"We're at the Early Stages of a Truly Novel Structure That can Organize Humans and Money:" Olaf Carlson-Wee
And it's going to be "extremely massive and unstoppable," Polychain Capital's founder told The Defiant.
In today’s episode, I speak with Olaf Carlson-Wee. Olaf joined Coinbase as the exchange’s third employee, right out of college, enamored with the idea of bitcoin and cryptocurrencies. After helping scale the operation to millions of users, he left in 2016 to start Polychain Capital, a venture fund designed to invest in digital assets. He managed to grow Polychain into the largest crypto fund, at one point crossing the $1 billion mark.
He was already telling Wired magazine about programmatic finance back in 2016, so it’s no surprise Olaf is very excited about the growth and promise of DeFi. He thinks smart contracts are enabling different ways of organizing people and capital, turning traditional corporations into internet sovereign corporations. He says Compound Finance, one of Polychain’s investments, is a great example of a business that was able to so far move from a pen and paper-based to software-based.
He believes that given a compelling underlying product, liquidity mining will be an incredibly effective mechanism for accelerating network effects, which will be applicable to many different types of business models even beyond financial services.
He thinks that the narrative that every blockchain is competitive with every other blockchain and that there could only ever be one winner is dumb. And belives that automated financial services will grow dramatically and that the smart contract execution environment will over time lend itself to the many types of applications that make up the internet today.
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Olaf Carlson-Wee: I found out about Bitcoin in the summer of 2011 and immediately was enamored by the concept of a totally decentralized monetary system that is sort of governed by the users rather than by a central authority. And so, this idea of moving assets and money natively onto the internet and having it be a distributed system, very similar to the internet itself, where there's no single governing body or person in control, whether it be a government or a corporation, was extremely enticing to me and felt like a massive breakthrough.
“ … this idea of moving assets and money natively onto the internet and having it be a distributed system, very similar to the internet itself, where there's no single governing body or person in control, whether it be a government or a corporation, was extremely enticing to me and I felt like a massive breakthrough.”
At first, I was just skeptical that mechanically it would work. I kind of spent that summer diving into how Bitcoin was constructed, all the peer to peer networking, cryptographic signature schemes and mining and everything and became convinced that this was actually a robust, resilient and scalable system that would work to manage basically the world's money and assets. At that point, I was going into my senior year of undergraduate studies and wrote my undergraduate thesis on cryptocurrency.
Camila Russo: What were you studying at the time?
OC: I was majoring in sociology.
CR: Oh, so far from computer science and cryptography.
OC: Yeah. I've always been a pretty hardcore internet user, so I felt comfortable, obviously, navigating a lot of the complexities of the Bitcoin universe. But I really had to convince my professors that this was an appropriate topic, given the area of study. I think there was a lot of skepticism around this topic, but I think I eventually convinced them that it was sort of a valid area and ended up finishing the thesis on cryptocurrency. So that was really exciting.
Olaf Carlson-Wee. Image source: WSJ
30th user of Coinbase
But also, at the time, cryptocurrency was a very nascent area. It was basically, an open-source software project and a series of forums where people could talk about it. There wasn't what you would call like an industry, the way we think about it today. This was in 2011-2012. Towards the end of 2012, I joined Coinbase as one of the very first users. I was like the 30th user of Coinbase and I thought the product was fantastic. I ended up emailing Coinbase when was fresh out of school and basically said, I'll do any job to work at, just to join Coinbase.
I joined Coinbase as the third employee, at the time, this was pre-series A, very, very early stage business operating out of a residential apartment in San Francisco. Once I got started at Coinbase, I really got introduced to the entire kind of startup and venture-backed business ecosystem, which I really wasn't familiar with before joining Coinbase.
At Coinbase, I was there for three and a half years. For the majority of that time, I was the head of risk. We scaled from about 10,000 to 5 million users. We also grew from the three of us up to about 200 employees during the time I was there. So, really went through some pretty aggressive hyper scaling within Coinbase, but also at a more macro level for the crypto industry, the foundation was being laid during that time.
CR: In 2013 crypto had a small “bubble,” Bitcoin had a big run-up in price…
OC: It was a big bubble, I would say. In 2013, Bitcoin went from $10 to about $1,000, roughly speaking. And I think that kind of growth was also reflected in Coinbase’s user base and just the general volumes and activity that we were processing. So that was a wild year. I mean, I was working a lot in 2013. And it was a very big lift, given it was sort of, in a way my first real job, but managed to navigate it all.
