Traditional Venture Capital Firm Greylock: Innovations and Opportunities in the Web3 Space

Original Title: “The New Computing Paradigm”

Original Author: Christine Kim, Greylock

Compiled by: MK, Chain Catcher

Abstract: As a well-known traditional venture capital firm, Greylock has been heavily investing in the crypto industry in recent years, with investments in projects such as Rabbithole, Pinata, and Portals. In this article, Christine Kim, an investor responsible for Web3 at Greylock, discusses her understanding of Web3, including the creator economy, DAOs, NFTs, etc. This is highly valuable reading for those in the Web2 space to understand Web3.

Heather Mack: (hereafter referred to as HM)
Christine, welcome to Greymatter. Thank you so much for being here today.

Christine Kim: (hereafter referred to as CK)
Hi, I’m really happy to be here.

HM:
Great. Well, let’s start with the basics. First of all, what is Web 3?

CK:
Web 3 is an all-encompassing term that refers to the next iteration of the internet. Some people might call it a decentralized web. I’d like to quote Decrypt, which defines it as: “Web3 is the next major iteration of the internet, promising to take control away from the centralized companies that dominate today’s networks.” This is indeed a significant theme of Web3.

In many ways, Web3 is a reaction to Web 2.0; you could say we are moving out of this era, or that we are currently in it. We aim to take control away from centralized platforms like Facebook, Google, or Amazon, which today provide amazing and stunning services, but mostly aggregate data and profit from it.

I believe that users on the internet have created a movement where they want to control and own more of their own data, desire control over their own identities, and understand what companies can do with that information.

I think this is a philosophical movement. It’s interesting to think about the ideology behind Web3, with principles like decentralization, personal ownership, distributed collective collaboration, or distributed computing.

In any case, if we take a brief look back, Web 2.0 is the period that follows Web 1.0. So, let’s pause for a moment for the audience and review this history. Web 1.0 is the period from the 1980s to the early 21st century.

Early competitors like AOL, Netscape, and Yahoo were part of the very early internet era. Some might say this was a read-only version of the web. Accessing content on the web could be very difficult, but at that time, users were just beginning to digest and consume content that was controlled and published by a few users in the field.

This is what we mean by read-only - you had AOL or Yahoo publishing news and reporting things, and they might even take over the channels through which we previously consumed media like television and radio, and now we can access all this information on the internet. But we weren’t really participating in the way consumers published information or in the process.

Web 2.0 is the period from the mid-2000s to today. We are still in an environment dominated by Web 2.0. Companies like Facebook, Google, and Amazon truly dominate this space. But another way to think about it is that you now have a read-write web experience, rather than just a read-only web experience.

Now, when I say “read-write,” these are some primitives you often hear in computer science. And “read-write” means, “We can not only read and view content on the internet, but we can also publish and push content to the internet.” So this is early blogging or things like Reddit or even Facebook, where I can upload photos, write blogs, or publish content on the internet, user-generated content. YouTube is a great example.

We are in this new era where users consume content while also publishing and creating content. However, at the same time, this model is still largely controlled by centralized platforms and companies. I would say that most of the social media experiences we have today, or much of the content management and moderation that is controlled, has brought us to Web3.

So we’ve touched on some principles that define Web3. If I follow the analogy from read-only to read-write web, now we have a read, write, and execute web, where we not only consume, we not only create content there, but we (at a distributed level) execute on the web.

When I say execute on the web, I really mean on a decentralized network basis—where you have many computers or many participants genuinely contributing to the computation needed to expand the internet. This is the layer added in this Web3 element.

So that’s why you see the emergence of networks like Bitcoin or Ethereum, or even decentralized exchanges like UniSwap. These are household names in Web3. There’s so much more to understand. But a fundamental defining feature is that you have a collective community contributing to it, or you have some kind of collective network contributing to the computation. This is undoubtedly a new feature we don’t see in Web 2.0.

HM:

2021 was an incredible year for cryptocurrency, and the whole Web3 space is booming. Why do you think now is the time for us to pay attention?

CK:
2021 was a very exciting year for crypto and Web3 because I think it was the year we really started to feel the widespread mainstream adoption of crypto for the first time.

