving forward
- the three advantages he sees in automated market makers as opposed to centralized
exchanges - his thoughts on Uniswap and SushiSwap and why he’s not sure Uniswap will make a token
- his thoughts on fair launches and whether he thinks they will threaten traditional crypto VCs
- whether the CRV token launch really was instigated by someone unrelated to the team
- his thoughts on the yEarn yETH vault and what it says about where the DeFi space is going
- what he sees as the pros and cons of rebasing
- why he sees projects like YFI as a new kind of corporation
- whether he thinks Ethereum will scale fast enough to meet the demand already being put on it
- why he thinks systems like Polkadot are going to expand what is possible in the same way that Ethereum expanded beyond what was possible with Bitcoin
- whether he thinks the yields from yield farming will pull investors away from staking on Ethereum 2.0
- what he thinks DeFi teams should do to improve security
- Bitcoin on Ethereum and what he believes it could mean for DeFi in the future
- the chatter around a potential public offering from Coinbase, and what’s in store for Polychain in the future
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Episode links:
Olaf Carlson-Wee: https://www.linkedin.com/in/olafcw/
Polychain Capital: https://polychain.capital
Previous interviews with Olaf on Unchained and Unconfirmed: https://unchainedpodcast.com/why-the-first-employee-of-coinbase-launched-a-hedge-fund/ https://unchainedpodcast.com/to-the-moon-and-back-with-polychains-olaf-carlson-wee/ https://unchainedpodcast.com/special-episode-with-cnbcs-crypto-trader-olaf-carlson-wee-on-why-this-crypto-winter-is-different-from-previous-ones-ep-028/ https://unchainedpodcast.com/all-things-cryptoeconomics-pt-1-with-olaf-carlson-wee-and-ryan-zurrer-of-polychain-capital/
Why trading on automated market makers has risen so quickly: https://unchainedpodcast.com/why-decentralized-trading-has-10xed-in-a-few-months/
Launch of yEarn/YFI: https://medium.com/iearn/yfi-df84573db81
Dex volume over time: https://defiprime.com/dex-volume
YAM recap: https://www.theblockcrypto.com/post/74810/yam-token-market-cap-collapses-by-more-than-90-flaw
YAM team’s plans going forward: YAM Post-Rescue Attempt Update. At approximately 6PM UTC, on Wed August… | by Yam Finance | Aug, 2020 | Medium
SushiSwap vs. Uniswap: https://unchainedpodcast.com/sushiswap-takes-on-uniswap-which-should-win-and-why/
Ian Lee of IDEO CoLab Ventures on fair launches vs. VC coins: https://synthesis.substack.com/p/fair-launches-will-disrupt-crypto
And on fast-follower forks: https://synthesis.substack.com/p/fast-follower-forks-in-defi
CRV token launch: https://www.theblockcrypto.com/genesis/74921/the-story-of-the-botched-crv-launch
yEarn’s yETH vault: https://www.coindesk.com/yearn-finance-yeth-vault-defi-triforce
Ethereum’s transition to 2.0: https://unchainedpodcast.com/vitalik-buterin-on-ethereums-five-year-anniversary/
Security in DeFi: https://unchainedpodcast.com/defi-security-with-so-many-hacks-will-it-ever-be-safe/
Whether Coinbase will do a token offering when it goes public: https://unchainedpodcast.com/will-coinbase-do-a-token-offering-when-it-goes-public/
Transcript:
Laura Shin:
Hey, everyone. Just a heads up about this episode, which is a fascinating conversation with Olaf Carlson-Wee of Polychain Capital, mostly about things happening in DeFi. Because, I’m sure as you all know, things in DeFi change very quickly, some key events occurred after we recorded and so are not discussed in this episode. Namely, what’s missing, is that the creator of SushiSwap, Chef Nomi, cashed out, causing a firestorm in the community and prompting the anonymous developer to hand over the admin keys to SushiSwap to Sam Bankman-Fried, the CEO of cryptocurrency derivatives exchange FTX, which is building the Serum project on the Solana blockchain. It was a stunning sequence of events, and each step of it is probably worth unpacking. However, that will have to wait for another time. Despite these events not being covered here, there is still so much to dive in to in this episode, especially, since I think we are all wondering whether SushiSwap, being a fast-follower fork, or Uniswap would’ve prevailed, had Chef Nomi not cashed out early. And that is just one of many juicy topics that Olaf and I dive into.
Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com/C/UnchainedPodcast and subscribe today.
Crypto.com Crypto.com is waiving the 3.5% credit card fee for all crypto purchases until the end of September. Download the Crypto.com app today.Laura Shin:
Today’s guest is Olaf Carlson-Wee, Founder and CEO of Polychain Capital. Welcome, Olaf.
Olaf Carlson-Wee:
Hey, Laura. Thanks for having me, and good to see you again.
Laura Shin:
You’ve been on the show before, so I think a lot of listeners will know your background, but I’ll just briefly recap. You were the first employee at Coinbase. You worked your way up to head of risk and then left to found the crypto fund Polychain Capital. For those who aren’t familiar with Olaf’s background, I urge you to listen to my previous interviews with him, which I’ve put in the show notes. So, I want to dive into the big topics of the day in the crypto world to get your take on some of the really big developments that everyone is talking about. Let’s start with DeFi and the yield farming craze, which has totally exploded this summer. I know Polychain thinks a lot about token design, so I wanted to get your take. What is yield farming good for? When does it make sense for a team to introduce a liquidity mining scheme, and when does it not make sense for them to do so?
Olaf Carlson-Wee:
Yeah. So, this concept of yield farming, or what I sometimes call network mining, I think is a very interesting mechanism to sort of bootstrap network effects in an underlying system. Primarily, in this case, it’s bootstrapping liquidity in some sort of lending marketplace or trade volume in a DEX marketplace, or something like that, and in doing both the bootstrapping of the liquidity, you’re simultaneously then distributing ownership and control of that system to the underlying users. So, you’re sort of accomplishing two things. One is the capital formation and human coordination around what is effectively distributing what look and feel a little bit like shares of a corporation, but it’s not a business entity or legal entity that’s based in a specific geography or jurisdiction.
It’s rather just a pure software system that allows those people to coordinate around capital and coordinate decision making. So, you’re both sort of distributing ownership of that underlying system while simultaneously bootstrapping the network effects of that system, and so, today, yeah, that’s trading, that’s lending, but I think this is a very, very useful structure, potentially, to bootstrap, really, theoretically, any sort of platform that has network effects, and so these kind of financial service applications, I think, make a lot of sense as a first use case, but I think, over time, these types of liquidity-mining-type schemes will actually be used to bootstrap, you know, massively multiplayer online games, bootstrap social media services, you know, any sort of e-commerce marketplace, really any sort of business model that has strong network effects where the users’ kind of primary benefit is from the activity of other users.
