Crypto Experts Explain Stablecoins & the Future Financial System w/ Ali Yahya & Arianna Simpson

1. 0:00 – 0:45

   Introduction

   1. AYAli Yahya0:00

      Crypto can help decentralize the power structures that are emerging in AI.

   2. ASArianna Simpson0:05

      Chris always talks about like, do you wanna be the indie band or do you wanna play like at the Super Bowl or the, the mega stadium? And I think like stable coins really have the ability to appeal to like a much broader audience.

   3. AYAli Yahya0:15

      So there's something like sixteen trillion dollars in volume, uh, on stable coins per year.

   4. ASArianna Simpson0:20

      I actually think it's, it's a great time for folks to be building token networks.

   5. AYAli Yahya0:25

      Crypto is like a fundamentally radical, uh, set of technologies that is very, very hard for incumbent players to adopt and run with precisely because it, it is so fundamentally disruptive to the way that, that they do things.

   6. ETErik Torenberg0:40

      [upbeat music]

2. 0:45 – 1:47

   Bitcoin's Original Vision and Evolution

   1. ETErik Torenberg0:48

      Ali, Arianna, welcome to the podcast.

   2. ASArianna Simpson0:50

      Thank you. Great to be here.

   3. AYAli Yahya0:52

      Great to be here.

   4. ETErik Torenberg0:52

      So I'm excited to do a deep dive with you on where we're at right now today in, in this space. So crypto's a space where people have long been excited, uh, about the vision and the potential, and people have long also been skeptical about where are the use cases, what's happening, what, what's actually working. So here we are in, uh, you know, May twenty twenty-five. Why don't you give some context on what's actually worked so far or what, what's working right now? Maybe, Ali, why don't you start off?

   5. AYAli Yahya1:17

      Sure. Happy to. So actually it's, it's quite interesting because if you go back all the way to two thousand and nine when the original Bitcoin white paper was published, uh, the first line, or is one of the first few lines of the paper describes Bitcoin as a peer-to-peer electronic cash system, a payment system, uh, which was kind of the original vision behind what, what a blockchain could do. And it's really taken us like fifteen, sixteen years to get to a point where the technology is mature enough to actually make that a reality.

3. 1:47 – 3:02

   Stablecoins: The Game Changer

   1. ETErik Torenberg1:47

      Yeah.

   2. AYAli Yahya1:47

      Uh, and this is now manifesting with, uh, stable coins. So one of the-- Well, like some of the big issues that Bitcoin had that made it impossible for Bitcoin to become that peer-to-peer, uh, electronic payment system is that, one, it was extremely inefficient and very slow, and it still is, and therefore that it's become more of a store of value type of system as opposed to stable coins. And two, Bitcoin is not a stable unit of account, and so it's very hard to use it for payments. And so since then, uh, one of the big things that has happened is that the infrastructure has matured tremendously to the point at which now we are, uh, at a level where a transaction of any amount of money can be done for less than a penny in cost and can-- it can be done under, in under a second, roughly, like those numbers are, are kind of approximate, um, which finally makes something like a peer-to-peer transaction of a few dollars viable on the blockchain. And that combined with the kind of the regulatory clarity that we're having now as of the new administration, makes stable coins something that are really, are really beginning to happen. So that's maybe like the biggest, the biggest thing that's going on in the crypto world at the moment is that, is that stable coins are beginning to really gain traction. So there's something like sixteen trillion dollars in volume, uh, on stable coins per year.

4. 3:02 – 5:22

   Current Use Cases of Stablecoins

   1. AYAli Yahya3:02

      Uh, and there are many traditional financial institutions that are beginning to use stable coins to rip out a lot of the kind of the backend of, uh, of their financial systems. And these are like fintech companies. Think Stripe, think Revolut, think Robinhood. Some of the, some of the companies in the traditional financial system that rely heavily on the trad financial system are now realizing that stable coins are a much better way to do things. Um, so that's kinda like the biggest thing that's going on and we, we believe that that'll likely lead to this cascading, um, sort of trend of adoption because once stable coins become, um, a more kind of mainstay of the way that the financial system works, that opens the door for a lot of the other more advanced and futuristic ideas that crypto has introduced, like DeFi, uh, to begin to also gain adoption. And, and I think that, that as a result will lead to kind of all of the other things that we, we believe, um, crypto can offer to, to, to really start to, to ramp up.

   2. ASArianna Simpson3:59

      One interesting thing though is that stable coins, at least us who are in the industry full-time, have been thinking about for like years and years. 'Cause I remember talking about them in like twenty seventeen, twenty eighteen, and I think there was always kind of a narrative about them being useful for remittances or, um, in countries that have had hyperinflation. And you know, for those countries, Bitcoin is a better store of value than their native currencies because sometimes it goes up unlike those which only go down. But it's not ideal because again, as Ali mentioned, it's not a stable unit of account. And so it's interesting to see that, you know, even though this has been talked about for years, now it's, it's sort of really having its moment. And I think, um, to Ali's point, a big part of why that's happening is because the infrastructure has evolved to a point where you can now efficiently move money and you're not having to spend, you know, a huge amount of money to move the money, um, among other things. So I think, I think that's why we're sort of starting to really see it shine now.

