Meltem is one of the most visible and most thoughtful personalities in the crypto / web3 world and it was a real pleasure to welcome her at Crypto Driven.
In addition to running her always entertaining Twitter account, Meltem is Chief Strategy Officer of CoinShares, a digital asset investment firm that manages $4B in assets on behalf of a global client base. She previously played a senior strategic and investing role at Digital Currency Group (in which my firm FirstMark is a proud investor).
We covered some great topics including:
- The three phases of evolution of the crypto market
- How crypto is impacting culture
- Why Bitcoin has a unique place in the pantheon of crypto currencies
- Why Meltem is a shitcoin minimalist
- Why Meltem is excited about BitFi (DeFi on top of bitcoin)
- How crypto venture has been overheated
- Meltem’s excitemetn about DAOs
Below is the video and full transcript.
(Crypto Driven is a team effort – many thanks to my FirstMark colleagues Jack Cohen, Karissa Domondon and Diego Guttierez)
TRANSCRIPT [edited for clarity and brevity]:
[Matt Turck] You and I met in 2015 through Digital Currency Group where you played a very pivotal role, and where I’m involved through FirstMark as an investor. Today, you are the Chief Strategy Officer of CoinShares, a digital asset management firm that manages several billions, and the head of CoinShares Ventures. As most people here probably know, you are also one of the most visible voices in crypto. Very active on Twitter, frequent guest on television and podcasts. So, for me, I tend to think of you as the “high priestess of crypto”.
[Meltem Demirors] That’s a great honor. I will take that.
[MT] I was listening to you on a podcast just a couple of days ago, and interestingly, you were describing yourself as a “Crypto Grandma”? And yesterday, you tweeted that you found your first gray hair [laughs]
[MD] That’s right.
[MT] Maybe that’s a great place to start. You’ve been in the space for a number of years now. How have you seen it evolve?
[MD] Yeah, absolutely and I think the Crypto Grandma Moniker is a fun joke.
I started my career in the energy industry, in the oil and gas industry. I worked with men in their 50s or 60s, who had seen the many evolutions of the commodities business, particularly the shift of it being a very physically-driven business to being trading-driven.
And then, that trading got digitized through electronic commodities trading. It changed dramatically when derivatives were introduced and derivatives markets started to outpace spot markets. And now, the commodities industry just looks entirely different than it did.
I feel similarly about my experience in the crypto industry.
I started in the crypto ecosystem, if you could call that really, in 2015, when I joined Barry [Silbert] at Digital Currency Group, and actually it was on 4/20/2015. So, tomorrow will officially be my eight year anniversary, which is a very long time.
Back then, there was only really one asset that people talked about – Bitcoin. We didn’t have Ethereum yet. The yellow paper would be published in 2015. The Ethereum ICO would happen that year, but it really was just Bitcoin. We were investing in Bitcoin startups.
At that time, I could count the number of venture investors in the Bitcoin ecosystem, probably on one hand. And then, later in the year, it became two hands possibly. But it was just a much different time. The crypto industry looked very different.
Even just the act of buying and selling Bitcoin, when I started personally engaging with Bitcoin in 2012, there was no way for you to easily buy Bitcoin in the United States.
It wasn’t until this little YC startup called Coinbase came along in 2013 that you could even buy Bitcoin with cash in an easy way.
[MT] Coinbase, in which you all at DCG invested in.
[MD] Exactly. We invested in that. Circle as well. When I was in Boston for grad school, I used Circle a lot. So thanks to the team at Circle for helping me not use local Bitcoins and not meet people in parking lots with cash to buy Bitcoin.
And from there, I think we went through these three really interesting phases.
The first phase was really about on and off ramps and very basic infrastructure, what we refer to as picks and shovels. Coinbase was an early leader there. We had platforms like Circle and others. We had the early beginnings of payment ecosystems. So, BitPay, in particular, was the big player there, as well as BITNET, which is a startup that didn’t make it, but raised a lot of venture capital back in 2015.
