Nick Tomaino, general partner of 1confirmation, discusses his firm’s recently announced third fund of $125 million and gives his perspective on many hot crypto topics, such as NFTs, Layer 2 solutions, Polkadot, DAOs, and more. Show highlights:
- why Nick became interested in crypto and his background
- what drives 1confirmation’s investment thesis
- why he Nick believes NFTs have taken off in popularity this year
- why NFTs are currently in a bubble
- what we might do with NFTs in the future
- how competition between different NFT marketplaces will shake out
- how music NFTs could work
- the feasibility of charging royalties in the secondary sale of NFTs
- why environmental concerns over crypto mining to only be a short-term issue
- why Nick is not an Ethereum maxi and how he feels about the fragmentation of Layer 2 solutions on ETH
- why Polkadot is such an exciting project
- whether, as an early Coinbase employee, he would say the fat protocols thesis is true
- what new trend Nick is keeping an eye on for 2021 and beyond
Thank you to our sponsors!
Twitter handle: https://twitter.com/NTmoney
- Introducing 1confirmation Fund 3
- NFTs + Mimetic Desire
- Twitter Threads
- Has crypto “earned it?”
- Ethereum + decentralized identity
- WSB optimism
- The crypto perfect storm
- His journey from Coinbase to 1confirmation
- Guest Appearances/Quotes
- “Digital art has a chance to exceed $3 trillion in total value and flip traditional art”
- “It’s not going to look the same as the crypto booms and busts, but there are going to be a lot of these sales that maybe don’t have buyers in the future”
- “It’s clear we’re in some type of NFT bubble”
- Old Unchained Appearances
- Recently announced fund
Recently, 1confirmation has funded…
- Notional Finance
- SuperRare series A
- Nexus Mutual
- dYdX series B
- Polkadot governance
- Unchained podcast discussing the petrodollar
- Fat Thesis
- ZED Run
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time.
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Today’s guest is Nick Tomaino, founder at 1confirmation. Welcome Nick!
You just closed your third round. Congratulations! It’s a $125 million new venture fund. Before we get into that, since we’ve actually never had you on the show for a long interview just about you, why don’t you tell us about your background and 1confirmation?
So my background, I kind of fell down the rabbit hole back in 2013. I was just a random person on the internet in Portland, Maine. A lot of people talk about why they fell down the rabbit hole, whether it’s for technology or economics. For me, what initially drew me was kind of the social movement that I saw happening online back then. I, like a lot of people, read this Wired article about this magic internet money that was being used to buy guns and drugs on Silk Road. That was the early media narrative as you well know.
I think wasn’t it a Gawker article? Or maybe it was a different one.
Different publications were writing about at that time to get clicks. I’ve always been an online community person. So dating back to like middle school when I was interested in comic books, high school when I was interested in sneakers. I’ve always wanted to dive online to online forums to see kind of who was talking about things that I was interested in. When I first read this article, I was intrigued. I jumped onto Bitcoin Talk, which was the first online forum that Satoshi actually created and /r/bitcoin. And what I saw kind of underneath the surface of the media headlines, there was this really passionate community of people from around the world who weren’t aligned by physical location, meaning they weren’t in any one particular location. But they were aligned by a shared belief system. Meaning they all kind of believed in the values of Bitcoin. And economic incentives, meaning they all owned Bitcoin.
And to me, what got me so excited, was when I saw these people forming based on values and economics. I saw a social movement happening and that’s when I kind of decided I wanted to do something in crypto. I talked to every different founder in the space at that time. I was meeting with the BitInstant team in New York city and skyping with Mt. Gox. These were some of the early leaders at the time. I connected with Brian and Fred at Coinbase. Actually, I was one of the first couple of hundred users of Coinbase product, which kind of led me there. I reached out to Brian and then joined shortly after that. So that was kind of how the long-winded way of telling you how I got in the crypto space and kind of what drew me. I had a great experience at Coinbase. And back in 2017 started 1confirmation. Here we are.
And so far across your two previous funds, you have raised $70 million. What has your investment thesis been over time and how have your bets played out?
So our thesis is very simple: back authentic founders that have deep historical context on crypto, that are building products that we understand as users. I think there’s a ton of different ways to make money in crypto. For us, we’ve kind of stuck to what we understand and what we get excited about as users. That has has treated us well. And that’s kind of what we’re going to continue to do.
I think there’s a lot of investors in the space that are trading based on memes or fundamentals — there’s a whole different bunch of ways to make money. For us, it’s products that we get excited about as users. And again, that’s kind of what led me to Coinbase back in 2013. Back then I was buying Bitcoin by taking out cash from an ATM and wiring it to through to Mt. Got via Western Union.
