WBD029 Audio Transcription

Token Economies and The Fat Protocol Thesis with Jamie Burke from Outlier Ventures

Interview date: Friday 10th August

Note: the following is a transcription of my interview with Jamie Burke. 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, I talk to Jamie Burke from Outlier Ventures who has invested in a number of token-based blockchain startups. We discuss token economies, the fat protocol thesis which Jamie wrote a supporting piece about called the hungry protocol and the path to decentralisation.

“It is probably going to be true, as in most tech cycles that the first attempts at something won’t be the ones that succeed.”

— Jamie Burke

Interview Transcription

Peter McCormack: Hello, Jamie, good to see you again.

Jamie Burke: Hey there, yeah, good to see you.

Peter McCormack: So, quite a lot's happened since we last met, for you, for Outlier, the market.

Jamie Burke: And for you?

Peter McCormack: And for me, yes, and for me.  I've found myself learning a lot more, finding I'm asking more questions, and finding that the more you learn about crypto, the less you think you know; I don't know if you ever feel like that?

Jamie Burke: Yeah, I mean it's an incredibly overwhelming space, and it's getting more complex, not less.  So, just trying to keep up the pace with that, even with the amount of people that we have at Outlier now, almost 30 people full time, and still it's almost an impossible task to track it all, to understand it, especially when you're running a business, you're not just reading white papers all day.  So, you're looking at the operational stuff that goes with running a growing company.

Peter McCormack: And you now have a US outfit?

Jamie Burke: Yes.  So, we recently announced that Rumi Morales was joining us to head up the North American office.  Obviously, we already have an office in Toronto, but nothing formally in the States.  So, she's based out of Chicago, ex ran a venture arm at CME Ventures, and did a number of investments actually very in line with the Convergence thesis, so it was amazing that we'd not really heard of each other until recently when we got introduced.  So, she invested in Ripple, the company, digital assets holding, digital currency group, and also a number of IoT and AI companies.

Peter McCormack: Okay.  And I also met with Toby from Fetch a few weeks ago, which is another one of yours.

Jamie Burke: Yeah, great podcast.

Peter McCormack: Thank you, really interesting project.  And I've also been really enjoying your newsletter.  I think you launched that not long after we spoke, and there's probably three or four really good newsletters in the space actually that I think I find better than almost any other industry I've worked in.  There's yours, Pomp's got an off-the-chain one.  How much work goes into the newsletter?

Jamie Burke: I can happily say that I have very little to do with it.  So, it's really run across Lawrence Lundy's team, our Head of Research; there's a guy called Joel out of India, who's very involved; and then also a number of other analysts in the team who have plugged that gap.  But yeah, it's a great newsletter.  We always have so many people discover us through that newsletter, and sometimes refer to it as an expresso shot of crypto news, but also a bit more expanded around Convergence.

Peter McCormack: It's very useful.  I'll share it out in the show notes so people can subscribe and see it as well.  So, when we first met, you called for a haircut.  You said the market was getting out of hand, it needed a haircut, 50% ideally.  Actually, I think you said 50% but ideally up to 80%, which we've now had.  And one of the interesting things I found, through going through a bear market, which is nothing I've ever experienced before, I was previously in advertising like you, is you actually ask more critical questions now.

My overriding thought is that we're still in this huge test, and does anybody really know where value will be created?  And this is one of the things I want to talk to you about today.  But how are you feeling since the big drop?

Jamie Burke: So, I forget when we actually did the podcast, but I did a post, I think it was called Back to the Future, which was in the first or second week in January, and was really based upon internally at Outlier, with the peaks of the prior December, it really felt like there was no correlation between underlying value in the market and the pricing and the money that's being thrown around.  Of course, nobody minded because everyone's making lots of money.

But there was a huge disconnect, and because we're primarily focused on infrastructure, you saw the amount of projects that were raising money on the assumption that there would be an infrastructure for their application to work on, and they were trying to execute all these market layer opportunities; and the infrastructure just wasn't there, and it still isn't there.

And to your point, we're just going through -- it's one big experiment in a number of different things, some technological, some around governance, and then linking all that together with tokens, kind of socioeconomics.  So, there's so much complexity in there and there are so many things that we need to figure out that it's an amazing intellectual exercise.  It is very difficult to invest in and it does require a lot of diligence and thought to be put in, and to be honest, just exposure to the market.  To be seeing the sheer volumes of things coming at you allows you to spot trends and hopefully, we've got a good team that allows us, when we spot something that we think is interesting, to be able to explore it with some depth.

Peter McCormack: The way I'm splitting it up now for me is, I see it as Bitcoin and everything else.  I think for me, Bitcoin is semi-proven, in that there are some use cases.  I buy into the digital gold store of value, I understand that, although I still think there are questions to be asked.  I find the use case of what's actually happening in Venezuela interesting.  I interviewed Alejandro Machado, who is a writer for the Caracas Chronicles, and I find what is happening there is interesting, and there are certainly use cases that are proven.

I then think everything else, there's a lot more questions around protocols and dapps, and that's the area now that I want to explore, because it's probably the area I'm struggling most with.  The question I keep asking myself is, "Where is the value?  Where is value being created?"  And, I know you've been looking at this and you're interested in the Fat Protocol Thesis, but also your own work on the Hungry Protocols.

So, can we explore that for a bit?  Can you talk to me about where you think value is, or will be generated, because obviously that's central to your business?

Jamie Burke: Yeah.  So, we do broadly subscribe to Joel Monegro's Fat Protocol thesis, and it was deliberately a high-level concept.  And of course, value is much more nuanced and complex in it and there's been some interesting critiques of it recently.  Jake Brukhman of CoinFund did a really interesting post, where he totally dismissed the idea of investing, as a thesis, into the Fat Protocol.  And, his central argument was really that, where does the protocol start and end?  There's so many things that could be regarded, in one sense as a protocol; and in another sense, an application of another protocol.

