Dialogue with Messari Founder: NFT Regulatory Risks are Low, Algorithmic Stablecoin Experiments are Necessary

Visitor: Ryan Selkis, Founder of Messari

Compiled by: Amber, Foresight News

Background and Early Stories

Eric: So I'm very excited to invite Ryan Selkis to the podcast today. For those who are not familiar with Ryan, the best analogy I can give is that I feel like I'm talking to the Google of the cryptocurrency world. Ryan is one of the most prolific writers in this field, having been deeply involved for quite some time. He has spent over 250 hours writing more than 160 pages on the outlook of the crypto industry.

As time has passed, many of the expectations mentioned in his writings have become a reality. Before we discuss market expectations, I would like you to start from the beginning, for example, when and what prompted you to enter the crypto industry? What was your first job in the space? And tell us about your "legendary story" of exposing Mt. Gox.

Ryan: After graduating from college, I was involved in investing and entrepreneurship. I started doing venture capital right out of school and got my dream job working with a group of very smart people. From a different perspective, it was like a three-year startup boot camp. I quickly realized I wanted to be on the other side of the phone, so I started my first company at 25, which I closed in mid-2013, just as I began to closely follow Bitcoin.

At that time, I had deferred business school for a year, so I had a 10-month gap. While that time wasn't enough to find a job, I was restless with all the free time. Fortunately, in the years prior, I had first encountered Bitcoin, although I didn't buy any at the time. There wasn't an easy way to invest in Bitcoin unless you were mining it. My understanding of it was limited because I was focused on dollars, treasuries, and the gold market.

However, because Fred Wilson invested in Coinbase and the Winklevoss twins filed for an ETF that summer, I started paying attention to Bitcoin again. When the FBI shut down Silk Road, it clicked for me that Bitcoin was credible, and those who did wrong could be punished, which meant Bitcoin was not just a tool for money launderers or societal outcasts, but could generate substantial positive value.

My writing about it began quite accidentally. My Twitter handle, twobitidiot, was a throwaway name from Reddit, and for the first few months, my account was completely anonymous. The industry was so small at the time that even CoinDesk had only been around for a few months, and there weren't many sources of information. The Reddit Bitcoin forum was probably the main source of information every day.

So, I started a newsletter that simply provided a brief overview of everything happening daily. At that time, there were usually only four or five major headlines, and sometimes what happened that day didn't even qualify as a headline. The newsletter was more like an interesting discussion thread on Reddit Bitcoin or a briefing that industry practitioners would find interesting. Fortunately, in a short time, I got most of the executives in the industry to subscribe to that newsletter. And that’s how I was able to obtain the Mt. Gox bankruptcy documents, laying the groundwork for my subsequent rapid growth.

Eric: In the crypto market, there are investors and builders, and one thing that truly sets you apart is your willingness to keep up with the times and share your views. What happened after you exposed the Mt. Gox story?

Ryan: At that time, no one knew who I was. I was just a grassroots blogger on Twitter using a South Park avatar and a random pseudonym. You can imagine that many people were saying I was creating panic or that I was talking nonsense, accusing me of trying to maliciously manipulate the market. But when it became a fact, I immediately gained credibility. However, I then had a struggle with the Bitcoin Foundation shortly after the Mt. Gox incident, as I angered some people by touching on their interests. But it was a fight worth having, and since then, the Bitcoin Foundation has become less relevant; now we have more professional governance teams. Everything will be alright.

Eric: You have previously mentioned that you enjoy digging into some well-known figures and stirring up "social judgment" by exposing them. I am just curious to understand this better. Is this your consistent approach, or do you think it has become the most effective way to communicate as you have become a big name in this field?

Ryan: I'm not trying to cause trouble, let's put it that way. For me, when a systemic issue arises, rather than picking out those obvious bad intentions or small cases of fraud or misconduct, it's better to try to find the biggest players involved. It's easier to go after one person than many, and it's easier to catch a big fish. This is similar to what law enforcement would do. They want to take down the mob boss, not the average gang member on the street. Ripple is a great example.

