[ 07/23 Virtual Event] CryptoMondays: Interview with Miko Matsumura – Funding a Successful ICO
CryptoMondays and BeFast.TV invite you to join the Virtual Event: “Miko Matsumura’s Interview – Funding a Successful ICO”
The chat with Miko was broadcasted at 6:00 PM, July 23rd, 2018 (Pacific Time). Keep an eye on upcoming CryptoMonday’s events here.
Part 1 – Fireside Chat
Mark: We welcome our guest of honor. Mr. Miko Matsumura.
Miko: Thanks very much. I’m excited to be here. I see a lot of familiar faces some new faces. It’s always it’s always exciting. I’m a huge I guess a proponent of the space so I’m glad to see a lot of folks also interested know we are going to ask if we can get that.
Mark: Miko is a multifaceted individual who has his roots an open source software and an enterprise, he’s the founder of Evercoin, is an advisor on a number of projects (edit: 14 projects). I think probably has more air miles than most people I know because every time I see his feet he’s on a different continent but Miko what don’t you tell us a little bit about yourself. And tell us a bit about Evercoin and how you got to where you are now.
Miko: I am really obsessed with what I call “open source” money and that’s pretty much. My background has been about 30 years here in Silicon Valley working on open source software. And for me starting with the Java platform. Java has really become almost like a legacy code at this point. People still use it to make Android apps so I’m pretty happy about that. Obviously, Kotlin is cooler but you Java is still there, thankfully. So I was part of that team and then I’ve been working on open source startup companies ever since then. And to me, the transformation that has occurred is that we had like 30 years of what I consider to be almost like solar energy going in to GitHub . If you look inside of GitHub there’s like a trillion dollar’s worth of licensable software sitting in there for free. I don’t know how I came up with a trillion but it’s worth something and you know and it powers every meaningful company right. If you look inside of Facebook or if you look inside of Apple or if you look inside of any company and you’re going to see 90 percent open source code. Which is amazing!
If you look inside of GitHub there’s like a trillion dollar’s worth of licensable software sitting in there for free.
That’s amazing that is all of that was created without having a deeply meaningful model that incentivizes these developers which is shocking. Because what we expect to see on networks is the tragedy of the Commons. We expect to see abuse and we expect to see a race to the bottom.
And yet inside, I’m just using the name GitHub as an example of a place to look for this phenomenon, you see a reversal what I call “the comedy of the commons” which is just a pileup of value which is astonishing because there was not an incentive model. The thing that has happened is to me akin to the emergence of a viable nuclear fusion which is the solar power has now been captured by open source projects.
The similar biggest project that has done this with success is Bitcoin which has created its own sun, which is it’s now powered by its own.And it has not even just created an incentive model for participants in Bitcoin, it has created an alternative economy. That’s where I get very excited.
I worked on an open source project called HazelCast and the founder of Hazel Cast came to me, it’s in memory DataGrid used in high-frequency trading applications, and said hey we need to do crypto stuff, we need to start a crypto company. I was a little bit taken aback because I didn’t know much about it but I said: “Sure, let’s do it!” When we started at the time it was called Pay Cent and we went down the track of creating a bitcoin debit card and we eventually decided that was a lousy business. So, we pivoted into exchange. And now building an exchange technology platform and think the theme of tonight is Token Sale. We are going to march Evercoin towards its own exchange token sale. I’m excited about that. Other things I’ve been doing – is a token advisory. I have about 14 projects listed on Miko.com that you can see.
I’m also a general partner in Gumi Cryptos Ventures which is an investment early stage crypto invest fund based in Tokyo but I’m actually based in the San Francisco office. It’s a global investment fund but we’d like to bring portfolio companies into Japan which by the way is the largest crypto economy in the world. Last time I checked, 77% of the daily volume of FIAT to Bitcoin was in JPY was in Japanese yen. 77% of the daily volume up from 56% six months ago which is crazily astronomical. It’s not just the biggest, it is by a clear dominant player in at least Bitcoin. Anyhow, investment, fund, and exchange advisory those are my three business units.
