a16z's Crypto Thesis | Arianna Simpson, Ali Yahya

Transcript

as you unlock more computational capabilities that will inspire a new generation or a new class of entrepreneurs who now see that it's possible to do certain things that they'd be interested in building that they would previously just not even not even bother considering because it would feel so out of the realm of possibility that they wouldn't even begin to think about those ideas so it's interesting to think like once you have say a thousand X more performant blockchains that just expands the design space so much that that I think we'll just be surprised right by the kinds of applications that people build and it's very very hard actually foresee them because we'd be trying to out think an entire ecosystem of entrepreneurs this episode is brought to you by Circle the issuer of usdc which hopefully as

you all know is the preferred stable coin of digital Natives and crypto natives with over 1.5 million holders globally you'll hear more about usdc later in the show [Music] all right everyone welcome back to another episode of Empire you've got me running solo Santiago's out today uh we are super lucky to be joined by Ariana Simpson and Ali both GPS from Andreessen Horowitz Ali and Ariana welcome to the show thank you for having us yeah super excited about this um I want to just actually start like very big bucket like Frameworks narratives and then actually go into some of the more specific questions Ali I remember this um tweet that you sent out in like writers D5 summer was like

ripping I remember it was it was the network flywheel tweet if you remember that I'm gonna ask you to pull your brain back two years here um but yeah the network flywheel and it was like uh you have these end users come in and that's the community they've got the vision and protocol moves in that that gives value to the Token that more more token value means like more productive Capital which means more platform functionality which means more uh useful application I think I'm remembering this correctly then more useful applications which means more utility which means more people I think I think I'm getting the flywheel correct I just want to see like two years later you know we things that have changed since then we went through D5 summer nfts really boomed uh play to earn had its like moment in the

Sun and then kind of fell down even even though other some plate urns are still doing super well Ariana that I know you're involved with I just want to get your update on like this network flywheel and maybe the bigger questions like your updated thesis on like the business model for blockchain based businesses yeah I know that's that's a great that's a great starting point um well just to recap so this was yeah back in 2018 this was one of our Theses for how it is that you can build a network or a business that is entirely open source that exists entirely on chain in the Paradox being that traditionally in history businesses have always really made money by having something that is ultimately a secret that they own that is intellectual

property or it's just like a trade secret and that they charge charge other people for access to or that they that allows them to do something better that other people cannot and so it's a paradox that in crypto and in web 3 it's possible to create things uh it's possible to create software that is a hundred percent open source that still somehow manages to capture value and so if you look at something like Bitcoin Bitcoin is 100 open source and in fact the more widespread it is the more value it ends up capturing and uh the flywheel was just an attempt at explaining how it is that that is possible uh and the answer is ultimately that uh because crypto enables you to build these canonical

um instances of software that everyone coalesces around you have a network effect uh in this flywheel that that uh that we talked about two years ago um starts with an idea it starts with the founding team of a protocol that initiates a kind of movement and as people rally around that initial movement um it is possible to then potentially raise money that creates an initial value for the token that ultimately will power the network and then once the network launches that token creates the incentive structure that provides the network uh its functionality so in the case of a layer one blockchain for example in the case of Bitcoin the token the Bitcoin token uh incentivizes miners

to provide security to the network and to provide the service that is actually securing the Bitcoin blockchain the same applies to something like ethereum where the the miners or the now validators now that it's proof of stake uh perform all of the computation in the network and so once that exists then there's a possibility for a whole other group of people namely application developers to come in and to start using that functionality to actually build products that that leverage the functionality that the network is providing and as those products come come alive and and actually begin to provide something useful to end users that reinforces the initial movement right the the idea that that started everything at the beginning and so that brings us back to the

beginning of the flywheel and sort of around we go like that that again reinforces the token price which which subsequently again reinforces the incentives for minors validators or participants in the network and then that query has a possibility for even more applications and so on um and I think that since then it has held up fairly well I think that the only defensible mode in crypto has been uh the network effect there there really isn't any defensibility in keeping something if if we're talking about protocols there isn't any defensibility in trying to keep anything secret because you you want broader reach you want the you want it to become a movement um and there isn't really any kind of defensibility in in other things like for example just liquidity for a D5

protocol we've seen is is not much of a defensible mode because liquidity is very mercenary and it's quite easy uh for incentives to get the liquidity to move from one place to another very quickly as we saw with for example the sushi swap Saga so I think that ultimately the thing that's most important is is building this movement that creates this network effect with this flywheel and that applies for layer one blockchains it applies to two protocols that are built in layer two like like D5 protocols or Protocols of other kinds like decentralized social networks and how happy to kind of dive deeper but that is I think that the broad thesis that we articulated back then and I think it's still it still stands yeah a lot to unpack there um Ariana I'd love to hear you just I'd

love to just I mean you've been investing in the space for a long time I think your old firm is called autonomous Partners if I remember correctly like just I I think I remember I remember listening to a podcast of yours on epicenter when you were at like Bitcoin 2014 you've just been investing in the space for a really long time uh and and Building Things in the space for a really long time what what is your updated thesis right now on just what what's going on in crypto today well I think that's you know you correctly articulated how we think about blockchains at sort of the infrastructure layer and um you know Ali is the best person to to talk more in depth about that I'm sure we'll get into it I think what we've seen is that the thesis rather than having change

necessarily has expanded to include more things and so a lot of our investments at this point are also at the application layer and somewhat more consumer facing than what we might have seen a number of years ago and that was really a very sort of necessary sequence we first needed to lay the infrastructure foundations of l1s now l2s um and you know a number of these networks needed to exist before we could start to build more consumer-facing applications that could live on top of those and so again I think nowadays we're seeing a ton of activity in for example the web 3 Creator economy and the participation of different kinds of of creators in a way

