For Bitcoin, there isn't a whole lot you can do with it
You can send money around and you can hold it us a store of value
But it doesn't really let you do much in finance itself
And so I think when you see products like the theory I'm come out then enable you use these things called smart contracts
where you can send money to a computer program and
You know remove the lawyers in the middle
Then I think that's where we actually started to see this huge flourishing of people starting to build projects
How do you think of their assets is there opportunities to invest?
I don't think the typical investor needs to worry whether there are
Securities or not securities if there's not a market for what you want to trade on
You can actually create a market for that which I think is actually the most powerful piece
Because up until this point that's not good feasible. Our fund has returned another than 40 X
So it's it is possible and that's why I think investors should put a few percent of their portfolio in crypto
Could go to zero maybe but you know, it's very asymmetric risk reward
Mike Green for real vision
I'm excited to sit down with two of my favorite people in the Bitcoin space Joie Krug and Dan Moorhead of Pantera Capital
Joey is a brilliant young investor focused in the Bitcoin space is going to tell us some exciting news about that and Dan brings an
Incredible experience with Bitcoin and the general cryptocurrency environment. I'm really interested to hear how things are developing for the two of them
Mike Green, I'm here in San Francisco and I get to spend time again with Joey Krug and Dan Moorhead two guys
Who are as deep in the crypto space as just about anybody on the planet?
And I wanted to catch up and see what you guys are thinking about these days Dan
You're from Pantera Capital is one of the first to launch a crypto oriented fund in particular
You were focused on the store value dynamic, you know speculating not to not to use the word in a pejorative sense
but speculating on the the appreciation in
crypto coins back you launched in 2013 or
So obviously spectacularly successful. It's been an extraordinary investment and your returns of far outpaced
What has been seen for the individual coins? A lot has changed in the world since we last talked last fall
In terms of prices appreciating sharply and then having corrected
What do you think happens next? Where are you? And the the crypto is a store value of a dynamic
I think that's an important question back in the day. There was just Bitcoin
No other currencies not really any equities you can invest in now. There's 1500 projects
you could invest in plus maybe 500 different equities that you could buy and so I think it's sensible approach for a
Investment is not just buy one thing because that's not the way you would trade stocks
You'd buy a basket of things and I think people should
Avoid the temptation of worry about is it Bitcoin that's gonna win. Is it a theorem?
that's gonna win or is a big one cash or ripple and
Get a sensible portfolio of assets whether it's cryptocurrencies pre-auction IC O's or venture
investments, so when you when you answer in that way
You're thinking of these as securities at this point
I mean this is it is a collection of assets some of which I've coin or currency like characteristics some of which are
surely equities
Some of which may be dividend paying entities and in terms of capturing usage fees, etc
but you think we're at that point now where it becomes a
Securities market as compared to a well securities very loaded work has very legal definition in certain countries
I would say that most of the I see owes we've invested in our
Valuable only because their utility and they're very far from the definition of a security
I just think of their assets is their opportunities to invest I don't think the typical investor needs to worry whether there are
securities or not securities
And so at this point though
The the idea of is Bitcoin going to a million dollars or is Bitcoin going to zero dollars
It sounds like your answer to that is but I don't think it matters, right?
I mean that's that's one component of 1,500 different possible permutations that you could explore
You see it as a series of option like bets
Within a broader portfolio. Yeah, I think that's the right way to look at it and in my
30 years of investing this is by far the most asymmetric trade I've ever seen obviously you could lose
Substantially all maybe even one X your money
But you could make 50 X or hundred x on many of these trades and it sounds ludicrous in the normal
securities market to say those kinds of things but our fund has returned hundred and forty X so it's it is
Possible and that's why I think investors should put a few percent of their portfolio in crypto
Could go to zero maybe but you know, it's very asymmetric risk reward
so I've spoken with others about this idea that that crypto is
And it's thought of as an asset class that people associate with gold etc
Or people have labeled it, you know dot-com type dynamic, you know
It feels to me and in summer are out there saying you know, this is only 1994 and the internet analogy, etc
It almost feels to me like this is so much earlier, right?
There were still I was I was speaking with somebody else about the idea that like this is maybe 1982, right?
People are still like gluing stuff together in their garage and a lot of ways. There's a incredible amount of experimentation
Where do you where would you draw the analogy if you're thinking about it? I'm glad you said it because very few people
go before
1992 when they do their internet analog any thinking about it DARPA net was around from the 70s and
Only 1% of the world used it in 1992
They created it
Browser made it easy for the rest of us and it exploded into use right and I think that's the way bitcoin is right now
It was a couple percent of the world to use it
So it is potentially the eighties internet rather than the is it 95 vs. 99
argument and again there
I had a fascinating debate on CNN with an academic who's a very rare breed of an animal a super negative academic on Bitcoin and
Had written a paper our IP Bitcoin. It's time to move on. It's failed
It's pets calm in the story. There is the art was written was at 400 bucks
And now you know, it's at 9,000
so you're really missing this massive asymmetry in the leverage and then again to call it pets comms really
Forgetting who was the majority investor in pets calm
It was a guy who saw a very disruptive
Technology want to invest in a lot of different ways to use this disruptive
Technology one was selling pet food on the internet didn't work. The other one was selling books on the Internet it worked
And so that's we people should view Bitcoin aetherium XRP
Not all of them are probably gonna work
But if you have a portfolio of them and it's as disruptive as we believe the portfolio will do quite well
well, I think we can actually name that individual or Jeff Bezos and
Not the founder of Barnes & Noble, but it's so I agree with with that that people need to think about it from a portfolio
perspective
There is this interesting
question about you know
We've been doing it and and the analogy in terms of time horizon also
Helps to address what people are pushing back on right?