So, it's not binary or clear-cut, even as a definition, just the word "protocol" in and of itself, and this is of course one of the age-old problems with crypto, is that we get so bogged down in definitions, people get so dogmatic about what that means.  So for me, the Fat Protocol as a thesis is a general statement about what could be different in Web 3.0 versus Web 2.0, and the idea that no commercial value resided in the protocol layer in Web 1.0 or Web 2.0, and the idea that that could be flipped on its head in Web 3.0

Now, I don't think it's as clear-cut as saying that all the value will be in the protocol layer, and no value will be in the application layer, for the very reason that Jake flagged which is, there's an interplay between different protocols.  But for us, I think, if we look at where we are in the cycle, and I think that's the most important way when considering your thesis, is at what point in the cycle are you investing?  For us, there is still so much infrastructure that is yet to be proven, is yet to be built, and is probably yet to even be thought of.  And, there will be a lot of value that accrues in those protocols.  Whether it's all the value is to be seen, and it's unlikely to be the case; but certainly, a significant amount of value.

If you were to enable a protocol for, say, identity like Sovereign is trying to do, and identity not just for people, but for things, agents, objects, if you were able to tokenise that, which is what they're trying to do, and that would become the identity layer and standard for the web, that is a pretty significant investment opportunity from our perspective.  Equally, if you were to create protocols that may be oriented around enabling data marketplaces, such as Ocean, enabling autonomous economic agencies, like Fetch, then these are significant building blocks.   

I think Jake's argument was, it's going to be very difficult to pick those winners, so it really comes down to the confidence of your ability to not just select, but inform investments, and this is I guess why --

Peter McCormack: Wasn't his argument that you should have a broad investment across all the protocols?

Jamie Burke: Yeah, which is a classic VC approach, which is just shotgun, and that's not what they do.  But his argument was, if you're going to follow his line of thinking, then you should diversify as much as possible, including into competitors' protocols, because there's always going to be this interplay.

But where we're focused is being able to inform effectively value track.  So, if you think about what token design is, and the new framing of that is token engineering, and we're very involved in a number of token engineering meetups, both Toronto, London and a number of others around the world; they're really focused upon, how do you leverage a token to incentivise and disincentivise certain behaviours in a particular system.  So, that can be there's a reward for certain behaviours, or certain contributions to the network; but equally, there's a cost, there's a cost to misbehaving in that system.

I think that's a really important concept, if you think about what's different now to conventional open-source systems.  Previously, there was no cost to misbehaving, you could pretty much do what you want.  And equally, there was no incentive, so there was some network effect.  But that can obviously be amplified by having a direct monetary incentive for positive behaviour.  And so, what that means is, by introducing a token into the system is, we're moving away from forking a bit of open-source technology that's not tokenised, is really just creating a slightly different technical pathway.  But there isn't really any economic consequence to that.

Whilst, if you have a tokenised open software system, aptly abbreviated TOSS, then there are much greater implications to a fork.  You are forking an economy, not just a technical pathway.  So, we believe that having tokenised protocols is going to be a huge opportunity.  It doesn't mean it's always going to be executed well, but there's a huge opportunity to trap value within this economic system at the protocol layer.  That doesn't mean that that protocol can't interplay with another programme; it doesn’t mean that applications can't build value on top of it; but primarily, if you're looking at these general-purpose protocols, but they're equally solving a particular infrastructure problem, then there's a huge opportunity.

Peter McCormack: One of the things I've struggled with this therefore, as someone who's considered investing, and also looking at the retail market, which has been investing in this primarily actually, and probably shouldn't be, is that for most of these tokens to accrue value, there has to be some form of scarcity engineered into it.  Therefore, I find that there's almost very complicated economies being built, and I'm struggling to see the reason for it.

So, I think of Augur as a good reason, and I think it's very impressive what they've done.  But at the same time, it's a very complicated product, very complicated for new users to set themselves up, and that's reflected in -- I don't know if you saw the other day the number of daily users?  It's very low.  And I'm wondering whether there is going to be a market need for these token economies.  Do you see what I'm struggling with?

Jamie Burke: Yeah.  So, I mean, it's probably going to be true, like in most tech cycles, that the first attempts at something won't be the ones that succeed, because there are so many learnings that you're going to have when the rubber hits the tarmac.  And this actually feeds into something, I guess we might talk about a little bit later, which is there's been this rush to codify rules, governance, into protocols, assuming that you can get everything right, every decision you're going to make right, you can pre-empt and that these things are going to survive intact.

The problem is, that rush to codify everything and anything, including governance and "code is law" and all these various things, is that you're building something that is incredibly fragile; because, one of those assumptions at least is definitely going to be wrong.  This is why you then see what's plagued the crypto space is the threat of a hard fork, because certain decisions that people couldn't predict come about, and it could be as simple as a hack, and all of a sudden there's a constitutional crisis about how that is responded to.

So, one of the things that we encourage is this two sides to it.  So, we've got a crypto economics team that function out of Toronto, a team of quants, and they spend a huge amount of time modelling out these economies, thinking through adversarial attacks, thinking through inflation schedules, thinking through supply, but there's a huge amount of assumptions there.  You can see that if you change one variable in the model, it can break the model, or it has unintended consequences.

You model as best as you can, but then in parallel, you allow for more kind of agile, what I call "wet" decision-making.  So in the beginning, I actually think it's quite sensible of certain aspects of a network to be quite centralised as you're trying to figure out, to borrow lean start-up terminology, "network market fit".  So, you've kind of got two layers running parallel to one another, and the goal is to have the protocol meet a need for a market, and ideally several markets, over a period of time.  But until you achieve that, effectively you haven't established whether any of your design decisions make any sense.

Peter McCormack: Okay, that's kind of interesting as well, especially as you brought up the lean methodology, because you and I, both from a digital advertising background, will be aware of when Eric Ries released The Lean Startup, and it became a bible for product development and product market fit and the minimum viable product.  And I think I read, was it in your article, you talked about a minimum viable community?

Jamie Burke: You've got a few minimum viable things!

Peter McCormack: But I found that really interesting actually, because I find a lot of what has been developed in crypto is almost we've gone back, not just one step, but a number of steps of what the start-up world has learnt, in that Eric Ries would encourage you to get a minimum viable product out really quick, and whatever you think your minimum product is, it's even smaller than that, and you'd get out there and test your assumptions.  Whereas, something like Augur appears to have spent three years to get to its release.  Obviously, I don't know the development process, but do you have to be decentralised when you're building a minimum viable product or community to test your thesis?

Jamie Burke: Well, yeah, so this is it.  It's very easy to intellectualise many of the problems that the crypto community is faced with as it looks forward into its future and thinks about what's going to be required to scale all this stuff to allow for retail users, to allow for institutional money to flow in.  And, you're right, one thing that's been missing is pragmatism. 

