#223 Kyle Samani & Tushar Jain: Multicoin - Emerging Frameworks for Cryptoasset Investing

Transcript

this is epicenter episode 223 with guests Kyle cemani and Tushar Jane hello and welcome to a percentage show which talks about the technologies projects and startups

traffic decentralization and a global blocked in revolution my name is Brian Fabian crane and I'm a Hanoi today will converse with Kyle Somani and to share Jane were the cofounders of multi coin capital a thesis driven crypto hedge fund multi coin capital has become well-known in this space for a lot of blogs that they write and these blogs have insightful ideas Kyle into sure welcome to the show thanks for having us my hair we're big fans of epicenter and really excited to be out here with you Amy and Brian super excited to be on cool so as usual before we start discussing multi coin tell us a

bit about your background and how you got to be involved in the cryptocurrency space starting with Kyle yeah so I started programming and getting into technology when I was pretty young probably round ten or eleven years old I went to NYU to study finance thinking I wanted to go work on Wall Street within my first kind of year of college I realized that was not my passion and that I wanted to be working in technology after after college I ended up coming back home to Austin which is where I'm originally from and worked at a health IT company for a couple years along with Tushar he was at the same company after about a year I got frustrated and left and in May of 2013

my first company called pristine pristine built software for Google glass for use by surgeons yes that Google glass that one I was at the glass hole running around built that company up I grew it to a few million of revenue raising capital kind of did the startup thing then Google pulled the plug on Google glass at which point I had a lot of problems I ultimately ended up pivoting the company and leaving the company and the company got sold I found myself unemployed in January of 2016 and didn't know what to do with myself I discovered this thing called etherium in March of 2016 I was particularly drawn to etherium because no one could pull the rug out from under me after my

experience with Google glass and experiencing the pain of the platform kind of disappearing under your legs I was particularly drawn to the whole decentralized thing so let's go now I got in a crypto 2 jar and I have known each other since college we met there we're best friends and we kind of got into crypto together I'll let him tell this story cool thanks Kyle yeah so my background is more in the finance world I also studied finance at NYU I was investment banker very briefly at Credit Suisse covering healthcare realized that the investment banking world was not for me I didn't really enjoy it very much so I decided to leave that and actually move

to Austin about six years ago and Kyle would convinced me to come to Austin and join the healthcare IT company where he was working that company was called versus suite it was an electronic medical record provider and after working there for about a year I realized that I was much more interested in the data that was being created out of these electronic medical record systems then I was in the software itself so I left in 2013 to found a company called a patient finder where we used data science techniques to match patients with clinical trials based on their electronic medical record data that's actually a really interesting data science problem because the data

points that are collected in your day-to-day doctor's visits are different than the points that are necessary to determine your eligibility for a clinical trial so that was a lot of fun we did pretty well raised some venture capital at about 2 million patients interacting with the system etc and in the meantime I heard about this thing called Bitcoin back in 2013 and I bought a couple literally just - I wish I had bought more I think everyone does and I bought these - Bitcoin thinking of it as a tuition check really I wanted to have some skin in the game so I would go and learn a little bit more about the technology and as I learned more about the technology of Bitcoin it was very interesting but I really saw it as being inherently

limited because it could only do one thing the idea was a huge idea to have digital peer-to-peer money but it wasn't from a technological perspective as interesting to me at the time and only in 2016 when I saw the etherium white paper and saw how this blockchain or distributed ledger technology could really enable the world to move towards a more decentralized paradigm where all these businesses that have a rent-seeking middleman or extracted that I got much more interested in crypto started investing really heavily in 2016 and in 2017 Kyle and I got together and realized that this was absolutely going

to be a world-changing transition and that we needed to be a part of it so once you decided you wanted to move into crypto space why did you decide to start a fund as opposed to startup or something else so maybe use some of your medical tech background that you both have if you think about like call it white-collar jobs there's like broadly speaking two major categories of white-collar job operator and allocator - Shawn and I have both done the operator thing and we've learned a lot from that experience but I personally find like my interest and passion has always been and just like synthesizing tremendous amounts of information and then figuring out kind of like what to

do around it that aligns more to an allocator skillset that an operator skill set Tushar leans more operator than the night I like to like basically if you could just give me books to like readin all day and then write about it like I would love that job and that aligns towards the kind of allocator skill set and I'm also happen to be relatively extroverted which is good for just meeting people and talking to people so when we thought about what are we gonna do in crypto we thought about building versus investing and we we don't for me certainly I lean towards the allocator side I think to Charlene's that way as well although he has more operator tendencies than I do yeah to add to that I mean once I really started to wrap my mind around crypto I

realized it was combining my for absolute favorite things in the world which are going to be cutting edge technology new financial models a healthy dose of economic models and also top that off with a bunch of game theory and understanding how the various incentives play out amongst the network participants so it was the most intellectually fascinating thing that I've ever done and so being an allocator and bein running a fund allows us to get a lot more breadth in terms of being able to go look at every single project out there you know full-time job is literally go and do research and understand how everything out there

works and be on the cutting edge of how all of the projects operate and how everyone is thinking versus being a creator kind of is limiting to your own scope and going deeper and at least for me personally I was much more interested in going wide right now and going deep in the future and in what way could you see yourself going deep in the future I won't rule anything out but it would be pretty cool to help move the crypto ecosystem forward in more ways than just investing so on your website you position yourself as a thesis driven crypto fund what is your thesis that's a great question and we don't have a