You know
One of the the rallying cries for those who are super bearish crypto assets is we're 10 years in and there's not a use case
Yet, right
Well as somebody who grew up in in Silicon Valley, you know
There was no use case for the time that I spent banging away on
A trash eighty, right?
It was a it was a you know, total waste of my time as my father was was very happy to remind me
but it ultimately grew into something that
was totally unrelated and Radio Shack is now bankrupt and or Tandy Corp as it was back then but
It's something that we use every single day and and again
Crypto seems difficult to look at and think that it's not going to be a feature of the universe
whether it's Bitcoin or Bitcoin cash or
smart contracts in the form of aetherium, you know, these all seem like things that are absolutely
destined to happen
yeah part of that is the misunderstanding of how the protocol and the application are gonna
derive value in the post Internet world
So in the current internet, it's the protocols that have no value in as applications
It's like, you know money out of their customers somehow on top of it. They get all the value
So everyone's saying hey, there's no killer app of Bitcoin. They missed the point that bitcoins the killer app of Bitcoin. There's
Hundreds of thousands of transactions have any everyday moving?
You know billions of dollars around the world using it as the application layer
You don't need to pay somebody else to you know, you don't need some rent-seeking, you know company on top of that
So there will be really cool things built on top of all these block chains, but the protocols themselves are very valuable
Well, that's that's an area where I have a slightly different take right, which is that the use case of Bitcoin
I agree with you is Bitcoin
It happened to arrive at a time period in which criminal enterprises in Russia and China needed mechanisms for getting money abroad very easily
so I'm I'm very
Skeptical of that dynamic but I agree with you that
there are
Absolutely use cases in the form of it is used for money laundering. For example
And that's certainly not the only thing that it's used for but it's a primary use but it opens up so much else
Right, and I know you disagree with me and and and feel free to push back, you know instinctual responses
Oh, it's so great for crimes
and hate maybe years ago was pretty anonymous and it was okay for crimes but its features prominent features every ten minutes a
ledger of every trade that's ever happened is published with a permanent paper trail of every
Step in that 10 minute process. That's a really bad feature for committing crimes
All of your transactions are there and it's very well known that the silk or guy used Bitcoin, right?
Very few people know that there were two federal agents that went rogue and were extorting money from the Silk Road guy
Independent of each other in the same task force stealing money from other people on the internet doing all kinds of bad things
They wired a million dollars through five major banks in the US and one mutual fund company
None of whom filed a suspicious activity report when you have a federal worker pain is mortgage off in one pay check
writing $30,000 checks to Cash that's suspicious right it was to
peer to peer companies venmo and bitstamp
That reported these both of these people to the authorities and I'm actually on the board a bit Sam and they were telling me this
There's a federal agent laundering money on their site. I'm like you guys have watch way too many Tom Cruise movies. There's no chance
That's actually happening. I looked at this stuff and I was like, oh crap. We got to report this
So we reported it to another federal agent that guy resigned that day and we're like, oh no, that's a problem
so both of those people were rogue and
The deal is when the prosecutor Katie hunt dropped the whole list of all their crimes from the blockchain
on their desk
they had to sign guilty pleas like there is there's no way to even remotely even go to trial because you have a
list of all the crimes so I think
Law enforcement already knows the big ones terrible for crimes
so I again I I'm not disputing any of that and you know, the interesting dynamic is
I would articulate what I've seen on the Bitcoin front from from China in particular
Is that it is a misuse of subsidized electricity in China and in the process of mining
To create that but that's not my focus. Actually. It's just it's it's
It's an interesting dynamic on Bitcoin itself, which has captured people's attention because the price has risen so spectacularly
Fallen, and now the debate is what happens next, right? That is totally separate from
the crypto universe
And you know, one of the first people that I talked to that I thought was so fascinating
This was actually Joey right and it was it was really interesting
listening to somebody who is much younger than either of us, right who has
Had an immediate impact in this space
And so that's the other
area that you've been very focused on is making the investments and either the picks and shovels or the individuals that have a
tremendous amount of capability and talent within this type of
developing industry
Joey you
Started auger out of your dorm room, right?
I left college dropped out and then we started in LA
And and last time we talked
I told you how proud your grandmother must have been of you for what you've managed to accomplish in this but
From that point not only have you been continued to work on auger
But you also have been managing with Dan a fund that thinks about Krypto from a value
Standpoint effectively or from an investment standpoint, which is one of the complaints that a lot of people have
How do you value these things? How do you think about how do you think about that? What have you been doing?
Yes, the way I think about it is you know we have on the fun side on the trading side
We really have two main strategies
One is for investing into new cryptocurrencies. And they're I think the way we approach valuing them is you know
Do they actually need to be a new currency or new token? Do they need to have a separate token?
Do the economics make sense? It doesn't actually
Benefit from using this tech and then after passing those filters, which is kind of specific to this investment
Then we look at all the regular stuff you look at with any investment like product team market things like that on the other fund
Which is more quantitative the sort of stuff we're looking at there
Are more kind of like little individual things that you can basically use to form a quant model
So things like sentiment data, you know, what's the sentiment around these currencies?
Things like how many transactions are flowing through a given chain at any point in time?
transaction flows across the block chains themselves
You know as well as you know other kind of warp steer things
So my other point I was just in New York. I was meeting with some Tiger Cup friends that are on the equity side
They're all like, hey, we don't touch crypto currencies because there's no cash flows to discount
We've no idea how to value it and I think there's the one time I would go with the crypto currency analog
Is this like the fiat currency market where there cash flows two dollar yen?
You have to figure out what factors drive it like current account and interest rates or whatever and use that to say
Hey, this currency is cheap. That one's rich. It's the same with crypto currencies
Transactions per second. How many fees are being paid?
