• Bianca Chen

Blockchain Revolution: Exclusive interview with the co-founder of CoinFund Jake Brukhman

New York is a vibrant blockchain community and the birthplace of many legendary leading companies in the cryptocurrency industry. The so-called “blockchain revolution” CoinFund is also located in Brooklyn, New York. CoinFund is a crypto-asset investment fund and blockchain research and advisory firm. CoinFund recently announced that it has led the seed round of GEO Protocol, an open source overlay protocol that enables creation and interoperability of value transfer networks in a lightweight, cost-efficient and scalable way. During an exclusive interview with the co-founder of CoinFund, Jake Brukhman, a writer and artist, but also a technologist who has a background in mathematics and computer science, will uncover his experience and suggestions of notifying and avoiding the risk factors such as ICO fraud when investing, as well as the exciting thrills of taking part of this “dangerous business”.

Jake Brukhman

Bianca: How did you hear about bitcoin?

Jake: Around the middle of 2011, I heard from a friend who was very involved in innovative technologies. I became an investor in and since I've worked in technology for about ten years as well as having a background in mathematics and computer science, I feel like I have a very good understanding of consensus algorithms as they are applied to block change technology.

Bianca: What is the biggest change that blockchain is going to bring to this world?

Jake: Blockchain is a very interesting and general technology that allows people in organizations and companies to create scarce digital assets and decentralized networks. So, the main change that blockchain will bring in the way that people apply decentralized networks to different areas of society. One really good example of that is online marketplaces. Blockchain is excellent at replacing middlemen and building decentralized networks as the backbone of marketplaces where people can transact directly.

Bianca: How did you get into blockchain society and the blockchain community?

Jake: I started working on Coinfund in early 2015. The thesis behind Coinfund was digital assets or tokens. They will represent economic interests and the growth of decentralized networks and decentralized applications, kind of similar to stocks or private equity of companies. But in a digital format, it's much more efficient to buy or sell, transfer and transact in. And Coinfund basically said why don't we take a portfolio of digital assets and diversify the risks of these nascent and growing technologies. And so we've been doing Coinfund for two and a half years now since July of 2015, investing in cryptocurrencies and digital assets in the space.

Bianca: I read your bio. You used to be in the financial industry as well. Do you think CoinFund is operating in a traditional hedge fund or traditional fund style?

Jake: Yes absolutely. The fund that we are bringing up this year is very much a traditionally structured vehicle. And the types of investors that have reached out to us are very traditional types of investors. The early stage technology VCs are interested in this space, while hedge fund managers and traditional endowment funds are now looking into this. We see bitcoin moving toward traditional financial markets in the form of a proposed ETFs and futures exchanges. And I think very soon some of the traditional financial world will also have access to buy and trade digital assets.

Bianca Chen (Left) with Jake Brukhman (right)

Bianca: Why are these traditional investors interested in investing in this new field? What’s their motivation?

Jake: We can't advertise the fact that we have a fund, not even those going to China. Many of the traditional investors out there have seen the growth of blockchain as the growth of a new asset class and I think that's the correct way of looking at it. In 2017, the entire market capitalization of all cryptocurrencies and digital assets were about ten billion dollars. As we sit here today, It's about I believe 220 billion dollars. That's 22 times growth. Those traditional investors are now very interested in this space as a potential opportunity.

Bianca: Coinfund is also a research entity. Tell us a little bit about what kind of trend are you observing?

Jake: You can separate broadly the different kinds of companies that are interested in blockchain into two categories. Very early stage tech startups or blockchain tech startups that are building completely new products. There are a set of banks and financial institutions and corporations who are evaluating how blockchain technology can be used in the context of their existing business, whereas as an efficient technology or as a new business model to generate revenue. And those two kinds of companies generally have very different issues and needs. The tech startups are all about how do we finance this. The biggest challenge in blockchain is how do we get the mainstream users to use the product. The kind of corporate and institutional angle is more around how do we best integrate this technology. We already have teams that are quite large. We have resources. These companies have a larger regulatory onus for compliance. And so it costs them more money to integrate these technologies. At the end of the day, the users of the products of these companies may or may not see cryptocurrency. They may or may not see the blockchain applications directly. Those applications might be hidden inside and providing efficiency without being visible, really visible to users.

Bianca: In some projects, you are also clients, getting research support or community support. And from your observation, which industry are they concentrating on now? Which industry is providing more value?