singular thesis per se the theses are really more like a product market fit or a market that is uniquely enabled the benefits of crypto so this distributed ledger technology has three inherent strengths from our analysis one is that it is permissionless another is that it is decentralized and therefore censorship resistant and the third is that it's trustless and everything that we invest in needs one or more of those attributes in order to exist if there is a project out there that does not need

one of those three attributes then we think they should use a regular database and not go and mess around with distributed ledger technology and so that's really one of the theses is making sure that whatever we invest in is uniquely enabled by crypto and we have a handful of examples of specific markets where that is the case so you guys started to fund in August 2017 about now what we have seen right I remember we did an episode with poly chain I don't remember when it was but quite a while ago among the first I think it was maybe metastable and poly chain right that were started in 2016 I think and since then we have seen an explosion of fun so I like I don't know

how many Cooke the headphones there are but it's probably in the hundreds how do you guys view this development like what was the market looking like when you guys started and how has it gone since and how does that kind of affect your strategy yeah so we kind of made the decision in May of 17 to do this you have really still the only two funds of substance we're probably changing amount of stable and pantera those those three we did not foresee the number of funds growing as quickly over the summer we started like talking to lawyers and getting all that stuff together kind of the initial fundraising by the time I remember I think it was like the day before the day after our fund went live Forbes put on an article saying 15 new

crypto hedge funds are watching and I was like wow we are late to the party I forget who was in that list I think Paula Chino was in a list and metastable I forget who else I think now the official tally if you go on like some of the hedge fund databases I think is something like 200 so it's grown a lot since then I don't have like a act like a super specific breakdown but I could tell you just kind of what how would I see and feel from conversations with people in the ecosystem I senses a substantial majority of those funds are in New York and they're there on mostly by finance guys their derivatives traders so these are guys building quantitative models they're doing market making they're running ARBs they're relatively short-term focused definitely not

technology oriented I think that's the substantial majority of the funds most of the funds on the West Coast or more run by tech people they you know think more like venture capitalists and I do like a traditional hedge fund manager so we've kind of seen that just major bifurcation happen and we have realizing carved out our own niche and we're super happy with it and that's kind of as Tushar describes it having venture capital economics with public market liquidity I'll let him describe that yeah for sure so venture capital economics with public market liquidity is a really interesting concept because the things that we invest in have the attributes of a venture capital investment in that they are really high risk investments there

are investments in early-stage technology projects or companies that have potentially a lot of outside and obviously the venture capital portfolio is based on the fact that you can only lose 1 X your money and you can make 100 extra money and that's why VC is a profitable business at all so we think that the fact that all of these assets are liquid really changes the game and actually makes it even more profitable because you can go and change your mind at any time unlike a typical VC who only gets to choose entry prices and doesn't get to choose when they want to exit it or when they want to invest more we get to choose all of those things so we can

invest in something and if we get new information that changes our mind and says oh actually a competitor is going to beat this out or oh actually this doesn't make a lot of sense we don't think it's going to have the returns that we think then we can go and sell that asset or if we get information that makes us more bullish we don't have to convince the founder or the CEO to go on another round of capital we can just go buy some more and actually double down on our position so we think that the public market liquidity really enables both risk mitigation as well as helps us know you know generate more upside as investors when added on to the already quite lucrative venture capital economics and add a little bit more color there if you look at a traditional

venture capital portfolio you have between 20 and 40 companies is pretty standard the reason that's kind of the normal range is that you know you want to catch a winner and like you just if you only have five bets it's just a low probability that one of those five ends up being a really big winner it's a problem that's been capital of course is once you make the investment the investment becomes a liquid and you got to wait five ten years to get it out for us because the investments are liquid we believe that it allows for more concentration so rather than having 20 or 25 or 30 different assets in our portfolio today we actually have under 10 I think we have seven or eight at the moment we consider core positions those comprise the vast majority of our portfolio we have a handful of pre ico

positions as well that comprise I think six or seven percent of our portfolio today but the vast majority of our portfolio is liquid the reasoning is if we have the conviction to invest in an asset we're not expecting that like there's something that comes out tomorrow that causes the the asset to tank I mean it's possible there's like a bug in the theory more Manero than like everything goes wrong but but in general those are like very much edge case of ents that would cause an asset to crash like that dramatically relative to the rest of the market and and we're obviously very plugged in we're full time investors in the space you know everything we invest in we make sure we're close to the team's we work with and we make sure we're value it creative to them as we either have a sense for

like the vision what's going on competitive dynamics etc and so if we change our minds about something like even if we were wrong and we're down 20 or 30 or 40 percent we're not down 100 percent and we expect that we've will be able to get out before an asset actually goes to zero in the event of ultimately something goes towards failure so because of that in fact that we can recycle capital it allows us to be more concentrated and actually like doubled and triple down on our winners could you also see yourself going short at some point and in taking short positions we are formally a long biased state agnostic Ted fun so our portfolio is generally long we you know right now exploring derivatives

using CBOE CME Ledger X as Nasdaq and that stuff comes online in the next few months we'll be exploring those as well we so absolutely we will use derivatives we're not like actively day trading derivatives that's not our expertise or our forte we are tech people first but we can definitely use derivatives to hedge risk in certain ways so and we will do that one of the unconventional views that you have espoused in public forums concerns the store of value market so the key narrative in this in this in this market is like money is medium of exchange store of value and a unit of account and there's this idea

that the Bitcoin system and the Bitcoin token can just succeed as a store of value coin and for a store of value coin what is most critical is that a lot of people should accept it as a store of value and that would create a network effect you differ in this opinion right on how the store of market value will evolve so like tell us your thesis there yeah so if we look at store value medium of exchange in unit of account those are three kind of independent functions they are related and they're they can impact each other in terms of how things play

