In this episode of Abra Money 3.0, Abra founder and CEO Bill Barhydt is in conversation with Ryan Selkis, the founder and CEO of Messari. The conversation is a deeper dive into the Crypto Theses for 2020 paper that Messari recently published. Some of the topics include the Bitcoin as digital gold narrative, unbanking the banked, the future of crypto on-ramps, tokenized income share agreements, and Messari’s plans to create a decentralized autonomous organization.
Listen to the episode or find a full transcript of the conversation below:
Bill Barhydt: Welcome to Abra Money 3.0. Bill Barhydt here from Abra. And I’m thrilled that Ryan Selkis from Messari is here with me in the virtual Money 3.0 studio today. Welcome, Ryan.
Ryan Selkis: Thanks for having me, Bill.
Bill Barhydt: Hey, my pleasure, man. You and I go way back in crypto time, probably going on five years now, I think. So many things I want to talk to you about today. All kinds of the macroeconomic stuff going on, events that might relate to the broader cryptosphere, had a chance to read your fantastic Crypto Thesis for 2020 document, which if people haven’t read, they should definitely go to your website and download. I assume they’re for download. I got it through your email, questions about that.
Bill Barhydt: And also want to hear, I heard some rumblings about potentially some type of DAO-related announcements out of Messari. I’m not sure what you can say there, but definitely want to understand what’s going on there. And my guess is, is by the time we’re done with all of that, there’s 10 or 20 things we’ll manage to sneak in and probably have to unpack a few different recursive conversations here. So, let’s get into it.
Bill Barhydt: So, Iran, China, is any of this going to move the needle for Bitcoin, smart contracts, stablecoins, I mean, anything that you’re excited about in there as it relates to the broader crypto macro-environment?
Ryan Selkis: Well, I think if you look at any of these narratives in a vacuum, it seems like on any given day, it’s going to make or break Bitcoin and crypto in general. And the truth of course always lies somewhere in between. I thought it was interesting that you could basically trace a line to Bitcoin and gold throughout the 72 hours or so that most of the drama in Iran was taking place. And it certainly seemed like Bitcoin was serving as a very temporary flight to safety, which is not something we’ve seen before.
Ryan Selkis: And I think the important thing there was it was geopolitically inspired. So, I do think that there may be a difference at this point when it comes to macro events between the geopolitical and then just the economic. So, you tend to see Bitcoin trade as a risk-on asset. Where if the stock market is doing well, Bitcoin’s doing well. And really, we haven’t seen any exceptions to that because we’ve been in an 11-year bull market, ironically. So, the only real signal that I think you’ve been able to get historically out of Bitcoin is how it reacts to geopolitical news and regulatory news. And that’s why every time that there’s a rumored announcement and an actual announcement out of China, the price moves pretty significantly. And we’ve seen this as far back as 2011 with the Cypress Bank balance. Bitcoin does react to those types of events.
Ryan Selkis: But how much of it is like other people betting that that’s going to move the needle versus it actually being a flight to safety? I bet on the former versus the latter. And I think you and I can share this opinion when it comes to the halving, which is different, but it goes to this concept of virtuous and vicious cycles that impact these monetary assets.
Bill Barhydt: Yup. So, let’s just get right into it. So, I look at kind of the long-term bull trend that we are still in Bitcoin if you look at it from a prop trading perspective and completely correlated with the fact that we’re in the midst of one of the longest bull runs in US market history. And I wonder what would happen to that bull run if basically we entered into a five-year sideways downcycle, which a lot of people who are in Bitcoin have never experienced in their life because this started when they were 17 or 18.
Bill Barhydt: And now, when they’re in their late 20s and then basically only know a big bull market, which is what I went through when I was at Netscape in the ’90s where a lot of people who were going through the dot company days had never experienced a downturn. So, I don’t know, do you think that they’re that correlated where a huge stock market downturn basically puts Bitcoin even further in the doldrums?
Ryan Selkis: I think that’s certainly a possibility. I mean, who knows? I mean, I’m just some guy off the streets, same as you. Well, it’s not like we’re going to prognosticate on what the future of the global market really does, much less maybe we can opine on some of the edges around Bitcoin and certain crypto assets. But I think many people that are into crypto have already in some respect made a long-term macro bet that we may never see another recession until like the big one, like the inflationary recession because it doesn’t seem like there’s any willingness to taper spending at any of the western economies, or in general really.
Ryan Selkis: And ultimately, as long as you keep printing money and stimulating the economy that way, it seems like it’s kind of going to work until it doesn’t. And at least for me, I mean that was the general trend that got me into Bitcoin in the first place. This is 2011 around the debt sequester I’ve heard of it, but at that point, it wasn’t really easy to acquire, so, I kind of wrote it off, bought gold, shorted the Treasury ETF, and didn’t buy Bitcoin. So, I was right on a thesis but was like, 0 for 3 on a massive scale. And then it wasn’t until 2013 that kind of corrected it.
Ryan Selkis: But I think everybody whether it’s 2011, 2013 like this year, that whole narrative is the driving force behind the entire industry even though it’s very Bitcoin centric. And so, maybe you and I will disagree a little bit on Bitcoin is digital gold versus peer-to-peer cash and the value therein, but I certainly think that’s the one that sticks and the one that resonates the most closely with people as the macros get bigger.
Bill Barhydt: Yup. By the way, I have no qualms with Bitcoin as digital gold. I think that’s what people have decided it is. That’s what, more importantly, the developers that spend their hard, valuable hours working on and have decided. I just don’t see any visibility into any kind of sovereign free P2P-based version of that getting any traction anytime soon. And that’s disappointing to me. And there are myriad reasons for that, which we could spend hours on. But as digital gold, I think it’s great. I think I’m personally long Bitcoin and I have no intention of going long on anything but Bitcoin in that regard. But it is what it is at this point. So, there’s no point in pontificating further on that.
