Chain Reaction

Sequoia’s blockchain bull on whether crypto startups are building web3 or web2.5 (with Shaun Maguire)

Episode Summary

Anita and Lucas discuss whether it’s wise to YOLO your 401(k) on crypto, why Coinbase CEO Brian Armstrong is throwing shade at Apple and what Elon Musk’s $44 billion acquisition means for “Crypto Twitter.” Sequoia partner Shaun Maguire joins us for a conversation on crypto investing in 2022 and the value of partially decentralized web.

Episode Notes

Anita and Lucas discuss whether it’s wise to YOLO your 401(k) on crypto, why Coinbase CEO Brian Armstrong is throwing shade at Apple and what Elon Musk’s $44 billion acquisition means for “Crypto Twitter.” Sequoia partner Shaun Maguire joins us for a conversation on crypto investing in 2022 and the value of partially decentralized web.

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Episode Transcription

Lucas Matney  0:00  

Hi everyone. I'm Lucas Matney.


Anita Ramaswamy  0:08  

And I'm Anita Ramaswamy.


Lucas Matney  0:10  

And this is chain reaction.


Welcome back to our second episode. We've got a lot to talk about this week. Anita, how's it going?


Anita Ramaswamy  0:22  

Yeah, it's been an eventful week. I mean, Elon Musk buying Twitter is obviously the big thing on everyone's minds. We'll obviously get to chatting about all of that later. But first, we should start with two other pieces of news that happened in the crypto world this week.


Lucas Matney  0:38  

So big news in the world of people yoloing, their 401 K's this week, fidelity is introducing Bitcoin into 401k accounts for the 23,000 companies that use its retirement plans. Ultimately, those companies will still get to choose whether or not they give employees that option, but they're rolling out the Bitcoin offering later this year. And they say they're eventually gonna allow other cryptocurrencies. I don't exactly know how I feel about this, and neither is this good. How should we? Yes,


Anita Ramaswamy  1:04  

I mean, look, it depends on who you ask. So I'll start with the regulatory view, and then give you my thoughts on it. Obviously, the regulators don't love this, you know, the Department of Labor issued this directive last month. And they actually were warning fiduciaries who are thinking about introducing products like this, where you can invest your retirement savings into crypto, and they were warning against volatility and speculation which were sort of their biggest concerns with crypto in particular. And they also noted some complexities around custody, like, you know, if you sort of have your crypto Wallet account, and you lose your password, what happens then. So regulators have been pretty heavy handed in general about crypto investing in crypto investment platforms. And they've been really focused on investor protection. But in this particular case, they really already issued this warning. So it comes at an interesting time. You know, Fidelity has always been at the forefront of crypto as a financial institution, they introduced their first crypto offering in 2018, when they started offering custody of crypto assets. And they have been pushing the envelope a lot when it comes to crypto in general. So it's interesting timing, that fidelity sort of chose to roll this out right after the regulatory warning about how you should be really careful if you're going to do this. But it is important to say regulators did stop short of actually making it illegal. So they don't love it. And I think there's a lot of skepticism in general about crypto and retirement accounts. But I personally actually think it's a good thing, I can get a little bit more into that it's a good thing, because it's going to increase access for everyday average retail investors to be able to use strategies that billionaires have actually been using for years and years. So you know, when you think about the 401k account, it's a tax deferred account. And I think it makes a whole lot of sense to use that for crypto investments. Like I'm not saying you should use your entire savings into some shit coin, like, that's absolutely not what I'm saying to do. But I can see how it makes a lot of sense for the everyday person to take a very small allocation to crypto, which is a very risky asset and put that in a tax advantaged account. So basically, what happens in a 401k is that you're contributing pre tax dollars, which reduces your income tax bill every year. And it also gives you more money to invest up front. So given the long time horizon, and that it's a retirement account. The third benefit is that if you're relatively young, if you invest in a volatile asset in that retirement account, you can more easily recover any losses over time and sort of weather any of that volatility. So if you want to invest in a riskier alternative asset like crypto to potentially have access to higher returns, which is where, you know, the strategies of billionaires sort of comes in, that's why it could make more sense that if that's something you want to do to do that out of a 401k, rather than doing it out of an individual brokerage account.


Lucas Matney  3:34  

So I guess, you know, I've seen a few other retirement or like financial organizations doing stuff with 401k is and crypto. Why is it a big deal that fidelity did this what's special about fidelity? Yeah,


Anita Ramaswamy  3:45  

for sure. So there are actually a lot of startups in the IRA space specifically that are doing this, and IRAs and 401 K's they're similar. Roth IRAs are tax exempt as well. So they function really similarly. But the thing with the 401k is that the employer owns it. So a lot of Americans just get a 401 K when they start a new job. Whereas if you want to open an IRA, you have to go and actually take the initiative to do that yourself. So they're less popular, right? So there are startups like rocket dollar, like auto IRA, a number of other ones that basically offer this self directed IRA product that you can invest in alternative assets. So what that means is like, instead of just investing that retirement account and public equities, public stocks, bonds, etc. You can invest it in things like private equity, you can invest in venture capital, real estate, and crypto also falls in the category of alternative assets. So there are startup providers that offer that but it's a really big deal, because fidelity is the largest provider of 401 K's in the country. I mean, they're a giant in the retirement space, they manage $2.3 trillion in plan assets. And you know, just because they touch so many different people's retirement accounts. That's why it's such a huge deal. They're bringing it mainstream. Yeah, I'm


Lucas Matney  4:49  

curious about this because I think there's something interesting happening with the fact that a lot of these asset classes have been democratized. At the same time people can go on to their apps they can buy shares of certain public companies they can go and buy shares of startups through certain rate programs. But it seems like there's almost like an over allocation of retail investor resources on alternative assets. In my view, I don't know if you feel the same.


