This post was last updated on July 11th, 2019 at 08:05 pm
In this episode, we explore privacy coin investing with our guest, Jordan Clifford, Co-founder and Managing Director at Scalar Capital. Before Scalar, Jordan was a lead growth engineer at Coinbase and a business analyst at Capital One.
Hear Jordan & Clay discuss the fungibility of cryptoassets, the privacy coin landscape, and how macrotrends in society will lead to increased interest in privacy-centric cryptoassets.
This episode is broken up into 8 chapters:
- Chapter 1: Jordan’s background as well as Scalar Capital’s origin story
- Chapter 2: Scalar’s thesis and approach to deploying capital
- Chapter 3: Survey the privacy coin landscape
- Chapter 4: Jordan’s favorite privacy projects and why they matter
- Chapter 5: Decentralized Exchanges
- Chapter 6: The state of institutional investments in cryptoassets
- Chapter 7: Jordan’s favorite crypto resources and the events worth attending
- Chapter 8: Lightning round game of “Overrated/Underrated”
Topics Discussed In This Episode
- How the Cyprus financial crisis in 2013 led Jordan (as well as many others) into exploring Bitcoin
- Why everyone should read the “Cypherpunk’s Manifesto”
- How easy it is for companies and governments to trace your transaction history on the blockchain
- Why privacy matters
- The companies that Coinbase uses to profile the entire history of transactions on the blockchain
- The fungibility implications for cryptocurrencies
- When the “digital gold” analogy for Bitcoin breaks down
- When and why Jordan and his co-founder, Linda, started Scalar Capital
- Why privacy is the main focus of their fund
- How privacy coins empower individuals to custody their own assets
- Where privacy-centric cryptoassets will catch fire
- How people will pay more attention to their own privacy and therefore interest in privacy coins will also grow
- Why Monero stands out above the rest in the privacy coin landscape
- How mandatory privacy works and why it may be holding back Monero from wider adoption
- How ring signatures work
- Why JP Morgan is looking to use some of the technology found in Zcash
- Why Monero has a larger market cap even though Zcash is more popular
- Who the biggest threats are to Monero and Zcash (you might be surprised)
- The “instamine” issue on the Dash ecosystem
- Why Jordan is excited about decentralized exchanges
- Why more institutional involvement in cryptoassets is inevitable
- Why Schnorr signatures are a game changer for privacy
- Cryptoinvestor Weekly Newsletter
- Clay Collins
- Scalar Capital
- Jordan Clifford
- Jordan Clifford on Twitter
- Cyprus Financial Crisis of 2013
- Cypherpunk’s Manifesto
- Ring signature
- JP Morgan
- Schnorr Signatures
Clay: Welcome to Flippening. The first and original podcast for full-time, professional and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns and storage from the frontlines of financial disruptions. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.
Nomics: Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion [00:00:30] and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Clay: Welcome to this Exploration of Privacy Coin Investing with our guest, Jordan Clifford, co-founder and managing director at Scalar Capital. Before Scalar, Jordan was a lead growth engineer at Coinbase and a business analyst at Capital One. This episode is broken into eight chapters. [00:01:00] In Chapter One, we explore Jordan’s background as well as Scalar Capital’s origin story. In Chapter Two, we talk about Scalar’s thesis and approach to deploying capital. In Chapter Three, we consider the privacy coin landscape.
In Chapter Four, we deep dive into Jordan’s privacy projects and why they matter. In Chapter Five, we briefly discuss decentralized exchanges and their role in privacy. In Chapter Six, we discuss the state of institutional involvement in cryptoasset [00:01:30] investing. In Chapter Seven, we talk about Jordan’s favorite crypto resources and events worth attending. Finally, in Chapter Eight, we play a lightning round of overrated/underrated. We’ll get to the episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the privacy coin Veil which funded this episode and made education about privacy coins and privacy coin investing possible.
Veil defines [00:02:00] itself as privacy without compromise, providing anonymity through a combination of technology like Zerocoin and RingCT. Having launched this year with over $1 million in seed funding, Veil boasts an experienced team including members working on Ravencoin, PIVX and more. Before it’s launched, the Veil Team released the X16RT mining algorithm which has been adopted by projects seeking resistance to ASICS and FPGAs. Veil’s hybrid Proof-of-Work and Proof- [00:02:30] of-Stake consensus lets users mine the coin, stake with Zerocoin or both.
Veil states that staking with Zerocoin allows Veil users to earn rewards anonymously by holding coins in their wallets. Find Veil on leading data feed like Nomics, CoinMarketCap, Blackfolio and CoinGecko. To learn more about Veil, check out their website at veil-project.com. Join their discord and telegram chats or follow them on social media @projectveil, spelled V-E-I-L. [00:03:00] Thanks again to Veil for making this episode possible and then to learn more about them, you can go to veil-project.com.
This episode is also brought to you by Nomics API. If you need an enterprise-grade crypto market data API for your fund, smart contract or app, then consider trying up Nomics API. Our API enables programmatic access to clean, normalized and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with exchanged [00:03:30] APIs of varying quality, you can get everything through one screaming fast fire hose. If you found that you or your developer have to spend too much time cleaning and maintaining datasets, instead of identifying opportunities, or if you’re tired of interpolated data and want raw primary source trades delivered simply and consistently with top-notch support and SLAs, then check us out at nomicsapi.com.
Okay, back to our regularly scheduled program. Here’s my conversation with Jordan Clifford from Scalar [00:04:00] Capital. Enjoy. Let’s start with Chapter One which is an exploration of the origin story around your involvement with cryptoassets as well as the origin story of Scalar Capital.
Jordan: As a kid, I was really fascinated with technology. That led me to study computer science at Carnegie Mellon. At Carnegie Mellon, [00:04:30] I added a second major in economics because I found that really interesting as well. I’ve always really liked having a foot in both finance and economics world as well as the technology and computer science world. I’ve worked as a business analyst as well as a software engineer, so it really caught my interest when I first heard about Bitcoin in 2011. Initially, I was rather skeptical. I actually was looking for ways to [inaudible [00:04:54]. Luckily, I never found any ways [inaudible [00:04:56] at that time because it would have been a painful road [00:05:00] for me.
I followed it for a couple of years, 2011-2012, just on the sidelines reading whatever occasional article popped up in mainstream media like Wired. I think I originally found it on Slashdot, but then in 2013, I saw the Cyprus incident happening in Europe where the Cyprus government thought it was a good idea to seize their citizens’ bank account balances and this sent Bitcoin from $30 to $260. At that point, I really couldn’t ignore it anymore. I thought that was a [00:05:30] rather amazing summit, so I read the white paper, I bought some Bitcoin and I’ve been super fascinated by this technology ever since.
Clay: That’s really interesting what was happening kind of a microeconomic scale during the Cyprus crash. I heard a lot of people refer to that as being their entry point into the space. They started realizing that the utility value along with events in Argentina, Venezuela, Zimbabwe, etcetera. I think it’s really hard to get exposed to the most critical use cases [00:06:00] for Bitcoin when you live here in the United States.
Jordan: Yeah, I think that’s right. For a lot of these technologies, the very first adopters are needs-driven adopters. It’s not going to be the person in New York or San Francisco that is the first adopter of cryptocurrencies. They just don’t have any need to. The payment systems work pretty well here and the banking systems work pretty well here, whatever. In South America, in Africa, Southeast Asia, all these places, there just are no other options for getting access to the financial [00:06:30] system and I think that those are going to be some of the places where you see really user adoption pick up probably in the coming years.
Clay: I head a little bit about your personal history with the space as an investor. What has been your relationship to the space as a software developer or as a computer engineer?
Jordan: I worked at Coinbase for a year and a half. I did a lot of internal systems at Coinbase. I was a backend engineer. I did a lot of refactoring and adding features to the compliance [00:07:00] system. Every action that user takes are in Coinbase, it actually goes through deep set of systems that verify that action is allowed by law and is compliant. There’s a number of indicators that have to be looked at and a number of systems that all those things go through. That’s where I met my co-founder for Scalar Capital, Linda. She was a product manager at Coinbase and we worked together to really make sure that the company’s operations were running very smooth.
Clay: Very cool! [00:07:30] What was Linda’s role there?
