Investing in Smart Contract Platforms w/ Katya Kovalenko from P2P Capital

This post was last updated on July 11th, 2019 at 07:45 pm

Investing In Smart Contract Platforms - Katya Kovalenko - P2P Capital

Part 1: The Audiobook

Part 2: The Interview

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Part 1 Description

This is part 1 of a series on investing in smart contract platforms. The research arm of Nomics, creatively titled “Nomics Research,” will be publishing the audiobook you’re about to hear on Audible. But before we do that, we’re broadcasting it here for free.

This audiobook is a reading of Katya Kovalenko’s 10K word blog post, entitled “Investing In Smart Contract Platforms: How Developer Ecosystems, Crypto Economics, and Token Mechanics Create Value on Platforms Like Ethereum, EOS, Cardano and Tezos”

We hired a professional voice actor to create the audio, and I think it turned out well. The main audiobook content is about 1-hour long, which is about as long as it takes to read Katya’s article. (Note: If you’re interested, we also created an audiobook for the article Nathaniel Whittemore and I published last December, entitled “Crypto Market Cap: An In-Depth Review & Survey Of Emerging Alternatives”).

What you’re about to hear is a private investor’s take on the smart contract space and possible ways to evaluate and invest in smart contract platforms.

This audiobook is broken up into three parts:

A deep exploration of what smart contract platforms are
A framework for evaluating smart contract platforms
A consideration of smart contract investing’s future

Part 2 Description

This episode is the second and final part of our series on investing in smart contract platforms. I’m joined by Katya Kovalenko, a partner at P2P Capital. We explore the pros and cons of smart contract platforms, how to evaluate them, and what the future holds.

This interview is broken up into 6 chapters:

Chapter 1: A primer
Chapter 2: Smart contract use cases
Chapter 3: The pros and cons of popular platforms
Chapter 4: Evaluating smart contract platforms
Chapter 5: How to invest in smart contract platforms
Chapter 6: Why the future of smart contracts depends on the creation and adoption of a “killer app”

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Topics Discussed In Part 1

What are smart contracts?
Potential use cases of smart contracts
Current concerns with smart contract platforms
Ethereum, Stellar, EOS, RSK, Cardano, Tezos
How to evaluate smart contract platforms
The role of developer experience and governance
Ecosystem funds and developer adoption
Power law distribution
Various avenues for investing in smart contracts
Katya’s predictions for the future

Topics Discussed In Part 2

How Katya got involved in cryptocurrency investing
The origins of P2P Capital
P2P Capital areas of focus
How P2P Capital is structured
How the business involves staking, running nodes, and participating in networks that reward network participants
What kind of things are codified in an agreement that an investor makes with a project
What smart contracts are and what they can do
Smart contracts that have been shown to work historically
How smart contracts are used during token sales
Compelling future use cases of smart contracts
What smart contracts are and aren’t good for
Popular smart contract platforms
What is possible with regards to smart contracts on the Stellar platform
Smart contracting languages
What Katya is enthusiastic about when it comes to EOS
How investors should consider smart contract options
The Moloch DAO
How to place bets in the smart contract space
Common arrangements when it comes to equity plus token arrangements
Accrual of value to tokens aspiring to be currencies like Bitcoin versus the accrual value to smart contract platforms
What the future of smart contract platforms looks like

Links Relevant To Part 1

Links Relevant To Part 2

Quotes

“When you come to this market you realize all the potential and you start thinking well, in two years the world is not going to be same, it’s going to be different, all this technology’s going to work. And then you realize oh, it’s probably going to happen in 10 years.”

“So, if the user sends a certain amount of funds to certain smart contract then the smart contract issues certain amount of tokens and sends it to the user’s wallet, for example. This is the most basic “what, if” condition that smart contract can enforce in the token sale.”

“And so contrary to the very popular narrative, decentralization is rarely a thing, a parameter, that developer optimizes for. It’s more like a path to achieve some certain characteristics of the network, like optimal security, optimal scalability, and it depends on the application that the developer is building.”

Part 2 Transcript

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 stories 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.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay [00:00:30] and podcast guests are solely their own opinion 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.

We’re just about to kick off the second and final installment of this deep dive on investing in smart contracts. I believe this is the best material you can find anywhere online about this topic. There just isn’t a deeper treatment of this topic anywhere. [00:01:00] I’m joined in this exploration by Katya Kovalenko who is a partner at P2P Capital.

Part one of this series which you can hear in episode 35 of this podcast, is an audiobook reading of Katya’s 10,000-word essay posted to the Nomics blog entitled “Investing in Smart Contract Platforms: How Developer Ecosystems, Crypto Economics, and Token Mechanics Create Value on Platforms Like Ethereum, EOS, Cardano and Tezos.” That audiobook [00:01:30] serves as a great foundation for the content you’re about to hear. If you haven’t listened to it yet, that might be a great place to start.

In this second installment, we have a free-form conversation and learn about the pros and cons of smart contracts, how to evaluate them, and what the future of smart contract investing might look like. This interview is broken up into six chapters. Chapter One is a primer on smart contracts. Chapter Two [00:02:00] is a discussion of smart contract use cases and what they can’t do, just yet. Chapter Three covers the pros and cons of the most popular smart contract platforms. In Chapter Four, Katya reveals her step-by-step process for evaluating smart contract platforms. Chapter Five explores the various avenues one can pursue to invest in smart contracts. Chapter Six is about why the future of smart contracts depends on the creation and adoption of a killer app.

[00:02:30] We’re just about to kick things off, but before we do that, I wanted to provide two announcements regarding Nomics.com—the company that produces and funds this podcast.

The first announcement is that we’ve hired a producer for this podcast and starting with this very episode, we’re coming out with podcasts each and every week. We’re enthusiastic about this because, without trying too hard, this podcast has gone on to become the #1 podcast for institutional crypto asset investors, [00:03:00] and we’re ready to up the ante. Given that we’re going to be releasing more podcasts, we now have room for a few more sponsors. If you like the work that we do and would like to support this show, then a sponsorship might be a good fit for you.

I can say from our own experience that Flippening sponsorships work. Each and every time we put out an episode of this podcast, we mention our own API. And to date, every single one of those advertisements has resulted in one or more new customers. [00:03:30] In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. Over 80% of paying customers mention that they heard of us through our podcast. Right now, sponsorships run between $2000-$4000 per episode and we accept one outside sponsor per show. Of course, this is probably going to change in the future, but this is where it stands right now.

The second announcement is that [00:04:00] our team at Nomics has been hard at work on the Nomics API and we recently released a number of new endpoints and features for that product, including our new ticker endpoint. Check it out at NomicsAPI.com. Speaking of which, if you need an enterprise-grade crypto market data API for your fund, smart contract or app then consider trying out the Nomics API. Our API enables programmatic access to clean, normalized, and gapless primary source trade data [00:04:30] across a number of cryptocurrency exchanges.

Instead of having to integrate with multiple exchange 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 up 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, [00:05:00] then check us out at NomicsAPI.com. Okay, back to our regularly scheduled program.

Here’s part two of our series on investing in smart contracts with Katya Kovalenko from P2P Capital. Enjoy.

Katya, tell us the origin story of your [00:05:30] involvement in the cryptocurrency space and cryptocurrency investing?

Katya: It started with a real-world use case rather than starting with buying and playing with Bitcoin as most people do.

I started working in corporate finance and in energy, and oil and gas sector over 10 years ago. So, that’s where my career started. Then I joined different international corporations. Started as an auditor in Big Four, [00:06:00] and then joining power management companies. I worked in Switzerland for a few years and then I joined an interesting startup in the US that was dealing with grid-scale batteries. Then my husband was working [00:07:30] in real estate investing parallel. While he was working with this use case, he found out that there were a lot of people that were interested in participating in real estate in the US that were not able to do it because of all the complexity.

And he became curious of how to make it possible to [00:06:30] build a fund, a real estate company that will be able to sell little pieces of US real estate to foreign owners basically, in one click. It was just an idea. He started questioning this and that’s when he stumbled upon blockchain technology. Some of his friends and partners told him, “Hey, you should look at this.” In 2015, he connected with one of our future partners in the firm and the first thing they told him, “You should tokenize it, you should tokenize it.” He’s like, “What the heck is this?” [00:07:00] I started being interested too, because he’s like, “Kat, well, you have more finance background, let’s look at this together.”

So then fast forward, as you can imagine after we started diving in what blockchain is, we both abandoned whatever we were doing, and both started working on blockchain full time. Actually, our investment firm was only found last year but we started investing back in 2015, and the partners that we joined, they started back in 2014 so they had very good experience in the market. [00:07:30] we started investing in alternative platforms like Genesis Investments and Ethereum and then in the early platforms like BitShare. Basically, it was all experimental back then.

Then we realized what an amazing use case smart contracts could bring to the market, and also having the experience in real-world sector. My husband started immediately diving into the projects that were building products for real estate sector. Again, we saw how difficult that is to implement [00:08:00] in the real market. I started looking at the projects in the energy sector, the projects that we’re doing with energy trading on blockchain. We started kind of connecting our real world, real industry experience with the blockchain. And that’s kind of shaped our thesis in the beginning. Then we started looking into infrastructural projects because we realized how far the industry still was and is still now from anywhere, from gaining mass adoption, and even real business adoption. [00:08:30] We started looking at infrastructural projects, infrastructural blockchains, smart contracts back then.

Clay: What became of the real estate use case? We did a documentary on security tokens. We had Josh from Harbor. He was talking about REITs and the ability to use tokens to sell for actual ownership in real estate projects. Did that ever come to fruition or was that kind of the gateway drug that got you involved and then you moved into investing, sort of more [00:09:00] broadly, rather than doubling down on the real estate use case?

Katya: It was more as a gateway because when we started looking at the use case, we realized just how early it is and how non-mature and nascent the technology is. That’s why we started backing and looking at the infrastructure layer. We’re still very interested in this, so we’re still looking at the real estate use cases but now that being in the market for a few years, we realize that this is really, really far.

