Drinking From The Crypto Firehose

It is my view and our view at USV that the crypto market is in what Carlota Perez calls the installation phase.

We believe that we are still putting the pieces in place for a new technology architecture to take hold.

The “big bang” for this technology cycle was the publishing of Satoshi’s whitepaper, almost ten years ago.

But we still don’t have consensus mechanisms that can scale to transaction speeds that are typical of mainstream web apps, we don’t yet have consensus mechanisms that are both energy efficient and battle-tested at scale, we don’t have an array of development tools that make building applications on this stack easy, quick, safe, and secure, we don’t have hundreds of millions of users with crypto browsers & wallets, and we don’t have all the other things that would need to be in place in order to move into the deployment phase.

But we do have the one thing that is the hallmark of a classic installation phase. We have a frenzy of innovation and financial capital that has been unleashed by the ICO boom, itself a creation of the crypto tech cycle.

Over $20bn has been raised by crypto projects via ICOs in the last 18 months.

And that is not counting the amount of capital that has gone into crypto companies via traditional means (venture capital, angel capital, etc).

This frenzy of entrepreneurship and investment has unleashed thousands of crypto projects all around the world.

And many of these teams, projects, companies are shipping things now.

Which is leading to an incredible amount of innovation coming to market in a very short period of time.

Like any early market, most of these projects and companies will fail. Some will fail to ship. Some will ship things that don’t work. Some will ship things that work but aren’t adopted. And some will ship things that are adopted but are surpassed by something better. The failure rate of these thousands of projects will be very high.

But inside this cohort of companies and projects will be the next Google, Amazon, Facebook, Twitter, Dropbox, Uber, and Airbnb.

And so the job of a crypto investor is to sort through all of them and decide which ones have the best chance of emerging as a winner.

We have been doing that for seven years now, since we first started poking around this sector in 2011.

And it has never been harder.

It is like drinking from a firehose right now.

There are so many high-quality projects, high-quality teams, and blue-chip financings happening in the crypto market right now.

It makes my head spin just trying to stay on top of it all.

And we have a great team of investors at USV working on this, and we have a network of crypto funds we have invested in that we collaborate with, and we have a bunch of like-minded VC firms that we work with in this sector.

That produces a lot of information flow and helps us better understand what is going on.

And what is going on is a frenzy of innovation that will lead to many important things.

But keeping up with it all is exhausting.


Comments (Archived):

  1. awaldstein

    I want to thank you Fred for being so generous with your thinking on this for the past years.It forced me to dig deep technically early to find a foundation. Buy tokens as a means of understanding the space which turned into investments over time and now–I focus on what segments matter to me, not on crypto itself.Not 100% of what i do but an increasing percentage.Thanks!

  2. LIAD

    Keeping abreast is a full-time job. Can see now why management fees are so important. You need to keep the lights on whilst doing all the non-income earning work until investments, hopefully, pay out.

  3. LIAD

    – side benefit of instaliquidity, depending on fund structure, is you don’t need to find the projects which win ultimately. You just need projects which have a time in the sun. Constant optionality .

  4. William Mougayar

    Yuppppp….. Sh-t is flying, literally, right now.Not having enough of the right signals increases your risk. A lot of data points are required, in addition to pattern recognition skills and depths in perspective.

    1. Pointsandfigures

      I think first principles too. Having deep knowledge rooted in something helps analyze stuff.

      1. PhilipSugar

        Yes I am amazed how many investors do not dig into the technology.

        1. William Mougayar

          Many so-called investors in crypto are momentum chasers. They are clueless about what’s behind these coins.

          1. PhilipSugar

            This is why people like Fred get paid what they get paid. Knowledge, Experience, and Reputation. The momentum chasers get the scraps that fall off the table of those with those three. I mean let’s be real, you get the deals that that somebody who has been studying the market for almost a decade, investing for three, and people want in the deal because it increases your value, doesn’t want. Good luck.

          2. LE

            Knowledge, Experience, and ReputationYour number three is actually the big heavy on that. So along those lines a new whipper snapper can jump ahead of his cohorts by somehow figuring out a way to work for USV and Fred in particular. Then they can be like the Tiger Cubs. [1] Branded as such in the mind with respect to nailing future opportunities.[1] https://archive.nytimes.com

          3. PhilipSugar

            Yup. Hey bought and paid for. Nothing wrong with that.

        2. LE

          how many investors do not dig into the technologyMaybe there are cases where that is a benefit. Meaning knowledge and deep understanding can limit the chances that you will take and what you believe is possible. [1] This is often how old school misses out on the new thing. We don’t have any statistics (and will never have). The more you know the more you are able to find reasons why something won’t work.What do you think would happen if someone approached the retired head of Marriott (let’s assume no financial ties any longer) with the idea of Airbnb?What would happen if you approached someone super knowledgeable about taxi cab industry about Uber?Your dad about oil fields, my dad about giftware importing? My BIL the jeweler (top notch btw but zero business skills) laughed at the idea of Blue Nile selling diamonds over the internet. He told me (in the 90’s) ridiculous people need to see the merchandise. Guess what? Millenials don’t. Ditto for buying cars from an app what would Norman Braman say about that idea? My BIL? Had to close his shop founded by his great grandfather in the 1930’s! Almost 100 years of reputation down the drain.Remember the guy who was very experienced in what I ended up doing after graduation who saw my location and said point blank ‘will never work no office buildings … you need tall office buildings’. He was wrong he never considered other angles only what he knew of.What I think? The more ridiculous the idea maybe the less you actually need to know. Standard idea? Sure I’d love to be partners with Danny Meyer in the restaurant business (even he got burned on that tip thing btw).[1] We don’t want this to be the case because we want to believe that deep knowledge and hard work pays off and someone who knows less is at a disadvantage. I want to believe that my wife’s nephew (one of the eagle scouts) is making a huge mistake by thinking he should delay college and pursue a music career by moving to Boston. If it works I will actually be disappointed. And I realize that it could actually lead to some serendipity that will pay off but honestly we don’t want to think that is the way to run an airline, do we? The other eagle scout in the same family? We want to think he is missing a huge opportunity by having a kid at 19 and not going to medical school. That is the standard thinking that is often right honestly more than it is wrong. We need that type of certainty typically don’t we?

          1. PhilipSugar

            I think you are missing my point. It is one thing to know too much and to NOT try new things. It is another to try new things with a totally open mind, and be willing to fail. I bought my wife’s engagement ring (very expensive) sight unseen and the platinum tension ring had to be forged in Germany. We were engaged in 1998.I never stayed at an AirBnB. I have a friend that wanted to figure out Uber and signed up to be a driver.

  5. Joseph K Antony

    Leemon Baird’s Herdera Hashgraph seems to have tackled successfully the issue of scalability in the Digital Ledger Technology space. Against Bitcoin’s eight transactions a second, Ethereum’s current 20 transactions a second, Visa / Mastercard’s 20, 000 transaction a second – the Satoshi implementation of Hashgraph achieves half a billion transactions a second across five continents. Machine Zone CEO Gabriel Leydon’s demo should open everyone’s eyes on Digital Ledger Technology’s imminent potential to rewrite the current Information Technology structure. Watch this video from 1:35:00 onward, if you want to cut to skip the tech and marketing details.https://youtu.be/FCy9FnOq19s

    1. Sebastian Wain

      Where is the source code of Hashgraph? There are strong computer science limitations for scaling blockchains. You can only scale them if you relax the core assumptions (e.g. partial centralization).

      1. Joseph K Antony

        Hashgraph is not a Blockchain but a Digital Ledger which is based on DAG ( Directed Graph Technology) and the consensus mechanism is based on the Gossip protocol at the core. It has theoretically provable asynchronous Byzantine Fault Tolerance and immune to DDoS attacks. It also has a unique consensus governance mechanism and it guarantees there will be no forking.What amazes me most is how the mainstream DLT ecosystem turns a complete blind eye to this technology which is proven in its permissioned (private) version -Hashgraph, now in its permissionless (public)version -Herdera Hasgraph is well poised to make its presence felt. It is well funded and is coming out with a token for incentivising the growth of the public ecosystem but only for accredited investors.It is an important part of the firehouse blast of developments in this space, keeping track of, which as Fred points out is a very serious challenge. But extremely rewarding. It needs to be examined very seriously. It will be open source.The source code is here: http://www.swirlds.com/down…But you need to contact their sales team if you wish to deploy an app made with their SDK – which is a bit weird.