And, Coinbase survived despite some serious scaling issues, these are all the best kind of problems to have when you're running a business. But Coinbase made it through that year against all odds, I would say. And a lot of crypto businesses from that time period ended up having various problems, mostly getting hacked, sometimes having issues with banking relationships, we managed to sort of navigate all of that.
It was a pretty remarkable journey going through all that scaling at Coinbase. And after the three and a half years there is when I left in 2016 to launch Polychain.
CR: Now, what an amazing journey to be right out of school into this rocket ship that was Coinbase and crypto at the time and when the industry was just getting started with the Bitcoin chain, starting in 2009, so just a couple of years you started diving into it.
So, what prompted you to start your own crypto fund? What was the thesis behind it and how has that change until today?
OC: In 2016, I started to really notice a lot of very, very interesting activity coming out of, at the time, the Ethereum ecosystem. And Ethereum was sort of a new architecture for a blockchain and it tweaked some of the ways that Bitcoin worked. It's still a peer to peer system. There's still this concept of kind of a native cryptocurrency that adds security to the system and also acts as the monetary unit of account in the system. But Ethereum allowed more complicated financial logic to be expressed and embedded in the blockchain and these kind of more complicated bits of financial logic are often referred to as smart contracts. Because instead of relying on a pen and paper legal contract, there are more of a pure software system where the code sort of enforces the state of that contract.
In 2016, I was starting to see a lot of experimentation with smart contracts and I felt like the larger crypto ecosystem, maybe didn't realize how big a deal this was. And a lot of the investment groups at that time in 2016 were all structured as venture funds, looking for equity investments in startups in the blockchain ecosystem.
And one thing I noticed though about a lot of those venture firms that were operating here was that while they may be had produced positive returns that accompanied the growth of the cryptocurrency industry, they had massively underperformed. Most of the kind of basement hackers I knew like myself, had actually generated way better returns, basically by buying cryptocurrency itself, which is liquid and freely traded, instead of buying the equity of various startups or software businesses, built on top of cryptocurrencies.
“ … one thing I noticed though about a lot of those venture firms that were operating here was that while they may be had produced positive returns that accompanied the growth of the cryptocurrency industry, they had massively underperformed.”
With Polychain, what I set out to do was create more of a structure that was well suited to actually purchase digital assets, so not the equity in businesses, but actually digital assets themselves. I wanted to do a very, very long-term investment strategy focused on these digital bearer assets. A lot of what I was excited about and continue to be excited about is this idea of smart contracts. I think that these are a very, very big deal, an extremely powerful devices that we're still only really learning what they're capable of and the types of ways that they can organize humans and capital.
“ With Polychain, what I set out to do was create more of a structure that was well suited to actually purchase digital assets, so not the equity in businesses, but actually digital assets themselves.”
I remember I did an interview for Wired magazine in late 2016 when Polychain was getting off the ground. And the area that I talked about being very excited about, I called “Programmatic Finance”. This is sort of combining this idea of money and financial services products with pure software. Anything that you can express in code, you can now embed in a blockchain and have a fully functional financial product that is sort of operated entirely with the code in that smart contract, so you're not reliant on any individual party or government or jurisdiction or corporation to sort of process that financial product. This idea of programmatic finance, now I think has sort of become this larger wave that we now call DeFi or Decentralized Finance. And I think that this continues to be an area that I'm very excited about.
CR: Your main driver to start the fund seems to have been Ethereum. Is that right? You're excited about this in the possibility of having smart contracts?
Longing for Long Tail Growth
OC: I think that was one of the very big catalysts embedded in the name of the funds. We’re Polychain, not monochain. When I launched Polychain, Bitcoin represented 95% of the market share in cryptocurrency kind of digital assets. And so, a lot of my bet was that there was going to be a lot of very interesting activity that was uniquely enabled by alternative protocols to Bitcoin. It's not that Ethereum was this nice to have thing. It's these types of constructions are uniquely possible using, what's called a Turing complete scripting language that's embedded into Ethereum. And so, that on that remaining 5% long tail growing because of all the unique applications that it would enable, a lot of people to time thought I was crazy.
“It's not that Ethereum was this nice to have thing. It's these types of constructions are uniquely possible using, what's called a Turing complete scripting language that's embedded into Ethereum.”