Last time I checked, 77% of the daily volume of FIAT to Bitcoin was in JPY was in Japanese yen. 77% of the daily volume up from 56% six months ago which is crazily astronomical.
Mark: Miko, you bring up a really good point which was open source software until the incentive mechanism came along and bitcoin did that incredibly well with the miners and aligning the interest of the miners and the users in creating that whole ecosystem. Token sales have to have the alignment to make it work. There has to be an economy. When you think about preparing for a token sale what are the dimensions that you look at? Do you look at Token economy? What general advice can you give to people who here is considering a token sale?
Miko: From my perspective, there are a lot of pitfalls, there are a lot of bad fault states, in this particular market climate the pendulum has swung a lot. The type of investment that makes sense today is radically different from even six months ago. But I feel the pendulum is much better. The pendulum has swung from public sale radically to private sale which tends to look a lot like venture capital right.
Today the token sale fundraise tends to look a lot more like a venture capital fundraise. And I have to say, my experience has been of in the past 30 years, I raised for startups about 60 million USD in just classical venture fundraise and then in token fund raise probably about 300 million today and probably will hit a billion by the end of the year in terms of just being a party to that fundraisers and advisers. What happened is that the venture capital is back and you should really be thinking and reasoning about your token sale as venture class fundraising. That’s my advice.
Mark: You make a great point that we’re in a radically different world than we were Q4 last year when I call that ICO 1.0. Anyone with a token could do ICO and it would be great, it’d be huge and everyone was moaning and talking about Lambos. And then, as of January, is what I called as ICO 2.0 which is the adults in the room started to show up. People actually care about viability of a project and people want serious people. People are sick and tired of B.S. and so add to the whole issue of utility tokens versus security tokens, the US doing a horrible job and not being able to decide any basic regulation, in general the whole landscape has radically changed. And the question there is when you’re thinking about that, do you believe in an ICO 2.0?. If so how has your go to market approach been with the companies you work with? How’s that different now than it was in 2017?
Miko: I guess I have an allergic reaction to anything 2.0 and it’s 10x stronger if it’s 3.0 and if it’s 4.0 I just run out of the room.
But that being said I totally believe that the landscape has changed so significantly that the tactics that worked don’t work now anymore. And you need to completely change the mindset of how you raise and that, the mindset now is way more of VC but it’s VC with like a really big twist. To me it’s a lot about signal investors it’s about private presale and it’s about layering the private pre-sale. I think the optics are different from venture because it’s time compressed. You’re doing three rounds in six months as opposed to three rounds. It’s not series A B and C over four or five or six years. So, the time and process became quite compressed.
Mark: How would you describe the difference when utility tokens and security tokens because both names are confusing an obviously inaccurate and in many ways. And how do you see the infrastructure that will enable the next iteration of so-called security token?
Miko: About a week and a half ago, I jumped on the phone with the SCC, with the Valerie Szczepanik, who is the head of crypto at the SCC and she said a couple of really interesting things. One of which was there are zero exchanges that have been licensed to exchange cryptographic securities. So that’s interesting. I think we are on the cusp of that. Coinbase has a pretty strong indication. I think TZero has a pretty strong indication if you read the tea leaves, Hong Kong VC invested 160 million dollars behind TZero and you don’t move that kind of money without diligence. So I think they probably know something. I think the Boston exchange probably know something that’s partnered with Tzero, we’re on the cusp of the emergence of the security token exchange. I really try to avoid conversations that use the phrase security token because what comes with security token is the concept of utility token and I think the schema is broken right which is you can’t have a good conversation about security token versus utility token. It’s a bad distinction.
The reason why it’s a bad distinction is that one of the statements that the SCC made was: we’ve been abundantly clear about the regulatory framework. Jay Clayton chairman and the other folks who have talked about the subject have been abundantly clear that the vast majority of all cryptographic tokens on the market are securities. And they’ve been very clear that Bitcoin is not and they’ve been clear that Ether is not and they haven’t really been super clear about very many others. But let’s just assume that the rest are securities We have a bunch of so-called security token exchanges none of which are licensed and then we have a bunch of exchanges. The exchanges we do have that are exchanging what appeared to be securities.
