Around The Block - Special Episode: Crypto Theses for 2022 with Brian Armstrong & Ryan Selkis

Yeah, thanks for having me. It's good to do this.

So I started my career in VC, decided pretty quickly I wanted to be on the other side of the table, and started a company when I was 25 focused on charitable payments that required IRS approval for a pretty critical component of the business. I decided to defer an offer to business school to work on it, but ultimately shuttered that business in October. So I deferred for a year, had nine or ten months in my hand, and it happened to be early in that 2013 run-up, the fall of 2013. So I had to make a decision: what am I going to do with the next 10 months, and what am I going to do with this asset that just went up six times in a matter of weeks that I kind of locked into because I bought a little bit actually on Coinbase just to start learning a bit more about Bitcoin. I went down the proverbial rabbit hole over a long weekend and realized there wasn't really anyone writing about Bitcoin full-time. Started a newsletter, started opining on the Reddit forums, that's how we got connected pseudonymously. At the time, there were probably only a couple hundred people that were either funded or actively investing or full-time in the space, and many of them were subscribers. So I ended up getting my hands on the Mt. Gox document that exposed what they were trying to salvage in terms of the $700 million hack or whatever the ultimate damage was. So I started writing out of necessity because I had 10 months on my hand and I didn't want to get another full-time job, and I decided I was excited enough about Bitcoin to take a chance and maybe pass on business school. Sure enough, that's what happened. I joined DCG later that year, helped build the core team, was running seed investing at DCG in the early days. We closed around in 2015, and then when we acquired CoinDesk, I flipped back over to the operating side. So in some way, shape, or form, I've been touching information products for close to a decade with respect to crypto from a few different seats at the same table.

Well, I think it's probably similar to a lot of other folks, particularly those that have been around for a while. You and the early folks at Coinbase have been working on regulated financial products and financial services, adding credibility to this industry for a long time. There are dozens of others that are in our shoes. From my standpoint, Messari was born really as a bit of a policy response itself. If you think about our core information products, we're trying to reverse engineer what SEC disclosures would look like or what a good solid set of information reporting standards would look like for community-governed assets. And some of the language coming out of DC, particularly around the broker language and the infrastructure bill and the debate over that particular provision, at some point you just throw up your arms and you're frustrated getting slapped around by misinformed or downright dishonest folks in DC just because it fits their political purposes. So I think that frustration bubbled over for a lot of us, and I'm glad it did because in the 'never let a crisis go to waste' mindset, August was a pretty good rallying cry. We knew we were going to have to get active at some point, and it wasn't just going to be a straight shot to cleanly integrating into the financial system with no roadblocks put up by regulators or the state long term. So it's not so much that this broker language got passed and we ultimately lost the battle; I think as a catalyzing event, it was much more powerful long-term for us as a community and for this tech movement. I think the virality of that particular thread wasn't so much a moment of genius as much as the right moment in time that captured where people's heads were collectively.

I think everyone's moving as fast as they possibly can in a lot of respects. It is important that there's follow-through and that these industry groups come together and people rally around them and we have a somewhat united message in some of these conversations. The reason I say that is it's an especially critical couple of quarters, and it's the reason I've been so outspoken on some of these issues, because I do think these next couple of quarters are critical in the sense that we have a bull market in our sales right now. We've got a lot of enthusiasm. First it was DeFi summer, then all the later ones rallied, then NFTs rallied. It's been the rotating 'hop all the money' trade where a lot of people have done very well, gotten excited, and there are a lot of applications that people are picking up on. We're getting close to, if not already crossing the chasm, especially with younger investors. If we can't capitalize on that now that we have regulator and policymaker attention, then when the market does turn the other direction, they're going to be able to use that against us. A lot of people got hurt, there weren't adequate disclosures and consumer protections. So the time to mobilize, get the funding, and get these policy teams in place both within companies and at these trade organizations and advocacy groups, I think it's now, and we have to capitalize on that. I think what Andreessen has done is amazing. If you want to go fast, go alone, and we need someone going fast right now while the rest of the industry tries to come together and have the broader alignment conversations between CCI, Blockchain Association, and Coin Center. I do think one of the things that is missing, and I've spoken about this more generally, is that we're going to need an individual member organization that is much more grassroots in its approach and isn't just an agent of the incumbent crypto institutions. I think that's very important, and that's probably where the rubber meets the road from regulation. But I think we want to make sure we continue to call out the individual self-sovereign element, and that's why I was so happy to see interoperability as a problem with a Coinbase proposal when it came out. I think that is going to go a long way towards giving people confidence that this is a good faith effort to engage with policymakers and not just an instance of the new gods replacing the old gods and having the set of regulatory capture that we're used to in every other emerging industry.

