Posts from Web3

Investing in founder-led businesses is comforting to me. They have the ability to see the forest through the trees and do what is necessary to evolve the business.

Two great examples of this are Microsoft in the mid 90s and Facebook a decade ago.

Microsoft had spent more than a decade competing and winning the desktop software market and then Netscape came along and presented an entirely new market opportunity that had both major upside and major downside for Microsoft. Microsoft reacted by moving aggressively to compete with Netscape by launching Internet Explorer and using its desktop software dominance to establish IE as the dominant browser by the end of the decade.

Facebook had spent about a decade competing and winning the social networking market and then Apple launched the iPhone and new mobile social networks like Instagram emerged that both threatened Facebook’s existing dominance and also presented new large opportunities in social networking. Facebook went on a year-long effort to become a “mobile-first” company and also acquired Instagram that year. This all happened in Facebook’s first year as a public company.

I was thinking about that because as many are wringing their hands about the collapse of crypto prices and stock prices and cutting back costs and playing defense, Coinbase announced yesterday that they are investing heavily in the next wave of web3:

The application era of crypto is upon us and products/companies like Metamask and OpenSea are showing how important and lucrative that market is. Coinbase has reacted by making huge new bets on Coinbase Wallet and Coinbase NFT and is committed to winning in those markets like it did in the investment era of web3.

It is very hard to do this sort of thing when your stock price is under pressure and when the markets are in free fall. And yet that is what leaders must do when new use cases emerge and present themselves as both an opportunity and a threat.

Disclosure: I am a Director of and our family is a large shareholder of Coinbase.

It is Earth Day, a day to celebrate our planet and rededicate ourselves to saving it. I plan to walk and ride my bike, avoid cars, and enjoy being out and about in NYC today.

But I’d also like to talk about something that is bothering me.

The New York State Assembly and Senate are working to pass a bill that would put a two-year moratorium on “proof of work” cryptocurrency mining. Here is the most important part of the bill:

1. For the period commencing on the effective date of this section and
    25  ending two years after such date,  the  department,  after  consultation
    26  with  the department of public service, shall not approve a new applica-
    27  tion for or issue a new permit pursuant  to  this  article,  or  article
    28  seventy  of  this  chapter,  for  an  electric  generating facility that
    29  utilizes a carbon-based fuel and that provides, in  whole  or  in  part,
    30  behind-the-meter  electric energy consumed or utilized by cryptocurrency
    31  mining operations that use proof-of-work authentication methods to vali-
    32  date blockchain transactions.
    33    2. For the period commencing on the effective date of  this    section
    34  and  ending  two years after such date, the department shall not approve
    35  an application to renew an existing permit or  issue  a  renewal  permit
    36  pursuant  to  this  article  for  an  electric  generating facility that
    37  utilizes a carbon-based fuel and that provides, in  whole  or  in  part,
    38  behind-the-meter electric energy consumed or utilized by a cryptocurren-
    39  cy  mining  operation  that uses proof-of-work authentication methods to
    40  validate blockchain transactions if the  renewal  application  seeks  to
    41  increase  or  will allow or result in an increase in the amount of elec-
    42  tric energy consumed or utilized by a  cryptocurrency  mining  operation
    43  that  uses  proof-of-work  authentication methods to validate blockchain
    44  transactions.

I believe this bill resulted from an application to fire up an old coal-powered electric plan to power a Bitcoin mining facility and I will be the first to admit that is a horrible idea. We should not be firing up old fossil fuel plants for any sort of economic activity. It is time to retire fossil fuel-powered plants and replace them with nuclear, hydro, wind, solar, and other clean energy sources.

But the idea of targeting a specific industry for this moratorium and leaving all other economic activity in NYS free to use fossil fuel is just absurd. Is it OK to use fossil fuels to power bowling alleys, movie theaters, car washes, sports stadiums, data centers, banks, homes, cars, etc, etc? Is it just not OK to use fossil fuel to power a network that secures our next-generation technology stack?

And at the same time New York State is doing this, the State of California is preparing an Executive Order that will be extremely friendly to the emerging crypto/web3 industry. New York State is already fighting an uphill battle with the crypto/web3 industry with its god awful BitLicense law and now they want to do this.