Then, we went into the second phase. Around 2017, we saw this explosion of new tokens, new blockchains emerging. And that was really the ICO boom.
And there were two tracks there.
There was one track that was crypto-native which was ICOs tokens, new layer one blockchain protocols.
And then, there was a second corporate version. If you recall, Matt, the narrative then was blockchain not Bitcoin. So many corporates came out. They participated in these consortia like R3 and others that were going to revolutionize finance without Bitcoin, but with blockchain, this revolutionary database. That phase lasted about two years.
Then at the same time, we saw the evolution of this entirely new financial market that operated entirely outside of existing markets. Having started my career as a trader and having traded overnight rates and other assets throughout my career, this idea that you could create a market entirely detached from existing markets was a really crazy idea.
Also, the introduction of a very specific type of derivatives contract called a perpetual swap really was the backbone of the crypto financial system. And to this day, the perp swap up as well as the stablecoin, which was pioneered by Tether in 2013 and then expanded on by newcomers like USDC and now others that really changed the game. Because for the first time you could trade cash-settled products against crypto and settle in the same way that you would settle Bitcoin transactions. That was truly revolutionary.
Then in 2019, 2020, we shifted into this new phase, which was the phase of DeFi, web3 and all things crypto.
I think now, in 2022, crypto truly is eating everything just like software ate the world 20 years ago.
We started with the web, and consumer web in particular. We’re now going through this really interesting evolution where crypto is very much becoming [broader than just] the tech industry.
We see this with so many new funds being raised, funds raising huge amounts of capital – crypto funds are now in some instances outpacing the size of their traditional tech peers. Last year, 5% of all venture capital went to crypto startups, which is a pretty crazy number.
The other thing that’s really interesting is the way that crypto is impacting culture. The way it’s entering the popular zeitgeist, whether that’s through NFTs and art, things like PFPs or profile picture NFTs. So an example would be Bored Apes or maybe punks, but the way that communities are forming around these and the way that these communities are intersecting with fashion, with music and other parts of pop culture has been really interesting.
And, in this new stage that we’re in, it’s still unclear where we’re headed.
There’s certainly a keen interest in crypto. It’s easier to access the asset class than ever before, but I think we’re finally at a point where we’re ready to move beyond just this asset class narrative and the financialization and capital markets narrative. And to really start looking at the ways that number one, the financialization of everything is going to impact us across all facets of tech. You probably see this in your investing a FirstMark, but then the second piece is I really do believe that crypto and public blockchain protocols are core element of how that financialization be delivered and natively embedded into both existing experiences and existing behavioral loops, but also help create new experiences and new behavioral loops and open up new markets that haven’t previously existed.
[MT] You’re known in the industry as a strong bull on Bitcoin. I’m curious, given the whole explosion of all the other L1s, why that is currently and whether that’s an exclusive perception.
[MD] I just want to frame our understanding of Bitcoin.
As you know, the “crypto influencers” [crowd] is a very mixed bag of a lot of different types of characters and personas. And that’s one of the things I love about crypto, but it’s also challenging for people who are new to the space. There are a lot of charlatans out there. I think as with any new industry, right? There’s always hyperbole, there’s exaggeration. There are a lot of characters – we attract that.
But I think one of the things that makes the crypto space challenging to navigate is the way that most people talk about crypto and protocols is whether or not something is a good investment and is going to make you money.
I think that’s the wrong way to frame it. Yes, crypto is an asset, yes Bitcoin is an asset, but if we peel back the onion, my mental model about Layer 1 blockchains is that there are three fundamental layers.
You have the protocol itself. The protocol itself is open source code typically, right?
And the protocol itself dictates how consensus is maintained. And consensus is really important because what we’re trying to do here is decentralize and disintermediate so that there is no one central entity or power or group of individuals who can control or dictate what happens in these networks/ That’s the whole premise of why crypto and web3 is different than web2.
Well, the sad fact is in many of these protocols, that’s actually not the case. There is a small group of insiders who own a majority of the tokens. There aren’t a lot of instances, a consensus mechanism that doesn’t necessarily support decentralization at scale, which is fine.