So, there's been a lot of dogmatism, especially around decentralisation, and so obviously, there are some aspects of decentralisation that are integral to something like Bitcoin.  You need high degrees of decentralisation in certain aspects of it to allow for its security, because its whole value proposition, its objective function, the thing that it's trying to optimise for is security.  But that doesn't always make sense for other projects, so there's trade-offs that need to be made.

I think what we're starting to see now is the first wave of innovators in the space who are very dogmatic, and were intellectualising things far too much.  And actually, it's because a lot of them didn't have any start-up experience.  So, it's very easy to build mathematical models and all this kind of thing, but to actually take a start-up out there and figure out nobody wants it, even though you know they should, and even though you know the product is going to solve lots of pain points in their lives, but nobody uses it.

So really, what we try to encourage is, some of our projects will be two years before there's a live token.  So, Fetch, for example, by the point they sell a token to the public will probably be two years before we began our engagement with them.  So, we're guilty of it a bit as well, but that's largely because they've built an entirely new protocol and a unique combination of consensus algorithms to serve specifically the machine learning.  So, there's a huge amount of R&D that had to go into that.

But in parallel, you're going, "Okay, well how are people going to use this?" and you're modelling it out and you can do degrees of user testing, so we do testing with Imperial College.  We give people decisions to make, based upon certain incentives and disincentives, and see how they perform to test the game theory.  But ultimately, the best way to test it is to get people to be using it at scale.

When it comes to that, I think the important thing is to have governance, or layers of governance, that allow you to adapt to what the market tells you, without leading to a couple of things.  One is contentious forks, splits within the community, you need to be able to carry the majority of the community; and the second one is value leakage.  So, one of the key things around token engineering and optimisation for token design is, how do you allow the system you're building to retain as much value as possible.  So, they're the kinds of things you're designing for.

Then there'll be an optimisation function, what is the core thing you're trying to optimise the network for?  And Trent of Ocean, BigchainDB, did a really interesting presentation recently, I saw, with a CEO of a very large public company.  It was a kind of private CEO dinner.  And he just said, "Look, there's many criticisms around Bitcoin and how inefficient it is", and he pulled up a picture of a massive server file and he said, "Look at what billions of dollars have optimised for".  Totally decentralised networks of people have contributed massive amounts of hardware and energy and really optimised that very specific to the objective function of that network, and it's mobilised billions.

So, that is the potential, if you can design a system properly and you can allow for, with all the hindsight we've now got of watching the ideals of things like Bitcoin and Ethereum and where they've struggled.  It's hard to be the first, it's hard to be the second, it's hard to be the third, and what can we borrow from those learnings?  I think most of the learnings will be around governance actually, hopefully.

Peter McCormack: Do you think the general public will really care about decentralisation?

Jamie Burke: No, I don't, and again this is what he's selling.  So, if you're selling decentralisation, there's a very small market of people that are wanting to buy that thing.  So sadly, the people that care about self-sovereign identity and data and all these things are very few.  At the end of the day, the product is going to have to be faster, cheaper, and the experience is going to have to be equal to, if not better than, the incumbent experience.  If it's none of those things, then it's going to really struggle to be adopted.

If you think about how many things in your life you do or you use, even though they'd be better for you on a number of measures, just because it's easier.  I'm morally opposed to Uber, but I still use it, because if I'm flying around from city to city, I can get a taxi anywhere in the world without having to reinstall a new app.

Peter McCormack: I have the same feeling about Amazon.  I just think, if you look at it morally, it's a horrible business, the way they treat their staff, the destruction to small business, the monopolies they've created; but at the same time, I always end up using it, just because it's front of mind and it's easy to use.  Somebody spoke to me recently and said, "Wouldn't it be great if we could build a decentralised Facebook, because then they can sell our data?" and I just said, "But nobody would care", or a small amount of people would care.

Jamie Burke: Well, the thing is, one of the interesting concepts about tokenisation, when you think of it as a form of equity or ownership of a network, is that the users can own the network, and therefore there's an alignment that the problem with things like Facebook, or even Amazon, is there's a misalignment of the user and the shareholder.  So, if they're one and the same thing, you would hope the outcome would be a more aligned, ethically and socially better aligned solution and protocols out there.  But at the end of the day, if it's going to cost me more, if it's going to take me longer, if it's going to be an inconvenience, the barrier to adopting that for the mass of people is going to be too high.

Peter McCormack: And that's when I then go back to having quite a big problem with Augur, in that if I want to -- yes, Augur might have some quite unique betting markets.  Recently, they've had the assassinations.  But generally speaking, they do have some quite unique betting markets.  But I don't think there's a huge demand for those.  I think it's niche and it's kind of interesting.  My problem is, for most people to download and set up, it's a pain.

Another thing that's crossed my mind recently also is that, I think decentralised and anonymous base products are going to have a harder job at building traction and retention, because they're not going to have the tools that we've had in traditional digital marketing to talk to their customers.  So, I'm now then also looking at the products and thinking, there's a difficulty in attraction, a difficulty in retention, and then we also have got this problem of tokens in that users are being asked to understand these new economies.

I don't know about you, I go on holiday and I have a rough calculation of the exchange rate in my head, and I kind of know how much I've spent.  People are going to be using products where token A has a certain value, token B has another value, with market makers changing the value with volatility, and I just can't see that working on a consumer level.

Jamie Burke: No, that's it, and the point is, very few people understand HTTP or need to.  And I've always said this, I think the crypto space or blockchain space, or whatever you want to call it, is going to be most impactful when it's invisible.  And I think once you start to combine its infrastructure with machine learning and AI, where the system becomes intuitive and it's just transacting with itself -- and by the way, when you're designing economies and you're thinking through behavioural economics, having logical, rational machines is a lot easier than people, as traditional economists know all too well.  People are inherently irrational and make decisions that are often counter to their self-interest, but machines generally don't.

So I think, for us, that's what's really interesting, is when you start to look within the context of divergence, the idea that DLT starts combining with machine learning, and then you have these kinds of incentives and disincentives through the tokens that we're no longer just talking about people, we're talking about machines. 

