Crypto x AI: Funding the Next Industrial Revolution

Transcript

All right. Uh privacy and AI, those are the two big important things in life. Um I've been a crypto VC for a very long time. But actually, uh before founding my firm Hack, uh I was uh focused on AI infrastructure software at a big firm called Bain Capital. And I would say for the la- for the first 5 years of like the 10 years I've been doing this, crypto was actually the cooler, more technologically exciting, kind of sexier of the two technology trends, right? And now, sadly, maybe we're kind of in a little reversal, uh where basically everyone in the entire world is talking about AI, and AI is like this black hole that just sucks up all the

capital in the world, right? Um and I think there is this there's this idea, well, okay, it's sad all this capital, some of it should go to crypto, right? But I'm here to tell you today that I don't think these two trends, mega trends, are opposed to each other. And actually, I think um crypto historically has been incredibly essential and critical to the AI build out. And um we're going to talk a little bit about a story of a very unlikely group of characters, basically these these Bitcoin and crypto mining companies, um who were able to see the AI future ahead of anyone else, ahead of any other companies, uh profited from it quite enormously and their shareholders, and basically became the engine uh by which

the AI build out has occurred. And then we're going to talk about like what are some lessons that we can learn uh from this story when we're looking at what's interesting, especially as as a VC, like from an investment opportunity uh in the crypto AI intersection uh from here. Okay. So, the first thing to talk about with AI is actually, if you zoom out, the hype is pretty real. Like it is in fact one of the greatest uh uh technology shifts in the history of uh capitalism. And the way you can measure this is basically what percentage of of GDP uh has been spent on building out infrastructure for this technology shift. And if you see it over the course of what is this? Like 100, 200 years?

Basically all the big technology shifts that we thought were big in our lifetimes of the last 20 years like crypto, SaaS, biotech, they're not even on the screen. Like they're just little blips, you know? Um you have to go back to the internet to see something that's of comparable size, right? And and and still uh the AI build out is like four times bigger than than the internet build out. It's like almost 10 times bigger than electrification, which is like a pretty pretty big deal, you know? Um and railroads historically have been the biggest in Western world. Uh and and this is uh crypto or or sorry, AI has recently eclipsed that.

So, it is really big. Um it's uh it's worth paying attention to, right? Uh my contention though is is actually the AI build out started a few years ahead of time of of ChatGPT and generative AI. And it really started, you could see the origins of it with the Bitcoin mining uh build out, right? Because if you think about what is the AI infrastructure build out? Like what's whatever three or four percent of GDP going toward? It's three things. One, it's this huge production of of chips, right? From Nvidia, AMD, um that are And these chips, they're specialized pieces of hardware.

Um and they're they're actually technically ASICs, right? Like specialized for doing compute. And then you put them in data centers around the world. And uh then underneath there's just this massive insane amount of power, right? That's going to to power these chips to produce AI training and inference. So, the sort of the outputs of AI. And if you think about what those three things are, you're basically building out this distributed global compute network. So, the Bitcoin miners did that first. It's quite cool, right?

they already built this infrastructure and really what happened over the last few years is they did it on a small scale and then it became a test case for the AI buildout and it sort of went into that and became essential for it. Um and so there's this question like, well, what is it that the Bitcoin miners saw first and how are they able to to take advantage of this trend? Uh there's a Who is it? I think Balaji has this quote, who's actually speaking upstairs, that um Bitcoin is kind of like a battery in many ways, right? And the miners saw that early on and took took advantage of that trend. And and AI is is sort of like this, too, right?

It's a battery in the sense that it's this form of value that exists on top of real-world infrastructure um anywhere around the world and it it turns that real-world infrastructure, which in this case is energy, into compute and into value. And sometimes it even goes backwards and it's sort of fungible. It's like this financialization of of the world's assets, right? Um and so uh the crypto miners saw this early and they focused on basically power as a bottleneck when they were building their data centers. And now that's like a meme, you know, what's the latest bottleneck? Power is obviously the biggest one in the world right now. Um they zeroed in on that and so instead of building their data centers where the customers were, which is what like AWS and and Google did,

they built them where the power was cheapest um in like places like northern Canada, Texas, North Dakota, things like that, Siberia even. and they focused on power, they focused on operational efficiency, speed, permitting um because and then interconnectedness, this idea that you have to have like 99.9% uptime with your energy, with your internet connectivity, because otherwise if your power shuts off when you're mid mining a block, you lose the block, it's very bad, right? Um, and so they're able to carve this space out for themselves in this like data center world, right?