I think SCC is doing a great job in crypto. It’s a super hard job. And I think they’re doing pretty well. With that caveat, I do want to say that they have a mindset that they have to be politically correct. The seniors in the SCC have to be politicians, they have to be lawyers and by function of their daily day to day operations they have to also be bureaucrats. We need to understand that most people in the United States are sitting within the jurisdiction of the SCC and we need to be respectful of those laws. The reason, why I disliked the phrase utility token vs. security token is that the ICC has been abundantly clear that there are almost all security tokens.
I think people mean when they say security token is something other than what the SCC means they are trying to explain to a hungry tiger the difference between people and meat right. And I think that Tiger actually has a distinction and I think in the schema in the mind of the tiger there is meat that like screams and runs away and then there’s meat that mostly just sits there and gets eaten. That’s the distinction. But the reason why I’m saying it this way is that the concept of a security token and a utility token is a bad mindset. Nobody doing an ICO should be thinking: “oh I have a utility”. My lawyer wrote an opinion letter that I’m a utility token so I can ignore the SCC that is bad legal advice aka you are going to be a criminal like if you go down that road you will be a criminal.
Nobody doing an ICO should be thinking: “oh I have a utility”. My lawyer wrote an opinion letter that I’m a utility token so I can ignore the SCC that is bad legal advice aka you are going to be a criminal like if you go down that road you will be a criminal.
Mark: Now I do like Miko but I’m going to take the other side of this argument. As an example, one of the larger exchanges here who I was engaged within my work with one of my clients, is a big private equity platform, crypto private equity platform. They recommend talking to some experienced lawyers who can get you into their platform. Here is the question number one: what happens with all these thousands of utility tokens that are out there? But number two, you so rightly pointed out they are lawyers and politicians together and bureaucrats, they are not famous in getting things done in a right innovative way.
Miko: The SCC thinks what it thinks and whatever it thinks is the law. There’s no point in talking about the moral correctness of it or how suppressive that opinion is to the advancement of technology and innovation. It doesn’t matter because they’re the regulator. The SCC protects investors with a strong preference to Main Street investors to retail investors because the accredited should know better.
The SCC protects investors with a strong preference to Main Street investors to retail investors because the accredited should know better.
Mark: I think the big problem with the SCC is that it has totally failed to give any clarity to an emerging technological marketplace and the end result has been people talking about Cayman Islands, BVI, Singapore Malta and so granted there’s a lot of confusion. But I believe at this stage the SCC should be able to give us a safe harbor that within these parameters you’re not going to jail. And from firsthand experience I know a lot of legitimate projects that are like: we’re scared, we don’t want to go to jail.
And so granted there should be regulation and there should be protection of the investors. But at the same time let me play devil’s advocate. There is no bureaucracy that keeps the blue-haired lady from going to Vegas and blowing her Social Security at the slot machine right. There’s no protection for stupidity from those investors. The other side of the coin is the accredited investors the rich people. Guess what? 100 percent of the people they got ripped off by Bernie Madoff were accredited investors.
As a comparison, I was in Malta last week interestingly, they said: we’re defining digital assets as a new category. It’s not a security it’s not a debiture, it’s a new thing and we’re going to create a whole regulatory regime from the ground up. Now that may be naive to think that the U.S. would do it with the complexity of our markets. But something at least to give people some sort of comfort to operate in, should be beneficial don’t you think?
Miko: The point I’m making is that SCC is really just trying to contain the damage and you have to remember that the SCC is 1 percent of the size of Goldman Sachs. And by the way, they have to regulate Goldman Sachs. I feel sorry for those guys. It’s a hard thing that they’re trying to do and obviously places like Malta are going to take more risks. And I am incorporating Evercoin exchange in Malta and we are going to benefit from the VFA act. Our purpose in doing so is to access the European market. But if you’re not if you’re really just thinking about token sale and not an exchange product that sells into Europe Cayman is good too.
