"Things Tend to Get Better. For Anyone Involved in Crypto, It's Obvious That This is 1,000x Better," 1kx's Lasse Clausen
|Jul 18, 2020||3|
Hello Defiers! In this week’s interview, I speak with Lasse Clausen, founding partner of 1kx, one of the most active venture funds in DeFi.
A typical VC question in the traditional tech space is it a 10x? Is it 10 times faster, better, cheaper? This concept has been dressed up very nicely as like, often with grand statements about making the world a better place, but really, Lasse says, VCs are subsidizing a market takeover. The real question they're asking is, can this become a national monopoly, where users are so locked in, that they have no choice but to use the product.
Lasse thinks crypto will crack this system open and that the paradigm shift is so big that there will be some networks that are really 1,000x improvement over the status quo. That's why his fund is called 1kx.
We talk about token-based business models, and how he prefers systems which aren't based in extracting value from users with fees, but rather on pushing the token itself to appreciate. In any case, Lasse believes token-based models are a huge improvement to the current system, as they provide a sort of membership into a digital cooperative, a way to participate in governance, and the potential to benefit as the platform gains in value. that's already better than free.
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Lasse Clausen: I was a software entrepreneur in Berlin and I was doing mobile internet startups and was or still am just a product nerd. And in 2012, I wanted to know what it's like to pay with a mobile phone. And at that time, the only way to do that was either in Japan and I think South Korea. Paypal didn't have an app yet and really, bitcoin was the only way to do that.
Bitcoins for Burgers
Berlin had the first place in the world to pay with bitcoin, the Room 77 Burger Bar started by this libertarian Texan. And so [being based in Berlin], I kind of had the fortune that it was relatively easy for me to try this out. And I came from sort of a product manager perspective. I wanted to really know what is the user experience of paying with a mobile phone and spend a couple of Bitcoin on a burger and fries. And so, what’s interesting also about this place is that it really was that early that there wasn't even a mobile wallet before and so people would come with a laptop and type the public key manually. So, really enthusiastic, very, very early Bitcoin people.
The first mobile bitcoin wallet in the world actually was built in Berlin. And it was great, you scanned the QR code, you punched in your pin , paid, bitcoin was fast and cheap as a payment back then. And I thought, oh, this is great, but I don't see them winning sort of mainstream adoption. And this is because something that we as entrepreneurs at those times, with apps with millions of users, really understood how difficult it is to get something in the hands of millions of users. Understand that maybe just another tap might be too difficult and too challenging and backing up the private keys and all these things was just something I didn't see happening.
“You scan the QR code, you punch in your pin paid, bitcoin was fast and cheap as a payment back then. And I thought, oh, this is great, but I don't see them winning sort of mainstream adoption.”
And on top of that, payment networks are even more difficult, because first, you need to convert like 80%-90% merchants. That for me, in Berlin, I wouldn’t bother downloading just another app just so I can pay. We actually had two projects in our portfolio that they're doing a terrific job at converting Starbucks and other companies to user payment network, but I didn't see the bitcoin core guys doing that, they were not going to wine and dine Starbucks. And I think we can still see that bitcoin itself is sort of struggling as a payment network.
Lasse Clausen. Image source: Twitter
And back then that was a narrative of bitcoin, that was peer-to-peer cash. And so, I thought it was great, but I didn't see it winning. And so, I kind of had this useless bitcoin on my phone left. At the end of 2013, I met Amir Taaki and heard about Ethereum from him.
And that really resonated with me, simply because of the fat protocol thesis. So, the idea is that in venture, you had to be really smart and be able to predict an individual application that will be successful. And I as an entrepreneur, I had really witnessed that nobody really can predict innovation and on average, VCs actually lose money.
And so, what resonated with me is that I don't even need to know what's going on to win on the application layer. If I invest in Ethereum and then decentralized insurance or maybe decentralized money or whatever it is, become successful on top of the Ethereum, then I will participate in the upside. So this is something that I learned: When you're young it's actually really nice to put yourself in a position where you can be pretty stupid and still be successful. And this seems like a very good way to do that.
