Dialogue with a16z partner Chris Dixon: Thoughts on stablecoins, regulation, and the collapse of the crypto market

Original Title: “Opinion | As Bitcoin Busts, What's the Future of Web3? And What Even Is Web3?”

Original Author: Kara Swisher, The New York Times

Translation: Hu Tao, Chain Catcher

Chris Dixon is one of Silicon Valley's most enthusiastic advocates for crypto technology. As a general partner at the venture capital firm Andreessen Horowitz (a16z), he currently leads a16z Crypto, seeking investment opportunities in the Web3 space.

Last week, Bitcoin hit its lowest point in 18 months, Ethereum's value has dropped to a quarter of its peak in November 2021, cryptocurrency exchange Coinbase announced it would lay off nearly 20% of its workforce, and cryptocurrency lending platform Celsius paused withdrawals, with various black swan events occurring.

In this context, Chris Dixon recently gave an exclusive interview to New York Times reporter Kara Swisher, discussing Web3, stablecoins, regulation, and the crypto market crash. Here are some excerpts:

Kara Swisher: Can you briefly explain what Web3 is and how it differs from Web2? Can you give a concise explanation? This concept may not be easily summarized, but please give it a try.

Chris Dixon: Well, simply put, Web3 is a whole new way of building networks. Web3 networks are not owned by companies but by user communities. So, you know, you can have a social network where the community gains economic advantages through tokens and other types of mechanisms, and they control the rules of the network, thus combining the best features of openness. Web3 is like integrating the decentralized protocols of Web1 with the advanced modern functionalities of Web2.

Kara Swisher: In other words, there won't be a Google in Web3.

Chris Dixon: Hopefully not. In Web1, no single company benefited from the development of the web. I mean, there were individual companies on the web, but no company owned the web, right? In Web2, you have a set of companies that own the web. And I think we are now in an era where four or five companies control most of the internet. I think that's a bad thing for many reasons. I believe Web2 has made the whole thing less dynamic and interesting, but I think, more importantly, for creative people, if you do what you do, or if you're an artist, or you're doing—you're now being intermediated by these companies that are very, very good at extracting all the money.

Kara Swisher: Well, Andreessen Horowitz will be an important part of Web3.

Chris Dixon: Indeed.

Kara Swisher: That seems indisputable.

Chris Dixon: Indeed.

Kara Swisher: Yes.

Chris Dixon: We are part of Web3.

Kara Swisher: But the crypto market doesn't seem to be performing well these days. So let's talk about what's happening now. Can you explain the cryptocurrency crash and how you, as an investor, assess it?

Chris Dixon: Sure. Actually, I mean, I think my view right now—my point is that no one really understands the complete macro situation. To me, the market is not just about cryptocurrencies declining.

I mean, for example, if you look at high-growth tech stocks, they have also dropped a lot. I don't know what will happen next, but to me, this feels more like 2008, I would say. It feels like a macro thing, with inflation and everything else. Again, I'm not an expert in this area. I think the first things to be affected are high liquidity, high-growth stocks, like crypto and tech stocks. So we will see how it ends. But I do think—

I think there are a few things happening. So, for years, cryptocurrencies have certainly been very volatile, no doubt about it. This is an emerging industry category. I mean, we in the venture capital category place a lot of emphasis on early technologies being built, but these technologies may not be very mature at the start, so that is certainly a factor. But I think this is also a whole macro thing, and we will see how the macro economy plays out in the crypto market.

Kara Swisher: Okay. Let's talk about this crypto market crash. Bitcoin and the entire industry you have been investing in have been hit harder than any other industry. Currently, the price of Bitcoin is about $22,637. (Note: This figure is the BTC price at the time of the interview)

Just recently, in November 2021, the price of Bitcoin reached $68,000. At the peak of cryptocurrency, the overall market cap was basically maintained at $3 trillion, but now it's only $1 trillion. By the way, Ethereum's value is about $1,200, down from the $5,000 peak in November. As an investor, how do you address this issue?

Chris Dixon: Well, we have a venture capital model, right? So we are not a hedge fund, so we don't go buy a bunch of stuff and bet on momentum or anything like that. So we do it this way.

By the way, this is a very deliberate choice. We are very intentional about wanting to be a venture fund. We want to have a long-term vision. Our limited partners (LPs) are the same as the limited partners in our main fund, and basically, the term is over 12 years. We tell them, look—there will definitely be bad news in the market, but I believe in crypto, and I will dedicate my career to it, but if you are willing, you should choose to join, and we have actually attracted a group of limited partners.

Kara Swisher: So essentially, these people give you money, and you take it.

