Ali Yahya: Andreessen Horowitz – A16z Crypto Investment Thesis #494

Transcript

welcome to epicenter of the podcast which talks about the Technologies projects and people driving decentralization and the global blockchain Revolution I'm Sebastian Couture and I'm here with my co-host mayor Roy today we're speaking with Ali yaffya he's a general partner at a16z of course they are a massive fund uh which Bears no I don't think they need any proper introduction everybody knows who accr and uh and the type of the Investments they've made uh but we're going to be chatting with Ali today about a bunch of stuff including Asics and G's thesis um also taking a step back and looking at fundamentals of crypto networks and some of the broader Banking and political crises that have been

happening around the world in the last few weeks and months um but first yeah Ali thanks for joining us and um maybe starting off by giving us a little bit of a background and how you became part of the team at accz yeah I sure thing thank you Sam and mayor it's great to be good to be here uh so yeah maybe I'll give you a little bit of a little bit of my history I was I was originally born in Mexico City was born and raised in Mexico and uh throughout my childhood I was fascinated by technology I was very into engineering into the things that humans have built I was always in awe of things like you know fast cars or planes or like tall buildings all of the

superlatives it could be kind of the great things that humans could build and I was in particular fascinated by uh computers and by Robotics and the prospect of AI and the kind of that whole that whole world um and and very much wanted to pursue a career in engineering and so I I kind of saw I looked like toward the us as a place to to study as a place to to kind of make a career and in the end I ended up going to Stanford to study computer science focused on systems in particular I really like to like write code and that was like the track that would that would expose you the most to large like programming programming projects and programming experience and so focused a lot on distributed systems Operating Systems computer networking computer

security those were all of the fields that that were most interesting to me um and this was by the way I like my undergrad started in 2006 this is before crypto was a thing at the very tail end of my undergrad degree uh in 2010 um I was doing research with David mazieres at the at the computer security Lab at Stanford and that's when we all became aware of the of the Bitcoin white paper I still have a few emails like in the lab of us being like Oh like isn't this a cool thing we should just like play with it and we all we all uh like downloaded it played with it we mined it but I think most of us especially certainly I did I missed the implications of how important it was going to be so even though I was playing

with it and minded I didn't track anything I didn't track any of the private keys that I was that I was mining with and so that was that ended up being later on like three years after the after that until 2013 when it started to become more clear what the implications really were that was my first very visceral lesson uh in the space and I kind of uh that kind of like was they became seared in my memory as a as an experience early on and I feel like many people who've been in this space in a while have similar stories um but but I was fascinated by it so I I kind of was was following it closely since then um at the time there was no there were there weren't really many ways of of

working on it full time and I was also as I said I was also interested in Ai and so I actually I joined Google um first I joined Google X and I joined this robotics project called replicant which had been started by Anthony Rubin which is this agglomeration of a bunch of different robotics projects and the mission was to build an operating system for fleets of robots um and that was that was nice because it kind of married my interest in distributed systems and then also machine learning and Robotics so it was a very fun project to work on for for two years um that that that that ultimately um it was a project that was at X it actually became the everyday robot project it's just now a real real thing

I mean it's like it's live it's now public you know how X is super secretive about about everything but but it's now a project that people can talk about which is nice uh but after that I moved over to Google brain where where I did a little bit more of the same it was distributed systems for machine learning generally and I was working closely with the robotics team at Google brand um it was a core contributor tensorflow to make tensorflow more capable to to work in that kind of environment um and then finally in in 2017 like all throughout this time by the way it was still kind of fascinated by crypto Google of course will never touch crypto with a thousand foot ball so I could only really follow it and play with it in my own time uh and my my roommate at the time was

was uh Juan Bennett who's the founder of protocol Labs so we were we were very close we're like Excuse Me Maybe my best friend and we were kind of contemporaries in school so we we we go way back we were living together at the time and talking about all the stuff uh so so I was fascinated by the space at one point they got connected to Chris to Chris Dixon Europe firm um and we kind of hit it off and he and he essentially just said like hey you should you should join we should start a crypto a crypto fund because back then the firm was invest investing we Chris was investing in in crypto he's been investing in crypto since 2013 or so uh but but it was all entirely within the context of the main of the main Farm

um so the thinking was we should build a dedicated team for crypto and really double down and that was his pitch to me and to me that's not like an operator I love the space it's super interesting I was frustrated that Google was just such a big company it's very hard I actually get things done uh so I I jumped I I kind of I joined the firm in 2017. um it was Chris and me at first and then we started to build out the team we recruited a few other people and then since then we built out the entire entire crypto vertical um here at the firm and we're now we're now up to 80 people or so across a bunch of different functions and the idea is to not only make great Investments but to also support every portfolio company in every way we can and I'm happy to

talk a little bit more about the way that we tend to work with Founders but that that's a story it's been five years now and it's been quite a ride and and it's been awesome it's been really great that's uh that's a fascinating story I I didn't realize that uh your roots into crypto went so far back and that like many of us you had been burned early by Yeah by not realizing the implications of what you were getting involved in um what uh you mentioned that you you think that Google will never touch crypto with a 10 football or or perhaps even longer Paul uh why do you think that is and why do you think Google hasn't uh you know embraced crypto because they're such like a forward-thinking company on so many

other your verticals and industries but crypto seems to be something that they are incredibly hesitant to touch on although although you know recently there were some announcements that they were implementing like in their Cloud offerings like some MPC services and things like that that seem to indicate that they are you know open to providing infrastructure services to crypto companies but at least like on the payment side or on any of the you know higher level aspects of the stack there there's they're quite absent yeah well I could go into an hour-long rant about Google uh that would consume the entire podcast uh but I think that maybe that the core reason that that Google will will likely never do