I think it’s absolutely fine to have different consensus models for different use cases. Not everything needs to be trustless and fully disintermediated and decentralized, and some measures of centralization in certain use cases can be helpful.
But I think with Bitcoin, when I think about it’s really about turning computation into permissionless money. And that requires that the networking level for us to use this consensus mechanism is called proof-of-work. What proof-of-work does is it helps us convert energy and computation through these specialized pieces of hardware called Asics, which is a specialized type of semiconductor. It allows us to use energy and computation to create security in the Bitcoin network. And more importantly, the security of the Bitcoin network is separate from ownership of Bitcoin, unlike proof of stake or proof of history or proof of authority, right? Or some of these other protocols.
What’s really important in Bitcoin is there’s this constant power check between users of the protocol, holders of Bitcoin and people who run the code, i.e the miners who are using energy and computation to power the Bitcoin network.
We’ve had repeated power struggles in Bitcoin’s history. You know this, you live through some of this with us in 2017, particularly during the blocksize wars and those different factions, all sort of fought with one another, but also it was the users who dictated what was going to happen to Bitcoin. The miners weren’t able to push in a specific direction, large holders and owners and wealthy investors in Bitcoin. Weren’t able to dictate the direction. And I think for something like Bitcoin, there are 300 million people around the world who use Bitcoin as a savings tool, as payment mechanism, as a way to achieve economic self-sovereignty.
So the fact that Bitcoin uses energy and the fact that Bitcoin does have this fundamental relationship between physical infrastructure and digital security, I think is a very important linkage and makes Bitcoin very unique amongst all layer 1s.
Now the last layer. So we have the protocol layer, we’ve the network layer, and then we have the application layer and the way that consumers are interacting with Bitcoin is through this application layer.
One interesting thing that’s now starting to happen is we’re starting to see layers being built on top of these Layer 1 blockchains. So, in Bitcoin, the Layer 2 network is called the Lightning network. The lightning network enables a lot more transactions, so it can enable millions of transactions per second, and it can also enable them at very low cost. So that allows us to use the core security of the Bitcoin protocol to enable use cases like micropayments or payments for coffees or things like that, where you don’t necessarily need the security guarantees the Layer 1 network provides.
Then we’re also starting to see utilization of Bitcoin at the Layer 3 level.
We just invested in this cool company called Impervious. That’s using Bitcoin as a communication layer. Because the blockchain is actually a way to store data in a sequential time ordered way that cannot be altered, right? It’s immutable, it’s also a great medium for translating and storing information. Now you don’t need to do this in the base block itself, because the core Bitcoin block has limitations on how much information you can put in it. So we do it by having this Layer 3 and then hashing it back into Layer 1. So again, that’s one example, but again, like I said, I’m not a Bitcoin maximalist. I think I get painted as such by people who are not into Bitcoin. And then by Bitcoiners I get painted as like not Bitcoin maximalist enough.
So what I like to say is I’m a shitcoin minimalist.
There is a lot of stuff out there in the crypto space that’s parading as decentralized, parading as web3, but is really more web2. And again, that’s perfectly okay, totally fine. There’s room for all types of innovation that I think what we’re trying to achieve here is fundamentally different.
That being said, I am an investor in Ethereum. I invested in a lot of Ethereum-based projects. I think what Ethereum has done is truly profound and super interesting, adding the flexibility and composability of smart contracts. Now we’re starting to see some of the limitations in Ethereum itself. And I think Ethereum is going to go through some maturation process, similar to what Bitcoin went through, where they’re going to have to make tradeoffs between flexibility and expressivity in the core protocol versus what’s done at the Layer 2 and through bridges and other solutions that allow for scalability. And we’ll see if Ethereum shifts to proof-of-stake. I’m actually a fan of Ethereum staying on proof-of-work.
