Podcast Summary
Exploring the crypto landscape with Paxos APIs: Paxos offers businesses APIs to easily integrate crypto buying, selling, transferring, and more. The crypto market's potential value and hypotheses for its growth continue to be debated, with store value and platform hypotheses being popular.
The crypto market is evolving, and fintechs and banks are starting to offer crypto features to their customers. Paxos, a trusted infrastructure provider for crypto and blockchain, offers an easy solution for businesses to integrate crypto buying, selling, transferring, and more with their APIs. The path to massive network values in crypto, such as $10 trillion, can be debated among crypto enthusiasts. One hypothesis is the store value hypothesis, which emphasizes the need for a secure, self-sovereign, censorship-resistant, and globally accessible digital currency with a fixed or predictable supply. Bitcoin is often associated with this hypothesis. However, other hypotheses, such as the platform hypothesis, emphasize the importance of network effects and the potential for smart contract platforms to become the backbone of various industries. Ultimately, the crypto landscape is full of possibilities, and it's essential for investors to stay informed and consider various hypotheses when making investment decisions.
Crypto Value Debate: Store of Value vs Utility: The crypto world debates whether a cryptocurrency's value comes from its stability as a long-term investment (store of value) or its usefulness and adoption (utility). Bitcoin and Ethereum represent these hypotheses.
The debate in the crypto world revolves around two primary hypotheses for the value of cryptocurrencies: the store of value hypothesis, which argues that a cryptocurrency's value comes from its ability to function as a stable, long-term investment, and the utility hypothesis, which asserts that a cryptocurrency's value comes from its usefulness and the number of people using it. Bitcoin is often seen as the prime example of the store of value hypothesis, while Ethereum represents the utility hypothesis. The store of value hypothesis argues that a cryptocurrency should have a low velocity, meaning it turns over fewer times per year, making it more valuable. On the other hand, the utility hypothesis suggests that a cryptocurrency with high velocity, meaning it's used frequently, can still have value, even if that value doesn't reside in the cryptocurrency itself but rather in the ecosystem built around it. Ultimately, it's unclear which hypothesis will prevail, and it may depend on the specific use case and adoption of each cryptocurrency.
Ethereum's Limitations Hindering Widespread Adoption: Ethereum's focus on decentralization limits its throughput and latency, making it less suitable for dynamic applications. Potential Ethereum competitors prioritize performance and scalability to better serve use cases, and the most useful assets will capture the most long-term value.
While the utility of cryptocurrencies like Ethereum is gaining traction, the limitations of existing platforms like Ethereum are hindering their widespread adoption. The speaker argues that Ethereum's focus on decentralization comes at the cost of low throughput and high latency, making it more suitable for store of value than for global, dynamic applications. The speaker is bullish on the crypto market as a whole but is intellectually short on Bitcoin due to its limited utility. He sees potential in Ethereum competitors like EOS, Dfinity, Tezos, Cadena, and Solana, which prioritize performance and scalability to better serve use cases. Ultimately, the speaker believes that the most useful assets will capture the most long-term value as the market evolves and global asset flows into crypto.
Ethereum vs EOS: Different Approaches to Building Decentralized Applications: Ethereum focuses on decentralization, while EOS prioritizes usability through centralization. EOS offers increased transaction throughput, reduced latency, and no transaction costs, making it more accessible to end users.
Ethereum and EOS represent different approaches to building decentralized applications. Ethereum focuses on decentralization, while EOS prioritizes usability through centralization. EOS's centralized approach allows for increased transaction throughput and reduced latency, making the system more accessible to end users. EOS also imposes no transaction cost on users, which is a significant advantage. These platforms, along with others, are competing with Ethereum to explore the vast design space opened up by smart contracts and crypto assets. This design space enables new creative outlets and solutions that are uniquely enabled by blockchain technology. The removal of intermediaries and the ability to coordinate in large, flexible ways through smart contracts is a major breakthrough, opening up a new design space that has never existed before. This design space was last significantly expanded with the advent of publicly traded corporations.
New business designs enabled by publicly traded corporations and cryptocurrency: Cryptocurrency and publicly traded corporations open up new design spaces for businesses, enabling the creation of decentralized prediction markets and social media platforms, among others.
