ep 16 – Mental Models for Navigating Crypto Markets & Cycles

Transcript

welcome to web 3 with A6 and z a show about building the next generation of the internet from the team at Asics and Z crypto that includes me your host sonal choxie this show is for anyone whether developer or engineer artist or Community manager researcher or policy maker company leader or entrepreneur seeking to understand and go deeper on all things crypto and web 3. we're back with all new episodes next week but for now I'm sharing a rerun of our very first episode in this new show from six months ago not only because we have so many more and new listeners since launching the show but since this conversation is still actually vary if not more relevant to current times because we discuss mental models for

thinking about crypto markets cycles of innovation as well as methods metrics and some key trends it's a hallway style conversation that took place note in our more casual sound environment previously between Chris Dixon founding General and managing partner at Asics and Z crypto Eddie lazarin head of engineering at Asics and Z crypto and me and we also discussed our 2022's date of crypto report which was co-authored with Darren matsuoka and Robert Hackett as well which you can find at asicsncrypto.com date of crypto as a reminder none of the following should be taken as business legal tax or investment advice please see Asics and zoo.com disclosures for more important information including a link to a list of our investments [Music]

all right so let's talk about where we are so it's May 2022. crypto has been around for something in the order of 13 years we just got through what seems like a big bull market a lot of investment a ton of new companies formed it seems like assets throughout the world have declined particularly risk on assets as they say so high flying tech stocks things like that although Gabriel I mean Mark could see little Spooks people are worried about inflation you might be entering a recession so that's kind of a broad backdrop and anyways what I've been thinking about a lot lately is now as we enter this new what appears to be a new Financial environment what's going on in reality in the layer that really matters which is the kind of Technology product

layered so in the 10 years I've been in crypto there have been two this might be the third major downturn we'll see in the third winter the first one 2014 15 16 the second one 2018-19-ish a few years ago we asked the question these Cycles seem kind of random to Outsiders but as insiders who live and breed this we felt like there was kind of a pattern and specifically the theory was that what would happen is the prices would go up that would generate more interest more press more social media activity leading to more entrepreneurs developers creators entering space new products being created planting seeds

that would then develop over the next few years at some point people got a little bit over excited about some of these genuine kind of tech breakthroughs but maybe they were the speed at which they would mature was overestimated the markets dropped again but very importantly you had the siege planted new software new products new infrastructure new companies formed which then kind of created the next wave and I think we saw that you did all the data analysis an interesting thing that came out of it we did see and we published this in the blog post and we published it again recently I see a crypto report we believe that we saw like the real a causal pattern there during the last winter it was a bit over two years ago yeah yeah two years ago and the analysis was like basically if we're right all of these sort of seeds

planted in 2018 specifically a lot of sort of infrastructure Solana Avalanche near this big wave of l1s l2s Optimus Etc a bunch of applications FIFA unit swap compound Etc nfc's open C Dapper those would eventually mature get people excited it's kind of what happened right yeah yeah it's interesting is that when you're seeing everything in the flow it's pretty clear to me how many new seeds have been planted over the last couple years and it makes a lot of sense why it should take some time for those seeds to germinate so to speak take for example the scaling of solutions that we're seeing it's just starting to grow now right like optimism arbitrum ZK sync like there at their earliest stages but

you can see publicly on chain they're just starting now to take up about one percent of the on-chain block space in ethereum and they're just starting to be real and these ideas like optimistic rollups and zero knowledge Roll-Ups and so on we started hearing about them years ago yeah Eddie quickly explained optimistic Roll-Ups and zero knowledge or ZK roll ups so optimistic Roll-Ups and ZK Roll-Ups both scale their underlying blockchains like ethereum an optimistic role the basic idea is that you can aggregate all the transactions together into a single checkpoint and put that onto the underlying layer one blockchain and create a period where anybody can permissionlessly come along

and check that the work was done properly if the work was done properly there's no problem after some period those changes are accepted but if there is a problem someone can construct a proof and it's called a fraud proof it's like a cryptographic object that shows definitively that something was calculated incorrectly and if they post that fraud proof onto layer one they actually get a reward for doing so so the way that The Game theoretics net out is that if there's a problem someone out there is incentivized to find it because it's free money and if there's no problem well as long as the sufficient amount of time passes we can all kind of trust that yeah there probably wasn't a problem because someone would have wanted to get their free money right and

see optimistic I love it exactly this is a terrible analogy this makes me think of like one of those lame questions people would ask each other do you give trust by default or do you wait for people to earn your trust optimistic Roll-Ups remind me of the former model where you give the trust up front until proven wrong it's like how humans engage is this model essentially that's exactly right I love the Navy crypto me too and I also like it because I think people forget when we talk about systems of code that they're very human systems like at the end of the day code is just a way for people to create and transact and share with each other oh exactly exactly right and that's literally the purpose of all of this okay ZK Roll-Ups so zeroles from survive proving that a fact is true without having to reveal

the fact in this case you're revealing that the computation occurred in a valid way without actually revealing all the competitions so Ezekiel also Aggregates a bunch of transactions into one check point or one piece of data the difference is that it comes along with it a special kind of cryptographic instrument specific cryptographic proof some call a validity proof which is a proof that actually all the calculations that are alleged to be in this piece of data were done correctly and that's very kind of counter-intuitive idea like if someone says they added two big numbers how do you know that they're right without having to do the addition yourself of course you could check their

work by doing the work for yourself but it's much slower to do that especially there's a lot of complex calculations in doing this it could take a very long time to replay someone's work especially if for example it's many thousands of transactions that occurred all over the blockchain from all over the world so instead of having to calculate it all yourself if there was a way to construct a proof that it was done correctly so a very short quick and dirty way to verify that everything was done and you could probably accept right away what was alleged and that's how zero knowledge probes are used to scale an underlying blockchain it just takes this long for them to start to work and it will probably take some time for them to

become the predominant Computing layer for ethereum like and that's kind of been the design all along just like for example the migration to proof of stake for ethereum that's not just some recent trendy idea it's been in the works for years probably five or more years at this point it just takes that long for the incremental technology and like research Innovations to take place and it takes a long time because it's complex and also because these are decentralized systems a lot of people come together and agree on them exactly right so from my view when I look at how everything's going it feels like despite Financial turbulence things are proceeding according to plan in the loosest sense of course there's no specific plan these are decentralized

