Simone Cicero 

Hello everybody and welcome back to the Boundaryless Conversations podcast. On this podcast we meet with pioneers, thinkers and doers and we talk about the future of business models, organizations, markets and society in this rapidly changing world. Today I’m alone but I’m also with a fantastic guest for today. I’ve been looking forward to this conversation for many years I would say. We tried to set this up.

 

I’m more than excited to have on the podcast a legend of Web3, now a founder and general partner at Variant, which is an early stage crypto fund investing in user-owned internet startups. And Jesse was previously program director at Crypto Startup School, one of the most iconic learning and acceleration programs for startups in crypto and Web3. And I would say also a pioneer of blockchain use cases earlier on with Media Chain Labs later acquired by Spotify. Welcome to the podcast, Jesse Walden.

 

Jesse Walden

Thank you so much. Yeah, I’m really glad to be here after many years trying to make it happen.

 

Simone Cicero

Thank you so much, Jesse. So let’s go quickly to the meat, let’s say. And first question, I think for me, is the elephant in the room, let’s say. I’ve been thinking about this recently, especially because I was reading your colleague Li Jin’s recent post where she wrote that the major problem in crypto is product market fit and not UX, which kind of resonated with me. 

 

And also recently I was listening to, I was looking at Twitter and I saw that Jason Calacanis said this tweet said, you know, basically, after all this year, you know, we didn’t, you know, the WebTree really didn’t deliver its promise, it’s just about financial, it is money and transferring money and financial services. So I’m really, you know, coming to the core, first core question with you, which is after all this year, why the question, why should I build on chain is still the hardest question to answer. And what’s your answer at the moment?

 

Jesse Walden 

Yeah, it is, I think right now a challenging time for anyone thinking about building in the space to answer that question. To me, the answer is very simple though. I think the key idea is that crypto enables people to own a piece of the internet for the first time. 

 

It’s never been possible to have digital ownership that entitles you to the same rights and responsibilities as ownership in the physical world. And that changed with Bitcoin, where for the first time you could own a digital asset, a financial asset, independent of any third party, just like you can in the physical world. 

 

And of course, that became more of a design space with the admin of smart contract platforms like Ethereum, which allowed developers to program these digital assets and new ownership experiences. And so to me, that is a very fundamental shift in the way that the internet works or what is possible to build and why I think building on chain continues to be one of the most interesting and sort of fruitful spaces to keep exploring.

 

Simone Cicero

Normally, we connect this idea of user-owned networks with governance tokens, mainly. We tend to think that people own the network by owning a piece of the governance tokens and being able to participate in the governance. I would like to ask you maybe to extend this idea of ownership. So of course, user-owned networks, user-operated networks, it’s much different than, you know, protocol centralized, sorry, platform centralized networks. So what do you mean with user owned? What are the facets of ownership?

 

Jesse Walden 

Right, yeah, that’s a great question because I think the concept of a user owned platform is one manifestation of the idea of digital ownership, right? Like being able to own a piece of the product and products and services you use every day, a very compelling idea and one that we’re interested in. However, I think the design space of ownership is much broader and

 

What we look for in investments is new products, new networks, where ownership is a keystone of the user experience. And that could mean platform ownership, but it could also mean owning a piece of digital media, for example, like owning an image, a video, a song, owning a membership pass, owning an access pass or something like that. And all of this is newly possible again, because of this concept of being able to own your digital stuff, own your identity that crypto enables. And so we think that, you know, there can be many, many types of products and platforms built, some of which can be owned and operated by users. Others where ownership is a keystone of the user experience. And so…

 

Coming back to your question, I think governance and control is one type of experience that can be built into an ownership or an asset, but not the only one. And we’re excited to see the full design space explored.

 

Simone Cicero 

So if I understand well, you mean sometimes you don’t need to own a right to govern a particular interface or platform itself, but it’s enough that somehow you own your assets or own your identity to already shift the balance of power that have been characterizing the last 20 years, you know, where platforms were, you know, basically, I would say monopolies of power, right? When people couldn’t really relate much with the platform owner. So that’s an interesting point. 

