Thank you Erik Torenberg, Village Global, and the Commonwealth Club for organizing this event. It is a truly fascinating conversation. This was a live episode of the Venture Stories podcast by Village Global titled The Present and Future of Crypto, hosted by INFORUM – An Innovation Lab at The Commonwealth Club and they released the conversation on their Youtube channel titled Blockchain Today and Tomorrow.

Venture Stories podcast: https://www.villageglobal.vc/podcast/

Commonwealth Club (@cwclub): https://www.commonwealthclub.org/

Youtube video: https://youtu.be/bUuad7V-qhs

Podcast episode: https://player.fm/series/venture-stories/live-episode-the-present-and-future-of-crypto-with-naval-ravikant-and-balaji-srinivasan

Naval Ravikant (@naval), CEO and co-founder of AngelList.

Balaji Srinivasan (@balajis), Angel investor. Cofounder of Earn, Counsyl, Teleport, Coin Center. Previously CTO of Coinbase, GP a16z.

Erik Torenberg (@eriktorenberg), Co-founder @Villageglobal & @tokendaily & @beondeck.

Word count: 14,156

Reading time: 71 minutes (approx.)

Enjoy!

Erik: Hey everybody, it’s Erik Torenberg. Co-founder, partner, of Village Global; a network-driven venture firm, and this is Venture Stories – a podcast covering topics relating to tech and business with world leading experts.

Marisa Levine: Please join me in welcoming Naval Ravikant, Balaji Srinivasan, and Erik Torenberg to INFORUM.

[applause]

Erik: Welcome everybody to tonight’s program at INFORUM at the Commonwealth Club; Blockchain Today and Tomorrow. I’m Erik Torenberg, partner and co-founder of Village Global, Token Daily, and it is my pleasure to be speaking to some of the biggest names in Blockchain. Naval Ravikant, co-founder, Chairman of AngelList, and Balaji Srinivasan, C.T.O. of Coinbase. Naval, Balaji, for the beginners out there how do you explain what is Cryptocurrency, what is Blockchain, why should people care, what’s fundamental about this, in 3 minutes.

Naval: I think human beings are a network species, we operate in groups, we always work in groups, we’re like ants or bees in the sense that we have to cooperate to do anything interesting, and that’s kind of how we conquered the world. But we are a unique species in that we cooperate across genetic boundaries. Everyone in this group is pretty much unrelated to each other yet we’re brought here by common cause and interest, and we’re the only species that can do that.

And so we build these networks and these networks in history have to be governed because networks have rules, they have cheaters, they have people contributing resources, and you just have to figure out how to organize them. And historically the way we’ve organized these networks is we create a country and put a king or a president or a ruler in charge, or we have an elite or an aristocracy in charge, or we’ll have a priest in charge, or we’ll put a corporation in charge, or we’ll have a democracy where it’s one person one vote, so these are kind of the ways that we have organized networks throughout human history. And invariably whoever is at the center of the network just ends up very powerful. Kings become tyrants, elites become aristocracies, corporations become monopolies, democracies turn into mob rule sometimes, so you have to worry about who’s in charge of these networks that run our lives, and these networks are very important. Electricity is a network, the phone system is a network, the United States is a network, money is a network, your favorite religion is a network.

So it’s very important who runs these networks, and the last few hundred years we’ve created a new way to organize these networks and those are marketplaces. And whether it’s credit markets, debt markets, stock markets, currency markets, markets are a way to organize a network with no single ruler in between. You have a market mechanism doing the pricing and the allocation. And what Blockchains are is a way to bring this network, this market-based networks, into all digital systems or into many kinds of digital systems.

Bitcoin is the most famous one, but there we say “hey money is too important to be controlled by any one central entity, so what we’re going to do instead is we’re going to organize it through a Blockchain-based network, and we’re going to use mathematics and rules to make sure that even though nobody’s in charge nobody can cheat, no one can spend the same money twice, no one can steal the money that already exists. Or, Ethereum is a network for running trustless smart contracts, financial contracts, and, or, distributed applications, and we’re going to make sure nobody can cheat even though there’s nobody in charge of this network and we’re going to use a market-based mechanism do it.

But unlike a stock market or a market for tomatoes, we’re not paying with cash we’re paying with resources. So anybody can enter this network, they can contribute the scarce resource, in Bitcoin that might be hash power to secure the network, in Filecoin that might be computing and storage to provide more storage resources for people who want to use a network like a new Amazon Web Services. You could have a self organizing network on a blockchain that controls electricity, like today we have PG&E (Pacific Gas and Electric) here controls who gets electricity, but you could create a solar network where everybody puts a solar panel on their house and they pay into the network with solar power, they get paid back out with solar coin, and nobody is actually in charge and you still make sure nobody cheats. You could do the same with a network that’s allocating bandwidth, so we don’t need Verizon to do our cell phones we could all do it collectively. You could even do a social network that’s run this way so you don’t have a single king like Mark Zuckerberg or Jack Dorsey being dragged in front of Congress for hearings as to how they’re running the network today.

So really what’s happening is the Internet is moving from this idea that – you know, the Internet was originally supposed to be a democratizing force, it was supposed to be “oh everything’s going to be equal and even, we’re all going to have websites, and nobody’s going to be in charge”. But now meet your new overlords: Google, Facebook, Twitter, Amazon; these are the people really in charge. So what blockchains do is they give us a system for taking networks that normally would have been run by individuals or kings or corporations, and instead making sure that their leader-less, and that to me is what’s really exciting about them.

I didn’t really describe how they worked, but that’s kind of more at a metal level and what’s interesting is we’re starting with the single hardest thing which is money. Bitcoin is trying to replace gold or maybe even money at some point, and if you can do that then you can replace any network ruler. If you can run the network for money without a single entity in charge when everyone’s trying to break it and everyone is trying to steal from it then in theory you could make any network decentralized, and that’s what I think is interesting about blockchains.

Balaji: Yeah, that’s great. Let me take a somewhat orthogonal kinda, maybe complementary – so let’s say that you wanted to have a database of all the money in the world. Well, your first requirement for that database would be that some random person can’t just update it and award themselves lots of money, right, everyone would try to do that. So that database has to, first, be highly tamper resistant, second; very auditable, and third; it needs to be in a sense decentralized so that no one actor can just go award themselves a million bucks, right. When we start enumerating the technical requirements to build something like that, you get something like the blockchain that underpins Bitcoin.

And what a cryptocurrency is is the native money on a database like that. And so once you’ve got a database that can represent all the money in the world in a tamper resistant way such that no one party can award themselves lots of money, well you can represent other things. Not just money but stocks and bonds and you know mortgages, loans, derivatives, other kinds of things. Everything from the things that have an analogue in Wall Street today, you know like stocks and bonds, to things that don’t like video game potions or maybe, you know, a contract for hard drive space on someone else’s computer; things that we wouldn’t think to trade on Wall Street. So once you can solve that problem of representing digital scarcity in a way that people can’t corrupt it and award themselves a lot of money, you can solve a lot of other problems of coordination and representation of financial instruments.

Erik: So I’m curious to learn more about what got you both into the cryptocurrency space in the first place. Because you both have had long storied careers before cryptocurrency. So Naval you, among other things, you democratized angel investing with with AngelList, and Balaji you started a Biotech company Council which sold for almost $400,000,000. So how do you explain your interest in Blockchain as it relates to the arc of your career?

Balaji: You know my my first company, Council, you know, was doing gene sequencing in the biotech space and testing for mendelian diseases. And as part of that, you know, I encountered a lot of regulations and I start to realize wow, a lot of these rules that had ariden 70, 80, 90 years ago are not as relevant in the modern world and they’re really holding back progress. And so I started to think, OK, well could that be applicable in other areas as well outside of just biotech. And I, you know, started to believe that was the case. And we saw that with, you know, the rise of Lyft and Uber, and Airbnb with taxis and hotels – old rules that were holding back innovation. And it was also the case in finance. And so seeing that Bitcoin was technologically interesting and also understanding that there was a market need from, you know, having encountered what regulations were in practice, that’s one of the big things that kind of got me from genomics into this sector.