I think the hallmark of 2021 was the surge in use cases, which felt very broad and diverse. So if you compare it to previous boom and bust cycles, you’ll find they were dominated by one or two themes. And the earlier cycles, like from 2011 to 2017, were somewhat dominated by the launch of Ethereum or the early miners, exchanges, or wallets being built. Cryptocurrency needed chips to survive in an industry, but we hadn’t really provided services for outsiders to cryptocurrency in other real-world use cases. In 2017, we experienced the ICO boom. Many tokens and coins were launched, and we also developed a strong interest in DeFi (decentralized finance), which aimed to rewrite our financial rails on new decentralized protocols.

So in those earlier cycles, there were definitely one or two themes that insiders and builders in cryptocurrency felt a lot of people were rallying around.

In 2021, it really felt like there were many themes. It wasn’t just gaming; it was NFTs. DAOs, creators, social tokens, music, and DeFi were really the hot topics of 2021. Now there are so many themes that it really starts to feel like everyone is paying attention to this movement. We saw many Web 2.0 brands trying to enter this space. Nike, Adidas. They are doing very interesting things in this space. Many people are starting to realize the applications and their broad use cases.

So I would say this is an incredible theme to pay attention to in 2021. I have to credit projects like NBA Top Shot, which is bringing Web3 and this concept of digital scarcity and ownership together with NFTs, but using concepts like basketball collectible moments that everyone gets very excited about and really feel like it has attracted a lot of mainstream audiences. Because NFTs have been around since 2017. CryptoKitties has always been a project. Rare Pepes NFTs have emerged. And these projects were most appealing to insiders in Web3.

So Top Shot is a great example of attracting mainstream sports fans. Or what we saw with Axie Infinity, which has really provided a huge boost to an entire nation in the Philippines and has been responsible for distributing cryptocurrency to a large population in the Philippines through this play-to-earn game. We can think of gaming as a theme we are excited about in this space, but when you think about it, it has attracted gamers, mobilized an entire nation, an entire population. I think these are examples of crypto starting to transcend the community and are truly exciting use cases that attract large numbers of mainstream users.

We are excited to see this pattern continue. It’s really exciting to think about what the next cryptocurrency will be that brings the next billion users, what will be built, and what it will bring to our parents, our elders, our friends in crypto, those who haven’t fully grasped it yet. I am genuinely excited about all of this.

HM:
But still, after a very strong 2021, cryptocurrency has recently experienced a major crash. So why do you still have faith in this space, and how can you convince all the others who are not quite sure it’s worth exploring?

CK:

That’s a great question because I think for many people outside the cryptocurrency building community, it’s easiest to focus on the price fluctuations of tokens. For many, they are participating in tokens from an outside-in perspective. We see many publications reporting on which projects are doing well, tokens are going up, year over year, month over month, they are up thousands of percent. So we all know that saying, right? People bought into projects early or bought tokens early and made a lot of money. So I think we might be overly focused on token prices, Bitcoin prices, Ethereum prices, and the like.

In many ways, it is certainly a very useful leading indicator. We shouldn’t ignore what’s happening in the current market. What’s happening in the traditional public stock market and the crypto market, stocks or growth projects related, in many ways, reflect geopolitical instability, changes in interest rates, and our expectations about how the economy will develop in 2022.

Of course, these are very important signals. But one thing I encourage the audience to think about is:

“The price of tokens is often unrelated to the quality of the project, the adoption of the project, or the revenue of the project.”

So as an investor, when I look at projects, I see revenue, I see many users using the project, and I see the ups and downs of the token. When you see these, it’s actually interesting because you often have to normalize revenue with the ups and downs of the token price, and you’ll actually see they can be negatively correlated at many times.

So in a sense, you do have this public sentiment, which means there’s a very layered and complex outlook on what’s happening in the market in many ways. But I actually think that as long-term investors, our view of things is very long-term. And we don’t overly focus on prices, so we don’t overly focus on how Bitcoin, Ethereum, and the countless tokens on the various projects we participate in or support perform on a day-to-day basis.

Are there historical examples I can point to for why this is the case? If you look at important projects that have stood the test of time, Ethereum or Coinbase are great examples. These projects actually started during the cryptocurrency winter. The tokens during these periods performed poorly or saw significant declines. So this is actually two projects that launched during the cryptocurrency winter that may not have made any progress. But today they are both “winner circles,” key parts of today’s Web3 ecosystem.

