Meltem Demirors: The Dark Side of Crypto

Anthony Pompliano
Sep 13, 2018 · 58 min read
Meltem Demirors, Chief Strategy Officer at CoinShares

The following is a transcript of a conversation between Anthony Pompliano and Meltem Demirors, Chief Strategy Officer at CoinShares, about the intersection of technology and finance, why she believes stablecoins are the new CDOs, and where cryptoassets fit into an institutional investors’ portfolio.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Meltem Demirors

Anthony Pompliano: 00:00:00 All right Meltem, we’ve got a lot to get through.

Meltem Demirors: 00:00:03 Whattup? Keeping it casual on a Thursday.

Pomp: 00:00:09 We had a great warmup before we turned on the recording, so it should be fun. Let’s go over real quick for people who don’t know just your background.

Meltem: 00:00:15 Sure.

Pomp: 00:00:15 Then we can dig into all of the controversial ideas that I’m sure you’re excited to talk about.

Meltem: 00:00:20 I don’t think they’re controversial, they’re just thoughtful I hope, but we can debate the merits of that.

Meltem: 00:00:27 Look, I don’t want to be boring. Math and finance background, started my career in the oil and gas industry during the onshore shale boom, have seen what irrational bubbles look like form the inside of some of the world’s largest corporations. Focused primarily on oil and gas MNA, oil and gas strategy, and then decided to go as a consultant, decided to go in-house at Exxon mobile, worked for the treasurer of the corporation there and go to see the inner workings of, which at the time, the world’s largest corporation, which is really interesting. Learned a lot there. Went to business school at MIT, did a lot of work there on the thin tech startup wave that started around 2012–2013. Got into the venture space and really just saw so many interesting problems in venture with incentives between investors and entrepreneurs. Had been bitten by the bitcoin bug and then met Barry Silbert who had been working on this idea called digital currency group. Joined him in 2015 to build that out. Spent three years there, took the firm from 20 portfolio companies to 120, built a bunch of great businesses, did a lot of really interesting things, and also was there really for the move from bitcoin only to enterprise block chain, then to tokens, and now it’s back to block chains via security tokens. It’s been interesting being a part of that evolution and really being involved in many different parts of the ecosystem.

Meltem: 00:01:54 Now what I do is I’m at CoinShares which is a digital asset management business. I’m really focused on building the next generation of financial products and services for retail investors, institutional investors, and most importantly, the crypto space. We need to start bringing more institutional asset management principles into this industry to really make it credible and an investible asset class. It needs to be done in a way that is true to the principals of crypto, but also incorporates that last 150 years of knowledge around corporate finance, behavioral finance, incentives, et cetera.

Pomp: 00:02:27 Absolutely. What originally drew you to bitcoin? Why bitcoin?

Meltem: 00:02:32 The original draw to bitcoin was I needed to send a transaction and I needed to send it to a market where there was no real banking infrastructure. My family is from Turkey originally and I looked at a bunch of different options. One of my friends is like, “Oh, have you heard of bitcoin?” I went on Reddit and I went to r/bitcoin and I was like, “Wow, there is a lot to unpack here. This is wild. It’s weird.” I had to then get bitcoin, so I pinged my brother who he and I grew up playing video games together, he’s a programmer, and a developer, so he’s always on the bleeding edge of these things. He’s like, “Yeah, localbitcoins.com.” I went on LocalBitcoins, and I met someone in a parking lot, and it felt like a drug deal but it was a bitcoin deal, which was pretty exciting. From there just the more I started learning, the more interested I became. Luckily, in grad school I had a lot of free time. I was at MIT where there was a lot of work going on on campus with students who are mining in their dorm rooms. Some students got sued by the state of New Jersey for running an illegal lottery because they were running a bitcoin faucet, so just really funny, really interest.

Meltem: 00:03:44 Then the whole crypto anarchist thing just added an extra layer of interest. I never really though about the relationship between money, power, politics, and societal structure. So I think for me that was really a moment where I started to just become a lot more aware of what was happening in the world, the implications of changing the structure of how money works.

Pomp: 00:04:04 Absolutely. It’s I think not talked about enough that not only is this a technology solution, but it’s also opening the mind and really drawing attention from a psychological standpoint, what do you think is the most misunderstood concept in crypto?

Meltem: 00:04:20 I do think the word … So there are two things that really trouble me. I make this comment often. I say a lot of times when people who are new to the crypto space and who are skeptical enter the crypto space, or go to a meetup, or a conference, what they say is, “I feel like I walked into a dystopian Ann Rand novel filled with 25 year old white dudes.” Look, that’s not a criticism. I just got a check mark, yes, yes, okay. I think we have 2, 25 year old white dudes in the room here.

Meltem: 00:04:53 Look, here’s the two things I think we do that don’t really translate well … And to the point you made earlier about this being psychological, the way I would phrase that is this is a battle for hearts and minds. If we look at innovations, if we look at big shifts in structure in human history, it’s really about moving hearts and minds and I think we’re missing that bit right now.

Meltem: 00:05:14 The first concept that’s really overused is this word decentralization. Decentralization means many different things. You could have decentralization at the protocol level, both from the distribution of wealth, so kind of geni coefficient analysis as well as the distribution of power and who gets to write the code, and set the rules. We’re seeing that being challenged, bitcoin, huge power struggle all the time. Ethereum has Vitalik who more or less has been their anointed leader. I think every protocol kind of struggles with decentralization. Then you have the networking layer decentralization, so mining power, how that’s distributed, staking power, how that’s distributed. Then at the application layer, are there a lot of different entities producing applications? Are those applications decentralized? That word is so poorly defined and it’s used as an ad hominem attack on projects without any qualification. I think that’s one kind of concept that we use a lot that we don’t really articulate very well.

Meltem: 00:06:12 I think the second component is there is this moralistic bent the crypto community has where I think a lot of people who adopted bitcoin and other crypto currencies early, they have become wealthy. They have gained independence of thought through luck and some degree of conviction. But I think for a lot of people it was really luck being in the right place at the right time and they’ve now started to attribute that to intelligence and some sort of moral superiority. I think that’s a troubling narrative and it’s also not a very inclusive narrative. I think for people, for hearts and minds to really shift, we need to start moving away from this moral high ground and really start thinking about what does the next billion bitcoin users look like and how do we get to that point. It’s probably not by talking about decentralization and all of these political and economic principles, but giving people something that they can use that makes their life better in some way.

Pomp: 00:07:10 Absolutely [crosstalk 00:07:11].

Meltem: 00:07:11 … that.

Pomp: 00:07:12 I think that’s fair. Let’s go back first to this idea of decentralization. In non-crypto technology the idea of a founder being able to really drive, go through obstacles, recruit people and set this vision that we’ve made it really sexy to be a founder.

Meltem: 00:07:33 As a former founder it’s the least [inaudible 00:07:36]. It’s really crappy. You haven’t showered in a week, you haven’t eaten a proper meal, you have no idea what’s going on, you’re emotionally exhausted, you’re constantly living between a state of euphoria and tremendous soul crushing anxiety, but yes, the narrative-

Pomp: 00:07:52 It’s a duck.

Meltem: 00:07:52 … is it’s sexy.

Pomp: 00:07:54 The duck analogy, right. So if you look at a duck in water, above the water they’re cool, calm, and collected, below water they’re just paddling as fast as they possibly can so they don’t drown. In this decentralized world, this idea that there is no leader, and you don’t need to have a single point of failure, or that threat component, how do you think founders and leadership play into a decentralized world and is it important?

Meltem: 00:08:23 That’s a really interesting question. I don’t think I have a definitive answer. Again, going back to this idea of hearts and minds, and how humans operate, I think people are drawn to characters, even though the crypto community, to some degree, tries to be decentralized, what’s really interesting is we have a very strong cast of characters and they’re very opinionated and very loud. What I think it goes back to ultimately is, look, I’ve been in the venture space for quite some time. What’s interesting about it is in the venture space the way that founders operate, you’re running a company, companies require organization. The reason that the corporate form was created it’s really just a governance structure because establishing contracts for every single piece of work, every single transaction doesn’t make sense. The corporate form was created to line incentives between investors, employees, managers, stakeholders in that entity. They’re all incentivized to work together towards a common set of goals. That’s reinforced by legal contracts, financial incentives, and the terms of shareholder value, and bonus structures, and how people get compensated.

Meltem: 00:09:35 It’s taken 200 years to get to a workable corporate form and we see that reflected in the size of the equities market. People are willing to put trillions of dollars into that corporate form in the form of investing in stock. What’s interesting about crypto is there is no such firm.

Meltem: 00:09:53 The crypto firm, or what I like to call the theory of the crypto firm, is highly immature because this is new. But what we see is people are trying to replicate things that have existed in the corporate form for the last two centuries in the crypto firm and it doesn’t quite work because right now if you’re an investor and you’re putting capital into a crypto firm or someone who’s capitalizing their company through a token you have no rights, you have no preferences, there are no covenants, there’s no legal contract that binds that founder to do anything on your behalf. What you then see is there are tremendous abuses of power. There’s a tremendous degree of moral hazard. I don’t mean that to say that people set out with that intent, I just think the form we’re using is perhaps not appropriate for what we’re trying to do, which is why I think the narrative around security tokens is really compelling because investors can understand that.

Meltem: 00:10:51 When you say to someone, if you read the terms of some of these tokens, there’s a disclaimer in ever token sale that says you have no rights, you’re not entitled to anything. We’re not promising that we’ll give you anything. The idea that we’re going to give people billions of dollars on the basis of social trust I think is an imperfect idea because block chains don’t change human nature.