Mark: It’s unfortunate that we can’t say that America is great we can do business in America. And companies are being forced out of U.S. jurisdictions to other jurisdictions. Would you agree you’d be would be beneficial if we had a little more certainty here so companies could operate better here?
Miko: So one of the wonderful things that Valerie said on the call in an unsolicited form is she said the FCC has been abundantly clear about the regulations which to me is kind of cool.From a pragmatic standpoint just know that the SCC will look at whatever ICO whatever token you’re selling and be like yeah that’s probably security and you need to act accordingly. And the most popular thing to do is an exemption under the Jobs Act. And there’s a beautiful law associated with that registration exemption where you can conduct a crowd sale. Of course, there are limitations. And yes, I mean, the rules are the rules I guess.
From a pragmatic standpoint just know that the SCC will look at whatever ICO whatever token you’re selling and be like yeah that’s probably security and you need to act accordingly. And the most popular thing to do is an exemption under the Jobs Act. And there’s a beautiful law associated with that registration exemption where you can conduct a crowd sale
Mark: So you’ve spoken a lot about infrastructure and limitations of the two largest crypto platforms: Bitcoin in Ethereum. And there seemed to be a lot of work to overcome what hasn’t been done or try to create a solution for which these platforms were never built right, e.i. to have a Visa style number of transactions per second. What do you think about how much off chain, side chain, under chain or whatever you want to call it stuff is going on and how much should one be trying to modify Ethereum versus XYZ? Are there platforms that you are excited about because it’s allowing us to go do more stuff without much work around?
Miko: So I think facts. that’s really important from a factual perspective is to look at the primary channel from the perspective of fitness for purpose. Now there’s a bit of a raging debate about what bitcoin is purpose to do. What was bitcoin supposed to do? And in a way, I feel like Bitcoin was supposed to be a Swiss bank account. And you can’t buy a sandwich with a Swiss bank account. And nor should you try it
The point I would make about infrastructure chains is that if we are talking about what I call the originally open source money then we do need other packages as we do need are the equivalent of a credit card. The goal of this entire enterprise is to provide a strong decentralized alternative and to hybridize our entire global economy. The question we should ask is if the traditional economy collapsed today what would happen to the price of bitcoin. Is the crypto economy actually strong enough to hold up the economy? Like what’s the point of having a large decentralized set of services and the financial services if it’s not actually performing at the level that we need as a global economy. So if it’s not able to do that we failed. And the problem is that we don’t know when the economy is going to tank again which is interesting. Now if it goes into a period of protracted recession then we should expect the price increase.. Because if you just look at the trading pairs BTC to Fiat is going to be favorable in every country in the world. So it should increase. But if it crashes when the economy crashes because people will sell bitcoin to buy groceries and dump their portfolios because they have no choice. All in the in a catastrophic crash every hand becomes a weak hand. And we’re all washed out. So putting that all back together in into a neat package to talk about infrastructure we totally need new packages.
The second point I wanted to make is if you look at fitness for purpose on Ethereum. We can actually ask Vitaly Buterin about it, and he says this is the world computer at 7 transactions per second. So as far as fitness for the purpose it’s super clear that Ethereum isn’t fit for its original purpose. Which is fine by the way.
There’s probably room for maybe eight primary chains. I think a number of them will be performance chains. I like some of these super alternative chains but the other thing that’s super clear is what are the extra analogies associated with these perform with these chains. And I think one of the biggest ones in bitcoin is electricity consumption. I tend to like things like Spacemesh and Chia. I believe EOS is being intellectually honest about getting more centralization and that will increase our performance. Today EOS makes 1000 transactions per second which by any chain standards is fast and they’re forecasting 50000 transactions per second which is faster than Visa. It’s an alternative and obviously should we trust that network depends on what with. Should we trust it with buying a sandwich maybe. Should we trust it with 10 million dollar investment. Probably not right. But like that’s fine because it’s different fitness for different purpose. So that’s my mood about infrastructure.
Mark: One thing I think we can be pretty clear about is dead trees in our wallets is not the future of money. These pieces of paper isn’t money. This is a promise to give you something in the future. This is not money so we could go on for a long time but it is backed by debt and a debt that is increasing tremendously here in the United States.
