Beyond Bitcoin: A cryptocurrency hedge fund manager looks to the futurePublished date: Jul 27, 2016
Daniel Ruskin was 14 years old when he planned his first IPO. His company was a cryptocurrency arbitrage outfit — he’d been buying up web storage and servers in U.S. dollars and then selling them for Bitcoin. In an effort to scale his business and raise capital, Daniel had decided he would need to sell some shares. Filing with the S.E.C. was plainly out of the question, but the teenager knew another way of publicly auctioning securities: the blockchain.
A blockchain (in this case Bitcoin’s) is essentially a digital ledger. It’s a public dataset that records individual transactions of cryptocurrency. Its simple but airtight protocol enables a decentralized, peer-to-peer system on which users can trade digital money, like Bitcoin, without the burden of having to trust one another. Once traded, the money can’t be clawed back.
To skeptics outside the Valley, the belief that this virtual cash and the backend architecture that supports it might displace the dollar is almost as ludicrous as a 14-year-old boy who thinks the Fed is encroaching on his allowance. But to blockchain enthusiasts like Olaf Carlson-Wee, it represents an ingenuity that will elude the skeptics until it upends them.
Olaf shares some of the younger boy’s wunderkind qualities. At Vassar, Olaf wrote his thesis on how Bitcoin would change the world. From there, he became Employee #1 at Coinbase, an Andreessen Horowitz-backed Bitcoin startup with a strong claim to being the most legitimate company in the cryptocurrency space. By the time Olaf was recruiting Daniel, Olaf had been promoted to Head of Risk at Coinbase. The startup had taken an interest in the high schooler who was bootstrapping an IPO.
“This is where real crazy innovation is happening, in this 14-year-old’s basement,” Olaf says. “When people want to know what’s happening in the future and what’s next, this is the type of person that is determining that. It’s not the innovation team at some bank trying to make a better Automated Clearing House protocol.”
There are certain irregularities in recruiting a 14-year-old. Daniel’s guardians would need to sign a permission slip. So would his school principal. Nevertheless, the kid understood the Bitcoin economy intimately and had showed technical promise. Speaking in rapid succession, Olaf pauses here to clarify.
“We hired him.”
There aren’t many people who understand the Bitcoin landscape, but there’s an immense amount of opportunity for those who already do. The payment capabilities are becoming more complex. Blockchain technologies are rippling out from finance, into other institutions. To Olaf, writing cryptocurrencies off as fringe would be like downplaying the internet in 1991: easy, but wholly ignorant of what comes next.
“A lot of people want to see it work before doing something in the space, even as simple as investing,” Olaf says. “The time for entrepreneurs and developers to start working on this is now.”
Who the hell is Olaf Carlson-Wee?
In many ways, Olaf resembles a hacker straight out of Netflix central casting: stone-cut Nordic jawline, black sweater, intentionally distressed pants, fingers glittering with rings. Forbes mythologized him as the “man who has been living on Bitcoin for three years.” He somewhat infamously wired his life savings to Japan to purchase Bitcoin when it was trading at $15, only to watch it fall to $2 shortly after (Today it’s trading around $650.)
But Olaf is nothing if not a smooth operator. What comes to mind when he opens his mouth is an economist. He name-drops ineffectual, grandfathered Fed policies left and right, and then recuses himself – he’ll save the soapbox for another time.
Two weeks ago, he stepped down as Head of Special Projects at Coinbase to found Polychain Capital, a cryptocurrency hedge fund. Understanding this stuff a lot better than anybody on Wall Street, Olaf’s betting big on cryptocurrencies and the systems that enable them.
“A lot of people think blockchain technology is here to stay and that this is a good investment broadly speaking,” he explains. “I want to build a diversified portfolio that invests in the promising technologies early, based on my knowledge of the space, and which balances those carefully. No matter which technology ends up succeeding over the five or ten-year horizon, this fund will do very well.”
His bullish outlook doesn’t only have to do with his own expertise, but also the cryptocurrency economy at-large. Bitcoin’s market cap is hovering around $10 billion. Ether’s, which is built on the Ethereum blockchain, slingshotted to $1 billion after seven months, growing at a much faster clip than Bitcoin did. It’s not just an opportunity for investors, either.
Coinbase has already proved out some of cryptocurrencies’ potential for developers. The company acts as an exchange on top of the blockchain, helping users to sell and buy Bitcoin and Ether. It has an API that enables other developers to easily integrate blockchains into their products. With Coinbase, your business can accept Bitcoin and then convert it into USD.
Efficiency gains in the payment space are cryptocurrency’s clearest and most-present advantage. Olaf guesses that the layperson, when she uses cryptocurrencies, probably won’t know it. She might welcome its velocity, anyway.
Example: Bitcoin can move internationally and instantaneously in a way state-regulated currency can’t. Olaf imagines mobile payment apps like Venmo integrating Bitcoin into their product to process small transactions instantly, doing away with two or three-day waiting periods. The user would be comfortably abstracted from the unknowns of cryptocurrency, but there would be efficiency gains for the app developers (and relatively little to lose).
Most blockchains are fully public datasets on top of which any number of companies could build abstracted layers, just as Coinbase has, and so it’s a wonder more haven’t. The trouble for most is not knowing what comes next.
That’s why Olaf is excited. Listing off the different ways Bitcoin can enhance present technologies, he betrays a small tell of holding back. A curtain of Minnesotan politeness draws over him whenever he gets ahead of himself. He carries some aspect of the benevolent professor, super-accelerating his yeses and exactly’s as his student (me) gets closer to his vision for where the blockchain and cryptocurrencies can really go.
He gestures to the efficiency gains in payment and then tables them: “All of that is much less interesting than what cryptocurrencies are going to enable that couldn’t previously exist.”