        1. Sebastian Wain

          > Hashgraph is not a Blockchain but a Digital Ledger…When I said there are strong limitations for scaling blockchains I meant BFT limitations that applies to DLTs.> What amazes me most is how the mainstream DLT ecosystem turns a complete blind eye to this technology which is proven in its permissioned (private) version -Hashgraph, now in its permissionless (public)version -Herdera Hasgraph is well poised to make its presence felt.There are no proofs of what they said. Not saying that is impossible but without independent adversarial attack research there is no way to blindly trust them.You can check Blockchain Consensus Protocols in the Wild” written by well known researchers. They say:”The Swirlds hashgraph algorithm is built into a proprietary “distributed consensus platform” (https://www.swirlds.com); a white paper is available [7] and the protocol is also implemented in anopen-source consensus platform for distributed applications, called Babble (https://github.com/babbleio…. It targets consensus for a permissioned blockchain with n nodes and f < n/3Byzantine faults among them, i.e., the standard Byzantine consensus problem according to Section 3.3.In contrast to PBFT and other protocols discussed there, it operates in a “completely asynchronous”model. The white paper states arguments for the safety and liveness of the protocol and explains thathashgraph consensus is randomized to circumvent the FLP impossibility [31]. Since the algorithm isguaranteed to reach agreement on a binary decision (i.e., with only 0/1 outcomes) only with exponentiallysmall probability in n [7, Thm. 5.16], it appears similar to Ben-Or-style randomized agreement [18,Sec. 5.5]. However, no independent validation or analysis of hashgraph consensus is available.”

          1. Joseph K Antony

            Hashgraph is patented but Herdera Hasgraph is Open Source. ‘Blockchain protocols in the Wild’s’ comment is hardly a rebuttal. Gab Leydon’s demo is the most apt “proof of the pudding” type of demo and its implications are gargantuan. They have published the theoretical proof of their consensus mechanism and the theoretical underpinning of the governance mechanism. It looks robust in every way except for some cap on the number of nodes. Capped at 1000…? Not completely sure about that though.

  6. PhilipSugar

    The signal to noise ratio is very high. Don’t love Gartner but I do love this curve. I would say we are at the top of peak expectations. This does not mean I don’t believe in the sector but it does describe how so much new technology is adopted:https://setandbma.files.wor

    1. fredwilson

      we may have been at peak expectations in Dec and Jan

      1. PhilipSugar

        You would know much better than me. Always hard to call the top or bottom.

        1. LE

          If you try to coorelate the bitcoin price (for example) over the past 30 days with the google interest in bitcoin over the same period there is no correlation. Previously when it shot to $19k there was. I had commented that when it broke $10k it would then shoot up because the ‘magic number’ would garner attention and it did. So I get a citation in the ‘journal of I was correct’. On a serious note very possible that given the lack of correlation the price is being manipulated to bring it to over $10k again. Also it makes sense for players to give intermittent reinforcement so to keep people thinking that by trading you can make money. Even JLM I believe was doing that. Anyway that is the psychology the way I see it (and how I would manipulate it).By the way I will disagree with Fred that what we saw in December was not ‘peak expectations’ at all simply everyone and their Uncle attempting to ride the wave. And you know that is the plausible explanation of what happened.

          1. PhilipSugar

            What you can’t do is correlate it. Bizarre coming from me yes? I was roommates with two of the top guys in the CDO and one from Enron, three internet guys. (Different times) They have and have made much more money than me so if you count that as the scorecard they win.But you cannot correlate it. Just like so many things.Just try to see it happening a bit early than the next gal.NO POLITICS. But tell me who predicted Trump, three years ago?

      2. jason wright

        software and crypto have the characteristics of super modularity. earlier technological innovations, a rail, a canal, et.c. did not. i don’t go with the Perez thesis being applied so religiously to this new tech cycle. we can’t say where we are.

        1. Girish Mehta

          I have the same sense that we actually don’t know where we are where crypto is concerned. I don’t understand how one can call out what Dec/Jan represented.

      3. William Mougayar

        We will probably cross these highs again before it all crumbles down again. And we will need to see more many visible failures before hitting the reset button.

        1. jason wright

          that crossing has been made several times over the years. it will continue. there have already been visible failures, The DAO was one. there will be more. bitcoin will endure.

      4. Joseph K Antony

        It’s just possible these cycles are getting shorter in duration and so is the Blockchain cycle. But it creates a new perspective and a new base of opportunities.

    2. Sebastian Wain

      > The signal to noise ratio is very high100% but if you do a careful analysis there are strong signals (e.g. second layer protocol implementations, PoS) that fundamental technologies are being created. This is not based on ICO promises. In general, these are small teams focusing on implementations rather than marketing themselves.

      1. PhilipSugar

        By PoS you mean Point of Sale? If so we do 1B yup B transactions per year, and another 5B of messaging. There will be players that come in that have been doing this since 1995 and have infrastructure when they see the time is right.

        1. Sebastian Wain

          Proof of Stake. Regarding scaling transactions there are many projects working on that. SpanChain is one of these.

  7. Ryan Lechner

    Ryan from ConsenSys here.Ethereum will have deployment-ready infrastructure in the next 6-12 months. We are starting to see a) meaningful advancements in Ethereum’s scaling solutions / protocol upgrades and b) developer-friendly, feature-complete infrastructure and core components. Tens of thousands of developers working on the Ethereum tech stack build out is an encouraging signal.Happy to chat if I can help answer any questions: https://twitter.com/ryansco

    1. jason wright

      Last weekend Fred posted Buterin’s chat with Tyler, where he freely admits that scaling is a huge issue and not solved or even close to being solved. Ethereum has nice branding in this area (‘Plasma’ being that latest catchy name) but at 15 transactions per second it is going nowhere.

      1. Ryan Lechner

        It’s true that “magic leap” scaling solutions are a while off, but Plasma (for example) will enable meaningful dApp usage in its own right. Interested to hear any reasons why such advancements might not be sufficient for platform adoption.

        1. kidmercury

          To me, plasma and other off chain solutions seem inferior to a specialized blockchain dedicated to a given transaction type that can execute it on chain. I’m a little skeptical the network effect of ethereum will make its off chain more advantageous to a dapp than a specialized chain with a smaller (but conceiblvably more relevant) network. Hope I am being clear

          1. Sebastian Wain

            Not clear how this blockchain solution would work since there are strong limitations (CAP theorem, BFT performance) to build that blockchain. For example, cutting edge new blockchains like Algorand provide performance in the few hundred transactions per second scale.Off chain/2nd layer protocols are a solution to this problem because when you have a blockchain you need to agree between n participants where n is big while in 2nd layer protocols you just need to reach consensus between a few participants starting by 2 with a P2P protocol. The generalized state channels is a good solution in this sense and some companies already implemented it.

          2. kidmercury

            IMO those limitations are only factors to the extent that the blockchains are decentralized. If we accept the highly regarded SCAB theory of evolution, which posits that blockchains will increasingly become semi-centralized in the name of becoming easier to make applicable to real world problems, then CAP and BFT do not become obstacles for new blockchains to emerge.

          3. Sebastian Wain

            Yes, obviously if we relax the decentralization factor it is possible to go everywhere but if a second layer does the trick I prefer the later.

  8. Richard

    The Y axis of this chart always bugged me.Applying the graph to “crypto” ensures “something” will eventually fit the curve at some “scale”.But isn’t the technology at issue, the “blockchain”? ( a specific data structure: a linear transaction log with ZERO trust as to the “data entry” but COMPLETE trust to the date entry type and date displaces data structures) ? It is certainly a good fit for low volume transactions that require complete Annononymity.

