How To Survive A Bear Market | Olaf Carlson-Wee

Transcript

this episode is brought to you by bitmex the og crypto exchange that is back and better than ever you'll hear more about bitmex later in the show [Music] [Applause] all right everyone back with a uh special episode of empire i'm joined today not by santiago but by my co-founder mikeypolito and also very special guest olaf carlson we ceo and founder of polychain capital olaf welcome to empire hey guys thanks for having me of course you didn't you didn't introduce me as a b squad this time so already i'm leveling up since the last episode i know exactly yeah exactly b-squad is back so olaf we're excited to have you man this is uh a crazy crazy crazy time in crypto so we're excited that you were

able to make time to jump on here um i just wanted to actually start pretty high level and just get your framework for how you're viewing things right tara um is seems to kind of be falling apart right the peg on ust broke it went down from a dollar down to 30 cents it's back up to 68 cents at the time of recording luna has fallen from like 84 bucks down to like two or three dollars bitcoins down to 30k um and a lot of things are you know 50 60 70 80 off the highs so maybe we can just start broad and i'd ask you like what is you've been through so many cycles like what is your framework for how you're viewing the markets right now yeah so um as a backdrop i mean um i went through the 20 2011 crash um

the the 2014 crash the 2018 crash and and now i think i can safely say like the the 2022 crash so you know i just think crypto is highly cyclical um it kind of always has been obviously i guess um and you know what happens is there's this sort of um there's this thing that happens in crypto with newcomers especially where new people always find out about crypto during one of these like market cycles and it's during the high points in the cycle so i got into crypto basically at the exact peak of the 2011 um you know run up and i think if you ask everyone in

crypto i would say 90 of people found out during basically the exact peak of one of these market cycles um so it's it's this weird way that crypto sort of spreads um into new users um but then the real sort of actual process of building things in crypto you know i think it generally happens in a more focused um you know and pragmatic way when markets are low and there's not like this flood of new people coming in um basically the macro growth slows down and then it's up to actual entrepreneurs and engineers and builders to like create useful products and services rather than there being such a strong

macro tailwind that everybody can just sort of um ride the wave so to speak um so i actually think it's you know sometimes i wish it wasn't so crazy um in crypto like the way that it it really goes up quite a bit and down quite a bit but i do think it's it's sort of healthy the cyclical nature of crypto because it helps people um just sort of you know it it really helps like a lot of capital come into the space and a lot of new people come into the space um and you know so you get this kind of sci-fi moment where it feels like anything is possible um and then you know you can sort of use those those new

users and that new capital to actually build useful products um during the bear markets and it's during those bear markets that everything important has ever been developed you know i would say bear market one um coinbase was founded 2012. uh bear market two um 2015 ethereum launched um bear market three 2018-19 is when the beginnings of both d5 and nfts um sort of launched so i i just think that um i'm very excited to see what the big you know important thing that comes out of this bear market is and that's mostly what i'm going to spend my time on is trying to figure out

what's the next sort of macro trend that will drive you know drive the the next narrative and drive the kind of next wave of new users like what will inspire them to get into crypto um now that said you know i for people whose first time it is going through one of these market cycles it's probably pretty scary um and you know i i don't have a lot of um a lot to say other than you know you just have to deal with it like there's i don't think there's a really simple like way to to navigate it it's just like just take comfort in that you know you know i've been a professional crypto

investor for years but the the first investment i ever made in crypto i like lost over 90 on instantly basically um which was bitcoin in 2011. so um you know it's i think it happens to everybody when they first get into that olaf let me ask you this there are cycles in every industry right i'm reading this book about rockefeller right now and it's talking about um the oil the oil cycles have moved in very actually similar manner to crypto and um uh laying the railroads in america moved in a very cyclical manner the tech um everyone points to kind of like the similarities between crypto and the dot-com bubble but it does feel like crypto moves in these uh very intensified cycles that happen very

quickly it's not like a decade-long cycle it's maybe a 18-month or two-year or three-year cycle um and so i'm curious to get your take on why like what what does cause these very intensified cycles and is this something that you see eventually slowing down is the intensification of these cycles or this is just something that's inherently just in the nature of crypto i think that because crypto is such a brand new category um and it's it sort of rejects so many um you know of the archetypes of the old system both from a financial and a technology perspective that um it just means the product development and technology development

is is really fast and very hard to predict um so the the way that crypto has sort of um blown up you know and like the number of users that have come in and the number of new products um and new technologies that have been developed it's really fast like it's it's very very hard to keep up with um everybody who's in crypto knows that it's just sort of like the number of kind of fringe crypto projects is at this point uncountable it's actually crazy when when i truly try to grasp in my head all at once how many like weird little crypto projects are out there um it's kind of like trying to keep track of every weird

little website right um in the early days of the internet right it it's it's financial in a lot of ways so it's um it's a little bit different right than just just those websites but that's really like the scope of the entrepreneurial experiment here it's like we're all gonna make websites one of them will turn out to be amazon.com um but like literally anybody can make a website right um so i do think you know because of that um like massive entrepreneurial laboratory there's just a lot of chaos but also it means things move really quickly um if a bit savagely like there's lots and lots of failures in

order to get those one thing one or two things that really really work and and move the whole thing forward um so because of that whole kind of entrepreneurial laboratory it i just think the whole thing moves fast and that means new things get developed very quickly and so then these rises and falls of of interest happen very quickly it's it's like with the um invention of of icos and crowdfunding you sort of saw this incredible wave of interest um in in 2017 um and then you know it turned out that was sort of incomplete and really just a component of this larger concept of defy that really had some some real legs to

it and really feels like um it is going to be long-term the the sort of substrate of the global financial system so i i think that um there's also this this dichotomy i think oftentimes with young crypto projects between like this will radically transform the entire world um and like we have 100 users right um and it's like you can see it right um this is but like it it's sort of hard to then price such a thing right um i think this is how i felt about bitcoin um when i first found out about it it was like

