Jan 2, 2019 · 34m · a16z
a16z Podcast | Why Crypto Tokens Matter
0:00 / 0:00
▶ Watch on YouTube →
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of the a16z Podcast, host Sonal Chokshi, Chris Dixon, and Fred Ehrsam explore the fundamental mechanics of blockchain technology, explaining how tokens realign developer incentives, solve network bootstrapping challenges, enable novel governance structures, and establish a new paradigm for decentralized internet architecture.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. The host holds 3% of the talking time here. How this is scored →
The host as informed peer 6.6 Guest teaching 3.8 Guest disagreement 1.1 The host pushing back 1.9
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 33:00 Guest pushes back on host's rejection of Carlotta Perez models
Fred directly defends Carlotta Perez macroeconomic models after Chris argues that traditional technological innovation frameworks do not apply to software.
Hardest push from the host ▶ 1:21 Host challenges guest's premise on internet economicsChris immediately refutes Fred's claim that economics are being embedded into the internet for the first time by pointing to credit cards and Amazon.
Biggest teaching moment ▶ 27:40 Guest breaks down token monetary valuation vs equity cash flowsFred demonstrates how evaluating tokens as equity is a fundamental misunderstanding, walking through monetary velocity equations (MV=PQ) using Filecoin as a concrete example.
The host holds their own ▶ 17:13 Host articulates the corporate army vs weekend militia thesisChris takes complete command of the discussion when asked to make a bet on web2 vs web3, delivering a detailed framework on the predictive power of open-source weekend developers.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Embedding Economics into Protocol Building Blocks | 7 | 3 | 1 | 5 | When Fred asserts that tokens embed economics into the internet for the first time, Chris immediately pushes back by bringing up credit card forms and Amazon. Chris then demonstrates host expertise by detailing the history of open protocols, the Heartbleed SSL bug, and how platform centralization starved early protocol development. | |
| Developer Platform Battles and Incentive Alignment | 6 | 3 | 1 | 1 | Chris expands on developer platform fatigue by citing historical examples such as Microsoft versus Netscape and Apple keynotes killing developer startups. Fred complements this by explaining Satoshi Nakamoto's white paper as an engineered incentive structure that produced massive emergent scale. | |
| Solving Network Bootstrap Problems with Tokens | 7 | 2 | 0 | 1 | Fred explicitly credits Chris with the insight that tokens overcome the chicken-and-egg network bootstrap problem. Chris builds on this with founder examples like Airbnb and eBay, framing token incentives as a systematic financial offset for early network users. | |
| Decentralized Governance and Economic Experiments | 5 | 5 | 1 | 2 | Fred educates the audience on Tezos's self-amending ledger and token inflation bounties for protocol upgrades. Chris connects this directly to ongoing Ethereum sharding and scaling challenges discussed with Stanford researchers. | |
| Staking Mechanisms and Negative Incentives | 7 | 3 | 1 | 2 | Chris introduces the concept of staking and negative incentives, providing a concrete analogy of how required stakes could eliminate spam email overnight. Fred outlines the structural tradeoffs between centralized control and decentralized parallel experimentation. | |
| Open-Source Militias vs. Corporate Armies | 8 | 3 | 2 | 2 | When Fred asks Chris to place a bet on web2 versus web3 races, Chris responds with a detailed framework comparing corporate armies with ragtag weekend open-source militias. Chris cites his own predictive blog post heuristic regarding what the smartest developers do on weekends. | |
| Ethereum's Paradigm Shift and Multidisciplinary Lenses | 7 | 3 | 1 | 1 | Chris outlines three distinct axes of innovation introduced by Ethereum, noting that the crypto movement split between purely financial and platform-oriented paths. Fred adds that evaluating crypto requires combining financial lenses with computational architecture lenses. | |
| Evaluating ICOs: Legitimacy vs. Red Flags | 6 | 5 | 1 | 1 | Fred breaks down ICO red flags including rent-seeking tokens and centralized pools disguised as tokens. Chris reinforces this by pointing out legal security implications of dividend-like structures and advising extreme investor caution. | |