anything significant in the space is it's just a classic uh innovators dilemma it's just the fact that crypto is such a disruptive technology the fact that crypto works by being fully open by being open source and by decentralizing power as much as possible the fact that that is at the core of what crypto is about is entirely at odds with the entire business model that Google that Google leverages to survive um and so in order for Google to actually truly um move into the space and actually do something meaningful it would it would have to disrupt itself it would have to disrupt the core business models and drive it today and because as a company it's no longer really founder LED you

don't have Larry and Sergey there as involved as it used to be um and because of the fact that it's atrophied in all these ways and that has become I mean I think I think it's fair to say it's become a more complacent company than it used to be uh it's just very unlikely that for them to for them to do anything that's disruptive everything that they they do now it seems to be seems to be much more incremental and seems to be in service of the core business model that has that has powered them this far so yeah I think uh I I have I'm not holding my breath for Google to do something meaningful they do have all of these like little little experiments because Google does still have this kind of Freedom where you as an engineer you can use your quote-unquote 20 time

and play around with things and then there are a couple of teams that are maybe experimenting but it's hard to imagine that Google will actually invest heavily in and make it a core part of what they do um for a portal of the above reasons and maybe that Google is like the it's like the IBM or the HP of Our Generation oh no for sure I I agree with that completely I mean that at this at this point in sort of this size it yeah the innovator's Dilemma is probably the the biggest culprit here and that's the case for many many companies not just Google you know we could say the same thing about Microsoft or or Facebook or although you know there have been some I think other types of this interesting experiments there

that you might leverage crypto at some point but in a very different form than what you know we know and and sort of thriving for it as people have been in the space for long as we have um so just maybe zooming in a little bit on a16z and and the and the the the crypto team you mentioned it's 80 people uh what is that what does that look like and you know what are the you know one of the key roles there I'm curious because I'm also starting a fund and you know there's a lot of things that I think I have to learn from you know other funds and you know even though ECCC is just a massive organization and like you know is nowhere near the size that I'll ever aspire to get to you know

understanding so what the course core uh support structures there are and and support um functions uh yeah give us a bit of an overview of what the team looks like yeah of course so the behold the vision from the very start was to was to build a vertical within the firm that mirrored the original a16z um form factor uh but was very tailored for crypto specifically um and so originally I mean a16z is firm the whole vision from the start was that it's a it's essentially a platform it's a firm that not only makes Investments but but is truly a partner end-to-end across many different functions to help

the companies in our portfolio succeed uh what that means for crypto is that um because crypto has certain big differences from traditional traditional companies that there are things in ways that we can help that that are fundamentally different that require building out the team differently so as an example of that um one of the observations that we made was that uh because most of the work in crypto tends to be open source because it the work that's done uh tends to be out in the open it's actually possible for collaboration to happen between organizational boundaries and that means that as a as a venture firm we actually can get involved in

some of the core technical challenges that some of our portfolio companies are facing which is something that would be much more difficult to do in any other sector of Technology like you can you imagine for example in the world of Biotech in order or in the world of like I don't know deep like enterprise software in order to get access to the code base or to the intellectual property that the company is working on you you really have to become a full-time employee and so it would be difficult in those worlds to contribute technically to contribute to the core uh science of technology that each of our portfolio companies are uh working on whereas in crypto there's much more it's a much more collaborative environment the fact that it's all open source actually changes the game and makes it makes it possible for us to build the

research team uh which is led by Tim rothgard and he's a former professor of Snapper who's actually my professor we like I took all of his classes and these were these were some of the most interesting and hardest classes that I ever took um and he's a Pioneer in in the world of algorithmic Game Theory uh and he he's also extremely deep in the space so he in a sense he's a bit of a bit of a unicorn there are really a few people who have the kind of knowledge and rest of the traditional literature the academic literature around distributed systems and Game Theory and mechanism design but who also deeply understand the crypto and blockchains and bring those two together to to do like yeah he's great oh great yeah of course and

he was actually the person who who did the formal analysis of a eip1559 and and actually got the community or helped get the community more comfortable with incorporating eip1559 to ethereum so he's the head of research and under him we have a team of of a world-class researchers across cryptography distributed systems economics Game Theory mechanism design and we're still kind of open to to continue to expand that team and the idea there is is that they can really help our portfolio companies at the very least understand what's been done before and then also uh we can help them think through some of the open-ended problems

that that are actually research problems and that team works very very closely with our engineering team which is headed by Eddie lazarin you may also know so any Eddie lazron is our CTO and head of head of research and under him we have a team of of like extremely senior very um sort of they they better end like like uh smart contract Engineers uh security Engineers uh people who build who build things and they work closely with our research team and our portfolio to to actually produce uh production grade code and so much of the work that they do tested the open source again and the idea here is that we want to contribute we want to help our portfolio

to solve open-ended problems but we also want to help the community at large so all of the work that we do is fully public and we we publish all of the research papers and all of the research content both in our website and then also in in um a peer-reviewed conferences on the research side and then we publish all of the code that our engineering team produces um in in our GitHub repo right so it's all it's all open so those two teams were closely with our portfolio and there's a it's a third important team which is very different from from like a traditional Venture side like the kind of the main firm and that is the Regulatory and policy team because as you guys know that's that's obviously like a huge open open kind of question in the space uh there are no

bright lines as to what is regulatorily compliant and what isn't and as a result we have to take we have to be very smart about about how we navigate the regulatory landscape and so we have a team that includes um that includes people from people who have been extremely senior just about every regulatory agency including for example uh Bill Penman who who was um the person who actually established the the framework for decentralization at the SEC who um established for example that that ethereum should not be considered a security in part because or largely because uh it fails like the fourth

prong of the how we test the fact that it's that there's no managerial and entrepreneurial efforts of others uh because it's fully decentralized and so that whole framework came from him and so he he works closely with us and and works for the portfolio companies to to think through some of the regulatory constraints and so then it's important to have both of those three teams the research engineering and Regulatory and policy teams in the same room often with the portfolio company to be able to explore at the same time all of the possibilities on the research and Engineering side but then also the constraints like how do you design a protocol that also is also compliant and doesn't doesn't run a foul of like Securities laws or AML like like other kinds of uh

