WBD021 Audio Transcription
Token Economics and Raising Crypto Capital with Jill Carlson
Interview date: Friday 15th June
Note: the following is a transcription of my interview with Jill Carlson. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview we discuss token economics, raising capital for Crypto projects compared to traditional startups and the general state of the market.
“For the first time there is no longer a monopoly on the creation of value or monetary systems, that is really What Bitcoin Did.”
— Jill Carlson
Interview Transcription
Peter McCormack: Hi, Jill.
Jill Carlson: Hi, Peter. Good to be here.
Peter McCormack: Welcome to London. We're sharing a mic here because I seem to have broken one on my travels. So, you were at Consensus last week?
Jill Carlson: I was indeed, amidst the madness!
Peter McCormack: What did you make of it?
Jill Carlson: Well, the Conference itself was an absolute mess, in my judgement. I spent about two hours just walking the floors, checking out the booze, taking in the scene, and, I'll be honest, it was difficult to walk away from that experience feeling very good about a lot that's going on in the space.
Peter McCormack: What was it that was worrying you?
Jill Carlson: Have you seen the movie The Big Short?
Peter McCormack: Yeah.
Jill Carlson: So, there's that scene in The Big Short where they walk into the mortgage conference in 2006, and it's set in Las Vegas, and there's just crazy hype around the market and there's the guy standing up on stage saying that the mortgage remains the bedrock of the American economy and the market is going to continue going higher and higher; it just felt like that level of peak bubble hype insanity to me.
Peter McCormack: Was there anything you did see though that you did find that was promising?
Jill Carlson: Yeah. So, that was the conference itself; I would say that what was really good about it though, about the whole week, was that it did bring together a lot of the people who are doing a lot of the really hard work building in the space. A lot of the meetups that happened after the conference, or on the side around the conference, were really positive, and that was a nice reminder that progress is being made; there are people who are there for more than just the Lambos!
Peter McCormack: Wasn't there a bunch parked outside?
Jill Carlson: There were, yeah.
Peter McCormack: I didn't see them.
Jill Carlson: Yeah, there's a whole crew of Lambos that rolled up every day, mid-morning, that I think was just more of a mean than anything else; I can't imagine that was being done in all seriousness. But it was a nice contrast between that and -- there was also this scene of protestors outside that I think was just being put on by Cryptograffiti or maybe one of the other artists in the space of people. It was mock bankers protesting against Bitcoin, cryptocurrency, which was hilarious and also a nice juxtaposition with all of the Lambos parked outside.
Peter McCormack: So, I read every word of your blog. I'd read one of your articles before, which I mentioned before we started, but I've now been through and read every word of every blog article you've written.
Jill Carlson: I'm not sure that's recommended!
Peter McCormack: No, it's good, actually.
Jill Carlson: Mostly just rants!
Peter McCormack: Well, no, actually it's pretty good. There are a couple on your Medium which haven't put on your blog. So, I've read it all and I thought it would be really interesting to meet with you and talk with you, because you've got a really interesting way of looking at the past but also, therefore, looking to the future. So, I've got a whole bunch of questions but, for context, you've just quit your job recently?
Jill Carlson: A while ago, actually.
Peter McCormack: Oh, was it a while ago?
Jill Carlson: Yeah. I've been freelancing for the last six, nine months.
Peter McCormack: Oh, right. Sorry, I'd associated it with the article.
Jill Carlson: My LinkedIn might be out of date.
Peter McCormack: Right, that's maybe what it is. So, can you, for context, talk about your previous roles at Goldman Sachs, then your role at Chain and then now you've gone freelance, just so people know you are, what your background is and then what you're doing now?
Jill Carlson: Yeah, absolutely. So, I started out my career as a bond trader at Goldman; I was trading emerging markets, debt and derivatives. So specifically, I was trading the sovereign debt and credit default swaps of countries like Argentina, Venezuela; it was some really basket case economies and governmental systems going on, especially at the time.
I was on the desk when Argentina defaulted back in 2014/15, I was on the desk when Hugo Chávez died, in Venezuela obviously, and it was through that lens that I was first really introduced to Bitcoin actually. A broker friend of mine, who's based in Argentina, called me up one day in about 2013 and said, "Jill, you've got to check out this Bitcoin thing; I've just managed to get money off shore for the first time in a decade", and that really struck me as, "Okay, there's a real use case here for this stuff".
So, I started to get curious about it back then. Never in a million years would have thought that I would wind up working full time on Bitcoin or in the space of cryptocurrency. In fact, it was a running joke on the desk at the time, because I was spending so much time researching it, trading it around a bit, trying to figure out how the hell to buy and custody this thing; this was even before Coinbase was mainstream.
There was a running joke on the desk that, "Oh, Jill's going to be the partner on the desk of cryptocurrency trading at Goldman Sachs one day". Of course, back then, that was preposterous. A handful of my friends at Goldman have reached out to me over the last few months saying, "Hey, now we're setting up a cryptocurrency trading desk". So, funny to see how things come full circle.
I left Goldman a few years back to go pursue an advanced degree in economics, political economics. At the time, I was going to school to study what I thought was going to be a pretty mainstream topic of sovereign debt sustainability, the dry topic in economics. By the time I got to university though, by the time I got to this Master's degree, I was fully down the crypto rabbit hole, went in to my supervisor the first day and said, "I'd really actually rather study the impact of this thing called Bitcoin on financial markets and regulation, and what's going to happen here". I got a lot of raised eyebrows, as you can imagine, but studied that anyway, wrote a dissertation on it.