out in the real world if you look at the history of kind of time there's different goods and services that have acted as different kind of different combinations of those three variables I believe the network effect of money meaning money being like general purpose currency so it is a medium of exchange Janus travel you and the unit of account the network effect of that device or that's assets I believe is measured at N squared in terms of the number of users we use the system in particular the fact that it's a medium of exchange and the people will use you know accept it is what gives it the network effects all right the whole point of Facebook and phone calls and fax machines is that like it's the people who are on the other side that make it valuable a store value in and of itself is not

create a network effective the medium of exchange does so when people talk about the network effect of Bitcoin being you know so high and so large that nothing can ever pass it's hey we have very substantial empirical proof today that that's wrong although aetherium hasn't passed Bitcoin the fact that aetherium is even approached Bitcoin suggests that that narrative is fundamentally false but then secondly if Bitcoin exists basically is just digital gold and there's a vault somewhere and then like you take it out of the vault every so often you've got ten Bitcoin and hey I want to buy a house so I withdraw one Bitcoin in my house and then I want to pay for my groceries and I withdraw you know five Satoshi's and pay for my groceries like withdraw that and then I have it in like litecoin or ether or whatever you have something

else and then pay that narrative to me does not imply a network effective and squared for Bitcoin that implies to me a network effective login what matters if you are have Bitcoin and you want to withdraw it into some of the thing and then use it as a thing to pay for stuff is that you need to have liquidity to get your Bitcoin out of Bitcoin so you need a marketplace words it's being traded fortunately we already have exchanges coinbase you know bit drugs baloney X all these places daily volume on Bitcoin is like I think the coin to Fiat pairs is somewhere in the order of ten to fifteen billion dollars per day so I mean there's there's real liquidity there and so once you're out of that liquidity then like I don't see what the additional opportunities for Bitcoin and so the my sense is the network effect

for a pure store value is closer to log n than N squared and that the network effect for something that becomes general-purpose money where you both store it in your wealth in it and you you spend it and other people on the other side take it that Network effect ends up approaching something closer to N squared so I'm curious here maybe I could just just jump in here with a question so there is certainly this idea that a lot of people have that in the future we will have millions billions of tokens and that there will be all these seamless decentralized exchanges or these basically protocols that allow you to exchange any token for any other tokens you know hopefully you know without touching and very cheap so right

so I I have talking a you know you only want to talk B but you know I I basically just pay that amount it gets exchanged and and you wouldn't that kind of upset this n-squared dynamic of medium of exchange if basically anything can become a medium of exchange let me reframe that for you a little bit and ask you to look at it a little bit different because that's a very valid point but let's say right now we could wave a magic wand and solve the scalability issues of Bitcoin right and if we were able to do that do you think that this world that you're describing where you have many different tokens serving as medium of exchange would exist probably not why would you go and turn your Bitcoin into like coin or you know

Manero or a-z cash or whatever to spend when Bitcoin itself could go and handle those transactions this idea or this vision of the world where you have a separate store of value from a separate unit of or medium of exchange is really just a symptom of a backwards looking technological view where if you look backwards at the technology and look at like oh we haven't been able to solve scalability on bought chains yet then yes you do need a separate store of value that has more security than the minimum of exchange that makes sense but there is nothing about scaling block chains that is inherently unsolvable this is a technical problem that I can say with extreme confidence will be

solved I can say with a little bit less confidence but still strong confidence it'll be solved within the next five to ten years so we're not talking about generations of time we're talking five to ten years where you will have a blockchain that scales to support all of the all of the transactions that are needed and so in that case why would anyone have that extra layer of friction of well I pay you and coin X and I pay that person in coin Y but I really store all my assets in Koine or in coin B and that's just a lower friction version of the world that it seems more likely to happen add that on to that right so once you accept that you know we will have scalability and you like the store value and the medium of change can technically

be one thing I know we're not there today but if you take it for granted too that will become the case which I think it will then the next question from there is a balance sheet risk so right like the problem is no one wants to have their wealth like stored in a thing that's like variable relative to all of the other things they commonly purchase people in crypto complained that US Dollars are a terrible storm al you and like on a long enough time horizon and if you're like an Austrian economist you're like you know these guys keep printing money and inflating my dollars like I understand that view it's technically correct but on a practical basis turns out people like US dollars that they work pretty well especially if you live in Argentina or Venezuela or something but even most people in the United States seem to be

pretty happy with US dollars so you know although you have to call it 2% annual inflation that's not that bad so people you know like like having everything denominated in one currency means you don't have balance sheet risk of oh my god my eggs tomorrow or worth two times the price they were today where my gas is worth 4x the price like there's real like like when I submitted never protectors N squared it was ever like it's not just that they literally accept the money on the other side and that they could then can like it's also that they denominator wealth in that thing and whenever in denominates their wealth in that thing that's what makes the the network effects are powerful so this is interesting because to show you basically made the point if I cut this

correctly right so we're gonna have Locke change that scale you know without almost you know if we've almost no limit or two extreme amounts and I certainly agree and then if you have a medium of change there you know that would be kind of universally accepted in the kind of soar values almost a byproduct and then caelum at the point of the importance of stability for a store of value so would you say that if somebody creates a blockchain that scales and that somehow also has a stable coin or maybe is some sort of safe stable coin that that would then be you know likely the winner possibly so I believe that money is an emergent phenomenon and what that means