When I started writing about Ripple in early 2018, Ripple was surpassing Ethereum in market capitalization. In terms of total market cap, it was almost on par with Bitcoin. It was fundamentally a broken network, and the way the company operated its token sales encompassed almost all the worst elements of the 2017 ICO market, so I wrote about Ripple very directly. However, for those scam projects ranked outside the top 400 on CoinMarketCap, not many people cared about those scams, so I didn't need to spend energy on them.

I think this set the tone for our encouragement of proactive disclosure or community-driven disclosure of these bad tokens when we founded Messari. We can do this by collaborating with projects without being seen as promoting them, because we are thoughtful in our collaboration. It's not about writing critical investigative journalism pieces, but rather disclosing facts, and then we provide a third-party check. You can only do this credibly if you really have a history of pursuing misstatements. Therefore, no one questions us because they know the reputation we have built for "fact-checking."

Eric: Let’s move on to the next chapter of the story. When did you join DCG to run venture capital and get involved with CoinDesk?**

Ryan: At the end of 2014.

Eric: What was it like working there at that time? It must have been interesting to work at such a dominant company in the early stages of the industry.**

Ryan: Indeed, because at that time, DCG was just a diverse startup team that was involved in very early investments in companies like BitPay and Coinbase. Then, there was a spin-off operational subsidiary called SecondMarket, which was a marketplace and broker for trading illiquid secondary securities, like auction rate securities; they sold a lot of secondary Facebook stock before its IPO, and that business made a lot of money.

However, the market changed, and now the scale of such businesses is very limited. Fortunately, the early team recognized Bitcoin, and as Bitcoin rose, the team began to fully invest and used Bitcoin as a pivot for the brokerage, eventually creating Grayscale, which is now the largest cryptocurrency asset management company in the world.

The first 12 months were basically just about completing the merger, raising funds for the new company, spinning off the old entity, and just maintaining daily investment flows to ensure we continued to build networks. As goals were achieved, we entered a new operational phase, considering our growth from the perspective of the new subsidiary. The initial goal was for me to split off multiple subsidiaries; some of the subsidiaries we discussed early on are now subsidiaries of the DCG brand. We talked about mining businesses, and years later, obviously, Foundry has expanded. We talked about acquiring exchanges, and eventually, Luno was acquired three years ago. But the first was CoinDesk. We scaled that business and turned it around, and I personally left the team in 2017.

Eric: What led to your decision to leave?**

Ryan: At that point in time, it was time for me to go. Let's not discuss that. I will save some things for my memoir.

Eric: When I try to recall the ICO craze, I can imagine the hype and excitement, while you pragmatically thought it couldn't continue. It seems that the initial vision of Messari was to be a beacon for these issues. When you decided to launch Messari, how was its initial vision established? What was it like at that time, and how has it changed over time?**

Ryan: Our initial launch post talked about creating a decentralized EDGAR database for cryptocurrency assets. Some things were tailored for the assets owned by these communities, and the securities disclosure framework didn't necessarily make sense. To do this, you need to figure out what the key performance indicators and financial disclosures are. You need to do a lot of work on things like "what is the protocol description" and "what are the risk factors." This is a capital-intensive endeavor; you have to figure out who owns what and what they are selling. You need to be able to track things like corporate governance and corporate actions. We were a startup with a small team and a million tokens in circulation. So, we built on the experience of a volunteer analyst team that helped us fill the initial database. Then we began to recruit product and research teams.

We started picking different parts from these components, I would say, like a quarterly or annual report. Fast forward a few years, we have full teams working on all these different elements and covering hundreds of assets quite deeply at scale. But from day one, our model has always been that we want to build EDGAR because its foundation is really important; you need a foundation to build on, but there will be a corresponding SaaS product, a Bloomberg-like product that you will be able to sell to enterprises, investors, and those who need a more convenient source of information, a one-stop shop, and a sufficiently reliable data source.

The Potential of DAOs and NFTs

Eric: In your writings, you mentioned that Messari would work on building an operating system for Web3. What does it mean to build an operating system for Web3? What is the vision in this regard?**

Ryan: I believe DAOs will ultimately replace most forms of human cooperation, not just governments and governance, but also companies, nonprofits, investment clubs, and vehicles. I think everything is on the table. Any group that needs to adjust its spending or incentives and is managing some resources can benefit from a DAO. The problem is that the actual systems being used are very inadequate.

