A16Z announces $4.5B fund for crypto and blockchain startups
theblockcrypto.com
theblockcrypto.com
A fund investing in snake oil and perpetual motion machines would add more value to the world economy
“You want to put CREDIT CARDS on the INTERNET?!”
“You want to replace the POST OFFICE with the INTERNET?!”
“You want people to post details about their day on the INTERNET?!”
Those “snake oil” investments at the time eventually became Amazon, E-mail, and Facebook. The first ideas funded aren’t always the final execution of it (Facebook was not the first social media platform) but the idea is that VC funding spurs innovation and people taking risks with new ideas, which pushes the entire space forward.
People who see the entire crypto space as a “scam” are (in my experience) unaware of the real cryptographic research currently being done. Threshold based signatures, multi party computation, zero knowledge proofs, etc are new tools and primaries to build a better internet and give us better, concretely provable, tools to shape society.
Are there scams in the space? Yep, and I don’t like them just as much as you don’t since they delegitimize the real work being done. But I also see the future Googles, Amazons, and Facebooks of the world emerging from this unique space to do some truly amazing things despite those scammers in the same way that those companies rose from the early internet cesspool of scams and ads.
I think it's a pretty arrogant stance to say that just because you don't see the value in a thing that value doesn't exist. I don't see the value in Tiktok/Facebook/Snapchat, but others clearly do. Maybe it just wasn't built for me.
My general thesis on the crypto industry is that it's a fertile space, and provides new tools to people who want to build things. Is the next Google going to shake out of it with 100% certainty? Of course not, no-one knows the future.
On the flipside though, fertile spaces with new tools are exactly the conditions that gave rise to orgs like Facebook/Google/Netflix/etc, which changed the world in a number of ways.
If we're in the 90's and I'm pointing to this newfangled "HTTP 1.0 Protocol" RFC and trying to describe to you web browsers, Netflix, etc, I'm pretty sure most people will look at that as a pipe dream that will never see reality in their lifetimes. It also took many many websites and iterations to get to the Netflix we have today (Netflix being a proxy for "streaming services" for video content).
Same deal with putting credit cards on the internet for faster payments and describing Amazon or Ebay. Does e-commerce have obvious credit card fraud and criminal activity on it? Absolutely, if anything it's grown as a parasite in lockstep with the success of e-commerce.
Does this mean e-commerce is a bad idea in general? My position is no, new technology just presents new challenges with the benefits they also bring.
Social media is the humanity hurdle du jour in a lot of ways, but does that mean we should get rid of it wholesale?
No, you just don’t appreciate the value of those social media services. If you don’t see it then you’re blind. They let people connect and share stuff they enjoy seeing. It’s fine if you don’t like it, but the use case is obvious.
What is the use case for crypto. Do you have a vision for it?
> What is the use case for crypto. Do you have a vision for it?
Short term, the crypto space is building neat things like multi-sig contracts, decentralized finance products (with unique characteristics like flash loans), DAOs to govern things in a decentralized way via on-chain voting, and spurring innovation into real cryptographic research, including things like privacy-preserving crypto and multi-party computation. People are thinking very deeply about things like trust relationships and engineering systems to be trust-less.
Medium term, I see protocols like Compound eating the profits of the large banks and either forcing them to innovate (which would be great) or replacing them entirely. Why does my savings account yield 0.01% when they lend out my very same dollars at 5% in the form of car loans/mortgages? I'm not discounting FDIC insurance or the federal reserve, but things have tipped too far into the banker's favor IMO. Same deal with the traditional markets, there's a lot of fees and friction unless you're a big boy that locks a lot of retail out of the game. Private capital markets are in for a wake up as well - VCs hold a crazy amount of power and potential upside exposure because they're just the only ones who can get in on deals early (think early Google investors) - if that was more access-able we might be able to break the VC hegemony which loves throwing good money after bad and propping up terrible companies.
Long term, I see it as a series of tools and protocols that can establish a more "global-native" economy. Our world is getting more global, not less. A core foundation of immutable software feels like a more reasonable base layer to build on than trusting politicians and a gordian knot of deals. Someone from North Korea can build a smart contract and I don't need to trust them that it does what they say it does, because I can verify it for myself. Also economically, having a store of value that is also impossible to counterfeit is hugely useful, so people can't paint lead yellow and call it gold - https://www.reuters.com/article/us-china-gold-kingold-jewelr....
If the car loan defaults, you don’t lose your money. That’s the primary reason.
> Same deal with the traditional markets, there's a lot of fees and friction unless you're a big boy that locks a lot of retail out of the game.