That was the best way to buy Bitcoin at that time. Then Coinbase came along, it was just this product that made it dead simple. That’s kind of what drew me. We kind of let the products guide our investment thinking. And yeah, it’s gone pretty well. I mean, it’s kind of allowed us to invest in DeFi before DeFi was a category and NFTs before NFTs was a category. Now these categories are, of course, very hot, but we’re kind of thinking about what’s next. I think by focusing on product, it allows you to kind of ignore a lot of the noise in the space.
That’s really interesting. Yeah. I have plenty of questions for you about NFTs and DeFi, because I did see you were so early on those trends. As for this latest fund of $125 million, what do you plan to do with that money?
We’re going to continue the strategy that we have been executing, which is invest in companies, cryptocurrencies, and NFTs, as well. We tend to focus on bleeding edge technologies. We like to be early money in, at the kind of pre-seed or seed stage, and write checks anywhere between $1m-$3m. And we also take core cryptocurrency positions. So that’s kind of the strategy that we’ve been executing. The new fund, it’s really just a continuation of what we’ve been doing. It’s a slightly bigger fund. Some of the sizes of investments and things like that may increase a little, but we really just want to kind of continue what we’re doing. I think focus has treated us well so far.
Let’s talk about NFTs. As I mentioned, you were very early on the NFT bandwagon. I have been noticing you’ve invested in a diversity of different NFT plays. There’s OpenSea, which is a bigger platform. SuperRare, which is pretty focused. So, first of all, let’s just talk NFTs generally. Why do you think they’ve taken off so much in the last several months?
I think they’re bringing new people into the space in a way that nothing else in cryptocurrency has. I’ve been waiting for my brother, for example, who’s outside of crypto and isn’t that interested in finance, to get excited about crypto. That’s happened with something like NBA Top Shot. NFTs are bringing in people who are interested in sports or music or art or culture outside of crypto in a way that nothing else has. Up until NFTs, it was very kind of finance, money… and certainly finance and money is part of NFTs as well. It is, for a lot of people, still about making money. But it’s kind of combining finance and culture in a really exciting way.
I think it’s just getting started. NFTs, right now, are mostly just kind of static files that you can’t do much with. You can show them off in your home on a digital frame, or you could show them off on your OpenSea profile, but you can’t really use them in virtual worlds or in games and things like that. And I think that stuff’s all coming. I think what really catalyzed it in the past six months was just so much culture coming in and making money. To be clear, it is still mostly about making money now, but it’s kind of combining culture and money in a fun way.
Yeah. It’s interesting that you say that because this also is the first time I got my sister interested in crypto. She’s an entrepreneur in fashion. NFTs are also what finally drew her, cause otherwise my whole family was like, why are you always talking about this stuff?
What I really love about it is it enables a new business model for creatives. I’ve always thought the first couple hundred million people that get into crypto — they would buy it and invest in it. But like the billions of people that come in, I think their first way is going to be earning it. And how easy it is for a creator to go on OpenSea and use their create tool to sell an NFT. Or a really talented artist to go on SuperRare and sell kind of a premium piece of crypto art, like that is really powerful. And it’s bringing in new new people to earn, rather than to to invest or to speculate. And that’s super exciting to me.
It’s interesting that we’re talking about this because I did see that you did tell the New York Times that we’re in an NFT bubble. I saw you told Cheddar that there will be a secondary market, but you also said, “will some of the stuff that’s getting bought now at millions of dollars go down in value? I would say so.” Where do you see this vision with NFTs going? Do you expect a lot of these buyers will make money? Or is it just mostly the creators that will? How will this kind of market end up looking a few years down the line?
I think the bubble is better for creators than than retail speculators. What I like about this NFT bubble is it’s artists and creatives, and it’s not like opportunistic business people, for the most part, that are launching a hundred million dollar ICO.
I think there are a lot of parallels to the 2017 ICO boom, in that there’s kind of an explosion of people creating. There’s an explosion of kind of retail demand to invest in these things. Just like in 2017, we saw Floyd Mayweather endorsing ICOs, now we’re seeing a different iteration of celebrities that are launching NFTs. And I think — it’s not to write them all off.
I think there are some that kind of understand what’s happening and are doing it in an authentic way that I think could create long-term value for the retail investors that are investing in these things. But, I think there’s also a lot of cash grabs — just like there were in 2017. I would say there’s probably a small percentage of the NFTs being created right now that I would say will have long-term value. That said, just like in 2017, where a lot of these — what seemed like scams are still here — they’re still here and the same could happen for NFTs. Because value is just about belief. And if you have people believing that these things have value, then they’re going to continue to have value.
I know that as an investor, this may not be your area exactly, but I’m sure you thought about this. And I just wondered, at this moment, as you mentioned, NFTs tend to be pretty static. There isn’t a lot people can do with them. And so that kind of leads us to this moment where the main use case is speculation. I was just wondering, over time, what do you think will eventually make a good NFT or what sort of creative things do you see coming down the pike that you expect will become bigger trends?
