Dialogue Paradigm: Never predicting the final winner, only focusing on projects that provide value to users and developers

Source: UpOnly

Compiled by: Dong Yiming, Chain Catcher

At the end of last year, Cobie & Ledger, hosts of the crypto video podcast UpOnly, interviewed Matt Huang and Fred Ehrsam, founders of the crypto venture capital firm Paradigm, to discuss the future of crypto. Matt and Fred come from Sequoia and Coinbase, respectively, and both have experienced multiple cycles of cryptocurrency, aligning and complementing each other in their worldview of crypto. They founded the cryptocurrency investment firm Paradigm during the bear market of 2018. Below is a compilation of the podcast by Chain Catcher, with some parts omitted.

Fred Ehrsam (left) and Matt Huang

1. How did Matt Huang and Fred Ehrsam meet?

Fred: We actually have many intersections; the story can start from 2017. Candidates interviewing at Sequoia typically need to submit a mock investment memo, and Matt chose to write about Coinbase, but at that time we didn’t know each other, which might have some destined meaning.

We really met after I left Coinbase. I wrote a blog post that mainly outlined how blockchain is the foundation of the metaverse, and we established contact because of that blog post (Related reading: “Paradigm Co-founder’s 2017 Insight: Blockchain is the Foundation Layer of the Metaverse”). Matt thought I might want to build these ideas as an entrepreneur, but I felt I could never truly be a builder. We probably exchanged about 60 emails to share ideas.

Matt: Yes, I often have a moment of inspiration when discussing ideas with Fred, and I can sense that he is a very special person, which makes me hope to work with him one day or fund his next company or something else.

2. The foundation of the metaverse: blockchain enables true digital ownership

Fred: I once spent a weekend discussing "what the metaverse will look like" with executives from large companies. The conclusion at that time was: the visual aspects of the metaverse that people often discuss will definitely be part of it, but its foundation should consist of some data layers, through which we can transmit the data of this world into the metaverse. I think at that time, people discussing the metaverse did not realize that crypto is the metaverse. It is not just a VR world, but a shared data layer where everyone has the right to decide who can own which digital assets.

Cobie: What do you think the metaverse will look like in 15 to 20 years?

Matt: Obviously, people will spend more time and money in the digital world. The scale of the economy of in-game items is huge, but if you really think about it, it’s a bit like putting all your energy into systems that will ultimately belong to others. This is not a government with clear laws and property rights, but a world built by whims of companies like Google and Facebook.

What is most appealing to me is that blockchain can make property rights possible, allowing people to truly own property in the metaverse. Just like in some countries, if people do not have strong property rights, the government can intervene and confiscate their assets, and local warlords may track and control you. Crypto can empower people with strong property rights, digitizing their ownership. This way, the digital world will be much larger than it is now, and this is a general trend in the next 10 to 15 years.

Fred: Yes. I think people currently do not realize how severe the limitations of today’s internet are, and they have not fully understood the true concept of future digital ownership. We still live in a feudal internet world today; if you want to leave, you cannot take anything with you, and if you want to change how this system works, you absolutely have no power to do so. As Matt just mentioned, crypto will change all of this. Everyone will truly own their things and can take them elsewhere.

3. Crypto is changing the barriers to entry and exit

Fred: I think crypto fundamentally changes the barriers to entry and exit. Not everything in crypto is decentralized; this is a mistaken way of thinking. Many centralized experiences will be built on a decentralized foundation. We can see that in the past decade, the top 10 apps in the App Store have hardly changed; this is not a market that allows for free competition. When people want to create something entirely new, their barriers to entry are very high.

Now, due to crypto, the barriers to entry have lowered significantly. With the new foundational layers, whether as entrepreneurs or artists, people can publicly build more innovative things. It’s a bit like the "gatekeepers of web2" have realized this trend, which means web3 has begun to threaten web2.

Game companies may be able to cross over faster because installing an open economic system in games seems like the right thing to do, while it seems harder to achieve for social media.