Coming out of that, I worked at Chain. Chain is a start-up based in the Bay area, focused on enterprise blockchain, so, that fit well with the combination of cryptocurrency and Wall Street background. Left that last summer, so going on nine months or a year ago, to start working with a bunch of friends that I had in the space who were starting a variety of start-ups and launching cryptocurrencies, launching ICOs, the first of which was Tezos, so I worked with Kathleen and Arthur a bit on that, and from there expanded the portfolio to have done some work with the likes of 0x, dYdX, a lot around decentralized exchange. I've done a bit of work with CoinList and a handful of other organisations.
Peter McCormack: What kind of work are you doing for these guys?
Jill Carlson: So, just generically at very high level, anything business or operations related. So, with decentralized exchanges, one of the huge challenges that that space is facing is just how to bootstrap liquidity, so trying to strategise around that is a very tough problem. With some of the ICO projects I've worked with, it's been a lot more around how to structure things from an operational or corporate governance perspective.
So, as we were mentioning earlier before we kicked off, I've done a decent amount of thinking around how these types of projects can and should be structured and what that looks like, not just over the short term but over the very long term. It's a complete paradigm shift from what we'd normally think of as a start-up that's aiming to be cash flow positive and profitable; these are you're usually dealing with two to three entities for a given project, there's usually no revenue model, etc.
Peter McCormack: Right, and that's something you've written about specifically with regard to how these companies are managing cash flow in terms of tokens. What is your fear with this?
Jill Carlson: Yeah, so exactly. My fear is that these companies, these projects, are going to run into a situation down the line where they're eating away at the resources they have. Even if today, it seems like they're eating away at it but at such a pace that they'll never catch up with the growth of their treasuries, because they're inevitably sitting on a bunch of crypto assets, whether it's their own tokens, whether it's the Ethereum or Bitcoin they've raised and everything's gone parabolic, or at least until the last few months, that's just not really responsible risk management; also, you're ultimately going to run into a cash flow issue.
If I were to throw to my hands up and say, "Right, I'm just not going to worry about my own income; I'm not going to worry about generating more and more cash flow for myself as an individual ever again. But I have all of these investments that I've made and I'm just going sit on those investments and hope that, over time, they appreciate at a faster rate than what I'm spending on living my own life, and presumably that spending is going to go up over time", I'm going to run into an issue, probably, eventually. Markets correct, markets crash, and you just don't want that much correlated risk in your portfolio.
Peter McCormack: So, one of the things I've struggled with is the difference between enterprise value and token value in that, in enterprise value, there's a traditional P&L, there's a traditional target to be cash flow positive after a certain amount of time or, if not, refinance as long as you're on the right trajectory. With a token-based economy, it seems a bit different, and I can't picture how that works. Is that something you've looked into?
Jill Carlson: Yeah. So, one of the funny things to consider about fundraising via a token is, and I'm certainly not the first one to say this, but you're basically executing your seed round and your IPO at the same time. Now, usually when companies IPO, it's because they've reached some sort of an escape velocity in terms of their growth, in terms of having a proven revenue model, if not a profitability; and generally, they're not so worried about having to do another fundraise, at least in the short term.
Now, what you find with token projects, however, is when you're conflating that seed round and the IPO at the same time -- there's a reason why early-stage start-ups don't just go out and IPO; it's because there's a lot of uncertainty, it's because things aren't proven yet, they don't know how much funding they'll need down the line. But if you've made this promise to your investors that this is it, basically, you're not going to issue some other deluded funding round and massively damage that investor base that you have, or perhaps not investor base, donor base, as the case may be in token land, then suddenly you've backed yourself into a corner and that's all you get; I think that that could also prove very problematic.
Peter McCormack: So, it's like one shot; you've got one shot?
Jill Carlson: It feels like it oftentimes, yeah, and maybe that one shot has yielded you $50 million or hundreds of millions of dollars; but again, if you take a step back and you look at the amount of the funding that most start-ups raise over time, there's this sense amongst people right now that, "Oh, $50 million, well, that will give us a runway ad infinitum"; that's just not the case.
Peter McCormack: No. I guess the lesson from traditional fundraising is there is a reason to have a seed round and a Series A and a Series B. Also, with these tokens-based economies and tokens-based businesses, I feel like without venture funding, they're almost missing a layer of advice and support that they would get that comes along with the venture funding; whereas, people who invest in the tokens don't really have any influence over what the business is doing.
Jill Carlson: That's what keep me in business! But in all seriousness, I think that's absolutely true. I think that something that a lot of, especially the earlier projects -- now, most of the time, you see a pre-sale happen or some sort of equity round happen that does include some of these very seasoned angel investors or else even the big, major VC funds that does provide that advice and that support that you mentioned. But I think, especially amongst the projects that we're first to market with this model, that's something that was massively discounted; I would argue wrongly so.
The fact is that, as much as everyone, at least in Silicon Valley, loves to hate on the VC model, unless you are a venture capitalist of course, it exists for a reason, just like the classic seed, Series A, Series B and so on structure exists for a reason. I think that that's speaks to a much larger trend actually in cryptocurrency, which is that people who have come into crypto, they love to reinvent things that have, for a very long time, been in existence.
I was just having a conversation the other day with an absolutely brilliant young entrepreneur who's creating some very convoluted but very interesting, I think, structures using state channels. At the end of this five-, ten-minute long conversation, I just scratched my head and said, "Oh, so escrow; we've created escrow accounts?" He was like, "Yeah, that sounds about right actually", it's just like, "Okay".
This is absolutely an interesting new experiment and perhaps changes some of the fundamental ways that we might think about these concepts, but there's no need to go back and reinvent the wheel on everything. Sometimes, some of these financial concepts or else just best practices in business, they exist for a reason and maybe we shouldn't throw out things like raising equity rounds, turning to VCs for advice, support and all of the other value add that they have; there's no need to reinvent the textbook on things like revenue model and business model, etc.