Bill Barhydt: So, one of the things I’d like to talk about is you basically published as part of your document these top 10 narratives for … I could spend an hour in each one, but let’s pick a couple at random and talk about the narratives and what they mean and why you included them in the list. So, I’m going to pick a couple at random here. Let’s start with the revolution needs rules. And I think here, you looked at another exchange’s advertising campaign around the revolution needs rules. Why were you so bullish on that campaign?
Ryan Selkis: Last year when it came out, it was very controversial. It was against the crypto-anarchist ethos of Bitcoin in the early adopter crowd. And this came out of Gemini, who was really orienting a campaign towards institutional investors as Gemini being the best regulated, most tightly run institutional-grade platform for acquiring these assets. So, they’re talking their own book. But I think as times passed, I have gotten to be a bigger believer in that narrative because this year, we hit a bunch of milestones. President Xi is talking about blockchain. Trump is tweeting how he doesn’t like Bitcoin. The Treasury and the Fed and the IMF and major European leaders, at the government and kind of regulatory level, they’re all starting to recognize that the genie is out of the bottle when it comes to this tech and some of these assets.
Ryan Selkis: So, it’s, it’s high time that the people that are the biggest proponents of these technologies and these assets get our collective shit together and come up with some common sense, better form of self-regulation than what currently exists today because otherwise, it’s just going to be top-down and you’re going to get more disastrous, regulatory schemes like the bit license that basically heard everybody involved in that given jurisdiction. We’re already seeing some of the penalties in New York State and the US more broadly to some of this uncertainty plus overreach on the regulatory front.
Bill Barhydt: Yup. I agree with that part. To some degree, I mean it’s almost like it’s inevitable regardless of self-regulation. I mean, I feel like whatever California’s going to do, California is going to do in a vacuum regardless of what industry tells you that they’re going to do on their own. It sounds like you may feel like that that is not necessarily inevitable. Is that true?
Ryan Selkis: Well, if the revolution is to be successful, the revolution itself needs rules. Otherwise, the monarch just will continue to set the standards and tell us what to do and we can go back and play in the sandbox. But it’s not really going to offer any meaningful improvements over the legacy financial system because you’re going to be burdened by 40-year outdated standards that really applied to a much different world and never even would have conceived of the idea of a third ledger to universalize all the other recordkeeping systems that they used to take for granted and we take for granted now. But I just generally think that there’s been a historical bias to encourage or promote safe harbors, fight for safe harbors, or laissez-faire type regulatory structures.
Ryan Selkis: And in reality, that the same people that have been pushing for that are very often the ones that raised hundreds of millions or billions of dollars and then spent it on yachts and Caribbean islands and all types of bullshit that any regulator is going to look at. And they’re going to say, “Well, this is why we can’t have nice things. You’re looking at us like we’re the bad guys and you’re acting like this, what do you expect?”
Bill Barhydt: Yeah, totally. So, I mean, time will tell. I think it’s going to be a combination of both things. Rules for revolutionaries, we’ll see. I don’t want to just be the pessimist, but I do think to a certain degree, larger states and actors are going to do what they’re going to do. But it certainly behooves us to do the right thing regardless, whatever the right thing might be. And when I say us, I mean anybody who’s got a stake because it’s going to mean different things to different people.
Bill Barhydt: Okay. So, let’s talk about this thesis around I think you wrote unbank the banked. Now, I chose this one because just reading here, two things. One, you mentioned Wences Casares, who I love. Aand LSD, which no comment, but if you mentioned LSD, I got to…
Ryan Selkis: Which you also love.
Bill Barhydt: So, I didn’t say that. But anyway, so you wrote unbank the banked. I love this quip is what you wrote. So, what do you mean by unbank the banked?
Ryan Selkis: Well, it’s a reversal of the meme, bank the unbanked, which I think kind of hit it’s nadir when Mark Zuckerberg was promoting all of the good things that Libra was going to do for the unbanked of the world and positioning Facebook is this white knight, the fintech savior for hundreds of millions of their existing users. And no one really bought that narrative when he spun it. And I think more and more, it’s not really something that’s a primary focus for the Bitcoin community in general. You do see some pockets of the crypto community that are still working on this application set for the end-user base. But by and large, I think people recognize that like the Elon Musk model of selling a Roadster before he gets the Model 3 is probably the way that you need to go as you’re getting people to adopt this technology.
Ryan Selkis: And that really means that you need wealthy people to be able to take their money out of the financial systems that they’re used to and use the digital gold use case so they can take the clothes on their back and whatever in a brain wallet and mnemonic and flee whatever jurisdiction they’re in, if that’s what they intend to do. Now, this opens up some pretty sticky situations that’ll be bad from an optic standpoint when they inevitably arise. Some plutocrat is going to escape from Russia or Ukraine and try to get asylum in Ecuador and they’re going to have hundreds of millions of dollars of Bitcoin that they have scattered with or is going to happen in China or really any jurisdiction.
Bill Barhydt: I think we had a Japanese auto exec make his way to, I don’t even remember, somewhere in the Middle East over the weekend.
Ryan Selkis: Yeah. Ghosn and just went to Lebanon.
Bill Barhydt: Lebanon, yeah.
Ryan Selkis: A meat locker or whatever it was. Now, imagine if he had taken all of his assets and they were sorted bitcoin and you just-
Bill Barhydt: How do you know he didn’t?
Ryan Selkis: Maybe he did, but as long as it didn’t make the news, I think that’s a net positive.
Bill Barhydt: That’s what we’ve devolved to, the fact that that didn’t happen at least from a news perspective is actually a good thing for crypto.