Bitcoin launched in 2009, and in early 2011, some of the very earliest people in the cryptocurrency space experienced a significant surge. And then at the end of 2011, there was a major crash. Many of us may not have been involved in crypto at that time, but perhaps we started to hear about it. Interestingly, exchanges like Kraken and Bitstamp launched in 2011. Coinbase launched in 2012, so it was really a year after this massive crash. So these three—Kraken, Bitstamp, and Coinbase—entered their own realms during a period we call the cryptocurrency crash, which is very interesting.

If you look at the next cycle after that, there was another major crash in December. Interestingly, these crashes always happen in December. But in December 2013, there was a crash. If you look at that time, Ethereum was founded in 2013 and then launched in 2015. Historically, if you look at Bitcoin’s price, this was another winter, another time when external sentiment about cryptocurrency might be seen as very negative, but the builders inside remained very low-key and focused on building.

So while I don’t want to downplay prices, we absolutely don’t overly focus on them. We take a very long-term approach. What’s actually very interesting is that I would say what we see historically is that during winters or these downturns, it can actually be an incredibly efficient time to build quietly because it’s the quietest time, and you’re not distracted by the performance of tokens or all these projects that are launching.

I would also say that if you can hire, if you are making progress, if you can launch during that time, if you are a project that can endure those winters, then that’s a very strong signal for the people you are trying to hire into your project and the investors you are trying to work with.

One of the dangers of boom cycles is that when all projects are doing well, then as a user trying to participate or as an employee trying to join one of those companies, how do you know what a high-quality project is? But these boom and bust cycles certainly bring healthy quality. I would say the last loud comment is that we are not overly conservative about prices; we absolutely believe and hope it is healthy.

HM:
Greylock has been investing in Web3 for a while. As you mentioned, the firm is an investor in Coinbase, and we made several Web3 investments last year. Can you talk about some of those?

CK:
That’s a great question. Greylock has been investing in this space even before I joined Greylock, and I’m very excited about it.

So we are certainly investors in Coinbase. We also invested in a hard drive-based blockchain company called Chia and a decentralized DNS naming protocol company called Handshake.

When I came here, we really started to ramp up our investment pace and put in more full-time effort. So now we have several partners at Greylock who are full-time focused on crypto. We like to call ourselves the crypto team. In the past year of 2021, we really accelerated, as I mentioned, our investment pace in this space.

At the beginning of 2021, we invested in a decentralized storage company called Pinata, which is an NFT storage management service. Think of Pinata, or think of decentralized storage like Dropbox or Google Drive, except it’s on a decentralized network. Storage is absolutely a foundational part of the Web3 ecosystem. When we think about NFTs and consider the demand for them in gaming, storage will be a key part of that infrastructure.

We are also investors at the gaming layer, so we invested in a game called ZED Run. We actually supported the studio that created ZED Run, which is called Virtually Human. They are a studio that will provide a full suite of entertainment and gaming experiences. Besides their first concept, ZED Run is a blockchain-based horse racing game where the horses themselves are NFTs that you can breed and trade. It makes sense that lineage and genotype and all statistics will be stored on-chain. This is a very interesting investment for us.

Recently, we just made an investment in a project called Portals. We just announced this project, and we are very excited about it. It’s a metaverse where you can own a part of this metaverse, specifically a room. You can decorate it however you want. You can put your NFTs there. You can even imagine how these rooms are stitched together into this city or downtown where you can visit other people’s rooms. Based on that entertainment factor, we love the team there, and the image quality is very high.

They are also building on the Solana ecosystem, and I’m excited about the broader ecosystems. Solana is home to many interesting and amazing consumer applications. We really believe it can play a huge role in gaming or virtual worlds. Anything that requires high computational power, low costs, and very high speed, Solana can do very well.

Of course, there are many more that we haven’t announced yet, but as I said, I think it’s important to keep an eye on this space. We will be announcing more soon. For this exciting space, we will be investing more deeply in 2022.

HM:
There are indeed a lot of cool things. These companies are very different from previous iterations of the web. So is our approach to investing in Web3 companies different as well?

CK:
Part of it is the same, but a large part is different. We are looking for great markets, great ideas, and great founders. So I would say supporting these types of entrepreneurs is similar in many ways.

So when we evaluate a company or we are assessing a founder, I would say our evaluation process: looking at revenue, looking at the business model, thinking about how this market will grow over time, we rely on those frameworks we’ve developed over the years investing outside of Web3. So in many ways, it’s the same.