So, when I go on Facebook, right, I don’t go on that website in order to interact with Facebook or some sort of service Facebook provides. I go on there because of the content that’s being produced by the other users of that service, and so any sort of application where those network effects exist, in theory, you could bootstrap those network effects and distribute ownership of the underlying service using the same mechanism, which is this sort of network mining, and so, to me, there’s really two paths of innovation happening in the cryptocurrency landscape that sort of feed on each other in a very powerful feedback loop between the two of them. One is these actual DeFi products and protocols and just sort of thinking of them as a product, right, where I can trade a token for another token, or I can get yield on an underlying asset, or I can borrow assets. You’re sort of seeing very, very fast iteration on that product-development side, but simultaneously, you’re seeing incredible experimentation in the capital formation and human coordination side, which sort of crops up these corporations which are sort of sovereign to the internet rather than registered in a specific geography.
And so, I think that you have these two separate structures like the Dow or the decentralized organization and the DeFi product and protocol, and both of these are, you know, we’re just going through a massive step-function change where the pace of iteration and experimentation is hard for anyone to keep up with.
Laura Shin:
So, let’s talk about some specific projects. Polychain is an investor in Compound, which started the liquidity mining or yield farming craze this summer. Did you help with the design of COMP, the governance token, and if so, how did you think about how to structure that token, and what were Compound’s goals, and then what design choices did you make to help achieve them?
Olaf Carlson-Wee:
Yeah. So, we’ve been thinking about this concept of network mining for a really long time. Even, you know, we first invested in MakerDAO in January 2017, and even around their launch, we’re talking about if MKR distribution should be made to the early people that made collateralized debt positions to issues DAI in that system. So, that would’ve, in a sense, been sort of like the Compound liquidity mine, whereby the more people that add capital to the underlying contract, the more COMP tokens they earn. So, we’ve been thinking about this structure for, frankly, many years. We were definitely involved in the high-level design of the entire Compound token system. I mean Robert and his team really, you know, obviously did all the heavy lifting and came up with all the specific parameters and I think did an excellent job.
Laura Shin:
Robert Leshner, the CEO.
Olaf Carlson-Wee:
Yes, exactly, but yeah, we’ve kind of thought this was a really, really interesting way to bootstrap liquidity while simultaneously distributing future ownership. So, I think that the whole mechanism is pretty fantastic, and I think it can be applied to many more types of models than people realize right now.
Laura Shin:
And in terms of that goal for the users to govern Compound, you know, what design choices did you make to help achieve that?
Olaf Carlson-Wee:
Yeah. I mean we’ve always been interested in this idea of a group of token holders that have basically a multisig ability to upgrade or change the underlying contract and potentially can, at some point, attempt to extract revenues from that contract in some manner and basically apply what we would traditionally think of as like a business model to an underlying smart contract system, and so those early examples of this were systems like MKR and MakerDAO, ZRX and the 0x trading protocol, and now Compound, right, where there’s sort of a set of token holders attached to an underlying smart contract system, and I do think that that smart contract system benefits from distribution of ownership.
So, you just have more stakeholders that are community participants, and you have more people with more ideas about how you could potentially upgrade or change these contracts, and you could do lots of really interesting sort of exotic things when you have a group of incentive-aligned token holders all voting on how to change the system. In theory, you could, for example, issue new tokens and put them into some sort of pool, which can be sent as funding to effectively anything. So, you could fund marketing of the underlying project by, you know, engaging with a marketing firm and just paying them a set of tokens, and as long as everyone can agree with the dilution that you’re taking on from that issuance, you know, those types of decisions can be highly rational.
So, you know, if you have a group of token-holders around a smart contract and you say let’s take on a quarter of 1 percent dilution in order to pay five developers to build the next version of this protocol, you know, that’s likely going to improve the price of that system by much more than a quarter of 1 percent, which in crypto terms is very small, and so taking on those bits of dilution in order to raise capital, in order to improve the value of the system, is something that traditional corporations have been doing forever, right? They issue new shares in order to sell them to raise capital to make all the shares more valuable.
So, even though you’re getting diluted as an existing owner, you’re doing that to raise capital so that net/net, after it’s all done, you actually have more value than your old net, and I think that crypto systems are just in the early days of executing that same sort of logic, which is, actually, let’s accept a certain amount of inflation in order to fund development, fund marketing, fund user acquisition, fund partnerships, whatever it might be, right? It can literally be arbitrary, and use that funding in order to improve the value of the token beyond the dilution that we took on, and that sort of, yeah, issuance of tokens for capital raising in order to put that capital to work to support the network, I think we’re in the very early days of.
Laura Shin:
So, a lot of these ideas, I feel like, are ideas that I have heard you talk about for years, particularly back in the ICO craze days or even before. So, what is different about yield farming versus the ICO period when people were buying these tokens to ostensibly, you know, participate in these networks? Why is yield farming different?
Olaf Carlson-Wee:
So, yield farming has more positive externalities. So, if I want to contribute capital to a Compound pool, in order to farm the Compound token, it’s actually improving the costs of borrow for other users in that platform. It’s not just in the way an ICO was sending capital to some group or party and then, you know, who knows basically how they would use that capital. So, the other difference is with yield farming, you know, again, with the caveat being that the smart contract, itself, needs to be secure, you know, you’re also going to get your capital back, right? This isn’t a transfer of money from one participant to another in kind of a trade, so to speak.
A lot of the ICO craze was basically trading ether for some sort of ERC-20 token, and oftentimes, when that was taken advantage of by projects that maybe didn’t have a super-strong value proposition or a really strong roadmap or were just sort of outright a bit malicious, you’re basically trading like a good version of money for a worse version, right? You’re trading your ether for a worse asset. In this case, you can kind of put your ether to work that will generate a possible externality for the underlying product and also gain ownership stake over that, the future revenues and governance of that underlying product, and you’re free to hold on to that or sell it as you see fit, right, sort of like a Bitcoin miner, right?
But I do think, like Bitcoin mining, there’s positive externalities. Bitcoin miners act selfishly, right? They’re not altruists, but in their selfish actions, they actually secure the network for everyone who’s using it and everyone who’s holding coins in that system. So, I do think there are significantly more positive externalities. You really are bootstrapping liquidity in these underlying services, and there’s a bit of a flywheel effect, where you sort of work on bootstrapping the underlying service during that sort of liquidity mine period, but over time, hopefully that liquidity becomes sort of a positive network effect, in itself, and you no longer need the liquidity mine in order for the system to keep perpetuating itself.
So, these liquidity mining and network-mining type systems do not replace useful products, right? If the underlying product is not useful, the liquidity mine will only last for a little while, and then it will crash when that issuance schedule stops. However, if you do have a useful product, with real product-market fit, it’s sort of like gasoline on those network effects, right? It just allows you to bootstrap the network effects significantly more rapidly than you would’ve been able to otherwise, and you know, there’s lots of precedence for this, you know, outside of crypto. So, for example, just user referrals, in many web services, are sort of, you know, if you sign your friend up to PayPal, we’ll pay you 10 dollars, right?