I think it’s one of the [00:09:30] main issues most investors have in the market is the time horizon. When you come to this market you realize all the potential and you start thinking, “Wow, in two years the world is not going to be same, it’s going to be different.” All this technology’s going to work. And then you realize, “Oh, it’s probably going to happen in 10 years.”

So that was the biggest shift because I remember back in 2015, we thought, our work is going to be very different in three years. Well, corporate finance still exists, real estate market still works pretty much the same, [00:10:00] it’s very conservative. But there are exciting companies that are trying to make a difference there. We’re looking actively at those use cases.

Clay: We’re going to have Rob Nance on the show and everyone’s always like tokenize your funds, tokenize your funds, so he actually went to do it. And it took him, certainly, well over a year, multiple attorneys, a full-time in-house attorney to manage all the external attorneys, multiple legal entities, compliance across multiple jurisdictions, to tokenize his funds. [00:10:30] It’s one of those things where it sounds like the technology’s probably the easiest part of doing all of this and there’s just a lot more red tape that comes with that.

Katya: Absolutely. It costs so many months just to set up a private investment firm correctly.

Clay: Let’s move on to P2P Capital. It doesn’t sound like you accept outside capital. You’re probably not going to get in trouble for soliciting but what can you tell us about the origins of P2P Capital and [00:11:00] some of your areas of focus? How it’s structured? How it got started? And when and how you joined?

Katya: Sure. The firm itself only shaped last year but it’s mainly the result of the legal work and etc. The partners, they started to work on this in 2014. My husband joined it in 2015 and he’s still a partner in the firm and I joined in 2016. I was very hesitant to leave my full-time job, but I did.

The firm is focused on infrastructure investing. [00:11:30] Investing in liquid portfolio and venture investing, as we call it. Maybe, more than half of the fund is liquid portfolio. So, that means they’re tradable tokens and the biggest chunk of it is Bitcoin, I’m personally very bullish in Bitcoin, and we are as a firm. And then also it’s Ethereum, Zcash and then EOS, so the trade at highly liquid tokens.

Then the less liquid part of it are the tokens which are either locked, [00:12:00] or not traded yet, or we have the agreements not to trade for certain periods of time—this is illiquid part of the fund. And then there is VC. There’s our equity investments, we do SAFEs, we do [inaudible [00:14:55], we do token purchase agreements, SAFTs—different type of investments.

Clay: With illiquid fund, it sounds like that’s ICOs or maybe not ICOs, no one wants to use that term anymore. But tokens have, for whatever reason, the illiquid portion is certainly, [00:12:30] dealing with tokens. There’s tokens that either the tokens are locked up, you have agreements not to trade them for variety of reasons. You know there will be a token eventually, but it doesn’t exist yet. When you speak to the venture part of your portfolio, that’s just 100% equity?

Katya: Yes. It’s not always a clear definition of what is just liquid or venture. It depends on the stage of investments. Sometimes it’s a seed stage, so there is only equity. And actually, it’s preferential because it’s not necessarily sure for the projects [00:13:00] at the very beginning if they want to create a token, how it’s going to look like? What’s going to be the structure? What’s going to be the token economy? So sometimes it’s much better, even though it’s kind of old school investing that a lot of crypto funds don’t like to do. Sometimes it’s much better to invest in equity and just to give the team some time to breathe and find out how to structure their project the best way.

Clay: Before they have to answer to thousands of people in a Telegram group asking them about [00:13:30] when they’re going to get their Lambo

Katya: Oh, yeah. I think this is over. Well, I haven’t been in those Telegram groups for a while, but I think the “When moon?” and “When Binance?” is kind of slowing down, which is good.

Clay: And we had talked a little bit during earlier conversations about a part of the business that involves staking, running nodes, basically, participating in networks that reward network participants in some fashion. Can you speak to that part of the [00:14:00] investment as well?

Katya: Yeah, absolutely. This is also important part of our operations, and our partner in Europe manages this mainly. This is generalized mining as it’s been named. Jake Brachman from CoinFund, I think he coined the term and he explains it pretty well. This is basically, participating in the early networks and helping bootstrap the networks. The reason why crypto-investment firms and funds want to do this is not only for [00:14:30] gaining the extra return on their capital which is obviously going to happen later on but sometimes they even do this at loss.

And there’s actually an interesting article, I think Multicoin Capital also do that, so it’s kind of an industry trend. I guess it’s part of the responsibility of the investor to help bootstrap the network at the early stage because most of the networks suffer from the chicken and egg problem. No matter if it’s just a smart contract platform or if it’s a transcoding network like LivePeer or [00:15:00] any other similar platform, it suffers from the lack of participants who are willing to secure the network, take part of it and basically, bring the supply and demand in balance.

Part of the work that we do is running nodes, running validators, participate in transcoding on Livepeer. We run bakers on Tezos, we run validator on Cosmos. It’s for P2P org. We also plan to run a node on Algorand, on the test nets, we’re working this now. [00:15:30] It’s very time-consuming and it requires a lot of operational security efforts. I think this is going to be difficult for the investors because they have to learn a completely new set of skills to participate in this market.

But I think it’s necessary because pure financial investing is not going to be as attractive going forward. Because at certain point of time there was a huge inflow of capital in the market. And the pure capital investments, [00:16:00] we’re getting less and less efficient in the market because they could bring less and less. So being able to understand the networks, being able to participate in them, being able to provide proper operational security—not only for the node operators and for validators but just for the firm itself—to secure your tokens to secure your funds. It’s just part of the skills that all of the investment companies have to learn to be able to join the space.

Clay: From a practical point of view, when it comes to traditional VC investments, often VCs will present the company with the [00:16:30] term sheet and there’s a variety of things spelled out on that term sheet. When it comes to generalized mining or investors’ participation in their early network, in order to help bolster it and secure it and do a number of things, do you ever see that codified in an agreement that an investor makes with a project? Is it ever spelled out that a particular amount of hashing power will be given for a certain number of years [00:17:00] as part of the investment? Or is it usually just something that’s done at the investor’s sole discretion, as one of the many things that they might do to be a value-added service layer for the companies that a fund might invest in?

Katya: I haven’t seen it in the term sheets yet and in any type of token sale agreements. But I think, now that we’re talking about this, it might well become an industry standard at some point of time. The only question is [00:17:30] it’s really difficult to define it it’s not easy to see how much effort is really put in this. You cannot really audit operational security of the validator, or the transcoder. You just basically have to trust them. You kind of have to see their reputation.

It’s not easily traceable but I think, it’s a lot about reputation. And it’s a lot about the project knowing that this firm has been actively participating in other networks. They have seen their results, [00:18:00] they’ve seen their performance. But also, again this is in the very best interest of the investor itself, himself or herself because you have to ensure that the network survives in the long term. It’s not only for earning your staking rewards or validate rewards, it’s for making sure the network is secure, making sure the network has the necessary level of participation.

I think, we might see it in some way in the term sheet. I don’t think it’s going to be [00:18:30] legally binding because again, it’s hard to ensure it’s done properly. But I think, as long as the market understands that it’s in a very best interest of the investor to help bootstrap the network, I think, generalized mining is going to be the trend.

Clay: Do you see this done particularly when there’s something in it for the investor? Obviously, if the investor is purchasing a certain number of tokens through a SAFT or whatever mechanism their purchasing them through, if they believe those tokens are valuable or will be valuable in the future then obviously, [00:19:00] it makes sense to mine, if it has the double benefit of strengthening the network and increasing the value of the tokens that they have into the future but also generating some kind of reward for staking or validating. Do you also see this done even when there’s absolutely nothing in it for the investors other than peace of mind that they’re helping out the team or the increased security benefits to the network?

Katya: I think it’s hard to see when there’s going to be [00:19:30] none for the investor because if there is nothing to gain by participating in the network then how is a network going to incentivize other players to join. There is always some kind of incentive mechanism. Now, maybe the risk and rewards balance is not as perfect as investor could get elsewhere. Now, this can very be the case. But I think still, again combining the risks of participating in the network and for example, staking a huge amount of tokens, [00:20:00] together with a potential of the upside for this tokens, I think it’s still going to make sense.

Again, if their incentives are very weak then probably, they’re just not built in the right way and the network is going to struggle to attract other participants. It’s another good point for investor to think. If he’s not interested in joining the network, then why would other network participants be interested in joining it.

Clay: That’s a really valid point. I think I’m just a little bit jaded from [00:20:30] Bitcoin mining. It’s so competitive these days that I forget that with these incredibly early networks, even if it is traditional proof of work mining, there’s still is an opportunity to get rewarded. And then in a traditional staking model or something like Tezos, at least, you can maintain your position and not have the value of your tokens deflate.

Before we jump into the main body of this, is there anything we haven’t covered [00:21:00] with regards to your origin story or the origin story of P2P Capital and what you guys do over there?

Katya: I think it covers it pretty well. We’re a private investment firm. We’ve only accepted a handful of investors throughout the very recent years, four years actually right. We’ve been pretty conservative. We are putting up our website, it’s just taking, for some reason, an incredible amount of time to produce. But it’s going to [00:21:30] show our portfolio and the things that we do. We’re not very vocal in the space for these particular reasons. We think that the risks are higher than the rewards for being too vocal. So, that’s our origin story. I think we’ve covered it pretty well.

Clay: For everyone listening, we’re going to be diving right now into an exploration on smart contracts. What they do? What they’re good for? And how one might think about making investments in the space? We’ll end [00:22:00] by peering into the future and what the future might hold for smart contracts and smart contract investing.

Katya, let’s start with Chapter One. For the lay person or for the person who’s heard a lot about smart contracts and perhaps, needs a refresher course on what they are. What is a smart contract?

Katya: There has been a lot of discussions about the term and I think it’s getting sideways. Computer progress had been called smart contracts now. But basically, smart contracts [00:22:30] started even before there was a word blockchain. It was not called smart contracts, it was just the way two machines interact with each other based on basic IF, WHAT conditions and do some value transfer. And then the term smart contracts itself was coined by Nick Szabo in the 90s, in 1994, if I remember well. He referred to it as a computer system that enforces the condition of a contract.