  9. sigmaalgebra

    With meager assumptions, lazy S-curve growth has to be quite common. E.g., several times at AVC I’ve presented the little virality argument that gave a little differential equation that has a lazy S-curve solution, once saved FedEx, etc.So, lazy S-curve growth does not have to be from the sequence of Perez events. So, that there is a lazy S-curve does not imply that the Perez events are extant.It appears that one hope for crypto is distributed data base suitable for, say, public auctions.Okay, okay, okay: As we know very well and have for decades, database technology is important stuff. So, need the usual functionality of security, performance, transactional integrity, etc.And people have been working for decades: There were various proprietary database software products, too many names. Then as I recall some of the history, IBM worked on relational database; so did E. Wong at UC Berkeley. IBM developed the query language SQL.So, …, as the years went by, we ended up with IBM’s DB/2, Oracle, Microsoft’s SQL Server, MySQL, ….The work, functionality, documentation, code, etc. are enormous.It’s fair to say that a significant fraction of larger businesses are crucially dependent on relational database software.Okay, maybe after all that work, there is more to do in database that would be important. Maybe.Since database is one of the largest, most important, and most mature parts of computer science, making significant improvements now stands to be challenging.So, it’s tough now to expect that a new direction in database will be as big as Apple, Amazon, etc. If there are big bucks to be had in new directions in database, someone let Larry Ellison know right away — my guess is that he is already well informed.So, what is the source of the energy, i.e., money, for all the attention to crypto? A guess: Selling coins!Since never is a long time, tough to say that crypto will never amount to much.But starting early in computing, database was very, VERY serious stuff. Development shops were bogged down using simple flat files and struggling with the weaknesses. So, database software was developed. There was network, hierarchical, eventually relational. The needs of the software developers and their employers in commercial banking, insurance, manufacturing, government, later on-line customer service, and now interactive Web sites … were enormous and desperately pressing. So far the crypto community seems to have a difficult time finding a similarly important need.Crypto still looks like a bubble of hype with a technology still looking for suitable applications.With all the loose money being thrown around in the world of crypto, maybe there will be some opportunities to understand the market, buy early, and sell at the peak. Maybe. From a movie, “The problem with playing chicken is knowing when to flinch.”.But there are a lot of fads with hype, including in computing. E.g., there were software development paradigms, structured programming, logic programming, rule-based programming, object oriented programming, and none of these did much for software or created much in valuable businesses. Instead, these were fads with hype. So are machine learning and artificial intelligence. Looks like crypto will be similar.The research libraries are awash in clever, creative, etc. solutions still looking for problems. So, the usual reaction now is to have a prerequisite — early on insist on one, maybe two, applications.One way for a while to circumvent the prerequisite is to get a tanker truck of soapy WonderBubble and add a lot of hype. Then get out before the bubbles start to pop.

  10. Sudha Lakshmi

    “But we still don’t have consensus mechanisms that can scale to transaction speeds that are typical of mainstream web apps…”It’s tempting to think of this as something that can be overcome as technology advances. After all, throughput seems like just the kind of thing Moore’s law ought to apply to!But that’s not the case here at all. What stands in the way of decentralized consensus protocols scaling to mainstream web speeds is not primarily a technological constraint, but a game-theoretic one. The central issue is how, given network latency (which of course can never go to zero, thanks to basic physics), one can design a widely distributed system, maintained and used by millions of selfish agents, and make it essentially strategy-proof.I’m not quite willing to say that the Nakamoto consensus is as good as it gets, though it is a work of stunning genius. Indeed it’s already being improved upon in interesting ways. But it’s important to see the hard limits of the problem itself, and notice that these limits are not fundamentally about technology, but about mathematics and human nature.

    1. Twain Twain

      The blockchainers don’t know yet that they’ll hit the same hard problems with game theoretic frameworks as the AI brigade have.

      1. Sudha Lakshmi

        That’s interesting. I actually suspect though that the limits for distributed consensus are harder — much harder — than those for AI. But we’ll see soon enough, won’t we? This is the one thing that makes growing older fun. 🙂

        1. Twain Twain

          Schmidhuber, the inventor of LSTM (long short term memory) in AI structures, says: “The limits are essentially the limits of computability identified 85 years ago by Kurt Gödel, the founder of theoretical computer science (1931). Gödel showed that traditional math is either flawed in a certain algorithmic sense or contains true statements that cannot be proven through computational procedures, neither by humans nor by AIs.”* https://www.infoq.com/artic…Google has the most PhDs, the most data and some of the fastest processing servers in the world and even they can’t get to the truth — despite billions of people clicking and searching which could be inferred as a form of consensus:* https://www.cnbc.com/2017/1

          1. Sudha Lakshmi

            Ah, we’re talking about the limits of computability itself! Yes, obviously AI can’t get past that, but there’s still a lot it can do within those bounds.

        2. Twain Twain

          As well as the Gödel problem, there is the fact that game theoretic frameworks simply cannot be the foundational mechanism for consensus.* https://uploads.disquscdn.c…Google’s Tensorflow is already a distributed blockchain, by the way. Yet that doesn’t mean Google Tensorflow can understand our language any more than Ethereum does. https://uploads.disquscdn.c…Imperial Innovations: “Encoding in Ethereum entails translating a natural language statement regarding law (from a contract), into an object-oriented code regarding computation (in Solidity). There is thus a high chance of a loss in translation, and the gap between natural language and Solidity paradoxically creates new inefficiencies in the system. This is true even when the legal and programming skills reside in the same person implementing smart contracts.”In any case, if the crypto crew want to drink the koolaid/snake oil from the firehose that’s marketing.The mathematics shows something different.

          1. Twain Twain

            @JLM:disqus — It’s all maths.

    2. sigmaalgebra

      What part of game theory, e.g.,T. Parthasarathy and T. E. S. Raghavan, Some Topics in Two-Person Games.Guillermo Owen, Game Theory.Avner Friedman, Differential Games.did you have in mind?

      1. Sudha Lakshmi

        Not sure what you mean. Game theory is game theory. And as far as I know, the different texts you mention don’t have meaningfully different points of view on the subject.Of course, given the number of players in a blockchain network, we’re not really talking about two-person games. So the literature on that wouldn’t necessarily be relevant (many of the results of two-person games generalize beautifully, though others fail in spectacular ways).

    3. Michael Elling

      Have you looked into hashgraph?

      1. Sudha Lakshmi

        Is it another of those directed acyclic graphs? I’m trying to keep an open mind about those, really trying… 🙂

        1. Michael Elling

          I’m just offering up an alternative consensus approach, not making a call on whether they really solve the inherent challenges of mathematics and human nature. See my comment above.

    4. Michael Elling

      Networks are all about tradeoffs (ie risk) between layers and boundaries when it comes to clearing supply and demand ex ante. Layer 3 is merely a tradeoff of layers 1-2 (a star or hub is more efficient than fully meshed). These tradeoffs go all the way up the stack to layer 7. Likewise we can have distributed (edge) or centralized (core) processing and storage depending on supply and demand.There are huge differences in supply and demand based on normal and pareto distributions. Nothing is uniform, yet every economist would have you believe in a world of averages. Hence all their models fail. I also believe that human nature can be viewed through 4 systems, not 2 as Kahneman holds. In addition to the intuitive and logical, there is the emotional and moral. One can love (emotion) a heroin addict but hate (moral) what they are doing. That is neither logical nor intuitive.All networks (and internetworks) tend toward centralization because of these tradeoffs and the maths; namely that value is captured at the core and grows geometrically based on the number of endpoints and transactions. Scale economies grow the closer to the core and top of the network or informational stack making the system self-perpetuating in the short-run. Costs grow linearly at the edge, where few scale economies exist, and are more or less uniform; albeit there are still enormous marginal differences. We observe this everywhere in the universe.Every communications event and economic transaction (the latter is a subset of the former) are fraught with risk. Properly functioning networks reduce the risk if all the above tradeoffs and differences are accounted for. That is done through a system of settlements (price signals) enabling incentives and disincentives. Furthermore, in these settlements there must be equilibration mechanisms between the core/top where the value accrues and edge/bottom where the majority of the costs are borne.If those don’t exist, then imbalance will occur and risk will increase and the ecosystem (network) will collapse. The internet does not have these settlements; nor do any of the crypto platforms as best I can tell.I stumbled upon the necessity of inter-actor/network settlements and equilibration mechanisms while modeling sustainable, generative and universally accessible broadband and IoT networks. Not sure the blockchain/DLT/DAG camps fully understand these principles; universally applicable to all socio-economic and political institutions.