wow this is like you know this is going to actually replace um you know state-backed money like it's it's the craziest it's such a huge um concept it's way beyond technology it's like a social phenomenon um but at the same time like i'm on mount gox you know doing this janky um stuff to try to buy it and like you know it's just not there yet right and so then it's really hard to price that thing and it makes sense to me that you can see this future but the reality is is pretty bleak at the in the moment and then it's very volatile um because you're kind of tracking from a to b um so yeah i i do think um

all of these add up to why crypto is like so crazy and then on top of that a lot of people are using leverage which just you know i would i broadly would not recommend for the average person but a lot of people use leverage and so ever all of the stuff i'm talking about that's sort of fundamental just gets um it gets worse with leverage i i have a question for you olaf just having lived through many of these particular cycles in crypto yourself so i get your emotional advice is that people who seem to deal with it uh but like what are some patterns that you might have noticed right having lived through these cycles in the past right because in there's always a narrative that accompanies the fallen price so and there are usually are external events like in 2014 it was or

is mount gox right that broke um in 2017 to 2018 is kind of the unwinding of the ico bubble during this particular one you know people are very focused on and i want to lead into kind of ust and everything that's going on there but people are very focused on the macro right and everything that's going on with the interest rate environment and then we've just kind of had a stable coin blow up on us so i guess just having lived through many of these in the past what are some kind of repeated patterns that you've noticed going through these market cycles and then specifically things that you might be on the lookout for for like all right this feels like a bottom or as low as we're gonna go or or just things of that nature yeah um i mean these you know it it is interesting how

um there's like these there's like these single project events that blow up that sometimes feel like they're accompanying just like the larger market cycle um if i had to place them it'd probably be it'd probably be like mount gox um maybe bit connect um or something um and then you know now it just feels like it's it's definitely um this this dpeg of of ust and the accompanying fallout of luna and the ecosystem there i mean it's there's part of the reason is a lot of systems

in crypto at a base level have leverage sort of embedded inside them um in the case of mount gox this was um you know the willy bought um and basically the insolvency of the platform so it was you know artificially buying a lot more than the actual demand in the market that works just fine as long as the price keeps going up forever like nobody will notice willy bot um exists but then once the price turns the other way all of a sudden you know you will recognize that this is this is a problem and olaf the the willy bought for those who don't know this was the was this an automated trading yes that was happening on memphis um so it's a

little unclear exactly who built it i think but broadly um some you know somebody i you know and i don't want to point fingers i have no idea really what was happening but there was an account at mount gox that was generated by an administrator it was automated and it purchased a ton of bitcoin like every two minutes or something you know it was just very regularly bidding the order book very heavily um but there wasn't like real money in the account um you know actually it was just sort of a database entry that this account had a ton of money in it um so it was bidding up the price in the order book but there wasn't like

you know it became like fractional reserve there wasn't actually money there um to pay for it so you look at the and mount cox at the time was like 80 percent of the trade volume in in all of bitcoin and there was no other coin really there was just big so um willy bot like drove the price up very dramatically um and then when it unwound the other way um and mount gox came out as insolvent and everything it obviously unwound um very aggressively so you know i think that when you look at ust and the de-pegging there's similarly a kind of leverage mechanism in that a lot of these

seniorage or algorithmic or partially collateralized stable coin designs you know they do have an element of like a confidence game that's kind of a game theoretical prisoner's dilemma a little bit where if we can sort of all agree um to play the game a certain way it's a stable system um but you know you have these outside factors that can cause people to sort of start to question that equilibrium and like sort of run for the the door and it's kind of a bankrupt situation um and because it's only partially collateralized um you know there isn't like a

a base there in the same way that these fully collateralized projects um have that kind of full collateral base and so that you know on the way up you see a lot of um positive feedback loops you know driving the price up and that leads to larger ust issuance that leads to more people speculating on the underlying um luna that leads to um you know more and more ability to pay out um returns in in anchor like it's all this positive feedback loop that just keeps working as long as the the price is going up um but then once we see price drops like it the unwind is as

dramatic right because you have these feedback loops and leverage kind of hidden in the system and you see that all unwind the other way so people want to run for the door with their ust you know it causes the price of luna to drop um you know it's just all the mechanisms that make it work make it break too um and we we saw of similar unwinds you know that were pretty intense i mean the you know that when i was looking at um revenue or like you know protocol level earnings by axi infinity um you know i think top tick to bottom tick it's dropped by like over 99 percent um

which is pretty dramatic you know it's just but it's the way this works where if you put in this system where you know the price going up leads to all these people playing the game and mining um and then you know people buy the coin because the the number of people playing the game is going up you know you're kind of getting the causality wrong when you're betting that way it's like buying bitcoin because the hash rate is going up um it's like it doesn't make sense um and then you know when it goes the other way people get you know it gets unwound the other way so not only is the price dropping but all the players are logging off too and so that makes people want to sell and the price is dropping more

players log off more it's like this um reflexive um yeah relationship oh maybe this is where we can kind of get into the weeds a little bit on just this whole situation that's going on with luna and ust so you're kind of just talking about these systems that have virtuous cycles on the way up and then maybe the opposite occur on the way down can you just walk folks who might not be familiar with what exactly is the relation like what is ust what's the relationship with luna and what happened right now like why have we seen depending yep so um okay so it's it's sort of a complex system um but it's useful to just understand sort of the theory behind um different stable coin mechanisms um you know the there's kind of

three i would say broad-based categories of stable coins one is where there's collateral but the collateral is not on the blockchain um so this is like um usdc this is tether this is where the collateral is held in by some central entity off the system um and then you can you know redeem you know the the stable coin that's on the blockchain for cash that's sort of just in a bank account off the blockchain um so those systems are you know relatively simple conceptually the problem is of course that there's kind of a central entity that that controls all that collateral the second type is where the collateral