 

So to continue like that, I would like to ask you to maybe jump into another core concept that you seem to be very interested in. And I reconnect with your recent conversation at the Summer of Protocol that we shared as guest lecturer. And you spoke about this idea of complete contracts versus incomplete contracts. So maybe it’s a good idea for me if you can explain quickly why you feel like complete contracts are different from, I mean, that’s more of a definition. Complete contracts are different from incomplete ones and why they are relevant for the Web3 space. And I can refute that later.

 

Jesse Walden 

Sure. So the concept of incomplete contracts is actually is not mine, but belongs to the economist Oliver Hart, who is a Nobel Prize winning economist. He wrote this great paper on incomplete contracts and control. And the quote from that paper that stuck with me is, quote, all but the simplest contracts are incomplete. So the key idea is that in a contract, you cannot anticipate every possible outcome or set of actions that the contract is to govern, given the complexity and dynamism in the world. And so an example I always come to is, you enter into a contract with a plumber to fix your sink and it’s, you know, seems to be a very simple, straightforward thing. You fix my sink, I pay you. But what happens if there’s an earthquake? The contract doesn’t anticipate that, probably, maybe. 

 

Okay, so that’s what’s behind this idea of all but the simplest contracts are incomplete. So why is this applicable to crypto? Well, in crypto, we have this new thing called smart contracts.Which is essentially are just software that runs on blockchains and specifies, if-then statements, much like a legal contract would. And what’s amazing about blockchains is they automate the running of these smart contracts, such that anyone in the world can kind of trigger them to run and they run permissionlessly.

 

So this is a very exciting and profound new capability is: you can run a piece of software without any third party in control of it. But the corollary is that piece of software, it needs to kind of specify exactly what it’s gonna do in as many sorts of circumstances as possible. And so a simple example in the real world would be a vending machine. 

 

A vending machine is got some software running, if you put in a quarter, it gives you the M&Ms, right? There’s a very simple contract and it’s kind of complete. You know, put in the quarter, get the M&Ms, that’s a complete contract, as close to it as you can get. In the context of blockchains, I think the corollary is that smart contracts have to be kind of, they have to be fairly simple, or else they have to be, they’re going to be incomplete.

 

And when a contract is incomplete, this is true both in the physical world and in blockchains, you need to rely on some outside authority to figure out what to do when the contract hasn’t specified how to address a dynamic situation. So this is where governance comes into play. In the case of legal contracts, when something is not specified in the contract, you fall back to the court system.

 

or the legal system where there is one. In the case of blockchains, the question is what do you fall back to if a smart contract is not completely specified and requires some dynamic input over time? So that’s like the concept of incomplete contracts and why I think it’s relevant to crypto and I’ll pause there. We can go in a number of directions probably.

 

Simone Cicero

Yeah, no, but I mean, I think this is also one of the original questions that I always said about Web3. It seems to imply a certain transition of state, let’s say, between the institutional economy where you have third parties that, let’s say grant that agreements are fulfilled and can intervene in case the agreements are not fulfilled, like courts, for example, and instead a stage where people interact and engage in agreements that somehow they accept that won’t be mediated by an institutional intervention. So to some extent, they agree that we’ve been talking about this a lot, software is slow, right? And essentially, to some extent, the point that I’m raising here is, maybe the core question around why you should build on chain cannot be answered in the institutional world. It needs to be answered in the post-institutional world, so in a world where to some extent we transcend the concept of the economy, regulated economy and economy subject to central government policy and so on. 

 

So to some extent, how much do you think that the real potential of smart contracts and of this digital infrastructure that are deliberately, post-national, post-industrial to some extent can be fulfilled in the current context? Because my question to clarify is, it looks like if you try to stay in the traditional agreements and traditional economy, and you do smart contracts, it’s like you are doing things twice, because there is already a legal framework that protects you in traditional contracts. So why do smart contracts then? It’s like you’re doing things twice, and instead, in a space where there is no legal framework that can ensure that the agreements go as agreed there is where smart contracts will be needed. That has been my feeling sometimes. What do you think about?

 

Yeah, I mean, I said that sometimes I feel like when you use smart contracts and blockchain in an institutional world where you have legal obligations and third parties that grant the contract, it’s like you’re doing twice the work, kind of pointlessly. And instead, when we didn’t really understood yet how a smart contract based agreement can really execute in a space where there is no legal protection that can operate.

