#256 Aleksandr Bulkin & Jake Brukhman: CoinFund – Crypto-Investing by Community Building

Transcript

[Music] this episode of epicenter is brought to you by top down top towel is addressing the talent shortage from the blockchain space connecting companies of all sizes with the world's best blockchain engineers if you're looking to scale your team check out cocktail comm / epicenter and by Dutch X the fair and secure decentralized exchange platform by kenosis to learn how you can build apps which leverage axes look really cool visit epicenter TV /x hi welcome to epicenter in cryptocurrency podcast that

interviews academics entrepreneurs and thought leaders in the cryptocurrency and blockchain technology spaces I am ahead Roy and today I'm really pleased to have a new host join me in this interview at Hostos free 30k earnest Frederica welcome to the epicenter team hi good to be here so tell us a bit about your background Federica and and how you started in the locking space oh yeah sure absolutely so I'm actually physicist by training so I studied physics and then I did a PhD on low dimensional complex quantum systems and I quite enjoyed science so I

stayed in science for a little bit longer after that I am did a postdoc at Columbia University and then a second one at Stanford in slack but otherwise I had actually become pretty interested in the blockchain space so I heard about Bitcoin for the first time over five years ago 2013 and at first I thought oh this is uh this is a load of whatever [Laughter] but it was it was enough to actually get me interested and I started thinking about what money is and what what actually makes money valuable and

the social contracts that actually underlie all of that and at a similar time two friends of mine started gnosis so I I was actually close to gnosis from the start and after my time at Stanford decided to join them full-time and so I became the CEO this was there before the token saya so early last year and I've been in the blockchain space for time ever since and have never looked back wow that must be quite a switch from low dimensional quantum physics to cryptocurrency yes and no so I I was an experimental physicist I always really enjoyed building things um and

blockchain is I mean it's a completely different subject matter but a lot of a lot of the things that you do on a daily basis you question hypotheses you build test systems you think about what could possibly go wrong and that's that's actually very similar as in physics so Fredrika tell us about some of your interests in the cryptocurrency space and what kind of episodes could the listeners look forward to from you oh I I am super interested in business models that weren't possible beforehand so basically capturing and use potentials in a way by

actually making things peer-to-peer that's one of the things I also love governance and governance mechanisms and I think governance you notice I noticed that it often goes wrong in politics for instance but then when you actually sit down and think about what could be done better it's actually pretty hard to come up with a decent system so in hindsight I actually have to apologize in my head to a lot of people that I didn't really say any of those things but I thought this is a system that was devised in a weird way and and actually thinking about these things I find really pleasurable and and asking myself how would I design

this if if I had to design design this and kind of blockchain gives you a platform for doing this and I also really like deep tech so things like scalability and the sort of low-level language that you use for building stuff yeah so III I'm interested in just the actual building blocks and how they all fit together as well cool so so we I mean I'm really looking forward to recording quite a few episodes with you Frederica for our listeners please do draw a physical note as an iTunes review or to one of our email addresses so feedback is would be

really good to get her started on a represented journey thank you so today we are talking to Jake Brookman and Alexander bulkin from coin for coin found is one of the earliest crypto phones to have begun business and it's been one of the is therefore it's one of the oldest crypto funds so you're pleased to have Jake and Alex on the show Jake welcome thank you my pleasure to be here oh so so Jake of course we've known each other for for a while now we met at last Def Con and I'm familiar with your story it's a very interesting story so for our listeners tell us about

how you came into the blockchain ecosystem and why did you start this fun awesome thank you you know I'm a technologist I worked on on Wall Street in kind of the hedge fund world for for one time I the kind of person that is an early adopter of Technology got my first Bitcoin sent to me by a friend of mine in 2011 and at that point I I don't think I fully understood what it was but I definitely started paying attention and then around mid 2013 I bought some Bitcoin on coinbase in order to just make a random investment and hold it and see what

happened and that's what really got me engaged in the space and then you know it wasn't really until the etherium white paper came out and I started I read that and I started to think about what does it mean to have a world of many different kinds of digital assets and I you know along with Alex kind of said hey maybe we should create a portfolio that diversifies the risk across all of these different kinds of assets they're assets that are likely to appear given the advent of a platform like aetherium and so that became you know basically the basis for coin funds and you know we launched this kind of a

proof-of-concept fund and in 2015 fantastic and so you I tried on research prior to that right yeah so my career is basically you know kinda in the hedge fund world for about five years and there was a technical product manager an engineer at amazon.com working on ad tech products for two years and then as a CTO of trade research the company that did a lot of interesting financial modeling and private technology companies good fantastic em Alex so how did you get there get into the blockchain ecosystem and what made you want to start a fund um yeah so I blame Jake who you know started telling me about crypto in 2015 and then eventually

showed me a couple of at that time they were extremely new and advanced ideas such as you know a theorem in our day and when I combined together a theory I'm an author in my mind I kind of saw just how powerful this technology was to you know to be able to enhance real-life interactions between people and provide alternative finance technology and so I got completely bought in it that came on the heels of me also studying some amount of some amount of organizational and social psychology which made it extremely interesting we need to think about consensus in both technology space

and the humans and how they kind of flow into each other so I joined jaqen early 2016 and eventually you have going to be funding full-time good so as I understand it like jaqen and Alexandra you founded coin fun with with another co-founder and then like other people joined on board from the community coin fund created right well we started there was us and and a couple more people who are who were and still are slightly you know passive they were just curious but then Jake was the first to start and launch

the coin fund slack which I think by the way you know Jake is the best community manager I've ever known and is extremely insightful in creating sort of community spaces which i think is still our strongest point of coin fund but quite fun slack very quickly became a source of information ideas to poll you know allies arguments and so on and so forth so our current partner Alex Felix came as a slack member and many other people we worked with down the road who yeah I mean I I personally appreciate Jake's