   3. AYAli Yahya4:52

      Yeah.

   4. ASArianna Simpson4:52

      I, I would also add that it's sort of intersecting, um, in interesting ways. We're still super early in this, but, um, there's obviously a lot of talk about AI and agents and, um, if you wanna dispatch your agent to go transact on your behalf, you can't really give them your bank account or your credit card, but instead you can give them your crypto wallet. And so kind of this interplay of agents, you know, buying or spending money on behalf of their users with, um, stable coins is a really interesting theme that we're sort of starting to explore.

5. 5:22 – 7:08

   Challenges in the Financial System

   1. AYAli Yahya5:23

      To that point, it, it's kind of ridiculous to think about the way that the financial system works today, where even a normal, uh, sort of local like domestic financial transaction where you go to like a coffee shop and you buy a coffee with a credit card, that transaction involves like the point of sale, the payment processor, the issuing bank, the acquiring bank, the credit card network, and each of these intermediaries takes some cut, some like, uh, some fee on the transaction to add up to something like multiple percentage points on the transaction. And that is the case in a domestic transaction, and if it-- the transaction happens to be international, then that entire stack of participants and intermediaries gets duplicated and mirrored on the other side to the point that, that kind of any kind of financial transaction across borders is, is kind of insane in terms of its inefficiency. Take-- It can take up to like three to seven daysTo move a-- to move money from one country to another, and it can cost like up to ten percent of the transaction to do it. So when you have a technology that can now, again, move an arbitrary amount of money from anywhere in the world to any other place in the world for under a penny and under a second, that truly is very transformative, and it-it'll be very kind of disruptive to the way the fin- the financial system works. So to Arianna's point about AI agents, it's kind of inconceivable that an- then a human may want to participate in the financial system would have to kind of go through all of that inefficiency and deal with all, with all of these arcane human intermediaries, some of which are not even really automated. Uh, that's inconceivable, and the only real way for, to bring online millions or potentially billions or more AI agents into the kind of the financial system is through a technology that's fully based on software and is as efficient as, as like the crypto, kind of the crypto rails that are, that are now available and now can be used.

6. 7:08 – 9:02

   The Future of Stablecoins and Financial Systems

   1. ETErik Torenberg7:08

      So say more about some of the use cases that stablecoins are currently enabling. Is, is it mostly on institutional level? Is it, is it on a consumer level? Or what, what are sort of the, the common interactions people are having with, with stablecoins right now?

   2. ASArianna Simpson7:20

      I think it's both. It depends sort of what markets you're talking about. Um, you know, there's a company in our current accelerator batch called Zarpe, which is, um, operating in Pakistan, and they're, um, basically creating a network of small, um, you know those little shops if you've been to Africa or, or wherever they have these little sort of mobile kiosks where you can put money on your phone and that sort of stuff. And so, um, they're basically using that network in order to, um, create a way for people to come in and deposit their local currency and get stablecoins. Um, and then they're building a whole suite of like financial services around this kind of as the atomic unit. Um, and I think a lot of countries that have, you know, unstable currencies or, or other financial issues for which holding dollars or the equivalent of dollars in stablecoins is very appealing, um, immediately understand the value of this and are very attracted to, to using it. So I think, you know, it goes from that all the way through to banks and financial institutions. Um, I think in many cases there's been an interest in crypto and, and some of the banks and financial institutions have wanted to get involved, but it's been very unclear how they could do it, um, largely in part of the regulatory, uh, largely as a result of the lack of regulatory clarity. But also because, you know, crypto can be a little scary or whatever. And so, um, it hasn't always been obvious for, for them to see a path, how do we get involved? What's, what's the way that we can, you know, bring this to our consumers? And so stablecoins, I think, are, are kind of like a, a baby step in, um, in the sense that it's, it's a lot more clear what the value proposition is. It's a non-speculative use case. Um, and so I think it, it's just a good entry point for some of these larger institutions.

7. 9:02 – 18:21

   The Role of Big Companies in Crypto

   1. ETErik Torenberg9:02

      Ali, why- why don't you give a brief overview or help us understand better sort of the stablecoin landscape around like what big companies or types of companies have emerged or will emerge as a result of it, or, or what it means for the, the-- or how it impacts the crypto startup ecosystem more broadly.

   2. AYAli Yahya9:16

      Right now, like the kind of, the kind of the-- at the center of all of the action are the stablecoin issuers.

   3. ETErik Torenberg9:21

      Yeah.