[MD] We’ll see, I think what people don’t appreciate enough is how challenging it is to change code that dictates consensus when there’s literally almost half a trillion dollars at stake in the case of Ethereum and a trillion dollars in the case of Bitcoin, right? These assets have “economies” that are bigger than most G20 economies, right? And in the instance of Ethereum last year, there was over $3 trillion of activity on the Ethereum network. So, that’s a huge amount. And so changing any one parameter of that core protocol just introduces a lot of complexity.
So that’s a long winded way of saying I‘m not a Bitcoin maximalist. I’m excited about a lot of layer 1s, but I think again, Bitcoin has a really unique place in the pantheon of cryptocurrencies. And I think the arc of time will continue to prove why Bitcoin is so relevant. Doesn’t mean other things are relevant. It just means that Bitcoin’s role in this is extremely unique.
[MT] I heard you use the term or perhaps even coin the term “BitFi” the other day, meaning DeFi on top of Bitcoin. Is that one of the areas you are excited about?
[MD] I’m very excited about DeFi on top of Bitcoin, I’m very excited about smart contracts being introduced to Bitcoin through new programming language called Clarity that’s being developed by the stacks blockchain, which is another layer 2 that brings some of the Ethereum like smart contracting capabilities to Bitcoin, but continues to leverage Bitcoin’s underlying consensus model and security model.
And then I think again, we’ve seen this massive shift in the narrative and the capital away from Bitcoin to new Layer 1, obviously because the ROI is not much higher. None of the Bitcoin activity on Layer 2 is introducing a new token. Whereas all of the other protocols, their Layer 2s have their own token, their bridges have their own token. So as a venture investor, whose job it is to generate returns having tokens been a very attractive path to liquidity, we’re starting to see that a lot of these Layer 2 tokens are struggling and will continue to struggle.
I think what we will start to see is the arc shifting away from this proliferation of new Layer 1s and Layer 2s as yields on those especially investor IRR starts to go down and we’ll start to see shift back to things built on top of Bitcoin that have more traditional business models and are more in line with traditional venture valuations as well.
Crypto venture has been very overheated. There’s $10 billion of dry powder. There’s not $10 billion worth of ideas. I do think crypto venture will get more competitive. And I think we will see diminishing returns, particularly in all of these token driven projects where the incentives of investors may not necessarily be aligned with the long term incentives of growing a useful utility driven protocol.
[MT] There was a recent blog post by Eric Newcomer the other day that showed the returns of some of the top two or three crypto investors. They were absolutely phenomenal, but what do you make of that generally where people invest in tokens, which are not considered securities, but like effectively they invest very early and then they have this path to liquidity that’s much faster than when you see in regular startups, effectively taking this and selling it to the public or broad retail. Do you think that’s a sustainable model? How do you see that evolving?
I think it’s very cyclical in crypto. I think we have cyclical trends and secular trends.
If we look at the cyclical trend, we tend to operate on these two to three year cycles. Historically they were based around the Bitcoin halving schedule back when Bitcoin was 80% of crypto’s overall market cap. Now that Bitcoin dominance is around 40%, it’s predicated much less by the Bitcoin halving cycle, which is when the emission schedule of new Bitcoin gets cut in half. And it’s predicated much more, I think, on what’s happening with these Layer 1s and just general inflows and outflows of capital into the space, which is something we track closely at CoinShares.
But I think what we’ve seen is, again, being early and having conviction is always going to be profitable as an investor. A lot of these firms were early to some of the biggest protocols in the space, which have seen rapid price appreciation. And so it’s no surprise to me that crypto has and will continue to produce some of the most outstanding returns of any asset class of all time. I do think that what is happening in the cryptocurrency space overall and what is happening across the web3 and crypto ecosystem, if I can bundle those two together is probably the most significant technology innovation of my lifetime.
I’m in my mid thirties, right? My generation, we finished university, we graduated into a job market that was basically nonexistent. We missed out on the housing boom, we missed out on the stock market boom, but we are now in this amazing place where we can take advantage of this new sector that’s emerging that I think again, is slowly eating away at all of these different components of the tech stack and of the tech ecosystem.