Think about it: in a decentralized organization, the authorized decision-making, authorized spending performance, and general accountability monitoring are worlds apart from a centralized company. It's clear; we all know this is impossible. You can't have a proxy vote every time you want to hire a new employee. So how do you manage the checks and balances of token governance with the day-to-day needs of the community to get things done?

We have seen this firsthand in both aspects of the business. How do you get information disclosure? Who will have the motivation to test and propose a reliable framework to understand the progress of projects? Right now, community managers take on this task, and one of the first services we provide for DAOs is essentially outsourced CFO or outsourced investor relations functions; we basically do all these quarterly reports on their behalf. We can do this because you can parse the blockchain, and we already have this large analyst team.

So, we have built the infrastructure to do this. However, beyond the services we can provide for DAOs, you also need to establish a pipeline that makes it easier for communities to operate in practice. I think this will open up a series of applications for our company. To truly unlock the long-term potential of DAOs, this will be necessary.

Eric: I'm curious about the timeline for this. I think the initial vision of DAOs and true decentralized autonomous decision-making, compared to what we have today, feels like you're betting on a management team. It starts to feel more like you are a shareholder with a board or a centralized group. Is this a transitional phase where we are stuck between the old world of organization and coordination and the new world? What does it look like to you when it reaches its fullest potential?

Ryan: I think we are in the early stages of a Venn diagram. The overlap between these two worlds is very, very small. But I believe that ultimately, DAOs and smart contracts will replace the backend of most traditional organizations. So it's clear that this is also true for the protocols themselves. I believe every company is essentially a market. Smart contracts and tokenized protocols are really good at adjusting incentives around different markets. If you think of every company as essentially a market with internal transaction costs, then the possibilities of what the backend of organizations using smart contracts and all the DAO infrastructure we see could look like become very large, and I think this will continue to build in the coming years.

Eric: I'm trying to wrap my head around the idea of viewing a company as a market. In the future, will the founder of Messari, the shareholder, and the visionary creating incentives, Ryan Selkis, no longer exist? Or will there be some indescribable change?**

Ryan: Theoretically, my existing investors, employees, and other shareholders could drop me at any time. The company is currently managed by me because I am doing well enough. I think future DAOs will be similar. No one would try to kick Vitalik out of Ethereum. Although he doesn't admit it, I think he owns at least 1% of the Ethereum network (value). I think we will see capable leaders of decentralized organizations, and these leaders will be given certain powers by other token holders.

Then they will be able to make decisions on how to deploy capital, including full-time resource budgets and how people get compensated, among other things. Therefore, I think the nature of work and employers will change, but labor is a fairly sticky concept; people will work on a project for a long time, and I don't think that will disappear.

Eric: Where do you see the most opportunities when you provide resources? Are these companies saying, "I think I want to convert what we have now into a DAO," or do they come to you from the start saying, "We are a DAO. We want to get started. Can you help us with this service"?**

Ryan: I mean, we are currently working with many DeFi protocols, many mature large L1s, and some large Web3 decentralized storage and media applications. It's a small mix, but I think this is the demand for most of these entities. How do you get consistent high-quality outdoor information for your project? Then when it comes to tools, DAOs themselves have only been functional for about 18 months. It takes time to build and scale decision-making infrastructure. We are still in the super early stages on both fronts.

Eric: So we have touched on DAOs and your vision for how to further build DAOs. When I look at the top three areas for you in 2022, they are NFT infrastructure for identity, DAOs, and cross-chain bridges. So, let's move to NFTs. In October, you commented that you were really bearish on NFTs. You hoped South Park would create NFTs, and then you would help out. Talk to me about your initial views, how your views on NFTs formed, and how it became a strong theme in your 2022 outlook.

Ryan: I wouldn't say I'm generally bearish on them. I think I have a short-term fear of the bubble around many digital art, PFPs, and NFTs. But more importantly, I am excited about NFTs as a data asset, and I have been excited about it from day one. I haven't invested in projects; instead, I focused on investing in the infrastructure of NFTs, which made me excited about the applications. It's around certificates and NFTs as components of digital identity, just as you mentioned. The reason for this is simple. I think how we share information about ourselves and, importantly, how people verify the credibility of that information largely comes down to certificates.