is actually held on the blockchain this is what the maker dow system does so it's fully collateralized stablecoin but all the collateral can be visualized and seen on the blockchain and it's not controlled by a central entity so it's decentralized in the sense that there's not one single entity that you know in theory could freeze the collateral or or seize the collateral or something like that but it's a trickier system to reason about it's just a little bit more um complex and you know it's it's harder to build it's harder to scale but it's it's it's a lot more resilient um than the first type then there's kind of a third type that people generally refer to as senior

edge or or algorithmic stable coins and um this is where you know the peg is is backed up um so there's this the stable coin itself and then there's a secondary asset that um sort of represents like an interest in um the stablecoin system sort of and it kind of acts as collateral of last resort for that stable coin it's important for the market cap of that collateral to stay above the market cap of the stablecoin um and the idea here is you can always redeem the stablecoin for one dollar worth of

the underlying um and you can um redeem the underlying for um one dollar of the stablecoin and so in that way if the stablecoin ever goes above a dollar or below a dollar you have arbitragers that um you know do this collateral exchange and can make a profit and the further it goes off peg the larger those arbitrages stand to earn so if it goes off the peg by one percent you know an arbitrager can earn one percent if it goes off um by 99 an arbitrager in theory if it gets back to the peg stands to make a 100x return right so you you kind of increase um

reward as the peg becomes undone and you're increasing risk in a sense for the arbitragers um what's tricky about this system um and in the case of of tara luna is that the the collateral is is highly correlated with the the you know success of the stable coin so in the case of a system like make or dell um dye has lots of different collateral assets um they're all crypto so they're all broadly correlated on some level but they're not you know it doesn't have um mkr like the maker token as the collateral in the system

um you know so one way to view tara luna is it it's sort of like the luna token really only exists in in a way to act as collateral or or seniority shares whatever you want to call it um for that ust stablecoin so you know what we found out here is that the problem is that when that those two assets are correlated like as the pay gets undone people lose faith in the system and so the price of luna drops and as the price of luna drops it becomes harder and harder to use that collateral to restore the pig and it's like a confidence loop so

you know it's it because the two assets are correlated um and you really depend on you know luna retaining value in order for ust to to um be sort of backed or or collateralized you just see this feedback loop where as people lose confidence um you know in one they lose confidence in the other and so you know if these two things were sort of uncorrelated you know it might have a better chance of working um in this case you know there's like not enough luna in a sense to redeem um for ust um and then

you know in that case like the ust isn't really backed now on top of all this mechanism i'm talking about which is sort of the algorithmic stable coin mechanism there's also a foundation um collecting you know tens of thousands of bitcoin to back the system so it's sort of like partially algorithmic and like partially offline collateralized sort of in a usdc or tether style capacity um but the the problem is that that offline collateral you know wasn't i mean i don't think it is significant enough here to backstop the entire system so you have this kind of partial collateralization and then you have this algorithmic um

backing but you know neither of them is sort of big enough here so i mean it's and just to time stamp this i mean it's it's may 11th in the morning so you know i this is very much like happening right now um i i don't want to talk like it's it's 100 done but um you know it does feel like these these unwind um has these kind of irreversible confidence game um effects at play so just to ask the question then um it may be a little bit of a two-parter but you know for luna terra do you see that confidence ever getting restored in that in this particular stable coin and the

you know the other the follow-up to that is you know you kind of have these voices coming out in twitter and to be fair people did say this for a long time and people have actually been making this argument even before uh tara luna right when there was basis back in 2018 or whatever that a senior edge model is simply impossible we're not solving a technical problem you're solving a you know collective behavior problem and it's just the senior edge model just doesn't work uh so my question to you is a is this kind of curtains for for tara luna and then b on a on a higher level do you think that the senior edge model for a stable coin can work or is it just a flawed design uh from the start um you know i've always been fascinated by this category um

you know i was a seed investor um in um basis which you mentioned um and i was a seed investor in terra as well way back in 2018 so you know i've always been fascinated by the concept but i think empirically it doesn't look like it's working uh well i i don't have a strong um stance on like in theory could it ever work um to your question of of you know this particular project um i you know i don't think that

it it can work like it just i mean tara is down 99 in value um from the peak to now and so that's i think it's too much like they i don't you know there's like i said there's these confidence feedback loops that kind of um either take it back you know um up or it kind of unwinds all the way and it's a you know it's maybe not completely completely over but like i i think we can effectively say like the unwind is is done olaf does the does this unwind make you lose faith in decentralized algo stables as a concept or do you just

kind of think okay next up we have fracks and maybe frax works but if fracks doesn't work we have another thing and then there's another thing i mean in i'm i'm you know i'm fascinated by the concept for sure um you know i in a way the maybe the us dollar is like the ultimate i'll go stable that hasn't collapsed yet yeah well well that and maybe that's because you don't the us dollar's not doesn't have to be tied to anything and just pegging something to something else is a really really hard maybe even impossible yeah but then you get into this like you know if we're going to just create assets that aren't pegged and are speculative

why like have backing at all um which is you know bitcoin and ethereum they're not like backed by some other asset um and it's it's in a way sort of ironic that it's safer to create an asset that is you know backed by nothing then that's like sort of fact it's kind of like nfts it's like when nfts have no utility it's just about the art but when there's utility it's like well how what is this thing actually giving me you know yeah so yeah it's it's kind of weird but um empirically in crypto it's been more effective to create a thing that um you know is not tied to any other

value has no collateral has no revenue etc um that's been sort of the safer approach so if you can't create decentralized stables well i'll go algo stables maker dao is is is functioning um as a fully collateralized and i think that approach um the the really the question there is how much how many different types of collateral can we use as um backing so you know a big experiment that will happen over time is you know can we you know include lots and lots and lots of different on-chain assets as