Anita Ramaswamy  5:13  

Yeah, well, I actually would disagree with that just based on the data that I've seen, because I, I was chatting with the CEO, actually, of auto IRA, and I was catching up with him on some of the news. And one of the things that he mentioned is that when you look at the allocations of high net worth individuals or institutions, they typically have very, very high portions of their accounts dedicated to alternative assets. Whereas if you look at the average IRA, for like non billionaires, it's around 2%, much, much lower. So I think there is some room to invest in some of these riskier asset classes, because risk and return are correlated. And if you want a shot at the higher returns, you have to take a little bit of risk. And that's not to say it's guaranteed, obviously, it has to come with education. And it has to come with prudence. Yeah. But in the past, there were just not any platforms that enabled people to do this. It's always been legal. Like I could go do it if I wanted to, right now, the problem was the infrastructure was lacking. And so now Fidelity has given people a means to do that. But it'll be interesting to see whether they also provide the proper education and the resources that investors actually need.


Lucas Matney  6:11  

Right. I'm interested in how this goes, because I think that probably the vast majority of Americans should probably be doing something that's a little bit more set and forget insurance of how they manage this. Because you know, otherwise, it kind of seems like they would be just going after all of the trends of the day. I have a very balanced 401k. It's 30%. Game Stop. 20% Doshi? No, sir. Yeah, like that's, I think that that's like the concern, because otherwise, you know, who's going to choose to invest in bonds? If they're also buying crypto? That's just my take?


Anita Ramaswamy  6:39  

No, no. And I think one point to note is that Fidelity has said they're gonna cap this around 20%. So you're not going to be able to invest more than like, 20% of your 401 K funds in crypto. Yeah. But you know, the reason why I ultimately think this is a good thing, and I totally, I buy some of the skepticism. But the reason that I think it's good is that for the average retail investor, this really does expand access, and it's not suitable for everyone. It's not something that everyone wants to do. It's not something that makes sense for everyone's investment goals. But particularly in terms of crypto, you've seen surging demand from women and people of color who want access to investable opportunities in that space. And that's because they've been historically left out of the traditional financial system. And so I think any other means that allows people to access crypto in a safe way in a way that's diversified and in a way that they're not making super, super risky bets. I think that's ultimately a win for retail investors.


Lucas Matney  7:29  

I'll be curious to see how this plays out. But I think moving on to our next topic.


Anita Ramaswamy  7:33  

Yeah. So we're talking about Coinbase. Our colleague Manish wrote in an article about Coinbase CEO Brian Armstrong and Bryan Armstrong has actually been on this huge push in India to promote coin base in the country. It's obviously a really big market. And he went on a local podcast recently to talk about the company. And he had some really interesting things to say particularly about Apple, which Lucas can tell us a little more about,


Lucas Matney  7:55  

right. So coin base has been trying to make things work in India, it's a huge emerging market for crypto, the government doesn't seem very psyched at all about they're not too thrilled. They are not and yet they're really Coinbase is going on full court press. Brian Armstrong was recently out there for an event, then he went on this local podcast. And here's kind of the key quote, he said, Apple so far has not really played nice with crypto, they've actually banned a bunch of features that we would like to have in the app, but they just won't allow it. So there's potential antitrust issues there. Now, that kind of fighting words, I would say from anytime anyone, any public CEO says something about Apple, it makes news.


Anita Ramaswamy  8:33  

Yeah, yeah, definitely. So look at what are some of the features that he's talking about there? Did he say anything in specific, right? So


Lucas Matney  8:39  

I mean, he didn't, you know, he obviously didn't call anything out. It was a pretty short quote on the company. But there's reason to believe that he's tipping his hat at NF T's because Apple doesn't allow them to be purchased inside mobile apps on the platform. And Coinbase just launched its NFT platform into beta a couple of weeks ago. So there's a lot going on there. But who knows what else is happening in the background? I'm sure there's a lot that he's kind of floating, and he wants to get Apple's approval ahead of time before they release it. I'm sure Apple is a little wary of crypto because I think anyone in the industry would see that as a move they would make


Anita Ramaswamy  9:10  

sure Yeah, and Apple likes to run a tight ship in general, right. And as the sort of dominant mobile provider, at least in the US, it's really interesting that they have such power to sort of make or break these crypto apps and these crypto platforms. I did notice when I was reading this that Brian Armstrong actually floated the idea of like a crypto specific phone. What was the deal with that?