All those types of data will give you a sense of which ones are cheap and which ones are rich
So that's interesting because I actually think about fiat currencies
as equities
they're effectively the equity of the country right or the
the debt of a truly sovereign entity at which there very few can really be thought of as the debt of the country right so
Are they you know taking the money and spending it appropriately investing in human capital and improving
Underlying conditions under which business can be done or profits can be generated
This is really similar. I mean you're thinking about it in the same way, right?
you're saying what's the infrastructure and who are the
Participants and what's the respect for property rights and does it create something new and compelling right?
Is it does it mean something, you know does north northern Japan and southern Japan with those be two viable countries know there's Japan, right?
and so that's you're approaching it from a very quantitative and
Securities analysis type framework, right? Yeah. I think the way the way we think about it is, you know, we've kind of drawn from
Both stuff that you can you can analyze sort of any assets like we looked at, you know ways to analyze commodities securities
Currencies and then there's some stuff as well that's specific to this asset class
But the thing I think about quantitative analysis is a lot of the same sorts of things
work across multiple asset classes
I think there's you know, no reason to believe and empirically we've seen that they seem to work on in crypto as well
So that would play to the idea that these are these are similar to equities at least in terms of how you should be thinking
About them and obviously quantitative tools and techniques, you know work across assets
But there is this underlying dynamic of being able to evaluate
Yeah, I think the one big difference is you know as Stan said most equities you can attach a cash flow to them
and so when you look at an equity
There's all this sort of stuff you can get from the balance sheet and here there's not really any balance sheet
So, you know that it does make the more challenge well challenging
To you know values in it
You get an equity in my opinion that also makes it a lot more fun and challenging as well
I think although the use word fun
Right because that's that's part of the search for alpha is effectively what which should be happening a lot of guys
I know are not having fun in the regular securities market
so that's because there's like 10 million people all staring at the same things and they're getting tiny tiny little
Crumbs that are picking up and I was just talking at a quantitative
Hedge fund conference and I was thinking back when I started trading seed CMOS in the 80s
People are managing the book once a week to market on a yellow pad with a pencil. So huge opportunities
But now there's so many people applying so much capital to the normal securities markets. The opportunities are tiny
We're trying to apply, you know state-of-the-art
Techniques to a very primordial market the crypto currency markets are having enormous amounts of alpha opportunity
So so you mentioned this idea that it's you know, challenging and more fun, but there aren't traditional balance sheets the soda
I mean, I would I would challenge that a little bit right because the balance sheet is just a measure
Particularly the structure of a balance sheet. It's just a measure of the staying power. All right, and so it's you know, obviously compared
It's a stock versus flow. Dynamic as you think about the income statement of the cash flows
But you're effectively saying how committed are they to this? What's the tenor of the optionality that I have?
you have something very similar within the crypto space which is
How much cash do they have and how committed are the developers to this project?
I mean, it seems like you're thinking in very similar turn so that I
Half agree you have disagrees there. So there's some stuff where that's definitely true
Especially on the kind of ICO side where we're investing in these projects very early on on the flip side, though
There's a lot of assets at the quant fun trades where there is no actual
You know formal company behind it providing developers for it. They're actually just much more organic community different projects
And so for those ones you don't really have you know, there literally is no real balance sheet back in it
It's just you know, but there are things you can look at right if you look at how many developers are contributing to it
How much is is?
You know getting merged into the code base how many improvements are happening stuff like that?
So you have data it's just sometimes different, right?
Like if you're looking at a public company for the most part, it's unheard of to look at their github
When when evaluating the equity right, but here it's actually, you know fairly relevant
So, you know again the analogy goes back to the 1980s if you you're you I don't think you'd been conceived at that point
but there was a
There were a series of things called BBS's right, which I'm sure you're familiar with the term BBS
But it's bulletin board and with the early chat boards, etc
There's a group called the well that ultimately provided much of the underpinnings of what became CompuServe right?
So a real company grew primordial II out of this community type dynamic that you're talking about
And again, this feels very similar feels like we've been here before
It just sounds like people are awfully impatient for you know, there's lots of opportunities to create value
There was lots of technology investing going on in the 1980s
It didn't just suddenly spring forth with the Internet in the 1990s
even though the same underlying companies and the servers and the network technology and the memory chips, etc were all
Linked it feels like what you're doing. All right, is that does that feel fair to you? Yeah, I think it does
I mean if you you know, everybody wants to compared to the Internet and so it's sticking with that for a moment
I think if you think about the Internet, there were a couple decades of R&D that happened before it
It was mostly relatively quiet, you know some academics knew about it
But not that many people did I think if you draw the comparison here, you know Wayne came out 2009
I think that's kind of that R&D period and the reason is you think of the ARPANET
It was relatively you kind of just relegated to institutions. No actual public member people had access to it and
For Bitcoin, there isn't a whole lot you can do with it
You can send money around and you can hold it as a store of value
No, I think those are both huge markets and very powerful, but it doesn't really let you do much in finance itself
And so I think when you see products like a theory
I'm come out then enable you to use these things called smart contracts where you can send money to a computer program and
You know remove the lawyers in the middle
Then I think that's where we actually started to see this huge flourishing of people starting to build new projects
And so I think that's kind of you know
Maybe it's late 80s Early 90s sort of scenario or you actually see people building stuff on top of it
so
People talk about these dynamics of smart contracts on the idea of removing lawyers
Which I'm sure lots of people would like to it's a personal aside. I have a letter
between General William Tecumseh Sherman and his brother John Sherman who was the secretary of the Treasury in the
1870s and the entire letter is William Sherman bitching about lawyers - John Sherman
So the idea of getting rid of lawyers predates us all
the
The struggle I have with a lot of these smart contracts though, is that lawyers
play a very valid role in most of the
Transactions that they're involved with. All right so pre for
discussions about you know
How do I know what to even put into a smart contract which will play into a discussion of augers we've moved forward
Lawyers play an incredibly important role there. It's not just you know
filling out traditional forms etc, right
Which strikes me is most interesting about the potential for smart contracts is?