Jordan: Linda joined Coinbase as a compliance investigator and later got promoted through the ranks and ended up being product manager for all the internal tools. Basically, every backend system that employees would interface with, all the fraud detection systems, the legal systems, the compliance systems, she was the one writing out tickets and creating specs for how we should upgrade those.
Clay: I want to transition in just a bit to Scalar Capital and [00:08:00] your story, but first I want to ask something that just came to mind when you were talking about compliance and compliance systems which you both were involved in and that is, did Coinbase’s audits of the history of cryptoasset and I don’t know if policing is the right word, but the checks and balances they put on tokens before they come into the Coinbase ecosystem? Did that have any bearing on your proclivity or interest [00:08:30] in privacy coins and privacy in general?
Jordan: I would say yes. I don’t think it was the genesis of my interest in privacy. I’ve been really inspired by kind of the origin story of Bitcoin and then the cypherpunk kind of culture. A Cypherpunk’s Manifesto is one of my favorite short essays. I recommend everybody to read that essay. It’s not long and it definitely fires you up in terms of making systems and building software that actually protects individual liberties. That’s really rooted in Bitcoin, but [00:09:00] the fact that Bitcoin really doesn’t encourage address reuse. It encourages new addresses every time.
Bitcoin on its own has already kind of had that privacy culture, but working at Coinbase and seeing all the compliance systems and seeing all the blockchain analytics that were going on and all the tracing and all the subpoenas and law enforcement, it definitely reminds you that, “Yeah, this is not a private by default. This is actually quite public.” All of your dealings in the blockchain [00:09:30] and maybe that’s not the best answer for most people for the long term. I’m sure we’re going to privacy a bit later, but privacy is really not just about big bad government spying on you. It’s also about your neighbor, it’s about your friend, it’s about Russian hackers. You really don’t want to be revealing all kinds of personal sensitive financial information when you use a transactional network.
Clay: As a Coinbase user, I recall one incident where I tried to transfer tokens to what Coinbase deemed a questionable address, [00:10:00] got my account flagged and checked down for a couple of days until a support reopened things for me. I’ve also had friends who tried to import tokens from I guess that Coinbase deemed to not have a great history. Can you share what you’re able to about the checks and balances on coins flowing in and out of Coinbase and similar systems?
Jordan: Well, I can’t get it to too many specifics, but Coinbase works with a number of vendors that are really [00:10:30] solely focused on blockchain analytics. They do a lot of wallet analysis. One of the ones out there is Elliptical and then there’s Chainalysis and I think we’d worked with both of those in the past. They’re actually out there just profiling the entire history of the transactions on the blockchain and they are able to figure out, “Is this a gambling website? Is this a dark net market? Is this something even worse?” They will actually work with Coinbase to find [00:11:00] whether users are interfacing with things they shouldn’t be. That’s about as much as I can say.
Clay: What are your personal views about the fungibility implications to that kind of work?
Jordan: Personally, it’s very concerning. I mean you don’t always know who’s taking these actions and you don’t want innocent people getting caught in the middle. If I’m getting money back from my friend Bob and Bob happened to sell some marijuana for that money and he then sends it to [00:11:30] me, I don’t want to be cast suspicion upon when I go and spend that money. We don’t trace $100 bills, and really if that $100 bill has been used for cocaine trafficking, look funny at the person because we just don’t know that $100 bill is fungible. I like cryptocurrencies to be that same way.
I think it’s really a chilling effect. You can trace the history of the money and see that it has been used in some illicit act in the past and I hold that against the current bearer of that [00:12:00] money. I think that’s a really negative thing for the whole system and it makes people a lot more cautious about accepting money and about freely transacting in the way they may want to.
Clay: I think this is probably one of the major areas where the analogy to digital gold breaks down, like there’s no history attached to that gold. It had been involved in terrible things, but the current holder of that gold shouldn’t be held responsible for the past actions of the holder of that gold. [00:12:30] Let’s transition a little bit to Scalar Capital. You and Linda are working at Coinbase and what are the roots of Scalar Capital? What kind of conversations did you start to have that led to the formation of Scalar?
Jordan: Linda and I were both drawn to Coinbase through our passion for cryptocurrency. At Coinbase, we both were really active in terms of helping the company and helping our fellow colleagues understand crypto better. [00:13:00] I would ride crypto office hours every two weeks where I would just answer people’s questions about from basic to advance, “How does a blockchain work? What is SegWit? What is the Lightning Network? Why does this all matter?” I would help my colleagues understand that. I run Coinbase onboarding, so crypto onboarding whenever new hires would come in every Monday.
I would give then a short 30-minute feel about why crypto matters and what’s exciting about this space. We both brought in a number of external speakers, [00:13:30] so Linda brought in Vitalik. She brought in Fluffy Pony or Riccardo Spagni from Monero.
Clay: I saw that talk, Toxic Coinbase, right? It was a series on YouTube.
Jordan: Yup, a lot of these are on YouTube. I brought in Greg Maxwell. I brought in Peter Rizun. We really like to engage with the crypto community and we really like to be on the frontlines, learning as much as we can about the protocols, about the newest ways the engineers that are figuring out how we can get more bank for a buck and scaling or [00:14:00] expressivity in smart contracts and we are finding that at Coinbase we were less and less getting exposed to their cryptocurrencies themselves, the frontier of the cryptocurrency world. Coinbase started off as a Bitcoin company and slowly expanded its offering, but it’s still a small sliver of the cryptoassets out there.
CrypCoin is not the place to get the latest and greatest cryptoasset. It’s not the place to get exposure to those. It’s much more of a lowest [00:14:30] common denominator mainstream. These coins are vetted. They’ve been pored over by compliance folks and make sure that state regulators are accepting them. It moves a lot more slowly. We were starting to feel like we wanted to be more on the frontlines. Linda suggested that we go off and set up an investment management company and I was definitely onboard with that. It sounded like a lot of fun. The idea of managing [00:15:00] capital in the states is really a learning.
Clay: When you speak about the training that you did in the crypto office hours or lunch hours or brown bags or whatever, was that for internal training primarily?
Jordan: Yeah, it was almost exclusively internal training. If there was any external people, it was probably someone’s boyfriend or girlfriend they brought in to the office that day that just wanted to sit there.
Clay: I think there’s all kinds of reasons that someone might join Coinbase especially these days. A lot of people are just driven [00:15:30] to the allure of stock options in a fast-growing company. Other people really like DevOps challenges or there could be a whole host of reasons. Did you find that it was a challenge as Coinbase grew to kind of maintain that domain knowledge and ear-to-the-ground monitoring of what was happening in the crypto space? Was that a challenge as the company grew?
Jordan: It definite was. As the company grew, the industry grew even faster and the company [00:16:00] had a lot of internal challenges that had nothing to do with the latest and greatest cryptocurrencies or the newest protocols. We felt like we were getting again pulled further away from the frontline and we could have been working at a fintech that didn’t deal with cryptocurrencies. The jobs would have looked similar have we worked at Venmo or PayPal. That was really the same kind of challenges. These are product challenges. These are payment challenges. These are compliance challenges.
These are not really uniquely cryptocurrency challenges and [00:16:30] I wasn’t actually working on the cryptocurrency integrations. There are some people at Coinbase that do that and they probably got a little bit more cryptocurrencies in their day-to-day work, but at the time I left, I was the lead growth engineer at Coinbase. I was really focused on marketing metrics as doing things like Facebook campaigns and Google search engine optimization and I was really trying to help craft the message for getting cryptocurrencies a little bit more accepted by the mainstream masses.
[00:17:00] I really was branding challenges and marketing challenges more than trying to figure out how Bitcoin is going to scale or what the [inaudible [00:17:09] protocol really looks like.
Clay: I think that’s a really interesting point. I think the vast majority of jobs in the space are really … They’re about UX. They’re about bizdev. They’re about partnerships. They’re about regulatory compliance. They’re about scaling pretty traditional databases. They’re about copywriting messaging and SEO. [00:17:30] There’s probably not a lot of jobs out there where you are just in the thick of the latest of what’s happening in the space and that’s part of why I do this podcast. I could see why transitioning to investing in the frontline of this space why that would be appealing. What month did you guys quit and start raising?