Right now, we use a very short list of certificates, such as: Where did you go to school? Where do you work? What clubs are you in? What status do you have in your community? This really gives a very superficial understanding of people's identities and their qualifications.

Then, of course, there are a bunch of other things. I think from the perspective of digital ownership, when it comes to "yes, you will own land in the metaverse," "yes, you will have unique digital skins for your virtual avatars," and obtaining all of this could be interesting. But in the future, I think we will see more things like Rabbit Hole NFTs, which are proof of authority or attendance, indicating that you have been there, you have done the work, or representing who you are.

Eric: On some sort of proof of knowledge, I am a subscriber on Messari, I am there, I am reading articles. There, perhaps, are some things similar to cookies and Web 2.0 that I am doing. I would be happy to share or provide information for your team, "Hey, Ryan, this is something Eric is interested in. Look at what he has read. See the types of knowledge he has accumulated from the Messari website." I just think it's a very interesting way to show how much work a person has done or how much they understand this space.

Ryan: I think that's a good point. In this case, you can think of NFTs as your own opt-in cookie, rather than trying to track you with third-party trackers on the web.

Eric: How do you view PFPs and art and the hype and bubble cycles?** I have thought about this. It is experimental. People are taking capital risks, and there is obviously a lot of speculation. But I am really glad to see these more real use cases that NFTs hold, holding my own search history medical records, and being able to opt into different algorithms, saying, "Okay, I want to know what my friends are searching for, not just the searches in the world." As an investor, how do you view this transition? It sounds like the infrastructure for NFTs is much more than animal JPEGs.

Ryan: The infrastructure will only be built when the actual NFTs themselves have a terminal market. I think this is happening within a predictable cycle, but you need to establish this liquidity foundation, with speculation as the primary purpose, and sustained enthusiasm to be able to enter the next phase of infrastructure. Using your NFTs for loans, collateralizing them, thinking about new forms of NFTs, not necessarily simple speculation. And when there isn't a terminal market yet, it's hard to build infrastructure.

Regulation and Its Impact on the Web3 Ecosystem

Eric: Let's talk about regulation. If we rank from the loosest to the strictest, I think NFTs are collectibles, the least concerning, followed by unregistered DAOs and DeFi. How do you view the Web3 ecosystem, and how does regulation affect its different parts?**

Ryan: I think your attitude towards Bitcoin is a bit extreme. It is now quite mature and will be treated as a commodity like gold. The regulatory issue with Bitcoin is whether policymakers will have a negative view of PoW mining. We now know there is community ownership, and it's hard to call these platforms securities because they operate like decentralized finance or the operating system of Web3. I mean, just the way information and value move on these platforms makes it hard to see something like Ethereum as a security. DeFi is a bit different because you are talking about protocols that actually move funds, and they usually have some type of withdrawal rate, with some fees returned to protocol token holders, who have governance rights and can control some parameters of these systems.

So, these look more like cooperatives or mutual aid societies. They do look a bit like securities. The problem is that our securities laws are outdated, and how do we adapt them to this new technology rather than trying to rely on 90s laws and 80s corporate cases to make judgments?

I think NFTs are relatively safe because no one is going to consider a monkey image as a security. This is also another reason we can treat NFTs as fundamental elements, because from a legislator's perspective, they don't carry the same baggage as fungible tokens. DAOs can go either way. But I do think it's interesting to use DAOs to replace existing organizational structures.

Ultimately, the pathway into the market will be like the limited liability companies we see. States like Wyoming or Texas will step up, and they will create a framework for DAOs to register as actual businesses. Then, over time, this will be standardized and gradually permeate both domestically in the U.S. and internationally as laws evolve.

Eric: Coincidentally, I was talking to a lawyer yesterday, and he mentioned that Bored Apes should be considered securities. But I agree with your point; how we define securities is the main issue because we have a whole new asset class that has been created. How do you see the cryptocurrency industry shaping this? Do you think we will truly see changes in securities laws, or will we continue to try to create products that in some way exempt or further distance themselves, and all of this will end up in court with people debating it?