Peter McCormack: I think one thing that I found interesting when reading one of your articles is that, and I hadn't really thought about it, but a number of these, let's call them utility tokens, have a native token and you questioned why don't they just use ETH or Bitcoin? I thought that was interesting, because actually, if they use ETH or Bitcoin, they're essentially just replacing the dollar bill or the pound with a universal monetary token that sits globally. But actually, it feels a bit more like they would treat it as an income and then have almost like a P&L just based on crypto; whereas, with a native token, I don't see the model working the same.
Jill Carlson: Yeah. So, I'm glad you asked about the native token. My thinking on this has actually changed pretty substantially over time, but I'll walk you back through it. When, and I don't mean to call them out, because I actually think that the project in many ways is brilliant, but specifically when Filecoin came along, and they were the first example in my mind that I, at least, really took notice of, of being a so-called utility token, something that's having utility within their network, within the technology that they're shipping; when that came along, I thought, "Oh, this is just really silly. This is just conflating their fundraising, their equity round with, okay, maybe something that they need within the network, but in reality, I would much rather just use the ETH that's already in my wallet than a Filecoin. They're really only just using this model in order to (a) be able to fundraise at the time, and (b) in many ways, not actually have to worry about revenue, or so they think, because they'll be sitting on all these Filecoins that are going appreciate in value, etc; we've been over this".
I still maintain that that's true for a lot of these utility tokens, meaning that there isn't a really compelling reason to have that exist as opposed to just using ETH or Bitcoin or something that was pre-existing. It's a bit like, I moved into a new apartment building a few weeks ago and, in that apartment building, kill me, there's a communal washer/dryer that I have to go in and put quarters into and, guess what, for the first three weeks that I lived in that building, I didn't have any quarters lying around. Who has spare change anymore? Who uses fiat anymore; am I right?!
Peter McCormack: I've actually got a quarter on me.
Jill Carlson: Oh, this guy does! A US quarter?
Peter McCormack: Yeah. I was in a shop earlier and I tried to pay with it; I tried to pay, and I thought it was a 10p piece and they gave it back to me.
Jill Carlson: This guy's got the dirty fiat on him!
Peter McCormack: You can keep that for your washing!
Jill Carlson: Perfect. Point being, I didn't do washing for three weeks because I didn't have quarters. I tend to think that, for many of these utility tokens, the story's going to be the same where it's just added friction to the user experience; no one wants it, no one wants to be having to change whatever it is they're already using into another token that they're going to have to go on Poloniex or Binance or so on to access.
So, that's been my baseline thinking around utility tokens all along. As of late, it's evolved a bit and the evolution of it is not that now I suddenly think, "Oh, utility tokens actually have some native utility", it's more just like, "Well, shit, now we have all of these things; they're probably not going to go away". Everyone who's building in the space seems to have bought into this idea of, "Oh, yeah, utility tokens are fine".
So, now my thinking is more around, "Right, how can we make it such that these utility tokens can be seamlessly transferred from one to another, exchanged from one to another, without adding friction to the UX?" That's a big part, actually, of what has gotten me really excited about decentralized exchange, is because with something like 0x, there's the possibility that I can go into IPFS and purchase some file storage using Filecoins without even ever really knowing that they've changed from ETH to Filecoins. I think that that is, if we have to live in this world where utility tokens are a thing, I think that that is probably the most compelling vision of how it ends up looking.
Peter McCormack: So, I started reading more about atomic swaps, and I had two questions about it. The first one is, it seems to me like atomic swaps give you the ability to not need to hold all these different tokens and that you can just hold Bitcoin or just hold ETH and therefore, with atomic swaps, at the time of requiring a Filecoin, you could just do an atomic swap which made sense to me. I thought that saves this hassle of jumping between exchanges and holding multiple currencies.
Then, at the same time, I was thinking, "Well", and I put it out on Twitter and I still haven't seen a compelling argument; but it seems like therefore, atomic swaps almost devalue everything apart from the top two or three coins at the top of the food chain, because what is the reason to hold them then?
Jill Carlson: So, this is actually where I start to think that the token model might be interesting from the perspective of just inventing a new sort of asset class where the reason for holding them is merely because you think that the network is going to continue to gain value over time; it's a means of exposure to it. Now, I still struggle with that a bit, because there is no way to really fundamentally value them today. It's not like the case of equity where there's this contractual arrangement where you own a bit of the network. You don't own a bit of the network, you own a bit of the asset that's moving around in the network.
With increased usage, whatever, should that asset necessarily go up in value? Not necessarily. It starts to get into questions of velocity and so on that Chris Burniske and others have written a lot on, but we've yet to see any of that really proven out, so I remain a bit of a utility token sceptic. I do like this vision of, "Right, if we have to live in this utility token world, then something like 0x, or atomic swap models, or whatever, will just abstract it all the way", because I frankly don't really want to have to deal with anything else besides Bitcoin, and maybe ETH if I have to.
Peter McCormack: But you don't own any ETH, right?
Jill Carlson: You'll note I took that off of my Twitter handle actually yesterday! I think that we've hit something of a local minimum in it, but we shall see. I hate making price predictions out loud, so that's as close as I'll come to one.
Peter McCormack: So, back to that point on utility tokens, the way I try to picture in my head to simplify it is that, it was almost like buying up a bunch of tickets to Disney and standing outside the Disney estate and, if enough people come, you could sell them at a profit because the demand's there; but if there are not enough people coming who want to come to Disney, you're going to have start selling these tickets at a loss.