you know community management in fact I have to admit that while preparing for many of the episodes at epicenter I have listened to Jake's podcast because like he had the guest first listen to that podcast and they liked my epicenter questions were like you know like variations on Jake's questions or questions that I think Jake did not cover so you know like actually like Thank You Jake for your you know the almost invisible contributions to the sentence thank you very much it's very nicely you may hear but you know I think overall like if you if you kind of go on the coin fund Twitter account it says you know the best way that investing in

a community is to be a part of it and that was sort of a little tagline that we had from very early in the game where we really you know figured that like in this very early space we're really quite small still in 2016 you know especially in the space where you're making investments and teams one of the most important things is to engage the communities and from the from the decentralization standpoint a lot of these projects are creating open decentralized networks and those networks depend on you know their constituents their participants the governance of those networks and so as an organization we've always like been very community oriented we you know we for example throw regular quarterly

happy hours here in New York kind of get some face time with our with our community we try to participate in our community events and also as investors we try to participate in the networks of the projects that we that we hold in our portfolio and that was by the way one of the things that drew me the coin fund in the beginning is is how easy it was to reach to all these students when these projects and asking questions and pick their brains which is something we'll still do and and with not a small amount of pleasant career I think we've segue right into the coin fund discussion so what would you say

makes a crypto fun to crypto fund and what do you mind disclosing and how what assets in what amount you have under management currently I would mind disclosing that but but I'm happy to talk about I'm happy to talk about crypto funds and you know ultimately from the very beginning I thought that a crypto fund is kind of a slightly different structure so you know I think what we have seen happen over the last couple of years in blockchain and I think most people in blockchain would agree is that there's a there's a new asset class here this is the digital asset class and whenever you have a new asset class presumably it has different

properties and what it has different properties presumably the structure of an investor or fund that's participating in that asset class should be kind of commensurate with what the asset class so there's a few things that set it apart right for example liquidity like you can invest in early stage projects as we've seen many people do in 2017 and you get inc liquidity much faster using blockchain technology than you would in private equity you know where are their forms of investments and you know a lot of people when they when they kind of come into the crypto fund space they try to put a box around crypto they say you know we're gonna do a VC fund in crypto we're gonna do a hedge fund in crypto we're

gonna do a fund of funds at crypto but ultimately like we have always thought that you have to create a structure that conforms to the asset class and takes advantage of the features of the asset class that you're that you're investing in and so we've spent a lot of time thinking about what that structure is and you know in short a crypto fund I think is it's a little bit of a hybrid right between a VC fund in the sense that you're always you know at this stage in the game you're working with early-stage teams you're really trying to push those projects for get them to production and it's very much a venture capital location but at the same time

you're then dealing with assets that are liquid to trade on 24 hour markets and that's very much a hedge fund vocation so at a high level I think a crypto fund is sort of a hybrid structure between those two and it keeps developing right so now you know as we as we talked about kind of staking invalidation I think the role of crypto crypto funds begins to change even more and just to add to that I think if you want to do a good job in encrypted investing it requires you to be a professional synthesizer in a space where past experience doesn't

necessarily inform future be future experience because this space gets really reinvented every six months or so and so you know you asked me initially why do I call myself chief Alchemist that's part of it it's like how do you look back and then project a picture into the future which is you know a good picture which is not going to be outdated by the new ideas which does not prevent you from taking new directions as a crypto fund you always have to be ready to go into a new direction such as for example we're going to talk about

generalized mining that was a direction that became obvious to us early but but but not you know last year in this year and so you have to adjust and you have to be structurally fluid and you have to be fluid in your thinking you can't just decide oh it's all protocols because that's actually what actually changes have you ever considered that one of the biggest factors holding back growth in the blockchain industry is the lack of talented available developers by some estimates there are up to 14 job openings for every single blockchain developer in the world that's where top dog comes in top Cal is a global network of talent in business technology and design and they pick their members by selecting only the top 3% of applicants

when you work with top tell you're getting the Kendall XM we've got a blockchain specialization that's an on-demand service that connects your business to an elite network of developers and engineers specializing in areas like solidity smart contracts hyper ledger fabric our 3/4 decentralized applications and more what's best about top tile what I like the most about this service is I think the stress and pain out of hiring who has time to publish job opening is a sift through resumes and scheduled interviews and all that stuff it's a White Glove service so they take care of everything and a top tile director of engineering will deliver the best candidates for your position on a silver platter and as fast as 24 hours and from there your company can work with your new hire or a nourished trial period and you pay only if you're satisfied so

simplify your hiring process and access the world's best blockchain talent for a limited time epicenter listeners are eligible for a $1,000 credit after the first two thousand dollars paid towards surfers hire to learn more go to top.com slash epicenter and we'd like to thank top towel for the support you're very flexible as to what to invest into so how do you pick projects to invest into um yeah so on that on that point just like the core principle of coin fund is that we were looking at a technology space that's first of all very nascent and constantly constantly changing right so you know to paint a quick story in 2015 you know VC saw teams building

decentralized networks and they said we want to invest in that so they invested in the equity of the teams but then the value of Croods the tokens right and that's kind of the high level and like the fad protocol thesis but then you know the technology shifted again and now we have all these layer 2 projects but layer 2 projects only a tiny minority of them actually have token models today and very very few of them have equity that gives you exposure directly those projects in fact about half of them are open source projects and the way that founders tend to monetize that is by building apps on top so if you're a VC you know you're suddenly you're in a position where like oh I thought I was investing in tokens

but now the the landscape has changed again and how do I find exposure to layer two so what are the foundational principles of you know kind of how we think about structuring exposure to projects as we say we want to be maximally flexible in how we can structure exposure so that means if the appropriate mechanism is is very traditional private equity you know we'll do that and an example of investment that we've made out of coin fund is for example coin list right a very very traditional equity investment well all the way on the other end of the spectrum you know we might be investing in it in a decentralized network directly and that might mean you know buying tokens on on liquid markets and then somewhere in between it might mean buying ass after buying a convertible note or buying equity that may convert