regulatory constraints so those are three important teams uh that are fairly unique to crypto and no other no other vertical at the firm has has those those teams um just yet and then beyond that we have like the more traditional the traditional teams that that help our portfolio companies and the ways that you'd expect so for example we have a big recruiting team to help our portfolio companies recruit at uh at every level recruit both individual contributors people like software Engineers product Managers generally product or ux people uh as well as Executives uh so hire a like if you want to hire like a general console for example which is again super important given the regulatory fees

um so the recruiting team is an important function we also have um the kind of the biz Dev Market Dev team which helps with Partnerships and that team is connected to just about every team every every entity every individual important individual in the space and also outside of the space so we want to connect our portfolio companies to um potential Partners do exchanges maybe also Partners from the traditional world like we want to connect them to a company like like stripe or resell companies like that um that team is basically the connector of everything and then beyond that we have the marketing team which uh which helps base it helps us basically produce all the content we do but it also works closely

with the portfolio companies to to shape the narrative to basically help them tell the story of their company uh and we we help especially around important moments like announcements um or or for example if there happens to be some kind of Crisis we can really be helpful at managing the the pr and the the cons around around moments of Crisis so that's a very important team and then finally we have the network operations team uh which is the team that allows us to participate actively in all of the networks that we're involved with and so that involves staking our tokens for example for layer one blockchains it involves voting or

tokens uh for protocols that have on-chain governance it involves delegating our tokens to other players in the space so as to increase the decentralization of these networks um so for example we have this this delegate program that that involves many um university blockchain groups that are very eager to learn a lot about space and who would like to participate in some of the governance conversations that happen for for protocols like you to swap and compound and protocols like that like that um so we we very actively we have a whole process for forbetting the various different delegates um that we can potentially delegate tokens to as a way of including more

voices in the conversation and making the space more more decentralized so that was a bit of a rant that's that's maybe the the full rundown of the of the various different ways that we work with the portfolio and that's that's how the team is structured so I need for those of us who don't know a lot about the Venture Capital business you started off as partner in the in the in the crypto arm of a16z and then you became General partner I think a couple of years back that's right what does a partner do and what does a general partner do in this in this organization structure General partners are responsible for ultimately making investment decisions

and then the whole investment team works together at at finding the best Founders um being connected to everyone in the space thinking through what our thesis for the space is it's always um an active conversation and we have many meetings internally to discuss what we believe to be true and what we think might be interesting to invest in so it's a fairly flat organization and that everybody has a very active role in making any one particular investment and then the the one distinction is that ultimately a general partner is the one who makes the final the final position of whether or not to invest and also is the primary point of contact with with the portfolio company the Raptor though the whole team again like I just

basically went through the whole team but that ultimately the portfolio company will work with and the general partner ends up being more of a router or like uh it's like oh you need help with literally well let me let me connect you to Craig like uh research Tim like you start to Tim or there's an engineering problem to try to edit um so it's really a team effort like we all work very closely together and we're we're different from many other Venture firms in that um we really do work as a team and it's not as if every investor has its own his or her own um mandate and and is is like um sort of it's like survival of the fittest which tends to be the case in

other places where there's just less teamwork and each person is more of a solo actor here we do have a holistic General thesis for the space we all believe it we've all kind of crafted it together we debate it constantly and we work closely together to make sure that all of our companies are supported let's um let's maybe talk about the thesis a little bit um or you know to the extent that to whatever extent we want and we could we could probably talk about the thesis for a long time so what is the what is Asics thesis when it comes to crypto yeah well the the heart of it starts with the with the Insight which I think by now is is now better understood that a blockchain is a computer it's a the

best way to think of it is a is a computer and it's not it's not some sort of database or Ledger or whatever yet no there are many there are many other terms that people like to use to describe blockchains and that the right model to think about this is a new paradigm for computation it is a computer that has special properties if you if you look back at the history of computing every every Paradigm along the way has introduced something that's qualitatively different and that's what that's what kind of the markets the different the different phases of computation and that's also what allows for the kinds of applications that we can build to expand and to and to kind of lead into more aspects of our lives and so we started with things like mini computers and mainframes and then we

moved on to personal computers and then we had uh cloud and mobile um and the whole kind of Internet chapter and now we contend uh we have we have blockchains uh and if you look at previous uh waves of computation new new kind of computing paradigms like for example take mobile tend to actually be worse than previous paradigms in many ways maybe in most ways like for example a mobile phone is a slower computer than a personal computer and it doesn't have a keyboard and it has limited that battery life then it has a small screen right and it's it's kind of maybe clunky to use it first uh but it has one key feature that personal computers don't have and that's that it fits in your pocket and that it

has a GPS and that it has like this all of these mobile features that that actually unlock new kinds of applications that you couldn't have possibly built on a personal computer which include things like uber for example right or include all of the you know the things that we love about about like the mobile Revolution the kinds of things that the people have built over the past couple of decades um so our our contention is that blockchains yes like there are criticisms of them that are true like for example that they are very slow like a blockchain is a computer it's a very slow computer it's an expensive computer to run um but there are features that blockchains have for the traditional computers don't have

and in particular blockchains are a kind of computer that allow developers to write programs that have a life of their own in a sense these are programs that can make strong commitments about their own behavior in the future these are programs that run without interference from anyone from including the people who originally wrote them including the people who run the actual physical machines that execute the logic of those programs and including the people who interact with those programs as they run these programs can run free of interference from all of those all of those players and that's a very powerful thing and in particular it's powerful because

it can create a kind of trust that a normal program that runs in a computer that someone else controls cannot engender one way of putting this this is a credit to Chris is that blockchains invert the power relationship between software and Hardware where traditionally Hardware has power over software because whomever controls the hardware can turn the software off or can change it into whatever they want whereas in crypto on a blockchain is the reverse the software actually has power over the hardware the hardware is actually just provided as a commodity by various different participants who have an economic incentive to participate but who do not have any kind of control over

