20VC Inside The World's Leading Crypto Fund, The Future Exit Environment for Crypto Assets & The Beauty Of Benevolent Dictatorship with Olaf CarlsonWee, Founder @ Polychain Capital



In a dynamic episode of the 20 minutes VC, host Harry Stebbings interviews Olaf Carlson-Wee, founder and CEO of Polychain Capital, a leading investment firm in blockchain assets. Olaf, a pioneering cryptocurrency investor and the first employee at Coinbase, shares his journey from investing in Bitcoin to managing over $200 million in blockchain assets. He discusses Polychain's unique investment approach, focusing on digital assets rather than company equity, and the firm's structure, which combines venture capital's early-stage investment style with the liquidity of a hedge fund. Olaf also touches on the transformative potential of ICOs in accelerating software development and redistributing wealth within the cryptocurrency ecosystem. He emphasizes the importance of technical expertise and a deep understanding of crypto economics when evaluating white papers and investments in this space. Finally, Olaf predicts that traditional venture capital will need to adapt by offering more than just capital, as global capital coordination becomes a competing force.

Summary Notes

Introduction to Polychain Capital

  • Polychain Capital is a leading investment firm focused on managing a portfolio of blockchain assets.
  • Founded by Olaf Carlson-Wee with an initial fund of 4 million USD, now managing over 200 million USD.
  • Supported by prominent investors including Sequoia, Founders Fund, Andreessen Horowitz, and USV.
  • Olaf was the first employee at Coinbase and has a background in cryptocurrency investment.

"Having founded the firm less than two years ago with 4 million undermanagement in their initial fund, Polychain now has over 200 million under management with backing from the likes of Sequoia, Founders Fund, Andreessen Horowitz and USV."

The quote emphasizes the rapid growth and success of Polychain Capital, highlighting its substantial increase in managed funds and the support from high-profile investors.

Olaf Carlson-Wee's Background

  • Olaf Carlson-Wee is the founder and CEO of Polychain Capital.
  • He was the first employee at Coinbase and has experience as a head of risk and product manager.
  • Olaf has made angel investments in companies like Robinhood, Ethereum, and Numerai.
  • Introduced to Olaf by Brian Armstrong, founder of Coinbase.

"And prior to founding Polychain, Olaf was the first employee at Coinbase, serving as their head of risk and as product manager."

This quote provides insight into Olaf's professional experience before starting Polychain Capital, indicating his deep involvement in the cryptocurrency industry.

The Concept of Native Cryptocurrency Investment

  • Olaf Carlson-Wee describes himself as a native cryptocurrency investor.
  • His first investment ever was in Bitcoin, with no prior experience in traditional investment vehicles.
  • He became interested in Bitcoin in 2011, attracted to the idea of an always-on, global, open-source financial system.

"Yeah, so what I mean by that is actually that the first investment I made in my entire life was bitcoin."

Olaf's quote explains his unique entry into the investment world, starting directly with cryptocurrency rather than traditional assets.

Getting a Job at Coinbase

  • Olaf secured a position at Coinbase by cold emailing the company with his undergraduate thesis on Bitcoin.
  • His academic focus on Bitcoin during 2011-2012 was rare and helped him stand out.

"I actually cold emailed jobs at Coinbase and I had completed my undergraduate thesis on bitcoin."

The quote details the proactive approach Olaf took to join Coinbase, leveraging his early academic work on Bitcoin to gain employment.

Polychain Capital's Mandate

  • Polychain Capital invests exclusively in blockchain-based assets, also known as cryptocurrencies.
  • The fund does not invest in startup equity or public equities, focusing solely on digital assets secured by cryptography and consensus mechanisms.

"Really, the mandate is to invest exclusively in these digital assets that are made scarce through cryptography and consensus mechanisms."

The quote defines the core investment focus of Polychain Capital, emphasizing its specialization in digital assets and the technology that underpins their value.

Organizational Structure of Polychain Capital

  • Polychain Capital was designed to make venture-style investments in new cryptocurrency protocols.
  • The firm's structure resembles a hedge fund due to the liquid nature of cryptocurrency investments, despite having a venture capital approach.

"So I was stuck with a tricky problem, because these cryptocurrency protocols at the early stage have the sort of risk profile of early stage venture investing, but contrary to early stage equity, they're actually liquid."