Jake: I think it's still a little bit early to see what the results are but we have a very large thesis around social media and communications. This year Coinfund worked with Kik-interactive on the Kinn-project and Kik is a chat application. We're also working with YouNow which is a mobile live streaming platform in the United States with digital assets that people transact on that platform. There is a huge demand for a chat or other communications tools. This is something that has become a ubiquitous part of our lives and yet it's extremely hard to build a sustainable company with a revenue stream from a chat app. For these companies, often the only viable model to monetize chat application historically has been some kind of ad revenue. But what you see in most of the ad markets across industries is that there is a lot of monopolization by the big technology companies like Google, Amazon, and Facebook where they eat most of the revenue model. You're left with this conundrum where you have a lot of demand. Everyone needs to use chat. Everyone wants to communicate with each other but it's extremely difficult if not impossible to build a business that is sustainable that creates those kinds of apps. So, blockchain has come along. It has provided an opportunity to create a new business model that actually makes those companies sustainable. and the way they do that is you introduce a digital asset, you create a digital economy within the application and then you monetize that. One way that you might do that is, I think, the first step is introducing a cryptocurrency that would allow users of that network to transact. Users can then send cryptocurrency back and forth, they can exchange cryptocurrency for goods and services they can do tipping and you know there are other models in which economic transactions take place on these communication platforms. You probably know in China I think something like 40 percent of financial transactions happens on Wechat, which is a huge number. That would be a great example of the digital economy that is already out there in the world.

Bianca: So, the media is a big area. What else?

Jake: Within the blockchain space there is a lot of development devoted to the protocol layers and the infrastructural layers that will in the future support many of the subsequent applications that are built. Something like a very important infrastructure layer is smart contract platforms and so Ethereum is just the first example of a smart concrete platform that's out in production and has a developer community and has a lot of people building applications on top. But I think in 2018 we'll see a lot of alternative smart contract platforms come about. You have things like Zen protocol and many, many, many others that are building alternative networks upon which ecosystems of applications can be built. And so that's a very important piece of infrastructure.

Biance: I think you have been seeing a lot of different new projects, are they good or bad?

Jake: Again that breaks down into early-stage teams and sort of established companies. So, if you're looking at early stage teams then, just like in technology investing, the team is the most important aspect of the company. And if you want to get familiar with the team you must understand what their level of experience and expertise is, how they work together, how they are incentivized within the corporate structure to perform well. I think that's the first step. If your team isn't up to snuff, if it's not on par or if your team has not the best intentions in seeking ICO, for example, you know you want to see teams that are very product-oriented rather than finance-oriented. The second step is to evaluate their technology. Does this technology fit into the trends, the technological trends of the blockchain space that we understand to be important, right? You know someone who is building. Social media is arguably a little bit too early compared to someone who is building infrastructure so maybe in certain cases infrastructure might make more sense to be building now rather than in 2017.

Bianca: I observed that sometimes when bitcoin price goes up, other coins price will go down. Do you think it will be a problem when bitcoin is too strong, it will affect other coins' growth?

Jake: There are theorists out there who say at the end of the day, Bitcoin is just going to keep going up and it's going to attract most of the money and most of the value in the space and there is no sense in investing in anything else. I disagree with that point of view. I don't think that that is how innovative nascent technology spaces develop. I think they develop through many different people coming into space and building different competing technologies and making older technologies obsolete. And therefore I firmly believe that. We as an investor should be diversifying across different digital assets and across different networks. Now when you see that kind of what you allude to is that there are correlations in the market there. There are times when bitcoin goes up anything goes down and they are anti-correlated and then there are times when they are totally correlated and they go up at the same time. And what you're alluding to is the idea that when people see bitcoin go on these very aggressive up trends and price then people feel like they're missing out so they start selling all of the different tokens that they have accumulated and then putting that money into Bitcoin. And what you'd normally see is that bitcoin sharply goes up and then the long tail of other digital assets sells off and goes down. And so you see this as short term Anti-correlation between price. But then what usually happens thereafter is that bitcoin stabilizes at some level. And then people have made money who have participated in that upslope and suddenly all these other tokens are really cheap and so they start buying those tokens again and the market renormalizes.

Bianca: Stocks have a different exchange, like the NASDAQ, but for coins, a lot of coins are not listed anywhere, this makes investing in those coins very hard. What are the pros and cons compared with traditional stock trading.

Jake:Most coins do get listed on crypto exchanges from a more traditional lens. Institutions like hedge funds, for example, are actually not very likely to take a cryptocurrency exchange as a counterparty. It's very risky. Today cryptocurrency exchanges are not highly regulated. They have often been hacked. But what you also see is number one highly compliant exchanges are moving toward including more and more digital assets on their platform and they would be a lower risk counterparty to the traditional markets. You see decentralized exchanges proliferating and suddenly the process of getting listed on an exchange is going to become highly efficient and highly automated whereas today issuers of tokens have to go to centralized organizations to get their assets listed. I think the availability of liquidity for different tokens will become efficient, automated and relatively safe like stocks.

