Bootstrapping A Crypto Nation State w/ Eric Meltzer

This post was last updated on July 11th, 2019 at 04:49 pm

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Description

Today’s episode is part 2 of my conversation with Eric Meltzer.

Our previous episode with Eric has gone on to become one of our most popular episodes to date and this is a second chance to hear from him.

This episode stands on its own and includes a very compelling step by step strategy for bootstrapping a crypto nation-state.

For some background, Eric is a partner at INBlockchain, China’s oldest and largest institutional crypto asset and blockchain fund with several billion under management, and he’s recently opened their US office in Boston.

Please enjoy part 2 of my conversation with Eric Meltzer of INBlockchain.

Topics Discussed In This Episode

A step by step plan for bootstrapping a crypto nation state from scratch.
Some of Eric’s favorite token projects.
Eric’s thoughts on Token curated registries.
The appeal of masternodes as investment opportunities
The importance of biz dev for blockchain projects.
Monero’s move to ASIC Resistance.
Ethereum’s shift to proof of stake
Eric’s opinions on some of the world’s most popular crypto hot spots.

Links Relevant To This Episode

Transcript

Clay Collins: What you’re about to hear is part two of my conversation with Eric Meltzer. Our previous episode with Eric has gone on to become one of our most popular episodes to date and this is a second chance to hear from him. This episode stands on its own and includes a very compelling, step-by-step strategy for bootstrapping a crypto nation-state. For some background, Eric is a partner at INBlockchain, China’s oldest and largest institutional crypto asset and blockchain fund with several billion under management and he recently opened their U.S. office in Boston. In this episode we discuss: one, a step by step plan for bootstrapping a crypto nation state from scratch; two, some of Eric’s favorite token projects; three, token curated registries; four, master nodes as investment opportunities; five, the importance of biz dev for blockchain projects; six, Monero’s move to ASIC resistance; seven, Ethereum’s shift to proof of stake; and eight, ecosystem funds. We also talk about Silicon Valley, Hong Kong, Singapore, Switzerland, Berlin, and the effect that place has on the development of our ecosystem. I should mention that if you want to discuss these topics or this podcast episode, feel free to join us on our telegram group at nomicstelegram.com. Conversations like this are why I do this podcast. Please enjoy part two of my conversation with Eric Meltzer of INBlockchain. Eric, when we spoke last time, we had a pretty compelling conversation around a step-by-step strategy for bootstrapping a crypto nation state from scratch. Can you break this down for us?

Eric Meltzer: The basic idea is there’s a lot of interest among crypto people in setting up new forms of human organization. There’s projects like Aragon that are trying to facilitate that. You see guys like Binance that are so large and so extra-national that they’re almost approaching like sovereign entities themselves. A bunch of us were thinking what would be the path to bootstrap a new extra-national sovereign entity. What I was thinking is that most of these people out there that want to like start a country, first of all, they’re almost always dudes. They’re almost always a little kooky. The thing that they tend to seize on and what in my opinion is kind of like cargo culty is they think like what does a country have? Well, a country has land and so the priority for them is I got to go find some land if I want to have a country. Yve seen everything from people building stuff in the ocean, people claiming floating-sea platforms, people claiming tiny volcanic islands. There’s some awesome guy, I believe it’s called Liberland, but some guy figured out that in between the border of two very small eastern European countries there’s this tiny sliver of unclaimed land. He just went there and he’s like, “Okay, this is now my country, Liberland.” I feel like it’s going okay, how these things normally end is someone just shows up and is like, nope, that’s not a country, we’re annexing it, I think maybe that hasn’t happened to Liberland yet. But anyway, what we kind of thought was an alternative to this would be,

Eric Meltzer: if you did want to start sort of a sovereign entity, the first thing you want is actually, recognition from other countries. It’s not land. What you do is, first you raise a lot of money. You call it a sovereign wealth fund. Before crypto, that step was impossible. You would fail at the starting point because, if you wanted to raise a lot of money for another country, you would have to put that money somewhere. If you put it in the bank account of a bank in any other country, then at that point your new entity is not really an independent sovereign because all of its money is under the control of wherever the bank is. Of course with crypto, you can just say, well this Bitcoin address represents our country’s sovereign wealth fund and the first thing you do with that money is you identify some countries that are in need of infrastructure investment and you make a deal with them and you just say, “Look, we’ll invest in your country.” Hopefully, you can invest in like electricity generation and do some mining or something. Hopefully, you can find some synergy. You just invest in these guys, and, in return, they recognize your new entity as a true sovereign and they give you an embassy. Via this bootstrapping process, what you end up with is a bunch of small countries that recognize you and a bunch of embassies scattered around the world that you can sort of think of as like a distributed country. What’s cool about this is, if you issued your own cryptocurrency, I would assume that that cryptocurrency will appreciate in value a lot

Eric Meltzer: every time a new country recognizes you and, at some point, you have enough people that recognize you and you have enough money in the bank that you can go buy some land. At that point, you’ve successfully bootstrapped the new country, which is something that no one’s done in quite a while. It’s like a cool idea, and I think we’ll see flavors of this start to happen over the next decade or two where people will realize that crypto provides a really powerful way of organizing humans around a common goal.