systems with tons of different participants and tons of different motivations and interests and incentives and it's chaotic definitely when you're deep in it it's chaotic but when you kind of zoom out you can see that each incremental piece of tech that we've needed to make this kind of thing work or make that type of thing more even to be able to experiment with this new type of application like they're all coming in like one at a time and it feels like sometimes the excitement can outpace the level of tech development but I actually think there's a reason for this too the fact that people can buy these things and can own a part of them and they can trade freely it contributes to the ability to talk about it the prices can change like all these effects are things that weren't even possible in previous

generations of the web because the only way that people could get access to these things before web 3 is either by working at the company being a privileged investor or starting your own company and the fact that anybody can buy these Assets Now means you get a little bit of the chaos one expects from democratization yeah from just broadening access to wider groups of people that creates turbulence it's also part of makes web 3 is that everybody can get skin in the game everybody can be an owner everybody can participate crypto has always been retail-led and institutional followed like the institutions are always laid behind my mental model is retail is very good at macro and bad at micro institutional is very good at micro embedded macro that's interesting say more part of the point

of this episode is mental models I want to hear more about that and how it fits here so retail gets the Big Ideas so retail gifts that like crypto is a big thing retail meaning like your smart software developer in Ohio who like lives and breathes code all day gets why a blockchain's a big deal right in a way that a banker in New York doesn't and so they get the macro they get self-driving cars they get AI they get the macro micro is very hard because they don't have the diligence teams they don't have the access they can't go and say okay here are 10 layer one blockchain I did deep work and I can tell you which ones are better for distributed systems point of view how could they they're like behind the keyboard playing a game I think it's much more advanced on the

kind of zeitgeist side and just understanding where the future is going then the banker in New York but doesn't have the tools right the banker in New York essentially grasp lines through shards don't really have Vision don't really understand technology almost none of them have knowledge of computer science to the internet but they have teams of people and they're able to say this lidar company is better than that light our company the CI company is better than that and so I think one thing with crypto is because it's been retail LED they I think are directionally correct get the macro get the big picture get excited by new Concepts but they also can't distinguish and frankly The Regulators have decided instead of going after the bad projects they're going to have good projects and as a result you get people who are directionally correct they're excited

but some of the projects they choose are bad some of those things blow up and then you get this kind of chaotic up and down cycle that we see but one that I think is directionally long-term correct but chaotic in the short term an analogy I've used uh is sort of flying a plane with instruments versus through sight I've never actually flown to planes this is very much a metaphor but you fly when it's foggy or something else you know using your instruments and when you use your instruments you have to kind of trust the system right and you can't kind of rely on your senses and in my experience if you just sort of trust your senses and by senses I mean the news you read the people you talk to your kind of instincts it's very easy to get caught in this up and down herd

mentality cycle of markets this is not by the way a new idea that only iPad it's a common idea if you read people like Howard marks and others who talk about Market cycles and sentiment and what happens in these kinds of Cycles is in a good cycle in a positive cycle every piece of news gets interpreted positively everything is kind of self-reinforcing it's sort of availability Cascade where you know more and more good news leads to more and more good news in a negative cycle it's the opposite and so a very important thing to do I think when you think about innovation entrepreneurship the future seeing where the world is going is developing Frameworks to parse information in the world look at patterns look at the evolution of products I always talk about sort of in

Computing Cycles a very important kind of reinforcing feedback loop between infrastructure and applications so you know the first iPhone came out in 2007 the App Store in 2008 kind of the golden period of app development and snap Instagram venmo Uber were all created with 2009 to 11. that created a whole bunch of new use cases for phones which in turn gave Apple and Android Samsung Etc you know they sold more phones they had more money to invest they built better phones better phones led to more apps you had this reinforcing cycle understanding things like where are we in that flywheel cycle of the Computing cycle is very very important and so that's the instruments and what you see around you is this show of people freaking out and panicking or on the flip side everything's wonderful and

we're all geniuses you know keep focused on the fundamentals on the technology on the products on the entrepreneurs and where's the talent going that's the kind of instruments in my mind and that's for me has been a kind of mental model that has served me very well is developing those Frameworks and then sticking to them and ignoring the stuff you see around you I love that mental model this is not like a normal technology cycle because it's not just a matter of new technology leads to new types of things that people can build and it takes some time for them to find that new tech and build on it and incorporate it and learn it and add to it and then that creates new things that kind of Serial process the fact that you can put price into it because these are assets that you can

own and that you can give to people and that you can receive through doing interesting things when something is permissionless and open and exciting you can get hordes of people who are super interested in the thing barging down the door and that's a powerful super interesting effect you also allow a new usual and new types of talents to be attracted to it you know like Chris was saying the engineer in Ohio who just thinks about code all day maybe was never going to work for a big Investment Bank or for a major Silicon Valley company but it's a brilliant engineer nonetheless they may be attracted to this and contribute and benefit and have an impact that they never could have

just because of how open and permissionless it is so those two super powerful forces are at play in a new way and that creates chaos in the short run in the long run I think it creates more Innovation at a faster Pace you know I was going to add one thing to that which is I think it creates more composability and opportunities for composability because when you think about how communities form are on lore and like storytelling able to exchange ideas around the frenzy and excitement of an idea like the memes frankly yeah I was even thinking of an example like Loot and the activity that is entirely enabled by having a community and that kind of excitement so it's not just an either or it's something in between too yeah exactly this is like an incredibly

fine Edge yeah you know like this is a incredibly powerful instrument this ability to create growth by like making assets that people can speculate on and you can get his Rewards that is an incredibly powerful tool that we don't even know how to use yet I firmly believe that the next wave is going to be people thinking much more carefully about designing sustainable types of growth and using the incredible growth tool yeah but thinking very deeply about retention and keeping people in the system and yeah I think of token rewards as like mentally I picture it like you blow up a balloon and let it go and it flies around the room and it zigzags and yeah Butters around yeah and it's like

