Hello everyone, welcome back to On the Brink. Thanks for joining us again. Today we sit down with Kyle Samani, co-founder and managing partner at Multicoin Capital. Most of you or all of you will be familiar with Kyle. Certainly, he's said things I've disagreed with about Bitcoin, and I'm sure the converse is also true, but agreeing with us is not a precondition for appearing on this podcast. Quite the contrary. We welcome spirited debate. Today, we hit a number of topics. We start with Kyle's current outlook for Bitcoin and Ethereum and their near-term prospects. We look back at the calls that Kyle is most proud of and some of the mistakes he's made, and we look back at Multicoin's EOS position and their thinking behind that. Then we move on to web 3, which is really the subject of today's episode: what web 3 actually means to Kyle, how he defines it, and how near we are to web 3 becoming a potentially consumer and functional phenomenon, and what the near-term breakout applications might be. We also look at whether web 3 requires Ethereum to work or whether its future lies with other chains, and Ethereum's relationship with the web 3 thesis and how that's changed over time. I want to thank Kyle for coming on. Let's dive right into it.
Brought down by bad mortgage investments. Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden, people start to worry. So out of this worry, we have something called Bitcoin.
Kyle Samani, thanks so much for coming on. Welcome to the show.
Nick, good to be on. Longtime listener. Good to be here on the show.
I love to hear it. We've butted heads a few times over the years.
We don't see it eye to eye on everything or even maybe like a majority of things, but you know, that's crypto. So we have a lot to talk about. The main general topic for discussion is the concept known as web 3. But before we do that, you always have like interesting and contrarian opinions on Bitcoin and Ethereum. So, I wanted just to get your view on not like price-wise per se, but where you see Bitcoin and maybe also Ethereum in terms of their positioning and their general prospects as networks, especially as a lot of these newer protocols come online.
Yeah. So, very fun question. Let's start off with the most polarizing tribal question just to make this fun.
We'll just throw you in the deep end first thing. Let's do it.
So, I think it's actually easier to start with Ethereum than Bitcoin. Ethereum, like I want to love it. And Ethereum is what made me fall in love with crypto. I was never, I never had like strong libertarian views or had strong opinions about monetary policy and government printing money and all those things. So, Bitcoin kind of never appealed to me. But Ethereum did as this development platform to do cool things. And as it became increasingly clear that financial applications were going to matter, it was very clear to me early on that smart contracts were going to be a very important thing for the future of money and finance. I've become somewhat disillusioned with Ethereum over the last probably 18 months. Just because I disagree with a lot of the kind of long-term technical decisions that have been made in terms of how we're actually going to scale this thing to be meaningful in terms of users and dollars. Although the dollars on Ethereum are somewhat significant. I mean like 10 billion of TVL and there's like three or four billion dollars of loans outstanding. I mean these are real numbers. Now the number of actual users is almost zero. I think the best way to think about that is look at the Uniswap airdrop. There were 250,000 addresses that received UNI tokens from the airdrop. So that tells you that no more than 100,000 people have ever used DeFi. Right, I personally have like four addresses that got those tokens. I'm guessing you probably have one, two, three yourself. Right? It's hard for this math to get over 100,000 users. And I look at gas fees and everything and it's just like we're so many orders of magnitude away in terms of scaling that I've become very disillusioned with how the current Ethereum roadmap is going to get us there. And I've developed a lot more conviction that A, the network effects are not insurmountable because the number of absolute users is so small, and B, that there are much fundamentally better architectures. And I've come to believe both of those things with pretty high conviction.
So your point is that given that it's at most a couple hundred thousand users that are totally taking advantage of all of the block space available and just clogging all the network's resources and kind of reaching exhaustion almost if you look at fees, that requires really significant scaling to support more users.
Yeah. I mean, I think for these systems to really work as we really want them to at global scale, we're off by right now about a million x. Like we're not off by 10 or 100x, we're off by a million x. And if you think about it in that lens, you have to completely throw away all conceptions of what is the current performance and any notion of tweaking the current architecture and you have to go back to the basics and just say okay, how do we just compute more stuff faster? And I don't think the kind of current propositions being discussed are going to get you anywhere even close to a million x.