is things become money by being used as money another way to look at it is don't look at something being money as a noun look at money as an adjective so some things are more money than other things the US dollar is more money than almost everything else and you know anything that you're using for barter and some sort of barter economy is less money than something like the US dollar which hopefully will be replaced by a crypto that is even more money than the US dollar because it's global etc right so when you start to look at it this way you'll see that once something starts being used for transactions because it

has good actually it has the attributes of good money then it actually becomes more widely used and like Kyle mentioned the network effect of something that serves all three purposes of money is N squared and so that will actually quickly start to grow and value and attract more people to it that's just how no X ended up playing out so I would say that if we saw a blockchain that scaled and had the principles of sound money a stable coin might be that perhaps depending on you know an individual's view on economics they might not think that a stable coin is actually sound money they might want it to actually be deflationary which a lot

of people in the crypto world seem to like but I expect that a blockchain that has the right amount of security and the right amount of scalability and also has the decentralization to make it trustless really comes out and is also able to be used as money that we will see that actually end up winning so how is this reflected in your multi coins trading kind of strategy and theses and positions today I mean it sounds like you guys aren't very bullish on Bitcoin so you kind of like looking out for what are the new protocols new technologies coming up that will most likely take on

that kind of position yeah so today I spend a substantial majority of my time I'm kind of thinking about that issue sometimes back to your stable coins point there's kind of three I think fundamental hypotheses for what becomes the mega winner or mega winners and crypto like the things that are measured not even in the single did Gillian's within the double-digit trillions and those could be the one hypothesis is the store value so just like Bitcoin the coin cash Manero as you cash those are kind of the four major contenders are not friends the other major hypothesis is the smart contract platforms become the stores of value because they're the most useful because you need the native soakin of the platform to power all the

transactions there's gonna be all these useful taps on top of them and so the utility creates value and basically it transforms from a member good to a like just full-blown store value that's second hypothesis and then the third hypothesis is basically stable coin is with the killer app it turns out that like the big problem for crypto all along has been price stability and that if you could just get price stability and decentralization like once you have a stable coin then you could you know you could easily layer is part of contract platform on top of it that wouldn't be too difficult to do at some point down the line so you could see that path essentially happening as well right now if you told me to pick one of those paths and you know bet my my fortune on it I would say pick number

two which is just smart contract platforms in general and so I spend a lot of my energy today evaluating those working with those teams understanding pros cons trade offs and then like understanding how their ecosystems are developing what's being built on them what are the challenges are building on them right and understand how value will accrue in those ecosystems but to be clear we do have bets on the of the traditional store value bets we have some Bitcoin although it's a very small allocation and stable coins we've been very we've talked about them publicly a lot with space we're super interested in the other way to look at it is like we're looking at the portfolio probabilistically right and trying to see what do we think has the best chance of winning we do currently hold a view

that the token that is most likely to become money or you know digital peer-to-peer cash effectively is going to be the native token of a smart contract platform that becomes dominant we are in the very early stages right now we're like this is still up in the air however I do expect that once we have a dominant smart contract platform that there will be a lot of social inertia and that token being money and social inertia will carry the day so we will see how that plays out and I don't know that stability relative to a fiat currency is going to be a killer app for that platform I think that's a helpful transition maybe but stability relative

to a fiat currency just use the fiat currency the whole point of using cryptographically bound protocols to define money is to not allow politicians to go and control your money so if you want to peg your stable point to the US dollar then use the US dollar so you mentioned like we can think of this as a tree right so there's this three branches so one branch is like things that are trying to be money or stores of value Bitcoin bitcoin cash second is second path could be smart contract native tokens like ISA neo one of these could become store of value and the third branch is perhaps people do

succeed in building a black swan resistant staple coin zooming in on the second path what do you think of ethers chances to become a store of value if you told me if you pick one crypto today and come back in ten years I would pick ether my sense is the probability that ether is kind of a big winner let's call it ten to twenty percent like somewhere that range so I think a very substantial minority percentage but like they are clearly the leader it is nearest lose there are lots of ways they can lose up is there's lose so I signed a probability somewhere on the order of ten to twenty percent and then everything else I signed basically zero or near zero just the unknown you know saying today like oh well Definity is

the hot new thing and it's gonna change the world like that's that's lunacy to say that I personally think Bitcoin has gone the wrong way Bitcoin cash has a chance maybe I would assign maybe a some substantial probability to Bitcoin cash you guys are smart contract platforms I mean really haven't launched in the substantial capacity so it's began assigning you know probabilities that are substantially larger than zero is not really justifiable yeah and one of the things that we do well at multi coin is we disagree with each other sometimes so like I am more bullish on Bitcoin than Kyle is I am more bullish on the Lightning Network etc and it's important within a firm to have different points of view so that way you don't just create your own echo chamber