One thing I’m super excited about is NFTs within virtual worlds. The metaverse, which a lot of people are excited about. A recent example is Meebits. Which is a a project launched by the Larva Labs team, the same team behind CryptoPunks. I’m not sure that Meebits is going to be kind of the winner here, but the idea of a 3D avatar that you can use as your avatar within a virtual world, as opposed to a static image that you could use maybe on Twitter, for example, I think that’s a step in the right direction. So I think NFTs that you can use within a virtual world, either as your identity, or maybe to compete, to play games, and things like that.
That’s super exciting. A lot of the NFT OGs remember when Cryptokitties launched. There was an ecosystem, a small ecosystem, that emerged on top where you could race your Cryptokitty. I forget what the name of that project was, but that was that was pretty cool. And I think we’re going to start, we’re already seeing that with things like Zed Run. I’m not sure if you’ve looked at that or covered that in the past, but that’s gotten a lot of excitement. It’s basically virtual horses that you can collect and compete in horse races. So this type of thing I think is still incredibly early. We see the attachment people have to their NFTs now when it’s just a static file, but imagine when you can actually use these to compete and to make more money and things like that. That’s super exciting.
As we mentioned earlier, you have invested in these different types of platforms. For instance, OpenSea is kind of like a catchall platform, and then there are others like SuperRare that are focused on a specific niche. How do you think competition between these types of platforms will shake out?
I get this question asked a lot because there’s a lot of new NFT marketplaces popping up. And I think, really just like any other type of marketplace, the long-term differentiation is kind of brand and product. And I think that’s how they’re all competing right now. So OpenSea, for example, has a really strong brand as kind of the leading secondary marketplace for NFTs. They have a really good product. They’ve kind of innovated on product at a really fast clip and added features that users want and stayed focused on that.
There’s definitely an opportunity for other marketplaces focused on kind of other niches to build their brand around that niche. Maybe focus on primary rather than secondary and build a really good product. And that’s happening, right? We’re starting to see marketplaces for music NFTs or different types of sports NFTs. And I think that’s just going to continue. At the end of the day, to win as an NFT marketplace, you need to focus on brand and building a really strong brand. There’s a lot of ways to differentiate your brand and build a great product.
Maybe what you’re describing is that some of the specialized ones will be kind of like more primary sales and then something like an OpenSea will be more focused on secondary sales. Is that kind of where you were going with that?
That is the case, right? So, OpenSea, why they’ve really succeeded, is they’ve been a general purpose platform for all NFTs. And Devin and Alex are really tapped into what’s happening in NFTs and they’ve been really quick to add new NFT projects. So for example, a couple of weeks ago, Meebits launched. Meebits very quickly was added to the OpenSea platform. And very quickly, tens of millions of dollars worth of secondary trading was happening on OpenSea. The whole OpenSea business, the reason why they launched it in the first place, is Cryptokitties popped up. Cryptokitties was charging something like 5% to buy on the CryptoKitties marketplace. And what’s what makes an NFT? At the end of the day, it’s true ownership.
The idea of like a marketplace controlling the buying and selling of that NFT doesn’t make a ton of sense. OpenSea saw that and they launched a secondary marketplace and they decided to charge 2.5% instead of 5%. That’s kind of the OpenSea business.
There is room for primary marketplaces. I tend to think OpenSea, for a secondary marketplace, OpenSea is likely the winner. I think OpenSea is going to be a multi-billion dollar company. If you look at their GMV (gross merchandise value) over the past three months, it has been over a hundred million. They’re going to have their biggest month ever this month.
We just invested in a marketplace for music NFTs. I think music and NFTs are going to start exploding. So far it’s really been visual creators that are really capitalizing on this, but imagine when audio creators. There are some that are doing stuff, like 3LAU. As I’m sure many of your listeners know, he’s created some awesome kind of audio plus visual stuff. I’m pretty excited about just purely audio NFTs really exploding in activity.
We just invested in a platform that’s doing primary audio NFTs and building a strong brand around that because they understand the music space really well. They’re going to curate to get really high end, emerging artists on the platform and things like that.
What does that look like? Because, in a way, it’s funny because the logical side of my brain still feels like it doesn’t get NFTs. And yet, when the Kings of Leon NFT was announced, it was like, I have to have that. By the way, I paid $90 in gas fees for a $65 NFT. So obviously I seem to get it on an emotional level.
I was wondering for these music NFTs, are they going to be based on scarcity? Or is it still going to be something else? Like the Kings of Leon, I could get that on my Apple Music. Yet at the same time, I felt the need to buy the NFT.
For these music NFTs that you’re talking about, are they ones that people will be able to get through their subscription music service, or will it be something that is scarce?