So I guess you could say we have to throw out incrementalism and start being more revolutionary in how we think about these networks.
Specifically in how to scale computation. Yes.
Now, I feel like your views on Bitcoin have maybe moderated a little bit. I don't know if that's just me speaking optimistically. What's been your personal history in terms of your view of Bitcoin and where does it stand today?
Yeah, so I've definitely gone back and forth on Bitcoin from me being a full smart contract kind of believer to losing a little faith in smart contracts and now kind of appreciating Bitcoin for the simplicity of what it provides. The more I think about Bitcoin, the more I think the fundamentally interesting question for Bitcoin is what's going to happen in like five years or so from now when you've got some sovereign wealth funds or pension funds or whatever and they're like okay, we're going to finally buy these non-sovereign money things whether it's Bitcoin or Ethereum or whatever new layer one it is because it has some cryptographic properties and some monetary properties. Of all of those options that are available, let's say there's going to be three or four potentially main real competitors, Bitcoin is almost certain to have the strongest Lindy effect in terms of just it's the oldest, right, proof of work, it's been around the longest, it'll obviously have those properties, it'll probably have the hardest most simplistic monetary policy of all of these things. But is it going to be 10x better in those fronts or is it going to be like 15% better in those fronts? And I think it's going to be closer to 15% than 10x. And so if you kind of assume that's what that's going to look like, which I think is actually a pretty reasonable assumption. And then you also think like, hey, are one or multiple of these smart contract platform things going to be facilitating trillions of dollars of trading and commerce and whatever all these fun bank widgets and stuff. At some point if you're the no-coiner in 2025 or 2028 who's got to deploy a trillion dollars or hundred billion dollars into these things, where do you put your money and why? And today it feels very easy to say Bitcoin is the only answer and I agree today that's clearly a much better answer. But when smart contract platform X or Y is trading that kind of volume, that's a lot less clear because again, you're getting the same cryptographic properties and you're getting almost all the same monetary properties.
What do you make of the injection of bitcoins into Ethereum with the whole wrapped Bitcoin phenomenon? Some people have said that is kind of demonetizing Ethereum on its own chain by putting this different monetary asset in there. So weirdly it's to the detriment of Bitcoin and then there's obviously the talking point about well Bitcoin can't even support the conveyance of its own units and so it demonstrates Bitcoin's obsolescence as a technical protocol. What's your, or is it just completely irrelevant? What's your attitude to that?
Yeah, so again, if you believe that monetary policy is binary and either it's Bitcoin fixed supply, set in stone 10 years ago and has never been modified, right? But if you're going to take that pretty extremist stance on monetary policy, then Bitcoin being on Ethereum is good for Bitcoin and bad for Ethereum because Ethereum's monetary policy is obviously not as strict as Bitcoin's. I'm not saying strictness is good, but it's just clearly not as strict and that's not really a question. And the same is going to be true for any of the other smart contract platforms as well. They have more governance and they're newer and more people yelling at each other and so their monetary properties are not as good. But now if you look at the other way around and say monetary policy maximalism and the strict fixed supply thing is not binary and it's a feature but not necessarily the only feature. Then I think it kind of lends itself to the other argument which is Bitcoin can't even support itself. It's just going to end up somewhere else and ultimately the other thing over there is going to be more valuable. I tend to lean towards the latter view more than the former. It's okay to be off by one or two or three or even 5% in terms of monetary policy. You don't need that level of precision to provide the world the order that it needs.
What would you say like the single biggest reversal you've had in terms of your attitude to the industry has been? Something you believed was true which you subsequently realized was not the case.
I'd say this is one, this is a piece of advice I share with all of our portfolio CEOs. Which is that the most important feature of a token is its market cap. And I don't mean that in the I want to make money as an investor kind of a way. I mean that in the social legitimacy that having a high market cap provides. It still to this day perplexes me how Chainlink has a $10 billion market cap. Like I don't know who owns all these things. Same with Litecoin. Like pick another many other assets in the top 10. I cannot explain to you where those dollars are, but I know they're real dollars. Like somehow somewhere they're real. But I've also realized that the social legitimacy of being higher on CoinMarketCap is real. People take things seriously because they're higher on CoinMarketCap and CoinGecko and Binance and all those other things. And that is immensely powerful and underrated. And so we really emphasize that to our portfolio companies is you need to be higher on CoinMarketCap. It makes you real.