So again, Fetch is a really good instance of that, where most of the magic for Fetch in the future will happen behind the scenes, you're just presented with some -- you're rerouted on your journey.  You don't know why or how, other than maybe you might have set some parameters about your life choices, how you would like the system to make decisions on your behalf, but then the system goes out and your representative, your agent, goes out and makes those decisions, and will probably be more rational in making those decisions on your behalf, based on your self-confessed moral compass or whatever it is, such as your carbon footprint, or whatever, for transportation.

I think what's happened is, you've got this huge brain trust.  I'd argue, if you compare it to pretty much anything else, there's this amazing brain trust that's come around this industry that we loosely call crypto and once you go down that rabbit hole and you're very technically able, certainly more technically able than me, you will go down a rabbit hole of a million scenarios, and you start building for a future that's made on a lot of assumptions.  And to be honest with you, understandably, nobody wants to build boring stuff.  The boring stuff's not sexy, the plumbing and the piping's just not sexy when you can think about autonomous economic systems and all that kind of stuff.

So, I think there's a bit of a gap between people solving the boring problems and then you have this other group of people that are solving the future, maybe even two steps ahead of where we are now.  So, yeah, I think this should definitely be the focus and this is why, the beginning of this year, I wrote that post, Back to the Future.  Let's get back to building the future, but one step at a time; what's the critical infrastructure that we need to be putting place, rather than rushing to realise even applications at the top, because once all this is there, we know that blockchain will be applied to thousands of different use cases, it's just obvious once you get your head around decentralisation. 

But the reality is, that's very far out and I think that having large-scale dapps being used by people, where you could go into a pub and people would know it as well as they know a conventional app, I'd say we're still three, four, maybe even five years away.

Peter McCormack: Right, okay.  So, it's probably a good point to talk about then what you wrote about the Pathway to Decentralisation.  Can you talk about that, and I'll share the article out on the show notes, but can you explain your thinking when you wrote that?

Jamie Burke: The kind of thinking around the Pathway to Decentralisation was really triggered by recent commentary by the SEC around how they would determine whether a token is a utility token or a security token, and they listed decentralisation as a key measure.  Obviously, there are many problems with that.  How do you measure decentralisation?  And it kind of asked more questions than it gave answers.

When they followed up with saying they felt that Ethereum, Bitcoin and Ethereum, and again not picking on Ethereum, but this is just their commentary, Ethereum, based on what it is today, not necessarily how it was previously, is very likely not a security, because of its high degrees of decentralisation.  And again, if you try to quantify that, or any project actually in the space, and there's a really interesting site called howdecentralizedarewe.com --

Peter McCormack: I've seen it, yeah.  Is that Jackson Palmer did that, the Dogecoin guy?

Jamie Burke: I'm not sure, to be honest.

Peter McCormack: Okay, I'll dig it out.

Jamie Burke: It has huge gaps, so it doesn't cover IOTA and EOS and a number of others, but it's interesting nonetheless, and he kind of breaks down how you might try to quantify how decentralised a network is.  And on most measures, it's very difficult to say most of the popular networks that we know and love, or hate, are very decentralised.  They're actually pretty decentralised at different levels.

So, the kind of commentary that, I think it was William Hinman of the SEC said was, "A decentralised project is one with the absence of a central third party/promoter, whose efforts are the key determining factor in the enterprise: through developing the asset, building the network, use of proceeds to enhance functionality, exercise of governance rights, retaining a significant stake".  And again, that's a really high bar, and I would argue almost none of the protocols as they are today meet that bar.  So, it begs the question how they've determined some things are. 

But the reason why this is important as a driving factor is, decentralisation has always been a thing projects get beaten with.  So, if someone wants to critique a project it's, "You're not decentralised", on whatever level.  And the reality is, most aren't.  And then even, what is decentralisation?  Is it even desirable in every level?  Is it practically relevant for it to be?  And then, there's also a staging question, at what stage; and this is really the Pathway piece, at what stage is it appropriate to be decentralised? 

Usually decentralised means committing to codifying something, hard coding it, which then make it fragile, and you've got to be really sure of the design choice that you want to codify; and the only way to correct that is through some significant potential hard forks, and could potentially lead to a constitutional crisis.  You've got to have really high degrees of surety.

Circling back to what we were saying earlier about lean business principles, lean start-up principles, there's such a period of these cycles of experimentation and validation before you commit something to code.  So usually, you build this thing that looks like the product, you get people to play with it, and then if they've used it in the appropriate way, then you build the back end, then you'd commit it to code.  So, it's amazing that not much of that thinking has been brought into the crypto space.

Peter McCormack: It's interesting, because I've been going down the Bitcoin maximalism rabbit hole recently, just trying to understand it, just trying to understand why they are so anti every other project; and I've come to the conclusion that I fully understand the argument that there will only be one winner in the digital store of value.  There could be other players, but they will take a much smaller sector of the market, because everyone will gravitate towards the leading store of value, similar to gold and silver.  So, I understand that.

But one thing I don't agree with and I struggle with is, where the maximalists will say that a blockchain is only useful for censorship resistance and immutable records and nothing else should use it, therefore nothing else needs to be on a blockchain; but I actually see multiple blockchains and the ability to buy and sell between different tokens as a way of transferring value around different projects around the ecosystem.

So, in my mind, not everything does need to be as decentralised.  And even though I don't like the EOS project, I understand what they're trying to do.  I understand that Kyle Samani talks about the trade-offs between speed and decentralisation.  I understand the trade-off, in that by being less decentralised, you have less issues with scaling.

Jamie Burke: And I think linked to that is what do people want?  So, if there wasn't a requirement for things like EOS with their design choices, people wouldn't use it.  So, I think there's this idea that people who are dogmatic in a particular position of what they think Web 3.0 should look like and how decentralised they think it should be, is very different from -- you can't shout at somebody to use something and find it useful.

So ultimately, I'm for all kinds of experimentation in the space, especially around governance, especially around degrees of decentralisation to inform scaling.  We personally are only interested in investing in open-source tokenised infrastructure.  That doesn't mean that there's not an opportunity for things that might not be tokenised, that might not be wholly open sourced.  We just think, in the scheme of things, they're going to struggle to compete.