| Infrastructure Building Phase and De Novo Blockchain Native Applications | 7 | 4 | 1 | 1 | Fred argues that current blockchain throughput demands an infrastructure focus rather than user-facing apps. Chris extends this with rich historical parallels from the early internet, including optical switching, AWS, and Barnes & Noble versus Amazon. | |
| Valuing Tokens: Equity vs. Currency Monetary Models | 6 | 6 | 1 | 1 | Fred quizzes Chris on pre-internet incumbents in top 50 websites before explaining why tokens resemble monetary velocity (MV=PQ) rather than equity cash flows. Chris validates the analysis while highlighting work by Chris Berniske and distinguishing digital commodities from utility networks. | |
| Digital Commodities vs. Fat Protocol Networks | 7 | 5 | 2 | 4 | Chris challenges traditional innovation framework models like Carlotta Perez, arguing software is unconstrained by historical industrial cycles. Fred respectfully counter-argues that Carlotta Perez models describe human population adoption timelines rather than software creation limits. |
Statements from this episode (30)
Ehrsam: Crypto enables direct monetization of internet building blocks
“You could pay for literal goods and services on the internet, but the building blocks of the internet themselves were not precisely programmed and parceled out into little units that you could pay for directly through the protocol. And that's sort of what we'r…”
Dixon: Internet protocol development stalled due to lack of monetization
“There basically has been almost no, I mean, for all intents and purposes, there's been basically no protocol development since the beginning of the internet because there was no business behind it.”
Dixon: Tech platform abuse is pushing developers toward crypto protocols
“Meanwhile, you've got a whole group of developers who have been, frankly, kind of abused by platforms for a decade. You just arbitrarily get banned, you know, or if you're lucky, you get to pay them 30%, right? So there's a deeply unhappy group of developers a…”
Ehrsam: Bitcoin created the world's largest supercomputer network by 4 orders of magnitude
“And years later, we have a seventy billion dollar cryptocurrency, a whole ecosystem of companies, users and investors involved and the largest supercomputer network in the world by four orders of magnitude.”
Ehrsam: Tech value from 2002-2017 accrued to proprietary database networks
“If you look at all the value that's really accrued over the last 15 years, the vast majority of it has come from companies who have effectively built proprietary databases with strong network effects around them.”
Dixon: 99% of attempted networks fail during the bootstrap phase
“Percent of the networks that are attempted fail in the bootstrap phase.”
Dixon: Crypto solves network bootstrapping by trading financial value for utility
“And so one thing that cryptocurrency does potentially is it's like a universal solution to the bootstrap problem. We call it chicken egg problem, which is you incentivize the early users when there's not enough network value, you give them financial value. And…”
Dixon: The cryptocurrency movement is not driven by Silicon Valley
“And actually a lot of, by the way, the cryptocurrency movement, it's not a coincidence, isn't coming from Silicon Valley. It's coming from other places.”
Ehrsam: Over 1,000 tokens exist, acting as mini central banks
“You can view each token as basically creating its own little central bank and its own little government. And there are already over a thousand tokens.”
Ehrsam: A working sharding upgrade would boost Ethereum's market value by 10-20%
“If you're to come out and submit an improvement, like sharding, for example, a working implementation, it could easily raise the value of the network 10 or 20%, which we're talking two and a half to five billion dollars.”
Ehrsam: Requiring economic staking on email accounts would eliminate spam overnight
“Spam email is killed overnight, probably.”
Dixon: Performance critiques of decentralized systems are a red herring
“I would personally argue the performance and the usability critiques of decentralized systems is a red herring. Because you need to look at these things as dynamic systems that evolve over time.”
Dixon: Early open internet beat AOL despite initial clunkiness because developers built on it
“The same thing happened by the way with the internet versus AOL. AOL had a, it was a much slicker interface and more performant in the beginning. The internet was clunky and weird. And slower and all these other things, but you had all the developers building …”
Dixon: Facebook data portability is meaningless due to invincible network effects
“Like, it doesn't matter if you can export your data from Facebook. All your friends are on Facebook. It's a network effect. That game is over.”