Lucas Matney  9:28  

Yes, that was one of the more fascinating things I mean, just said it in passing, but I think there's something about the idea of you know, Coinbase has partnered with so called hardware wallets. So if you want to hold cryptocurrency on your phone on your computer, you basically need a wallet, which you can set up and it can be either a software experience you can do with an app or you can buy like a dedicated it looks like a flash drive or something. It's essentially just safer because it doesn't connect to the internet for alternative purposes. You have to make the choice about when you do it. So there's some security added there. But I think basically what he's talking about is the idea that there would be a secure on flav on this crypto specific phone that would kind of hold the custody of your crypto goods and it wouldn't be accessible outside of you like explicitly making it so so there's something interesting there. This obviously isn't a feature that Apple would probably introduce. They haven't been doing many crypto pushes. But it might be something that Android phone manufacturer or someone else might have some interest in. So it's an interesting thought to have. Yeah,


Anita Ramaswamy  10:22  

some tension web three things. They're gonna come for Apple. We'll see how that goes. But um, yeah, it's interesting because what Coinbase I mean, they're going through quite a hard time right now their stock actually hit an all time low this week, their shares are down 46% Overall, this year alone, and the company has actually lost two thirds of its value since its IPO.


Lucas Matney  10:39  

It is having a very tough time. And it's funny because like you were saying with the point before, like the Department of Labor, not happy about having people invest their 401 K's in cryptocurrencies because they're volatile. The public tech sector has taken a huge hit lately and companies that are dealing with trading cryptocurrencies have taken a pretty bad hit too. And it's been worse than the hit that some of the top crypto currencies have taken. So Coinbase is in in a rough spot. Robin Hood also in a pretty rough spot.


Anita Ramaswamy  11:05  

I don't know. Yeah, yeah. So Robin Hood, they're down to $10 or so. And they announced yesterday that they were laying off 9% of their staff, which is very sad news. They hit their lowest stock price since IPO. So yeah, lots of volatility and crypto, what's new, I guess, but I think next we should talk about another public company that's seeing a lot of turbulence and volatility this week, Twitter, Twitter. This week, Twitter's board approved Elon Musk's $44 billion bid to buy the company. And it came as a pretty big shock to the entire tech industry. But obviously Twitter plays this outsized role in crypto as well. It's sort of become the de facto place for new crypto products to launch and for insiders to make relationships. And the move obviously has big implications for tech and society. But Lucas, what does this mean for crypto Twitter?


Lucas Matney  11:48  

Yes, this is the move that spawned 1000 hot topics, and among them were a lot of takes on crypto specifically. So Elon Musk, obviously a figure that a lot of people in the crypto industry think a lot of, I guess in the old days, whenever he tweeted about something, he'd caused wide swings in Bitcoin or Dogecoin, or any of the top coins, you know, he hasn't really set a ton about what he intends to do with Twitter at all. So he hasn't said a lot about crypto, but the things he has said about it seem to be related to spam pretty heavily. So there's a lot of crypto spam on Twitter, anybody who goes on it, I think it ultimately contributes a lot to people thinking that every project is a scam, because they're getting mentioned by a ton of NFT projects or random coins with very few people on board. So I think it's like a public relations thing for crypto, but it's also just, you know, it's a bad user experience.


Anita Ramaswamy  12:35  

Yeah. And Elon wants to fight that. So I guess that's a good thing for our mentions, and for our notifications, at least,


Lucas Matney  12:41  

yes. And he like he tweeted something where he was like we will defeat the spam bots or die trying. So he has his own thoughts here. And you know, a lot of the spam like you'll see fake Elon Musk accounts tweeting like we're giving away 100 Bitcoin away or something that he's clearly knowledgeable of some of these issues. If he knows how to fix it, that's a different thing. But yeah, well, him deciding it's important as a certain thing, and then of itself, right. And


Anita Ramaswamy  13:05  

the last thing I just wanted to talk about was with blue sky, which is Twitter's project or project born out of Twitter for a decentralized social network, what's going on there?


Lucas Matney  13:13  

Yeah, this is one of the more interesting things Twitter has been doing. So basically, this really picked up a little bit of steam following when Trump was banned, but they're trying to make a social media centric protocol that Twitter operates on top of so if you think about email, you can send email from one type of account, you know, from a Gmail to an outlook. And you can read it across all of those platforms. So they kind of want the idea of like a social media post to operate in the same way where like, maybe you know, you're reading it on a Twitter client, maybe it's a different branded client. But ultimately, a lot of the information is portable in between services. So this is something that's very much in its early stages, they actually just recently announced their like, first crop of hires. And basically, it was a project born out of Twitter, Twitter hired the first person onto the team to kind of manage it. But otherwise, it's an external organization. Twitter has softly committed to implementing whatever protocol, we'll see whether that's something Elon still wants to do after he spends $44 billion of his own cash. Right, right. But ultimately, it should if Twitter the client decides it wants to ban Trump may be a secondary social media client service that can also read this protocol, doesn't want to ban Trump, and they don't want to ban other right wing figures. But ultimately, like there's still some portability and all of it and the clients still have moderation capabilities. But it's still kind of a free or platform in some ways. There are a lot of open questions and like something sound bad, something sound like potentially promising, but they're thinking that this could be a way to kind of avoid the idea of like, someone buys Twitter and now they own this huge swath of the public discourse.