But to wrap this up in what you’re talking about – is really the power of community. why is EOS popular? Is it because they’ve had the largest ICO’s gone on for over a year they’ve raised four billion dollars. Is it that reason or is it because they’ve built a community. And you said things very well when we were speaking earlier about you know the three levels of community: developers, investors and users. And I think that’s really interesting. Maybe you could expand on that a little bit.
Miko: I think the community is a huge deal. However, it’s important to sub-segment community and the purpose of community into those buckets (developers, investors, and users). An investor community is not a developer community and your developer community is not necessarily an end-user community. Those are all different and different projects maybe need different common interests. An infrastructure chain probably needs more developer community than it needs anything else. And the apps may need more user communities and they need investors or anything else. In order for us to be successful we need to specialize and focus on each of these communities independently. Of course, there are intersections like public airdrop mechanics designed to drive user communities and some ICOs need it and some don’t. Other things that are natural evolutionary mechanics are things like developing large token pools for incentivizing developers. These are all mechanics that are optimizing token distribution to properly incentivize because to me when you look at the Satoshi Nakamoto vision the third layer of what he contributed was the blockage the mathematical stopping of economic freeriding and the proper incentivization of ecosystem value adders right.
That’s the magic juice because if no one can take air out of your balloon but on the opposite people are incentivized to put air into your balloon then your balloon becomes self-inflating. In my opinion that’s the insight that Satoshi provided and that’s the magic internet money we’re talking about. The magic really has to do with organic decentralization coming from incentivization and a lot of the blockchains are totally missing that. If they’re blockchain but not bitcoin not only are they missing incentivization and decentralization but they’re also missing the concept of consensus which is how do you know that the contents of your blockchain are true or false which is a pretty big thing to miss.
The magic really has to do with organic decentralization coming from incentivization and a lot of the blockchains are totally missing that. If they’re blockchain but not bitcoin not only are they missing incentivization and decentralization but they’re also missing the concept of consensus which is how do you know that the contents of your blockchain are true or false which is a pretty big thing to miss.
Mark: Miko, you bring up two really good points which is what Satoshi did when she made it was that put together two amazing concepts from the last 500 years of Western civilization democracy and free market economy incentivisation. If you think about a blockchain is really a voting mechanism. And once you have consensus and everyone agrees, it is written and now you have triple entry bookkeeping. I love the Michael J Casey book where he elegantly describes that a dual entry bookkeeping has been great unless you’ve got Bear Stearns in charge of the ledger. But now you have the ledger which is immutable and spectacle.
So let’s bring back now to the 13 projects that you advise here in the audience. To sum up, so far, we’ve heard that they need to understand economics, to understand history, they need to understand international law. Plus they need to be able to tea leaf read the SCC. How does someone who is an entrepreneur wants to bring value to the world est move forward today in the tail end of 2018 and go out and successfully raise money and build a project? What would your advice be?
Miko: Well, you definitely need to assemble a team, an extended team. I’m definitely a proponent of the model of advisers but it’s important to ensure that your advisers value adding. I think you should look at the bandwidth of the advisor and the number of deals are running in parallel. There’s lots of weird potholes and having someone who’s probably fallen into every single pothole at some time or another is useful right because they can actually add the correct energetic emphasis to don’t do this because they actually know what happens if you do do that.
The other thing that’s really important is a signal around investment. Nowadays branded capital plays a significant role in building out the rest of your networks. I think appropriate layering is very important from the perspective of getting it right. With respect to legal counsel definitely it’s important. My attitude is that there are lawyers that will sell you an opinion letter and then there are lawyers that will keep you out of jail. I prefer the latter.
Mark: Is there still going to be a market for utility tokens six months from now and what’s going to happen to all these thousands of issues that are out there trading on the exchanges right now?