Introducing legal contracts in areas where we've dispensed with them because of the cost
I was talking with John Burbank earlier about you know, magazine subscriptions, right?
You used to receive a again you're too young to remember this but used to receive a mailer
And you'd fill it out and that was a legal contract right that said I will pay
$17 a year for 12 issues of you know, Newsweek magazine
and we dispensed with that because the cost of
actually enforcing somebody's viewing Newsweek magazine when it moved digital was just too high, right but
The potential for smart contracts to reintroduce that type of exchange so that I can get rid of the much hated
Universal advertising
Type vehicle that's that's really how you guys are thinking about things like smart contracts
It's not getting rid of lawyers on an MA for a 50 billion dollar or transaction
Yeah, I agree. I mean I think you're you're not gonna get rid of lawyers and done
Well, they're still gonna be around and still be very relevant. In fact, do you have any technology they can do that? No
But I think in there even gonna be relevant towards helping write better smart contracts as well
I think if you fast forward future as a legal profession 10 20 years in the future
We'll see a lot more lawyers who have CS
I think it's gonna be very relevant to this sort of stuff
I think the main benefits of smart contracts though are once you have a solid contract written and it's open-source
There's no need to
Involve a lawyer after that point for that given contract and they also make it really easy to do things in a very generalizable way
So you can create a system that allows people to create things like new financial markets in a very systematic way
Where you don't need a lawyer to customize every single aspect of it
so let's let's jump in that direction because I'd mentioned earlier you had found it auger and
You told me before this interview that that's about to go live. Yeah, that's right, July 9th
So this was one of the very first if not the first I see. Oh, is that is that correct?
That first one. I hear you the very first one on ethereum and
You go live in July. And so what is that gonna mean?
What will that practically mean? Yeah
so what what that practically means is right now augers running on a test network version of etherium with fake ether and fake money and
In July, it'll be on the main network version with its real money, essentially
When you say it's gonna be running with real money, right?
Cryptocurrency first of all
So I will need to buy some aetherium in order to transact on augur
and
What can I actually do on augur? Yeah, so there's basically three things you do, but I think
99% of users will do one of two and those two things are one is you can trade in a financial market on augur
So the way it's set up is there's actually a built in community curated category system
Or you can also just search for whatever you want to trade on
And then the second piece is if there's not a market for what you want to trade on
You can actually create a market for that which I think is actually the most powerful piece
Because up until this point that's not really been feasible
Like if I wanted to create a market on you know, the price of a pound of onions
Rolling up for you every month. You know, that's just not possible today in the United States. It's actually illegal in the UK
It's you know, tons of start-up costs to get it off the ground
So that that's actually a really great example
Not the onions, but the the cost for the onion the market will be a run always success
But you know, we're all familiar
Anybody watching this has probably watched the movie the big short
and there's a classic example of this type of dynamic I encounter this all the time because I deal with
OTC swaps or I deal with OTC options over-the-counter options, which are customized contracts, right? So I approach
Goldman Sachs or Goldman Sachs approaches me
With somebody who has made a bet in the opposite direction
The price of onions are going to be greater than five dollars, but these markets are expensive to set up
They require Goldman Sachs trained PhDs
There's require the goldman sachs pound of flesh
and they tend to be very illiquid and they they are the observation is is
often somewhat difficult requiring tons of legal interventions and language that runs several pages, but this is effectively, you know
What the character there was the individual played by Christian Bale was was doing in that
Scene in the movie where he says, you know, I'd like to create an option
I'm going to have a bank create an option for me on home prices
so this takes that and
Democratizes it is an overused expression, but it radically lowers the cost. Yeah, how do you see this launch?
I mean is this is this instantly going to take the world by storm and replace OTC options or
Not in the beginnings. I think I think the way to think about it is, you know
There's actually a good reason why it well why it shouldn't grow fast, but I'll just that in a second
So the first thing is, you know on aetherium you can only do about ten transactions or so per second
So in the beginning, it's primarily going to be used for things that I think where you're not super actively trading
So maybe some of these sorts of you know swap agreements where you do an agreement once and then a month later it resolves
Or maybe like betting on a you know sports match or an election or something
but you're not going to be trading say a derivative on Apple in the beginning just because of the fact that
People who trade derivatives on Apple want to be able to trade pretty quickly
Over time as a 3m scales that will change
the other reason it's it's good that it hopefully won't grow super fast in the beginning is
Since this code is all open source
It's very likely that it actually has security vulnerabilities in it
So it's good that if this is something attacked it gets done in the beginning when there's relatively little tap
System so that we can work out those kinks and problems. Yeah even Bitcoin
You know had a big vulnerability in 2010 where somebody created you know
Like I think it was like quadrillions an extra Bitcoin and they had to you know, roll it back
And so I think it's important that it that it grows slowly in the game
Facet I mean that's tremendous awareness of the challenges that can be created there and it is one of the advantages right?
so I mean dan was referring earlier to the aspect in solving a criminal case, right but that ability to
Rewind the world
You know and go back to the point at which a violation occurred and correct it is a somewhat unique feature of cryptocurrency
so forensic accounting does but
You know
Blockchain and other technologies associated with it effectively again democratize that are radically lower the cost of that type of forensic
accounting ya know a blockchain in one of its
Many attributes is an immutable paper trail of every transactions ever happened
So something a lot of it's there's a lot of cool things that you can get out of it
so
Joey is overseeing a fund and how actively involved are you and in the augur launch at this stage?
Mostly just kind of overseeing the future direction and vision out the project. I don't actually, you know write write code for it anymore
We have a team of about 20 people who works on it. And so what are the projects like augur?
Do you think we can be looking for?