Anita Ramaswamy  14:47  

Right. And the decentralization thing makes a lot of sense. In theory. I think one thing that was interesting to watch was blue sky tried to sort of distance themselves almost from Twitter this week, and they tweeted about how although they originated out of Twitter in 2019, they were a star Which this year as an independent company focused on r&d for a decentralized social network more generally. And they also reiterated that they're actually structured as some sort of like public benefit entity, which gives them I guess, the freedom to sort of operate separately from Twitter. So like you said, it could be a way to sort of insulate the vast reach of the social network from the decisions and whims of one cranky billionaire.


Lucas Matney  15:21  

Well, yeah, we'll see where this all goes. I mean, even though Elon Musk like this deal got approved, Twitter is still trading a few dollars below where his bid was. So I think there's still some skepticism that this deal is actually gonna go through. Tesla stock took a big dive this week, we found out that there's a deal where if the deal doesn't go through and Elon Musk walks away, he has to pay Twitter a billion dollars. I think there's, we haven't seen the end of the saga. There's gonna be a lot for us to talk about in the future. But it's something to wonder about early on. I think,


Anita Ramaswamy  15:51  

ya know, good luck to the investment bankers working on this deal. My Yes, my thoughts are with you.


Lucas Matney  15:56  

Yes. Okay, switching gears this week, we caught up with crypto investor Sean McGuire. Sean is a partner at Sequoia. He's invested in web three companies, including DSO formerly known as bit cloud layer zero labs and iron fish. He's also been a backer of some big non crypto startups. You've heard of like SpaceX and the boring company.


Anita Ramaswamy  16:23  

Sean, it's great to have you on and it's great to finally meet the person behind the crypto punk. So yeah, I guess just to kick things off here. It'd be great to hear your thoughts. You have seen a lot of different things in the crypto space. Why do you think investors are so interested in crypto right now,


Shaun Maguire  16:36  

it's very cyclical with VC interests in crypto. Basically, when market goes up, a lot of VCs come in, and then they leave. I've kind of been in the crypto space for 10 years now. Well as a GV, before Sequoia joined in 2016. And I kind of saw the investor interest last time and to be very candid, I think a lot of VCs that are really interested in right now are going to pull back. Sequoia is not one of those VCs, we launched a crypto Fund, which I think is emblematic of how seriously we're taking crypto and that we have permanent intentions. But I really think the vast majority is trying to market go up, try to jump in.


Anita Ramaswamy  17:14  

And I know you noted that you think Sequoia is sort of here to stay in here to weather any market volatility. But I'm curious how you would describe how sequoias crypto strategy is different from some of those other top tier venture firms,


Shaun Maguire  17:25  

Sequoia is very deliberate with every thing we do. And we spend huge amounts of time debating every strategy change every everything we debate every seed investment to sometimes excruciating detail, but it means we make it helps us make really good decisions and kind of make decisions as a team, rather than as individuals. And that's just the way things go at Sequoia is when we make a decision to do something, it doesn't happen unless the whole team is behind the decision. And so that's what you've seen, get unleashed with crypto over the last 18 months. It's like we went from it being some people with really strong positive views to the whole firm being completely behind it


Lucas Matney  18:07  

is the whole firm completely behind you're you obviously enjoy some of the blue chip NFT projects. Do you think all of the partners at Sequoia understand why you're into them?


Shaun Maguire  18:17  

I think Doug Leone is secretly the biggest whale. It's funny when I bought my first crypto punk, Doug Leone, within an hour of me changing my profile picture, he called me he's like, I saw you bought a punk. And he's like, should I buy one? I was like, yes, you should buy one. I don't think he bought a punk. But it's funny dog is really into crypto. His son Tyler is really into crypto, and I believe it has an ape PFP he may have changed it to an owl in the last 24 hours like all the other you know, people jumping in the Al program. But look, not everyone understood the punk by or changing my profile picture. But a lot of people did. And I think everyone understands it. Now,


Lucas Matney  19:02  

I think maybe like there's a broader question here, which is just like people looking at Silicon Valley and seeing investors get hyped about something they don't totally understand. But getting really, really passionate about it. When it kind of levels up were like maybe they didn't understand the beginning. But then they see people going crazy about it. It paints a very ludicrous picture for them about what's going on with like VCs AP and all these different investments into the space that they see is kind of fantastical. So I guess maybe like a little comment or being a little bit on the center of that yourself.


Shaun Maguire  19:30  

Yeah, I mean, look, this is absolutely this is the classic DC behavior, including from myself is akin to stuff you don't understand. Some of that is self deprecation. Some of it is truth. Sometimes what we try to do at Sequoia is have prepared mind on things because you never know when you're going to have to move really quickly on something and so we're constantly landscaping areas that we think are interesting landscaping meaning like we'll kind of make an internal presentation that says I think NF T's are really important and talking about the 3040 most important projects and NF T's and companies and infrastructure and what doesn't exist yet and all of that. So we really try to have prepared mind that when we do need to sprint, like we're ready to go, and we know where we're going,


Lucas Matney  20:16  

like one direction we want to take this conversation was a little bit talking about, like, the opportunities around decentralized organizations, and then not specifically Dallas, but just decentralized opportunities in crypto, versus whether some of these opportunities are just centralized companies built on blockchains. And I guess there's the idea of web 2.5 versus web three. So I guess maybe a little bit of you could touch a little bit on your thoughts there.