      1. Sudha Lakshmi

        “I stumbled upon the necessity of inter-actor/network settlements and equilibration mechanisms while modeling sustainable, generative and universally accessible broadband and IoT networks.”Thank god for people who stumble into game theory and mechanism design because they’ve been solving network optimization problems! To my mind at least, this area — often called algorithmic game theory — is now one of the most fertile research programs in both CS and Economics. The field was essentially founded by computer scientists working on problems in complexity theory and network optimization — mainly, Christos Papadimitriou, Eva Tardos and Noam Nisan, along with some of their students and colleagues — less than 20 years ago. If you don’t already know of this work, you might really enjoy the classic textbook on this, here for free: http://www.cs.cmu.edu/~sand

        1. Michael Elling

          Thank you. I jumped to chapter 22. They should have started with a more rigorous definition of a network; namely one of infinitely decreasing supply costs and infinitely bifurcating demand. None of what they are modeling is based on any real network that I’ve observed in 30 years of analyzing them; wired/wireless, physical/software-defined, etc…Pricing is not just a function of supply or (constrained) capacity, rather it is a function mostly of demand. And that demand can be sourced from the core or the edge. Pricing is therefore a function of marginal demand cleared by marginal supply ex ante. And that process can be influenced across many layers and boundaries, not just a simple link and node architecture as the authors believe. Read more here: http://bit.ly/2iLAHlGBTW, what is Nivelo?

  11. Evan Van Ness

    For anyone having trouble sifting through the firehose of info, I’m giving away free ETH newsletters: http://www.weekinethereum.com/

    1. jason wright

      Comments Policy infringement? Ethereum already pumps out more than enough self promotion elsewhere.

  12. David Albrecht

    Fred-I’d love to know, at a more meta/first-principles level, why you’re so excited about blockchains? Is it the excitement/buzz, obvious network effects that make a small number of companies highly valuable/fundable, the protocol-like dynamics that let stuff get built on top of it, etc?I’m asking because there are many sectors that share these same fundamental dynamics. Take autonomous robots. They’ll be transformative, have lots of winner-take-all dynamics/network effects, sustained R&D-driven margin potential, and lots of capacity for productive capital deployment.Why crypto? Is it what you feel you know and understand, living in NYC? Are there any other sectors where you’d invest? (Not trying to pitch you, just genuinely curious.)From the outside looking in, it seems you like software and network effects (marketplaces, communities, developer tools that end up being standards).Maybe something for a post later?

    1. sigmaalgebra

      I’ll give a guess: With so much loose, dumb money splashing around, although nearly all of it will be wasted, it should be possible if watch carefully to find some cases where there is money to be made. But constantly keep an eye on and a path to the lighted, red sign over the side door “Exit”!

  13. JLM

    .Crypto, having come from the womb in 2009, is still in its infancy and there is no guaranty it will survive into childhood. It is only since 2013 that it entered the lexicon of finance.It is estimated there are almost 25,000,000 wallets in the world which represents fewer than 10,000,000 unique users (the number I keep seeing is 6.8MM as of EOY 2017).In Oct 2013, Silk Road (Ross Williams Ulbricht from Westlake, Texas, a ‘burb of ATX) was smashed resulting in Ross’s life sentence for a number of different transgressions including an attempt to murder witnesses against him. Silk Road colored on the wrong side of the street and was a RICO – racketeer influenced criminal organization.You may argue that point, but the kid got a life sentence. The Federal Judge sentenced him far in excess of what the US Attorney asked for. Hello, America.In that same year, the DEA seized bitcoin as spoils of an illegal drug operation.The US Financial Crimes Enforcement Network (an often overlooked bit of the gov’t alphabet soup) issued regs which defined who is what and when. At the core of Mt Gox’s problems was that it did not conform to these regulations which they may not have even known about.That has been followed by the IRS issuing guidelines on how Bitcoin is to be taxed and the US SEC providing some mildly confusing guidance on whether Bitcoin and tokens are securities and when.The US SEC has also been less than enthusiastic about derivative securities based on Bitcoin such as the Winklevoss Twins ETFs.All in all, it has been a bumpy ride.We now have a plethora of token-funded startup enterprises awash with money, but who raised that money because they promised to do something with it. Some number of these folks should not be trusted to make change accurately.A word about failure – there are a great number of people who fail without being corrupt. They may be incompetent, but they may also have been the 6th guy to the market. Sometimes, the market says, “Enough market space for 4 of y’all. The next 3 I am going to eat for breakfast.” Timing is often a matter of luck, but it is also a terminal disease. Unforgiving.They are like a bunch of swimmers on the starting block all intending to hit a PR, but knowing that only one person gets the gold, silver, bronze.In another two years, there is smart money which says the outcomes will mimick the success rates of VC funded startups. It is hard to see how that is not correct. In fact, a lot of smart people think the tokenistas may be lucky to get a whiff of such success rates.Blockchain on the other hand, has become readily acknowledged as a software app, a ledger, with certain desirable characteristics. Is it fairly described as a solution looking for a problem to justify itself?You be the judge of that.What I am reminded of is the derivatives industry in which some of the smartest people in the world took a fairly simple financing concept and layered a degree of complexity on top of it, thereby trying to make a three tranche finance transaction something like 1 + 1 + 1 = 4.There was no shortage of smart, smart, smart people. There was no shortage of good intentions — all they were doing was stripping the different levels of risk out of a single transaction, pricing the exposure, pooling it, securitizing, and selling it to clients who relied upon the underwriters.They had the added wrinkle of buying insurance to reduce their supposed risk.When the feces hit the fan, the insurance went first, then nobody could figure out how to put Humpty Dumpty back together again, none of the really smart guys had ever foreclosed on a loan (let alone 1/3rd of a loan), and everything turned to shit in a single, short period of time.Smart guys. Modestly complex concept. Financial engineering. Lots of mousse in the hair. Failed because they didn’t price failure in and because they believed their own baloney that the insurance was going to work. There was not enough money in the world to make that insurance work.The token business is starting to feel the same to me. The blockchain software can be golden, but the token business reminds me of derivatives. I think blockchain could be good. Discovered sex good? No. Just good.Could just be me. One of the advantages of having lived through some of this stuff is having lived through some of this stuff. I smell something.JLMwww.themusingsofthebigredca…

    1. LE

      I agree. That is certainly the way it looks. But what do we know? Hey maybe this is like someone telling us a little pill will make our headache go away. Maybe it is not our business to understand what goes on under the hood or where it will actually lead to? [1]Fred says:There are so many high-quality projects, high-quality teams, and blue-chip financings happening in the crypto market right now. It makes my head spin just trying to stay on top of it all. So we have a drain of brain power from high quality projects not related to blockchain/crypto. That seems to be a problem for sure. I mean the guys who headed out west to mine gold probably had little else to do with their time is my guess. Every minute Fred spends on this he can’t spend on something else is also my point. This is actually my biggest issue. To much resource going to this. Once again I make money off it so this is not jealousy in any way.What you mention in terms of derivatives and the mortgage crisis was also what I call ‘the assumption of legitimacy’. New participants assume someone else has done the checking and it all makes sense. I think this is actually a bigger factor than ‘believed their own baloney’.Anyway there are two questions here and only one is a resounding YES. a) can you make money off of all this’. b) ‘Long term does this have legs and value?’.[1] Except this is business and history so that is not the case with this.

