Coinbase first-hire and investor dishes on the future of crypto

May 28, 2021, 2:30 AM UTC

Olaf Carlson-Wee grasped the potential of cryptocurrency before most people. A longtime believer, he wrote his college thesis about Bitcoin and later became Coinbase’s first hire.

Unlike some early dabblers who got washed out of the industry in one of its many down-cycles, Carlson-Wee’s faith never wavered. He stuck through the exuberant highs and chilling lows. In 2016, he left Coinbase to start an investment fund of his own, Polychain Capital, which has since become one of the earliest backers of some of today’s hottest crypto projects.

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Since so many newcomers are now entering the industry, Fortune used the opportunity to ask Carlson-Wee to share his insights, expertise, and forecasts for the future of crypto. Among other beliefs, he’s betting that decentralized web applications will burst out of the financial world and become the web’s next big thing.

Here is that conversation, edited and condensed for clarity and concision.

Fortune: You have a knack for being ahead of the curve. Where are you spending your time now?

Olaf Carlson-Wee: We’re in this phase that’s really exciting for me as an investor where we’re seeing the early stages of new types of apps that are uniquely possible with these new protocols and technical upgrades. [Carlson-Wee namedrops some projects and portfolio companies, including Filecoin, Polkadot, Dfinity, Solana, and various Ethereum “layer two” systems.] It looks and feels in a lot of ways similar to early Ethereum. It’s a little bit like how I was spending time in DeFi [“decentralized finance”] in 2016 and 2017, before the word DeFi ever existed.

What should people be paying attention to? Is there a particular area you think is going to pop, or burst out into the mainstream?

We have some ideas, but, like Ethereum in 2015 and 2016, it’s pretty blurry. It was not obvious back then that DeFi and NFT’s [non-fungible tokens] and crowdfunding would be big categories. It really wasn’t obvious. I say that as somebody that spent all my time tracking that area and trying to figure out what was going to be big. I think over the course of the next year, I will converge on confidence around a handful of use cases, but right now it’s very much in a rapid prototyping and experimental phase.

If you had to place your bet on something right now, what would you lay it on?

DAOs [“decentralized autonomous organizations”] owning web applications is something we’re very excited about. Today, DAO ownership units are, to me, the second major asset class that has come out of this whole area. The first asset class was what we’d call a cryptocurrency—stuff like Bitcoin, like Ethereum. DAO ownership units are tokens like Compound, like Liquity, where there is an underlying financial product, like a lending system or a trading system. Then there’s the DAO that sort of owns and operates that underlying financial product. DAO tokens are very different from cryptocurrencies. They sort of represent an ownership stake in that underlying financial product, whereas Bitcoin is more of like this gold-like, more speculative-style asset.

DAOs are big in DeFi right now. What’s their ultimate potential?

That DAO model can be expanded way beyond financial products. As more expressive platforms emerge, we’re going to see more web-like applications that look and feel like a website or a mobile app and less like a financial protocol. But these apps are going to be owned and operated by DAOs much in the way that these DeFi and financial protocols are. That’s probably my number one thing that that I do have confidence around.

One example of this might be like a Facebook without Facebook, a sort of decentralized social network, right?

Yeah, but I think it might start even more basic, like a decentralized Imgur, just a photo-hosting site or something. If you really look at everything that Facebook does, it’s a very complicated application. I think a Twitter or a Signal, a messaging app, might be a better example of a narrow kind of simple application that could be an early target for a decentralized system to operate and for a DAO to own. I think over time you move to more expressive, complex web applications, like say a Facebook or an Uber. But those are not likely to be the early use cases here.

A few years ago, Telegram said it was going to do an ICO [initial coin offering]. Kin did one and got sued by the SEC. Facebook tried Libra. Messaging apps were all looking to layer crypto on top. This sounds more like applications being built from the ground up using crypto.

With the benefit of hindsight, a lot of stuff was directionally right, but not implemented correctly. In 2017, we saw a lot of what were called “app coins,” a coin that would be attached to some sort of application. The problem was a lot of times that didn’t make sense. That you had to go out and acquire some new app coin to use the app added a lot of friction. People didn’t want to own it. They just wanted to use the app.

