Who is the founder of Basis that tricked a16z twice?

Author: Jeff John Roberts, Fortune Magazine

Compiled by: Luffy, Foresight News

Located three miles east of Princeton University in central New Jersey, Carnegie Lake glistens with sunlight, surrounded by lush trees, and is home to wildlife such as swans and herons. Many of freshman Nader Al-Naji's mornings in 2011 were spent here, training at dawn with other members of the rowing team. Many of his Princeton rowing teammates later achieved great success, becoming Olympians and executives at well-known companies like JPMorgan and Tesla.

Al-Naji is a true genius, holding a place among the elite in America. He pitched his vision of changing the world to Silicon Valley elites, and investors later described him as an unconventional startup founder. Al-Naji ultimately convinced institutions like Sequoia Capital, Google, and Bain Capital to invest hundreds of millions of dollars in his startup. But his bold vision was built on fantasy.

Al-Naji's first startup attempted to create an incredibly promising cryptocurrency company, but he failed, claiming to investors that it was a learning experience. Soon after, he re-emerged with a bolder plan: under the name "Diamondhands," he launched a social network that commodified other people's social profiles for cryptocurrency trading without permission. This project also ultimately failed.

Despite two failures (which, in hindsight, were based on far-fetched ideas), many of Al-Naji's supporters continued to believe in him. However, in July of this year, Al-Naji's luck ran out. The Department of Justice arrested him and, along with the Securities and Exchange Commission (SEC), charged him with misappropriating investor funds, living a lavish lifestyle in Beverly Hills, and transferring $1 million in cash to family members. Al-Naji called these charges a "misstep" by the U.S. government.

In some ways, Al-Naji's antics are just another story of a cryptocurrency mogul deceiving supporters. But it raises a deeper question: how did Diamondhands deceive these "smartest" investors in Silicon Valley? Meanwhile, it also placed one of the most famous venture capital firms among these investors, Andreessen Horowitz (a16z), in an awkward position: as a victim of fraud and a witness in the lawsuit.

Nader Al Naji, Founder of Basis

Princeton Days

Nick Bax is the CEO of a cryptocurrency forensics company and often testifies as an expert witness. Reflecting on the grueling training days at Princeton University, he recalls spending 25 hours a week training, with ambitious young men always vying to outdo each other. Even among such a group, Al-Naji stood out.

"Everyone knew Al-Naji," Bax said. "He rowed fast and was outgoing. We knew he was ambitious, and even by Princeton standards, he was exceptional."

During his time at Princeton, Al-Naji had a unique hobby: cryptocurrency. According to his LinkedIn profile, he graduated a year early with honors and "mined about 23 bitcoins using free campus electricity."

After obtaining a degree in computer science, Al-Naji's career path followed that of many other top Ivy League graduates, working for well-known companies in finance and technology, such as hedge fund DE Shaw and Google. However, in mid-2017, Al-Naji left the search giant to start his own venture. He became the founder and CEO of a cryptocurrency startup called Basis.

This new startup showcased the main characteristics of Al-Naji's projects: bold and disruptive visions wrapped in technical jargon, which, if you dug deeper, seemed too good to be true.

Basis was a new type of cryptocurrency stablecoin, supported not by the usual reserve assets but by a marvelous algorithmic power. If the price of Basis rose above $1, the system would issue new shares that could be redeemed for stablecoins, thereby lowering the price. If the price fell below $1, Basis would sell bonds at a discount, which could then be redeemed at full value.

Many were skeptical of Basis. One cryptocurrency observer called Basis a scheme to turn lead into gold, pointing out that Basis relied on a "first-in, first-out principle, typical of a pyramid scheme." (Three years later, in 2021, another algorithmic stablecoin project with the same design, Terra, defrauded investors of over $200 million, triggering a massive collapse in the cryptocurrency industry, vindicating Basis skeptics.)

Despite the shaky economic foundation of Basis, Al-Naji quickly raised $133 million from wealthy investors, including Andreessen Horowitz, Google Ventures, Bain Capital Ventures, and a former Federal Reserve governor.

However, nine months after successfully raising funds in October 2017, the Basis project failed. After the initial hype and a period of calm, Al-Naji announced the cancellation of the Basis project due to regulatory challenges and that he would return the remaining funds to investors after deducting incurred expenses.

However, a venture capitalist who invested in the project expressed skepticism about this public explanation, telling Fortune that Al-Naji chose not to continue with the Basis project because he believed it was unworkable.