Why does my thermostat need to pay my refrigerator?
Ethereum is the shiny, new blockchain. It’s like Bitcoin in its basic protocol, but Ethereum has an additional functionality for developers : smart contracts. Smart contracts are scripts of code that live on the Ethereum blockchain and autoresolve in an if/then capacity.
You could think of these like a Kickstarter project protected against disputes: once the smart contract is on the blockchain, users can’t retroactively alter it.
“You could say, if this Ethereum address has at least 100 Ether by this date, then send it to address X,” Olaf says. “If it doesn’t have 100 Ether by this date, then return the funds to everyone who sent Ether to it.”
He’s only offering Kickstarter as a friendly example for advancing his argument. Ethereum has unlocked so much more than minor financial logistics.
“I could see a lot of legal work being replaced by smart contracts,” he continues. “When you sign a paper contract, you’re just agreeing that if it’s broken, you could take that to a judge, and the judge could then penalize me if I violated it. With smart contracts, you don’t need the judge a lot of the time. If someone breaks the contract, it self-enforces. For example, when you enter into an agreement with another company, in a SaaS product, the penalty for not paying is already built into the software.”
The reneged contract won’t be a matter of he said, she said bickering. Instead, it will course-correct based on preset terms. Perhaps the contract knows to settle up, regardless of the buyer’s reluctance.
Some artful lawyering is lost in a completely logical, self-enforcing contract, but this technology will create something more democratic. In the current realm of claims court, large companies can win losing battles by simply bankrupting their opponents with legal fees. A contract on the blockchain would null and void that entire arms race.
With the hedge fund on the horizon, Olaf can’t wholly disparage lawyers; he needs one. He’s also skittish on fortune-telling one way or another. While he can envision several different futures for blockchains, he doesn’t want to pick the wrong horse. That’s why he’s dreamed up a stable full of them.
A blockchain like Ethereum, he explains, can be built into a product’s backend almost like an API. In this vein, he’s particularly excited about machine-to-machine programmatic payments. Ethereum, the argument goes, could represent a sophisticated logic inside the Internet of Things. Basically, it could let Appliance A pay Appliance B without ever getting humans involved.
“Now this sounds a little crazy at first glance, because why does my thermostat need to pay my refrigerator?” he says, referring to the Internet of Things in the home. “But when you think about driverless cars and auctioning for the fast lane in real-time, things get seriously interesting. How will autonomous cars negotiate traffic? I could imagine a whole payment layer. You can say, I’m in hurry, or you can say, I’m in the backseat. If you say, I’m in the backseat, maybe you earn 50¢ on your commute every day.”
When Olaf frames it like this, it seems obvious. Especially so, when considering how small the buy-in is for a Tesla or a Google–or you. The blockchain is completely public, which enables easy access and fast progress (“The open network is where the developers go, and so that’s where all the cool stuff happens,” Olaf says matter-of-factly). But the strengths of a blockchain are also its weaknesses. It’s vulnerable to hacks, a fact Olaf has to heed.
In 2014, $460 million disappeared off Mt. Gox, a Bitcoin exchange. Last month, $150 million was drained by a hacker from The DAO, a smart contract masquerading as a venture fund on the Ethereum blockchain. As cryptocurrency investors and developers try to pull off collaborative feats of great magnitude, the risk of hacks will become more serious.
Blockchain technology, for all its wonders, is still failure prone. Seeing as financial vehicles like these will be essential to Polychain’s success, Olaf has a vested interest in eliminating their natural risk. He had his doubts about The DAO. He spectated, but stayed out of it. The contract’s breaches have vindicated that decision.
It’s an unhealthy precedent all the same. What’s to prevent investors and developers from flying into a panic over these breaches? If one publicly available smart contract can have flaws, how can something like Ethereum be safe?
Olaf believes that developers will learn how to create airtight smart contracts that are well-tested against hacks. Every time a smart contract is exploited, developers will be able write up a stronger one, until one iteration proves impenetrable–then that will become the legacy piece. Following from this, the problem is building complex smart contracts for each new use. When you consider Olaf’s lane-auctioning cars, there’s too much liability in waiting for a few hacks to smooth things out.
“We are going to move towards a system where smart contracts are like Lego pieces,” he says. “They will be incredibly standardized and automated in this bulletproof way over the course of years. Then, people are going to combine those basic pieces, maybe in a simple user interface, in order to create more complex emergent behavior.”
As these Lego-like contracts amass, blockchain developers will attempt greater complexity with relative ease. Again here, Olaf meets prognostication with a shrug instead of a wink. He has a really strong feeling, but he doesn’t promise one future over another. Some 14-year-old is just as likely to stumble on the next big thing in Bitcoin.
Three years after being hired, Daniel has become one of Coinbase’s top developers, but his example still attests to the power of intuition in lieu of institutional knowledge. The beauty of cryptocurrencies is that all there is to know is in the open, but only those toying with it will have insight.
“The data all being available doesn’t mean everyone understands it equivalently,” Olaf says. “The fact that it’s all publicly available is actually super-helpful, because it means that I can spend endless hours researching new technologies, which I do in my free time anyway. I can send an email to the guy that created it. But not everyone will know the difference between a real breakthrough and something that’s not that big a deal.”
What it takes is a kind of gutsiness and willingness to play. Olaf’s life savings could’ve easily been lost at the bottom of a Japanese Bitcoin exchange. They weren’t, however, and his decision to invest then is what’s given him remarkable insight into the blockchain space.
“The main thing is that you have to assess from first principles is what this thing is capable of instead of looking for historical evidence of what it’s capable of,” he says. “By the time there is evidence it’s all working and the world has adopted this, your opportunity passed long ago.”
Photographs by Karri Saarinen and Arto Alanenpää, made available under an Attribution 2.0 Generic license.