 

Jesse Walden 

Right, so I think that in the full span of time, blockchains will both unlock sort of new kind of economic and organizational arrangements that weren’t possible before and subsume the sort of institutional regulated economy as well. But I think the latter will happen much later on. And I think that the internet itself is a good example of why that’s the case where the internet emerged in the very bottom up way, right? You know, people in chat rooms and forums, right, eventually you had America online and, you know, as individuals and consumer led adoption. And eventually, large enterprises came online and started using the internet for things that, you know, that they were doing previously. Like for example, a good example is DocuSign, right? Like big companies use DocuSign to execute legal contracts that they would have been faxing or mailing or whatever before. 

 

So all of that stuff happens, right? Like this is a technology that, like the internet, is going to underlie all of the world’s economic value. But I think what’s most exciting to us is the new economic value that it can create in a bottom-up way, as opposed to the institutional sort of adoption. And to bring this back to the concept of incomplete versus complete contracts – I think what’s exciting to us is that it is possible right now to use smart contracts to create new networks and marketplaces that are fully specified and fully automated. And a good example of this to make it concrete is something like Uniswap, which is a venue to trade tokens on Ethereum that has no governance whatsoever – the contract specifies exactly what is to happen when a party wants to trade token A for token B. And in this sense, it’s very much like a vending machine. Coming back to the earlier example, you put one token in and you get a certain number of tokens out. So it’s simple, but even in its simplicity, it’s able to drive billions and billions of dollars of transaction volume. So this is a fundamentally new type of marketplace that was not possible before smart contract blockchains in that this marketplace can operate in a totally autonomous way without any third party control. 

 

And that’s because blockchains enabled these kind of complete contracts to run, permissionlessly. So that’s an example of a new thing, new market, new network that expands the pie of what’s possible and we like to invest in those things.

 

However, as mentioned, I would expect that over time, there’s gonna be a broader spectrum of things that happen on chain, including, you know, traditional company formation, right? That can be sort of marginally improved by the transparency and sort of automation that smart contracts bring. So that’s more like the DocuSign example, right? Where you’re automating certain processes and flows using the technology. So we’re interested in the full spectrum, but especially interested in the complete contracts, because that’s the net new thing that we think is the bottom up innovation today.

 

Simone Cicero

Looks like this interest for complete contracts is more like an interest for simple things, like simple super-scalable things, like there is this definition of hyper structures that has been thrown around a lot recently. 

 

But I still have some questions, for example, why you couldn’t achieve something like Uniswap in software, right? Because in traditional software, probably traditional software is faster than smart contracts, it’s cheaper than smart contracts. But still, the value that people have been finding in Uniswap, I think, my impression is that it’s from its un-temperability. So the fact that, you know, reasonably, distribution of governance tokens and the way that clients get updated or customer contracts get updated was reasonably telling them no third party can change the rule without you knowing that or something like that, without the community knowing that and accepting that. So there is somehow a post-institutional idea.

 

Jesse Walden

Right, right.

 

Simone Cicero 

Okay, so there is a feeling that, yeah, that’s not a traditional institution. It’s more like a collective institution. So institutional innovation on one side. And on the other side, I feel like most of the value came from, as you said, permissionlessness and potentially anonymous, the fact that they say anonymous or autonomous, sorry, anonymous. So these are signals that are very, I would say, I cannot say very much about institutional innovation. So, so the, you know, despite a Uniswap is a lot, there’s a lot of money going on, and which is a very tangible use case. Most of the value is coming from these radical elements that are not possible in traditional institutions.

 

Jesse Walden 

That’s right. And I actually think, you know, what you mentioned, it’s all part of this, you know, one continuum, which is the permit. The fact that Uniswap runs permissionlessly on Ethereum without any central control is why, precisely why it is used, right? Because third party developers integrate Uniswap precisely because they know that it is neutral. It cannot be pulled out from underneath them.

 

And that’s what’s led to its adoption and growth as an exchange protocol. So the fact that it is this complete contract that runs autonomously and permissionlessly is an institutional innovation that creates a lot of new value. That’s, I think, the way it all strings together.