This quote explains the rationale behind Polychain's structure, highlighting the unique challenges of investing in early-stage, liquid cryptocurrency assets.

Alignment with Founders and Liquidity

  • Polychain's strategy is to hold investments indefinitely unless their thesis about the technology changes.
  • The firm believes value accrual in the cryptocurrency ecosystem occurs over a long period.

"So while we do have the ability to rebalance the portfolio and sell down a position while staying ultimately long on the technology, it mostly is our strategy to hold these things forever."

The quote reveals Polychain's long-term investment philosophy and their approach to portfolio management in the cryptocurrency space.

Impact of LP Withdrawals on Cryptocurrency Markets

  • Polychain is not large enough to significantly move cryptocurrency markets.
  • Markets like Bitcoin regularly have over 1 billion USD in trading volume, dwarfing the scale of Polychain's fund.

"Actually, I know for a fact we are not big enough to significantly move these markets."

Olaf's quote addresses concerns about the potential market impact of large-scale withdrawals from their fund, suggesting that Polychain's activities do not have a major influence on cryptocurrency prices.

Cryptocurrency Trading Volumes

  • Cryptocurrencies like Ethereum have high daily trading volumes, often in the hundreds of millions of USD.
  • Even obscure cryptocurrency projects can trade between one to five million USD daily.
  • The impressive trading volumes are notable considering the esoteric nature of these technologies.

Ethereum and other prominent cryptocurrencies are regularly in the one hundreds of millions USD and trading volumes a day. And even the very long tail of extremely obscure projects often will trade anywhere from one to 5 million usd a day.

This quote emphasizes the significant trading volumes of both well-known and obscure cryptocurrencies, highlighting the financial activity and interest within the crypto market.

Crypto Fund Competition

  • Olaf Carlson-Wee does not view other crypto funds as competitors because the cryptocurrency ecosystem is not a zero-sum game like Wall Street.
  • He believes that the growth potential in the ecosystem means multiple funds can succeed simultaneously, especially since many funds are more long than short.

I actually don't really view other crypto funds as competitors. The reason being that this is not a zero sum game like much of Wall street feels like it is.

Olaf explains his perspective on the competitive landscape of crypto funds, suggesting that the growth potential in the ecosystem creates opportunities for multiple funds to be successful.

Manager Selection in Crypto Funds

  • When selecting managers for a crypto fund, Olaf would look for longevity in the ecosystem, deep technical expertise, and solid networks.
  • He would be cautious of those coming from Wall Street backgrounds unless they focus on quantitative or market-making strategies.
  • The focus is on individuals who are capable of understanding and betting on the underlying technology of cryptocurrencies.

I'd look for people that had been in this ecosystem for a long time. I'd look for people that have deep technical expertise in this subject matter.

Olaf outlines the criteria he would use for selecting managers for a crypto fund, emphasizing experience, technical knowledge, and networking within the crypto space.

Sourcing for Digital Assets

  • Sourcing for digital assets is a global endeavor, not confined to traditional venture networks like those in Silicon Valley.
  • The profile of creators in the cryptocurrency space often includes outsiders who do not fit the traditional venture capital mold.
  • The example of Vitalik Buterin, the young Russian-Canadian creator of Ethereum, illustrates the type of unconventional profiles that are successful in the space.

It's very different, in part because this is extremely global. So the teams that we've backed are based all around the world.

Olaf contrasts the sourcing process for digital assets with traditional venture capital, pointing out the global and inclusive nature of the cryptocurrency industry.

Investment Process and Due Diligence

  • The investment process for cryptocurrencies involves reading and understanding technical protocol specifications, known as white papers.
  • Unlike business plans, these protocol specifications must be sound, as they describe how a system works, not just its purpose.
  • The ability for a protocol to function properly is critical and cannot be pivoted like a traditional business model.

Instead of reading a business plan, we're reading a technical protocol specification.

This quote details the due diligence process in cryptocurrency investing, highlighting the importance of thoroughly understanding the technical aspects of a project through its white paper.

Internal Investment Decision-Making

  • Polychain's investment decision-making involves dialogue with the team behind a project once a promising protocol specification is found.
  • Internally, Olaf acts as a "benevolent dictator" with the final say on investments, though he consults extensively with his research team and partners.
  • He believes that businesses operate more efficiently with a centralized decision-maker as opposed to decision-making by consensus.