This is another interesting thing about EOS modelling, it pairs actually the Hungry Protocol concept to the Pathway to Decentralisation.  So, the Hungry Protocol thesis is effectively saying that, if you take as an extension the Fat Protocol, these protocols that tokenise are able to raise a significant amount of capital and they are then able to deploy that capital to accelerate network market fit.  So again, a lot of things we were talking about, about things being usable, things being integrated into our daily lives, that could happen organically.  Or, you could have a very large amount of capital to pump into accelerators and incubators, or old-fashioned mergers and acquisitions.

So, this year, we've tracked the space, we've seen more mergers and acquisitions happen in the first half of this year than all of last year; I think it's something like two-and-a-half times the previous, as protocols have this large endowment of capital, cash, tokens, however they want to use it.  So, EOS has got $1 billion.  25% of the capital that they raised was explicitly for a venture arm.  They are doing a range of things. 

They're going to traditional VCs that invest in real businesses and are equipped to assess real businesses, and they're saying, "Look, we'll give you $20 million", I don't know whether it's in tokens or cash, "You match it with $20 million, but you can only invest in businesses that build on top of EOS".  Or you're seeing different types of acquisition happen as people are scaling their technical teams, acqui-hiring.  They're buying companies that have a banking licence, like Litecoin; they're buying businesses that aren't yet tokenised, but have a real business with real customers who are protocol agnostic in a way, and they will just buy them outright, integrate them into their protocol, and all of a sudden they can start to realise several layers of market fit that's usable.

So, I think whether you like it or not, and there is a debate on whether this is good for the system, I think it's going to create a frenzy of acquisitions, everyone's going to become very inquisitive; and in a way, protocols start to become funds, almost like private equity firms where they have a thesis, they're looking to make synergistic investments and then trying to combine them to grow market share, and that's going to become incredibly aggressive.  This is an area that Outlier is looking to build as a practice to our portfolios, how can you strategically deploy your capital and your holdings to accelerate network market fit?

That's why it's basically how the protocol stays fat, or gets fat, depending on your perspective; that's why it's called the Hungry Protocol.

Peter McCormack: We'll come to that actually.  So, a couple of think points off that.  That's where EOS is interesting.  So, outside of the ethical argument of raising $4 billion, they have a war chest now to push people towards building on it.  But the thing I really wanted to ask you therefore, and I think we might have covered this in our last interview, but for you as a venture firm, are you investing in the enterprise, or in the token, or both?

Jamie Burke: So, the major investment opportunity for us is in the token.  That's where we see the most value, that's where we would have the most holdings, and that would be anything from 3% to 7% of the token supply.  And obviously, we see that in terms of a cycle, so we'd look at the project, typically in a ten-year cycle.  If we're advising the design of that network, then obviously we have a greater feel on the cycle, in terms of when it might hit equilibrium.  Obviously, when a token hits equilibrium in a network, it's of less speculative value.

So really, it's speculative when you need to encourage early adopters to build on a network and bring value and build it out; but ideally, when it optimises and there's less speculative value, and it's just more of direct utility to the network.  So, we're riding that speculative wave.  We do, in some instances, invest, increasingly actually in the equity of a company in advance of a token, and that's usually because you have more rights, to be honest with you.  You have zero rights if you're investing in a SAFT; it's a promise.

It's really interesting seeing projects raise lots of money and then actively not deliver on what they said they were going to deliver on, because it's too hard, and just say, "Well, we're going to become a fund", because that's usually not what they've been given capital for although increasingly, that is part of the proposition.  So, we'll make an equity-based investment.  Sometimes we might invest in a SAFT, and that SAFT will have the rights to equity if there's no token, or the token takes too long.  But principally, we're only really interested in a project if it's going to be open-source tokenised infrastructure.

Peter McCormack: So, compared to a traditional venture firm, the extraction of value will be the selling of the tokens you hold?

Jamie Burke: Over time, yes.

Peter McCormack: Over time, which is a very different model, well it's almost an entirely new model, right, because venture firms don't traditionally sell off parts of their investment a little bit at a time, unless I guess -- I mean, this isn't my background or my experience -- so, unless there's an IPO and they're selling off their shares?

Jamie Burke: Yes, there's a capital event.  And usually that's what everything's geared towards.  You're looking for an acquisition, or you're looking for your IPO, and a typical VC firm is geared towards that.  And by the way, there's as much pump-and-dump that happens in that, if not more, than crypto.

So our model is, we've invested in that full cycle and we have a feeling for how to measure network health and its journey, so that point of equilibrium, and we will sensibly sell off tokens into the market over that full cycle, in a way that helps make markets, but doesn't disturb; obviously we have a large amount of token supply.  So, if we dumped that onto a market, you'd notice, it would probably kill the network.  It just wouldn't be sensible to do that, if you wanted to realise the full value of your token.

Obviously, some people dump the token, because they don't care or believe in the long-term value of their network, a lot of crypto pools do that.  But actually many instances, our holdings, certainly the advisory holdings vest.  So again, kind of an age-old, well-worn path with venture, which is our holdings vest alongside the founding teams, and that could be over several years, so it could be three years, five years.  So, even if we wanted to, we couldn't, but that's not inherent into our model.

Peter McCormack: Have you extracted any value that; is it something you've started?

Jamie Burke: Yeah.  So, general rule of thumb is, there is obviously a capital outlay for Outlier involved in any project, especially if we've underwritten the project for two years.  So, we have some projects, I mean thankfully, we've got several projects all doing a token sale towards the end of this year.  But on average, we would have underwritten that project for anything from a year to two years.  I don't think there's any less than a year.  So, we've had our money locked up.

So, when there is a token sale, we're a very capital efficient business, so the amount of capital we deploy in the scheme of things is very little, direct capital, but obviously we have this infrastructure that we're building with 20 partners, 30 members of staff; it's not inconceivable we could be 100 this time next year, as we look to provide value to our portfolio through the full cycle.  So, the first one is token design and token sell, the next one is governance, enterprise engagement, mergers and acquisitions.

Our objective is how can we maximise the value for us, for the market, for the project and founders that we're involved in?  That requires a huge amount of investment.  At the moment, all of our investment's been upfront.  So typically what we'll look to do is to make 2X, 3X on our upfront investment on each project, which is very easy to do, if you've been the first investor in, almost a friends-and-family round.  And by the point that there's a token sale, the project's already raised, maybe even deployed, $15 million, $20 million, $30 million.  It's built a product, it's being used by enterprise. 