to tokens in the future so so that's the first thing to say about kind of like how how we structure investments what we invest into generally falls into two categories we kind of consider ourselves first of all full stack investors means we don't just invest in protocol we don't just do that's the middleware we don't just snaps we try to find the best opportunities in the iterating cycles of how these technologies develop and we think that you know for example applications that have hundreds of millions of users that can put blockchain in front of their user faces are still very very compelling in the same way that protocols are compelling in their kind of adoption case but we're

also not you know we're also kind of practical right we say like in order for the web 3 or you know the central decentralized world vision to take place money has to move from traditional markets founders have to have financial services there needs to be compliance clarity everyone needs to be able to operate and kind of experiment with these different projects and for that reason we'll invest in what we call key financial infrastructure so these are things like issuance platforms these might be things like secondary secondary trading exchanges it might be banking financial services for startups and in

that way we're we're a very like general investor our team is general and multi-disciplinary and we can apply kind of our knowledge and expertise in blockchain to select what we think are are compelling projects in both of those areas that's what we're interesting and so once you've selected a project what kind of support do you offer them and how actively are you actually involved in governance and staking for instance so Alex do you want to take this because alex has worked very closely with many different projects also he's for example that the author of the stable coin model at sweet bridge I am the author of the

credit risk model for ether is right and so these are examples of how we deeply work with projects yeah so so we we really try to be as useful as we can and I think over time with help projects on many levels you know understand the economics and and kind of product market fit in crypto was one of the big value that we provided to non crypto native companies that were coming in to crypto and and trying to make use of these innovative models to operate you know it starts from the very first

conversation we have with the team even before we invest you know all the questions we ask the team are the questions that everybody should be asking that team so you know one of the biggest question we always ask budget is like right watching you know is that just a publicity stunt or does it actually make sense and and on that on that trajectory we always inevitably come to a place where we look for the right integration and balance between centralization decentralization user experience and crypto economics and so on you know we've helped project build out their kind of investment structures

first and foremost for our own benefit but then of course our you know that then later helps them go to other investors we we have advised projects what sort of help they may need who they should be working with you know in this space and who they who they should be hiring with interviews people on their behalf so it's a very broad it's a very broad space of value that we provide and I think now that's that's shifting and continuing to progress and this kind of ties into fredericka you're coming about

staking so as the market kind of of decentralized networks develop develops what we're starting to see is more and more diverse and domain-specific network so in the beginning you know you had crypto currencies you maybe had some asset issuance platforms like counter party or bitshares then aetherium comes along and they're like no this is here you go this is a general smart contract platform and those very low-level technologies that's what we kind of thought of as the centralized networks but we live a little bit more in the technology continues to develop and now we see resource networks these are

networks like file coin which give you decentralized storage these are computational networks you know like Gollum for example where you can render video music a user and that works like live peer where you can transcode and stream live video you see social media kind of content networks and decentralized Twitter's and decentralized Wikipedia's and what you start to you know anticipate is a world where these networks are ubiquitous they're glow globally accessible and in some cases that might even grow potentially you might grow larger than they're kind of centralized counterparts especially be thinking about like the

centralized storage space right look ultimately there's more storage in the world across people's devices then probably Google and Amazon put together and so in that world of decentralized networks every different kind of network has to engage third parties to perform services for that network in the beginning it was miners who were processing transactions on Bitcoin then you know we went kind of to proof of stake systems and then we had validators and delegate errs and now if we go kind of case-by-case what we realize is the number of participants in these networks is growing I was just at the Polka Dot meetup last night here in in New York

and in the Pokemon system they have a they have a participant type of network called fisherman and what fishermen do is they go into you know they they basically submit proofs of wrongdoing about what people are doing on network to insure kind of the security of that network and so in a world where all these different kinds of participants are providing services it's sort of natural for a fun to say no hey I might have access to this network because I'm an early investor here or this is a project that is in my portfolio and by engaging their network directly I can add very measurable very obvious benefits in that work they think

about if you're if you're in layer 2 a lot of the success of kind of state channel payment networks depends on well how much liquidity can I have in the hub's you know of of the payment network and if you're a fund and you and you can kind of make an investment where you're providing liquidity and that's great for your network right because then you increase the network stupid so there's some examples of how of how funds can participate this almost starts to touch into this topic that you call generalist generalized mining Jake we will I think we'll we'll get to that theme later on but and like your thoughts on generalized mining but super interesting

that like with the times like coin fund as a fund has kept changing right like it started out doing doing liquid investments then it went into like shaft like illiquid things and now it's also like building validators and like some of these service providers for these for the for these networks another key idea behind coin front is was expressed in one of your blog's in which which was titled like fad protocols and not an investment thesis right in which you talk about like you know coin funds approach to investing but you also like sort of not admonish but awkward some of the downsides of adopting this fad

protocol investing investing approach in the blockchain space so I'm actually like the curious about about your thoughts there so could you tell us what this fad protocol investing approach is first absolutely so fat protocol is famous first created by John maneger who's now partnered placeholder VC and you know it's sort of describing the view cultivated at Union Square Ventures and it's actually like a really important piece in the sense that it tells the reality of the centralized names and that reality is overall at a very high level very generally Val value of

decentralized networks will tend to pool in their digital assets rather than in the equity of the team that created the network and this is like a key early insight into how investors should be structuring exposure to blockchain projects and so in that sense is very important but but the other thing about the fad protocols post is that you know it's it's one of the earliest attempts to kind of make sense of these things and it's also not very precise and I think a lot of people who who were coming into the block chain spaces investors they needed to anchor themselves in the space somehow and that protocols seemed like a really kind of

very compelling narrative just to say okay look just like another technology and best thing you know in a new space I'm gonna go and basically like invest in the infrastructure of that space rather than the apps and you know in the case of watching those are protocols and here's why it's because the the value you know will accrue there now what happens when you start actually spending time with protocols and applications and basically the the centralization stack is that you realize like there's no really like clear distinction between like what is a protocol what is an app it's sort of like you know is the Twitter is Twitter an app or is it a