So internally we do have a benevolent dictator, which is me.

Olaf explains the internal investment decision-making structure at Polychain, where he has the ultimate authority but still values input from his team.

Evaluating White Papers

  • Olaf advises against attempting to evaluate white papers unless one is a subject matter expert in areas like consensus mechanisms, cryptography, and crypto-economics.
  • The complexity and technical nature of these documents mean they should be left to those with deep understanding in the field.

I don't think people should evaluate white papers unless they consider themselves subject matter experts.

This quote suggests that the technical depth required to properly assess white papers means that only those with specialized knowledge should undertake their evaluation.

Valuation Framework for Digital Assets

  • Valuations of digital assets at early stages are mostly relative due to the lack of a robust framework for precise pricing.
  • The intellectual honesty in acknowledging the relative nature of valuations reflects the nascent state of the digital asset valuation field.

So I think the really intellectually honest answer here is that most valuations are relative.

Olaf provides insight into the valuation process for digital assets, indicating that there is no definitive framework and that current valuations are largely comparative.

Valuation of Smart Contract Blockchains Relative to Ethereum

  • Ethereum is the most prominent smart contract supporting blockchain.
  • Valuation of other smart contract enabled blockchains is considered in relation to Ethereum's current value.

Ethereum is by far the most prominent smart contract supporting blockchain right now.

This quote emphasizes Ethereum's leading position in the market for smart contract platforms, which sets a benchmark for valuing other similar blockchain projects.

Filecoin and Real World Applications

  • Filecoin's valuation can be informed by comparing it to services like Amazon Web Services, Microsoft Azure, and Dropbox.
  • The unique value of Filecoin lies in enabling applications that cannot be supported by centralized services like AWS.

What's most interesting for me about Filecoin and the IPFS distributed file storage system that Filecoin is built on top of is the applications that it will enable that cannot be supported by Amazon Web Services.

This quote highlights the potential of Filecoin to support decentralized applications, which is a key differentiator from traditional cloud storage services and a factor in its valuation.

Token Issuance by VC Portfolio Companies

  • It's uncertain if issuing a token can feasibly incentivize network effects that already exist on a platform.
  • A rule of thumb is that businesses must have network effects to justify creating a token.
  • Companies issuing tokens should be prepared to stop extracting revenue in traditional ways and move to a peer-to-peer model.

If your business is not based on building network effects, then it doesn't make sense for you to create a token.

This quote establishes a criterion for businesses considering token issuance, emphasizing the need for existing network effects.

The moment you make the network effects of your platform incentivized through a blockchain token, you also lose control of that platform to an extent because you no longer have full control over what is now a peer to peer protocol.

This quote explains the implications of token issuance for control over a platform, highlighting a significant shift in revenue models and company structure.

Mergers and Acquisitions (M&A) of Token Networks

  • M&A activity involving token networks could occur through incentivizing token holders on one blockchain to migrate to another.
  • Traditional companies acquiring token networks may not be feasible as token networks are decentralized and not owned by a single entity.

I do think that we will see M A's of token networks.

This quote suggests that M&A activity can happen within the blockchain space, albeit in unconventional ways compared to traditional business acquisitions.

Paradigm Shift in Fundraising

  • Tokens represent a new fundraising mechanism, requiring cryptocurrency technology for investment.
  • ICOs have changed the pace of software development by allowing for global capital coordination and accelerated funding.

So tokens, to me, enable a completely new mechanism of fundraising that you need to use cryptocurrency technology in order to invest in these new cryptocurrency technologies.

This quote indicates that tokens have introduced a novel method of raising funds, distinct from traditional fundraising mechanisms, and specific to the cryptocurrency sector.

It will irreversibly change the pace of software development in this ecosystem.

This quote suggests that the introduction of ICOs has a lasting impact on the speed and nature of software development within the cryptocurrency industry.