Clay Collins: It reminds me a lot of blockchain consensus mechanisms. Instead, this is nation-state consensus mechanisms and, to your point, once you do buy some land, it’s not just that you own the land, but you also have a network of other nation-states that are sort of obliged to recognize that physical land as part of your nation.

Eric Meltzer: I’m kind of skeptical that you ever end up wanting to buy land in this scenario. If you look at the functions of a modern nation-state, many of them have nothing to do with physical land or physical anything. It’s like providing a passport, providing corporate domicile, all of these things. A lot of these things you can do without land. In some sense land is like a liability. If you have a truly decentralized country, where all of your physical holdings are just embassies in other countries, it’s very hard to attack you. There’s definitely potential for sovereign entities to exist that remain landless. In background research for this idea, I looked into has there ever been sort of landless sovereign entities and, in history, it’s happened a few times. It happened during World War II where there were these governments in exile that got kicked out by the Nazis, but were still recognized as legitimate governments. In a much more longer term and persistent fashion, there’s this super interesting organization called the Sovereign Military Order of Malta. What they are is they’re the original government of Malta back from the Crusade days. They’re granted UN observer status and they’re recognized as a sovereign entity by like 200 countries that have embassies. Really beautiful Crusader-age embassies all around Europe. What they do now is mostly humanitarian aid. Being a sovereign is useful for them because they can just enter war zones and help evacuate people, which is the main aim of their NGO.

Eric Meltzer: Yeah, these guys exist and international law kind of figured out a way to work around it. We will start to see this like model of landless sovereigns come about because of crypto.

Clay Collins: I could see people wanting land, perhaps, because of alternative tax structures. I definitely see a huge value-add for having embassies all over is that, if you ever get into real trouble, you could make your way to the local embassy and I could see, potentially, an alternative model as opposed to having sort of a large country-size piece of land and a bunch of small embassies that you could actually have, potentially, very large embassies in other countries that might have a hotel or a resort or maybe a strip of beach, and then just wanting to hang out there.

Eric Meltzer: There’s some precedent for that from colonization where you’ve had colonial powers that have had like legation areas within the countries they colonized. You can have a much less exploitative version of that where a country could lease some land. You could lease some land for 99 years or whatever it is, to some other sovereign that wants to have a place to do stuff. There’s a lot of fascinating models. Anything that sort of increases competition among nation-states for people is a good thing. Right now the cost of switching countries is ridiculously high. And you see that. Anytime that switching costs are high, then people get badly treated. As an American, I really wish the US had to compete a lot harder to be a place people wanted to immigrate to. What you see right now is the opposite. The US is, in my opinion, much to our detriment, very anti-immigration and is not at all competing for talent. The more you can force nations to compete for talent the better.

Clay Collins: If I were super aggressive, I’d just be like, we’re going to brain drain the world.

Eric Meltzer: Totally, that’s like totally what the US should be doing. And, having gone to school in China, and watched a bunch of my, The school I went to in China is thought of as like the Harvard of China and it was easier for me to get in. That’s not a brag. It was very easy for me to get in compared to the Chinese students. But the Chinese students that go to that school are, literally, the .00001% top students in the country. Every single one of them should end up in the US if they want to. But what I saw is, many of my classmates who very much wanted to come to the US, had no path to doing so, which, to me, is just like out-of-control ridiculous.

Clay Collins: Let’s do the lightning round of underrated/overrated if you’re down for this.

Eric Meltzer: Awesome.

Clay Collins: Hey, it’s Clay cutting in here from the editor’s booth, to give you a heads up that a lot of what we’re about to talk about might be out of scope for someone new to this space. We’re about to discuss technical analysis, the fat protocol thesis, Ethereum Improvement Proposal 999, ASIC resistance and much more. Please know that if any of this is new to you, we’ve got you covered because our show notes for this episode contain a list of resources and links around these, and more topics. You can find the show notes at blog.nomics.com/18. Okay, back to the interview. Fat protocol thesis, underrated or overrated?