what the software does and that's a very powerful shift that has never that has never happened in the history of computer computer science having a network and the software have power over the hardware that's what's unique that's what's different about blockchains and as I mentioned before the powerful thing about this is that it can create um applications that that have a different level of trust the first application of that was Bitcoin where the fact that you can trust that Bitcoin will only have will only ever have 21 million Bitcoins and that transactions will be processed in a way that's that is well defined and that is valid and that no one can release a vert the logic of how Bitcoin works and that's the first example but it's a very simple

example in we contend there's so many different different things that you can do like now that you have this primitive you have this kind of program that can make commitments what can you build with that and some of the applications that you could build might be Financial in nature Finance lends itself well to this space because of the fact that it requires trust so you can build maybe more sophisticated Financial Primitives like that may be the whole like defy world you can build exchanges that would be centralized that have a single property of trust right or you can build a lending platform you can build stable coins you can build some of the interesting D5 perimeters that people have experimented with but you can also build things that have nothing to do with finance and I think one of my favorite examples which is fairly topical these days is uh the

whole the whole world of of social media because you can conceivably build something like a decentralized social network that is truly decentralized and doesn't have a monopolistic 44 billion dollar Tech Giant in the middle that can control who you get to follow that can control um who gets to follow you that controls what you see and and has like the one given algorithm one given duration mechanism that controls what your feed contains and instead you can build something that is decentralized where you as a user control your own identity you as a user control who you get to follow and get to follow you you maybe even control the algorithm that's used

to curate content and you have control over your feed uh and there could be a whole Marketplace for different kind kinds of recommendation algorithms that is competitive and people and people um participate in um and then you can do that with crypto in the same way that you can build Bitcoin and it has the same property that that you can trust that the network will maintain and will commit to certain rules that that will be upheld throughout time that cannot be changed by some kind of central operator uh so that's basically the the heart of the thesis and there's there are many implications to that but that's that's where where it starts yeah that's that's an interesting way to you know I I think if you still if you

ask a lot of people today what is a blockchain I think like 90 of people will say it's a decentralized database or it's like a a decentralized ledger or you know this this idea of a decentralized letter Ledger still permeates and then and I think there is a shift you know in narrative in the industry that is that is leading more towards this idea that it is a computer and you know like it sort of started that way right with ethereum as the world computer and then it went to decentralized ledgers like in the whole like mid 2000s with or 2010s with like you know Enterprise trying to build whatever their their private blockchain the whole thing yeah blockchain not Bitcoin exactly yeah yeah and so I think a lot of that narrative came from that

and and now it it's it from from what I'm seeing like teams that we're looking at and and the narratives that we see at least like you know I'm pretty I'm fairly well connected like in The Interchange ecosystem but those those narratives are starting to come back again and I think it's quite positive because it really does I think align well like you said with the with the evolution of computing and you know it it might very well be that you know if you if you go back to that example of mobile mobile enabled new types of applications that are uh are well suited like for for people who are not who are not uh stationary right it's like they're

they're applications that are well suited for for Mobility they're mobile right um where here you know the types of applications I think we will discover is types of applications and sort of like self-serving is what I'm about to say but the types of applications that that require typically that will require trust in in a person or an entity and what we'll what we'll realize you know as as crypto and and decentralized applications become more mainstream is that that that this will be the defining factor and yeah so only you've started off with the minds there uh these um these blockchains are distributed

computers and the key property is that programs running on these computers are able to credibly commit something about their future Behavior to participants and because they're able to credibly commit about future behaviors the naturally and end up getting applied to finance because those sorts of commitments are important in finance yes from this Viewpoint as it do you see particular verticals in the crypto area uh verticals of crypto that are kind of especially good or especially bullish about so what I mean is when you scan

across crypto you you have the crypto gaming area then you have the the Storage storage area or like Computing Services area then you have D5 and you have these exchanges you have this data sharing area data dials Etc right are there any particular areas that you are especially bullish about and beneath that in 20 20 years that those one or two areas are going to be the massive successes the power loss successes yes absolutely so I think um I mean one of the other ways in which trust really plays an important role in the world of software is is this notion of platform risk which historically in the web 2 world

has been a huge source of risk for any startup that is potentially building on top of some other companies apis and I think you I mean we've all kind of seen this there have been many startups for example that built on top of Twitter apis a long time ago remember like Tweety and there's this whole kind of set of companies that were doing interesting things and composing different kinds of web 2 apis but then ultimately because those apis are controlled by a centralized company the company the central company can change the rules and can decide to move against the startup that is starting to get big and instead charge more or instead like change something about how the apis work such that the central

company captures more value and then maybe the startup ends up dying and this happens this has happened time and time again right there's certainly kind of like the Tweety Twitter example there's Zynga Facebook and it's also by the way dates back to to kind of the the world the world of operating systems where you have uh operating systems like Microsoft Windows also subverting the functionality of some of the applications that are built on top so platform rest has been a theme and technology and software for for a very long time um and I think it gives you some insight as to how crypto can be used for for things that are no longer Financial in nature uh so when you can build a program that has a kind of API that uh is committed to that that the program

commits to not changing then you neutralize platform risk and it it as a result allows startup companies to build on top of that program in a way that that it is no longer possible uh in the world of web 2. like these days if if there's a company that comes pitch house for example if they come to pitch our main main consumer fund uh with an idea to build a product that depends entirely on the apis of Instagram or the apis of Google or whatever that's a non-starter because it is now very well known that that that won't work you cannot build a massive company on top of the apis of a company like that because at some point sooner or later

uh whoever runs that centralized company will will change the rules and they will want to capture moral of the value and it just doesn't work so now I think this is this is by the way that what enables composability in the world of crypto the fact that you can neutralize platform risk the fact that you can actually build on top of ethereum and not worry that ethereum will change the rules on you and will try to take a bigger cut of the of the money that your product makes um that's huge and the fact that that continues even above that right the fact that you can build uh a product or a startup on top of say uniswap right you can build a startup on top of um somebody some of the applications

