Polychain Capital founder Olaf Carlson-Wee became a poster boy of the initial coin offering (ICO) boom when he appeared on the cover of Forbes’ July 2017 issue under the caption, “Craziest Bubble Ever.” At the time, the crypto market was in the midst of an unprecedented climb that would see bitcoin approach $20,000, a level that it would not revisit for another three years. Before breaking off on his own, Carlson-Wee was Coinbase’s very first hire and ultimately led its risk management.
Fast forward to today, and the market is once again breaking records and Olaf’s venture capital/hedge fund Polychain has more than $4 billion in assets under management. However instead of ICOs, which were white hot in the crypto bubble of 2017, the new crazes are decentralized finance (DeFi) applications and non-fungible tokens (NFTs).
I spoke with him to find out his takeaways from the ICO craze and whether he believes that history is going to repeat itself with these new trends. He also shared fascinating insight into decentralized governance structures, how DeFi platforms can use them to bootstrap traction and then ultimately scale, and how he is approaching the NFT space.
Forbes: How would you articulate the Polychain thesis to a prospective investor?
Carlson-Wee: We like to be very early and long-term-oriented. Our goal is to invest in breakthrough technologies that will enable new types of human organization and behavior. It’s no accident that all the things you see in the decentralized financial ecosystem are happening on top of ethereum, from capital coordination in the form of ICOs to decentralized financial primitives, like lending and trading to stablecoins and other types of synthetic assets. It is all due to low-level changes to ethereum, relative to bitcoin, namely its ability to write in solidity (an ethereum-native programming language) that allows for more complicated types of financial instructions. So, this is one type of enabling platform that can unlock new types of behavior. The other big brush strokes category that we invest in are new applications that had not been previously possible. A lot of the time these new applications are also paired with a new human and capital structure that is also on the blockchain. These are called DAOs (decentralized autonomous organizations).
Forbes: Let’s talk about the ICO boom in 2017. There was a famous bubble and you ended up on the cover of Forbes. Why do you think that prices rose so quickly and did you think that they were sustainable at the time?
Carlson-Wee: Keeping it in context, when I was on that cover, the headline was “Craziest Bubble Ever.” The market value of cryptocurrency never went that low ever again. I think people have sort of famously misread the scale of things happening in cryptocurrency. At the time, it felt to me pretty natural that the world was kind of catching up to a lot of the fundamental technology and infrastructure in crypto that had been developed between 2013 and 2016. A lot had happened in that time period, both in terms of the sophistication of businesses like Coinbase, that service retail users, as well as the more cutting edge stuff in the ethereum landscape. I do think that anytime you see a nascent area, that’s sort of global and grassroots, kind of like the internet, it grows in these really sudden bursts. This is how crypto has always been. I’ve been through several of these sort of run ups in price and media attention. But the prices in my mind are often not very correlated, if at all, with sort of fundamental developments. In the 2013-2016 period so much was being built, and so many new users were coming into the system, yet the price kept going down.
That said, I do think crypto captured the popular imagination at that time in a way that I didn’t expect. Ethereum was about two years old and was still really nascent. People didn’t know what was going to be built here. A lot of projects that did ICOs, in a kind of theoretical sense, represent some of the most efficient human and capital coordination ever conceived. To combine capital into a pool that’s worth, say hundreds of millions of dollars, over the course of a day is remarkable. So I always felt conceptually that it was a super interesting area. But as the market got hot, you also saw a lot of people enter the space that maybe didn’t understand what they were getting into. But that’s also the complexity of being an investor in this area.
Forbes: Fast-forwarding a little bit, in your opinion what are the biggest technological advancements in crypto that you’ve seen?
Carlson-Wee: There are three pieces here. The simplest one is institutional infrastructure. Some very basic stuff, like custodians and the ability to store cryptocurrency at scale, did not exist in 2017. Now, there’s a relatively robust landscape of custodians out there that are sort of credible and have great security controls and access controls. The ability to have brokers that execute trades on your behalf really didn’t exist.
Second, is this area of smart contracts, decentralized finance and decentralized autonomous organizations. That was effectively non-existent in 2017. Today the value held in the smart contracts on ethereum, surpassed $40 billion. So in the scheme of all of finance, this is still a small number, but the growth rate is unbelievable. For perspective, at the beginning of 2020, so about a year ago, I’m pretty sure that number was at $500 million. So it’s grown by about 80 times in a year.
The third category is what I would call more like deep tech approaches to substantially increasing what developers can build on top of blockchain, and substantially increasing the kind of scalability of underlying blockchain. Some examples of these projects are things like polkadot, filecoin and dfinity, which were all investments we made in 2017. Two of those we’ve seen go live over the past about six months.
This is the other category that has really blossomed between 2017. During that time period we mostly had ethereum to build on top of. Having more efficient platforms, and platforms that are more expressive so developers can write programs in many different programming languages, not just Solidity, or the ability to serve up files to the user, things like texts and images, aren’t really possible on ethereum today.
Forbes: Let’s dive into decentralized finance. What are the key differences between DeFi platforms and the ICOs from a few years ago.