Eric Meltzer: Mega overrated. I was actually on a panel with Jill Carlson who’s a great Twitter follow for anyone out there looking for cool people to follow on Twitter. Jill’s super smart. And Nic Carter, who I mentioned before. We were on this panel about whether we believe in fat protocol. My sense is just that it’s not a thing. There’s actually just no reason why the underlying protocol should be more valuable simply because people are launching tokens on top of it.

Clay Collins: EIP-999, overrated or underrated?

Eric Meltzer: That’s a fascinating question to me. I really wish that Augur was online so that I could make a prediction market bet on whether they will fork and get those funds back. The proposal that I saw that I liked a lot from this guy Alex van der Sande, was you could issue a token that represents those lost tokens and, if the lost tokens ever do get recovered, then these new tokens that you issued would be redeemable for the lost tokens that we recover. That’s a really cool idea, right, ’cause the idea there is the market will just price those, and so, if people think there’s a decent chance that those tokens are coming back, then you imagine that the lost-token tokens would trade at near parity with ETH. In reality, I think they would trade way under the market value of ETH. But it provides like a non-coercive way for these people to at least get some access back to their tokens. Personally I think immutability is a super important component of blockchains. It would probably be a pretty bad idea But it’s a super interesting test sort of of the community. I think as an issue its importance is impossible to overrate.

Clay Collins: If they do this for Parity, will they do it for me, and so why Parity, not me? And then what about its scale over a lot of years? Yeah, it’s a big deal.

Eric Meltzer: A lot of the vitriol people have towards Parity is kind of sad. The Parity folks are shipping cool stuff and then they’re a big part of the Ethereum community. They’ve gotten a lot of hate over this which is sad. On the other hand, it probably is not a good idea to recover those funds.

Clay Collins: Moneros’ move to ASIC resistance, overrated or underrated?

Eric Meltzer: I’m a huge fan of ASICs. I think it’s not a good idea. It’s cool that they did it. It’s interesting to see. Monero is a very decentralized community. It’s a very like noisy and fragmented community. It was cool to see them come to consensus around hating Bitmain ASICs. Their logic for being ASIC-resistant, which I do respect, is like, they think if there’s only one company out there with these ASICs, then we should not allow them to be controlling such a large chunk of the hash power for network security reasons. I don’t think they’re wrong there. I think long-term though, it makes much more sense to embrace ASICs and to have a lot of reference designs for powerful ASICs out there publicly, so that you can have a lot of manufacturers making the ASICs. I guess there’s two facets to this, and if you want a much deeper look at this issue, David Vorick from Sia has a blog about why ASICs are good, that I think is a great read. The short summary is just that, if you’re relying on graphics cards, you’re also kind of relying on a monopoly because, typically, it’s only NVIDIA graphics cards that really work very well for this. The other issue that I think’s much more important is that if you buy ASICs, so if you spend millions, and in some instances, hundreds of millions of dollars of cap ex on buying ASICs that only work for a given chain, your fate is now bound to the fate of that chain and you’re strongly incentivized to not do anything that’s long-term negative for that chain. You have sort of like a suicide pact. Whereas if you have GPUs, and you get 51%,

Eric Meltzer: then maybe you just go do a massive double-spend and then go mine some other GPU coin, because you’re not bound to that coin. You have no loyalty. I think ASICs, in general, are great. But I think that the Monero decision to move away from a specific ASIC that was the dominant hash power on their network for awhile is an understandable one.

Clay Collins: What I respect about Monero is the pace at which they learn. They might not always be making the right decisions but they just automatically do a hard fork every so often and so they’re not afraid of making decisions and everyone seems to learn as a result and it almost feels like one of the best indicators of the success of a project is the rate at which they can learn, whether or not those learnings are sort of positive or negative. It’s cool to watch. Okay, time out. I’m going to do some native advertising for the Nomics API. This episode of Flippening is sponsored by the Nomics API. The Nomics API offers squeaky clean and normalized primary-source trade data offered through fast and modern endpoints. Instead of having to integrate with a bunch of exchange APIs of varying quality, you can get everything through one screaming-fast fire hose. If you found that you or your developers have to spend too much time cleaning up and maintaining datasets, instead of identifying opportunities, or, if you’re tired of interpolated data and want raw, primary-source trades delivered simply and consistently, with top-notch support and SLAs, then check us out at nomics.com. Okay, back to the show. Biz dev for blockchain projects, overrated or underrated?

