The Antifragility of Cryptoassets - Alexander Bulkin, CoinFund

Transcript

[Music] hello and welcome to the blockchain and us we're pioneers and thought leaders talked about their journey in blockchain technology crypto assets and a token economy and I'm your host manuel staggers this episode has support from no official sponsor but from my very own the blockchain and us newsletter get an email from me every two weeks with a very short summary of new podcast episodes so you can immediately pick those interviews you'd like to listen to to stay up-to-date just visit www.wymt.com [Music] my guests today is Alexander Vulcan alex

is the co-founder and Managing Director at coin fund and he is a multidisciplinary thinker with a special interest in social and technological innovation bridging technology with social science and psychology he has 13 years of experience in developing pricing risk management and high-frequency trading software at Goldman Sachs and he is holding a dual degree in mathematics and computer science from New York University and a master's degree in organizational psychology from the process work Institute in Portland Oregon and now to the interview hi Alex and many thanks for making time today thank you Alex you've been a

software developer at Goldman Sachs for more than 10 years and then in 2016 you switched to coin fund why yeah that's a great question I think I wanted to do something very different and kind of more oriented into the future of Finance rather than rather than the same old I read my partner at quite find this Jake Brookman whom I know whom I've known for a really long time and you know he sent me the same white paper I knew about Bitcoin before that and having read the etherion white paper it dawned on me that this would be a majorly disruptive

innovation in finance and I became so interested and started reading about other projects and then eventually decided to this full-time did you ever try to do this within Goldman as well no I haven't thought frankly did not occur to me and maybe there also wasn't the platform for it back then so what is the core business of coin fund of your work you're doing there with Jake yeah company we started well - started in 2015 and then I came on board in mid-2016 and then a couple more people Alex feeling

and all that goal above the two other partners have joined in early 2017 and we've always been a very broad broadly targeted company in the space we we've always been an investment company because you know in my view investments is a is a really great way to understand the space but we've done other things too we've always been helping projects think about crypt economics think about their products with you know we started doing staking and network operations services recently which is something

that's really coming into the space with all the proof of stake networks and there's a great opportunity to add efficiency to your crypto asset Holdings by staking them and utilizing them effectively within these networks and I can dive into that topic later if you want so we've we've always been looking very broadly we've never focused on one specific vertical or one specific activity we've never really been hands-on technical but other than that we really try to understand and do many things mm-hmm okay on the website it also says coin fund is a highly

multidisciplinary team bring together engineering mathematics financial analysis social science and product expertise in blockchain so how does social science come in with coin fund really does and that's a great question I love being asked that because that is part of the reason why I joined crypto is because these applications and networks and frameworks they ultimately interact with large groups of people and so it's always a human-computer interaction but but the very large-scale and complex and it becomes a social question as much as a technical question

about how to make these these algorithms work how to make these applications work how to make the right product in the decentralized space how to create the right economics so you can never consider just technology you always have to look at it from both the technical and the social side hmm but how do you do it practically you know in your work I mean how do you bring in that social side well it comes when when I think about crypt economics it comes when you have to think about human behavior in the way that people will interact with your product and and in the way that people will play your

economic games for example when you think about the price behavior of assets in markets that are not fully efficient which crypto market is it's not an efficient market right now you you have to understand you know behavioral economics and you have to understand individual incentives and you know how people interact with value and scarcity and you know and how people try to game the system so there's a lot of social game theory there's a lot of behavioral economics in considering these questions and you know I'm not a behavioral

economist and I'm not a social scientist with experience but I did study some psychology and and I find it exceedingly valuable because whenever engineers approach these products and design these products they usually make the silliest mistakes like like which mistakes so well let me give you a few examples so for example if you if you remember the Dow in 2016 you know the Dow was one of the first systems that was rolled out to the theorem that had a governance component and and the governance component it was very basic it was a

vote oriented governance with quorum requirements and you saw like we saw very quickly that the participation of people in the in these votes was very low and that is something that you have to remember that people you know you may think that if you give people a voting system that they will vote but that's not true and so so giving another example occasionally a project with what would it appear my radar that it tries to create an incentive eyes economically incentivized Wikipedia or economically incentivized github and I am generally

of the opinion that that can't work if you read literature in the history of Wikipedia you'll see that Wikipedia tried to create a commercial system early on and that failed miserably and there's a reason why it would fail because because social incentives to contributing you know good quality content are not necessarily the same incentives as those that you know make people contribute for money and so introducing economics in large open source systems is much more complicated process than a lot of people think mmm-hmm so you think there's still much work much more work to be done and