That's interesting. Yeah. I find myself realizing that a lot of my committed beliefs about this industry end up just being false over time, which I guess is a kind of flexibility you have to have to have any longevity in the industry. I mean, I would say I've noticed from you a certain amount of flexibility or at least open-mindedness, like a willingness to explore new concepts pretty aggressively.
One really big mistake I made early on was I got into Ethereum because of the ideological belief and the power of decentralization and openness, absorbing I'll call it the Bitcoin Ethereum view that the primary metric of decentralization that matters is node count. And the longer I've spent in the space the more I've realized that that is too simplistic and that also that view is a manifestation of an ideology that may have been necessary to get crypto off the ground but doesn't mean that it has to be necessary for crypto to continue to move forward from where it is today. And I'm increasingly of the view that at this point every libertarian on the planet owns Bitcoin. You can't really be a libertarian and not have heard of Bitcoin and not wanted to buy it. All the ideological buyers for these things have been exhausted. And so, to get to the next 10x of growth in market cap, we need buyers who are not ideologically driven. Whether that's open finance or whether that's open software building on a decentralized network or whatever. Or just libertarianism. You need market driven, utilitarian driven buyers. And so I think in a lot of ways the strong ideological beliefs that are the basis for many of these networks are increasingly hindering them.
One thing I remember from one of your old blog posts was this effort to create sincere real valuations of certain tokens. Like I remember an Augur one where you looked at the cash flows that might occur to Augur and you endeavor to devise a valuation of that one and it's kind of like an early attempt to view certain classes of tokens as capital assets. I know this is something that has been hotly debated over the years and I would say today it's interesting that there is a whole genre of tokens that explicitly have cash flows occurring to them and there's actually a few dozen that have maybe fairly material cash flows or at least burns. What do you make of this new kind of class of DeFi tokens with cash flows? I mean, I see people applying a price earnings analysis to them and you look even comparing those multiples to public equity. Do you think that's legitimate? Does this kind of vindicate that attitude of yours or do you find that analysis questionable?
Yeah, I mean something that has cash flows of form is you can run a DCF and identify the yield and people can play a cost of capital game on if they think the asset is overvalued or undervalued. And I believe that is a fundamental law of finance. I don't see a way around it. So I'm excited to see a lot of those capital assets starting to do the things that they said they were going to do. The DeFi community today tends to exaggerate what a lot of those ratios are in pretty intellectually dishonest ways. But they are starting to accrue. I think the biggest actually open question for most of these DeFi things is long-term value capture. I've been kind of poking at this debate online and I usually get kind of yelled at when I bring it up, but it's not clear why Uniswap needs to have a token or why Balancer or those kinds of things. 0x, you know, kind of already went through this life cycle of debate. And I actually have a blog post I started working on a couple days ago. I'll give this the sneak peek preview here on the Castle Island podcast. But basically my theory for the framework I've come up with on how to think about which DeFi tokens can actually capture value are the ones where the token actually has to manage risk in the system. So the easier way to think about that is like Maker versus Uniswap. In Maker, MKR holders are the equity backstop of the system in a very real way. But in Uniswap there's attacks on the system. And it's not really clear that there's a way to evolve that Uniswap protocol in such a way that there's actually any fundamental risk in the system. If you look at Compound, dYdX, those again have clear notions of fundamental risk in the system. So that's kind of the framework I've been thinking about. I think it's intellectually coherent. I think it makes sense, right? Which is just look, if you are the final backstop in the event of some liquidations or some assets being stolen out of the vault or whatever, if you are fundamentally backstopping the system you are effectively the bottom of the capital stack. And therefore you have a right to cash flows out of the system and you can price that risk. I believe that view is coherent and I think we'll start to see the market get there over the next couple years.