How are things different now?

Now we have a better economic model for these types of apps. Things like Compound have a token attached to them, but you don’t need the Compound token to use Compound. The token just represents ownership in the DAO, which accrues value from the success of the underlying financial app. The Telegrams and the Kins and everything of that previous era really weren’t designed properly, from an economic perspective, but we’ve come further now.

As someone who has been investing in crypto for so long, how much of your net worth is in crypto today?

Man, it’s somewhere between 95%-plus.

Are you planning to buy, sell, or HODL?

I’ve always been a holder. When you’ve been through as many cycles as I have—I’ve been through the 2011 cycle, the 2013 cycle, the 2017 cycle, and now we’re in the fourth big adoption cycle—I would say, it really starts to feel inevitable. This is the fastest growth and highest compounding investment area and industry in the world, and it has been for 10 years. I have higher confidence than ever. I think a lot of the other people that have been in this for a long time feel similarly.

As Coinbase’s first hire, were you pleased by its market listing? Did Coinbase do the right thing, or was it a missed opportunity to pursue something more crypto-native?

I have two views. I’m happy that Coinbase took that path, because for a lot of people it legitimized the whole industry. They’ve always been a white knight, doing things the right way. I think it’s funny that we talk about a direct listing as traditional now—of course, everything’s relative in crypto.

Now, on the flip side, had Coinbase listed the Coinbase asset on Coinbase and done a sort of IPO on their own platform—giving people an ERC-20 [Ethereum-based crypto token] version that represented the stock or equity, which could then be plugged into the wonderful world of DeFi and crypto and everything—I think it would actually be trading at a significantly higher price.

Presumably, there are more investors out there who are comfortable with traditional stock trading than there are Coinbase users buying and selling crypto, no?

A lot of people don’t realize that crypto is now one of the most liquid asset classes in the world. Bitcoin-USD is one of the most liquid order books in the world. You can compare it to literally anything. A Coinbase token would plug into all of that. That means international traders and especially people with access to leverage and more exotic financial products, with access to DeFi, they would be using it. I think, in a way, crypto is the best market to be plugged into for an asset, period.

Curveball time—as a former lumberjack, what do you make of the price of lumber these days?

I have no opinion—zero. I did not navigate any aspect of the business side. I was just doing manual labor.

Okay, but more seriously, a lot of people have been pointing to the rise in commodities’ prices as an indicator of inflation. That feeds into the whole Bitcoin narrative of needing a hedge against inflation. How much credence do you give that thesis?

The main thing I’ll say is the primary way inflation is measured by quote official sources is in the Consumer Price Index. It’s very obvious to me that the way we are seeing inflation is through asset price movement, more so than the Consumer Price Index. Therefore, these quote official sources are chronically under-reporting the true rate of inflation.

I take it you subscribe to the bitcoin-as-inflation-hedge thesis?


Will this crypto bull run mimic past ones, where there is a peak and then a fall-off that’s higher than the previous leveling off?

If you look at these kinds of bull runs, historically, the peaks were at huge multiples of the previous highs. In 2011, Bitcoin peaked at about $30. The previous high was basically $1, so call that 30x. If you look at 2013, the peak was at $1,000. So, relative to that $30 previous high, that’s, again, about 33x. And then you look at 2017, which peaked at about $20,000 relative to the previous $1,000 high. That’s about 20x.

Right now, we’re at about a 3x from that previous high. I don’t think I would call that type of market activity we’ve seen exuberant. I would call it reflective of genuine progress in on-boarding users, building useful applications, and gaining real traction in blockchain-based applications unlike anything we’ve ever seen before.

Is that because Bitcoin is now reaching a level of maturity as a legitimate asset class that’s recognized by Wall Street, or is it because there is still so much higher to go in this cycle?

We’ve been talking for years, since that last cycle, about how institutional capital is coming. I can say very confidently—I mean, everybody knows this—it’s showing up right now. And it’s not done. It’s very much happening. It has not completed. I’m really bullish. Once we solve the user experience problems, it just feels like it’ll be a massive unlock.

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