By the time something's sold to the public, this is a live network with clear, demonstrable utility, that we've already generated a lot of the values.  It's very easy to get 2X, 3X back on the hard capital that we put into that early stage.

Peter McCormack: That's very different from most other ICOs in crypto, which are often trading on an exchange before they've built anything or established any value.

Jamie Burke: Yeah, so one of the things that's frustrated a lot of people with Outlier Ventures' investments is that you go into a Telegram channel, and I'm not going to name names, but some of them have 14,000, 15,000 people in there, very actively engaged community, and the project will not talk about its token sale at all.  And it won't do that, because generally it may be raising private money, it may be deploying that private money and building out the product.  It will only talk about a token sale when it is no longer raising money through private sales.

Now, that doesn't mean it's excluding people; you can contact them and ask them and if you pass the criteria, you can probably invest.  But they are not promoting an ICO.  Then, when they do start talking about this token sale, you will first probably have to do something to join the network before you can purchase a token.  So, you have to become a network participant, you can't just be a speculator, and then at the point where you can actually purchase that token, you will be able to use it in that network.  That network will already be being used potentially by several enterprise partners, who would have been using their testnet previously. 

So, they're very unlike other projects.  To be honest with you, I don't think there's a proper appreciation for this yet, but there will be as these all come off the ramp by the end of this year.  I think there'll be a clear difference when you see the quality, and there will be a premium; you will be paying a premium for that if you want to come and participate in the system.  But it will be a live network, and there's a lot of money and time and thinking that's gone into it, and time will tell; but ultimately, because we're locked into the long-term value of the system, we have to be sure that the economic decisions are viable, the governance is right, the treasury management, how they're going to manage their capital and deploy it in a way that's going to grow network value.

There's a lot of thinking and processes that have been put in place behind the scenes that will ultimately make our investments more sustainable.  And again, people don't appreciate it now, because everybody says that; but over time, I think this should become really apparent.  And then I think increasingly, there'll be that expectation from Outlier projects.  I think that is a big differentiator.

Peter McCormack: How are you feeling about the token sales, because obviously there was an ICO boom last year and early this year, but most, almost all ICOs I look at now are struggling to hit their hard caps?  Do you think your ICOs will be seen differently because of the hard work you've done up front?

Jamie Burke: Hopefully, you never know.  These projects, by the time they do their token sale, will have already raised and deployed anything from $5 million to $30 million, so they've already raised money, and from professional investors who have done their due diligence and are happy with all the things that a professional investor would want to see.  They are all, of course, coming into a market where still everything is correlated to Bitcoin, and that is correlated to -- it's kind of oversensitive to positive news or negative news, there's no real rationale in the market.

I mean, I always find it fascinating, people create these trading charts and predict where it's going to go; but then, the SEC says something and it all goes to shit.  So, when we've designed these systems, we've designed them to last, we've designed them to function initially on their own, and there really shouldn't be a correlation between that and any other asset.  However, that's just not how the market works.  So ultimately, it impacts the price the project's able to invest at.  Actually, in the presales, it's impacted how much, you know, if we were in a bear market, people are going, "Well, I'd rather hold on to Ethereum.  That's going to appreciate by X, my Ether, rather than deploy it into a project that I know will have more long-term upside". 

So, it's really when people think they want to come in and out, and a lot of our projects have lock-ins.  So, Ocean's lock-in for any investor is over a year, so you've really got to believe in the network.  You can't just be somebody that's wanting to recycle your capital.

Peter McCormack: But it's a more mature approach to what has actually been quite an immature market?

Jamie Burke: Yeah, and I think when I wrote that, sort of calling for this crypto winter, at the beginning part of the year, it was to bring some sense into the market, where people stopped tracing and chasing the pump-and-dump and started to say -- because, I think everyone's seen the downside of that now.  Before, there was no downside, so the game theory behind that was, "Well, why wouldn't you be just flipping your money?  Why would you be looking for anything of value?  Why would you even care?" because there were plenty of things that had no value.  Everyone knew that, and yet they could still make lots of money.

I think the rules of the game are changing, which is a really good thing.  People are having to start to look for value.  You'll still get traders but some people will start to say, "You know what, I played the trading game, I lost a load of money; it's better for me to just try to find things that I believe in long term, park my capital in that, and get on with my actual job that pays the bills and pays the rent".

Peter McCormack: I almost feel like we've got this wipeout that's still to come, in that there are still a lot of token projects out there who are sat on funds, who are probably not going to deploy something anyone's going to use, they're going to struggle with traction, and I still think there's probably a hell of a lot of ETH still to be sold back into the market, while there's probably less ICOs out there that people want to invest in. 

So, I think there's a lot more downward sale pressure on ETH to come, and I think we've got this kind of death spiral to go, and I feel like that's when almost this bear market will end, and that will wipe out a number of these projects, and almost similar to the dotcom bubble, some will survive.  We'll have our Amazon, our Google, our Facebook, but we will then have that next round where the rules of the game will have changed, and everyone will have learnt from this first phase.

Jamie Burke: Yeah, and very crudely, there are three things that will be the differential between those that fail and those that are still here in three years.  Obviously, there's some technical decisioning, which is very difficult to predict.  The innovations which we think are going to be the future now, might not be those in three, four, five years' time, ten years' time. 

But there's some basic ones that is, have they got the token distribution rights?  So, just the sales process themselves, have they made sure that the tokens are in the right people's hands, or they will be in the right people's hands?  What is the treasury management of their holdings?  Have they just held it all in ETH thinking it's going to continually go up?  What is the governance that's in place, how they make decision?  These are the basic things.

Then of course, the actual economic design.  The combination of these things will give resilience to projects that will still be there.  And by the way, I think, coming back to the Hungry Protocol thesis, there is opportunity in the winter, if you are a well-capitalised project that has all of those things right, coming into a market where there might be a foundation that's totally screwed something up, be it just basic governance, be it they've run out of money, that are acquisition targets, either just for the team. 

So, we've played around with some concepts about what mergers and acquisitions could look like.  We're seeing things, I call it the Cuckoo.  So, I don't know if you know, but the cuckoo basically lays an egg in another bird's nest and allows the other bird to hatch it, and we're seeing a lot of well-capitalised protocols that might not even be the best technology, who are approaching projects that are about to ICO and saying, "Don't use our token, and we'll give you $25 million, $30 million of our token, our capital, ideally our token, and you just build on our network".  We're seeing things like I call the Missionary, where you're approaching projects that aren't yet converted to crypto and you're acquiring them.