Naval: Yeah, I didn’t have any grand plan, I just read a post on Hacker News. It was actually –

Erik: What was that post?

Naval: Paul Bohm, he was the founder of Buttercoin later, but he wrote a post on the Byzantine Generals Problem which is the underlying computer science problem that had to be solved before we can figure out how to have a network without a ruler in the center. And he wrote a post that very cogently explained how Bitcoin solves that problem. And once I read that and figured it out I couldn’t think about anything else. And so all I was doing was talking to my friends about it and brainstorming about it. And as I realized, that, this is a way out of centralized tech monopolies, it’s a way out of gatekeepers for money, it’s a way out of inflation and printing of money, and towards sound money and all of these things. I just couldn’t think about anything else, and you know it’s very very rare that you’ll find something that’s technologically interesting plus something that’s socially really interesting plus it can make you rich. Right, and that combo is really addictive.

Erik: In 2015 we had this narrative emerge, the “blockchain not Bitcoin” narrative, where people said “it’s not about this money thing, but the underlying technology is really valuable for me at J.P. Morgan” or whatever enterprise company you were working for. But recently we’ve had sort of the opposite, sort of a resurgence of Bitcoin maximalism, saying “it’s Bitcoin not the blockchain”. So I’m curious where, if you look at that as a spectrum, where have your thoughts evolved on that spectrum and what do you say to both groups?

Balaji: Yeah, so I think that actually the full 2 by 2 exists, right. There’s like anit-Bitcoin anti-Blockchain, thinks the whole thing’s a scam, right, OK. Then there’s pro-Blockchain –

Naval: They’re called no-coiners. That’s the term that they use.

Balaji: Yeah, exactly.

Erik: We’ll get to that in a bit.

Balaji: Then there’s pro-Blockchain anti-Bitcoin, that’s like the banks. You know, “Blockchain not Bitcoin”. Then there is pro-Bitcoin anti-Blockchain, and that’s like Bitcoin maximalists. And then there’s where I’d land up and a lot of, I think, investors in technology in this space will end up, which is pro-Bitcoin and pro-Blockchain, you know, kind of let’s say upper-right corner. And the reason for that is, I think, you know, you just have different solutions for different kinds of problems. You know, I think the Internet is probably the best analogy, at least the one that would be accessible to lots of folks here, which is that we went and we digitized movies and music and books and newspapers and pretty much every form of information and, you know, that’s obviously valuable 20 years later. And the same way with the blockchain, we can definitely digitize gold that’s super important, but we can also, and we should digitize, you know, stocks and bonds and loans and mortgages and derivatives and all of that other stuff should get digitized as well. So this is why I’m in the Bitcoin and Blockchain camp.

Naval: Yeah I agree with that. I think with Bitcoin you’re looking at sound money, gold, store of value, and possibly a currency over time. You’ve also got a set of currencies that do something that Bitcoin doesn’t do today which are the private currencies like Zcash and Monero and Dash and a few others. Because Bitcoin is, it’s as I think a Secret Service guy calls them “prosecution futures”; everything is trackable on the blockchain, you know exactly where every transaction went. So a blockchain, ironically, if it’s controlled by a government ends up like the largest tool for totalitarianism we can imagine, because everything is trackable.

And then you’ve got where Ethereum and a few others are going, which are these Turing complete blockchains; Turing complete means they’re programmable like computers and they can in theory do anything a computer can do. Although it would be more expensive and more slow. So this is trustless computing, and I think these are also very important and they’re very different than what Bitcoin is optimizing for. If Bitcoin tries to be more expressive, more programmable, more like a computer it actually becomes more attackable, more hackable, and it doesn’t want that. So on the other side you have blockchains that are like Ethereum, which are Turing complete computable, they’re more attackable, they’re more vulnerable, they’re not trying to be sound money but they’re the infrastructure on which you can build an entire parallel shadow financial system, alongside Wall Street.

And I think what may very well happen in this space is 5 years from now we may see that you may have a whole series of applications on top of Ethereum, or the next Turing complete blockchain, where you can do loans and you can do derivatives and you can place all kinds of bets in sort of this global financial market. But you can do things that you just can’t even do on Wall Street, because Wall Street is not that programmable. You want to create a new financial instrument you’ve got to go to Goldman Sachs and a lot of lawyers get deployed, a lot of accountants, a lot of paper. But here, a 15 year old kid can hack something together and then some grandma in Zimbabwe can be betting on that security contract. Now, let’s leave the laws aside for a second, but it’s theoretically possible. And because in the Internet if it’s programmable and theoretically possible, it’ll happen. So I wouldn’t be surprised if 5 years from now you have bankers who are working at Goldman, who basically go to their boss and say “look, that custom derivative or security or bet that we want to do I can do it but I can only do it on the blockchain, I can only do it on this infrastructure that has been built parallel. So I have to convert out of U.S. dollars into Ethereum or Augur or whatever the heck tokens I need to use, do that trade and then come back”. So, yeah, I’m a crypto maximalist, not necessarily a Bitcoin maximalist.

Erik: When looking back at our history to understand the future, some people like to look at the history of money to find out where crypto will go; they look at how monies have emerged over time and the implications of that are that money is winner take all, Lindy effect, such and such. While other people look at the history of the Internet and say, you know, software is eating the world, software tends to rewrite the things in which it runs into, and the implications there are that there can be multiple winners and you don’t have to be the first search engine or social network, you just have to be the last. So as we look forward to the future, which history do you think has more predictive power. The history of money or the history of the internet?

Balaji: So I think, actually, I wouldn’t say that money’s history is actually totally winner take all, because you do have the Dollar and the Renminbi and the Pound and the Euro and the Ruble and what have you. So, it’s kind of like, I would slightly object to that. I think both histories are certainly relevant, I think most people are more familiar with the history of the Internet and you can point to that parallel of “OK we digitized everything with information, now we’re digitizing everything that’s related to scarcity and to finance” and that’s a very obvious thing. I think far fewer people are familiar with the history of money. But with that said, sometimes, you know, history doesn’t repeat but it rhymes. It can also lead you wrong if you’re too overly levered on a historical parallel it can tell you it’s going to happen like this and it happens like that, right. So, short version is I think both are relevant but I would use them only as guides and not as like hard forecasts “it must happen this way”, you know.

Naval: Yeah, I agree with that. Nobody actually knows what’s going to happen here and how exactly it will play out. When you talk about just money, it’s important to break it down to its components. We use money as a store of value; so, you know, hopefully it doesn’t inflate away tomorrow – if you’re in Venezuela or Argentina that may not be the case. We use it as a medium of exchange; I give you money and you accept it for bread or horses or cars or whatever I’m getting from you. Or we use it as a unit of account; that thing costs $12.00 and that one costs $14.00. Store of value does have a network effect, but it’s not that powerful. Like, for example, we do use gold as a store of value, we use Bitcoin as a store of value, we use real estate as a store of value – look at the Chinese buying apartments in Vancouver – we use oil as a store of value, we use the U.S. dollar as a store of value. Medium of exchange has a much stronger network effect because now the money’s in flow, who accepts what, who doesn’t take what. And then unit of account is the ultimate network effect, because you can only have one. I’m not quoting you something in Dollars and RMB, you just care about Dollars. So, the network effect actually can be influenced by which one of these properties of money you end up adopting. And the truth is, today, 99.9% of people in the world aren’t using crypto, so it’s still a jump ball.

Erik: I think one of the mistakes that people made in terms of not understanding the history of money is, one, you know, confusing or conflating payments and medium of exchange.