Shaun Maguire  20:39  

Excellent question, huge surface area of question. So I'll say a few things. One is that I think you'd have a hard time finding a bigger crypto bowl than me like I am a absolute crypto Maxi. But I think that there's a lot of things that are misunderstood by the masses in crypto today. And so like Moxie, famously had this post, and I think he was wrong, like missing some important things. But like, I think he was right with a ton of it. And like decentralization is not a silver bullet that just solves all problems and is better for everything. You know, like, for the vast majority of compute, you want it to be centralized. For a lot of decision making, like centralization can be better for certain types of decisions, roughly how I think about decentralization is just like for the highest value items that you own, or for the most important decisions or as a check against bad behavior. Decentralization is very, very powerful. So it's roughly like a philosophy of centralization. But with a decentralized escape hatch whenever you need it, okay. And I just think that philosophy is going to permeate almost everything, like because of crypto over the next 20 years. And so there's all sorts of benefits to being a social media platform that decentralized from a computational standpoint and things like that. But users should be able to leave with their identity and data. At some point, I actually think that having that ability, hopefully, you never need to use it, but it prevents people from taking advantage of you, because they know you have that escape hatch. So just that's roughly,


Lucas Matney  22:22  

yeah, cool.


Anita Ramaswamy  22:23  

Yeah. And it sounds like sort of what you're saying there is that even if full decentralization and your operations isn't always the goal, that it's more of like a checks and balances thing for the system to have that right. A sort of follow up question on that is like, do you think that there's a chance that as this ecosystem develops, we're going to end up in a long term state of more like web 2.5 having a lot of centralized companies like operating on the blockchain? Or do you think that that's a step on the journey to like full decentralized operations?


Shaun Maguire  22:47  

So the way I think about it is for the highest value most important things, you want those things to be decentralized, owning your identity. I want that to be fully decentralized. Yeah, controlling your bank account balance, like I want that to be decentralized, having processes even for like intermediate value things to make it decentralized if you need to, but I don't think it's necessarily like to use Solana as an example. They obviously in the centralization, decentralization spectrum, they made design decisions that were kind of more towards the middle. And for things like building video games on chain and owning, low value, NF T's like low dollar value NF T's that like, say correspond to a video game or storing the state of a game. God forbid, if I lose my rank in Overwatch, which I play a lot of Overwatch. Yeah, that sucks. And I need to go create a new account and get to level 25, which takes like 20 hours and then play five qualifying matches. But I would roughly be back where I started. Like, it's not the end of the world. And so I actually think there's like a huge role that something that's 2.5, centralization, or whatever, I think as a huge role that plays to have the performance for something that's relatively low cost downside before my bank account balance, or for like my Shawn, I want to own that. And I don't want someone else to be able to own that. And so it's I really view about view all these things as a spectrum and kind of like being able to go back and forth between all these different modes.


Anita Ramaswamy  24:19  

Got it? Yeah, that makes sense. And I guess I kind of wanted to transition to a question that has more to do with Sequoia and your specific strategy, like we were talking about earlier, I know that you guys raised this sub fund in February, and that's kind of focused on specifically investing in tokens. And I'm just wondering, in a broader sense, like, what is sort of the advantage to investing in tokens versus investing in traditional equity, especially for a larger firm like Sequoia


Shaun Maguire  24:41  

the answers and the answer is both. We want to do both. And it really depends on the time meaning of the markets and you know, for example, there's a couple very famous crypto funds that put basically all of their dollars in, there's one I don't want to name them, just the cuz I don't know if he's public, but like, there's one famous fund that called all their capital in 2018 Put the vast majority of all of it into like Bitcoin and Aetherium and had fantastic performance because they timed the market really well. And then they're able to sell some of the tokens to make equity investments when it's a better time in the cycle for that. And so for me, it's more just having the ability to and there's all sorts of times when it was an amazing strategy to buy tokens, you know, as another. So that's one modality. Another example of Solana a year ago where once Solana got to call it $15, a token, which you know, SPF in January, said he would buy anyone's lawn at $3 a token, and it just the ecosystem kind of exploded after that. And being able to identify that there's huge developer momentum and something changing, you know, the traditional venture capital model, like you couldn't have more than 20% of a fund in anything other than primary preferred shares. But now that Sequoia we've kind of moved as the whole firm into the Sequoia funds. And when we did that, we became a registered investment advisor. And so we kind of are now able to be more flexible and ambitious with our token goals. And that was kind of the area where we were just the least active in all of crypto, so it gives us another arrow in the quiver.