Ryan Selkis: Yeah, exactly. I think that use case though, it’s important. And it’s like the true gold bug, like doomsday prepper type mindset I think, to have a little bit of this electronic gold/cash that might be volatile, but at least it’s transportable if things really hit the fan short of Mad Max. Like things hit the fan and you just emigrate to another country. How do you do that? I think that’s pretty powerful, especially given the negative interest rate environment that we have on a worldwide scale and the fact that no one really knows who’s going to be impacted the worst by whatever the next recession is.
Ryan Selkis: Whether it’s the big one or just another major global downturn, there will be another recession at some point because there always is. That’s when coming back to the earlier conversation throughout, we’ll see exactly how Bitcoin is working and whether it’s just a true speculative bubble that’s going to go back into a 5, 10-year winter or if it’s got staying power as this inflationary recession-resistance asset, which is where I think you and I have our money.
Bill Barhydt: What you’re kind of implying earlier, what you said is you have to start at the top of the income pyramid. It almost like it becomes like schmuck insurance to say if things really go south, then the top 1 percent of income earners globally, which is about 70 million people should be doing this. How does that happen? Because if 70 million people tried to do what we were just joking about goes in doing, that wouldn’t be possible today.
Ryan Selkis: Of course not.
Bill Barhydt: That’s only 1 percent and that’s potentially, like you said, that’s the uber rich who where we should probably market this to at the beginning as some type of doomsday or schmuck insurance, whatever you want to call it. I mean, is that even possible? So, obviously one motivated person can do a lot, but can 70 million motivated people actually do a lot?
Ryan Selkis: I mean, I think a little bit differently. I just kind of view it as inevitable based on it’s just a function of time. And the example that I used, I may have written this in the thesis, I don’t remember. I blacked out when I wrote it, and tried to forget about it after the one-week mad dash. But I compared it to like when I was in college, seeing all of Macbooks on campus and the first year maybe it was like 10 percent or 5 percent of people had a Mac versus a Dell computer. And then sophomore year, it doubled. And then junior year, it seemed like a doubled again. And this kept going on. And my grandfather is not tech-savvy at all, but I told him that and he bought some Apple and that ended up being a very, very good investment in 2008, 2009.
Ryan Selkis: And I kind of feel like the same is true for gold investors. There’s going to be a generational rotation from the folks that are uber skeptical. There could ever be a digital gold compliment to those that are a little bit more receptive and the millennial class of investors. And as that younger generation gets wealthier and as they inherit some of that wealth from their parents or grandparents, it becomes a heck of a lot easier to see the allocation shifting. That’s like five-year tail momentum and tailwinds, or 10-year, 20-year tailwinds that often is underappreciated, especially given the fact that Bitcoin itself has very little supply left in terms of its daily issuance, like net new issuance. So, you’re talking about secondary demand for these assets and there is a sizable chunk of the monetary base for Bitcoin that’s pretty well-spoken for.
Ryan Selkis: I mean, you and I probably have a certain percentage of our holdings that we’re like, yeah, I’m not fucking touching that, like almost like regardless of the number and maybe you average out, but I think you got to wonder how much is like truly offline now out of that base. And when you start thinking about it in those terms, you think about the 70 million folks, and it doesn’t have to happen all at once. It’ll happen I think in these fits and starts just like it always has.
Bill Barhydt: I think it has to happen that way technically anyway. I think there’s simply no physical way for it to happen any other way, which is fine for now. But I think at some point if the shit hits the fan, that’s not going to be good enough for a lot of people who feel like it’s their exit visa. So, I don’t know what happens in that. I hate to say it because it sounds like almost sadomasochistic to say, it would be fascinating to see what would happen in that instance because I don’t really want us to have to go through that, but it would be to see how society would deal with that.
Bill Barhydt: Okay. I’m going to pick one more and then we’ll talk about some other things. So, let’s see, I’ve got my list here. “Stack sats and earn crypto.” So, let’s talk about that. What do you mean by “stack sats and earn crypto”?
Ryan Selkis: Today, the primary method that users have acquired Bitcoin or crypto assets with has been by investing. So, you open up a Coinbase app, you open up an exchange wallet or accounting and you’ve set some type of recurring buy or one time buy and start trading and speculating. I do think that there’s something to be said for earning crypto and one of the easiest ways to invest that’s a bit of a mind shift is via payroll.
Ryan Selkis: So, I have a feeling that until there’s another big bubble, you’re going to very few new users that are opening a Coinbase account and making their first purchase or setting a recurring buy. But you might be able to add many, many more users with a pretty significant net new inflow if you have better crypto payroll solutions. And I’m shocked that this hasn’t taken off yet. In fact, if I had realized it was going to take this long for Coinbase or some of the other major wallets to build out this payroll tool, I would have done it myself back in 2015 when I started this. Five years ago, I was certain that some of these solutions were going to be available because it just makes so much sense.
Ryan Selkis: And you can take points of that as the Bitcoin payroll processor and you could set the allocations however you’d like to. It’s embedding with the payroll systems that would make us really valuable. So, you can set at once as you go through your onboarding at your employer or set your annual benefits allocation and all of a sudden, you can crew maybe a thousand dollars a Bitcoin a year if you put 1 or 2 percent end depending on what your income is.
Ryan Selkis: So, pretty sure that we’re going to see those in the next couple of years because how else are you going to onboard new users? Everybody knows Binance. Everybody knows Coinbase. But you’re not really changing the formula if you’re still just relying on new users coming in because they’re going to start speculating. And I think that this is as or more important, even though we know rationally speaking, it doesn’t matter if the price is 8,000 or 800,000. It’s really about what percentage of the underlying supply you’re purchasing. But people don’t really think like that. They want to be able to own a full Bitcoin. So, one way to do that might be to do it gradually through payroll. So, you can kind of save up to that milestone. And this is kind of in keeping with the stack sats meme that the folks at Lolli have been using to pretty good effect.