Now if we look at the more expanded explanation of smart contracts, this is [00:23:00] any arrangement that is a contract like arrangement that is expressed in a certain source code, and the behavior of this program actually enforces the term of the contract. I like this definition. It was given by Dean Tribble of Agoric at his Web3 presentation. I think it makes a lot of sense. It’s an arrangement where the program enforces it in the source code.

Clay Collins: I think when it comes to illustrating what a smart contract is and what it can do, [00:23:30] I kind of put this into two buckets. There are smart contracts that have actually been written and shown to work somewhat well and then there are kind of future-oriented smart contract ideas that on the surface sound like they probably will work but have not been executed at scale. What are some of the smart contracts that have been shown to work historically or that maybe someone might not realize [00:24:00] that they are using a smart contract but if they are interacting with the Ethereum blockchain or other blockchains in the space that they use pretty frequently, what are some of the existing smart contracts?

Katya: I think the most practically adopted use case of smart contract to-date has been token sales, ICOs and some estimated that there are over eight million smart contracts on Ethereum. I heard this on the presentation last year by [inaudible [00:29:43] team and [00:24:30] I was pretty surprised by this huge number. But apparently, there can be a lot of small smart contracts at one token sale event. Token sales were, I think one of the largest use cases, no matter we like it or not, and what came out of it, but it was the largest use case of smart contracts so far.

What I like to give an example is the decentralized finance use cases. MakerDAO for example, their collateral debt, the smart contract that issues their CDPs [00:25:00] on the blockchain, I think it’s a very interesting use case for working smart contracts that survived a very severe bare market. It showed that the system actually performs pretty well. And then all the various multi-seeker implementations where you have multi-signature or multi-signature access to the funds. These are more of the, as you said, the smart contracts that some of the users might not even be familiar with the fact that they’re using a smart contract. But if we’re going [00:25:30] to look forward into more promising use cases, here we see all the different types of industries that can be disrupted by smart contracts.

Clay: Let’s talk about token sales, since it’s probably the most popular use case when it comes to smart contracts. I don’t know that the average person that has participated in a token sale really thinks about the fact that a smart contract is being used to issue the token. I think from their point of view, there’s a token, [00:26:00] it lives on the Ethereum blockchain, it’s an ERC-20 token. What are some of the ways that smart contracts are used during token sales? What are some of the logic that’s being enforced?

Katya: That’s basically, an IF, THEN condition. If the user sends a certain amount of funds to certain smart contract then the smart contract issues certain amount of tokens and sends it to the user’s wallet, for example. This is the most basic WHAT, IF condition [00:26:30] that smart contract can enforce in the token sale.

Clay: I don’t know enough about the theory on blockchain to know if there’s any kind of multisig smart contract embedded at the base layer. But one might say that it actually isn’t needed because you can just use a smart contract to enforce multi-sig and that there can be an infinite number of multi-sig scenarios that can be enforced by an infinite number of smart contracts.

When it comes to the future and all of these scenarios that folks have [00:27:00] projected could occur in the future, there’s Uber on the blockchain, there’s sharing electricity on power grids and using tokens to gamify that. What are some of the more compelling future use cases of smart contracts that are particularly appealing to you, both as an individual and as an investor?

Katy: I think the term smart contract has been a little bit over hyped in the last years. [00:27:30] And it’s kind of normal for any new technologies that when it appears, you assign all the possible use cases to it. And there were all the conversation that we’ll all get rid of all the lawyers and accountants and all our supply-chain and our romaine lettuce is going to arrive to us fresh and clean just because of the smart contract. And even though I am overall quite bullish on the use case, I think again, as I said earlier, investors have underestimated the [00:28:00] time-frame of how fast all these things can happen. Because all these industries have been functioning for a long time and enterprise cycle of changing anything is very long—the sale cycle is very long.

I’m not very interested in the use cases for smart contracts for enterprises right now because again, working in the big corporations I know how long it’s going to take. But what I’m very interested in is financial use cases that we’re starting to see now. [00:28:30] And these other platforms that are introducing collateralized debt, that are introducing P2P lending or derivatives trading. These are like Dharma, dY dX, Compound for example, and MakerDAO that I already mentioned.

Ok. Timeout. I’m going to do some Native advertising for the Nomics API. This episode of Flippening is sponsored by the Nomics API. The Nomics API offers squeaky clean and normalized primary source trade data offered through [00:29:00] fast and modern endpoints. Instead of having to integrate with a bunch of exchange APIs of varying quality, you can get everything through one screaming fast firehose. If you found that you or your developer have to spend too much time cleaning up 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 [00:29:30] at Nomics.com.

Katya: First of all, the users of this platforms and of this use cases in general are more sophisticated, just by definition. I think it’s going to be easier to penetrate this market. Secondly, this market, like the financial market, is highly inefficient. Whenever you deal with the financial system you know what I’m talking about. I think this is a very clear first path forward. This is nothing new, I mean, the decentralized finance [00:30:00] open finance narrative. I think it has been the narrative of 2018 and it’s going to continue through 2019, 2020.

While the technology is going to prove itself certainly, I think it’s going to face some regulatory hurdles and it’s also quite normal. While this gain will be gaining traction, platforms or projects are going to face all this, audit transmitter loss, all this broker-dealer licenses and that’s part of the norm and I expect this. I’m still very interested in how the technology itself is [00:30:30] going to prove in the financial industry.

Clay: Those use cases are really compelling. I particularly like what Dharma is doing, and it sounds like they’ve decentralized things enough that it’s somewhat similar to decentralized exchanges where it’s more of a bulletin board for people getting matched up with other people and none of the funds actually flow through a central party. I don’t know, it’s too early.

Katya: Yeah. It’s in your space, we don’t know how it’s going to turn out. [00:31:00] But I agree with you that these projects, I think, are moving in the right direction. I’ve heard interviews with the founders many times and they are ready to work with the regulation. I think it’s moving slowly in the right direction.

Clay: I also like these financial use cases that involve applications that are native to blockchain. So being able to do collateralized debt with MakerDAO or some kind of pure play [00:31:30] crypto stable coin, or even more volatile assets like bitcoin or Ethereum, it’s when they start making connections to things that are not on the blockchain that’s hard in it of itself, it seems like. And then connecting into the real world to objects that aren’t digitized in any way, shape, or form that require oracles, it seems like those are going to be the most difficult use cases to nail.

Katya: Oh, absolutely. I think there are several concerns that still need to be solved and the [00:32:30] oracle is one of those because first of all, they require people to make inputs in the smart contracts. I’ve seen this quote somewhere that smart contracts are as smart as the developers who coded them. I would add that also as smart as the people who input data into it or create a data oracle. These are all the foundations of the smart contract. And there are projects that are tackling this now. [00:32:30] I think, there’s project called Chainlink, if I remember well. It is a known problem. Oracle problem is a known problem, but it still exists.

Also, the smart contract security is the most obvious obstacle, I think, to the real-world adoption because before in the Web2 you could just, if the problem doesn’t perform correctly you lose your data, someone steals your photos or gets access to your email. Now with the Web3, with smart contracts and all the finance applications, if something doesn’t work as supposed to, you could subject to hack and [00:33:00] you lose all your money, so it’s a different level of risk and that’s why it requires a different level of security. I’m also very interested in the projects that are building around security and that are building around making smart contracts easier to code securely and safely.

Clay: Let’s move to chapter two. Chapter Two is about the range of things that smart contracts are good for and what they aren’t good for. How would you summarize what belongs in either of those buckets?

Katya: [00:33:30] It’s really hard to see all the future use cases of smart contracts. But if we look in the very near future, there obviously, smart contracts are probably good for, as I said, the applications where the user’s sophisticated enough to deal with it, so far. Because it hasn’t been abstracted away enough up to now so that the user can just interact with a DApp or whatever application that is using the smart contract.

But if we’re going forward, I think, there’s infinite [00:34:00] amount of use cases that smart contracts are going to be used for—from self-driving cars to supply-chain, to insurance, to real estate, that we talked in the beginning. So infinite amount of use cases. But I think where it’s going to be difficult to implement smart contracts is anywhere where the complex legal language is involved. I used to work in consulting, and I remember all the difficult legal language that was [00:34:30] involved in the contracts that I used to sign. Like, “I have to act with integrity, I have to perform due care in my actions, I have to perform the reasonable amount of effort to estimate the potential of fraud in the financial statement,” for example. And it’s very difficult to estimate this unless we have AI that is much smarter than a human and it can judge the outcome of this better than any human.

Whenever we look at the very complex legal arrangements or just when there is a very complex service agreement, when they are [00:35:00] multi steps of implementation of the service. I think, now I’ve seen use cases where smart contracts are stretched too much to try to incorporate all these difficult arrangements. But for the simpler IF, THEN conditions, I think it’s going to be perfectly fine as long as the security problem and the oracle problems are solved in the near future.

Clay Collins: I liked your comment about complex legal language. It probably doesn’t serve most people to [00:35:30] consider or to expect rather than a traditional legal contract would be able to be hardened with a smart contract. It seems like there’s a lot of deterministic aspects that are required in order to be able to create a smart contract around things. I think about a lot of the contracts that I’ve seen or that we write-up, we have customers that we go back and forth with commercial contracts and commercial contract negotiations. And [00:36:00] attorneys like adding the word reasonable to things all the time. Like, “Vendor shall make all reasonable efforts to secure X, Y and Z.” Of course, that’s in there so that if the contract is ever litigated a judge can come in and decide if reasonable efforts were taken and that’s just impossible to do with smart contracts, at least right now.

Katya: Absolutely. Their legal status is [00:36:30] another point of question because nothing of that has been tested in courts yet. The smart contracts are immutable and that’s their main property. If again, if something goes wrong it should go back and elevate to the traditional legal system. Well, some of the entities like CFTC has issued a nice primer on smart contracts. And actually, they judged that smart contracts are subject to existing laws like the Commodity Exchange Act or AML rules.