that are already running on top of ethereum because those applications also make commitments then you can actually that you can actually trust um so I give you one example of a vertical uh or of a sort of an area that's super interesting which is that of social uh media like decentralized social media the fact that you can build a decentralized social network that has rules and has apis that that can be trusted uh in perpetuity is very interesting because now now you can have um a social network where the social graph is kind of like a public good right that exists on chain that is owned collectively by all of the users you own

your node in the graph and other users own their own notes um and then all sorts of startups can build on top of that same social graph uh you can imagine a startup building one particular client that gives you one of you into the social graph and that maybe decides to curate content in one particular way but someone else can build a client too that's different that has a different interface that maybe maybe like highlights different kinds of content maybe one of them is kind of like Instagram and another one is more like medium I don't know um but it's the same social graph and this is what enables the composability and none of those startups that are building on top of the social graph have to worry that the rules will be changed from underneath them and that and that as a result they'll go out of business

so that's one very interesting vertical where where this notion of platform risk plays a role where crypto I think in crypto and the trust features that crypto provides really make a difference but there are many others I think another one as you mentioned gaming is another interesting area where you can look at the history of gaming you can look at uh examples like fortnite right the fact that people pay a lot of money for for in-game items that are purely cosmetic right the fact that these in-game items don't actually change Gameplay at all they only change the way you look in the game or the the kinds of little emotes that your character can make um and it's a it's like a multi-billion dollar run rate business that's

fascinating because the company at the center of it has full control over that economy imagine if you could actually build a crypto economy into a game such that the indium items that you buy are actually yours right such that you can actually take them out of the game and maybe even take them into another game if it's a standard for example that multiple games begin to support then maybe maybe your character does it actually isn't just specific to one game you can actually take it from one game and into another game and this becomes a much larger economy that spans multiple different kind of digital universes and this is what people like to call the metaverse and I'll become a word that has been co-opted and it's very

overloaded but but it's an interesting idea and it's it's born bottom up and again the trust features really matter here right because it's it's important that you you trust that you actually own the things that you own um that's what allows this ecosystem to emerge um so that's another interesting area maybe a third one and then I'll stop I'll stop renting is is the area of uh of media generally and maybe I'll lead with an example um so we're investors in a company called sound.xyz which is a decentralized music streaming platform uh which I think is a super interesting application of of crypto uh if you look at the music industry historically the

the record labels have an inordinate amount of power and the reason for that is that they they control the catalog and so so a company like Spotify for example cannot really negotiate against the record labels because any one of these record labels controls so much of the historical catalog that if they pull out uh Spotify becomes almost unusable because now it's missing like a third of the music and the total value proposition of being able to to provide you with every song on you that you might want to listen to is no longer held up so the record labels have enormous leverage they take a huge cut and then Spotify has a ticket cut and so therefore the there's only a sliver that's left that that it actually goes to the artist so the artist is

royally screwed and if you actually look at the numbers there's something like 8 million artists on Spotify and only like 14 000 of them so 14 000 out of eight million make more than 50k per year which is hardly a living which is to say basically no one makes any money on Spotify the only people who make money are like be the very head of a distribution the kind of the Taylor Swift's really some sort of the daisies of the world and then everybody else makes 50k or that or less uh likely much less in order to actually make any kind of money on Spotify you have to have millions if not tens of millions or hundreds of millions of Trades it's insane how much how much traction you

have to have as an artist to make any money on Spotify so sound sound is is a little different so you guys remember SoundCloud from before SoundCloud was this nice kind of music service you as an artist can upload music and it had this cool feature which was that you can as a user you can comment on the track as it plays on the website such that other users can then see your comments right so as as the music plays and it rolls over the time at which you've left your comment they can see what the comment was which side was like a cute idea it created this kind of social Dynamic around a piece of music so sound took that idea and their initial their initial uh product API is that you can actually make that comment and then a t

meaning that say as an artist you upload a piece of music and there's 100 nfcs for that piece of music whomever buys those nfts if you have one of those entities you now have the right to add a comment to the track and if you sell your nft then the comment disappears and then whoever follows the nft now the new the new folder of the nft can now add a comment as well so this creates a bit of a little something like a little market right for these nfgs the beauty of it is that a hundred percent of the money that is recouped from the sale of these nfts goes to the artist or or maybe like 95 of it in a small percentage of it goes to selling the protocol um

so that's great but the more important piece of this is that as an artist you now have a direct relationship with your super fans these are the people who are willing to buy an entity to add a comment to your track these are the people who truly believe in your music have a truly we truly like your music um and it's not only a relationship it's an economic relationship you you know the crypto wallets and that's a community you can now start doing interesting things you can for example uh I don't know do like backstage passes for the people who hold any one of these nfts or you can have like a Discord uh group that is tokengated and only people have nfts of this time can can access it or any other kinds of benefits where you

as an artist now have like a more direct relationship with your with your fans uh and it's connected to this idea there's this great blog post by David Kelly um called a thousand two fans uh which which argues that all you need as an artist or as a Creator to make a living online is a thousand true fans and his logic is if you define a true fan as someone who pays you ten dollars a month then if you do the maths write a thousand true fans each paying you ten dollars a month that's a hundred and twenty thousand dollars a year all you need is a thousand two vents um clearly on Spotify that doesn't work you need you need millions of fans to actually make any kind of living but if

you had a more direct economic relationship with your fans you can actually make a living and so soundness is basically exploring how you can use crypto to do that right as an artist you can you can build a community of two fans and have an economic relationship with them maybe they pay you at least ten dollars that's that's more than you could make on Spotify all right so far by the way they paid out like five million dollars was not as a content creator getting to a thousand true fans even for just five bucks a month it's not easy to ask it's not easy it's not easy to get there but making it you're right for that to happen and you know things like patreon have definitely shown how you know this model works right like I think patreon has a similar type of model and and one that is very

