Some thoughts from the Multicoin Summit (10/2018, NYC)

This post originally appeared on Token Economy.

This Wednesday, about a hundred people came together in New York for the Multicoin Summit. As usual, the team brought together some stellar people to — in Tushar’s words — “debate the hardest questions we could find.”

Given the nature of the event, we (David and Ha) at Cambrial Capital met an investment-side heavy mix of people — some of our favourite crypto funds, a ton of individual investors with varying degrees of familiarity in the space but all with some pretty fascinating backgrounds, some crypto projects, liquidity providers, family offices, and a couple university endowments actively thinking about how to allocate to the space.

Here’s a writeup of our favourite takeaways.

On Portfolio Construction in Crypto Assets

Fred Wilson (Union Square Ventures) & Tushar Jain (Multicoin Capital)

USV update their investment thesis semi-regularly. The latest iteration is the third in 15 years, and came out earlier this year. While the focus has always been on networks, this is the first time protocols are mentioned. But getting there wasn’t easy. As Fred said…

Joel joined USV 5–6 years ago as an analyst, one of the first thing he said to us was “we should buy Ethereum”. I told him no — our LPs can buy Ethereum. We get paid to give our LPs access to things they can’t otherwise get into. And Joel’s response was “they can… but they won’t”. Of course they didn’t, we didn’t, and we should have. And what we learned the hard way from that is that it’s challenging to bring early-stage VC perspective to the sector. This is super early-stage technology, but there’s a ton of things about the space that don’t fit into what we do: governance is different or non-existent (and split between team-governance and network-governance); there’s no board to sit on; you can invest in competing networks; it’s far from obvious that the decentralised compute space will see winner-take-most dynamics…

Thinking about portfolio construction in this space isn’t easy, and especially when you’re USV, who’ve made only about 80 investments in 15 years. USV’s answer has been to invest in six crypto funds (including Multicoin). Meanwhile, Tushar’s take on their portfolio construction revolves around investing in the those protocols that are the best at something, and as we get new information — we rebalance. This fits in well with their ‘scalability-trilemma’ focussed post.

Looking at USV’s aggregated portfolio on a look-through basis they’ve pulled together a pretty awesome group of investments while leaving the actual portfolio construction to the crypto funds they invest in.

The lesson here seems to be that crypto really is a distinct asset class from an investment perspective, and if USV doesn’t feel comfortable building that portfolio themselves it should give every other generalist VC in the space pause before taking the leap.

Other takeaways-from & thoughts-about the conversation:

• Fred spoke … erm… ‘passionately’ about Ethereum’s governance model. We’ll wait for the video to come out as we’re not sure what they’re willing to share publicly, but the main trust was that if Ethereum was run more like a company (more like an EOS model), they’d be absolutely crushing it. He asked: We have shareholders meetings but no tokenholders meetings
  We weren’t quite sure what to make of this. I (David) tend to think small focussed teams with everything to lose often ship better and faster than decentralised ones, but I’m just not sure that’s the right model for open-source cryptographically-enabled networks. These are different beasts.
• When designing networks, try to think of which role certain central nodes play and how to incentivise them, because some nodes will always be more vital to a network than others (and not just in DPoS).
• The decision process around whether to put features into layer 1 vs layer 2 is analogous to first choosing the right models and afterward tuning the hyperparameters in ML.
• Fred mentioned in passing the absence of activist investors in crypto markets… something we’re thinking a lot about too.
  We’re convinced we’re going to see both ‘corporate-raider’ activists (i.e. Carl Icahn) and the ‘fundamental-value’ activists (Jeff Uben @ Valueact, Dan Loeb @ Third Point) in this space one day.

The State of the Web3 Stack

Kyle Samani (Multicoin Capital), Katherine Wu (Messari), Jack O’Holleran(Skale Labs) & Tony Sheng (Decentraland)

“This space is never going to scale if every startup needs to hire a cryptographer” — Tony.