that we've never seen before and to return to your earlier point of business models I think the Crux that unites all of that industry is really this idea of saying the participants in these networks should be benefiting from the value that they're creating and so it shouldn't just be the company at the center that's benefiting but really rather the participants in the networks themselves and so I think all of the other you know modifications or or um tweaks around business models are you know will get there in terms of refining the details but that is sort of the core idea

um and that I think is the most important thing that unites all of the the things that we're looking at at web 3. are you guys investing more in the in the app Phase right now because you think the infrastructure phase has been like adequately built out we've got I mean we we basically had Bitcoin then you then you had to eat and then you had all the all the kind of new l1s uh now you've got like the like the next wave of the new L ones obviously um do you think that the l1s are like the L1 game is almost over I think that's I think that's my real question I'll start and then I'll hand it to Ali I think um absolutely not what what we've seen so far is obviously a lot of progress in a

really short amount of time and I think one of the amazing things about this industry is the fact that because almost everything is open source projects are able to look at what other people are doing and quickly learn and iterate so you know Solana was able to look at what ethereum did you know and and a number of the newer uh blockchains that are launching now like Aptos and sui are able to look back at what the the prior uh blockchains did and learn both in the good and you know bad what what um they're really able to see what was good and what was bad and what can be improved and iterate their models so all that said we definitely don't have the end Solutions fully baked yet and

the demand for throughput on blockchains continues to be significantly ahead of supply and that is exhibited in the fact that you know we've had very high gas fees and things like that so um no I think there continues to be a lot of work to be done in that category and you know Ali spends most of his time in that universe so I'll let him jump in but from my perspective you know much to do still Ollie do you think um does it does Andreessen crypto have a like team-wide or firm wide thesis on the right way to build a multi-train world and and like let's take a couple different buckets here so like one bucket is okay all uh like the future is like l2s like the future is built on like starkware and

like optimism and arbitrum and like that's like eth l2s is how crypto scales like maybe another thesis is like Cosmos and like the app chain thesis another thesis might be like these alternative l1s and like you've got like Solana and Avalanche and Aptos and sui and maybe a couple of those are going to win and it looks kind of like the cloud space today with like AWS and Azure and things like that does Andreessen crypto have a firm-wide thesis on uh on what the world looks like in a couple of years with with regard to scaling it's a great question yeah and I'm happy to happy to talk about that so I think well first your first question about whether or not we still invest in infrastructure we we definitely do as Ariana said we I think we if we have expanded the thesis as opposed to

replaced it and that we still very much believe in our core infrastructure thesis from before but now I think now that the infrastructure is closer to being able to support all of the kinds of applications that we want to build we now obviously also have a lot of activity a lot of investing activity at the application layer as well so kind of our scope has expanded it felt like in 2018 and 2019 it felt like really we were building infrastructure in a vacuum back then because we we didn't yet have the kinds of applications that we have today that actually stress test the infrastructure and reach millions of millions of users um and now it feels like we actually have both things we've got we've got infrastructure that's still evolving and we've got applications that are

beginning to work and and kind of showcase the way the way in which Developers want to use the infrastructure so we have like more of a feedback loop going than we than we had before which is great because I think that that is what causes the acceleration of the space as as um sort of new developers come in they they kind of demand certain things that the infrastructure which causes the infrastructure to improve in the right ways um to your question about how we think the landscape of infrastructure in layer one blockchains or blockchain scalability will evolve um we are fairly open-minded to many possibilities uh in part because it's just so early and there are so many experiments that are being run and and it'll be interesting to see how how it

all evolves but but uh we do have like I I personally have have loose opinions um about how this how this might all shake out so for example one um line of thinking is one one question could be how many blockchains how many uh general purpose programmable blockchains do we think will exist in the long term and I think that this question is somewhat analogous to the question uh in the traditional Computing world of of how many how many Computing architectures do we expect to exist right and if you look at at uh Computing as as it exists today there's there's really just a handful right there's like x64 and there's uh maybe arm but then there's also gpus and there's just a handful of different

kinds of computing architectures that each satisfy different application requirements um and and that makes sense it makes sense that you you would have a handful because there are you know games are very different than spreadsheets and and and and so you kind of want a handful of different kinds of uh of approaches to to meet all of the the potential kinds of applications that people want to build and I think it'll likely be similar in the world of crypto where we'll probably end up with a handful of different kinds of blockchain architectures that land in different regions of the trade-off space and satisfy all of the requirements of different kinds of applications including again like things like games maybe things like D5 or decentralized social networks there may be certain applications that require things like

privacy and that's a that's a whole other thing and and there are significant trade-offs you have to incur if you want to be able to support privacy so maybe we have like you know five five dominant uh smart contract platform architectures in the in the long run so I think it'll be you know something like five it won't be one it won't be like a winner take all like like the god chain that takes over everything I also don't think it'll be hundreds or thousands or or you know more than that um and so this maybe gives you a hint as to how we think about something like the cosmos thesis or the sort of the the app chain thesis I I think that um it's it's likely that we will have some consolidation right that you will have

uh platforms that support different kinds of applications by virtue of being general purpose as opposed to having every application having to build their own blockchain from scratch and the reason for that is that there is significant Network effects as we were discussing before two being on a single blockchain there's Network effects when it comes to security right like that like having all of the security Consolidated in one blockchain or a small number of blockchains is better than having it to be fragmented across multiple versions there's also Network effects that the at the developer level right like there's two chains and programming languages and things like that that encourage people to coalesce or consolidate around a small number of platforms same thing with composability right the fact that you can integrate