Eric Meltzer: To the extent that it’s like Ripple-style biz dev or it’s just like you go find the junior VP at some random bank and you’re like, “Hey, want to do a Ripple trial,” and they’re like, yeah, that sounds cool. And then the next day you announce it as like, Bank of America partners with Ripple. I’m very down on that. I’m not a fan. I don’t think it’s useful at all. I think it’s basically just market manipulation. Real biz dev for projects that actually have a useful thing that are going out and developing interesting relationships with companies, I think is great. I guess the company that comes to mind that’s doing, in my opinion, a pretty good job of that, is Stellar, actually. Stellar has this relationship with Keybase where they’re integrating Stellar payments into Keybase. Stellar has a whole bunch of other stuff that is currently not public, but fascinating stuff in the pipeline in terms of BD. I think it can be a great strategy, but often it’s like, just completely misused as a market manipulation strategy by projects like Ripple.

Clay Collins: It does feel like it can be helpful to accelerate network effects, but, if your project is dependent upon biz dev for your network effects, then you probably don’t have a sustainable advantage. It’s just going to decay.

Eric Meltzer: Totally.

Clay Collins: EOS, overrated or underrated?

Eric Meltzer: Now, I think it’s like properly rated. But, back in the day when we invested in it, I think it was massively underrated, understandably so. A lot of the non-technical aspects of EOS appeared very scammy. They had a giant billboard in Times Square and they were making pretty grandiose claims and putting on fancy events. A lot of people, basically, wrote the project off as a scam, and then we took a closer look at it, and we saw that Dan Larimer and, to a lesser extent, but this guy’s also very involved, is this guy Ian Grigg who’s just a very OG crypto dude. When we saw those two were the technical team behind the project, we figured it was going to be something big and that turned out to be a very profitable bet for us.

Clay Collins: Token-curated directories, overrated or underrated?

Eric Meltzer: I’m so interested in these token-curated registries. There’s a very interesting project that I’m on the fence about investing in right now that’s doing cool stuff for TCRs and the team behind it has put in a ton of really interesting thought, in terms of how to set up the incentives for these. For me, the proof will be in the pudding. There’s either going to be some big TCRs out there that are really valuable or there won’t be. Writing think pieces about it is probably less valuable than just going and building some and see how they work. So Proof of Work has that Proof of Work Common App. On the Common App, basically, any company that writes to me and is like, hey, we want to be added to this pool of companies that sees the applications, I’m happy to add them as long as they look decent. So, what I was thinking is, it would be cool to turn that into a TCR. So the idea is, all the companies that are currently on there become the validators. If a new company wants to join the registry, they have to buy some tokens, and they stake the tokens, and then the existing companies decide, would adding these guys be a net positive to the registry or would it lower the bar, so to speak? I think that’d be really fun. It would be like a toy TCR because it’s pretty small, but I think it would be cool to see whether that works and what the failure modes are. TCRs are really interesting and they’re sort of a subset of what I think of as like the oracle/prediction market mechanism design space.

Eric Meltzer: All of those things are going to be super interesting and, as we figure out how to properly leverage them and to avoid the failure modes that they have, we’ll probably be able to build some really cool stuff.

Clay Collins: Yeah, I think that was the most succinct explanation of a TCR that I’ve ever heard is what you described you’d do with Proof of Work. Now I’ve got to ask, because it just came up, prediction marketplaces, overrated or underrated?

Eric Meltzer: I think every specific prediction market is overrated ’cause, so far, none of them have managed to ship. The concept itself is probably either underrated or properly, like accurately, rated. There’s a lot of real cool stuff you can do with those. I’m really looking forward to seeing some of them actually show up. I think they’ll start with things that look like toys. They’ll be ways to bet on sports or ways to bet on stuff like the Parity hack. Actually, so, the Parity hack was a really interesting example to me because, if you think about it right now, Parity has, I think it’s 120 million, or 90 million. They have a huge incentive to convince the Ethereum community to get their funds back. The incentive on the other side is pretty diffuse. My incentive to oppose them getting their funds back is either largely non-monetary. It’s just out of some sense that immutability is important for ETH, or it’s like this extremely diffuse thing where it’s like, well, I don’t want the supply of ETH to increase, and so I don’t want you to get your money back. But if you think about it, typically, when you look at these situations, whoever has a concentrated incentive, tends to get their way over like a giant group of people that have a very diffuse incentive. What I thought about was, if you have a prediction market, and you have a lot of people that predict that the Parity funds will not be restored, then those people now have an actual monetary incentive to make sure that doesn’t happen. You could see how prediction markets would actually lead to people taking specific actions

Eric Meltzer: in the real world to increase the probability that their prediction comes true. The really scary examples of that are like assassination markets and stuff like that. But I think even on a much less spooky thing, you can see the prediction itself actually leads to a change in the world.

Clay Collins: That’s super, super fascinating. Delegated proof of stake, overrated or underrated?