Over the course of the next couple of months that it should change the way ours begin to change the way people start to think
About this use case dynamic honey. Joey's best good - sure it's I think another big one is
You know for these sorts of financial applications on aetherium. You don't necessarily want to use ether as underlying currency because it's very volatile
So one really important application that's actually went live a few months ago as a project called maker I which is a collateral backed
Cryptocurrency that became it aims to be stable relative to the u.s. Dollar
actually, it's relative to
the
Special Drawing rights of the IMF but practically speaking. That's basically basically the dollar
And I think God will be really powerful because then every other project on etherium can all of a sudden use this
It's basically very stable very low volatility to back their underlying contracts
You know besides that I think we'll see some stuff. It's just very practical and kind of fun use cases
So in the beginning of the internet, you saw a lot of people create gambling sites. Same thing is gonna happen here
There's a project we invested into called funfair, which is an online casino on aetherium
there's also one called virtue poker, which is decentralized poker on aetherium and
Those are both kind of really low hanging fruit cool use cases where today
You have a few problems one is you have to trust online poker site not to cheat
Not to have the not to you know deal the hand in a malicious way
On the online casinos that are just trade up gambling. You have to trust that. They're actually telling you the odds
Honestly, they're not they're not screwing you over like in regular because you know, you know
They have a payout ratio and they get audited and stuff like that
Online that doesn't really happen so they could say their payout ratio is you know
Whatever and they can be completely lying about it
Versus if it's all open source on the blockchain you can easily prove whether they're being honest and the fees are also much lower
You know, those aren't the most revolutionary things in the world, but I think that's sort of stuff
We're gonna start to see you come out first
No, but it's actually a really interesting point, right because we have a Nevada licensing committee
For example their controls and monitors always same thing
New Jersey right that it's you require a large infrastructure in order to maintain
You know the regulatory environment around this and suddenly you're talking about evaporating that and turning it into
You know a piece of smart contract for all intents and purposes, right?
You know, how do you think about
the regulatory apparatus
Reacting to that. Alright, cuz there's nothing that prevents us from putting one-armed bandits on the same dynamic and wiping out the need for
very well-paying jobs in the Nevada regulatory environment
Well, I guess the important point is peer-to-peer gambling's always been decriminalized
so if you're having a poker game in your living room and the cops can't kick the door in and arrest you and
Don't smart smart contracts allow you to do peer-to-peer
gaming without having a central a party and that's basically it I think it a funfair or you know a
Project like this are a great example of how simple smart contracts actually are because all the stuff about, you know
Smart contracts and it sounds very high-tech, but it's basically telling the computer. Here's you know $10 worth of
cryptocurrency if the roulette wheel stops on
double zero you pay this guy if it doesn't stop in double zero you pay the other guy and
That's how simple smart contracts can be. So that's a wonderful articulation of it
There is this element of if I get cheated by a casino
All right, there's two ways that I can I can play this right one is I can seek restitution
All right, and the second is I can you know, make sure that they're put out of business right from a reputational standpoint
That's very easy to do in in the blockchain world. All right, just be basically raise a flag. Say these guys are
You know criminal operators or unfair operators and that's been proven
And it becomes extraordinarily tough for them to to get back into business again, right? But how do you go about
Capturing restitution, right? I mean that's where the lawyers come back in. That's a traditional court system, etc
How do you think about that development in that dynamic who who turns into the policeman and the court system?
in the blockchain and crypto world
Yes, I think one thing is it it depends on you know, first of all
It depends on whether you actually have an operator or not
Due to the fact that smart contracts are run on a bunch of computers around the globe
A lot of these applications don't actually have a central operator. That's you know, really controlling anything
So at that point the kind of institutions and argument from because it's very different you could say, you know
We could sue the developer who wrote it. I don't think that quite makes sense. It's kind of like
Suing the author of a book because you had a really bad thought after you got to a certain chapter
It's it kind of goes against free speech in a sense
Code has been protected by as under free speech at the Supreme Court in the past
So, I think another another dynamic at play too is these systems are very global
You know if you think of a regular casino, it's generally relegated to a specific location whether that's Nevada, you know city
Or whether it's you know, they're usually physical locations. All the online ones are usually one country
So it's very easy to kind of figure out what court system and he's sort of problem falls under
in these blockchain based systems, you know, it's kind of like well who has jurisdiction over say aetherium
I think there's kind of you know, two possible answers of that, right?
there's what regulators may think the answer is and
There's a second answer which is what practically speaking who actually does I think in the practical standpoint right now
it's really the community of developers miners people who are using it and building on top of it a
practical example for what happened in a scenario like this is when the Dow smart contract and
2016 hacked a bunch of people lost their money and
the network basically voted they voted on whether to rollback that transaction and
Basically hard fork to a universe where that person didn't see all the money
Or voting to let it continue and they voted to actually roll it back
that's that's interesting for a couple reasons one is because
They're actually able to make an effective governance decision in a relatively short period of time
Without getting you know, a bunch of regulators involved for a huge long court process on the flip side
You look at mount GOx case
No one has gotten the money back still and they actually have more than enough money to pay all the original deposits
and so it's kind of an interesting comparison between
The old existing legal system and and kind of how fast you can move on the tech side
It's not the say there's not downsides but it's pretty interesting. I think. Yeah, the important point is there's
provably fair gambling odds, so
If it ever diverts from that people will just stop using that site and they go to one that was provably fair
So it's not like finding out
Oh, the casino has been ripping people off for 12 years and there's an enormous amount of you know back restitution
we have to make in the
Unlikely event that a online
Crypto casinos doing something wrong people knows that quickly and darwinism go somewhere else. Well the the other
Dynamic though that that
That that creates right is
You would expect to see
Systems very rapidly converge so casinos as you mentioned would be low hanging fruit. Right? So people would very rapidly converge to a
fair system
Right online poker would potentially it would be very difficult
For example for an Indian casino in central California to justify why their video poker machines are not linked to the blockchain
alright
How do you think about that type of disruption and and and again to your point how regulators choose to react to it?