Miko: In my worldview there is no utility token, utility tokens don’t exist. But there are what I call “service-back tokens” which are tokens that are backed by a service whether it’s services as a humans or whether it’s an online service or SAAS. Question is what will happen to the market for service back tokens? To me, those are the ultra-speculative assets whereas an asset-backed token isn’t speculative. Eg: this token represents real estate and that’s not a speculative asset. That makes asset-backed tokens adding a lot of stability to the crypto economy as well as a lot of value which is 10 trillion dollars are going to come into there pretty quickly and that’s a conservative estimate. The so-called security token space is going to become very big very fast. But if you look at the so-called utility token space I would postulate that it will resemble what happened during the dot-com wave. If you look at the dotcom wave there were probably five companies that really came out huge and those are platforms.
I think platforms will be the dominant form of life and the platforms will actually aggregate lots and lots of applications and become the dominant form of life. And that’s the natural progression of the world. What it means from an investment standpoint is that even kind of the ones that don’t win may be able to retain value through things like M&A which we haven’t seen much of but we will and I think that what’s going to happen is a lot of consolidation and 99% percent of the tickers that we see today will probably go away. But it doesn’t mean that the value that’s implicit in those tokens will necessarily go to zero. They may end up being merged into something bigger. If you do it mathematically like 99.9% of the tokens that exist today will not exist in three or four years. Does that mean that every single person who invested every single one of those 99.9% will lose all their money (like Jason Calacanis thinks so) but I don’t think so.
The value will be retained and that’s based on what I call my “mid-thesis” whereas my “upper-thesis” is what I call all doge-coins go to heaven. So that’s a non-optimized thesis. And what I mean by it’s not optimized is the only way you can optimize thesis is to have anything. If you hold anything you’re good for that thesis.
The other extreme thesis I have is what I call “all-crypto-kitties-go-to-hell”. That thesis is also not very optimized which is your best case and that thesis is the hold no cryptos. The only thesis that makes sense to me is what I call the mid-basis which is what I’ve nicknamed “valuable things will have value”. If you follow that thesis where the things are extremely valuable like engineering and products that customers want them to do that they’re willing to pay FIAT or Ether – something really beneficial will happen to those people and they will produce positive outcomes. My mindset is the mid-thesis: valuable things have value. And one should really be looking for those and ultimately we have to ship software that people want to use and that people really want to use and not just casually dink around with in order to figure out what’s going on.
Mark: I agree with you the platforms are really important that are going to add real value instead of a utility of a specific thing that does a specific thing but rather something that enables a lot of things. Would that be accurate and then follow on to that, give us a quick prediction of what you see one year from now going on in this market?
Miko: Let me clarify, the dominant platforms sometimes don’t start as platforms for example if you look at Facebook. Facebook is a dominant platform that started as an application. Amazon is a dominant platform that started as an application. It’s a platform when I say that the platforms are going to win. It doesn’t mean that you have to start as a platform and then when it means you have to end as a platform.
If you have an utterly dominant killer application you get a free invitation to then turn that application into a platform.
I’m just saying that platforms will win right. And they can begin as platforms. If you look at EOS, they have billions of dollars of VC where they can start to potentially acquire killer applications and have that dynamic relationship between platform and application. That’s what matters, I call it brains and muscle, you need traction, you need business usage, you need a crypto economy which is driven by a killer application. But at the same time, the brain’s part comes from actually having a foundation that maybe today isn’t but eventually could become a platform. And when I say platform I don’t mean necessarily an application that’s built your own performance blockchain. What I mean is that you have to be able to navigate between horizontal and vertical functionality and you have to make appropriate investments at appropriate times.
Yes, crypto kitties could absolutely become a platform. But the shot clock is run out on that play because in a sense like Beanie Babies was a killer application but it Beanie helped out eBay and then eBay helped out PayPal and eBay became this fertile spawning ground for crazy mafia entrepreneur types.
If you look at the history books I think Crypto Kitties will probably be the Beanie Babies of crypto.