 

Simone Cicero 

So this leads me to connect with another topic that I wanted to discuss with you, which is the topic of protocols and products. You have been writing a lot about protocols and products. Should I build the protocol first, the product first? And you have been wrangling around products, subsidizing the development of protocols and so on. 

 

So this is also I mean, that’s also because we were engaging with some of the protocols, because we have this idea that something similar to what happened with Uniswap, so the emergence of a third infrastructure, third space, which is independent from the entities that interact in the space and to some extent can represent a level playing field where everybody can be reasonably sure that their rights are going to be, I would say, protected, that they can, they won’t be policed out like, you know, it happens sometimes with Airbnb or things like that. It’s their use case, or at least it’s one of the major use cases of Web3. 

 

So the question that I have at the moment for you is why we haven’t seen protocols emerge in spaces which are not, or rather, we have seen so little protocols emerge in spaces which is not finance or trading of crypto. And I’m talking about, you know, protocols in science or supply chains. Or, we have seen something, but two major things that I still see and I wanted to share with you is first, they are, most of them are corner shop sites, very small things, or especially respect to Uniswap, which is enormous. And on the other hand, why we are seeing product developers always reinventing the protocol. And there is a source card’s tendency to build on some other protocol which is already there. Even if these protocols have shared governance, open governance,permissionless, and open for everybody.

 

Jesse Walden 

Yeah, good question. So maybe I’ll start with the last question you just asked. Why are developers kind of building and rebuilding protocols versus building on the work of others? And maybe backing up a sec, I think an important thing to touch on is that one of the promises of blockchains is that they’re open, they’re permissionless. And so in theory, anyone can build on top of the work of others without fear of them sort of pulling out the rug from under them has happened, you know, in with developers building on top of web two platforms like Facebook and the like. So that’s the promise. 

 

Why hasn’t it happened? Well, I would argue that for one, it has happened in certain instances where the protocols are kind of ossified, meaning they’re true permissionless protocols that are not subject to a lot of change. And I think I always use Uniswap as an example because it is the pinnacle, it’s the biggest, right? But this, I think Uniswap is a great example where, I think roughly 40% of the volume in Uniswap is driven by Uniswap Labs front end product. 

 

But that’s a minority. 60% is driven by third parties, right? Who’ve integrated the protocol directly. And they’ve done that because, Uniswap is open, completely transparent, permissionless, and the governance surface of the protocol is very, very small. So developers have certainty that it’s not going to change underneath their feet. And that’s sort of what I think is necessary to get developers to build on top of existing protocols. It follows from that line of thought that if a protocol has a lot of governance involved, developers might be more suspect about building on top. That’s one reason that people are rebuilding. I think another reason though is network effects, right? So In order for a protocol to be attractive to a third party to integrate, there has to be some benefit to integration versus rolling your own. Right?

 

And so, you know, one of the primary benefits you can get from building on top of a platform is that platform has some existing distribution, right? It has some user base or some, you know, quality to the platform that gives you a competitive advantage to build there versus rolling your own.

 

And I think it’s the case today that in crypto there aren’t a ton of protocols that have very, very strong network effects. And that’s in part, I think two reasons. One is you could argue, well, maybe these protocols just don’t have market fit. There’s no protocol market fit, they haven’t solved the problem. That’s one reason. Another reason may be that because users have control or ownership of their identity, their money and their data protocols are less defensible. They don’t have the same network effects that platforms in Web2 have because those Web2 platforms control your identity, your money and your data. You can’t move it as easily between protocols. So maybe the case that, because users are more empowered in Web3, protocols have fewer network effects and therefore there’s more competition, which is not necessarily a bad thing, right? More competition is better for end users.

 

So yeah, I’ll pause there. I think that’s a few reasons why people are rebuilding.

 

Simone Cicero

Yeah. Very, very interesting. Let me just underline a few things. So you said there has been convergence on protocols when these protocols are ossified slow, they tend to not innovate too much, which is very much resonating indeed with the thesis on hyperstructure. So very slow to evolve. And especially when I read about hyperstructures, I said, you know, why no doubt, why no institution behind these things? And now I kind of feel like that’s why, that’s because they don’t evolve. So they don’t really need any institutional element because it’s like, you know, you build the railroads, they just need maintenance, you know, they don’t evolve that much. So that’s an interesting point.   