So I do think firms that invest in crypto will continue to generate outside returns. However, I do think also that many of these protocols, right? The emission schedule, particularly for some of the newer Layer 1s, 30% to 40% of the tokens in the protocol go to the team and the early investors, sometimes it’s as high as 60% to 70%. So I’m not sure how different that is from traditional venture and given how much tech IPOs have struggled over the last year, given how much public markets for late stage tech have struggled.
I do believe that in crypto, we will start to see more of a differentiation between projects that succeed long term and those that don’t. And I think a lot of that has been dependent on inflows of new capital. And so the question really is where are those inflows of capital going to come from in a market where I think starting at the start of COVID, we had this massive wave of interest in retail, investing enabled by FinTech, gen to one products like Robin Hood and others. Now that retail capital is starting to dry up a bit. Now that we have rate hikes inflation and more general economic concerns around monetary tightening and policy shifts, retail also generally has less capital to deploy. I don’t know who the buyers of these new coins will be. And I also think there is going to be more scrutiny of some of these liquidity models that I do think in many instances mimic more traditional technology companies.
They’re not really delivering on this promise of decentralization. So I think are some careful decisions that investors need to make.
I think one of the other things we’ve seen is we’ve seen a lot of investors who’ve engaged in reputationally questionable behavior, certainly not the top tier firms that everyone became a venture investor in 2020, in 2021, particularly in the crypto space. There’s just a lot of wealth created people, always recycle that wealth and roll it from these assets that have already generated returns into longer tail higher risk assets, right?
It creates this risk-on environment. I think as we start to see that pull back a bit during this market, that’s been trading sideways for the last six to nine months.
And the question is what’s going to happen to a lot of these firms that are now underwater in and out of their positions.
Things I’m bearish on generally: very bearish on metaverse and play to earn games. There are a few sectors where I think the hype is certainly outpacing the reality of the experience we can deliver today. Doesn’t mean long term, they won’t be compelling, but I think version one and what we are capable of delivering right now is far from the promise of what we can do with this ultimately, so.
[MT] What are your thoughts on DAOs?
I’m very excited about DAOs. I actually run two DAOs.
One is called DAO Jones, which is incorporated as an LLC, which is interesting. It’s actually technically an investment club. We use infrastructure created by a company called Syndicate, which I’m also an investor in, that provides legal tooling and DAO tooling to run these investment clubs.
We’re a collective – “DJs and degens”. Our website is daojones.wtf. If you want to see some of the musicians and artists and crypto degens, who are part of it. We raised about $3.7 million collectively between us. So members could put in a maximum of $100,000, we wanted everyone to have the opportunity to participate. All of the funds are managed through a no multisig. We have five key signers of which I’m one. We file K-1s, just like a traditional and investment firm would, but it’s been interesting.
I do think DAOs are becoming more prevalent. The idea of dao5 that I think is really compelling is this idea that as a founder, you depend on a high degree of luck, right? To dictate whether or not you’re successful. And when you’re part of a venture portfolio, and this is something we talked about doing at DCG back when we had only 150 portfolio companies back in 2017, one of the thoughts we had was how do we allow founders to participate only in the success of their own company, but in the success of a cohort of peers, particularly in a space like crypto, where the difference between being successful or not successful could be a matter of a few months. Timing is big. There are a few small components that can make a really big difference in outcomes.
So one of the thoughts was how do we change that distribution of luck, which is this unaccounted for variable in startup founding? And so the idea was, could we create a pool where founders could each contribute, say 0.1% of their companies into this pool and participate in the upside of an entire portfolio. So what we can now do, and this is another example of why moving away from securities, which are eradicated on paper contracts and lawyers in this world of complex negotiations and complex transactions that are packaged via these legal contracts that have to be negotiated very expensive. What if we create these crypto native primitives that allow us to codify that, and since these securities were issuing, are already digitized in nature and settle with finality and can be controlled using public private key infrastructure? Can we now create these pools of assets where founders can contribute these assets to a pool?