Crypto fees are often terrible. The ones that aren’t tend to rely on a few centralized party for trust.
> Private capital markets are in for a wake up as well - VCs hold a crazy amount of power and potential upside exposure because they're just the only ones who can get in on deals early
That’s… not true and risky startup investing is a snake pit for ordinary investors
> Someone from North Korea can build a smart contract and I don't need to trust them that it does what they say it does, because I can verify it for myself.
And go to jail because you’re violating international sanctions?
Decentralized finance products also already exist. They're called microloans. Someone got a (memorial) Nobel prize for this in 2006.
Multi-party computation. Have you heard of SETI@home? It came out in 1999. It was followed by Folding@home in 2000.
So basically, all of the "innovations" of "crypto space" are just things that have already been done in the real world, but now are being done online less efficiently. I guess that's what counts for progress if you never bothered to learn history.
Decentralized finance products like uniswap and compound are not the same as micro loans, and micro loans have massive issues with trust, fraud, and solvency. Being able to swap or lend assets in a completely trustless way is something new, and enables new and novel technology like flash loans to exist (which make for more efficient markets). Plus I can go read the actual holdings of these protocols and build whatever machinery I want to respond to changes. Both protocols have a governance process with a timelock so no changes are made without the market having time to react, which overcomes a lot of the risk of malicious proposals (if I somehow pass a proposal that says “pay me all the money in the contract” then everyone will pull their money from the platform before it executes).
As for MPC I’m taking more about cryptographic MPC than something like SETI. A HUGE problem with managing cryptographic keys, be they root dns keys (13 of which control essentially the entire internet) or keys for SSL certificates is that they must exist somewhere in memory to be used. If they’re in memory they can be stolen and no one can actually tell if they’ve been stolen or not until it’s too late. Right now we have ok solutions to some of this through HSMs but then how do you also do backups properly? The MPC research I’m talking about specifically offsets these risks by never having the key exist in one place, and instead it being similar to a multisig where participants come together to create this material. An added benefit depending on how you set this up is that it only requires 1 party to be honest for the whole system to remain sound. ZCash did their entire setup for their protocol this way (https://z.cash/technology/paramgen/). Coinbase also just rolled out support for doing this at scale so that they can have users participate in these crypto protocols without having to manage their own keys (https://cointelegraph.com/news/coinbase-unveils-web3-mobile-...).
So yeah I can see how if you’re a person who has done 0 research into this things sound similar on the surface, but you’d probably also be in the camp of “we already have the post office, what’s the point of email” back in the 90s.
And your argument for crypto basically boils down to needing a blockchain because you don't trust your counterparty. In the real world, there's a simple solution for parties who don't trust each other: do business with someone that you do trust.
I find this extremely fascinating and I think stems from both understanding things that the other side doesn't fully appreciate. I wrote about this more on my blog: https://lawrencexie.wordpress.com/2022/05/13/on-crypto-misco...
Also, sorry for the wall of text, but I'm legitimately interested in engaging with you on this topic (obv).
On Terra/Luna - there were a ton of people who did 0 due diligence on it, saw a money printer, and didn't possess the capacity to understand that the economics of it were unsound. On the flipside, I know of a good number of people who predicted that it'd destroy itself on the first bear market cycle. Retail loses here because they believe the hype train, and that's not a good outcome.
MIM (https://coinmarketcap.com/currencies/magic-internet-money/) is another stablecoin that's over-collateralized (first pioneered by MakerDAO with SAI/DAI), but has people similarly nervous, not because of its economic design (which they lifted from MakerDAO's SAI/DAI) but because of the stewards of the protocol - https://rekt.news/sifu-scandal/. Similarly the same people who saw Terra on a crash course have sent out warnings about MIM, and in general it has stalled in terms of its market penetration, which is the market working IMO.
DAI is the most popular algo stablecoin, and I believe it to be sound because of a smart contract based liquidation process that ensures that any DAI generated are over-collateralized with other assets, even if the underlying price of the collateral falls rapidly (there are economic incentives for people to liquidate others when this happens). I disagree with them using multiple baskets of crypto (DAI's collateralization is largely backed now-a-days with USDC, another stablecoin) vs the initial model where it was backed solely by ETH though, since I think it compounds risk in the system.
> In many ways cryptocurrency projects are recreating many of the (failed) experiments in traditional economic history.
I agree with this wholeheartedly. People are taking risks and trying to overcome old problems with new technology and sometimes failing as a result. It doesn't to me mean that those risks shouldn't be taken, and I'm extremely glad that the UST/Luna explosion was isolated basically entirely to the crypto markets since I see this all as expieremental.
