Having been both a startup founder and VC, I’ve studied and worked in a lot of markets. After a while, you learn how to “get up to speed” on a space, knowing how to go from little knowledge to very knowledgeable in a period of weeks or perhaps months.

This is not possible in crypto today.

As a founder in crypto, almost every day I have a jaw-dropping conversation or interaction. More interesting is that the circumstances leading to someone’s jaw hitting the floor always differ. For all kinds of reasons, there are misunderstandings around some of the most basic elements of the industry and a lack of common context. This isn’t primarily a principal-agent problem and for the most part, it’s not about anyone being intentionally misled, but the conclusion that cannot be escaped is that there is a cavernous degree of information asymmetry in crypto.

Here’s an example of the massive disconnect about basic fundamentals. One of these two Tweets is wrong (and I’m not going to say which one here).

Why?

Crypto is 10x more complicated than any other technology market, and it may be fair to say that it’s 10x more complicated across multiple dimensions. Blockchains and the crypto startups building on them need to address and mitigate a multitude of so far unquantifiable questions and risks. On top of that, the landscape and the tectonic plates underneath it are all moving incredibly fast.

Some of the best teams in crypto are on their 2nd or 3rd pivot, and it wouldn’t be just to suggest these pivots are indicative of failure. The newness of the frontier and broad design space blockchains and smart contract platforms provide make for rich and challenging experiments, but a steep learning curve nonetheless.

Most of what constituted best practices and thought leadership in crypto 18 months ago is becoming rapidly outdated, and with the benefit of hindsight will look wildly misguided in another 18 months.

Whither Natural Selection?

There are a number of obvious parallels here between the ICO bubble and the dot com bubble, but one key difference.

“This is the Internet. You don’t need revenue, you just need eyeballs” was the insane hypothesis underlying many of the startups that drove the dot com bubble. This bubble was privately financed by venture capital, so when that hypothesis failed and the dot com bubble imploded on itself, VCs and startups were the ones who were hammered as the death spiral ensued and startups quickly ran out of cash. No founder or VC would ever again be caught saying that “revenue didn’t matter” (and yes I realize that many still believe in deferring the pursuit of revenue). That lesson was delivered so harshly I can still viscerally feel the PTSD it created in Silicon Valley.

The ICO bubble saw all kinds of similarly silly hypotheses, but the key difference is this time the tokens underlying the silly hypotheses are liquid. In fact, most projects and startups have ostensibly failed or are failing, but delivered or continue to deliver returns for their investors, either short or long term. Sheer irrational speculation, predominantly in Asian markets, keeps these tokens trading at nonsensical valuations. Certainly a project like Dogecoin, where the founder was clear that the project was never intended to be taken seriously, should trend towards $0 in a rational and efficient market.

This bizarre economic suspension of disbelief confuses consumers and economists, and continues steering many crypto startups towards a model that assumes that being listed on a centralized exchange is the goal. If Dogecoin and the like were worth $0, we’d see more entrepreneurs and investors learning the necessary lessons and adapting.

Dizzying Pace of Innovation

It’s becoming increasingly clear that the information asymmetry gap is growing, not shrinking.

There are numerous verticals developing within crypto, and it is becoming near impossible to be sufficiently knowledgeable in multiple verticals. Developments are too diverse and progress is happening too quickly for anyone who is dabbling to be sufficiently up to speed.

Given these unique circumstances, it’s understandable that traditional VCs are not up to speed. What’s more interesting is the number of crypto-native VCs who are falling behind. In recent weeks, a small handful of the more prominent crypto VCs have publicly offered takes which will look embarrassingly off the mark in the not too distant future.

To provide some generalized context, these takes are not just a difference of opinion, they are more the equivalent of a VC suggesting that a direct-to-consumer brand was enterprise software. This should make many LPs jaws drop. The crypto space is making some very smart people look like they are out way over their skis.

If the supposed crypto-native subject matter experts are quickly falling behind, what chance do the fly-by generalists have?

From Fred Wilson’s AVC blog post 9/4/19 — https://avc.com/2019/09/some-thoughts-on-crypto/

Another example. Both of these can’t be true.

Whither Lightning Network?

The information asymmetry is present across crypto verticals as well. While I am definitely not an expert on the Lightning Network (LN), I am regularly in touch with a number of LN startups and developers.

Just last week, a LN developer showed me perhaps the coolest LN demo I’ve seen thus far. Her face beamed with pride when the test LN payment went through seamlessly. (I happened to have $5 in BTC stuck in a payment channel in a LN wallet app on my phone that I couldn’t figure out how to move prior, but that’s for another post).

Somewhat sheepishly, I asked if she had heard of the Burner Wallet. She had not. I explained that the Burner Wallet enabled instant, disposable payment channels for DAI via a URL that cleverly solved for scalability using a sidechain. It works well today, doesn’t require persistence and is already being integrated into a number of Ethereum and DeFi startups.

Does the Burner Wallet, in combination with a WBTC or TBTC, render the Lightning Network obsolete, I asked? She had to pull up her phone to Google “Burner Wallet”. This time, it was her jaw that dropped.

Today, the LN is a long way from being ready for primetime, still working on the fundamental and mission critical handling of persistence. Has a single Ethereum developer’s hack made the Lightning Network obsolete? I don’t know. Perhaps. But more importantly, not a single LN startup or developer I’ve spoken to in the past few months had even heard of it.

Whither Fintech?

I might argue the most interesting example of this information asymmetry involves folks from traditional Fintech. Late stage Fintech is HOT, as Techcrunch recently noted. In fact, the article even points out that “some blatherer always yells blockchain from the proverbial back row” as if Fintech, broadly, has a firm handle on it.

More than once, this particular blatherer has spoken with a Fintech CEO whose company could be existentially threatened by DeFi products.

In each case, the CEO not only knew nothing about the potential for competition from crypto-based products, but clearly did not take the potential for crypto-based alternatives seriously. In cases where the potential for blockchain-based financial services is quite well understood by now, hearing “why would I want to do that on a blockchain” from the CEO of a company that needs to know the answer to that question, certainly made my jaw drop (metaphorically speaking). And that should make every GP and LP wonder if their jaw should be dropping too.

This bears some resemblance to the Blockbuster/Netflix history, but Netflix was still a mail order company at the time and streaming was years away. How much worse would it have looked if Netflix had v1 of the streaming product and Blockbuster still dismissed it? DeFi startups have early prototypes of a variety of Fintech killers. Which Fintech companies do I think have existential threats emerging? All of them.

I’m not privy to any of the investment memos for the recent late stage Fintech deals, but if they didn’t include a serious analysis of cDAI and it’s growth, then they got it wrong (unless the plan to exit was imminent).

The Crypto Knowledge Pyramid

To that end, I thought it would be fun to take a stab at the levels of crypto knowledge. It’s overgeneralized and meant in good fun, but is useful to illustrate that the depth of knowledge goes far deeper than most onlookers realize.

With such a potential impactful technology, it’s fascinating to see such a range of opinions and beliefs, and even more fascinating to be able to take part in the continued and rapid evolution.