20VC Scalar Capital's Linda Xjie on Who Will Win The Smart Contract War, The Future of Exchanges Centralised or Decentralised & The Pros and Cons of Differing Privacy Coins

Summary Notes


In this episode of the 20 Minutes VC, host Harry Stebbings interviews Linda G., co-founder and managing director at Scalar Capital, a prominent crypto asset fund. Linda shares her journey from witnessing her immigrant parents deal with inefficient money transfers to becoming a key player in the crypto space. Her experiences at Coinbase and as an advisor to 0x inform her insights on the importance of privacy coins, the intricacies of decentralized exchanges, and the challenges of scaling Ethereum. Linda emphasizes the need for a strong community and cautious fundraising in crypto projects, predicting that institutional capital will meaningfully enter the space by the end of the year, facilitated by regulatory clarity and improved custody solutions. She also discusses the potential for China's significant role in crypto and her recent investment in Cadena, a smart contract platform with a unique approach to scalability and security.

Summary Notes

Introduction to Linda Xie and Scalar Capital

  • Linda Xie is the co-founder and managing director of Scalar Capital, a leading crypto asset fund.
  • Prior to co-founding Scalar, Linda worked at Coinbase as a product manager and at AIG as a portfolio risk analyst.
  • She is also an advisor to Zero X, an infrastructure layer built on Ethereum token standards.
  • Linda's background gives her a unique perspective on crypto assets and their potential in the financial ecosystem.

"And so we're gonna change that today and I'm very, very excited to welcome Linda G. Cofounder and managing director at Scalar Capital, one of the leading crypto asset funds to have been born over the last few years, with Linda becoming one of the most prominent figures in the space."

This quote introduces Linda Xie as a significant figure in the crypto space and sets the stage for the discussion on her background and insights into the crypto industry.

Linda Xie's Personal Crypto Journey

  • Linda's interest in crypto assets was influenced by her immigrant parents who experienced asset seizure during China's Cultural Revolution and the inefficiencies of sending money internationally.
  • Discovering Bitcoin in 2011, she was captivated by the concept of an unseizable asset.
  • Initially deterred by the sketchy nature of the crypto community at the time, she later joined Coinbase when it appeared as a legitimate player.

"So when I finally came across bitcoin in 2011, I was really fascinated with this idea of just having an unseasable asset and I thought the technology was absolutely amazing."

Linda's quote explains her initial attraction to Bitcoin's promise of asset security and the underlying technology that facilitates it.

The Genesis of Scalar Capital

  • Linda's shift from Coinbase to Scalar Capital was motivated by her desire to focus on researching new crypto assets and supporting teams building in the space.
  • She sought a technical co-founder from Coinbase to launch the fund, which invests in tokens and coins and provides support to teams beyond just capital.

"So I decided to start scalar because I was trying to think of what exactly I wanted my data to look like. And that was pretty much researching new crypto assets that were coming along and just really getting closely involved with the teams that are building the space and helping them out."

This quote outlines Linda's motivation for founding Scalar Capital, highlighting her focus on research and active involvement in the crypto asset space.

Lessons from Coinbase's Growth

  • Linda observed the importance of focus during hypergrowth, learning from Coinbase's decision to not add every new altcoin during the early days.
  • She learned that building a lasting platform requires not getting distracted by fleeting trends.
  • Preparation for hypergrowth is crucial, including avoiding technical debt and having scalable tools and infrastructure in place.

"So that was an important takeaway as I've started reviewing this space and investing. Another piece was also just how the hyper growth period might actually take some time to actually get to."

Linda's quote reflects on the key lessons from Coinbase's growth and the importance of strategic focus and preparation for scaling.

The Importance of Privacy Coins

  • Privacy coins offer enhanced privacy features compared to pseudonymous currencies like Bitcoin.
  • Linda advocates for financial privacy and fungibility in digital currencies, noting the risks of transaction histories affecting the acceptance of coins.
  • Privacy coins are important not only for illicit activities but also for legitimate use cases such as protection from corrupt governments and business confidentiality.

"So I think that in itself is very important to just have this fundamental financial privacy."

This quote emphasizes Linda's belief in the fundamental need for financial privacy, which privacy coins aim to provide.

The Competitive Landscape of Privacy Coins

  • Linda discusses the competition among privacy coins like Monero, Zcash, and Dash, each employing different privacy-enhancing technologies.
  • The privacy-focused community often favors Monero for its consistent transaction privacy.
  • She acknowledges the trade-offs inherent in the different technologies used by various privacy coins.