      1. JLM

        .The things that really get us into trouble are the things we WANT to believe.As a young man, I wanted to believe that the Vietnam War was a smart play. That we were saving the world from Communism – a noble notion. As it turned out, when I got older and wiser, I saw it in a new light. It was an enormously stupid war (as are most wars). 58K KIA, 450K WIA. I buried a few of those men, notified their next of kin, handed flags to their widows.How did they ever fool a smart guy like me? Cause I wasn’t nearly as smart as I thought I was.A huge disruption to our culture. Worst since the Civil War, another incredibly stupid war.Remember, I used to be in the war business.The leadership of the US and the school I went to conveyed upon the war a sense of nobility, duty, and purpose which in turn we wrapped ourselves in.I WANT to believe that blockchain is going to be something great. As a guy who used to deal with property records all the time, I know the inefficiencies of the county-by-county registration of property records.But, I just don’t see the world stopping, taking a hiatus, re-tooling, and changing – for what? Replacing a system which works with another one which works, arguably, just a smidgen better.Same thing with SWIFT. Blockchain will make it faster, but now SWIFT is reacting to that market threat. They are speeding up their execution. So, why blockchain?It seems to be folly to expect the legacy owners to ignore or not to react to blockchain. Best case, they just buy a ticket to the dance.The entire derivatives industry was underwritten by firms whose reputations preceded the product. They were “underwriters” without honor.Meanwhile, on the third floor, they were creating them.On the fifth floor, they were marking them up, bifurcating them, securitizing them, and selling them.On the seventh floor, they were shorting them.On the ninth floor, they were acquiring troubled derivatives.All the while on the 23rd floor, they were insuring them (laying the risk off really).Meanwhile, on the top floor, they were counting their profits while ignoring their conflicts of interest.Smart, smart, smart, smart guys working their butts off. Fleecing the public?The entire notion of eliminating trustworthy intermediaries feels like outlawing flush plumbing to me.The entire crypto industry is still a micro undertaking even though on a website like AVC.com it feels like it’s big. It is tiny.I cannot imagine this industry doesn’t run into the buzz saw of token failures and continuing use by the dark net.But, hey, that’s just me.JLMwww.themusingsofthebigredca…

        1. LE

          Will never match you on history or the war in Vietnam however isn’t it also possible that preventing the spread of communism was a worthwhile cause ‘all of Asia will fall’ and we just weren’t able to win against an enemy that knew the lay of that land? Meaning despite all the reasons we didn’t win if we had won the tune would be different in retrospect? Am I way off or? My point is were you naive (as you say) or did things simply turn out bad. Or both? If naive and we won that war do you think you would say the same?Look Jews don’t really care about what happens in Israel with their enemies (the other side getting killed), only that the bottom line is there is still Israel and they are the victors. If they weren’t the victors and there was a war that they lost and kids from that country died wouldn’t the tune be different?Interesting fact. During periods of conflict in Israel my Dad was faced with two different problems. Interest in goods from Israel was high (because people wanted to support Israel). Getting merchandise was precarious (employees off to war, bombings and so on). Net though the war, I seem to remember, and the conflict paid in part for some of my school as a result of the increase in business.

          1. JLM

            .Victors write the history, so if we had won in Vietnam, we would have written the history in a noble manner.The best thing for Communism is to allow it to kill itself – look at any of a number of failed, crushed Communist states.The problem with being young and dumb is being young and dumb.JLMwww.themusingsofthebigredca…

          2. sigmaalgebra

            For yourWill never match you on history or the war in Vietnam however isn’t it also possible that preventing the spread of communism was a worthwhile cause ‘all of Asia will fall’ and we just weren’t able to win against an enemy that knew the lay of that land?Bear Trap #1.We started getting interested in what happened in the government of Viet Nam right after WWII. E.g., an early date was when the WWII victors told France that they could have their colony Viet Nam back; uh, the Japanese took it early in WWII.As France tried to return, many Vietnamese shot back. There was a war. I remember reading that the US helped France with guns, etc.The French lost. As at Google and athttps://en.wikipedia.org/wi…the end of France in Viet Nam was the battle of Dien Bien Phu, 13 March – 7 May 1954.The settlement was to partition Viet Nam into North and South with elections planned for the whole country.Now we have the context of Bear Trap #1:The US still well remembered WWII where we had to fight “The Axis” of Berlin, Rome, and Tokyo as they pursued the old take over the world ploy.And since (i) Stalin got the countries the Russians marched through on their way to Berlin and set up the “Iron Curtain” as in Churchill’s speech of March 5, 1946, (ii) along with the victory in China of Communist Mao against the other side led by Chiang Kai-shek and that fled to Taiwan, (iii) along with apparently friendships between Moscow and Peking, and (iv) then the victors in North Viet Nam led by Communist Ho Chi Minh, a lot of US foreign policy “wise men” saw a new axis of Moscow, Peking, and Hanoi trying another case of the take over the world ploy.And, increasing those fears, we had the war in Korea.Ike had tried hard to keep us out of a “land war in Asia”. But in the early 1960s, during the terms of JFK and LBJ, the “wise men” were all wound up, high up on their hind legs, screaming that the US had to hold the line, stop, block, the Red tide, etc. or else, e.g., Dean Rusk, dominoes would fall from SE Asia to Taiwan, South Korea, the Philippines, Laos, Cambodia, Thailand, Indonesia, Australia, …, all across the Pacific and land on the beaches of San Diego.Well, apparently the “wise men” thought that they were at a fork in the road: (A) Say nothing, let the dominoes fall, get blamed, and lose their careers or (B) speak out and spend blood and treasure that was not theirs to try to look correct.So, Dean Rusk, Walt Rostow, Robert McNamara, all the “wise men”, took option (B). LBJ didn’t want to be blamed for “losing Viet Nam” and wanted a “coonskin cap” from the hunt.So, the US was caught in Bear Trap #1.Bear Trap #2.So, what went wrong?(1) That Ho Chi Minh, former dishwasher in Paris, was a Communist mattered nearly not at all to the leadership/people of Viet Nam who regarded him as a nationalist, patriot, leader who had helped drive out the Japanese and later the French.(2) Viet Nam and China have not been two cute bear cubs snuggling in a cave but more like two scorpions in a bottle — they fear each other and easily hate each other. That they would join in a take over the world ploy was not credible; in particular, neither Viet Nam nor China wanted the other to get stronger or start to take over land.(3) Sure, Ho got some free dinners from Moscow and Peking, but that was a long way from a new axis and take over the world ploy.(4) The US supported some leaders in Saigon. These leaders were dumb, unconcerned, incompetent, corrupt, lacked respect of the people, little faults like those, and ran administrations commonly hated in the villages in the countryside. That hatred helped the start of the Viet Cong resistance in South Viet Nam.Net, the US just did not know how to select, foster, support a popular, effective government in Saigon and South Viet Nam. Apparently the US did fine in West Germany and South Korea but just flopped badly in South Viet Nam.In addition, the US failed to see that Ho had no intention of being a Dean Rusk domino. The axis of Moscow, Peking, and Hanoi was just a bad dream from some bad oysters at dinner or some such and not real at all.That Ho called himself a Communist was next to irrelevant to any and all US interests.Bear Trap #3.So, there was a war between North and South Viet Nam. The North got supplies from Moscow, and the South got supplies, training, and soldiers from the US. The people the US backed in Saigon were losers, and they and the US lost.Now we do see: Viet Nam is no problem for the US. Tough to believe that it ever was or would have been. We couldn’t have lost much worse than we did, and the negative consequences for the US have been ZERO.So, we guess that had the US in 1945, 1954, 1960, etc. approached Ho with goodwill and gifts of even 1% of the treasure the US spent fighting Ho, we no doubt would have had a BFF.Okay, save the 1%. Instead, here was a MUCH better strategy than what we did — for the US in Viet Nam, do nothing, NOTHING at all, do zip, zilch, and zero, nichts, nil, nada, just f’get about it. Then definitely save the blood and treasure of the US and, we should count, the treasure and much greater blood of the Vietnamese.Bear Trap #4.More generally, especially in foreign policy, the US with their Fords, Chevys, and Plymouths, TV and family TV dinners, was absurdly gullible and easily exploited by the Dean Rusk, LBJ, etc. simplistic, mostly wrong, screams about boogie men. Can throw away a country sending blood and treasure on “absurd foreign adventures”.In Gulf War I, Bush 41 and Schwarzkopf showed how to win a war quickly for remarkably little US blood lost — good.W got us into absurd foreign adventures in Iraq and Akrapistan.Obama backed out of Iraq in a way that led to ISIS.A Trump (disclosure: I’m highly impressed with Trump) campaign promise was to “bomb the shit out of ISIS”. Well, Secretary Mattis did something likely even more effective, very quickly, for remarkably little US blood and treasure. Good.Lesson #1. Avoid silly bear traps.Lesson #2. Wise up, don’t be gullible or foolish.That’s the way I see it.