 

And then on the other side, when you said sometimes people don’t see the benefit of using an existing protocol because there are no network effects. And of course, just to clarify to our users, it’s very interesting when you join a protocol, if you find a lot of people there, or a lot of entities there, you can enjoy network effects, you get demand, get suppliers and so on. And you said, why we don’t have network effects? 

 

Because either there’s no product market fit, which would be a good answer, or because they are less defensible. So there is less possibility to build network effects. And this is kind of a circular thing. Basically, the thing that the question that raises for me, and I’m getting back to you, is so we’re never going to build large things which are not super simple on Web3. 

 

So the question for you is, since you also wrote about AI a lot in the last few weeks. So it kind of tells me that Web3 is going to be much more modular and much more diverse than Web2. So AI can help, maybe, right?

 

Jesse Walden 

Yes. Yeah, that’s… Well, yeah, I’m glad you brought up the word modular because that’s what I was going to say in response to the provocation that Web3 is not going to build big things. I would actually push back on that and say, I think Web3 can build networks that are, on the one hand, much bigger and more valuable than Web2 networks because they’re permissionless and they’re autonomous and therefore third parties want to integrate and build on top. Again, Uniswap being the sort of like pinnacle example of this. But it’s in order to do that, I think that we will get there through modular components being composed. So like Uniswap being composed into a third party application is a good example. I think a lot of the experimentation to date has been in trying to build protocols that have a lot of surface area, are incomplete, require a lot of governance. And this is problematic because when you have a lot of dynamism in a protocol, but you make decisions through governance by committee, you are de facto slower than a Silicon Valley startup that has a CEO with a vision and is iterating very, very quickly. So I think given that competitive disadvantage of building a sort of network by committee, the better approach is to try to modularize the components of what’s needed in a given protocol into small pieces that can be shipped and sort of managed independently and therefore iterated on more quickly to get to this ossification point where they are components that can be reused by third parties. And the sum of parts I think can be much greater, right? And we can build networks that are big and valuable, but it has to be done in this kind of modular way.

 

Simone Cicero

I mean, very interesting because the implications for these are massive. Massive from a perspective that the image that I get is that things are going to become very simple, very modular. And most of them want to be huge, I guess. Most of them may be small products like smart contracts that can be integrated with other things.

 

Basically, as a builder in Web3, you try not to have too much, too big domain of things. You try to be very small and say, I’m building this thing, and then you can use it to compose with other things. But when this happens, the chances that you have to extract value from something, because you cannot integrate it vertically, you cannot have a very much a number of pieces, a value chain, whatever. You’re going to have to do it and only one small piece that is going to be integrated by the others. This caters much more for the economics of open source than the economics of web two, right? So this is very challenging also for investors like you. You know, another question that I always have, what is the thesis of an investor in web three? Where you cannot extract money from as you would from equity because there is this security issue.

 

And sometimes people, companies cannot, I would say very skeptical of building or having tokens that generate returns, right? Because they are skeptical of being considered securities and so on. So that’s one thing. Then also you have to build modular things because building large protocols is scarcely affordable. You’re never gonna make it. So what is the real thesis of capital in Web3, because it seems like it’s a space that is very much about efficiency, simplicity, modularity, openness. So how do you extract returns from Web3?

 

Jesse Walden 

Yeah. So let me answer this maybe by starting in a roundabout way. So I think if you look at the Internet itself, it is a stack of modular protocols that do very specific things. Starting at the bottom, you have IP protocol, which specifies how data is to be packaged up and moved across the wire.

 

And then on top of the IP protocol, you have other protocols like SSL, which bring privacy to the packets, which is necessary for e-commerce and just general privacy. You have protocols for email, HTTP, SMTP. So the internet itself evolved in a very similar way where you have these modular components, the sum of which enables a very rich design space that brought us everything that we know today in terms of in Web2, right? They all rely on these underlying protocols. The thing that’s sort of, so I think there’s a parallel there in the potential for Web3. We can build these component protocols that do very specific and very useful things that when combined together, enable very rich applications. 