with any particular application that's already running on a blockchain if you choose to build on that blockchain as well it's also a powerful driving force towards having sort of a smaller number of blockchains as opposed to sort of thousands of options um so I think that the likely end game is is having a small number a handful of dominant a smart contract platform architectures that are fairly general purpose potentially with things like l2s or l3s if you kind of get crazy that that are maybe more customized and and that provide the special features of different kinds of applications need so maybe the app chain thesis materializes nl2 as opposed to having thousands of actual like like independent blockchains

that somehow have to communicate with one another yeah so it'll stop there but that's kind of a no that's really interesting I mean Ariana sounds like you generally agree with I miss I would assume you generally agree with that thesis that we're not going to have a million different chains we'll have four or five or six different chains and they all have their own built out ecosystems and maybe some of them are better for some things like one is better for finance and one is better for gaming or they're all like do you generally agree with that thesis yeah absolutely I think there's um sort of economies of scale and diverses where where you don't want to have to reinvent the wheel for each chain in terms of having a totally different set of tooling to have to

learn a totally different language so I do think there will be kind of consolidation as Ali mentioned where people aggregate around certain chains and you know they they might prefer a chain if they're optimizing on one axis versus if they're optimizing on another I think eventually hopefully we come up with architectures that are so good that the trade-off space almost Fades into the background where you're not really having to choose between speed and security and you know a number of other factors um but that's probably a few years out still yeah does it ever um on that like I know you guys are doing a lot of investing in like into the what I've called the newer L ones uh like the

aptoses and suis of the world which are Super exciting and have like these world-class teams building them and you're already seeing a lot of interesting stuff going on on app just right now um does ever worry you that you don't have like okay so the initial ones built these like cult followings right because a lot of and the reason why is probably because a lot of people made a lot of money like life-changing amount of money from something like a Solana or an avalanche um does it ever worry you that you probably won't have those called followings as much on an Aptos or sui is because maybe the token price is starts out higher there's a lot of there's pros and cons as far as I'm concerned so right now the

total addressable market for some of these newer l1s is a lot bigger than it was a few years ago and so it's true they may be starting off in a different Market condition although crypto is cyclical so depending on when somebody launches um you know it might be a better or worse time regardless if it's earlier or later historically um you know so so they they do however benefit from potentially a larger Army of enthusiastic users um who may want to come and use the platform over time so there is some some truth to what you said but I don't think it's in any way a

limiting factor and if anything the the fact that these platforms have been architected specifically with the desire to support millions of users at scale for potentially entertainment and gaming types of use cases which you know require very significant throughput um they've really been purpose built for that and so I think that means there is just more of an audience of people who will potentially be interested in using them and evangelizing them as well I think the only the only thing I would say is um I think there are so many factors uh to to building the kind of community that some of the successful uh

layer one blockchains or ecosystems have had in the past and one of them is the token price and in particular I think it's useful for the for the token price to generally be uh monotonically increasing over time because this way every person who enters the community at any point is making money and then that that kind of catalyzes Goodwill and and it makes people happy and it makes them more likely to talk about about uh the network and to evangelize these other people but I think there are other things too right I think that that um the developer momentum the fact that some of these new blockchains support different kinds of use cases and that brings a new kind of developer which which is a new kind of community and they have their own story they have they have their own way of talking about why

crypto and blockchains are exciting I think all of that will lead to to movements that will look different than the ones before but maybe just as powerful and and just as important yeah um Ollie I'm curious how you think about just like where should value accrue to some of these protocols yeah this is the age-old question and it's it's one that we I think debate endlessly um ridiculous regulatory component here which I know you guys are making a ton of inroads on and you have a whole policy team but yeah which which factors into this but yeah definitely I think it goes back to to I think 2017 or 2016.

well like obviously it goes even back even before that but there was the the fat protocol pieces that uh placeholder put out a long time ago which uh I think is one way to look at this right the fact that the fact that there are network effects at the protocol level gives you gives you the ability to argue that value will be captured at the protocol level but then there is this question of how much value and and therefore also how much value will be captured at other levels um and there's a power dynamic as well between interfaces and protocols where you could imagine if if the interface layer ends up being very centralized and that there's only one dominant interface that's driving all of the traffic and all of the volume uh to an underlying protocol then that that interface

remember whoever controls that interface the company the centralized company that controls that interface um has a lot of power over that protocol because they could for example easily Fork the protocol create an alternative uh and then drive all of that traffic and all of that activity and volume to to the fork as opposed to the original protocol and that could therefore sort of move over the fees or you know in some way benefit that company more than than it benefits the people who are the token holders of the original protocol that's getting forked um if on the other hand the protocol has very strong Network effects and it has like countless Integrations with a bunch of exchanges and wallets and applications and there's many interfaces and none of these

interfaces have a dominant position such that they could they could try to subvert the the protocols um hold then uh you could see how you could see how there would be a competitive dynamic between the various different interfaces that are building on top of the same protocol and that their fees would therefore kind of be it'd be erased at the bottom it would be it would be compressed because users would have options they would have different choices for for which interface to use and in that world you could see how the protocol will end up being more powerful and we'll end up will end up potentially capturing more value so it's very I think it's it's interesting I think it probably is Case by case it depends on how strong the network effects of a protocol are um it depends on how good the the people

who built the original protocol got the protocol integrated and made it an actual movement that has real Network effects as opposed to just like you know something that they put out there uh that that is useful but but you know doesn't have the the rallying cry and movement behind it that you would need to make it truly defensible um but that's maybe one way to think about it and I think that there are Frameworks from before as well like kind of the notion of aggregation Theory the notion of of of the fact that you you kind of want um to either own a particular layer uh in this in the kind of the value chain or you want to commoditize it right like this this uh there was this great uh blog post by Joel's polsky uh a while back called uh