nobody has cracked the right approach to it yet yes I think we will we will see a lot of traditional academic work eventually merging with blockchain design work where the thinking in the theory of social choice will slowly filter into the crypto community and kind of root there because the the the community is currently are quite disconnected crypto is still a very exotic area for academics and they haven't yet fully realized that this is where their knowledge is very applicable and in fact it's a great platform to test many of these systems that people have been thinking about so we will see

a lot of good thinking come in when when the when the communities interact more mmm-hmm also I think a coin fund you have this focus on the ecosystem how do you go about that I mean how do you go about connecting these communities maybe bring in communities that aren't you know so I haven't warmed up to to blockchain technology and crypto economics yet I mean how do you build these bridges there Oh slowly very slowly but but i but I have had a few conversations with experimentally economists behavioural economists there's budding interest there it's just not fully realized yet

it still takes time I guess yeah I'd like to ask a few more questions about crypto asset management maybe specifically where do you see the differences the main differences between more traditional fund management asset management and crypto asset management oh yeah that's a great question I think the main difference is that crypto assets are rarely passive even if you are holding Bitcoin or ether which you technically don't have to do anything with it is still the case that you have to have a lot more sort of awareness of technology when you call these assets

you have to have awareness of technology with respect to security with respect to technology and systemic risks in the ecosystem you have to understand the way that technology works to really understand how to manage these assets and then in the recent past you know we see a much greater number of crypto assets actually require you to do things because because unlike for example traditional equity crypto asset if yours will want their investors to do things they will want their investors to stake

those assets they will want their investors to vote and provide governance to the ecosystem they will want those that investors to provide curation services they will want their investors to facilitate the operations of the network and so with respect to Krypton native assets he will see a lot more assets require investors to understand things and do things and this is not to say that that's true across the board so we see a lot of interest in in security tokens for example which are you know not a I don't see security tokens as a disruptive innovation security tokens are more and more like a radical

innovation or an incremental innovation on traditional securities so in those areas you will see less of that but I think ultimately even though the security token markets are probably going to be pretty big we will still see you know the the real the real innovation and the real improvements coming from alternatives you know I don't like the word utility tokens because it's kind of at this point overloaded and it has been used too much in their own place but let's just call them crypto native assets so crypto native assets would be platform tokens

for critical networks must aching assets voting in government's assets discount tokens and so on where you see real economic innovation and a lot of that is tied to technology and and an understanding of the community and technology in the product mm-hmm so you mentioned before as a crypto asset manager basically you have to be more savvy maybe in technology correct and the users of course the investors themselves also have to understand the assets much better maybe on a technological level but when did you see this this change you know from being

just an asset manager investing in crypto assets to fund managers becoming more technologists and technology companies well we saw this from the very beginning because one of the early projects in the space is auger and when I when we when you read the auger white paper you know you'll see that auger rap is a is an active token it gives you it requires that you resolve markets on the auger prediction market system right so so we saw this from very early on but a lot of traders and people just entering the space would always look at crypto assets

more like traditional financial assets and so and so we always people always come to us and ask these questions and you know and we tell them about you know why it is that assets required understanding of the technology and they always get their mind blown hmm you know all these traditional hedge fund you know management companies that now say oh we'll also start a crypto fund and it's a top ten fund you know long only mostly do you think that's really totally missing the point of crypto assets no I don't think so I think I think they will just eventually have to hire the right team and they'll eventually have to understand the

systems better but I think investors investors do define the space but also the space defines the investors so the ecosystem is both in the innovation that comes with projects and investor attitudes and knowledge that makes decisions on how to deploy a capital right but but but the effect is mutual they're new ideas coming from project founders will filter into the investment community and D and define how investors think about all the future projects and then the investor community will also define what goes and what doesn't in the

project space and also you know order even now retail investors are at the force in in the space but the investment companies really do lead the charge and really create the signals that the retail investors need so so it's a well functioning ecosystem you know assuming that the knowledge is fluid and and filters and all the places it needs to go and so find large financial companies who you know come into the space they typically look for a custodian and it's hard right now because custody is a very

new is a very new service in this space but it we may see a process where custodians are actually also partly managers because then custodians will will take care of staking tokens and and utilizing them not just holding them I think anybody who is going into crypto and is looking at long only passive holding I think it's doing is wrong but but they won't be doing it wrong for too long because they'll lift get disrupted away you mean well because they will eventually understand that that's not ambitions yes

yeah but understanding is one thing and being able to do is another thing you know the first question I ask you why why didn't you just implement the etherium idea directly at Goldman that you know that was because you saw maybe other opportunity to do it on your own do it with a different team and I just wonder sometimes you know how agile will these more these fund managers with a more traditional background be to make that switch I think I think agility for this cut for these companies is never an issue my thinking there's very much influenced by this great book called the innovators dilemma which explains the disruption really doesn't disruption is