Jordan: August 2017 is when I departed and then Linda left in September.
Clay: What is actually the latest [00:18:00] instantiation of this template for a crypto hedge fund? I’ve heard it. It’s an overseas entity with a Delaware LLC. What’s sort of the latest configuration that people are going with?
Jordan: I can’t comment on everybody, but I know that what we have is master fee structure, so our actual investment vehicle is in the Cayman Islands and that opens up a lot of doors, so we’re unable to get exchanged relationships with pretty much everybody. We’re able to get into pretty any project, a lot of projects will exclude US [00:18:30] investors, but by having our investment entity, the investment vehicle itself in the Caymans, we’re able to avoid some of those exclusions. That’s where the investment activity happens and then there’s feeder funds both domestically and foreign in the Caymans.
Clay: Are you guys denominated in USD?
Clay: Let’s move on to Chapter Two which is an exploration of your thesis and approach to deploying capital. What’s your approach? The reason why I asked this [00:19:00] is because I’ve heard a lot of really compelling investment theses around cryptoassets in general versus traditional asset classes. I’ve heard fewer compelling differentiators among other crypto funds and I think it’s because a lot of people are providing basic exposure like that’s the state of institutional investing is like, “There’s cryptoassets and we want exposure,” but I think the space is starting to mature [00:19:30] a little bit. Someone who’s investing in a few different crypto funds wants to diversify their bets. How do you describe your thesis to that person?
Jordan: We believe that cryptoassets are going to uniquely enable all kinds of commerce, commerce that wants to happen today but just can’t because there’s no way to make transaction happen. All the existing payment rails, all the existing banking systems are either too slow or they’re too cumbersome or too expensive [00:20:00] to make some of these transactions happen. These are things like micropayments. These are things like mobile applications, new marketplaces, new prediction markets. It’s really hard to pinpoint what exactly it’s going to be. I think it’s going to be a bit of all these things.
I just think we’re really early and we’re still at the infrastructure layer and protocol layer and we still have probably two layers to go before we could actually interface with [Judge Mel [00:20:25] and have him be comfortable using these systems. The main trust of [00:20:30] why we’re here is the uniquely enabled commerce. This is a way that any two peers, peer-to-peer transactions can happen. Anybody in the world can accept payments from day one. Anybody in the world can send money to anybody else. This is like akin to the internet, but with the internet did for information, these networks are going to do for value.
When you interweave them together, you’re going to see some magic happen, but it’s still so early like I can’t stress that enough. If you actually go and look at the developer tools [00:21:00] that people are playing with, it’s no easy to shoot yourself in the foot. It’s really hard to get confidence in what you’re building. It’s really still a frontiersman’s game. It’s like the pioneers are the ones with the arrows in their backs. That’s like kind of where we’re at. I think we really need to have a bit more settling down, a lot more maturities at schools and the development of ecosystem.
We really believe these networks just enable all kinds of commerce and our focus is a bit on the privacy, so [00:21:30] that’s the main focus of our front. We’ve talked about privacy a bit, but privacy again is the ability to conduct your transactions without needing to worry that somebody else is going to be able to profile you or learn information about you that you may be would rather keep to yourself or keep between yourself and your auditor. There’s no real reason to reveal everything about your finances to the public and that’s something that we think is really undervalued and that’s something where we look extra careful to find noble approaches to privacy and [00:22:00] scalability.
Those are the two main challenges we think that are out there, is getting these networks to behave in a way people can feel safe with their information and also getting these networks to behave in a way that lots of people can use them without degradation of performance.
Clay: What would be like some of the micro trends that you’re betting on? It sounds like one of them is potentially the increase in desire for privacy overtime. Maybe Step One is adoption and Step Two is, “Holy (beep), [00:22:30] the IRS and Chainalysis and Coinbase and everyone in the world can see what I’m doing. Let’s protect against that.” Is that one of the trends you’re betting on?
Jordan: Yeah, really these assets are powerful and they empower the individual from censorship and asset seizure and they empower the individual to custody their own assets and that’s something that we haven’t really had where you can actually have financial [00:23:00] assets that you can custody yourself. Outside of bars and gold, there are cash in your own vault, but something that you actually custody yourself that still can interface with the rest of the world that you can still transmit very easily. This is something that’s rather new, the idea of being your own bank and it’s something that I think we’re betting up, will take fire and catch fire in places like Latin America, Southeast Asia and in Africa.
I think that’s kind of a global microtrend, just banking the unbanked that [00:23:30] we’re fighting for and then I think that a lot of these decentralized application, that’s also a tailwind that it’s going to take some time to really pick up but will be quite strong once it gets here.
Clay: Let’s transition to Chapter Three, an overview of the privacy coin landscape. When you think about the different categories of privacy or the different legs of the crypto privacy tool, the different kind of components that exists here, what is that landscape look like to you?
Jordan: Any [00:24:00] action that a user is taking on the network has side effects and those side effects are observable to some set of people. When you think about privacy, there’s the idea that I hold an asset and that people shouldn’t be able to tell that I’m holding it and then I can spend it. People shouldn’t be able to tell who I’m spending it to, what I’m spending it, how much of the spending. That’s kind of I guess the storing the value and then the transmitting of value. There’s different privacy [00:24:30] problems with each of those situations.
Then there’s also smart contracts and keeping privacy there, so there’s the data layer, there’s the actual executional code and the transactional graft of what’s happening and you want to be able to, in an ideal world, only be revealing enough information to the world that they can verify your transaction happened and they shouldn’t really be able to figure out why it happened, who it went to, when it happened, [00:25:00] how much it was for. Privacy is a cat-and-mouse game about minimizing the metadata that you’re wicking and minimizing who that metadata gets revealed to and really you want only have that metadata be a proof that the transaction happened.
This is like a ring signature [inaudible [00:25:18] proof that something happened, but you actually can’t tell what happened and this is really the magic of cryptography that allows us to build out these tools where we can verify that [00:25:30] things are happening and that the whole system is correct, but we don’t actually need to see what’s actually happening. It’s a mind-bending thing at first, but it’s really rather exciting.
Clay: When we were talking earlier, you mentioned privacy coin as a percentage of overall crypto market cap and I think the implication there was that these tokens by and large are undervalued right now. Is that a correct assessment of your views?
Jordan: Yes, we think that people are [00:26:00] going to start to pay attention more and more to their own privacy. They already are a little bit with their data and some of the backlash we’ve seen, and as they get involved with these networks, I think they’re going to start to prefer networks where they feel safe knowing that when they transact they’re really not comprising their own information.
Clay: What is the percentage of total market cap that is captured by privacy coins right now?
Jordan: Last I checked, it was around 3%. I know these markets are quite volatile. [00:26:30] I had to recalculate that in a few weeks, but it was around 3% when I last looked.
Clay: Here in Chapter Four, I’d like for you to break down some of your favorite privacy projects. What stands out to you right now in terms of innovators in the space and projects that you are particularly keen on?
Jordan: Monero is by far my personal favorite privacy project. They have just an amazing track record of coming up with improvements and shipping the improvements [00:27:00] and actually delivering those improvements to users. There’s a lot of great ideas in the space, but there’s less actual execution and timely execution. Monero really stands out as a team that ships, so I’ve really been a big fan of them and I really like a lot of their design decisions that they’ve made. For example, they really favor mandatory privacy.
Mandatory privacy is the idea that if you’re going to use a system, you’re going to get privacy. This protects the users of the system from themselves and also from [00:27:30] each other. If you offer optional privacy, that’s problematic for a couple of reasons. One, that person doesn’t get any privacy, but two, that person’s also casting a little bit of suspicion on other people who are opting for privacy. Why are you using privacy if you don’t need to if you’re casting suspicion on them when really that should be the default, like “I shouldn’t have to reveal everything about myself when I transact”?
Clay: Hey, I wanted to pause [00:28:00] for a second to let you know that this episode of the Flippening Podcast is brought to you by the folks at Veil Project who believe in sponsoring educational material about the privacy coin space. Veil defines itself as privacy without compromise, providing anonymity through a combination of technologies like Zerocoin and RingCT. Having launched this year with over $1 million in seed funding, Veil boasts an experienced team, including members working on Ravencoin, PIVX, and more. Before its launch, the Veil team released the X16RT [00:28:30] mining algorithm which has been adopted by projects seeking resistance to ASICs and FPGAs.