“So this is something that I learned: When you're young it's actually really nice to put yourself in a position where you can be pretty stupid and still be successful. And this seems like a very good way to do that.”
CR: You just need to have the platform win and eventually, you're reading that one of the many different applications on top of this platform will become successful.
Becoming an Investor
LC: And this wasn't the case before. With the internet, the way to do that was buying a lot of domain names. That was the only way that you could sort of index-ize internet of information. And with blockchains, the unique thing is protocols are investable and you can, again just broadly bet on the Internet of value or the Internet of money is going to be a thing and then invest in the protocols that are most likely going to get the most developer adoption.
And then I was sort of actively watching crypto evolve, because I knew about timing and was continuing doing mobile internet companies. And then end of 2016, we had another hype cycle starting to form and my CTO and cofounder, Christopher, we thought maybe it is time actually now that we as application developers can build on top of blockchain.
We realized that was a little bit early, but this is all the sort of when we kind of refreshed our understanding of the fat protocol thesis and more things which lead us to formulate our thesis, got us really, really excited about participating in the space no matter any way we can move forward. We saw the best way to do that at that point was by being an investor.
“And with blockchains, the unique thing is protocols are investable and you can, again just broadly bet on the Internet of value.”
CR: Hay you already invested in Ethereum before this point or bought ether?
LC: Just bought ether in the ICO, never touched the wallet until 2017.
CR: Oh, that's nice. So, at this point 2017, you decided to become a dedicated investor in this space and move on from building applications?
LC: Yes. And so, what we saw is that, I think, when you've been an entrepreneur, it is substantially easier to be helpful to other founders than when you haven't been. I just think being an entrepreneur is exceptionally difficult. It's really a pretty difficult life. And it seems kind of glamorous and exciting from the outside. But 95% of the moments of an entrepreneur are really difficult. And we had one VC that had backed us as entrepreneurs that gave us the sense that he's always got our back. And when you have these sleepless nights and some sort of existential anxiety about your company, I think it's extremely helpful and comforting to have the sense that there's at least some people out there they’re going to go through this with you no matter what.
“When you've been an entrepreneur, it is substantially easier to be helpful to other founders than when you haven't been.”
And so that was our inspiration. As investors, and also looking at the space, especially in 2017, the average quality of investors, it was what it was, but it wasn't fantastic. And so, we really saw a wide gap of investors and entrepreneurs themselves that understand technology, but then also understand this new paradigm. Because on top of that, what we saw back then is that a lot of very successful traditional VC funds had a really hard time wrapping their heads around this completely new paradigm.
CR: Let me stop you there. Is this when you founded 1kx or did 1kx come later or was this a different fund?
LC: 1kx started in early 2018. We just invested the private ether windfalls and then had some folks in adjacent spaces reach out to us and proposing that we start a fund and that we take outside capital. Namely, Passport Capital was the one that persuaded us the most and helped us a lot with setting up the fund structure. I think at that time, there was still a lot of confusion about how you best structure these things. Is it a hedge fund? But it shouldn't be because you're not trading, you're investing.
On the other hand, you have something that you buy that is liquid immediately and most of all active network participation. ETH2, if you don't stake, you're going to get inflated by up to 50- 60% a year, so you can’t just keep as capital. And especially what we're seeing now is that, really one of the most important things for early stage DeFi protocols is that you actually provide liquidity, that you stake, that you contribute. And this is in a lot of jurisdictions, a VC fund has big problems, because the tax treatment is different for operational companies versus investment companies. So, they can be funds that only have an investment mandate and they can't be operationally active which sort of all these things are, and then they fall into different tax bracket. So, it's very difficult for them to actively participate.
CR: Oh, interesting. So, what kind of classification do you fall under?
LC: When you have a fund like ours with a very, very broad mandate that is particularly offshore, then you don't have this classification.
CR: We talked a little bit about this before and I love your reasoning. Tell me about the name 1kx, what's behind it?