Bill Barhydt: Yup. So, what is out of all of the kind of, let’s just summarize on the top 10 narratives. Is there one that I didn’t mention that you’re particularly excited about in terms of the Top 10 2020 Narratives?
Ryan Selkis: I mean, I don’t have them memorized off the top of my head, but I mean the one that we didn’t talk about was, or the one that we did talk about that I think some most important one is the digital gold basket trade. So, we didn’t talk exactly about what I meant in that narrative section. But essentially, my point is that we should stop trying to pitch Bitcoin as its own thing and instead try to latch on to the gold bug. So, if you’re an investor in gold, you are Ray Dalio and you’re finally investing in gold after decades of writing it off or thinking that it’s just an illogical investment to make.
Ryan Selkis: You should probably invest in a basket of gold and digital gold, gold for the analog, digital gold for kind of the new tech-savvy users. And those things when the Iran incidents happened, traded in lockstep pretty surprisingly. So, if you’re thinking about that as a thesis, well, even though there might be a little bit of volatility within that basket, you could maybe dampen that volatility and generate much more significant upside by adding Bitcoin to that basket because, versus gold, if that narrative does take place, it can only go up. It’s only 2 percent right now of the global gold market cap. So, wouldn’t you want to own 2 percent or 5 percent or 10 percent of Bitcoin as part of that basket? Because if it does become a good substitute for gold, then you’re going to come out way ahead. Even if gold doesn’t perform as wildly as you think it might with these types of inflationary pressures.
Bill Barhydt: Yeah. I mean, I’ve been saying for years that there has to be a point if we’re all right, where the correlation between gold and Bitcoin becomes clear from a macro perspective and not just be these kinds of micro-events that you’re alluding to like what happened in Iran last week, but that hasn’t happened yet. And so, one would think that if it really does happen, that could be the biggest impetus for pushing those markets significantly higher. I mean, it almost becomes a circular discussion, but it just seems like that’s the path to greatness here.
Ryan Selkis: Yeah, I think the first few markets cycles, Bitcoin was so small by comparison and there was so much other noise in what could drive price that it didn’t really make sense to look. But I think from here on out, it would be interesting to watch and I’d imagine that every subsequent cycle, you’ll start to see a tighter and tighter correlation until they’re basically trading on the same level. But that obviously assumes that we’re going to go 50X, which is wildly optimistic. But I think something that you and I don’t think is out of the realm of possibility, even though it has six years ago when we were first talking about it.
Bill Barhydt: Yup. I remember when it hit 500 and people thought this is ridiculous. That would be obviously a disaster of epic proportions now if it got to 500. So, all right, let’s switch gears here. So, I’m looking at the list here. Let’s talk about DeFi. So, everybody now is super excited about Dai and DeFi systems, and crypto lending. And where do you come out on it? One of your investments, 20 Bits of Investment Advice list in your document was ETH: DeFi reserve (versus ICO reserve). So, what does that mean and where do you come out on kind of the state of DeFi where it’s going?
Ryan Selkis: Well, just for clarity, so I don’t get in trouble with our team. I think that section was 20 Bits of Investment Advice — in parentheses it said, not investment advice. So, let’s just be clear about the witticism here so that I don’t get in trouble. I think 2017, I’d argue that rally was largely at the back of ETH and it wasn’t because ETH was really good at powering smart contracts. It was because it turned into the reserve currency for the ICO boom. And you need an ETH in order to pile into some of these speculative investments and then you’d recycle them when one popped. And you’d kind of move on to the next coin.
Ryan Selkis: And what’s interesting is the bubble more or less popped in kind of early 2018 and around the same time towards the end of 2018, you had Maker really coming into its own and basically last year was the year of Maker as a project in terms of the value that was locked in collateralized deposits in terms of the amount of DAI that was issued. And I think that narrative really started to take off and the total value of ETH locked in that system started to take off. So, it took the place of ICOs at least a little bit in terms of kind of proving why you would need ETH as a kind of base asset for running smart contract applications instead of just using it for gas, for instance.
Ryan Selkis: And I think that’s healthy. I think that the Ethereum community, in general, would probably do just fine if they focused on being a global censorship-resistant settlement layer for new financial applications. I don’t think you need virtual cats and timestamping services and other nonessential — arguably important, but certainly not essential — for that blockchain solutions to exist on the same chain. I think that ultimately my interest in Ethereum started when it became clear that people were thinking about it as money, full stop.
Ryan Selkis: So, there are three assets that I hold right now. It’s Bitcoin, Ethereum, and Zcash for very different reasons. And they’re all monetary assets and that’s it. I don’t think about really anything else right now as being properly valued just because we’re still in the infrastructure phase and then when choosing any of the shit anyway. They could. I’m sure there will be killer apps that emerge soon, but the closest that we have are those that are built on top of Ethereum and the DeFi stack today.
Bill Barhydt: Do you have a theory as to what takes DeFi more into the mainstream in the traditional banking sense? Or do you see them as kind of just different worlds, whereas what we’re calling DeFi right now services crypto or is there some overlap at some point?
Ryan Selkis: I think it’s hard for me to imagine a scenario where DeFi is interesting for folks outside of crypto this year. You’re still talking about very small numbers, it’s hard to use. The tax consequences are not well understood, well, not widely understood. They should be well understood because a lot of these DeFi applications give you the worst possible tax consequences you can think of, particularly around staking rewards which are treated like cash dividends but function like stock dividends. So, about the worst trade that you could make if you’re trying to produce an income stream from a “staking yield”, which is a good marketing term but not really sensible otherwise.