Naval: Yeah.

Erik: And, two, saying “hey, I’m never going to be able to buy – or, I’m not able to buy Starbucks with Bitcoin, thus, it must be useless”.

Naval: Yeah the use case for Bitcoin may not be Starbucks. Crypto is really good at micro micro transactions, where if, let’s say, that, you know, today on the Internet we have denial of service and we have spam attacks and that’s because bandwidth is too cheap to meter. But it’s not, people abuse it. So, what if I have a server that says “hey you can request a web page from me, but you’ve got to pay me a trillionth of a cent”; that can only be done in crypto. On the flip side, and I’m stealing this from Balaji, but, it’s also good as a Spanish galleon. If I want to send $1,000,000,000 to somebody and I want to make sure that there’s no sticky fingers from relayers in between, I would send it through crypto. So it’s really good for the micro transactions and the macro transactions, it may not be that good for the human-sized transactions like going to Starbucks and buying coffee.

Erik: Right, and even if it isn’t good for that it could still be worth trillions of dollars.

Naval: Absolutely. If it just replaces – if Bitcoin just replaces gold, you know, gold is worth 7 trillion dollars. And gold is not easily divisible, it’s not easily verifiable, I can’t store it in my pocket or my brain, I can’t send it across the Internet, so it actually has quite a few advantages over gold. But unlike gold it is trackable, unlike gold it’s easier to hack remotely on the Internet, so it’s got other issues. And gold has the Lindy effect, as Nassim Taleb says, it’s been around for a long time, whereas Bitcoin is only a decade old. So, we still have to see, you know, new – it hasn’t been fully tested, we have not seen sovereign nation states attack Bitcoin with all of their resources yet.

Erik: I feel like I’m shilling Bitcoin so I should specify that this is not investment advice, but –

Naval: Yeah, none of this is investment advice. If you were an investor in crypto you would have lost 20 percent your money in the last 24 hours, so…

Balaji: You know one thing just to complement that is, I think with the – just taking the Internet analogy for a second – voice over IP was an application of the internet but not the application, and in fact it’s probably one of the ones which has arguably one of the least improvements over the pre-Internet status quo because we had working phone lines and you could call somebody up and so on, right. Not to say that Google Hangouts or whatever isn’t useful, but it’s like a nice to have feature not a must have. Whereas things like search, or a bookstore that had an infinite number of books were a true 100x or 1000x over the status quo.

I think one of the reasons that digital gold is really important is it didn’t really have competitors in terms of where the financial system is right now, because most people are not carrying around a brick of gold. It’s like truly something that was a 10 or 100x improvement over the status quo versus paying at Starbucks there’s like 15 different options to do that, there’s your Master Card there’s your Apple Pay there’s your square terminal or whatever, and so there are reasonable options there and so I think eventually crypto will get into the niche but that’s like when the very last things – it’s like VOIP – as opposed to one of the first things.

Erik: I want to hear more about what applications outside of money you’re most excited about within crypto. You know, we focus on – often – ten to one use cases; something becomes much cheaper like email vs snail mail. But I’m curious as to the zero to one applications that unlock a fundamentally new capability like the Internet with Wikipedia or, you know, phones you had cameras and now you have Snapchat, or you have G.P.S. and now you have Uber; what are the zero to one applications going to be for crypto?

Naval: Some of these are less sexy and less fun, but they’re very infrastructure related; routers metering bandwidth, metering disk space and compute in distributed storage and computational grids, you can imagine that 10 years from now the question of where do you host your website will be a nonsense question because you just say “on the Internet”, right. I just write the piece of code, I drop a fraction of a crypto coin into it, and then it goes and it buys a file storage and it buys compute power it and buys all the pieces that it needs to instantiate itself and serve whatever customers show up on the web. So I think that’s one interesting use case, these micro micro transactions that current money can’t address.

On the flip side I think there is the sound money thing, which is played up, but it’s the revenge of the Swiss bank account. So it’s the ultimate safe haven, if the Jews have to leave Vienna today they’re not carrying gold out, you know, they’re carrying Bitcoin out. So I think that’s another example.

A third one would be, I think, setting up large distributed networks that bootstrap themselves. I mentioned solar power earlier as one, bandwidth would be another; sort of replace Verizon with a distributed grid of Wifi access points. You can even have self driving cars, if you had a future where we’ve got a lot of stuff driving cars driving around and they’re communicating with each other, you could see them paying each other for rights of way, “I want that stoplight green right now instead of red” and you bid against each other – literally congestion pricing on the fly, very efficient.

I mean, these are not super sexy end user applications, but I think these are ones that are uniquely enabled by cryptocurrency. And then finally, there are a set of things that maybe we want to see exist but the governments of the world for whatever reason don’t allow them but are legitimate applications. Like a lot of economists would tell you that prediction markets working across the board would be incredibly useful for society, yet because they get caught up in sweepstakes laws and sports betting rules and this hodgepodge of state laws in the U.S. and international laws you don’t really have working prediction markets, they can’t get the liquidity to make accurate predictions, and if we could have good prediction markets then we could start posing them questions like “what is the best way to address climate change, is it A or B” and the prediction markets can opt into that. Actually, they’re not good for that one but there’s others. It’s hard to test that one.

Erik: So I was trying to explain to my mom. I should have used the Jews in Vienna line, she would have love that. And I was explaining, sort of, the tribal nature of it. Explaining Bitcoin vs Ethereum, I was explaining Bitcoin vs Bitcoin Cash, I was like “mom, there was a civil war. People aren’t playing around here”. Everyone vs Ripple, and all these various subtitles. And what’s interesting here, I say this all to say that crypto is not just a technology phenomenon it’s a social phenomenon.

Naval: It’s a religion.

Erik: Yeah, haha. And the social phenomenon, the religion, is perhaps just as interesting and fundamental as the technology. So how do you make sense of blockchain as social – like why has it captured the hearts and minds?

Balaji: I can tell you that one. I think the thing is that, you know, when I first described it I was talking about the blockchain as a kind of database, right, and it is that. But it’s not just about the reads and writes to this, you know, digital data structure. As, or even more, important are the reads or writes to all of the brains around the world to make those people value that, you know, entry in the database as money. If you think about it, everybody’s had to write to your brain many times since you were a kid to value a green piece of paper as valuable whereas a blue one would not be, right, and you kind of take that for granted. Why is this money and why is this not? Well, there have been writes of software to all of our brains to do that, right.

So, as much as this is something which is writing software, it’s also writing intellectual software in people’s brains and the reason that this tribalism happens is because that early group of folks who had those writes to their brains to say “OK I can value entries in this database as being money”. Well, there’s a huge incentive in flipping those folks to one side or the other because they’re already, you know, over the hump of thinking of this stuff as money, right. So that’s a good customer acquisition strategy. This is one very meta way of thinking about it. These folks have already gotten into the blockchain space and a huge part of it is making folks value it as money, so different tribes compete for them. That’s one way of thinking about it.

Naval: Yeah, it is a form of politics. Because if you zoom back, these are ways of governing networks. One big way we govern networks is countries, right. So the moment you’re talking governance you’re talking about who’s in charge, how do you run it, do the developers run it, do the so-called miners who are providing the resources to run it, do the users run it, do the exchanges that are in the center run it. And so there is just like a big tribal fight over the whole thing. And unlike in a normal country where tribes are fighting like, say, Democrats and Republicans or you know if you’ve been on Twitter, there’s a war on; everyone’s fighting, but, they’re fighting but they can’t – a revolution is unthinkable, right, we’re not going to take guns and go in the streets and split the country in a half.