different from say like a Spotify uh model uh but you know I I think like the those there there were probably you know just as many musicians 50 years ago uh that were that were making zero dollars uh they just weren't streaming but I mean of course like the the the um the the platform allowing this you know does a lot does like allow opportunities for people to to achieve those goals you know there was that so one thing you were mentioning earlier about you know the the platform risk and recently in the last year or so you I used to have this idea that like blockchains are immutable the rules that are embedded in the blockchain and the smart contracts are immutable and like that's it and you know you could you

could sort of like deploy there and be assured that like you know your uh your your code will be run in perpetuity forever and then and then there was the whole Juno whale thing and I don't know if you followed this uh this particular part of Cosmos drama but essentially a governance vote on Juno which is a smart contract chain in the cosmos secret system that that runs cause and walls and smart contracts a governance vote decided that funds that were held essentially by an individual who had received air drops um for for reasons that I'm not going to get into here were uh were to be clawed back essentially and um and because because you know the

rules of the airdrop had not specified certain Provisions about people holding other people's funds or whatever it's a there's a whole block list about it and um and then if that's not enough the the people who were meant to take those funds and sort of transfer them into a treasury so that they could be effectively managed or whatever made a mistake when transferring the funds and lost like tens of millions of dollars uh or maybe even hundreds I mean it was a massive catastrophe but it just showed me that I just then I realized that you know what like blockchains do have this immutability uh aspect and sort of like this this like um this is this platform risk Assurance when they arrive

at a such a state that governance is solid enough that uh that if governance and incentives are aligned such that validators are not going to screw you know the the user base uh or or you know account holders and I think there's a delicate balance between you know validators users and application developers that really mirrors kind of governance that that we that I know and sort of from from from from our everyday lives and democracy and sort of like human governance but when it comes down to it like blockchains are our mechanism for for executing you know human decisions uh and and the power balances that exist in the real world can also exist in

blockchains you know how do you reason about that when when thinking about you know this whole idea of platform risk and eliminating platform risk yeah it's a really good it's a really good point um I think that that the way down think about this is that a blockchain gives you an enormous design space on top of which you can build all sorts of different things including different kinds of governance systems which I think is an exciting some really exciting thing because now um it is possible for a thousand different companies who are building different ecosystems to run a thousand different experiments about how to run a

governance system for their Community which actually gives us insight about governance generally and it gives us Insight that maybe can translate to Beyond crypto and in a way that was impossible before where like I think before crypto if you wanted to test a new kind of sort of political governance system you had to spin up a whole civilization Institute your new experimental governance system wait 10 000 years and check to see if everyone has died or if it has somehow paired well or not whereas now it feels that you can run much more isolated experience experiments with with a network that then maybe does one simple thing and has a community that governs it you can come up with a new governance system that hopefully does better than other

government systems and some will do well in others and others won't and I think over time we will figure out what the best practices are maybe we conclude that one token one vote is not the right model because it leads to a kind of plutocratic outcome maybe we conclude that the governance system has to be restricted in some way so that you can't call back tokens maybe that's not something that's within the purview of the government system uh maybe we conclude that we need different kinds of stakeholders like like maybe you have token holders as a as one camera in the governance chamber and then there is also like actual uh applications or drivers of volume or drivers of activity in the network that uh also have some say and have some ability to participate

in the governance process it's a very big design space and I don't think we found all of the answers and I think that some of the some of the initial experiments are interesting I think for example maker is pioneering what pioneered I think one of the one of the initial models for governance with the mkr token and the way that that Governors works for that role system which is very complex but but uh it was interesting that we learned a lot from it then also compound was also initially one of the one of the Pioneers on token-based government governance with their governance module that as I forget actually the name of the code file government sappho uh or something uh and I think since then we've seen we've seen many other experiments and

it's exciting to see I think what when you you think people may try and along the way there will be failures like the one that you described uh but I just think that that's part of the learning process in my crypto Journey one of the things that I found very hard is making sense of a crypto token valuations by by that I mean is you know pick any random coin and you often have this sense that okay if this coin is trading at uh 100 million that's awesome and if it's trading at 10 billion I'm not going to buy that coin right you often have this kind of kind of gut instinct where um what you invest in depends

on the market cap of the of the coin you're looking at yet there is no good way to quantify or think about it logically so I'm actually curious how a16z has a as professionals that make these decisions day in day out how do you how do you think about valuation and what makes sense and and what doesn't yes uh it's a great question well and I think this this often is a is a conversation that we tend to have on a case-by-case basis because it very much depends on the kind of network the kind of protocol the kind of product that we

are looking at and there are different models for different kinds of things especially uh when it comes to different layers of the stack so for example you can we can work through this type something that exists at the at the user interface like client level an application that's maybe communicating with protocols that run on chain but that it in and of itself isn't on chain and that maybe has a more traditional business model right something like a wallet where where wallets business model is to potentially just take take fees on all transactions or something like this that's straightforward we don't have to spend too much time on that we use traditional methods of reasoning evaluation in that case and we move one level down like

there may be applications that run on chain um that are protocols that for example like run on top of ethereum and this could include uh some of the some of the D5 protocols like uniswap or um or compound or or like applications like I mentioned like sound.xyz as like an Unchained component there's a protocol that runs on on ethereum um oftentimes in those cases there there's this is by the way I think of apparently like a misconception about space people think that people think that all cryptocurrencies are just like fully speculative in in most cases there is still some notion or some something that resembles Revenue right where there's like a fee that's being taken by

the protocol on chain the fee accrue accrues to some Unchained Treasury and the token has some claim on that treasury um or has a potential claim down the line based on governance potentially and in the same way that that maybe the shareholders of a of a company have a claim to the assets on the balance sheet and to Future cash flows token holders similarly um have that kind of claim over our protocols treasury um of course it's fully decentralized right so there's no there's no company uh when we're talking about the protocol there's no company that controls the treasury and it's just a broad ecosystem which is by the way it's why the token