collateral um and then the the big experiment is can we include you know off-chain assets as collateral um for a maker dow style system so like if if maker dao included like a factory or real estate or some you know tangible asset um that's kind of not endogenous to the blockchain can we have that as backing in in a maker dow style system and you run into some really complex stuff with you know like who represents that dao and like if that collateral you know goes bad like how is it legally seized and and and liquidated and everything um and it gets very tricky because you can't just write

a smart contract to do all that stuff um yeah so i think we're we haven't yet seen where the edges or the limit are with that collateralized model either but i think it's it's pretty clear to me at this point that on-chain collateral um in theory like should work and i think it has worked so far um i think the main question is what kind of scale can we get uh well maybe just to wrap this part up and i want to kind of move into stuff you're excited about right and ask you some questions about like the future uh of crypto but um you know one thing that i think a lot of folks are asking right is if we're officially drawing the comparison between right now the current time 2022 and 2017 and 2014 and 2013 and 2011 there were

some pretty vicious there's a pretty vicious bear market of about two years where things were pretty bleak um so i guess my you know open question to you here is do you see this time as being similar like are we is your kind of base case that we head into something that looks like a um you know like a two-year bear market or you know because of something like permanent capital or because we're just much further along and much more developed than we were in the past do you see it being maybe more moderate i'm just curious how you think about the next 12 to 18 months yeah i mean i don't have a strong view on how um how long it lasts um but i mean we're we're in the bear market it's it's not like a forward-looking thing at this point

um you know i do think also that crypto got big enough that it's tied to global macro now um and we obviously saw you know tech stocks and all this kind of growth private equity crash um and you can see that playing out in crypto i mean the you know the last private round of um open c is equivalent to the liquid public market cap of coinbase like the last private round of ftx was like double the liquid market cap of coinbase i think you know i'm excited about those businesses but i do think that's a little um crazy right to think about relative valuation um

so i i think that um we're gonna feel it in crypto um as well just like that bigger macro backdrop but it's it's interesting because all the previous cycles in crypto nobody was like talking about interest rates for the stock market um it just is it didn't matter and it's because crypto was such like a petri dish it was so small that um you know these these outside factors like never mattered um now i think there is you know it's just big enough that like capital markets in general affect crypto um but you know i i think i don't have a strong view on on how long this lasts um it's it's more so up to the

entrepreneurs and builders in crypto to continue to develop um useful applications that people want to use um i mean it's in my mind like the the scariest bear market still for me was for sure that 2014-15 and it's because it was just really unclear like what the path forward was um you know there just wasn't that much happening and we were trying to figure out you know use cases for bitcoin um outside of trading and speculation um which is of course a very useful use case but it's it's sort of maybe not for everyone um i remember like having these meetings in

2015 trying to figure out what was going to happen and like nobody having very good ideas and then ethereum like uh like enterprise blockchain oh man yeah i mean whenever you see enterprise blockchain come back that's when you know you're in the bear market and it's like it's like oh you know we don't like crypto tokens you know we just like blockchain it's like oh okay now it's probably the accumulation phase right um yeah so that you know it is interesting i mean i swear we will see it trust me we will yeah well we actually had some yeah yeah we had some guests on the show the other day that thought um who who i really liked by the way um but one of their predictions is that every company will end up taking their

every sas company will end up taking their api and turning it into their own layer 2 basically and having these like kind of private l2s like forked l2s which is kind of feels like an extension of the enterprise blockchain thesis exotic prediction we'll see how it plays out so i i think um you know broadly to me um you know like the launch of ethereum in 2015 and then like the ensuing stuff that started getting built there really like built us out of that bear market right um and you know i think that defy and smart contracts on ethereum sort of built us out of the 2018 um bear

market and so i think that's that's really um this the next step is like we need you know to always support our entrepreneurs that really are the core of everything in crypto um that are taking on these these radical experiments most of which will fail um but some of which will succeed and um we need to build our way out i mean that's like how this has always worked um to me i mean it and also like the this is i in my opinion coinbase built this out of the 2012 uh bear market it sort of like added this new ability to get capital into the system um that didn't exist before it was super hard to buy bitcoin before coinbase like i mean

now it's easy with so many different platforms but at the time it was like a nightmare to buy bitcoin and it's like if you wanted to buy you know a hundred thousand dollars of bitcoin it was like impossible i mean it was very very very hard um and very scary sort of um so now you know we just have to build our way out that's how it's always been yeah um olaf does it make you so the other day richard from numerai posted this thing on twitter saying that he's out of ethereum he got in in the in the sale he got a 26 cents and now at 2 500 bucks he's selling all of his ethereum and the reason if you watch the video i don't know if you did but he said now crypt is just tied to global macro and that makes it much much much

less interesting to him and yeah i know you mentioned uh that's one of your things now is for the first time ever crypto's tied to global macro does that make crypto just as an asset class less interesting to you well it's it's you know i think part of the subtext and richard's a good friend of mine and i i really respect his thinking um i think one of the subtexts though was like you know i'm up 1000 x i probably am not going to go up another 1000 x in the next five years like i yeah he did which i think is um our what he's actually he was actually up 10 000 x i guess 10 000 yeah he's up 10 000 x um in five years or seven years i guess

and i i do think there was some subtext that was like okay i don't think that back return profile is going to carry on into the future um and i think that's perfectly appropriate for to say right like i you know i i don't think ethereum will 10 000 x over like the next you know that would be like all the capital in the world so i think um you know that was i think some of the subtext um i do think there's more correlation to to global macro but i think it is asymmetric on the upside um for sure like i just don't think you can invest in the s p 500 and get the type of upside you get in crypto at all like you know even over

the next the next three to five years um i i still think crypto is is relatively speaking small misunderstood um and by many considered you know still like a a scam or um you know used for illicit activities it's all it's all the same um counter narratives that we've dealt with for for a decade um but i think that you know the the asymmetric returns on the upside are significant compared to other asset classes even if they're somewhat correlated we interrupt your programming with a special announcement empire has a new sponsor santi and i are very excited to