Lucas Matney  26:15  

On that note, I mean, this is a leading question, fair warning, but like, I'm curious, you're buying tokens, I can go into Exchange, buy some tokens what Sequoia is advantage, obviously, there's some you got some industry heft behind you, you know, a lot of people, but what do you think your advantages are over a schmuck like me?


Shaun Maguire  26:31  

Well, you're not a schmuck. And they're, I mean, the returns of some crypto schmucks is absolutely insane, like, good for you schmucks like good for you DGM, proud of you respect. But, you know, joking aside, you could ask the same question about all sorts of things, even private investment, it's not for the average schmuck to use your words, but like, sure, you know, it's become a very competitive market Sequoia to stay on the cutting edge, we've had to build data science efforts, we've honed over 50 years, like institutional wisdom about how to pick, you know how to identify trends, how to identify inflection points in companies or projects. And one of things with crypto is that a lot of projects became liquid so early in their journey in tech, like SAS, for example, there's been this trend of delaying IPO staying private for as long as possible in crypto has been the opposite of go public as soon as possible. So I actually think a lot of the alpha is kind of in identifying the best public thing. I always


Lucas Matney  27:34  

think that elements interesting because it's like, you know, there's been all this long term stock exchange all these different things where it's just like, let's keep SAS companies private, as long as possible quarterly earnings don't really serve their long term interest. But then they're like with crypto and NF T's. It's kind of like, alright, let's like IPO, like a budding songwriter on day one or something, essentially. And it's just it's funny in that capacity, just figuring out how to make the liquidity of your potential work in your favor, I guess. And just


Shaun Maguire  28:00  

as one other example. So I worked in an algorithmic trading firm in 2008. Dr. Wu, it was an absolute blast. And with public equities, anyone can go buy stocks, but there are some funds, like the algorithmic funds, and the quant funds, like Ren VivaTech is an example of like a not pure algorithmic, it's more of a quantitative firm that have just crushed, maybe rent tech until last year, year and a half. According to the press, like the returns haven't been it's good. But there's just always, whenever there's new markets, whenever there's change, like there's a lot of opportunity to kind of see things differently.


Lucas Matney  28:36  

I've seen some tweets from you even on it. But basically, whenever any venture firm invests in a project that's kind of maybe they have a dowel or some governance tokens or something, anytime a big venture firm invests, there are a lot of questions from the early community that are just like, alright, what kind of, you know, what kind of discount on the tokens that these guys get? Like, why are they giving this and like the early communities not? And I think that that's a question that everybody always has for investors. And I think the answer typically, to put words in your mouth would be like, Hey, we're bringing a lot of opportunities, we're working capital or something like that. But the question still pops up every time.


Shaun Maguire  29:06  

Yeah, no, I mean, you're absolutely right. QUESTION always pops up. I think there's a bunch of legitimacy to the question. But I do think that people generally don't understand or appreciate like the level of work and company building that Sequoia does, and you can go ask any of our Dan includes, like, crypto projects. And, you know, I don't want to because of how you framed the question. I don't want to name like our any of our projects, but like, we work our asses off for our companies and protocols. And we really tried to help move the needle in huge ways. And in one, when we invested, they made a term of the investment that the community the retail investors, were going to get to invest in better terms than us four or five months after we invested because they wanted to carve out some of the round for kind of retail, you know, DNS, and I think that was reasonable. Like obviously, you don't want to do that for like 40% of the tokens like that wouldn't be fair, but you You invest four months earlier before the thing is launched, you're taking more risks, and you're investing at a higher price and other people are gonna get to invest in. But for some portion, I think it's


Lucas Matney  30:08  

very reasonable. Yeah, I think that like where the question says sometimes though, is just whether all of this stuff is just framed as truly democratizing access to like retail investors. But I think they're just some clear elements where it runs into things where maybe the SEC made securities disclosed things that ultimately retail investors might not get a heads up on something versus people on their board, or people who know, the pseudonymous founder is are going to have some like information asymmetry. I think that's always an interesting part of the question to me, were just like, sure this is democratizing access to a emerging asset classes, but there's still some gray area in terms of what is getting democratized all the time.


Shaun Maguire  30:45  

Totally agree, there's a ton of gray area. You know, one of the tensions I have in my head is that I think people sometimes forget that a lot of the consumer protections put in place by US law were like one out of hard fought lessons. Yeah, like century. And there's a lot of wisdom in there. But there's also a lot of technical debt to use a technical word and like a lot of things that are broken and no longer makes sense. And in some ways, one way to view what's happening in crypto right now is it's almost like throwing all the old rules out and started with a blank canvas. Yeah, and I think what we're seeing is a lot of the crypto community is actually coming back in 90% of the situations and realizing that Oh, actually, the way things were done in the past was actually pretty good. Like, got there for an optimal reason. But 10% is like radically different and realize that like, oh, wow, that 10% of things, they just got fundamentally, totally wrong. And it's an opportunity to be and you can kind of meaningfully improve the whole system by getting some of those things right. And so, I think is the overall theme. That's one of the things I've seen.