is not a security the fact that it's a fully decentralized uh ecosystem where there aren't any asymmetries of information it's just all on channel and it's all open source um so for those for those networks or those protocols it's also reasonable to think of it in terms of the traditional methods of valuing a company like what is the current the current Revenue the current cash flow and what is our thesis for what that uh what that might look like in the in the long term future and we believe that this protocol will somehow become like a fundamental piece of the crypto world and if crypto is going to is going to ultimately reach billions of people then you can make some argument

for why it'll be much bigger than it is today but the methods are still fairly fairly traditional um in those cases and then there's there's the question of how you would value a layer one blockchain uh so something like like ethereum for example uh the the good news is that even a blockchain like ethereum which is a layer one blockchain and the token serves many different kinds of purposes uh also has a notion of Revenue and that comes in the form of eth getting burned with every transaction thanks to eip1559 uh that that is is a form of Revenue because it it is taking it out of circulation and that's mathematically equivalent to essentially doing a

distribution of that amount of money to all eth holders um so you can use that at least to reason about the value of each but there are many other uh drivers of value for that each token so sort of the fact that eth is used uh for staking makes it a kind of productive asset such that you can actually earn money by holding it and and owning it in the way that validators and the networks do and that provide that that drives some value to the Token because because it's a productive asset think of it as capital uh it also is the currency with which everything gets paid for in the network you need ease to pay for competition in the network which means that people have

to buy it uh to be able to use ethereum to be able to participate which is another driver which gives the token a kind of monetary premium people begin to think of it as kind of money that um is also maybe a good store of value and and as a result they probably just hold some amount of these um longer term which which drives which drives the value to the Token uh so that there are a number of different and there are there are more maybe we can keep talking about the drivers of of value for a token like ease but we we tend to think of all of those things and and try to at the very least get some quantitative sense for for how all of these interplay but it's it's very hard it's very hard to make it a a very quantitative analysis for what

a layer one blockchain should be worth and people have tried I'm sure you guys have heard of them of the basically the application of the equation of exchange to two layer one blockchains which is that equation MP equals to PQ which is used to Value 4X foreign exchange uh currencies like one currency with respect to another you can think of ethereum as a kind of like uh like a sovereign nation state that has its own currency naming ethereum and it has one export and that's decentralized computation and then you can apply the equation of exchange to try to Value geek in that way and there's a term there which is a velocity of money like the more it gets transacted then the less valuable it is because it's not being held um and so that's the intuition but if

you actually use that model to try to predict the price of need you're going to be completely out um so we we take all of those factors as inputs uh and then we think about what the future might look like if we believe that and there's a whole thesis that we have about how there will likely be a handful of winning smart contract architectures um there won't be a thousand and there won't be one there will probably be a handful in the same way that there's a handful of winning processor architectures and the winning ones will likely be if if I get if we write about crypto and crypto will reach billions of users and we'll become this major phenomenon um in a whole world it's akin to web 2 will be built on top of web 3 then we strongly believe that each one of these

winning smart contract architectures will be worth many many trillions of dollars um so that's that's kind of how we think about it and we just try to imagine what the future looks like and then back back uh backtrack from there to try to like then uh make an argument about what the what the token should be worth today and then make investment decisions in that way so one curiosity is so it makes a lot of sense right if you if you have a wallet Value meat as a traditional business okay present value of future discount present value of futurecast knows easy when it's a protocol well if it's a protocol like uniswab you can still still view it that way the

uni token maybe may be viewable that way and you can you can have some kind of rational uh model for it but it comes into each ethereum you can have a rational valuation for it but then there's some kind of Premium that needs to be added because the market is attaching some kind of monetary premium and if you ignore it it's going to be hard to justify the values at which each is practically trading in the market um and then maybe when we get to bitcoin well you really can't see any good Revenue stream at all and then it is entirely some kind of monetary

premium which will be really hard to approximately do I get that right and then so my question would be do you think other n1s L1 tokens will also have monetary Premier in the future or is the market kind of already won by Bitcoin in an user it's a good it's a good question I think that um to touching on this on our thesis for for why there will likely be a handful of uh of winning architectures well the thinking is that no one blockchain can fully cover the

trade-off space there are there are many different things that you can be optimizing for you guys maybe if I'm familiar with the scalability driver there are a number of different um optimizations that you can try to make and it's very hard for a single architecture to just be the god blockchain that like basically takes the whole thing um and this is similar by the way to to just traditional Computing where you have CPU architectures that are intended for general purpose computation like uh x64 and arm and things like that which by the way themselves have big differences between them uh but you also have different kinds of architectures that are optimized for completely different things like gpus that are optimized for parallel compute and Optimizer gaming and now they can turn out to actually work quite well for what

she learned in AI um and so similarly we we believe that there will be a handful of different kinds of um of architectures for smart contract platforms that collectively cover the entire trade-off space but no one architecture Will Will just win win everything um and I think that that's maybe the reason for why there won't be one and now I also have to argue I have to make the argument for why there won't be a thousand of them and and the reason there is that there are very strong network of x and so you do have two blockchains that are fairly similar and not differentiated with respect to one another I think that the equilibrium state is for is for one of them to

ultimately win and that's that's because of the self-reinforcing feedback loops involved the fact that there are network effects at every level uh there are network device at the security level because as a validator you want to validate on the blockchain that's more secure and the blockchain that will give you the biggest reward which is the blockchain that has the highest token value and so so that that results in a self-reinforcing feedback loop that causes one by lightning causes one blockchain to win um there's also Network effects at the application Level where because of composability you want to build your application on the blockchain that has all of the other applications because you can use those other applications as building blocks this is the whole notion of like Lego building blocks in crypto the fact that there is no platform risk