I do want to add to that that like there is a substantial chance in my mind that Bitcoin could win just because it is the shelling point of it was the first blockchain that actually worked and really has lasted all this time and it's very stable and if they sold their scaling problems they have a fair shot at it so I wouldn't put that probability at zero let's just say so this is a matter of extensive debate within the firm so I'd like to combine many of your views together into into a question so one of your views is moneyness is an emergent property second view is the store of value is going to be tied to

whatever wins the medium of exchange now if you combine these two things with the et liam's transition to proof of stake my question is going to be whether if you combine these three things you end up with something that's not so good that's sort of sort of illogical acted at some level so the nature of proof of stake is if you have a coin like ISA that's in proof of stake and and there are validators that are bonding this proof of this coin in order to validate then it's likely that a majority of the coin supply will end up bonded and stationary and the greater the fraction of coins that are bonded and stationary the more secure is the proof of stake

system right so the designers of aetherium would would Warren say 60 percent of future ISA to be locked down but if coin is locked down it doesn't behave well as a medium of exchange because token velocity then is very low the rate at which the money flows through the economy becomes very low whereas for medium of exchange you want the token velocity to be higher and then if a proof of stake system isn't going to succeed medium of exchange since moneyness is an emergent property that emerges out of medium of exchange a proof of stake coin ought not to win the money nests or store of value market how do you

reconcile all of these three things so let me just ask you to dive a little bit deeper into that scenario that you constructed why would the fact that 60% of ether are staked in this scenario that you created actually effect the velocity of the remaining fourth percent of ether if you just see the velocity of that remaining 40 percent go back and increase significantly so that the vlog this is that the velocity of the total system stays at let's say you know five or someone between five and ten which is the range of velocity for the US dollar for the past twenty years or so then it seems like that would solve that problem I find most of the like economic counter arguments against proof of stake to be

very theoretical in nature and not like as is useful to think practically if you think about a network here right we've got an open trust this network and like anyone can be validator kind of a thing like someone has to be the validator and they need to be compensated for doing that they're fundamentally two ways to compensate them for doing this either you have transaction fees or you just inflate the money supply and pay the people you know pay the validators with inflation like those are the only two choices Iona has their idea for like you do your proof of work thing that like a super skeptical of I you know they're really the only to like conceptually viable

models we have today are inflate or transaction fees Bitcoin today is you know inflating and that there's some transaction fee bonus on the side ethers doing the same thing I see no reason why that harmony can't just continue to co-exist forever and even if you get scalability high enough there's even a world where transaction fees go to zero like and you just pay with inflation the OS that is the system by design it just takes that to its logical conclusion and I don't see anything funded another wrong with that to add to that real quick actually I saw and you you tweeted something about transaction fees recently on Twitter and I thought that was really interesting and I added a little bit to it but I strongly believe that a inflation based

model wins because the fees that are invisible to the user are much more palatable to the user and because we believe that money is an emergent phenomena I believe that the protocol that enables a predictable amount of inflation I'm not saying crazy inflation I'm not saying go and put you know the central bank in charge hit or anything like that but a predictable amount of inflation in order to pay the validators for the security of the network actually ends up winning because now people are less hesitant to actually use that asset as money versus right now every time like if I wanted to use Bitcoin on bitpay to like buy something I'm even with like $4 fees that means I'm never

gonna go and buy a t-shirt or you know pay for lunch with it etc so we really need to see zero transaction fees I think that is the logical conclusion once we see zero transaction fees you will see that emergent phenomenon effect of money kickin and the only way to pay for that and still have a secure Network is to have inflation yeah maybe let me briefly explain yeah it kind of refer to you know what you mentioned and I totally agree especially with the store of value use case the inflation makes so much sense right because let's say you have Bitcoin and then people say oh it's become a sort of value you don't have to use it you Hodel it and it just sits

there but that really means that you have people who may have let's say somebody has a million dollars in Bitcoin they never use the coins right to sit in their wallet for like a year they have paid absolutely nothing towards I mean in a world where you don't have inflationary or block reward anymore they've paid absolutely nothing towards securing your network so you have this really unstable situation where on the one hand you know transactions have to become so expensive to pay for all the people not using it and people not using a free ride on the rest so it seems like a very ugly system and I agree in general in the long run what makes most sense to me is that you have networks where you basically paid for the whole security through inflation

and transaction fees are really just spare anti spam and spam prevention right so you're just trying to create people from creating you know it's crazy tax on the network by sending pointless transactions but otherwise there should be you know new zero yes the anti-spam mechanic is actually really valuable and I am confident that there will be an anti-spam mechanic in any future blockchain that ends up winning this use case there are a number of other ways to do that as well where perhaps you know you have significant capacity enough to absorb standard daily global transactions but if you start to get beyond a certain threshold you start to

implement certain either fees or prioritization for transactions so you can also prevent spam attacks by identifying them and deep prioritizing them rather than necessarily charging a fee like for example when you look at your email inbox you probably have to her little spam in there actually at least those spam emails that like everyone was so familiar with 15 years ago and the reason for that is not because they charge people to send emails now it's because Google primarily I would say Google cuz that's my email experience I'm sure the other providers have gotten good at this too but Google has gotten phenomenally good at identifying what is spam and what is not and they D prioritize it they go and put it in that spam inbox so there's no reason to suspect that if we weren't if

we were able to do that with the email that we will not be able to do that with transactions on a blockchain yeah I mean this is the whole thing of like a I and you might call it censorship and like maybe this censorship but like my miners today I already have the right to censor blocks we see some miners might empty blocks like fundamentally if you have like miners mining things that miners can censor things and if miners come to the conclusion that they can run some a algorithm into tech spam and then filter it those spam transactions and just not do them then they will and like maybe there's some miners that say no I'll take the fees and do it and that's their prerogative they can they can do that maybe like I expect over a long enough period of time like every miner is

ultimately and so he or she can like choose to censor those transactions however they wish and if it turns out that all the people who were producing blocked at some point come to consensus about some algorithm that like sensor spam transactions than like sorry spammers yeah although I feel if experienced spammers I wouldn't call it a permissionless system anymore so the other piece that I'd like to explore in this idea that each area ether could be a store of value in the future is in your other blogs you mention this other concept which is called the smart contract Network effects policy the idea here is that evolution of blockchain technology is proceeding in a way that

