Cryptocurrency and Blockchain: Where is it Headed?

This is PKF Texas Entrepreneur’s Playbook.
I’m Russ Capper, this week’s guest host, and I’m coming to you from the Gulf Coast
Regional Family Forum and my guests Chris Dannen and Brandon Buchanan, Co-founders of
Iterative Capital. Chris, Brandon, welcome to the show. Thank you. Thanks for having us. Tell us about Iterative Capital. So Iterative is a large-scale cryptocurrency
miner, investment manager and private digital exchange. Okay, that’s three separate categories right? It is. We do pretty much every line of business
you can do in cryptocurrency. Okay, let’s say we’ve got somebody that’s
not way up to date on cryptocurrency, explain a little bit more about the three categories. Sure. I guess we’ll start with mining. So
mining is foundational to the network. These are essentially peer to peer financial networks
where people can send payments back and forth, a lot like Fedwire or Swyft. Miners are the
entities in the network that validate and process transactions. That’s like being
a network owner so to speak. Okay. The other side of our business, we are also
investors as well, both on the venture capital side and then on the hedge fund side. When
we originated in 2016 we started off as venture capital investors. We made seed-stage investments
of blockchain focused companies, we eventually evolved to doing token offerings and now,
which is very specific proof of worth networks that we trade in. So as Chris said we have
the full stack, we go from mining to trading and also have a liquidity provider as our
digital asset exchange where we have outside clients we seek to buy and sell cryptocurrency
through us. Now in the mining category do you actually
do mining or do you just invest in mining companies? We actually do the mining. We actually mine, yeah. So we bought the mining hardware. Chris and
this gentleman by the name of Don at our data center have come up with our own internal
software to be able to mine different cryptocurrencies and we don’t participate in – there are
mining pools out there that people can just contribute money and receive back tokens but
we actually do the dirty work. When people are mining cryptocurrencies are
they mining Bitcoin or Bitcoin and Ether or multiple different cryptocurrencies or do
you specialize? We specialize. It really depends on your fundamental
view of the networks and what hardware you have at your disposal. So Bitcoin mining is
done with a specialized hardware that you have to buy from a select number of companies
in China. Ethereum and some of the other proof of worth networks that are ASIC resistant
– they’re resistant to specialized hardware – can be mined with off-the-shelf computer
components. We started as GPU miners because it gives us more flexibility; at this point
we’ve invested in ASIC so now we’re doing – almost all the networks that are worth
anything we’re mining And the mining process itself; I mean I think
everybody’s getting a picture that it’s a room full of servers that are working around
the clock and they’re actually working to find specific sequences of numbers and actually
alpha characters that have been originally formed to represent cryptocurrencies. Is that
accurate? For the most part. What’s actually happening
is the network is always trying to agree upon an order of transactions in a given 10 minute
period; a 10 minute period is a block. Sort of the way a day is a block of time in the
traditional banking system we deal in days, you deal in 10 minute blocks. So the idea
is the network is coming to a consensus about what is the order of transactions and by extension
what is everybody’s balance because these two things are inter-related. So essentially
mining is a process where the computers that all agree about the truth compete to essentially
randomly win a prize. So if you’re in the subset that gets the
order of transactions correct as a machine – which is not guaranteed because if you’re
very far-flung in location you might hear about transactions out of order owing to just
network latency – physical distance. So once the majority of the network has coalesced
around an order of transactions for that 10 minute period the machines that got the order
right essentially just start guessing. And what they’re guessing is – they’re looking
for what we call a block header which is essentially a hash of all the transactions in that block,
but the block header has to have certain sort of arbitrary qualifications that a certain
number of zeros have to prepend the hash. And what the network does is if that number
is found – if the hash is found too quickly it adds a zero and it says okay, now you have
to find 10 zeros plus the hash and that just makes it slower. The point of all of this,
if it seems kind of obscure, is to regularize the network around this 10 minute block time,
no matter how much computing power is being thrown at that problem it needs to always
be 10 minutes and so that’s what’s happening. And so when you get one what happens? Does
just a digit go up by one or do bells go off or what? You get 12.5 bitcoins as of today. And you know – is somebody sitting there
watching a counter and knowing that you got it or do you just look at the end of the day? Well actually the way that people have set