I'm not a rocket scientist either nor am I a pilot but I imagine people originally built rockets and planes had the same problem right and then eventually I don't know if they've passed around the room but I'm sure they didn't go in the direction they wanted to and the whole thing was like how do you take this incredibly powerful new force and kind of control it and maybe go in the direction you want and I think we're in that phase of crypto right now yeah yeah like it is a nuclear level Force the power of taking people who have been distance franchise who sat on the sidelines who basically effectively you know 98 of the people on the internet are left out of the internet economy everyone who uses Facebook is not really part of that economy but the question now to me the most important

question that we'll be discussing in the next couple of years is how do you take that new kind of Rocket Fuel that's right now in some cases flowing out of control and doing crazy things and leading esteemed Publications to constantly say that crypto is a bunch of Ponzi schemes and everything else and how do we take that powerful force and harness it to fulfill the web 3 vision and to be the web three vision is how do we build new networks the killer app of the internet is networks this is what you do with the internet the internet is a system upon which you build new networks you can build a network like Facebook or Twitter or email smpp the web and I believe there's going to be 10 000 new networks created in the next hundred years how do we use tokens to create new networks where the people

that do the work of building a network own and control the network work instead of the company and the people that funded and the founders of that company in a way that builds better networks that are more inclusive and that incentivize long-term positive behavior and that help a bunch of networks that previously it was just very hard thing when you're building out a network in the beginning the cold star problem the chicken egg problem the initial hump and one of the very powerful things of tokens is we can now use those to incentivize users to help those networks get to critical mass yeah I mean a question I'd ask someone who is skeptical of this is like how do you design a network so that enforcing and encouraging pro-social Behavior yep is

native to the network there is no way to do that in a network that is just owned by someone I'll do the other side let me just defend it like the bill swulsky at stack Overflow would be the closest to the other side you use games you know badges Maybe Wikipedia so there have been a few cases where it's worked I think in the Kingdom of a benevolent dictator like it's just fake let's just admit it like the web 2 narrative uh people feel like they're part of these companies and it's a community it's a fake narrative they use these words like community and it's all like no one actually feels outside of the venture capitalist like us and the owners and a few other people feel like they're owners within those companies right has anyone ever shown up to a convention and said you use

Facebook I use Facebook oh my God for both Facebook users that's awesome I feel a sense of kinship to you the way that they just showed up to garyvee garyvee at a convention in Minnesota 10 000 people show up at a football stadium to talk about the Francis and a tea project to my knowledge I think the first time in the history of the internet that's ever happened that consumers not developers not fa not sales or streamforce consumers have flown across the country ten thousand of them talked about the consumer internet product they did it because they have skin in the game because it's like it's a new thing let people finally feel these people they felt left out and now they feel like they're part of it and it's a very powerful force the other thing I think is that how many scale networks do you have internet now like

20 30 there aren't that many yeah and there's like a million things you can imagine doing on the internet including like just an example dealings of crypto protocol that is trying to build kind of a Grassroots Telethon and alternative to Verizon and ATT and wouldn't it be cool if you could build an incentive system so that people would put up the transmission Hardware on their house in other places they've done half of it they've built the supply side and that's a network that very likely could not exist without tokens and there are many others that are probably out there that haven't been created yet actually going back to this idea of networks as much as networks as a networking and networking with each other and going back to Eddie's point about what makes something inherently pro-social and creates kind of these

multilateral just like really like not like Hub and spoke interactions where you have like a central player it's all mediated through a platform like Facebook groups people can certainly interact with each other in those groups but it is still in as Eddie said the kingdom and the benevolent dictator yeah and on top of it they don't control the moderation policies they don't get to set that like maybe at whatever levels that Facebook decides and predetermines they get to pick down from some pre-designed configuration they may be able to tier it slightly the permissions and settings for their group but that's about the max yeah they can't decide like a group can't decide on Facebook hey we want to reinvent the breastfeeding groups or whatever groups they are they can't reinvent that from scratch and so I just want to put in context what you mean about the ability

to do that and that goes to your point about Community because like this weekend you tweeted this line which I thought that was really profound that a community isn't just when people have an affinity for the leaders that's celebrity it's when they also have an affinity for their peers yeah well that's what I was saying about like the Facebook one like you don't go to a bar and like oh my God use Facebook I use Facebook where you would go to a bar and say oh my God you have a 485 according to experience and that's I think directly correlated to feeling a sense of ownership in the community and these examples the first time that people on the internet have felt that way and that's why no one in 30 years the internet who shows up to conventions for Facebook Google some of the YouTubers do because they're making

money again skin in the game right if you have skin in the game if you make some money if you feel like you're part of it you'll show up so far the consumers have been left out of the party on the internet they're just the products right they're the ones getting surveilled getting shown ads now they're getting to participate this is the whole promise of web three I mean I think the only other communities that feel this that weren't mentioned as like game communities like video games yeah but that's also clearly because Gamers for really interesting reasons they feel sense of ownership of games even though they don't right they don't have any ownership but they feel a sense of ownership there's a status and status on our family it has something to do with status something to do with just being devoted to the thing and like spending

all this time like incredible amounts of time and having in-game assets isn't it kind of sad that in the end it's like this fake love affair and then the game winds it down or gets unpopular and they're like one day I used to be really great at some game well what they do is they go fight with the game publisher for years to get some kind of carve out so they can maybe spin up their Community server that's like underfunded or they go off Market into like secondary markets to make trade and do more and build community like everything's happening outside of the game because there's such a need for that exactly you do either one of those things my friend Eugene way he wrote that famous post about status as a service he has this whole interesting theory about what happens when there's a

loss of status and that we don't talk about it enough and I think that really applies to the web 2 versus web3 analogy like we haven't actually spent a lot of time thinking about that as well in these networks that's very interesting by the way just one more line that Dixon had this weekend there was a guy who responded to his quote about what's a community which I thought perfectly described what you guys are talking about yeah he said the difference between a community and an audience is which way the chairs are facing and to Eddie's point the pro-social version is the chairs face each other but in the web 2 version the chairs are facing one way like it's only bilateral you face towards or against this audience span versus Creator or like look at the tweets about becom this weekend there were few tweets that showed people