Pomp: 00:11:12 Absolutely. I think that what’s interesting is people forget that these securities started out looking very different. When equity was first created and somebody said, “I’ll give you money to run this company,” it wasn’t for enterprise value to then go public or to be acquired. It was literally a claim on cash flows.

Meltem: 00:11:32 Exactly.

Pomp: 00:11:32 Right? It’s almost like we’re coming full circle to some degree with all this on chain governance or claim to transaction fees, et cetera. In the block chain world how much of that do you think can be solved by technology versus the psychology?

Meltem: 00:11:50 That’s a really great point. I think that’s probably a great way to summarize what I just spent five minutes articulating. I think what’s interesting here is you have a lot of people, a lot of the people in the crypto space who are working on these ideas tend to be younger. I think a lot of them haven’t worked in corporate structures before and that’s not a bad thing. There’s a lot of value in experimentation and innovation because you learn things that can be applied at scale.

Meltem: 00:12:20 I think the challenge here is that the learning process has gotten a bit bastardized because we were building things that are highly imperfect that are very flawed in a lot of different ways, both from a technical perspective, governance perspective, and actual scalability and implementation perspective, a practical application perspective. Yet, these projects are being capitalized at valuations that exceed the average IPO by a factor of 10. I think we kind of have created this false sense of success where people feel, “Hey, I’m able to raise a shit ton of capital,” and it’s literally a shit ton and they have no plan on how to deploy it.

Meltem: 00:13:01 I think the interesting conversation I have with founders, because one of the things I’ve been focused on is helping people with treasury management, is there’s a difference between need and want. Maybe I need $50 million to build this idea, but the market wants to give me $500 million, so look-

Pomp: 00:13:21 What do you do?

Meltem: 00:13:21 Yeah, exactly. Block chains don’t change human nature. There’s a lot of ego involved. This crypto environment right now the narrative is so focused on price and how much money was raised that we’re getting to that stage where I think the money needs to get flushed out a bit and we need to go back to building. This goes right along with Carlota Perez’s research around capital formation, bubbles, and how that corresponds with technical innovation cycles.

Meltem: 00:13:46 A lot of this is we have this technology, but can we articulate a clear reason that this technology needs to be utilized for things that we already do in the existing world? I think that narrative just isn’t there yet.

Pomp: 00:14:03 It’s the trade-off between, because there’s so many technologists, they want to talk about technology, I call it the hacker mentality of their tinkering. They make technology do something that they haven’t seen before, or it’s faster, or it’s better, whatever. They start showing people, people get excited, but I think there’s too much focus on that technology. Instead, if you look at it the opposite side and say let’s look at it from user behavior, now the user actually doesn’t care what’s under the hood, right?

Meltem: 00:14:28 Exactly.

Pomp: 00:14:29 There’s some users that will, obviously, some subset, but the mass consumer, mass user, doesn’t actually care what that technology is. They just want to accomplish what they’re trying to do with the [inaudible 00:14:37] technology.

Meltem: 00:14:37 I think this is part of the challenge when you have a movement that really started with engineering and technology is you have a bunch of developers and engineers who for the first time are discovering finance. They’re saying, “Oh we can treat finance like code.” There’s an input and then there’s a contract, and then there’s output. The thing is, you and I have worked in traditional finance. That’s how people think. People don’t respond to an input function or a particular output. I think my friend Jill Carlson says it best, “It’s not you put in a token, you get out an action.” That’s not how incentives and systems work. It’s a little bit more complex than that because human beings react to emotion. Human beings I think are fundamentally irrational. Again, behavioral finance is a field of study that’s only really half a century old, 50–60 years old. We’re still learning a lot. Look at what happened in 2008, not a lot of people saw that coming. Look at what happens in individual asset classes. We have all these great ideas and what we see is the breakdown of markets. Look at the equities market right now, look at the fangs, right?

Pomp: 00:15:44 Absolutely.

Meltem: 00:15:45 It’s an imperfect science, but I think treating crypto like a math problem, treating it like an engineering problem, treating finance and money in that manner in interesting, but I don’t think that works. I think the next 5–10 years are probably going to be spent trying to figure out how to integrate other disciplines into [crosstalk 00:16:08].

Pomp: 00:16:08 I think that an example where the finance community has previously treated money and finance as a math equation or a math game is with CDS.

Meltem: 00:16:21 Yeah, I see that with like CAPM and Wack, and DCF, and all these valuation models.

Pomp: 00:16:24 Well so if we go to the CDOs-

Meltem: 00:16:24 Sure.

Pomp: 00:16:28 … you recently said stable coins are basically the CDOs of crypto. Explain what you mean by that.

Meltem: 00:16:34 Right. I think here’s the problem is the crypto community has latched on, we tend to latch on to narratives and then we work through a narrative for six to nine months. The narrative that started developing last year was oh, the reason that people don’t want to invest in crypto is because it’s too volatile and moving into an out fee [inaudible 00:16:55] is too difficult. People started saying, “Why don’t we create this concept of a stable coin?” We’ve already seen iterations of it. I think part of the impetus, frankly, was the fact that Tether was so success and so widely adopted that it kind of shocked everyone. I think the problem with stable coins, and now every platform is launching is launching their own stable coin, so you have collateral-backed stable coins like Tether or like Digix, which is backed by Gold. Then you have collateralized stable coins, so things like Maker or Haven that rely on kind of a two coin system where you can redeem or create the stable coin through a secondary mechanism. Then you have the idea of a programmatic “decentralized” almost decentralized bank structure or sovereign issuance structure where people are issuing assets. Then there’s complex governance structure.

Meltem: 00:17:46 I think the problem is this, number one, the thesis as to why stable coins needs to exist has not been proven true. Same problem with fat protocols. That caught on and then we saw billions of dollars of financing flow into nonsensical protocols because everyone was so addicted to this idea of fat protocols. I think we have the same narrative with stable coins where we’re creating this false narrative in our minds because at first blush it makes sense, so if A, then B, therefore C must be true. We know that’s not always true.

Meltem: 00:18:17 What I think we’re doing is, number one, we’re financial stable coins through an investment structure that doesn’t align incentives, so going to an investor and saying, “Hey, if you buy this asset early on then you’re going to get to participate in value creation or in the flow of payments through the…” That doesn’t really work. No one’s paying the fed to create dollars, so I think that’s a weird structure. I think what we’re doing is we’re creating all of the systemic risk because now we have stable coins on protocols and then on top of the stable coins there are more coins. It’s coins all the way down, coin, coin, coin, coin, coin. The thing is, at some point we stop being able to untangle how any of this works. The degree of systemic risk in the system is already so incredibly high. You think about the fact that Xapo Custody is 10% or more of the world’s bitcoin. You think about the fact that Coinbase holds a lot of crypto assets.

Meltem: 00:19:06 You think about the fact that Binance probably hosts 50% of traded volume in all assets. We already have a lot of systemic risk. We don’t need to layer in 50, to 100, to 150 different stable coins that are all abstractions of themselves with no governance structure, no auditability. Frankly, no one has the appetite to monitor this shit either.

Pomp: 00:19:26 Yep, well-

Meltem: 00:19:26 So [crosstalk 00:19:27] unnecessary.

Pomp: 00:19:28 Part of it too, and I think we agree that if you have an engineer heavy team or a finance heavy team you’re at a disadvantage than a team that is more diverse. So having a combination of people who come from the engineering world, from the technology and product world, from finance, from design, et cetera. By bringing all those people together you get different experiences, different perspective, different knowledge bases, so the product is probably going to be much more usable and also technically sound, or is kind of the theory.

Meltem: 00:19:59 The other piece, I’ll just add to that, is I think it helps to have people with different backgrounds and different experience. What I always like to say is history doesn’t repeat, but it rhymes. I think a lot of times when people come in and they pitch an idea to me I’m like, “That’s interesting, but this has been done 50 times before. Have you gone back and just-

Pomp: 00:20:25 Looked at them.

Meltem: 00:20:25 … looked at it?” I think sometimes we jump on ideas because of the newness of the idea when in fact it’s really just an iteration of what’s already being done in other industries. I think there’s a little bit of intellectual arrogance in the crypto community and I myself I think when I started in bitcoin was probably guilty of it and I was probably a little bit of an asshole. But as I’ve learned I’ve really started to appreciate when I go into meetings now with people outside the crypto space I actually spend most of the time next talking. I spend most of the time just asking questions and trying to understand someone’s mental model.

Pomp: 00:21:02 In that, where do you think crypto assets sit in a traditional capper allocators portfolio, how are they thinking about that right now?

Meltem: 00:21:12 I just put out some content around this and hopefully in the next few days we’ll push out a longer report with a lot of great data in it. If we look at this institutional investor class there’s about, in the U.S., there’s about $28 trillion of institutional AUM. That’s mostly pensions, but that’s endowments, family offices, hedge funds, venture funds, PE firms. Crypto market cap is $220-$250 billion, somewhere on a daily basis right now. What I think is challenging is right now those firms are allocating to low-risk securities, so T bills, strips, bonds, et cetera. That’s a small percent of their portfolio. They have cash, money market stuff. They have traditional equities. They have real estate. Then maybe 15% of their portfolio is in higher risk assets that focus on early stage capital formation, the growth stage capital formation, so that’s growth equity and PE, it’s hedge funds, and it’s venture.