[00:37:00] But it’s still unclear. I mean, it’s good that the regulators are thinking about it, but we haven’t seen this stuff in courts. We haven’t seen two parties contest on the outcome of a smart contract and then if a court rules that the smart contract has to be reversed then how is it supposed to be done on that immutable blockchain. They have to force one of the parties to create another smart contract to cancel the previous one. I don’t think these are obstacles that cannot be overcome but it’s still a lot of work to do.

Clay: [00:37:30] I wonder if we’ll ever see a day where judges have a securely stored private key that allows them to arbitrate on matters that require arbitration according to the terms of a smart contract and they have to decide one way or another and populate fields with certain inputs.

Katya: That would be fascinating.

Clay: Arbitration on the blockchain. I wonder if we’ll call them oracles [00:38:00] instead of judges, who knows.

Katya: That would be interesting.

Clay: We talked about some of the things that these smart contracts are good for right now. We talked about financial products especially, financial products that are in, as many respects as possible, native to the blockchain. What are things they’re not good for, things that are outside the blockchain, things that reach into the physical world where you’re dealing with atoms instead of bits. [00:38:30] They’re also not good for codifying things that are very complex and have a lot of ambiguity. Anything else to say about this before we move on to chapter three?

Katya: I think there are a lot of other use cases for smart contracts that are being explored. For example, domain name services. This is more of a non-financial use case that I like, one of the most now because I think it’s one of the obvious areas for disruption because now the process is very inefficient. [00:39:00] It’s non-transparent and it’s subject to fraud. I think that whenever we see lack of transparency and very unclear job of the intermediary then this is where smart contracts could easily come in to place. And, again, this still belongs to the web so it’s a more obvious use case to start with. So, one of those use cases, I’m also interested in.

Clay: I’m really excited about what’s happening with the Handshake network. I’m still surprised [00:39:30] by some of the hacks that happened involving smart contracts. There was the DAO hack that happened, and it was pretty early on. I think, people shrugged their shoulders a little bit and said, okay, we get that this was a publicly available contract, anyone could’ve read it, anyone could’ve audited it. This didn’t happen but that was early. But to see the Parity hack, I believe it happened last year?

Katya: I think there were three of them.

Clay: Yeah, with multisig wallets. And again, this is code that a lot [00:40:00] of people looked at and used and these vulnerabilities still weren’t discovered. I find that absolutely fascinating. I would say that, in my opinion, they are not good, in general, for securing things, even though that’s probably one of the most important things they need to do. But it does seem that there’s a Lindy effect around smart contract code.

One of the things that I’ve seen is in [00:40:30] just libraries were un-hacked and sort of smart contracts that people have agreed on that work and are generally secure. That those things tend to stand the test of time and people often fork them. But I’m still so surprised at the hacks we’re seeing today on heavily used smart contracts. It’s just absurd that this is still happening.

Katya: It still shows us that the technology’s very new. I’m not a developer. I tried to do some developer courses [00:41:00] to gain more knowledge in this, but this just gave me much more appreciation how complex this job is. But I talk to developers almost every day about the projects that they’re building and what I hear is that, first of all, building smart contracts is extremely difficult. It’s very hard to code them and to code them correctly and securely.

And that’s why there are a lot of projects that are focused on the correctness and security of smart contracts. Also, certain platforms like Tezos, like Cardano, they’re focused on formal [00:41:30] verification as one of their main competitive advantages because it’s clearly understood in the market that it’s very hard to code smart contracts correctly. But also, what’s important is that almost up until now there was no way to fix the bug in the smart contract.

The projects like open [inaudible [00:49:08], they are working, and I think it’s one of the most adopted solutions in this field to implement the software to securely amend the smart contract after it’s been deployed. [00:42:00] There’s still a lot of work to do and I never blame developers until it’s done really reckless situation because I know, I understand how difficult it is and how new it is. We’re going to see more and more of this, but we just need to make sure we are learning our lessons.

Clay: Let’s move on to Chapter Three and discuss some of the more popular smart contract platforms along with the pros and cons. Obviously, everyone has heard of Ethereum. There are other platforms [00:42:30] that haven’t branded themselves as smart contract platforms and then there are others that have done a really good job of this. But they’re all in various stages of development that are seen to be quite a way behind Ethereum in terms of number of developers and the extent to which high-functioning, high-transaction volume apps can occur on them. Can you walk us through some of your favorite smart contract platforms, maybe, going in descending order from most popular to least popular?

Katya: [00:43:30] I will try to be objective and cover some of the smart contract platforms that are in our portfolio, some that are not because we have made different decisions that still, I think, it makes sense to kind of try to cover this space.

Ethereum is obviously the most popular and I think that many reasons for that. First of all, they were just first in the market and they caught the ICO wave. Over 90% of all the ICOs were made on Ethereum blockchain. This is their obvious advantage over all the other platforms. Other platforms were playing the catch-up game since the Ethereum launched, basically. There have been different narratives. The scalability narrative emerged, I think, sometime in 2016. It became very popular in 2017 with CryptoKitties.

After it clogged, the Ethereum network, I played CryptoKitties—so no one escaped this—and it was extremely slow. I tried to [00:44:00] breed couple of cats, and it was extremely slow, so I lost my patience, but I tried it. It tested the boundaries of the scalability of Ethereum blockchain. So, then all the other platforms started to play the scalability narrative, obviously. And pitching, the high transactions per second, speed, latency, all the scalability metrics to improve on Ethereum performance.

We’ve seen all the projects launching from 2017-2018. I think mainly [00:44:30] 2017 with 2018 some launches of the big projects and then the big chunk of it we’re waiting in 2019. We’ve seen Stellar, EOS, Tezos, Rootstock or RSK, I think they rebranded to RSK, Cardano, all of these platforms. I can dive in the details of each of them. It’s a lot of information. I think, it’s a totally separate universe if we tried to compare them. What I think makes sense, maybe to just go into their main [00:45:00] competitive claims.

Clay: Sure.

Katya: Stellar, actually has limited smart contract functionality so it doesn’t really market itself as a super-advanced smart contract platform. But it markets itself as a platform for financial industry. And they managed to get some good partnerships with IBM where they have a very good, very significant type of system font, so I think they have their strength. And also, they’ve been founded by the co-founder of Ripple, so they got a lot of Ripple technology. [00:45:30] I’m not very familiar with Ripple, it’s not part of our portfolio so I cannot speak to Ripple much. But, yeah, that’s Stellar.

EOS is a very interesting platform, because it’s so controversial and I had a very different opinion on EOS during 2017, 2018. The interesting part of it, I think, is that the founder has previously launched two other blockchain platforms—BitShares and Steemit. Actually, Steemit was one of the first blockchains I interacted with. [00:46:00] I started blogging on Steemit and I did it for few months in 2016. I had to learn all three currencies that they had. It’s really interesting. Then it also ran on a delegated proof of stake that Dan Larimer pioneered, and he keeps pushing it forward, where the consensus is achieved by a small number of validators. And they also have their own, quite complex, governance mechanism, honestly, with a constitution and their arbitration entity which is again, pretty controversial because they had already the [00:46:30] block proposers, collisions and they had a lot of very arbitrary arbitration, if I can put it like this.

I was very skeptical on EOS, to be honest. But whenever I’m very skeptical on the project, I start reading on this, as much as I can because I try to overcome my initial skepticism. I’ve been talking to developers and they’re a lot of people who are building on EOS and are interested in the transaction speed and the cheap transactions and in the [00:47:00] usability of the platform. I may be jumping a little bit too far now, but they have their very interesting business approach with their enormous token sale, that I don’t want to comment on, but now they have a very huge financial buffer to play with and to attract developers and to attract projects to build in EOS. I think, no matter the criticism, we shouldn’t ignore it, it’s gaining its traction on the market.

Now, RSK is an interesting platform just because it’s built on Bitcoin blockchain. [00:47:30] I’m a big fan of Bitcoin. I think that it’s interesting to look at what they’re building. At the same time, I think RSK has been pretty quiet, in terms of their marketing, in terms of their partnership, so I’m not sure where they are going forward. But I keep watching, I think it’s an interesting project. Their scalability narrative is like 100 transactions per second, so I think it’s not really very active on that side, but we’ll see.

Cardano is also interesting. It’s been founded by Charles Hoskinson and he’s been a co-founder of Ethereum, and they have a very [00:48:00] strong scientific team. This is a project, truly focused on scientific research and validating their claims and making peer review, academic review, they’re focusing very much on this. I’ve heard somewhere, I think on their presentation, that they are not interested in building it first, they want to build it right and that’s an interesting approach. We don’t see a lot of big partnership announcements and releases on Cardano. [00:48:30] It’s pretty focused now on the research and building their product.

And Tezos is another very interesting platform. I think it’s one of the most hotly anticipated projects last year in the market. First of all, you know how bumpy their ride was with their foundation and their governance. It was kind of ironic because it’s a project that’s claims to solve the governance problem and the first thing they did is [00:49:00] stepped into the big governance problem. But I think they came out pretty well and they launched the platform. It’s still very interesting to see how their liquid proof of stake is going to work. What I like when I look at the smart contract platforms is see what their best at because there have been 100s, I think, of smart contract platforms that are trying to be Ethereum killers, just because they’re faster.

There should be something more to it. In Tezos, I think their governance experiments. I treat it as an experiment purely, I think it’s very interesting. [00:49:30] I’m very curious to watch how it’s going to turn out. And they also offer two incomplete smart contract language, so that means that the complexity is similar to the one that you can build in Ethereum but also, they’re claiming to have formal verification which means that theoretically, the smart contracts should be much more secure.

But again, it hasn’t freely been battle-tested, we haven’t seen much use cases build on Tezos, so it’s still going to be interesting to watch it. There’re so many more that I haven’t looked into like Tron, for example, [00:50:00] NEO and NAM. Some of them are, I think, are pretty interesting like Quantum, like Zilliqa. This is such a crowded space.