Regardless of the reasons for Basis's failure, it is astonishing that a savvy group of investors was able to bet on a project that seemed to violate basic economic principles. One explanation is that the nature of venture capital is to take risks on seemingly crazy ideas. Another explanation is that investors valued Al-Naji as an individual.

Many venture capitalists heavily rely on so-called pattern matching: looking for entrepreneurs similar to those in previous successful cases. For Al-Naji, he was a perfect fit. In interviews for this article, two venture capitalists from different firms who supported Al-Naji's projects described him with the same phrase: "an unconventional actor." This description applied not only to his educational and work background but also to his confident demeanor.

Another venture capitalist who invested in Al-Naji noted that he resembled another notorious cryptocurrency figure, leveraging the venture capital community's preference for pattern matching.

"In hindsight, they share very similar personality traits. Al-Naji, like Sam Bankman-Fried, speaks too quickly, and you might not always understand what he's saying, but he gives off the impression of being a decent guy," the venture capitalist said.

A fourth venture capitalist, who had invested in two of Al-Naji's startups, offered a more measured perspective based on his previous assessments of founder missteps.

"Half the work in all these stories is figuring out whether someone is a psychopath or a narcissist," the venture capitalist said. "I never seriously considered Al-Naji to be a psychopath or a narcissist, but to me, he seems to lean toward being a narcissist."

Meanwhile, questions arose about how Al-Naji spent the funds he did not return. Al-Naji claimed he had returned over 90% of the funds invested in Basis. In 2021, he explained to TechCrunch, "The $10 million I didn't return to investors was actually spent on lawyers."

However, several of Al-Naji's investors found it hard to believe that a small startup could spend $10 million on legal fees in just a few months.

The Birth of Diamondhands

In 2021, the largest cryptocurrency boom in history was in full swing. Elon Musk propelled Dogecoin to new heights with his appearance on Saturday Night Live, and cryptocurrency enthusiasts rushed to invest millions in digital monkeys. In Silicon Valley and New York, venture capital firms had amassed billions of dollars to invest in cryptocurrency projects.

This was the perfect time for Al-Naji to take his next step. When he re-emerged, he did so under the name "Diamondhands," an anonymous figure. He would launch a decentralized social network and then disappear into the mists of the internet, much like Bitcoin's creator Satoshi Nakamoto did years ago.

Al-Naji viewed Basis as a breakthrough in the field of economics. His social network plan was even grander. Bitclout would disrupt companies like Facebook and Twitter with a new platform that had no control or centralized servers. It would operate "solely on code and tokens."

To launch BitClout, Al-Naji borrowed from Silicon Valley's so-called growth hacking techniques, scraping the profiles of 15,000 Twitter users to populate the new network. The website itself resembled a hastily made knockoff of Twitter.

The name Bitclout evokes Klout, a failed social network that ranked people based on their influence, which many criticized as "Yelp for everyone." Al-Naji took this concept further, encouraging Bitclout users to buy and sell tokens whose value would be tied to the identities of people on the site. Users had to exchange Bitcoin for the network's new cryptocurrency.

Like Basis, the idea seemed immature. First, no one could explain the technology that Al-Naji touted as "operating solely on code and tokens." Meanwhile, Al-Naji decided to pre-fill the network with existing Twitter profiles, which was understandably seen as a serious infringement of intellectual property.

Then there was the false mystique surrounding "Diamondhands," a name inspired by cryptocurrency slang referring to those who do not sell during market crashes, but this did not obscure the fact that Al-Naji was the driving force behind Bitclout.

In March 2021, when Al-Naji launched the Bitclout website, he shared the URL link with others, casually telling them not to spread it. When the link went viral, Al-Naji claimed it was an accident, although all signs indicated it was part of a growth hacking plan.

While the earlier failure of Basis might have deterred investors from Al-Naji, the cryptocurrency market had gone mad. Not only did well-known institutions invest in Al-Naji again, but they also agreed to participate in the identity-hiding scheme of Diamondhands.

Months before Bitclout's launch, companies like Andreessen Horowitz and Coinbase Ventures had struck deals with Al-Naji to purchase tokens at a pre-sale price of $6 (later investors paid $16). While many supporters of Bitclout also invested in Basis, the new project attracted newcomers like Sequoia, a cryptocurrency venture capital firm that later lost $214 million investing in Sam Bankman-Fried.

Like SBF in his early days, Sequoia released a flattering profile of "Diamondhands." The profile explained why BitClout had no executives, board, or any other standard company mechanisms for accountability.