This is a very similar mechanism, actually, where they’re giving out cash instead of equity in the business. But, you know, for a growth corporation, those are pretty equivalent, right, because you can always sell equities, you know, issue new shares and sell them in order to get cash, right? So, this concept of sort of distributing ownership or capital in one firm or another in order to accelerate network effects in the underlying platform has a lot of precedence in different areas outside of cryptocurrency. The amazing thing, though, with crypto, is that we can formalize them in pure code, and so, with that, you get incredible scale and just sort of an elegance to the entire mechanism design.
Laura Shin:
COMP was listed on Coinbase extremely early on, within days of being released, which is, I think, unusual for Coinbase because it has a reputation for being relatively conservative, particularly when it comes to regulatory issues. Do you find that having been Coinbase’s first employee is yet another advantage that Polychain can offer its portfolio companies?
Olaf Carlson-Wee:
We don’t really have any influence over what any exchange does when it comes to token listing. There’s a lot of different factors at play when it comes to what exchanges decide to list. So, in the case of something like Compound, one of the useful features is that it’s an ERC-20 token. So, the technical integration is very, very easy, relative to like a new Layer 1 system with block rewards and different signature schemes, and you know, so, then there’s different cryptographic schemes. They need to support different curves, different signature types. So, I think that it’s not surprising to me that it’s a lot easier to get an ERC-20 listed on Coinbase than a new blockchain, but I think that I’m not really involved in the whole internal decision making process there.
Laura Shin:
The success of COMP then set off a wave of yield farming schemes with, for instance, BAL tokens from the automated market maker Balancer, AMPL tokens from the price-elastic cryptocurrency Ampleforth, MTA tokens from Stablecoins aggregator mStable, among a number of others, and then came YFI, a coin that had no pre-mine, no presale, it was not listed on Uniswap, and it could only be earned in the Yearn protocol, and this is what we now call a fair launch. When you saw YFI, what were your thoughts?
Olaf Carlson-Wee:
Yeah. I think it’s a super interesting project, this idea of pure distribution to the underlying owners, I think, is really compelling, or rather, to the underlying users, right? Now, a lot of the times, the reason teams raise capital is because they literally need the money in order to deploy the system. In the case of YFI, I think what’s really interesting is that this was built really without any significant capital resources up front. It was just sort of launched, and in that case, I think that this sort of even distribution based on users in the underlying system is quite a rational way to distribute ownership over the future of that contract system, and I think that, you know, what you’re seeing is bootstrapping like a corporation from zero, right, outside of any jurisdiction, without really any sort of management or concept of management, right, YFI has more of an inventor than a CEO, much in the way that Satoshi invented Bitcoin but is by no means the CEO of Bitcoin and has no outsize ability to manipulate Bitcoin.
And so, in that way, you know, it’s remarkable that something like YFI can bootstrap itself to being worth a billion dollars over the course of just a couple months. I think it’s completely unprecedented, and I do think it looks more like a corporation in the traditional sense of coordinating a pool of capital and humans than it looks like a pure “cryptocurrency” the way we think of, say, Bitcoin or Ethereum, where the value is not really in ownership over an underlying contract but rather sort of a pure money system where the value is totally speculative.
Laura Shin:
Okay. We’re going to maybe dive into that a little bit more later, but I wanted to just keep sort of moving through what happened this summer. After YFI was the YAM debacle, which was another fair launch coin that within days had amassed 600 million dollars of total locked value, but it was unaudited, and so within a few days, the YAM team did discover a bug that they thought initially could be… or that they thought YAM could be rescued by getting some whales to lend them enough tokes so they could have a quorum to make a governance change, but later on, they realized that it was actually impossible to make any changes, and at that point, the market cap crashed. What was your take on YAM, both on the token itself, when it launched, but then also what happened with the bugs?
Olaf Carlson-Wee:
Yeah. I mean, again, I thought the YAM product and concept was really, really interesting. I think that a lot of participants in this market have never been through a really big hack. For those of us who have been around for a while, you know, I remember way back, you know, Bitcoinica, Bitfloor, MtGox, you know, the DAO. Like, I’ve really been through this stuff, right, and I think that a lot of market participants today don’t realize that if there truly is a money losing exploit, the money is gone, like right away, overnight, instantly, and irreversible. So, I think that there is an amazing tolerance, in my mind, for putting capital in contracts that are unaudited or created by pseudonymous developers where there’s not even like a reputational recourse if something were malicious or just misconfigured or whatever, you know, it can be hard to tell sometimes.
So, you know, I continue to think the project and concept is great. I do think it scares me a little bit how much capital is being dumped into contracts that are unaudited. I think that getting security audits is, overall, an important part of maturing any one of these systems. Now, that said, though, it’s a testament to how much market demand there is. The other thing that’s a major bottleneck in my mind to all of this is just basic UX and usability. You have to go out and get Ether, you have to download this third-party software, usually MetaMask. You have to actually go interact with these smart contracts and sign transactions and everything. Gas fees on Ethereum are extremely high right now.
It’s remarkable to me that that much capital is available to put into something like that, but it shows how much demand there is, and if we are able to abstract away a lot of the underlying complexity, so there is a better user experience, and get to more scalable systems, where there’s fewer fees, I think we will see an order of magnitude increase in the amount of capital available for these types of things. So, yeah, I mean I love watching all these experiments. I do get scared, a little bit, that at the current pace, at some point, money is going to be lost in a bad way, not like because of a poor investment, per se, but because of like an exploit, and so that is a bit concerning to me, but overall, like I just think that the enthusiasm is great.
Laura Shin:
Now, what do you think of the fact that YAM still lives in the sense that the community decided to just fork the project and migrate, and I think they’re going to do that very soon?
Olaf Carlson-Wee:
Yeah. I mean it’s awesome. All these projects are open-source and forkable. You know we got multiple versions of Bitcoin as some of the most valuable cryptoassets, and it would be surprising to me if we didn’t have multiple versions of smart contracts that acted in a similar manner. So, the fact that these are all forkable and remixable is just a remarkable feature of these systems, and you know I kind of love all of the various fork attempts and ones that are executed correctly, where they can split liquidity and migrate, I just think it’s all part of the sort of hyper-competitive, very meritocratic, and global competition that is on Ethereum today.
Laura Shin:
And was Polychain one of the whales that planned to help YAM before the final bug was discovered?
Olaf Carlson-Wee:
No, we were not.
Laura Shin:
Okay, just curious. All right. So, let’s now talk about Uniswap and automated market makers. One of the big enablers of the yield farming craze this summer has been that automated market makers such as Uniswap, Balancer, and Curve, they’ve risen very quickly, doing more than 11 billion dollars in trading volume in August as opposed to less than 1 billion dollars in January. Why do you think AMMs have garnered market share so quickly? When or why do you think traders prefer to use these over centralized exchanges?