          3. JLM

            .The French did not defend French Indochina when the Japs showed up. The French, who had other fish to fry, took all their officers and NCOs back to France to fight the Germans thereby abandoning the Vietnamese.For this reason, French educated lawyer Ho Chi Minh believed that when he pushed the Japs out, VN was an independent nation – as they were an abandoned former French colony.His logic was simple: France abandoned us to the Japs. We beat the Japs without French aid. When we drove the Japs out, we reverted to that independent, abandoned former colony of France.The fly in the soup was the Yalta agreement that every Allied nation was entitled to the return of pre-war colonies with no mention of abandoned colonies.HCM’s logic looks sound.JLMwww.themusingsofthebigredca…

          4. sigmaalgebra

            Yes, I’ve heard that Ho was also a lawyer. So, he was not just a lawyer but also a dishwasher in a Paris restaurant! Sooooo, when the semi-tough, quasi-fierce, pseudo-effective French cut and ran back to Mother France and quickly lost to the Manstein Plan, no doubt the quality of food in some Hanoi restaurants declined! :-)Yes, I believed that the “knife in the back” of Viet Nam was thrust at Yalta but didn’t want to check!There are also the claims that during WWII somehow some US fliers were downed in Viet Nam, and Ho’s forces rescued them and returned them to the US.I’m guessing that somehow some of the Hanoi crowd tried to tweak the US, to stimulate Dean Rusk and his domino fears, etc. So, I’ve always wondered how the heck either side could have been so stupid for so long with so much wasted blood and treasure and wondered much more how both sides could have been.All along it should have been like now — Brother printers, better than my old HP, and Trump’s visit to Hanoi with pretty dancing young women, warm hand shakes, nice speeches, etc.On Viet Nam, I had been reading articles and books and watching TV video clips. So, I concluded that we should stay out of Viet Nam and let the incompetent Saigon government fall, assume that Ho would have won the planned elections, and f’get about the place.But later I joked, as events moved along I became for the war — we should help Hanoi throw out the bums in Saigon. Finally I became against the war again: Hanoi was perfectly capable of throwing the bums out, and our efforts had been so bad that we would have hurt the situation.I’m no Viet Nam or Ho fan boy and fully love and am fully loyal to my USA, but I’m against any waste, especially by the USA, of blood and treasure — and in Viet Nam, and as collateral damage via Pol Pot in Cambodia, the waste of blood and treasure was so awful I refuse anymore even to estimate it.A Lesson: Maybe we should borrow a phrase: With great power comes (should come, better come) great responsibility to use that power wisely. The two options (i) never fight and (ii) never pass up an excuse to fight are both not wise.

        2. LE

          re-tooling, and changing – for what?That is my opinion. And you have a bunch of actors and participants who make money (like in tobacco) feeding off different parts of this as well. Look at just re closing and title insurance and how that is charged for. Or different county offices where people work and things are recorded. The retool issue btw is why we still have spam.The entire notion of eliminating trustworthy intermediaries feels like outlawing flush plumbing to me.Will also mention that intermediaries who create friction (and charge for that) are also a part of security. In many cases that friction means the wrong thing is less likely to happen. I know that’s hard to believe for most people.I mean you go to buy a piece of real estate say a house and the house is $400k and the old school paperwork adds $400 to the transaction. Not a big deal. That is why title companies can ding you on the settlement sheet. (Even in states that regulate the title insurance). Because the amount of the ding (or friction) is trivial to the transaction. We are not talking buying a USB charger from Amazon.Lastly paper records also provide an important audit as well as security and systems audit trail. I still keep both paper and electronic records of all of my business transactions.I have always won disagreements by having the most complete records while the other side can’t produce anything. I am really good at that type of thing actually.

          1. JLM

            .This issue is WHO pays?If it is on the seller’s statement (also paying the sales commissions), the buyer doesn’t care.The buyer is the source of the money and if the source of the money doesn’t care, nothing changes.JLMwww.themusingsofthebigredca…

        3. JamesHRH

          All time post.

        4. sigmaalgebra

          For yourThe things that really get us into trouble are the things we WANT to believe.the movie The Big Short starts withIt ain’t what you don’t know that gets you into trouble.It’s what you know for sure that just ain’t so.Mark Twain

        5. cavepainting

          I just finished watching the Ken Burns documentary on Vietnam and was truly horrified.This is what ails governments, companies, and movements. It is indeed a theme that repeats again and again across generations.There is this big idea that you have to absolutely be on board for because it will change the world, stop communism, or deliver the next big market for your firm.Over time, people – especially in leadership positions – have so wrapped their egos and identities around this new thing that they really cannot step outside of it to see opposing viewpoints.Anyone not in agreement is a luddite, not a patriot, not a team player, or worse.And by the time,, people realize the naked truth without spin, the reality without tint colored glasses, tens of thousands of lives have been lost, the company has gone bankrupt, or an entire emerging sector has been shown up as a fraud.”Strong convictions loosely held”, Saying “I don’t know”, maintaining healthy skepticism, and looking to understand and even embrace the other side’s perspectives are some of the most important principles in life and business.We are all more wrong than we care to admit. When dealing with incerto, let us be humble and doubly skeptical of conventional wisdom or whatever is passing off as the majority opinion.

          1. JLM

            .Ken Burns leans in a direction which is his right.The real problem is this — sometimes we just get it wrong and sometimes we don’t work hard enough to get it right. Not getting it right is often a product of inferior intel. The intel as to Vietnamese and Chinese intentions in VN was horribly wrong.We Americans have a penchant for action, not surprising given the history of our country, but sometimes the right thing is to do nothng, don’t intervene, let the locals sort it out and marinate in their own juices.Afghanistan – the Graveyard of Empires – is a perfect example. Perhaps, we should have punished and destroyed the terror training camps and never, otherwise, intervened.The above is basically what we have done with ISIS – provided massive fire support and let the locals run the ground battle. The results speak for themselves.JLMwww.themusingsofthebigredca…

      2. Mac

        “assumption of legitimacy”. Nicely put. A hint to the wise.

    2. Sebastian Wain

      I agree with your sentiment and a lot of money poured into this space is disappearing in the vacuum. That said, in non developed countries there are market inefficiencies that are almost never solved and the decentralization (blockchain ⊂ decentralization) is a real solution. For example, if you live in a country with high interest rates you can receive loans with lower interests via “some blockchain”, this is a killer use case that immediately lower the barriers to enter the finance world.I can add many other examples that are invisible for people living in well developed “financial” countries.

    3. PhilipSugar

      I’d use a different analogy. I’d say it was going out telling kids to bring me bags of dog shit or strawberries I’ll pay you the same finders fee.Put them all in a hefty sack. Then I pick out bags and say hey at the bottom tranche there might be some dog shit. But the strawberry season ended and now the kids brought me mainly dog shit. I’d insure it but I don’t own nearly enough strawberries.

      1. JLM

        .This is my first “dog shit and strawberries” analogy.JLMwww.themusingsofthebigredca…

        1. PhilipSugar

          Hey when you see a single teacher mom get a mortgage for a $300k house that’s basis three years before was $130k for 110% of loan value so she can pay off some credit card debt with a Volvo lease and stated income is $50k. Interest rate ratchets after first year to 9.9%. You tell me what that is…no chance of making that paymentYou tell me what that smells like. Common saying here you think your shit smells like strawberries. See south park. Give you a hint. Not strawberries

          1. JLM

            ./The lack of credit underwriting on the buy side of real estate was the gasoline on the fire which burned the house down.JLMwww.themusingsofthebigredca…

          2. PhilipSugar

            I’d say it was so many things normally as in flying they say an unbroken chain of three mistakes kills you, but there were so many:Freddy and FannieAlan Greenspan and the Fed low enough rates people did anythingiBankers that were not holding just flipping for the feeEveryone realized I can make money if it wins and not lose if it doesPress hyping it’s a sure thingSelling and shorting at the same company after making the feeAnd yes mortgage brokers who got paid to originate

    4. cavepainting

      Carloto Perez is a great model for illustration only for those projects that survive the installation phase and make it into deployment.There are a lot of projects that do not make the cut. They die gradually, then suddenly.Will blockchain survive the transition or not is yet to be seen.