 

The difference between these early internet protocols and Web3 protocols, is that Web3 protocols are stateful, which is a, this is a technical term, right? But what it means is that the, you know, the, um, the protocols themselves, they hold the state or the data of their users. Whereas web, early web protocols do not, they left, you know, the maintenance of state to companies who had the incentives to maintain the data. And that’s why Facebook, for example, owns all our data today. They maintain the state at the end of the transmission from my computer to their server. So blockchains kind of changed this because they introduced incentives to maintain state, right? So the miners of the Ethereum blockchain and the Bitcoin blockchain, they maintain the state of all the protocols that are running on top, which obviates the need for a third party like Facebook. And so there’s two points I want to land here. 

 

One is that through modular protocols, you can create a really rich design space, a very functional design space that enables really big networks to form. But two, the way that Web3 works is that these protocols are stateful. And the corollary is that they can capture the value of that state in part, whereas Web1 protocols could not. And so,

 

Coming back to your question, what is our thesis? How do as investors, how do we make money investing? We believe that what three protocols can step into the flow of the value that they’re creating because they’re stateful. And therefore we wanna invest in assets that coordinate that state. So in the simplest case of something like Ethereum, which manages the state of all the  application protocols built on top like Unionswap we want to invest in eath right because that’s the asset that coordinates that state and you know, I would make the analogy back to a company, you know in web to a company like Facebook the asset that coordinates The state of the Facebook network is a share in Facebook Right. And so we want to effectively own a piece of the networks That control the state of Web3 protocols. Does that make sense? That’s our thesis.

 

Simone Cicero

Yeah, it makes sense. But intuitively, I must say that you can extract a relatively smaller amount of value from a database than you can from a fully integrated vertical platform. Because what I’m thinking here is that if we buy the fact that diversity is going to be much broader, there’s going to be much, maybe on the same protocol, you can have 1,000 different experiences that cater to 1,000 different niches instead of one experience, like in Facebook, which makes it valuable, let’s say. 

 

So even if you have stateful representation, for example, and you own a piece of that, you’re not going to have network effects in the verticals. Because verticals is going to be niches, much more modular, much more composable, and so on.

The factors that have determined the possibility to extract so much value that we have seen the last 20 years for Web2 are simply not there. I mean, I agree with you that it’s very important to have a common stateful representation of a level playing field. But I feel like this is going to be a commodity over long term. And so you cannot extract much value from it.

 

Jesse Walden 

I think, so I would agree that you can extract less value, but I would push back and say that while you can extract less, the pie is gonna be much bigger because you have this large ecosystem of third parties integrating these modular components. And so the sum of all of the parties building on top is greater than any individual one, right? And so you can extract less value at the protocol layer, but the total value flowing through is much greater, and therefore you can still have great investment outcomes. So another way of talking about it is that I think protocols have to be minimally extractive. They will only extract the value that they are able to create for the applications that are integrating on top. If you try to extract more than that, the applications will leave. And we talked earlier about how there’s much more competition here in Web3, because these protocols are open and users control their identity, their money, their data, so they can move more fluidly between them. So that’s another, you know, forcing function for protocols to remain minimally extracted. That said, they are still creating value. And, to the extent that they’re only seeking to, you know, extract the value that they create, they can be in the flow of it. And the assumption is that, you know, the sum of all the integrations on top will result in the protocols, you know, having a lot of volume through scale or a lot of value through scale, even if lower margin.

 

Simone Cicero 

If we agree that, by the way, to regenerate value, you need a lot of convergence, right? So you need to have large, simple things, basically. You can extract money, a value, from the large, simple things, and not from the countless modular things that can build on top. So my impression is that there’s going to be less large, simple things. So, for example, when we say, let’s say, not Uniswap, let’s say supply chain coordination. How many blockchain supply chain protocols are gonna be there? Maybe one or two, because it simply doesn’t make sense to have more than that, right? So this is affordance for digital public infrastructure. So it’s an affordance for building for the commons essentially, right? Which is another thing that makes me think that it’s gonna be hard to extract value because commons are good for essentially give value, produce value for people, but rather not good for extracting value. 

 

And again, when I was thinking about the internet and the example you made, I was thinking about Mariana Mazzucato’s work and the way that she said, the state has innovated with the internet and then the value has been captured by the private institutions. 