So I guess to synthesize that your point is that if you as a Maker holder are constantly bearing that risk of dilution because there's some insolvency in the system, you're more incentivized to make good decisions and participate in governance. And so in theory that leads to a healthier system overall.
Yes. Correct. And in exchange for bearing that risk, people who want to obviously, DAI creators, they have to pay for the cost of leverage, you have to pay to borrow money and so you are justified as an MKR holder of receiving cash flows.
One last one before we get to web 3. So obviously you write a lot and I think that's something people associate with you is a willingness to cover a huge diversity of topics. What of your historical pieces are you kind of happiest with and you think has aged well? And then conversely which one that you kind of wish you could bury in the ashes of history.
So the one I want to bury is easy. That's the long EOS paper we wrote in April of 2018. We were just wrong. We just totally missed the mark on that one. We had a bunch of theories. Most of those theories were just plain wrong. We even laughed at plenty of times for it. We lost plenty of money on EOS. We moved on and it is what it is. But the paper is still on our website. If you dig at Multicoin Capital EOS, you'll find it. We have not taken it down.
Just on that one, have you done a retrospective on EOS at all? Like on any podcasts?
Not on any podcasts, internally. We do a quarterly decision review where we look at kind of decisions over the last three and six month periods and figure out what we did right and wrong. So we have a lot of internal grief and learnings but not in a public setting.
So I don't know maybe just briefly, are there bullets of what you know, places you identified where you went wrong or is it just one of those things that you took a swing and you missed?
So I'd say the most hidden thing that was very non-obvious but that I have a deep appreciation for and that actually really shaped my views on Ethereum and DeFi was the correlation between price and transaction usage. So one theory we had was if you look at the Ethereum transaction gas consumption chart over the course of second half of '17 or first half of '18, it's generally trending up and to the right. And our view was that basically the system by basically June or July of 2018 was going to become saturated like 90% plus gas consumption. And we were pretty convicted that was going to be the case and prices started kind of going down after like April May or so and never kind of recovered from there. It just got very apathetic in the market and gas consumption started to fall and we thought that the gas prices were going to cause people to basically look at EOS because EOS was launching in June of '18. And we were ultimately right about the thesis if you look at what's happening now, that's literally what's happening. But we didn't appreciate the power of the correlation between price and gas consumption.
That's really really interesting. Okay, so now here's your opportunity to say the blog that you're proudest of.
The blog post that I am the proudest of. I'm going to go with the one I wrote about six months ago. It's called On Forking DeFi Protocols. And over like everyone was talking about DeFi, all the Ethereum maximalists latter part of 2019 and first few months of this year and you could feel the bubblings in social media and I was very well aware of what was going on and I am an avid snowboarder and whenever I go on a solo trip, I'll just shred all day and what I'll do usually on those trips is listen to podcasts on the way up and music on the way down and I have a lot of time to think and I listened to literally 15 DeFi founders over the course of like two weekends and so a bunch of stuff is just bubbling through my head and as a result of that I consolidated all my thoughts on DeFi into that forking protocols piece. And if you look at it now six months later, the funny thing is when I wrote that, all the DeFi people were throwing tomatoes at me being like, no, these things are so defensible and whatever. And the funny thing is actually I was off by an order of magnitude of how undefensible most of them are. And how easy it is to fork them. And what I realized is latent capital is so plentiful and so fickle that the forkability and defensibility in these things is quite low. And I think a year or two from now we're going to look back on that post and I think it's going to have directionally nailed everything and it tried to directionally cover seven or eight different things and although I think the order of magnitude of each of them is wrong, I think directionally all of them were correct. And so I'm looking forward to reviewing that post in another year or two.
I'll put it in the show notes. All right. So let's dive into web 3. I mean, so admittedly, web 3 isn't something I've ever spent a huge amount of time on, maybe kind of shamefully, but you guys invest in it a lot and you talk about it a lot. So, I figured you could give me the description. How would you actually describe web 3 as a concept? Because it's been described in really nebulous ways. So, what's your kind of favorite description for the phenomenon?