• General thesis: Web3 allows consumers to be self-sovereign.
• Jack: ‘This is going to be a three-year overnight success”. It’s building and building and we’re going to see the effects hit all at once, much like what the ERC20 spec did.
• Tony noted that the ratio between building infrastructure vs product has significantly changed over the last 12 months for them. Only in the last quarter have they started spending less than half the time building infra.
• Interoperability between Web3 technologies and Web2 technologies needs to be kept in mind. Jack speaks of Web2.5 in that context.
• Katherine: You can’t move fast and break things when building important public infrastructure and raising millions from non-professional investors. Buidlers need to buidl responsibly.
• The challenge with cryptonetworks is that you’re trying to solve for fundamental human behaviours when thinking about token governance. These are soft, fuzzy, non-deterministic type problems.
• Jack believes that production-ready layer 2 technologies will accelerate development by freeing up the 20% of engineering resources out there that are currently focused on silo’d work on solving for their own infrastructure & scalability issues.
• Tony: What’s missing is not scalability but onramps. The current TAM of Dapp users is extremely small.
• Kyle: We’ll have 1.0 versions of a lot of the Web3 stack coming out in the next 12 months.

The Great Stablecoin Debate

Vishal Gupta (Circle), Nevin Freeman (Reserve) & Steve Becker (MakerDAO)

“If this works, we’ll see the separation of money and state.” — Nevin.

• Nevin: You can split up use cases for stablecoins between predictable and non-predictable. We only think of predictables right now (of course) which includes substitutes for high-inflationary fiat currencies and trading, hedging, payments, lending etc.
• Nevin: There are 16 countries right now with unstable currencies.
  Unrelated: We hear the BIS are working on a paper addressing the appropriateness of stablecoins in countries unable to maintain stable monetary regimes. A significant evolution from their position just 6mo ago.
• On maintaining pegs: Steve pointed out stablecoins basically swap volatility risk for blow-up risk. The big risks are all systemic: court orders, hacks, a botched ETH fork etc. Spreads from the peg represent risk premia.
• Tushar: “I see stablecoins as a way to bring the USD to the rest of the world”.
  A very American sentiment, please come visit ROW 😂. Adoption of a collateralised stablecoin can be thought of as opting in into the monetary policy of a different social group.
• Tushar: There’s a design tradeoff trilemma (yes another one) in the stablecoin design space: Decentralisation; Collateralisation; Capital efficiency / scalability. He suggested none of the projects solved all three… they all disagreed 😂.
  But we think Tushar hit the nail on the head. E.g. Maker is decentralised and collateralised, but the desire for leverage rather than the lay demand for DAI is what drives supply…
• Each type of collateralisation comes with its own challenges: Fiat = brittle onramps; Crypto = volatility; Non-collateralised = you’re relying on having an ever-increasing army of arbitrageurs (given the growing monetary base — see this excellent debate).
• “Building stablecoins comes with enormous social responsibility”.
  I can’t remember who said this but I can’t agree more. There are stablecoin mechanisms out there that are going to break, and ordinary people will have put their savings into them not to speculate but to store value / transact, and you can be damn sure that regulators are going to take a keen interest in protecting them.
• If pegs break it’s worse than if no one adopted the stablecoin in first place (similar to Tony’s argument about being semi-private)
• Privacy is going to be a real issue for stablecoins. On the one hand, it’s extremely troubling from an AML perspective. A couple years from now this is going to be a trivial feature to add… therefore some projects will. See above point on social responsibility.

On Aggregation Theory and Thin Protocols

Kyle Samani (Multicoin Capital), Joey Krug (Pantera Capital) & Jesse Walden(a16zcrypto)

“As far as I can tell, liquidity is the only moat in crypto. In Augur, the canonical smart contracts benefit from pooled liquidity, which protects them”. — Joey

• Jesse: A way of thinking how much value is captured is to think how much of the important state is stored in the protocol, making it truly stateful. If not much important state is stored, it can be rather seen as a library which captures less value…
• … we are always thinking: “is this protocol a stateful network or a library?”.
  👌. Maker vs. Zeppelin.
• Jesse: Where there are stateful smart contracts, there are real network effects (in the form of liquidity, security, and oracles).
• In the future, each individual market will be a sidechain of a rootchain that stores state.
• Joey: If networks already operate at their marginal cost there is no incentive to fork.
• It’s difficult to directly map how governance on the base layer captures value created on the layers on top.
  This reminds us of Bill Gates’ famous definition of a platform as being defined as something that creates more value than it captures.
• The panel generally discussed a lot about how 0x and Augur capture value or not, revolving around liquidity, statefulness, and governance.