not doesn't happen because companies are not agile enough disruption happens because companies really don't have a good it could be good incentive to go into these new more kids so if Goldman's clients or or for any large institutions that clients keep calling the company and saying when can we you know invest into crypto assets through you the company will create the right infrastructure and it will create the right teams and it will you know purchase the right hardware and get the right expertise and you know I might get a call you know one of these days from Goldman say hey Alex come back and help

us create a crypto desk I don't know hmm you know maybe that well maybe that will happen maybe not but the point is the company will be agile if it needs to do but the issue is that it currently doesn't need to be because you know crypto assets as much high as they as they gather around themselves you know the risk profile of crypto assets it's still wrong for large investors and it's still there's still no crypto products that you know large corporate companies using financial services need so I see a fall-off you know let's say coca-cola

isn't gonna call Goldman and say when can I invest in Bitcoin the CFO of coca-cola will only call Goldman when there is a financial product that can be useful to coca-cola for example you know some projects are bringing out short-term lending systems using blockchain and those will be incredibly efficient and very cheap but there's still toys they're still small they're still very risky and so you know when they mature that's when Goldman is going to have to come in and it will okay interesting interesting point you mentioned before and I want to get back

to this point you mentioned staking yeah so what other services of these you know infrastructure services do you think will crypto asset managers provide engineer and you know medium-term future well there's so much right for example take steam write steam is a is a is an old is one of the first and most functional crypto networks and crypto products and holding steam passively is silly because you you lose it through inflation hmm so so the a better way to use steam is by curating content or by delegating

steam to somebody who curates content and it's the same exact process as staking it's just not it's just not about network services it's more about content services but the idea is the same you get punished if you hold tokens passively and you get rewarded if you use those tokens to provide services to the network so in the case of steam the service would be curation in the case of maker Dow the service would be repurchasing the CDP that went underwater or market making in the case of augur its resolving prediction markets you know I can go on and on now you said well funds surely can provide these services I actually want to

disagree with you there because the tax the tax implications of creating income inside an investment company are actually quite complicated hmm and so and so it's not necessarily true that it's easy for funds you know we spend maybe a total of a hundred hours working through tax issues that that arise from actively utilizing tokens so it's not that simple but I mean I was just the reason ask it was because I was referring to you know Jake's tweet where he tweeted I think it was a few few a month ago maybe where he

said the line between investor and service provider is blurred we might become miners takers validators bonders curators dispute resolvers nodes hubs watchers routers for networks and and so I mean I think it's a faster idea and it's a very very good observation and and so I just wonder you know how does that well what does that actually means well I mean it's it's a very dynamic space we're figuring it out as we speak so there's many possibilities you can you know you can partner with staking companies there's a number of them going online right now doing research with various networks

some specializing in more traditional mining some specializing in proof of stake mining some specializing in generalized service provision you know so what to watch out for is a hard question unless you want to if you if you have a significant holding of diverse crypto assets you would you would have to do a lot of research and see or you know companies like us we really we provide this type of input to our LPS you know people who you know who could invest in in coin fund we share research with them for example that

that's that's one way so there's many possibilities it's either you do research yourself or you have somebody you partner with who does this type of research the space is very big so so it's it's a lot of work with staking right I mean it's a it's a software challenge it's a timing challenge an organizational challenge a legal challenge sometimes I wonder you know is it possible maybe for a crypto fund to create some sort of product or some sort of derivative that would you know reap these benefits that these new network services can provide and somehow pass it on to investors you know in a more

scalable fashion I mean some of the staking companies actually looking at tokenizing their services as a fund I don't think we really want to do that there's a lot of legal complexity that we would probably not want to deal with but you know stay tuned because new ID has come to market every day mm-hmm I'd like to speak a little bit more about crypto economic primitives basically reusable building blocks that can be used to describe and incentivize interactions between people it's it's an area I've been reading a lot about in the last few months and I know that you

have a company called adapt that focuses on this so why don't you describe what you have in mind with adapt yeah so well adapt is is an interesting project it's a it's a it's something that I've been thinking about since I joined crypto and it's in it's a software system for launching decentralized networks and and the question is kind of why right why do I want to do this mm well you asked about crypto economic primitives one of the issues in crypto economics is that you can't easily reuse things that other

people do it's open source you can look at code but generally the ecosystem is not set up for code reuse and it's not set up for it's not set up for libraries of components and there is there are clear components in crypto economics you know think of token curated registries think of governance primitives voting primitives tokens you know staking tokens discount tokens all of these should be developed and software in a way that's reusable but that is currently not happening and I am you