Ryan Selkis: And I do think that some of what’s getting built, it doesn’t need to be logical as long as people are tinkering with it and you’re kind of building liquidity in the system and breaking things. Honestly, I feel like that’s okay for a while. And the folks that are going to use these systems, they might not be paying taxes on it because they’re trying to stay off the grid. And you can argue what kind of precedents that sets or what type of narratives we’d have to bat back if that proved true. And you could measure the impact of that.
Ryan Selkis: But in reality, I mean, it’s no different than what happened with Silk Road and Satoshi Dice and all the other early Bitcoin applications. So, I think you’ll get into a scenario where people continue to dabble, that the folks that are actually making money versus just experimenting will hopefully pay their taxes and that’ll be the funds that are trying to arbitrage into these things. And then everybody else maybe they report something, maybe they don’t. Because it’s just they view it as the minimum but that kind of mass of users should be enough to at least get through some of the experimentation phase until something sticks.
Bill Barhydt: You wrote today that income share agreements could be a killer use case for cryptocurrencies and smart contracts. What did you mean by that? What are income share agreements and why are you so potentially bullish on them?
Ryan Selkis: ISA is basically just referred to your ability to securitize an income stream or a portion of your income stream. Lambda School has done this with their retraining programs where their students don’t pay anything in the way of tuition. But then they do pay I think 17 percent of their post-graduation salary for a fixed period of time or until they hit a certain payback cap. And what it does is it’ll eliminate some of the risks for the borrower and the lenders happy because you can still come out net ahead if you’re good at who you’re extending these ISAs to. The classical argument was, well if you create like an ISA then people don’t have the same incentives to work hard. That’s not really true because it’s basically like a spin on the, oh, if you tax me at 50 percent versus 35 percent, I’m not going to work that hard. That doesn’t actually ever happen in practice.
Ryan Selkis: But what’s unique about the news with Spencer Dinwiddie, the Brooklyn Nets guard who’s really started this meme again around tokenized earnings and tokenized contracts is it looks like a toy and it actually borrows from historical legacy financial system innovations around securitizing entertainers income streams that happened with David Bowie when they call them Bowie bonds. And then it happened with a company called Fantex, which stood for fantasy exchange that tokenized the contracts of like Arian Foster, Vernon Davis, a few other NFL players.
Ryan Selkis: But what’s unique is, you’re talking about I think the right time, 10 years ago, 20 years ago is probably too early for that. Now, given social media and how digital the experiences, even when you go to a concert or when you go to a game, it seems like the fans would be more interested in trading for a player or ownership and a player or one of his income streams if it’s much more liquid and gameable. If you try to do that using something that was trading via the SEC, there’s not a lot of sex appeal in that.
Ryan Selkis: But as soon as you start like tokenizing securities and adding it to Robinhood and Square and any of the other wallets, it might ultimately support some of these assets. Now, it’s a little bit more fan-friendly and it seems like it could have staying power. That goes back to my like Roadster example too. And in the grand scheme of things, does it matter that like one NBA player is like the eighth-ranked point guard in the league is tokenizing his contract? Of course not at all, but it’s going to get headlines. And I think more players will end up doing it. And if more players end up doing it, the more entertainers will end up doing it. If more entertainers end up doing it, then brand personalities on YouTube will start doing it and then upstart brands will start doing it, so that their fans are with them early and part of their early click and you kind of tag along for the ride if they make it big.
Ryan Selkis: So, you can see this kind of gradually taking flights across a couple of different realms. One being education refinancing, and the other being kind of brand tokens and personalities. And that’s probably most important because really the world that we’re moving to is a gig economy where people are going to want some type of income security, but the rewards will end up being very, very lumpy. So, I think that this is a huge precedent. And it’s nice because it’s backed by earnings. It’s not backed by air.
Bill Barhydt: Yeah. We’re thinking about this guy from the Nets, the Brooklyn Nets, Spencer Dinwiddie I think is how you say his name. A good player, I mean, like you said, average player by NBA standards.
Ryan Selkis: Above average.
Bill Barhydt: Yeah, above average.
Ryan Selkis: But he’s … Yeah-
Bill Barhydt: Okay, but my point is, is that there was precedent for this in kind of the nondigital world with Bowie did, which you mentioned earlier, that never went anywhere. I mean, it was never followed on with other musicians doing the same thing. And I would venture a guess that most musicians didn’t understand what the hell he was doing in the first place. And they probably still don’t.
Ryan Selkis: That’s because they packaged and sold it to other financial investors. The financial investors want to make money. I think what’s different now-
Bill Barhydt: Who else are you going to package it to? So, I get that. I agree with that. My point is, is that I think what he did is very interesting. I’m amazed that he did it. It’s much easier when you’re making that much money to just basically give it to Goldman, let him manage it and go about your day and have fun and they all basically do their venture investing now and they have a great time outcompeting each other. They compete in venture to one-up each other just like they do on the court. It’s fun to watch. Why would he bother doing this knowing that it’s more work, more risk either contracts have broken in the past. It seems like on the surface, you can almost make the case is more downside than upside here.
Ryan Selkis: Well, I mean he’s still getting the cash upfront. If he wants to speculate on a theory or a crypto asset, it’s no different from him buying a chain of restaurants or whatever your financial advisor is going to recommend it. And the important thing is, is not the whole income stream. When Fantex was still around, this is five years ago, and they went under, I don’t know the exact story of how it all went down, but they had half a dozen player contracts that they’d securitized. The issue wasn’t ever had like a big star. And also, the dollars were quite a bit lower and the predictability was lower. Because you’re talking about NFL players versus NBA players or MLB players. Obviously, NFL careers are on average three years.
Ryan Selkis: So, some of these players like Arian Foster, they took an ISAs contract. He blew out his knee the next preseason. So, that could still happen in any sport. But the thinking is that you could ultimately grow with the player. So, if you get a young player like Dinwiddie and you’re able to kind of trade this token over time and kind of parlay this, so it almost becomes like a futures market on what you think the next contract will be, well, that’s great for the player. That’s great for the fans. That’s kind of good for helping set price for contracts in the NBA. It’s almost like a prediction market of sorts at scale. Maybe this one just kind of is an anomaly for right now.