Zero Knowledge Proofs: Mind Bending Tech That’s Going To Change The World

Evan Shapiro (Coda) & Uri Kolodny (Starkware) & Kyle Samani (Multicoin Capital) & Josh Swihart (Zcash Company)

“The remarkable thing about cryptography is that at the heart of the matter there is faith, not logic. In hash functions we have no formal proof that they are provably ‘hard’, that is to say that given the output of a hash function it’s very hard to compute the inputs of that function. Never forget that old, simple and battle-hardened cryptography is the only thing you can rely on when building valuable public networks.” — Uri

• Josh: Basically, privacy in crypto doesn’t exist (currently, <1% of Zcash transactions are “Shielded to Shielded”).
• There is a lot of work to do with regulators about why this is important and why it’s not just about money laundering and black markets.
• Uri: Starkware is working on regulated privacy which means you can e.g. proof that both parties did KYC/AML without disclosing who transacted how much.
• We need to start thinking of blockchains as extremely expensive real estate.
• Zero knowledge technology allows for scalability through computational integrity. Zks allow for proof of computation, which allows for far better federation of work. You can take all of the computation off-chain, parallelise it, and get to AWS-type loads.
• Other uses of zks beyond private transactions and proof of computation: proof of solvency for an exchange (instead of bringing in a trusted auditor and exposing valuable information — Bitfinex take note!). Also you can imagine an insurance company or fractional reserve bank posting a proof that they haven’t exceeded risk thresholds in real time. The basic idea here is to reveal the necessary information and nothing else.
• Zcash plans to make privacy standard and not optional by deprecating the option of not shielding over the mid term
• On last-mile anonymity: Josh posited that KYC and AML should live on the fiat on-ramps and this will be sufficient.
  We’re not convinced that works in a world where a material portion of the economy exists and is transacted in these networks.

The Evolving Role of Crypto Investors

Tushar Jain (Multicoin Capital), Josh Nussbaum (Compound VC), Ari Paul(Blocktower Capital) & Alex Felix (Coinfund) & Shane Molidor (FBG One)

• A difference of crypto vs venture investments is you need to take into account global competition from day 1. The investor shall act as global eyes & ears
• Crypto investors can help to bootstrap a network from the supply and/or demand side by participating as a node in cryptonetworks. From a strategic point of view, you help your investments gain traction earlier on. Financially, by participating in appropriately incentivised networks from day 1 you earn tokens and reduce your blended cost of ownership.
  We’ve been diving deep on Generalised Mining (the bucket this fits into). It’s fascinating and we’re hosting a meetup in Prague this week on the subject with our friends at CoinFund — come to the meetup or tune in to the live-stream, most of the best minds in the world on this subject will be there! We’re excited!
• Investors need to help not only by coaching re soft skills (mentorship, how to build an organisation etc) but also with hard skills = situational expertise.
• Different ways of thinking about network level vs. team level governance, community management to avoid forking.

The final talk was a surprise session with Steven Kokinos from Algorand to talk about Streamlining the Financial System. Our main takeaway was that some things require verification while some require computation and that most current smart contract platforms aren’t being judicious about separating out the two and are wasting a lot of computation in their VMs. Ties in nicely with the Web3 discussion.

If the last Summit is anything to go by, Multicoin will be releasing many of the sessions as episodes on their podcast. Make sure to subscribe!

Finally, feel free to connect with us online or offline at our meetups if you’d like to dive deeper into these topics.

A big thank you goes to the Multicoin team. They put together an amazing event for which people from all over the world came to New York. We really enjoyed being part of it and are looking forward to the next one!

David and Ha from Cambrial