"BitClout has no CEO, board, or shareholders, only token holders. They believe that an open, blockchain-based organization, whose direction is determined by the community, will outperform the traditional ad-driven business model of social media," Sequoia wrote, and the company did not respond to multiple requests for comment on this article.

After BitClout launched, early token buyers quickly made a fortune as the site's namesake token soared to nearly $200. However, the good times were short-lived, as Al-Naji announced once again that he would abandon the project, claiming it had always been a "beta version" that should not have developed to this point. Instead, he would invest the proceeds from Bitclout (whose token price had already gone to zero) into another project dedicated to decentralized social networking. Meanwhile, retail investors who exchanged Bitcoin for Bitclout tokens on the site found they could not redeem their tokens back for Bitcoin.

The SEC stated that Al-Naji raised $257 million by selling Bitclout tokens to investors and the public, and contrary to the declaration of "only tokens and code," he could directly use those funds. In court documents, the SEC accused him of using Bitclout proceeds to pay credit card bills and for a six-bedroom house in Beverly Hills, as well as gifting nearly $3 million to family members. According to court documents, the whereabouts of the remaining funds remain unclear.

Star Witness

a16z is headquartered on Sand Hill Road, a picturesque thoroughfare winding down from Interstate 280, passing Stanford University. Over the past decade, a16z has built a multi-billion dollar business empire, leveraging the immense success of early investments in companies like Facebook and Airbnb, and recently exerting influence in political and cultural spheres. The firm also actively and effectively promotes its own mythology, with some joking that it is a PR firm disguised as a venture capital company.

Recently, a16z has taken on a new, unexpected identity: in the case where the DOJ has charged Al-Naji with criminal wrongdoing, it has been labeled as the fraud victim "Investor 1."

a16z's role in this case is surprising, as it only invested $3 million in Bitclout. For a firm that often invests $100 million or more in startups, this is a trivial amount, and the company is sensitive to negative publicity.

"In general, funds do not betray the entrepreneurs they invest in. They just quietly absorb the losses," a cryptocurrency lawyer familiar with Bitclout told Fortune. "When a fund loses money, they do not pursue the entrepreneur's accountability; they just bear it themselves."

Venture capitalists interviewed agreed with this view, noting that companies are reluctant to engage in public legal disputes to avoid giving the impression that they are unfriendly toward the founders of the startups they support. According to the cryptocurrency lawyer, a16z's role as a witness may have been forced.

Renato Mariotti, a former federal prosecutor and now a white-collar defense attorney at Paul Hastings, stated that this arrangement also aligns with the DOJ's typical strategy in such cases. "Having the victim say 'I lost money, they lied' is more persuasive," he said.

a16z declined to comment on this article, but after the Bitclout incident, the firm seemed to harbor no ill will toward Al-Naji. In fact, a16z appeared to have agreed with Al-Naji's plan to invest Bitclout's funds into a new social networking venture called Deso Foundation. According to Crunchbase data, Deso Foundation is ostensibly decentralized and aims to support other cryptocurrency businesses but has only made three small investments, the most recent of which was in early 2023.

Deso's funding recipients include AODAO, which Al-Naji endorsed, a venture aimed at forming decentralized communities for people to invest in NFTs. In a 2002 interview, Al-Naji explained to me that DAODAO represents "the next opportunity for people to have true ownership."

In mid-July of this year, Al-Naji was arrested in Los Angeles, and federal court charged him with fraud. Mariotti stated that if Al-Naji is convicted, he could face 3 to 6 years in prison. Court documents show that Al-Naji's lawyers (he hired attorneys from several top law firms) are negotiating with the DOJ, but so far, no settlement has been reached, nor has there been a formal defense against the criminal charges.

Currently, Al-Naji seems unconcerned about his legal troubles. When asked to share his thoughts on the events, he politely declined.

"I really want to help, but I have to be cautious at this time. However, I believe this will be a thoughtful article, and I will definitely reach out to you as soon as I can tell the complete truth," he responded on Telegram.

Meanwhile, he is very active on a new social media platform called Diamond, and his fans are worried that his arrest may delay the launch of a token he promised called Focus. He has attempted to alleviate these concerns through a series of videos and text posts, one of which hinted that the U.S. government's charges against him are a mistake that will be clarified.

"But after some thought and discussion, the impact of the events is not obvious and may even have a positive effect. On one hand, if we launch Focus and there is negative follow-up coverage, it may harm people's willingness to share the app. On the other hand, it will also make more people aware of it," Al-Naji wrote.