letter number four I think it was something along these a strategy letter number four I can I can send you a link and then maybe you can include it in the show notes but it's about commoditizing the compliment right the fact that uh any company like the most vicious battles in technology or generally in business tend to be between compliments like the sort of the hot dog versus the hot dog bun as opposed to substitutes namely like the hot dog versus the hamburger um and that's because whatever portion of every dollar that gets spent in in a particular service has to get split often between the compliments like some amount of money will go to the hot dog uh and some of the some of the money will go we'll end up going to the button right and so if you make if you make

making bonds a commodity such that very little money very very little profit goes to the bond and more of the more of that dollar will go to the to the hot dog to the sausage uh and then same thing if you think about internet like services like Google there's like a whole value value supply chain um I think actually Chris has a very good blog post about this where like you know you follow the user's trajectory but you have to you first first use a browser and then you have to kind of type type into a search box and then you eventually kind of go through the whole the whole uh Supply the whole value chain of using Google search uh every every layer there has the potential of of capturing some value and taking some fee and so if you are Google you kind of

want to commoditize everything you don't own or you want to own it um so anyway that's that's a good framework to think about all of this and I think it applies to crypto as well and you if you if you're like a unit swap protocol or if you're a D5 protocol out there you kind of want the interface layer to be a commodity so that it can't it doesn't intermediate you or it can't uh sort of compete against you and potentially Fork you that's really interesting uh Ariana I have a question for you on on going off of Ollie's idea there about like basically following what the consumer and following like um following the value so like when I think about the value stack in crypto you have like three buckets you have like mining the base layers and the application so you have like the

miners and Mining hardware and stuff like that uh then like the base layer would be like l1s l2s data layer and then the application layer would be like maybe C5 D5 payments nft marketplaces social platforms uh some new stuff coming out with like privacy and identity where do you see the most promise um for just value accrual in the next cycle well as as Ali mentioned we definitely talk about that a lot um frankly it's it's hard to pick a specific category because um you know we've seen hugely successful entities in at each application or at each level of the stack at the application layer at the infrastructure

layer um and I think that's going to persist um so I don't necessarily feel that it's particularly useful obviously I think about this through the investment mindset um to pick one category and only focus there so we think a lot more about making sure that we find the best teams in each specific category rather than being super opinionated about this is the right category because what we've seen over many years of investing in crypto and Beyond is just that it's very hard as an investor to forecast that um and you wouldn't want to have passed on an incredible team because your broader thesis was wrong I think at the

end of the day the founders and the market will figure that part out and so we tend to focus more on saying you know what are broadly the areas that we think are exciting not being super opinionated about putting you know our Focus entirely on one part of the stack and instead spending a lot of time making sure that we know all the given players in those areas and so can correctly identify the best teams all right everyone time for a quick word from Circle and uscc as a crypto user you know the power of stable coins dollar digital currencies that transcend borders banking hours and Legacy Financial rails while circles usdc has quickly become one of the most trusted

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if you think that the last so when I think about the last cycle it was like so I kicked off with covet actually and then like all this money Printing and then like the narrative that Bitcoin is an inflation hedge and then Paul Tudor Jones bitcoin's the fastest horse in the race so I guess the first one I was like boom all right Bitcoin inflation hedge Bitcoin starts ripping then we get defy summer in summer of 2020 then we get like nfts go totally parabolic and then the cycle kind of ends with this fourth narrative around um like metaverse and Facebook changes their name to meta and like metaverse stuff gets really exciting actually probably a fifth one in there was like gaming and like play to earned games and the the kind of Genesis of people getting really excited about crypto gaming like when you think about the

next cycle can I pull out some predictions from you guys about where where you're really excited is it just like all of those buckets like gaming and defy and stuff will be bigger than they ever were and the last one or is it there are new things that are going to be really exciting like web3 social and music nfts and obviously gaming is like super super early days but Ariana can I try to pull some predictions out of you sure um you know one thing I'm excited about is to see the next generation of applications that will be enabled by new blockchain architectures so for example we touched on uh mistin or their blockchain suite and Aptos those chains were specifically built to

support a high high volume of uh transactions and that is necessary if we want to think about gaming entertainment use cases for millions and millions of users those kinds of numbers haven't really been possible so far so I think a lot of the creativity at the highest level of the stack has been somewhat limited by the fact that you really just couldn't run these applications so now what we're seeing I think is a lot of really strong Talent being attracted to those ecosystems because all of a sudden you can Glimpse the opportunity where you could actually run a game of the same caliber of what we've

seen in web 2 in terms of graphics and things like that on a blockchain so to me it's not necessarily only a new category but it's the next evolution in that category um so you know I think I think that's one thing that's definitely on the horizon hmm reminds me of this um Union Square Ventures piece uh that they wrote I think it was Danny Grant and Nick Grossman wrote in 2018 was the myth of the infrastructure phase and everyone thinks you like what do they talk about it's like the uh you usually actually apps are invented before infrastructure so like with light bulbs Right light bulbs were the app here that were invented before there was an electric grid you didn't need the electric grid to have light bulbs but

you did need an electric grid to have like broad consumer adoption or like planes right planes are the apps those were invented before their airports which were the infrastructure you didn't need airport stuff planes but to have broad consumer adoption of planes you did need airports so it feels like that's kind of what you're talking about Ariana which is uh you have some of these apps you don't need amazing infrastructure to build them um or like games you don't need amazing infrastructure but now to have them go mainstream and have millions or tens of millions or hundreds of millions of people to use them you really do need this baked out infrastructure yeah and I think to go a layer more specific for example if you look at kind of the initial cohort of web3 games most of them were somewhat Limited in terms

of how actually on-chain they are because of some of these architectural limitations like you couldn't necessarily run the entire game logic on chain because it just wouldn't work um now I think again with some of these advancements lower in the infrastructure stack you can think about having a fully Unchained game where everything from the graphics to the data to the logic lives there um so yeah in in my mind like that's going to be a really exciting unlock because of course fully blockchain based games will have significant architectural limitations because of the the you know the the traits that blockchains have but it also unlocks I think a new

