Hash Power – Ep. 3 - Funding, Forking, and a Creative Future

**Patrick O'Shaughnessy** (0:05)
In episodes one and two of Hash Power, we explored blockchain technology and cryptocurrency investing. In this episode, we discussed the current and potential future states of the crypto world. We covered new forms of cooperation, regulation, security and storage, and why blockchains allow systems to evolve at such a rapid pace. Be sure to listen until the end, where we close with some advice about conducting ourselves in a new world where creativity reigns and repetitive jobs disappear, a trend that may only accelerate thanks to blockchain technologies and cryptocurrencies.
Once again, this episode is brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers and financial advisory firms. For more information, please visit fidelity.com.
As I said in the first two episodes of Hash Power, nothing that you hear in this episode is investment advice. If you plan on deploying capital into crypto assets, you should spend months reading and exploring the topic first, and consider the risks carefully.
This past Thursday, as a result of this deep dive into cryptocurrencies, I had the chance to sit and have dinner with a group of investors and engineers who are leading blockchain development. This movement sometimes inspires an almost religious fervor in its supporters. And while I could sense passion in the discussion, what I noticed most was how deeply each and every person there had thought through the potential issues facing blockchain in the future. No one there had any doubt that the impact of this new technology will prove immense, but I was impressed with the realism and pragmatism on display. There were lively back and forth debates about complicated topics like blockchain governance, developer compensation, emergent technologies, and the velocity of cryptocurrencies and how it might affect their value. This movement is full of brilliant engineers, cryptographers, investors, economists and thinkers. But if what I saw Thursday was any indication, it's also filled with new leaders. I've been blown away by the people you've heard so far on Hash Power, and by those you'll hear from for the first time today. We hinted at how innovation in blockchain may happen faster than elsewhere. This is because of two phenomena, funding and forking. Forking is when a network splits into two paths, like the recent schism of Bitcoin into Bitcoin and Bitcoin Cash. Forking allows a sub-community to alter a protocol and continue forward in a different direction, with new rules or features. Think of forks like genetic mutations in the evolutionary chain, experiments which will be tested in the real world and will thrive and survive or die. Funding is the second, the ability of developers to raise capital from a global investor base to build protocols. Initial coin offerings have been the story thus far of 2017, where teams use ICOs to raise funds by selling tokens. It's Kickstarter meets venture capital meets speculation, all with little to no regulation. On the one hand, this could be a revolutionary way to fuel innovation. On the other, it may be the single best way to defraud and scam investors we've seen in a long time.
In 2016, startups raised an average of $1.14 million in their seed round. Some protocols dwarf that number. Tezos, a potential competitor to Ethereum, raised $232 million in just three days. But here's the thing, if you go to the Tezos website, the results of the fundraised are not displayed in US dollars. Instead, it says that investors contributed 66,000 Bitcoin and 360,000 Ether.
To discuss this fundraising trend, we begin this episode with my conversation with Olaf Carlson-Wee, the founder of Polychain, who describes how this all could get very wild.

**Olaf Carlson-Wee** (4:01)
Yeah, so let's step back a tiny bit, and I'll give a little bit of background on some of this technology and some trends happening in the space right now. And then I'm going to extrapolate that and assume it kind of plays out to the logical conclusion and see what happens. So a main one is that people are doing crowdfunding to launch new open source peer-to-peer protocols using cryptocurrency. So these are also called ICOs, or initial coin offerings in the media. These crowdfunds are really fascinating because it allows people to use cryptocurrency technology to actually accelerate the development of cryptocurrency technology. So these crowdfunds in general, how this works is someone will publish a sort of protocol specification. This looks sort of like a blueprint, but it's for a protocol or a project. And then they will say, hey, if you want to donate to this project, I will in exchange give you tokens which power that protocol. The interesting thing here is right now to mechanically do these crowdfunds, what people are doing is creating nonprofit foundations or sort of holding companies like LLCs or C-Corps. These are often in Switzerland, Singapore, Hong Kong, often in sort of a jurisdiction that's often different from where the team is, mostly for legal compliance and tax purposes. So that kind of holding company, that connection to the kind of non-blockchain real world is primarily so that the team can open a bank account and effectively cash out some of the cryptocurrency that they raised so that they can pay service providers, pay salaries and have a stable store of value. Because we've seen many times teams or companies raise money in cryptocurrency, not properly hedge the financial risk and get either really lucky or have really unfortunate things happen for reasons basically unrelated to their execution, right? Just cryptocurrency volatility is massive. So one thing that I think is going to happen, and we've seen it in small ways, but I think it's going to keep developing, is as we get financial products, more advanced financial products built in a native blockchain environment. So this is stable coins. So coins that are basically pegged or follow or track something more stable like the US dollar or some other more stable currency or an asset like gold, say. As well as when we just get a better suite of governance, smart contracts, smart contracts here being the native piece of bits and pieces of code that live in the Ethereum blockchain or other Turing Complete blockchains like Tezos.