Veil’s hybrid Proof-of-Work and Proof-of-Stake consensus lets users mine the coin, stake with Zerocoin or both. Veil states that staking with Zerocoin allows Veil users to earn rewards anonymously by holding coins in their wallets. Find Veil on leading data feeds like Nomics, CoinMarketCap, Blockfolio, and CoinGecko. To learn more about Veil, check out their website here at veil- [00:29:00] project.com. Join their discord and telegram chats or follow them on social @projectveil. Thanks again to Veil for making this episode possible, and again to learn more about them, you can go to veil-project.com.
This episode is also brought to you by the Nomics API. The Nomics Market Data API offers squeaky clean and normalized primary source trade data offered through fast and modern endpoints. If you’re a professional investor or developer, you need accurate prices and I can tell you that our competitors’ prices [00:29:30] are not accurate. We’re actually going to come out with a report about this soon. I should also note that the Nomics API is used by many of the largest and most influential companies in the space including top exchanges, $100 million AUM funds and prop shops. Hit us up if you’d like more details or go to nomicsapi.com. Okay, back to this conversation.
Jordan: Monero does mandate privacy and they consistently operate the level of privacy that they require, [00:30:00] so the mixing size. The Mixins are basically decoy inputs, so you can think of them as, “When I’m spending my money, I’m going to also put in there some decoys that could be the ones that are being spent,” and you’re not going to be able to figure out which one it is through that ring signature. The ring signature is going to be a combination my actual input signature with a couple of others, so I’m going to take my public keys, a couple of other public keys, and I’m going to smash them altogether with a signature that it looks like it could have come from [00:30:30] any one of those inputs and they’ve taken that mixing level from …
I think initially there’s no required Mixins. It’s just completely Securix that’s equivalent to Bitcoin. They’ve upgraded it to two. I think it might be even four now. They’ve also added RingCT which is the adaptation of the confidential transaction scheme like Greg Maxwell came up with for Bitcoin and they actually adopt the data and deployed it on Monero. Now, not only do you have the transaction graph that’s obfuscated, [00:31:00] with RingCT, you actually have encrypted amounts and you can’t actually see the amounts that are being transacted on Monero and the way this works is through homomorphic encryption, so that’s a really fancy way of saying, “Math over encrypted amounts.”
Homomorphic encryption basically encrypts amounts in a very special way especially that the math still works, so you can actually verify addition, subtraction, equality. You can verify the summation [00:31:30] of the amounts is equivalent even though you can’t actually see what the amounts are. This is a rather clever trick and that’s pretty amazing to see working out in the wild. Then just one last thing about Monero, they’ve actually opted into a television. There’s a lot of game theoretic concerns that happened in sort of an end state when the mining your words are out and the inflation schedule is depleted.
The television is just the idea of, “Hey, we’re always going to be providing our block producers, our miners [00:32:00] with a reward and giving them in a set of eyes.” This actually removes a whole class of theoretical problems from the network. That’s my favorite one. Zcash is very exciting. They have a great team. They have brilliant cryptographers. Cryptography is very new that something everybody should be paying attention to. This stuff does take time to mature, but Zcash has been very creative and innovative and they’ve inspired a whole class of forks and knockoffs which I don’t think hold the same luster as the original which is gaining [00:32:30] much more of a network effect.
They’ve been listed on Gemini. They’ve got a lot of exciting developments behind them. I think Barry Silbert has created a fund for it. They’ve got a lot of network effect as well. We applaud and cheer on both Zcash and Monero.
Clay: It does seem like perhaps it’s because of the required privacy with Monero that it has suffered a little bit when it comes to network effects and adoption. It [00:33:00] seems to be a little bit slower to be added to exchanges. Institutions haven’t come out with supporting it like they have with Zcash. Could you describe some of the challenges associated with interacting with Monero?
Jordan: Monero, it has a property where you actually will never able to understand whether a transaction output is spent or not. In Bitcoin, it’s very easy to see [00:33:30] which transactions outputs are spent. It’s all in the clear, on the chain, and because of that, you can actually prune older data. You can run a light client that actually doesn’t contain the entire history at all. It just contains the current set of transaction outputs. With Monero, you have to keep the entire history because the only way you’re able to verify transactions are if you have the entire set of transaction outputs as well as the [00:34:00] set of key images which is a detail about the Monero protocol, but the key image is what actually protects you from double spent in Monero.
The state of the Ledger, there’s a lot more data that you have to keep track of with Monero. Running a light client is actually very difficult, which makes it very hard to make a wallet for it on the phone as well as on the hardware wallet. There are some technical challenges with the ropes that Monero is taking. I’m confident and I believe that the benefits of this approach will win [00:34:30] out in the longer term when hardware is getting better and better, software is getting better and better. We’re going to figure out ways to deal with the size of the Monero chain.
It does follow that Monero has a little bit more technical challenges to deal with. We’ll find out whether that having that complexity is worth it, data complexity and cost and we believe that it is, but it’s going to take some time to let the story unfold.
Clay: Actually, I’m really into the purist approach that Monero has taken to privacy. That said, [00:35:00] I’ve had challenges using the wallet on my desktop. It takes forever to download the damn blockchain, and every time I reload the wallet, I have to synch up and that seems to take forever. I was encouraged to see though the other day Trezor on Twitter posted a screen grab of the beta version of their Monero wallet, so Trezor is about to support it.
Jordan: Absolutely, it’s really exciting news. I haven’t seen that, but Trezor is my hardware of choice and the fact that they’re adding Monero is really exciting.
Clay: [00:35:30] Thanks for explaining ring signatures a little bit. We got in to some of the technical details, but could you just sort of with a broad brush describe how ring signatures work? Is it essentially that with every block, there’s a mixing event? Is that how it works? How would you describe it to the layperson?
Jordan: Let’s back up a bit. In Bitcoin, in Ethereum and any of these networks, the transaction is [00:36:00] really two things, one is state change. We want to take the Ledger from state A and move it to state B. The difference is the state change, the transition of where the transaction is going to and from. From address A to address B, that’s the actual effect of the transaction. That’s the intended effect of the transaction and then the other part of the transaction is the authorization. “How do I know [00:36:30] that this transaction is valid and that moving from state A to state B is a valid thing? Does the holder of coins in state A really want them to go go to B?” That’s the signature part.
That’s the authentication that says, “Yes, I am actually the valid owner of the coins in A. I want them to go to B. That’s a true statement and here is my cryptographic signature that shows I actually do in fact own those and I do in fact authorize this change.” In Monero, we actually [00:37:00] don’t specify who the coins are coming from explicitly. We make it a set of possibilities. We say, “Our coins, maybe it’s slot one or maybe we put it in slot four,” and then we also find some decoys. These are people who have no idea this transaction is happening, but they’re definitely spending their money. They are out there on the chain and we include them as possibilities for our transactions.
[00:37:30] We’ll include our own input. We’ll include three decoy inputs, and instead of authorizing my spending of my coins to be, I’m going to actually generate something a little bit different and I’m going to degenerate a signature that authorizes one of these inputs going to be. One of these inputs means that my public key as well as the public keys of the decoys are all being included in the same exact manner. [00:38:00] There’s no special treatment for the real one. All the public keys are included and then the signature is generated to include all those public keys and the signature comes out and says, “Yes, in fact, one of these public keys authorized the movement of funds into this new address, and just so you can verify that this is unique,” and I’m starting to beating the weeds here, “So that you can verify that this is an actual unique thing and I’m not spending [00:38:30] the same coins more than once, here’s a key image.”
You think of it like a hash of a true input. The key image is emitted and this key image set is what protects you against double spending. When that new transaction comes out, you check the ring signature, “Okay, I actually see that all these four public keys, the signature matches the four public keys,” so I know one of these public keys actually signed it. One of the private keys corresponds to the public keys actually signed it and then here’s the [00:39:00] key image. Is this key image unique and have I seen it before? If I’ve seen it before, that means that somebody is trying to pull a fast one on the network and they’re trying to double spend. You still don’t know which of the four is doing the double spend, but you know that somebody is double spending and that’s an in-doubt transaction.