New York State should just put signs up on the Holland Tunnel, the Lincoln Tunnel, the George Washington Bridge, the Peace Bridge, and everywhere else people arrive in New York State that says “Web3 Is Not Welcome Here.” And save themselves the time and energy of doing nonsense like this.

We get the message loud and clear.

Mike Masnick wrote a good piece on this topic on his Techdirt blog last week.

I particularly like this part:

First, let’s look at the world without any content moderation. A website that has no content moderation but allows anyone to post will fill up with spam. Even this tiny website gets thousands of spam comments a day. Most of them are (thankfully) caught by the layers upon layers of filtering tools we’ve set up.

Would anyone argue that it is “against the principles of free speech” to filter spam? I would hope not.

But once you’ve admitted that it’s okay to filter spam, you’ve already admitted that content moderation is okay — you’re just haggling over how much and where to draw the lines.

And, really, the spam example is instructive in many ways. People recognize that if a website is overrun with spam, it’s actually detrimental for speech overall, because how can anyone communicate when all of the communication is interrupted or hard to find due to spam?

https://www.techdirt.com/2022/03/30/why-moderating-content-actually-does-more-to-support-the-principles-of-free-speech/

I, like many in tech, would prefer a world where there is little to no moderation and where you get a lively expression of different views. I use Twitter explicitly to hear voices I don’t hear in my day-to-day routines.

But as Mike notes, you must moderate content online in order to create spaces where conversations can be had.

And inevitably, this leads me to the same conclusion that Mike comes to at the end of his post. What we need are way more venues for conversations and way more venues with different moderation policies.

In other words, the concept of free speech should support a diversity of communities — not all speech on every community (or any particular community). And content moderation is what makes that possible.

https://www.techdirt.com/2022/03/30/why-moderating-content-actually-does-more-to-support-the-principles-of-free-speech/

The early days of Twitter are instructive here. The Twitter website was unreliable and the API allowed anyone to build a third-party client. So many Twitter users used a different user interface to access Twitter and use Twitter. Had that architecture endured it could have created many “clients” with different moderation policies. Just like we have many email clients. It did not endure and so we have one company controlling the moderation policy of the entire Twitter conversation. That is not ideal.

Contrast this with Ethereum. We have a single protocol with many self custody wallets. Each self custody wallet has a slightly different user interface that allows users to access the Ethereum network in slightly different ways. But all of the teams working on the Ethereum ecosystem have a shared incentive to improve the network because they all own ETH. So a single protocol with a rich variety of third-party clients becomes sustainable.

If we want free speech then we want less concentration of market power and business models that allow for that. Advertising does not. Token-based business models do.

I went to renew a .ETH domain I own this morning and the gas fees were so high that I decided to come back another time.

Ethereum is the most popular smart contract blockchain by far but it frequently gets congested and expensive. Using it to acquire and renew domains, normally a transaction that costs less than $100 USD, is challenging.

That is why there are a host of Ethereum Virtual Machine (EVM) compatible layer one blockchains (L1s) and a number of layer two networks (L2s) that run on top of the Ethereum mainnet. These networks allow decentralized apps (dapps) that use Ethereum smart contracts to operate much less expensively.

I went into my Coinbase Wallet this morning to see how many of these L1 and L2 networks they currently support and found this list.

There are many more L1s and L2s that have launched, but that is a list of some of the most popular ones. I expect that Coinbase Wallet and Metamask and other self custody wallets will continue to add additional ones over the next few years.

My son went to the Knicks game on Saturday and they were offering Knicks NFTs on the Jumbotron. I told him to buy me one. He did and bought it on the Polygon network to save fees. He sent it to my self custody wallet and when I switch networks to Polygon in the wallet, I can see the NFT.

That’s how these L1s and L2s work in self custody wallets today.

I don’t think that is how they will always work.

I think that a lot of the Web3 “plumbing” that is now visible to users in the wallets and dapps will eventually be hidden by developers so users don’t need to worry about which network their assets are on. They will be able to find them, use them, transfer them, sell them, etc without needing to know which chain they are dealing with.