Clay: I think it’s important to note that even the Bitcoin block itself is an extremely limited smart contract platform there are smart contracts that can be built in a very limited form. I’m not technical enough to dive into this very much. But there are things you can do with the Bitcoin blockchain. [00:50:30] Probably they’re so limited that no one claims or sort of considers it a smart contract platform. Did you have something to add about that?

Katya: There have been some experiments and Blockstream is developing Simplicity which is a smart contracting language for Bitcoin blockchain. I think it’s all interesting to watch even though I look at Bitcoin as a store of value. It’s a totally different asset and I think it shouldn’t be even compared to smart contract platforms.

Clay: Let’s talk about Stellar for a second. [00:51:00] I certainly, don’t hear Stellar brought up very often as a smart contracting platform. Yet I know it is possible to do things on Stellar like launch your own token and arguably, it’s probably a safer, more secure place to do that. And you don’t have to worry about your ICO getting shut down due to bandwidth requirements and scalability issues. Can you speak a little bit to what is possible with regards to smart contract on the Stellar platform?

Katya: [00:51:30] As I’m not a developer, I’m not really familiar with a real-world use cases. What I know is that indeed it offers a limited functionality which is basically, buy and sell, simple value transfers, token sales and use cases like that. I wouldn’t dive too much into this because I haven’t really seen the real use cases of the Stellar platform. Also, Stellar is not part of our portfolio so I don’t do any deep analysis of it, but I still keep watching it because I think it’s interesting.

Clay: I think another interesting smart contract platform to [00:52:00] discuss for a second is RSK. You talked about Blockstream creating a smart contract platform that runs in the bitcoin blockchain. RSK has done that as well.

Katya: Language. Smart contract language.

Clay: Yes, smart contracting language. Do you think it’s likely or not, that eventually all the innovations that happened on these smart contract platforms and with these smart contract languages end up getting rolled up into Bitcoin in some way or another, [00:52:30] whether it’s in directly on the bitcoin blockchain or through some kind of Layer 2 scaling solution?

Katya: Well, first of all, as most of this technology is open-source then sooner or later all the best features are going to be copied. Developer tools and user-friendly domain name, for example, all of these nice features that some of these platforms offer, they’re going to be copied, if needed. [00:53:00] It can be ported to Bitcoin blockchain or any other blockchain. I’m not really looking at which blockchain is going to succeed, I think it’s more dependent on the use case as to why it’s going to be done.

The success of the platform is going to be driven by the product that’s going to be built on this. If there’s going to be an awesome use case for the product or DApp that is going to be built on the Bitcoin blockchain, then all of the features that all the other blockchains can offer [00:53:30] can be copied and forked, not forked but even copied. That’s why some of the projects like Dfinity, for example, they chosen to build closed-source until the main release. And they’re going to be releasing their technology in stages, just because they, I think, they want to just capture this competitive mode and capture the network effect and then release the technology open-source.

I’m not sure if the strategy is a winning strategy, to be honest, because I think in the end, in this market, [00:54:00] the network effect and the use case, this is what’s going to drive the winner, not really any closed-source code that is so perfect that all the market is driven to it.

That’s my view on this. It might be copied out for the Bitcoin blockchain and we can talk separately, I think Layer 2 solutions is a separate topic. I think this is going to definitely get a lot of popularity and this is going to drive a lot of focus from the on-chain scalability beauty contest and perfection per second to the actual use cases [00:54:30] they’re going to use lightning network, [inaudible [01:04:49] network Ethereum and all this Layer 2 solutions, so that’s a separate conversation.

Clay: I was initially skeptical about EOS. I remember before they’d even launched, they were taking out billboards on, I think it was Times Square and the crowdsale was huge. I came to some of the same conclusions that you did. First off, I think it’s pretty impressive from, at least, the scalability perspective. What was accomplished with Steemit and BitShares? I think there are other critiques [00:55:00] people can have of those projects but Steemit was an actual, working DApp and it’s pretty impressive.

And the scalability requirements of Steemit, seem to be pretty high in terms of the need for a low-cost transaction and a lot of things to be written into the blockchain. I think when my mind really shifted on the topic was when I logged in to a blockchain explorer and looked at the number of EOS tokens I had. [00:55:30] I was told that I had so much dedicated RAM and compute cycles on the network. It was the first time that I had seen that kind of illustration of the notion of this world computer. Ethereum has talked a lot about being a world computer but it seemed real that time that I looked at what was happening on EOS, I think for the very first time. What are you most enthusiastic about when it comes to EOS?

Katya: Again, even though I was skeptical, I think they totally rocked it in terms of marketing [00:56:00] and business relations. They are one of the best in this sense. There was an interesting article and one of the developers, he wrote his experience when he went to Ethereum Hackathon and EOS Hackathon. He said, “Everything is being looked at from the business perspective.” They were like, “If you’re building a DApp, [00:56:30] where’s your business plan? How’s it going to earn money? Where’s the cash flow model?” And he was like, “I’ve never seen this on hackathon. On Ethereum they’re just like build something awesome.”

They have Block.one. They have, it’s a controversial entity, but if we look at as it is, it has a very good connections in the space, it has great experience in gaming. We can also see, if we look at the number of DApps, EOS had been able to catch up in the number of DApps with Ethereum [00:57:00] just after like six months after their launch. It’s been incredible. And again, a lot of this can be attributed to their $1 billion ecosystem fund and their venture arm. Ethereum also has their Ethereum grants but it’s not compared to what EOS could spend on the advertising.

As you said, they’re advertising on Times Square. It doesn’t matter that we on crypto Twitter hate it. We’re not the target audience there. I think they have very large potential in building business relationships and also maybe, again going forward a little bit, [00:57:30] smart contract platforms will specialize in certain things. And I think, EOS is finding its niche pretty nicely there. If you look at the DApps that are built on EOS, they are mainly betting DApps, gambling, gaming. And this is a huge market and they’re getting it pretty well. If I have to be excited about EOS that’s what I would be excited about.

Clay: Those DApp examples sound like instances where it’s really beneficial to have really cheap, [00:58:00] highly scalable transactions. It probably isn’t a great use case for Ethereum, at least how it exists at the moment.

Let’s move on to chapter four, which is about ways to bet on smart contracting platforms. When you go to consider how you might, as a professional institutional investor, going to make investments in the space, how do you consider your options? And what are the options that exist for you?

Katya: It’s the most difficult part, [00:58:30] I will try to cover it in a few short bullet points, even though it’s actually many, many hours and days.

To start with, the recent narrative has been to evaluate smart contract platforms based on their scalability. It’s kind of point zero. It’s the tech behind it, and so scalability narrative for transactions per second has been the prevailing narrative among few investors I will say, but among generally the market for the last couple of years. [00:59:00] It’s been pushed mainly by the CryptoKitties issue. That’s Clock, the Ethereum network in 2017, right?

Yeah, but the talks had started earlier, and the networks that were launching after that were all competing in transactions per second, and while this is an important metric, we are not focusing our attention mainly on transactions per second. There are several reasons for that. I’ll get to this a little bit later, but I think our two solutions will be very important in this year [00:59:30] and the coming years, and we’re already seeing them being implemented. Bitcoin Network, which is Lightning, Liquid Network, and several solutions on Ethereum Network, several plasma chains, for example.

It’s probably not like the on-chain through but it’s probably not going to be the key decisive factor for the large-scale applications. Then, also, there are other ideas for scaling, like side chains, dry chains, layer zero solution. I think the scalability is one of the factors, [01:00:00] but it’s probably not the key, the most important factor. That was the first thing like I wanted to point out.

Then, what do we look at? Point one is the user experience. And who are the users of smart contract platforms? Well, it’s not the general consumer level. Smart contract platforms are built for developers to build awesome product on top of it. Developers are the users. And that’s why we believe that developer experience is one of the key factors among the competitive advantages of smart contract platforms.

[01:00:30] When we look at developer experience, there are many things that go into this. And while I’m not a developer myself, it’s part of my job to talk to developers that I work with, that I respect, and I think who are building awesome products and to see what they’re looking for when they’re choosing what smart contract platform to build on.

And so contrary to the very popular narrative, decentralization is rarely a thing, a parameter, that developer optimizes for. It’s more like [01:01:00] a path to achieve some certain characteristics of the network, like optimal security, optimal scalability, and it depends on the application that the developer is building. What is the throughput, the on-chain throughput he’s looking for? What is the latency he’s looking for? How fast the application has to react? And what are the gas phase? What are the costs? It also depends. Like if the application needs to perform thousands or millions of little tiny on-chain transactions, [01:01:30] then cheap, or free transactions are very important and some platforms, so far it’s like EOS or TRON I believe as well.

In that sense it’s important to see what are the use cases you are most bullish about? What are you looking at? Is it music, real estate, or gaming? And then, this use case should shape the developer experience that will be important on this platform. For example, for gaming, speed is much more important than [01:02:00] sovereign-grade censorship resistance. That’s why we can actually see that in most of the games, and betting apps are built on platforms like EOS and TRON. While the decentralized finance apps are focused on Ethereum because they’re the security of the platform, and the censorship resistance is arguably more important.

This is one of the important metrics and also, the developer tools and usability around the platform. I think actually the developer tooling [01:02:30] will be one of the key things that’s going to be built in 2019 and already several platforms are optimizing for this. Like, EOS is famously focused on usability, like human readable addresses. I think Cardano is copying this feature. It’s important, usability and as long as it’s all open source, it can be copied. It’s a starting point. The fundamentals of the technology and how it is important for developers, I think that’s kind of the most important part.

Then the second big piece that [01:03:00] we’ll look at is governance. The governance of the smart contract platform. The way we’ll look at governance is not from the theoretical perspective that’s been very popular in the market where there are a lot of debates, whether proof of state creates autocracy, whether on-chain governance is important to create democracy on the blockchain end.

While I think it’s important from the theoretical and from the practical perspective, how we look at governance at that, the best governance is the one that delivers the [01:03:30] best performance to the platform. Governance should serve the platform so that it upgrades and updates in the fastest and most efficient way. It uses the funds that it has in the most efficient way. It adopts the features that will be beneficial for the platform.