Meltem: 00:22:17 As we look at that, where do crypto assets fit in? Monetary instruments, probably the closest analog to something like a bitcoin, so that’s more like your money market bucket. Real estate, that’s probably more like securitized assets, so can we securitize assets and make them more flexible, maybe. Equities, that’s more like token offerings that represent equity in privately held companies, that kind of displaces that PE bucket. ISOs probably fit more into the VC bucket where it’s really early stage ideas getting capitalized.

Meltem: 00:22:50 I’m trying to think of in the context of an institutional investor, what are those analogs because I think there may be new capital that flows in, but likely it’s more of a displacement of existing allocations into some of these new asset classes. I think what’s challenging there is you have to frame the narrative in a way where an institutional investor, A, understands what they’re buying, it fits into the mental models they have that have been trained over the last 50 years. Then they also have to be able to hold it, trade it, deal with it, talk about it to their investors in an easy way. I think that’s where the market infrastructure side is a little immature. We’ve been so focused on the creation and distribution of assets that we really haven’t started thinking about the management of assets, so that post-investment life cycle is pretty underdeveloped. Then end of life of an asset, what happens when a token is dead, how do you redeem a token back into cash, what do you get. There’s going to be a lot of experimentation.

Meltem: 00:23:50 I think the slice of the pie that’s going to go into crypto currencies, true store value crypto currencies, ISOs, security tokens, and securitized assets is initially going to be much smaller than we imagined. But then when we start being able to prove that in fact that efficiency, that liquidity, and that usability component that we talk about can actually be realized once there’s proof of that, I think it will grow much more quickly, but we’re not doing a very good job right now.

Pomp: 00:24:20 I definitely agree with that and I think that what one hope of a lot of people in the crypto world is that some of these traditional legacy players can come in and legitimize the space. ICE, for example, coming in and saying, “Hey, we’re going to create this platform. We’re going to put our name, our experience behind this.” How do you think that impacts the space, not only from the development of crypto assets and networks, but then also from the institutional investors’ perspective?

Meltem: 00:24:48 I think the ICE announcement is one that I’m still processing. In one way I do think it’s really it’s really good because it adds legitimacy to the space, I think particularly bitcoin. Bitcoin is that asset that it’s been in the market long enough. There is enough data around that investors are starting to get more comfortable with the idea of bitcoin, so I think that’s-

Pomp: 00:25:06 It’s familiar.

Meltem: 00:25:07 Exactly, right? But also that body of knowledge exists and we now know how to deal with it. Most importantly, you know how to value it and market. I think that’s a huge problem we don’t really talk about as much.

Meltem: 00:25:18 Bitcoin is starting to feel familiar, so ICE coming out and saying, “Look, we’re going to enable you to really easily with a trusted partner that you already can trade with buy and sell bitcoin.” That’s material. I think the hard part is, is once the financial institutions start moving in they’re going to do what they do. Banks got to bank. People have started talking to me now about the idea of extending leverage on top of bitcoin. I’m like, “Oh-

Pomp: 00:25:44 It’s coming.

Meltem: 00:25:46 … shit.” That is not going to go over well. That’s the antithesis of why bitcoin was created. I do think there is this component. What I always say is there is the revolution camp, which is where I started out when I got into bitcoin, like down with the banks, like fuck the institutions. That’s one.

Meltem: 00:26:00 Like fuck the institutions, and that’s one narrative and then there’s the evolution narrative, which is, “Hey, we’re going to start with something that looks, smells, tastes, feels like what’s already happening in the world of institutional finance.” Then over time it will evolve and form to be more reflective of all the technical capabilities of a blockchain-based asset or cryptocurrency.

Pomp: 00:26:21 Which do you think is more likely to occur today? The revolution or the evolution?

Meltem: 00:26:27 Okay. Here it actually depends on the broader macro environment, which is something I don’t think we think about often inside the crypto bubble. If we have another 2008, if we have another Cyprus or another Greece, then I think we’re going to go revolution. The thing I always think about is are we ready? Right? When that narrative starts to really accelerate and when people have that impetus, when there’s that … What I always think is path dependence, right? If we stay on the current path, we’re going to go evolution but if there is a massive force that jolts us out of that path, then we’re going to go revolution.

Pomp: 00:27:01 This is fascinating because somebody asked me recently what did I think would get us out of this bear market, right? I said, there’s got to be some kind of catalyst that will create some inflection point. I said, retail product is one option. Not necessarily because I think people have a hard time buying bitcoin, but it’s more of the legitimacy, insurance, custody, all that kind of stuff. Another could be that just some huge institution reveals that they’ve got a position that no one knows about. Right? If a sovereign wealth comes out and says, “Listen, we’ve bought billions of dollars worth of bitcoin,” something like that where again you just get a bunch of legitimacy. But the third one-

Meltem: 00:27:38 If that happen then like capital inflows, that would really drastically shift.

Pomp: 00:27:43 Yeah and so here’s the third one and actually what I think doesn’t get talked a lot about, you just mentioned this. It’s worth spending time on is if there is an economic chaos that occurs in a specific region or country that causes people to flow into bitcoin for example, because it is the best option available. It’s almost we get to watch it play out as an example.

Meltem: 00:28:06 Right, but let’s go back to hearts and minds, right?

Pomp: 00:28:08 Yup.

Meltem: 00:28:08 I don’t think it even has to be economic. I think if we look at the political climate in a lot of economies, we look, globalization was the theme in the ’90s and the 2000s. Now what we’ve started to see, is like, yes, globalization has changed the world. Integrated markets, more efficient markets, more assets, more capital, more cash has lifted a lot of people out of poverty. Objectively speaking, if we look at the data, people are living a better quality of life. There is more wealth in our world than there was in the past but inequality has grown. I think this is the challenging part is a lot of what’s happening, it’s social. There’s a lot of social unrest, there’s a lot of political unrest. There’s a lot of uncertainty and fear even with investors. We look at what’s happening in equity is like the Dow hit 25,000 and everyone’s like peak, peak, sell, liquidate.

Meltem: 00:29:05 What are we going to do? It kept going up. Everything feels overvalued. You look at real estate, real estate feels overbought, VC, everything’s overvalued. Investors are looking at the world at this macro environment. They’re like in a world where everything feels overvalued and overbought, in a world where we’re really not sure where Alpha is going to come from, what do we do?

Pomp: 00:29:28 Absolutely.

Meltem: 00:29:28 I think that creates a lot of room and I think again, what we as an industry need to start to think about is how do we win hearts and minds?

Pomp: 00:29:38 This is where the virus is spreading, the phrase came from.

Meltem: 00:29:40 This is the Pomp approach.

Pomp: 00:29:44 Literally the thought process was I originally said, one of bitcoin’s greatest qualities is that it’s captured, I said, the mental energy of a generation. People were so excited and the talent was flowing into this space. The capital was flowing into this space and so you get these boom and bust cycles, but innovation follows that talent and capital because there’s just so much mental energy being applied to it.

Meltem: 00:30:08 What I worry about it is like we look at what happened with retail in late 2017, early 2018, and this is what I worry about is a ton of retail investors got crushed.

Pomp: 00:30:19 Absolutely.

Meltem: 00:30:20 I think the hard part is those people aren’t going to come back for a while because their trust has been destroyed. We did it through this financing vehicle where we created a bunch of wealth under the guise of decentralization that really flowed into the hands of a few people. You see this reflected in all of these crypto conferences and people going to exotic locations and living really lavish lifestyles. Then this gets glamorized which brings in less educated wave of retail. I find that a bit problematically. Crypto has a little bit of an image problem and yes, like the sexiness, like the sex, drugs, rock and roll appeal of crypto is definitely there but I think it’s a double- edged sword because a lot of people have gotten really burned and I think a lot of people look at it and they’re like, eh.

Pomp: 00:31:07 Yup, well if you think of the last 12 months, we’re doing this August 2018, so August ’17 is really when I think the more mainstream audience started to at least hear about it and then you go into October, really November, December, and then you look at the price depreciation since those days. There’s a possibility that more people lost money investing in bitcoin in the last 12 months than made money, right? On an aggregate number of investors.

Meltem: 00:31:35 Absolutely. I have so many stories from retail investors and institutional investors by the way, who really got burned. I think part of the problem here is people like stories, right? Where humans have a rich oral history because we tell stories. That’s how we share information, that’s how we connect with other people. The story around crypto up until January 2018 was this, everyone had a friend or someone they knew who bought bitcoin early or who bought Ethereum early and the asset they bought went from X to Y and that delta was a 1000%, 12000%, 5000%. People look at that and they’re like, “Bitcoin, Ethereum, Ripple, people who got into these assets early that have been around for five or six years, they made a 100x, 200x, a 1000x their money. I want to do that.” Then all of these ICOs are pitching, “We’re the next Ethereum. We’re like bitcoin but better,” and so people buy it and then that doesn’t materialize. I think this is the problem with growth stories, right? This is the way equities market really.

Pomp: 00:32:43 Absolutely.

Meltem: 00:32:44 You see it happen there as well. It reminds me of penny stocks.

Pomp: 00:32:47 Absolutely. Part of it is you’re trading or gambling, right? If you look at a 100 of them.

Meltem: 00:32:55 You get to say you’re a tech investor, right? You get to gamble full-time. I love gambling, [crosstalk 00:33:01] player.

Pomp: 00:33:02 I tell people that you can’t claim you’re investing if you don’t have a thesis, you don’t have underwritten the risk and you don’t have a price target.