Anita Ramaswamy  31:53  

There's one other overall theme I wanted to dive into, and it has something to do with a specific investment that Sequoia is made. I know that you guys invested in layer zero, which is this infrastructure company that to my understanding helps make interoperability between different blockchains easier. And I guess my question there is like, as this sort of ecosystem gets more and more interconnected, a lot of the vulnerabilities that we've seen in a lot of the hacks have originated from bridges. So do you think that this sort of multi chain future that a lot of investors are talking about is possible in a secure way?


Shaun Maguire  32:23  

Oh, juicy question. juicy question. You know, I just got to love myself. In the past, I was a hacker as a kid and started a cybersecurity company, which, you know, we did some really amazing stuff. So this question is near and dear to my heart. So I absolutely think cross chain infrastructure is going to be huge in the future, and we'll work but there's a bunch of sub comments to make. One is that whenever there's a new kind of like computing paradigm, or whatever, you're gonna find there's a lot of low hanging fruit in terms of vulnerabilities. And over time, you know, like vulnerabilities just kind of get discovered and ironed out out of stuff. So like, with a theory, um, there was the Dow hack in the early days, which was obviously catastrophic, and led to a hard fork of Aetherium, which almost killed a theory. And back then in 2016, we were finding Ethereum vulnerabilities at a much faster rate them today, because everything was just new, like smart contracts was a totally new paradigm. And like people didn't understand even what to look for, and how to audit it and all of that. And with the layer zero launch, I learned and really in the weeds with them, like, wow, when you get to all these, like, interactions between chains, and all the calls that happened back and forth, there's all these weird bugs and glitches and artifacts that like no one knew about and no one's ever found before. And I think there's going to be more major bridge issues, like because it's such a new paradigm, but I think that in two to three years, we're going to figure it out, the vast majority will have basically like auditing standards and paradigm, but it's really hard, and it will, there will probably be a couple more mistakes. And we're just we're just to go back to the original premise. Like there have been a bunch of vulnerabilities here. But Ronan was doubt seems like you know, all the reporting is that it was more of just like spearfishing, and that it was all just I won't say anything else.


Lucas Matney  34:16  

Yeah, I get what you're saying though. But on that note, I would imagine that like, I don't know, you know that some of these questions about like, oh, let's figure out our best practices for how to manage our multi SIG wallet or something. And then, you know, you find out after all this stuff happens at like, a state backed North Korean hacker group or something like uses money to fund weapons programs. Like that's all a lot to like, mentally wrap your head around when you're talking about what's fundamentally a Pokeyman esque breeding RPG game. I mean, like this is like, it's it's part of the fact it's just so much money.


Shaun Maguire  34:48  

Yeah. God I'm sorry. I'm sorry for laughing No,


Lucas Matney  34:51  

I but I mean, it's just you're talking about one thing and then you tip over the first domino and it's like North Korea gets enough money to build out a robust nuclear program. It's like, It's wild.


Shaun Maguire  35:01  

It is absolute wild. There's a famous saying in cybersecurity that you want to be a target of choice, not a target of opportunity to use a pack animal analogy, you know, like, you don't want to be the slowest animal in the pack, because the lions or whatever will just, you're gonna be the one they come and get. But if a lion decides that they want to pick off one particular pack animal, you're their target, they're gonna get you. And that's just kind of always been the case with cybersecurity when nation states get involved. There was a famous Hawk from The New York Times back in 2013, I believe were basically after they wrote the story about Wen Jiabao. Basically, the whole New York Times was subjected to just kind of insane spearfishing campaign where they were basically like, targeting people's third degree connections. Because if you can go and they look on Facebook, for example, and realize that like, Okay, your friend of a friend of a friend, and if you can go get that go hacker Grandma, you know, then with the grandma, you can go look at every email they've ever had between the grandma and grandpa's friend, and find something then hack the grandma's friend. And anyways, you can just it's very hard to defend against like when a nation state wants to come after you, I think was broken, and it was probably somewhere in between the two, like, I think they probably were not doing security best practices, which made it a little bit of an easy target. Yeah, I'm sure there have been some nation state level hacks in crypto that people are not aware of that have never been shorted. And I'm sure there'll be more Yeah,


Lucas Matney  36:33  

I think maybe like a direction to take that question also is just, I follow that blog, web three is going great. And I like see all their posts and my Twitter feed all the time. But I you know, I think that it kind of capitalizes on something where it's like any new technology is going to have people who are skeptical of it, but I feel like with crypto, it's a different level of skepticism. It's like, it's like, legit skepticism. Exactly. And there's some like, obviously, there are ton of great points embedded in a lot of these arguments. But as a person who's making early bets on a lot of different companies, is that a lot for some of these people to be up against?


Shaun Maguire  37:07  

It's a really good question. It's been something that's been fascinating for me to watch over the years,


Anita Ramaswamy  37:14  

I'm sure especially since you've described yourself as the biggest crypto bubble, you'll have a good take on that.


Shaun Maguire  37:20  

Let's just say I have been in religious arguments hundreds of times, and I think probably only like two to three of those times have actually convinced someone to like get converted in the moment. But what you do see what I have seen many times is like you get in this extreme debate with someone and then four or five years later, you see them with like an NF. T PFD. And there is I even gotten to debate one time with someone I said that like once you get read pilled on crypto, like you don't ever go back. And so I got into debate and like there's a couple of people ever that have gone back, but there's really not that many. And so I just see this as like a one way arc of history that people are just gonna get read pilled over time, it will take decades.