the notion of one particular blockchain or the other blockchain mattering to the user is going away all the user is going to see is token and that token can move across different chains chains can also anchor their security to other chains which means they might not be any advantage left on the infrastructure level itself or up for a particular token on the other side a lot of different programming languages for smart contracts are emerging a lot of ways of making smart contracts are emerging so perhaps smart contract platforms are going to be like

programming languages there's going to be many winners and many different use cases in these many winners and this might not be one dominant smart contract platform if there might not be one dominant smart contract platform in that world ether does not have any particular advantage and if ether does not have any particular advantage why or it to have a special position in the store of value market yeah so the general case for that when I said earlier he's going to pick one crypto and come back in ten years and I pick ether my reason is that I think ether is the highest probability of their in being the most useful chain and then

ultimately value will accrue people will assign values because they want their value in that chain touken the kind of thesis of the smart contract network like fallacy is all of the technical things that make a network affect the case in check all traditional technologies by and large are not relevant the fact that everything is open-source the fact that you can have synthetic tokens and move them across chains the fact that you can anchor chains into one another for security purposes all of these kinds of things do commoditize the chains themselves but you can still never commoditize the notion of balance sheet risk and like people wanting to accept it and store it as their like their fundamental store value so that is a real network effect and like that's intrinsic to like

moneyness and that's not in any way tied to technology specifically when I think about like all the smart contract so I think that that's a very theoretical in like abstract view of the space and I think on a long enough time scale the kind of hypothesis presented in the smart contract network effect fallacy will play out I think we're like at least five years away from from that happening in any substance what's very clearly happening today is we have a Cambrian explosion of ideas of how to scale spark contract platforms the kinds of features we offer developers all that stuff like there's a massive Cambrian explosion you've got cosmos and those guys saying hey there's gonna be 50 bajillion chains

and every chain is gonna be soldered and they can talk you've got a OS saying guys this is all too hard to scale we were over decentralized let's resent relies a little bit and that like solves our engineering problems you've got a theorem you know and and polka dot and affinity basically saying hey we can shard these things look at our new novel consensus models we can get too fast consensus shard these things and communicate across change and have pooled security and to kind of have the best of all the worlds like digital right now there's a lot of ideas being thrown around these ideas are like some level they're all competitive and in other ways they're adjacent in some ways they're kind of fluid you could totally see a world where iOS is massively

successful for some sort of class of application and iOS plugs into cosmos that and that cosmos is plugged into some polka dot chain and that polka dot relay chain has like 50 pair of chains in it like that's totally where we end up in this really interesting mesh hybrid thing in fact that probably to me seems probable over the next five years that we get these like really interesting heterogeneous networks but that on a long enough time scale this is the gravity will have it once like all I'd say what's all the questions are answered how do you architect these things how do they work like how does all this stuff kind of come together and and once like there's no I say it substantial technical risk and like the system as a whole then you'll start to see convergence around

well what's the one I just want to keep my money in what's the one that everyone else just wants to keep their money in and that would be the network effect of the moneyness cool fantastic I think that was a really compelling view of how this ecosystem could evolve and yeah I can I can totally see that now I want to jump to a blog post you guys a you wrote tile that is is really interesting it just came out and you're differentiating there between different types of tokens so you're talking about basically kind of a payment token are you talking about a work token and a burn and mint token and and kind of very different dynamics that those tokens have so can you first

of all just like briefly define what those are and then how they affect the different models kind of affect how they values or how they would be valued yeah and so just for some context on this so you know obviously I talked a lot of entrepreneurs in the space and it everyone's come to me saying oh look I have a new token and like basically my token is used to pay for my service and all of these tokens have kind of this problem that I call it the velocity problem which I've written I think I wrote about it November or December of 2017 the loss problem basically says if you just have a proprietary payment currency then like the money supply will turn over so at some point will turn over so fast that in value in itself

will not accrue to the token so that's kind of the hypothesis that I call the velocity problem so a lot of smart people agree with me a couple of people disagree with me I have pretty high conviction that that will be a problem that will stifle value capture for basically all payment tokens so I got really frustrated because I just kept getting pitch interesting things like they sounded cool but I was like guys I can't make money I'm an investor I'm a fiduciary to my investors and like I need to see how this thing will actually capture value and I for basically everything I looked at for the number of months the guy was just like they all have the same problem and a handful of teams I spoke to had like presented

interesting ideas to solve the problem and I kind of thought more about it and eventually kind of came up with some more coherent theses around how entrepreneurs in general can try and solve the velocity problem and that's what's reflected in the post I published a few days ago that post is called new models for utility tokens so one model is you know right now where all these utility tokens are specifically I'm referring to utility tokens so I'm not referring to Manero or Z cash or Bitcoin those are general-purpose stores value I'm also not referring to the native tokens and smart contract platforms I'm referring to things like civic zero acts basic identity token rate in like these kind of go along these kinds of things

that are like functional utility tokens so if you look at these tokens they're all payment tokens and the velocity just kind of accelerates towards infinity if these things become successful so one model maintains that those tokens should stay payment tokens but introduces this interesting burn and mint equilibrium mechanic so that even as usage grows exponentially price like the system will capture price well the price of the token will increase another system will actually capture value and that model is called the burn in mid the equilibrium model the basic idea in this model is every time I want to pay for a service let's say I'm paying like a zero extra layer for example for right facilitating some trade instead of paying them the