I think collecting an NFT is all about authentic ownership. It’s not about owning a piece of music that no one else can listen to. It’s owning the true creation that was created by the artist that you love. That is the case with digital art. Like this Robbie Barrat, I own this. Anyone could show that off in a digital frame, but only I own the authentic version of that. I believe that if Robbie Barrat grows in importance in the world, then there will be demand in the future for authentic ownership. The same is true with music. What I like about a Catalog, which is the name of this marketplace that we recently invested in (catalog.works).
What I like about this marketplace is the team behind it is really plugged into indie music. Indie music is not well suited for existing platforms. If you’re someone brand new, it’s really hard to get distribution on Spotify. And SoundCloud, like five years ago used to be really good for this, but SoundCloud also changed their algorithm. For brand new artists, it’s hard to break through and connect with your fans. I think there’s an opportunity for a new kind of indie music discovery platform.
And so what Catalog is doing is kind of trying to bootstrap this new discovery platform with a business model that can get these artists who have maybe 10 fans, but that really love them, that are willing to pay a thousand dollars for their authentic piece.
I’ve started collecting stuff on Catalog for some new artists that I love. And for me, it’s not because I like want to be the only one to listen to this, or it’s that the music is scarce. It’s because the authentic ownership is scarce. And I hope that the artists that I buy on Catalog end up blowing and getting huge on Spotify. And then I think there’s going to be more demand for like that authentic first work that they dropped on Catalog. You know what I mean?
Okay. It’s like having a signed version of the book.
Obviously I’ve been talking about this on my show for months now, and still a part of of me is like, wait, why do these have value?
I’ve written a blog post about this. And I think this can be a helpful mental model. Humans fundamentally desire what others desire. They desire what’s scarce. Think about if you own a house. Part of owning a house is that you want to show it off to your friends and your neighbors or whatever. When you own a house, you show it off to a very limited number of people.
With owning an NFT, it’s kind of this global thing that you could show it off to the world. I think that explains why people are willing to pay millions of dollars. I know people that have paid millions of dollars for CryptoPunks that don’t own their house. I think that’s part of it.
It’s this like kind of belief that more and more people in the future will desire this thing. And it’s at like a global scale in a way that even like home ownership isn’t. I’m kind of very bullish on the longterm value of very blue chip or high-end NFTs. That’s why when you talk about a bubble, I think just like in 2017 when the high quality assets were good buys even at that time, I think kind of the same is likely to be true about NFTs. Because, again, it’s just like, why does any cryptocurrency have value? It’s belief. And it’s the fact that other people desire these things. Once the desire gets going, especially with like internet based products, it can get really big.
Obviously the difference with these cryptocurrencies is that they have utility, like Bitcoin has utility. Ether has utility.
Yet at the same time, I, while you were talking, just had this vision of Instagram feeds. It’s like people kind of show off their experiences, but now with NFTs sell sort of show off their possessions. And I think it’s like a different way of showing status, which, now that I think about it, I did see some commentaries saying NFTs are basically a way to show status. And I think maybe the more I think about it, maybe that’s what it is. It’s a hugely fascinating thing to me because obviously this just has taken off. It’s gotten a bunch of non crypto friends of mine interested. And yet, like I said, the logical side of my brain is like, why? I don’t get it.
Just to challenge you on that, I mean, there certainly are some cryptocurrencies now that have utility and that a lot of people are using. Cardano has a $75 billion market cap right now. Is that because Cardano has utility?
This is a good question because every time… often when I tweet now, I get spammed by these Cardano supporters who want me to do an interview on it. It’s fascinating, you know? Another good example is Dogecoin.
It’s belief, right? Why is everyone spamming you about Cardano? It’s not because Cardano is useful to these people. It’s because they own it and they believe it’s valuable and they believe it’s going to increase in value and they want you to talk about it. So I think NFTs are a good parallel. It’s the meme. I think it’s even more interesting because there’s actually a human creator behind it as opposed to these cryptocurrencies. So I actually think people could feel more attachment to a lot of these NFTs than they do these cryptocurrencies, but we’ll see.
I could see that. That makes sense. So I want to ask you a question about two people that I think you know well, who were recently on my show, Mark Cuban, who is an investor in 1confirmation, and Devin Finzer, the co-founder and CEO of OpenSea.
Mark told me that his light bulb moment around NFTs was when he realized that creators could get royalties in perpetuity off the secondary sales. Later, when I interviewed Devin, he said, he thought people would try to get around paying those royalties. And that basically that’s not going to be a thing kind of, or I don’t know if he went that far, but he kind of said the likelihood you’re going to get the royalties as a creator is you may not get them. So I was just curious to hear your take, how do you think that’s gonna play out? Do you expect that buyers will try to pay that cut to the creators or that they’ll try to circumvent that?