"Monero and Zcash and Dash probably being the most popular ones that you might have heard of."

This quote introduces the discussion on the competitive landscape of privacy coins, setting the stage for an analysis of their differing technologies and trade-offs.

Monero's Privacy and Scalability

  • Monero implements mandatory privacy for all transactions on its network.
  • It utilizes ring signatures and ring CT to mix transactions, making it difficult to trace them.
  • Monero faces a scalability issue due to the storage of additional data, such as key images, to prevent double spending.
  • The coin is not yet user-friendly and is not ready for mainstream use due to these challenges.
  • Monero is working on scaling solutions to improve its usability and efficiency.

"Monero is private by default. And so there's mandatory privacy on this network." This quote explains that Monero's design inherently ensures privacy for all transactions, distinguishing it from other cryptocurrencies that offer optional privacy.

"Monero itself isn't as scalable because it's storing all this additional data." This quote highlights the scalability challenges Monero faces due to the extra data required to maintain privacy and security on the network.

Zcash and ZK-Snarks

  • Zcash is a newer cryptocurrency that uses ZK snarks, a form of zero-knowledge proofs.
  • Zero-knowledge proofs allow verification of transactions without revealing any information about the transactions themselves.
  • Zcash's privacy feature is optional, leading to only a small percentage of transactions being private.
  • Generating ZK snarks is currently memory-intensive and time-consuming, which is a barrier to widespread use.
  • Zcash is working on making ZK snarks more efficient to encourage more users to opt for privacy.

"Zcash uses a new technology called ZK snarks, which are something called zero knowledge proofs." This quote introduces ZK snarks and their significance in enabling private transactions without disclosing transaction details.

"Only, like, 13% of the network right now is actually private because they have to opt into using this." This quote points out the low adoption of Zcash's privacy feature due to its optional nature and the inefficiencies associated with it.

Dash and Master Nodes

  • Dash uses master nodes to mix transactions, which differs from protocol-level mixing.
  • Master nodes may have more visibility into transactions, raising concerns about privacy.
  • Dash is more user-friendly and targets specific markets such as marijuana businesses that struggle with banking.
  • The coin's ease of use has made it a more attractive option for practical applications.

"Dash is another one. Essentially, they use something called master nodes." This quote explains Dash's unique approach to privacy, which relies on master nodes to mix transactions.

"Dash actually tries to cater to that market, make it really easy to use." This quote highlights Dash's focus on user-friendliness and its strategy to serve markets with specific needs, like the marijuana industry.

Privacy Coins and Ease of Use

  • Most privacy coins currently lack ease of use, which is a significant barrier to adoption.
  • New coins are being developed with a focus on improving efficiency and user experience.
  • Privacy is often considered a secondary feature that should not compromise the user experience.

"In the end, I think something that most of the privacy coins really lack at this current state is just ease of use." This quote emphasizes the current challenge faced by privacy coins, which is the need for improved user-friendliness.

Transition from Speculative Trading to Transactional Use

  • Real use cases and merchant adoption are necessary for the transition from speculative trading to transactional use.
  • Improvements in protocol and technology are needed to ensure scalability and ease of use for mainstream adoption.
  • The industry is still in the early stages, focusing on getting the technology right before productizing.

"I think that we need to actually still work towards improving the actual protocols and the different technology." This quote indicates the need for continued development of the underlying technology to enable practical, transactional use of cryptocurrencies.

The Role of Decentralized Exchanges

  • Decentralized exchanges allow users to control their funds and trade trustlessly.
  • They provide an alternative to centralized exchanges, which have faced issues like hacks, exit scams, and jurisdictional limitations.
  • Decentralized exchanges are essential for global access to trading infrastructure.

"A decentralized exchange is essentially an exchange that the user has control of their own funds." This quote defines decentralized exchanges and their significance in empowering users with control over their assets.

"So decentralized exchange allows anyone to be able to trade trustlessly and have access to this trading infrastructure." This quote underscores the importance of decentralized exchanges in providing universal and trustless access to trading.

Centralized Exchanges and the Core Ethos of Crypto

  • Centralized exchanges with demand and supply powers may seem contrary to the decentralized ethos of the crypto space.
  • However, they provide an option for those who prefer not to manage their own crypto assets.
  • The crypto ecosystem offers choice and optionality, catering to both users who want to be their own bank and those who prefer the services of centralized entities.