know I have many different areas where I have knowledge but I have my deepest experience is an engineering of large systems and you can't really engineer a large system if you can't slap together and prototype quickly and in order to slap things together and prototype quickly and then change them you really have to have libraries of pre-existing components you can play with and and that currently does not exist in fact in fact it currently cannot exist because because of how smart contract languages interact with their networks I don't think they can exist at all but still they're necessary

alright maybe first how would you describe what crypto economic primitives are well they're components of system behavior and their components that you put in to create incentives so let's take just just a simple example let's take an augur let's take order prediction market ok so order prediction market has clear components that could be made into reusable primitives right for example resolving the market happens through a process we call you know an Oracle an Oracle is a way to report

information to the blockchain it's not necessarily crypto economic but it's definitely a part of a crypto economic system because it's a required component there right so so an Oracle is when somebody can report a piece of data to the blockchain then there's a dispute period there's a there's a potential challenger that can come in and say no you just lied you know and all to create a piece of data in the blockchain you can trust okay so so Oracle is one component there another component in Oracle that in in in order that can that can be you know isolated and made into a reusable component is the market itself

because you know in augur you have trading off of shares of various prediction markets and the trading part of it is actually a primitive so when you trade something it's basically you atomically swap it for something else and and that piece of it buying and selling shares you know is a non-trivial amount of code and could be also a component that can be reusable in other places so the problem right now is that everybody who's developing these systems have to do everything from scratch hmm what is maybe an analogue right in a in a pre blockchain a world I mean because

financial primitives have been around I mean that's not a blockchain innovation but how could one say that you know a crypto economic primitive is the next evolution that builds on blockchain technology off this one thing that existed before so what is an example of that I I don't actually agree with you I don't think that's something that's existed before but is it not like an options contract or a futures contract yeah just gonna say that the legal technology you had kind of cookie cutter contracts so you think of those as reusable primitives but blockchain is the first time when that became technology enabled and and and that is

such a new it's so much more powerful that to say that that a crypto economic primitive is just the next iteration of a financial contract I don't think that's correct it's just too far out it's it's just too innovative for that so it's much more than creating financial contracts with token economics you're saying I really do I really do think think so because in if you think of legal technology as a predecessor to change technology the cost of of enforcing a contract is really really high on blockchain in some cases the cost of enforcing a contract

is really really low and the difference there it's two three five orders of magnitude right so that makes it qualitatively different because you can do so many things like mmm so so for example think of a of an expense of creating a new tradable financial contract it requires millions and millions of dollars you have to register it you have to you know you have to define it you have to get exchanges to accept it you have to get exchange regulators to accept it it's it's years and years of work whereas in some cases you can create a blockchain based financial contract in a

matter of you know days and weeks with you know a fraction of the cost and you can deploy it and people can use it exactly and people people can use it and then potentially you can trade it you know the same day because for example and if they're Delta you don't even have to list the NASA to trade it you sir ether Delta will trade any air sea 20 token mm-hmm where where does most of that innovation in in these crypto economic primitives where does it come from currently I mean is it new startups is it existing exchanges maybe do you know that create new tradable instruments or where do you see all that coming from currently exchanges I don't see enough innovation coming from exchanges because

it makes you know with the swap and and all that yeah I don't know much about MIT max actually I haven't done sufficient research there but yes bit max is certainly very creative in some cases destructively so but the fine line has always it's it's the fine line for sure you can have you can put technology to use in various different ways but but other than that you know I think decentralized exchanges are definitely innovating but I think we still think of an exchange in in terms of like eighteen seventy right we still think of it exchanges in the order book and that I think is going to change too there's

ideas in in exchange technology that can that are there that far supersede open order books I mean can you elaborate on that a bit okay okay but well sure I mean let me disclose some of my IP so so think of what an order but in exchanges right an order is something like I we'll buy X shares of y4 for the price Z so so what an order is it's a it's an expression of your of your of your will in some sense you are telling the

exchange to do something on your behalf you're telling the exchange to do something according to your specifications well in order is a very simple way to specify what it is you want to do but if you think of expressing your will to an exchange you can actually do a whole lot more because blockchain is is a is a technology that allows you to embed pieces of your desires into technology and and and trust the fact that they will be executed according to your specification so for example you can say something like I want to have X shares of Y if Z has price T right you can you can say I

want to have X shares of Y at the price at an average price at which you know Z shares of Y have been tracked traded over the past one hour right people think of those things as properties of a training of a training strategy that gets executed on an exchange but not by the exchange right however you can actually with with secure hardware and blockchain you can embed pieces of your trading strategy directly into the exchange if the exchange supports it and so and so you immediately deviate from this idea of an order as as just a