And then that became extremely extremely relevant uh for AI when it happened. So I'm going to talk about a little little example. So this is a company called Crusoe that uh I seeded way back when. Um, and they're one of the biggest neo clouds today. Uh they started as a Bitcoin miner uh with a very similar thesis to what I just said. They were like, let's go find underutilized gas um in America. And there was this for regulatory and cost reasons, there's all these gas reserves in America like a decade ago that were just being underused and you would use some of the gas, but a lot of the gas you would literally have to burn because you couldn't truck or build a pipeline out to this like remote place in the middle of America um to access the gas.

So their idea was like, well, let's bring the sources of demand for uh the gas on site, right? So let's build these data centers, fill them with Bitcoin mining machines, wheel them out to like Texas, Abilene, Texas, it's like the middle of nowhere. Um, and uh and then we'll also build mini power plants uh on site, right? And this idea of building the power plant is like crazy ambitious and difficult. Uh but they had to do it, right, to to mine Bitcoin cheaply. So that worked, they became a billion-dollar company. Um they had multiple percentage of the hash rate, but they were super big into AI. Uh they always had like 10% of their resources focused on AI.

Um and so when GenAI happened, ChatGPT launched, it sort of became the main thing. Now they're $30 million company um and their concept of like building a power plant on site, it's called behind the meter. This is like what SpaceX does. This is sort of the cutting edge of um of how you build AI data centers now. The reason being like AI data centers are insanely massive. So when you measure the size of these data centers, it's in gigawatts. 1 gigawatt is enough energy to power like a like a mid-sized American city. So like San Francisco is powered by 1 gigawatt. And then this initial site that they did, which is which is the main develop like they're the main developers for Stargate, which was this half a trillion dollar initiative from you know, the

Trump administration, Open AI, SoftBank. So this site, which is basically where ChatGPT's latest models are trained, is like yeah, it's a mid-size city, right? So So basically if you want to create this much power, you can't take it from the grid, it would be like a big problem. You have to develop it yourself. And that's what they did. So it was super successful. And yeah, it's not just Crusoe. If if you guys are public market investors, you have noticed that the the crypto public stocks have done incredibly well in the last year or two, and it's not really been like Coinbase, it's been or even Circle necessarily, it's been like these mining companies, right, that have pivoted or grown into into AI. And so eight out of 10 of the biggest neo

clouds are crypto businesses or started as crypto businesses. So they made hundreds of billions of dollars in in value, you know, to their shareholders and themselves. And they literally are powering and sort of building the AI industry, right? So it's a pretty remarkable achievement. Okay. VCs are always thinking about what's next, what's the big problem that needs to be solved. that's kind of where the value lies, right? So after we built out this huge industry known as neo clouds, where else is crypto coming into play?

Okay. The thing that I see the most as a problem right now, having seeded a lot of these neo clouds, um, is basically this issue of how do you actually finance this world historic build-out of of uh, of AI, this like next industrial revolution. And so, there's trillions of dollars already committed to the build-out, and there's a it's not enough. You need another 1.5 trillion to make all of our dreams a reality, and uh, power muse and all that fun stuff. Um, but even the trillions that are committed right now, it's very unclear whether, you know, banks, private credit markets, and traditional financial rails will be capable of like handling this

amount of financing. And the reason it's such an issue is the size, for sure, but also it's very new and it's very opaque. Um, you don't really know when you're like lending money to these uh, neo clouds and even SpaceX and things like that, where exactly it's going, what are the assets that you're going to get or be able to use as collateral, what their resale value is, whether they're fungible or not. Uh, there is this uh, I saw just earlier today SpaceX uh, asked for like 40 billion dollars in a credit financing to build some data centers, and people are the banks are complaining cuz they're like, we got a two-page memo.