Olaf Carlson-Wee:
Yeah. So, AMMs have, like in my head, three very neat advantages. One is that they can cover a really long tail of assets. So, we were talking about the listing process in centralized exchanges. That doesn’t really exist in the context of AMMs. You know, these things can get listed very rapidly and easily, and you know, so there’s liquidity for a massive, massive, basically infinite long tail of assets. The second advantage is that its very gas efficient in the context of Ethereum. These open order book models struggle because market-makers, in general, need to place and cancel many, many bids for every one bid that actually gets filled.
So, in general, as a market maker, it’s hard to interact with open order books in a gas-constrained context, and with automated market makers, you don’t really have that problem of placing assets and bids that need to be cancelled. So, automated market makers are more gas-efficient, and then the third thing is that there’s just this really easy user experience where once you’re set up with MetaMask and Ethereum, there’s no user login, so you don’t need to make an account, no email address, no password reset. You know you can just interact straight with the system without having to login or anything like that, and you know it’s sort of a Coinbase-like experience in that you don’t have to interact with an order book.
You just hit buy or sell, and it’s sort of all market asks, market bids, all right? It’s all sort of this very simple interaction mechanism from a UX perspective. So, all three of those things, to me, are the tailwinds behind the growth of these AMMs.
Laura Shin:
Yeah, and as we’ve seen in recent days, Uniswap has already now overtaken Coinbase Pro in terms of 24-hour trading volume, although there’s a pretty specific reason for that, which I want to discuss right now. So, this is a very quickly-moving situation, so I just want to give the caveat to the audience that by the time this episode comes out, this might seem outdated, because this happened to me last week with an episode, but right now, the dominant AMM Uniswap is facing a challenge from a forked version, called SushiSwap, and SushiSwap introduced a token with a yield farming scheme on top of it, but otherwise it’s essentially Uniswap. So, Uniswap hasn’t yet introduced its own token but is later going to come out with a version 3, perhaps by year’s end. It’s not clear exactly when, so, Olaf, I just want to ask you, what would you do if you were Uniswap?
Olaf Carlson-Wee:
I mean, it’s tricky. It’s hilarious to me how the conversation has changed from forking out tokens to forking in tokens, but I think that the market has accepted that these sort of internet sovereign corporate sharer type of tokens really can be quite valuable, and objectively, today, are quite valuable, just as a subset of the larger cryptocurrency market. So, I think it’s a tricky situation. I don’t think anybody quite knows what’s going to happen, but, you know, I’m watching it very closely because it has a huge impact on the future of DeFi and like Web3, you know, beyond just financial applications, in that if you don’t have this sort of tokenized ownership unit, it could actually hurt your ability to defend or build a moat around that system.
It’s also possible that certain types of systems, you simply can’t have a moat and extract value the way we would think about a traditional business sort of building a moat and extracting value based on the services that it provides. A lot of open-source software is never effectively monetized. So, I think that we are in this rapidly emerging experiment trying to figure out what types of systems are defensible, what types of systems need governance, what types don’t, where is there an ability for there to be underlying owners that extract some sort of value but not in a way that is, you know, so negative for the end users that they actually fork out those sort of underlying governors of that system. So, I think there’s a lot of unanswered questions. You know, it’s all moving very rapidly, but I think in about a year, we will know a lot more, empirically, about what works and what doesn’t.
Laura Shin:
Does this flip on its head, or could it potentially flip on its head, the old model of a company just investing in building up a company, getting new users, and growing the network, and then later trying to extract value from it, and instead, is it more now that because the users are the ones who are extracting value that you have to introduce that element much more quickly?
Olaf Carlson-Wee:
Well, so, one of the ways I think about these governance tokens that sort of manages the smart contract, and this is a crude metaphor, but I think somewhat useful, is that shareholders in businesses often don’t expect there to be any sort of profits. In fact, a lot of businesses operate at a loss for a long time before turning a profit, and even when businesses do turn a profit, it’s quite common to reinvest that in the growth of the business rather than actually distributing that to shareholders, especially when the business is sort of early stage and growing, right? So, a lot of these coins that manage an underlying smart contract, there isn’t sort of any revenue extraction, but I think it looks a little bit like owning a share in a growth business, where you’re not expecting any sort of dividends or profits. You’re really investing in growth and user acquisition and market expansion much more than you’re thinking about how to extract revenue.
Laura Shin:
All right. In a moment, we’re going to finish out this conversation about SushiSwap, but first, a quick word from the sponsors who make this show possible.
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Laura Shin:
Back to my conversation with Olaf Carlson-Wee of Polychain. Between Uniswap and SushiSwap, which project do you hope wins?
Olaf Carlson-Wee:
Oh, I think, in a way, it would be really interesting if they can both succeed, and so we see both models go head to head and see how that dynamic plays out.
Laura Shin:
Okay, but when you say that, I mean, most likely, Uniswap will introduce a token, so when you say go head to head, do you mean like that it’ll be interesting to see if like a fast follower succeeds as opposed to the original project? Because, like ultimately, I think maybe the projects will actually look quite similar.
Olaf Carlson-Wee:
Well, I’m not so confident that Uniswap will ship a token in the short term. So, I think it would be interesting to see sort of the token-owned version of Uniswap versus the, you know, legal entity in a specific geography sponsored version of Uniswap and kind of watch what happens between those two.
Laura Shin:
Wait, I’m sorry, are you saying that SushiSwap is an entity that’s…?
Olaf Carlson-Wee:
No, I’m saying Uniswap is, like, Uniswap has raised venture capital. It’s a legal entity in a specific jurisdiction. Whereas SushiSwap, my assumption is it will just be token holders governing an underlying smart contract that’s basically a fork of Uniswap. So, we’ll see that this is where, again, the DeFi product, in a code sense, is essentially identical, right, but the capital formation and sort of “management” or human coordination around control and ownership of that product is quite different. And, so, we will see the competition play out not in terms of the product, but in terms of the underlying sort of capital structure at the end that sort of sponsors the development of that product.
Laura Shin:
So, maybe my next question, you might just disagree with the premise of it, but I was going to ask you, because I was assuming that Uniswap would introduce a token. Like, I feel like even before the SushiSwap thing happened, a lot of people were saying that it would simply, because, you know, of all the other yield farming stuff that had been going on. But I wondered – because another thing I’ve seen people chatting about is whether or not Uniswap should make any token that it does introduce retrospective, meaning that the token should reward the liquidity providers who were in Uniswap even before the token was introduced. So, do you think that should happen, or do you just not even agree that there should be a token?
Olaf Carlson-Wee:
Yeah. I think that’s definitely an interesting component of the design, to sort of retrospectively reward people. That said, it’s optimizing a bit more for some sort of perception of fairness instead of maximizing growth in the future. So, if you, instead, took all those rewards, and instead of giving them retrospectively, just gave them to future liquidity providers, you would probably see more explosive growth in the size of the liquidity pools, but it might be perceived as less fair.