But in crypto land it’s so easy to fork. You basically just take the source code, you create another copy and now everybody who wants to be “red” goes over here, everyone who’s “blue” goes over here, and now it’s a shooting war between the two different factions. So that just happens in crypto all the time. So, the downside is the moment you have digital governance, revolution is really easy. Splintering, factionalism, tribalism is really easy. And so these wars come very much out in the open. But on the other hand it’s also sort of a good thing because everything is being tried as opposed to like in the U.S. we elect a president for 4 or 8 years, we head in one direction for a little while, then we tack back, we head in the other direction back. Here we have to keep choosing, in crypto land you don’t have to choose, everybody can fork off at any time wherever they want. And, you know, if we could do that in the real world that would be kind of an interesting experiment. We kind of already do, you fork to San Francisco or you go live in Texas, right.

Erik: Haha, no one specific in mind. You mentioned religion, I have to ask about that. Cypto as religion: unpack that a little bit and, I mean, who are the priests, who are the deacons, who are the clergy, like, paint a picture for us.

Naval: I’ll change that analogy a little bit. The priests, the religious fanatics, the Jesuits, you know, the Spanish inquisition here are the crypto people. And normally they would have allied with or competed with the Kings, but here they’re literally sacrificing the Kings. They’re saying to the altar of crypto we get rid of the leaders, so crypto is just another part of the grand trendline of the Internet which is getting rid of the gatekeepers. So the Internet was supposed to get rid of all the gatekeepers, I keep going back to this sorry to keep harping on it, but it’s a peer to peer network underneath, it was supposed to get rid of all the gatekeepers. But now who are our new gatekeepers; ICANN is the big DNS gatekeeper, Google’s a search gatekeeper, Twitter and Facebook are the social network gatekeepers, and as far as Silicon Valley is concerned “oh yeah the Internet revolution was great, we’ve got rid of the old gate keepers and now we’re the new good keepers, this is fantastic”, revenge of the nerds. But I think this is phase two, this is saying “no, now let’s get rid of the next set of gatekeepers and keep getting rid of them until there are no more gatekeepers”.

Erik: Yeah. One thing, you know, as I look at this social phenomenon, I think there’s sort of a core idea that unites us all in that power needs to be more diffuse. More diffuse, more equally held, and that technology and market mechanisms can play a critical role in achieving that goal. But I think what the blockchain community has not clearly articulated is what that society needs to look like or how that becomes possible. it’s a technology that points in a vague direction, but not what it means or what it would look like, how do you respond to that?

Naval: I think it’s going to be an evolved process, I don’t think it’s a top-down designed thing. If you look at markets, look at the economy for example, the economy is a giant series of markets. No macroeconomist can actually tell you how the economy works, you get enough macroeconomists in a room together it’s like politics, they’re all just arguing. They can’t figure it out, it’s back to the blind people and the elephant story; they’re all feeling different parts of the elephant trying to describe it. So crypto is like that; we’ve created something that’s larger than just us, it’s like the Internet; it’s larger than us, it’s like the economy; it’s larger than us. You have to describe it, observe it, evolve it, and try to keep up with it rather than trying to top-down say “oh yeah this is how it should work and this is the vision we’re all heading towards”.

Balaji: I can give some, you know, without going into the macro of it, I can give some examples of things I think will happen at the micro level that may be maybe interesting. One is I do think that crypto will in the medium to long term result in what I call instant jobs, right, so right now you can just land on a website and you can go and post on like a forum or, you know, Facebook or Twitter you can just go and post and post information, publish information. We take that for granted but that’s a huge thing relative to say 30 years ago when it was very hard to go and, you know, get a printing press and paper and distribute information. So instant jobs are interesting; you click a button, you do a task, you make money, we’ve got something like that at Earn at Coinbase and I think that’s going to be a very big part of let’s say 5-10-15 years out, and anywhere there’s a phone there’s a job, you just have a feed of tasks and you do those tasks and that’s your job.

A second thing I think is going to happen is, at the micro level, I think we’re going to get billions of investors and this is actually something that I think is now kind of an obvious thing that’s going to happen but has been under remarked on, I think maybe 99 percent of the world will be investors and maybe like one percent will be entrepreneurs. And what do I mean by that? I think everybody pretty much can buy something, you can go and buy something at Starbucks, you can swipe a credit card, everybody here has bought something. It’s pretty hard to build something but with crypto there’s no longer any threshold for investing in something. You can invest a dollar, you can invest $10, people put $10 into Ethereum; they’ve got like, you know, $10,000, you know, like a few years later. Not every investment is, obviously, like that in crypto but it is the case that as you totally remove all thresholds you can have somebody from any country in the world click a button and in 10 or 15, or maybe even 5 but probably more like 10 years, just as easily as you’d “like” something or “poke” somebody you could send them a dollar. And you’re going to start to see fundraising rounds, maybe not in the United States, maybe in other countries where it’s like a million people putting $1.00 each into somebody, right, and that’s going to be very commonplace and maybe that’s what you do recreationally each day, you spend a couple of bucks doing that and that’s like, you know, your replacement for Twitter or Facebook because you’re not just “liking” or “thumbs up”-ing something but you have a little bit of skin in the game, it’s a little fun to follow that portfolio, you can see how it’s doing and you’re helping somebody get financing when they might not otherwise be able to do so.

So I’m interested in this from like a microeconomics view, I think it makes a lot more people think like Angel investors, think like venture capitalists.

Naval: Yeah, you can have people crowdfund entire countries, you could have people crowdfund a war, you could have people crowdfund a revolution, the possibilities here are kind of endless. When people are investing a dollar in something maybe they’re not even thinking about it as investing anymore, it’s somewhere between donation and investing. It’s like Kickstarter, a lot of those projects fail to deliver but the investors don’t really seem to care, you know, they were kind of doing it more to just support the founders as much as anything else.

Balaji: One comment I’d have there, though, if you did try to crowdfund a war I think you’d have a lot less war because I think people wouldn’t pay for it as easily.

Naval: That’s true, it’s easier to fight wars with other people’s money. Nassim Taleb made the good point recently that historically people who, warmongers, people who declared wars had skin in the game; they had to go fight at the front of the war. But today you can be sitting at your desk in Washington D.C. or in Moscow and you can launch a war and you never have to fight it.

Erik: And you hide the cost by just creating money.

Naval: Exactly, you print money.

Erik: It’s worth double-clicking on something Balaji said which is if you had invested in Ethereum at $0.03, or whenever the ICO was, that’s a-

Naval: $0.30.

Erik: Or, whatever, $0.30 – you would know, perhaps. That was a better investment than investing in Facebook or Google at the seed round.

Balaji: Yeah, it’s true.

Naval: Yeah 700x within 2 or 3 years, fully liquid.

Erik: Say more about some of the – don’t worry, you guys didn’t miss anything – say more about some of the –

Naval: And it was open to everybody.

Erik: Yeah.

Naval: And ironically the people who missed it were the venture capitalists.

Erik: Yeah, that’s some karma. Or, a great irony there. Talk more about what society looks like in a world in which everyone is an investor, or there are way more investors, and I’m particularly interested in the life of the average American, how does it look.

Naval: Yeah, first it looks like a giant casino. Right? First it goes completely crazy-

Erik: While everybody loses money.

Naval: Yeah everybody scams everybody. A lot of people lose money.

Erik: Like the lady on the slots.

Naval: But you kind of have to let them go through that, it’s a learning curve. It’s like it took a while before the Securities Act came along and divided penny stocks from public stocks and what was considered legit and what wasn’t. So it’ll take a while for people to figure it out and there’ll be some money lost along the way but it’s a global learning curve, it’s distributed across 7,000,000,000 people. It’s happened very quickly, I would argue that, you know, the recent downturn has been great. Crypto’s had 75-80 percent of its value wiped out, some of these coins are down 95 percent and will fully disappear. That’s good because it’s going to teach people that “oh”, you know, “you can’t trust everything you read on the Internet and you certainly can’t send money to strangers on the internet based on what they wrote”. So, it will raise the levels of diligence, it will raise the requirements for investing and I’m hoping that out of it we will see at some point a real investment market will emerge. But in the short to medium term it looks like a big casino.