protocol well in fact kind of the Twitter front-end is an app on an API that exists and that API is kind of like the Twitter protocol right and then people build other apps other than Twitter on top of it or if you look at augur well augur is an app right it's a prediction market platform but what it really is is a protocol because someone can come in they can build another front end on augur they can build some kind of other protocol or application on top and so you begin to like realize that you know the distinction between app and programs not quite clear-cut I mean there's certainly things that are like you know like lower level in the stack things that are higher level in the stack and things that are more user-facing and things that are more developer facing but

ultimately in order to understand where value of crews you kind of have to understand how that individual protocol works and then my posts pepper calls or not investment thesis is just trying to point out that you know very simply that like if for example if you're investing in ether because you think some applications are gonna take off on aetherium and thus appreciate ether price you might not actually be making the correct investment because in order to determine whether the value of application usage flows to ether price you really just have to examine that particular application or that particular protocol like in its own

right and all that post is saying is that like you you know you need facts and circumstances and sometimes it works and sometimes it doesn't but if you don't understand the crypto economics you can't really like make the decision of whether this is the appropriate value of cool that your investment so for interesting so the way I've kind of thought about like when I read your blog the imagination I got was if you look at like the the internet like so you have you have all of these protocols TCP IP and TCP HTTP then you have like TLS and let's say like you were a VC let's say you were I don't know I don't know Adam

Adam Draper's grandfather or somebody like that and you had a chance you like you you you were a VC through the 80s and the 90s maybe you were that Tim Draper or Tim papers father and and if you think of a career like that that career is pretty interesting because I am sure they had the opportunity to invest in some team that was like I don't know maybe Tim berners-lee's team building HTTP but and they did have the chance to also invest in a team like Google that was using HTTP to build a search application differences Tim berners-lee probably made like 20 or 50 million whereas Larry

Page made fifty billion right so that's like a I don't know almost like a probably a thousand fold difference in the outcomes whereas like you can it would be hard to argue that like Tim berners-lee's contribution was smaller than Larry page's like I would say like technologically both are equally valuable but the financial outcomes for both of these things are so radically different right so like when when you do that kind of when you see that kind of VC journey you start to empathize with the VC class in in always thinking about where value accrues on this tack right so I think if somebody's a VC their fundamental

question is okay cryptocurrency is coming blockchains are coming and they'll power all of these applications but and there will be many good technologies invented but it's not necessarily that every good technology will make people rich so they want to invest specifically in those things that are going to make people rich because investing in those things is what is going to make them rich and so and so like this fad protocol thesis argues that like it's the base layer protocols that like Bitcoin and ëthere ium that are going to make you rich invest there but it's like your approaches don't be so hasty about that judgment italy it

sort of depends on the particular application we are talking about would it be correct to say that in in your idea it there might be cases in which Evolved makes most of the money or like some some UI facing element makes all of the money and the protocol layer and even like the application logic doesn't make any do you think scenario like that could happen absolutely I do think I'll let me give you like two quick examples to maybe illustrate right so so let's say like you want to capture the value of an app on etherium like auger right you kind of have two choices what you can go into into auger rep tokens if you feel that

rep will reflect the value you can also try to go into ether because you're saying you know ether as the base layer technology will accrue the value of auger what is the value of logger well a lot of traders you know they make trades on the platform and all these prediction markets and then the platform you know the market basis kind of takes fees and then it pays some of those fees to the resolvers of markets which are rep holders right and so you have this concept that like turnover so now it's it's fairly easy to see that you know if you're an ether then you're what you're doing is you're capturing kind of the utilization of the auger protocol and the auger app you're not so much

capturing the turnover in order to capture the turnover you actually have to hold rep right and this is because you know when auger transactions go on chain they're sort of you know the theory would be okay a lot of people want to use auger people are then buying buying ether in order to utilize the other protocol but then what you're capturing is the value of utilization of auger but not the transaction volume a lot right so for that you probably want to hold wrap in that case I'll give you a give you an example from the totally opposite end of the spectrum let's say that you're a centralized company and you have a user base of a hundred

million users well what you what you're taking on is a blockchain strategy where you can actually put you know some kind of crypto or or blockchain features in front of this existing audience well who's more likely to convert you know tens or hundreds of thousands of users into crypto a protocol that has been built you know with no obvious utilized applications or an existing company with a track record of converting users and that already has like a measure of user trust and market fit why would argue maybe they both have it a shot but but it's you know the application case is still is still pretty compelling and so that's why I

think you know as an investor and especially now that there were a couple of years into smart contract platforms and apps they are definitely compelling opportunities where some companies will be able to put applications in front of kind of mainstream users and capture value that way and there are compelling opportunities where someone might you know create a protocol that that everybody adopts and captures the value you know the Dutch have given us so much orange carrots Bluetooth artificial hearts even donuts were invented by Dutch people but they also gave us Dutch auctions which as it turns out are great for decentralized exchanges Dutch X is a decentralized trading protocol for er C