The data has already shown that there are collectors that want to honor that. SuperRare, for example, has paid out millions of dollars in royalties to crypto artists on SuperRare. I think that’s an important thing. It’s hard to enforce because, again, an NFT is about true ownership and people being able to do whatever they want with it. And so there may always be a marketplace that allows you to buy and sell it without giving that artist the royalty. And there probably a segment of people that will always want to do that on the buyer side. Particularly on SuperRare, I can just say, there there’s a collector community that really values what the artists are doing and appreciates artists work and wants to support artists.
It is a really powerful that an artist — if we ever sell this Robbie Barrat, Robbie will get a significant cut of that. And Robbie himself has already made tens of thousands of dollars in royalties from secondary sales on SuperRare. So I would say it’s definitely happening. I think it’s going to continue to be kind of a thing. How big it is and how much people actually honor that, I’m not exactly sure.
Oh, I see. So just for the people listening on audio, Nick, when he references this, he keeps pointing to a framed painting behind you. But I realized now, it must be digital because I see a cord hanging from it. So is that an NFT? And then that was a physical version that you got for buying an NFT?
This is a digital frame. So this is called a Mural Canvas 2, which you could buy for $400 and put it on your wall and show off your NFT collection. So there’s an app you can download. I basically have an app that I can change it and it’s fun.
I can show off my there’s a Coldie Vitalik which is one of my favorites. Coldie is one is kind of the OG crypto artists. He’s an awesome artist. He’s one of the first creators on SuperRare as well. So this is one of his best works in my view.
People, if you’re listening on audio, you should come check out the video to see this version of a Vitalik. It looks like a video game version of Vitalik or something. So in a moment, we’re going to have one more question about NFTs that I am curious about — but first, a quick word from the sponsors who makes this show possible.
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Back to my conversation with Nick Tomoino. One other thing that has been happening now that NFTs are taking off and normies are entering crypto, is that we’ve seen a lot of pushback against proof of work mining increase. And I wondered how you see these environmental concerns affecting mainstream adoption? And what do you think is the best way to address that?
All cryptocurrencies are narrative based. I think this is a narrative that is certainly picking up steam. It’s particularly picked up steam within the art community. With Elon’s tweet last week, it’s gotten even crazier, but a couple of months ago there were was a lot of talk within the crypto art community with them actually talking about this. Artists tend to be kind of socially minded and they actually were talking about this first. There was a segment of Ethereum artists who left to go to a platform on Tezos, for example, because Ethereum is still proof of work and Tezos is proof of stake. I’m TBD on like how big of a impact this has in the longterm.
Wait, because Ethereum is moving to proof of stake or why?
I just mean people caring about this environmental proof of work narrative generally.
Really? I feel like it’s just getting worse.
Well, it seems to be right now. I don’t know. It seems to be particularly from people that don’t like Bitcoin. Who don’t see a value in Bitcoin. I listened to actually part of your podcast last week. I think you had some really good guys.
Alex Gladstein and James McGinniss talking about proof of work and the environmental impact. It was a great show. If people missed that, they should listen to that.
Again, I’ve spent all my time on new products and cryptocurrencies, so I don’t understand much of what’s going on or have too much time to devote to environmental stuff. But from my perspective, it’s a narrative that people seem to care about at this current moment. But the main reason they care about it is because they don’t see utility in Bitcoin. And so I think, as more people care about Bitcoin and more people around the world recognize the utility of Bitcoin, I think that the narrative could die.
One thing I was thinking about is like, if you think about Tesla, right? Tesla, obviously, electric cars are better for the environment. But why do people buy Teslas? I’m sure there are some people that buy it for that. But I have a Tesla, I have a lot of friends that have Teslas, and all the people I know, they didn’t buy it because it was great for the environment — they bought it because it was a great product.
And it’s great that it’s great for the environment, but it’s a very — compared to any other car — it’s just the best product. I think in the long run, the best products will win and the environmental stuff will prove to be a bit overblown. That’s my view. I also recognize that environmental issues are becoming increasingly important and this could be kind of a blind spot for me.
I will have to disagree with you. So we’ll have to check back in a few years, because, from my perspective, I think that people are viewing climate change as becoming a worst problem that should have been addressed longer ago. And so the more time that elapses with it not being addressed, the worse the problem gets and the harder it is to fix it. So I feel like kind of the desperation of people who care about that issue is getting even stronger moment by moment. I mean, now with this new administration being more friendly to environmental initiatives, that might lessen. So we’ll have to see how this plays out.
I don’t disagree with that. I think, what I’m saying, is that a lot of people that are saying this about Bitcoin, don’t understand the facts of what actually is better for the environment. The traditional fiat system and payment infrastructure or Bitcoin. There’s no doubt that people are going to increasingly care about the environment, but I just think the narrative — the reality is different than the narrative. And as the product of Bitcoin proves to be more and more useful, the mainstream perception of that will adjust for that.