Eric Meltzer: I feel very boring saying so much of this stuff is accurately rated, but I think like DPOS, we have a pretty good idea of how it works these days. There’s two big projects that use it. There’s Steemit and BitShares and EOS uses a quite similar model to those two. My sense is that, if you’re trying to build the M1 Abrams battle-tested, sovereign-resistant blockchain like Bitcoin, you don’t want to use DPOS. But if you want to do something that you can actually run high through-put applications on and sacrificing some level of decentralization is okay, then DPOS is a pretty appealing way to do it. It’s appealing in its simplicity. There’s not a lot of complication to how the block production works and what the sort of pathological cases are for it.

Clay Collins: Stable coins, overrated or underrated?

Eric Meltzer: I feel like your average stable coin project is highly overrated. There’s only really two stable coin projects out there that I think are legit. That’s Maker and Basecoin. I guess Basecoin’s called Basis now, they rebranded. Basis is cool from the perspective of if it works, it has some really strong incentives behind it that’ll push adoption and perhaps create virtuous cycles that results in a truly huge market cap for Basis. Maker is cool for two reasons. One, it’s a very clever mechanism. And two, it actually works so far. So you see these, a DAI system that Maker created has remained stable even during pretty bad market crashes. I guess what I worry about with Maker is that, like the demand for the stable coin might vastly exceed the demand for people that want to leverage ETH into these CDPs and so Maker is likely to run into some liquidity issues. But I think those two projects are both really interesting and cool and are not overrated. However, there’s this massive proliferation of what I think of as Basecoin clones, of Maker clones, of weird implementations of Senyard shares, and I feel like most of these are not going to work. Most of them have really obvious problems. The other problem is, most of these systems require a lot of money to get started. Basecoin got a a lot of flack for raising a huge presale round, and they’re going to raise even more money soon. Actually that’s absolutely the right thing to do because, having that initial stability, is,

Eric Meltzer: A lot of times these things are like path-dependent. If you start out stable, you have a higher chance of remaining stable in the long term. A lot of these stable coin projects have come to us and they’ve been like, oh, you should like us because we’re not raising very much money. We’re not greedy. And I’m like, well, no, that’s like, that’s a bad thing.

Clay Collins: Masternodes as an investment opportunity, overrated or underrated?

Eric Meltzer: It’s played out. I know a couple people that made a bunch of money doing that, but it’s priced in by now.

Clay Collins: Ether’s shift to proof of stake, overrated or underrated?

Eric Meltzer: What I love about what they’re doing is it’s so considered. They spent so much time thinking about this and thinking about all the ways that it could go wrong. They’re doing it in this really incremental way. It’s great. ETH should move faster than Bitcoin and ETH should be willing to take these risks. I’m super curious to see how it turns out. I would say I’m pretty bullish on it working out for them. There’s a lot of projects that claim to be ETH killers because they have this feature or that feature, and I think, honestly, ETH is probably going to eat most of those guys’ lunch.

Clay Collins: Clear regulatory guidance and clear regulatory compliance on the part of crypto projects and the impact that will have on this space.

Eric Meltzer: Oh yeah, it’s super important. The two places you see this a lot are one, right now, there’s a lot of projects, and there’s a lot of founders, like what I’ve seen over the past year or so, is there’s a lot of really badass founders who just graduated from Stanford and they want to go do something. But, they’re just not willing to take the risk of going to jail because the regulatory environment for what they want to do is super unclear. As a result, they’re being very, very cautious and they’re not really charging ahead the way they could if there was a clear regulation. Once you have that, you’ll see a lot of projects that say, “Okay, now we know what the target is, we’re just going to go be super compliant with that and go make this thing.” There’s this guy, John Pfeffer, who, I imagine, most of the listeners of this have already read this memo, but, he has this memo sort of about what the price of Bitcoin’s going to look like if the really, really huge institutional players get involved. Spoiler, it’s very, very high. The big obstacle to those guys getting involved is largely just custody. I initially thought that was custody from a technical perspective because technically, safely holding Bitcoins is not that easy. But it turns out that’s totally wrong and, having talked to this guy Matt Walsh, at Fidelity who I like a lot, kind of clued me in to what the real situation is. What it really is, is you need these regulated custodians. They’re these government-anointed special institutions

Eric Meltzer: that have plans in place for how they hold these assets. Until you have those, and until the regulation around those is really clear, mutual funds, school endowments, whatever, can’t just go buy Bitcoin. The impact of that, even now, is probably still underrated. Once those custody solutions hit, it’s going to be pretty wild.

Clay Collins: Indexing as an investment strategy.

Eric Meltzer: Yeah, skeptical. There’s not that many good assets out there. Usually what you’re doing is mixing Bitcoin in with stuff that’s way worse than Bitcoin and so you’d be better off just holding Bitcoin, or holding Bitcoin, ETH and two or three other projects that you think are cool. These sort of automatically-rebalanced indexes are, I’m skeptical.