   4. AYAli Yahya9:21

      So we've got, uh, like two of the major ones right now are USDC, which is, which is created by this consortium between Coinbase and Circle, and then there's Tether. Um, and so both of these are like the kind of the biggest two issuers of stablecoins today. Uh, then, uh, of course, all of like both of these, both of these, uh, stablecoins operate on top of blockchains. So an- another important piece of the stack is the infrastructure on top of which, uh, some of these stablecoins operate on. And then you have like this kind of sort of a collection of companies at the periphery that are generally just companies that help connect the crypto world to the external world. And that would include wallets, it would include like some of the kind of fintech companies that are using blockchain technology as the back end, but have a, a front end that it looks, looks more like a Web2 type of front end, uh, and doesn't expose the crypto aspects to the end user as much. And all of those players will be a part of the, part of the story as well. So one of the things that we talk a ton about is like, what, what will this stack look like end to end, um, as, as the space evolves? And one of the exciting things that we, we are hoping will happen soon is that we'll have-- we'll get legislation, uh, that, uh, sets the rules of the road for stablecoins and for, for what is required for an issuer to create a stablecoin, what kind of collateral is needed for the stablecoin to be compliant. We strongly believe it'll likely, it'll likely happen this year. Uh, it will, it-it'll to some extent commoditize the issuance layer because it'll be easier for new issuers to emerge and create their own stablecoins that, that are also user u-u-USD denominated, uh, to the point that those new stablecoins are somewhat fungible and interchangeable with USDC and with Tether. Uh, because if all of them are compliant, then, then you c- you kind of can trust that all of them are likely to be, uh, ultimately redeemable for a dollar, and they're equally trustworthy. Which, which means that, that then, uh, the issuers may no longer be the ones that capture all the value the way that they do now, um, and instead, a lot of the value might be captured by, by some of the other layers. Like, for example, the infrastructure is likely to capture a lot of the value because a lot of the activity, a lot of these sort of transactions, stablecoin transactions that are happening happen on blockchains like Solana, Ethereum, Sui, a, a number of other kind of important Layer 1 blockchains. And all of those, um, require payment of gas for all of those transactions. So tho- tho- those, uh, blockchains are likely to be important players in, in, in kind of like the way that this, this unfolds. And then I think the other-- like, that's on one end of the stack, and then the other end will be, will be kind of the endpoint, like the user... The, the, the interface that connects this whole crypto world to the end user. So wallets will be likely important. Uh, one of our portfolio companies, Phantom, will likely be well positioned as a, as a gateway or an interface for people to interact with stablecoins and get kind of exposure to US dollars re-regardless of whether-- where they may be. So that's maybe a bit, bit of a layout for, for what the ecosystem looks like at the moment.

   5. ETErik Torenberg12:29

      It seems like for years there's been this question of, hey, what's gonna make it so that there's hundreds of millions of, of, of users? Or I'm not sure what it is at, at the moment across all of crypto or, or a billion users. Or, or they asked before that kind of what's the iPhone moment? What's sort of the, the product that everyone's gonna be using that's also a platform for everything? Is it, is it stable coins or is it something else? Or how do we think about that?

   6. ASArianna Simpson12:48

      I mean, I think the odds are good that, that stable coins are that thing. Um, I also don't think that necessarily there needs to be one thing.

   7. ETErik Torenberg12:56

      Yeah.

   8. ASArianna Simpson12:56

      I think, um, you know, we mentioned AI. Ali has made some investments in that category. We've, we've done some as a team. Um, I think like, you know, there's going to be different waves that bring in different users. A while ago, Web3 Games was a big entry point, um, now it's AI and stable coins. So I think, you know, the, the users do come in waves. I think there's, um, a lot of it that sort of tracks the cycles that-

   9. ETErik Torenberg13:21

      Yeah

   10. ASArianna Simpson13:21

       ... um, you know, we see every couple years in crypto. You know, Chris always talks about like, do you wanna be the indie band or do you wanna play like at the Super Bowl-

   11. ETErik Torenberg13:28

       Yeah

   12. ASArianna Simpson13:28

       ... or the, the mega stadium? And I think like stable coins really have the ability to appeal to like a much broader audience because like we said, it's just a, a use case that makes sense. It's, it's pretty clear what the value proposition is, um, and so it, it appeals to a broader audience.

   13. AYAli Yahya13:43

       Yeah, in, in part also because it, it addresses a very real pain point, uh, whether it be for people in third world countries that want exposure to the dollar because their local currency may not be as reliable, or people who want to move money between borders, and we, we talked about how that can be extremely inefficient.

   14. ETErik Torenberg14:01

       Yeah.