The pool is controlled by multisig, and we can implement programmatic rules as to how liquidity is managed, how ownership is managed and recorded, et cetera.
So I think there is the is interesting trend emerging in DAOs.
The one thing I will say is leadership in DAOs is really challenging. You still need a core team of people. You still need people who are going to do the heavy lifting, do the work, do the coordinating. So I don’t think DAOs obvious the need for strong leadership, but they certainly can bring a lot of transparency, see a lot of efficiency and much lower cost to the process of building investment groups.
And also I think allowing a much broader group of individuals to participate in venture and early stage investing and to allow people to benefit from shared capital creation. So it’s certainly compelling a lot of real world problem that still exist though. So crypto is not a panacea for all of the challenges of running businesses and venture funds. And I very much think venture funds like FirstMark and others still have a very important role to play in supporting not only Web 2, but also Web 3 startups and crypto protocols.
[MT] Can you expand more on your recent take on Web 3 draining talent from tradFi? What is the trend in the 12-18 months?
[MD] Okay. I’m going to say something that’s controversial that as you know, I don’t shy away from sharing.
[MT] Yeah, I know. It’s a bit of a surprise, but…
[MD] I’m normally so shy. Okay. Here’s my very candid view. I think that if you look at opportunity, right? As humans, we are intrinsically motivated by opportunity and it’s not just money. It’s the ability to actually have an impact. If you look at the roles that most people have, right? If you are a white collar knowledge worker, most jobs that people have are bullshit. They’re pushing paper around your cog on a wheel. I was a management consultant. So I’m speaking about myself here. I did it for five years. It was soul sucking. It was boring. I wasn’t solving any real world problems. And it just wasn’t that interesting. If you look at what’s going on in crypto, the size of the opportunity and the potential for actual impact is massive. And I think as people look at the opportunity in the traditional world, you have people like David Solomon at Goldman Sachs flying around on his private jet, vacationing in exotic locations during COVID yelling at his employees, his junior employees, because they’re not working enough, telling them they need to come back to the office, right?
There’s this real detachment between the managerial class and people who are working and still trying to climb that ladder. And there’s such limited opportunity in traditional corporate life, right? Like the goal when I was a consultant was to make partner – what a ridiculous, ridiculous goal that is.
I think as people look at the opportunity in web3, number one, you can make the same amount of money or potentially even more money than you did in web2 or management consulting or whatever you did before. Number two, you have the ability to actually work on something interesting that you get excited about, gets you out of bed in the morning and is interesting. And number three, you get to work with a bunch of really crazy, really cool people who are intellectually curious. The conversations in our industry are really, they’re stimulating, they’re motivating, you’re exposed to a lot of different types of ideas.
I think generally there’s a real openness to questioning the status quo and experimenting with different models, for working with different models, for organizing companies, with different models, for compensation, with different models, for how we form communities. And I think innately like humans are optimistic. Our world is not feeling very optimistic right now. So I think a lot of people look at what they’re doing today. If you’re selling ads at Facebook, or if you’re building a better algorithm to sell ads at Google, that’s not exciting to most people, I don’t think.
And then you look at Web 3, there’s no comparing. And I think people are looking for meaning. I’m writing a series of blog posts about religion, divinity and the role of crypto in modern society and our search for meaning. And I do think crypto communities fill that fundamental void of meaning that a lot of people are looking for. So, that’s my personal view. It’s a little out there, but I do think people want to work on things that are important and make the world a better place and make them feel like they’re contributing to something positive, not necessarily selling more ads or making Facebook shareholders or Mark Zuckerberg or Jeff Bezos wealthier.
[MT] No, this is incredibly awesome.
[MD] Well not my bag. That’s not my bag.
[MT] I get that general sense. Incredibly well said and very inspiring and feels like a good place to leave this conversation for today, but really enjoyed this. It feels like you just have so many thoughts on so many parts of this ecosystem. It’s always wonderful to hear you talk about just any topic. So thank you so much for coming today. Hope you join us again in the future for another update on the ecosystem. Thanks so much.