Ryan Selkis: But I think the important thing is it helps set the precedent. You kind of paved the way for others and look, he’s going to make that back tenfold just by being a brand ambassador for whichever platforms he gets built out. So, there’s always little benefits to doing these things that are “free”, particularly in our emerging market where people are so competitive about getting their allocations. He’s going to get into every deal that he wants to with this new basically $13 million personal account that he can use for angel investing.
Bill Barhydt: Right. So, just coming back to this income share agreement concept in general, how do you enforce that? So, I guess you basically enter into this debt agreement like this Lambda School you mentioned. Does tokenizing that represent any benefits to enforcement in some way? If the person is actually earning money in the kind of traditional physical world, how does that translate back into a smart contract in the digital world that represents a benefit for kind of tokenizing your right to future earnings?
Ryan Selkis: Yeah. I think the token element should ostensibly help with faster resale. So, more liquid trading of these ISAs.
Bill Barhydt: So, in other words-
Ryan Selkis: Yeah. I mean, it doesn’t necessarily solve the enforcement mechanism, but I think that’s why you need things like athletic contracts and tuition payment plans because there is going to be some kind of real-world financial contracts that you ultimately need to satisfy those obligations. And with Lambda School, it’s easy because they’re helping place the candidates so they know what they’re making. And by and large, the candidates that they are retraining are getting 50, 75, 100% increases or more in their salary versus what they were getting beforehand. So, there’s quite a bit of goodwill.
Ryan Selkis: On the kind of athletic contract side, it’s about fan engagement and it’s about being able to get money upfront and ultimately, most of these contracts are guaranteed. So, you’re not taking that much incremental risk as a fan to purchase this. I don’t know that it works if you’re trying to just take some guy off the street with a suit and tie and say, “Okay, we’re going to rank your resume and then say you’re worth X amounts. But then we got to chase you throughout like your employment next five employers to actually collect on that.” That’s somewhat dystopian. But at the same time, you can see a future where that becomes easier if payroll systems, for instance, can talk to each other. Or if you have a global identity that they can permission out and want to access this parallel financial system and credit system.
Ryan Selkis: So, those are going to happen. It’s where the early use case is going to emerge and how could those be interesting. How can those toys ultimately lead to something that is a little bit more broadly relevant?
Bill Barhydt: Yup. So, I’m fascinated by this topic. This is one of the things that we have to come back to.
Ryan Selkis: I thought about doing one by the way. Bill, do you know this?
Bill Barhydt: No.
Ryan Selkis: I think we talked about it. Yeah, I mean after I left CoinDesk before I started Messari, I was talking about doing an ISA because I wasn’t sure what I wanted to do, but I wanted to keep getting paid that summer because everybody else is making fucking money, so I figured, why not?
Bill Barhydt: It probably would have worked like any of the other ICOs you were complaining anyway, more than you probably trust a lot of those founders, right?
Ryan Selkis: Yeah, exactly. But the only reason I didn’t do it is because there wasn’t security token apparatus in place. And one of the things that was missing from the security token realm was some type of standardized disclosures and some way to enforce those contracts. How do you even pipe that information in? And so, one thing led to another and we built a company focused on disclosures. So, once we’ve gotten that right, then I’ll go back and I’ll sell a portion of my soul.
Bill Barhydt: Okay. I may need that because you never know, I mean, who knows what happens, one board meeting to the next. I may need to tokenize the second half of my life soon. So, I’m going to ride your coattails to figure that out. So, I think that something else I got to ask. I think I saw you tweet something or somebody pointed out to me that you tweeted something which might allude to either Messari or Ryan Selkis himself doing something related to creating some type of new DAO. What is this? What’s going on here?
Ryan Selkis: When we started Messari, we knew that we want to build a universal disclosures registry that would mirror the role that Edgar has in the traditional equity markets. And one way, one challenge of doing that is there’s no global regulator, so there’s no global self-regulator. That means that there is no global enforcement mechanism to browbeat these teams into doing some type of common sense disclosures. So, a hack that we thought of initially was, well, maybe we could create a token curated registry where you basically have projects put stake in the system and then if they lie or they failed to disclose some material bit of information, they can get slashed and those are words go to whistleblowers are kind of many auditors of sorts.
Ryan Selkis: And the market just fell out or the bottom of the market fell out. And we realized pretty quickly people trusted me and Messari way more than they did, this emerging token concept called the token curator registry. And then late last year, we started to see more DAO projects come to market, which are very, very similar to the TCR concept that we initially laid out. The benefit is there’s no affinity token. So, there’s no Messari token that we’re showing as part of this. It’s just basically a simple multiparty escrow system and governance system to allocate where this pool of funds goes.
Ryan Selkis: So, the data that we have in mind would hopefully have token projects, major exchanges and other regulated entities contributing to this pool of capital and then nominating both the projects that they want covered as well as the auditors. So, who’s going to verify this information? Who’s going to act as an arm’s length…
Bill Barhydt: That becomes like the Oracle if you will, into those contracts, I guess at some point, right?
Ryan Selkis: Yeah, exactly. And so, we’ll take a phased approach to this just like we have done previously, but from day one, the company is two years old, so basically, since early 2018, we knew that we wanted to decentralize this because the information that we are collecting and verifying should be table stakes to any functional global market for these assets. Like who’s your team? How does the token work? How do the governance systems work? What are token economics? What’s the supply distribution?