Governance is a tool. We’ve been known for years for building very poorly working governance systems. The most, important part is try not to copy them on the blockchains. [01:04:00] And that’s why I was, initially, and I still am to a certain extent, kind of skeptical of EOS because it’s very complex.

Governance resembles our representative democracy which doesn’t really work perfectly. Who said this? Churchill? That democracy is the worst governance system of all the rest. It doesn’t work perfectly, but it works. The idea is not to replicate the most complex human governance structures, but just to make the platform the most adaptive, the most flexible, and the most robust to changes. I think [01:04:30] Tezos articulates it pretty well. In one of the interviews, the founders actually that, “We’re building unchained governance and we’re focused on the governance, not for the sake of it, but because we want Tezos to be the most successful platform and we want Tezos to adapt and to be flexible so that all the features that it wants to adapt it can do it through governance, and it will not get stuck in the debates and off-chain arguments.”

But at the same time, because it’s very hard to build from scratch, it’s important, [01:05:00] if you are investing in the platform from the very beginning, I think what’s important is flexibility. Because if the governance is written in the white paper and it’s implemented in the code from day one, I’m pretty skeptical about this because we will see all the failures and problems, which will probably be hard to fix later on.

We’ve seen this with the bumpy launch of EOS. You’ve probably seen this, their arbitration issues, randomly freezing accounts in the beginning of the launch. [01:05:30] It was pretty bumpy ride, because I think they’ve just implemented too many governance features all at once. But again, that’s how we look at governance, and it’s a very long topic and a separate topic of its own, so I’m just trying to kind of gloss over this.

The third point is pretty much straight forward, but it’s still important to mention that, how much money does the network have to develop, and what is the structure around its funds? Ecosystem funds around the smart contract platforms are [01:06:00] crucial to support development around it. And almost all of the platforms have adopted it in one way or another, like in Ethereum there is a grant problem and actually now there’s Moloch DAO, which is a very interesting and very ambitious project. Maybe you’ve heard about this.

Clay Collins: How do you spell that?

Katya: M-O-L-O-C-H. I’m not sure how to pronounce it properly. It’s a mythological creature that requires a sacrifice. It’s pretty weird but it’s interesting. It’s a DAO that’s going to decide on [01:06:30] how to allocate Ethereum grants. It’s supposed to be objective and very interesting mechanism to see if it’s going to really optimize for where the money goes to be optimal for the Ethereum network. And the whole idea is there. You can only buy shares, vote with shares, or sell your shares, so. I will not dive into this, but this is one of the interesting ways of allocating the funds because one of the questions, as long as you have the consistent fund is, “Who decides where the money goes?”

[01:07:00] But then, ConsenSys is also, of course, a very important company that is building a lot of strength around Ethereum ecosystem. But then EOS with its crazy, totally crazy fund raising of $4 billion, has a very good war chest in the end. A lot of projects were supported by EOS, and I know, there are people who are switching to EOS, there are developers who are switching their apps to EOS, first of all because of cheap transactions and usability, but secondly, because they got some financial support. [01:07:30] This is very important for a lot of developers who have a dream of building something amazing and they cannot really reach to the funding.

And while I believe that, I agree with most people in the industry that you cannot really buy the work of really good developers, they will only develop on the platform that they know and they trust, but when the choice is not that obvious, like when developers are choosing between the two platforms that he believes are both legit and interesting from the technical perspective, it might be a decisive factor, [01:08:00] if he can get some financial support.

This is also important, like what is the war chest of the network and how it’s going use it. And pretty much all of the networks that we discussed earlier, they have some kind of ecosystem fund, but we can see that EOS, for example, is much more active and much more aggressive with this with their VC arm, they’re investing heavily in the project. Cardano also has VC, I’m not sure if it’s a VC firm there [inaudible [00:12:34] entity, but I personally have not heard about their investment moves, so I’m not sure they’re heavily focused on that.

Clay: [01:08:30] I actually know someone who started a project because they were funded by an ecosystem fund. At the end of the day, the promise of having a year’s worth of income for them and their co-founder to build on this platform was really seductive. I don’t think they felt like they were selling themselves short. I think it was, kind of both platforms were more than good enough, and they were off to the races, so I agree with you. My experience validates [01:09:00] what you said, where trust and decentralization, and history and Lindy effects are important.

That the decentralized finance apps tend to go to Ethereum, but for gaming, gambling, things that sort of are more analogous to apps that might run on our phone or on our computer, that require high transaction volume, I have seen people move over to EOS and I have seen [01:09:30] part of that be the ecosystem fund. I don’t know that that means that those funds are actually going to return much, unless they conceive of returns as being just an overall increase in the value of the token, which is probably a more realistic goal than trying to get kind of like traditional IRR returns for a VC fund.

Katya: Oh yeah, [01:10:00] you’re totally right. I think that’s the main goal—developing the ecosystem around their platform. They just wish the platform grows and the value of the underlying token grows with it, that’s the whole idea behind it. Also, it’s important to mention that a lot of these platforms are now developing interoperability solutions. And some of the computing platforms like Hedera’s Hashgraph, I believe, they start working with Solidity, so you can actually import your smart contract from Ethereum to Hedera’s Hashgraph, and then [01:10:30] when you would have Cosmos, when you have Polkadot, we have working cross-chain bridges, I think QA Network has built working cross-chain bridges like last year.

You will not be locked up with one platform, definitely and forever. It’s going to be actually easier to port it, or to connect your application with other smart contract platforms, so I think, that also gives more flexibility to develop teams.

Clay: If number three is the existence of an ecosystem fund in a war chest to [01:11:00] fund development on the platform, what’s the fourth thing that you look at?

Katya : I believe that’s the team. Actually, it’s not the order of importance, I think, like you look at the team, it’s important in any venture investing and it’s pretty obvious. But here, I’m only focusing on the specifics of smart contract platforms, and looking from that angle, when we look at the teams, of course we look at the technical profile and this is kind of the point zero of all the due diligence is to look at [01:11:30] the technical foundation and how strong is the team from the technical perspective but taking this into account. What is important and what we see lacking sometimes in the teams that develops our contract platforms is some knowledge of the general business development and skills in this case.

Clay: What’s the business plan?

Katya: You will probably not actually have a developer build a business plan for you. He will laugh at you.

Clay: Yeah, no one writes them anymore.

Katya: No. But we need them, we don’t invest in Excel spreadsheets, we’re not interested in Excel spreadsheets. But what we’re interested in [01:12:00] is the skills to build business relations in the industry because the approach of, “We will build and they will come,” it was prevailing and we’ve heard from so many teams like, “Look this platform is so awesome. The tech that we’re building is so amazing, that whenever developers and projects and companies discover it, they will just switch to our platform.”

But markets are not 100% rational and we know that. I’m not a big fan of huge marketing, but business relations is very important to these teams. Go and tell and convince companies [01:12:30] and projects how awesome your tech is, and why they should build with your platform. It’s very important. And these are the skills we want to see in the teams together of course with the strong technical background.

But at the same time, we’re not big fans of heavy marketing and endless partnership announcements. We’ve seen this, we continue to see this, even today with certain platforms that jump high in the rankings on CoinMarketCap just because they announce something. We try to look deeper into that and [01:13:00] see if they’re really able to build business relationships and convince the market companies and enterprises, if it’s focused on enterprise, for sure, to build on the platform, and to send the right message about their technical functionality.

Clay: It does seem like with partnerships, if the value of what you’re creating is dependent upon network effects, it behooves you to do business development and probably the best way to bootstrap the network effects apart from creating something 10 years ago [01:13:30] like Bitcoin and having first move advantage, one of the biggest ways to bootstrap network effects is by doing business development and creating partnerships and that in and of itself can’t move it forward and it’s just a given that the technology has to be right. But being able to get deals done, and get on planes and have steak dinners and close deals, it’s often looked down upon and maybe frowned upon a bit [01:14:00] and certainly that’s not what most of the team should be doing, but you can create winds that way, at least in the short term.

Katya: Especially with this competition, so it’s really important. But then, depending on the stage of investing, if you’re investing at the seed stage, of course that’s pretty much what you can see and do the technical due diligence of the white paper. But if you’re investing at the later stage and the platform is up and running and we do a lot of that, we do a lot of virtual rebalancing, we do a lot of reassessment of fundamentals, so [01:14:30] we look almost every week at least at the platform usage and the stats, and this is like .5, and this is very important. And this is what the token economy actually enabled investors to do is to constantly reevaluate and look at the fundamentals.

And platform usage is one of the fundamentals to look at who is actually using the network and who is actually building apps on top of this. And there are a lot of [01:15:00] different metrics we look at and they are all kind of not perfect. For example, we look at GitHub activity, this is obviously to see how many lines of code have been added, how active is the development of the platform, and this can never be perfect because some developers build private repositories.

There are some periods, for example, before [inaudible [00:20:37] or after like major [inaudible [00:20:39] when there are a lot of lines of codes added, and this spikes that will go down, but still it shows the activity pretty well. [01:15:30] I like to look at the SANbase and they show it pretty nicely if you just filter by the lines of code. It actually gives interesting perspective.

Like you will see projects which are not so heavily talked about like POA Network for example that has a much smaller market cap, that most of the projects that we talked about, but has consistently very high development activity. It’s because they’re building, they’ve built, I think it was the first working cross-chain bridge. [01:16:00] They built xDAI Chain, it’s a chain that’s run on DAI’s stablecoin. But they’re very low on marketing, and all of this kind of business activity. That’s why I like checking this GitHub activity, and seeing who is actually consistently building and delivering. Again, there are many metrics.

There’s one interesting website, I don’t remember which one, which shows the social network activity around smart contract platforms, like what are mentions, what are people talking about, I have the link somewhere in my blog post. [01:16:30] This is not the key metric, of course, but it’s interesting to see what the industry’s talking about, and it might be totally not related to the lights, the shipping of the code, or anything. It might just be some narrative popping up.