Lucas Matney  38:00  

Well, I'm curious as like you said, you're an Overwatch player. Like all these kinds of industries rising at the same time, people are imagining that people are going to spend a significant portion of their lives in like gaming type universes, where you know, theoretically crypto is going to be a big part of but like right now, the people who play Overwatch they have a love hate relationship with the major developers of all those titles and they're like, Oh, we're gonna give these guys NF T's now they're gonna get state, they're gonna get to sell me NF T's. So like, I don't know if I trust the activations of the world to make the like most consumer friendly choices there.


Shaun Maguire  38:34  

I mean, I agree with you. And I think that's why we've seen such strong backlash from gamers like, against discord against other studios. Like there's a community that just defaults, extreme skepticism and like defaults that they've been taken advantage of. And I was laughing because oftentimes, when I'm playing Overwatch, I asked people, I say, what crypto do you guys own? It's just just purely for my curiosity. So now some random person listening to this podcast is gonna, like, be in a match with me someday, and they'll know it's me. But I'm shocked. Usually, the answer is none, which I think is really interesting for the gamer demographic. And then if it is usually ahead on all the tech trends, yeah, but if people do answer like, it's usually the biggest shit coins that I've never heard of, like, is what they'll own. And that's like, what about Bitcoin? Or Aetherium? Like, oh, no, like,


Lucas Matney  39:24  

Elon Musk? Floki Dogecoin is the only


Shaun Maguire  39:28  

even Doge is to blue chip for most of these gamers. And so anyways, I just gamers are incredibly skeptical, but they're gonna get there over time. It's kind of my


Lucas Matney  39:38  

Yeah, but yeah, I mean, I guess just wrapping up a little bit on that conversation. Like, are there any arguments that you see that from the skeptics that you see as particularly like damning right now, things maybe you can recover on but


Shaun Maguire  39:49  

I mean, I think probably the piece that had the biggest impact, kind of from a skeptics perspective was the Moxie post. And the thing that was is interesting for me about it is like, yeah, Isn't this obvious, which like the piece basically said that a lot of infrastructure in crypto is centralized. And there's a lot of dependencies today and the current state of crypto, I think probably where my biggest disagreement is with a lot of people is like, I don't think that's the case with the layer ones of Bitcoin and Aetherium. I think it is basically the case with everything else in crypto today. But I think the fact that Bitcoin and Aetherium, I believe, have proven to be just wildly robust from like some of the biggest shocks that I can imagine throwing at them. And just like extreme incentives for people to own them, like gives me a lot of confidence in Bitcoin and Aetherium. But almost everything else is pretty centralized today, and like, sure has also two issues. And so that post is the one that got the most attention. The thing that I was most surprised by from it is just like, Isn't this obvious? Didn't everyone already know this? And having skeptics be like, Oh, look, you've been wrong about crypto all the time, because this post was like, Wait, this is stuff that I've known for seven years, and like I'm not worried about at all and doesn't apply to Bitcoin or Aetherium. It was just very interesting kind of revealing. I think how a reminder of how low the baseline level of knowledge is today by most people, including a lot of crypto bulls, a lot of crypto bulls don't really know what's happening under the hood.


Anita Ramaswamy  41:24  

Yeah, and I know that that's something you've talked about before is like this is still very, very much like early stages in terms of consumer adoption and mass adoption by people who don't spend all their free time on Twitter or on Discord like some of us probably do. But yeah, anyway, it was great chatting with you. And thanks so much for taking the time to talk to


Shaun Maguire  41:42  

us. Thanks for having me.


Lucas Matney  41:44  

Thank you, Sean. Really appreciate it. Best of luck getting some some better answers from your fellow Overwatch players.


Shaun Maguire  41:50  

I'm just looking for the Alpha. You never know where you're gonna find it. But let me just say I have not found the alpha from Overwatch Alpha everywhere.


Anita Ramaswamy  41:57  

Well, you're probably the most bullish person on crypto that we're going to have on the podcast. So we'll see how long you can hold that title for I


Shaun Maguire  42:03  

so far. Yeah, I mean, people are going to be coming for me after that comment. So I everyone.


Lucas Matney  42:11  

Awesome. Thanks, John. Thank you. Thanks for listening. We'll be back every week with the top news and interviews with crypto experts. You can catch us on Spotify, Apple Music or your favorite od platform and subscribe to our companion newsletter the link which you can find in our show notes. Be sure to follow us at chain underscore reaction on Twitter for breaking updates and the occasional Twitter spaces chat about crypto news chain reaction


Anita Ramaswamy  42:37  

is hosted by myself. Anita Ramaswamy along with my co host Lucas Matney. We are produced by Yashad Kulkarni, our associate producer is Maggie Stamets with editing by Cal Keller Henry pick Yvette and Yashad Kulkarni, our executive producers Alyssa stringer leads our social efforts and Bryce Durbin is our Illustrator. See you next week.