Clay Collins: Ecosystem funds, overrated or underrated?

Eric Meltzer: Both. The really big ecosystem funds are going to have a lot of trouble deploying capital in a way that makes any sense. However, I think small ecosystem funds that are targeted and that are run by people that really understand what the ecosystem needs, can be really useful and are probably underrated. It’s going to become sort of something that every project does. The difference in impact between like a 20 or 50 million dollar fund that’s targeted at doing some really important stuff that no one’s really building right now versus like one billion dollar fund where you’re just splashing money around on anyone that will use your system, you’re going to have very different impacts there.

Clay Collins: Silicon Valley, overrated or underrated?

Eric Meltzer: I think it’s still underrated. I’m from the Bay area. I’m like a Bay area native. I now live in Boston while my wife is doing school out here and the opportunity cost of not being in the Bay area remains pretty high. There are other hubs that are also great. Beijing is another great place to be, but, just the proximity to all those investors and all of those other people that are building crypto projects that might be the people that end up acquiring you, or the people that you merge with, or the people that you just poach designers from, whatever it is, just that melting pot of activity is incredibly useful.

Clay Collins: Hong Kong.

Eric Meltzer: I don’t know anything about the Hong Kong crypto scene. I know there’s this really cool guy, Jehan Chu, who runs a fund out of there called Kenetic. But, Hong Kong as a city is super awesome. My fondest dream is that San Francisco will eventually wake up and decide that it makes sense to build a ton of housing and turn into a mega-city like Hong Kong. But I think maybe my grandkids are going to be the ones that see that.

Clay Collins: Singapore, over or underrated?

Eric Meltzer: Personally not a Singapore fan. My absolute favorite science fiction author of all time, this guy William Gibson, had this really trenchant description of Singapore, which was Disneyland with the death penalty.

Clay Collins: Oh God.

Eric Meltzer: Hearing that kind of made me never want to go there. And my dad had a funny anecdote about like in the ’90s, he was flying into Singapore and they had some announcement on the plane that was like, He’s from California too, he went to Berkeley in the ’60s, if you get my drift. He’s on the plane and they go, anyone found carrying narcotics or marijuana will be executed upon landing or something crazy like that and he was like, “Oh, man, this is not the place.” Maybe this is silly, but I kind of think of Singapore and Hong Kong as being quite similar.They’re both these extremely commercially vibrant Asian city-states. I come down massively on the Hong Kong side of things. Hong Kong is dirty and crazy and it’s 24 hours and it’s ultra-multi-cultural, but, you’re not going to get caned for chewing gum. You could almost classify people as Singapore people or Hong Kong people and I’m much more of a Hong Kong person.

Clay Collins: Switzerland and Crypto Valley, over or underrated?

Eric Meltzer: That doesn’t really seem like it’s much of a thing anymore. A lot of people were like really pushing it. Ta small group of people that were kind of trying to make that happen. And then, I guess people saw what happened with Tezos and that was really unfortunate. The appeal of these Swiss foundations maybe is a little bit tempered now.

Clay Collins: Berlin, over or underrated?

Eric Meltzer: Berlin’s great. Berlin’s great as a crypto hub. Berlin has been like a spot for hackers for a long time. Growing up in San Francisco, I was really into this amazing hackerspace called Noisebridge in the Mission District, SF. It’s a real scene. It’s kind of insane. It’s gotten a little bit more mellow in recent years. But what I didn’t realize is that hacker-space scene actually got started in Germany. So when I went to Berlin for the first time I went to this place called c-base, and it’s one of the first hackerspaces in Germany and it is a mind-blowing space. The upstairs is cool. It’s this kind of normal event space. And then the downstairs, legit looks like a Hollywood alien spacecraft set. It’s unbelievable. These volunteers set this thing up and they have all these great events there. Berlin will stay like a hub for very serious crypto projects that are shipping real stuff. It’s a lot less commercial and it’s a lot more focused on the tech, which is great.

Clay Collins: It’s like giving the rest of the world a run for their money. Gibraltar, under or overrated?

Eric Meltzer: I don’t know. I don’t know much about it. Gibraltar and Malta seem like the two contenders for regulatory arbitrage plays. I’m a little skeptical of geographical regulatory arbitrage in general though, as compared to crypto regulatory arbitrage just because we tried that. I have a lot of friends that were really involved in online poker back in the day. All these online poker companies tried to go to friendly jurisdictions and the US still popped them anyway. The arm of US regulation is extremely long. I’m not sure you can just go to some other country to avoid it.