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marked the top we co-founded block works i think within a month of the all-time high and then watched it fall for two months after or two years after uh but you know back then i remember um you know people are kind of questioning it maybe it's this idea that maybe bitcoin is the only that's the only legitimate thing so it sounds like in 2014 2015 people like is bitcoin even going to work or like what else is kind of the way forward and in the in the 2017-2018 bear market it was like all right bitcoin and probably ethereum and what it feels like now right is okay some of these scam projects weren't going to work but it feels like bitcoin and ethereum are very kind of solidly you know encased um it seems like people generally believe in a multi-chain future and while there's definitely a

lot of like hype and speculation around nfts and dows and i want to get your thoughts on like governance versus tokenomics kind of going forward and just value accrual but like what what feels different this time you know potentially going into the bear market like do you think these ideas are like enshrined and definitely going to work like do you feel like uh yeah i guess what do you feel like is different coming out of this one versus previous bear markets it's it's mostly that um the sheer magnitude of experiments being run right now is it's massive it's like unfail well in the number of like obscure startups that raised a few million dollars over the past 18 months is is crazy so i i just think that

um the capital available if you find something that it hits is it's pretty insane in crypto like if you have a project and it actually has product market fit and it's actually growing and stuff in crypto when it works it tends to grow really fast um the amount of capital available to fuel that is is is pretty unfathomable um and you know just the number of kind of fringe experiments being run is is massive it's like way bigger than it was um in in say 2018.

you know i think in 2018 i could still keep track of you know basically every individual project in crypto it was hard but i was you know obviously doing this on a full-time plus capacity um but i could basically keep track of every single thing that was happening um that is completely impossible now like i am lucky if i keep track of 10 of like the total um quantity of what's happening so i just think that the entrepreneurial laboratory is bigger here than you know i i wasn't around in you know 90s early 2000s internet as an investor but it's i think it's got to be one of the biggest

entrepreneurial laboratories in history if not the biggest um so i just have a lot of confidence that smart people out of that burbling chaos will build amazing things um but you sort of have to have that faith i mean stuff like ethereum especially really came out of nowhere right um you know there had been these previous attempts to build what were basically smart contracts from more complex logic into blockchain systems and ethereum just um you know it worked and um it it kind of saved the the whole industry in a weird way um at least that's my perspective on it um

so i you know i i think that i've continually um been impressed by the ability for our entrepreneurs to build like incredible new things in crypto yeah before um just one last question before getting into kind of i know mike wants to get into just multi-chain future and where value accrues but one last question is um it still feels like maybe we haven't felt max payne i know we are in the bear market right now and we're you know six probably six months into it probably little ways to go but in 2020 even with bitconnect and this slow drudge down in 2018 2019 max payne really wasn't felt until march of 2020 so when you look to start buying and accumulating things that you really like and and on backing

entrepreneurs that you really want to back in the liquid markets what signals are you looking for olaf like are you starting are you seeing the markets right now and you're like boom great huge buying opportunity are you like no no no like this is not max payne yet no huge buying opportunity i mean i i i like i don't know when max payne is but there's you know i don't need max pain you know i can just take regular pain regularly regular yeah yeah i mean it's yeah it's i think like now begins obviously the era of of buying not selling nice um all right i've got i got a couple questions for you uh just about you know

i think the driving narrative uh if you had to ascribe one to 2021 was kind of this competition that was occurring on the layer one sort of smart contract layer right um and yet a bunch of different you know kind of viable i guess i mean some people get offended fights but viable competitors to ethereum sort of emerge for the first time ever uh that that had some pretty different trade-offs right so there's like kind of the solana's uh right which had their own kind of ecosystem then they're like evm compatible smart chain or smart contract chains like like the avalanches of the world in general um i guess like at a really high level it's like such a simple question to us but like how do you see those kind of smart contract wars kind of playing out like how do they compete with each other and

then another question is do you think we've seen the ones that are going to win like is it going to be some combination of maybe uh like ethereum solana um whatever or do you see new competitors potentially coming out of the wood chat that don't even exist yet yeah so um i don't see it as like a zero-sum game um i i really think that different platforms will lend themselves to different types of applications um i think we've already seen that with ethereum and bitcoin a lot of people um thought that was going to be sort of a war what we've really seen is them coexist with alternative alternate use cases right um and there's you know the fact that there's these irreconcilable trade-offs

like the fact that ethereum even has defy causes it to be it's it's harder to reason about core protocol um matters so you get things on ethereum like minor extractable value um and you get things in ethereum 2.0 like d5 yields competing with proof-of-stake yields um that's it's hard to reason about it makes it complicated um so that you know the simplicity of bitcoin or reasoning about bitcoin um is is kind of nice what i mean to say is it's not that ethereum is a superset of bitcoin it's an alternative project that has its own value proposition you know separate from bitcoin it it's

to me it's not like a zero-sum competition i similarly i view a lot of these you know new blockchains alternate relatively speaking newer that are alternatives to ethereum similarly i i don't think that this is like um them versus ethereum i just think there's alternate architectures that make trade-offs and you get different types of applications or use cases or users that like those trade-offs so you know if you care more about cost uh then then security like there's a lot of easy trade-offs for you that are alternatives to ethereum where ethereum you know is expensive to use um and so i i

i think that this experiment is gonna last for many years i i don't think it's over at all um i think stuff like um you know optimistic roll-ups and the whole kind of layer two system ecosystem on ethereum we still really haven't seen emerge in a really big way and i think we will see that um i think we're going to see more and more of these bridging protocols so you're going to be able to build multi-blockchain applications move assets across blockchains um i think it's all getting like more complex not less and i think there's going to be both existing projects that you know stand the test of time and there's going to be