Meltem: 00:33:11 I think this actually is a really good point. People are so focused in investing and this is true venture as well, right? I worked a lot on the post investment side. People are so focused on everything up to the point of writing a check and then once they write the check, they’re like, “Okay, my work is done.” No, no. Actually, your most important job as an investor, one, the investing process is about controlling entry price and it’s articulating a thesis and a strategy as an investor. But as a fiduciary, your primary responsibility is that post investment lifecycle.

Pomp: 00:33:45 You have to monetize it.

Meltem: 00:33:45 How do you track the status of these projects? Right? How do you articulate a cogent thesis on where your liquidation points are? How do you periodically rebalance and de-risk and take out some of the principal and then reinvest? How do you think about your role in the governance of these companies that you’re capitalizing? What’s so funny to me is like I’ve been doing this in the venture world with the portfolio companies I’ve been working with for the last five years and now crypto funds are like, “Oh, like maybe we have to be partners to these projects.” I feel like, am I taking crazy pills? I think so. It’s just really interesting the naivete and just, and again, I sound like a skeptic I feel like we’re not learning lessons. I feel like we’re so unwilling to accept fundamental truths about human nature that we’re forgetting that like, hey, when you write a check-

Pomp: 00:34:41 What’s part of the revolution, right, is if you go from step one to step seven, you don’t get the benefit of learning what two, three, four, five, and six.

Meltem: 00:34:50 Actually the other thing is people have gotten away with free writing, right? Both in their diligence process people are like, “Oh, if Andreessen invested, if USB invested, I’m investing.”

Pomp: 00:34:58 I’m in.

Meltem: 00:35:00 There’s free riding on the investment process side where people basically do no work and are able to raise crypto funds. Then the second component is there’s a lot of free riding in the post investment process and it happens in traditional venture, which why everyone is like, “Find a strong lead because I don’t want to do the work. Let’s have someone else who is more capitalistic do the work to help you grow.” Same thing in crypto world, right? The problem is when you have a bunch of investors who are free riding off everyone else and they don’t actually own equity, they just own tokens which are liquid right away. What’s the incentive to actually help people long term? I feel bad for projects who raised money from investors. They basically sold their souls to raise this money. Then as soon as the token lists, everyone dumps the token, takes their cash out and they’re trying to build.

Meltem: 00:35:40 They’re like passionate about building a vision and everyone who told them they were also passionate about it, just fuck them. They’re like, cool, we got our cash buy. That’s not a good paradigm either, so I do feel bad for companies who have a big vision who were trying to build it. That why I think a lot of these projects who didn’t set a date for releasing their token, they’re probably better served to not release their token until they’ve gotten the max juice out of their investors in terms of helping them.

Pomp: 00:36:05 Very interesting. Okay, let’s go to the dark side of crypto.

Meltem: 00:36:10 I love that shit.

Pomp: 00:36:13 Three things. One is let’s talk about we’ll call, “professional investors,” right? Funds and venture capital, et cetera. Buying tokens at huge discounts and not disclosing positions and then dumping on retail.

Meltem: 00:36:27 The shitcoin waterfall. I love the shitcoin. waterfall.

Pomp: 00:36:31 Explain your perspective as to what’s been going on really. I think, some of it hopefully is dissipating a little bit, but maybe not as fast as we want it to, but explain how that happens and then where you think things need to change.

Meltem: 00:36:46 Sure, I’ll quickly describe the shitcoin waterfall. It’s a terrible way of saying something, but okay, so the shitcoin waterfall is this, you get a bunch of people together and they’re like, “We want to do this crypto project, we’re going to build a decentralized computing protocol.” Right. Great. They go to small group of investors, typically insiders, known people in the crypto space. They’re like, “Hey, we’re doing a pre seed round. We’re doing like a pre presale, we’re going to give you tokens at this price.” Everyone writes their checks and they raise a couple million bucks. Great. They then get to go market and hire more people and then they get to a point where they put out a white paper or something more articulated to the market and they go to a bigger group of investors and institutions. They’re like, “Hey.”

Pomp: 00:37:33 Who are less on the inside.

Meltem: 00:37:34 Who are less on the inside. Right. They’re like, “Hey, we’re doing a presale. Look at the people in this pre presale, they’re awesome, but we’re doing presale now and we’re going to give you a price that is 10x what they paid.” Okay, great, so they paid 10x more and then they’re like, okay, we’re going to presale bigger audience, less informed, you get less information, less insight and they’re like, “Hey, we’re going to let you in and it’s at 100x what the pre presale people paid and 10x what the presale people pay.” You create this laddered structure. This kind of resembles liquidation preferences, right, in a traditional corporation. You have the structure and then you’re like okay, we’re going to list the tokens on the market. They have all these announcements and they are going around telling their pre presale investors like, “Hey, here’s our plan, here’s what we’re going to do, here’s what’s going on.”

Meltem: 00:38:20 Then the pre presale investors by the way all collaborate together to say, “Okay. We’re going to buy, we’re going to sell.” They can manipulate the price of these assets. Actually, my research team has been working on analyzing movement of coins, like the network topology of some of these tokens through the process of listing and how that sort of evolves over time. There’s some shady shit people do. What ends up happening is people start dumping their coins on the market. Retail starts buying it. There’s this narrative that gets created like this is an amazing coin. Look at how innovative it is.

Pomp: 00:38:49 Look who backed it.

Meltem: 00:38:49 Look who backed it. Right. Look at the founders. This is amazing. This is so phenomenal. They do a bunch of marketing. They throw a bunch of events. They do maybe a couple of press releases or partnerships or announcements where they’re paying people for partnership and then retail buys up these tokens. Everyone’s exiting their position and it just starts dumping. The thing is, the reason the shitcoin waterfall has worked historically is because investors knew there was always a buyer of last resort who was not them. I think in this market right now because retail has lost their appetite, there is no buyer of last resort. It’s institution selling bags to one another and so I think ultimately this just becomes a game of who gets the most information the fastest and who can dump the fastest.

Pomp: 00:39:30 Absolutely. It now leads us to a problem of how much capital inflow is actually going on versus are we just recycling funds? Right?

Meltem: 00:39:38 I think the circularity of capital is really problematic and you see this like one of venture funds invest in a crypto protocol. They do an ICO, they raise money from other VCs then take that money and give it to another VC to invest in more startups who then create tokens that the VC buys that then the protocols. It’s like the circularity is incredible and I think part of it is there is no utility for these tokens. They’re speculative assets for ideas that are poorly implemented in some cases. Look, it’s not a criticism. I sympathize with people who have really big visions and are trying to build them but I think the circularity of capital problem, if everyone’s motivated by financial return, what ends up happening is you have people who have a short timeframe, they have short attention span and the minute that it’s no longer worth spending a minute of time on a project because you’re not going to get any juice out of it. What’s your incentive as an investor to spend time on it?

Pomp: 00:40:34 Yup. All right. We got the shitcoin waterfall.

Meltem: 00:40:38 Yeah.

Pomp: 00:40:39 Let’s stay within bad actors in the investing community. I think the narrative normally.

Meltem: 00:40:45 I don’t want to use bad, right? Bad is a prescriptive word that imbues some sort of judgment. I don’t think it’s bad. People play this game in every market known to man.

Pomp: 00:40:54 Shitcoin waterfall I don’t think is necessarily bad, as long as there’s some understanding of what’s going on.

Meltem: 00:40:59 You set transparency.

Pomp: 00:41:00 Yeah. The bad actor I think is the insider traders, et cetera. Where is that line? Right? Because we’ve got some commodity, some security, some unknowns. What specifically I’m interested in is recently New York Congressman was arrested for insider trading, actual insider trading. Right? How do you think about a traditional established, well-governed market like public equities where obviously people who are in positions of power are coming under scrutiny, arrested, et cetera.

Meltem: 00:41:37 The Tesla example is a great one, right? Did Elon Musk commit some sort of securities fraud by announcing something?

Pomp: 00:41:44 If we took that level of scrutiny and apply it to the crypto markets, what’s the end result? How much of it do you think is actually bad acting? Versus, “Hey, these aren’t securities, they are commodities.” Walk me through how you think that looks if we apply that level of scrutiny to crypto markets.

Meltem: 00:42:03 Okay. First I want to differentiate between two things. There’s the law which are a set of written rules that are enforced by agencies that have teeth, right? They can put you in jail, they can find you. There’s the law. Then there is morality which is very subjective. It’s cultural in nature, right? Something that might be deemed immoral in the U.S. could be moral in China or vice versa or another part of the world. I think separating the law from morality is important here. Legally speaking, the shitcoin waterfall, market manipulation, et cetera, it’s permissible. There is no agency that has come out and said, “Here are disclosure standards, here are reporting standards, here are standards for how you publish research,” that doesn’t exist yet. Legally speaking, what people are doing is permissible under the current state of regulations and the markets they’re operating in. Legally speaking, when there is no threat of enforcement, when there is no threat of going to jail or getting fined or getting removed from the investment community.

Meltem: 00:43:05 There’s no real grit behind these claims people are making and you’re not doIng anything wrong in the eyes of the law so it will continue. Morally speaking, I think that’s where it starts to get interesting. If the premise of crypto is based on moral arguments around fairness, decentralization, these ideals and principles around the democratization of capital, then morally speaking, this behavior is inconsistent with the narrative we’re selling to people. When we’re selling crypto and that incompatibility, that incongruency makes the whole asset class really unappealing. I think the bigger problem is and because there are no regulations and law, the industry itself needs to set a standard. Last year I created my standard for transparency and disclosure. I also wrote a disclosure policy for digital currency group around how we’re going to invest in tokens and announced that and let people know. I disclosed everything I own, every company I have an interest in, every project I advise.