Ryan Selkis: That’s like front of the S1 type of information in the public market. So, we never thought of that, that is proprietary. Instead, we thought if we can build a network around this and we can get the basics done right, then we can kind of gradually decentralize that, put all the data into creative commons and then we’ll make money based on the tools and services that we provide around that. But by the way, so can some of our competitors.
Ryan Selkis: At least we’ll all be talking about the same data in the same way. So, you get instead of 20 different versions of the same 10K, you have one universal version and we’ll let the chips fall where they may from a competitive standpoint because I know that we’re going to be able to build interesting things beyond that.
Bill Barhydt: Yeah. So, how does Messari, in theory, make money in this model?
Ryan Selkis: Yeah. So, right now, we’re charging an annual license fee directly to the teams that are working with us on the registry. As we make this transition, those teams should contribute those same revenues to the DAO. And then the other stakeholders in the DAO will ultimately pick the verifiers. So, if the projects want us to continue representing them almost like you pick KPMG or Deloitte or E&Y over each other, then that’s fine. But they also have the option to maybe allocate some to us and some to another third party.
Ryan Selkis: The same is true for the assets that are not currently on the registry. If some of the major exchanges contribute slugs of capital or this DOA, then they might say, okay, we want to split 25 percent of the assets that we’ve committed. We want Messari doing the work on these 10 assets and then we want ABC company serving as the verifier for these five projects based out of Asia where the team there has a closer relationship. So, we kind of trust that they’re going to get higher fidelity information. Not that we think that’s true. We think we can be competitive anywhere, but I think it’s almost healthy for us to have a couple of legitimate competitors because then the likelihood that we have a greater pool of assets with some real financial skin in the game from these projects increases pretty significantly.
Bill Barhydt: My understanding is, is you are kind of midterm bearish on most altcoin projects. You see a lot of going to zero, which mitigates the need for lots of disclosures. It’s something that doesn’t exist or goes to zero then you don’t need disclosures. So, where do you see the biggest application for this over time? Tokenization of what, what kind of protocols, what kind of projects would need these disclosures? Where is this going to add the most value?
Ryan Selkis: Well, I mean if the assets are on their way to zero, all the more reason that there’s disclosures because you’re going to have quite a bit of legal activity around that. And by the way, I expect most of these early protocols to fail and fall by the wayside. And that’s fine. That’s the nature of an early-stage market. But it’s also the reason that we stayed intentionally out of the way of actually rating assets. So, we’re all about transparency ratings versus quality ratings.
Ryan Selkis: First of all, because it is early and we don’t know better than anybody else, whether something’s going to make it. And some of the crazier low probability experiments might end up being some of the killer apps in the ecosystem. So, I think over time, you will have some monetary assets. You’ll have some work tokens and kind of digital resource tokens around file storage and bandwidth and the like. And then you’ll have other synthetic securities that are issued on-chain. So, whether that’s an ISA, whether that’s a derivative, whether that’s a shadow security that’s mimicking the returns of the S&P for an investor in India that doesn’t otherwise have access to the stock market, I think those are some of the most interesting assets that we’ll see kind of down the line.
Ryan Selkis: But we’re focused on building this infrastructure right now because we like to joke Bloomberg had junk bonds as the backbone of their business. We have shit coins. So, I say that with love. Because that is our customer base and I think they all get it. No one really knows what they’re doing yet because there’s no users except for Bitcoin and maybe Ethereum. So, everybody else kind of recognizes that because we’re in this experimental phase, in some cases it’s guilty until proven innocent. But at the same time, you want to allow for this experimentation to take place in good faith and make sure that people are able to do this without running afoul of existing securities law or hurting people in the process unintentionally.
Bill Barhydt: Yup. Okay. So, by the way, so sounds like you could almost replace the word token with smart contract in the context of what you’re talking about because in theory, you’re talking about disclosure.
Ryan Selkis: Yeah. There is no token, we’re talking about a DAO. I mean, I guess it’s technically a coordinating token. So, you have voting rights, but it is not necessarily designed to have its own value.
Bill Barhydt: What I meant was a little bit different. So, you’re not actually talking about like rate disclosures around specific tokens. It could be disclosures around specific types of smart contracts or specific smart contracts or anything that would be happening in any type of ERC-based contract, effectively.
Ryan Selkis: Hypothetically, but I think the strong bias that we’d have is around actual tokens because there’s some monetary value there. Whether you believe in what backs that value or you think it’s smoke and mirrors is another story. But I think orienting around the assets themselves is what really matters. Because you can’t invest directly in a smart contract. You technically do but really, you’re investing in the actual ERC20 asset.
Bill Barhydt: So, that was a perfect segue to my last question/comment, which was I would be remiss if I didn’t bring up the mother of all Selkis pet peeves, of course, which is the Ripple XRP protocol/token. And you’ve written extensively on your feelings on their transparency or lack thereof. You mentioned it again in your 2020 comments. You’ve mentioned that you’ve been surprised, dumbfounded maybe at the staying power of both Ripple, the company and XRP, the token. Where is your current thinking on the company, the protocol, its staying power? Are they transparent? Are they not transparent? Where is this all going?
Ryan Selkis: Well, I think that Ripple, the company has built one of the more impressive tech stacks and has much closer to product-market fit than 99% of other projects that are in crypto. The issue has always been I’ve called them like the Jekyll and Hyde of crypto. So, on the one hand, you’ve got Dr. Jekyll who’s trying to disintermediate SWIFT and they’re working with all these banks and they’ve got this phenomenal team and venture board and advisory members and they are creating interesting tech, solving real problem, and they were very early as pioneers in the industry.
Ryan Selkis: And then there’s Mr. Hyde, which is the one that comes out with these bullshit transparency reports where they kind of obfuscate how funds are actually flowing and they’re not quite transparent about the actual funding model for the company, which is essentially just a continuous fundraise, but it’s treated as revenue. Because the party line is that they just stumbled across this 80 percent of XRP that hit their balance sheet and it was a found asset like oil versus being sold as a security. And I don’t really care about the securities law aspect of it. What we do care about is whether the assets that are currently outstanding are truly circulating or whether they’re encumbered in some way, shape or form.