Chris Dixon: You could say that. Yes, the limited partners are the ones giving us money. So we have a group of investors who chose this model. I mean, they are all large institutions, I don't know the exact numbers, but they might put 0.1% of their endowment funds and other things into these types of projects— they know this is venture capital, right?

Kara Swisher: You are already a $4.5 billion crypto fund.

Chris Dixon: Yes, that is our newly raised fund.

Kara Swisher: Focused on blockchain investments?

Chris Dixon: Yes, we just completed fundraising for the new fund.

Kara Swisher: Right, just in time. Have you received a lot of calls today, this week, or recently?

Chris Dixon: From limited partners?

Kara Swisher: Yes.

Chris Dixon: Honestly, I haven't received a single call.

Kara Swisher: Really?

Chris Dixon: Yes.

Kara Swisher: Don't they see the current market situation and worry, saying: oh, oh, my God, this is bad?

Chris Dixon: In fact, many of our limited partners have been working with a16z for over 10 years. We have spent a lot of time trying to educate and help people understand things. I will hold some kind of webinar or something at some point, probably soon, to talk to people and things. But no, I think our limited partners are very patient.

Kara Swisher: So they are not panicking now? After all, when the market crashes, people tend to be scared.

Chris Dixon: Not at all.

Kara Swisher: So, do you still have a positive outlook on the crypto market? Is it time to double down on your thoughts?

Chris Dixon: Yes, I am very optimistic about the crypto market. I mean, the way I look at crypto, you know the history of the internet and technology, I think it is two independent processes happening. Financially, I feel that the cryptocurrency prices were too high last year, and of course, I feel that they have dropped too low this year. That’s my understanding; I am not providing investment advice. But to me, it seems very unstable in a way that is not entirely meaningful. In terms of products and technology, I consider: what is the pipeline for good products? How is the infrastructure? Is it being built? So you know, I place blockchain in history, and if you go back to World War II, every 10 or 15 years, there is a new wave of computing. I have spent a lot of time thinking about this and reading its history.

Every wave has what I call an incubation phase. Take mobile computing as an example; we saw companies like General Magic emerge. I think it was around '93 or '94, right? That early. The other day I was watching "Die Hard," for some people—not "Die Hard," was it—"Lethal Weapon."

Kara Swisher: You've seen this before. But let's focus on this news first. I want to draw an analogy to something else, like the crypto bank Celsius stopping withdrawals for nearly 2 million users, and the cryptocurrency exchange Binance temporarily halting trading. It feels like we've all seen "It's a Wonderful Life," and we know what a bank run looks like, right? What do people think when this happens?

Chris Dixon: Well, I think we should talk about regulation. I think a lot of the issues here revolve around the fact that there is not enough regulation around these things. We are not directly involved with Binance, Celsius, or Terra or any of them, but my point is that, overall, we have received almost no guidance from regulators, and what they have been doing is actually what is called enforcement regulation. So there is selective regulatory action. I have worked on the board of Coinbase for a long time, and what frustrates me the most is that they spend a lot of time and money complying with regulations, and then they always have some kind of offshore competitor that ignores the rules. What ultimately happens is that for whatever reason, regulators spend all their time on Coinbase. Let's take stablecoins as an example; look at how Terra Luna has made headlines, right? I think U.S.D.C. is the gold standard for stablecoins.

Kara Swisher: Explain what USDC is. Is it a dollar?

Chris Dixon: USDC is a blockchain token worth $1 because they actually have $1 stored in the bank, right? And it is audited. Like, is it perfect in terms of regulation? I don't know. Maybe they could upgrade a bit.

Kara Swisher: USDC is considered one of the safest stablecoins?

Chris Dixon: Yes. But I mean, they do have a dollar in the bank. This is very, very different from some of the so-called uncollateralized stablecoins, which have nothing in the bank. Yes, uncollateralized stablecoins are just backed by another token. Then they have a bank run. So I think in a wise regulatory regime, it is the regulators who distinguish between these two things, right? They would say, well, there are rules.

If you are going to call yourself a stablecoin and you are going to market it and you are going to say it is safe—I think the worst part is the marketing to consumers—you need to do something, but those rules do not exist.

Kara Swisher: So let's talk about the 2008 analogy and mainstream cryptocurrencies. To what extent is the current market crash a recognition of systemic risk? Some people compare it to the 2008 financial crisis; do you agree? Others feel that the crypto market is still a small area, after all, real estate is a $43.4 trillion industry, and gold has a market cap of $10 trillion. Of course, those have also experienced significant volatility, especially housing.