My fear is that, in planning ahead, the token supply from any of these projects is huge, and once these projects start actually delivering services, the velocity's not going to exist for day one, or it might have a spike on day one, but the reality is I think the market will probably drop for all of these coins; there's a potential that a lot of people are going to lose a lot of money.
Jill Carlson: That's absolutely a possibility. Well, I think there are two things here, and it's important to distinguish velocity, which is this notion in economics of basically, the rate at which money supply moves around an ecosystem or market, and then liquidity; I think that they're both important considerations as we try to make predictions about how these utility tokens will behave.
The one that I actually worry more about is liquidity. Let's say we live in this world where something like decentralized exchange, it's abstracted everything away on the back end. Well, okay fine, we're living in this world where we think of things as disintermediated, and therefore there aren't third party rent-seeking intermediaries and so on, but you're still having to exchange those tokens; I'm still having to buy the Filecoins even if it's abstracted away from me.
If someone can buy those Filecoins from someone on this back end, and likely that's a dedicated professional market maker, there's nothing really you can do about that, and that market maker is going to be charging some kind of liquidity spread. So, is it this case where we've actually just replaced the old boss with a new boss and it's really the same thing here? Meet the new boss, same as the old boss; that's the quote.
There's still some sort of rent-seeking going on, it's just that we've displaced it from third-party coordinating intermediaries that we see and we're clear on, we've substituted in these market makers that are just going to sit on the back end of these systems.
Peter McCormack: The other thing is actually, of all the different categories of crypto and blockchain projects, I actually find the utility tokens probably the least interesting in that I understand Filecoin, it sounds interesting, but really what is it that's going to take me from Dropbox to that? Is there going to be a significant difference in price and the same user experience? Okay, maybe. Possibly, I see a niche use case for people who are worried about the files they're storing; they want to decentralize.
There are a couple of things I find a little bit more interesting; I feel like cryptocurrencies, themselves, as a monetary unit, a lot more interesting. I've read part of your article about Venezuela. Do you know Alejandro Machado?
Jill Carlson: Yeah, well, I know him on Twitter.
Peter McCormack: So, I interviewed him a couple of weeks ago; it's not out yet. We had a long conversation about Venezuela, and he was telling me, even with the dip from $20k to $6k, if you hold Bitcoin, you still have more bolivar at the end of the month. So, I find that really interesting because it's an actual use case, and I find ironically a lot of the things that Anthony Pomp talks about interesting, even though he inspired your article.
Jill Carlson: Thanks, Pomp!
Peter McCormack: Yeah. Thanks, Pomp! I find a lot of the things to do with asset tokenisation -- I interviewed Trevor from Polymath about that and, again, I find that really interesting because that's a real use case. With everything you know, and your experience and your background, what are the things that excite you most and the things you think there are actual use cases and the things you think people aren't going to use?
Jill Carlson: So, I absolutely think that today, it still comes down this censorship-resistant, tamper-resistant form of money. Like I said, the way that I first understood cryptocurrency was through this lens of hyperinflationary emerging markets, or emerging markets where there are very strange capital controls in place; that's where I still see a lot of the utility and the value in these things, is in places like Venezuela where at this point, it's almost descending into a state of Mad Max anarchy.
I've spoken to people who've told me that it's devolved into almost a barter economy where people will bring their bananas, or whatever it is that they have on hand, to the marketplace and exchange it for goods and services, because that is just more efficient than using the bolivar, using the national currency. If there is anywhere where cryptocurrency makes sense, it's surely in an environment like that.
I think the thing that's really transformative about all of it, and this is the thing that I had to remind myself of as I was walking away from the madness of Consensus, and frankly that I have to remind myself of every few weeks as I receive whatever ICO pitch that just makes no sense, I just keep coming back to this idea that, for the first time, at least since the Peace of Westphalia or whatever, we have certain modern nation states, for the first time, there's no longer a monopoly on the creation of value or monetary systems; that's really what Bitcoin did.
Peter McCormack: It's a great quote. Okay, so let's delve into that. So, with Bitcoin then, obviously there's a specific use case with basket case countries like Venezuela, but do you see a wider use case?
Jill Carlson: For now, I think that the wider use case remains this digital gold or digital store of value, which I know a lot of people love to say, "Oh, well, how big of a deal is that really? How many people do you know who store gold bars in their basement?" Well, firstly, they wouldn't tell you about it if they did in all likelihood, but I do think that that is a much bigger deal than people give credit to.
Often when I say this to people, especially people who are just getting into the space and really excited about it, they raise their eyebrows at me and they say, "Well, if that's it then why are you devoting your career to this; why are so excited about it?" But I do think that is a really, really big deal in ways that people who want to see this vision of the whole decentralized web, so on and so forth, tend to dismiss.
Peter McCormack: Why, though; why is it such a big deal?
Jill Carlson: Well, again, I think it comes back this idea that there's no longer a monopoly on the creation of money and value, and specifically there's no longer a government monopoly on that. Suddenly, there's this globally acceptable and globally transferable unit of value that I don't need a vault to store, that I don't need to trust an institution or bank to store, and that I don't need to be, at least in theory, a member of the upper class or upper echelons of society to have access to.
Now, have we seen any of that really come to fruition yet? I don't think so. I think that's there's a lot of work to be done in order to make it actually be used in these ways. But I look at things like innovation and custody and I think that that's a good step in the right direction, or I look at work that a company like Bitpace is doing, and I think that that's a massive step in the right direction as well.
Peter McCormack: Do you believe it has to be used to spend to give it the value; do we need to have the flow -- because I struggle to understand something that is a store of wealth if it isn't also some form of means of exchange. I know, at the moment, along with Ethereum, provides a liquidity to most of the crypto market but, if there's no ability to spend it on something, I struggle to see it maintaining value; I understand it's just psychological.