new projects that none of us have ever heard of that emerge so it's i know that's a hand-wavy answer but it's um i don't think there's any like clarity um at this point i think it's it's complicated and still like i think it's still happening very much so in in the future i mean maybe like focusing in on ethereum scaling roadmap in general is kind of the future that you envision uh like there are successfully kind of these layer two protocols that get rolled out and in the future when apps launch they'll launch onto the layer twos um and the reason i'm asking that question is like when you know uh board api club did their lan sale i'm blanking on the name of whatever their

metaverse um thanks uh you know that was you know caused an enormous amount of congestion on uh you know the ethereum main chain and then uh and then basically they said they're gonna come out and create their own chain so i guess my question to you is when you see you know new projects in the future are they going to be launching on layer twos are they going to be creating their own chains or is it going to be some combination of the two of those things yeah um i think you know if you're an ethereum app developer and we get um you know substantial users onto for example arbitrum why would you you know launch on the base chain instead of arbitrary um you really should just probably

launch an arbitrary um so i um you know i think yeah you're going to see app developers migrate to layer 2 systems for sure um i also think that the applications that get big enough will in certain cases want to build their own sovereign chain um i you know i don't think it's every application because composability is very very important in crypto um so you you know if you had flash loans just as a basic example on its own chain it would sort of render it useless right the kind of the point of a flash loan is

to use the flash loan to go interact with another application so it's you know you can't silo out every single app um but i think in certain cases you are going to see this migration from like smart contract system to you know sovereign chain with its own logic um so you know it's i think it's not super clear what class of applications that will be um but i i do think you will see it happen and i think it can make sense in a lot of cases and um you know do you see for some of these layer twos even like the the ones that have been traditionally extremely associated with ethereum right like

optimism or arbitrary um you know eventually right i guess if these other layer ones like the solanas and avalanches are successful then their block space will fill up and they'll also need to go to a layer two right on top of that like do you think that there's a chance that some of these projects that people traditionally identify as like extensions of ethereum almost will they do you think do you see a world where they will actually integrate with other uh layer ones yeah where layer two systems like move across layer ones yeah yeah i've always you know i've kind of always said i think layer twos are basically a mechanism to launch a new layer one but with really good ux right

yeah that's like broad-based my view on it um because you know you just really really tightly integrate to an existing l1 um in this case you know ethereum but then over time you have your own app developer ecosystem of people deploying there and then you start to think well wait a second you know couldn't couldn't we add similar security to an alternative blockchain you know that's evm compatible like an avalanche or something um and then you know all of a sudden it starts to feel like wait a second what's the difference between this and just a chain that has a bunch of bridges to it um you know i think they're all likely to launch their own

token um you know and there you go i mean it's i i just think that it's interesting to me in the ethereum ecosystem um there's a you know a certain subset of people that sort of are very much rooting against alternative uh layer one systems like say solana or or avalanche um or or binance chain you know but they are rooting for um optimistic roll-up systems and layer twos and sort of view those as like friendly to ethereum um i think that's the wrong framing yeah you know it's every these layer two systems are just

really really tightly integrated to ethereum in order to better extract assets like and i don't view it i to use the word extract is like pretty intense but um it it really is just really really good bridge ux to better pull over application developers um it gets you know the the light mode is like avalanche evm compatibility so it's really easy to build bridges really easy to integrate into existing ux systems like metamask etc and then like the that's like light mode and then you know heavy mode is like we're literally inside ethereum you know what i mean um and so yeah i think it you know i think these optimistic roll-up systems will be

very successful um and you know i think that people often think about they they become sovereign chains like i think that's long term what's going to happen oh so all of how does so let's extrapolate this out a couple years so let's say all these optimists the ro the roll-ups end up working and let's say some of the other l1s like the nears and the avalanches and the salons end up working too how do you think about as an investor how do you think about allocating capital into that kind of world and thinking about really like where the value in this world accrues yeah so i think that um in the past in crypto it's it's been relatively easy to say i am just going to speculate on the coin

that has users so wherever the users go and the application developers go i'll just buy that coin the problem is that you know a lot of times there isn't necessarily a value accrual mechanism based on the number of users or application developers or transactions as in there there is no real reason per se that that should drive value to the coin other than an expectation that other people are thinking like you and speculating on the value so now though you see this world you know um post eip1559 um in ethereum where you know more transactions more smart

contract activity actually burns ether i think that is a critical turning point for thinking about value accrual in these systems i think it's going to be necessary to have that sort of system you know a kind of real like a burn type system embedded inside all of these these chains um and then that will become much more heavily impactful on how to think about value over the long term i i think that it will become less about um speculation um and more about those kind of like real value accrual mechanisms um a more yeah this more mechanistic um value accrual to the underlying asset

so i think the systems that you know do upgrades like that or incorporate that into their architecture are um on track i think you you need to be now as a as a layer one developer you need to be thinking about how does that um how do we drive demand based on transactional volume inside my system yeah i mean that's it's just kind of interesting to i mean how do you think about let's say the relative amount of economic activity that occurs between a layer two and a layer one let's say a relatively simplistic world of where like there's one layer two like on ethereum and then there's ethereum itself and the vast majority of economic

activity per se because just so much transactions are so much cheaper on the l2 all of the apps and users kind of live in and use that ecosystem but ultimately it's still very dependent on ethereum the main chain right because all those transactions settle to that chain so like how would you think about in and maybe you just answered this and i just didn't understand it but like how would you think about the relative value then of a token uh you know the layer two token versus the eth token and does it have less to do with the amount of relative economic activity that's occurring at each layer versus some of that that value-cool mechanism that you were talking about like the relative supply of the asset like some kind of burn thing yeah i mean i it's it's complicated because