But there's other interesting ones, like I've heard recently, I don't know if it's a rumour, but Nexo were talking about buying or taking over the Salt Network.  I'm not sure how that would work, and I think Salt have just disputed it, but apparently they've burnt through a load of cash, they're in financial trouble to govern the foundation.  Again, can't verify that at all, it's just a rumour.  But it's interesting you've got one entity saying, "You know what, we'll take over the network, we'll merge you somehow into ours".

So, there will be some residual value out there, whether it's network participants, nodes that newly minted protocols can begin to go into and acquire, and I think that's where it starts to get really interesting.

Peter McCormack: Do you think there's probably a wider need for stablecoins in all of this, because one of the things I also struggle with is the volatility?  I think for wider institutional investment, I don't think these institutional investors are going to be happy with the volatility of these tokens they don't understand when actually, a stablecoin does the job.

Jamie Burke: So, many projects are now having two tokens in the system to counterbalance this.  They have the one, which is a way you can exchange value in and out of a system, and then you have the one that's actually driving the core utility.  So, they're able, in a way, to have their own stablecoin in that network to remove the volatility. 

But actually, I think volatility's a broader topic which is, these capital markets are in their adolescent stage, they're really inefficient.  So, there's a project we're working with at the moment that addresses explicitly this, where you look at the pairings between these growing numbers of tokens and the difference between exchanges is huge.  So, just some basic algorithmic stuff, algorithmic trading, can allow you to tap into that.

Then, there's some interesting innovations around, how can you tap into the collective long-tail holdings to create a decentralised form of liquidity between all of these pairings, and this is an investment we'll talk about in the near future.  But effectively, this volatility's primarily driven by thin liquidity, and there are some basic innovations that can come through that can remove that.

So, at the moment, if you're a hedge fund, you love volatility, and they've got enough capital where they can deploy it, it's opaque, they can market manipulate.  Most of it's not security, so most of the normal rules don't apply.  And so, we've got this hyper-volatile system.  I think all of that will gradually be ironed out, whether it's stablecoins, whether it's new forms of market making and decentralised liquidity solutions.

Our focus to date has been less concerned with all that.  So, we accept that most of our tokens will experience degrees of volatility, and we try to design ways to manage that and minimise it, but we're not going to be watching the daily price movement on our tokens; I think that will be incredibly distracting.  This is one of the big distractions for most protocols out there, that they're public companies and this is why a lot of projects don't go public for a number of reasons, because it's a pain in the arse from a regulatory perspective; but also because the attention changes.  The attention if much more short-termist; it's, how can we move the needle on the price?

Peter McCormack: Well, isn't this what Elon Musk did yesterday?  He wants to take Tesla private because of the distraction, and probably because he has to be the key driver of the PR that keeps the price high.

Jamie Burke: Right, and I think the Elon Musk debate's almost as contentious as anything in crypto.  But his argument is, if you're interested in all of that stuff, these short-term reportings, then you should be investing in Tesla, because we're doing something bigger, and that requires patience and a long-term outlook.  But that's very difficult if you're a public company.  Again, this is one of the challenges with these tokenised companies, in that public companies without the usual infrastructure of being a public company, how you manage communicating with the market and shareholders.

Peter McCormack: Okay, look, before we finish up, there's just one thing in my notes that I haven't fully covered yet.  We talked about the path to decentralisation, but one thing I don't fully understand, probably because I'm not close enough to it, is the actual steps that this goes through, and I know you've written about it.  Can you just explain that to me?

Jamie Burke: Yeah, so basically what we've created is an agile process and it's really come about from the work that we're doing with our various projects and the decisions they're having to make as they work through the degrees of utility that they have in the network, how they're going to govern that network when it's live, within the kind of regulatory environment that we're in and the ambiguity that exists within that.

So, decentralisation today has been primarily a technical discussion and almost a political ideal, so it's a starting point.  Most projects start from the point of decentralisation so, "This is how decentralised we want to be.  We must be that decentralised at day one".  And actually, what we're seeing with our projects is that it's this pathway, it's not linear, you move around quite a lot as the rubber hits the tarmac, so there are some key milestones along that journey to decentralisation.

We do have the discussion when we're thinking through token design, and thinking through the ledger and consensus mechanisms, to what degree of decentralisation is it sensible for your network in the context of its utility and in the context of its regulatory compliance?  So, if you're hoping for your network to interface with the insurance industry or the banking industry, then there are many different considerations around centralisation and decentralisation.

But ultimately, you're thinking through a couple of key milestones, so one is slightly arbitrary, and this is a really challenging one, which is full functionality.  So, we believe you need to be looking at decentralisation in terms of codifying governance in parallel to the token sell process, or ultimately, who is joining the system and at what stage?  Who and where is it appropriate that somebody can enter that system, especially when you start considering retail users or investors, or whatever you want to call them?

So, "full functionality" is a phrase used by the SEC, which they determine is a key criteria as to when the public should be able to participate in buying tokens.  And obviously, in a protocol that's open source, how can you ever say it's got full functionality, because functionality's evolving and it's developing?  But they have this determination.  So loosely we say, "What is the minimal viable utility…" so again, another reference of minimal viable something so, "What is the minimal viable utility the network needs to demonstrate for us to be able to satisfy this regulatory requirement for full functionality?"

Then, the second one is this network market fit.  So, until we reach network market fit in at least one market vertical, we believe that decisioning governance should be wet, involve people, be quite analogue; but if we borrow the learnings from open-source systems, be incredibly transparent, so this ultra-transparency.  And if you actually look at the history of open source, it's easy to say it's distributed; it's not so easy to say it's decentralised, because most of the activity in open-source systems, whilst it's open to contribution from anybody and everybody, and it can be quite egalitarian, decision-making is hierarchical, and often there's a benevolent dictator there.

So, if you look at Linux or Mozilla, or any other project, ultimately somebody calls the shots, and that allows the project to move forward and not get bogged down in trying to satisfy every possible opinion.  In reality, we kind of see that in other protocols, I'm not going to name them, but there's a debate about, do we have these individuals that carry a lot of weight in the ultimate governance of a particular network?