Jill Carlson: Yeah. There, I think, that the right comparison is to commodities markets, gold, especially the precious metals. How many people do you see going around trying to buy a coffee with dockets of gold or what have you, and yet that obviously is still endowed with value by the markets? But a massive amount of that is also speculation, so I think today that's the right comparison.
Now, I think that down the line, as Bitcoin becomes more viable to be spent on day-to-day goods, I think that the case for value becomes stronger and stronger, and I think developments with the Lightening Network, and so on, are going to be really critical to see that come to fruition.
Peter McCormack: Are you a Bitcoin maximalist with this are there any other monetary tokens you like?
Jill Carlson: Do you know what, everyone I meet all of a sudden wants to tell me that they're a Bitcoin maximalist. It's suddenly become this en vogue thing to go around saying, "Oh, yes, I'm a Bitcoin maximalist". There's someone, I think it's Chris Burniske, is running a Twitter poll right now that says, "Are you a Bitcoin maximalist?" For the record, I answered no, because I think that very, very few people are Bitcoin maximalists in the traditional sense, but it was something like 45% yes response to Bitcoin maximalist.
Peter McCormack: I don't believe that.
Jill Carlson: I posted this funny meme a few weeks ago about --
Peter McCormack: Is that the four brains?
Jill Carlson: Yeah, it's the four brains, and normal brain is Bitcoin and then the semi-galaxy brain is Bitcoin and Ethereum, and then suddenly the galaxy brain is all of these altcoins, Bitcoin, Ethereum, Litecoin, Dash, Monero, Zcash, so on, but then they alter a galaxy brain and it's Bitcoin again. I feel like everyone who came into the market in the past year has suddenly come around throughout this crash and said, "Oh, maybe Bitcoin is really the only one with the value, and a lot of the really sensible people in this market seem to be these 'Bitcoin maximalists', so I'm going to be one too". Nothing wrong with that; I think that Bitcoin still today has the most proven out value.
I think that one really underestimated thing about Bitcoin is its governance model. To me, one of the big takeaways from the, at least for now, resolution to the scaling debate, if you can call it a resolution, was that the model works, that the governance model works. If you want to revolt, go ahead and fork, we'll see how successful that is; otherwise, yeah, it's a dogfight to get anything implemented into the Bitcoin Core codebase, and that's exactly as it should be. Your money shouldn't be trivially upgradable, nor should there be one forceful individual or institution in charge of what those upgrades are.
So, that's the reason why I've been most consistently impressed with Bitcoin and the community around it. That said, I again would not tout myself as necessarily a Bitcoin maximalist. I think that there are lot of other projects out there that offer a lot of value; I think that the privacy coins, Monero and Zcash, are great examples of that. I think that some of the work that's being done in the Ethereum community is absolutely incredible and I'm really excited to see where that goes.
I think that a lot of these other platforms that are coming to market, these smart contracting platforms, have a lot to offer as well. So, the jury's out, but for now I would absolutely maintain that Bitcoin has proven itself out the most of any of them.
Peter McCormack: I think that meme actually, beyond just being quite funny, is actually quite interesting, because I think it reflects the journey you go on with crypto in that you usually discover Bitcoin and then you discover all these other things that you think are great, possibly a little bit biased because you make a bit of money on them, and then you come full circle. I don't think it should be binary, Bitcoin maximalist for everything; I think what happens is if you get a broad vision and then it narrows and you realise, actually, there are only a few genuine use cases.
So, I would never be a Bitcoin maximalist. I love Monero; I think Monero's great. I don't see a need for Zcash. I see a potential need for Litecoin as a backup when Bitcoin is busy, but I'm just starting to see a narrower use case. Also, if you're investing in most of these long term, will they hold value long term compared to Bitcoin? So, I understand that. Let's talk about stablecoins.
Jill Carlson: Oh, good!
Peter McCormack: You've talked about stablecoins; I don't get them unless it's pegged. To me, there's no such thing as a stablecoin, because a stablecoin is volatile or stable, depending on what it's pegged to. The only case I will truly understand is pegged to a specific currency; I don't understand any other. So, can you tell me your thoughts on stablecoins; what am I missing?
Jill Carlson: Yeah. So, for the sake of argument here, we'll define a stablecoin as a coin that's attempting to be pegged roughly one-to-one with the US dollar; let's just start there, because that's what in practice most of them are doing. I know most of them are also roadmaps to move to some kind of global CPI, the economists like the Big Mac Index, whatever it is.
Even if you're a stablecoin, trying to peg yourself one-to-one to the US dollar, I have problems with that. Again, you have to remember, before I kick off on this rant here, that I came into this through the lens of having traded sovereign debt of Venezuela and Argentina, where let's just say that any attempt at stability by the central banks in their monetary policy dramatically failed; what you wound up with was black markets and so on.
Now, there are basically three different models for attempt at stablecoins, as I see it today; there's, let's call it the Tether model, where ostensibly you have a bank account somewhere and there are exactly backed one-to-one the number of dollars in the bank account with the number of crypto assets floating around in the crypto market.
The second model you have is, call it the Basis model, which is basically you have some kind of algorithmic monetary policy in place that's adjusting the amount of supply based on the fluctuations and the amount of demand in the network.
So, you've got the Tether model, you've got the Basis model, and the third model is the Makerdao model, which is basically an over-collateralisation of other crypto assets in order to create something that's pegged one-to-one.
The problem that I have with stablecoins, regardless of the model, is that even just the name of them, the branding around them, and the promises that most of the teams around them are making, feel a bit dishonest to me. The reality is that all of these things are compelling, all of these things serve a use case; I think Tether, above all, proves that out, that people are still willing to use this thing that is near universally considered questionable at least.