i still think we're mostly in the paradigm of um you know speculation rather than mechanistic value accrual if you want to divide it that way uh and i think we're like dramatically still in that paradigm as in it's probably like 95 you know not mechanistic value accrual in the way the average person is thinking about these assets um but as it does get more um complex in that there's lots of platforms assets move across platforms you can use bitcoin in d5 etc i think it gets more complicated and more and more people over time especially like

institutionals are going to more and more start to think about that mechanistic value accrual so i do think that's sort of the way this goes longer term but we're not there yet oh if it feels like all eyes most guests who come on the show end up saying two things that they're looking at are like roll ups and l2s uh maybe three things are rollups and l2s and then uh other l1s and like expansion of different ecosystems and bridges what do you think is kind of the most underlooked thing where it kind of boggles your mind that that other folks aren't talking about xyz more yeah you know now there's so many people talking about so much stuff in crypto it's it feels like everything is covered you know do you uh

do do you miss the early days olaf well are you reminiscing ever simpler times for sure yeah it's like you know once a week like a new project dropped you know and you sort of read about it and then get back to work trying to scale coinbase um but yeah i i think it was easier it was easier for sure yeah um you know i i just think um i really like these kind of more exotic experiments always where it's just sort of us unproven um so a couple categories that i think are just interesting and i don't see people talking about um you know there's there's this concept of of like could we use um a proof mechanism like proof of

work um to to do something else other than validation um of transactions in the system so for example could we use that proof system to like train a machine learning algorithm right where all of the miners are doing this sort of useful work uh towards training a machine learning algorithm um there's one project doing that that i i think is is pretty fascinating um and it's just like a new category right unproven um but it's it's fascinating if it did work you know as the coin price of that system goes up you get a stronger and stronger and stronger ai basically um

which is which is very cool the second you know another category that comes to mind is um you know this concept of like um a digital creator so um if you're familiar with like lil mickey um yeah there's this it's like she's an instagram star but she's completely digital like there's there's no real person there um or you could think of like the band gorillas right where like it's all kind of animated and digital um thinking about like how could you have that be a dow ownership structure so um when you look at you know meat space stars like um a kanye west you can't like buy shares or ownership units of

kanye west right um however with like a low michaela you really could like you could really have a a dow that like owns that you know digital asset um and then little michaela could release music or release um nfts or like do things and one of the nice things about that is they can perform in like 100 cities every night of the year right or they can they never go to sleep um they never like slap somebody at the oscars or like [Music] yeah oh can i can i actually push back on that one idea for a second which is really what you're talking about is kind of like social tokens like the ability to get upside in a creator essentially i would say this is different because the

creator is a fake person um so it's like i think that there's problem like i think the main problem with social toke the idea that like i'm gonna fund my college by selling 10 of my future earnings right that's like the classic social token experiment right right i just think you run into some pretty dicey area there um that you know i think it's kind of obvious the ways that could go wrong or feel kind of weird um yeah well well any any any sort of token or anything that gets traded on a marketplace you will eventually will be able to go short on that thing and what happens if i a lot of people are buying olaf tokens well i just loaded up on a short position on olaf and now i'm pretty

incentivized to see you fail that gets pretty ugly pretty quickly yeah like you don't want to accidentally make markets prediction markets um right where you're incentivized to actually influence the outcome um yeah but yeah i i think that you know um in the case of like a low michaela say um it's cool because you you really can distribute um ownership and build a community around that those digital assets without um you know any of those weird ethical problems basically that come from like selling shares of a person or something like that um yeah so i i like that's

just another experiment that comes to mind um you know there's there's stuff like this happening where it's it's small today but um if one of these things works you know maybe maybe it's very big tomorrow yeah speaking of dow's olaf um i've obviously heard you on a bunch of different shows and podcasts just talking it seems like you're quite optimistic about where dows go in the future could you ever turn your fund the entire firm into a dow is that something that's on the roadmap um you know i i think that would be pretty cool um if it weren't for um if it weren't for like all you know laws and and regulation around that so yeah you know conceptually i think um

dows in my mind they really only need to get one thing right which is capital allocation um and the governance process around that capital allocation so i do think dows are sort of like limited partners in funds like they should be investing in managers they should be investing in in startups i don't think they should actually be doing anything as in operating i think all they should be doing is allocating capital and perfecting the governance process to allocate that capital you're saying you're saying all dow's or venture does i'm i mean like all daos all doubts should just be allocating capital and i'm talking

that are at scale if you want to build like a little neighborhood dow that's like a different one but well like uh like what maker has set up basically where they allocate capital to different teams yeah like and or like uh you know these dows that have really collected like hundreds of millions of dollars um from sponsoring d5 protocols um i don't think that they should you know the the level of zoom on dows right now is like way too zoomed in way too zoomed in yeah in my opinion so like you get these votes on like an individual developer salary you know it's that is insane it's like going to the board of a company a publicly traded company board to say like what should this one engineer get paid mike and i were reading the forum

for i forget which doubt it was but it was um oh my god they were voting on something that happened at the off site they were like should we spend a day at the lake at our company at our off site and there were like 12 people at the offset and you had like 200 people voting on this thing and people are like why are people spending time at a lake at the off site and i was like oh my god this is a nightmare yeah i mean it just it's it's like all the dao should do is allocate capital like i think the dow needs to be separated from the startup so to speak i think the startup should just be like ceo entrepreneur um you know top-down decision-making execution etc um and the dow is just the capital provider that you know gets to

decide if that entrepreneur is executing or not um or has a good strategy or not so i i think that if you can reduce dows to capital allocation um i think they can be highly highly effective i think a lot of the problems with dows is they're trying to do stuff instead of just allocate capital today yeah do you think that a lot of the companies like okay so you spend a lot of time at coinbase when i look at coinbase right now um i actually have multiple questions about coinbase but coinbase goes up against someone like uniswap i'm gonna make these numbers up but coinbase has something like four thousand or five thousand employees uniswap has like 50 employees and again super rough numbers does someone like can can a centralized company like one of these quote unquote c5 companies like