up mining is a lot like office lottery pools; Brandon made reference to mining pools. So
the way that everybody mines now is you join a pool essentially – or you start a pool
– and so when a reward is achieved it’s split out among the people that bought the
ticket. So in practice you get regular small payments that you share with people in your
pool. I understand and hear a lot these days that
it’s not an inexpensive endeavor; you can’t do it with your home PC or anything like that,
we already mentioned rooms full of servers. It can be fairly expensive right? It can, yeah. Okay, and I heard you even in a talk recently
that you just gave the cost – the estimated cost – and what is that today? In the U.S. it’s about $5800 last I checked
to produce a bitcoin and that’s just averaging out North American electricity prices, higher
in some places, lower in others. That’s if you can actually get your hands
on these things. There’s great difficulty even getting GPUs or ASIC miners and so you’ve
seen this represented in the price of AMD and Nvidia and other folks that have the GPU
graphics cards. It’s a challenge to get it large scale. All right, so people watching are probably
thinking man, these guys know what they’re talking about to, I think it’s real interesting
to share your backgrounds. Brandon, share yours first. Sure. I come from a traditional finance and
legal background. I started my career as a securities lawyer at WilmerHale. I was doing
broker dealer regulation, white collar criminal law and securities law. From there I sort
of pivoted. I always wanted to do venture capital, I came along when it was sort of
peak of the economic downturn. That’s even how I sort of stumbled into securities law
when I wanted to be a corporate lawyer or a banker. So I switched and I was doing M
& A banking at Credit Suisse for about a year and a half, which is around the time that
we met in 2012. And then from there you can see sort of a
straight line trajectory towards me and venture capital. So I went to Gunderson Dettmer. I
was a venture capital lawyer doing fund formation, venture financing, corporate governance for
all sorts of startups. Primarily in New York so I touched on Union Square Ventures, FirstMark
Capital, Tiger Global, betaworks; a lot of the big companies that came out. I was part
of the team that sold Tumbler to Yahoo. From there I joined Metamorphic Ventures, I was
the Chief Operating Officer and general counsel there. And then at the end of 2015 we both
left our respective venture capital jobs and started Iterative Capital. Throughout 2016 we were sort of on the road
trying to raise capital for this first fund. Incredibly challenging, at that time no one
had really heard about blockchain. Cryptocurrency was really this sort of – not an underground
thing but really only developers and engineers were talking about it. Investors certainly
weren’t putting money into tokens. So raising capital was a challenge but at the end of
2016 we closed a small amount. 2017 was a huge success and I think now you’ve seen
us build up the full stack of what our platform is; we’ve added employees, we’ve added
offices and it’s really been exciting. Wow, and you office in Los Angeles now. I am opening an office in L.A. I just moved
there in November. I’m still back and forth bicoastal with the guys in New York but we
actually did just get an office in L.A. off Comey Avenue with an investor of ours who
is one of the best architects in the world actually and I think top 10 in the United
States called M-Rad Architecture. So we partnered with them, you can imagine the facility looks
fantastic and it’s a great place to work. We’ll hopefully be expanding into London
by the end of this year. We certainly have an advisor out there, we have plans to be
out there, but we’ll continue growing and scaling. Quite a story. And Chris you’re in New York? Yes. Share your background. So I’m from New York originally. As Brandon
mentioned we were both working in venture capital when we decided to launch our own
fund. I was at a fund called Undercurrent Ventures which was a two-headed beast. There
was a consulting company whose primary clients were mega-corporations like Pepsi and AMEX
and GE BlackRock, GE Capital, and then it had a $20million venture fund. And what we
used to do was essentially look at the problems that we were seeing – this is my summary
at least of what we used to do is look at the problems we were seeing in the enterprise
clients and then fund companies that were solving those problems on the venture side. So there was a lot of back and forth and I
realized that I liked the venture stuff much more than the consulting stuff because I can
see my ideas actually take off and in consulting it’s rare that your client actually listens
to you. Prior to that I had been a journalist. I was the Senior Technical Editor at Fast
Company and I had done some management consulting on and off before I took that job because
I really wanted to study the state of the art in technology businesses. And you can’t
do that by having one full time job, you really need to be dipping in and out of many different
companies. So I did that Until I felt that I could be a competent venture capitalist.
