The Token Trap: Decentralization’s Kryptonite

Transcript

Do I press this now or does it come up? Okay wonderful. All right, thank you. Good morning. I think I've been on stage at every ECC apart from one. Um, and it's very nice to be here again. I love being in Can and thank you Jerome and all the other organizers for a fantastic event. Um, I'm here to talk about something a little different, which is my perspective on token funding models and what's broken in the industry.

Um, many times I've stood up here, I've been representing my previous company Orchid, which was building a decentralized VPN architecture. Um, I'm now representing a venture fund, so I have a different hat on. Um, but I'm still involved in a number of early stage projects and I of course invest at pre-seed stage, so I work with founders very closely. So, I'm not just capital. Um, hopefully I'm um, also representing founder thinking process here. Point of this resume is to show you that I am from this industry. I spent here since 2013 or so. I'm not just coming in to throw water on the party. Um, I'm also not new here. I've been giving talks. I

don't look so good there. I think it was middle of middle of building Orchid out. Um, but I I'm a little bit like schizophrenic, kind of um, conflicted. I'm both a believer in crypto and also a huge skeptic. And this is my puppy looking a little skeptical. Um, I also describe myself as the character from the X-Files if any of you are old enough to watch that show. Um, whereas like he wants to believe in aliens and he's like, I just want to believe. Um, but you're still trying to find aliens.

Um so, what am I talking about? Well, I'm talking about decentralization. So, we have really embraced this principle in the industry. Um and the companies that we built are often judged on how centralized they are, how decentralized they are. We've almost built this almost as like a a feature that we measure ourselves. Um and it does really matter. And I strongly believe that decentralization as a primitive and the technologies we built are very important for society as a scape valves. I I want that to be this technology in the world. This is what we built at Orchid, decentralized VPN rails.

Um in most cases, however, decentralization just lets you route around things that you shouldn't be doing. Right? Regulatory laws, copyrights, etc. And of course provides us a lot of redundancy, availability, um all the kind of nice positive aspects. But, we're often looking for applications and finding things that just really don't have that big a market and they're not venture scale opportunities, which is the thing I'm looking at.

And decentralization as I'm putting here, it kind of became this excuse to build things. And we funded things based on narrative arcs and memes and added PhDs to those memes and then called them projects, try to call them companies, and then we find out they just don't have any revenue, they don't have any customers. And so, this is I feel is like the core problem that we're facing in a lot of the industry today. Um in 2017, we kind of invented this idea of building things backwards. So, normally when you build startups, you raise a little bit of money, you get some product market from some believers who believe that you're going to find product market fit, and then you work to find product market fit, and you get product market fit, and you get a little bit of traction, and you get a bit more

money, and then finally people pile more money, and so on and so on. You keep getting more revenue. You go public. You know, that's the dream. Instead, we all go public first, the ICO, and then the SAFTs, and then some other kind of mechanism, and so on. We go public like as in a token generation event before we have traction, before we have customers, before we have revenue. And then we wonder why our tokens get dumped. We wonder why we end up at zero within 6 months or just after the unlock. And the answer is because people are valuing on a price-to-earnings ratio, and the earnings are zero.

So, for the price goes to zero. And we've trained a group of people in the community and how to play these games. We have We're surprised when people act in their own financial interest. We're surprised when they act like hyper capitalists because they are hyper capitalists. We are building hyper capitalism here. It's also an incredibly expensive way to build a community. People just dump the token. They've They've built There are There are communities built out there. There are industries built out there around getting our tokens and selling them, farming them, holding them for just the right time. People model these things.

They're even using agents now to do this. And people are acting very, very rationally. We have built, as I said, this 24/7 global casino. We're hyper financializing everything you can think of. Now we have prediction markets that can bet on any single outcome that you are willing to put capital behind. We are financializing the world, and we're doing a really good job of it. And in comparison, there's AI. Now, I I work in the AI space now. Um I jokingly describe myself as the intersection of crypto and AI. I take crypto money and put it in AI. I help crypto founders build AI companies.

I am still a believer in crypto and AI. I just I'm like the guy from the X-Files. I haven't seen any aliens yet. There's no evidence. But this is open claw. This is actual adoption. This is like hyperbolic adoption of something. We think we're embracing and getting all these users and going fast. We're not even close. This stuff is insane. And then this is also matched by revenues. We're investing in companies where we see ARR kicking in in the millions in the first year. And we wonder why we're seeing a brain drain of talent and a brain drain of capital to other sectors like AI.

And the worst part is the token is the product now. And I ask companies I try to call them companies cuz I don't like the word projects cuz it sounds like something you do at the weekend. But I ask companies what's your product market fit? What's your revenue? Who are your customers? And they say, "Well, we have a community and we have a white paper and we have this and we have that." And I'm like, "Well, that I don't care." And they're like, "Well, we're raising $100 million." And I'm like, "This is not a time machine. This is not 2017. You can't do that anymore. The whole thing grew up. Everyone woke up. We've done this year after year after year after year and no one's buying it anymore. So, don't do this." But people still fund them. People still build them.