20 tokens and it's invented designed and built by kenosis current order boat based exchanges whether centralized or decentralized have a couple of issues miners and exchanges can front-runner trade when they step in front of a large order to gain an economic advantage not to mention issues with securing funds high listing fees lack of liquidity and pricing efficiencies the Dutch tax exchange platform uses a Dutch auction mechanism to determine the fair value for a token and participants in a trade are encouraged to reveal their true likeness to pay which eliminates front running as a permissionless Unchained protocol it's useful for BOTS and other smart contracts needing to exchange tokens and Dutch checks also acts as an oracle for - requiring a price feed so to learn more check out the

documentation at epicenter TV slash Dutch X smart contracts are live on the etherium main net so you can start building today we'd like to thank gnosis and Dutch X for their support of epicenter I also personally feel like the question of value capture can be very complex right like say you mentioned like the example of auger now if I look at something like decentralized exchanges that's an even more complicated question because like when you see like a protocol like 0 X so you have aetherium just a base protocol then you have 0 X which is like this decentralized exchange protocol then you have these order books right so centralized

companies can build like order books that run on zero X and then then you have this UI or wallet layer where ultimately the user the one they want to trade ethelia for maker they are in a wallet and they click a button and then that wallet is going to decide whether to use the which order book which protocol 0 X or a competitor on which platform right so you have these like 4 different parts of the stack and it's entirely unclear which one is the one that's going to make the most money right so of course like all transactions will go through aetherium but like

helium just get some transaction fee per order is that gonna be the biggest amount or 0 X which is like a governance token is govern is gonna get like the most of the value capture or does the order book get a lot of the money because it traps liquidity or whether in the end it's the wallet that makes the money because like if you if you see the best Hardware wallet is ledger right so if there's lots of decentralized exchanges happening the way ledger the hardware wallet maker structures their integrations with these centralized exchanges are going to determine what what what players win on the order book an exchange level and therefore they'll extract their own commission to route

users to these order books so alleged can also make money on on this stack and so like it's it's a highly complex question on like which which part accrues value isn't it absolutely it is and you know and again and in that example right if you're let's say if you've transacted a hundred thousand orders on on 0 X protocol right you could have transacted a million dollars or you could have transacted a hundred million dollars and it's sort of like the the actual turnover or Mag order of magnitude of of the throughput of that system is not necessarily like off

reflected on chain it's more like a like a projection of the utilization of that protocol on the chain right and so in that case you know should you be holding ether should you be holding the 0x token well 0x token is interesting in its own right right because you mentioned that it's a it's a governance token and I think it's still you know we're still learning about governance tokens and exactly how do they you know how do they value the ability to upgrade protocols and things like that but it's certainly kind of a compelling case to say you know if a lot of people are using that protocol and they kind of rely on that protocol for their business or whatever activities

they're engaged in then they would want a stake in the governance they wouldn't want that protocol it's like get away from them in some way right and present risk to their businesses so so maybe that is a compelling way to to value tokens that way quota so I think we were we are already moving in that direction and in the past it recently you a you to Alex and Jake have started speaking about generalized mining um would you be able to explain to us what that is yeah so as we sort of mentioned before you know I I regard the the generalized mining space as kind of the space of

opportunities to provide what CRISPR tyskie called self supply-side services the centralized networks so these networks they are if you'd be kind of fast forward into the future if we accept the idea that there's gonna be a lot of these different networks they're gonna be very different they're gonna be serving different domains some networks are gonna be about social media other networks about are gonna be about decentralized storage other networks are going to be about registering DNS domain names and so on and so forth if we live in that world then all of those things all those networks they're not they're not companies right they can't hire a you know a hardware and IT department

they can't hire appliance department they have to rely on on the third on all these third parties to provide the services that make them function many times those services are highly specific to exactly what those networks need to do if you are a decentralized storage network then you're looking for storage if you're looking if you're live pier then you're looking for people to build GPU Center you know GPU data centers to to transcode video if you're a social network you're looking for highly competent curators of content maybe those are humans maybe those are BOTS but the point is that there's all these

third parties that have been kind of you know if you will extract it out of these hierarchical traditional organizations that we have and now form this cloud that can they can provide service you know these kinds of services to to decentralize networks the question for us is you know how does a crypto fund fit into that scheme and the way that the way that we kind of think about it is there's a spectrum of opportunities and some of those opportunities are very Hardware intensive and require relatively low proprietary software these are things like work mining right here you're building a hundred billion dollar data center and you're competing on your ability to you know maximize

your hash rate on the other side of the spectrum you have opportunities that are very software intensive but but these software proprietary strategies you can kind of run on you know fairly basic and inexpensive hardware maybe on AWS and so an example of something like that might be you know market making you have a proprietary algorithm that that market makes a certain mark given in blockchain it might be what just happened in the last year Network which is the mark oh my Merkel mine saw a bunch of third-party miners this basically distributed 63% of the live peer tokens supplied to eligible aetherium wallets

and those miners are doing that because they're getting a little bit of reward in the tokens it's interesting krypter economic system and then if you go into like the middle of that opportunity space in my hair you will know a lot about this this might be something like cosmos cosmos is you know not something that you necessarily have to write a lot of proprietary software for because the project is kind of giving you the node software but as you well know you might want to write some you might want to have kind of increased security in your data center you might want to have redundancy you have to worry about maintaining sensory nodes you have to worry about physical hardware as well in some sense because

you want to increase the physical security and so this represents kind of a you know staking opportunity but it's somewhere like in the middle of the spectrum where it's like a little bit of proprietary software a little bit of hardware there's certainly more more expensive than than what you would get in a totally a commodified hardware side and where I think crypto funds fit in they have a natural space in this in the spectrum right if you are looking at the hardware end of the spectrum well this is the natural place where proof-of-work miners are coming in and maybe they're repurposing some of their hardware for these different kinds of networks that are coming in if you are on the software side of the spectrum this is the realm

of quants this is the realm of you know smart people who are kind of building models and like trying to you know find the best algorithm that you know the gets the best contents even up to the top and so I think that's that's the side of crypto funds and Kwan's and then kind of in the middle you have this thus taking sort of area of the spectrum where here you're competing on how efficient I am I have secured a my we've talked to a number of projects that coin fight at this point whose product is you know one-click the deployment of staking nodes on various networks so this is all about like how fast can you get into

this network how fast can you build stake how secure you and maybe even how many networks can you be on at the same time so I think I think crypto funds are gonna go to so the more proprietary software side it's sort of very natural funds don't want to learn hardware data centers if they don't have to everything they've probably rather than best in teams that are doing that and this becomes an incredible value add for a fund I think in I think we'll see this in the future one reason is that you can add tangible measurable value to your portfolio companies as we sort of touched upon before right another reason is that you might be this might be a