Dixon: Smart weekend projects predict tech trends 10 years in advance
“The history of this is very clear, and that the side of the nights and weekends for the last 30 years, that's been the best predictor of the future. That's where I bet, that's how I make my investments, that's where I spend my time. I have this blog post, what…”
Dixon: Tech giants plan 2-5 years out, open-source developers 10 years longer
“When you're a company, no matter how visionary you are, I mean, I think Zuckerberg and Larry Page, they're extremely visionary and they're extremely long-term thinking, but ultimately they do try to manage probably to a two to five year horizon or something, r…”
Ehrsam: Developer activity is crypto's key leading indicator
“Perhaps the leading indicator of the whole industry is developer activity and experimentation.”
Dixon: Ethereum proved multiple scaled blockchain networks can coexist
“One, it showed that you could just simply have another Scaled network, right? I think a lot of people just assumed it was gonna be one network to rule them all, network effects, et cetera. So it showed just like an existence proof that you could do another net…”
Dixon: Token networks redesign the internet so participants own network value
“A lot of what's going on here is new internet. You know, it's sort of redesigning the architecture of the internet in a way that allows for the participants of the internet to own a piece of those networks. And ultimately those networks will have value and tho…”
Ehrsam: Most ICO projects will fail like ordinary startups
“Just like startups, there's a small percentage that are legit and really worth funding. And there's a whole glut of projects that unfortunately are not and probably won't go anywhere.”
Dixon: Profit-sharing ICO tokens are textbook securities
“If the token gets dividends in proportion to the company's profits, that's almost textbook security, right? And so that's also something that, that should be done in the traditional way.”
Ehrsam: Ethereum throughput is 20,000x short of running Facebook
“And if you look at what Ethereum is capable of in terms of just throughput of the network, it can't handle more than about twenty-ish transactions a second right now, which means that you're about 20,000 X off being able to run Facebook on the chain.”
Ehrsam: Crypto infrastructure startups have higher success odds than consumer apps
“So as a result, it's probably a lot more valuable and relevant to build infrastructure components that lets people scale that and build apps in the future rather than trying to build Facebook right now. I would assign a higher likelihood of success to systems …”
Dixon: Native first-principles products consistently beat legacy hybrid models
“But the hybrids, you look back at the internet, like the hybrid stuff never worked. There's always the pure all in on the internet, first principles, redesign it.”
Ehrsam: Only two top 50 websites were created by pre-internet companies
“One thing I think is really interesting to look at is the top 50 sites on the internet today. Guess how many of them were made by companies that existed before the internet was popularized? It's two. MSN.com and Microsoft.com, both by Microsoft. Every other si…”
Ehrsam: Crypto tokens resemble currencies rather than cash-flow equities
“Upon closer examination, tokens more closely resemble currencies where you look at some kind of monetary theory equation like MV equals PQ, and it turns out that the important things to look at are not the right to a future stream of cash flows. Rather, it's t…”
Dixon: Protocol network tokens require a distinct valuation model from digital commodities
“My personal nomenclature, like I think of in the first bucket, the commodity bucket, there's Bitcoin, there's Monero, Zcash, maybe Dash. And then there's this other thing, which is kind of the networks, call them fat protocols, call them tokens. There's this w…”
Ehrsam: Underlying valuation equations for digital commodities and network tokens are identical
“I would argue the equation actually that underlies both of them are the same though.”
Dixon: Carlota Perez's innovation framework doesn't apply to software
“This is also why the traditional models of innovation, like the Carlotta Perez model don't really work in software worlds because in software it's bound only by the ability of people to kind of come up with new, interesting ideas.”
Ehrsam: Tech paradigm shifts commodify previous value layers
“And the surest way to fail is to assume it's a zero sum game. It does not have to be a zero sum game. And this is true of all technological paradigm shifts where there's a commodification of all the value creation that happened in the last paradigm. So now val…”