But in many ways, it’s very different because crypto companies and Web3 companies have philosophies and ideologies in Web3. These companies certainly have different motivations and goals, which are very different from the previous Web 2.0 company era.

One example is the concept of collective ownership or community ownership. Many projects do this in a tokenized form. So they are creating a token that public community members can own. Through this token, they have governance rights, they have rights, and they have a say in the future direction of the company. This may not be much different from the rights you get when you buy publicly traded stock in a company. But in many ways, it’s very different because we really have to reflect, “I own stock in a company, and I don’t really have that much voting power or say in what they do.” Of course, governance works differently. Web 2.0 companies have boards and different governance models.

What Web3 is doing is really starting to try some of these things. So what we see in many projects is releasing a token that allows the community to vote on what should be on our roadmap, who should build this, how much they should be compensated, and even how the internal company operates itself. They are also doing this on a more collective basis.

If you compare Coinbase with UniSwap, the appearance and operation of these companies are very different. But these are surface-level differences; in reality, Web3 and crypto companies, like Coinbase, are considered a crypto company. It’s an exchange where you can buy and sell different currencies.

UniSwap is actually very similar. You can buy and sell different currencies more on a peer-to-peer basis. They are a decentralized exchange. UniSwap is open-source. If you were to compare how UniSwap and Coinbase operate, Coinbase is more like a traditional company. They have employees, a CEO, a board, a leadership team, and it’s more of a top-down management style.

On the other hand, UniSwap is more like a committee (there’s a committee, and then there’s a large contributor network contributing to this open-source project). These contributors may actually get compensated, just like employees might get compensated at Coinbase, except they are not locked into an employment contract; they are contributing to UniSwap, but they are also contributing to another decentralized exchange, SushiSwap. Perhaps they are contributing to a dozen other projects, and they are all compensated in the form of grants, and they can flexibly enter and exit these projects as they wish.

So there are many similarities with what we see in the open-source development community. This is a style we see in Web3.

“When we talk about tokens, governance, or community ownership, these are things that Web3 companies are experimenting with, and these are the ways in which the attributes of these Web3 companies look different.”

They look different in other ways too, such as those that simply set themselves up as DAOs. DAO stands for Decentralized Autonomous Organization. It’s a mouthful, but basically, you can think of a DAO as the next generation of online internet communities. We have been involved in many, whenever you think of online internet communities. So when we are on Reddit or Discord, or even like we are on Instagram, we have somewhat entered these online communities, but what DAOs do is financially align the community typically with tokens.

I would say this is a way to organize talent, labor, or community online. So the applications of DAOs become very interesting. We absolutely see it as a new paradigm for companies. I mentioned the example of UniSwap versus Coinbase earlier. UniSwap operates as a DAO. In many ways, it looks like a committee managing a group of open-source contributors. The UniSwap project has about 10,000 contributors, and there are actually more people who own UniSwap tokens. So theoretically, anyone who owns a UniSwap token is part of the UniSwap DAO because they have a stake in the project, and they have a say in what happens on the roadmap of the company, whether the company should add this feature, whether the company should support this blockchain, and whether they should increase support for this new token.

“We are very excited about DAOs as a new model for businesses. But because it’s just any collection of online people that are financially or vision-aligned, I really think the applications of DAOs, like NFTs, are super early, and we will see more in the future.”

We think there are some applications that are still in their infancy, but I’m really excited about grassroots movements or collective action in general. If you want to raise funds for something, how would you do it? If you are a startup looking to raise funds, or if you want to buy a house and live with a community or cooperative, you can do that through a DAO.

In fact, we can clearly see a group of people online raised $43 million in ETH trying to buy a copy of the U.S. Constitution at auction. This is an example of grassroots movements and collective action leading the way. I’m excited to think about how it can be used for social good, or climate and political issues; I think DAOs could be a very powerful tool for accomplishing some of those things.

Another thing we are really excited about in this space is a big theme for us, not just collaborating and supporting leading DAOs in the space—social DAOs, social clubs that we see today. I’m a member of Friends with Benefits. I’m also a member of Club CPG (Crypto Packaged Goods). Those are two of my favorite groups. But I would say there are social DAOs, collector DAOs, similar to DAOs that collect art or collect assets, a bit like our investment DAO. As I mentioned, we are also seeing more project-based DAOs, like UniSwap.