Balaji: Yeah, I would say a couple things. I think a lot of the things that in Silicon Valley we’ve developed like term sheets that contemplate things like liquidation preferences and drag along and stuff like that they’re all based on previous train crashes or car crashes that happened like, you know, big conflicts that happened in the past and then lawyers go and bake that into contracts to avoid those things happening in the future. So you’re going to see a lot of that baked into smart contracts where a lot of the wisdom of, you know, how investments have worked gets baked in and folks start getting 1, 2 or 3 year lock ups on their crypto. You’re already starting to see this type of stuff and incentives start getting aligned, and so I’m optimistic in the medium term that once you’ve got that those contracts out there and folks have done diligence on them and they’ve proven that they’re also in for the long term alongside you then you’re going to be more likely to listen to their recommendations on the coin and then you’d buy in. So I think it’s a process but I do think there’s a light at the end of the tunnel.

Naval: Yeah, long term you’ll see that a lot of these crowd fundings online, to the extent that they still happen, will require that the money goes into smart contracts that then very carefully bleed out the money to the developers or people as they hit milestones that are verified by 3rd parties or held in escrow and that as revenues come in taxes are automatically paid and pieces are siphoned off and dividends to investors and so on. Ronald Coase, the economist, famously said that a firm is just a nexus of contracts and you can take the nexus of contracts here and you can program the whole thing, you don’t necessarily need lawyers and bankers and judges watching every little piece; for a lot of the simple stuff you can just have it be on rails and the first company that does it, because it’s open source, the second company would just copy it and copy it and copy it – you won’t have to reinvent the wheel. It’s just like with code, it will create layers and layers that people will build on until our kids will probably – to them, creating a company will be they’ll just hit one button and like a whole series of smart contracts will fire up and a company will get created and they’ll drag and drop in who’s an employee, who’s an investor, who’s owed how much and you’ll be able to run this completely distributed, virtual, auditable, trackable, trustless company without needing armies of lawyers and judges.

Balaji: Yeah, and actually just to kind of emphasize that or drill into that; when you go and buy a car from somebody they sell it to you and the most important thing they’re selling to you is, you know, the keys – you put in the keys and the car turns on, great, you can go with it. When you go and sell a company to somebody it’s not yet a machine like that, right, the owner can’t just leave and you can’t just operate it on your own, there’s all of this hidden knowledge and, you know, how to give this instruction to this person, what’s the context of this contract, etcetera. The more and more of that we can encode into a nexus of contracts, the system of smart contracts, the more saleable and liquid a company is because it’s like a machine that you can just sell for its future cash flows, right, and I think that’s going to start with just basic websites like, let’s say, a file conversion service or something like that. That’s the kind of thing where you can start to imagine “OK, it’s got this many visitors a month, it’s just code that executes on inputs and returns outputs”, that’s the first kind of thing I can imagine that starts to get sold in this fashion but then over time more and more complex companies start to become machines like cars that you can just sell and then operate without the owner.

Erik: So if the firm goes away, or the way we understand company building becomes radically different, what skill sets are now needed much more in order to thrive in the new blockchain economy?

Naval: It’s the same skill sets that are always needed. Anything that a computer can eventually be trained to do a computer will do, and the things that computers cannot do and probably will not do in our lifetimes – I’ll take the other side of the general A.I. bet – is they can’t be creative. So at the end of the day you want to be creative, you want to be learning skills to create new things; entrepreneurship is one instantiation of that, art is another. But any time you’re solving a new problem you’re going to get paid for that. I forget who said it, but famously said, that in the future either you’re telling a computer what to do or a computer is telling you what to do, and you don’t want to be on the wrong side of that transaction. So it’s much better if you can be creative and then you can teach a computer how to do it, rather then the computer is giving instructions to do the last set of things the computers can’t do yet.

Erik: One question a lot of people ask is about regulation, but what I want to ask is a slightly different question related to it which is if you assume that the key role of government regulation in market economies is to correct for market failures, in a decentralized economy how will you correct for market failures or is part of the crypto thesis that there are no true market failures only distortions created by regulation itself?

Balaji: I think that people want regulated markets in the sense that they want some trustworthy actor to ban bad actors and impose some form of quality rating on the system, which are – those are two different things by the way. Banning a bad actor is not the same as giving – that’s like a 0 star actor, versus giving 3 stars to a well intentioned but maybe not amazing good actor. So they want regulators to do this kind of thing but the form that regulation can take it could be a national regulator or it can be an international regulator like an Amazon, an eBay, or a Lyft, or an Airbnb which have star ratings, they have reviews, they have reputation and people consult them and look at those star ratings prior to buying their products. It doesn’t have to be a national regulator, it just has to be some trustworthy source of reviews and reputation that can de-platform bad actors. And so I think what’s going to happen with the crypto space is you’re going to see a wide variety of different kinds of review and reputation and other kinds of sites arise, we’re already seeing this, and then those that are good enough will either be subsidized by, you know, crypto transactions or will be good enough that people will pay for it just like the current market for like buy side and sell side advice. So I think that will arise and then we’ll see whether, you know, more is necessary than that or whether that’s a whole area in its own right.

Naval: Yeah and to the point of like if a certain crypto economy has a market failure, it’s poorly designed and it’s not allocating resources properly or people are getting cheated, they’ll leave; they’ll fork it or they’ll just go to another one. There’s a Cambrian explosion of crypto experiments out there which makes it really really easy to hop around and when you look at the price of one of these it’s basically how much trust people have in it right now.

Balaji: I can add to that also, I think one thing that’s an interesting concept is sometimes you have period of tolerable anarchy. So, for example, with email spam it got really bad and there are all these vigilante-ish approaches that were proposed and then, you know, finally, what actually did work was a mathematical solution, bayesian spam filtering, which maybe didn’t solve 100 percent of the problem but solved most of it, you know, with Gmail’s spam filters. And sometimes if you have somebody intercede too soon they can lock in a solution that’s not necessarily the optimal one, like another example is in terms of spectrum auctions, you know, much later we develop things like C.D.M.A. and technologies that don’t require, like, this government spectrum auction of frequency-division bandwidth but those weren’t available and we locked in a solution based on regulation rather than tolerating a period of anarchy and letting technology develop.

Naval: Or like right now with investing rules we have a locked in solution called the accredited investor program where you have to have a million-dollar net worth and then you’re allowed to invest in a lot of private assets and if you have less than a $1,000,000 you’re considered a moron and if you’re more than a $1,000,000 you’re a genius. And that’s obviously not how the world works, and it should probably be replaced by some kind of sophistication test and everyone’s known it should be replaced by some kind of sophistication test and here we are 83 years later still talking about what is a sophistication test.

Erik: I want to hear more about how you two – we talked about, you know, outlined the future – and we see how you two want to participate in that future. So Balaji first, maybe you can describe the vision for Coinbase and your work there and then Naval you can get into AngelList, CoinList and your other efforts.

Balaji: Sure, yeah, so what am I doing at Coinbase. So, uh, I am –

Naval: Vesting.

[laughter]

Balaji: Right, well, driving the addition of new assets first and foremost, the integration of Earn and, you know, making that something that I think, you know, maybe you’ll be able to earn as well as buy and sell at Coinbase, and then a bunch of other cool projects I can’t talk about too much, and then doing a bunch of things with Coinbase Ventures and investing in a lot of the companies that are coming up.

Erik: And talk a bit about the vision of Coinbase.