Actually this goes back to that episode that you referred to, because in that episode, Alex Gladstein of the Human Rights Foundation, gives a really detailed description of how the US dollar is essentially something called a petrodollar and how it’s basically fossil fuel money. And so it is interesting that Bitcoin is taking the brunt of this criticism when actually the US dollar really is heavily tied to fossil fuels.
So all right, so let’s switch tracks. We kind of keep going off on tangents. I have a whole host of other topics I wanted to touch on.
Ethereum is facing issues with scaling to layer 2 quickly enough to meet demand. And I don’t know if you saw this tweets from that Kain Warwick of Synthetix had. In it, he talked about how this problem has given a foothold to competitors like Binance Smart Chain and Solana. And I wondered, for you as an investor, how are you and your portfolio companies thinking about how to scale? There’s this period now where kind of DeFi is a bit fragmented in layer 2. So are you advising portfolio companies to all try to go on the same layer 2? Or are you having them check out building on other protocols entirely? How do you think this period is going to play out?
I would say it reminds me a lot of the 2015-2016 era of crypto, where there was Bitcoin that was working really well, that had a really passionate community of people. And then something else came along, like Ethereum, that the tribal Bitcoiners didn’t like. They thought everything was going to happen on Bitcoin. I think there’s still people out there that are waiting for Rootstock or some of these side chains, initiatives. There’s still people that think DeFi is going to happen on Bitcoin. It just shows you how biased people are and how tribal people in crypto are. So I use that example to say, like, look, we’re incredibly bullish on Ethereum and the Ethereum ecosystem.
Pretty much everything we’ve invested in as a fund to date, all the applications have been on Ethereum. It’s working really well. But I’m not someone who thinks everything is going to happen on Ethereum. That view gets you a lot of likes on Twitter. It’s kind of playing the card of the tribe. One thing I’ve always liked about Ethereum is kind of a more open ethos. And while there are some of these tribal people within… I mean like Vitalik is not himself tribal at all. And the culture of Ethereum is more open and inclusive and it’s always been. And so I hope the Ethereum community can kind of follow Vitalik’s lead on that and be open-minded to the idea of not everything happening on Ethereum.
I think just like in 2016, there are some promising initiatives at the layer 2 that are bringing scalability to Ethereum. Some of that stuff may happen. It’s probably going to take lot longer than we think.
I think if you’re a crypto art marketplace, where people are buying pieces of crypto art for thousands of dollars, then paying $50 or $90 for a transaction is okay. But for a $100 asset within a game or something, it’s just not viable.
I don’t want to dismiss layer 2. We have a few portfolio companies in particular that are using Matic right now. And well, I think Polygon, yeah. Everyone still says Matic, but yeah.
We’re very excited about other layer 1 chains like Polkadot and Cosmos that are bringing in new developers and enabling new use cases that Ethereum simply can’t support right now. And those use cases, the naysayers will say, well, where are those new use cases? These platforms have been around for many years now. It feels to me like we’re still kind in the 2017 period for Ethereum, where back in 2017, it was all speculation. There wasn’t billions of dollars tied up in Ethereum smart contracts. I think we’re kind of in that period for other layer 1s. I’m open-minded. I don’t have a strong view on which of those are going to win.
How I think about it is that it’s likely going to be a platform that offers something kind of new and different. I don’t love when I hear like a platform just talking about scalability benefits. Just like kind of executing the Ethereum idea better. What I’m most excited about is new ideas that are pushing the space forward in different ways.
One example is governance, right? Like Polkadot has a radical approach to on-chain governance. Ethereum is all about governance minimization. Vitalik has never been in favor of on chain governance. And I think something like Polkadot and the radical approach to on-chain governance is this kind of fundamentally new idea to crypto that is pushing the space forward. Whereas something like Binance Smart Chain or Solana, they’re really copying Ethereum and just trying to do it better. I don’t think that’s likely to really push the space forward and win in the long-term. Although I could be wrong.
Oh this is so fascinating — everything that you just said. So a couple of different questions. So, first of all earlier when you said that you, that some of your portfolio companies were on Polygon or Matic. Is that because you kind of tried to get a bunch of them onto the same layer 2? Do you feel that this period where the different smart contracts can be fragmented on different layer 2s is a problem?
We’ll give our feedback, but we let our portfolio companies kind of do their own thing. So we’re not necessarily directing them to any one layer 2. What I would say is I’m pretty excited about bridges that make layer 2s interoperable. Actually, one of our portfolio companies started on Ethereum which was a smart contract wallet, and they’ve kind of pivoted to creating a hop exchange, which is kind of a bridge that connects, that makes it easy to go from one layer 2 to another. And I think that’s something that is interesting and that could play out. Hop is not the only one, there’s another one I think, called Connext. So there are teams that are working on making this seamless.