And to Brandon’s point, by the time we got there venture capital had become – and I
still think of this – it’s like a caricature of what it was in the 80s or the 90s or the
2000s and so I’m glad we made the switch to this world. Okay. Let’s get into blockchain a little
bit and then I want you guys to make some predictions for the futures. But blockchain
is a key part of everything in cryptocurrencies; it enables it to work, to trade, to be protected
and also it is starting to be used in other categories other than trading cryptocurrency,
correct? That’s true, although it’s nascent. People
are figuring out – the fundamental mechanism in Bitcoin is this trustless ledger and people
are figuring out other things they can put into trustless ledgers that could be useful.
I think title deed is probably one of the easiest low-hanging fruits but with these
things there has to be a blockchain that everyone considers economical before you would ever
build such foundational public services on it. I don’t think we’re at the phase yet
where we know which blockchain is going to be the one. But people are certainly experimenting
with what we call private blockchains. And I guess there are already interim places
where you can trade from one cryptocurrency to another, is that right? Yeah, exchanges. Why would one want to do that? Well mostly to speculate I think at this stage. Because they’re in one and they think it’s
not going up and instead of spending more money and cash to – okay, interesting. So
share your perspective on the future. I know we could talk about this kind of stuff for
hours on end but you guys came together and chose this path because you think this is
where it’s happening. So I’m interested in it – to segue from
my comment about venture capital – I’m interested in it as the next foundation for
growing companies. I don’t think that the way that the financing pipeline works now
is conducive to building products that work. It’s conducive to building products that
can sell quickly to enterprises or go public quickly. So I think this is going to bring
back some spirit of creativity into entrepreneurship, especially in technology. And why did you go down this path? Well for many of the same reasons. We thought
that the way the companies were funded was really highly inefficient. I mean a company
that has a great idea, to go from seed all the way to IPO processes, it’s highly inefficient.
But I think for me the futurist in me wants to see what Chris was alluding to during the
talk about internet of things and being able to enable machines or driverless cars and
things of that nature, how to really do that within cryptocurrencies and the ability to
do micro payments on a global, order-less, trustless way, I think there’s a lot of
promise there. So I think about the movie Minority Report and all these cool things,
I hope that we get to a level where blockchain enables a lot of these other things to pop
up. So of these ICOs that have popped up is that
actually sort of the beginning of it or do you think that’s a little bit risky right
now? I think 98% to 99% of them are worthless or
useless and it’s not a knock on any of the teams but we certainly get emails everyday
about a new ICO that’s happening and the use case sounds completely ridiculous or that
they’re only using it as a mechanism to raise capital. They don’t really need to
incorporate blockchain or cryptocurrency. So I think with the ICO as shown is a way
to raise capital from many desperate people all over the world and that’s what I think
the ICO has shown. And I think that’s the real innovation there. I don’t think it’s
that these companies are doing anything particularly exciting, although there have been a couple
that have come out. Before I let you go say we have somebody watching
that’s really interested but is just at a very basic level of understanding today,
have you got any advice on how they can get smarter about cryptocurrency? Follow our newsletter. Good plug. A plug. How do they get your newsletter? They’ll go to our website – Iterative.Capital
– top right, click on subscribe. You’ll see our team’s research from our great Head
of Research Leo, inputs from Chris and you’ll see sort of daily and weekly news and insights
from us, and then we also have a podcast on SoundCloud where you’ll be able to hear
directly from the team and folks that we interview. And then also Chris’ book. So I have a new book coming out. I have an
existing book – another plug – I have an existing book Introducing Ethereum and
Solidity. I have a new book coming out this year that I wrote with my friend Kedar, who’s
a great engineer, it’s called Ethereum Games and it’s all about building casino games
on Etherum with real money. Okay. Brandon, Chris, thank you guys a whole
lot. Thank you very much. You bet, you bet. And that wraps up my discussion
with Chris Dannen and Brandon Buchanan with Iterative Capital. And this has been a Thought
Leader production brought to you by PKF Texas Entrepreneur’s Playbook.

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