Balaji: Oh, vision of Coinbase; build an open financial system. And while that sounds maybe like, you know, generic corporate speak or whatever, what it really means is if you think about what Linux was vs Windows, Linux was an open source system and anybody could download it and you could hack and you could get access to it and now you had an operating system that you could customize and the same way like building a more open financial system it’s hard to imagine a financial system that’s more closed than our one is today, right. So a more open one is one where you can pull a blockchain and a kid in Vietnam can go and collaborate with somebody from Japan and Brazil and Turkey because they’re all using the blockchain at the same time, and we’ve helped onboard people into that we’ve helped educate them, we’ve helped them get their first amount of digital currency, maybe we’ve set up an exchange in their country, we’ve basically onboarded people into this more open financial system and that’s our mission.

Naval: Yeah, I’m mostly involved in this space with CoinList and with MetaStable. Coinlist is the legal, regulated, well-lit marketplace for ICOs that we spun out of AngelList and we’ve run ICOs for Filecoin, Blockstack and a few other pretty well known players in the space, now also doing legal compliant airdrops so we just run the Dfinity airdrop, airdrop being when they’re giving out coins to influential people like developers who they want supporting the project. And then with MetaStable we’re the oldest cryptocurrency fund that bought anything other than Bitcoin and mainly there we back teams that are building – that are improving decentralization and scaling for new protocols on blockchains, so we’re investors in Chia, Basis, Coda you may have heard of a bunch of these, but a ton of them, and we’re always in the first round and what we try and do is we have highly technical team that works with the companies to basically look at solving fundamental protocol challenges. I don’t think we’re quite yet in the phase yet where somebody can build large scale working applications on blockchains. You may not have caught this at the beginning but the solution to how to make sure somebody doesn’t run off with your money in blockchain land is everybody keeps a copy of the entire database going all the way back to the beginning of time, it’s incredibly inefficient so blockchains just don’t scale well – you trade off decentralization and survivability for scalability, and so now there’s a whole generation of startups that are trying to solve the scalability problem and so we back teams that do that.

Erik: You also, of course, started AngelList and AngelList among other things really tried to democratize venture capital, democratize investing in startups. So, I’m curious how you think about inequality as it relates to crypto blockchain – wealth inequality, social inequality.

Naval: Yeah, I mean, you got to unpack the word inequality because some people use it to mean inequality of opportunity and some people use it to mean inequality of outcome. So equal opportunity is, you know, the American dream. It’s, in theory, if the American dream works we all have equal opportunity to get to wherever we want with enough effort, but equal outcome is quite the opposite. I mean, that’s what you get in North Korea so you have to be very careful about differentiating between the two because free people make free choices and if you make different choices, you get different outcomes and they will be unequal outcomes. And now we’re living in an age of tremendous leverage, so if you make the choice to start a social network while you’re a student at Harvard, you know, you might be Zuck and you might make billions of dollars but if I make the choice to start like a location tracking network 3 years ago that goes to zero or if I make the choice to go study medicine – that’s unleveraged, so we are seeing very unequal outcomes because of the huge amount of leverage in the system. So I think that, over time, what blockchains do offer is they do offer equal access, anybody can go and contribute to the Bitcoin blockchain or the Ethereum blockchain, anyone can contribute code to it, anyone can contribute resources to it. And I’m not even just talking about good old fashioned inequality or equality of opportunity in the USA, I’m talking about globally, I’m talking about across all ages, I’m talking about a 14 year old kid who’s sitting in Bangladesh can contribute to the Bitcoin blockchain. So you want to talk about equal opportunity, they have equal opportunity in that regard but, on the other hand, in no way does that promise equal outcomes – it’s a meritocracy and meritocracies have winners and losers.

Balaji: Yeah, I’d cut the problem slightly differently, I mean, complementary. Which is inequality is typically concerned with let’s call it centralization of wealth, and within crypto people are often concerned with centralization of power but those are actually very related things and, you know, what I’m optimistic about blockchains for is they give us a way as a community to fork off and someone’s only powerful or wealthy if effectively other folks are giving them that power, at least in the context of blockchains. So we always have this exit, we always have this ability to vote against, you know, some kind of tyrannical force with our feet and with our wallet and fork away from it.

Naval: Yeah, in fact, I think one of the interesting things to note is that one of the ways that some of the new coins are competing with existing coins is they’re taking a model, which I will just call the fair coin model, which is they’re trying to airdrop or distribute the currency as widely as possible so you’re literally seeing new coins instead of doing fundraises from investors they’re just trying to identify people and just give away the coins and the extreme version of that would be Facebook airdropping a coin to billions and billions of users under the idea that the more widespread the money is the more likely it will to be used as money and become valuable, as opposed to today we’re sitting in a system where land ownership goes back hundreds or thousands of years based on whose great great great grandfather got there with a gun first. So that’s an unequal system, it’s far more equal to like reset the wealth and redistribute and then hope if you can get it into enough hands they can respark what money really is. Today, for example, the way the Federal Reserve distributes money is they basically drop it to the banks who have extremely sticky fingers and then slowly bleed it out into the economy – is that the best way to distribute money? I’m not so sure. So I think at least with blockchains we get to test new models of equal distribution of resources.

Erik: This is, perhaps, another version of a purity test but I’m curious what would need to be true or what facts would have to emerge in order to change your mind on some of these topics and maybe not become a crypto maximalist anymore, you say “you know what, maybe this is not going to have that much of a big impact and I shouldn’t spend that much time on it”. What do failure modes look like here?

Balaji: I would say like if there are some fundamental heretofore undiscovered security issue, that’s the kind of thing which – and what I mean by that is it’s not something that can be patched, right, but like a theoretical new class of attack that renders, you know, all these different kinds of blockchains like infeasible or you can constantly attack them and update them in a bad way. That would be the kind of thing which would make me say “OK, you know what I thought this was a secure way of building things but maybe it’s not”. I think that’s hard to do because we’ve now got a diversity of different approaches to updating blockchains but it’s possible, so that’s the kind of thing that would make me question whether that future is real.

Naval: Yeah I think there are technological failure cases, I think you could have let’s say a Bitcoin or something like that gets used in like a, you know, horrible terrorist attack and you know how the government is like; any excuse to grab power, like after 911 we got the Patriot Act. Patriot Act gave us all these kinds of abuses including N.S.A. surveillance of all of our activities for the rest of time. I could see politicians overreacting and blaming all of crypto and basically cracking down on next gen internet, in which case it sort of flees to other countries and it kind of goes underground and still gets developed it just gets developed elsewhere more slowly.

Erik: How should governments be responding to all this, engaging.

Naval: The governments are in a little bit of a – they may not realize this, but they’re in a little bit of a race with each other. The United States is extremely lucky that we have the reserve currency of the world today, and we’re extremely lucky that Silicon Valley is parked in the U.S. It’s not luck, I mean, a lot of it is due to good policy but we’re lucky that that good policy existed or exists that allowed those formations to happen, and I think in crypto land what we’re basically saying is at least big chunks of the next generation of the internet and possibly what is the next definition of money is up for grabs. Like, if I was like, you know, running a little Singapore I would strongly consider just buying up a bunch of some crypto currency probably Bitcoin but if it’s too expensive maybe I’ll just make my own and then make sure we have all of it and make it legal tender and then make it available to rest of the world so then all of a sudden you have a cryptocurrency that has a lot of usage and other people in the world can adopt and use a sound money and by being the first adopter here in a big way the country would end up just making trillions upon trillions of dollars equivalent and would probably become the new reserve currency after the U.S. dollar. So in some light sense the countries of the world are in a competition against each other but it takes a big leap.

Balaji: So I would mostly agree with that, I also think there’s a big mental shift you make when you go from thinking of the government to a government because there’s more than 100 governments in the world, right, and you know depending on how you count it more than 70 percent of Silicon Valley is made of immigrants and everybody here you know either within your lifetime or your parents’ lifetime up and left – why? To make a better life, right? For economic opportunity and if that economic opportunity is not in the U.S. because it’s not keeping pace with the blockchain, well, you know it’s easier to move nowadays. Now you’ve got mobile, you’ve got social, you’ve got all the stuff, you can get in an Uber, you know, get to a flight right away. So, you know, the other aspect of it is you don’t need huge amounts of natural resources you don’t need like, you know, a mine of uranium or something like that to build a blockchain community you just need a –

Naval: An internet connection.