I think the truth is, there’s not one layer 2 solution that has enough momentum that there’s one clear one to go do. They all have different trade-offs. dYdX is in our fund one — I know you’ve had Antonio on before. It’s one of the most underrated products in DeFi, I think. They are are building on StarkWare. StarkWare has its own set of pros and cons that Antonio really liked. So I think it’s still kind of wide open and I’m all for different experimentation.
I think that in the long run, it’s possible that they are connected. It may be clunky. It may make sense to be on another chain as well. I’m not someone that thinks everything needs to be on Ethereum. Although I do think Ethereum has the best chance of any as being the long-term winner.
That was my other question for you. It sort of seems like what you’re saying is that you feel like for a smart contract platform, that Ethereum kind of has the lead and that it’s going to be hard for anybody else to take that mantle. And so that’s why, for anything else, if you’re going to invest in something that even seems slightly competitive, it has to have a different feature, like what you were saying about Polkadot and its governance. Is that correct?
Yeah, let’s talk a little bit more about Polkadot because you have really invested in a lot of Polkadot ventures. I wanted to hear a little bit more about how you don’t view it as competitive, because I’m sure you’re well aware there are many people into Ethereum who do view it as competitive.
Is it competitive or is it kind of cooperative? I view like Bitcoin — I guess it depends how you look at it, right? I think how we should look at it is that projects that are pushing this space forward are only good for the existing incumbents. Which I would say Bitcoin and Ethereum are. Ethereum, while it’s cut into the market share of Bitcoin, I would argue it’s been very positive for Bitcoin and Bitcoin wouldn’t have the market cap that it has now if Ethereum wasn’t around. Because Ethereum, with all the innovation stuff, DeFi and NFTs that we’ve talked about, that’s bringing new people to the space. It’s Ethereum. So I think we should be open-minded about the fact in the Ethereum community that there could be something else that comes along.
If you’re looking at the total pie of smart contract platforms, could it cut into the pie? Yes. But I think it would grow the pie immensely. And potentially thinking about it as kind of a cooperative rather than competitive, I think is a more healthy way to look at this. I would say what I like about Polkadot — and particularly like the radical approach to on chain governance — is this idea of like a 12 member council that is making decisions.
There are great things about governance minimization. It makes it tough to change. If you have a product that just exists, it’s a good approach. And so it’s good for something like a store of value like Bitcoin, maybe it’s good for like a dex that just works, like Uniswap.
But if you’re any type of product that like needs to rapidly evolve, I think the a hundred billion dollar question is: how do you create some type of decentralized governance that can actually evolve? No one has really done that.
Ethereum effectively has the same governance as Bitcoin. It’s been really slow to evolve. It’s been able to evolve better than Bitcoin because Vitalik’s the benevolent dictator who’s still around and can kind of kind of rally the whole group. I’m very excited about this idea of a decentralized governance that gives power to token holders, but can evolve faster than the governance minimization approach that we’re kind of seeing as commonplace in crypto today. And that’s kind of the promise of something like Polkadot. I think the Polkadot governance is wildly unappreciated and unexplored.
I’m not saying it’s like fully fleshed out and it’s necessarily working great, yet. But, I think this idea of voting in a council, the council can make decisions, quick, but if the majority of token holders disagree with the decisions, they can vote against those decisions, so that the council doesn’t have unilateral power. I think that is a really powerful idea. That’s going to exist in some kind of way, shape, or form in the future. And that’s why I like that Polkadot really brings something new to the table that no one else in crypto is really doing.
Yeah. I’m also hugely fascinated by these governance issues and that’s something I’m really keeping my eye on.
Let’s switch tracks for a moment. I wanted to ask about Coinbase because obviously as we discussed, you were an early employee there. As I’m sure you’re well aware, oftentimes in crypto, there’s this comparison made between investments made at the protocol level and investments made in applications. And I was curious, as somebody who probably just experienced a nice little windfall from the Coinbase direct listing, but who also has probably made a lot of money via tokens themselves, what’s your take on that Fat Protocol Thesis? Can the earnings from applications still compete with earnings from protocols?
I think the upside is just greater if you’re a cryptocurrency based project. What we’ve seen over the past three months, with even Coinbase’s valuation. The fact that Cardano again, not to try to bring it up again, but it is valued at like a 50% higher valuation than Coinbase right now shows that, for whatever reason, for this new paradigm of crypto, people think about value differently. Well, not for whatever reason. I think a big reason is that anyone can participate and so you have just a bigger pie of potential investors. And that’s a big piece of it.
The Coinbase IPO was great in the sense that for the people that pay attention to Wall Street, read the New York Times, and care about that world, it was more validation for crypto. But I think it wasn’t that big of a deal to crypto people — and I’m a crypto person. A token as a way to capture value is kind of definitely the model that I believe in more. I haven’t sold any of my Coinbase stock. I’m a believer in Coinbase as this utility for the ecosystem, but in terms of where I see upside, it’s very much in the cryptocurrencies rather than the companies that are trading on Wall Street.