the ZRX fees that I was that I would have otherwise paid them I actually take those ZRX fees and I burned them you literally burn the tokens and then you say you in an issue you know as send a notice to the blocker and say hey I burned this money here's proof that I burned this money and I burned this money in the name of that relayer whoever that relay might be so you have that dynamic running completely so he workers constantly burning money every which way and system is deflationary then completely independently of that you have the system mints tokens on some predefined schedule it could just be a flat number it could be a schedule that has some curve or some growth curve to it or something but it just fins it prints a fixed number of tokens per day per month per

hour per block whatever some sometimes we can see and then the idea is that for each time frequency that goes by each time period that goes by you as a service provider and then at work if you've got tokens burned in your name let's say all of the tokens that got burned in the last 24 hours were burned in my name then I have the right to claim one percent of all the newly minted tokens that are minted at the end of this 24 hour period and so with this this system does it sounds a little bit convoluted and it is a little bit you know organic but what the system does is it solves the velocity problem because if let's say you're minting 10,000 tokens per month and let's say people are burning $15,000 per month as a result of using the system well at some

point that's going to create so the supply will be decreasing and that will create upper to press pressure and as the price of the system goes up then the number of tokens right if the underlying cost of the service is denominated in u.s. dollars then that means now for one token you can do more of the same service like you get this fundamental equilibrium will come into play and it took the idea of the burn in mid equilibrium model it's a little bit hard to kind of follow verbally but if you check out the post it walks through it pride some examples and stuff the really important thing about the burn in mid model is that if it basically guarantees that on a long enough time scale and I don't think it needs to be that long we're not talking years I mean even on

the order of months if the system if demand organic demand for the service is growing and people are using the thing more price will go up because you are creating a lot you figuring out a way to capture value in the system itself so that's number one the other model I propose is what we call work tokens for work tokens are a fundamentally different way to think about tokens work tokens are not used as payments in the system work tokens it's said think of them as a right to perform work for the network kind of like a tax medallion kind of a thing and so the kind of first pioneer of work tokens is probably augur a more recent example that I'm also privy to is keep and maybe and these models is keeps a little bit easier to understand

so keep is a platform for multi-party computation basically just think of it as people running out their computers and doing some very interesting technical stuff with their computers the idea is that you can any quant anywhere in the world can rent out a keep computer that can do some interesting privacy computation stuff scenarios keep is instead of paying for the service and keep tokens if you want to be a node operator in the keep network and run those computations on behalf of whoever you have to buy that keep tokens we have to stake to keep tokens then as new jobs come in as new your people all of the world say hey I need to run a job at the keep Network then basically the system looks at the total number of keep tokens that are staked by node operators it looks at the number of keep tokens that

you have and you get the sign that probability of getting assigned the next new job in the ecosystem in the system and so new jobs come in do you get a proportional number of those jobs and then you run the job and then you get paid in some other token it doesn't really matter what's hooking you're paid in in the case of keep-keep is in TRC 20 token and I believe payment will be an ether since the vast majority of you know new tokens today are ERC 20 tokens it seems reasonable that most work token models you know the person being the service provider will be paid probably an ether and then the cool thing about this is a it actually makes ether more money as we were talking about earlier but coming back to the valuation models it actually then becomes very easy to

value keep tokens keep tokens just become now valued using a pretty traditional net present value model where you can value to keep token as a function of cash flows being paid to the node operator and so you can have just very rational buyers behind keep tokens inerting yield on keep tokens and on the hardware they have sitting around keep the work model works very well for basically any commodity type service so you're selling hard drive space you're selling like life here you're selling transcoding services you're selling bandwidth like any of those types of things the work tokens work fantastically for if you're gonna host any sort of distributed application like high-performance distributed application or something it would work great for those and then like there's people not

playing with work tokens as well for even human jobs like I know gems is doing this for example I'm sure there are other where the idea is it's like a telling up work where you just say hey you know I want to do a job pay five bucks whatever I'll do the job ten bucks and but to do that I will stake some of my own money and then it'd be like that's my I'm gonna go at risk right and so if I don't do the job as advertised then I will be penalized and all of these work token models have that model of like you state your tokens you take on some risk if you fail to perform the job as you said you would then you get penalized so you have accountability and then you can do the job correctly you get rewarded and you

can value that as a function of cash flows the really design goal for both of these models is if you adopt either of these models there should be linear or even perhaps super linear relationship between organic usage of the system and price appreciation of the token and like I think that's a very profound thing you know we have all of these entrepreneurs running around asking people for millions of dollars investors are expecting a return given that's the case you need to design the system the token to actually capture value and appreciate in price rather than simply just having a philosophy that trends towards infinity even if the underlying service is very successful cool no I think that's a really great mental model to think through that now the the payment

tokens don't fare very favorably in this model do you think they're all use cases where like that makes sense so do you think they should be in general a kind of trend towards you know I do these work tokens all these burn and mint tokens I think something that needs to be taken into account for these payment tokens is that if all it does is it's a proprietary peanut currency can it be forked out very easily right and in the model that Kyle is describing especially a twent potassium value model the tokens cannot be formed out very easily because you actually need them as a part of the incentive structure of the

protocol you need something to punish bad behavior on part of suppliers to that protocol with the burnin mint to equilibrium that is more vulnerable to that type of actual working out so but there is a chance that you see a lot more of these proprietary payment currencies get worked out because that is a more stable from a game theory perspective it's more stable equilibria where you will never see a proprietary pana currency for it in to something right so I actually think that the idea of proprietary payment currencies is going to go away almost entirely and that there will be