Balaji: Yeah, an internet connection and a good regulatory environment, right.

Naval: Maybe a nice beach.

Balaji: That’s right so any – yeah, maybe a nice beach, that helps.

Naval: Actually, the blockchain companies are the most distributed companies in the world.

Balaji: Right.

Naval: Because we invest in them all day long we see them all day long, their developers are spread out, in some cases they’re fully anonymous like even the team members don’t know who the other team members are and they’re all over the world.

Balaji: And they’re not necessarily all companies, right. Some of them just go straight –

Naval: Open source groups.

Balaji: Yeah, they’re open source groups that just go straight crypto and may not even have traditional, terrestrial, you know, bank accounts.

Naval: Yeah, there’s one that’s coming up that’s really, that people are into, that all the developers are named after Harry Potter characters and nobody actually knows who they are or where they live.

Balaji: This is MimbleWimble?

Naval: Yeah.

Erik: But why isn’t Singapore or other governments doing this now or what would, um, is it possible that they might or is it too much of an innovator’s dilemma?

Balaji: No, they’re starting. Like Malta, Bermuda.

Naval: It’ll just take one. It’ll just take one, forward looking one. Someone has to be both desperate enough and smart enough. Like Venezuela is desperate but the thugs are still in charge, right, so it kind of just has to come together in the right way. You could see, for example, a post communist Venezuela that sort of recovers, when people are getting together they are going to have a choice of “what do we do with our currency?” and nobody will ever trust a Bolivar ever again, hopefully. So then what do you do, “do we adopt the U.S. dollar as legal tender? But now our monetary policy is set by the United States” so you can see that there are scenarios where if the crypto infrastructure is good enough that they might go with a crypto currency.

Balaji: Yeah and there’s already governments that are definitely, you know, moving in a very pro blockchain direction, so, Malta, Bermuda, Estonia, and you know then a bunch of others that haven’t necessarily announced anything publicly. But I think, you know, governments are already trying to compete, for example, for Amazon’s HQ2, right. They’re trying to compete for Google’s sidewalk labs, and they’re trying to compete for, you know, various investment dollars from startups and tech companies – this is just an extension of that.

Erik: And Balaji, you have some thoughts on how blockchain unlocks or enables new career opportunities – for us to think about our careers in a different way, that you don’t have to be in Silicon Valley –

Balaji: Oh yeah.

Erik: Unpack that a little bit.

Balaji: Sure, sure, yeah. So I have this concept that your single most important metric for your life is arguably your personal runway, which is your savings divided by your burn rate, and the thing that’s interesting about that – you know, savings is a very anti-American thing to talk about, but let’s suppose it’s not.

Erik: We’re all immigrants.

Balaji: OK, great.

[laughter]

Balaji: So, you know, the thing that’s interesting about that is it’s much much easier to reduce your burn rate by 5x or 10x by moving out of San Francisco to, you know, Thailand or India or South America or something than it is to increase your net worth by 5 or 10x, right, because like reducing your burn rate is deterministic – it’s within your power, you could execute on it tomorrow. And what’s interesting about crypto is it’s making it even easier to go and earn, like, a San Francisco or first world salary even if you’re in, you know, the developing world and the developing world has gotten a lot nicer because you know from globalization the last 10 or 15 years. So you can have a basically first world standard of living with, you know, 3 or 4x as much savings each year and then you don’t need angel investment, you’ve got plenty of runway, you can work for a year and take 2 or 3 years off. So I think that’s going to become a bigger deal, this combination of digital nomadism, remote work, cryptocurrency etc. That’s a trend I see growing.

Naval: Yeah this has already happened to me. I won’t name the town, but I went on a vacation to a beach town somewhere in Asia and I was looking to get away from all this stuff and I get there and they have multiple crypto co-working spaces, they have a big blockchain incubator, people are recognizing me and the next thing I know I’m giving talks about the blockchain there.

[laughter]

Naval: So, especially when you get to those kinds of places with a lot of expats you notice that a number of them are now making a living somehow in the crypto community.

Erik: We have some great audience questions that I want to get into. AI and blockchain; complementary or competitive in the long term?

Balaji: So Thiel actually has a good line on this, which is he had an observation that AI is mostly centralizing and blockchain is decentralizing in the sense that, you know, first this is like definitely buzzword bingo, first, right.

Erik: Yeah.

[laughter]

Balaji: But if you actually engage with it, to build a machine learning algorithm you typically need to accumulate a lot of data and that is typically a centralizing thing. You’ve got data from lots of different people, or lots of different cameras or whatever all in one spot, you know, with the Chinese government being like the zenith of that kind of centralization. It is possible with technologies like federated machine learning or homomorphic encryption to actually keep the data local and then just collect some coefficients but it’s harder, much harder. So, AI is going to be this, probably, centralizing force that will give more power to centralized institutions. Conversely, blockchain is a decentralizing force and the key thing is even though it makes it more complicated because it decentralizes everything, it creates enough money and wealth that that more than compensates for the cost of decentralization which I think is a critical thing and that’s why I think blockchain without Bitcoin doesn’t work or blockchain without a token doesn’t work because then you’re just decentralizing without that added economic incentive. So those are these two kind of, you know, forces; centralization and decentralization, and I think you’re going to see interesting mixes and remixes between them, but those are – that’s one axis on which to cut it.

Erik: How do you think about identity in a blockchain world? How does it change the concept of how we understand identity, you know, a lot of people talk about anonymity, privacy, but perhaps they’re missing the bigger picture on how it’s going to reframe our sense of identity. What are you thoughts on that?

Balaji: You want me to go or you want to?

Naval: Yeah, I’ll let you dig into it again, but I think at a very high level you can have identity, you can have your wealth tied to anonymous identities in the blockchain world which you can’t do in the real world or it’s much harder to do in the real world. And then also in blockchain land, you can actually own and control your identity. Today our choices for identity ownership are the government, which like leaks social security numbers left and right, credit card companies – every waiter has your credit card – or it’s, you know, Experian or whoever who just got hacked and lost everything, it’s Facebook – you trust Zuck with your identity right, he’ll sell you for like a 10 cent click ad. So, all the ways that your identity gets held out there are just sieves, like you don’t actually own your own identity. Anyone here who has been the victim of identity theft knows how incredibly frustrating and useless it is trying to regain their identity, and then we talk about biometrics where, yeah, somebody lifts your fingerprint once and your identity is stolen for life. So I think we have a big problem where in a world where we have digital assets that our identities are all over the place, and the good news about crypto is that to secure your digital assets properly they’ve had to build tools that are very very good for preserving identity so we’re going to see a lot of effort spent by a lot of crypto entrepreneurs to bring personal ownership of private keys, identities, and passwords to the masses and that’s one area that I’m really excited about over the next decade. So if that happens, it’s not just for securing your Bitcoin ownership it’s also for securing all of your identity data including your medical records, and your credit history and all of those kinds of things.