The invention of publicly traded corporations and the concept of limited liability opened up a new design space for businesses, enabling the creation of new businesses that didn't exist before. A great example of this is Augur, a decentralized prediction market platform. Augur allows for the creation of a decentralized prediction market using smart contracts, eliminating the need for a central party to mediate bets. However, to ensure the accuracy of results, Augur relies on a system of token holders to mediate disputes. This system incentivizes truthful reporting and prevents global coordination among millions of people to manipulate the outcome. Augur is launching soon and represents a new design space for interaction models enabled by cryptocurrency, including prediction markets for various industries and hedging risks. Another hypothetical example is a decentralized social media platform, where users have control over their data and interactions, creating a new business model and user experience. These are just a few examples of the innovative design spaces made possible by the unique properties of blockchain technology and cryptocurrency.
Decentralized social media with shared database: A decentralized social media platform with a shared database could lead to innovative technologies in gaming and social interaction, potentially becoming a global digital money with significant value from its use as money, while ensuring no single entity controls access.
The concept of a decentralized social media platform with a shared database that can be accessed and modified by multiple applications could lead to innovative and valuable emergent technologies, particularly in the areas of gaming and social interaction. This idea has the potential to create significant value for users and investors, as it offers a new design space for developers to build on and could eventually become a global digital money or monies not controlled by governments. The value of such a platform comes from its use as money, as people will provide goods and services in exchange for access to it. The decentralized nature of this platform also ensures that no single entity controls read and write access, allowing for greater innovation and potential value creation. However, it's important to note that there are challenges to be addressed, such as identity verification and privacy concerns, which will need to be addressed in order for this concept to reach its full potential.
Designing economic incentives into smart contract platforms: Smart contract platforms intentionally create economic incentives to increase token value through network usage and resource allocation. Network effects, represented by n log n, drive token worth by reflecting diminishing returns of adding new users.
Developers of smart contract platforms are intentionally designing economic incentives into their base layer protocols to increase the "moneyness" of their tokens. Two examples given were Ethereum, where ether is used to pay for gas on the network, and EOS, where token ownership grants network resources. The strength of network effects, a key driver of cryptocurrency value, was discussed, with Metcalfe's Law being a common but misleading model. A more accurate representation is n log n, which reflects the diminishing returns of adding new users as networks grow. This explains why it's challenging for new networks to compete with established ones. Overall, the economic models of smart contract platforms and the network effects they generate contribute to the "moneyness" of their tokens.
Network effects often follow an S-curve or logarithmic growth pattern: Early adoption provides significant value, but the value of each additional user decreases as the user base grows. Liquidity network effects, particularly relevant to stores of value, increase logarithmically but marginal gains decrease rapidly.
Network effects, which describe the value derived from the number of users interacting on a platform, often follow an S-curve or logarithmic growth pattern. This means that while there is significant value in early adoption, the value of each additional user decreases as the user base grows. A notable example of this is the market for messaging apps, where multiple large players exist due to the diminishing returns of adding new users. Another type of network effect to consider is the impact of liquidity, which is particularly relevant to stores of value like gold or digital currencies. In these cases, the value of liquidity increases logarithmically from inception, but the marginal gains decrease rapidly as the market becomes more saturated. For Bitcoin, if it becomes digital gold, the network effect is expected to be relatively weak due to its logarithmic growth. However, if it becomes digital cash, the potential for exponential growth could make it more valuable. Currently, less than 1% of the world population uses crypto, so the potential for explosive growth is still significant.
Emphasizing the importance of network effects and digital store of value for crypto assets: To invest in crypto assets, consider their potential for strong network effects and their role as uncensorable, unseasonable digital stores of value. Evaluate specific projects based on their utility and economic design, focusing on latency, throughput, and censorship resistance.
Having a strong network effect is crucial for the long-term success and defensibility of a crypto asset. When convincing institutional investors who are not yet invested in crypto, it's important to emphasize the demand for uncensorable, unseasonable wealth and the potential role of crypto assets, such as Bitcoin, as a digital store of value. However, it's also essential to consider the utility aspect and the economic design of the asset. When evaluating specific projects, dimensions such as latency, throughput, and censorship resistance are important considerations. However, the weight given to each dimension can vary depending on the specific project and its potential use case. It's also important to note that the current market cap of crypto assets is small compared to the total addressable market, and trying to time the market is not an easy exercise. Instead, averaging in over time is recommended for investors who are not full-time. In summary, the key takeaway is that the potential for strong network effects, combined with the unique properties of crypto assets as digital stores of value and utility tokens, make them an attractive investment opportunity for those who are open to the new asset class. However, careful evaluation and consideration of the specific project's dimensions and potential use case are crucial for making informed investment decisions.
Trade-offs in open-source blockchain assets: Decentralization vs centralization and expressiveness: Identifying an asset's place in the multidimensional trade-off space of decentralization, centralization, and expressiveness, and assessing its probability of capturing value based on market pricing.