Because historically, up to that point, empirically, Bitcoin had really outperformed any alternative project. I continue to be convinced that these alternative systems will kind of uniquely enable new types of business models, new types of products that are only possible because of novel architecture at that lowest level where people can embed code into these blockchains.
CR: Do you think this 5% long tail will grow enough to potentially overtake Bitcoin’s relevance or market share or however you want to measure it, in the crypto industry?
OC: I think Bitcoin is a very powerful system with a lot of very unique properties. So, Bitcoin, I've called it sometimes like the “cockroach” protocol in that it will survive anything. And I think one of the great features of Bitcoin is actually its governance, which is that it doesn't have governance. There is no system to upgrade Bitcoin. And well, that is on one level, kind of a bug in that a lot of new breakthroughs on a technical level have come out since Bitcoin was invented. And frankly speaking, Bitcoin now, if you were to build Bitcoin today, and just make it a bit more efficient, a bit more scalable, you probably wouldn't build it the same way that it was built in 2009, in fact, you definitely wouldn't.
But that said, the fact that if you own Bitcoin today, you know that it will be the very same Bitcoin that you own today in 10 years, I think that is a very powerful feature. And so, I would never bet against Bitcoin.
However, that said, as an early-stage investor with a lot of knowledge about how these low-level technical breakthroughs will manifest, new types of business models, new types of ways to organize humans and capital, I think that there is outlier opportunity as an early-stage investor in many of these alternative systems. And I continue to believe that the market share represented by Bitcoin will continue to drop. Now that said, it does not mean the price of bitcoin will drop. It's more than its market share, relative to the macro growth of this entire area will reduce.
“I think that there is outlier opportunity as an early stage investor in many of these alternative systems. And I continue to believe that the market share represented by Bitcoin will continue to drop. ”
CR: Because the industry itself will just be bigger. You also mentioned this particular or specific feature of your fund that was different to most funds back then, which is that you wanted to invest specifically in digital assets and not equity. And I just wanted to dig a little bit deeper into how you invest in crypto protocols and projects.
Do you only invest in the token and not the equity and when you do, is it a long term hold? Or are you actively trading tokens and participating in these protocols, for example, in all the DeFi protocols, providing liquidity or taking an active role in governance. What kind of investor are you?
No Short Positions, No Algorithmic Trading
OC: We continue to operate that digital asset fund today. It's a long term buy and hold. None of the alpha generation here is trading strategies, algorithmic trading or anything like that. We don't enter into short positions. We don't use synthetic or derivative style instruments. It's a very vanilla early-stage acquisition and then buy and hold approach to the digital asset kind of landscape.
Now, in addition to that, we've since launched venture funds that do equity investing in startups building in the blockchain landscape. And part of the reason that we did that is that between 2016 and 2018, the entire size of the cryptocurrency landscape grew by something like 100 times. It just went through another dramatic period of growth, very similar to the time period between 2012 and 2014.
After that period of growth, I started to feel that the opportunity at seed stage in equity was there for the first time. I didn't feel that it was a compelling opportunity in the 2016 landscape, in part because there simply wasn't a big enough outcome. When I launched Polychain, Coinbase was the most valuable cryptocurrency business in the world, and it was valued at $400 million. That may sound like a lot of value, but in the scheme of a venture fund, that's not a very big outcome in order to balance inevitably the seed stage investments that fail or are more middling outcomes.
And so, in order to justify seed-stage equity investments, you need to feel that there's a very enormous market for those seed stage companies to grow into. By the time 2018 came around, I felt like that market was there and that's why we launched our venture funds that do seed stage equity investment.
CR: Can you name some of the biggest investments you've made in both equity and tokens?
OC: Absolutely. I think some of the systems that are on the kind of cryptocurrency protocol level that we're excited about include Filecoin, Polkadot, Dfinity and Tezos. These are some of the kind of more emergent, newer architectures that I think have very, very interesting properties. That's not an exhaustive list of the types of things we're investing in. But these are some of the kind of next-generation systems that are in the midst of launching.
Another very recent launch we saw was, for example, Cielo, which is sort of an entire blockchain protocol dedicated to the issuance of synthetic assets that are pegged to more traditional asset classes. The first product there is like this Cielo dollar, which is pegged to the US dollar value. I think those are some of the things that we're excited about happy to dive into what any of those are.