competitive advantage if you're doing this and other funds are not doing it then maybe you're generating returns that are not correlated to what most people are doing which is long term long only investments and in these like saft notes and you know this flat or down market that might be an interesting source of returns for funds and finally I think you have access you have better access as an investor and so you know for us live pier is like a great case study for that in the sense that we were never early investors in the note however when the network came up about a year later we were able to use their mechanisms of transcoding and mining to

build up a stake in that network kind of in a single-digit percentage size wise right and is comparable to stakes of early investors and we think that's really interesting because it democratizes the ax access you know to to ownership of these networks now you don't just have to be a VC to get that kind of ownership you can be a technologically savvy participant and well finally in summary what that says to me is that I think crypto funds over time are gonna have to get a lot more technological and then VCS who are sort of pure VCS and pure equity investors are gonna get a lot more constrained because they can only kind of invest in

this one stage of the blockchain company lifecycle which is the stage where your funding that the early the early equity what other folks can choose the stage at which they invest right they can invest in that equity but then they you know by the token on the market and finally they can they can build stakes by direct participation in markets so we think that this is like a set of features like it's an amazing opportunity for funds well thank you that was super interesting and so basically when when you speak about generalized mining you mean that more people actually actively contribute to the upkeep of the network and so how far do you see that going would you expect

complete laypeople to actually contribute or is it a select circle of people contributing how do you do you have to have some sort of gatekeeping um how do you make sure the people who want to contribute are actually capable of contributing how do you know their hardware their software is good enough I I think it will vary and it will you know again it will run from highly experienced very technological companies like like for example the company that my hair is working on which is providing like very advanced technological services you know to just sitting on steam it as a as a human being and kind of like using your mouse to to curate articles but the point is you know even

if you're human like here's an opportunity for you to earn value from the network by contributing a valuable service and that about the services curation so I think you know I think there will be all kinds of players in that in that market and there I'll be doing like pretty different things some people would be casuals and some organizations will be very serious about it very like narrow area and another people might be just concerned with kind of scaling data centers so the centralized storage networks might might flow and work this sort of brings a different dimension to a crypto fun right like so in the beginning it's like

crypto fans are like oh I want to invest in the liquid assets that can become the currencies of stores of value in the future then like the second generation is oh there's going to be these application stacks and I want to invest in that part of the application stack that's going to capture value and now this almost feels like coin front is going to put a new kind of Hattin which is okay there's this new protocol coming and it's going to need all of these off chain workers can coin fund bailed one of those off chain workers and if coin fund does then is that workers is is there a competitive advantage to building that worker that lasts over the long run and if you do

find that there is a competitive advantage to building a worker then coin front would build a sort of a worker node or a generalized mining node do you actually think there can be defensible competitive advantages to generalize mining nodes or worker nodes I got experience with protocols like life Pierre Bezos and even like Bitcoin is that with all of these mining and off chain services the market ends up highly competitive because there's free entry anyone can enter and build one of these workers so there's gonna be this probably like thousands of miners in

Bitcoin there's already a hundred Baker's in tazers it's probably gonna be you know hundreds of transcoders on life beer do you think there will ever be a protocol in which building a worker makes sense for a crypto font from a competitiveness and long-term perspective yeah actually so I have a I have a whole range of thoughts about that but most importantly is the fact that as the number of networks that need this type of service increases the networks will always compete for attention from you know different staking companies so a staking company has a limited amount of resources you know both engineering and

hardware and cognitive cycles to contribute to every specific project so all of this taking companies are going to always choose the best ones and so networks that need this type of service they will always try to feed the best incentives this is a little bit unlike the mining the hardware mining space where the costs the the profits the Minor Prophets will always gravitate towards zero because in the staking and generalized mining space there's a upward push on the under on the mining rewards from the networks that compete with each other so

you know you as a company can state pesos or cosmos or life here right which one are you going to choose and and so there's this natural two sided competition one between the staking companies that want to provide the best service and one between networks that want to get the best staking companies and so if you are a company as a crypto fund you get a very natural early entry point to all of these - all of these opportunities and and so the competitive advantage for a crypt of fun doing this is that the crypto fund is usually aligned with a network from the very

beginning and has these dialogues early and so for us to set up a generalized mining operation for a specific network is very natural and I think long-term defensibility is a great question but we don't mind doing generalized mining in the short term it's always the same discussion as which never do we invest in which never do spend time on and so on so like the trade-off space for fun like coin forint almost appears to be okay there is this there are these new networks that are coming up either we can build these service nodes or channelized mining nodes ourselves or we

could delegate to other people that are building those nodes right and so imagine like this - there's two parallel universes one in which coin front adopts the approach hey we'll build generalized mining nodes in protocols we love like life beer and there's another parallel universe in which like coin Francis hey we are not going to bother like building these generalized mining nodes let's just delegate right let's just delegate to the to the people that are so in these two universes like coin phones performance over like five or ten years it's going to be different mm-hmm and coin front is building generalize money node so you have chosen this universe

where you do build right what do you think is the long-term advantage to the coin fund given that like generalize mining is so competitive so yeah yeah yeah so so again this goes back to kind of my assertion right that the space and generalized mining opportunity is actually much that much more vast than the space of staking opportunities right so like if you look at you know most companies in the staking space like Alex was kind of getting at or not funds right and so they're their business model kind of depends on their ability to leverage third party delegation and kind of take a commission on that on

that delegation but of course that's a limiting factor because not all networks will have opportunities that are staking opportunities and not all staking opportunities will have delegation right so at least on on protocol delegation right so if you take good for the first example that comes to mind is new cipher Network right new cipher doesn't you can actually delegate it's taken a new sector you have to write a note and so the competitive advantage for a fund I think is not so much in competing with the highly commoditized market of staking companies and people who are competing an efficiency it's more like competing in the kind of hard to