I think that's 100% accurate. I actually think, given this administration's approval ratings and the straight shot down that it's been all year, there are whispers that one of the policies they're meeting with congressional leaders about and telling them to tone down and dial it back is around crypto. Why make any more enemies when right now things are shaping up to be pretty terrible for the Democrats as a party going into the midterms? Why would you turn off an entire base of young progressives that actually are passionate about this? That's been my biggest fear, that this gets politicized and becomes just another political football. But we're starting to see a slow sea change thanks to a couple of the Democratic senators and congressmen that stuck their neck out.

Yeah, I mean, first I'll talk a little bit about the report itself. You kind of teased it in your intro. It's long, right? But for the fact that there's a lot going on in the industry, so there's a reason that this takes the amount of time that it does. We actually prioritize it, and I do say 'we' because it takes me so long that it distracts my focus from other parts of the business, and the team picks up the slack. But one of the reasons that we put this together is not only to have our own mental model for how the industry is evolving and what's coming around the corner, but to hopefully serve as a starting point for conversations across all of our customers, all the folks that we do business with, all of our investors. And no one else does it, right? So it's really trying to address what I think is a vacuum of information when it comes to having a Mary Meeker-style internet report. I'm not trying to say that I'm at the same level as Mary Meeker, but I do think that's important for an emerging industry that's moving as fast as crypto is. So that's kind of the starting point. The other thing is this is broken down into 120 sections, so you can literally go chapter by chapter, section by section, and digest it in bite-size increments depending on what you're diving deep on. I write it for myself to serve as an index, as I'm going back to a given topic: what can I cite, what do I know from memory, and how do I update my assumptions over the course of the year? My hope is that other people can use it in the same way. The first half of the report is basically narratives and key tailwinds, people to watch, which all have different themes associated with them, the regulatory update, Bitcoin and just Bitcoin, and then market infrastructure. That's the first half, section one, which can be very useful for institutions or basically any newcomer to the space. The second half is we're getting into Web3, and that's essentially four chapters: NFTs, which are obviously the theme of the year, the word of the year from Web3 or one of the dictionaries; DeFi and all the evolution that we've seen this year even though it's been in a secular bear market relative to the other assets; then the explosion of other layer ones and this multi-chain future that we're living in, how that infrastructure is ultimately going to be built and how these chains communicate with each other; and finally, how it's all governed, which really comes down to DAOs as an organizing primitive. So I think those four Web3 building blocks are each deserving of their own 20-page report, but that's more or less what we covered. I think you can't really have one without the other because that's going to be the foundation for many years to come, those four elements.

I think that was the biggest update to a lot of people's thesis this year: are we going to have one winner take all smart contract platform, and is ETH2 basically going to absorb the addressable universe of blockchain applications? I think the answer is no. We've kind of seen that now. Do we think there's going to be 30 different competing standards? Probably not, just because that would be a nightmare for developers and it would be difficult to replicate all the infrastructure that currently exists on Ethereum on five or six different stacks. So I think it really, to me right now, it's looking like anything that's EVM compatible, and then maybe anything that can plug into Polkadot, IBC, and Solana, are going to be the protocols and the sets of infrastructure that you need to pay attention to. I did not think that Ethereum was going to have a clear arrival at the beginning of the year. I'm still not really sure, but it's no longer 100% probability or close to it that Ethereum just runs away with it. They still have to deal with the merge, we've got to prove that there's good interoperability between layer one and layer two and between the different layer twos. There are a lot of up-and-coming ecosystems that are moving faster in different respects because they're making different security trade-offs.

I think the early returns on ZK rollups are very good. If early teams can prove that they're able to effectively develop using ZK tech on Ethereum layer 2, that to me is the foot race. Yes, there are other projects like Arbitrum and Optimism, but I think how quickly you can have layer one to ZK rollup seamless integrations and applications built on those chains, and then how well those different chains are able to communicate with each other, is going to dictate whether more mind share floods to IBC and the Cosmos ecosystem or whether something like Solana can really take off. Solana's interesting because they're making a fundamentally different set of trade-offs when it comes to security and decentralization. Ethereum obviously has the head start, and then you kind of have Polkadot and Cosmos lingering with their layer zero type approach, basically agreeing from day one that the most important thing is that different sovereign chains can talk to each other versus trying to create a master chain to rule them all. I would be surprised if Ethereum loses its head start just because of how much infrastructure has already been developed and because the scalability solutions are coming to market and they are moving quickly on them, and we know that they work at least for some applications like the IDEX and others that have already moved to L2. But I don't think it's a foregone conclusion like many people thought at the beginning, myself included. That's again been the biggest surprise for me.