looking up the stage but the vast majority were a bunch of people that had never met who are internet friends all meeting together and like it's the same idea right it's peer-to-peer not peer to leader exactly one question I want to ask you kind of to segue here like when I think about crypto I think of a lot of analogs to open source and OG open source communities which I spent like almost two decades studying and writing about and editing and I have a question for you guys which is what's different now A and B what can we and can't we borrow from like open source to now so good question first let's talk about the history of Open Source so open source started in the 80s with Richard stallman MIT who was motivated by extreme anti-copyright sentence he created these famous sets of Unix tools new GCC I

think a whole bunch of other things and then kind of in the 90s was I think mostly just missed as a kind of left-wing political movement and then in the 2000s and 2010s morphed into a very major technology movement I think today my guess would be 99 of the software on Earth is open source almost every server you run your Android phone is Linux a lot of your iPhone is open source so it's a very interesting story which I don't think has been properly told first of all I think the main reason of one it's a couple of things one and more from political movement into technology movement and to fit strategically and with a lot of big corporate interests so the biggest funder of Linux is Intel Intel funds Linux as a counterweight to

Windows and other proprietary operating systems that run on top of it it's a complicated kind of strategy questions so why so that really worked but I think the most important thing is what we call composability so composability is the idea that you can take a piece of software on GitHub or some other place and Fork it copy it and build another piece of software on top of it and assemble the software together the way you would Lego bricks and this allows you the community the world to develop software in a much faster way yeah how is web3 how is open source in crypto different from Open Source before crypto one immediate path that's clear to me is that in a crypto project when you're

working on a crypto project in open source and this isn't true of all crypto projects but it's true of many crypto projects that they can eventually become a decentralized protocol that people can have access to those tokens whereas an open source project by default pre-web three is not actually an investable project it may become a super popular library that people love that spreads all over the Internet and becomes like a critical piece of the developers toolkit but that's a different kind of results than something's becoming economically very meaningful that it creates a lot of value that a lot of people can use just a fundamentally different thing like if you look at for example react to like Facebook's open source front-end framework or look at like requests like

the open source library for python for making HTTP requests like those are huge libraries it would have been very interesting to track their activity but as far as I can tell react has only monetized indirectly you know as a result of I'm not even sure exactly like how Facebook benefits from it and then request hasn't at all just subsists on a very meager diet of donations whereas open source crypto projects they can potentially become something that's self-funding or Community owned so on and so forth it's just a totally different sort of evolutionary pathway they can become much more sophisticated much more advanced starting from the same early form just a little bit of cone will contribute to I'd like to say

that composability as the software is compounding interest is to finance the same way in finance so you put a dollar in and it grows and it grows and it grows and it's kind of seemingly magical way because every year the interesting counts upon the interest in the same way with composability the software compounds upon the software and I think it's the core driver of Open Source so crypto of course almost everything in crypto is open source and so ethos it's aligned with the movement there's weird cultural tensions that a lot of current prominent open source people actually are anti-crypto I think a lot of it's some sort of weird mix of generational differences and political differences I think crypto is perceived to be slightly right-wing because of the history of Bitcoin it's not that's a non-true

narrative but a narrative nonetheless I think some of the generational cryptos a new thing is threatening it's differing they dismiss it for a bunch of reasons they're culturally very different they're ideologically very aligned in that they believe in Open Access permissionlessness democratization of knowledge and ideas I think over time they will come back together as Generations evolve change retire as the technology kind of rises above the politics you know in the early 2000s you're in technology you read about Microsoft I read everything about Microsoft in the 90s the word Linux to my knowledge like in the Anti-Trust trials all the other things never came up Linux is ultimately the thing that dislodge windows and that's 99 of the

servers in the world are Linux not the Windows Server it's now like I think a fairly Niche server at the time it was like Java and all these other kind of corporate competitors it's really remarkable how it went from mixed political movement to irrelevant to a toy to by far the most dominant software in the world it's very underappreciated even by a lot of Technology Advocates like exactly what was that driver that made it go from this new for the community to 99 software in the world I think it's undertold and underappreciated story I would argue you can't begin to understand software and Technology if you don't have a good explanation for how that happened I was just going to add the code like content all these things it wants to be free it wants to be distributed across the

widest set of people people to use it people to understand it people to build on it that's the Natural end state of complex and interesting systems web3 makes it possible for people to do that but then to still maintain some ownership of the underlying fitting one of the things that makes me so excited about web3 as a movement is that it has been too profitable and too useful as a business tool to make opaque the most important types of code and because of the new kinds of business models and the new types of ownership and ways of thinking in web 3 that it just seems much less likely that the companies of the future will want the hyper code I agree I'd add a third thing because

based on my studies of evolution of Open Source I feel like I could write this book someday but I would add Dows to this as well like decentralized autonomous organizations as mechanisms for organizing the communities and activities and that's very native to crypto and the reason is when you look at the history and culture of Open Source and how it's evolved a lot of it boils down to how the communities were organized as a very big kind of Monolithic entities and then they would fork and have like different ways of splitting the communities they'd be very religious wars all very interesting to follow but the other big movement that kind of came around in the last decade and a half was obviously like this move towards microservices more modularization endows are another way of organizing like smaller groups to transact and create culture essentially

and transact and change governance models around code and how to use that code and what to do with that code and so I would actually add that as a third kind of cultural thing to this as well that's going to change the way open source comes into the age of crypto totally agreed I think we're still in the earliest days just because forget the tech forget the tokens and the blockchains and multi-cigs and DOW boats and staking and all this type of stuff like just on a pure cultural level it's a new thing for groups to be able to very quickly and easily align their incentives around like a specific specialized goal and manage like a pool of capital that's like Global and transparent like all these types of things on a personal human level are sort of new yep and we haven't quite

developed the cultural technology around like what it means to be a stakeholder and how to get people aligned and how to measure people's participation these are sort of totally non-tech things but they're important prerequisites I think of being able to advance the tech that's one of those things that might just take generational time to resolve but I think this inevitable that it will be resolved yeah I agree 100 for me one of the questions that does come up is when I look at our data we do a lot of talking about developer activity but yet it's not only enough because open source has had plenty of users is developer activity enough of a proxy to say like this is going to be a real thing because you know open source has a lot of activity yeah it's a really challenging one actually because you need to