number of n the price right you can go to fairly complex requests that you can shoot into the exchange and if you think of an exchange as a cloud and that cloud can max can match together all these different wants from different participants then you get this very interesting picture hmm where for example you know with the right amount of encryption and information hiding you completely avoid things like front-running or things like market manipulation or you know things like self trading various manipulative practices will go

away if you combine cryptographically enabled data hiding with with a sufficiently enriched language that would Express you know people's wants mm-hmm right so so that's that those are the types of innovations I'm talking about what happens if you speak to somebody coming more from a traditional finance environment when you when you discuss these ideas people who get it will not but but they won't they won't believe it they they will it will get it intellectually but they will not usually connect with it they're like oh that sounds good but it's too far out okay why do you think they feel it's too far

out well I think blockchain actually is to some extent kind of has a bad rap to some extent there's a lot of speculative behavior you know a lot of kind of shady practices and and then and then also um traditional finance people are looking for signals from traditional finance people so you know if JP Morgan goes tomorrow all in and starts publishing good blockchain research all kinds of things will start happening but they're not gonna do that nor can they at the moment they can't because they don't have the incentives you mean yeah and they will publish research from

Bitcoin and mining which to me is a bit like 2012 yeah interesting how long do you think it's gonna take until that gap closes a little bit you know maybe close completely or at least significantly start happening soon but but it will take a few years before there's any real understanding maybe five to ten from the more traditional financial players you mean yeah yeah how do you see other companies in the economy deal with this momentum of innovation that blockchain technology provides I think everybody right now is in the wait state they're like well we're gonna wait to see if

anything real comes out of this so so even we we know that there's a lot of interest but we know that this interest is exploratory kind of middle stage startups in technology are much quicker to react but large established companies they are all in in kind of in the right state mm-hmm it's this in your view is just a good strategy let's take a quick break for a message from our sponsors this episode has support from no official sponsor but from my very own the blockchain and us newsletter get an email from me every two weeks with a very short summary of new podcast episodes so you can immediately pick

those interviews you'd like to listen to to stay up-to-date just visit www.cannainsider.com/careers large established companies they're all in the right state in your view is this a good strategy I think it is a good strategy um I actually I actually think that a lot when I when I hear of large companies investing in Bitcoin I actually think that they should wait some more before they understand what they're doing I think large companies should go to the right players for information I think there's there's a good number of excellent startups in

blockchain that can help with the research and I think that you know the information that's coming to large companies is coming from places like Microsoft IBM you know McKinsey you know because they when they ask these questions they they ask these questions of people they know but unfortunately people they know don't know anything you know and and even as much respect as I have for IBM and Microsoft going into blockchain they are there to cover a consortium private blockchain use case yeah which is not very interesting right they're there to provide kind of a new

technology for distributed databases which again is incremental not disruptive and so and they those companies are not going to tell you about a theory they're they're gonna basically tell you about you know hyper ledger and and similar models they're not interesting from the perspective of financial innovation they're just interesting new ways for large companies to collaborate but they're not disruptive and so large companies should have a spectrum of people helping them you know people like Vinay Gupta of material Scott Nelson of sweet bridge you know coin fund place holder capital

you know large Krypton native companies are the only companies that can that can really help understand the disruption behind this technology do you think and and again they're right I mean before you said it's maybe not a bad idea for some companies to wait but for these tech giants you know like Facebook Twitter Google Apple do you think they're missing the boat on all of this I think these large companies I honestly I am not I'm not actually able to speculate they're you know large technology companies have done many

surprising things and not that familiar with that culture so it would be speculating for me to guess mm-hmm yes absolutely I'm just wondering I mean I'm in finance you know the writing's on the wall and I hear this all the time that you know most of the financial services in the crypto space will perhaps come from newcomers and so I'm just wondering sometimes you know what the other tech companies honestly I think that the biggest I think investment banking like like you know Goldman Morgan Stanley you know those types of companies are probably quite safe at the moment but I think that the companies that are going to see the most amount of disruption

very soon are just traditional banks yeah totally green because because because honestly you know people who started using iPhone as teenagers are now 25 right or or or even like 30 and what that means is they're gonna demand the level of user experience and product exposure that the banks will simply not be able to provide or agree on or gain the expertise for because think of think of Citibank for example I never worked for Citibank Bank but you know a friend

of mine worked for Citibank for you know several years and you know no serious technology team will ever be Wanna employed by Citibank and and because and and and and and that's and that's a problem for banks because they're so you know they're so out of date with their culture and their approach to serving and user needs they still think that it's okay to make people come to branches you know they still think that it's okay to use you know photographs of signatures they still think that it's okay to use you know your mother's maiden I mean that's going away man