type of creativity the medium imposes limitations but also opportunities and so you know I think that's a category that I'm very excited to see develop yeah yeah go ahead Ollie oh yeah well I was just gonna just to push back slightly on the the that thesis from USV from before I think that that it's often true in the world of Hardware or in the world of sort of just inventions in general you want to invent something like a teleporter you kind of know very clearly what it is that you want you want the thing that transports you from point A to point B and then of course the infrastructure comes after but often with Computing is actually the opposite because Computing is such a general purpose thing that is kind of

hard to imagine what you would use it for before you actually have it and I think this this applies to both personal Computing where the personal computer existed it and it was I think like through through um like Apple's efforts with the apple one and the Apple II and and so on and that's like what kind of with the initial revolution of personal Computing people believe that the killer application for a personal computer would be something like managing recipes in a kitchen right and that that would be what they would be used for and that that's that's what all of the advertising and commercials around around personal computers were about initially and I think it's only once they existed that developers got creative and they figured out how to use this very very general purpose thing for

all sorts of incredible things and I think the killer app initially ended up being spreadsheets with lotus one two three and then similarly with mobile phones it was kind of hard to imagine what the killer apps would be as well until you have the App Store you had the iPhone in the app store and then people invented a bunch of new things that would have been hard to see um a priori and then in retrospect it feels obvious but I think that like the infrastructure really had to be there for those things to be even remotely possible and for there to be an ecosystem of creative entrepreneurs who then explore the idea Mas and then discover those things and go build them and I think it's similar with blockchains where where I think as you as you unlock more computational capabilities that will inspire a new

generation or a new class of entrepreneurs who now see that it's possible to do certain things that they'd be interested in building that they would previously just not even not even bother considering because it would feel so out of the realm of possibility that they wouldn't even begin to think about those ideas so it's interesting to think like once you have say a thousand X more performant blockchains that just expands the design space so much that that I think we'll just be surprised right by the kinds of applications that people build and it's very very hard actually foresee them because we'd be trying to out think an entire ecosystem of entrepreneurs um by trying to predict that's a really good yeah I I totally agree and I think you know sometimes there's also an interplay between the two so to give a concrete example

the Dapper Labs team back in the day the day being 2017 launched crypto kitties which obviously you know broke ethereum basically there were there was too much demand for cats on the blockchain and so the fact that ethereum could clearly not support that was one of the key factors which led the same team to build the float blockchain so in that case you had this application as a direct result of the limitations of the infrastructure that was available at the time you got this next generation of infrastructure which then to Ali's Point breeds I think even more opportunity for developers to come in and and build

creative things from there so I do think there's kind of a back and forth it's a good point it also reminds like non-non crypto stuff it reminds me of um like uber and Snapchat and things like and things like that it's like by by putting a GPS into a phone you were able to get Uber and Lyft right by putting a camera into a phone you were able to get Snapchat and there's no way you can exactly that's right it wasn't immediately obvious yeah yeah exactly um you got you guys have uh I mean one of the things andreessen's really known for is like building teams that help portfolio companies right so you have like a research team and you have a really great policy team and you like the legal team and the engineering team and you help your portfolio companies that way one team I'm curious to get

your guys's take on is the governance team um obviously coming out of like D5 summer you see you saw a lot of dows really taking off and like this idea of the Dow really kind of came back after the after Daz had had maybe a quiet period a little bit of a low um what is your what's like what does the governance team do I guess and what I mean they're obvious I I like I see them I see them participating I see them actually really impressively delegating to a lot of groups that I really like a lot of like a university blockchain clubs which is just a really cool thing but like how do you guys think about governance and delegation and like your role over proposals and like how active of a role of vce fund not even a16z but like how active should a VC be in

governance a very broad question there but curious to your take maybe Ariana if you want to start sure I think on-chain governance is super important because if we believe this theory that blockchains and networks are going to be a significant way in which you know applications run parties communicate with one another in the future um having a diverse and decentralized group of stakeholders who are participating in the advancement and governance of these protocols is super important so we view ourselves as just one participant of many in each of these

protocols and we think it's very important that you have kind of a again diverse set of participants who can each bring their own perspective um I think a a well-run network is one in which you have different types of stakeholders who are contributing different things and bringing different perspectives sometimes our delegates vote against us that's totally fine that means the system is working as intended we just want to make sure that people are informed and engaged but you know they may not agree with us on a given proposal and we think that's totally fine so you know we want to be a voice obviously we have opinions on things um but we also think it's important that

many other members of the community are able to kind of bring their perspectives also yeah what's your thought on Dows in general and like I feel like we got overly excited about Dows and now folks are like cautiously optimistic about Daz and there are a lot of great companies that are kind of in the same bucket like you look at like maker Lido and uh flashbots like all doing great things in defy maker super super dowey I would say uh flashbots very Central like a centralized though pretty flat organization and then like in the middle is like Lido right so like how do you think about whether or not a dow makes sense for uh a comp a brand an organization that you've invested in like whether or not

they should go Dow I guess um well I think one of the one of the trends has been that the word Dao has become so generic and and applies to everything to such a degree that that it's it's hard to to know what it even means I guess I think it would be a product as specifically like not like not like nft not like uh fun Dows or not like a constitutional like for product ads like the aves and unit swaps of the world the people building products like I guess I would say yeah completely so I think uh I mean one thing that is very exciting is that because of the way the technology works you can use it to build new kinds of coordination structures right and then I think any kind of