Meltem: 00:44:04 Before I get on a stage, I put it all online. I update it every two weeks to a month. I think the biggest thing is intent. I will speak about certain assets. I’m excited about projects, but it’s important to state to the general market that I have a financial interest in these things. That’s why disclosures exist. Right now it’s voluntary. I would love to see more people practice disclosure. It’s opt in and again, I think the industry can create an environment, particularly the investment community. If we can set an internal code of conduct and if we can sort of raise the bar for how we conduct ourselves on the moral side, not legally or regulatorily. One, it’s going to change the perception of this industry, but two, it’s actually going to impact the regulators and lawmakers because the perception of the industry will change a bit. The question is, are we going to hold people socially accountable for committing fraud or violating that moral code? The problem is there has been no social cost to being a scammer in the crypto space.

Pomp: 00:45:09 Morality is very much driven by those around you.

Meltem: 00:45:13 Absolutely.

Pomp: 00:45:14 The moral rules are unwritten, but they are created and upheld by those in your community, those in your industry, et cetera and so it’s kind of like criminals, right?

Meltem: 00:45:30 Yeah.

Pomp: 00:45:30 They have a code of conduct.

Meltem: 00:45:32 Don’t snitch.

Pomp: 00:45:34 Right? That would be deemed immoral but obviously the things that they’re doing are illegal. Right? Once you get into these communities, and I think what you’re saying is crypto is very different. There’s many, many, many more good actors than bad actors or people who are nefarious or malicious, but it is up to-

Meltem: 00:45:53 So we hope.

Pomp: 00:45:54 That is true, but it is up to the community itself to enforce those moral standards and hold people accountable to some degree for any bad acting, et cetera.

Meltem: 00:46:05 I think the hard part is what I always like to say and I know I’m fairly vocal about my views on things, but I’m not the judge, not the jury. I’m not an executioner. The only thing I can choose is my behavior, right? I have no control over other people and my only goal in what I’m doing and the way I talk about what I’m doing is to just set a standard that feels right for me and I know personally what my values are and how I want to operate. I personally am willing to forego financial return if it violates my personal principles. Not everyone feels that way and that’s fine. I’m not making a judgment as to whether or not they’re a good person or bad person. I think everyone’s incentives are different. I’m trying to point out, I’m trying to use facts and I’m trying to use data driven evidence to demonstrate that a lot of what we’re doing here is not going to help us win hearts and minds.

Meltem: 00:47:02 Really my goal like, is money important? Do I like money? Yes, because it buys me freedom and freedom means I can do and say whatever I want, which I really enjoy but I think freedom also comes with responsibility and I passionately care about bitcoin in particular, but the broader idea of cryptocurrencies and this idea of the democratization of capital, I deeply care about that becoming a reality. If those two things are true, then for me it creates a responsibility. I’ve chosen to act on that personal sense of responsibility I feel. I think there are other people in the community who are doing that. I’d love to see that type of leadership come from the investment community but I think unfortunately, the investment community, you know, the reason people give you capital is to earn a return.

Meltem: 00:47:49 Until we start to see intent and purpose align with capital formation, it’s difficult and I don’t begrudge anyone because like, look, that’s your job, you can’t go to your investors and say, “ Hey, yeah, we didn’t dump this token at 50x because, you know, hashtag morals.” Arguably, you’re violating your fiduciary responsibility to your investors. It’s a sticky problem. It’s a thorny problem. I just think talking about it and experimenting with it a little bit could be helpful for us.

Pomp: 00:48:18 Absolutely. No, I think that makes sense. All right, let’s go back to the lighter side of crypto and get out of the dark side.

Meltem: 00:48:23 Can we do favorite shitcoins?

Pomp: 00:48:26 Before we get there, I’m going to ask you a couple of questions and be as honest and controversial as you want.

Meltem: 00:48:34 I’m so shy though. I’m so afraid of expressing my opinions, Pomp.

Pomp: 00:48:39 What is the most controversial thing that you believe is true that you think the highest number of people would disagree with you on an industry?

Meltem: 00:48:51 How many enemies do I want to make today? How many death threats do I want to get today? Let’s see. Okay.

Pomp: 00:49:02 The best part about this question is people know what their controversial thoughts are and so you already know the top two or three things you want to say. Just say number one.

Meltem: 00:49:10 I’m trying to pick between the top two. Okay. Number one is this, I think there is actually less than 0% chance that bitcoin will not succeed.

Pomp: 00:49:19 Interesting. Explain.

Meltem: 00:49:22 I love bitcoin. There’s so many things about bitcoin that are just beautiful and just so incredibly well-designed and Satoshi was just brilliant and not just in its technical design but the social design, the messaging around it, the political design. There’s so many things about bitcoin that are really elegant and really interesting, like fundamentally innovative and that they challenged long held assumptions about how humans can collaborate to get something done, which I think is really interesting. I think the hard part with bitcoin, I spent a lot of time in the bitcoin community from about 2014 to 2017 and decentralization is one of these things that’s appealing, but centralization creates efficiency. Decentralization has a really high costs. Then bitcoin decentralization has had a really high social cost.

Meltem: 00:50:21 I think every day that goes by that bitcoin continues to operate in this very unstructured manner is a day that talent flows to other spaces and interest flows to other spaces. The bitcoin community doesn’t necessarily do a great job being communicative. It doesn’t do a great job with the hearts and minds piece. I think the predominant attitude whether right or wrong is bitcoin doesn’t need to change. You need to change, I think that’s unwelcoming and that’s fine but I think that kind of approach and it’s really the ideology and the mindset of the bitcoin community just makes it tough for people to embrace it.

Pomp: 00:51:09 I agree with you that that’s what’s happening. What if they’re not wrong? What if actually part of the beauty of bitcoin is that whether you like it or not, it is a better design.

Meltem: 00:51:22 It absolutely is, right? It’s not a flaw. It’s a feature. I agree with that and I think to a hyper rational person and a thinker who’s been in the space and has the time to really think about it, that works.

Pomp: 00:51:37 People who don’t have the advantages of spending time thinking.

Meltem: 00:51:39 Time, yeah, freedom of thought, and I think that’s the hard part. Again, institutions now getting on the bitcoin bandwagon, if they become the mouthpiece that sells bitcoin to the broader retail and institutional community, they’re going to completely bastardized all those ideas and just steamroll everyone and destroy this beautiful thing we spent 10 years building.

Meltem: 00:52:00 Destroy this beautiful thing we spent ten years building. And so I think either the Bitcoin community takes more ownership of the narrative, or someone else is gonna do it for us.

Pomp: 00:52:10 Yup.

Meltem: 00:52:10 Or gonna try to do it, and I just, I worry about the impact that will have. And that’s the problem though of social coordination right? That’s always been the problem, that’s the fundamental problem, Bitcoin itself with Byzantine fault tolerant consensus mechanism tried to design for and it’s, it’s a very hard problem. Part of it’s related to usability, part of it’s related to just the language we use. Part of it’s related to the relative immaturity of the tools we have to buy, sell, trade, hold, store, learn about Bitcoin.

Pomp: 00:52:42 Absolutely.

Meltem: 00:52:44 But it’s a big problem.

Pomp: 00:52:45 What do you think is the most important company in crypto over the next ten years?

Meltem: 00:52:51 I was having this debate with someone the other day. Look, I think Bitmain has been one of these companies that-

Pomp: 00:52:58 Interesting.

Meltem: 00:52:58 Like, has been so underappreciated and just has silently built an empire. Same thing with Bitfury. We don’t really talk about mining, but like these companies are building next generation not just Bitcoin infrastructure but compute infrastructure.

Pomp: 00:53:11 Absolutely.

Meltem: 00:53:12 And for Blockchain to work at scale, the networking layer has to be really robust which is gonna require a lot of next gen compute infrastructure. And so we see the existing fabs are just starting to get on the ASIC and GPU mining bandwagon.

Pomp: 00:53:26 Absolutely.

Meltem: 00:53:26 But these guys have already been there and so I think that’s, that’s gonna be really interesting to watch that battle. The other company I think is really underappreciated, I mean everyone talks about Binance and how revolutionary Binance is, I actually think people aren’t paying enough attention to platforms like ShapeShift and Abra.

Pomp: 00:53:41 Mm-hmm (affirmative).

Meltem: 00:53:42 And really their mantra is, ‘We want to enable users to transact and invest in trade in a private secure way.’ These noncustodial designs I think are really important to enabling crypto to really spread. If we want to truly create a better financial system, owning your own assets, truly owning your own assets, is really important. And Coinbase and Binance and all of these platforms that facilitate trading, they’ve become central banks. They’ve become-

Pomp: 00:54:09 Absolutely.

Meltem: 00:54:09 Points of failure. So I think companies like Abra and ShapeShift and others in this vein who are enabling trading, holding, storing, where you have full custodial, where you have full control and full discretion over what happens, really critical.

Pomp: 00:54:23 Absolutely. Let’s go back to mining for a second ’cause I think that your point about how undervalued these companies are, right? So the two things that are top of mind for me, Bitmain specifically. So one is, a lot of people in the crypto community when they see success, right? There’s two paths that they can go down. One is either they walk and they, you know, “I made a bunch of money and gonna take it and go enjoy life.” Or the other is they get really, really bold and ambitious, right? And I think that’s what we’re seeing with Bitmain, right?