 

So what’s your point of view in terms of how this transition from diversity, I don’t want to say diversity, I mean, I would say vertical integration and extraction moving into these horizontal, large layers that support diversity on top and this kind of affordance for public commons and digital institutions. How it’s gonna change the whole theory around capital for the digital, for web three age and post institutional age. So what is your perception is?

 

Is capitalism really being challenged to some extent from these new affordances that we have to build these multi-sided, multi-polar layers? What’s your feeling?

 

Jesse Walden 

Yeah, it’s a fascinating topic. And in short, yeah, I think what we’re seeing is the sort of merging of capitalist incentives, market incentives, which is, we’re a venture capital firm, we’re capitalists, we’re investing for a return. And we’re doing that by investing in these networks that we hope will become the credibly neutral infrastructure that lots of people want to build on top of. And again, that is minimally extractive, right? And so you use the term public good, I think maybe a better term is club good, which is a good that people pay for like a toll road, you still pay to use it, right? The toll is there to fund ongoing operation and maintenance, right? And the toll has to be set appropriately to do that so you can cover the cost, right? But not be overly extractive, you know, in a way like a for-profit company would be. that’s sort of the, you know, setting that toll correctly is where you find a sweet swap between public benefit and value creation and the value capture to be able to maintain the service. And so I think that’s maybe more apt of analogy for what we’re describing, where you can still have an investment that makes sense there, right? An opportunity to invest early on and capture some of the growth in this thing over time, but have that thing sort of run at cost at scale. That’s sort of the end goal. We think that there’s still great investment returns to be had there because these networks can grow quite large and end up capturing a sliver of the value that they create. So it is, I think, a merger of capitalist incentives with ideas from the public sector.

 

Simone Cicero

Yeah.

 

Simone Cicero 

Maybe it’s more that we are, since we are at the start of this transition, because we don’t have many protocols, now you still can have a good investment thesis, because there is a lot to build. But maybe in 10 years from now, it’s going to be much more difficult to make money out of these infrastructures.

 

Jesse Walden 

I would agree. And I think that, yeah, the same is true of Web 2, right? Where, you know, the first 20 years of Web 2, say from, you know, year 2000 to present, right? We, we, there was a ton of investment and kind of like, you know, there’s like a handful of major, major successes that came out of that and lots more that failed, right? And I think we’re, we’re sort of at a similar point where we’re at the emergence of this new way of building internet protocols.

 

And like you said, there will probably be a consolidation to a handful of them that actually are widely used and able to capture meaningful value. And 20 years from now, they will be ossified. They’ll be mature. They’ll have very strong network effects, right? And the investment opportunity will be lesser, similar to how Web2 has.

 

Simone Cicero

Or at least you will have to do much more portfolio work. So investing in tons of things, which is a signal that we are already getting from the venture capital market, right? As we see in transition from the traditional rounds into something that is much less equity sold, much more longer term operated. So I think we are getting the same signals from the VC market. 

 

So last question, maybe before we move into the breadcrumbs and the closing.

 

I think an interesting point is that this evolution towards composability and modularity on the market is clear. We are seeing a lot more modular PCs, more smaller projects, more portfolio approaches. And you are also excited about AI and especially about the perspective of having AI based on zero knowledge systems and that doesn’t exploit the data for training but rather, again, gives ownership back of the models to the people. 

 

So what is your thesis about the role of AI in product, in composing products and creating experiences? What is your feeling about, how is it gonna change the landscape in this, given these things that we discussed?

 

Jesse Walden

Yeah, so a theme we’ve been talking about throughout today has been automation, right? Smart contracts are an automation innovation, right? Like you can now automate the execution of software without any third party running it. And AI is obviously also an innovation in automation. So I think there’s a very interesting overlap between the two. 

 

Smart contracts enable you to specify how a program should run, but as we’ve talked about, a contract is all but the simplest contracts are incomplete. I view AI as a way to extend the completeness of what a contract can do, right? So you can specify in a model, an AI model, how to act, right? Or what problem to solve. And so maybe this introduces sort of a new space where legal contracts fall back to the legal system and smart contracts fall back to token holder governance. A third option in the future, and this I appreciate is kind of potentially a little bit scary, but a third option maybe to fall back to an AI agent to make some of the decisions that humans would otherwise have to make.