In the world of open-source blockchain assets, the focus shifts from unique features to trade-offs that cannot be copied. Centralization versus decentralization is one such trade-off, with Ethereum and EOS being examples of different choices. While Ethereum prioritizes decentralization, EOS offers a more centralized approach with limited block producers. Another dimension of trade-offs is the expressiveness of the language used to control assets, ranging from limited functionality like Bitcoin to full Turing completeness like Ethereum. Our investment approach involves identifying an asset's place in this multidimensional trade-off space and assessing the probability of that spot capturing value. Market pricing also plays a crucial role in our investment decisions. While some value may accrue in the completely decentralized and inflexible areas, there are other spots in this trade-off space where value could also emerge.
Considering technical and social aspects in crypto investments: Effective marketing and go-to-market strategies, as well as a well-rounded team, are crucial for crypto projects to gain widespread adoption among consumers.
When evaluating potential investments in the crypto space, it's crucial to consider both the technical aspects, such as user-friendly tools for developers and producers, and the social aspects, like effective marketing and storytelling. These elements are essential for bringing a product to market and gaining widespread adoption among consumers. The team at Multicoin Capital, with a background in enterprise software, emphasizes the importance of go-to-market strategies and values teams with a well-rounded skillset beyond just technical expertise. They often debate topics like Bitcoin and the Lightning Network, with differing opinions on its potential to solve scaling issues and become accessible to the masses. Ultimately, their firm thrives on open debates and making informed decisions based on well-backed arguments.
Potential Irrelevance of Traditional Blockchains with Zero-Knowledge Proofs: Zero-knowledge proofs could enable digital asset validation with fewer nodes, challenging the need for decentralized networks as we know them.
The concept of blockchains as we know them today, with their focus on decentralization and social scalability through technical inefficiency, may become irrelevant in the future due to advancements in zero-knowledge proof systems. These proofs allow for computations to be verified without revealing the input or function, potentially making it possible to validate transactions and maintain a digital asset's integrity with fewer replicated nodes. However, this development doesn't directly impact the supply schedule or inflation of a digital asset but rather the role of those who maintain the network. This is a complex and evolving area of research that could significantly change the way we view and use digital assets.
Trusted Computing in Decentralized Systems: Decentralized systems like Bitcoin and Ethereum offer scalability and security through trusted computing, where a few trusted entities ensure network function and provide proof of protocol compliance.
The future of finance and technology lies in decentralized systems like Bitcoin and Ethereum, where a small number of trusted entities can ensure the scalability and throughput of the network while providing mathematical proof that no one has violated the protocol. This concept, known as "trusted computing," offers the benefits of centralization while maintaining the security and transparency of decentralization. A compelling trend in this space is the smart contract platform wars, where well-funded teams believe they are building technologies worth trillions of dollars. Examples of infrastructure primitives that will expand the utility of these platforms include Augur for global prediction markets and tokenized securities, which can create new financial products and expand the design space for developers.
Exploring the Future of Crypto: Infrastructure, History, and Community: The crypto industry is growing, but requires more time for mass adoption and user experience improvement. Focus on infrastructure for future growth, follow resources like the Nakamoto Institute and Token Economy, engage on Twitter, and utilize tools like Crypto Canon and 16z's list.
The crypto industry is still in its early stages and requires more time for mass adoption and user experience improvement. The speaker is most excited about the infrastructure layer that will enable this growth. He recommends resources such as the Nakamoto Institute for those interested in the history of crypto and the Token Economy website for general ecosystem information. The speaker also suggests following him on Twitter for real-time conversations in the industry. A kind act that stood out to the speaker was when his apartment manager went above and beyond to help him during a flooding incident. The crypto journey takes time and dedication, and resources like Crypto Canon and 16z's list can be valuable tools for investors and developers alike. Twitter is also a crucial platform for engaging in crypto conversations, despite the noise and real-time nature of the platform.
Appreciating the little things in life: A visit home reminded the speaker of the joy in simple moments and encouraged listeners to explore new ideas and broaden their horizons.
Simple moments in life, like being covered in a blanket by your mom and cuddling with a small pet, can bring immense joy and happiness. The speaker, who was initially focused on Bitcoin and developer platforms, was reminded of this during a weekend visit home. The experience shifted his perspective and highlighted the importance of appreciating the little things in life. Additionally, the speaker encouraged listeners to explore new ideas and broaden their horizons, as well as to join his book club for monthly reading suggestions at investorfieldguide.com/bookclub. Don't forget to leave a review for the Invest Like the Best podcast on iTunes to help more people discover it. Follow Patrick on Twitter @Patrick_Oshag for more updates.