Meltem: 00:54:50 Sure.

Pomp: 00:54:50 They’re saying, “Look, we’ve had a bunch of success. We’ve been able to drive a bunch of capital.” Right? Their last round they raised I believe that outsiders of the company owned less than 5%. Right?

Meltem: 00:55:01 Yup.

Pomp: 00:55:03 All of a sudden, now they’re talking a little bit more about artificial intelligence, machine learning, compute that is used for non-mining or non-crypto applications.

Meltem: 00:55:14 Yeah.

Pomp: 00:55:14 And it goes back to this idea that, you know, everyone says ‘data’s the new oil’, right? And if data is the new oil-

Meltem: 00:55:20 I threw up in my mouth for everyone listening. When Pomp said that I have like vomit on my lips right now.

Pomp: 00:55:24 Right? So it’s everyone who says that, I always respond with, “If data’s the new oil, computing is the new steel.” Right? Because you actually need the infrastructure to let that whole data driven world exist.

Meltem: 00:55:35 Yeah. Okay. So hold on, let’s talk about this. So I think the most underappreciated layer of the crypto space is the network, network space right?

Pomp: 00:55:45 Okay.

Meltem: 00:55:45 So, we think about ICOs and Tokens, all of the capital formation is happening at the protocol layer, right? Everyone’s like, “Ah protocols, protocols, ah amazing!” And then we see, sorry. And then we see the application layer, right? That’s where the VCs, like traditional VCs are like, “I only do equity.” And they’re investing in applications, and then we see people trying to get around that by doing these app coin things. But no one’s really focusing on that middle layer-

Pomp: 00:56:08 Yup.

Meltem: 00:56:08 That enables protocols and technical design, to get implemented in physical compute space. And we see this because these networks people are building are not robust.

Pomp: 00:56:17 Absolutely.

Meltem: 00:56:17 Like, look at what’s happened with Ethereum, look at what’s happening with EOS, look at like these new networks that are launching. They’re not secure, they’re not robust. And the problem is, is that if we’re gonna live in a world with thousands of block chains, they’re all gonna require expression in physical compute space.

Pomp: 00:56:30 Mm-hmm (affirmative).

Meltem: 00:56:31 And where’s that infrastructure gonna come from? How specialized does it need to be? And then does that actually become the new domain for competition? Because we can easily raise capital at the protocol layer and at the app layer, but at the networking layer there’s an actual physical constraint to implementation, because there’s a limited amount of compute.

Pomp: 00:56:48 Absolutely.

Meltem: 00:56:48 And so to me, investing in compute, and I want to create structured products that offer compute capacity to protocols. Like if you raise money through an ICO for your protocol, you should be buying compute with that money. You should be buying dedicated networking infrastructure that’s resilient and robust, and that is secure, and de-risked, so that your protocol can run in all sorts of adversarial environments.

Pomp: 00:57:10 Well if you think of the compute that’s previously been available, it’s been very CPU heavy, right? Because that’s what the, the networks and the consumer applications, it’s actually required. We’re now moving to a world where a 6 GPUs are becoming much more valuable, and I think you and I have talked about, like, the idea to even go and start to get legacy infrastructure companies under your control and then start swapping the CPUs out for GPUs, ASICs, et cetera. Super interesting. Now-

Meltem: 00:57:37 It’s also really, it’s a cost of production game, right? So if we think about vertical integration, integrating power production with manufacturing, with actually operating the facility right?

Pomp: 00:57:47 Absolutely.

Meltem: 00:57:47 This is the perfect oil and gas example. I spent, you know-

Pomp: 00:57:50 Yup.

Meltem: 00:57:50 Seven years of my career, the start of my life, in building big infrastructure projects that took 20 years to build and cost $20–40 billion.

Pomp: 00:57:57 Yup.

Meltem: 00:57:57 We look at the crypto space, right? If this is truly gonna be a massive industry that’s heavily focused on building new network infrastructure that’s resilient, secure, decentralized, whatever, we need a physical expression of that. That’s infrastructure financing. That’s very different from financing a protocol. That’s structured finance, it’s principal plus interest. And finding new ways to, to, and effectively like infrastructure financing is all about reconciling the mismatch of cash flows, right? You end up using venture cash but you don’t get any in until five, ten years from now?

Pomp: 00:58:28 Yup.

Meltem: 00:58:29 Same thing in the crypto space. Very few people have had the vision and the foresight to understand that that networking space and that physical compute layer is so critical.

Pomp: 00:58:37 Well it’s actually how I got involved in crypto.

Meltem: 00:58:40 Oh wait, this is how you and I became friends.

Pomp: 00:58:44 So, my family’s been in the data center business forever, right? And what I saw was, in the traditional data center business, space, power, hardware, operations, right? In-

Meltem: 00:58:56 And technology by the way.

Pomp: 00:58:56 Yeah, yeah. In mining you have space, power, hardware and operations. It’s just the hardware’s different, right?

Meltem: 00:59:02 Yup.

Pomp: 00:59:02 And the part that got me was, you can drive more yield and take the same amount of risk. And you don’t have to deal with customers.

Meltem: 00:59:12 Well and the yield, but the yield component, that’s because like right now when people bid on compute space-

Pomp: 00:59:17 Yup.

Meltem: 00:59:17 On AWS right? And when they’re doing that, there’s a limited amount of margin you can capture, and really, the amount of margin you can capture is a function of demand, right?

Pomp: 00:59:28 Absolutely.

Meltem: 00:59:28 There’s a supply and demand component. What people don’t recognize is, mining is the same thing but in addition to that supply and demand sort of price point, you also have this inflationary reward in a lot of these protocols right?

Pomp: 00:59:40 Absolutely.

Meltem: 00:59:40 And so I think what people aren’t understanding is the intractable relationship between protocol design and physical compute implementation. And this is where I think the idea of decentralization really isn’t truly possible until we find a way to remove this compute infrastructure constraint. That’s where I think like really, really new ideas around consensus design, so Algoran’s gossip, gossip passing protocol, Chia and SpaceMesh. They’re just very different implementations of proof in space and time. Even I think some of what Filecoin’s thinking about, is really thinking about like, ‘How do you dis-intermediate and decentralize the compute layer?’

Pomp: 01:00:16 Yup.

Meltem: 01:00:17 And to me that’ll be the narrative that dominates crypto from like 2020 til 2025.

Pomp: 01:00:23 Absolutely.

Meltem: 01:00:23 I don’t know. Wild ideas, super fun though. I love, it’s just such, these are such fun thorny problems, and sometimes thinking about them makes me dizzy but, yeah it’s really interesting.

Pomp: 01:00:35 For sure. What do you think it’s gonna take for the “crypto world” to completely blur the line with the non-crypto world, and it’s less about, “Is that a crypto project or not a crypto project?” and it’s just, “Is that something that users are gonna use?”

Meltem: 01:00:50 Yeah. I think we haven’t, this is the really hard part, okay so what I always say is, we’ve figured out how to create crypto assets. We’ve figured out how to distribute them and sell them through these new forms of capital formation. We’ve figured out how to speculate on them, right? Like most of the “infrastructure” or the picks and shovels people are investing in are exchanges, it’s about financial speculation.

Pomp: 01:01:14 Mm-hmm (affirmative).

Meltem: 01:01:15 What we haven’t figured out yet is how to utilize this stuff. And what we haven’t figured out yet is the specificity between previous stake protocol A, previous stake protocol B. Like, what, it’s like a fork right? A fork is a very specific tool that you use for very a specific thing. What’s the specificity for something like Bitcoin versus something like Zcash or Monero or Dash, right? That specificity narrative hasn’t really started to evolve yet because-

Pomp: 01:01:40 Yup.

Meltem: 01:01:40 No one’s really using this stuff. So I wrote this post back in March of 2018 called ‘Drowning in Tokens’ and my whole premise, was that what we’re doing right now, is we’re just pumping out a ton of supply but there’s no demand. There’s artificial demand and speculative demand, but there’s no utility demand. And without a real demand function, you can’t really model growth. And that’s the problem, until we find natural demand for this stuff, it’s very hard to see where the future might go. We can have ideas, but we haven’t seen that many projects reach the mass market and start to eat away at the market share of payments companies, or to generate an entirely new type of demand. We just haven’t seen that yet.

Pomp: 01:02:23 Yup.

Meltem: 01:02:25 And that’s what’s interesting to me, and it goes back to like these concepts that have been around in the business community. Sorry, where I come from for awhile, like adoption curves, the innovation S curve right? It’s really trying to think about, we’re so early, we’re either so early or we’re so late in the adoption curve. I actually don’t know anymore. Like maybe the total addressable market for Bitcoin is really small. Maybe that’s just a reality. And I think in its current iteration, the total addressable for market, market for Bitcoin is actually quite small because it’s too hard to use, right?

Pomp: 01:02:57 Mm-hmm (affirmative).

Meltem: 01:02:57 There are a limited number of people with the competency and the capacity, and frankly the interest, of using it in its current iteration. So then it’s technical innovation but also product innovation that creates a larger addressable market. And I don’t think we’ve really started to think through that yet.

Pomp: 01:03:11 Yup.

Meltem: 01:03:11 People had ideas like, when Earn.com when, back when it was 21, came out with their initial idea, that was a cool idea at the time right?