   15. AYAli Yahya14:01

       Or even companies that want to move money across borders, uh, they still have to deal with all the inefficiency, and, and stable coins are actually... Like, like apparently companies like SpaceX are, are already using stable coins for treasury management to move money from, like one country to another, uh, in a way that's much more efficient than using the-

   16. ASArianna Simpson14:19

       Yeah, I believe they were using Bridge-

   17. AYAli Yahya14:21

       ... traditional mechanisms

   18. ASArianna Simpson14:21

       ... which Stripe now acquired. Yeah, I mean, it's interesting. Stripe Sessions, you know, their-

   19. AYAli Yahya14:25

       Yeah

   20. ASArianna Simpson14:25

       ... their big conference was like all about stable coins.

   21. AYAli Yahya14:27

       Wow.

   22. ASArianna Simpson14:27

       Like so many of the talk tracks last week were, were about that. And so I think it's, it's really indicative of the fact that this is kind of permeating not just crypto companies, but out more broadly. And I think obviously the, the other necessary element in addition to the infrastructure improvements and all that is just the fact that now we have a more friendly regulatory regime, which is interested in seeing these kinds of things flourish.

   23. ETErik Torenberg14:47

       One thing I've always appreciated about crypto investing is you guys as, as domain experts don't just need to understand the technology, which is complex enough in and itself, but you also need to understand, uh, sort of the policy regime, law, uh, monetary policy, you know, economics, uh, foreign policy, and how all these things are, are sort of intersecting with, uh, with crypto startups.

   24. ASArianna Simpson15:08

       Well, I mean, I'm certainly not the domain expert on, on some of the policy stuff, but we've really assembled a super strong team-

   25. ETErik Torenberg15:13

       Yeah

   26. ASArianna Simpson15:13

       ... who's been kinda very involved in DC and, and trying to kind of push the ball forward for the whole industry.

   27. ETErik Torenberg15:18

       You mentioned Stripe getting deeply involved in crypto. It's interesting 'cause people often contrast it with AI and say, "Hey, AI is mostly sustaining innovation," and that of course there's, you know, massive companies that have been sort of formed, but a lot of the gains have gone to the, the, you know, the biggest companies, whereas crypto is mostly a, a startup industry, though some companies are, are getting-- some bigger companies are getting involved too. You know, it's funny, like maybe Facebook was just a few years too early with the... If, if they had launched Libra in a more friendly regime-

   28. ASArianna Simpson15:44

       Mm. Yeah

   29. ETErik Torenberg15:44

       ... might that have worked? I guess how, how do you think about sort of the startup versus incumbent distinction in, in, in this space?

   30. AYAli Yahya15:50

       Yeah. Cryp- crypto is like a fundamentally radical, uh, s- set of technologies that is very, very hard for incumbent players to adopt and run with precisely because it, it is so fundamentally disruptive to the way that, that they do things. Um, I was at Google a while back. I was at Google X, uh, working on a robotics project, but I was already very interested in crypto, and Google X is supposed to be like the moonshot factory-
8. 18:21 – 23:20

   Decentralized Social Networks and Consumer Preferences

   1. ETErik Torenberg18:21

      Is that still the vision, uh, that we'll have decentralized social networks, decentralized marketplace, or kind of where are we on that vision, and what are the bottlenecks to that vision being, being realized? Sort of, you know, networks at scale that are truly decentralized and competing with some of the centralized ones. Is it technological, or is it that people just don't really care about sort of-

   2. ETErik Torenberg18:38

      This in the same way, or like why hasn't it happened yet?

   3. ASArianna Simpson18:41

      I think it's, it's mostly a consumer preference issue. Um, I, I do think like now some of the products have gotten really good, like Farcaster, for example-

   4. ETErik Torenberg18:50

      Oh, Farcaster, yeah

   5. ASArianna Simpson18:50

      ... the product experience is, is very good. But it's just challenging to get people to switch, um, because, you know, you're-- the reason you're on the social network is for the graph, and so it's difficult to kind of export an entire graph. Um, I, I think like users are kind of accustomed to being the product. Like, you know, i- if, if you're not paying for the product, you are the product, and I think in many cases, consumers are kind of used to that experience and, um, you know, ads are annoying, but they're not necessarily that bad. And so people just kind of, um-

   6. ETErik Torenberg19:25

      Right

   7. ASArianna Simpson19:25

      ... accept it and don't think too much about it. And by the way, this is interesting because if you look at like all of the big social networks, none of them have been started in the last decade. Um, and-

   8. ETErik Torenberg19:35

      Right

   9. ASArianna Simpson19:35

      ... and that's not true just of crypto, it's true in general.

   10. ETErik Torenberg19:39

       Yeah.