Yeah, so that the Sager point is kind of like
People will start demanding to see the same level of accountability for regular casinos. Yeah, I think that's something that will happen
I think you know since they're kind of larger institutions
and generally like the
Slot machines aren't super upgraded super frequently and casinos if you walk around in Vegas, they tend to look pretty old
But I think people will start demanding it and over time. I think we will start to see more transparency from them
I don't think there's really much of a downside
From anybody's perspective because from the regulator enhanced transparency
Makes makes basically their job a lot easier
From the user the better. They actually know what's going on in the casino if you do it in a smart way
It shouldn't require them to do much extra
what I would expect to see in that sort of scenario is people start to vote with their feet right that ultimately
The odds are better in the online casinos and people would attend
In Indian casinos less and they would either have to choose to shot
Or to make the investments to move themselves on to the blockchain
but that's that is gonna take time and there it does feel that there will be
a
Regulatory pushback and potentially a variety of areas. I mean, how how do you guys think about that?
When does the reaction happen right I mean cuz that's that's been one of the big questions is
when or the authority is going to step in and prevent the rise of
alternatives to fiat currencies which allow them to collect taxes or various other things
Well, I think your analogue spot-on people will vote with their feet because they're gonna want more transparency
Better service and a much lower fee. That's basically we saw when we started routing voice over IP
We used to have national monopolist than control each country 18
t used to be 16 percent of the market cap of the entire United States and now nobody even thinks about the cost of
Connectivity to the phone network. That's basically we're gonna see gambling or the other, you know, 25 interesting use cases at crypto is
The cost for consumers is going to go way down and the quality is gonna go way up
It's a great analogy and it's it's one that I love because it takes me in the next direction
Which is where do you guys see huge investments that are being made similar to the AT&T analogy and really?
You know AT&T established a price umbrella
under which companies like Global Crossing or the
WorldCom had his own issues. But you know created a price umbrella under which an incredible amount of investments level-3
It would be a good example
where people made huge investments in infrastructure in
In physical construction, etc. That ultimately
Failed to deliver on the underlying promise and just particularly a problem the debt markets
Because the prices were so deflationary and they just collapsed. All right. Do you guys see areas where people aren't making those assumptions today?
that is a negative case for
For where you see investment occurring. Oh, I'd say that I don't see it as a negative case
But all the payments monopolies and oligopolies have very high
Rents, and there's a lot of blockchain oriented solutions that will undercut them
yeah, I think you know maybe one area kind of and it's a kind of a categorical statement, but I think if you look at
just businesses in general
They're not focused enough
I'm kind of migrating to
Certain technologies particularly blockchain tech that can drop their costs of operation down a lot
Instead of just kind of focused insane in the same place operating with very high operating costs
To a good example the examples of this or like MoneyGram in Western Union
You look at them and you actually look at their balance sheet and then profit and loss statement
They're actually not that rent-seeking in the sense that it's just actually really expensive for them to operate because they're so dang inefficient
And so if you're a company like that
Instead of just continuing to funnel billions of dollars in cash into your operating expenditures
Without trying to make any part of your process more efficient
You should try to make it more efficient undercut your competitors and increase your margins margins all at the same time
I think it is possible for a company like to do that in practice
I think it won't happen and they'll get displaced. I think that's probably biggest mistake. I see in general
Well, so money grant would be an interesting example because the stocks down 92 percent or something from its peak
It's gone from being a sixteen billion dollar company to seven hundred million dollar company
I think you know that would would very clearly be one
but if you think the visas of the worlds which are networks that
You know that control significant rent-seeking dynamics in terms of payment processing
Very efficient in terms of a number of transactions relative to an etherium or certainly to a Bitcoin
And
Operating at a low cost perhaps not as low as we can get in a crypto world
You know certainly efficient and showing that as a sixty plus percent profit margin, right?
I mean it really really attractive businesses if those are going to give way
That's gonna have a meaningful impact on how people think about this space is that's something that you see happening
within an investable time horizon or is this just a headwind that those
Industries are going to those platform companies are going to face. I
Think on that one that specific use case. I think it is kind of more of a headwind
it's really hard to invest in that specific use case right now because it's so early but I do agree that
it's also one of the most impactful but it's probably gonna happen towards the end of the list of stuff and
I think you look at the impacts of it, you know, two to three percent for Visa MasterCard looks small on paper
But if you're say a retail business or a small business in the United States, your margins are typically three to five percent anyway
So you can almost double your margins if you can cut that few cut that middleman out
and so I think over time we'll start to see more and more of that Visa MasterCard are interesting because
They actually would benefit even using blockchain internally because they've pay so much to the banks that they work with
They actually don't take very much of the few for themselves
a lot of it goes to the banks so you could get credit card fees in my opinion down to like 0.5% if
They just switched using the underlying blockchain alone, you know, whether it goes lower than that if everyone switches away from them or not
I don't know, you know 0.5% may be low enough. People are okay with it
I think that's something that those companies will migrate to and do have
It just makes logical sense in my opinion
And so what do you think is holding them back from making that change now?
Because if they could get to 0.5% obviously it'd be foolish not to do so
there is an element as you're saying, you know, one of the first
situations where
Redressing very popular in 90s phrase the the innovators dilemma, right?
Where them making that transition would actually be bad for their prior partners. The banks might help forestall
Some of the inroads of a blockchain and a crypto based solution right a peer-to-peer based solution
Well, what do you think is keeping them from doing that? Yes, I think you know that they've announced they're working on stuff internally
I think the questions, you know, why is it not in production?