People want that convenience of having something that they can trade in and out of, that they can use to take profits within the ecosystem, that they can use to buy things on the dark web, or what have you, without exposure to Bitcoin or Ethereum, although I think that use case still has yet to come to fruition. But they all tout themselves to be stable, and in some sense maybe efficient as well when, in reality, these things will break down under some black swan event circumstances.
Now, the extremity of those circumstances might be up for debate, but I at least think that none of them should ever be really trading one-to-one with the US dollar, because there has to be some kind of discount rate there.
Peter McCormack: You tweeted this out, right?
Jill Carlson: I did, yeah. The responses that I get to this argument I think are valid in the sense that, "Well, if you take into account the convenience that these things offer, maybe that balances out whatever the discount rate should be"; that's fine. Maybe, if you really buy into this thing serves a utility in this market, and therefore if a normal discount rate would bring it down to 90 cents on the dollar, that 10 cents on the dollar gets added back in because it's serving this utility; I don't buy that. I don't think that these things are really serving a utility to the market that can't be provided by other more compelling, more viable, crypto assets out there.
Peter McCormack: Such as…?
Jill Carlson: Well, even something like Litecoin, if you're worried about the use case of moving between exchanges, which is one major use case of Tether and other stablecoins. There, you still get some volatility of course, but you don't have to worry about fees as you do with something like Bitcoin. You don't have to worry about over-collateralisation.
Maker, I think, is probably the most compelling of any of the stablecoins, because to me it seems like it's the most honest of them all just in terms of the limitations of it and what it offers, but it's hugely capital inefficient right now. You also don't have to worry about, in the case of Tether, even really I would argue Basis, these things breaking down, either because what has been promised is not actually there, it's not actually collateralised, or because, "Well, hey, it turns out maybe this thing isn't actually stable".
My perspective on it as a trader is, if the unknowns are at least known to me, then I can discount that and I can price that in. What scares me are the unknown unknowns, which I would say that all of these proposed stablecoins have massive amounts of unknown unknowns to me, and I think that that's the way that they should be viewed by the market as well.
Peter McCormack: So, one interesting use case for stablecoins that I thought existed outside of an exchange when people want to come and out of crypto assets is, when I looked at Polymath and I met with Trevor, I had a play with the platform, and you can raise money in ETH or in Poly, in their token. My worry for them with that is that you're trying to tokenise assets, so you're potentially trying to have funds, bring their funds within your platform, which makes total sense in a number of ways, but these funds, they're not going to be reporting in crypto; they're going to be reporting in dollar.
If they target, say, raise $50 million in ETH and that takes a week, and during the process there's a crash and they lose 20%, they've suddenly lost $10 million. So for me, it made sense to have a stablecoin in that scenario, because they're able to use the technology, they're able to access the liquidity of crypto, yet they don't have the risk of currency falling in value dramatically during the raise. Can you understand that?
Jill Carlson: Yeah, that does make sense. To be honest, I haven't looked deeply into Polymath; I haven't played with the platform. It sounds, to be honest, like I would have probably five to ten other issues with it perhaps just from a regulatory perspective, but yeah, I haven't actually looked into it myself.
I think that that makes sense to me in terms of, as you're going through a fundraise, you don't want to necessarily be exposed to these big fluctuations in the market. I think that that's, to go back to our earlier conversation, an issue that token projects across the board would do well to consider as they're thinking about the makeup of their treasury as it is; it's not just during the fundraise, a lot of these token projects are still sitting on, in many cases, mostly ETH if that's what they've raised in. There, I would encourage them not to diversify into a stablecoin, but just to diversify into the US dollar itself or other fixed income assets that most normal treasuries would have exposure to.
Peter McCormack: Yeah. I think Ari Paul, maybe it's him, maybe it's somebody else, who said that at least 50% should be converted back into USD.
Jill Carlson: Oh, at least! If you think about it, there's massively correlated exposure, where if your project is hugely successful, then in all likelihood the larger crypto market has also been hugely successful, which way the causation goes there, whatever; it doesn't really matter. But, in that scenario, you're least likely to be really worried about the funds that you have in your bank account, and in all likelihood they've gone up 3X, 5X, 10X, whatever it is.
In the event, however, that your project is failing disastrously, well that might in part be because the crypto market has also taken a dive. In that case, when you're most worried about having funds and runway, then you might find yourself with half or less of the funds that you initially raised.
Peter McCormack: Are you finding the people that you speak to from the institutional side and traditional investors are having a struggle understanding this space and getting involved, and is there also any fears with it's going to fundamentally change their model over the next five to ten years?
Jill Carlson: I think there definitely is that fear that it will fundamentally change the model, and you definitely do see this game of catch-up going on of, "We've got to figure out this space". What worries me the most, however, is when I see otherwise very smart, sensible people just suddenly throw all of their assumptions out the window, because cryptocurrency is somehow involved.
I feel like I see this all the time where people will start down the path of, "Well, hang on a second. Okay, you're telling me, if I invest in these things, then I'm getting these things called tokens, or maybe I'm not even getting the tokens, I'm getting a promise for future tokens for technology that doesn't even exist yet, and there's no contractual agreement in place; there's no fiduciary responsibility going on; there's no cash flow on these things; there's no revenue". They start to go down this path and then they just throw it all out the window and say, "Well, I must be missing something here. I just don't understand; I'm the problem, not the market".
Every time I see this happening, I just want to grab these people and shake them and be like, "No, no, no, you're asking really good questions. No one over here really knows what's going on or what they're doing!" We all have hypotheses.