coordination structure that brings people together and enables them to collectively make decisions or allocate resources um or do something productive in the world is what is known as a decentralized autonomous organization so that that is a doubt and what's very exciting is that the design space is very very broad right so in the traditional world because of the limitations of just you know having to having to instantiate Something in the world as a legal entity like an LLC or a C Corp or something like that and having to get people to to coordinate with these extremely archaic um legal constructs there's only so much you can do right it's very hard to get creative

um with how you structure an organization it takes very very long to run any kind of experiment um and and so as a result I think you you don't learn very much it takes takes a long time to to kind of discover new new uh Innovative and effective structures because software is so much more efficient and the fact that it's a it's a thousand or a million times more efficient it just launch a smart contract to to write some software and deploy it on the blockchain than it is to say pay fifty thousand dollars in legal fees to set up a legal entity I think the rate of experimentation is much higher and you've started to see some of the interesting initial structures like the most obvious structure would be one token one right if you if you have if

you have a stake token stake in a protocol then you get to participate in the governance of that protocol and you get to vote proportional to your stake in any governance proposal for that protocol and this would apply to any of the kinds of products that maybe you were thinking of Json things like uniswap compound some of the D5 protocols or things in the nft world like board apes and also later ones right like later ones in some cases also have governance that that is controlled by by token holders but I think that is the very beginning I feel like this will lead to a kind of golden era of experimentation and you're already starting to see it like for example optimism has this kind of bicameral structure where there's two kinds of stakeholders and there's a system of checks and balances you can imagine sort

of getting very creative as to what the mechanism looks like and what the incentives look like to make sure that it remains decentralized and to make sure that the community gets together and it's representative of everyone and not just of the people who have the most money um so I'm excited that this might lead to that kind of golden era of uh of experimentation for like different economic models different governance models uh different sort of game theoretical models and that those would be actually testable and then we'll very quickly start to learn what works well and what doesn't um so yeah I think that's going to move maybe abroad characterization of the devil kind of world so optimistic on Dows and experimentation outside of just regulatory Arbitrage that one yeah definitely it brings down

the barrier to creativity and I think that's a very good thing um talking about creativity I want to maybe think ahead to the next some some of the big ideas and that that I think are on the horizon for maybe the next cycle things like uh the next iteration of nfts like music nfts um are on I really want to get your take on just like what's going on in gaming right now because I'm kind of removed from that World um yeah like music obviously metaverse stuff is super interesting so maybe we can start touching on some of those pieces that like touch at the intersection of like crypto and culture I might say um Ariana can you just give us like a maybe we could start those are really big topics like a state of the union for like crypto gaming maybe

um and just like what what's going on with crypto gaming today I think we had this initial wave of web3 games that really kicked off a movement um axi Infinity I think was was really the Catalyst there and they have since gone on to become the largest blockchain game um but I think it's really just the beginning for that category one of the most important things that I think axi pioneered and that now has been unlocked for the rest of the ecosystem is this idea of play and earn games and that actually returns to my earlier point where the core Crux of the business

model in web 3 is that the members of the community are also participating in the upside and it's not just the game maker or the platform who is benefiting from it but also the members of the community who are actually playing the game and generating the value so I think this was like a super important paradigm shift and something that we're still really just in the early Innings of of interpreting and incorporating to me it seems obvious that if you look a few years down the road most games will have web 3 models I don't see why as a player you wouldn't want this and I think to

the extent that people are against it or um you know come out negatively on it they really just haven't understood it properly because if I'm a gamer why would I not want to participate in the upside of the value I'm creating it's just it's it's beneficial for me it makes the most sense it's fair it's obviously better for consumers so to me it's silly to even have conversations about whether this model is going to stick around because it's obvious that it will now of course you have significant headwinds from the existing gaming industry because they have made billions and billions of dollars with the

existing model where you know they're purely extracting value from the players and not really giving anything back um but I think that you know eventually number one some of them will be pressured to adapt to this model and number two there will be new entrants actually Infinity but you know dozens and dozens of others who will launch amazing experiences where you're not sacrificing fun for you know participation or anything like that but you can have like a amazing game experience that incorporates the web three pieces as well so I think that's sort of part of where we're heading um right now we're also seeing I think a

lot of work being done to refine economic models obviously managing game economies is super super hard and the first wave of you know folks who launched web3 games didn't all get it right by the way they're the first who would tell you this themselves and so they're very actively working on iterating these models figuring out what are the sinks and Faucets in each game economy meaning what behaviors release tokens to the users versus where do users pay tokens back in to like breed something or you know mint something um and figuring out how to keep these economies balanced which by the way is

very hard it's not dissimilar to managing real world economies and we all know that's not easy exhibiting the economy today um but I think you know in general it's it's a really important step for us to understand these levers better because it'll allow us to be more thoughtful in designing game experiences that can have a long life span not have hyperinflation in these games not have people there for the wrong reasons um but also you know just be really fun to play yeah what about on the nft side of things like music nfts and kind of like the next iteration of nfts I'm just curious I don't know if this is for Ariana for Ali just curious to get you guys to take on that I'm happy to talk a

little bit about music nfts um music seems to be one of the one of the categories that's most ripe for disruption with something like crypto in part because it has been Hostage to a small number of record labels for so long and the power structures in that world have remained constant for for decades as a result um I think an actual fairly shocking stat is that there are currently something like 8 million artists on Spotify and of those 8 million only 14 000 Which is less than it's like 0.02 um make more than fifty thousand dollars a year which is barely a living which just goes to show like no one actually

makes any money on Spotify no one makes a living on Spotify other than the top like you know 0.02 of artists on the platform and that is because just the structure is such that it's it's very power lot like all of the the streaming revenues of going to a small number of our artists and then so much of it ends up getting captured by Spotify and by the record labels um and the record labels have so much so much leverage that it's very hard to sort of try to displace them and so then I think uh there's a question like what is a better model this is very good blog post from a long time ago by by uh David Kelly known as it's called Uh a thousand two fans right the fact that this idea that if if you can cultivate a thousand true fans on