I think the reason for that is if you think about it
What they would have to do to credibly kind of kick the bank's away
would be to have something it's very very trusted and
even though people trust Visa MasterCard
I don't actually think that they trust them enough to allow them to operate say a private blockchain where they process all these transactions
I think the banks would just be so mad. They quit working with them
And so I think that for this to actually work they probably would have to do something that was generally public
Open to people to see and be able to audit it
And so I think in that scenario the scalability problems haven't been solved yet
I think once you get to that point you can kind of try to credibly tell the banks to go away
Because if your Visa and MasterCard, you can say hey look this is publicly auditable like we don't need you to oversee us anymore
We had this public ledger that anyone can view
Versus that they said hey one do it all in-house
Then Visa MasterCard kind of lose the argument of hey
We had this huge consortium of banks that audit us and make sure we're being honest and I think Visa has been pretty
Forward-thinking giving their you know their legacy business
They have a deal with one of our portfolio companies chain comm to build a private blockchain
Prototype and but these things do take a decade, right? You know the hugely
Important financial systems don't change overnight. Well, one of the dynamics that people often talk about within disruption, right? It's is that it's
Nowhere near as exciting to work for Visa as it is to work for a start-up
And the best talent tends to verge
On the opportunities and the innovation as compared to working for the large
institution
Is that is that a risk for the existing institutions in your mind or am I over blowing that dynamic?
You have to whisper. They're just downstairs. It's their headquarters
No, I think you know they're they're all
Evaluating when is it time to bring the fee structure down that hasn't changed in 50 years and has a 60% operating margin
versus you know, when will the outsiders, you know make headway and I agree with Joey that
Retail processing is one of the absolute last things that blockchain will do
There's massive network effects, you know visa master her do their job really really well
and so we haven't invested in any credit card processing type competitors in the
companies we've invested in over six years and I think
You know that will be one of the very last things that gets disrupted
So we talked about the prediction market some things it effectively could replace many many markets like OTC swaps, etc
and options markets
And I mean again just like reiterate when you know, something like augur
There will be companies I would imagine that would become participants that might have a particular need
Because of an expiring contract on a legacy basis to have a particular option that expires on
11:35 on the level of the S&P on Thursday, you know, June 17
2023 right which is something that I can go to goldman sachs and have them create for me today
But it's not something that's easily available in in an exchange-traded basis. Right? So I am
Involving a lot of lawyers. I'm involving a lot of resources I have to have an is the agreement. There's you know
Tremendous costs and setting something like that up
And so I would expect there to be use cases like that to begin to emerge relatively soon on a platform like augur
Where else should we be looking for early disruption?
Where have you guys identified areas that you think are particularly important? Yeah, I think so. I think we will
Actually see some stuff in payments ignore the Visa MasterCard stuff disrupting them at this point
But more like there's a lot of businesses that actually can't accept credit cards
They can't process them and there is forced to accept cash today or they're forced to do these things
Where you relay the money through like a Cayman Island company and they charge you 10 to 15% in credit card processing fees
This can be anything from a gambling business to things that are much much more, you know
Considered legitimate respective businesses like Airlines if you start up a new airline
You actually can't process credit cards if your American Airlines
Yeah, you can basically bully visa into inter letting you use their network or if you're a start-up one
It's actually very difficult most card networks actually ban them. And so there's a huge swath of these businesses that can't process payments today
I think that's one area. We actually will see the tech start to be adopted in the short-term mid-term. Just very quickly
so it's a
not knowing the particular dynamics behind that is that effectively just a bad actor dynamic because
the visa network through its member banks bears the cost of fraudulent activity, so
Somebody that a that collected large cash payments in exchange for services to be rendered in the future
That would be an area that would have high risk of fraud or yeah, exactly
So it's it's anything that has high fraud risk, which to Visa and MasterCard is basically, you know greater than four or five percent
And the cool part about crypto is if you're paying up front and it's crypto and you can't reverse it
The fraud risk basically doesn't really exist. Well, you can reverse it you're saying so like you could say that wasn't a legitimate transaction
They failed to deliver the service
Well, they you you can still have like in traditional dispute mechanisms and stuff. Just like you you have in a regular business model
But it's different in the sense that like someone can't arbitrarily charge you back
so like for instance say I booked a flight on this new airline and
I was unhappy with it. I have to go through customer support or something to get my money back
Am I paid in crypto versus in the visa? Mastercard scenario? You can just do a charge back and
That cost trickles through the system and causes them to pay more
So you're saying from the business operations standpoint, right?
I would then have to dispute that with the member banks and with Visa that would incur costs that would ultimately
Impact my bottom line. Yep, and if you have too many disputes, they'll actually just shut you
Which is kind of you know, then you're kind of out of luck and are just forced to accept cash
Okay, so so early in the payments
effectively address in the bad actor dynamic and anything else
Almost all countries a domestic electronic payment is pretty much free in pretty much real time
But whenever you cross a border, it gets really slow and really expensive even from say the u.s. To the UK to very sophisticated countries
Across forty five bucks do a wire you have no idea how many British pounds are gonna pop out the other end
there's four or five banks to take a little bite out of your trade as it's moving and with
Blockchain particularly Bitcoin you can do cross-border money movement. That's
Within tens of minutes and you know exactly how much money is gonna pop out the other end
Get a mid-market FX rate and you normally pay say one point five percent
Fee rather than you know several percent
So if you were a public investor if you were sitting in my seat, or you were sitting in a retail investor seat
How would you choose to invest in this space?
Put it all on over sock-doc all on over so I'm just kidding
I I don't really think there is a public markets trade right now
all the blockchain
Enable the companies are still private. So there isn't yet a big public strategy
It did fit again that analogy feels correct to me that we're earlier in this process than most people think
We're nowhere close to the Netscape IPO
Yeah, one thing to put perspective is there's 30
Protocols that are unicorn sized, right? You know, there's a lot of big investable things. They're just not listed on the New York Stock Exchange
Do you see regulation changing in that way?