And like, we're supposed to give 40 billion dollars and put into pension funds and retirement accounts with this like two-page memo for 40 billion dollars. Like, this is this is insane. Um, are we supposed to trust Elon? So, the alternative is uh, you know, you could use crypto. so, I think that crypto is really well positioned as the solution here. Just like the crypto miners, they sort of allowed us to sort of financialize energy and spur the sort of global race um, to create data centers all around the world, um, and the distributed compute network, so too do I think blockchain technology is going to help AI by basically financializing

the AI build out. So, these are a few of the areas that I think are the most exciting. They're a lot of them are very early stage. That's where early stage VC. We don't I mean when I invested in Crucible it was like 5 years before it got big. So, it might take a little while for this to play out, but this is the stuff that we find the most exciting right now. So, I'm going to go through it. And some of the, you know, companies working on this. Okay, the first thing that I think is exciting is using DeFi and stable coins for uh financing GPUs and also financing tokens. Tokens as in Tokens as a name for the output of of AI, right?

Inference tokens. Um and it's small now. It's like the a dollar amount that these companies like US DAI and Gaige have have uh raised is like half a billion dollars. So, it's a little bit shy of 1.5 trillion, okay? But, you know, it's a growth opportunity. Um and but it makes a lot of sense, right? Because if you look at the benefits of DeFi, it goes from like in Elon we trust, you know, like here trust me, bro. Like SpaceX is cool. To uh you trust the technology, you trust the rails itself, right? You trust this sort of transparent financing that's happening on chain.

Uh because it's transparent and because it's liquid and because it turns sort of things into assets, right? And the liquidity is very important. So, the second thing that I think is going to happen uh very soon is we're going to have this mass uh of mass evolution or proliferation of compute like trading products and financial products. Um you see this right now in the next month or two, the CME and ICE are both launching uh they're the largest exchanges in the world. They're both launching crypto uh futures or sorry, not crypto. Uh compute futures products, right? Uh and Kalshi uh just launched what's called a like market implied

forward curve, which is basically they aggregated a bunch of prediction markets about what's the price of this GPU unit and what's the price of this inference and these number of tokens in the future um to get a to get like a curve out of it. Uh and this is just the beginning really because I think the next stage once you get the centralized products, you're going to get the decentralized tokenized versions of these things. They're going to trade on hyperliquid and Uniswap and your favorite DEX. And then from there once you get things tokenized, things go crazy. You get you know, synthetic versions of these things and wrapped versions and you get levered versions and basically I think we're we're going to get this new like like what we saw in the mid-2000s

with mortgage-backed securities uh and tranching and slicing of products. I think we're going to get that turbocharged with like compute-backed securities and a lot of that is going to happen on chain and with tokens. Now, you may say, well, hold on. Hold on. Didn't that lead to like the 2008-9 financial crisis? That is true. That is true. we will see there's this question of like the bubble in all of this stuff. I'm not really going to get into it. It's like a much bigger conversation. Uh I'm just here to tell you the future, you know. Uh we'll see we'll see where it leads afterwards.

So, I think that's going to be pretty massive and crypto is going to be a big part of it, right? Um and then the third area that's also very exciting and these are sort of the tokens that are a lot of them have uh you know, boost here and um you can buy them today and stuff. Uh is this idea for like how do you do AI on chain? This is the big dream, the big promise of what blockchain technology can do for AI. Like what if you get to a world where the AI itself, which is to say training and inference, happens on chain. It's ambitious. It's not quite here today. takes a lot of scalability issues and things like that.

Um but it'll get there. And the benefit you hear from these companies, things like Near, Venice, or Gravity, um is very user-focused. It's like you could have a private version of your AI. You could have verifiable compute. That's very useful open source. Um that's very useful for enterprises. Uh that's cool. But actually, I think the exogenous benefit of this for the AI buildout is like 100x greater than just the narrow benefit for users. Which is once you get the actual output of AI like digitized and standardized on chain, then it becomes legible to finance. You can make markets around it.

You could use it as collateral. Like this gets to the core of like how do you solve the how do you finance the compute buildout problem, right? Um so it's like a two-step. Step one is, you know, private verifiable compute. Step two is part of this broader financialization story. So, we're very excited. I think the future is bright. Um crypto, I think will continue to be a very critical part of the greatest infrastructure buildout we've ever seen. And uh yeah, it's truly insane how big it is. It's like world historic. Um and it's amazing to see it doesn't get talked about enough how important crypto and these mining companies have been to it and how I think the rest of crypto, DeFi, and on chain, and the financial part are going to be uh go- going ahead into the future.

So, that's all I got. Thank you guys so much. Really appreciate it.