Carlson-Wee: In short, products and users. I know that’s a very simple answer. But, it took a lot of iteration. Some of the stuff happening in DeFi is pretty mind boggling. You can now have lending agreements for millions of dollars between two people around the world who don’t know each other’s identities. And this can be an agreement between a person and a computer, or a corporation and a computer, or a person in a corporation. There’s no concept of identity or legal contract. And yet, you can have literally billions of dollars of financial contracts between these people.
Forbes: There was a 2020 survey from CryptoCompare suggesting that DeFi platforms were overwhelmingly used for speculative purposes and to earn governance tokens. What will it take for DeFi to truly go mainstream?
Carlson-Wee: Two things there. To me, decentralization is a means to an end. The end is very high security guarantees that are ultimately technical properties of the system. Without decentralization, you can’t have these platforms and assets and monies that aren’t owned or operated by a central party. It’s really about the security guarantees that are created through decentralization, much more than decentralization in itself being the goal for the end consumer. It’s basically unlocking these new types of behavior through decentralization,
Regarding DeFi going mainstream, I would first say that today when we look at global financial infrastructure, it’s all to enable the movement of money, and trading, lending, speculation and payments. It is neutral, in that all the various people that are interacting with those systems may be doing it for whatever specific reason they have in mind. It’s not going to look and feel mainstream the way, for example, that Snapchat feels mainstream. But it’s not to say it’s not incredibly useful for average people. I’m sure that people have taken out loans on DeFi platforms to take a vacation to Hawaii. But because they’re sort of a neutral financial infrastructure, it’s a little bit hard to know.
Forbes: Now I want to get a little bit more into how these platforms are going to scale. Many DeFi platforms have used an approach known as the “fair launch” to more equitably distribute tokens to users than what was done during the ICO craze. Do you think this has been successful? And if so, how does a project move from this initial traction to mature growth?
Carlson-Wee: In startups, the idea of using capital to effectively bootstrap your growth rate in order to build network effects is an old one. It is the same concept as PayPal or Uber referrals. But very much like Uber and like PayPal, once you have robust network effects, you no longer need that user acquisition subsidy ( referral payments or bonuses). So it’s an excellent mechanism to accelerate growth; it doesn’t in itself, make a good product or give that product market fit. That said, I do think that these DeFi systems have very strong network effects, such as liquidity. The ability to trade with low price slippage (meaning the trade executes close to the spot value of the asset), trade an asset for any other asset, take out a loan at a low interest rate, get yield on assets and grow in scalability with more people is very interesting.
Forbes: The SushiSwap vampire attack on Uniswap (when it surreptitiously siphoned hundreds of millions of dollars from Uniswap) highlighted a challenge many platforms face when it comes to placing a moat around their projects to protect their customer base. What were your takeaways from the saga and what advice would you give to prevent something similar from happening?
Carlson-Wee: This is one of these beautiful properties of the system. Anybody in the world can view the code, fork the code and remix the application logic. So I do think it’s an open question, because it’s still very early days, around how entrepreneurs can attempt to basically build moats of some kind, in this open source, permissionless context.
Forbes: A lot of attention has been placed on governance issues and protocols within DeFi platforms, but layer 1 blockchains have been experimenting with decentralized governance for years. What lessons can DeFi applications learn from their layer 1 brethren?
Carlson-Wee: I think what we’ve seen empirically is just as these systems scale, it’s harder and harder to coordinate upgrades, which at a high level, kind of makes sense. It’s harder to coordinate 100 million users than it is to coordinate 1,000,000 than it is to coordinate 10,000. I’ve been very interested in the formal upgrade processes, where you actually utilize, in some sense, the consensus logic that gets you the security guarantees and the systems in order to implement protocol level upgrades. That was sort of pioneered by tezos, and has now been expanded upon by other systems, like polkadot. I think ironically, in many ways, centralized hierarchical development teams have been faster at shipping peer to peer software than this sort of loose, open source, contributor, environment. A lot of that just has to do with the ability to coordinate these massive global systems with many disparate actors with different incentives around what changes to make. That said, it’s hard for corporations to innovate the bigger they get. Whereas for startups, you can pivot and iterate on the product quickly. At a smaller scale it’s just easier to be nimble, and I don’t think blockchain systems are really an exception to that. I do think there will be more experimentation there, and that is a promising way to get coordination at higher scale.
Forbes: The NFT space has been white hot. Why do you think that it has suddenly taken off?
Carlson-Wee: NFTs are a re-imaging of ownership in a digital and gamified environment. The internet generation cares about avatars and profile pictures more than clothing and cars. As we transition to digital lifestyles and eventually, a fully internet-native metaverse, NFTs become the artifacts all around us.
Forbes: Finally, I’m interested in your thoughts on whether or not ethereum is going to be the dominant platform in the long run. If it’s not, which among its potential competitors is best positioned to unseat them?
Carlson-Wee: First, I have never seen so many people building on something, as I have seen people building on ethereum. Second, this is not a zero sum kind of equation, much in the way that ethereum sort of expanded on what was possible in the crypto universe; it did not destroy or replace bitcoin. I don’t think anything is going to replace ethereum or steal its market share or anything like that. It’s more that I think some of these new systems will enable new types of behavior that are uniquely enabled by the properties of that system, relative to ethereum.
Forbes: Thank you.