Matt: One analogy I can think of is that the digital world we live in today is like all monarchies or dictatorships; we are looking for the first country willing to move toward democracy, willing to give up their rights for the people to rule. I think this is very difficult for a large enterprise to do. And we can see that nowadays, the internet companies with the largest market value have given users some power to varying degrees, which may become a norm in the next 20 years.

4. Play-to-Earn and similar models improve the low utility of early networks

UpOnly: Do you think it is important to directly tell users that a project can make money? For example, Play-to-Earn games like Axie tell people there is money to be made to attract more users.

Fred: I think this is necessary. The most difficult part of making network effects work is the early "chicken or egg" problem. If there is a new Twitter and you are the first user, you find there are no applications in the system, you will leave, and the second user will do the same, leading to an infinite loop. This is why some web2 giants have not changed network utility.

Overcoming this challenge is actually very difficult, and crypto provides the first real solution to the cold start problem. At the beginning, the network utility is very low, and there are very few applications, but even so, as an early owner of the network, you can still benefit and gain ownership of the potential economic upside of that network to offset the fact that network utility is very low at the start.

Matt: It’s worth noting that the concept of Play-to-Earn has existed for decades. I think you all remember the gold farmers in World of Warcraft or players buying and selling game items or trading skins, but these players ultimately are bound by the game’s terms of service. Crypto games are embracing the Play-to-Earn concept, and making money has become a core part of the game, which will attract those who want to earn money through gaming.

Fred: To some extent, I think work is the purpose of humanity, so many popular games like World of Warcraft actually have a strong "work" component that people enjoy, and people can find a lot of meaning in the game.

Matt: If you pay attention to those who love the metaverse around you, you will find that their commonality is that they are doing well in real life. But the metaverse will also provide more comfort and opportunities for those who are not doing well in real life, helping them find more goals and fun online. Previously, people would spend a lot of time and energy in games for some meaningless goals, but in Play-to-Earn games, this can really be converted into money.

Uponly: I have a question I’ve always been curious about. Why do we need to have images or 3D characters representing ourselves in the virtual world, and why can’t we just use our real image to represent ourselves?

Fred: I think the beauty of the virtual world is that it allows people to create the world they want to create. I guess if you ask most people what is most important to them, or what their impression of themselves is, they would not accurately describe their appearance. From my own experience, I spent about 4,000 hours playing World of Warcraft when I was 16, and at that time, I felt that my image and equipment in the game were more important than anything else. Moreover, people have many facets to their personality; perhaps on social networking platforms, they only want to showcase one or some aspects of themselves.

5. The opportunity and origin of founding Paradigm

Matt: Starting in 2017, I spent a lot more time with Fred. At that time, all the large internet companies had already been built, and crypto felt like the next frontier we could participate in building. The biggest problem we encountered was that we did not find any crypto investment firms that we were optimistic about. If we wanted to do something, we probably wouldn’t get funding from those investment firms at that time, which is why we wanted to establish Paradigm.

We tried to make Paradigm a place where talented and curious people would want to spend their time, so we did not follow the traditional company hiring practices of selecting partners based on roles, but rather sought to dig out truly talented people to join the company. Talented young people are the ones who truly create the future—20 years ago, it was companies like Goldman Sachs, 10 years ago it was companies like Google, and today it is cryptocurrency. Crypto will be a powerful movement sweeping the world.

Related reading: “Paradigm: Perfectly Timing the Bottom of Bitcoin with Strength, the Path to New Paradigm Investment”

Uponly: How do you retain talent?

Fred: Our goal is to help the most ambitious people continue to build what they want to build. If you are on the team, the coolest thing is that you can help many such talents during a period of time.

Uponly: How many members does Paradigm have now?

Matt: If you look at our official website, you will know that we currently have Samczsun, Hasu, and a new member will be joining soon. I think the benefit of crypto is that people can emerge from places you have never heard of, and we don’t have to care about where they graduated from or what they did in the past; as long as they have talent, what they create can speak for them, which is very powerful.