Mark: One thing I want to follow up on advisers. Totally agree with you on its importance. Recently I saw a post from someone who claims to be a guru security tokens and he said that every time he sees a company and adviser he interprets it as a sign of weakness because they’re not doing it themselves. And I vehemently opposed to that. The number one thing I look for in a project is: does the management team have humility? Are they able to admit not just what they don’t know but explore what they don’t know they don’t know? On the flip side of that is I saw a project down in the Bahamas the guy was pitching his project and claiming that Larry King is on their advisory board. I looked at this CEO and I asked whether Larry King is still alive?!Well, unless Larry King has a solidity dojo in his basement that I don’t know about there is no value in having an octogenarian semi bold name on your project. But to your point having people that have been there, done that and can accelerate the path away from landmines to get you where you need to go and open up doors. I think there’s value to that.
Miko: What investors will be looking for is some slider between experience and traction. If you don’t have experience then you need traction. Because that’s what’s going to convince investors in this climate. And I think that’s honestly what I would be looking for as well.
Mark: We’ll close with putting yourself out on a limb to make a prediction of what you see in your crystal ball within the next 9 to 18 months and then we’ll take questions from our audience.
Miko: Here’s a bold prediction which is DEX’s (Decentralized Exchanges) are going to continue radically under deliver, decentralised exchanges will continue to have low liquidity despite all of these outlandish performance. The bottom line reality is that there are still six orders of magnitude performance difference between on chain and off chain. And putting order book, order execution – putting those functions On chain is going to be super hard. We’re going to have to get our transparency and accountability in other ways. My prediction is DEX’s are going to underperform and under deliver. And ultimately the liquidity will be driven principally by institution and that institutional investors are not going to DEX. It’s super uninteresting to them, killer application for DEX’s, money laundering for DEX’s. Liquidity will be dominated by the centralized forms of exchanges.
My prediction is DEX’s are going to underperform and under deliver. And ultimately the liquidity will be driven principally by the institution and that institutional investors are not going to DEX.
Mark: Miko, thank you so much for coming to CryptoMondays and sharing your expertise. And big thank you to BeFastTV team for broadcasting the talk LIVE tonight.
Miko: So the question was about specifically the real estate tokenization and the schism between the security token aspect and the utility token aspect. So from my vantage point you have to look at the value split. And if you look at the value split the utility token aspect has to do with things like services and the services have to do with things like managing, real estate transactions, things like what sell side brokers do and so on – there’s a lot of middle players and disintermediation will happen. And by this a lot of the service providers will probably end up being paid in tokens. There are essentially utility tokens there but if you actually look at the total value like the total value of the asset backed token in real estate is cosmological. What I mean by that is if you go up to the South Bay and look at San Jose how much real estate do you think you’re looking at just in terms of the total value? You’re looking at like trillions of dollars right in front of your face. Tokenize that and what you’re going to see is a very big change both in the stability of the crypto asset marketplace as well as the total size. I think we’re at the cusp of having a legal framework to be able to do that.
Mark: And I’d add to that I had experience with one of these projects where the utility token was specifically akin the gas on Ethereum. You’re using the utility token to pay the network fees and that is divorced from any value inside the ecosystem which is a security token. I think you can have both but from personal experience it’s really hard to talk to investors about that and get them their head around that and then claim that the value of the utility tokens is going to go up the more people use the ecosystem. It obviously worked for Ethereum but it’s hard to make that argument.
Miko: The question was about the UK regulatory sandbox that provides guidance and to some extent regulatory safe harbor for innovative fintech startups. From the perspective of the mechanic I think that’s a very smart mechanic. One of the places that is doing that to very strong effect is actually Lithuania. It has some of the best banking, their correspondent bank is European Central Bank. The Bank of Lithuania is now helping out with crypto within the confines of their regulatory sandbox. From the perspective of a sandbox approach it’s very beneficial for the birth of a crypto economy. I don’t want to speculate much about the SCC adopting such a pattern because they’re not going to. We can’t expect that kind of approach. It doesn’t make that much sense from the perspective of our regular regulators.
Miko: The question: has Ethereum fulfilled its original purpose? How do I see the original purpose?
To me the original purpose is hugely ambitious which is world computer. From the perspective of world computer, I don’t think it has. Nonetheless, I think Ethereum is the most valuable cryptocurrency in the world just as a function of how supportive it has been to the creation of the diversified crypto economy, it’s incredibly valuable. Obviously, bitcoin is also incredibly valuable having kicked off this whole thing from the get go. Has it fulfilled the intention? The project is super ambitious and it’s great that it isn’t there yet however there are some amazing technological achievements left in the bag of tricks. And I have a lot of confidence in its amazing team too.
