Linda Xie talks supporting selective transparency, creating community, and finding Scalar Capital’s edge (Part 1)
Linda Xie is co-founder and managing director at Scalar Capital. Previously she was a product manager at Coinbase and a portfolio risk analyst at AIG. She is also an advisor to 0x.
In your Medium article “How to Join the Digital Currency Industry” you emphasize “join because you believe in the technology.” How did you get into blockchain and what keeps you believing in the technology?
I got interested in Bitcoin in 2011 because I was fascinated by the idea of not having a single entity controlling money. Although Bitcoin wasn’t legitimate in 2011, over time Bitcoin gained credibility with the creation of companies like Coinbase and adoption of the currency by merchants. It was really encouraging to see more and more developers come into the space.
What keeps me excited now is the fact that the crypto space has grown well past Bitcoin. People are now taking the idea of removing a third party/intermediary and minimizing trust involved in a transaction and they’re expanding that to well beyond payments and money. I’m really excited by what’s possible here, especially seeing the sheer amount of development happening in the decentralized finance space with decentralized lending, decentralized derivatives, and stable coins. This is technology we’ve never seen before in an existing financial system. I’ve never been more excited about this space.
At Scalar Capital there’s a strong focus on investment in privacy coins– coins that hide your identity when you make a transaction. Why?
Part of my role at Coinbase when I first started was tracing Bitcoin transactions on the public ledger. If you know someone’s Bitcoin address you can see their entire balance and incoming/outgoing transactions. Bitcoin is too transparent, especially if people want to use it as a store-of-value/payment system. If your address gets revealed, it could affect the fungibility of money. For me, privacy is a really critical piece. It doesn’t mean that you’re doing anything bad, it just means that you choose to hide information from everyone in the world. This mirrors our existing financial system– we don’t broadcast our bank account statements and our credit card statements, and if we go through audits or pay taxes we choose to share our identity, i.e. we have selective transparency. Privacy is a critical component of making sure that money is fungible and that individuals and companies are comfortable spending it. Privacy coins address this issue, and there are certain privacy coins that allow you to stay in compliance with the existing financial system.
What is the distinction between a token investment and an equity investment? What does it mean to invest in either or both?
It’s quite different. When you invest in a token, you’re investing in a protocol or some project that’s open source. You have to figure out how this team is able to create a “moat”– a distinguishing feature– around themselves, whether it be their knowledge of the space, or their strong community, or the fact that they’ve thought through the complexities of regulation. Teams need this moat, because it’s so easy to just copy what they are doing and fork their token away or create a new token that exists with a different team.
Something that I didn’t even think about until I started investing regularly is that when there are valuations and private rounds, token projects are often talking about the entire network valuation. They reference the total token supply that’s ever going to exist and the valuation of it. When you’re looking at traditional equity, there’s multiple rounds and the investors get diluted, so you’re not talking about the total company shares that will ever exist. It’s a very different way of thinking; often token valuations are very high, but you also have to consider that this is often the total supply that’s ever going going to exist.
With the large number of crypto funds being created in the past year, how will funds sustain, especially with the volatility in the market?
There were around 500 crypto funds that came about last year, which was crazy. There were a lot of funds that I don’t think should have started, just because they don’t have a particular edge. There’s a lot of people coming into the space who are focused on getting rich quick, and I’ve seen a number of funds talk about investments they’ve made in low-quality tokens. A lot of new funds with this strategy aren’t sustainable.
There are a lot of trading focused funds, so the volatility is good for them. It depends on what your strategy is. I think the majority of funds are not going to be operational for a while. The strategy I believe that works best in the long run is to pick out the winners of areas like store of value and smart contracts– the ones that are going to be dominant in a few years.
You mention that some funds won’t sustain because they don’t have an “edge.” What is Scalar Capital’s edge?
It’s the understanding, knowledge, and connections that we have in the space. I’ve been working in this industry for five years and following the space for eight years, so I’ve seen cycles within the space and many projects come and go. I have a strong understanding of what makes a crypto asset worth betting on. Not everything that we bet on is going to be a winner, but our goal is to make sure that we have the winners in our bets. My co-founder, Jordan Clifford, is a software engineer, so he has a strong technical perspective. He’s able to actually look at the open source code of projects we consider investing in and vet it, which is extremely important. I know that a lot of people have been sidestepping code reviews, because they either don’t have someone who’s able to do that or they just don’t think that that’s important, but I think that’s a really critical piece of the due diligence process. And the connections that we’ve built up with many of the top developers and people in the space is really important because we find out about projects and are able to invest in them early on. For me, I just love getting to help teams out– doing whatever I can in giving feedback, making intros, recruiting, and getting hands on.
How do crypto startups differ from traditional startups?
The big thing that’s different is the community management because crypto startups have to be so public facing so early on, where as traditional companies can choose to stay private for a long time and they don’t have to deal with the pressure of being public. As the founder, that really sets a different timeline and expectation for what you need to be doing.
Also, if you’re dealing with a token you have to think about how you are compensating the team. You have to deal with this situation where employees might be monitoring that token price pretty regularly. The markets are really irrational and not necessarily reflective of how successful you are, but reflective of speculation. It can be very distracting and discouraging, or even exciting at times when employees are exposed to the ups and downs of the crypto public market. It can be hard on crypto founders. They have to continually emphasize how there needs to be a long-term focus and not let the prices distract the team from what they are building. I found this to be a consistent theme with a lot of the founders that I’ve talked to.
In this article on Medium you state, “there are a number of projects in this space that lack technical merit and that are capitalizing on the large amounts of easy funding in this space.” How do you distinguish between projects that lack technical merit and projects that don’t?
It really depends on the stage of the project. If the project is public, then you can see the open source code quality. I can code but I’m not a software engineer. Even I can look at GitHub and see if a project is really low quality. Distinguishing among the higher quality projects is where I rely on my co-founder– there’s definitely best coding practices that some teams don’t follow, and you can also see the number of developers that are contributing to different projects.
In the private market, often there has been no code written so you have to rely on the technical docs they send, like a white paper or a technical paper. You have to try to get a sense of the architecture of what the team is trying to create. There are some teams where what they claim is actually impossible. When it comes to the higher-quality projects, Jordan meets with the teams and talks to the developers to get a sense of how they think and ask questions, which has been really helpful.
Do most funds do code reviews?
At any long-term focused fund they should definitely be talking to developers, but I’d say only a handful of funds really have that technical expertise. Having the person that truly is able to get into the weeds and understand what’s going on is so important. Some funds have specifically said they don’t think that this expertise is important, but I disagree. They think– and to some extent I agree with this– that if someone is very smart they’ll just bet on them, but you have to dig a little deeper than that. Some people are charming and good about charming their way to the top, and it’s helpful to have someone to catch anything that sounds off technically.
How did you build your community in the crypto space?
Anybody can build up a community. It just takes time. I built it up over a number of years, and it was honestly just reaching out to people on Twitter, attending hackathons around the world, going to meetups, hosting meetups. I co-organized the SF Ethereum Developers Meetup, and I co-organized Coinbase code school for developers. Posting on Twitter and writing blog posts on Medium are great ways to start. I love the space because people are so accessible– they’re really open to helping you. I love that people want to see each other succeed.
Connect with Linda on Twitter @ljxie. Tune in next week to read Part 2 of Linda’s conversation where she discusses her experience at Coinbase and bringing crypto to developing countries!
Write to Roshni Rawal at roshnirawal@berkeley.edu.The she256: Fireside Chats are sponsored by Upscribe.