Pomp: 01:03:18 Mm-hmm (affirmative).

Meltem: 01:03:18 Like I actually thought that that could have been an interesting way to spread at option. And I know that people laugh at the idea of mining with a, a toaster. I think that’s kind of the narrative that stuck, but it was actually a really cool idea. It was just way too early and the form factor, the 21 computer, was way too hard.

Pomp: 01:03:34 Yup.

Meltem: 01:03:34 And I think they realized that and they were like, “This was a great idea but probably like-

Pomp: 01:03:38 Too early.

Meltem: 01:03:38 Ten years too early.” Yeah.

Pomp: 01:03:40 Got it.

Meltem: 01:03:41 Sorry that was a, like, I’m not very good at answering questions. I just ramble.

Pomp: 01:03:45 Listen, you’re speaking your mind I love it. So last question for you, what is the one-

Meltem: 01:03:52 Do I get to ask you questions at the end? Can I do like a rapid fire-

Pomp: 01:03:56 Sure, go ahead.

Meltem: 01:03:56 Three, three questions for Pomp.

Pomp: 01:03:58 All right go.

Meltem: 01:03:59 No, no. Ask me your last question.

Pomp: 01:04:01 What’s the one thing you do on a regular basis, either daily or weekly that you think has done the most to inform your opinion about the space?

Meltem: 01:04:08 Go hang out with non-crypto people. Go to non-crypto events.

Pomp: 01:04:12 Interesting. Any specific types of events or people?

Meltem: 01:04:14 Yeah, I love hanging out in the consumer retail space. Like I think retail’s going through a mass, mass shift. The shift from physical to digital, and digital to virtual is a really interesting one. It’s effectively what we’re trying to do with crypto, right?

Pomp: 01:04:27 Absolutely.

Meltem: 01:04:27 We’re trying to take money from being physical and digital to being truly virtual and virtually native, digitally native. And that’s also happening in the retail space. And so I think it’s really interesting to spend a lot of time in the retail space where everything people do is driven by purpose and brand, right? Like retail’s ‘brand first, execution later’. And everything in crypto is, ‘idea first, brand like never’, and so spending time in the consumer space is really interesting. Spending time in the arts and sort of music space is really interesting, and there are a lot of these really interesting industries that are going through fundamental shifts in how they reach their market and sell and produce and distribute product. And to me it’s really interesting to hang out with people in those communities and to go and, like I don’t go in like, “Let me talk to you about crypto.” Like that’s, I hate that. I have gone to so many events where people are so pedantic.

Pomp: 01:05:20 Yup.

Meltem: 01:05:20 And they’re like, “Let me explain how Bitcoin works.” I’m like, “These people don’t care.” I just like to go in and ask people, I’m like, “How do you go about creating a strong brand? Well what do you think about everyday when you go to work? Like if you were the CMO of one of the world’s largest retail brands, what do you think about? What do you think of crypto? Like, what’s your perception of it?” And what you’ll find is people’s perception of crypto is not that flattering.

Pomp: 01:05:42 Mm-hmm (affirmative).

Meltem: 01:05:42 They’re like, “It’s intriguing, it’s interesting, but it feels real gross. It feels unapproachable, it feels weird.” So to me there’s like this really interesting kind of brand and narrative problem, and so it’s just good to get out of, of the crypto bubble and just go spend time with people. We think about a totally different set of problems that are very analogous to what we’re going through. So I find that fun.

Pomp: 01:06:01 Absolutely. My favorite people in those scenarios are the people who have like their professional perspective, right? And so they’re like, “Oh you know it’s all of the people in the basements.” And, you know bad actors all that stuff. And then as you’re walking away they’re like, “Hey by the way, which coin’s gonna go up?”

Meltem: 01:06:14 Yeah. Tell me what shit coins to [inaudible 01:06:15]. But like, there’s like-

Pomp: 01:06:17 It’s like their personal question on the side.

Meltem: 01:06:19 But block chains don’t change human nature right? Like, what do people want? They want a get rich quick button.

Pomp: 01:06:23 Of course.

Meltem: 01:06:23 You know how Staples has like the red easy button?

Pomp: 01:06:26 Yup.

Meltem: 01:06:26 We all want that money button where you just hit the button and you’re like, “Give me that sweet, sweet cash baby.” So I’m not gonna say what I said earlier, but the flash cash, you know?

Pomp: 01:06:36 Yeah, yeah, yeah.

Meltem: 01:06:37 All, yeah I’m not gonna say that.

Pomp: 01:06:37 Very true.

Meltem: 01:06:39 ’Cause that’s not acceptable on this podcast. I was told to keep it PG. I did not obey. But I think that mentality right? Like inherently, human beings are self interested.

Pomp: 01:06:48 Of course.

Meltem: 01:06:48 What do I want to do? I want to put in the least amount of effort and get the most amount of value out. Crypto is perfect in that way, and that’s why it’s kind of been the perfect the perfect Trojan Horse. Everyone’s like, “Yeah well I can’t really talk about this.” But they’re like, “I want to make money.”

Pomp: 01:07:00 Of course.

Meltem: 01:07:00 “I want to be rich, and I don’t want to do shit to get there.”

Pomp: 01:07:02 It’s a great incentive.

Meltem: 01:07:04 It’s the great American dream.

Pomp: 01:07:05 Yup.

Meltem: 01:07:05 America baby.

Pomp: 01:07:07 I’ll let you ask me one question. What question are you gonna ask?

Meltem: 01:07:10 One?

Pomp: 01:07:11 Three I’d get scared.

Meltem: 01:07:13 Okay, hold on. I want to, question number one. I’m gonna be incendiary because I can be, okay, question number one, you have gone from being fairly unknown in the crypto space; I would say like when I first met you I was like, “Who’s this Pomp guy?” To now people talk about ‘the Pomp’ as though it’s like an adjective, which I love, like kudos to you.

Pomp: 01:07:32 So ridiculous.

Meltem: 01:07:35 So you have engaged in a very effective growth marketing strategy.

Pomp: 01:07:38 Yup.

Meltem: 01:07:38 What’s your thought process there?

Pomp: 01:07:40 So-

Meltem: 01:07:42 The man, the Pomp, tell us more.

Pomp: 01:07:44 One is, I have a very unique advantage in that I’ve worked on growth at large technology companies, right? So I understand how-

Meltem: 01:07:53 You understand the Pomp.

Pomp: 01:07:54 Yeah. I understand how well the algorithms work, et cetera. I think that two is, I’m a huge believer that audience’s currency, right? In terms of, if you have an audience, it doesn’t have to be everyone but if you’re able to find like minded individuals you can use that to your advantage, right?

Meltem: 01:08:13 Yeah.

Pomp: 01:08:13 And for those around you to their advantage as well.

Meltem: 01:08:15 Yeah.

Pomp: 01:08:16 And then I think the third thing is, and I get a lot of shit frankly for this, is, I think that a lot of people in the space are very heavy and very talented on the technology side, and so they tend to be-

Meltem: 01:08:28 Or the think they are.

Pomp: 01:08:30 Well, but they tend to be-

Meltem: 01:08:31 There’s a lot of pseudo intellectual bullshit that gets said where I’m like-

Pomp: 01:08:32 Of course.

Meltem: 01:08:33 “Nah. You’re wrong.”

Pomp: 01:08:34 Well, and I think that’s every industry but probably even more here, right? And so what you get, is you get very like technical jargon. You get like the overly, you know, just kind of heavy conversation and-

Meltem: 01:08:46 With these esoteric explanations, it’s unnecessary.

Pomp: 01:08:47 Yeah.

Meltem: 01:08:47 I’m just like, “Dude, no. Just-

Pomp: 01:08:48 And so when I saw all of this, I said-

Meltem: 01:08:50 Nah.”

Pomp: 01:08:50 You know look, our business it to manage money for investors, right? Mainly institutional investors and help them get access to, what we really think of as the digital age. It’s not even the block chain age, but we think that block chain and crypto currency, Bitcoin, et cetera is like 90, 95% of that today. But I would argue that things like Robinhood or RoboAdvisors, et cetera, all are-

Meltem: 01:09:12 Yeah.

Pomp: 01:09:12 You know, an analogous to this world. And so the one area that I saw that nobody was doing a good job of, or at least not doing it at scale was, ‘Can you take these highly technical concepts and basically boil them down to the simplest form and then share them with an audience?’

Meltem: 01:09:29 Yup.

Pomp: 01:09:29 And so, it’s not really going after our hearts and minds, right? ’Cause I think that’s a piece of it, right?

Meltem: 01:09:34 Yeah.

Pomp: 01:09:34 Is, if you do this successfully you may get some hearts and minds, but really it was just, ‘I’m not smart enough to look at a very technical white paper and understand every single detail.’

Meltem: 01:09:45 Wait, but hold, I want to reject that notion for a minute.

Pomp: 01:09:47 Okay.

Meltem: 01:09:49 I think people in the space are like, “Oh well I’m not technical. Oh I’m not smart enough.” Yes you are. Like growth marketing’s a highly technical field.

Pomp: 01:09:56 It is.

Meltem: 01:09:57 Every field has a technical component to it, and I categorically reject the notion that being technical in a non-engineering field’s not valuable. I think you’re super smart.

Pomp: 01:10:07 Oh no, no, no.

Meltem: 01:10:07 I just gave you a compliment. I don’t like this. I take it back.