Then on the equity side, one of the things we're really excited about are businesses built around this concept of smart contracts. I do think that very, very unique business models are emerging out of this concept of smart contracts are totally programmatic financial services. And one of the trends we're seeing that I think is really, really interesting. We've seen it sort of evolve over the last several years is this idea of corporations and when I use that word, I mean, basically a way to pool capital and organize humans to grow the size of that capital, right, where, where the very corporate structure itself is defined by smart contract code logic.
CR: So, a DAO basically?
OC: Yeah, I like to call these internet sovereign corporations, because I think that sometimes this idea of DAOs or Decentralized Autonomous Organizations, people often think about, sort of a community governance system. In this case, I'm really talking about what might be what you might call like a capitalist entity, where it's actually trying to go out and accumulate capital and then use that capital to actually grow the amount of capital that it's managing, very much in the way that a traditional corporation would.
You have all these great features of corporations like the liquidity of secondary shares, so the owners of that corporation can be transferred quite rapidly between different parties. You have turnover of what you might call management, where the people that make critical decisions on behalf of that corporation in that capital can transition and change, so it's not reliant on one single person. And then of course, you just have the ability for all these different people to organize their capital together. You have this kind of crowdfunding, so to speak, where 100 different people with $1 might not be able to accomplish a lot, but if they all put in that dollar in a pool of $100, sometimes with scale of that capital, they can then garner much better returns together than they could have with that individual dollars on their own.
All of those sorts of different features that make a corporation a very popular system for wealth generation in our society, now you're starting to see all of those different structures be defined by code logic. These kind of internet sovereign businesses are something that I'm really excited about and I think it will be a much bigger trend than many realize.
CR: Have you invested in companies or projects that are spearheading what you view as internet sovereign corporations and in which have you invested in?
Internet Sovereign Businesses
OC: One seed-stage investment we made was in a business called Compound. So on Compound, we led the seed round of and participated in the Series A round. Compound Finance was a business that built effectively a money market in a smart contract. This is a borrow and lending protocol where you can pool capital and people can get an interest rate if they're the capital and on the borrow side, they can take a loan from that pool.
One of the very, very interesting properties of this is these are all fully collateralized loans and because it's all enforced through the smart contract itself, there's no concept of identity or geography or underwriting or any of the features that you normally would put in a loan contract, where you need a legal entity or an individual person and you need a region in which that a legal jurisdiction will enforce that contract and you need lawyers to draw up the terms of the contract and you need this concept of underwriting risk and all of these sort of things that go into any sort of lending contract, whether it be a private loan to a business or like a mortgage, or whatever it might be.
In this case, because it's a smart contract, all of that can be automated with software and all you need to rely on is the security of the underlying blockchain, rather than effectively the courts in the jurisdiction in which you would traditionally drop a pen and paper contract. So again, this is a very powerful construction in my mind for allowing any two people in the world to enter into basically an arbitrarily complex business arrangement, in this case, it's narrowly lending, but I think over time, these things will become much more sophisticated.
“This is a very powerful construction in my mind for allowing any two people in the world to enter into basically an arbitrarily complex business arrangement, in this case, it's narrowly lending, but I think over time, these things will become much more sophisticated.”
Compound Finance built this business around that lending protocol. And then replace that business entity with a cryptographic digital token system, where instead of owning shares in a legal entity, we are now owners of Compound tokens which represents rights to governing that underlying smart contract system. And so, now that sort of Compound business so to speak, it's more like a pure blockchain system that again, I would call it sort of sovereign to the internet rather than a particular jurisdiction. I think that Compound is a great example of the type of business that was able to so far move from a pen and paper business to a pure software-based business.
CR: I agree. What Compound has achieved is pretty incredible in just the short time it's been live, it's really enabled this entire smart contract powered money market, allowing people to borrow and lend without permission with the only requirement of having an Ethereum wallet.
I wanted to ask you about the COMP token that you now own because you're one of the shareholders of Compound Finance. COMP had an amazing debut in its listing a couple of weeks ago, it went up in value several times. It's now one of the most valuable tokens in DeFi and it has really spurred people to deposit more funds into the protocol with hopes of getting this token, because Compound is incentivizing users to deposit funds and in exchange for COMP tokens.