Ryan: I doubt that securities laws will change. What we need are precedents or exceptions that basically ensure that cryptocurrencies are not necessarily part of that, or that they fit into a slightly different framework. Regulators, these regulated frameworks, I think we will argue in the rule-making process or in court, or perhaps there will be a comprehensive law passed at some point that applies. I don't think existing securities laws will be thrown out; after all, there are trillions of dollars in trading in public markets. But considering that global financial markets have sufficiently strong safeguards, they can certainly be reformed. I think we might need a whole new framework to deal with tokens and Web3.

Eric: Will most of this industry be regulated by the SEC, CFTC, existing regulators, or possibly a new regulatory body?**

Ryan: Right now, they will definitely listen to the old guard. For a new regulatory body to essentially control and unify oversight of the cryptocurrency market and basically take that power from the CFTC, SEC, etc., Congress would need to pass a bill. The default assumption is that we are trapped by the current hegemons, and we just need to figure out workarounds and points of cooperation.

Eric: You have very strong views on the SEC and Gensler, and you have been very open about it. How has this affected your business or your relationships with investors? Do people appreciate you doing this? I mean, I think as a participant in cryptocurrency, many people see you standing up to the big players, and a lot of people don't want to do that. They don't want the headache. They don't want to be attacked. What are your thoughts on taking this stance?**

Ryan: **Many institutions can't because they have a token, or they are running a regulated exchange. I think they have reasons to be cautious and take a slightly different approach. Even if they are behind the scenes, they are equally frustrated with overreach and lack of guidance or clarity. For them, being publicly criticized and then turning around to meet with the same group of staff is difficult.

So in our case, we are two things. First, we are not regulated by the SEC, which may be a reason we are not regulated. We are also meeting market demand by essentially building a product and doing a lot of the things they want to see, in a flattened information competitive environment, protecting investors, and trying to identify fraud, abuse, and misrepresentation in legitimate investments. I think more often than not, people are glad we are here standing on the front lines, but we continue to work thoughtfully, selectively choosing our battles, and when we choose them.

Eric: Creating EDGAR seems somewhat ironic now, as it is currently managed by the SEC, and you have had conflicts with Gensler, which are more personal or about the SEC?**

Ryan: **I think it is Gensler personally, in terms of how he manages things and the approach he takes. Then there are the securities laws. This is not about the SEC itself. It's not a problem with the staff. They are just doing their job with the authority they have and trying to get it right. I'm not saying anyone at the SEC is lazy or incompetent or anything like that. They are working with what they have. They are doing their best. But I think some of the leadership decisions are counterproductive and clearly lack good faith.

Eric: Let's use the spot ETF as an example. What do you think Gensler's vision would be? What do you think his goals are?**

Ryan: **Well, if it's a spot ETF, they are basically holding these applications hostage until Congress essentially delegates power to the SEC to oversee various exchanges in the world. Our thought is that we won't prove there is a spot ETF until the spot market is overseen by federal regulators; Congress needs to hand over power to the Agriculture Committee or the Financial Services Committee, which is essentially between the SEC and the CFTC.

As long as the market is properly supervised, then we can talk. I think that’s what we are doing now. Meanwhile, we have a toxic future product, and now we have a quasi-ETF in Grayscale products that is just hurting investors. So, is it more important to get what you want, which is on-site supervision and oversight of cryptocurrency exchanges and bringing them under your jurisdiction and institutional power, or is it more important to protect investors? This chairman has to choose the former.

Eric: Do you think this is the direction we are heading? Is the only way for this to happen to have oversight of exchanges? Or do you think there is a possibility of launching a spot ETF without that kind of oversight as the system changes?**

Ryan: **If they vote against Gensler three to two, then he can be replaced, but barring any surprises, we will likely be stuck with him for another four years since his term is five years long.

Algorithmic Stablecoins

Eric: Let’s talk about stablecoins. When I worked at Fidelity, we had a large money market business. So when I first encountered stablecoins, I thought I understood them. But algorithmic stablecoins confuse me. Help me understand what these algorithmic stablecoins are, how they work, why they matter, and why they are so important to this space.**

Ryan: **When I figure it out, I will let you know. These algorithmic stablecoins are important and interesting as a practice for the future form of stablecoins. Algorithmic stablecoins carry the risk of bank runs and black swan events; they can collapse and be destroyed at any time. On the other hand, stablecoins like USDT, you really don't know where the reserves are. I'm not saying they aren't there. I'm just saying physically, you don't know which banks they are using because from a regulatory perspective, they are playing a whack-a-mole game. Then, with USEC, the opposite problem. You know exactly where the funds are, but you can't guarantee that those funds are at your disposal, and the banks essentially don't consider them assets.