replicate market of proprietary software and here you're kind of competing on how smart you are and how good of an algorithm you might build so so let's take steam it is my one of my favorite examples here right today there are a bunch of bots on the steam in network where user is basically send them a little bit of steam and those BOTS upload their article and our article goes up higher on the steam website and so they earn an ROI in steam because steam articles are compensated in steam by the web system and very you know many ways this is exactly the advertiser model it's like I go out to Facebook I pay facebook's the money and Facebook you know distributes my my ads

to men over 35 who recently have been divorced etc right and then they buy my product and I get an ROI the same way I can pay a steam bot get honor why now which bod is gonna give you the best ROI or which bot is gonna earn sort of like the best reward well it's the bot that can most effectively identify indeed what is the correct content and today most bots them even are really loose stupid they are like whoever pays them that'll just get uploaded but then eventually someone is going to come along and they say I'm going to use a kind of database and machine learning algorithm and some other technologies right to actually identify and try to

predict which steamed posts are gonna go viral in the future and if you can do that on Steam then you're gonna earn a much better return and because that's a proprietary algorithm nobody knows how it works is enough and so you're gonna earn a better return than others and that's I think that's really the competitive advantage of funds versus kind of going to these more commoditized networks or networks in the future will might be more thematic types like cosmos and Pez up some really like anything that has staking for those kinds of networks I think in the long term funds might be happy to delegate to other parties who spent a lot more time on security and efficiency and things like

that but in the in the proprietary software space I think this is with a really interesting stuff that that's going to certainly get competitive but not commoditized is going to happen just to follow up on that a lot of staking tokens today in effect if you when you stake them and it's a lot like getting a hidden dividend right do you think general mining is going to move into that space and take a big cut of that or do you think these staking models where where in fact you get a hidden dividend I think that will exist in the future well I think I think generalized mining opportunities like

from staking to proprietary algorithms to kind of hardware mining like they're all different forms of getting dividends I think as Alex touched upon you know I think in today's world whenever you choose to engage in this activity in a particular network that is still an investment decision right so like like if you look at you know staking out was like Tesla's cosmos you know you can try to calculate an estimate what is the token denominated return that I might get if I stake a certain amount of tokens and then you might get a number like exactly this but maybe maybe you'll get a number like 10 percent or like 20 percent but I think a lot of the people that are engaging in this activity is

not because they want to make 20% return on tokens it's because they believe they're actually speculating on the success of the network or these particular networks and becoming like large multi-billion dollar networks what they're really doing is they're speculating on the fiat denominated return but then they're trying to maximize it by also getting that 10 percent of tokens on on top all right so it's kind of funny like there's a there's a number of for example like lending platforms in crypto right now where you can put your ether and then you can earn a little bit of ether kind of by lending it out right but the amount of money that you earn in ether is like 70 cents but the volatility of ether is like thousands of dollars in

your position right and so a lot of times in today's market it makes sense to still sort of speculate on this and the future success of these platforms rather than so much worry about what is the dividend how much percentage of the dividend am I getting I think that's gonna get like to be a lot more important you know down the road when these markets become a little bit more efficient do I think that who takes a cut of that so I think like like in the commoditized area like when you're when you talk about specifically staking networks then as my hair was saying like yeah this gets like really really commoditized and so the the company is they're providing these

services are going to be competing on fees and it's always like kind of a race to the bottom I don't think it ever gets zero because these companies have to operate but again whoever can operate the most efficiently can will have the lowest sort of P and then aggregate delegation and state they're you have any thoughts on that Alex yeah I think it's hard to it's hard to distinguish and classify the space today I don't think of it as necessarily easily separable into you know staking delegation generalized mining you know it's it's very easy to fall into the trap of imagining that you know once

you've seen one network you've seen them all that's completely untrue the opportunity to make returns on contribution to various networks is very broad and so you know you can say well the funds could just delegate to other Staker and very quickly find out that that's not true you know you can say you know you can say that staking is a way to distribute rewards and then very quickly you find out that that actually requires you to pay a tremendous amount of attention and provide a good service and

so it's not just rewards but it's rewards for something else so I would be very careful drawing kind of black and white lines between these areas I think of that as providing services to networks according the rules that they set up networks are very immature and and the way that these rules get created is often you know very quickly becomes clear to be not ideal and mistakes and that they quickly become obvious and new networks try to fix them and so this is very fluid and like I said as a fund we are trying position to position ourselves where

we're agile and able to respond to these developments very quickly thank you that was super interesting and so you said that the network's they're kind of immature a way that you two are trying to mature them is by building by helping them by supplying them with a toolkit that you have started building named adapt can you talk about that a little bit yeah so I I started in blockchain working with projects very early and I very quickly realized and a number of limitations that projects face when using existing technology so let me give you an example

so one project I worked with before you know was trying to create a very advanced financial system and they were trying to use a theorem for that and and they very quickly realized that it's very hard for them to create the user experience that they want to create for their customers using aetherium because you know if the end transactions require paying ether and so all the users will you know who need to transact on their network are gonna have to hold the wallet manage their keys and cold ether and you know it came obvious to me that in blockchain and this goes back to our

discussion of cut protocols to which I have a slightly different answer right now you know these fad protocols like aetherium years and such they are in fact designed to capture well of course that's true you know the teams have to you know ensure that their currency has value and has a metric that value increases and what that almost always means is that their networks will compromise on on the possible user experience of people who are trying to build and induce products on top of them and so I will start I started to think about adapt as a kind of a

generalization of blockchain on many levels the main premise of that is that even the network in which your application runs has to be customized for your applications these days generalized networks will inevitably compromise user experience and the choices that these networks make will inevitably make things more complicated for at least some new spaces to give another example you know cryptic TVs was built in etherium etherium was was a network that was built from kind of came out of the Bitcoin thinking of sovereignty of mining and radical decentralization but cryptic aneesa's