But for now, this is the state of play with the Ethereum ecosystem. You increasingly need to go to a different L1 or L2 to do things cost-effectively. And when you do, there is added complexity for the user. This is both progress in the sense that third-party developers are building technology to scale the Ethereum ecosystem and pain in the sense that an already complicated user experience is getting more complicated.

Hiding all of this complexity for the end-user is definitely one of the big opportunities in web3 right now.

There is a lot of criticism of venture capital in web3. Bitcoin did not have or need venture capital. Ethereum did not have or need venture capital. So why would any web3 project need venture capital? It is a good question. In the age of community-funded projects, why would a web3 project want to take funding from venture capitalists?

Well buried deep in a 66 page blog post on the Flow blockchain by Packy McCormick lies the answer.

In a section called Kitty Down, Packy describes the challenges that the Dapper Labs team went through between late 2017, when CryptoKitties launched, and the summer of 2020, when Top Shot launched.

What Packy lays out is a series of notes that the venture capitalists (including yours truly) provided to Dapper during the last crypto winter that kept the project alive. As Packy says:

In Dapper’s case, VCs kept the company alive during the bear market and the company sold tokens to the public at the same price it sold them to VCs, even though VCs invested first. 

That latter bit is quite important. After Top Shot launched and it was clear that Dapper and Flow were gonna make it, Dapper offered Flow tokens to the community at the same price that the venture capitalists got in the conversion of the notes.

There are many alternatives to venture capital these days, particularly in web3, but there are few, if any, alternatives that stick with you, when times are tough, when a global pandemic hits and you have weeks of cash left, when everything seems lost and you are at rock bottom.

But venture capitalists do, particularly good, experienced, and confident venture capitalists.

And that is what Dapper had by its side. And that is why Dapper was able to launch the Flow blockchain, NBA Top Shot, the Dapper Wallet, and a bunch more hit products too.

That’s why you might want to take venture capital for your web3 project.

Last month our portfolio company Kickstarter announced the creation of a protocol organization that will develop a web3 protocol for the crowdfunding of creative projects.

They are now assembling a protocol team and are talking to candidates to lead that effort. The protocol lead role is an exciting one that combines product leadership, smart contract development, team management, and a lot more.

I believe Kickstarter is at the forefront of a wave of companies that have been built on web2 technologies that will be adopting web3 approaches to move their products and stakeholder networks forward. And so leading this protocol effort will be an opportunity to help shape what that looks like.

If you are interested in this role or know someone who would be great for it, please email me and I will make the connection.

As is my custom here at AVC, I like to end the year looking back and start the year looking forward.

This post will be the look back and I started by revisiting my look forward into 2021 that I wrote on New Year’s Day 2021.

In my typical optimist fashion, I was dead wrong about how quickly the pandemic would fizzle out. I predicted that vaccines plus immunity from those who had been infected would end the pandemic by mid-year 2021. That was obviously totally wrong and I am sitting here isolating with my own Covid case (seven days in now). I can’t imagine a more appropriate “punishment” for getting that one wrong.

I got the rest mostly right and when I look back at 2021, what I see is a world that is changing before our very eyes; becoming more digital (leading to metaverse fever in tech), less tethered to a job and place to work (and live because of work), warmer, more prone to natural disasters, and tribalizing along different dimensions than what has divided us in the past.

In truth 2021 was a deeply troubling year and no wonder that mental health issues abound among all of us, but particularly our young. Nothing seems right anymore. We must face that and then fix it.

Of course, 2021 was a great year for the financial markets, both stocks and blockchain assets. Even with a big year-end selloff, which I believe was mostly tax-driven (we will see soon if I am right about that), investors who owned tech stocks and blockchain assets saw huge gains in 2021. USV was no different. We had a banner year.

But that also means that it is on us who have benefitted the most to work harder and invest to address some of these troubling issues. We are doing that with our first climate fund, which we have been investing aggressively and we hope to have a second one to invest before the end of 2022. We are seeking to both invest in technologies/companies that can mitigate the climate crisis and that can help us adapt to the changes that are permanent and we must accept that many will be.