And it spurred this frenzy in DeFi with tons of other protocols announcing their own governance tokens and their own liquidity incentives with their token. And to me, it shows that this token mechanism is effective in incentivizing use, but it's also spurring this sort of frenzied speculation that we've seen in other crypto bubbles, at a smaller scale for sure. So, I wanted to get your thoughts on whether this kind of speculation is healthy. How sustainable is it if people are using these protocols just to get these governance tokens and not to actually use the protocol?
Hacking Network Effect
OC: A lot of what this category can broadly be defined as has been called liquidity mining or like network mining. And it's where you incentivize the users of a system who are contributing to the network effects of that system by actually distributing to them a right to future revenues from that network.
I think one of the very critical ways to think about this is that these network mining systems, they do not make by default for a good underlying product. You need to have a compelling value proposition for users. However, once you have that compelling value proposition and you have what is often called just kind of product-market fit, there's a market for what you're building, at that point, when you have a network effect and liquidity being kind of a subset of this larger concept of network effects, where the more users there are in the system, the more valuable it is for each user of the system.
Those network effects exist in terms of liquidity, but also in more traditional web applications like Facebook or Instagram, those services are more and more valuable to individuals as more and more people run to them. And that's often a very tricky sort of chicken and egg problem to bootstrap a network, because liquidity begets liquidity, users beget users, but it's hard to bootstrap the whole thing from zero. Because why would I be the first user of Instagram? Why would I be the first trader on exchange? The value proposition isn't there unless you can draw on lots of users all once.
And so, this network mining system where you actually distribute ownership in that internet sovereign corporation to the users that are bootstrapping that network effect, it doesn't make for a good product by default, you need that product-market fit separately. However, it is sort of gasoline for network effects. It just absolutely accelerates the solution to that chicken and egg problem.
“This network mining system where you actually distribute ownership in that internet sovereign corporation (…) it doesn't make for a good product by default (…) However, it is gasoline for network effects. It just absolutely accelerates the solution to that chicken and egg problem.”
It's a really exciting model to me for bootstrapping internet services and financial services that all rely on these network effects in order to be valuable to the individual user. I'm really, really excited about this kind of liquidity mining and network mining models that are emerging.
I think that the confusion that could lead to a frenzy as you put it is confusion that the liquidity mine does not mean the underlying product is compelling. You need both. But if you have both, I think the liquidity mine is an incredible mechanism for accelerating network effects that over the longer term is going to be applicable to many different types of business models even beyond financial services and building liquidity. So, not just for trade mining or lending mining, you know, yield farming as it's being called. But I think in the future, we will see a similar type of network effect mining to bootstrap, say, a social media platform.
Like what if to incentivize early users of Instagram, you basically gave those users shares of Instagram. It's actually quite logical if it's early passionate users that are actually contributing value to that and business by their individual activities to gain a share in the future revenues that that business earns. So, it's more like a community-owned cooperative, sort of business that's all native to the internet.
And I think that it doesn't again, the liquidity mine does not mean there's product-market fit, but if there is product-market fit, I think the liquidity mine is a brilliant mechanism for distributing ownership of the protocol to the users of the protocol and accelerating those network effects and is a massive sort of wealth generative for everyone in the system, like nobody loses. It's not a zero-sum game, it's actually a wealth generative mechanism.
CR: But this revenue distribution through these tokens, this needs to be voted in. With Compound, it's not included in how the token works right now. For now, it's just a governance token. I guess, the hope in people who are mining COMP tokens is that down the line, it'll be a way to have ownership and get part of the revenue that the platform is generating, right?
OC: Yes, that's exactly right and very similar to many traditional web businesses. You know, Facebook was around for years building those network effects before it ever turned on advertising and had a real business model.
This is not a new playbook from the perspective of building a valuable business. It's focused on network effects, user acquisition and scale before you focus on revenue generation. And so, yeah, I think it's very rational. I don't think that at the relative small scale that a lot of these projects are on, they should be focused on revenue, I think they should be focused on growth.
“I don't think that at the relative small scale that a lot of these projects are on, they should be focused on revenue, I think they should be focused on growth.”
To me, the other thing is that, those Compound token holders, they are the governors of this system. If they want to turn on various different types of revenue models that one could imagine, it's up to them. There's not this central party that they are reliant on to turn on those revenue systems. To me, I think that it would be myopic to be an early-stage investor in many of these network effects style businesses and be asking “Where's the revenue?” If you see this type of dramatic growth, in general, if you can garner lots of users and lots of capital, there's always going to be a business model available somewhere. And so, to me, this is not reinventing the startup playbook, it's rather leaning into it.