Balaji: Yeah, that’s right, I think your crypto private keys are going to be an anchor that brings a lot of stuff local and that doesn’t mean the cloud goes away, but what it might mean for example is that your private keys encrypt a lot of your data in the cloud only you can view them or only you can compute on them or something. One aspect of having private keys be local is that, you know, an identity system is effectively built into every cryptocurrency because it’s as if you have to sort of present credentials, you know, you need to sign a transaction before it can be broadcast and accepted by the network and that process of signing it is effectively an identity verification step and so we can build a lot of stuff on that primitive just like, you know, your credit card might be looked at by the person at the counter and they just see “is that actually you”. This step of identity verification can be used to set up new kinds of social networks, right, where you’re pseudonymous but your balance shows that you’re actually, you know, an actor with some investment in it; you’re not just a troll, you put, you know, 50 or 100 bucks into a token governing this network and now there’s less incentive to just go and character assassinate people because they have no character to assassinate, you just kind of have to discuss ideas, right. And, or you can pseudonymously troll them, you know, but where’s the fun in that, right. So, I think that this, you know, this entire concept is something I call the pseudonymous economy, I think in 20-30 years it’s going to become much less frequent to put your “real name” on the Internet, it’s like putting a Social Security number out there or your personal phone number, it’s this global identifier by which all the people who need to know it know it and the people who don’t need to know it can just use a pseudonym – maybe a realistic sounding pseudonym, but they wouldn’t know it wasn’t your real name but they don’t actually have that handle that kind of grabs you and that they can pull the database records on you.

Erik: We talked about blockchain and AI, I’m curious how you see blockchain intersecting with other emerging technologies – whether it’s virtual reality, or Internet of Things, or something like quantum computing.

Naval: Yeah that’s buzzword bingo. You know, quantum computing gets brought up as like “oh this could break blockchain and encryption”; not really – there are already quantum resistant hashing schemes out there and in a very deep physics sense quantum computing may actually help blockchains because it turns out that doing the hash function and entangling things is easier than detangling them even in quantum computing relative to normal computing. So it gets brought up as this “Oo, what about quantum computing” thing, I’m not worried about it at that level. With VR it’s actually really interesting because VR is about -now we’re in a digital world, and I’m sure many of you have seen or read Ready Player One, and the foundation of a digital world is a digital economy and if you want a digital economy then you’re not going to sit there in your digital economy and swipe a credit card and wait for it to go to Visa or Mastercard or PayPal, right – it’s got to be, like, programmable, it’s got to be part of the whole ecosystem, it’s got to be permissionlessly programmable. The Internet, especially if it’s going to dominate our lives to that extent, is going to have its own native money, right. Do you imagine that 100 years from now the internet is not going to have its own native money, but is still going to be using dollars or RMB or people shipping bricks of gold around? Of course not, right. So I think that a true functioning virtual reality ecosystem – which is probably you know 1-2 decades away so it’s still a little far out – will require its own native programmable electronic money and crypto is the way to do it.

Erik: Let’s play it out. 1 – 2 decades away, your 20-30 years – even further – who are the big winners and losers or what types of players are going to be the big winners and losers?

Balaji: So I think, well, winners hopefully will be the world in the sense that you’re going to have way more people able to get jobs, raise capital, trade without banking fees, incorporate, exit, start companies, invest in companies, all of that type of stuff I think is going to become much much more widespread. In terms of, you know, folks who might be on the other side of it well I definitely think Wall Street’s going to get a run for their money, you know, from all of this and some of the firms are smart and they know that blockchain is important and others they’re not yet there and then, you know, we’ll see what happens.

Naval: I’d say you have a form of governance right now that doesn’t require rulers or central actors anymore, so anyone who’s made a living as a gatekeeper is going to get hurt. And on the converse of it, anyone who was kept back by a gatekeeper gets helped. But it’s a very fuzzy statement, right; it plays out in a million different ways.

Erik: For the builders in the audience, for the engineers, for the people who are either starting to build in this space or perhaps they work at Facebook or Google and are curious about the space and what to get into it. What’s your sort of call to them, where do you want to see them building, experimenting, innovating, what’s your call to arms?

Naval: I think the best way to get into it is, if you’re a developer or engineer, start understanding the blockchains themselves. Go contribute to some of the open source codebases, these are all open source and they’re always looking for volunteers and contributors. It’s amazing how even some of these incredibly blockchains that have 10’s of billions of dollars riding on them will have a handful of developers, you can count them on one or two hands. So, just people diving in and helping out, it just takes a small number of people to make a huge difference. And it automatically makes a name for you, like if you’re one of the Bitcoin developers today you’ve got any number of career opportunities whether its at a hedge fund or whether it’s at an exchange like a Coinbase or wherever, people want to work with you. So, it’s the ultimate –

Erik: You could be 25.

Naval: Yeah, it’s the ultimate resume, you could be 12. You could be a Harry Potter character, it’s the ultimate resume. You could be 80, there’s no one stopping you.

Balaji: How many folks here in the audience are engineers? Ok, a few.

Erik: A lot listening as well.

Balaji: OK so –

Naval: Most of them have better things to do.

[laughter]

Balaji: So if you are an engineer, certainly the highest threshold is, you know, contributing to the code base, if you aren’t yet there what you can do is use Kubernetes, set up a private cluster of Ethereum nodes or Bitcoin nodes and then you can actually simulate, like, an entire set of transactions on them you can have them mined, you can have them send things back and forth and you’ll actually get an understanding for how the thing works in its own hothouse environment because you can like replay an economy, that’s I think a really good way to understand how all the pieces work.

Naval: You don’t even have to build anything in crypto, I can’t build anything in crypto, it’s so incredibly complicated; it’s the intersection of cryptography and mathematics and computer science and economics and governance, like it’s a really hard field.

Erik: Don’t scare people.

Naval: Yeah, just learn about it. I mean, just go read up on it. It’s really endlessly fascinating, it’s like when the Internet first launched to contribute to the Internet to do something on the Internet you didn’t have to go write a web server, you didn’t have to go contribute to a browser, you could just understand how this thing works underneath and start thinking through how it can play out and eventually of course the Internet is impacting almost every aspect of our lives, so that is the potential here as well.

Balaji: yeah, that’s one of the interesting things about this space, like, 99 percent of people can be capitalists and one percent are labor because the labor is this really mathematically, technically, challenging thing but everybody can at least go and buy it. So, that’s something that’s sort of an inversion of what things used to be.

Naval: Or can be airdropped it.

Balaji: Yeah, that’s right.

Naval: And maybe that’ll be the new basic, and it’s not quite a joke, there are people in crypto land who are talking about how do we airdrop enough coins to everybody that if this takes off that that’s the new basic income.

Erik: And I can definitely say that learning about it is its own reward. So it is my honor to have us participate in the Commonwealth Club tradition, which is with one minute left to ask both of you what is your idea to change the world?

Naval: I think it’s your turn.

[laughter]

Balaji: Alright, my turn. So I think that, this is somewhat related crypto, I think that the ability to collectively move large numbers of human beings, and by that I mean is like crowd migration; you take a Facebook group right now and, you know, people are just talking to each other and so on but over time you start adding cryptocurrency to that, that becomes like a digital economy. You start adding virtual reality to that, that becomes like a true virtual economy, it’s got a persistence to it, it’s got, you know, money to it you’ve got a job there etc. That’s I think where this, you know, social network thing is going in 10-20 years. I think eventually those, you know, virtual economies are going to have all these folks who are, you know, some are in Arkansas and some are in New York or whatever, they’re going to want to actually like move to one place and I think that that’s going to be a very important feature of the next 10 or 20 years. It’s something called Tiebout sorting in economics.

Naval: Mine is not crypto related, I think that it would be – computers are getting so cheap tablets are getting so cheap, and I think that we have the entire library of Alexandria of the modern age available on the internet that I would love to see like a giant airdrop of tablets to the developing world where you can basically just have all the textbooks, you can have all the interesting learning materials, you can have all the courses, all the Khan Academy preloaded ready to go, it can figure out with some simple software what language you speak, what level of education you’re at and automatically start teaching you from there and it can connect you with a volunteer network of millions of teachers across the world who can video in at any point and help you when you’re stuck. So I think we can educate the whole world much more cheaply than we’re trying to do it today.

Erik: I’d love to invest in that. Thank you very much. One last huge round of applause: Naval Ravikant, Balaji Srinivasan.