Okay, so maybe the Fat Protocol Thesis is still in place. So as we discussed earlier, you’ve invested a lot in these various DeFi protocols. What sort of threat do you think dexes and other decentralized applications or DeFi in general could pose to Coinbase eventually?
I think it’s definitely a threat. I don’t think it’s a huge threat. I mean, it’s a threat to Coinbase’s crypto to crypto business. The moat that Coinbase has is the regulatory moat and the bridge to fiat currencies. DeFi is not going to be able to play there.
There’s been initiatives. I think there’s still more money that’s outside of crypto than in crypto, and being an on ramp to crypto is a good business. So I don’t know. People in crypto, again, it’s this tribal nature where it has to be Uniswap winning and Coinbase losing or something like that.
I think that’s because people are tribal and competitive. It’s more cooperative and collaborative. I think dexes growing, I actually see as good for Coinbase because more people are getting utility out of cryptocurrency. That’s going to bring more people in. That’s good for the core Coinbase business model. So I don’t know. I’ve never viewed Coinbase as like a super innovative company that’s like doing new products to push the space forward in a big way. It’s just like this utility for the ecosystem that I think works really well. It’s really valuable and it’s good at executing. And I think there’s certainly room for that to exist and dexes to exist and thrive.
Let’s kind of pull this all together just for the rest of the year. Obviously, this bull cycle has been super interesting because, at least to my eyes, it has been driven by a few different things. Obviously there’s this trend with Bitcoin being taken up by institutions in a big way. As we’ve discussed, NFTs taking off amongst normies. Then DeFi kind of had its moment, but the gas fees kind of limit who can participate in that. Where do you see the rest of this year going? Which I think most people would say they’re expecting this bull cycle to last through that period.
I’m not sure about the cycle. I’m not a trader, I’m not good at timing markets. I could tell you, the types of new products that I’m most excited about that I think we could see an explosion in are what I call DeFi and NFTs for the masses.
I think, as you alluded to and we talked about, the fees on Ethereum right now for the vast majority of Ethereum applications, price out the masses. It’s still mostly rich people and crypto rich. I think that needs to change. I think that’s going to change once we see applications on new chains and we see layer 2s really thriving.
I’m really excited about people being able to make a Uniswap trade for a hundred dollars and buy a hundred dollars worth of Ethereum really easily. People buying a hundred dollars and or a $50 NFT on OpenSea within a game. Things like that, I think is likely to be the next leg up for crypto, whether that happens in the next six months or it takes a couple of years — I’m not sure. For us, that’s what we’re kind of going to be investing in over the next several years. And I think it’s a good long-term bet.
And then earlier, when you were talking about Polkadot and the governance, I was curious also for your take on certain things that a lot of people are interested in, but haven’t really taken off yet, but you think will in the future. And I wondered if DAOs was one of them and if there’s anything else that you see on the horizon that you want to mention, I’d like to hear what you’re seeing there and where you think it’ll go.
DAOs are already happening. I think there’s a lot of people that have like kind of anointed DAOs as the next thing after DeFi and NFTs. I’m not super bullish on that, as DAOs being like a thing that really brings in new people. I think DAOs — like on-chain treasuries are happening and voting on how to allocate funds in on-chain treasuries, that’s happening for many Ethereum in projects and Polkadot projects. Now I think an open question is like, will there be a product or a tool that makes it easy for anyone to spin up their own DAO for anything? And that’s something that I’ve been excited about, but there’s challenges with it.
I’m bullish on DAOs. Anyone who’s in cryptocurrencies thinks Bitcoin was the first DAO. Any truly decentralized cryptocurrency is, in effect, a DAO. I’d love to see an explosion of DAOs. I haven’t seen any product that is enabling that.
I guess another category that I’m very excited about, that I think we will see in the next five years — I don’t know it’s going to be one year or five years — is decentralized media. And NFTs itself is kind of a version of decentralized media. But we all see that the issues with the centralized social media companies, for example. Can someone kind of crack the code, if you will, and create a product that people really want to use because of the product, not just because of the investment opportunity?
We’ve seen things like Steem in the past and BitClout now, which is trying to like bootstrap this thing by by pure getting people excited from speculation. I’m not super bullish on that. I’m more bullish on something crypto native that the crypto community really gets behind from a product perspective and that something new and different that ultimately, the whole world uses. I think that will happen like in the next five years. I don’t think it’s been built yet.
All right. Okay. Well, this has been such a fascinating discussion. I’m so glad we were able to connect. Where can people learn more about you and your work?
I guess just go to 1confirmation.com. That’s our site. @1confirmation on Twitter. I’m also @NTmoney on Twitter. Follow Richard Chen as well. My partner, @Richardchen39 on Twitter.
All right. Great. Well, thanks so much for coming on.
Thanks so much for joining us today to learn more about Nick and 1conformation, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thanks for listening.