classify all the repos on GitHub that are crypto related right not every crypto related repo is just going to say it's crypto refill so we use electric capitals crypto ecosystems repo on GitHub as a mapping we've contributed a little bit to it and extended it made some modifications but we're building a bunch of internal tooling to be able to quantify live developer activity across all these different crypto ecosystems and that'll mean that we can be way more granular about showing how many monthly active developers are there in different portions of crypto which is a century an update to the 2020

post the state of crypto what changed methodologically to account for the new era of the current Ford cycle of crypto well one example of a change that was really big but worked out and we spent a lot of time ringing our hands about was in the original blog post the social media activity section was actually Reddit comments and the way that that worked was I collected every subreddit that was just clearly a crypto subreddit and there's some that are kind of on the fence I didn't count those just the ones that are just obviously about crypto yep and then just counted all their comments and just like this is just a measure of kind of engagement at super high level not trying to be cute about parsing each

comment just let's count the number of comments and that was really clean the hardest part was just collecting all the subreddits which is actually not that hard like if you can query all of Reddit data it was only several hundred separates at the time in this case we actually moved away from Reddit and now the social media activities all Twitter all tweets not Discord not Discord and the reason Discord would have been good the problem is that discord's API is difficult not just for pulling messages but also for finding all the relevant Discord servers and then joining them Discord is less public right it's harder to find discords not all or public yeah it's more like a dark Forest if you use the analogy of like the Fermi Paradox

and Reddit is more like a public directory exactly and so is Twitter it's like they're very public you just go there and see basically everything by default we looked into using Discord data but it just really really gnarly to get that the Twitter data is way easier you just need to query the API and the hard part in that case is you have to pick the terms that you're going to use and of course you might be tempted to use terms like token these days a lot of the uses of the word token have to do with crypto but it's far from 98 as far from precise enough to be really really tight about the data so we curated a list and non-exhaustive lists by design of keywords that are just almost certainly crypto related like ethereum

ZK Rola optimistic roll up all these different terms and the idea here was not to try to capture every single tweet that was crypto related that's impossible but instead to really tightly quantify some lower bound of tweets that are definitely about crypto the hope there is that you'll actually more carefully capture the waves the Ebbs and flows of Interest super interesting yeah because otherwise you're just getting a lot of background noise and like the Ebbs and flows may be a function of Twitter generally so we went back and we segmented different years to find as many keywords as we possibly could from each era it's actually a really funny thing going back to like the 2017-2018

era and seeing sort of the lack of certain terms even when crypto kitties is a thing nobody's really talking about nfts and 2017. one thing that's funny to me is like terms like daps when they first came out at coins and dapps were a Thing decentralized apps now people do use Taps but I think intuitively tell me if this turned out true far less than they did before oh yeah way less also Ico right Ico was like an obsession oh right like initial coin offering right like my God now no one mentions icos at all which is great because it was also like I was about to say it's a regulatory Nightmare on that one it was a total regulatory Nightmare and a horrible idea yeah frankly even in it's a an adverse signal so you see these patterns and of course as the space has

grown there's been a ton of new language so you know for better for worse a lot of the language is of course more contemporary language and that's because there's more new language just because it's bigger like the wagmies of the world and stuff we're all gonna make it speaking of Are We let's talk about what do we think is gonna happen like let's say there's a downturn what does that mean God I've been thinking a lot about it share your unfill thoughts it's so hard to say like on the one hand I just still viscerally remember what 2018 2019 early 2020 were like and just how there was still all this cool stuff but the space was just so quiet and the normal conversation I was having with other people was like oh isn't crypto that

thing that happened and then like ended like a year ago or it was like the normal conversation I can totally see the market cooling off especially if there's accompanying sort of macroeconomic changes but I find it just so hard to imagine getting back to a product mindset that's the same as back then I think it was 2019 I remember sitting with you and maybe a Lee or something at the end of the year and there were like very few products launched at all if any that year those particularly like this famous quarter and everything's gonna launch it didn't launch that's what happened right ethereum 2015 we had that Ico thing and then you had people say hey ethereum's cool let me Riff on it let me mod it essentially which is the other layer ones layer twos so that was 2017-18 and

that all kind of came to fruition around I'd say 2020-ish 2021 yeah and today it's still happening when you and Le and Eddie were at the end of that last cycle and you were looking at the like not anything new had been built were you guys actually bummed like what gave you the conviction not to be depressed oh yeah I was but also we knew it was in the pipeline like we invested a bunch of stuff we were waiting for the launch yeah so nothing was out there nothing was being built that'd be one thing it was nothing had launched like there's two kinds of Blazing software delays like it's never going to launch in delays like it's actually delayed luckily it was the case and we believed it was the case that was talking it was the latter kind but they had just disappeared alike so so it turned out to

be like these are hard systems to build yeah and it just took longer I remember that time nothing at launched it was like ethereum was the only fully programmable yeah blockchain at the time and there's all these other ideas for other ones and they just kept getting pushed back we were actually meeting with a lot of people who wanted to build and kept asking and said well where should I be building all what are the cool things you see launching it's like oh man it's kind of awkward there's all this cool stuff but it's not out there yet it's like just wait please you know whereas now now there's a hundred things you can point them to yeah this just feels like a totally different time the only thing that was live at the time was like maker this is literally I think the first time in human history we have a

Dao that's persisted this long with this kind of governance in practice like I don't think there is any other example this is it totally oh no no absolutely not no this is absolutely deleting example like the difference now is that we have to have minimally viable infrastructure you know it's not perfect but we have Solana we have detail one oh yeah like new layered ones like Avalanche Solana solo all these new layer one networks as well as new kinds of applications like dydx was in this category we have layer twos we have Avalanche we have a bunch of other kind of infrastruct polygon we've got a bunch of stuff which you know they all have pros and cons but they work in a way that they didn't three years ago number one number two we have a lot more we have open sea we have unit swap we have