ICOs and the Cryptocurrency Ecosystem

  • ICOs (Initial Coin Offerings) are a new fundraising mechanism within the cryptocurrency ecosystem.
  • They are public, allowing visibility of every deal, whether deemed good or bad by public opinion.
  • ICOs have accelerated development and redistributed wealth in the cryptocurrency community.
  • Investors in ICOs are often individual cryptocurrency holders, not traditional managed capital entities.
  • The crowd sale ecosystem has launched thousands of projects, leading to a redistribution of capital to numerous teams.
  • This process is anticipated to increase the rate of development and lead to "white swan" projects that become unexpectedly successful.

"these icos are happening in a public domain. And so you actually see every single deal that gets struck, good or bad, between the kind of developers who are purchasing tokens in these crowd sales and the developers who are creating these tokens."

This quote highlights the transparent nature of ICOs, which allows all transactions and deals to be visible to the public, providing an open and accountable investment environment.

"So I think that it is a new fundraising mechanism, and it does kind of change the characteristics of this ecosystem going forward because it accelerates development."

The quote emphasizes the transformative impact of ICOs on the cryptocurrency ecosystem, particularly in terms of speeding up development.

"So, to me, this whole crowd sale ecosystem and the thousands of projects that have launched as a result of this means, almost at random, redistributing capital to thousands of teams."

This quote reflects on the democratizing effect of ICOs, where capital is redistributed to a large number of teams, potentially leading to a more diverse range of projects and innovations.

"I don't see how this won't increase the rate of development. And we will see kind of white swans, right, where projects that maybe at the beginning didn't look promising will actually create something really interesting or useful."

The speaker is optimistic about the potential for ICOs to increase the pace of development and the emergence of unexpected successful projects, which he refers to as "white swans."

Traditional Institutions Entering the Cryptocurrency Space

  • Traditional institutions like endowment funds, pension funds, and mutual funds require a more established track record before investing in cryptocurrencies.
  • They need better infrastructure within exchanges and a clearer regulatory environment to understand how existing laws apply.
  • Overall, these institutions are looking for signs of maturity within the cryptocurrency ecosystem before committing.

"They need to see a more established track record. They need to see better infrastructure within the exchanges on which the trading actually takes place. They need to see, I think a clearer regulatory environment..."

The quote outlines the prerequisites that traditional financial institutions are looking for: reliability, robust infrastructure, and regulatory clarity, which are currently barriers to their entry into the cryptocurrency market.

Quickfire Round: Personal Insights and Predictions

  • Olaf's favorite book is "Infinite Jest" by David Foster Wallace, which he believes captures the essence of human subjectivity.
  • He believes that cognitive enhancement technologies are underinvested and underdeveloped, which could be key to solving humanity's deepest problems.
  • Olaf considers Fred Ursham, co-founder of Coinbase, as a significant mentor who has influenced his understanding of technology and business.
  • For learning about crypto, Olaf recommends engaging directly with the community through Reddit, Twitter, and various chat groups.
  • Venture groups need to provide value-add services and take a hands-on role to distinguish themselves as capital becomes more commodified.
  • Olaf's most recent public investment is in the Zero X protocol, a decentralized exchange protocol on the Ethereum blockchain.

"My favorite book is infinite jest by David Foster Wallace. I think that he captures the subjective feeling of being human and having a mind better than any other writer."

This quote shares Olaf's personal literary preference and suggests an appreciation for deep human and psychological insights.

"I believe that cognition enhancing technologies are massively underinvested and underdeveloped right now."

Olaf is expressing his belief in the potential of technologies that can enhance human cognition, indicating a futuristic vision for human advancement.

"I think a very important mentor for me has been Fred Ursham, who is the co-founder of Coinbase."

The quote highlights the influence of a mentor, Fred Ursham, on Olaf's professional development and perspective on technology.

"I would actually go direct to the source and start reading Reddit, Twitter, developer mailing lists, get in some WhatsApp groups, telegram groups, WeChat groups..."

Olaf advises those interested in crypto to immerse themselves in the community and learn directly from the sources where discussions and developments are happening.

"I think that when capital becomes totally commodified, venture groups have to distinguish themselves by value add services..."

The quote predicts a shift in the venture capital industry, where providing additional services beyond capital will be necessary to remain competitive.

"Our most recent public investment, I believe, was the Zero X protocol, which is a decentralized exchange protocol that lives inside an Ethereum smart contract."

This statement reveals Olaf's latest investment and hints at his belief in the future importance of decentralized exchanges within the cryptocurrency space.

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