But then, after looking at the GitHub activity, what is also interesting is just to see the general activity on the network and the source of like the most is Masuri. I think they’re really awesome. Like, everything they do, pretty much. But their integration of [01:17:00] on-chain effects has been really interesting, because now you can pull almost any kind of data. I think that might be interesting for you as well, because that’s what you’re working on to organize the data of the blockchains, so this is one of the interesting efforts there.

And you can see the number of active accounts, you can filter by the transaction volume, or transaction values, or the number of transactions, and again, these are all in perfect metrics. For example, for the [01:17:30] blockchains where transactions are free, it’s very easy to just make thousands and millions of transactions and to just boost the numbers with a better performance because it doesn’t cost anything.

I’ve read some interesting articles about different ways of measuring it, like operations versus transactions. The same with active accounts, it’s also not a perfect metric, but when you look at it in combination, you will usually see the same kind of handful of platforms in the top five, [01:18:00] top seven, maybe. It gives you a pretty good picture.

After you look at the general activity on the network, what’s interesting is to see, “What is these activities comprised of? What are people doing on this network?” And on Ethereum so far, most activity has being around ICO’s, and around token sales especially in the last couple of years, not so much in 2018 and will be way less in 2019, I believe, even if the STOs, the security token offerings’ taken off. But I think it’s not bad, it’s just one of the [01:18:30] use cases that’s been tested, and now I think it’s time to see some more other interesting activities in the network. The decentralized exchanges are pretty active, both decentralized and centralized exchange activity. And I think we’re going to see more and more of decentralized finance activity, so taking loans, loan positions, and issuing derivatives, so all of this activity will hopefully grow and grow on Ethereum network.

The other way of looking at it is to see what are actually the [01:19:00] DApps that have been built on all platforms. And there is a nice report, it’s monthly, I download it every month, without any numbers, it shows nicely with pictures the amount of DApps they’re building on each platform, and here, it’s really amazing to see that.

EOS has reached the same number of DApps as the Ethereum DApps. EOS with just over six months being launched had managed to attract a lot of developer activity for building dapps. [01:19:30] Well, most of these DApps are around betting and gaming, so it’s not like I’m the most excited about this use case, like it’s the most world changing blockchain use case ever, but at least it shows that people are interested in playing with a platform and building on top of it.

Also, just having this amount of DApps is good, just to battle test the platforms because they all use it in a different way, and we will all see with the failures, with the bugs, with maybe some [01:20:00] small funds stolen, hopefully not a lot, it’s actually good to see these platforms being tested. Because when I see the platform like Tezos and Cardano which are very solid from the technical perspective, but they have very few working DApps. That means they have still a long way to go to battle test them and see how they’re really going to perform under pressure.

But then, again, if we dig deeper, it’s interesting to see how many people actually use these DApps. If you look at the DappRadar, it’s always very small numbers. It’s always just a good [01:20:30] refresher, to understand that even though there are a lot of DApps, there are very few people who are using them as of now. I mean it counts in tens of thousands, at the best, we’re not talking about millions of users.

But I think it’s fine. It’s just still too early, we’re still in this proverbial infrastructural phase but we are really there, so it’s just a good way to see who are using and what type of DApps are being used the most. I think the most popular ones [01:21:00] are exchanges and games. And it’s actually interesting, I don’t really talk about TRON because TRON is not part of our portfolio and I haven’t really researched this platform. I have my reservations about TRON. I don’t want to put too much emphasis on this, but it’s actually interesting to see there are a lot of DApps. Well, a lot of compared relatively to the general blockchain adoption curve. There are a lot of users for the TRON DApps. [01:21:30] One of their, I think it’s Dice or like betting DApp, it exploded recently. It’s very curious to see when I look at the DappRadar I was like, “Really? People are using it. Okay good to know.” Because this is something I never use.

And there’s also State of the DApps, it’s a cool website. They have different set of platforms, so on DappRadar, they’re only Ethereum, EOS, and TRON, and on State of the Dapps, they also have Steem. but with Steem I believe their main DApps are just different interfaces to Steem. [01:22:00] And they have POA network as well.

It’s not like we have a perfect framework or big excel spreadsheet where we can find a formula for which smart contract platform is winning, but these are all factors that we look at, constantly, not only when making investment decisions but when we are reevaluating and reassessing our portfolio and the fundamentals.

Clay: Let’s move to Chapter 5 and discuss the various avenues available for investing in smart contract platforms. Let’s say you’ve evaluated some smart contract platforms and [01:22:30] you’re looking to make an investment in the space. What are the venues at your disposal? You obviously can purchase a token or take the traditional VC route and buy equity if it’s available. What else is available and how do you think about the various options at your disposal to place bets in the space?

Katya: It depends a lot on the stage of investing. If you are looking at their early stage seed investing when it’s pre-launch, pre-test mad, usually just white paper, or like a white paper and [01:23:00] part of the open source code that you can audit. Quite often you end up investing in equity, or convertible equity, or equity with a right to claim certain amount token. It’s more of a legal structure than anything but we do this type of deals. It’s interesting for us because it gives more flexibility to investor because when you’re investing in equity you’re investing in the team, in their knowledge and in their ideas so if in the end, if they decide to pivot, if in the end they decide to restructure, maybe it’s not a smart contract platform, maybe it’s [01:23:30] actually side-chain.

For example, RSK doesn’t have a native token it has BTCs, so in the end they don’t need a native token to operate. You might not need to invest in the token in this case. If they decide that they don’t need a native token, they’re going to build a different type of product, you are protected as an investor because you’re still invested in this company. And then if they continue building a smart contract platform as is, 95% of tokens on the market are useless. I think in 2019, [01:24:00] it’s common knowledge, it was not so much two years ago. But now it’s pretty obvious, so that’s why investors need to be very careful when investing in yet another token.

There are many reasons why a token can fail. If you put it in two buckets, one bucket, just because it never had a reason to exist, right? It and these are more like DApp tokens, layer two tokens, wallet tokens, all of the tokens that add unnecessary friction for the user and have very poor incentive models around. [01:24:30] It’s like, “Why do you need a token when you can work without it?” But in the second bucket of reasons, is when the token model was good enough and strong enough, which is the platform itself didn’t get any traction, and so that’s why the token didn’t gain value.

As an investor you probably should only be accepting risks in the second bucket. You should look very carefully, as to whether there is a reason for this token to exist. In smart contract platforms there is pretty much always the reason for it to exist because that’s how they secure the network because it’s all [01:25:00] layer one solutions, unless, again, you’re investing in this side-chain, but it’s little bit different.

Or if you’re investing in the permission blockchain, or enterprise blockchain, then you can continue and stay with equity because then the structure’s very different, there will be a company that will continue to manage this blockchain that will continue, for example, to earn part of a transaction fee, so it’s a different model. I’m talking mainly about public permissionless blockchains and this is the focus of our firm. [01:25:30] Yeah, in this situation if you’re investing in early stage, it can be equity, convertible equity, whatever gives enough flexibility to invest into the team to figure out the token economy right, and then in the end, you will end up holding the token because that’s pretty much the only way to participate in smart contract platforms if they are public and permission-less platforms.

And also, it gives a lot of opportunities to investors, first of all to participate in so called generalized mining, that we touched upon in the very beginning and [01:26:00] this is the way for investors to participate in the network economy to help bootstrap the network, to help network to grow, and to help solve the chicken and egg problem. But then later, as the network grows it’s actually a way to earn a decent ROI on your investment by staking your tokens acting as a validator or a staker, or a baker, depending on the structure of it.

Token give a lot of options for investors to actively participate in networks. And then also tokens give a lot of flexibility [01:26:30] which was not available to traditional investors before and with the smart contract and generally with blockchain space, it’s so fast moving but you need to constantly reassess your fundamentals. And you know in traditional VC firms, you basically have to make up your thesis, make your bet, and wait for 10 years until it turns out true or not so true. And here, this liquidity, actually gave a lot of down sides to the market with all the crazy bumps and downs and everything that we have seen, [01:27:00] but I think as this stages, I consider it over, it actually gives a lot of flexibility and a lot of opportunities to maneuver for the legit investors that are really interested in the space.

But also, at the same time, investing in tokens has its flip sides and for traditional investors and for people from traditional finance space, like myself, you have very steep learning curve, mainly about operations security, how do you deal with tokens, how do you custody the tokens, how do you transact safely? I remember in the [01:27:30] very first deal, I was afraid to click the button, ‘send’ because. You know that you do it on the blockchain, there is no recourse. There’s a steep learning curve for investors to learn about rational security, and all of that.

And also, the legal side was not always very clear. Like with the SAFT’s that were very popular later, different types of token purchase agreements, there’s still very little investor protection, compared to traditional equity rounds.

There are a lot of things to unbundle here, but in the end, [01:28:00] owning tokens I think it’s a very interesting way not only for an investor to possibly make bets on these networks but actually participate in these networks and see for themselves how it works, and also earn a decent ROI. Because in the end, investing is not buying something and flipping it for a better price in a few months or few years, it doesn’t matter. Investing is actually purchasing an asset to earn an ROI on it.

Talking to participating networks, actually gives the opportunity to be a real investor, [01:28:30] not just a speculator. Which is nothing wrong about speculating, and we all did that, but if we’re talking about long term investment, these are where the opportunities are, I believe.

Clay: What kind of consensus has developed around equity plus token deals? Equity can be diluted, tokens on some networks can be diluted, I guess if it’s a proof of stake system, you can sort of maintain your percentage of the overall network if you stake your coins. [01:29:00] It seems like there’s so many different arrangements that can exist. I’m curious what you’re seeing, what the common arrangement is for equity plus token arrangements and what your ideal scenario is as an investor?

Katya: Well the deals that we did before were usually in the form of convertible equity. It’s the equity that’s converted in the platforms they had a token at a certain rate—at a pre-agreed rate. What we look [01:29:30] most at is the token economy behind the token. That’s again, as you said, how is inflation going to work? What is the token supply? What’s the token distribution? Where are the tokens going to land? And this is very important for the platform’s future success.