that's that's just gonna go trash in itself mm-hmm let's go back to coin fund a little bit and then then we can open it up again in your work at coin fund what are you learning at the moment whoa well that's a great question I mean is there something that has surprised you you know where you thought I know exactly how to do that and then it was totally different yeah constantly but I think at the moment you know fundamentally at coin fund I think we have to learn

agility in fact anybody who operates in the space this is also very philosophical but anybody who operates in the space has to learn agility and as a matter of fact has to learn antifragility you know the I don't know if you've read the book with that with that title by Nicholas Taleb right anti fragile big favorite anti fragile is a is a Bible of crypto and so and you have to learn and it's not that easy because it's the easiest thing that you can do is oh you know if theorem is going to succeed let me invest this much money into it and a much more difficult thing

to do is how do you survive and succeed whether it's a theorem or anything else and it's not about diversification it's also about how to be an activist investor and how to be you know broad and how to be diplomatic and then how to be you know positioned correctly and how to have the right operational structure and how to have the right accounting system and how to have the right team it's across the board they're really really difficult and fascinating problem and when it's when we say it's multidisciplinary we mean it because it's law its technology its organizational structure its its

psychology its how do you you know fight with your partner and then and then and then work together in a way that's more you know more productive you know and we have we have disagreements all the time and and we're because of how we're able to have disagreements I think we're like the best team in the space I honestly am completely in love with how we work together mm-hmm cool is there or skills right that you mentioned before anti-fertility agility or just you know also more practical skills of running a business you know and it's always morphing and changing environment how do you go about

acquiring and training these skills you have to stay extremely humble it's like the moment you think you know something that's a red flag and do you guys you know speak a lot about these things in the team or you know you guys call each other out when you see those things happening or yeah yeah there was a period of time when Jake came back from eath bonus iris I started calling him at the Syrian Maximus you know it was a short period of time but but there was the funny interaction between us yeah it's about much more than

technology it's about much more than finance and that's what makes it fun I think yeah you mentioned a few things before that you believe are necessary to succeed in this space and if you look at the blockchain and crypto ecosystem more generally and more broadly what do you think this space needs most in the next few years to grow well so that I think we're doing a ton of things wrong like fundamentally wrong like wrong in a major major major way for example the mistake we're making is look crypto is a great innovation it works perfectly and that's a that's

wrong that's not the case crypto is a great innovation but it works nowhere near perfectly and and in fact the user experience of using any crypto product or exchange is so bad that only about you know 5% of people I know are even able to manage the complexity of it so for example let's take let's take one of the let me name one of the major assumptions under which crypto is being developed the major assumption that I want to name is we need that there is a 1 Network captures all the value premise and we need a

network to get as large as possible ok so that's the premise of a theory and that's the premise of us that's the premise of Cosmos Definity you know dick read stellar it's basically the idea of large network wins all scenario mm-hmm and and there's a an Associated set of derivative assumptions which is if you issue a token for a network that token is going to be a major value capture mechanism the you know the the market cap of these networks is supposed to be in the billions of dollars you know the development team is supposed to think of

this network is a universal network because it wants to attract as much as possible you know as many decentralized applications as possible and this is completely wrong completely wrong because because the large network thesis that we tacitly operate on is not correct it creates a huge amount of problems it creates for example the the surface of attack problem where because aetherium can run any smart contracts it increases the surface of attack of any smart contract it has a user experience problem because it took two hopper to

interact with a specific network you have to hold the currency of that network you have to pay for transactions you have to think of how many transactions you can pay for or have or or you know if you're building a decentralized application you have to somehow not clear how you have to do it on behalf of your users because you have to you want to users to have a good user experience but but the network becomes a major player in in in these applications right there's incentive problems where the one network wins all thesis makes networks very hostile to each other hmm and and it and it creates a situation

where oh this network is gonna will win it all so I'm gonna put five thousands of dollars into it and there's gonna be a four billion dollar ICO you know for this network and and that's just you know if you if you have any experience in venture capital you'll know that over funding a project is just as bad as underfunding it or worse mmm-hmm it creates really bad social dynamics so across the board these are these dynamics are kind of you know incessant and and intrusive and but at the core of what you're just describing is basically the idea of network effects as the most

valuable thing right in a network and you think that's wrong in in blockchain technology i I don't think the idea of network effects is wrong but you don't need one network to have network effects because crypt is very interesting crypto has a different kind of network effect the network effect in crypto is related to exchanging currencies and interoperating between applications but you can interoperate between different networks and you can exchange currencies between different networks and that's and we are developing this technology right now but it's gonna come and in that case you don't need one network to have a network