That said, I think that there are other tools/protocols/etc that are being built that are not purely economic in nature - things like multisigs are hugely useful for taking coordinated action in a trustless way, they just haven't been productized properly yet.
> However there are some fundamentals that technologists forget when thinking about cryptocurrency projects. One of them is that the total value of a system remains unchanged unless there is actual utility provided by a new product or service.
Value creation is something that's always hard to gauge, and is what leads to speculation I think.
Take Uniswap for example - it's by far the largest decentralized exchange (DEX) that exists. It recently surpassed $1T worth of value transacted, and even had stretches in the past couple years where it overtook the trading volume of Coinbase (binance of course shadowing both of them - https://www.theblockcrypto.com/data/decentralized-finance/de...). Is that value creation? I'd say providing a service to more easily swap pairs of assets with a very small finality window IS valuable.
Additionally, Uniswap (and some other protocols) have this notion of a "flash loan" or "flash swap" that, as far as I understand, are unique to on-chain crypto. The TL;DR is that this mechanism allows someone to borrow essentially infinite money as long as they repay it in the same transaction (with a fee). This leads to a situation where you don't need deep pockets to capture the value from an arbitrage opportunities - you can write an arbitrage contract that will either guarantee you a profit through a complicated chain of arbitrage, or it'll simply revert. To me that's a pretty unique primitive to build a more efficient market.
Another example I'll point to is Helium (https://www.helium.com/), which aims to build a global network of wifi hotspots, but incentivized (by crypto) based on the activity on your hotspot. Fon tried to do this in the early 2010s and couldn't find traction (because why would I share my internet with others for free?). Xfinity took a stab at this recently because they have a near-monopoly on people's internet connections (with no upside to the end user whose internet is being shared). To me, helium is creating value here, and the model is preferable to any alternatives.
That's not to say that I'm blind to the fact that there are a ton of ponzis and pump and dump schemes going on in the crypto space, but my point is that there is real value creation happening as well, it's just being drowned out by the other nonsense right now. The reason crypto keeps coming back is because bear markets shake out these crappy schemes and what's left is the projects and builders who are actually creating value and plan risk accordingly.
> The second reason there is a considerable amount of misconceptions about cryptocurrencies is the issue of echo chambers
I agree 100% with this, but it's also not localized to just crypto. Go look at /r/superstonk or /r/wallstreetbets on reddit and you'll see similar things. We have the same problem with our politics too, just across different mediums. All of these have bad impacts on individuals and as society as a whole, and is IMO one of the greatest threats to global peace that exists. The internet was supposed to unify us, not divide us.
> However misconceptions do not emerge purely from lack of access to differing ideas or opinions. Instead they originate when individuals are unable to recognize the limits of their own comprehension.
Again, 100% agree. This is also a problem pervasive in a wide band of things from politics to (as you pointed out) vaccine hesitancy. One thing I've grown to learn is that it's easy for me with my skillset to say "go do some research, idiot", but a good chunk of the population literally does not possess the skills to do so.
If you google "Is the COVID vaccine harmful" vs "Covid vaccine dangerous", you get likely different results, but most people don't understand that. Even if you do get to the right data it's usually nuanced and long/hard to comprehend so people's attention span falters and they look for a youtube video to explain it to them in 2 mins. Again, a problem that absolutely exists, but I don't think is unique to the crypto space.
As for your brainteaser: > A cryptocurrency stablecoin is introduced whereby holders must light a cash dollar bill on fire in order to “earn” one unit of crypto. The issuer reasons that for this reason, each unit is worth $1. Under what circumstances can this reasoning hold sustainably true? Is it possible for this peg to hold indefinitely?
This skips over the idea of redeem-ability entirely I think, which is a necessary part of a stablecoin. By destroying a dollar you're not creating something new since it's a one-way track. I can't redeem my crypto for the original dollar because it doesn't exist anymore.
If I instead "lock" that dollar in a smart contract to generate $0.50 of crypto, I can "unlock" that dollar by repaying the underlying debt. Likewise, I can take USDC send it to Centre on-chain to have them wire me money since USDC is just a tokenized representation of a dollar in a bank account.
Anyway, you seem like a smart person so let me know if you ever want to chat about crypto and economics in a more direct way. I think we could have some interesting discussions! :)
I agree with many of your conclusions, for example value creation IS occurring in the crypto space. Your examples of decentralized exchanges for example do solve a problem and increase efficiency.
And excellent - you got the brainteaser exactly! By destroying the dollar the no-arbitrage mechanism doesn't exist anymore and there is no more upwards pressure on the stablecoin to peg it to $1.