  14. Amar

    A good reminder on how to manage expectations – agreed. I would like to drill into one aspect if possible:Like any early market, most of these projects and companies will fail. Some will fail to ship. Some will ship things that don’t work. Some will ship things that work but aren’t adopted. And some will ship things that are adopted but are surpassed by something better. The failure rate of these thousands of projects will be very high.But inside this cohort of companies and projects will be the next Google, Amazon, Facebook, Twitter, Dropbox, Uber, and Airbnb.Historically or at least where the internet was concerned, the bulk of the web 1.0 and web 2.0 failures and associated losses were borne by the early investors/founders. Lay public was exposed to the risk but mostly through post-IPO companies: webvan, pets.com, etc. The failures of the likes of say Color or Theranos was mostly borne by the VC/LP/investor circles.What is different this time around is the exposure lay public has to the billions of dollars worth of ICO investments that are going to vanish. Of course, we all understand how “Buyer Beware” and “Caveat Emptor” works but it still “feels” wrong. The folks who have the capital to wait out the initial waves of failures will wait it out, so they can claim the lions share of the victory. This is the essence of capitalism and risk-reward scenario.While not perfect the bar to IPO was a >>>>>> the bar to ICO. I am still amazed that collectively this difference is being ignored because it is a NIMBY problem. Unless I am mistaken, the initial waves of failure will decimate a lot of unsophisticated investors. The net result being the technology that espouses decentralization and egalitarianism will in essence end up concentrating wealth amongst those who were wealthy enough to wait out the failures.Curious to hear other thoughts – /cc @girishmehta:disqus @philipsugar:disqus @le_on_avc:disqus @SixgillBlog:disqus @JLM:disqus

    1. PhilipSugar

      There are so many similarities and differences and so many nuances:Internet IPO’s, and CDO’s. Idiot investors getting separated from moneyInternet: Very valuable technologyCDO and (RTC I’ll show my age), lots of money put into real estate which came back, differentSame for Gold Rush frankly, Miners did not make money. Four rich white guys in CA.Real Estate lets you transfer wealth depending on howWhy we have cash….lets you buy things you want nobody to know you did.ICO’s let you literally print and move money. No different than central bank, but different because the money is in your head.The underlying asset can go to zero. I am not saying it will. But look at currencies in pre-War Germany if the U.S. and China got together said we monitor Bitcoin and anybody holding it goes to jail for a minimum of ten years……..Look at what the U.S. did to Gold during the Depression. But again you can hold it, but in this case digital.But this is no different than why people own guns and ammo…….very similar and very ironic? Yes?

      1. LE

        if the U.S. and China got together said we monitor Bitcoin and anybody holding it goes to jail for a minimum of ten yearsChina? Sure.US no way.Why?The big money and white shoe lawyers are in it now and they will protect their turf using any and all means necessary. Look how long it took to take down tobacco. Decades. Why? All the people involved and money. Had to be a slow erosion over time. TV ads I think were first.That is how this works. You establish a beachhead and then use money to fight, lobby and protect what you have.

        1. JLM

          .I agree with you but I think you’re on the wrong side of the street.The legacy world is way more deep pocketed and they can buy their way into the game.JLMwww.themusingsofthebigredca…

          1. LE

            But the legacy world has more people to answer to and has more to lose (if I am understanding your point). So it’s not just money.What you seem to be saying is that if, say, Goldman wants in, they will flatten everyone (or pick someone legacy company). My point is that type of organization may have more money but will not gamble the way a whipper snapper will.Look at Elon Musk and betting the ranch on all electric. He can do that because he doesn’t have a ranch left to lose. A much larger and richer legacy car maker can’t operate the same (foolish) way. (However they are stupidly trying to keep up with him..)

          2. JLM

            .You make my point.Elon Musk and Tesla (might add gov’t subsidies as a market builder) built a market, now the big boys are going to take it over.Musk is struggling to actually build the cars. The legacy car companies can build 2-3MM cars a year, building cars is not the problem.In less than a year, you will have BMW, Audi, Jaguar, Lexus (2020), Nissan, Infiniti, Mercedes, Volvo, VW, and domestic electrics with an established dealership network and maintenance.The Lexus purchase and ownership experience is extraordinary.Musk was a pioneer, but he is going to get an arrow in the back.Same thing will happen to the crypto pioneers. They may make a trip to the paywindow if they are lucky, but the big boys will prevail in the end.JLMwww.themusingsofthebigredca…

          3. Mark Essel

            I think there’s a case to be made for an American automobile brand like Tesla.If his company can leap the manufacturing hurdles, and navigate the cost inefficiencies it can win. It’s a gamble.

          4. PhilipSugar

            What is the case?

          5. Mark Essel

            That consumers will pay for a Tesla 😉

          6. PhilipSugar

            We agree with his market cap I don’t know why he didn’t buy a company and then apply technology. Probably because that’s not hip and cool. Ford said it is dropping sedans…..why not buy that division?Geely did with Volvo. Where are all those batteries made?? Right there in China along with Volvo’s where they took the knowledge the Swedes had and then applied Chinese labor and frankly manufacturing know how.

          7. LE

            Other examples might be Apple with the GUI but Microsoft won the market. Also with browsers Microsoft killed Netscape ‘cut off their air supply’ by giving away a free browser.So your point is that once Musk shows the market for electric cars (has not been done yet) and/or makes the market (may never happen) then the big guys will come in and eat the lunch.Counterpoint to that? Amazon. Certainly proved the market but because they were able to sustain losses for so many years (Bezos sleigh of hand) they could get big enough that they can’t be touched.Also why has no ‘big guy’ taken over Facebook, Google, Uber, Airbnb and so on? Or Dropbox. They got big enough.And what about in commercial real estate WeWork? Why are they valued so much higher than companies doing similar who could easily duplicate the concept. How hard is it to duplicate WeWork when you can see exactly how they do what they do?That said you are also right obviously. I think this is definitely going to happen with marijuana. The early guys (with those homespun shops and containers) will get killed by the big money.

          8. JLM

            .I think the big difference between Tesla/Musk and Amazon is that Tesla is in a big industry which has robust and fierce competition. His was a new wrinkle, but he is struggling with what are the demonstrable core competencies of the industry competitors.He will not attract the competition of a single competitor, but the entire industry will try to crush him. By entering the luxury slice of the market, he is also dealing with a bunch who will do it just to discourage such competition.Amazon is an almost agnostic process. It is a platform rather than a manufacturer. They can sell anything. Interestingly enough, the most exciting part of their business is really AWS which they should probably spin out for shareholder value purposes.I think Google has created a service that is unique. They own SEARCH.The rest of those businesses had a first mover advantage and now enjoy a critical mass advantage.WeWork is going to be a huge failure. They are acquiring their space long term and re-selling it short term. It is a recipe for failure. There is a prior art to what they are doing – HQ/Regis.Once marijuana is legal nationwide, as it is in Canada, one of the smaller tier tobacco companies will go after it hammer and tongs. They will destroy the competition reducing it to the craft beer model – which is not a bad model.JLMwww.themusingsofthebigredca…

          9. LE

            Agree on WeWork. For one thing plenty of $$ for that is flowing from VC money which is making it profitable.When young people find solutions it reminds me of when I worked for a very short time in Silicon Valley and found out that the product managers shipped all heavy printers by Fedex overnight (or 2 day) even though it would be vastly cheaper to go by regular truck or other logistics. They just didn’t know about truck shipping only ‘Fedex’. That wasn’t even (as you remember) Fedex’s original idea either.Remember Fred’s post about ‘some businesses don’t need VC money?’. That is because most young people think that is what you do you come up with an idea or app and you raise VC money. They don’t know other than that or have examples.So that is like WeWork. Lot’s of social proof that that is where you start. But all that is funded with the funny money.That said I read that they are now snagging real companies who don’t want to sign traditional long term leases. But honestly you have to wonder if you are a landlord you can do the same. All wework is then is getting paid for marketing and taking on risk. They can do this because they can sustain losses.