6. DeFi is still in a very early stage

Uponly: In recent months, people have been discussing DeFi 2.0. It has been a long time since anything interesting has emerged in DeFi, and the emergence of the new term DeFi 2.0 has once again attracted everyone’s attention. What stage do you think DeFi is currently in? What will happen in the future?

Matt: I think we are still in a very early stage. If we were to build a financial system on the blockchain from scratch, there is still a lot to establish. So I think innovation will come in waves, like new hotspots every month, possibly related to NFTs or Web3. We have privately met and discussed with some who are still building DeFi, and I believe DeFi will continue to develop over the next 10 years.

Fred: There is a top-down way of thinking about this issue—DeFi user assets have grown from 0 to 100 billion dollars in the past three years, which is a very astonishing growth rate. But compared to the scale of traditional finance, it is still a drop in the bucket. So from this perspective, we are still in a very early stage.

Uponly: What can take us from 100 billion dollars to trillions of dollars in asset value?

Matt: I think it may just take time. People’s trust in DeFi also needs to be built step by step; this is the process of technological advancement. Right now, crypto may be driven by interests and speculation, but looking at the long term, if DeFi can serve trillions of dollars in assets, it may become less speculative and ultimately become something that the public and financial institutions need. Institutions will also initially take on the role of intermediaries to help DeFi be accepted by the public. It’s like when elevators first appeared, they needed an elevator operator inside to make everyone feel safe. I believe we are ready for DeFi’s compound growth in the next 10 years.

7. How to find investment opportunities?

Uponly: Considering the cyclicality of cryptocurrencies, how do you approach investing?

Fred: Compared to focusing on short cycles, we pay more attention to the growth opportunities of projects over the next ten years, trying to set our sights on 10 years later rather than the short term. Cryptocurrency prices change every day, which can distract us, but you know, the biggest things take decades to build, so we still insist on keeping our vision broad rather than focusing on short-term gains. We need to think about what will become more important in the next ten years, which is much easier than thinking about changes in the next ten minutes or the next ten days.

Related reading: “Paradigm Partner: How to Conduct Research on Early Projects?”

Uponly: What do you think the Layer 1 world will look like in 10 or 100 years? Will it be dominated by Ethereum scaling, or will it become a multi-chain world?

Matt: Theoretically, there should only be one winner. Everyone should use a single social network system because of certain theories (like money as a means of value storage), and there are also claims that there should only be one cryptocurrency. But from experience, this is impossible; Bitcoin and Ethereum are two examples that have been created, each creating many different communities and use cases, and the same goes for other Layer 1s.

It entirely depends on your time frame; in 100 years, there may only be one winner, but I cannot predict that. So we spend less time thinking about who will be the ultimate winner and focus more on who will provide value to users and developers, paying attention to what kind of ecosystem they will become.

8. The future of Web3

Uponly: I know you are both interested in the role that web3 will play in the next iteration of social media. How do you think crypto wallets will evolve? Will they become a form of identity?

Fred: Just like the iPhone integrated all mp3s, emails, calls, etc., crypto technology is binding all your internet identities to your wallet. Your identity verification, bank accounts, reputation, and abilities will all be integrated into the crypto wallet; it will be your universal method of logging into the internet, it is the digital you. Now, smartphones have become an important part of our lives. Perhaps in the future, crypto wallets will be even more important than today’s smartphones.

9. Zero-knowledge proofs will ensure user privacy

Uponly: Can we achieve these things while protecting user privacy?

Fred: Zero-knowledge proofs can. Everything you do on the blockchain is tracked, and to some extent, the early beginnings of the next generation of social networks are based on on-chain data. To achieve privacy, we definitely need to develop better privacy tools; otherwise, we will live in a very strange transparent world. Zero-knowledge proofs allow us to use cryptography to prove certain things or do certain things without publicly disclosing personal privacy online.

But we need to know how many people truly care about privacy? In web2, many people have already "sold" their personal information to large companies for convenience. But if in the world of web3, achieving privacy makes the user experience worse, will they still choose to use web3 apps? One thing we often reflect on is that ownership is a key element of web3, which greatly changes people’s perceptions of the value propositions of different online applications.