In order for a transaction to be valid, you need to have that ring signature which authorizes one of the inputs, but it doesn’t kind of hide behind these decoys, so you don’t know which one and then the [00:39:30] key image that allows you to make sure that nobody is duplicating their input and trying to spend it twice.
Clay: One of the criticisms I’ve heard of Monero … The criticism is that Monero creates privacy through obfuscation and sufficiently complex systems whereas Zcash creates privacy math and encryption. Is that a false characterization?
Jordan: There’s a kernel of truth to it. Privacy is largely [00:40:00] about the anonymity set. Basically, the anonymity set is this concept in privacy where if I see an action, if I observe an action on the network, anonymity set is the set of people or actors, I guess it don’t have to be people, set of actors that could have taken that action. In Monero, when I see a transaction in the network, the set of actors is the people that are inputs … I don’t actually [00:40:30] know who they are, but the set of actors are the people who had the inputs that are associated with that transaction, so I don’t know which one it is, but there’s only four of them. My anonymity set is four.
They’re pseudonymous, so it’s a little bit more challenging, but the anonymity set is much smaller theoretically than something like Zcash where the system works in this kind of like global mixer level, so I can put my Zcash in a shielded address and [00:41:00] that puts in this global coin pool and then I can generate proofs that I’m spending as global coin pool and I have the authority to do so. Theoretically, my anonymity set is quite large. It’s the entirety of the people who have contributed to that Zcash private pool. It’s not everybody uses Zcash. People who uses a transcribed addresses are not part of the anonymity set and that’s one of my complaints with Zcash is that there’s so many transactions happening that do nothing to add to my privacy.
In fact, they’re [00:41:30] detracting from my privacy, but in Monero, you do have the smaller than these sets. It’s just really the size of your ring, but that said, in a practical manner, you can get very good privacy by using large Mixins and maybe using a couple of levels of mixing. That’s not to say that a very motivated, very powerful state advisory could de-anonymize you by putting a lot of effort into figuring out what’s happening on the Monero chain. It’s quite likely they are trying to do that. It’s somewhat [00:42:00] fair, but I think that obscurity, you can get quite confident that you’ve removed enough of your fingerprints on the transaction through a couple of layers of mixing that the privacy is still quite good.
Clay: The cost of figuring out what was happening by a state actor would be so enormous that in most causes it would be prohibitive. If you needed to send a transaction and your life depended upon that [00:42:30] transaction not being discovered by a state actor, which protocol would you use? Would you use Zcash or Monero?
Jordan: I would probably use Monero myself. I think that using Zcash privately is still a bit of a challenge just because you’re still revealing … You’d have to use Monero, but you’d also have to use a number of other techniques and I guess you could do the same with Zcash, but you’d want to use anonymous VPN, relayer. You’d probably want to have a [00:43:00] couple of layers of rubbing away from your IP address. You don’t want to have any sort of attachment of your IP address to this transaction at all, so you would want to go through a couple of, I think they call them bastion servers, so you basically set up a number of servers and you SSH in through all of them and then at that point connect to a VPN and then you relay your transaction and you kind of hope and pray that your OPSEC is really good.
Clay: [00:43:30] We’re having a lot of discussion about Monero and Zcash here, so we might as well delve into Zcash. Could you walk us through your thoughts on Zcash, zk-SNARKs and the strengths and weaknesses of that protocol?
Jordan: Sure, Zcash, it’s an actual implementation of I think it was a zero cash protocol. zk-SNARKs are theoretically sound ways of generating the best privacy [00:44:00] known possible because it’s a global mixing pool, so you put your coins in this pool and then you’re able to make these assertations about your coins without revealing which ones are you. This is called a zero-knowledge proof. You’re able to prove something happen without revealing anything about that thing other than it’s true. zk-SNARKs, I’m not going to try to explain them. I don’t understand it myself. I think there’s probably only five people in the world who truly understand them.
This is [00:44:30] really heady like math that you need a PhD in cryptography to really wrap your head completely around, but the general idea is that you can prove your transaction is valid without revealing when you set those inputs. The weaknesses with zk-SNARKs and I know they’re acting to remedy them, I actually recently participated in a new Ceremony. There’s a great Radiolab podcast, I believe it was Radiolab, that talked about Zcash and the Ceremony and this is a podcast [00:45:00] where they talked about the actual generation of the Zcash parameters. This is a really delicate moment with Zcash where they actually had what’s know is a trusted set up, so I think they have eight people come together to create these parameters.
If they were to collude, they could actually print Zcash out of thin air. We’re trusting that they didn’t collude and that’s something that a lot of people have had a challenge, so they actually decided to redo that trusting set up with a lot more people and so myself, I actually [00:45:30] participated along with one of my colleagues and I think they’re planning to get at least a hundred people to participate. As long as one of us is honest, you can actually trust that no Zcash is going to be minted out of thin air. This trusting set up was a bit of a challenge for some people. They’re remedying that, so that’s really exciting to see.
The Founders’ Reward is something that has also generated a bit of controversy for Zcash. Monero is much more of a Bitcoin-like cypherpunk [00:46:00] endeavor, anonymous developers, just throw it out there that miners get the coins and that’s how we’re going to do the minting whereas Zcash, they actually decided that they wanted to set up a Zcash Company and a Zcash Foundation and they would get a fairly sizeable slice of the network reward. I think they’re going to get 10% overall of the supply which is fairly modest compared to the newer ISOs, but still offensive enough to some purist that they decided to fork Zcash, so [00:46:30] there’s now Zcash Classic.
I think Zen Cash is a fork of that which added back into Founders’ Reward which is really nonsensical, but it’s there. Zcash, it’s got a lot of really exciting backers. Even JP Morgan is looking at using some of their technology on their own internal blockchains. Zcash has generated a lot of buzz. My only concern with it is that the cryptography is [00:47:00] really complex and really new. I think that when it’s still complex and so new that you really want to be patient with trusting lots of funds to it. It’s really very much an experiment. I think a lot of these networks are and sometimes I think people get a little at themselves thinking this is a bit more mature than it is.
These are very experimental networks and we’re still just figuring these out and Zcash is one of the most experimental out there. There’s a lot of exciting reasons to be bullish about Zcash. They have a great team. A lot of amazing [00:47:30] cryptographers and developers and they’ve got a lot of exchange relationships, and theoretically, it’s the best privacy you can get. It’s a little expensive to generate a private transaction. At one point it took a couple of minutes to shielded transaction.
Clay: One question that I often find myself pondering is why the relative difference in market cap. If I were just looking at that this is an outsider, I’d say Zcash has a partnership with JP [00:48:00] Morgan. They’re traded on Gemini. They have hardware wallet support on Trezor and Ledger. There’s a Zcash investment trust. All signs point to the fact that Zcash might be worth more. If I was just purely looking to signals, I’d say Zcash is worth more, but then Monero consistently is in I believe the Top 15 and often in the Top 10 in terms of market cap. How do you think about that relative difference and what do [00:48:30] you think its price into that delta?
Jordan: I think a lot of that is just a function of where they are under an inflation schedule. Zcash is a much newer protocol. Its supply schedule is very similar to Bitcoins and that they want to 21 million Zcash. There’s a lot of Zcash still to be mined, whereas Monero as soon as they hit 18 million, they’re going to be on their tail emission. They’re much more mature along their emission schedule. There’s just a lot more of the Monero supply already out [00:49:00] there. A lot of these can just be explained by just how far they are along the emission schedule.
Clay: I hear that arguments. I guess I think a lot about market caps and it seems like the scarcity of the token would be priced into the value of the token. If Zcash tokens are more scarce, people ought to be willing to pay more for them. Otherwise, these projects should be able to just like to say their outstanding supply is gazillion [00:49:30] and inflate their market cap, but I hear you.
Jordan: Well, just keep in mind how many Zcash are being created every day. There’s a lot of Zcash hitting the market everyday relative to how much Zcash is out there. The supply is more like a fire hose out there right now. When you take the fully diluted supply up, I can hear that you’re not totally convinced, but I think that is a large piece of what’s happening here.