I probably shouldn't say what this says cuz, you know, I'm in a polite society. But I wrote an article recently which was talking about um an article that came out from this group called Centrini. And Centrini they Centrini they they talked about how every time Claude and Anthropic announces some new capability, for example, healthcare tech or or legal AI, etc., the stocks in that sector just dive and they go down by like 30%. And so, they almost look like meme coins. And in fact, the whole the whole equity market has now taken on this kind of characteristic where a slight shock and everything just dumps. Last week Google released an algorithm called Turbo Quant which improves

LLM memory performance meaning you theoretically need less memory. So, SanDisk, Hynix, all those guys dumped. And really what we're building here in many cases is penny stocks. And if you ever watch The Wolf of Wall Street, it's a it's a it's a very fun movie, but it also talks about this era when penny stocks were the the the financial product that was sold to many people who just really didn't understand what they were buying.

Um we're building technology. The reason I got into this space in 2013 was I was fascinated by this idea of technology. And and these two industries I moved behind I have a PhD in AI, so I've kind of moved back and forth in between decentralization and AI. And these are the two really hardest problems in computer science. There are many other things, quantum and so on, but these for a long time have been the two hardest problems. And this technology is fantastic. It's incredible ideas. It has this incredible capability. You know, you really believe in it once you get into it.

But it has to find value, and it has to find a product market fit. And and for years and years, and I was actually talking to two of my teenagers earlier today, and I I feel like we're now at this point where we're saying you know, for years we wanted the regulators out the way. We wanted the institutions to come on board. We wanted the tech to scale. We wanted this to happen. And you know, we got it all. And like teenagers now, we're like, "But it's not enough. I want more. Dad, I want to have this. I want to have that." And you're like, "Sorry, you don't get NFTs and AI and all these things right now. You get TradFi. You need to go make friends with TradFi, build TradFi systems, make it great, win that use case, and then later you can try

something else. You don't get to do everything at once." And this is already happening. So, we have like the global 24/7 casino and AI and crypto. And then, I mean, I'm not sure AI is a utopia at this point, but you get the message. Um You have trillions of dollars of capital and of investment and revenue on one side, and you have financial services which are working really, really well, and then a whole bunch of other stuff which we should just let go of. So, you may think I'm anti-token. I'm not. I I I built a a company backed by tokens.

I've invested in lots of these things. And it does work. And if you came along today with Uniswap and you tried to launch it and it didn't have a token, I I I guess you'd have to figure out how to make it work without a token first, but let's imagine you did. You got revenues, you got users, and so on. It would still do well. It's not doing well just for some legacy reasons. It's doing well because people are looking now at the users, and they're looking at the revenues, and they're saying, "This makes sense." And my prediction is, this is not financial advice, the prediction is that anything out there that's established, not early stage cuz you can still invest in growth, but you can still invest in things and this happens all the time in San Francisco or elsewhere that you invest in things with

pre-revenue, with no users, all these things cuz you're investing in a dream. But if it's 5 years in and you're still investing in a dream, it's time to get out. And those things will go to zero. And I'm looking at the big guys, too. Not looking at Ethereum. It has revenue. It works. Stablecoins work. Hype is working. But everybody copies this thing without thinking through themselves, and I call this like actually laziness amongst this community. We have trained founders and investors to be lazy, to not look for product market fit. They kind of look the other way and say, "Well, those guys invested, so I'll invest." And it worked for that company and that project, so let's just keep doing it.

There are things out there that work. Back in 2013 and 14, I invested seed round in Circle and Abra. Abra's going public today. Circle went public uh last year, I believe. These things are crushing it. They are like real use cases. There are investment opportunities out there. There are founder opportunities out there. These two sectors, you know, this this sector here is is an enormous opportunity right now. Take your talent, go work in these sectors right now. And if you're a founder, this is kind of like the what's the point? Focus on users. Focus on PMF. Focus on revenue.

The token can come later. We have investments in, you know, the crypto AI intersection and we thanks to them find users, find companies that are adopting your services and that's working. Um Prime Intellect, which was started out of Berlin by DCI founders, they moved to San Francisco. They have a plan for a token at some point, but in the meantime, they are crushing it on the revenue. They are getting um tons of adoption. Vast AI, it's another portfolio company of ours. They um built a decentralized GPU platform with no token. They have massive organic demand and they get supply.

And then for investors, decentralization is not a business. And you really shouldn't fund things based on narratives. You should know better. Um venture scale opportunities will come. They do exist. But if it's a meme coin, it's a meme coin. Just be honest about it. I guess I'm wrapping up on this one. Um like The X-Files, um I I know there's something real here outside of the very strong use case that we have in financial services. I want to believe. I'd love to talk to people who are building interesting things. I actually believe that in the next year or so we will see very interesting opportunities. Um I'm not sure all of them will be venture scale opportunities, but I'd I'd like to believe.

That's me. Thank you so much. Open to questions. All right, if there's no questions, I'll drop the mic. Thank you.