the internet that you can make a living right if if a thousand true fans pay you ten dollars a month that is 120 000 a year right which is which is pretty good um so if you take that idea to the extreme and you use crypto to to try to disrupt music with that idea you you might arrive at something that looks a little bit like sound.xyz which is one of our portfolio companies which allows artists to upload their music and the music ideally now is is completely free but you don't have to pay to access the music maybe it's a new a new piece of music that's generated entirely for this new model and so it has no kind of connection to record labels it now exists on sound and anyone can play it so you can build a community around the music and then the interface of sound is

kind of like the interface of uh SoundCloud from before where where if you remember you could you could add a comment on the interface somewhere along the track of the music right and so it's kind of like a little social experience where like if it's like I don't know like a kind of like Dubstep Mix there's like a drop and people like to comment at the drop um and you can have fun with that and that wasn't kind of a cool interesting user Behavior back then and sound is actually taking that idea and making that an nft right so you you buy an nft from the artist so the all of the money that you pay goes directly to the artist 100 of it um and then that nft gives you the right to comment on the track all right and so maybe there's a hundred

nfts per per track and and that that is kind of an interesting an interesting start right for how an artist can begin to monetize their true fans but what's interesting about this is that that's just the very beginning because what happens next is that now you have as an artist you have this community of people who have bought your nfts and they're all they're all Unchained you have an economic relationship with all of these super fans of yours who have bought in the tease and then there's a question as to it's an interesting question as to what you can do with that maybe you can build like a token gated chat room where you have to hold one of these nfts to enter or maybe you can have like backstage events at your concerts or any other kinds of creative ways of engaging those people uh now that you have this

much more direct relationship and so I think it's the beginning of artists being able to connect directly with their super fans and being able to monetize their their um yeah their Community much more directly without having to go through record labels and through Spotify and so on and already I mean you can already see this like there's millions of dollars like three something like three million dollars has been earned by artists on sound.xyz and it's very early like the number of artists very small yeah many of those artists have made much more money many times more money than they have ever made uh through things like Spotify um so I think that that's an exciting beginning for the future of how music might be monetized on the line and how crypto might enable it yeah I'm with you on on music nfts by the way like I'm uh

I like house music and um I remember finding lost frequencies really early on and like my friends and I there's this house musician lost frequencies and like we found them super early on we're like at that point we basically give them as much money as we could give him but there was no way to give him money it was like you would just exactly I want to give you money like and I also want to publicly show that I'm betting on you outside of just like posting on my Instagram story like hey go check out lost frequencies and the same thing happened again with uh uh my friends and I love Fred again and like I was like Fred again is really cool and then like now Fred again is blowing up and I was like I saw that guy early uh but no exactly I mean you're totally right

and I think it's it's cool because it does enable what you're saying which is patronage right you want to be able to support an artist you love but it also goes beyond that because because it's this collectible thing that is actually worth something and so there's now a kind of market for that thing so you could actually end up making money as a result from from contributing and and supporting an artist um and you could imagine a whole new role emerging right imagine you being like a kind of music taste maker and as an artist you can get funding early on you can get kind of connected to some of your early fans um and then as a as a fan you can actually get to make money you can imagine making a living out of that right so it creates a new Whole New

Market that didn't exist people I think the biggest trouble that music nfts are going to have taking off is that they don't have the native distribution of web 2 social and what I mean by that is like if you look at nfts like board apes or like punks or some something like that they um they became pfps right so like they were shared all they were the biggest the best distribution ever for nfts was that people on Twitter made them their their profile pictures music nfts don't have that so I wonder I wonder how the you got to put some image together with it so but that'll be solved so um I guess the last two topics I want to get your take on is uh two topics that seem like the smartest people in the world that I know are working on two topics right now which is

like or maybe it's really one topic well zero knowledge proofs and like building privacy into blockchains that's what the like most Giga brain like smartest developers I know right now are are most excited about like building privacy into blockchains and zero knowledge proofs and I just I don't even really know my question here I just want to get your take on like what you're seeing in that space and if you're excited about it if it's under hyped over hyped like are a lot of people building in it you like just what are you seeing from from that space right now yeah totally I think that that is a very it's an important subcategory of the space um and I I would say that zero knowledge proves are might even be under hyped and underrated even though they are so insanely hyped and you hear about them

all the time now and that is because they are they are very very general purpose right they're almost like smart contracts the way that smart contracts were um in 2014 2015 2016 the fact that people were excited by them they were excited because they offer you this whole new general purpose programming environment that you can do all sorts of interesting things with that has that have special properties the same thing is true with zero knowledge um uh proofs now where where there are now constructions that are general purpose and it's kind of like this Holy Grail primitive for blockchains because what they let you do is um is essentially offload out any kind of computation that you want to perform to someone else have them execute it and then produce a zero knowledge proof that

they executed it correctly and then you just given that proof can become utterly convinced that they actually executed the computation correctly and that is that is like the holy grail for blockchains because if if you actually look at the way that blockchains work today the only way that you get security is by having everyone execute every computation um redundantly every Miner every validator every every full node in one of these uh blockchains today like ethereum has to run every instruction of every computation to convince themselves that that everything is working as as intended uh with zero knowledge proves you could actually completely change the game you can make it so that only one

node only one minor or validator has to actually run the computation and as long as they generate the zero knowledge proof everyone else just has to verify the proof and get convinced that the state was Advanced correctly uh and so that has dramatic implications over how you would architect the blockchain like now that we have these Primitives you can imagine going completely back to the drawing board and architecting a blockchain in a way that's radically different from the blockchain from before leveraging the fact that you now have this magical capability but that could lead to much greater scalability right you could be you don't have this redundant activity that happens in the network that is what causes blockchain to be so expensive and so slow so scalability is a big potential upside of