Clay: Fair enough. Why do you think there’s been such institutional support for [00:50:00] Zcash versus Monero given with the Zcash Investment Trust and adoption on Gemini, the JP Morgan relationship? There just seems to be a lot of momentum. Is that primarily because of a technological difference? Is that marketing? How do you think about that difference?
Jordan: From my perspective, that’s largely due to the structure of Zcash. Again, Zcash has Zcash Company and Zcash Foundation [00:50:30] and they have known figureheads and marketing departments and they’ve run very much like an institution. It’s a network, it’s a protocol, but the surrounding organizations are full of humans that actually can respond to a JP Morgan inquiry. There’s really nobody you can send that inquiry to with Monero. I mean you can send it to Fluffy, but he’ll probably laugh at you saying, “This is a cypherpunk kind of enclave. We’re not going to talk to you, JP Morgan.”
I think that it’s [00:51:00] cultural and it’s structural I think that really Zcash has formed itself to be much more friendly to kind of existing institutions whereas Monero is much more like, “Hey, this is the future and we don’t really care about the legacy institutions.” It’s an informal structure in Monero, its anonymous developers kind of on the GitHub, on IRC. There’s really no formal structures to Monero versus Zcash has much more formal bodies [00:51:30] that can be interfaced and talked to in terms of business development.
Clay: Is there another player in town or is it really Zcash and Monero? When you think of other tokens, I guess in my mind, I’ve definitely heard of Verge. I’ve heard lots of criticisms of it and then I think about like Ethereum playing around with zk-SNARKs and then Bitcoin talking about the potential for confidential transactions. What else exists [00:52:00] out there or do you think is pretty close on the horizon?
Jordan: Bitcoin and Ethereum both have significant privacy improvements that they’re working on. I think that those are the biggest threats to Monero and Zcash is Bitcoin and Ethereum. I think it’s going to be an uphill battle though. I mean backwards compatibility on a network like Bitcoin or Ethereum is tough and it limits you quite a bit. You don’t want to break compatibility with all the systems that have been built already. Adding significant privacy improvements technologically [00:52:30] and culturally is going to be a big challenge for Bitcoin and Ethereum.
That said, those networks are so large that even if you can get a small subset of those networks to adopt your techniques for privacy, the anonymity set may be sufficient that it actually does rival so unnative privacy focus network. I think that Bitcoin and Ethereum are the biggest threats, but I don’t see anything else. I mean there’s Dash which outside of its initial scam launch [00:53:00] is actually not bad. It’s kind of about a native coin joined built into it that’s run by masternodes. That said, there’s almost certainly people collecting data on the masternode network and compromising privacy in that way.
Dash has what’s known as an instamine which a lot of people see this is a scam. I don’t necessarily see it as a scam. What happened was 6 million Dash were created in the first 24 hours and then the people with all the Dash were like, “Oh, oops. [00:53:30] I guess we’ll just keep all that Dash.” Whether that was intentional or not is up for debate, but a lot of people see that as an unfair launch and that’s kind of a black mark on Dash’s record.
Clay: What are your thoughts on the anonymity features of the Lightning Network? Have you looked at that?
Jordan: Yeah, I think that is something that’s promising from very small payments. The thing about the Lightning Network is that you need to find a route between you and the recipient [00:54:00] and that route has to be wide enough in terms of the channel size that you can make your payments. There are some ability to find lots of routes for really small amounts like pennies and you may find that you’re able to like blast a number of pennies and a number of different routes and get them to the recipients and do that in a fairly secure and honest manner.
I’m not an expert on Lightning Network, but I do know that the routes are somewhat hard [00:54:30] to decipher and it’s really not clear where they’re beginning, where they end. You can get some privacy through the Lightning Network, but the Lightning Network is such early days and it’s so small and really the routing and the topology of the other network is still really rough. I would probably not use it for privacy anytime soon, but I think there’s some theoretical advantages to it that hopefully will be realized.
Clay: [00:55:00] Would it be correct to say that to your knowledge like all forms of token-based privacy is some kind of glorified mixing with perhaps more obfuscated and larger anonymity sets, but nevertheless, it’s about mixing?
Jordan: I mean I would say that’s say. At the end of the day, all of these networks have unlimited supply of coins and the networks’ [00:55:30] job is to keep track of them in a decentralized way where everybody can kind of check each other, and in order to make transactions happen, the coins are going to have to come from somewhere in that network and the goal of privacy is to make it so that it’s not obvious whose coins are moving to whom. It is I think fair to say that they’re all at some level a form of mixing. You want to basically move money without being identified [00:56:00] as a single individual. You want to kind of get lost in the crowd.
Clay: Let’s move to Chapter Five which is about decentralized exchanges. What are your thoughts on decentralized exchanges? Has Scalar Capital placed bets on decentralized and noncustodial exchanges like 0x or EarSwap?
Jordan: Indeed, we’re really excited by decentralized exchange. The idea that exchange can happened without needing to trust the third party with my assets is very exciting. I think you’ve seen a number of problems with centralized [00:56:30] exchanges. There’ve been a lot of hacks. There’s been some exit scams. There’s been some freezing of funds. The idea that you can have an exchange where you can get the assets you want, sell the assets you want without needing to hand them over for an extended period of time is very compelling. We have been placing bets in decentralized exchange vertical, full disclosure. 0x founder is actually Linda’s husband, my co-founder’s husband, so [00:57:00] we have close ties to the 0x Team and we’re very bullish on everything they’re up to.
Clay: One of my favorite things about decentralized exchanges is that you don’t have to do account creation. There’s no KYC, AML, etcetera. Do you believe that 10 years out, 15 years out that it’s going to be more likely than not that almost all transaction in commerce in the space will not require an account?
Jordan: [00:57:30] Like you, I’m very pleased that I can do something without generating an account. For one, I hate passwords. For two, I hate giving them my identity when I don’t need to, but I think accounts are here to stay. I think a lot of people do find some comfort and knowing that they have an account with a trusted institution. I think that the Coinbases, the Geminis, the [inaudible [00:57:53] of the world, I don’t think they’re going to go away, but I do think that in many markets and in many situations, we’ll find [00:58:00] people opting for decentralized exchanges where there’s no account and there’s no custody.
I think that it’s nice to have a mix of both options available to you. I think that we live in a hybrid world where some people can go completely accountless. Some people can have some accounts for some purposes and do other things without an account and then some people would just want to stay in the same box of knowing that they have to log in a password and a phone number to call if something’s going wrong.
Clay: Okay, let’s kick off Chapter Six now. I’d like [00:58:30] to know as an investor in this space, what are your thoughts on institutional involvement in cryptoassets and cryptoasset investing? I know custody has been an issue and that wall of institutional money that everyone is anticipating coming in like it isn’t here yet, but it does seem like infrastructure is being built. What’s your view on our progress institutionalizing this space and this ecosystem?
Jordan: From an arm’s distance, it definitely looks like paint drying. It’s like [00:59:00] we’re watching paint drying, waiting for the institutional investors coming in. When you actually dig in to it and you start having conversations with some of the people at these institutions, they’re very sophisticated and they’re actually looking at this with a very keen eye. They’re talking to a number of phone managers. They’re talking to a number of custody solutions. They’re doing their homework. I just think that these kinds of endowments and pensions, they’re not going to come in a deep way, but them dipping their toes is often $50 million or $ [00:59:30] 100 million checks.
I think we’ll start to see more and more of them come in through vehicles like Andreessen Horowitz’s Crypto Fund, so that’s Chris Dixon and Kathryn Haun that launched that $300 million fund. I think that that’s really going to turn the tides a bit and get more and more institutions excited and eager to invest. All the institutions that I’ve talked to, they’re taking it even more seriously now, even despite the down turn. The down turn doesn’t deter them. A [01:00:00] lot of institutions, they have a very long-term horizon. They do their homework and they take a long time, but they’re very long-term minded and I think that once we get some of their capitals on the doors, that’s going to really change the game.
Taking a step back like I’m really excited by the integration of these crypto networks with the traditional financial markets. We saw tip of the spear some of the CME and CBOE launching the Bitcoin futures markets. Those markets have slowly but surely been adding more and more [01:00:30] brokerage that offer them, more and more liquidity. I think that’s really important, and at some point, we’re going to have kind of this nice curve of expectations where the futures markets can duke out what the Bitcoin price is going to be in two to three months and people can kind of express that view on that through the futures markets and more of hedge funds and more traders can all express views.