Laura Shin:
Okay.
Olaf Carlson-Wee:
So, they’re just trade-offs. I don’t think there’s a clear right answer at this stage in the market.
Laura Shin:
Okay. Yeah. Let’s keep talking about this notion of fairness because, as we talked about, so, in general, there’s been this trend towards tokens like Sushi that are considered so-called fair launch, and by that, you know, it means they were launched without VC money, without anyone, including even the founders, having any allocation set aside for them. Ian Lee, managing director at IDEO CoLab Ventures, wrote a post saying, “If fair launches become more common, sophisticated, and successful, they should scare the shit out of crypto VCs.”
Given the number of new fair launch coins, as well as the creation of an organization called Fair Launch Capital…organization may be too strong of a word, but they do intend to give some coins the money necessary for expensive audits before launch, and also, there’s, as we talked about, this sort of general sentiment against so-called VC coins. Do you worry about Polychain’s ability to invest in crypto projects as it’s been doing so far, or about the success of any of your portfolio projects because of this trend?
Olaf Carlson-Wee:
No. I’m a huge fan of fair launches when it makes sense. I think that what people are underestimating is just, you know, in reality, when you launch a really complicated system, you need more than 1 or 2 engineers sort of working together pro bono, and you need to raise capital, and so, I think that if you move to a world that’s solely fair launch, I think you limit the scope and scale of the types of things that can be deployed in the crypto space, and I want people to be building sort of veritable rocket ships of crypto, which just take a lot of capital, to coordinate a team of 50 or 100 really sophisticated developers, and eventually ship, but that sort of thing is very hard to do with a fair launch mechanism.
Now, that said, for simpler projects, if they don’t need the capital, don’t raise the capital, and just do a fair launch. Now, that said, I think a lot of VC funds in the crypto space are large holders of a lot of cryptocurrency assets. So, our ability to participate, like for Polychain, in these sort of fair launch distributions, is pretty significant if we wanted to, and it’s possible that in the future that would be one of the primary mechanisms through which we enter positions rather than sort of private contracts the way that traditional VC is structured, and I’m very open to however the market goes, we are going to shift with it.
Laura Shin:
So, the way that you phrase that, you said you’re open to doing that in the future. So, does that mean that, you know, aside from COMP, which I know you guys are investors in, that Polychain did not yield farm those other yield farming tokens that came out, like BAL or AMPL or YFI or anything?
Olaf Carlson-Wee:
I’ll just say that we don’t put money in unaudited contracts.
Laura Shin:
And, okay, so, but some of the others probably were audited because some of them do…
Olaf Carlson-Wee:
We have put money in audited contracts, but so, we, we’re not sort of YOLOing in to the newest food coin, but you know we are open to putting large amounts of capital in smart contracts if we get confident that they’re secure, and it’s kind of like trading on exchanges, right? You know we will trade on exchanges that have been around a long time. Would I put money into an exchange and start trading on it if it was a week old? No, because we need to see some security track record and especially for the scale that we’re operating at, you know, we need to be able to do these things at scale, right? We can’t…anything with 1 million dollars doesn’t really make sense for us. It needs to be larger than that.
Laura Shin:
Ian Lee also wrote another post where he talked about how he expected yield farming to change in such a way where whales will be disadvantaged slightly or at least just not kind of linearly expect the same rewards as other yield farmers, and I just wonder do you think that funds and VCs buying or earning fair launch coins contradicts the spirit of a fair launch, and are you down with the idea of kind of bigger players maybe not earning the same proportion of rewards for their work?
Olaf Carlson-Wee:
Well, so, first off, I don’t think it’s possible to, in a pseudonymous environment, prevent whales because you can always split your coins into multiple addresses and look like you’re a bunch of smaller investors rather than one whale. It’s not really possible to prevent that type of behavior unless you have a central party collecting identifying information, or something like that, which, of course, is never going to happen in a fair launch, sort of distributed bootstrap mechanism. I think fair, to me, means that anyone can participate. It doesn’t mean, to me, anti-whale. That’s actually unfair, or there’s some sort of, you know, there’s a sort of design that is trying to get a certain type of participant, and that’s fine, but I would put that in a different category.
To me, you know, I think the reality is that bootstrapping these systems with huge pools of capital is actually a good thing a lot of the time and an important part of getting these systems off the ground. The reality is most of these yield-farming systems have a lot of really, really large investors in them. They’re not like a million people each contributing 10 dollars, right? It’s just not really what it looks like today, and so I think that the people who take the most risk should gain the reward, much in the way that people who take less of a risk should not take as much of the reward. So, like I said, I like this idea of fair launches. This idea that you could, in a pseudonymous environment, prevent whales from participating, I don’t think is possible.
Laura Shin:
Going back to automated market makers, I also now want to talk about the CRV token launch. As I’m sure you know, and some of my audience may remember, CRV is the token for the Curve AMM. When the token was going to launch, an anonymous person allegedly paid the 8 thousand dollar gas fee to launch the token contract, and the team eventually ended up accepting that as the legitimate contract for the CRV token. However, afterward, a number of people speculated that the person who launched the contract was either affiliated with the team or worked with them in some secret manner to launch the token. So, let’s leave aside, for a moment, what you think happened, you know, whether or not they launched it secretly, but if they did so, let’s just say they did, why would they do so? Like, what would be the motivation for that?
Olaf Carlson-Wee:
Likely some sort of fear that, from a regulatory perspective, if they ship the contract, that they’re somehow kind of the sponsors of the contract, whereas if somebody else ships it, you know, they maybe wrote the code, but they didn’t ship it. That would be my guess.
Laura Shin:
And so, what do you think actually happened? Do you think that was the case?
Olaf Carlson-Wee:
I have no idea. I think the beauty of these systems is that it doesn’t matter.
Laura Shin:
Yeah. It’s like the ultimate mystery, but we’re not going to figure it out, probably, although somebody may. If you do, let me know. Like, slide into my DMs, people.
Olaf Carlson-Wee:
I mean it gets into the same question of, you know, who is Satoshi Nakamoto? And I think the appropriate answer is it doesn’t matter.
Laura Shin:
All right. So, the week that we’re recording, and as I said, this might be all outdated by the time this comes out, which is only a few days before the episode comes out, but anyway, at this time, what’s all the rage is the yETH vaults in Yearn, which is sort of like this one-stop-shop for yield farming, and you can also now yield farm just holding ETH. You don’t need to get like these other stable coins or tokens or whatever, and crucially, it also then allows you to stay exposed to the price changes in ETH. So, for me, it looks sort of like some kind of Betterment for yield farming, and Olaf, I wonder what you thought of yETH. What does it say to you about where the DeFi space is going?