all of this but as you mentioned there's also the potential for building additional features like privacy so zero knowledge proofs also give you this this ability to potentially encrypt some of the some of the activity you can encrypt some of the inputs to the computation you can encrypt some of the outputs and there's a lot of flexibility over um what is exposed and what isn't so it allows you to also build for example fully private smart contract platforms fully private blockchains a good example of this might be Elio also in our portfolio it's um it's a fully private uh general purpose blockchain and that is that is powerful and and useful not just because users will care about their personal privacy which they

will right I think it's important that that people preserve privacy over their transactions and I think that that'll that'll matter but but it's also it's even more important because it'll unlock a whole new region of the design space it'll allow you to build certain applications that you couldn't possibly build without privacy um and that good example of that might be for example might be games games that require certain amount of uncertainty in the game to actually make the game fun um could be could be like a something like Dark Forest where you just don't have full visibility into the into the world of the game and you can use your knowledge proof to do that you can use privacy um to do that there could also be applications in the financial world where where you want to maintain certain

secrecy over over the transactions in a particular D5 protocol and we can go on and on I think there are many kinds of applications that you can build with privacy but zero knowledge groups are powerful for both of these reasons they I think they expand the set of applications you can build and they'll also potentially provide the solution to to the scalability problem in crypto yeah no I think yeah I mean I think at the nail in the head if it feels like like so you look at the space right now arbitrary and optimism both optimistic Roll-Ups now have a larger tvl than Solana it feels like there's been all this progress in ZK Tech but maybe the commercial applications of it are still lagging a little bit I think that changes in 2023 and then also you talk to a lot of financial institutions like

they don't want their financial transactions their inventory data Etc available for everyone and maybe this helps that out too so um I know we're coming up on time here Ariana just curious uh I'm gonna ask maybe both you guys the same question just as a closing question um Ariana maybe could start with you what what feels I mean you've been working in the industry for eight years or nine years now like uh uh just like a really impressive career in crypto and I think you've seen a lot of uh some things in crypto tend to like repeat themselves some of these Cycles like what what feels obvious to you right now about where the industry's going and where crypto's going that maybe others they think others are

missing sure so I think you know cyclical nature um and to me you know we've we've looked at the data over the years and what we've seen is that there really is a method to the madness in terms of what we call these price Innovation Cycles whereby you know you have an initial um you know the Advent of a new technology there's excitement there's enthusiasm that eventually gets kind of overhyped it gets ahead of real progress which causes a price correction um an important thing to note though is when the prices are rising what that means in real terms is that it's also

bringing in a lot of talent to the space there's a lot of developers coming in a lot of Builders who are um you know obviously there for the financial components but also there for the technology and when the prices come down what you see is that some people who were there for the wrong reasons end up leaving but a lot of the builders actually end up staying and that's the really exciting thing that sets things up for the next wave um sometime thereafter it's obviously hard to predict exactly when these things are so to me having been in this space for a while it's funny how these these waves seem pretty obvious I think to to me and US sometimes and yet there's still some Whiplash I think from

people on the outside looking in so to me you know again the the core motion here is really the fact that the builders are still building and that is the single constant that's been the case for all nine years that I've been in the space and you know I'm just excited to see what the next wave brings yeah it's a great Point Ollie you want to close this out sure yeah I think the other the other thing that is I think to all of us uh internally now very obvious is the is the kind of the core thesis right I think kind of this idea that blockchains are computers and they are computers that have this very new capability that has never existed before which is this ability uh for

developers to write programs that make commitments about their behavior that lasts well into the future um and that has never really existed as you put it before uh Jason it's this notion that uh blockchains invert the power relationship between software and Hardware in the traditional World Hardware has power over software because whoever controls the hardware can change the software or turn it off in the world of blockchains is the opposite where the software creates a kind of network that commoditizes the hardware and the hardware consists now of just validators or minors or things like that that are paid to contribute to computational resources to the network but they don't have any power over how the network works and that's a very powerful thing it's very new it's never existed in computer science or software before

um and we believe that there's just so many kinds of applications that you can build with this new kind of computational primitive and it starts with things like Finance it starts with with kind of the like the most obvious application was Bitcoin it's a program that makes a commitment that there will only ever be 21 million Bitcoins um but that is the the most obvious and the simplest things you could possibly do from there you can you can start to imagine things like in the D5 world right you can you can build decentralizes changes you can build Landing platforms you can build Insurance you can build options um but then beyond D5 I think all of the non-uh financial applications are even more interesting things like decentralized social networks where there isn't a multi-trillion dollar monopolistic Tech Giant in the middle

that controls everything and controls who can talk to whom and who gets to follow whom and instead you have more of a more of a public network where the social graph is something like a public good and anyone can build on top of it and you control your own node and your own identity within this network and you choose who to follow and who gets to follow you and there's no Central company that controls everything um so I think like our our belief is that this new computational paradigm is here to stay it's extremely powerful it will unlock all sorts of interesting new applications uh and we're only very much at the beginning and that to us is so damn obvious and it's kind of frustrating obviously to see on Twitter it's like oh what's the application what's the use case all these things where it's like well it was unclear what

the use case for the personal computer was right at the beginning and same thing with mobile phones and and so I think we're seeing a very similar kind of pattern with this new computational wave and I think it's only becoming increasingly increasingly apparent can ask for a better way to end it that's amazing Ali Ariana thank you both we'll uh we'll put links to your twitters and some of the resources we talked about in the show notes so yeah look forward to uh look forward to continuing this conversation at some point hopefully soon and thanks again for coming on Empire thank you Jason thank you thanks so much all right thanks so much [Music]