I think having this broad approach and experimentation is healthy. We will see what, if anything, the algorithmic implementations actually work long-term. But right now, Tether does have an impressive run. We have seen projects like FRAX and FEI working on the concept of value controlled by protocols and thinking more carefully about stabilization mechanisms. I think there are good teams working on this, and if it gets solved, it’s a trillion-dollar problem being solved. So it is absolutely worth it. I think it is necessary, especially considering the current fiat system and inflation rates.

Eric: What are your thoughts on the recent narrative around Luna and using Bitcoin as reserves? Is this something you anticipated would develop in this direction, or was it a surprising event for you?**

Ryan: **I think it is wise, and I think if we can start to decouple this industry a bit, having fiat-backed algorithmic stablecoins is a good thing. Now, whether Terra is safe and stable long-term remains to be seen. But I think Do Kwon is certainly an impressive entrepreneur, and the whole ecosystem is now thriving. You definitely don’t want to be suddenly stabbed one day when things are going well, so hopefully, we can avoid that. But algorithmically, stablecoins are one of those situations where you have to wait.

Eric: I have a question about the general narrative. At Coinbase, at Messari, I think narratives are important, and it’s really interesting. We talked about controlling the production of narratives and how these stories are formed. I’m curious about your views on the power of cryptocurrency media in cryptocurrency, and then how you see general media influencing cryptocurrency.**

Ryan: **The reason general media doesn’t understand cryptocurrency is that you aren’t allowed to play with it, use it, or invest in it. If you are always on the sidelines and never really participate, it’s hard to truly grasp what is interesting and exciting. I do think cryptocurrency media tends to be more targeted, not because the journalists are smarter or sharper, but because they can actually roll up their sleeves and play with the technology. There are some old-fashioned rules that you can’t own these assets and then write about them because of conflicts of interest, but conversely, without conflicts, there are no interests.

Currently, I think we are starting to see better, more balanced, and more thoughtful reporting on mainstream media because they realize the user base is very large now, and they can’t necessarily write it as a fringe group. They know it can get clicks and a lot of interest, especially from the enthusiasm of younger demographics. So I think over time, we will continue to see more and better investments that help bridge the gap.

Eric: In traditional finance, one thing that is always frustrating is that when you are a manager, you are basically taught to say nothing. Or if you do, you will be accused of "talking your book," or you said something negative about something. I think one of the things I absolutely love about what you do is that we are sharing analyst reports, what they hold, and very openly sharing your positions. Where did that idea come from?**

Ryan: **Well, basically, to be a good analyst, they have to actually use the technology and immerse themselves in the information flow of the industry to feel the market's rhythm. If you are really investing and you have the same feeling as others, whether in a euphoric phase, speculative phase, or then in a downturn, the reporting will be more on point.

So what we do is ensure that all of this is public, and our analysts are not allowed to trade, obviously, we get a lot of insider information that doesn't really exist in public agreements. But anything we write, we have trading restrictions, and then people have to share their holdings in their portfolios every month.

Eric: I love that. It allows readers to understand whether the author of the content they are reading has biases. I’m really curious about what excites you about building or seeing built in the next six months and the next six years?**

Ryan: **Let me first say what I want to destroy. I want to destroy the SEC. I hope it no longer exists and that the parts that are actually useful are auctioned off to the Consumer Financial Protection Bureau and the CFTC or any relevant agency that can absorb some of the fragments. As part of that, I want to see a better research and disclosure framework established, not just for cryptocurrency, but for the world. Because no one reads quarterly reports. In the internet age, you don’t need EDGAR files and paper documents that look like they do today. Therefore, I think establishing a more direct plain English investor relations system that still allows people to engage more actively in the governance of the companies or protocols they own is something worth striving for, not just in the next six months, but in the next six years.

Eric: Will we see you run for president? I don’t know if you are joking, but you clearly have a following. People believe in you, and many would like to see some changes like that.**

Ryan: **No, I don’t have that plan. My life is full of fun. But I am still young, and what happens in the future may only time will tell.