 

And so if you have an AI that’s capable of making those decisions and trusted to do so, maybe because you can verify the way in which it works. And then you can, I think, build contracts that are far more expressive and complex because the sort of subjective decision-making that humans would otherwise need to do through the legal system or through the governance system can be done very quickly by a machine. 

 

I think that AI and smart contracts together broaden the design space of the types of, you know, protocols or applications that can be built because they both are automation innovations.

 

Simone Cicero

We are seeing that, by the way, because I think it’s fascinating to think that you can make a smart contract and at the same time saying, when the smart contract doesn’t cover the use case, respond to these five first principles, something like that. And that’s a very fascinating topic. And we are already seeing these kind of things dripping into product design, because when you think about the chat GPTs, when you think about GPTs, the latest feature, to some extent, these are roughly specified products where customers, to some extent, accept that the LLM will think about it in responding ways that are not completely specified. So I think we are developing this sensitivity of being able to relate to the product in unpredictable ways and giving the products or smart contracts in this case, attributions like personality or, I don’t know.

 

I don’t know, political tendencies or something like that. So I think that’s a fascinating perspective. 

 

So before we move into the closing, I would like to ask you if you have some, we normally often share breadcrumbs with our listeners. And especially I would like to nudge you into, you know, beyond the breadcrumbs, if you want to point out from your perspective, from your observation point, what are the new things in this space that people should be really thinking about?

 

Jesse Walden 

Well, I think a big one, and this is sort of riffing off of the last topic on AI. One big theme for us is that if you look at sort of the evolution of computing, there’s a pattern where new computing innovations tend to emerge in couplets and sometimes in triplets. So, you know, for example, the PC, right? Everyone getting a PC at home.

 

And the internet itself kind of happened right around the same time, right? The internet was first, you know, coming online really like 80s, 90s, and people were getting really powerful personal computers around the same time. Then you had the advent of mobile, right? And the cloud, right? So cloud computing and mobile computing kind of happened and they synergistically reinforce one another because mobile phones were powerful computers and cloud computers were very powerful. And so together, they pushed each other forward. 

 

And today, I think we’re seeing kind of an emerging couplet and potentially triplet with blockchain computing, smart contract platforms like Ethereum and the like, and zero-knowledge cryptography or zero-knowledge computing, which is a way of  is a technology that enables computation to be verified using mathematics just like blockchains enable computation to be verified by a network of very secure machines all over the world. And then there’s AI, which is this kind of third leg of computing innovation, where AI mostly functions in a black box. We have no idea how to verify what the AI models are doing, right? We don’t really understand them.

I think that there’s going to be an interesting convergence of these three things where the verification that blockchains and zero-knowledge computing bring applied to AI result in really powerful new applications. We made an investment recently in a company called Modulus Labs, which is trying to do exactly this. They’re trying to apply zero-knowledge cryptography to AI models to be able to prove what they’re doing such that they can be used by protocols and smart contracts to extend their capabilities. So that’s a very high level, I don’t know, kind of framing of something I think is really exciting and where we expect there’s gonna be a lot of new startups building.

 

Simone Cicero 

Right, totally agree. Do you want to just add a bit for the listeners, to you know, if they have an idea or a startup they’re working on, if they want to reach out, what you are focusing on with the fund at the moment?

 

Jesse Walden 

Yeah, I would say we’re very full stack. And so our scope, what we’re interested in is anyone who’s building a startup in the crypto space or using the technology to build infrastructure or applications to reach billions of end users. That’s the scope, it’s pretty broad. And yeah, you can reach out to me on Twitter, on our website, variant.fund. And yeah, we’d love to talk with anyone building in the space.

 

Simone Cicero 

Jesse, thank you so much. It was a fantastic conversation. I think we touched all the big points that I had in my mind since a few months. It was a pleasure to have you, really thankful. So I hope you also enjoyed the conversation.

 

Jesse Walden 

I did, yeah, it was great. Great questions, thank you.

 

Simone Cicero

Thank you so much. And I hope our listeners leave the conversation today with a clear idea of the potential of these technologies and really understand why we’re talking about a kind of a state shift in thinking about the internet and how we build stuff. And of course, keep an eye on our blog. You will find all the transcripts from the conversation with Jesse, all the references of the things we spoke about.

 

And until we speak again, don’t forget, remember to think Boundaryless.