To be clear, overall, I'm bullish; I think that things are going to shake themselves out, but what we need is more scepticism and more people asking these sensible questions that might make them feel like they're just too old-school to understand the market. What really worries me is when people don't feel empowered to come to the table with those questions, and when I see people within the crypto space throwing stones at that sort of scepticism, it's all well and good to shout, "Hodl to the Moon!", but we also need progress.
Peter McCormack: Well, I almost think we need a couple of significant fuck-ups, like maybe a project to go live that just completely fails and nobody uses it, maybe even Tezors, but just a couple of significant fuck-ups to wake people and go, "Hold on", because at the moment everything's a future promise; they're almost debt tokens for a future promise that we don't know what's going happen with. It's almost like, if we have a couple of fuck-ups, that's going to get everyone a bit more realistic.
It was only when everyone got burnt during the first round of dotcom that things got a bit more sensible, and things have gradually got more sensible. It wasn't like all those Silicon Valley guys in the Sand Hill Road, their investment structure, they didn't just come up with that in the 1990s, it's been an evolution, right?
Jill Carlson: Yeah, I think that's absolutely fair. I guess my question then is, how big do the fuck-ups have to be? I look at things like, not to call it out, the Parity wallet multisig disaster, I think about some of the OPSEC issues even that teams have had that should just be so fundamental; again, not to call them out, but the Enigma team where there's just a very basic OPSEC issue that went on with their crowd sale.
It seems like, because the market is still at prices that people wouldn't have even been able to imagine last year at this time, or at least certainly I couldn't have, people are still willing to just write these things off as, "Oh, yeah, we put our hand on the stove; we are a bit burned, but let's just keep trying again".
Peter McCormack: The Parity thing, I just find unbelievable. We're talking about, was it $150 million?
Jill Carlson: Something like that.
Peter McCormack: Completely frozen.
Jill Carlson: Comically bad.
Peter McCormack: Just gone. You speak to people, they talk about Ethereum being the future of programmable money, and I struggle to see how large financial institutions will risk putting significant amounts of their business in smart contracts, because if $1 million can get frozen, $100 million can get frozen or a $1 billion can get frozen. I don't know!
Jill Carlson: Yeah, and I think, to play Devil's advocate a bit on this, because I can get into this cycle of being very negative about everything that's going on, I think --
Peter McCormack: You should do some positive stuff.
Jill Carlson: Yeah. I do think about some of the nonsense that even I witnessed, myself, go on on Wall Street of sums of money that amount to the same kind of calibre that we're talking about in the Parity wallet disaster. Also, no one can account for somehow gotten lost or disappeared in some way, because the back-office systems were broken, because traders were completely irresponsible at times, because of other forms of fraud or bad actors on Wall Street. I think of what's going on at Wells Fargo with their accounts; I think about the LIBOR-fixing scandal; I think about, basically, all of 2008, 2009.
I'm like, "Okay, orders of magnitude, different Wall Street, still perhaps worse in many ways", but I also think about something else which is that, having worked on Wall Street post-2008, there was definitely this sense that nothing you're doing was a game; it was all real life. There were always people on the other side of the trade from you; there were always regulators watching. Then, downstream from all of it, there were always the common mom and pop investors in whatever mutual fund or pension fund or what have you, and everything that you were doing was affecting all of this, this huge system.
I think about the Parity wallet thing in particular, and I remember reading, on the screenshots, of what was going on afterwards, one of the guys responding to it was shouting at the devops guy saying, "Dude, what are you doing? This is not a game", as he was going through killing it. That really stuck with me of like, "Yeah, that's something that this space really needs to learn". When you're dealing with real money, when you're dealing with real people's savings or accounts or investments or whatever, it's not a game; it's real life.
In particular, I think about the exams, the Series 63 exam that you have to take when you go to work on Wall Street. At the time, it felt like this total waste of time almost; specifically the Series 63, it's about ethics. Now, I've a lot of questions about the ability for this exam to successfully weed out bad actors on Wall Street; I think, objectively, we can see that it hasn't done that. But I do think that the fact that that exam even exists demonstrates something about what it means to work in financial markets, and I think that what is demonstrates is that, yeah, this stuff is important; it's important to consider the downstream consequences of all of these actions, whether it's committing some code or whether it's making a trade.
Peter McCormack: So, are you pro-regulation and pro-compliance?
Jill Carlson: I'm definitely not as libertarian as most of the people I find myself working amongst. In some ways, I probably am, but in other ways, to be honest, I really believe strongly in consumer protection. I think that that's something that probably came in part from my time working on Wall Street, but I think it's come in even larger part from just witnessing the madness, especially of last summer and last fall when you just see, whether they were just Reddit trolls or not, people posting on these forums, "Wait, hang on a second, what do you mean this thing isn't liquid and I can't cash out of it now?" and people who'd bought into presales of things with some amount of money that they just should never have been spending; whether it was people posting on these forums, "Wait, I've lost my private keys; I don't even understand what these things are. What do you mean I can't access my funds ever again; what do you mean there's no password recovery?"
Again, maybe some outsized amount of them were Reddit trolls, but there is a lot of desperation in the voices of a lot of these people who just had no idea what they were getting themselves into. You've definitely seen the same thing in January, February of this year as the market has taken a turn for the worse, of again people who seem to have just lost more money than they even realised was at risk.
Don't get me wrong, to a degree, sure, valuable learning experiences for everyone involved, but on the other hand these are, as with any financial market, these are complex markets. I don't think it's fair to expect people to understand what they're getting themselves into, and I definitely don't support anyone who is intentionally putting someone in that position in the position of being the bag holder.