other valuable tokens on No you know Max was sitting here saying that there's only one token that will have any value I think that many tokens will have a lot of value but the idea of a proprietary payment currency is just not sustainable from a game theory perspective on 4k so the proprietary beam payment currencies what are what are good examples of projects that that have such a system so the most obvious examples are probably raided in Gollum to come to mind but there are certainly others I mean most utility tokens are just payments they say they are governance oaken's some of them that's that's like it's not incorrect and like there may be some governance stuff that happens but

assigning substantial value there is there is no good formula at all and like the value in and of itself is actually like I could you can question it very substantially that it's even should be above zero so yeah it's just it's a very hard problem it's really hard to ascribe value to governance functions when forking exists right yes on chain governance could be valuable but any conversation about the value of on chain governance with a value of tokens as playing a role and on chain governance needs to remember that off chain governance will never go away we always have the opportunity to coordinate off chain and fork the protocol and so that puts an inherent

cap on the governance value of any of these proprietary payment tokens so let's move to one one last topic that you guys brought up which is the topic of you know competition between network and what kind of creates the sustainable an advantage for a network of course we have the situation now that with all these blockchain networks being public networks and thus the IP and the source code you know being open-source right you can't really have this IP patent advantage that baby traditionally was often used so so what do you think are the key determinants that makes you say ok this network has a sustainable advantage it will be able to you know

retain its position or what are some factors that make you think ok this will kind of suffer under competition it's a really good question and it's a another way to look at you know the 14 the token away is just well how do you look at competition in the space and understand how the inherent things about the crypto ecosystem affect competition I think that one of the key things is that everything is open source so because everything is open source you can't have what I just talked about in fork tokens away but also you can have other implications of open source like there is no proprietary IP everything is

public a good example of that is Z cash has a technology called CK Snorks it's a very powerful technology that enables you to do zero knowledge proof for blockchain but while that is extremely valuable and we have a lot of respect for the C cash team we have some the best cryptographers in the world for continuing to push the limits on this technology what we do know is that Vitalik has publicly committed to bringing ck starts over to aetherium so that does defeat the main fundamental value proposition for C cash both as a token and an independent blockchain you can't invest in something because it has this proprietary technology because it's going to get absorbed into everything

else so really one possible way to actually stay competitive that's not based on technology is choosing a different point within the trade-off sphere or the plane of trade-offs so if you choose a different trade-off like iOS is choosing a different trade off from aetherium scaleability you will see that gos is fusing to centralize a bit more and they're saying that decentralization is only valuable to a point after that decentralization for the sake of decentralization is no longer valuable and this is something that aetherium could go and copy but they won't

aetherium is very much committed to that specific point on the trade-off space that they have they do believe that decentralization is more valuable than den Larimar in the eos peen believe and so that's something that is not going to be taken by a competitor and that is one really valuable way to differentiate yourself that's so far interesting right so in any market if you can write down a trade off space so in this particular market it might be like decentralization speed of transom transactions and scalability and there might be different points of operation on this triangle and different platforms might occupy

different points and have a sustainable network and competitive advantage because they are occupying that particular point so perhaps in the future in the decentralized exchange market or in any other market you might be able to sketch these trade off points identify projects that are headed towards a unique trade off point and invest in exactly those projects because their trade off point is unique yes exactly and Kyle mentioned earlier that we are investing pretty heavily in the smart contract platform space because we think that it has the best chance of capturing the value of money or being the digital money and the way that we're

diversifying our investments in that space is looking at different places on the trade off space that different smart contract platforms are occupying identifying based on our knowledge and our analysis which of those trade off points are actually interesting or that we think will have a chance at capturing all of the value but then of course thinking about the world probabilistically and spreading out the the investments across multiple different places on that trade off space where we think that have a chance to capture a significant value we can't sit here and tell you that we know exactly what the right answer is I don't think anyone can but we can tell you that it

is extremely difficult to go and steer aetherium very quickly because it's a high inertia system and so aetherium is not going to now suddenly adopt this piece from a OS or you're not going to CEOs adopt concepts from cosmos or tender mint about how the security can be actually it just it's a different security model from pooled security right so I think that this directly educates our investing philosophy as well we kind of towards the end our episode but we would I'd love to hear from you guys what you sort of how do you see multi carrying evolving over the

next two years or maybe longer time horizon is so our immediate priority is well let's take a step back so kind of look where we came from so it's been a year and change kind of to the two of our close friends just kind of like reading Mark Richt learning with diving into and investing in a did that for a while not very organized maybe decision in May of seventeen that launch fund so getting more organized fundament live on August first we stopped launched the fund that's like three million dollars today we're managing about fifty so we've grown really quickly been very fortunate to bring on some some awesome investors around us we have seven employees now and growing to twelve here the pretty

near future so it's gonna you know how we got here is we look ahead for the company and for the firm are obviously like fundamental priority is maximize returns for our LPS intent of the context of our strategy but but like with in building the firm we're really just trying to build like a world-class organization and grow up so we were very happy and there are other days like we didn't have an for a while we now we're in a co-working space were finally getting an office where you know upgrading law firms like from small law firms large law firm we're doing like just getting from kind of the like we got off the ground so like how do we build a large you know multi hundred million dollar hedge fund

and like absent some sort of crisis in the market that should happen in a pretty near future and so our like a media priority right now is like growing the firm up from scrappy guys running around who know crypto stuff too like full-fledged world-class hedge fund learning from the guys in equities and derivative credit markets and durrës markets and traditional