CR: Speaking about these governance mechanisms, are you planning on being an active or Polychain being an active participant in Compound governance system? I mean, are you planning on proposing any changes to the protocol, any changes to these revenue mechanisms?
Participating in Governance
OC: I don't want to give any concrete idea of the exact types of things that we may propose in a given system. But by virtue of being large owners of this underlying system, we have a huge amount of skin in the game. And we're running a fund, we want these tokens to be as valuable as possible. We are going to make whatever proposals and vote on proposals that others put forward in order to maximize the value of our holdings.
I think that, we plan to be and have been, frankly, in Compound and other systems quite engaged in the governance and decision making around the design of those systems. Some systems that have been live with on-chain governance for a while, this is are things like Tezos, things like Cosmos, things like Maker, we've been engaged in those systems now for years. It's just that more and more of these systems are coming online and as they do, we're going to be covering governance in a lot of different systems.
“We are going to make whatever proposals and vote on proposals that others put forward in order to maximize the value of our holdings.”
CR: You mentioned Tezos and I'm reminded I wanted to ask you about in your token investments, you mentioned a few of what are considered “Ethereum Killers,” Dfinity, Tezos, Polkadot, and wanted to get your thoughts on that term, “Ethereum Killers,” if you think that they are competing with Ethereum and your view for whether the future will be multiple different blockchains with their own use case or what are your thoughts?
Ethereum Not Competitive to Bitcoin
OC: Yes, I do. I think, to give you an example that's already out there, I think it is extremely short-sighted to view Ethereum as competitive to Bitcoin. This is not a zero-sum game. Ethereum is capable of lots of things that Bitcoin is not. At the same time, Bitcoin has a lot of features that are desirable and aren't really present in Ethereum. Each of these architectures is quite different. And while at times there could be overlap, it is crazy to think about this as a zero-sum game where only one system can succeed in the long term.
What we've seen throughout the 10 years of the cryptocurrency landscape is actually a divergence from a single system towards a system of multiple blockchains that can all provide value to the end-user and actually uniquely enable different types of applications well.
I really don't like the sort of false narrative that every blockchain is competitive with every other blockchain and that there could only ever be one winner. That is one of the big reasons why my firm is called Polychain. Because I do think in the long term, there is no steady-state long term. This is all going to be roiling chaos for a very, very long time.
“I really don't like the sort of false narrative that every blockchain is competitive with every other blockchain and that there could only ever be one winner. That is one of the big reasons why my firm is called Polychain.”
But even amidst that chaos, there is always going to be different value propositions for the different architectures, different systems are going to be suited for different use cases and I view this as not a zero-sum game. I think that enabling new behavior that's not possible with Bitcoin or Ethereum, for example, the Filecoin system, which is really adding the capability for a smart contract type of system to deliver not just mathematical logic, but also things like images.
Right now, when you look at smart contracts embedded in Ethereum, one of the big reasons we see financial services application being one of the big use cases is because Ethereum is effectively limited to mathematical logic. You can compute compound interest or do multiplication or division in a smart contract. But if you want a more rich web-like user experience to be delivered to the end-user with a smart contract, today Ethereum can't do that. But with a system like say, Filecoin, you're going to be able to deliver an image to the end-user.
And so now instead of just having these internet sovereign corporations be financial services, over the long term, you will have these internet sovereign corporations owning things like social media products. And I think that no, it won't all be on Ethereum, but that's okay. Because Ethereum is going to enable all sorts of behavior and already is enabling all sorts of behavior that I think is extremely well suited for Ethereum. I really don't like the narrative of sort of Bitcoin killers, Ethereum killers. I think it's really stupid.
“And so now instead of just having these internet sovereign corporations be financial services, over the long term, you will have these internet sovereign corporations owning things like social media products. And I think that no, it won't all be on Ethereum.”
CR: DeFi being right now mostly on Ethereum, do you think that Ethereum is going to be the finance chain and then maybe Filecoin would be more like a social media chain and then Dfinity will be for something else and so on? Is finance a main use case that you're seeing for Ethereum or will that be shared too among different blockchains?