Again, we are not only excited to work, collaborate, and engage with these DAOs, but we are also interested in the tools needed to actually run these DAOs. A good example is if you consider the company you’ve worked for, that company might use a set of tools to get their work done. They might use Workday for HR, or ADT for payroll, or they use a set of tools that are actually just for internal hiring, operations, and building. Because DAOs don’t actually hire people in a similar framework, how will they understand these things? How do DAOs start or scale teams? How do you understand the database of everyone contributing all roles and all skills? How do you actually pay contributors? It might even be paying contributors in tokens, rather than in dollars like a payroll-type pay stub process.

So I think DAOs will need all these tools. We see a lot of things like voting, payroll management emerging. But I think as DAOs grow in their use cases, the tools they need to thrive will also grow.

We see DAOs mixing in things like Telegram and Discord for communication. So is there a better medium to understand the members of this DAO and communicate among them? I think we are excited to see developments in this area at the DAO level and the DAO infrastructure level.

HM:
Cool. As you mentioned, this makes me think about how people will manage their organizations and run their own work in different ways, which is the creator economy that has really taken off in the past few years.

CK:
Absolutely. I think the creator economy is a space I was deeply exploring even before I delved into Web3. As you acknowledge, the creator economy is just a term or an industry that has been growing overall, and we are collectively understanding the importance of this shift.

Setting Web3 aside, the creator economy actually refers to an industry and movement that allows individuals and creators to monetize their creative talents. For what constitutes a creator, I give a very broad definition, not just digital content creators on Instagram. I also consider people who publish courses or write. Any form of creative content or creative skill, even musicians, I would say they all fit into this broad term of creators.

Venture capitalists are creators in many ways. Or we are constantly publishing content about our thoughts in the space, on blogs or Twitter. The “creator” economy really refers to this vast ecosystem that refers to the increasing number of creators who are actually making money and fewer working for 9-to-5 companies, actually shifting more income to these creative revenue opportunities. If you really understand the broad definition of people selling on Etsy, to those writing on Substack, to those creating films on YouTube, there are about 50 million creators. So this is a huge and growing population.

So now looking back at Web3—and why the intersection of creators and Web3 is really interesting—is the concept of ownership and individual ownership of content or works. So the previous generations of companies that dominated the creator space, like YouTube, Twitch, Instagram, or TikTok, do indeed own the rights to the content you publish on their platforms. Now, these content platforms play a huge role. They aggregate demand so that you can attract an audience, right? “I’ll put my video on YouTube instead of posting it on my own website because people can discover my video and my content there.”

So they certainly have good uses, but in some ways, they also don’t give creators much control over the content they publish. I don’t really own the content I publish on YouTube. YouTube has the right to play, distribute, and showcase it wherever they want. With things like TikTok or Instagram, they control and own the feeds and algorithms that will determine who sees my content, who doesn’t, and my ranking.

“There’s a lot of exciting energy around creators and Web3 because I think as the population grows, creators in this industry are demanding more and more ownership and rights.”

What does it mean if creators have a say every time Instagram changes its algorithm? Every time Instagram changes the button at the bottom, whether you are a reel creator or a photo creator, you could vote for or against it.

All these subtle changes being made by centralized companies deeply affect the livelihoods of creators. So when creators have more say in the actual development of products or how they work, they also have more ownership over the content they create. I think this will be a more beneficial economy for all creators involved in this industry.

Another thing I find really interesting is that creators will benefit from the economics built around Web3. In Web3, there’s a concept of owning a piece of the content because the video or photo you publish could be an NFT. Someone might really want to own it. Then maybe they decide to sell it. So as this content exchanges hands, creators might earn royalties from every secondary sale. So as my article or as my photo exchanges hands, perhaps I earn a 2% royalty every time it’s sold.

There isn’t a real financial or economic structure in Web 2.0. So what Web3 economics aims to do is replace intermediaries. Maybe in the music industry, this example is like a record label that can benefit from all the royalties or all the streaming revenue, while the creator only gets a small piece of that pie. In Web3, you will have a more streamlined intermediary. You will essentially have the technology that facilitates this. You might consider replacing some of those intermediaries so that creators can benefit economically from all the value they ultimately create by publishing content.