Ryan Selkis: Because if it’s the latter and a sizable portion are encumbered, then two things happen. One, they’re understating the amount of sell-side pressure from insiders that will happen over the course of time. And this is played out over the course of the last 18 months. And two, their market cap is overstated, which means that anytime that there’s a basket weighted index is going to overweight XRP even though a good chunk of that XRP is held either in escrow by Ripple, or is currently held by one of the insiders. It’s subject to some structured reselling agreement.
Ryan Selkis: So, when we started to look into this, it was more about that issue of whether that’s at all sensible as a way to report on the supply. But I’ll tell you right now, I mean I still think that Ripple could end up doing very well if the banks take the bait and are offered sweetheart deals to buy some of these assets for pennies on the dollar, 50 cents on the dollar in return for actually partnering very publicly with Ripple. So, it’s like fake it until you make it coin almost. But what’s interesting is the revenue model and what the company actually delivers are two very, very different things.
Bill Barhydt: Yeah. I mean it’s incredible how much staying power that that coin has had. I mean, given that they’ve been masterful at signing up banks, but it doesn’t seem like any of them are actually doing anything meaningful with XRP yet. I don’t think much of any of them are doing much transaction volume at all with the software yet. But certainly, none have been very vocal about using the token. And yet as Ripple continues to sell to fund the business, it doesn’t seem to have an impact on the price. It moves down, but so does the broader crypto market or the broader overall market.
Bill Barhydt: So, I kind of share your lack of understanding. I mean, I’m happy for them. I mean, it allows them to fund their business and people who are buying and telling it don’t seem to complain. So, it’s astounding what power through them. Okay. So, what’s your most unpopular opinion as it relates to … Actually, what’s your most popular unpopular opinion period? Ryan, what’s your most unpopular opinion?
Ryan Selkis: I don’t know. I guess I have so many.
Ryan Selkis: Honestly, I don’t really know what’s popular and unpopular anymore. I never really tweet that.
Bill Barhydt: What do you get the most grief for online?
Ryan Selkis: What do I get the most grief for online? I’d say there’s maybe a couple things. Well, one that’s easy, but I don’t really believe is like the Craig Wright is part of Satoshi Nakamoto. The thing is like, I kind of have a hunch that he was involved very early, but I don’t know if he’s actually Satoshi and I hope he’s not, but more importantly I really just don’t care. But I’ve said that in the past and like I’m an enabler and a scumbag and like part of the problem because I think that someone who was very legitimately and maybe the top 100 people that had ever heard of Bitcoin and started poking around like I don’t even think that anybody debates that at this point. There is by definition 1 percent chance if he was part of that early crowd that maybe he was involved in some way, shape or form. So, that one’s definitely unpopular.
Ryan Selkis: Oh, I know. So, this is actually pretty easy. I was just trying to put my finger on it. I don’t believe that the 21 million Bitcoin cap is hard for Bitcoin. I think it’s kind of hard, but really you could find that in four, five, six years as the inflation rate dips below 1 percent, it becomes dangerous to rely on the fee model for Bitcoin because it’s too lumpy or for whatever reason, it doesn’t work or doesn’t scale. And the market collectively decides that, well, as long as we are below the annual inflation rate of the gold supply, that’s good enough and it is controllable enough where you can’t just inflate it because Bitcoin is only competitive in so far as it’s more deflationary than it’s fiat alternatives and kind of existing alternatives. So, it could end up being a better setup quite frankly to have 1 percent of the money supply term over and keep that at a steady-state inflation rate long term.
Ryan Selkis: That’s definitely unpopular. And it should be because it’s you don’t want to soften that narrative until you absolutely have to. But again, this is something where I just think it’s going to happen. I don’t really care because I’m not going to push one way or the other, but I think the market is going to make that decision for us in five years or whenever it is.
Bill Barhydt: Yup. I would say that’s definitely an unpopular opinion, but hey, it might be easier to get that done than having bigger blocks. So, you never know.
Ryan Selkis: That is true. Bet on that.
Bill Barhydt: Well, I always like to end the podcast by seeing who I can piss off. So, I think we’ve probably managed to piss off a few people, so we should probably stop there. Super interesting conversation.
Ryan Selkis: I think I pissed everybody off.
Bill Barhydt: Yeah, there you go. It’s not interesting unless somebody is aggravated. So, the good news is, is we’ve got a lot to document to come back to in a year, basically see where we’re at and see what we got right and what we got wrong. And obviously, we’ll be talking along the way, but I look forward to doing this in January of 2021 and assessing what we got right and what we got wrong.
Bill Barhydt: So, Ryan Selkis from Messari. It’s messari.com, M-E-S-S-A-R-I dot com. Did I get that right?
Ryan Selkis: Dot IO.
Bill Barhydt: Dot IO, I apologize. Okay, messari.io.
Ryan Selkis: We’re going to get the .com at some point, but we’re too frugal, so we’ll do it like right before our next fundraise before anybody knows that we have money.
Bill Barhydt: Gotcha. Well, we’ll link on it from abra.com anyway, so this email goes out to hundreds of thousands of people. They’ll see this link, messari.io. Two Bit Idiot on Twitter, my favorite Twitter handle besides my own, and a great newsletter every day. So, you can get all of that at messari.io. And Ryan, thank you so much for joining us on Money 3.0. We really enjoyed having you here.
Ryan Selkis: Thanks for having me. It’s always fun, man.
Bill Barhydt: All right, well, I’m going to call it there to wrap and thanks for joining us everyone. Take care.
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