We’ll get a more sophisticated market view point and more liquidity and then that futures markets they should [01:01:00] feed in to the stock markets and really just start to generate a mature asset class. A mature asset class needs robust futures and needs robust derivatives. It needs lots of liquidity and I think that we’re getting there. It definitely feels slow. When you take back, we’ve made a lot of progress. Goldman Sachs has a crypto trading desk. A lot of these institutions are taking very close look at it. We’ve talked to a number. I know other fund-managing to talk to, a number of [01:01:30] them.
I think that it’s not going to be like a wall that all of a sudden 10x is the crypto market and institutions are here. It’s not going to be that binary. It’s more of gradual shift into the market. You’re already seeing a little bit of it. It’s just slowly but surely come in over the next months to years and then it will be here and you’ll be like, “Wow!” You’ll feel like it’s always there. It’s not going to be like, “Oh, my god. [01:02:00] What is happening? The institutions are here.”
Clay: With [LighterX [01:02:04], we have a clearing house that’s pretty good. We have OTC desks. We’ve got CBOE, CME group with derivative markets and futures. We’ve got an ETF potentially on the horizon. In other countries, we have ETNs. What other financial products do you think we most need and are you most excited about that would help those to space?
Jordan: Well, we need a vanguard [01:02:30] and we need fidelity. We need those ETFs. Eventually, the SEC is going to run out of excuses for why they approve Bitcoin ETF. This is just my view and not legal opinion, but in my opinion, the SEC’s job is to protect investors from being defrauded. The job is not to protect them from investing in silly stupid thing. As long as the risks are being disclosed, as long as the markets are behaving [01:03:00] as they should without overwhelming manipulation which is going to be harder and harder to do, manipulation works when you have a $10 billion market cap or $50 billion market cap, maybe $100 billion, $200 billion, $1 trillion market cap, it starts to become implausible to actually have broad manipulation.
There’s just too much money in there to corner that market and manipulate it. I think the market size is going to [01:03:30] give the SEC some comfort, but the approach in the ETF application is based exclusively on regulated derivatives. It’s basically on the CME and CBOE derivatives and it doesn’t actually in my opinion look very different than oil ETFs might that’s based on futures. If the instruments that the ETF provider wants to trade in and invest in are completely regulated and completely within the sandboxes of institutional friendly regulated environment and the ETF itself is never touching [01:04:00] Bitcoins, it’s only getting exposure through these regulated markets, I’m optimistic that it will happen, maybe not this year.
It might take another year or two. The SEC definitely likes to take their time and nobody wants to be the ones that connect online to approve something that could cause retail investors to lose money and they definitely could, but as long as the risks are disclosed and people know what they’re getting into, I think the SEC is eventually going to have to allow it just because that just seems right.
Clay: The ETF has opened up the ability [01:04:30] for large index funds and the vanguards of the world to get in in a pretty easy way. That’s really exciting and I agree that it’s going to happen. We might have to wait for a few generations of career SECers to buying up Bitcoin.
Jordan: Yeah, there you go. I think they’ll be in the next coming years. I’ve thought too many years in a row that it’s going to happen this year, so I’m not saying that anymore, but I think eventually it will happen. [01:05:00] I’m pretty sure.
Clay: As someone who trades somewhat actively in the space, what are you hearing from OTC desks? Like I know on various aggregator websites and exchanges, you can see exchange volume. You can see exchange volume by different market pairs, but what’s happening in the OTC desk is pretty opaque. I know you’re not an OTC desk operator, but I’m sure you speak to them quite frequently. What do you see from your vantage point is happening on the OTC [01:05:30] desk?
Jordan: To be honest, it’s quite opaque to me as well. We do have relationships with a couple of OTC desk and I do speak to them, not occasionally, maybe on a monthly basis. I know that volume is robust. I know that a lot of the volume that definitely happens on those OTC desks. Someone is going to buy $5 million of the Bitcoin, that’s a really big challenge to do on the exchanges and you’re going to move the price quite a bit. A lot of those kinds of transaction happen [01:06:00] on the OTC desk, but unfortunately, I don’t really have too insight as to how that’s changing on a monthly basis.
Clay: No problem. Switching gears to talking about the current bear market that we’re in, what are you hearing from other crypto hedge funds? Is it harder to recruit LPs right now or is it easier because there’s the perception that we should buy the dip and institutions kind of operate on their own timelines which are kind of not so much affected by the knee-jerk reactions of [01:06:30] bull and bear markets? What are other fund experiencing with their fundraising cycles?
Jordan: I think different LPs have different kinds of psychologies. I think you’re absolutely right that institution operates to the beat of their drum and a lot of them had said, “Hey, it’s going to be Q3, Q4 this year. It’s going to be Q1 next year,” and that’s how they think. They think like three, four, five quarters down the road, that’s when they’re going to be deploying. I think [01:07:00] then they are largely undeterred, and in fact, I think a lot of them really appreciate the dip in prices. They’re able to get in at more modest evaluations which is good for upside, but a lot of high network individual LPs I think are a little bit more reluctant to get in as we’re going to the bear market. As soon as we find a more stable bottom, the appetite will come back.
Clay: For Chapter Seven, can you share with us what your favorite resources in the blockchain and cryptoasset space [01:07:30] are, starting with perhaps your favorite events?
Jordan: I’m really partial to the academic technology events. They’re not so good for maybe business development, but they are better for learning about this space. Scaling Bitcoin is a really good one. Berkeley has I think it’s called CESC. I forgot what it stands for. That’s a really great event, so I really like anything Stanford and Berkeley put on and obviously those are local to me, so that’s easy to get to. [01:08:00] I know MIT has a number of events. I’ve heard great things. I think there’s an MIT Bitcoin Expo. I haven’t actually attended it myself, but I look forward to attending a future one. Consensus in New York, that is just a mania, that’s mayhem, but that was also a lot of fun.
I don’t know that I learned a ton, but I definitely met a bunch of people and I appreciate being in an environment just to see the midtown Manhattan vibe. Midtown Manhattan and blockchain, that mix is just explosive. [01:08:30] That’s certainly a fun one to go to.
Clay: What you’re saying seemed to confirm what I’ve heard from a number of other people who I respect and that is that proximity to makers tends to create better conferences rather than proximity to investors or people on the bizdev side. I often hear people refer it DevCon or ETHDenver or scaling Bitcoin or like the Zcash event I’ve heard really good things about. What about favorite blogs and [01:09:00] Twitter feeds? Who do you follow?
Jordan: I love Chris Dixon. Chris Dixon has a lot of great work out there. Crypto Twitter is just full of lots of opinionated people. As far as recommending specific people in Crypto Twitter, oh geez, I have to recommend my partner, Linda. She puts a lot of great tweets out there. Adding Fluffy Pony is a fun one to follow. Not all of his tweets are quality, but many of them are and they’re always funny. [01:09:30] I really like to just go to Reddit. I know Reddit is kind of a wasteland, but if you just spend 10 minutes on Reddit, you can kind of get enough of a sense on what’s happening in the industry and you can get links to the latest news. Don’t spend too much time on Reddit.
You don’t want to just get sucked into it because you can. Just touching base with Reddit helps you keep tabs with the current events. I like to read the Hacker News and I think Schneier on Security is another really good one. It’s not [01:10:00] cyptocurrency focused, but I really like the way he thinks about kind of computer security, operational security and he touches on a lot of the current events too.
Clay: One of the things that I love about the crypto space is it seems to be bringing people away from their Bloomberg terminals and more into like telegram and Reddit. It’s kind of creating this consumerization of investor knowledge. You’ve got people on Twitter like Crypto Yoda who have in my opinion some [01:10:30] really compelling thought pieces, but it’s an anonymous person whose avatar is Yoda. There’s a lot of good knowledge out there. It’s often not in the same sources though that you would go to if you were like equity’s markets or something. What about favorite like newsletters or books? Any other resources that are top of mind that you might refer listeners to?