I have some other concerns with stablecoins backed by any asset correlated with crypto since it leaves the potential for market manipulation when controlled by a central party. I wrote about that in an earlier blog post too.
I'd be happy to chat about any of this more directly. My email is lawrence.xie90@gmail.com
And what we call the "internet" today was already being used by companies and research institutions prior to becoming commercialized. The pre-web was useful from the moment it was created. It didn't need to "find" a use case; the use was immediately obvious.
OTOH, we're still waiting for cryptocurrencies to present a use case that isn't better solved by an existing technology.
> We believe blockchains will power the next major computing cycle, which we call crypto or web3
> For example, with mobile computing, the golden era was 2009-11, when companies like Uber, Venmo, Snap, and Instagram were started.
> We think we are now entering the golden era of web3.
Prior cycles were pushed by demand after a key innovation (computers, internet, smartphones) changed our habits. Uber became popular because taxi companies were slow to adapt to smartphones. Venmo become popular because the banks were slow to adapt to smartphones. Snap and Instagram become popular because everyone suddenly had a camera on them.
Cryptocurrencies became popular due to distrust in the economy, but they did not prove to be a viable replacement. The dream of buying a pizza with Bitcoin is still a dream. At some point venture capitalists realized that they can pump and dump shitcoins, they just have to convince greater fools that they are useful, that they are the future. This is why we have this NFT and Web3 bonanza. There is no demand for them, they don't solve any problem, nor they try to. They are just shiny things for bagholders to look at. Rather than blockchain technology, it's distrust, desperation and greed what's behind it all.
I mean BTC or ETH were a lot better place to keep your capital in the last X years (where you can pick any X since the GFC/Bitcoins inception) than keeping it in dollars or euros.
Of course some people had access to a) the free money that the US gov has been printing over that same period, b) connections to early investment opportunities , and so may have had better places to put their capital.
But for regular people who didn't have the connections to invest in AirBnB during the earlier rounds and put their capital to work (doing all the good work that AirBnB has done) it seems to have actually worked pretty well if you distrusted the economy. I'll leave it up you to work the ratio of how many people exist in those two groups.
Also this comment seems to assume that it's over and everyone trusts the economy now, and that bitcoin & crypto have failed in that use case. Doesn't seem that way to me.
You can certainly criticize the actions of VCs in the space, and a bunch of other groups, and I wouldn't disagree, but believe it or not there is people in crypto who still have the original principals, and what is more is there is a constant influx of new people with those same principals.
There were a ton of shady internet companies capitalizing on this sort of hype and swindling people out of their hard earned money. Beanie babies were also huge.
Do you know what else was happening? The IETF was finding its feet as an org, RFCs were being written and iterated on, the building blocks of the modern internet were being built behind the scenes, and companies like Amazon were realizing that their value was not selling books but building a massive logistic network that could compete with brick and mortar stores. Porn companies (widely seen as morally reprehensible/unsightly) were also figuring out video streaming and PayPal was figuring out how to deal with online payments.
Yet, if you read the news and weren’t building in the space, you’d probably come to the same conclusions as you are today - the internet is a fad that will die out soon because there’s nothing of substance to it and it’s all just greater fool hype.
Zooming back to today - I’d implore you to go look at the research being done right now in the cryptography space - things like zero knowledge proofs, multi party computation, and threshold signature schemes are becoming more viable as building blocks every day. Same with a shift in mentality from centralized trust to decentralized control enabled by some of these cryptographic primitives.
Is every crypto project going to be the next Google? Of course not, but the entire point of putting VC money into the space is to push the space forward as a whole (along with spurring research), eventually leading to the next Amazon/Google/Facebook/etc. and pushing humanity forward in some direction.
New tools mean fertile ground for innovation, and VCs are interested in finding and pumping money into fertile ground since they usually have massively outsized returns.
Are they always right? Nope, but Marc Andreessen was around in the 90s, built one of the first web browsers, and co founded Netscape. So if nothing else he’s seen what unrealized fertile ground looks like, and a $4.5B fund signals that he sees it again in the space. Of course a more cynical view is that he purely sees the ability to enrich himself and his fund via pump and dump schemes without caring how it’s done but that’s something that only time will tell I suppose.
The cryptography space has a lot of promise, but the VC money is not being pumped into better privacy or confidence (which is better than trustlessness). It's being pumped and dumped, because securities fraud is where the money is. The idea is to prop up the image of crypto until you can dump.
Blockchain technologies are not the right tool for everything. They can eliminate the double spending problem in a decentralized way, but there are trade-offs involved in being able to tolerate a large amount of faulty or malicious nodes (for problems that require coordination) and they are fundamental. Blockchain technologies lock you out of efficiently solving a lot of problems.