"Crypto and decentralized exchanges give people the option to use them." This quote captures the essence of choice in the crypto space, allowing users to select between centralized and decentralized exchange models.

Linda Xie's Experience Advising Zerox

  • Linda Xie's experience with Zerox provided insights into the development of decentralized exchange protocols.
  • She helped Zerox consider fair distribution during their token sale, avoiding concentration of tokens among a few large buyers.
  • Zerox focused on building a strong community by ensuring a fair and grassroots approach to their token sale and community building.

"So one thing that was a huge takeaway was really helping them think through the token sale model." This quote reflects Linda's involvement in strategizing the token sale model for Zerox, aiming for equitable distribution and community engagement.

Importance of Community Building in Crypto Projects

  • Emphasizing the need for a strong community is crucial for crypto projects, especially when conducting a token sale.
  • A token sale makes a project public from day one, requiring careful management of investor relations.
  • Building a community focused on the technology rather than price speculation can lead to a more robust and supportive community.
  • Linda Xie learned the significance of community building through her experiences and considers it a key takeaway.

"So when I work with projects, I really emphasize the need for making sure you create a strong community early on."

This quote highlights Linda's strategy of prioritizing community building for the projects she works with, understanding its long-term impact on the project's success.

The State of Ethereum and Smart Contracts

  • Ethereum has the strongest developer community and is the primary platform for token sales and decentralized applications (dapps).
  • The popularity of Cryptokitties revealed Ethereum's scaling challenges, as it accounted for a significant portion of transaction fees and slowed down the network.
  • Various scaling solutions are being developed, including state channels and plasma, to reduce the load on the main blockchain.
  • Ethereum's ability to implement effective scaling solutions is vital to retain developers and prevent them from moving to other smart contract platforms.

"Ethereum has the strongest developer community right now."

Linda notes the current dominance of Ethereum in the developer space, which is a critical factor in its widespread use for building dapps and conducting token sales.

"Ethereum actually really has some scaling problems to figure out."

The quote addresses the limitations of Ethereum's infrastructure, particularly when faced with popular dapps like Cryptokitties that can strain the network.

Developer Loyalty and Competition Among Smart Contract Platforms

  • The early Ethereum community exhibits strong loyalty, influenced by the tech-focused ethos established by Ethereum's creators.
  • Developers prefer building on Ethereum due to its large ecosystem and interoperability with other applications.
  • New platforms may attract developers if they offer better scalability or other advantages.
  • Linda Xie acknowledges the potential for competition and the likelihood that developers without existing loyalty to Ethereum may choose alternative platforms based on technical merits.

"The current early Ethereum community is very loyal to Ethereum."

This quote reflects the deep-rooted support that the Ethereum platform enjoys from its early adopter developer community.

Market Dynamics for Smart Contract Platforms

  • Linda predicts a "winner take most" scenario with a few dominant smart contract platforms.
  • There may be specialized platforms for specific use cases or regional preferences.
  • The crypto space may see more centralized platforms for certain applications, like gaming, where absolute decentralization is not critical.
  • Interoperability between platforms is seen as a key development, allowing for more fluid movement between different smart contract ecosystems.

"I think that there's going to be kind of this like two to three winner take all, I guess, maybe take most."

Linda's view is that a small number of platforms will dominate the market, but there will still be room for specialized or regional platforms.

Valuing Tokens and Investment Strategies

  • Valuing tokens is complex, and there is no perfect model; it's similar to a venture capital approach focusing on fundamental aspects like technology, team, and community.
  • Token economics, such as supply and distribution, play a significant role in valuation.
  • The velocity model (MV=PQ) is one approach to consider, especially for utility tokens where long-term holding is not necessary.
  • Linda is cautious of teams that raise excessive funds without a clear need, preferring those who raise only what is necessary to build their product.

"I think that anyone who says they have a perfect model for valuing tokens is maybe misleading themselves because all of us don't know what's the best model to use right now."

Linda expresses skepticism about any claims of a definitive model for token valuation, emphasizing the nascent and uncertain nature of the field.

"I would likely not invest in teams that kind of have this thinking, to be honest."

Linda's investment philosophy is cautious of teams that follow a trend of raising excessive capital without a clear justification, suggesting a preference for more prudent and focused fundraising strategies.