Yeah. So, I'll give you a both more and less nebulous description. So I think of the web 3 maximalist type people. Those folks tend to talk about data sovereignty and data ownership and not being subject to Google and Apple and Twitter and Facebook and those people. And I think that's one potentially interesting outcome of web 3 in some distant future state of the world. But that's pretty far away and we're not even close to that stuff. I think the more interesting way to think about web 3 which is also a little bit more nebulous is just the foundation to create trust minimized applications. And so the largest class of trust minimized applications today are DeFi applications. But there's lots of other trust minimized applications. Things like Helium for example, things like Audius, things like Oxio, a whole bunch of others. All of these things share some common properties and underpinnings with DeFi and with Bitcoin. But they also have kind of new unique things as well enabling them. But the core of all of these things is facilitating trust minimized economic value transfer between two parties in some way.
One thing I've noticed is kind of maybe a disillusionment with the concept of web 3 since I feel like it was really really big in 2017 and it was kind of a very integral part of the Ethereum story. And then today the Ethereum story is a little different and it's kind of more narrowly lionizing DeFi with some of the non-financial use cases being marginalized a little bit. Where do you feel web 3 is in terms of its development based on where you expected it to be three or four years ago?
Relative to four years ago, I'd say it hasn't come as far as I expected. Relative to 18 months ago, it's in line. I've come to the realization that the most common expression of the web 3 thing by the kind of web 3 ideologues is again the own your own data self-sovereign internet applications and that stuff is just we are still very very far away from that, not even close. And so I'm just less interested there, but I also think that's okay. And we are, there are now some things that are possible that I am pretty excited about. And I think we're going to see a lot more of those things rise to prominence over the next 12 to 24 months. And I think they'll get probably undeserved media attention because they're basically the first ones that work.
Like you could argue DeFi has received undeserved media attention. Like right Coinbase is 30 million registered users. Binance is somewhere in that neighborhood. Binance has definitely more than a million daily active users. And we know DeFi has no more than 100,000 total users ever. And so DeFi has received undue media coverage because it's just the new thing. And I expect this kind of first wave of new web 3 things to also receive undue media coverage simply because they're first.
So, if you're pitching web 3 to a complete skeptic, what would be the applications that you would call out to them as the most kind of immediately addressable and relevant ones?
Yeah, the first one I would call out just for a mass market consumer audience would be Audius.
Okay. So, let's dig in Audius a little bit. So, tell us a little bit about it. You described it on our call as censorship resistant SoundCloud. What does that mean? What's the purpose? What's the reason for existence?
Yeah. So, full disclosure, we are an investor in Audius. We invested a few months ago. So, Audius is decentralized music streaming. The primary property that you receive is censorship resistance. And so the idea is the goal of Audius is not to compete with Spotify or Apple Music. So just kind of get rid of that mental framing. The kind of immediate priority for Audius is kind of two major segments of target users. One are DJs and hip-hop artists and those kinds of people who want to remix other people's music. They want to be able to do so and republish and broadcast to the world. For anyone who remembers SoundCloud, SoundCloud kind of had its heyday from 2010 to 2014 or so, and has become meaningfully less relevant in terms of broad-based social culture since then. Basically the top of SoundCloud was when the record labels all came in and said, hey, all of the stuff on here is remixed, copyrighted content. You have to take it all down. And so that happened and that basically killed the ideological fan base that comprised SoundCloud and most of those creators went elsewhere and tried to distribute elsewhere and have been largely suffocated. YouTube obviously does something similar and Spotify obviously does something similar and so that kind of underground of new creative music types has
Been largely squashed by record labels who have been able to dictate terms over centralized platforms. The goal with Audius, then, the kind of target user base, number one, are all those people who want to kind of unlock that creativity of music by recomposing in different ways. And then the second major use case for Audius are people who want to be able to stream audio into games, social environments, whatever, but in some sort of automated software application, and they don't want to deal with copyright issues as the game developer themselves. And so actually, there's like I think five or six games that recently started using the Audius API, which launched like I don't know six weeks ago, and those game developers, like the great thing is they can clean their hands and say, look, we're not streaming audio, right? It's coming directly from audio servers to users, and they don't have to worry about copyright issues for their games, which actually for like a long tail of game developers and other types of comparable things is actually a pretty big deal.