OC: It's hard to say. Obviously, these things playing out in the wild are very nuanced and complicated considerations for why an individual entrepreneur may build something on one system versus another. And many of those are technical and architectural in nature, like what is this system capable of. There's also though other considerations, like where are the users.
Today, there are millions and millions of Ethereum wallets out in the world that are capable of interacting with given financial protocols that are embedded on Ethereum. So, I think that there's a lot of different considerations that go into why build on a certain sort of stack of technologies. I don't have a really, really strong view about in five years, where are people going to be interacting with these financial services systems. And a lot of that also depends on the various roadmaps for the actual low-level protocols themselves.
Ethereum has been in this process of upgrading to Ethereum 2.0 for many, many, many years. If they can deliver when it works, ostensibly, there will be the capability for more scalable smart contracts to be embedded on Ethereum. Meanwhile, projects like say Dfinity, I think, they have today relative to Ethereum a better architecture for when your smart contract needs to be highly scalable, which is not every system, but also when you need more synchronous user behavior.
Most of the things in Ethereum today are somewhat asynchronous. And it's because the block time in Ethereum is on average, something like 15 seconds. But that doesn't serve well when you want to scroll a social media feed, think about if every image took 15 seconds to load, completely breaks the user experience. I think that by virtue of having fast block time, for example, faster finality, you may see new types of applications that again are sort of uniquely enabled by Dfinity that you just simply couldn't build on Ethereum today.
I think that it's going to be complicated. As I called it before, it's going to be boiling chaos. But I think that you know, there's going to remain use cases that are best served by specific blockchain systems.
“It's going to be boiling chaos. But I think that you know, there's going to remain use cases that are best served by specific blockchain systems.”
CR: Makes sense. I wanted to go back to something you mentioned earlier about how you were excited with the idea of smart contracts because they enabled programmatic finance. Do you see that it seems like that's finally becoming a reality right now with DeFi. Given that this was one of the things that excited you and drove you to create your own fund back then and seeing it becoming a reality right now, I'm interested in your opinion about decentralized finance and what are the most exciting projects or trends that you're seeing in this space right now?
OC: We've talked about a few of these. These automated financial services are very big right now and in the short term, like in the next one to two years, they will grow dramatically. The type of smart contract execution environment will over time lend itself to many types of applications beyond financial services that look a little bit more like rich web experiences that we think of on the internet today, like social media apps, things like Twitter.
“The type of smart contract execution environment will over time lend itself to many types of applications beyond financial services that look a little bit more like rich web experiences that we think of on the internet today, like social media apps, things like Twitter.”
Many of these will also be internet sovereign, where they won't really be businesses in a jurisdiction, they'll rather be a collection of humans and capitals that are sort of all on the internet. And so, outside the purview of any specific geography, they're sort of agnostic to geography, agnostic to jurisdiction, but rather are sort of native to the internet. I think those are a couple of the very big trends that we're excited about and excited to continue investing in. We've been investing in those trends for several years now.
Those are very flexible and open structures too, because this is all open source and all programmable and remixable. And I do view a lot of these systems as the emergence of a new way of organizing humans and capital as a very, very big deal. This is like the development of the corporation itself going way back in history and the development of stock markets and everything.
And when you think about how big of an impact those types of organizational structures for organizing humans has been and how much of an impact it's had on society, I think we're at the very early stages of a truly novel structure that can organize humans and money. I just find that very exciting. And I think, as a kind of mega trend, it's going to be extremely massive and sort of unstoppable.
“ We're at the very early stages of a truly novel structure that can organize humans and money. I just find that very exciting. And I think, as a kind of mega trend, it's going to be extremely massive and sort of unstoppable.”
CR: It's exciting. To wrap up, we're living in a very chaotic and dramatic time with everything that's happening this year, from riots, Black Lives Matter protests and Coronavirus, the world seems like it’s in this kind of tipping point of something happening. And people are thinking about things like property and privacy in different ways now. Do you think this can be the driver to accelerate the trend into more internet-sovereign organizations like what you described? Or do you think it'll continue to be a gradual movement towards that?
OC: I think the world is going to continue to become more and more chaotic and complicated. For better or worse, I do view that as a massive tailwind for cryptocurrency systems that are sort of native to the internet and organized on the internet.
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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.
About the editor: Camila Russo, is the author of The Infinite Machine, the first book on the history of Ethereum. She was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. She has extensively covered crypto and finance, and is now diving into DeFi, the intersection of the two.