effect you can have an ecosystem of many different small networks and from the agility and and user experience perspective a large number of small networks is a better model than there than one big Network and and that hasn't sunk in yet oh that's not we're not even doing this but but but adapt is a is a project I'm working on to enable people to build small customized networks quickly and easily and create reuse for decentralized code you know and you know let me rather than explaining the vision let me let me paint a picture for you mm-hmm sure okay I'm gonna take a

specific example I'm take I'm going to take an example of a decentralized marketplace and I'm going to paint a picture for you of how a network dedicated to a decentralized marketplace can work cool okay so so a decentralized marketplace think you know think Amazon right it needs needs its own needs its own economic network and that network has to operate under consensus but orders and and and stores of individual sellers don't have to be on blockchain they can operate as privately hosted

databases where the seller can choose what it advertises and it can have a reference implementation but they can change it and add new features threads and so you have a network where there's a backbone dedicated to this market it's not a it's not a theory it's the you know decentralized Amazon economic back backbone network that has you know a payment asset you know and it has a you know a reputation system and it has a seller directory with reputation and then sellers you know shops are hosted in cellars networks now how does this

network get launched well here's one scenario you first crowd fund the development of this network by selling staking licenses and thus taking licenses require you to run nodes to provide consensus services to the amazon's backbone network I'm describing a staking licenses which is not sellable as its own asset it is just your license to create a node on this network and early investors in your network are the best people and and you know think back to our conversation about staking how investors will also be stagers and network service providers well your

early investors are your best people to do this because they're interested in your success so so the network service so the the mining license will let you run a node and the node will mine the currency of the network but the currency on the network is different from the mining license so so if I were to develop this network I would create you know 100 mining licenses and I would sell you know 90 of them to the initial service providers to the future so initial stagers on this network and then when the network is done then I would take the money I would develop the network the network would be launched then the initial stagers would come in

and run nodes and if they don't run notes they will basically lose their asset right it's the requirement for them to run this not this node right but that the currency of the network will be mind will be mined by the staffers and so the stickers will create the initial supply of the currency there will be a share draw that will probably happen to distribute this currency to some extent and then the stickers will provide additional services like for example you know ensure that the reputation disputes are are resolved right make sure that disputes are resolved the some government services to tweak the parameters of this network and

so on and so forth right so so you can see that if when I describe this to you you can immediately get the picture that there's absolutely no way that it can be done on a theory hmm it can probably be done on aetherium to some limited extent but it's complicated and it's a huge development effort and in the end what you get is you get all the risks of etherium also inherited by this network and etherium miners of stickers are not aligned with your network so you want your stickers to be fully aligned with your with with the functioning of your network so in order to build such a

network you have to start from scratch or you can use a product like adapt and adapt comes in because adapt is a way to program this network top from top to bottom and and and with adapt you can program the consensus network of the market you can program the state channels that will be used for fast payments if the program the private databases that are run by the by the people who own shops hosted by this network right it's a unified programming model for databases that specifically accounts for the blockchain use cases and allows you to develop you know stay current incentives to develop the

requirements on your stagers to develop the requirements and your participants to narrow the scope of a track of your network because now this is a specialized network it doesn't have to have a smart contract being launched by people you don't know if it only have code run on it that fix a contribute to the functionality of the market so stagers then become people who accept or reject code improvements and/or changes on the network this makes the network more agile right this makes the incentives kind of fully aligned between the initial group of people who run the network and all that users of the network and all the sellers

on the network yeah you know it allows you to develop the network quickly because the network is based on potentially some reusable financial primitives like mining licenses or reputation systems or dispute resolution code or the code that governs changes to other code right and so the process itself becomes quicker oh and and and get this that the last piece of the puzzle is that you decentralized that network slowly interesting so so in the in the early stages of when the network is run its small and it doesn't need to

be fully decentralized so at that stage you run with your mighty licenses and you only and there's only you know 20 50 or 100 people that run your network but there comes a time that you code into the network where the mining license will become obsolete and then anybody folds the currency of this network will become you know a stake yeah interesting and what the amount of money do you think is necessary to build this this market yes because before we talked about you know hugely overfunded icos well so so assuming assuming adapt is fully built I think you can build a

prototype in a couple of months with my half-million dollars and sort of my goal is that that adapt is being built so that you can have hundreds and thousands of these experiments how long do you think it will be until we see all these smaller markets pop up like you're just described well so so I think if adapt gets developed I think everybody he's gonna start doing it I keep I keep hearing we're gonna fork aetherium we're gonna fork decried we're gonna fork Bitcoin and that's because the need is there you know the need for custom networks is there is it's just no good good software to build it yet mm-hmm so so unfortunately the problem is that adapt itself doesn't have a good funding