a block five versus an ave or coinbase versus uniswap over time can the c5 companies compete with some of these dows no um i think that the d5 systems win in the end um however d5 systems cannot integrate with traditional banks so the bridges will always be owned and by bridge i mean fiat to crypto bridge the fiat to crypto bridge will always be owned by by centralized exchanges like that that you have to have a centralized exchange there's no other way um however the order books um i think long term um are are won by d5

so it's it's like if you just want to trade crypto for crypto that long term is going to be uh defy um but if you want to you know exchange a hundred dollars in your bank account for crypto that's always going to be a coinbase like business olaf are you still close with brian yes gotta empathize for the guy right now i was telling mike i was like man it would suck to be the ceo of a public company i was like he's got this great business i love coinbase i use coinbase all the time i'm like yeah man i like gotta suck to be a ceo of a public company i don't know if you've talked to him about that yeah well i mean i i think um it's it's it's just did he have hair before starting coinbase basically that's what

i'm asking he's always had the same same haircut for sure um i i think that it's just hard being the ceo of any company because it's success or failures is kind of on your shoulders um i mean you know coinbase um really went through the gauntlet in in 2014-15 i mean it was it was hard um it's just this thing where you're hiring people you kind of have this this great company concept you know all these new product ideas um but like revenue was just dropping oh you know every month it was just like okay fewer and fewer and fewer people

using the system um and you get to the point where you're like wait a second you know are we like suddenly rethinking product market fit you know what i mean yeah we thought we like figured it out and we're in this like growth phase you know what i mean um and that's very hard as a startup when you're in a cyclical industry is like um you know what is um what is growth like of a real product market fit product and what is like you sort of accidentally rode the macro wave a little bit but you actually didn't have any product i remember reading uh that one of brian's pieces in 2017 when the servers were shutting down and he's like guys you gotta understand like

18 months ago he's like we were not prepared for this and i will admit that because 18 months ago we were like still trying to like we're running on a hamster wheel so yeah so i you know i think i'm just really sympathetic to um everyone that's in like an entrepreneurial journey i think that it's i think it's kind of sad in a way that um you know our societies you know most successful entrepreneurs are are vilified um and i don't think anybody really comprehends how difficult it is um to be an entrepreneur psychologically you know um you really have everything riding on on your shoulders um it all comes down to you and like so many

different people depend on you um and you know at the end of the day like it's um you know the people who are very successful entrepreneurs they bring up so many people with them you know um so many employees um so many investors like they you know um but the the reverse is true as well right if it fails you feel like you didn't just fail yourself you failed everybody um so i just think it's it's very intense and i have a lot of respect for people um that can handle being an entrepreneur and i think that as a society um it's probably time for us to re-examine the way that we think about

entrepreneurs because somehow they became like bond villains um when in reality i think they are very important to everything that that you know is happening and as i talked about with like the entrepreneurial laboratory that is like the tip of the spear for society on how we solve things like i really do believe in the entrepreneurial laboratory to solve problems that at really global scale um and in the most serious categories i could not agree with you more i love on all of that yeah oh maybe maybe to close um you know just at like a high level you kind of talked about um you know real problems getting solved during bear

markets right and that's been i think jason my experience too so what were a couple of the things maybe it's like dow governance maybe it's this idea of yield farming and just giving out essentially network equity for free right to mercenaries like whatever it is like what are a couple of the things that you think really need to be fixed or like got taken to extremes in the last bull market um and then at a higher level like you know just having gone through crypto for as long as you have there's so many overriding narratives right there's like the democratization of finance there's replacing of the reserve currency of the us like where do you think are there any of those narratives that you think are popularly accepted that you personally don't believe in i'd be curious like where you land on some of those

so um yeah one one like macro thing that i'm surprised more people haven't talked about is that in in 2014 we had the the sort of launch of altcoins um that had some sort of like pre-mine mechanism so some of the coins were held by the creator um in 2017 we had icos and this kind of crowdfunding phenomena and in 2021 we got nft mints okay and the the kind of financial mechanism underlying all three of those is identical it's identical it's like um the creator holds some coins and then

there's basically a crowdfunding you know event that pushes capital into the system um and you know the creator owns a portion from from the beginning um and it's kind of different form factors like you know it was base chains it was um you know ico projects and now at nft mints but i think that it's very tightly rhyming history right um and i do think like a lot of the confusion from new entrants in crypto is that just because something has this like cool financialization it doesn't mean

that there's anything underneath that um so a lot of the you know in in the ico wave it was sort of like you know i'm doing the ico because it's an ico like icos are just a cool thing in general so like you know and then i feel like that happened with nft mints it was like i'm just doing the mint because like holy [ __ ] i heard about it on discord and like you know it's like it's a mint i have to do it you know what i mean so i i like i think that um there's a lot of like you know i i think something i didn't like about this 2021 thing was this concept that like we're all gonna make it um

and it it's sort of like the problem is that it's like we're all gonna make it no matter what and the reality is it does you know the world's not that simple and you actually need to do useful things and um create value for other people to make it like you can't um just like ride this macro wave forever um and it's it's not actually like up only as and it shouldn't be like we actually have to prove ourselves um to the world like as a crypto industry like it is our job to show the world that this is useful um we can't just like you know we we almost can but we can't

just meme our way to the top you know that's an important component of it because this is social technology um but we really do have to build useful stuff for people and make it work um so i you know i'm excited to get back to the um era of just sort of like actually what's being built not just you know everything goes up um for no reason olaf this has been awesome i appreciate it on such a crazy day and a crazy week really appreciate all the time and this has been a fantastic conversation yeah thanks guys appreciate it awesome awesome we'll see you later [Music]