Olaf Carlson-Wee:
Yeah. I would actually agree with that description that it’s sort of a Wealthfront or Betterment for yield, and we’re getting into a zone where you’re seeing like programmatic automated fund management, sort of, is a loose way of putting it, where people, instead of contributing capital as a limited partner to a fund manager, who allocates that capital on their behalf and charges a fee, you’re contributing capital as a liquidity provider to basically an on-chain algorithm, which contributes that capital and takes a fee. So, I think it’s really exciting, conceptually, and I think we will see many, many more systems like this launched and compete with one another.
Laura Shin:
And let’s also talk about rebasing, which is becoming more common, and I’m going to attempt to describe it. I don’t know if I fully understand it, so please correct me if I’m wrong, but it looks like it’s a concept that, well, so it’s usually associated with the Ampleforth token, but basically the percentage of the total supply that a person owns will not change unless you sell or buy, but the number of tokens you have in your wallet could change based on the price every day, and this ensures that 1 AMPL will always have the same purchasing power. Did I get that right?
Olaf Carlson-Wee:
Yeah, effectively. I’m really impressed, Laura, with how deep you are in this whole agriculture space.
Laura Shin:
Yeah. Well, I’m obsessed. I mean it’s truly fascinating. So, I wondered what do you think of rebasing? Like, what are the pros and cons of having this feature in a cryptocurrency?
Olaf Carlson-Wee:
You know I think it’s conceptually interesting but ultimately not that useful, you know, for any real kind of use case in my mind. So, you know, I think it’s like a fun science experiment. I’m surprised that it’s being merged into so many different projects.
Laura Shin:
Okay. Okay. Yeah. I have to admit, I just kept thinking, if I’m holding this in my wallet, and the number of them changes every day, I’m going to want to get rid of it. Like, that was my thought. Well, I have a call actually scheduled with the Ampleforth people, so maybe I will change my mind, but all right, so, now let’s just keep talking about the agricultural aspect or the food coins. This trend with the food coins started with YAM, and after that, we got Spaghetti and Kimchi and Sushi and Hotdog and so many others, and I wondered why do you think this is becoming a trend, and in general, what role do you think memes will play in DeFi?
Olaf Carlson-Wee:
Yeah. I mean I think that these things are treated and look like toys, kind of, but I think when you actually step back and examine what they are and sort of look beyond the meme or look through the meme, we are seeing like hundreds of millions of dollars be coordinated by strangers across the internet to sort of prop up this sovereign corporate structure that manages a financial product that’s enforced solely with code or software. It’s really sci-fi, and it’s honestly mind boggling, and yet it’s wrapped around like a spaghetti noodle, and so that, to me, is really fascinating because a lot of early tech breakthroughs, I think, look or feel sort of like games or toys, or they’re the work of tinkerers. It’s not taking itself too seriously even though, I think, conceptually, what’s happening is like a massive paradigm shift, both for financial services as well as for like literally corporate structures, which are just huge arenas to be taking on.
Laura Shin:
And is that why you said, earlier, that YFI looked to you like a corporation? Can you expound on what you meant by that?
Olaf Carlson-Wee:
Yeah. I mean, you know, one could argue that every cryptocurrency sort of has this feature, but it’s this ability for a group of people to coordinate around a set of rules and coordinate capital together, which is basically what a corporation is, right? You have a pool of capital, you have turnover of management, so it doesn’t rely on any specific individual. You have secondary markets where the shares which represent an interest in that capital can trade, and then you have a governance process where the underlying shareholders can vote on how to allocate that capital in order to improve the value of their shares, right?
And conceptually, that’s what a lot of these kind of internet sovereign corporations or Dow-like structures look like, right? They’re actually replacing the corporate entity, itself. All of the legal documents that are enforced in geographic jurisdictions and you know a corporation is like registered with the state. That’s kind of how you get it into existence. You replace that entire system with pure software, and so it’s, to me, conceptually, a really big deal, but again, yeah, it looks a little bit like a toy or a meme right now, and yeah, I think that it’s a really effective mechanism for bootstrapping and managing certain types of products, and it turns out specifically products that are based on smart contracts.
And so, over time, though, I think you’ll see this sort of bootstrapping mechanism and capital coordination and sort of taking the corporate structure and putting it on the internet and replacing it with software, I think you will see that type of model applied to like social media networks, for example, or massively multiplayer online game environments, and I think we’re still a ways out from those things, but in theory, I see no reason why this structure couldn’t take on many, many different types of businesses.
Laura Shin:
Yeah, and honestly, I’ve been thinking, I think the disruption will come so fast because we have the internet now, whereas in the first internet revolution, there was a lot of kind of hardware that needed to, lines that needed to be laid and everything, but yeah, I feel like because business, itself, the structure of business is what’s being disrupted, it’s going to happen so fast, and it’s going to hit so many industries, and I’m a little bit like, whoa, we’re in for a roller coaster ride.
So, let’s now talk a little bit about the fee issue on Ethereum. At the moment, a simple trade on Uniswap can cost something like 40 dollars, and more complex transactions for yield farming are even more expensive. Do you think Ethereum will scale, in time, to retain all its market share in DeFi, considering that the explosion is already here and already pushing Ethereum’s limits?
Olaf Carlson-Wee:
In short, I don’t think it will be able to scale fast enough. Whether that just slows down the market or whether aspects of the market go to other chains, it’s too early to say. Though, it’s just DeFi, you know, is very exciting for Ethereum but in a weird way is actually really, really bullish, in my mind, for systems like Polkadot or Dfinity, right, that are, I think, from an engineering perspective, just candidly far ahead of Ethereum. They don’t have the network effects, users, while it installs or anything that Ethereum has, but they are, you know, Polkadot is live and working and scalable right now, today.
And so, to me, I do think you will see a lot of DeFi migrate from Ethereum to Polkadot in maybe the short-ish term. Long-term, I’m hopeful that Ethereum will be able to scale and upgrade and change, but that all said, what’s much more exciting to me about these new systems launching that have, you know, either better scalability features or like WebAssembly or WASM-based, virtual machine compatibility, so you can write programs in many different programming languages, all these sorts of features are exciting not just to narrowly sort of compete on DeFi.
It’s exciting to me because I think it will enable new types of applications that simply aren’t possible on Ethereum today, much in the way that Ethereum enabled all sorts of applications that weren’t possible on Bitcoin, and you know, today, we know that what’s exciting about Ethereum is not that it narrowly competes with Bitcoin, Bitcoin’s value proposition, but rather expanded the scope of what was possible for the entire sort of crypto universe, and we got things like stable coins, things like lending contracts, ICOs, all DeFi, right, and I think that systems like Polkadot are going to, once again, expand the universe of what is possible.
It’s not a zero-sum game where it’s narrowly like which chain is going to win DeFi. I think it’s a very myopic view, and it shows a lack of imagination about how many different types of applications these smart-contract type structures will affect. So, I’m very optimistic about scalability across the entire ecosystem. I’m less confident about like the short-term timeline of Ethereum. I just think that DeFi is moving way faster, like by over 10 times, at least, maybe even closer to 50 or 100 times faster than Ethereum core protocol developers.