again they don't need radical decentralization and at the moment you realize that we realize that the theory amidst is the wrong platform and and so what I'm trying to do is I'm trying to enable people to experiment of being smaller much more customized networks for their users does that make sense thank you that made perfect sense um so what kind of what kind of tools do you actually provide the projects with in this adapt framework so adapt this platform technology but it's not a platform network and that's a distinction which would have been very easy to make in 2005 and it's very hard

to make in 2008 even because everybody thinks of networks as platforms but if you go back to 2005 and look at you know we can you GCC you know Linux and so on you kind of quickly under standard platform software and so adapter software it's a software to build and launch networks and it's modular AI software so it basically is structured as a programming language on top of a very general data model that allows you to develop nodes build consensus algorithms and then also develop the smart contract infrastructure on that network in the

business logic and so is it - here it looks like a star where in the middle you have the compiler of the programming language that above that it has modules in that programming language and below that it has the primitives in the way of structures and the networking components that can be accessed from that language and and the language is basically the glue that makes the toolkit work so using the toolkit the idea is that basically you can first load and use you know all the necessary modules that somebody else has developed for things like wallets tokens you know voting

governance you know CCR's you know whatever generalized components that can be built in decentralized space and can be developed and reused and then you would add some business logic for your specific project and then you would launch that as a decentralized network that is specific to your specific project very interesting so to me like because I'm building a validator a commodity validator for the cosmos network I I tend to think of adapt as so the vision behind cosmos was like it allows entrepreneurs to build their own spoke change their own block change and

have those block chains handle their own application and like that rock scene is tailored for exactly that application so you know like this version of application specific block chains would have for example a good bill it's own blockchain network gnosis build their own blocks in network and so on and so adapted to me is is a very similar vision but with a different technology stack but the key difference is one of incentives right so in in cosmos they have this token the atom and they want to create a platform around the atom so when somebody else builds up builds a blockchain application some of the value of that blockchain application

they wanted to leak into the atom token right and so I cosmos the project has like launched this atom token and their incentives are geared towards leaking some of the value of these blockchain applications into the atom token what's special about adapt from this perspective is you don't want to create that central atom token or the central etherium token to which the application value should leak into right and you want to keep build just like this open source stack that anyone can use to build the blockchain network yeah so cosmos to me is probably one of the best thinking in watch-chain and it's actually like you say is very similar um

what cosmos is doing will naturally happen in adapt because you do need a hub you didn't need a training a training center we do need to infrastructure services for the entire ecosystem of these small to medium sized networks right the difference I would say is not in in the value capture process but more in the amount of freedom and the amount of sort of high-level high-level tools that developers get when they want to create their own networks so for example cosmos is completely based on the tender mint consensus protocol which has you know

fast finality and some really good properties however it's not necessarily clear to me that that's what you want for all new space cosmos uses fast finality because they want into watching communication we wanted to move tokens from one from one zone to another I don't think that's correct I think that's too limiting because in some zones you can implement tokens using different code bases that even don't even exist on the other zone you're neither nothing right so it's not clear to me that moving tokens from one network to another make sense what's

clear to me nevertheless is that we need for example a decentralized exchange to live kind of in the middle of the input system and and it's likely that you know that's that's where this will go but I want a lot more freedom in every zone I want zones to be able to choose their consensus protocol and and if they want probabilistic finality they should have it right if they want their zones to be not interoperable with the rest of the ecosystem they should be able to do it and that is much more high-level than going in terms of developing code because it's it hides away data modeling

and it provides high level tools for you know organizing data and clean and securely usable security primitives inside your database so I claim that it will be a lot quicker to develop a you know and adapt Network than cosmo's zone if you if you need if you want to be sufficiently different from from the restive thank you and that once would be interesting and so does adapt have a business model um we're working on it at the moment - that this fundraising on donations because I'm really sick and

tired of seeing projects raise billions of dollars on a white paper and and I have a very principled objection to that because you know it's really really bad incentives that don't easily destroy the space in the long term but but we are in discussion internally about how we can structure this effort because to us it is painfully clear that the kind of subtle shift in perspective that I'm offering that we are sort of trying to get together is really important for this space we want to do this as a fund because we are all so tired of projects coming to us and painting an unrealistic picture

of how their adoption and how their base layer technology you know will work because we've seen so much in the space and we've thought about it for so long in terms of real-world use cases in your world adoption that we can very quickly point out what will be a blocker for this project and that's what we're trying to solve we're trying to create a mechanism for people to build build the next generation of blockchain technology where each application can be customized and their network in there you can save protocol but it's a overuse the word will be customized to the users to an

extent where it will stop being a toy and will become a real-world tool so think about questions such as governance recourse validator incentives transaction economics can with your you know can your social networking application built on aetherium today have free transactions you know can your miners of your network also be your Oracle's also your you know service providers are many different levels for your application the answer is you know life here is running on aetherium if Tyrion has miners but life here has to

enlist a whole new group of people to help them with a merkel mindshare drop ideally those would be the same people this feeds directly into our discussion on generalized mining because you know and this takes me to the topic of initial written softens where it's very explicit that early supporters and investors in this project in a project should also be service providers and the miners that are highly aligned with the mission of the project we don't have that today we don't have that level of alignment between early supporters and later service providers and that's what I'm

trying to create because to me that's more important for for the long-term of this ecosystem cool Alex we really look forward to seeing the development of the adapt project perhaps we should have an episode on the adapt project when you know when part of the protocol is released and the first application the Oxygen Network start start building on it so that brings us to the end of this show Alex and Alexander and Jake thanks for thanks for joining us today thank you my hair for you guys so happy to be here so thank you for all that listened to this episode as you know like we

release episodes of epicentre every Tuesday or Wednesday so subscribe to us if you if you like the content you can also watch a video version on the of this show on youtube.com slash epicenter Bitcoin and you can chat with all of the hosts and the community members I have epicenter door TV slash cater if you like the this recording or you didn't like it leave us an iTunes review as it helps people find the show and it makes us happy and we look forward to being back next week thank you [Music] [Music]