allows you to leverage other smart contracts that are also running on the same blockchain as inputs to your own application and you don't have to necessarily re-embed the wheel which is another reason you you you're more likely to build on top of ethereum and you are on top of a random new blockchain that has nothing on it um and then the same applies that the Integrations level like if a blockchain is already integrated into all of the exchanges and all solids and all of the interfaces and clients a new blockchain has a hard time um displacing all of that and competing against I guess all of that so the network effects I think reduce the the possibility that there may be many different blockchains that are all

identical to one another um and so that I think precludes the possibility that there will be a thousand blockchains this was a result like I think my my strong belief is is we'll probably end up with something like five I don't know like some handful of different kinds of architectures all of which will likely be very big is that it's a small number that support um all of the decentralized competition in the world um and I think as a result it's likely that token for each one of them will will have all of the same factors that drive value and create right including the staking including the the fact that there is a monetary premium because people use it to pay for things and those ecosystems but take all this with a grain of salt you know filthy it says it's very hard to predict the future

um this is just this is just one way to look at it in your experience investing in um in some of these protocols I'm sure like a16z comes across the case where the thing this the split of Revenue may not be may not be clear at the time of investment what I meant what I might mean is like maybe I can only take a practical example like the unit swap case so where you have unit swap Maps well we'll build the protocol and for a long one did not actually want to launch a token and then out of the competitive Dynamics

uh uh with sushi swap they were forced to almost their hand was almost forced to go into the direction of of of launching a token and when I personally look at you unit swap like a rational valuation of the uni token is made for me hard by the fact that how does the revenue get split between these two these two entities there are many of these protocols in which there is like rational evaluation is made hard by the fact that there's a foundation and there's a there's a community Treasury and the Dynamics of that may not be clear up front now for me as an external

as an external like Market participants the only thing that is available is the token but for a16z in such cases you you would have the option to invest in either the public token or the like you know the uh the founding team do you have any kind of General guidelines for when to prefer one over the other or how to think about the state of space well we we primarily invest very early stage and and at that stage it's it's often too hard to know whether the value will ultimately be captured by some token

that the team decides to build or whether it will be captured by a company a traditional company that company builds the team Builds on top of on top of some protocol that maybe it's just open source and so as a result the structure that we've landed on is one where uh everyone involves that includes the team and it also includes investors like us should get both things they should get both an equity stake in the company in the case that the that the team decides that that's that's the path that they will take maybe they decide not to even launch a token like maybe the tokens are the wrong thing they just want to build a traditional business and it's too hard to know that in priori

um so in the case that that happens you want everyone to have equity or and then also I think if in the end it is actually a token thing and the token is Will captures the most value you also want everyone to to have the token and the reason this is important is just for alignment reasons you just want everyone to be on the same boat no matter what happens if the company succeeds everybody succeeds no and and then this also by the way maximizes flexibility it doesn't constrain the founder to to absolutely necessarily launch a token because the investors expect that or to just build a revenue uh earning business again because even investors expect that as investors we are on board we're we're on your team no matter what and everyone's aligned

and we've found that that is actually the best structure uh and we don't try to predict in priori you know where where the value is going to be captured because that that can impose constraints on the founding team that you don't want to impose that early yeah that's that's really interesting and you know I think you know for us you know as we think about how we want to construct our portfolio is also this also aligns with what what we look for when investing and and certainly you know there there has become I think a sort of standard that most teams raising in crypto will yo will raise on on a sale of future Equity uh agreement and and then and then a token warranty or

something like that so it is quite commonplace to have that sort of agreement uh with teams that are raising um yeah maybe just before we wrap up here one one final thing I wanted to to touch on I mean taking a step back and looking at the events of the last couple of weeks um is you know how has The Firm you know change or say how does the firm advise companies and teams in your portfolio to protect themselves against you know a potential banking crisis or um the shutdown of you know perhaps like the bank that they're working with or uh or more broadly you know uh

an economic crisis that that might you know have have them have their treasury be be wiped out um or to some extent you know even regulatory risks like how do you approach these sort of you know risks that are inherently tied to the system in which crypto operates uh in order for for teams to be better prepared against these types of events yeah it's a really good question and it's it's a hard one I don't think that there's a truly great answer and by the way I think that everything that's been going on with the banking crisis is is actually just a reflection uh the failures of centralized Finance so in a way like it kind of highlights

the way the reasons that you actually you actually decrypto in being able to have the transparency such that you can tell you know um whether an organization or a protocol is solvent or not um is some of the essential part of the essential ethos of of this base um but given that we are still embedded in the traditional Financial system and our companies still need bank accounts and our advice really just comes down to diversification you you want to not be entirely concentrated with any One Bank you you want to maybe split up the company's assets across three backs or so maybe maybe you could hold some amount of uh capital on chain in the form of uscc as well like it's

another it's another way of diversifying um but that's really ultimately the only answer like barring like most companies in the space at the moment cannot get uh bank accounts with the big like gcip uh organizations like the banks that are so big that they're too big to fail to fail because those Banks don't want to bank crypto companies um and so then as a result the only other option on this too is to maybe get three bank accounts with other more Regional banks that are more friendly towards crypto as a way of of minimizing the risk that any one of them might fail yeah I think that's sound advice and certainly it's what I've what I've encountered so far in the last last few weeks is the thus

has settled and people are starting to reason about how they want to reduce that risk and certainly for us you know we were uh we we were about to start working with one of the banks that was shut down and and now are thinking okay well I mean we probably need to engage with several Banks exactly as we set up our structure so that makes a lot of sense yeah this has been really fascinating uh I really enjoyed this conversation and yeah all the insights you provided here and so um would like to leave our listeners with one final thing where can people find you or um you know some of the things that you mentioned the the work that acc's is doing the research Etc yeah absolutely so we are a16zcrypto.com probably existing Z crypto specific uh

content and that's that's where we all are and that's where you can find us and then personally I'm on Twitter at a live underscore eat great thanks well Ali thanks for coming to the podcast thank you so much guys this was so fun really appreciate it