D5 and these things all really work well and have so many users and usage but then we also have just like a lot of really great entrepreneurs building at the app layer on top with a much faster product Cadence like they'll be able to release products some of the games and the tea projects just sort of social media like they have a three to six month product cycle they don't have to go and figure out these incredibly complex things you have to do when you build a layer one they can just go build an application it's much more like building a mobile app we're kind of getting to that phase we're sort of like building a mobile app I guess and therefore I have no idea what the prices will do I think that the products will see a lot of activity in the next 12 to

18 months and I think there's a scenario where it's actually good A lot of these products have launch in an environment that is not so financialized yep where the incentives could be much more around behavior and true economics completely aspect of Economics yep so maybe I'm an eternal optimist but I actually feel like this is all a positive thing and that things were getting kind of silly maybe a month or two ago and some really bad projects and again like The Regulators only going after good projects never the bad projects exacerbate this and so we had a whole bunch of bad projects and speculation and now maybe we'll get back to good projects yeah I totally agree it's so easy to make a token and that token can represent ownership of the thing that is just new you can do this really interesting thing where you can

distribute that token as reward to the early adopters of the system or the protocol or the DAP or whatever and that can create groups and when you compare that kind of growth with web 2 growth even like paid acquisition growths where you're just piling money into marketing and throwing users into the top of the funnel when the market is really really hot that web3 growth case where you can fund user acquisition with the token is set in its most crazy most overblown hottest form which makes it really really hard to disentangle like real authentic growth so something I'm excited about is as the market cools off hopefully that effect is dampened a bit and also hopefully entrepreneurs and new projects relying Less on it and

experiment and other more creative more sustainable ways it goes back to your point about retention and focusing more on retaining versus only initially engaging and that's actually ties to what Dixon just said about how you can actually innovate more behaviorally because you're focused on what people really want to do versus what they think they want to do just because it's a way to like maybe flip something or make more money like moving well past the financialization so I do have to ask you guys both here how do you think about this idea that Community precedes product versus the other way around and it's kind of along this line of what you're talking about you have this token as a way to quickly incentivize people get excited about something Etc but even beyond that how do you think about the difference between honestly a bunch of

hot air and something that's kind of real like do you have ways of analyzing it looking at it measuring it yeah that's such a great question I'll say about Community proceeding product part of the reason for this is creating hype and buy-in of course but there's good reasons for this too one is that the more attention that a project gets before launch the more contributors that it earns and because of the open source ethos and the sort of partnership and sharing decentralization ethos so common in web 3 you just benefit from more attention eyeballs whenever I look at a new project and I want to kind of sniff out whether or not they have a real community of course I go into the discords I go into the githubs I like message people I ask around that look at

who's talking about it in other communities and you can always tell that something is a high quality project not because of just the pure hype and the people talking about it but the people thinking about the core ideas and the tech in it and the things that they want to copy from so that's kind of a qualitative measure quantitative measures for better for worse or a little bit easier to game I think thank goodness we don't have at least yet a huge problem with like fake GitHub Bots starring rebos I've heard reports of it and I've looked into it but it seems like the problem is not nearly as bad as say fake accounts on Twitter maybe I'll leave it at that Dixon would you add anything to that the whole Community proceeding product how do you think about it well I think it's also like

token and product I guess the web 2 model was always build a product with no money in it no monetization make it popular like Instagram and then get acquired whatever or bad advertising later like snap one thing I learned working closely with uniswap is if you don't have a token early on the community kind of rebels they want to feel ownership they want to feel like they're part of the project they want to have student the game and so this old Playbook that's first building the product and then building the community and the monetization is reverse and it's a broader pattern in web3 that's one of the reasons that a lot of entrepreneurs and others don't understand what's going on in web3 is that I'd like to describe it as an alternative planet where there's different laws of physics and so things like all of these kind of lessons

that we've learned over 10 20 years on the traditional internet or really flipped in web3 so for example what I just described this idea that you first go build a popular product and then you layer in kind of the community and the skin the game and the monetization that split the idea that in web 2 interoperability is a pain in the ass like why would you interoperate and so like for a long time and like 15 years ago there were these things called mashups and apis and other kinds of things which basically all disappeared there's almost effectively no consumer apis anymore on the internet like there's stripe and business ones but not consumer ones they all went away and they went away because it really turned out to be a pain in the ass and a thing you don't want to do as a web 2 company

you just want to like build your network put a wall around them keep them in there and then like put ads in front of them surveil them and put ads in front of them that was the model and in the web free model it's no you do want to interoperate because it's a way to acquire the users and to build your network and to grow your token and to have more people build on top of you and compose on top you build software on top of you it's a very different way to think about things you know you said community community is many things it's users it's developers it's creative people like the way I think about web 3 it's the right way to build networks is we finally figured out after 30 years the internet and longer a building networks the right way to build the

network and the right way to incentivize Network development and once you do figure that out it becomes all about how do you grow that Network how do you grow the developers how do you grow the users how do you growing the creators how do you get the ecosystem going people to build software around it and continue to grow it so it becomes the only thing defensible really ultimately because all the code and everything else is open source Community is the only thing defensible yeah it actually forces everyone to do better by their people too because you can compete so easily yeah the switching costs are very low you're not locked in as a user like I'm locked into Twitter I have a bunch of followers I can't leave I'm locked up they give you the money that you're locked in like that's kind of web 2 today it's like you're just

kind of stuck there's a famous Scott commoner semi it was a clubs with entrapment or something it's like this whole famous old Economist article anyways but that's what web 2 is yeah it's like this whole you join the club it seems great it's like it's horror movies next to you know it's like this vampire cult like that's what yeah Hotel California funny that you say vampire cult too because I was just thinking of like vampire attacks too and like that's kind of a cool thing actually to be able to like suck out actually users and do things just for context for people who don't know Scott commoners is a researcher on Asics and Z crypto and he recently published an article that he co-authored in Harvard Business Review talking about how it's actually going to spawn a whole new age of competitive theories and intelligence

for how business is done yeah because everything is open source and because so many projects in crypto are composable by default and because there's no shame in kind of copying something that's working and borrowing a business model or retooling some code I think that something I really really expect is that over the next year two years if something starts to work I think the speed that it can be incorporated into other projects and then combined and recomposed with other types of existing infrastructure will be so fast that we may end up actually seeing like Progressive waves of extremely rapid mini cycles and lots of little growth as the interest area is a crypto expand