Laura Shin:
Oh, seriously. Yes.
Olaf Carlson-Wee:
And I see no reason for that to change. Like, I don’t think Ethereum core protocol development has ever been fast, and I don’t see any reason to think that it will get faster, and DeFi has always been fast, and I don’t see any reason to think it will get slower. So, you know, you add that combination of factors together, and yeah, I do think that you will see applications migrate into more scalable chains. I mean we’re already seeing this, you know, when you see major applications announce that they’re going to be launched on different chains outside of Ethereum.
Laura Shin:
Are you talking about, for instance, Serum on Solana?
Olaf Carlson-Wee:
Yeah, a great example.
Laura Shin:
Are there any others that come to mind?
Olaf Carlson-Wee:
Yeah, Serum. I mean a lot of stuff is being built in the Cosmos kind of Tendermint framework, so there’s a lot of different chains now that are sort of compatible with the Tendermint consensus mechanism that Cosmos uses, and once the IBC protocol in Cosmos ships, they will all be sort of interoperable with one another. So, I think you have a pretty strong ecosystem growing. As I said, I think, there are a lot of teams building Polkadot substrate chains, so these are substrate being the programming framework that allows you to ship systems on top of Polkadot. We are seeing a lot of sort of grassroots development activity using that substrate framework. So, yeah, I think that, and I mean I’m even having conversations now with teams that have yet to launch on Ethereum that are saying, you know, should we launch on Ethereum, or should we launch on a new chain?
Like, because the fee situation, I mean, it’s completely…it’s really bad. Like, it’s not like this is a bump in the road. It is existential for the entire landscape of applications we’re talking about. You know, right now, you have to be transacting, at least, I would say, at the very minimum, a thousand dollars per transaction for any of this to make sense from a fee perspective, and I would say that’s the absolute baseline because that’s assuming you’re willing to pay like a 10-dollar fee is 1 percent, right, and I would consider 1 percent to be a pretty high transaction cost, but that’s why I say a thousand is, in my mind, the absolute minimum. More realistically, I think you have to be using 5 or 10 thousand dollars to really accept the kind of fees we’re talking about, and so, a lot of people are using 5 or 10 thousand dollars, but you know obviously that’s pricing a huge number of people out of this market.
You know, if you’re a teenager who wants to tinker with these systems, I don’t think a lot of teenagers have 10 grand lying around to throw into yield farming systems. You know, and I wish that those people weren’t excluded from these systems. I also think that it massively limits the types of applications that can be deployed to Ethereum. When you reduce the fees by, say, 100 times, you open up this suite of applications that make sense to run on a smart contract by a huge amount, and it moves into things that I think are hard for us to imagine, much in the way that, you know, the whole agricultural revolution, here, was hard to imagine, you know, by people in the Ethereum ecosystem, I think there will be many, many other types of experiments that are hard for us to imagine running on these new, more highly scalable chains, like Polkadot.
Laura Shin:
And I just want to flag for listeners that Polychain has invested in Dfinity, Cosmos, and Polkadot, which Olaf just mentioned, and Olaf, I wanted to ask you, so, VC firms, as far as I understand, typically don’t invest in category competitors, but you know you’re invested in Dfinity, Tezos, and Cosmos, potentially even…I think you own ETH, Polychain owns ETH, and obviously, did I mention Polkadot? That also is in there, and those seem like category competitors, so are you just betting on multiple horses in each category, or do you not view them as competitors?
Olaf Carlson-Wee:
No. There is overlap, for sure, but these systems are really different, and I don’t really view them as competitors. I think it, like, when I go back in time, when Ethereum launched, everyone said this is competing with Bitcoin, why do we need another crypto coin, and I think, in hindsight, that was a really myopic view. In reality, Ethereum doesn’t really compete with Bitcoin. It just expanded the market, and it sort of enables all this functionality that Bitcoin just simply cannot do. It’s not like we would have all this stuff if it was all Bitcoin. You know we wouldn’t have just these basic things, like stable coins. I think you wouldn’t have the same robust universe of stable coin models that you have on Ethereum if we only had Bitcoin.
I think we would still only have Tether built on like the Mastercoin Omni protocol, right, and so I think that, you know, these systems genuinely enable new behavior. It’s just that because we don’t know what that new behavior will be, it’s hard to point to, you know, it’s hard to imagine it, just in the way that after Ethereum launched, I don’t think people really realized how big stable coins, ICOs, DeFi, you know, I don’t think anybody realized how big this stuff would be or that those types of applications would be the ones that took off, and it turns out all these other types of applications people have talked about never took off, token-curated registries, you know, never really took off, right?
And I remember getting a dozen pitches for this whole category, and so, you know, I just think that it’s hard to predict the future, especially when you’re talking about open-source, flexible, programmable platforms, where anybody in the world has permission to build anything, and then once that thing is live, it’s open source, so anyone else in the world can fork it, iterate on it, remix it, add it to their application, and so, because this is all software, too, the pace of development is just really, really rapid. So, all this said, I just don’t think that the right view is to view this all as a zero-sum game with every coin.
I mean the firm, the name of our firm is Polychain, and it’s because I really do believe in a future where there are multiple different chains that can carve out their own sort of valid reason for existing, and so, yeah, anyway, I know that’s a long answer, but I do think that it’s important to realize that these different systems really do enable different types of behavior.
Laura Shin:
And earlier, when you said that you’re seeing, already, that some teams are saying, hey, should we launch on a different blockchain than Ethereum, what are they typically considering when they ask that?
Olaf Carlson-Wee:
You know, it depends on their timeline to launch. So, you know, the only two systems live today, or the only three, rather, sorry, are Cosmos, Polkadot, and Solana, I would say, that are sort of live and have some scalability characteristics that make them, you know, just cheaper than Ethereum. They also haven’t been tested to the extent that Ethereum has, so there’s open questions about scale there, and there’s open questions about the economic design. You know it’s not to say that these are as robust as Ethereum today, but I would say those are the main three that are live today that people are looking at.
Laura Shin:
And in terms of the transition to Ethereum 2.0 and proof of stake, what do you think will happen with proof of stake? Do you think that the yield farming rage right now on DeFi kind of shows that this model works, or do you think that it basically will make people less interested in staking on Ethereum because they can get higher yields elsewhere?
Olaf Carlson-Wee:
Yeah. So, this is actually a really complicated question because it gets into some serious sort of game theory considerations for the security of a proof of stake chain that also has a DeFi ecosystem on it. Because these two things do compete for yield, but at the same time, the DeFi application’s security depends on the proof of stake yield being high enough that at least some people stake, I think you’re going to see pretty rapid movements from staking to things like yield farming and back to staking. In general, the staking reward curves rapidly go up as the percentage of coins staked goes down.