Jordan: Nathaniel Popper’s Digital Gold, I can’t recommend that one enough. It’s not technical. It’s more cultural and historical, but it talks a lot [01:11:00] about some of the early pioneers in this industry and gives you a bit of a flavor on what the early days in Bitcoin were like, so I really love that book. I actually gave it away to my groomsmen as groomsmen gifts. It’s definitely near and dear to my heart. Mastering Bitcoin if you’re a bit more technically inclined I think is a great book for just understanding the protocol at the underpinnings, really the deep layer.
Clay: In Chapter Eight, we’re going to close our conversation with a lightning round of overrated/underrated. [01:11:30] I’m going to name a concept, a technology, maybe a company, a product, jurisdiction, then you can respond with if you think this thing is underrated or overrated by the market. You can also say pass or you can say that it’s adequately rated which is a boring but often truthful answer. We’ll start off with index funds. Are they overrated or underrated?
Clay: Okay. Crypto index funds are overrated. Any additional color there?
Jordan: [01:12:00] If you look at the Top 10, there’s enough garbage in there that I would not want to own index of the Top 10.
Clay: For sure. Monero, underrated or overrated?
Clay: Zcash, overrated or underrated?
Jordan: Adequately rated.
Clay: Adequately rated, okay. Verge, overrated or underrated?
Clay: Okay. zk-SNARKs, overrated or underrated?
Jordan: Adequately rated. They’re getting a lot of hype right now. I think that’s largely deserved but again I don’t think they’re [01:12:30] going to solve the world. I think it’s just another building block that we to take into account.
Clay: Schnorr Signatures, underrated or overrated?
Jordan: Underrated. I don’t hear enough about Schnorr Signatures outside of the cor-dev circles. These are really game changing. This is actually going to be providing users economic incentive to that get better privacy. That’s going to give them better privacy and give others better privacy and it’s going to make them cheaper and faster to validate. Definitely underrated.
Clay: Could you give us just like the one [01:13:00] to two minute high-level overview of what they do?
Jordan: Sure. Schnorr Signature is the idea that … It’s a different type of signature. It’s a cryptographic building block that allows you to have one signal signature validate a number of different inputs. Schnorr Signatures are often talked about in the context of Schnorr Signature aggregation which means, “I’m going to take X inputs and I’m going to take the signatures and I’m going to combine them all together [01:13:30] into a single signature.” You can add one signature that represents authorization over a number of inputs.
When you combine the Schnorr Signature with conjoint, you basically break a lot of assumptions about transactional graphing. You can break the assumption that all the inputs are controlled by the same person because people are going to be incentivized to actually combine their inputs together into a single transaction with a single signature and this is going to make it faster to validate, cheaper for the users [01:14:00] with better privacy and it’s going to just really help the privacy of Bitcoin.
Clay: Get a high level, the benefits are cheaper transactions, more privacy. Does it also help scalability?
Jordan: Indeed. There’s a single signature for many inputs which consumes less data, takes less time to transmit over the network, takes less space in the hard drive and with the blocks as limited as it is, it means we can fit more transactions into a block.
Clay: [01:14:30] Does it require a hard fork of bitcoin to implement? Can it be implanted with a software?
Jordan: I don’t believe it does require hard fork and I don’t know the latest and greatest, but I think that SegWit opens the door for Schnorr Signatures and I think that it can all be done with soft fork.
Clay: Okay, ecosystem funds, overrated or underrated?
Clay: Overrated, okay.
Jordan: I don’t think that we need to focus exclusively on any one ecosystem. Our fund should be looking more green field than unconstrained in my opinion.
Clay: Cryptoasset investment thesis, [01:15:00] overrated or underrated?
Jordan: Adequately rated. I don’t know. I think it’s important to have a thought on what you’re doing.
Clay: Yeah, sure. Bitcoin Cash, overrated or underrated?
Clay: I saw one of your medium articles on Bitcoin Cash. Are you still pretty optimistic about the promise of Bitcoin Cash?
Jordan: I am. There’s been a lot of tools built for Bitcoin that have since left Bitcoin because Bitcoin doesn’t want to scale. I think that it definitely [01:15:30] brings a difference of tradeoffs and a different topology. It’s not one where you can verify the transactions to yourself on a raspberry pie, but if you decide that maybe businesses are in the better place to verify transactions and you can do more simple payment verifications, SPV kind of verification for yourself, the style of light client that many people use on Bitcoin and are quite comfortable with, you can have a system that just provides a lot more utility to a lot more people. I think there’s promise with Bitcoin cash and [01:16:00] I think it’s generally underrated.
Clay: Bitcoin, overrated or underrated?
Jordan: Underrated. Bitcoin is still dismissed by many people in the mainstream and in the world and I think that’s a mistake. I think Bitcoin has kind of proven itself over the last nine years and it’s being used more and more and definitely is here to stay.
Clay: EOS, overrated or underrated?
Jordan: [01:16:30] Oh, gosh! Overrated.
Clay: DFinity, overrated or underrated?
Jordan: Adequately added. There’s a lot of hype for DFINITY. I’m optimistic that they’ve got some clever noble schemes. They’re taking quite a bit time to actually launch. I don’t think the threshold signature scheme is going to necessarily win the world over just in its own merit. I think there’s a lot of hard work in terms of building a network effects that’s going to be needed if they want to compete with Ethereum.
Clay: Tezos, currently overrated [01:17:00] or underrated?
Jordan: Currently underrated. I think a lot of people have really thrown Tezos to the side. They have a lot of political problems, a little political drama. I’m actually quite upset with them over the KYC, AML news, but at the end of the day, I’m still optimistic that they’ve got some really exciting that they’re building.
Clay: Stellar, overrated or underrated?
Clay: Ripple, overrated or underrated?
Jordan: [01:17:30] Even more overrated.
Jordan: Underrated. I think Ethereum … I think a lot of people inside the crypto community are really excited about Ethereum, but Ethereum has at the application layer way more teams working on building it out than any other network including Bitcoin.
Clay: Casper and Charting and other scalability solutions for Ethereum. Are those overrated or underrated?
Jordan: Those are adequately rated. [01:18:00] They are a step on the journey to scaling. It’s not going to solve everything in day one. It’s getting a lot of hype, but the people are getting a little impatience as well. I’d say it’s fairly rated at this point.
Clay: Binance, overrated or underrated?
Clay: Oh, interesting. Why is that?
Jordan: They are definitely pushing themselves to get themselves some regulatory hot water. I think the Binance coin [01:18:30] is kind of a dicey in terms of actual value that it brings. The sources of demand are very transient and short lived. They give you discounts on fees and they buy back some small share of their profits for some period of time. Those are not permanent sources of demand. As far as the Binance coin, I don’t like it as a long-term investment and Binance itself, it’s showing what you can do if you’re just going to ignore all regulation, but I [01:19:00] don’t know if that’s going to be a sustainable strategy.
Clay: Maybe playing a little fast and loose with the loss and could find themselves in hot water.
Clay: Potentially. Coinbase, overrated or underrated or pass?
Jordan: I’ll pass on this one. Thank you for reminding about that.
Clay: Decred and other governance coins, overrated or underrated?
Jordan: Underrated I think the Decred Team is great. I think that they’ve done a lot of awesome work and I really like having an [01:19:30] on-chain governance. I know that some people aren’t much of fan, but I think that democracy, it’s the best of governance. It’s more dependent on the all other form. I forget the exact quote.
Clay: It’s the lesser evil.
Jordan: Yeah, the lesser evil. I think that it’s a valid experiment and an exciting project.
Clay: The role of location in hedge fund’s success?
Jordan: I think it’s overrated. I think that you can really do this from just about anywhere. It definitely helps with access [01:20:00] information, I think we’re getting into a world where location is not as relevant.
Clay: Well, that wraps up this conversation with Jordan Clifford from Scalar Capital. I hope you’ve enjoyed it. See you next week. Take care. That’s [01:20:30] it for this week. To sign up for our free crypto investing newsletter, listen to other episodes or get the show notes from this episode. Please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics, spelled N-O-M-I-C-S at nomics.com. Finally, if you got value from the show, the biggest thing you can do to help us out is to lead a five-star review with some comments and feedback on iTunes, Stitcher or wherever you listen to podcast. Thanks for listening and see you next week.