model and and unfortunately it can't because because the moment you issue a token for adapt you know you then limit the token to the network you know you you you you create the wrong incentives in the ecosystem is this an issue currently you think for these more forward-looking you know more truly democratizing projects that they just cannot attract you know quick and plentiful funding yeah sometimes you know if you want to really do the right thing and you don't want to create equipped economics just because just because you need one to create a funding model then then you have a problem and hopefully we'll see

innovation in that regard and we'll see the community becoming more active in terms of supporting projects for what they're building not for what they can pay mm-hmm right but that's happening already to an extent no I mean there's a lot of early investors in aetherium Bitcoin who want to see these kind of innovations happen I don't know that's true I think you know aetherium investors want aetherium to go up so they've already already become the establishment oh yeah Syrian Bitcoin years they're all establishments unfortunately yes interesting where do you think we'll be in you know

maybe five years with crypto asset management oh boy I think I think we'll see a good amount of innovation that will reach larger and larger user communities and so you know I I hope that will be somewhere in in the middle of finance 3.0 you know innovative banking products innovative finance you know clear regulation you know tax regulation that makes companies like ours easier to operate and honestly just to mention it

you know some people are thinking that securities regulators will will kill crypto but actually it's probably tax regulators because tax regulation is so complex and so hard to and so hard to work with when you're dealing with crypto you know we do a ton of work to ensure that we're doing it correctly and compliantly but we can do so much more if only the tax code were to be simplified for crypto that and if that happens then then the tax authorities would be getting more money there's no question about right and you're mainly

referring to the u.s. tax authorities here correct yes and and and the reasons why they would be getting more money's because they would people companies will be doing more business because a lot of business we are not doing we're just simply not doing because of tax circulation we understand that we understand that you know for example you know we have foreign LPS and you know in tax regulation with respect to international business is very complicated and and to to have foreign stakeholders is very complicated and see there's some things you simply cannot do because that that puts a very onerous burden on foreign regulator on foreign

stakeholders we will simply not do them and and so that's why you know tax regulators should think about simplifying this because people will be doing more business in the United States mm-hmm what about these other jurisdictions that are more open I mean Malta Gibraltar are you looking at those as well yeah but there's only so much you can do as a US company you know I mean do you think it's somewhat of of a drawback for a company that truly wants to innovate to be in the US yes I think regulation is right now the biggest obstacle to broad

us-based innovation I think I'm gonna estimate that us is probably losing huge amounts of money to foreign jurisdictions right now and while while this is a early stage space it doesn't seem so bad but honestly in five to ten years this is going to be translating into trillions and trillions of dollars going to leapfrogging jurisdictions you know Africa and in Middle East and and Gibraltar and you know Netherlands and all the other countries that are friendly to crypto we'll see extreme amount of of wealth coming to them and

us will not and and us will will lose the torch for innovation out of Silicon Valley unless they innovate which they still can do yes for sure how do you collaborate with other crypto asset managers you know maybe in the US but also abroad we there's nothing formal but we talk a lot and and we exchange information and research and deal flow and brainstorm together there's a fairly tight community of crypto native asset managers and we love doing it we don't feel that that the asset managers face

is competitive it's a very cooperative space right now mm-hmm cool if if someone wanted to start an asset management business you know maybe coming from a more traditional finance background or a tech background what do you think should they do first I think honestly if you wanted to do this you would want to partner with an existing company and and you if you for example feel that you can contribute you know good fundraising to a company you know come talk to you know to an existing crypto native crypto fund and and partner rather than starting your

own because starting your own in this space it's it's freaking difficult and you you would think that oh you just started fund and you start investing but you're gonna make so many mistakes that that that there are not in any way avoidable unless you know crypto really really well hmm but do you think it's already too late maybe for new entrants in this space because the ones that entered early you know have such a huge amount of an advantage right also in mind share and also obviously in assets under management but but do you think

that you know that window has already closed for new entrants here to make a dent you know I should say it's closed but but definitely make sure you you get you know you get good X but you know window close they're not good question I don't I don't really know I just know that there's like hundreds of funds that King came up in 2018 and and hundreds to many probably - it's it's a little bit too many and and it's a difficult landscape and you know if you have money to invest then you can do better things than when starting a fund great Alex

this was this was really interesting and I really appreciate your insights and your examples that you gave and your experiences and I thank you very much for this conversation thank you for having me it was really fun to talk about this I really love talking about it and so so thank you for letting me talk to your community thanks so much for joining us today more info on our guests and our sponsors in the show notes of this episode and on the podcast website the blockchain and us comm to help people find this podcast it's important that you download subscribe and give it a top rating and review on iTunes or on the podcast platform of your choice I'm Manuel staggers and I thank you very

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