I want to return to the pandemic before I wrap this year-end post. Sitting here with a mild case but isolating so I don’t pass it on brings home for me that our society has really struggled to find the right balance between what is right for the individual and what is right for society during this pandemic. We can’t agree on anything. Vaccines, masks, lockdowns, schools, offices, etc. Those who have a high tolerance for risk believe that we have gone way overboard in trying to manage this pandemic when we never could. Those who believe in government, public health, etc, believe that those with a high tolerance for risk are putting all of us at risk. And I think the truth lies somewhere in between. This pandemic is a metaphor for the broader inability of society to find a way to move forward together.

Beyond climate or covid, it is this plague of dissension, doubt, fear, disrust, hate, and worse that is our biggest challenge and one that is very much raging across our world right now. That’s what 2021 brought home for me.

Over the last month, there has been a ton of debate and conversation about web2 vs web3 with many leading voices raising doubts about web3. Debate and doubt are healthy. And web3 enthusiasts, particularly on Twitter, remind me of missionaries trying to recruit the unwashed to their belief system. Frankly, it is all too much for me.

However, the debate is important, the pushback is healthy, and ultimately web3 will have to deliver on its promise which means teams building things that provide new unique value to society. If that doesn’t happen, then web3 will turn out to be the snake oil that some are suggesting it is. I am confident that won’t happen, but it is important to understand that the proof is in the pudding and talk is cheap.

With that backdrop, I want to point everyone to a post my partner Albert wrote yesterday that explains why we at USV believe that web3 will allow teams to build new things that provide unique value to society.

It all comes down to the database that sits behind an application. If that database is controlled by a single entity (think company, think big tech), then enormous market power accrues to the owner/administrator of that database.

If, on the other hand, the database is an open public database that is not controlled and administered by a single company, but instead is a truly open system available to all, then that kind of market power cannot be built up around a data asset. As Albert says in his post:

It is difficult to overstate how big an innovation this is. We went from not being able to do something at all to having a first working version. Again to be clear, I am not saying this will solve all problems. Of course it won’t. And it will even create new problems of its own. Still, permissionless data was a crucial missing piece – its absence resulted in a vast power concentration. As such Web3 can, if properly developed and with the right kind of regulation, provide a meaningful shift in power back to individuals and communities.

You can already see this effect at work in the most developed areas of web3, like decentralized finance (aka DeFi) where literally hundreds of financial applications have been built on top of Ethereum that all share the same database and users can move from application to application, keeping their data (and their login credentials stored in their wallet) as they go.

But until teams build the same experiences for a wide swath of consumer and business applications, we will continue to have this debate. As we should. The good news is there are literally tens of thousands of teams building new things on a web3 stack now. Some of the best entrepreneurs and developers have moved over. The tooling is getting better. It reminds me of the early days of web2 in 2001/2002/2003, when we started USV. That was also a time of great cynicism. We almost did not get our first fund raised. Nobody was buying the story we were telling. But of course, that story turned out to be true. And I am confident this one will too.

We own a fair number of NFTs that I have collected since 2017 when I was buying Rare Pepes and CryptoKitties. We have accumulated a nice collection of Top Shots and a bunch of other NFTs as well.

But I don’t want to sell our NFTs. We also don’t like to sell the art we have collected over the years. We also don’t like to sell the crypto assets we hold.

But I am very interested in swapping NFTs for other ones.

Here’s how I would imagine an NFT swapping service would work.

1/ I visit the swapping service and connect with a wallet.

2/ I list the NFTs that I own that I am willing to swap.

3/ I browse the service to see the NFTs that others have listed to swap.

4/ I find an NFT I would like to swap and I make a swap offer to the owner.

5/ The owner accepts, declines, or proposes a different swap.

6/ If a swap is accepted, it is processed on-chain.

I could imagine that swaps would not need to be one NFT for another NFT, although you might start there. Over time, you could end up with multiple NFTs for a single NFT, or possibly one NFT for another plus some crypto to sweeten the deal.

I have been asking around to find a service like this and have not found one yet. If you know of such a service, pls let me know via email or Twitter. If there isn’t one, maybe someone should build it.