The Web3 projects I have seen so far would not be able to compete with their Web2 counterpart. They don't know their customers, they are hard to understand, difficult to use, they are trying to bank on artificial scarcity as if it's a new invention no one else tried. If your mother can't understand your Web3 project chances are you aren't going to get your big break.
What will, and is happening, you just don't see it as much - it's not as obvious because no one is making money or wanting to make money by taking a stand against Bitcoin, and draw the attention of the heavily invested ideological mob of HODLers - whereas everyone taking a stand for Bitcoin is financially incentivized to promote it with whatever true or false rhetoric and propaganda they find works best in the present climate; perhaps the best simplified comparison I heard is that Bitcoin is like Mary Kay for men.
It’s cultish.
This announcement from a16z sounds and feels the same.
These people you mentioned are not actually doing a giveaway, and YouTube is completely asleep at the wheel for combating these sorts of scams (they’ve been around for a couple years now, and automated detection is a harder engineering problem than scraping tweets).
The problem is that they’ve very lucrative for scammers since the scam is confusing enough for people that they think they’re credible, doubly so when they use hacked channels with changed names but have hundreds of thousands of followers to do the broadcast.
IMO YouTube absolutely needs to step up their game here - I’ve fought this sort of fraud at larger orgs and Twitter and Facebook both have pipelines established for security teams to escalate these things, meanwhile YouTube takes a report, let’s the scam run to its entirety, then picks up the pieces after the damage has already been done.
The unfortunate reality is these scams are designed to be believable, and without there being similar sophistication on the part of Google to fight them they’ll remain effective :-/.
It’s definitely an issue though - the ability to transact near instantly in an immutable way cuts both ways, and adds jet fuel to an already thriving phishing and hacking economy. So I think crypto still has a while to go before it’s safe enough for normal people. Or maybe the space just becomes a layer between other layers and is more for finalizes settlement between institutions. Only time will tell :)
That's how I was first exposed to them: I searched YouTube search for SpaceX live launch - can't remember exactly what I searched, and I believe they were first result or a top result anyhow. I clicked it and thought it was an official page for SpaceX.
It could even just be as simple as trying to promote/market Bitcoin to make people think it's more credible than it is by making it look like highly successful people are actively promoting it, etc.
I've also been seeing one where a deepfaked Elon (with AI generated Elon voice) encourages you to visit a crypto scam website.
https://www.coindesk.com/markets/2020/07/10/crypto-giveaway-...
I work in the security/user trust space and it was amazing how it went from 1-2 scams like this and me going “huh that’s new and weirdly effective” to copycats springing up so often now that they seem to be a modus operandi for a lot of scam groups now.
Unfortunately they’re getting more sophisticated and usually coordinating with a large social media push (usually on Twitter via bots) and using hacked verified Twitter account and hacked YouTube channels with lots of followers to signal boost their scam.
Putting myself in Google’s shoes this is a hard game of cat & mouse, but they are also uniquely in the position to do something about it, and I’m positive their massive org can fight this better than they are today. Devils advocate being that they are making tweaks to things to stomp out this behavior and it’s just subtle enough that overall things are trending downwards and I just have selection bias since I’m looking for these scams.
Those live streams are not run by Elon Musk, Jack Dorsey or Cathie Wood. They are low effort scams aiming at getting people to send BTC, its just recycled video content with text put beside it.
Also they invested over $100M in Clubhouse just because it became popular at the time(Pandemic and lockdowns) not because they think Clubhouse will have any reasonable long term value because it won't.
Bitcoin is digital commodity which conducts information and is used in order to enable decentralized communication.
Bitcoin's uptime[2] is 99.99%, now compare that to centralized software applications and you will be in a better understanding on why Bitcoin is valuable.
[1] https://arstechnica.com/science/2022/05/new-study-estimates-...
Btw some people said me here on HN that PoS is the evolution of crypto coins but I think the original design and protocol of Bitcoin is still superior if done right. Just like TCP is still viable to this day although it is almost 50 years old.
The historicity of Satoshi/Bitcoin is not something I care about when evaluating the actual technical details.
In the non crypto world orgs usually hold short term t-bills or other cash equivalents to help offset inflation. In the crypto space I see a lot of teams holding stablecoins, which is similar. Some hold their entire allocation in something super volatile which is a bad idea in the same way it’s a bad idea to take VC money and buy Tesla stock with it or gamble on GME options.
IMO treasury management is just another risk to manage as part of a business. If not managed properly you go out of business and if it’s because you were dumb with VC money by betting it all on Bitcoin then you likely won’t get more VC money again.