   11. ASArianna Simpson19:39

       And so it's just very difficult, I think, to kind of get over this hurdle of like reaching a critical mass whereby people actually say, "Oh, I'm in the network and I'm gonna stay in the network." Um, so it's not just a crypto thing. I think it's just-

   12. ETErik Torenberg19:51

       Right

   13. ASArianna Simpson19:52

       ... it's just difficult nowadays. People only have so much attention and, you know, with the networks that, that there are, most of the attention span has already been captured. So I think we may need to see some of the existing ones falter before-

   14. ETErik Torenberg20:05

       Right

   15. ASArianna Simpson20:05

       ... there's like enough room for, for some-

   16. ETErik Torenberg20:07

       Yeah

   17. ASArianna Simpson20:07

       ... of the new ones to really take hold. Um, but we'll see.

   18. AYAli Yahya20:11

       Yeah, we, we used to believe that these, these ideas and these companies would be the first to gain adoption, and that was largely because, uh, all of the financial use cases, like the DeFi use cases, even like the stablecoin-

   19. ETErik Torenberg20:22

       Right

   20. AYAli Yahya20:23

       ... stablecoin use cases were illegal.

   21. ETErik Torenberg20:25

       Yeah.

   22. AYAli Yahya20:25

       As was the case in the previous administration. And so it felt to us like the more kind of innocuous-seeming social network use cases, gaming use cases, would more likely gain adoption, and then that will be the gateway for other things to eventually become legitimate. And-

   23. ETErik Torenberg20:39

       Maybe it's inverted

   24. AYAli Yahya20:40

       ... and get like a acceptance from a regulatory standpoint. But now that the regulatory landscape has shifted so much to the point at which it's now a much more friendly landscape, and as a result we have like all these traditional financial institutions getting involved, and stablecoins are really having a moment, combined with the kind of the infrastructure clicking into place, it's now much more clear that the kind of the more financial use cases are likely to happen first. Those will act as a legitimizing force for the rest of the space, and then the consumer use cases, which we still believe in, will, will take longer. And I think as Arianna is saying, it's very, very hard to get, to get those things right. Like the bar that a consumer has on the quality of a, of a consumer-facing application is extremely high.

   25. ASArianna Simpson21:19

       Mm-hmm.

   26. ETErik Torenberg21:19

       Yeah.

   27. AYAli Yahya21:19

       And crypto has not yet figured out all of the UX challenges, and like the kind of the seamlessness and, and usability challenges of crypto are still... It's still a nascent technology-

   28. ETErik Torenberg21:29

       Yeah

   29. AYAli Yahya21:29

       ... on that front. Uh, so it'll take longer for all of those things to get resolved, but in the meantime, we have all these other financial use cases which, which I think will, will kind of solidify the technology, will legitimize the space for a broader group of people, will get more entrepreneurs to come into the space.

   30. ETErik Torenberg21:43

       Right.
9. 23:20 – 31:32

   The Intersection of AI and Crypto

   1. ETErik Torenberg23:20

      Ali, let, let's go a bit deeper on sort of AI and, and the intersection between AI and crypto. What, what's, what's working there? Where are you most excited?

   2. AYAli Yahya23:29

      Uh, Peter Thiel actually had the, this tongue-in-cheek line-

   3. ETErik Torenberg23:32

      Yeah

   4. AYAli Yahya23:32

      ... back in 2018, uh, which I think rings true, which is that AI is communist and crypto's libertarian. Which I, I think is, it actually, like the kind of the meta point is that these two technologies are, are, uh, very different from one another, and in many ways they're actually counterweights for each other. Uh, so there are many ways in which they are intersecting, and we can talk, we can talk through a few of them.

   5. ETErik Torenberg23:57

      Yeah.

   6. AYAli Yahya23:57

      Um, I think one of the most important ways is, um, that AI is creating a kind of overabundance of media and of human-looking, uh, entities, agents that can pretend to be human, uh, or deepfakes of video or audio that, that seems very human, and it's, and it's hard, it's hard to know whether you're looking at something that's real or something that's purely generated. Uh, and crypto happens to be a really good technology to, to help authenticate, uh, media or help authenticate data in general. One of the ways in which these two worlds will collide is that there are crypto projects that are working on, um, among many other things, proof of humanity.Uh, which would allow someone, anyone, a user on the internet to, um, to prove that they actually are human so that anyone on the other end can, uh, can know that they're interacting with a human and not with a, with an AI bot or an AI agent. Worldcoin is one of these companies, is one of our portfolio companies, and they built an orb that uses biometric information and also uses zero-knowledge proofs to keep all of the biometric data private. In fact, like, the, the data itself never leaves the orb, and only a, a, a code or a cryptographic object that is derived from the biometric data ever leaves the, the orb. And from that cryptographic object, it is not possible to infer anything about the biometric data itself. Uh, and it's, it's a, it's a technology that allows anyone to, to prove their humanity on the internet. There was that famous line in the '90s that on the internet, nobody knows you're a dog.

   7. ETErik Torenberg25:29

      Yeah. [chuckles]

   8. AYAli Yahya25:30

      Uh, and that, that is very, very true now in, in, uh, twenty twenty-five, where, like, on the internet, nobody knows you, you're, you're human. Like you could be, you could be anything. You could be-

   9. ETErik Torenberg25:39

      A dog or an AI

   10. AYAli Yahya25:40

       ...a dog or an AI [chuckles] or anything else.