Pomp: 01:10:10 Just to clarify, it’s not that I think that non-technical people aren’t valuable. What I think is that, if you sit me in a room and you say, “Hey explain, you know, zero knowledge proofs.” And you bring an engineer in, they’re going to be able to explain it better than I am at a very deep technical level. Now, the difference is-

Meltem: 01:10:26 But that’s what they’re paid to do. That’s their associate.

Pomp: 01:10:27 Exactly. Their audience is other people like them who understand that deep technical language. My audience is very different, and so I think that focusing and understanding, ‘Here’s who I want to talk to’ right? Now here’s, so that’s helpful, I think that that, you know Twitter all that stuff, that’s where a lot of those people are who want that message. Now the flip side of that, right? And the people who detract from that message, are the people who are the deep technical people who are like, “You’re dumb.” Right? Like, “You’re using simple language. You don’t understand it.”

Meltem: 01:10:55 Right.

Pomp: 01:10:55 And so it’s just the, the disconnect between, I’m talking to a different audience, right?

Meltem: 01:11:00 Yeah.

Pomp: 01:11:00 And so, at first when somebody, you know look, the Internet’s a wild place.

Meltem: 01:11:04 I’ve given you shit on Twitter. I give you-

Pomp: 01:11:05 Look-

Meltem: 01:11:05 The Venezuela thing I was like, “I love you but, nah.”

Pomp: 01:11:09 Look we can talk about it, you ready? So-

Meltem: 01:11:11 But do you want to, do you want to lay the context?

Pomp: 01:11:13 Yeah, yeah.

Meltem: 01:11:13 So Pomp, so let me give you my reaction.

Pomp: 01:11:15 Oh this is great.

Meltem: 01:11:15 So Pomp, so we’re gonna, like everyone loves tension, I’m just gonna throw it out there. I dish it, I also take it.

Pomp: 01:11:21 Go. Go, go, go.

Meltem: 01:11:22 Okay, so Pomp put out this Tweet, I think it was like March right?

Pomp: 01:11:25 Yup.

Meltem: 01:11:26 So, Venezuela issued its own crypto currency-

Pomp: 01:11:30 Yup.

Meltem: 01:11:30 Called Petro that was gonna be backed by its petroleum reserves, right? And I like to call them hunger tokens.

Pomp: 01:11:37 Yup.

Meltem: 01:11:37 Which is terrible. It’s like a real, it’s a bad situation all around.

Pomp: 01:11:39 But you have a legitimate reason for describing it that way.

Meltem: 01:11:42 Yes, but I think what, what troubled me is Pomp put out this Tweet and you were like, mister tokenize the world, spread the virus. Which I love, right? Easy, succinct messages. But I do think it, like they rile up the crowd.

Pomp: 01:11:53 Spread the virus sounds way worse than the virus is spreading.

Meltem: 01:11:56 You’re infectious.

Pomp: 01:11:57 Yeah.

Meltem: 01:11:58 I love that. It’s a great compliment slash insult. So Pomp put out this Tweet that said, “The virus is spreading. Like I look at everyone adopting block chain and tokenization. Best example yet, Venezuela creating the Petro.” And what you said, factually was true. But it was a terrible example.

Pomp: 01:12:24 Yup.

Meltem: 01:12:25 And I think again it goes back to like, there are things that are correct technically and then there are things that are correct morally.

Pomp: 01:12:33 Yup.

Meltem: 01:12:33 And my objection wasn’t on the correctness of the statement form a factual perspective, it was the fact that you had a really big audience and the statement form like a moral and subjective perspective was just, it felt like implicit endorsement of something that was subjectively horrific.

Pomp: 01:12:50 Absolutely. Yeah and I think that, you know when you, when you put it in that light, first it was, “Hey I didn’t think that me saying this obviously is me endorsing the Venezuelan government.” Right? And so-

Meltem: 01:13:02 If you thought that like I think we would have lunch in silent [inaudible 01:13:04].

Pomp: 01:13:06 But I think part of it too is, and this is something that, you know, look I think we struggle a lot internally. We talk about, when you’re in an area where experimentation is very important right? There’s going to be people who try things that cross the line or, or push to an edge that you don’t agree with, right?

Meltem: 01:13:21 Yeah.

Pomp: 01:13:21 With that moral line, et cetera. And so it’s, how do you encourage experimentation? How do you speak out against the bad applications of the technology?

Meltem: 01:13:33 So that’s like an expression of, ‘there are no sacred cows.’ Right? Like, there are-

Pomp: 01:13:36 Maybe.

Meltem: 01:13:36 We should be able to experiment with anything and everything even if it pushes the boundaries of what currently is socially acceptable.

Pomp: 01:13:43 Well, so I think that-

Meltem: 01:13:44 Okay.

Pomp: 01:13:44 I think the thing that we struggle with is-

Meltem: 01:13:46 I can kind of buy that.

Pomp: 01:13:47 Well here’s the thing that I think we struggle with is, so there are probably sacred cows, right? What if we actually don’t understand everything well enough yet, to know where those sacred cows are?

Meltem: 01:13:57 Well we don’t know anything.

Pomp: 01:13:58 Right?

Meltem: 01:13:59 That’s really the crux of this conversation, is-

Pomp: 01:14:02 Absolutely.

Meltem: 01:14:02 I know nothing. All I know is that I need to ask better questions and so, and then I need specificity. So people make statements like, “Oh our protocol’s decentralized.” I’m like, “Okay, qualify what decentralized means.” So I just think better questions and like, let’s accept, I agree with that. We don’t, we don’t know what we don’t know.

Pomp: 01:14:20 And here’s the really bad part of Venezuela or even other areas where a lot of technology is being experimented with and, and applied, is actually like, if you looked at their block chain Petro solution versus what they’re doing outside of the block chain space, I think that there would be a really deep, you know kind of emotional argument that people would have on either side as to which one was worse. Right?

Meltem: 01:14:44 Yeah.

Pomp: 01:14:44 Which is, almost gets you down in to, now you’re not just talking about technology. Now you’re talking about, you know, human rights, sociology, psychology, power, government.

Meltem: 01:14:52 But they’re intimately intertwined. And this is, so-

Pomp: 01:14:54 Absolutely.

Meltem: 01:14:54 One final plug, ’cause I know we’re getting really long here. This is why representation on teams that are building technology matters.

Pomp: 01:15:03 Completely agree.

Meltem: 01:15:03 The technology I use today, was largely designed by people who don’t look like me who are not like me.

Pomp: 01:15:10 Yup.

Meltem: 01:15:10 And the problem is, is if we’re going to fundamentally disrupt money, it can’t be a room of people who all look, think, feel the same. It was to be representative of the people, the 7 billion people, soon to be 9 billion people who are going to use it. And that is the fundamental problem, is how we design technology impacts how it gets used.

Pomp: 01:15:32 Absolutely.

Meltem: 01:15:32 And there are material, social, political, economic, and moral implications. And this is the problem with the tradition where like, ‘I want to blow shit up because I’m tired with the existing power structure because it does not serve me or people who look like me.’ And it’s 2018, the fact that we’re fucking celebrating that women can be GPs at venture funds is pathetic. It’s so like, people are like, “Oh let’s congratulate ourselves. First female GP.” I’m like, “It’s 2018. We’ve had female presidents in almost every country except America. Like, let’s get with it. We’re sad, we’re pathetic as an economy.”

Pomp: 01:16:08 And the part that always, you know, when it comes to, so-

Meltem: 01:16:10 That shit is sad.

Pomp: 01:16:11 So the female argument, right? The immigrant argument, et cetera, the part that I always have a disconnect with people is, it’s data. Data proves that it is actually true, if you have a more diverse team, right? And I forget all the data points but it’s like, if there’s a female on a public board for example, the company performs better.

Meltem: 01:16:31 Performs better, yeah.

Pomp: 01:16:31 Right? If, you know and you just go-

Meltem: 01:16:32 But then people are like, “Oh diversity, it’s so hard.” I’m like, “You hire someone who has a vagina. Like step one, hire someone with a vagina. Step two, give them authority. Step three, give them capital.” Like, it’s a three step solution.

Pomp: 01:16:47 There goes the PG rating.

Meltem: 01:16:50 Jesus. I, or I should say Buddha. This might be offensive. It’s like, I feel like I’m taking crazy pills because I always talk to people they’re like, “It’s so hard. It’s so difficult. Like, how do we change the, the problem?” I’m like, “It’s a three step solution.”

Pomp: 01:17:06 Absolutely.

Meltem: 01:17:06 Find people and hire them, one. Two, give them authority and real power. Three, give them money.

Pomp: 01:17:12 Yup.

Meltem: 01:17:12 I don’t know, that’s like, that’s pretty simple.

Pomp: 01:17:15 Straightforward.

Meltem: 01:17:16 But look, what do I know? I’m just a crypto person.

Pomp: 01:17:20 Yeah. We will end there because I think that is, that is the general feeling if you spend time in the crypto world and with, you know, traditional asset managing, et cetera, is, you know the world as we know it going forward I think is gonna look different, it’s just trying to figure out what it, what is it actually going to end up being?

Meltem: 01:17:37 And that’s the fun part.

Pomp: 01:17:38 Absolutely. All right thank-

Meltem: 01:17:39 I’ll see you on the flip side.

Pomp: 01:17:39 Thank, thank you so much for doing this.

Meltem: 01:17:42 Thanks Pomp.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Meltem Demirors

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Anthony Pompliano

Written by

Founder & Partner - Morgan Creek Digital Assets. They call me Pomp.