right so for example if someone figures out something that really really works in crypto games the speed that that can connect and have consequences in Dao is connected to that game or on defy or in nfts related to that game or all the other crypto areas the speed that the ripples can have their effect across these other areas is so fast because of that interconnectedness that it just seems so unlikely to me that we end up in a period of General long stagnation I think that's a really interesting thing in webstery that's fantastic what are the things on the pipeline that you guys are excited about that you guys know of along those lines I mean one obvious one is like the merge you know things like that or like other things that are

public are going to be public what would you say teach you giving the faith right now oh a lot of good stuff so yes ethereum like emerging through the stake and just generally kind of upgrades the l2s and ethereum I think you'll have kind of no trade-offs l2s within six months on ethereum like four eight four four or the IPA I like this change is going to happen ethereum is going to make them 100x cheaper yeah eap4844 also known as for dank sharding is a way to create a new type of data in ethereum that's more short-lived they actually call it a blob a blob of short-lived data that can be used by transactions in the blockchain what that means is that instead of properly

storing in the fully robust manner most data in ethereum is stored more or less permanently and oversimplifying a little bit we may introduce some epochs some so valid life spans of ethereum data but 4844 introduces a special area to store data in a special structure that's very cheap very short-lived which means that a whole Flur rate of transactions can use that cheap and short-lived data store to do complicated things in a way that doesn't require persisting as much data in the long-term storage of the blockchain it's almost honestly a little bit I think of like the human mind and like the analogy of like short-term working memory and like your long memories and like letting you do more

like the older you get the more you forget actually you know oh yeah that's right exactly right like the more that you store the more expensive it is the more onerous the requirements of the machines that validate and preserve this type of data if you have a bunch that you want to do in a relatively short period and you really don't need to store all the data for it but you do want to sort of course the long-term consequences of all those transactions you're doing then it sounds like a good idea to store in a temporary let a bunch of people use it and then only persist what needs to be kept okay great thanks for explaining that and so keep going Dixon what else would you add kind of lightning round real quick to this it's so long oh there's a whole set of

blockchains in the sort of next wave that's going to come out there's a whole other wave of kind of things coming on Bridges so Bridges moving across blockchains layer zero is a bunch of other good stuff better wallets better developer tooling that's the infrastructure side the app side I would say like a bunch of religion Chiefs have happened in the media side of nfts people creating kind of like centralized content creation store we're telling a bunch of really smart people in Hollywood media have gotten involved a bunch of really interesting gaming kind of related things social network funded two very high-end top-end entrepreneurs recently who are well known in kind of creating decentralized social media so I'd say we're really firing on both levels right now like firing multiple

cylinders in both the infrastructure and the application layer and content yeah I think it's really exciting time would you add anything else at that list Chris covered a lot of the big ones for me but a couple I'd say ZK math is entering like escape velocity or like everybody everybody I know that's talking about Sarah knowledge proofs and zero knowledge path with regard to privacy and scanly that's going to be parabolic Chris alludes to this too with Unchained games so this is like the whole family of games where all the games logic is on the blockchain it's way way way way out actually seeing this in the wild for mainstream players but it's a super interesting area where the sort of composability and interoperability opponents of blockchains get to shine in

a game context which is super fascinating to me what does it get you by the way really quick when you do that when you go up fully on Jane with gaming well means you can decentralize the game and we've never had a decentralized game and that sounds like a really awful important thing to build historically speaking games of course are made by like a single team that has total control over the whole experience but when you decentralize a game yeah you'd lose a lot of control over the development experience maybe but you get a game that can also act like a platform something that people can authentically build on build very seriously all and that could be things like mods and it could be things like new clients and new types of experiences all on something to do with the underlying game being shared I could talk about it forever got it no

that's cool then like another thing is that there's so many people well it's still very small total number actually but there's so many more people programming on blockchains now that we're actually getting people who care a lot about programming languages on blockchains which is really exciting that's a super interesting subject because until recently programming languages for blockchains have typically been very Loosely adapted contemporary the programming languages like JavaScript to solidity or rust to Solana right these are like programming languages that already have some prior purpose and history in web 2 world and are only Loosely adapted to blockchain programming purposes but now we're getting a lot of people talking about

custom built programming languages for blockchains and that includes special kinds of Primitives around ownership or around transferring assets and value things like that move is an example that came out of Facebook's DM project that's being used by a few layer ones that we're working with there's also new programming languages on ethereum even there's like the Fe or iron Fe Lang project on ethereum and a bunch of others but it's finally something that's getting attention as a first class subject which is totally overdue and super exciting for me especially as a programming language is weird I think overall we're in a really exciting time in web 3 crypto blockchains when I look back at past computer convince they tend

to be these kind of golden periods I talked about before and I think we're very likely in that period now where there's been a ton of really interesting Talent that's coming in and people building cool stuff and so I'm really excited about it yeah despite the chaos I'm as excited I've ever been because of all the really high quality people that we run into so I'm just so excited to see what everybody builds fantastic the way to end yeah thanks for having me fun to talk to you both all right thank you thanks Eddie and that's our first episode of web3 with Asics and Z there's a little bonus discussion about methods and metrics that follow these ending credits along with some behind the scenes internal team chit chat this episode was produced and edited by sonotoxy that's me the

episode was technically edited by our audio editor Justin golden with thanks to longtime sound engineer seven Morris credit also to moonshot design for the art and special acknowledgments to Chris Dixon founding and managing partner GMO Kim malasevich and several others on our team here for their support to follow more of our work and get updates resources from us and from others be sure to subscribe to our web 3 Weekly Newsletter you can find it on our website at asicsnzcrypto.com you can also find show notes with links to resources books or any papers mentioned or discussed transcripts and more at asicsencycrypto.com as well thank you for listening okay so let's cover some other methodology and metrics as well as a