   11. ETErik Torenberg25:41

       Yeah.

   12. AYAli Yahya25:42

       Um, so that's one way I think that, that, uh, cryptography, uh, blockchains, um, will help kind of deal with the kind of the immensity and of abundance of, of signal and noise that AI will, will generate. Uh, another big one is that, um, crypto can help decentralize the power structures that are emerging in AI. Um, at the moment, it seems like there, there will be a small number of very, very powerful players in the AI world. It's, it's looking like even though w- it's unclear as to whether there are things like network effects that drive defensibility, there are, uh, just a handful of really powerful players in the space, at least at the kind of the model, uh, layer, like OpenAI and the other kind of big, big companies that build foundation models. Crypto offers an alternative for creating, um, AI systems that's more decentralized. So an example of this is a company called Jensen, which is also in our portfolio, that builds a kind of marketplace for compute. So someone on one side of the marketplace can provide their idle, uh, GPU capacity, uh, to the network, and then someone on the other side who might want to use the GPU compute for training a, a model or for doing inference on a model can, can, through the network, um, make use of all of that compute. And the network manages all of these heterogeneous computational resources to create something that feels like a unified cloud on which you can run all of these machine learning AI, AI workloads in a way that's fully decentralized, in a way that is not, is not kind of controlled by a single company, and in a way that, that could actually be more efficient than, than a cloud by virtue of using capacity that otherwise would just go idle and unused. Uh, it's just capacity that's locked away in all of these, like, pockets that are, that are far removed and not in one particular data center. There are many hard technical challenges to get there, but, but, uh, there are a lot of smart people working toward, toward figuring that out, and, and we're, we're kind of very optimistic that that, that that'll also happen. Um, it'll also allow for machine learning workloads to run in a way that i-is also verifiable. So this way, you don't have to trust a centralized company like, like, say, like, uh, Facebook or, like, one of the kind of the social media companies that the machine learning model, that the AI model that they're running for the, for, say, like, um, the recommendation, uh, algorithm is, is unbiased or is, or has particular properties. You can actually, with cryptography, verify that those things are the case and that, that these things are, are executed in a way that's correct. You can use some of these decentralized systems for, for that as well. Um, and then maybe the final one, which I think is the most futuristic and the most challenging, is having crypto help AI figure out the new business models for-

   13. ETErik Torenberg28:33

       Mm

   14. AYAli Yahya28:33

       ...the internet. So one of the, one of the issues that AI will create with the current business models o-of the internet is that right now, um, the way that the internet works is that you have an aggregator, like a search engine, driving traffic to creators of media, like say someone who has written a blog post or someone who has, uh, like a page that has content. Um, and there's, uh, there's ads as like the business model that in- that mediates that, that whole interaction. And that entire business model goes away if you just have an AI that just gives you the answer that you're looking for. So instead of doing search on Google, getting exposed to a bunch of ads, and then clicking through to a website, and having all of those parties kind of be happy because, because kind of the business model includes all of them. Now, instead of that, you just interact with an LLM, and you get the answer immediately, and you never click through to the final page, and you never, you never get exposed to an ad. That kind of completely, completely changes the way that the internet works, and we're gonna need new business models for, for the internet if that's the case. Uh, so one idea is that you could, you could through, through, um, there, there are a lot of these research efforts to try to figure out attribution in the training of a machine learning model for what pieces of data contributed to a particular output. So you're asking an LLM a question. You kind of wanna know what pieces of data that were used to train that LLM contributed to the answer, uh, that the, the LLM ultimately gives you when you ask it a question. And if you could know that, then you could come up with a business model that rewards the people who contributed that data originally, and crypto could be part of that. So there are open problems on both sides. Like, you have to figure out this attribution challenge in the AI world, and there are people working on, on that problem. And then there's a, there's a challenge on the crypto side, like how do you build a network that, uh, can, using that information, compensate all of the parties involved in having the AI actually give you what you ultimately, you ultimately want?

   15. ETErik Torenberg30:40

       Fascinating. Are, are the big labs interested in encrypted? Do they need to be interested in crypto for, for th- this to happen, or is this largely coming from startups? You know, it's funny, Sam Altman, of course, um, OpenAI, but also Worldcoin, so-

   16. AYAli Yahya30:50

       Yeah

   17. ETErik Torenberg30:51

       ... has some familiarity. But what, what can you say about this?