Question: My question for Mika is what do you recommend to startups in terms of acquiring these users within their price given the uncertainty around the legal regulatory frameworks.
Miko: That’s a really complex question. First of all, you do need good legal advice for that. There are mechanics that reduce the dangers of being perceived as a security. And securities are investment vehicles. Unless you’re in the category of free it’s really hard to build a case that you’re selling security to those specific individuals.
I think that we have the wrong question. The question is should I incentivize people that are adding value to my ecosystem – that’s the right question. And then is everyone will be incentivized to do something or other in the next few years.? And the people that aren’t incentivizing their user base will not have a user base? Once you’ve answered that questions you can think about token distribution that does incentivize those people. Moreover, you have to create proportionality, ideally mathematically calculates value like Satoshi did with the compensation scheme for miners.
Miko: The question is how do you maintain the integrity of decentralization with all perverse incentives with all of the path to liquidity and the path to creating a viable ecosystem without very many apps. One of the things that I place my sincere hopes in is open source money. And the reason why I’m so pumped up about this concept is because of the way that open source competes for consent. If you think about this from the perspective of that, externalities and economics are simply costs that don’t come with consents. If you find an externality you’re finding someone that’s getting screwed. What happens in open source is externalities by their nature are essentially forked out. As long as we’re all continuing to invest in open source money and not in more iterations and generations of proprietary monies we will naturally move towards a world with fewer externalities. Because what happens is if you have two networks one of which screws over the users and the other network that screws over the users but less, the users will vote with their feet. The governance mechanic of forking will organically drive out externalities is the function of competition for users because they’re competing for the consent of the users. That’s what gives me faith in this entire enterprise. As long as people continue to invest in open source money we’ll continue to see beneficial and positive results. Obviously open source money needs to be more inclusive and friendlier, and more usable and more performant and more secure than the money. We just hired 23 billion dollars’ worth of people to work on this as a function of ICO investment and I feel like we’ve got a lot of talent and we’re going to crack a lot of these hard problems.
Miko: The question is what is to prevent Facebook and Amazon and these other types of centralizers from essentially acquiring all of the companies and subverting the paradigm of decentralization?
Again, I can place my hopes on open source because the amazing thing is that if you try to take an inherently decentralized phenomenon and you try to control it from a centrality, the centrality itself is an externality. You’d take the same code base that they’re working on fork it back out again and say we’re over here and we actually have a better coin for you. And then it becomes a race on uneven playing field. Facebook vs crappy social network that’s more open. People will continue to use Facebook because it’s better.
But the point that I am trying to make is that open source forces everyone onto its competitive matrix on its terms and the beautiful thing about the competitive matrix of open source is its terms are we’re all fighting for everyone’s consent. It means now Facebook is on the playing field of consent as opposed to where it was before. Let them acquire, that’s a beautiful event because it means that the viral code is uploaded into the mothership and the mothership is now going to cease operating or it’ll decentralize itself or who knows what will happen. It will be really interesting.
Miko Matsumura is a founder of crypto exchange Evercoin, is a General Partner with Gumi Cryptos and a Venture Partner with BitBull Capital, a cryptocurrency fund-of-funds. As a 25 year operating exec in Silicon Valley, he has raised over $50 million in venture capital for Open Source startups and over $250M in ICO capital. He currently advises cryptocurrency startups like Naga Group ($50M ICO Stock Trading), Playkey ($10.5M Streaming Gaming), Bee Token ($15M, Decentralized AirBnB), Celsius ($50M Ether Lending), and others. He is also an LP with Focus Ventures, a firm with over $800M under management, 9 IPOs and 44 exits. He holds a Master’s degree in Neuroscience from Yale University where he worked on abstract computational neural networks. He leads the Crypto Underground meetup in San Francisco and is a well-known speaker at many cryptocurrency and blockchain events.