couple of FAQs that came up with our recent stata crypto report which again people can find at asicsnzcrypto.com data crypto we touched on this already in the episode but was there anything else that changed for you when you did the original price Innovation cycle post from a few years ago and then the work that the team including you did for this recent report like what else changed another change from the blog post was that for the prices section back then we used the Bitcoin price just the Bitcoin market cap and that was because back even in 2020 I forget the exact number but Bitcoin market cap was the vast majority of the global crypto market cap and that is no longer the case there's tons of other stuff that contributes to

the global crypto market cap so now we just use coin market caps approximation which is not perfect but is much more precise than just wrong yeah it doesn't even matter frankly the Precision it's the directionality and the variety that matters actually it's a mix that it's no longer a single dominant thing only that's the narrative there yep exactly right anything more to add like what about addressing some other frequently asked questions that came up yeah yeah a couple of things I don't actually have a bunch when is the estimated Creator revenues slide we use averages which of course I know like any good data scientists a median would be much more descriptive here not even in good data scientists does anybody knows

does anything about data like I just for people who don't know like the difference between a median and mean here is really significant because for a lot of creators there's a lot of big outliers and when you're using an average versus a media and you're actually counting the outliers when you probably shouldn't be come on play more exactly and that drives me nuts because I would totally rather have a median yeah these kinds of creators so as you're saying it's totally power law distributed which means it's very prone to a mismatch between the median and the mean that's right more than anything it's like the worst case scenario so I can't even explain how much I would rather have not just median data but I'd rather just have why not just the full distribution I'd rather have a histogram go to each one of these

the full quantiles for everything and break it all like I'd rather have all that of course the problem is that that data is just not available for Spotify for Facebook for Instagram for YouTube right that's kind of distribution data that you'd need to really get it to the descriptive statistics it's just not available yeah now ironically it's totally available on the blockchain it's actually very easy to calculate the median earnings of an nft project that's actually totally straightforward totally easy to calculate but we're trying to be as Apples to Apples as we can right and of course none of the comparisons are perfect it's just meant to illustrate on a high level the differences between the ways that people who make content are monetized and participate in

monetization across different types of platform what two one three I just thinking to myself if you actually use ironically correctly that ironic thing I think you did it's dramatic irony if you interpret it that way because otherwise it would be paradoxically I was just mentally thinking you know Dixon's little not ironic chart yeah yeah well it's ironic in the sense that the very feature of a blockchain is the yeah it's the transparency which we can use yeah exactly yes totally exactly exactly no I got you I was just chuckling to myself I might not we gotta be careful we gotta be careful but I miss using it already that drives me crazy too actually oh dick fit is so funny about it it's so

hilarious like he's so funny he took it off because he's embarrassed by it but I feel like he should put it back on the Internet it's like a useful chart he had yeah um what are the other things you would add so besides a Creator and mean versus median versus the histograms and more yeah another is that and that create a revenue slide we chose to describe Revenue as opposed to profit just because there's all these other factors that play into the profitability of a specific company whereas Revenue directly speaks to the market value of the underlying content selling the attention that corresponds to right so for example in Spotify a lot of the Rev a new Spotify is not actually that profitable and it's because they have to pay Upstream licenses for all the content extremely generously for all

that content yeah and then like YouTube and Facebook like Google spends a ton on Research still and that's going to take away from the sort of profitability if you're just talking about pure profit on like an accounting basis same with Facebook like they all spend a ton of other unrelated projects which are moved from the overall profitability of the system I think that the revenue is a more precise way to capture the market value of the underlying content and that the other is that when we talk about like the number of creators nfts it says 22 400 creators creators is of course a broad word it really corresponds to entity projects but there's a lot of projects that are

the work of a single Creator and of course even on YouTube like when you talk about a YouTuber often they have many people working and collaborating with them like one YouTuber is not necessarily a solo show they can be many are right but they can be actually like a very produced tons of people behind the scenes or maybe they don't look that produced but that's actually part of the bit you know and they actually have a lot of really clever people behind the scenes making that show work so some people had some reservations around the usage of the word creator I think that just like artists sounds like a single person creator sounds like a single person Channel could be a single person I hope that the Nuance is conveyed here that a Creator can be a potentially a group just like an artist

can be a group or a channel totally I have a lot of thoughts on Creator collectives actually I love that great and one last question on this one thing you guys actually didn't Define it in the deck was tvl like total value locked yeah this is a super tough one part of it is that we don't want to lean into TDL because it's an imperfect metric and it's also defining it is also a total nightmare because yeah there's all kinds of ways you can Define it that I wish we didn't use CDL actually yep it's totally imprecise it's vulnerable to gaming it describes some types of protocols better than others unfortunately just for past dependent reasons it's the key metric that a lot of projects measure themselves by the right thing is to use

vertical specific metrics got it so like lending like Define lending tvl is fine for uh decks these symptoms exchange total volume is a far more precise metric for an nft project we're kind of in the early days of still defining what the key metrics are but there's already some really interesting ones like the number of tokens in a collection that are on sale that's an interesting metric another one it is the diffusion of the project so the average number of holders per 10 000 tokens in the collection yeah totally I would add my own I don't know if you guys have this on the list but I care most about the extensibility of that particular nft like how many derivatives have derived from it essentially because

that is the true art of nft Being something that is composable and you can build around oh totally now I've been back in the early days of unislaw and compound we actually used to we used to talk about the forkability of a protocol being a leading indicator of its quality if a new protocol drops and a bunch of people are working at a copying it yeah and trying to rip it off like that's not a sign that it's weak and should be abandoned then it's just easily copied no that's the sign that the original is incredible yeah it actually undoes a lot of classic VC and business strategy mindsets frankly about what emotes are okay anything more to add because I think we covered all the data methodology stuff that's it thank you so much

thank you for listening to web3 with A6 and Z you can find show notes with links to resources books or papers discussed transcripts and more at asicsandccrypto.com this episode was produced and edited by sonal choxie that's me this episode was technically edited by our audio editor seven Morris credit also to moonshot design for the art and all thanks to support from Asics and Z crypto to follow more of our work and get updates resources from us and from others be sure to subscribe to our web 3 Weekly Newsletter you can find it on our website at asicsnzcrypto.com thank you for listening and for subscribing let's go [Music]

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