Peter McCormack: Well, I would name Vitalik in Ethereum as a very obvious case, and I think that's where you have the clear separation between Ethereum and Bitcoin and their levels of decentralisation, because there is no Vitalik in Bitcoin.  That's probably the genius of Satoshi who he, she, they are in that.  So, I actually think, if you ask me, I think the SEC decision on Ethereum was really -- it made less sense than it was.  What I'm trying to get at is, I think they fudged it, because I don't think they wanted to stifle innovation and deal with the headache of potentially having to put a whole bunch of people in jail!

Jamie Burke: Well yeah, and also, who would go to jail, and if you look at who the SEC and regulators are going after, it's outright fraud.  So, their main focus is, what is the intent?  Is the intent to defraud people; or, is the intent to genuinely build a technical innovation?  Now, within that, there are nuances, and without legal precedent, they're going to be much more cautious about taking a project that has $1 billion in the bank to court, where they might potentially lose, than they are just picking off low-hanging fruit, who are carrying out outright fraud.

They're trying to give a guide.  So for us, thinking through as you're navigating that journey, we believe, ideally not concentrated in an individual, but certainly a group of committees with subcommittees with decision-making that is transparent and auditable, and of course we've got all the characteristics of blockchains to allow us to make that happen, we believe is a sensible way to realise innovation.

You've got to remember, in the early stages, there's a reason why consortia often fail, and where start-up can really succeed.  It's because often, start-ups don't ask for permission, where consortia explicitly have to go and try and find consensus amongst a group of conflicting stakeholders.  So, you've got to be pragmatic about this stuff, you've got to say, "How do we get from A to B, or A to B to C; how do we get there as quickly as possible, whilst keeping the majority of the network with us?"  It's this fine dance that you've got to make.

We believe, if you look at the history of open source, as long as you're transparent and you set out the pathway, you say, "This is how decentralised we want to be, this is how we want to get there, these are the steps it's going to take to get there, this is why we think we need to be centralised in these areas to start with", I think any sensible person is going to be okay with that".

Peter McCormack: Yeah, and like I say, I don't think they want to stifle innovation, and by deeming Ethereum a security, it essentially wipes out a whole section of potential innovation, and I think it just takes it away from America.

Jamie Burke: Sure.  So, the reason why the SEC were a member of a number of different bodies, Wall Street Blockchain Alliance, where we go on Wharton Retreats, until today, I think we've been the only VC; the rest are all the regulators from around the world and all the leading law firms.  And it's Charter House Rules, so you can't talk about what's said there, but we've had the fortune of being at these weekend retreats with the regulators, where they talk openly about what they want to stop, what their obligations are, what they think they can stop and then, what they want to stop and what they want to encourage.

The general theme across all of this is they don't want to stifle innovation.  Some are more protectionist on existing industries in the centres of capital that they might have, whether it's VC centres of capital or financial centres for the secondary markets; others have nothing to lose; some have more to lose than others.  So, there's of course a political dimension to this.  But on the whole, largely the regulators are trying to protect retail investors from Ponzi schemes, and they want to protect the market from outright fraud and outright market manipulation; that's their raison d'être.

From our perspective, we know we and our projects invest more time than most in trying to satisfy their requirements, whilst still going, "We've got to move forwards".  So, while there's ambiguity there, we've got to make a judgement call, because we've got shit to build.  And in a way, regulators are catching up, but it requires good actors, and it requires you to at least consider.

Peter McCormack: Did I notice that you've taken on somebody in that role recently?

Jamie Burke: Yes, we've got a Head of Issuance and Compliance, 15 to 17 years a securities lawyer, HSBC and another entities.  So, she's plugged in to Wall Street Blockchain Alliance.  We've just joined another one in North America.  We feed into things like the Crypto Assets Taskforce in the UK, we're a member of the Blockchain Working Group for the EU and several other things.  So, I would say of our entire 30-person team, maybe 20% of that goes to engaging with regulators, proactively engaging with them, and lawyers.  That allows us to have a greater level of confidence.

Most people have just been scared off from stuff and to a degree, that's what regulators wanted.  The SEC certainly just wanted to put the fear of death into everybody so they start thinking rationally about what they're doing.  But I think that tone's changed now.  A lot of regulators, some of them are being proactive, some of them are being forced to react and be more responsive and provide greater clarity.  But because of our proximity to them, we're very, very bullish that a lot of the concerns around crypto assets will be almost entirely removed in the next couple of years for sure.

Peter McCormack: Fantastic.  It's been great again, Jamie.

Jamie Burke: Good to chat.

Peter McCormack: Do you want to tell me, just finish off by telling me what's coming up for you guys, how people can stay in touch and who you want to hear from, and I'll share out all the links in the show notes too?

Jamie Burke: Yeah, so we've got several token sales happening towards the end of this year.  So, if you follow our projects, they might not have explicitly mentioned a date yet, they might be being slightly ambiguous about if it is or isn't going to happen, but I can assure you that they are going to be happening this year and they will be able to talk about it in due course, so just be patient with that process.  We actually wrote a post recently from our inhouse securities lawyer about generally what we advise our projects can and can't say.  So, check that out and it will make sense as to why our projects behave and communicate in the way that they do. 

We're also making new investments obviously, so Haja was a very recent investment which has lots of synergies to projects like Ocean, which is why BigchainDB invested, Polychain followed us into that, so that's going to be a really exciting project that we'll be able to talk more about over the coming months.  And, yeah, we're looking to build upon some of these concepts, Pathway to Decentralisation, Hungry Protocol.  We're about to release a very large thought leadership piece around token design engineering, which is the product of about a year's worth of work, which is almost a book, it might even become a book.  So again, that's going to be a huge pleasure to be able to share that with the world, so keep your eyes out for that.

I guess the easiest way to track all that is to sign up to our newsletter, which you can do easily on our website, which is outlierventures.io.  Look forward to everyone's opinion and thinking.  Most of the things that we put out there are definitely not fact, they're just to stimulate debate.  It's really to surface what we're thinking about and the work that we do.  They're almost always half-baked, so always open to input and criticism.

Peter McCormack: Brilliant, great.  Thanks again, Jamie.

Jamie Burke: Thanks for having me on.

Peter McCormack: Brilliant.