And there’s a very good article by MultiCoin Capital that when they talk about this, they actually give the example of Livepeer which is actually not a smart contract platform but like a layer two platform, but they have very interesting solution for token distribution. These things are crucial. [01:30:00] It’s not just the amount of tokens that you get on the price that you get but what is the token economy as a whole? How is the token planned to be used? And most importantly, what is the plans velocity of the token? Is there any underlying reason why the user of the token would want to hold onto it? You are not going to be the only one who holds onto it just because you were an early investor. There should be certain mechanics and design around the token that provides for either for velocity things or for other reasons or for [01:30:30] staking mechanics that lower the velocity and give fundamental reasons for token owners to want to hold onto the token.

Token economy is the key thing that we look at, and actually my finance partner, Constantine, he looks very deeply into this, and he helped several projects with their token economy at launch because these things are very difficult to undo. We can see it with Ethereum now, a few years after the platform’s launch and hundreds of [01:31:00] DApps working, they are now changing their live schedule, and it has very difficult consequences with the community.

I don’t judge them. It’s really difficult to be the first ones, and to change as you go, like to reassemble the airplane on the go as it’s flying. But this shows the importance of building the token economy right from the start. Or giving enough flexibility around governance to change it which is transparent and clear to the community and to the investors.

Clay: [01:31:30] You’re not seeing deals that come with both equity and token issuance? It’s that there’s some kind of convertible debt that converts to tokens rather than converts to equity at some conversion point. Is that right?

Katya: We’ve seen deals. It was not for smart contract platforms, though, it was for cryptocurrency, so more for like Bitcoin competitors and we were not really so much into that deals. If you stay up with equity, it always involves that there is a company that controls [01:32:00] some part of the smart contract platform development because then if you hold onto this equity, there must be a reason for this equity to grow in value.

Usually if there is such a company, then there are questions around how decentralized the smart contract platform is, if you can gain a lot of upside just investing in one company that’s running or participating in the smart contract platform. The fact that we didn’t get into those deals doesn’t mean that they are not viable, it’s just not the profile of our firm.

Clay: How do you think about the accrual of value [01:32:30] to tokens aspiring to be currencies like Bitcoin versus the accrual value to smart contract platforms where they derive their worth from their utility and the ability to run apps on top of them. Is there a different thing going on in those scenarios or do you think of them in similar ways?

Katya: That’s a very tricky question, actually. I think it’s cause of lots of debates in the industry, and I look at them differently. It’s actually [01:33:00] surprising to me that most Bitcoin maximalists they see Ethereum as their main competitor. They are arguing and publishing their claims against Ethereum, but I don’t really see it this way.

I believe that there will be monies and cryptocurrencies as Bitcoin, and in that sense, we’re not really spreading our bets across Bitcoin competitors, because I think the consensus around it is that Bitcoin is the most likely winner, and there are few other [01:33:30] privacy coins that might be interesting. But again, it’s probably going to follow the same power law distribution as in smart contract platforms we will see Bitcoin as the main winner.

The value accrual around currencies is very different, it’s around the social consensus, around the value of this monetary unit that’s going to serve as a store value, and later as a medium of exchange. People have argued that the medium of exchange functionality should come before that. If we look forward, I think [01:34:00] it’s all about social consensus around this particular currency being money being medium of exchange in store value.

With the smart contract platform tokens, it’s different. I see it as purely the commodity. Like if you compare Bitcoin to gold, I would compare Ether to, I don’t know, wheat, or soy beans. There are people who trade it, there are people who make a lot of money on it, there are people who make long bets. But it only works as long as people eat wheat. If the whole world goes gluten free, then [01:34:30] the wheat traders, it will be difficult to make money on because who will want to trade it?

So, to me, smart contract platforms tokens, native tokens, they derive their value from the usage of this platform, and that must be the key driver. I think we’re far from getting back into the bull market as long as we see this big gap in discrepancy between the CoinMarketCap valuation and the real usage of the token. We still see a lot of those gaps of the platforms that have very little usage and a lot of marketing and end up having multimillion-dollar valuations [01:35:00] while at the same time, we can see platforms with even more amount of things built around it, and having hundred time less valuation.

I think that’s where the difference is. That’s where I probably disagree with the market, we’re in. It looks at all the tokens as competing one against each other. There’s also an opinion that token cannot be successful unless it becomes a store of value. I’m not sure I agree with this. [01:35:30] It’s a secondary function, as I mentioned with a commodity you can probably allocate a percentage of value to it, but it’s only going to grow in value as long as the fundamentals are there. If the fundamentals are not there, and if no one is using the platform as designed, I see there’s very little reasons in the long term for this token to accrue a lot of value.

Clay: There are smart contract platforms, that have enough history, and that are sufficiently decentralized, that it doesn’t seem irrational [01:36:00] to think that although you can run smart contracts on top of them, that they actually could be a great place to store value. Just because Bitcoin isn’t great for running smart contracts, doesn’t mean that it’s better at being a store value than a smart contract platform that has many of the similar characteristics. That’s not to say that my personal investments follow the logic, I’m setting forth here. But there isn’t anything [01:36:30] inherently true about not being able to run smart contracts that makes you great at storing value.

It’s not irrational to think that something like Ethereum, where the percent inflation over time approaches zero, you know that it might not be a great place to store value, in addition to running smart contracts and doing a bunch of other things.

Katya: I see where you’re going with this and that makes sense to me. I think that it’s all about the narrative. And the narrative around Bitcoin and [01:37:00] around it being digital gold, that’s what’s shaping the money it is. What shaped gold to be as gold? It’s a narrative around it. You actually can build smart contracts on Bitcoin it’s just that it’s not optimized for it. I think it’s totally fine, it’s specialization. And I think why, in a few years, we’ll probably stop talking about ‘crypto’.

It’s like talking about shares, [01:37:30] equities—they’re all so different. The fundamentals are totally different. Like government bonds and shares of Apple don’t fall into the same bucket only because you can trade them on e-trade and that’s the same for crypto. I think it’s still a new asset class. And it’s going to shape itself. And I think it’s already shaping itself in the last years, and I think, maybe a couple more years we’re going to see it more clearly. But now it’s a little bit mixed and these debates around, “Oh Bitcoin is better than Ethereum.”” [01:38:00] It’s even more confusing because I see those things differently. That’s why both of those tokens make a very important part of our liquid portfolio because we make bets on both of these use cases and we see them differently.

Clay: It also makes sense why for smart contract platforms it probably doesn’t make sense to really target equity versus the tokens, if these things are going to survive long term, they need to be sufficiently decentralized which means that hopefully, any [01:38:30] equity stake might become completely not valuable in the future, unless you’re investing in a company that’s building on top of these platforms versus controlling them.

Katya: Exactly.

Clay: Onto our 6^th and final chapter which is about the future. Katya, what do you see the future looking like? What do you think the future holds for us?

Katya: I usually avoid making any predictions because I think it’s a very bad habit because you will either get lucky, or you’re completely wrong. I will not make predictions about token prices, God forbid, or market caps, [01:39:00] but what I’m looking at mainly is how the smart contract platform market’s going to look like. I think we’re going to see some kind of power law distribution which is the same way I look at the crypto monies and currencies and store value coins. The same way I look at the smart contract platforms where the most value will accrue to one platform which is going to be like a general trust later, which will optimize the decentralization sovereign-grade censorship resistance, and we’ll have large networks effect.

But then [01:39:30] also we’re going to see maybe like 10%, 5%, decrease in rate, something like this or 20%, 10% for other smart contract platforms. Why I think it’s going to happen is because there will be specialization. It’s really hard for one platform to answer all the questions and we already see that. Ethereum cannot optimize for high on-chain throughput and maximum decentralization. EOS cannot optimize for the best usability and cheap transactions and [01:40:00] decentralization. They will all find their markets, for example EOS is now shaping their making around gaming, Stellar is shaping their market around financial applications, etc.

But at the same time, what we see now can be very different from what we see in the future in terms of what platforms are in which place because we still haven’t seen the killer app. What we are looking for and our main job as investors is to look, “Where is the killer app?” And I think as soon as someone builds this app it will gain millions of users. [01:40:30] The underlying platform will be the winner. And we don’t know what platform it’s going to be. It’s probably going to be one of the platform’s that already exists, or maybe going to be launched this year because there are a few big platforms I was talking about that are very highly anticipated. But what’s going to be this killer app? We don’t know.

ICOs has been kind of this pre-killer app, but not really, so I hope to see something in the next couple of years and then, as an investor in smart contract platform, our job is to [01:41:00] hold the underlying tokens because they’re going to increase in value as soon as this killer app is built. That’s what I’m looking forward to.

Clay: I’m also looking for a killer app, but it seems like the killer app for these platforms is the ability to actually be a platform. The space and the market just isn’t large enough to support a killer app. My heart sinks any time I have to do something and I’m like, “Ugh, you have to use MetaMask.” I’m like, “Ugh, MetaMask. Ugh.” [01:41:30] The UI is horrific. I think we need to see a lot of improvements before we’re going to see a killer app.

Katya: I always think about my mom. As soon as my mom can use it, we’re ready.

Clay: All right, well it’s been fantastic speaking with you. Thank you for making time.

Katya: It’s been a lot of fun. Thanks for having me, Clay.

Clay: [01:42:00] That concludes part two of this two-part deep dive on investing in smart contract platforms. Thanks for listening. I invite you to check out my other podcast called The Nomics Update. I release the Nomics Update every single weekday. It’s my personal audio-journal as CEO of Nomics. During each episode, I tell stories from inside our startup including the highs and lows.

I also announce new partnerships and features, share lessons learned while leading my 2^nd software company, [01:42:30] and speak to important new idea shaping the future of nomics.com and crypto asset data in general. To subscribe to the Nomics Update podcast, go to nomicsupdate.com, find the link to your favorite podcasting platform, and hit the subscribe button. Thanks for listening to this interview with Katya. I’ll see you next week!

That’s it for this week. To sign-up for a free crypto investing newsletter, listen to other episodes, [01:43:00] 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, at nomics.com. Finally, if you’ve got value from the show, the biggest thing you can do to help us out is to leave 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.