          10. JLM

            .Commercial landlords like to get checks and leave all the property issues to their property managers, which sometimes are outsourced. I never did outsource them.Back in the day, I set up our own Regus type office arrangement using 1-2 vacant floors in every building. We netted 2X normal rent, so we liked it.There were some day-to-day headaches which commercial landlords would not have liked, but I had thousands of apartments which are a day-to-day headache every day, so it was no problem.I ended up selling all our office suites as an operating business, subject to a lease, to a HQ franchisee I knew. It worked out great for us and them.Of course, landlords will end up operating these type facilities at the next real estate downturn. WeWork will not be able to pay the rent and the LLs will cancel the leases and inherit the space which they will then operate.Real estate is not a VC type business, but it can generate some fabulous returns with the right amount of leverage. Leverage is the opiate. It propels the dream.Today, real estate people are afraid and incompetent when it comes to operating leverage.JLMwww.themusingsofthebigredca…

          11. sigmaalgebra

            Looks like Eisman is shorting Tesla.So, as athttps://www.bloomberg.com/n…is in part Eisman of `Big Short’ Says He’s Long GM, Short TeslaJuly 27th, 2018, 7:48 AM EDTSteven Eisman, managing director at Neuberger Berman, discusses General Motors Co.’s potential for a “big home run” and his reasons for shorting Tesla Inc. because of the automaker’s negative cashflow. He speaks on “Bloomberg Surveillance.” (Source: Bloomberg) That is, there was the Michael Lewis book The Big Short and movie of the same name.The movie had a character Mark Baum supposedly in real life Eisman.Right away can get a lot on Eisman just from Google searchEisman short Tesla

        2. PhilipSugar

          Theoretically. Same as saying you are going to get back guns. But it is those things that can cause wild swings down which can cause wild swings up.

      2. Amar

        I see the similarities but I still think ICO’s:: public ~~ slaughter::sheep and not enough is being done to prevent it or protect them

        1. PhilipSugar

          I do not disagree with the slaughter. Question is what do you do to prevent it and protect them.I am all for regulation when it comes to preventing things that directly hurt others. Housing, hurt your neighbors, banks needed bailouts, etc.When these ICO’s explode and most will other than pocketbooks what happens.Now the thing I do have a problem with is what happens to those at the top that end up with huge fortunes milked from greedy people? One could say those idiots deserve it, but this causes a huge moral hazard. That money should be clawed back and jail time should be delivered.Because the one Elephant Fred left out is there is a group, that has no intention of shipping.If you and I raise a ton of money and we work super hard pay reasonable salaries and we hire engineers and pay all sorts of non-related (to us) service providers and Chase comes in and squashes us C’est la vie to our investors.But if we raise that ton of money and we basically figure out how to stash it, buy cars, planes, boats, houses, etc. I have a huge problem.

          1. Amar

            Agree and well stated. You nailed the problem statement. It is the moral hazard issue. Punting it to the government feels like the easy way out. We need more SITG (skin in the game) for the winners and today it is mostly upside with limited or no downside.

          2. PhilipSugar

            Here is the thing. I do not like the bankruptcy law change where people can’t get out of student or credit card debt. Ask Joe Biden why he pushed that through after he traded for that house from a top guy at credit card bank MBNA and why SallieMac HQ is in DE.I don’t like SOX killed the small IPO market.But I do like if you have huge restatements or you were making more than lets say some really big number like $500k/year , you get all of that money clawed back. Just simple law for investors to get money back. Do dirty related party deals where you make money, jail and all money back if not disclosed at time of deal.Because I don’t mind if you pay some stupid rate to a landlord for a killer office, overpay employees, recruiters, etc. But if you pay that landlord and he gives you a house, then I have a problem.That is the big change since the 70’s, used to be partnerships. Now it is heads I win tails you lose. I have no problem as long as we have some rules.

          3. JLM

            .As long as we “enforce” the rules.Joe Biden, Sen-MBNAJLMwww.themusingsofthebigredca…

  15. JLM

    .Where on the S-curve were derivatives when they went to Hell?Not everything makes it through the entire curve. Some of it fails.JLMwww.themusingsofthebigredca…

  16. West along the Oregon Trail

    Fred seems like a man who enjoyed leading a group of pioneers in covered wagons along the Oregon Trail who became frustrated once the trail ran out, not far from the Pacific Ocean, because he had no further to lead them. Therefore Fred went back East to lead many subsequent groups of pioneers in covered wagons out West along the Oregon Trail but after a few decades was made obsolete by the first transcontinental railroad. That is likely partially fueling Fred’s current “Crypto Delusion” or as Alan Greenspan might say “Irrational Exuberance.”

    1. PhilipSugar

      You know your names and sometimes posts are quite funny why don’t you identify yourself. I mean that in a good way.

      1. I prefer online anonymity

        Thanks but I prefer to post anonymously on this blog. Actually, I am careful not to post anything publicly on the internet in my name. In part I value my privacy and in part I don’t want some pagan to decide to come after me based on something I posted. Haven’t you noticed some of the veiled threats hurled at me in response to my postings on this blog?Besides, as a Jew the question we always ask ourselves not, “Will we be persecuted?” but “When will we be persecuted?” The Romans were remarkably cruel to us yet even today we are regularly blamed for killing a Jewish man who they crucified.https://en.wikipedia.org/wi

  17. Joseph K Antony

    Reminds of a time when only three people apart from Einstein were believed to have understood the Theory of Relativity. Now the theoretical confirmations are coming in at a faster pace. In the case of Digital Ledger Technology, the confirmatory evidence regarding its relevance is coming in hard and fast.Take traceability. What happens when you can confirm the provenance of a product or produce in two minutes right down, say for a bar of chocolate, to the farmer, his field and time and all other details?It has been tested by Walmart and is actively implemented by Olam International and for so many products and produce, from fish to spare parts on oil rigs. One can imagine alternate technologies like embedded molecular level sensors obviating the need for DLT style authentication. But DLTs applicability is far broader.

    1. Sudha Lakshmi

      What exactly is the confirmatory evidence you’re seeing with respect to DLT?

      1. Joseph K Antony

        Confirmation DLT is a foundational technology, not a transitional one into something superior, typically being absorbed not completely replaced by another technology. Horse carriages could ride on the same roads as used by motor cars but floppy drives as a storage medium have been completely replaced. We still find an occasional horse buggy being used but does anyone use a floppy drive?In the same vein, one can find technological substitutes for blockchain based traceability. In that sense DLT as a technology could have a very short life. Only time will tell.

        1. Sudha Lakshmi

          Thanks. I’m still not sure what *evidence* you find to *confirm* DLT. We may just be using language very differently. I normally think of evidence being used to confirm theories — e.g., certain phenomena in the Galapagos confirmed Darwin’s theory of natural selection. Obviously, DLT is not a theory, but a broad range of technologies. And it’s just not clear to me what evidence might be used to confirm — or indeed refute — those.

          1. Joseph K Antony

            Put another way, the question I am asking is whether DLT in its current avatar can survive the Lindy effect. If Bitcoin’s Blockchain is the current poster boy of this technology, we have reason s to suspect its days are numbered, with DAG type of emergent technologies which are far superior on any measurable technological parameter.On the first mover and scarcity advantage which an incumbent like Bitcoin enjoys – it gets eroded by technology. Take diamonds as an example.Gold as a store of value and investment of last resort is clearly inferior to Bitcoin. And as stable coins mature, bitcoin’s dominance will fade away as the risk inherent in altcoins gets hedged and diversified away.

  18. Orbi Network

    I’ve always loved your articles, but this one is particularly refreshing because of your positive attitude, far from the usual bashing: “And many of these teams, projects, companies are shipping things now (…) The failure rate of these thousands of projects will be very high. But inside this cohort of companies and projects will be the next Google, Amazon, Facebook, Twitter, Dropbox, Uber, and Airbnb.”In our case, we are definitely building what Scott Walker from DNA calls a “lighthouse (i.e. some type of a massive, unfair advantage).” and this is what makes us so enthusiastic.So stay tuned and thanks for believing :)José at Orbi Network

  19. Ruhinda Ruganda

    I always enjoy reading the thread on this blog. It contains volumes of great insight and perspective. Thanks to all of you that make these issues consumable.

  20. John

    “inside this cohort of companies and projects will be the next Google, Amazon, Facebook, Twitter, Dropbox, Uber, and Airbnb.”All of these companies are US started companies. Do you think this will be the case for these new crypto replacements?