We talked about a little bit about augur being an early ICO on the etherion platform
Do you think I CEOs are coming to the public markets or to the equivalent of the public markets where they will be?
Accepted in I will be able to deposit it in my Schwab account
My thing in anyways is you know, probably not I think you probably will see sorts of things
We're like you can buy into an ICO on an alternative transaction facility or something
But I don't think we'll see them on like nice your Nasdaq at least not not anything anytime soon
Just because I think they're such weird assets
They're kind of so yo syncretic and they're all very different
And so unique that's really hard to kind of categorize them in any sort of box
I think the best any sort of regulatory body it's done so far as
Finiman regulators in Switzerland. I've kind of come up with three categories they came up with
You know equity currencies and then things that are what they consider to be utility tokens, which is kind of either of those
I think that's a decent approach. But even there they're not trading on the public markets
They're you know
Kind of each icos is different and unique fast forward a decade. Maybe that changes but I think for the next foreseeable few years
It's probably gonna be each on its own
So when you encounter somebody who's a passionate, you know Bitcoin fanatic
how do you think about that is that's just somebody who's made money in the past and has now created an an
argument that they'll make money in the future or is that you know is is there something there that
the rest of us are missing I
Think this is a new asset class and in ten years
every institutional investor will have a blockchain team that will block a mass asset allocation and
You know, we're just kind of in that you know
interregnum period between you know, early adopters and very institutional investors and so
To you know, use the internet analogy on that, right?
Today everybody has a technology team today. Everybody has a technology allocation, but nobody has shares in globe.com
Isn't
If you were to think about the vehicles that are out there today aetherium certainly sounds like one that you're very interested in
Certainly within the context of maker having created a stable reference point
Would you be surprised if Bitcoin went to zero over the next five years
I'd be extremely surprised if a basket of cryptocurrencies
Was not worth a lot of money in five or ten years
Bitcoin vs. Bitcoin cashiers, aetherium just lots of arguments on all different
Parameters and any one of those could potentially go to zero but as a whole if you have a half a dozen of them
it's very unlikely and
That's very different five years ago
I used to tell people you could lose it all because crypto could be a dumb idea
The g7 could outlaw it something really bad could happen
Given that there's been a crypto
Application number one on the App Store an apple and you'd have 60 million people or have it. I think it's reached escape velocity
so it's probably not going to zero zero but any individual one could theoretically
Would you yeah
I'd say I'd be very surprised at Bitcoin itself Linton's your over the next five years what I'd not be surprised about though is if
Bitcoin as a percentage of the overall cryptocurrency market cap continued to lose market share over the next five years
And you mentioned g7 outlawing and are there any regions around the world where you're particularly concerned about?
The legal framework of the legal outfit outlook for crypto. I'd say that ninety-five percent of the countries are totally neutral
They don't do anything to help crypto that and they don't do anything to hurt it. There's a few countries like Luxembourg
They're very progressive and in promoting crypto
And then there's a few countries like China that have national policies that you know might have their own self-interest at stake
but 95% of countries don't
Really care either way and so I mentioned China early on you. Just you brought it up. How do you think about China and
Bitcoin right because if I understand correctly roughly 70% of the hashing is currently done in
Mining is currently being done in China for Bitcoin is that and any statistics that I say wrong?
please correct me on that, but
How do you how do you reconcile that right as China has been one of the most restrictive and yet
Paradoxically it has one of the most active at least traditional crypto space
Environments, yeah, I think the earlier comment was, you know an electricity
Consumption and there might be pockets of China where electricity's near zero cost and that subsidizes
mining and then the demand for
cryptocurrency saving
vehicles is very strong in countries like China that that have potentially weak banking systems and the citizens want to save
China's been one of the largest importers of gold for decades because the citizens want to save and something
other than the banking system and that might be one of the rationales, but I don't
put myself out as an expert on Chinese policy Joey if I were to think about
What's the coolest new technology that you've seen emerge in this space in the past six months
What would be your pick?
Yes, am I my only me this project called seller make sure if you understand seller Cele are it's not stellar
It's a project they came to us a few months ago and it's a team of about five PhDs
And who also worked at Google and YouTube and what they're working on is a scalability solution for blockchain tech
So we talked about in this conversation how most this definitely does ten transactions per second
there's in this idea that's been kind of circulating around the past three or four years called payment channels or alternatively called state channels and
It's a really neat idea for doing lots of transactions off chain and then settling on chain once in a while
the problem with it though, is that
you when you're sending payments around you have to route these payments through a network and
Up until now. It's been an unsolved computer science problem of how to do that. So the best solutions today
Typically require about 10x
The collateral you would need to do a simplified like a five dollar payment requires two dollars in collateral locked up
That's not kind of work
These guys that come up with a optimal solution like theoretically optimal you can prove it with with mathematical proofs
They've come up with the solution to this problem. So it's the most exciting thing. I've seen in the past, you know six months
Because it actually gives me quite a bit of confidence that we will see those transactions through but numbers increase
Versus if you ask me about about that question two years ago, I would have been much more bearish on the space scaling
Fantastic, we did this roughly a year ago. I'd love to do it again
You guys willing to sit back down and six months to a year and and catch up on what's new in the crypto space
What's going on Pantera?
and
I'd love to follow up in particular on how augur is developing and we can talk through some of that in detail as we talk
Next time full. Yes. Thank you very much
Thanks. Thanks
Dan, and Joey gave us some really fascinating insights in terms of the cryptocurrency space in particular
We get to look forward to the augur launch in July and that's going to be one of the exciting first
Icos on the etherium space that goes live. Can't wait to see how that develops
I'm also really interested in Dan's general thought that the cryptocurrency space is developing that the
probability of the overall space turning out to be a disappointment is
Very low and it's really interesting to hear how that thinking has developed over the last couple of years
I
Look forward to catching up with them again in six months to a year to find out what new is happening and what their thoughts
are them
You
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