Chris Dixon: I think as of today, the total market cap of all crypto assets, including Bitcoin, is about $1 trillion, which is about half the value of Apple stock. But I mean, literally, the crypto market is insignificant in the global economy; it is small compared to housing, credit, and stocks.

Kara Swisher: But from your perspective, is this the "2008 moment" for cryptocurrencies?

Chris Dixon: Well, when I was doing it in 2008, I thought more—I mean, like I said when I talked to broader friends in finance compared to cryptocurrencies, I mean, since 2008, I have never seen such negative sentiment. It feels apocalyptic. I don't know if you've had that experience; I am surprised by the level of negativity from people.

Kara Swisher: Right, right, is it too early to say how great crypto is now?

Chris Dixon: I am not saying how great crypto is. But look, I think—let me say something else, I think there are really two factions in the crypto industry, right? There is one faction that we consider ourselves part of, which is the Web3 Builder faction I described earlier. Then there is another side, which I call the "casino." I generally do not like those who bet on crypto, and I do not support them. I do not like these promotional ads; I do not think they talk about innovation but send the wrong message. I think these things are bad, and I don't know if they need to be regulated or anything else.

I think the core technology is very important, and in the short term, we need some wise regulation. I hope to see a balance so that we can still build what I described. We can build social networks and markets and all sorts of new things. And look, I think this is the most important thing to balance the power of big tech companies. There are no other credible disruptive competitors—in my view, there are currently no other disruptive technologies that really have a chance to beat these companies other than Web3.

Kara Swisher: However, Jack Dorsey (whom I call a crypto evangelist) also opposes investing like you do; he is against centralization.

Chris Dixon: We are being attacked from all sides.

Kara Swisher: So let's talk about the idea of fraud and scams. We encounter many people who say that cryptocurrency is a massive scam? There are also a lot of plagiarism issues; can you elaborate on that?

Chris Dixon: Yes. Look, as I mentioned, I think regulation would be good. I think there are a lot of these things. I mean, look, there are many problems. We probably have 80 crypto investments right now, and they are all real entrepreneurs who can pass any test from any venture capital firm.

For example, we invested in a company called Uniswap, which pioneered something called decentralized exchanges. I won't go into detail. But what immediately happens is they get copied because everything is open source, so they were copied by Sushiswap, right?

Meanwhile, Uniswap, they are—I am in New York, and they are in New York. They are on the streets of New York. They are in the office. They are the most serious, geeky, great entrepreneurs you have ever seen, and they have a legal team. Then they have all these deceptive clones, so I think it is necessary. Frankly, it is frustrating, but it is also competition.

Kara Swisher: They have to deal with it. You have actually seen it in some at least relevant issues, just like you said, in your recent investment, the plagiarism clone, OpenSea. It’s like the eBay of NFTs. The blockchain verifies a lot of scam crypto security vulnerabilities, but it is actually not secure. When it is an open season like this, how do you deal with it? What is the mechanism for doing so?

Chris Dixon: Well, OpenSea is an example. We invested in them about a year and a half ago when they only had 10 people, and now they have hundreds. If you look at their executive team, they are hiring from Facebook, you know, senior people from Facebook, Lyft, and a bunch of other places. In 2020, OpenSea's GMV numbers were low, but in 2021, they reached hundreds of billions of dollars, and they are growing at an amazing pace.

Look, if you know Devin and the CEO of OpenSea, they are very, very serious, well-meaning entrepreneurs who are building things as fast as they can. But it is not perfect. Its growth is very rapid. Look, I have a bias, but I feel that some of the reporting only focuses on the negative things.

Kara Swisher: Can you explain what a DAO is to those who are unfamiliar?

Chris Dixon: Sure, a DAO is—a decentralized autonomous organization, basically an internet-native organization based on blockchain that can—whatever the organization can do. They can create software, they can, you know, play esports, they can do anything. But they are a group of people coming together.

Kara Swisher: Right.

Chris Dixon: A community coming together.

Kara Swisher: Yes.

Chris Dixon: I think that’s cool; think about it— to me, Wikipedia is one of the greatest miracles in the world. In fact, a group of people on the internet who are completely anonymous can come together and create what I think is a very good information resource.

I feel that having this "crowdsourced" encyclopedia now is a miracle, but Wikipedia runs out of money every year, right? Thank God, Wikipedia as a product doesn’t really need any product development. Yes, if they tried to build a search engine like that, they would eventually run out of all the investment and lose the game. So DAOs are exciting; we now have a great internet-native behavior where a group of people comes together. Unlike in the past, they can now own resources, which is an investment opportunity; that’s how I see it.

Kara Swisher: Anyway, Chris, thank you very much for the interview; I really appreciate it.

Chris Dixon: You’re welcome; thank you for having me.