Clay Collins: Maybe Estonia might also fall into that category. Okay, I’m going to give you just a couple more sort of standard non-geographical ones. Modern portfolio theory when it comes to crypto assets, overrated or underrated?

Eric Meltzer: My friend, again, Nic Carter, has some interesting charts about that from Coinmetrics and you can see that almost everything is correlated. It’s all getting more correlated too. The question of how crypto fits into a portfolio is a super interesting one and so there’s been a lot of hype about Bitcoin being an uncorrelated asset. So far, it kind of looks like it is. However, we haven’t seen what happens to Bitcoin in a true, massive economic depression. If it remains uncorrelated in that situation, that’s going to be massively bullish for Bitcoin. The people that I know who know about this stuff, and I’m not one of them, the people that I talk to who kind of think a lot about these macroeconomic issues tend to think it’s unlikely that Bitcoin would stay uncorrelated simply because, as it grows, the same institutional investors that invest in all the other stuff, are going to invest in Bitcoin. If you look at what happened with gold, gold wasn’t that uncorrelated in 2008. I hope it does. It’d be very cool if it was an uncorrelated asset but I’m a little skeptical that it will be.

Clay Collins: Maybe negatively correlated with traditional asset classes. If you were a capital allocator at a large institutional fund, would your strategy be to diversify among different strategies in different funds, or would it be to just be as opportunistic as possible and just rake in the gains?

Eric Meltzer: If I was allocating at a really, really large fund, I think there’s two strategies I would pursue. One is I would invest in other funds. Right now, honestly, if I wasn’t doing what I am doing, where I’m investing in early projects, I would actually love to be investing in funds just because there’s so many ridiculously brilliant people that are coming into the space and starting these crypto funds. I think that crypto funds have gotten a bad reputation because a lot of the early ones were just started by some random dude that had some Bitcoin. But what I’m seeing now is these people who are just incredibly talented who have super, super interesting strategies for making money in the space. I actually have a friend who’s setting up a crypto fund of funds for some folks in China and that’s a really good opportunity. The other thing I guess I would do is, if you have a lot of capital to deploy, the only strategy that is really available to you is just buying big chunks of these market-traded assets. Because you can’t deploy like, my early-stage fund is 20 million bucks and I think deploying all of that will be difficult. If you’re dealing with hundreds of millions or even billions, being able to deploy that without just buying large chunks of Bitcoin is pretty hard.

Clay Collins: The securitization or the tokenization of securities, is that overrated or underrated?

Eric Meltzer: This is another thing that I’m really interested in. There’s like two angles to this. There’s the tokenization of traditional equities and people talk about that like, oh, it’s going to be a $500 trillion market or whatever. I think that they’re right. Eventually you will tokenize all these things. There are some benefits to tokenizing them. It’s not like a huge deal to me and there’s no way to aggregate, capture all that upside. It’s just going to be, these things are going to get a little bit more efficient. Something that a lot of people haven’t really thought through enough is like, if you tokenize one of these equities. Imagine I tokenize a stake in your house. Then someone hacks you and they accumulate a majority stake in your house by stealing your tokens. And then they just show up to your house and they’re like, all right, well, it’s my house now. You’re not going to give him your house. You’re going to tell him to f*** off. When you have these things that are tokenizing an underlying asset, they’re not going to be like bearer assets. You’re going to be able to re-issue them if you lose them or something, but they’re not going to be like Bitcoin where ownership is 100% of the battle with Bitcoin. If you have the private key, that’s your Bitcoin. If you have the private key to some security token, that’s certainly not necessarily your security. At the point where that’s the case, then all the normal assumptions about what makes a blockchain cool kind of go out the window. You know longer care that much

Eric Meltzer: about the security of the underlying blockchain because like say I have 51% attack, like the security token blockchain, and I just steal everyone’s security tokens, like who cares? We just go to the security issuers and tell them, “Hey, these guys stole the tokens, not really theirs, go ahead and reissue them.” It’s like a really long-winded way of saying that, I think it is true that tokenized securities are going to be a thing, but that I don’t think it’s that big of a deal. The part that I think is much more exciting are tokens that are themselves securities. In that bucket you have Sia, the storage project has this real cool token called Sia Fund. How Sia Funds work is they get a perpetuity, I believe it’s three to 8% depending on how you calculate it, of all of the contract fees on the Sia network. Hold one of those Sia Funds then you have a long-term incentive to make Sia better. Short-term pumping the Sia price doesn’t do anything for your Sia Funds, so it’s a really cool way of aligning incentives. Without mentioning any names, there’s a lot of projects that have released ERC20 tokens to the public before launching their mainnet. In many ways that’s a security. People who hold those tokens are making a bet that when the mainnet does launch, it’s going to be cool. I actually think those are kind of cool. There’s a lot of dispute over whether retail investors should be able to buy those things but the idea that you can buy something in advance of it existing and then make a bet on whether it’s going to turn out better or worse