Peter McCormack: Yeah. Back in January, I think it was January, I had a Skype call with a lady from New Zealand who contacted me through my Facebook page, and her and her husband had invested a small amount into Bitcoin and then suddenly threw $100,000 in and spread it amongst ICOs and various coins and dropped down to $20,000; that was their entire savings. They didn't know what the hell to do, which was awful for them, but I also then struggle with the whole accredited investor rules, because I think they prevent people who are smart enough to invest from investing.
Also, even though Wall Street can invest, the decisions that Wall Street made investing, covered in The Big Short, which you mentioned, in the housing market, that affected everyone anyway. So, a bunch of people who aren't even investors got essentially fucked and lost their jobs because of other decisions. So, it seems like whether you're part of it or not, you still have the risk. What do you feel about the accredited investor rules that you must earn over, what is it, $200,000 and have $1 million of asset; what do you think of that?
Jill Carlson: No, it feels very arbitrary, don't get me wrong, and I think that it would be fantastic if there is a way to bring more people into that to allow people to diversity their investments, even into these more risky, less liquid areas of the market. I think the Jobs Act in the United States, things like Indiegogo and other crowdfunding platforms, I think they've done some interesting work there.
I think that it would be great if there was a way to prove some sort of threshold knowledge base, be it in investing, in portfolio management and general financial planning, or be it in the specific market of your choice, to be able to then participate in these things that today are only open to accredited investors; I completely agree, it does feel extremely arbitrary.
That having been said, I think that we've also seen, as you mentioned, these cases where people have just lost tons and tons of money that they're now not equipped to deal with. If there's one thing that drives me crazy, it's the self-congratulatory nature of a lot of the discussion in the space, not just about, "Oh, we've all made all this money", well, okay, there are always people on the other side of it, but also, "And look at all the good we're doing for the world; we're democratising the financial system". Well, okay, are you; or have the rich just continued to get richer here and maybe some early adopters of Bitcoin and Ethereum, etc, in the process?
Peter McCormack: Okay, we've done a good hour already. A couple of things I just want to discuss with you before we finish off. As you have worked on Wall Street and as you're now in crypto, where do you see the convergence of the two?
Jill Carlson: Yeah, it's a tricky question. I touched earlier on Goldman making a play into the crypto space. I think we're definitely going to continue to see the institutionalisation of it. I wouldn't be surprised to see some of the big fund managers continuing to offer more and more exposure to it, to their investors. Certainly, you have a decent number of traditional hedge funds and other asset managers coming into the space already; I wouldn't be surprised to see that extend even into the mutual fund space.
I think that as that continues to happen, what drives the sell side, what drives banks like Goldman and JP Morgan and Morgan Stanley, it's whatever their customers want; it's whatever their clients want. So, I think that the buy side will actually be the driver of it. I think that a lot of focus has been put on whatever initiatives are or not going on with the likes of Credit Suisse or Citi or Goldman and so on, but I think that the place to pay attention is actually on the asset managers, on the hedge funds and the mutual funds of the world.
Peter McCormack: Do you think the biggest block is custody?
Jill Carlson: I think custody is definitely a huge issue. That having been said, I would be surprised if some of these ultra-big fund managers didn't have the resources to hire the people who can sort it out and sort it out well. It's definitely a risk vector that they won't be accustomed to dealing with, but you're also talking about people who all they do is they price risk all day. So, there's a right price for everything and there's a discount for everything.
I think more likely, it's a regulatory game and a compliance game, and I think that there are a lot of questions that have yet to be answered there around what they are and are not going to be comfortable holding and trading in.
Peter McCormack: Right, so they're almost waiting for clarity?
Jill Carlson: Yeah.
Peter McCormack: Yeah, okay. Cool. Then, lastly, what's going on with you know; what's coming up for you next? How should people stay in touch with you and who do you want to hear from?
Jill Carlson: Yeah, thank you. So, I am going to be spending the next few months focused on a couple of things in particular; number one of which is around driving what I view as real adoption of cryptocurrency, which means not just speculative, which means for me specifically focusing on areas that it does actually make sense to have an alternative store of value and means of payment, so areas experiencing hyperinflation, experiencing other forms of, call it monetary policy mismanagement. I'm really excited to collaborating with a handful of people who I consider really sharp in the space on driving that. It's a tall order, but I think that it's something that's not being paid nearly enough attention to right now. So, if that's of interest to you, absolutely reach out; I'd love to hear from you.
The other thing that I'm going to be spending some time focusing on is the notion of identity; I think that that's something that is going to need to be figured out, regardless of how this whole thing shakes out, regardless of whether it turns out that the only good use case of any of this stuff is store of value, means of payment and speculation. We're still going to need some notion of being able -- I would love for there to be a notion of being able to do some sort of KYC AML, etc, where it's needed, have an opt-in system that is not just the cumbersome, fully centralized system that we have today; I think projects like Harbor, for instance, are really interesting from that perspective.
On the flip side, if it turns out that the Ethereum Blockstack vision of a decentralised web comes to fruition, I think it's telling that Tim Berners-Lee has said himself that, in the creation of the web, the thing that he forgot or left out was this notion of identity. I think that things like TruStory, the project that Preethi Kasireddy is working on, other initiatives in that space, uPort, are going to be really interesting. So, that's an area that am going to spend some time learning about and getting educated on.
Peter McCormack: How do people stay with touch with you?
Jill Carlson: The best way is to just tweet at me. You'll have to forgive me; I've closed off my Twitter DMs. If you're a woman working in crypto, you would as well! But yeah, tweet at me; please, for the love of God, don't send me InMail! LinkedIn has, I'm convinced, become the bucket shop of crypto; it's just a wasteland of fraud. So, yeah, that's the best way to track me down.
Peter McCormack: Brilliant. Thank you so much, Jill.
Jill Carlson: Thank you. Good to be here.
Peter McCormack: That was really awesome.