   18. AYAli Yahya30:53

       For the most part, I don't think so. I th- I think for the most part, the AI labs, they're just running with AI, and there's, there's so much that's exciting in that world that I think crypto is not-- doesn't really factor, factor in at all. But there are crypto companies that are very interested in AI and are thinking about the ways in which crypto will ultimately make a difference, uh, in that world. So, like this company I mentioned, Gensyn, actually, the founders are very, very deep in AI. They, they have an AI background, but they also happen to have, like, a deep, um, commitment to building things in a-- as a, as open source networks that, that are ultimately decentralized. And so they are, uh, of the few people who really do straddle both-

   19. ETErik Torenberg31:31

       Yeah

   20. AYAli Yahya31:31

       ... both worlds.

10. 31:32 – 35:54

    Misconceptions About Crypto

    1. ETErik Torenberg31:32

       Zooming out a little bit, what are some of the biggest misconceptions people-- you think people have about the space right now? May-maybe Arianna, starting with you.

    2. ASArianna Simpson31:39

       Well, I mean, I think for the last few years, it's been really challenging to launch a token network in the United States in particular because, um, there was a lack of clear legislation. Um, and then there were very aggressive, um, folks in several agencies, you know, working on basically not allowing entrepreneurs to launch networks, and that applied to entrepreneurs who were very well-meaning and very much wanted to do things, um, by the books. And so I think one of the, the challenges was that people obviously didn't wanna end up in, in legal trouble, and therefore, in many cases, kind of pulled back their plans on that front, which really impeded their progress on the product side as well. So they couldn't really build their vision, um, because I think tokens are part and parcel of what's valuable and interesting about crypto, and so if you remove that piece, it doesn't make any sense. Um, so the thing that's a misconception perhaps is that, um, the situation is, is very different now. You know, we have, um, a much friendlier administration in place. We have a very different, um, situation in terms of the leadership of these agencies now. Um, and so I actually think it's, it's a great time for folks to be building token networks. Um, and I think that message hasn't necessarily fully made it out there. Um, so I'm hopeful that, you know, more entrepreneurs kinda realize that the situation is, again, very different from what it was just a few months ago and, and start to kinda come back in, in force.

    3. AYAli Yahya33:10

       Yeah. Yeah, and I, I completely agree with that. I, I think another big one is i- outside of, like, our immediate circles, like, if you go outside of the world of tech, it's shocking to me that people continue to think of crypto as just like a, like a thing that's, that's supposed to be money only. Uh, or they think of a, a blockchain as a kind of ledger for money. Um, and I think that that misconception comes from Bitcoin, from Bitcoin trying to be money and only money and not really trying to be anything else. And the fact that, like, the, the mis- this misconception is that, like, Ethereum is like Bitcoin, and Ethereum is actually the silver to Bitcoin's gold, and that all that crypto really is, is just another kind of attempt to doing what Bitcoin did. Uh, and the fact that, that Ethereum actually is a fundamentally different thing than Bitcoin is, is still not widely understood. The fact that Ethereum is actually a kind of computer where you can build all sorts of different applications, where the software that runs on top of the computer has unique properties that no other software, uh, has ever had is, is I think not widely understood. And these are programs that-- like the programs that run on a blockchain like Ethereum are programs that have a life of their own. They are, um, programs that can make commitments that no one has to trust anyone to believe in. It's essentially free from interference from anyone, including the people who originally wrote the program. And so that's a very unique property that no other kind of software has. It's a, it's a kind of technology that inverts the power relationship between the software and the hardware, whereas historically, the hardware has always had power over the software because whomever controls the hardware can turn off the software or change it in some way. Uh, whereas in crypto with blockchains, the hardware is, is a commodity. These are people who run, like the min- miners, for example, or validators in the blockchain context, don't have any power over the software that runs on top, and, and that's what makes a blockchain unique, and that's what makes it capable of, of doing so much more than, than just money. You can, you can kind of build-

    4. ETErik Torenberg35:19

       Yeah

    5. AYAli Yahya35:20

       ... far more sophisticated primitives. So stablecoins are the first thing, but the, the things that come after, things like DeFi, where you can build much more sophisticated financial princip- uh, uh, primitives on-chain or some of these other more futuristic ideas where you can do AI, you can do, uh, Deepin, you can do, um, uh, some of these, uh, sort of, uh, a- consumer-facing applications like decentralized social networks. All of that relies on the properties of a blockchain computer that's not just a ledger. It's a full-on computer on which you can build applications. That I think is not something that most people really get.

11. 35:54 – 39:33

    Smart Contract Platform Wars

    1. ETErik Torenberg35:54

       Maybe Ali, can you give a bit of an update on kind of the smart contract platform wars? As a, as a, as a outsider or someone who's paid attention, you know, at certain times and not at certain times, what I've sort of heard or gleaned is, hey, Bitcoin, as you mentioned, has been-- has tried to be money, but there's a little bit of a nascent Bitcoin builder movement. I'm not sure if they've really, um, if that's led to something particularly meaningful in the space. And then my understanding is that Ethereum has tried to sort of optimize across multiple dimensions, both trying to be money, but also trying to be sort of the, the base layer for, for sort of decentralized internet and committed to decentralization in a way that some people think is at the sacrifice of, of usability, when whereas Solana has not had the same commitments to decentralization, is really optimized for, for u- usability. When is that a fair characterization, or how would you edit that characterization? And two, how, how has this all played out, or where are we r- right now on that, on that level?