Eric Meltzer: than people’s expectations is kind of interesting to me. There’s a lot of interesting ways you could go with that if securities law wasn’t so strict. An idea that David Vorick from Sia ran by me that I thought was really cool was, when you sell miners, when you sell ASIC mining chips, typically what you do is, you have a pre-order. Someone can buy the ASIC ahead of time and then, five months later or however long it takes, they get their machine. What David was saying was, it’d be really cool if you could, instead, sell them a token and that token is redeemable for one ASIC. The idea there is, if the demand for ASICs goes crazy, some people can just flip their tokens to people that want the ASICs really badly and will pay over market, or, if the ASIC manufacturer takes forever, it’s up for grabs whether they’re actually going to ever ship, then maybe you can just sell your token at a loss, but you recoup some of your capital. And the people who buy it are people that think that they actually are going to ship. There’s a lot of really interesting flexible, very cool stuff you can do with this. Most of it is pretty hampered by regulation. From an investment perspective, we kind of avoid this stuff just ’cause, it’s a lot more complicated than sort of native digital assets.

Clay Collins: There’s people talking about the ability for decentralized exchanges to facilitate people swapping securities with each other without an intermediary but those tokens still have to dial home and check on KYC AML compliance and blacklists, white lists and all that other stuff.

Eric Meltzer: That was something that really appealed to me. Harbor is doing that. The David Sacks thing at 0x is kind of building that functionality in. But again, from talking to Matt Walsh at Fidelity, my understanding of this stuff is extremely hazy but, what it seemed to me was that, it’s actually not legal for me and you to exchange securities without someone in the middle or without an ATS involved even if we’re both accredited investors. The system is so complicated that it just seems like you got to do so much hacking just to get around all this stupid regulatory craft. At the end of the day, it’s maybe just not the most exciting thing to invest in for us.

Clay Collins: Hey, it’s Clay. Since we’re talking about security tokens, I want to tell you about a three-part audio documentary we’re coming out with in a few weeks about the rise of security tokens. You know how we’re talking about how complex they are right here in this conversation? Well, after interviewing and speaking with a number of experts and operators in the security-token space, I actually find the topic to be much less complex now and I hope this series will do the same for you. You’ll hear more about this later. Is it better just to use a really efficient centralized database? I don’t know. It’s an important, outstanding question, especially if you can’t swap these things on Craig’s List.

Eric Meltzer: That’s why I think, if security tokens do become a thing, I think it’s more likely that they show up on blockchains like EOS or other blockchains that make some decentralization sacrifices in favor of performance. Just because the security model, again, is not that important. If your token gets stolen, you’re going to have some recourse to get it back. So hosting these on Ethereum might just be a waste of power.

Clay Collins: Yeah, like New York can’t have the Russian mob owning half of Trump Tower.

Eric Meltzer: Exactly, yeah, it’s just, there’s this fundamental disconnect I think people have where they haven’t really thought through the mechanics of how this thing would work. They think of it as like, oh, tokenized securities, but then, at the end of the day, there is a bottom line and that is the government 100% controls the issuers of these things. At the point where there is an issuer that is very much regulated, the code-is-law is just totally meaningless here.

Clay Collins: I would love to have more guests like yourself on the show. I know it’s no guarantee that if you say that I should interview them, that they will say yes, but, can you just, on the record, recommend two people, a man and a woman, that you think I should invite onto the show?

Eric Meltzer: Can I do two of each because I just have, I have so many friends that I think are awesome for this. Yeah, I think you should interview Nic Carter from Fidelity. I think he would be awesome. And then Dan Elitzer from IDEO and also formerly of the MIT Bitcoin Club, is just a super smart dude with a bunch of really interesting opinions on this stuff. Linda Xie from Scalar Capital is one of my favorite people in the space and super smart. And then also Ling and Ella from Binance Labs, from Binance’s new fund, are also super bright and have a lot of interesting stuff to think about in the space.

Clay Collins: This concludes part two of my series with Eric. It’s been a lot of fun. Just a heads up that in the next few weeks, we’ll be releasing a three-part audio documentary about security tokens and asset-backed tokens. We’re looking for sponsors for this audio documentary series so please get in touch if you’re interested. Stay tuned and we’ll see you next week. That’s it for this week. To sign up for our free crypto investing newsletter, listen to other episodes, or get the show notes from this episode, please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics, spelled N-O-M-I-C-S at nomics.com. Finally, if you got value from the show, the biggest thing you can do to help us out is to leave a five-star review with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcasts. Thanks for listening and see you next week.