Well, first I'll start with the question for every new crypto-based product: do people want this, can it work, and then can it scale? Those are the three questions that you ask with everything. If you look historically, typically if you answer the first two questions in the affirmative—yes, people want this, and yes, it can work—then every time historically within crypto, that scalability challenge and the infrastructure challenge has been met, and you've seen a slate of very valuable company services and protocols that address that third bucket. This happened in NFTs, it's happened in DeFi, it's happening in transactions and stablecoins. I think the same is going to be true in governance. So what do you actually need to scale? You need a 100x improvement in information quality and throughput, and you ultimately need identity and reputation systems that allow you to delegate authority very quickly even through a decentralized organization. I think we've seen this with Friends With Benefits and some of the other DAOs that are starting to adopt this pod-like structure where you have different committees essentially that are delegated certain authority to work on either different components of the treasury spend or protocol developments. That is going to be standardized over a multi-year period, and there's going to be a slate of companies that deliver tools related to treasury management, workforce management, payroll, and everything that goes along with actually transforming companies into decentralized companies, which is no trivial task if you're trying to interface with the real world. That's where we're excited, that's where we've spent a lot of time. Going back to why we wrote this report, how DeFi is governed, how these layer 1 protocols get governed, is ultimately going to be dependent on DAO infrastructure, and a lot of DAO infrastructure is going to leverage non-fungible reputation tokens and other packets of information that are not fungible but rather earned and can be transferred from wallet to wallet if you're thinking about delegated authority within some of these organizations. So to me, I think you're right, I think 2022 is going to be the year of the DAO. With respect to Coinbase in particular, I don't know. I'm sure it's such a big theme that you and all the other major exchanges, wallets, custodians, and other infrastructure developers are going to be building tools around how these protocols are governed. The design space though is so incredibly massive that it's a good place to spend the next few years if you're a developer or a startup.

Yes, this is what I'm looking forward to.

This one's a tough one because I think you do need a figurehead and a leader for this. It is one of those moments in time where everybody is struggling to keep their head above water and scale their own companies. The most likely candidates to lead something like this are probably among the group of folks that you already know, which would include me and probably include some other CEOs, and I just don't know how many of us are willing and able to step up and lead the charge on this as a dedicated effort. So having said all that, I am still kind of personally trying to find a small group or small organization that's going to take the mantle here, and then I'll personally throw my weight behind it and spend a good deal of time and effort and energy there because I think it's important. I do think you need someone that's going to be a catalyst and not a spokesman so much, but someone that we can hopefully capture that audience and get people to fund a winning organization so you can triage resources in the right direction. I think we probably need an advocacy group that has a political action committee and an education arm associated with it so you can play in both electoral politics and actively engage with some of these campaigns, but then also have a broader mandate to educate policymakers and create something like a congressional scorecard or other system to start triaging who are our friends, who are our enemies, and then holding them accountable when it comes time to vote every November.

Honestly, I'm not sure. Right, it's all speed, scalability, security, and then censorship resistance, preventing de-platforming. So it is a combination, but I think the real pain point is around speed and costs, which is where a chain like Solana has been able to really come up the ranks and eat into Ethereum's dominance. The reason for that is relatively straightforward. We've been testing our governance products, and you have to rack up thousands of dollars just during the testing phase for not a lot of transactions. So you kind of extrapolate that to the startup in the garage or run out of a dorm room, and it's just not feasible. You have to find another stack to build on top of. I think that's okay as a temporary bottleneck, but the longer it persists, the more likely it is that we see developers and whole swaths of infrastructure make the trade-off and accept that, yes, this is a little bit more centralized, but the other chain is unusable or the other tech stack is unusable. This happened to a lesser extent with Bitcoin. Bitcoin was never as robust as Ethereum, was never designed to be a Turing complete computer. But I think we saw this play out in real time. I don't know about you, Brian, but for a long time I thought that Ethereum would be the smart contract programming language, but ultimately you'd be able to port Bitcoin to it and Bitcoin would still be the settlement currency and the reserve. That was disproven, and I think the same thing is happening now from layer one to layer one, and it will continue to happen over time for the medium term at least.