1,000 Times Better
LC: A very typical VC question in sort of the traditional tech web to kind of space was, is it 10 times better, faster, cheaper, right? For a normal user that has an app that's working and they’ve used it for two years, for them to switch to something that is better, it really needs to be 10 times better. The question is it a 10x? And we actually think that the paradigm shift of crypto is so big that there will be some networks that are really 1,000x improvement over the status quo. And so, this is why the firm is called 1kx.
“… for [a normal user] to switch to something that is better, it really needs to be 10 times better. The question is, is it a 10x? Is it 10 times faster, better, cheaper? And we actually think that the paradigm shift of crypto is so big that there will be some networks that are really 1,000x improvement over the status quo. And so, this is why the firm is called 1kx.”
CR: That's such a kind of bullish point of view on crypto. I'd love to have you explain that further, are we already seeing that? Are some of the services provided by Ethereum or Ethereum dapps do you see them heading that way? Are they 1,000 times better already?
LC: We had this conviction very, very early on, because we're very intimately involved in Silicon Valley-style venture building and company building. And it's been dressed up very nicely as like, we want to make the world a better place . But really, the playbook is that you subsidize a market takeover with venture capital funding and you get to a natural monopoly or very, very strong technology lock in/technology dependence.
And this is very specifically, very surgically, is how you design the dynamics of these VCs companies. Can this become a national monopoly? And when you get to that stage, can you then pretty much —extortion is a strong word, but when you're in a position, is that you have a large number of people that are completely dependent on you and you can basically dictate prices in any way you want. And you can become this sort of benevolent, network to this really almost predatory, sort of extractor value out of an ecosystem.
CR: And is that what we're seeing, like with Google, Facebook, Apple?
LC: Exactly. I would make a point there. For example, at this point, there is no publisher that voluntarily gives Facebook anything. At this point, it's just pure dependence. We cannot get around Facebook. We have to do it. I think, this is with Google having 90% search market share is very, very obvious. Then you can see that now, Google is starting to push their own products.
Ultimately, the dynamic is company versus customers or suppliers. It's just how it will end up. The really, really big innovation in crypto is, yes, it's technology, but it's a structural shift, that you can now create token networks or the software networks that have the best worlds of being open source, but also have the sort of economic/capitalist incentives that for individual upside that attracts talents, that attracts entrepreneurs, but really gives you the design space to create a network and to create incentive structures that are more circular that keep the value among all the participants versus the typical company is, a board, a couple of founders and then passive capital that is extracting all the value out of the network via dividends or profit margins and dividends.
What we like here is that you can actually redistribute that value that’s accruing entirely to every participant. And so, in theory, these very, very powerful network effects that Silicon Valley companies also have of the first few years, because they're reinvesting everything they have into the network, you can actually now continue this in theory forever and in a very virtuous cycle. We do actually think that we might see some of these networks become bigger than any traditional company ever before.
“What we like here is that you can actually redistribute value that’s accruing entirely to every participant.”
CR: That's so interesting. I'd love to get more specific on this view. How exactly are these token crypto networks different from, for example, Google distributing shares among employees and just any user being able to own a piece of Google through its shares? Is that not kind of people being able to own a token in a network? Like, what's the specific difference that crypto is creating?
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Shares vs tokens
“For certain things, it's going to be really hard for a typical company to compete with these networks. And so, there are really specific reasons. The first one is that token models they’re better than free.”
“Permissionless innovation really wins, not because they're better or anything, it's just that the number of experiments that happen is just so much greater and innovation is a numbers game.”
Token-Based Business Models
“… we might not have definitive data yet on it saying yes, this is going to work for 100 years. On the other hand, we have over 100 years of data on the counter-argument, which is companies and where it leads to.”
“We understand that once you have a developer ecosystem, it's extremely sticky. Once you have tooling infrastructure, it's extremely hard to port that over. In Ethereum, yeah, you just copy it, EBM compatible, whatever, but it's just not the reality.”
“Over the long run, things do tend to get better. And this is very obvious, for everyone who's been involved with crypto, it's very obvious to see how this is really up to 1,000 times better. It really is.”
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About the founder: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.