    2. AYAli Yahya36:43

       That's actually a really good characterization. I, I think, uh, i-- the way that I wouldI would break things down is that there, there is a very large and multidimensional trade-off space, and it's very hard for any one system to cover the entire space. So it makes sense that you'd end up with different systems specialized for different things, and, and then as a result, having different use cases and different value propositions. So Bitcoin, I think, has been extremely successful at becoming like a kind of digital gold.

    3. ETErik Torenberg37:10

       Yeah.

    4. AYAli Yahya37:10

       It's been extremely volatile, but, but I think that there is this belief, there's a, there's memetic value that, that Bitcoin, um, is long-term a, a, a pretty good store of value that will, that will be around for a very, very long time. It's not going anywhere, and, um, and will have properties that are, that are desirable, that, that are not provided by other things like fiat or, or like, uh, gold itself or anything.

    5. ETErik Torenberg37:35

       It's funny, it's only been around for less than twenty years, but in my head I sort of treat it as gold. It's, like, gonna be there forever and-

    6. AYAli Yahya37:40

       Ex- exactly. Exactly. So it's, it's really succeeded at that and, and the-- I think some of the things that has helped it succeed at that is, is the fact that it is so hard to change and the fact that it is so simple and you can't do that much with it. Those things are disadvantages in some contexts, but they're real advantages when trying to solve for that particular thing. Then there are, like, all the other, uh, smart contract platforms that are trying to do much more and are trying to be computers, and Ethereum lands in some part of the trade-off space here where they do really optimize for decentralization, and they are fully decentralized, and so it's, it's a, it's like a hard... It's hard for Ethereum to change quickly because there are a lot of stakeholders and a lot of people who, who want to be able to, um, to influence its direction. Um, and so the choices that it has made ha- have made it a, a pretty good platform for some of the kind of the higher stakes, like DeFi applications or for, or for the issuance, for example, issuance of new assets on Ethereum. That, that might be the default simply because it's been around the longest, and its high amount of decentralization make it very suitable for that. And then there are blockchains like, say, Solana and Sui, which are extremely high performance. They're very well suited for, for transactions and for payments and for, for things that do require that, that level of performance. If you wanted to build something like, like the Nasdaq exchange on chain, there's no way you're doing that on Ethereum L1. Uh, you, you probably need a blockchain that has the, the kind of the level of performance that a Solana or a Sui or some of the other kind of more modern or more recent blockchains have. So I think I expect that, that, uh, that, that like each of these ecosystems will, will likely find, uh, their niche. Um, it's o- it's obviously very uncertain, and there's all this talk about how maybe Solana will kind of eat Ethereum's lunch, and that's a possibility.

    7. ETErik Torenberg39:27

       But it's still wide open is basically what you're saying?

    8. AYAli Yahya39:28

       Yeah, it's, it's wide open, and it-- there's, like, a lot of ways in which, in which it could play out.

    9. ETErik Torenberg39:32

       Yeah.

12. 39:33 – 41:14

    Policy Changes and Future Opportunities

    1. ETErik Torenberg39:33

       So Arianna, I wanna double-click on your point about the misconception in terms of how the regime, policy regime has changed.

    2. ASArianna Simpson39:38

       If you look at the Novi, Libra, you know, it had seven different names, so [chuckles] whichever one you wanna use, um, that was something that could have been incredibly interesting because you have, um, Facebook now, now Meta, with such an enormous distribution network, already has all the users, um, integrating payments into that via crypto made all the sense in the world. Um, but obviously they were told in no uncertain terms that that was not something that they could proceed with. And then unfortunately, um, you know, the whole project kind of died. I will say it, it went on to, um, flourish in other, other forms because, you know, we're investors in, uh-

    3. ETErik Torenberg40:18

       [whispering]

    4. ASArianna Simpson40:19

       ... Misson and Sui. Yeah, they spun out of there. So there have been actually a number of great teams who, who came from there. So I think the diaspora of talent has continued to kind of fight the good fight and, and build. But in general, um, you know, that's another project that I think sort of, as it was initially conceived, had to die on the vine because of that. So yeah, you know, it's, it's-- I think as investors, it's not necessarily our job to envision, like, what is possible-

    5. ETErik Torenberg40:43

       Right

    6. ASArianna Simpson40:43

       ... but rather to recognize it when we see it. Um, and so I'm, I'm personally very excited to see what entrepreneurs come up with in, um, the next couple years now that we have kind of a, a new opportunity space. [upbeat music]

Episode duration: 41:15