So, there is like a market mechanism that will reach equilibrium at some point. Now, given the types of yields we’re seeing in the short term on Ethereum, we’re going to see, if proof of stake were live today, I think you would see a very small number of people staking relative to certain yield farming mechanisms, but that said, staking is much more reliable and steady, right, than a lot of these yield farming games, which may or may not have the same sort of returns in two weeks, right? So, I do think that there are going to be people who will go for a worse short-term outcome for just the ease of use of that staking return being somewhat predictable, relative to the whole yield farming craze, but it’s a very serious security question for any chain that has smart contract compatibility and also proof of stake.
Laura Shin:
And then one thing I wanted to ask about was when you said that you think the people will kind of switch in and out of staking on Ethereum 2.0 and DeFi projects or yield farming, I thought that you had to lock up your Ethereum for some time period? I forget what the amount was.
Olaf Carlson-Wee:
Yeah. In general, proof of stake protocols have an un-bonding period. So, if you want to unwind your stake, there’s a delay.
Laura Shin:
So, I mean, will that just discourage people from staking more because they’ll want to keep their, you know, have the opportunity to engage in yield farming?
Olaf Carlson-Wee:
I mean it’s two sides of the same coin in that, one, it does trap capital in staking, and it also inhibits new capital from coming into staking. So, I think it’s not strictly bad for attracting capital in that, also, those lock-ups do prevent people from running to the exit, so to speak, in a short time horizon.
Laura Shin:
All right. Let’s talk a little bit about security. When Polychain puts its own tokens into DeFi protocols, you talked about how you don’t invest in unaudited contracts, but obviously, in DeFi, there’s just so much smart contract risk even for contracts that have been audited, and I saw that a couple months ago, Nexus Mutual, which is the DeFi insurance protocol, said that it had maxed out its insurance offering and that a lot of the demand was due to crypto funds. Does Polychain use DeFi insurance, such as Nexus Mutual?
Olaf Carlson-Wee:
We don’t today.
Laura Shin:
So, how do you, I mean, do you just kind of trust or try to invest in protocol, smart contracts that you trust, or how do you account for that risk?
Olaf Carlson-Wee:
Yeah. I mean it’s a risk-reward weighted decision. So, we would only put any money in a smart contract if we felt the risk-adjusted performance was worth it.
Laura Shin:
And so, speaking about all the different hacks and bugs, you know, this year, we’ve seen a couple of attacks on bZx. There was a drain on Balancer. There was an attack on Hegic, there was the YAM bug. In general, what do you think DeFi teams should do to improve security?
Olaf Carlson-Wee:
You know I hate to say it, but maybe move a little slower, more eyes on the code, do engage with an auditor, and start with smaller amounts of capital and work your way up. So, unfortunately, that’s the opposite of everything that’s happening in the market today, but you know, everyone, it’s a free market. Everyone’s free to do whatever they’d like, and I like it that way, you know? I don’t want there to be rules about auditing or something like that. I just think that as a market participant, it’s, I think, you know, I do ascribe by sort of the do your own research mentality, and I do think, it’s my opinion that you should be conscious of if the contracts you’re interacting with have been audited or not.
Laura Shin:
And I also wanted to talk about just one last trend involving DeFi, which is Bitcoin on Ethereum. There are several versions of Bitcoin on Ethereum, though some of them are centralized, meaning they have a single point of failure. There are other teams that are working on versions that are decentralized and trustless. Do you think that we could see Bitcoin being moved onto Ethereum in a big way, and if so, what effect do you think that would have on DeFi, or do you think that Bitcoiners are content to just HODL?
Olaf Carlson-Wee:
Yeah. I think we will see a lot of Bitcoin move onto smart contract chains.
Laura Shin:
And what effect do you think that will have?
Olaf Carlson-Wee:
You know, I just think that Bitcoin will become a really popular collateral type in a lot of these smart contract systems.
Laura Shin:
All right. Well, let’s talk about your first employer, Coinbase. There’s been a lot of chatter that the company will go public in the next year or so, with some people speculating that there might be a token offering. What do you think would be a creative way for Coinbase to go public while also showcasing the capabilities of blockchain technology?
Olaf Carlson-Wee:
So, I think it would be really cool if Coinbase went public in a traditional manner, on sort of a stock exchange, right, and you know traditional institutional capital will have access to interact in those markets, right? I think that it would be very interesting, though, if they also issued basically a tokenized version of that Coinbase share and allowed that to trade on Coinbase Pro, you know, and so then Coinbase shares, if it was like a DeFi asset, and I don’t think they need to do anything super fancy. This could be like a Tether-style system, where they sort of own shares in a vault, and they issue an ERC-20 that represents that share, and you’re free to come back and redeem that for like a “real” share if you want to.
So, from a tech perspective, right, it’s not very complicated. Then, though, you could have those Coinbase shares used in the DeFi universe. So, you could imagine Coinbase shares being used as collateral, and again, the security properties here aren’t super robust. It’s not trustless. It’s not decentralized. It’s really just a custodial system like Tether, you know, but for Coinbase shares and operated by Coinbase, but I do think that would be a really interesting twist on a public offering.
Laura Shin:
All right. Well, what’s up next for you in Polychain?
Olaf Carlson-Wee:
We are continuing to just partner with really, really smart entrepreneurs who are insanely ambitious and, you know, want to change multiple different paradigms of the world through crypto. So, it’s just a joy for me, every day, to hear all the radical ideas from different entrepreneurs we talk to, and that’s kind of continuing to be what we’re focused on. You know, we’re also getting more and more involved in on-chain participation in the systems that we’re investing in. So, one of the big ways we do this today is staking and proof of stake protocols. So, today, I’m pretty confident that we are among the very largest stakers in the world, just as far as the amount of capital we have at stake and proof of stake systems. It’s deep into the hundreds of millions of dollars and very excited to be able to basically support, in an on-chain way, all of the various systems we’re invested in.
Over time, I think we’re going to expand the way that we’re participating. So, we are participating in on-chain governance in many of these systems, and I think that involvement is only going to expand as time goes on, and I think that, in general, when it comes to sort of the DeFi landscape, our participation in those systems will also expand as time goes on. So, very excited to sort of roll up our sleeves and get more hands-on in these on-chain mechanisms and also just continue to partner with world-class entrepreneurs.
Laura Shin:
Great. Well, where can people learn more about you and Polychain?
Olaf Carlson-Wee:
You can learn quite a lot on our website.
Laura Shin:
Which is a joke.
Olaf Carlson-Wee:
Yeah. That’s, yes, however, that is how you can contact us, also.
Laura Shin:
Okay, Polychain.capital. All right.
Olaf Carlson-Wee:
Or just, yeah, find a way to get in touch with us. We’re all very online.
Laura Shin:
Great. Well, thank you, so much, for coming on Unchained.
Olaf Carlson-Wee:
Yeah. Thanks for having me, Laura.
Laura Shin:
Thanks, so much, for joining us today. To learn more about Olaf and Polychain Capital, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com/C/Unchainedpodcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and the team at CLK Transcription. Thanks for listening.