Token Sales and Equity Fundraising

  • Some legitimate projects have decided against creating a token, recognizing it adds unnecessary friction.
  • These projects have opted for traditional equity fundraising rounds.
  • There is a shift towards smarter fundraising due to regulatory risks and industry burnout.
  • Token sales before product launch can lead to SEC issues regarding unregistered securities offerings.
  • Good investors tend to avoid massive token sales and prefer value-add investments.
  • Projects are advised to raise smaller rounds or conduct seed rounds to attract quality investors.

"So there are really legitimate projects that have been going that route and a lot of them actually have said, okay, well, we realize we actually don't need a token on this platform at all."

This quote explains that some projects have realized the downsides of creating a token and have chosen to raise funds through traditional methods instead.

Regulatory Environment and Investor Burnout

  • The SEC's stance on token sales as potential unregistered securities offerings influences fundraising decisions.
  • Investor burnout is due to the high volume of token sales and massive fundraising amounts.
  • Projects are encouraged to focus on building a strong community rather than attracting speculators.
  • Linda Xie advises projects to be mindful of the type of investors they attract during fundraising.

"One being that just the regulatory environment right now, doing these token sales, especially when the product hasn't launched yet, definitely runs at the risk of having issues with the SEC for an unregistered securities offering."

This quote highlights the regulatory risks associated with token sales and the caution projects must take to avoid SEC issues.

Investment Sourcing and Crypto Networking

  • Linda Xie sources investments through her network, attending meetups, dinners, and conferences.
  • Crypto funds and investors share deal flow and collaborate in ways uncommon in traditional VC.
  • Weekly syncs between crypto funds help share insights on potential deals.

"These crypto funds and investors often share deal flow with each other. It's really interesting because these crypto funds are very collaborative."

Linda's quote illustrates the collaborative nature of crypto funds and how they share investment opportunities amongst each other, contrasting with traditional VC practices.

Market Fragmentation and Store of Value

  • There may be a dominant store of value in the market, but preferences will lead to some fragmentation.
  • Different preferences include privacy concerns or a desire for stability without innovation.
  • Linda predicts a "winner takes most" scenario but acknowledges niche demands.

"But I think that there will be some market fragmentation in terms of people have different preferences, so they might be a little more privacy oriented or they might want their store value to maybe not be innovative and not be iterating on itself too much."

This quote provides Linda's perspective on how individual preferences will lead to market fragmentation despite a tendency towards a primary store of value.

China's Role in Crypto

  • Linda anticipates China becoming a significant player in the crypto industry.
  • She speculates that China might create its own cryptocurrency, utilizing blockchain for monitoring.

"I actually think that they're going to be a big player in this industry."

The quote predicts China's impact on the crypto industry, suggesting their potential to innovate and possibly launch their own cryptocurrency.

Institutional Capital in Crypto

  • Institutional capital is beginning to enter the crypto space.
  • Regulatory clarity and the development of custody solutions will accelerate institutional investment.
  • Linda is optimistic about robust custody solutions emerging by the end of the year.

"So I do think that the institutional capital is already coming in."

This quote indicates that institutional investors are starting to engage with the crypto market, with further growth expected as regulatory and custody issues are addressed.

Traditional Tech VCs in Crypto

  • Linda welcomes traditional tech VCs investing in crypto but notes some are driven by FOMO.
  • Tech VCs can contribute expertise in team-building and product development.
  • She stresses the importance of understanding the necessity of tokens within the protocol.

"I actually really like seeing the traditional tech VCs come into the space."

Linda's quote reflects her approval of traditional tech VCs entering the crypto space while emphasizing the need for them to gain a deeper understanding of the industry.

Cadena Investment

  • Cadena is a smart contracts platform created by a former Morgan blockchain team.
  • It introduces Chain Web, a more efficient validation process, and a human-readable smart contract language.
  • Linda is impressed by the team and their innovative approach to blockchain technology.

"The most recent one, I think Cadena added us to their angel list page."

This quote introduces Cadena, Linda's recent investment, highlighting its innovative features and why it excites her.

Linda Xie's Personal Preferences

  • Linda's favorite book is "Sapiens" for its perspective on society and the concept of money as a story.
  • She does not believe everyone needs to be their own bank, which is controversial in the crypto industry.
  • Linda uses tweeting and blogging to build her network and educate others about crypto.

"I think that it has really changed my perspective on just how society came to be, and especially this concept where people are able to unite themselves around stories."

Linda's quote reflects on how "Sapiens" has influenced her understanding of society and the concept of money, relating it to the broader narrative of human cooperation and storytelling.

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