Bianca: Do you think a coin or cryptocurrency will replace shares like stocks.

Jake: We've already seen that in the market today. You have a few examples like VC funds raising money through ICOs such as blockchain capital. And the economic interests will be denoted by digital assets so I do think that we'll see more models like that. And I think as those models will be closer to the traditional finance aspect then they will probably be regulated as securities.

Bianca: Do you think we will have a more international legal system?

Jake: I think that's a stretch. It would be pretty hard for countries to agree on a unified framework. But one thing is for sure is that this technology is a global and borderless technology like many Internet technologies today and so that presents unique challenges for every jurisdiction. What's really interesting is that if you assume that this technology has success like a long term success scenario then it will be very profitable for, let's say, countries who embrace it and try not to overregulate it. Well suddenly there is this tradeoff if you're a country that wants to assert a high level of regulation then you can do that within your jurisdiction but you lose some of the value on a macroeconomic level as a competitor to other countries. And this is what we might be seeing today with the U.S. and Russia, for example, in the U.S. we have a lot of regulatory attention to the space and a prospective outcome where tokens are highly regulated in a securities regime whereas in Russia at least they are talking about embracing ICOs and regulating them in a low touch way. So if there is a success scenario and Russia is right. Then they stand to create more value in their jurisdiction using these assets. The price that they will pay for that cost is that they'll have more volatility. They'll have a more adverse scenario but they might create more value.

Bianca: Interesting. You mentioned it is hard for a country to agree on something, but it is hard for a community to agree on something too?

Jake: We have now been blocked and long enough to realize that the governance of decentralized systems is probably the main issue that there is. And when you see that of course in the kind of lack of governance or lack of efficient or effective governance inside of the Bitcoin network, you see a different governance model inside of the Ethereum network. You also see networks coming on the horizon that has governance as a platform level feature. You have startups like Aragón and Daoust who are specifically working on how do we use the blockchain to create efficient and effective governance systems and I think these governance systems in the future will be core components of these networks.

Bianca: Do you think this kind of governance problem will block the progression of bitcoin?

Jake: Let's say the time efficiency depends on how the governance system is structured, for example, if you require in a governance system the participation of 99 percent of your constituency then chances are you will never get quorum in order to pass a proposal because you will just simply not be able to find the 99 percent of people. But if you require only 10 percent of participants in order to pass a proposal then you can pass proposals pretty fast. And so the tradeoff there is that you know the 99 percent governance system is very democratic but it's slow and inefficient. This system is less democratic. It has a small smaller number of people making the court decisions but they can do it faster. And that's always a tradeoff between a democracy and a dictatorship, right? But hopefully, there is an optimal point in between that for bitcoin.

Bianca: You are organizing a big community, right? Can you tell us a little bit about it?

Jake: Yes. So we have a digital community which is online. It's called the Coinfund Slack. And one of the reasons that we have opened Coinfund Slack to anyone is because most of the projects that we study and we are investing in are open source and open community projects. This is a cultural phenomenon of the space. It's generally fairly unusual for a fund or an investor to open up their research community and to participate in it and share information with that community. Our community is over 7000 members today on Slack. Last I checked we have some great participants in our community, some of them are investors, some of them are the founders of the projects that we study and other folks are professionals and legal and accounting and tax fields that are for whom this space is very relevant because they want to learn how to deal with this technology.

Bianca: How did you start this community? How did you attract more people to come in? And what's your incentive to do this?

Jake: We saw some of our portfolio companies had Slack as open communities we opened up our own. Our approach to building the community was kind of interesting although we never really advertised it very much. We sometimes talked about it on Twitter but the very earliest members of our community were people that we invited. To come inside based on the work that we saw them do on channels like Reddit and Medium and Twitter. And so the early members of our community were some very serious people that took the research around blockchain technologies very seriously. And not the sort of culture that we have cultivated inside of quant funds because we were very scientific. We are logic based and want to provide evidence for things that we claim to be true. We want to be able to point to places in the white papers and the code bases of these projects to support our claims and so on so forth. And we've also worked in a community setting to do Google Hangouts where we interview founders and we let them describe their projects and we dive deep into the technology and how they're thinking about it. That has always been a free service for the community rather than a paid or promotional service. That's something that we've done. And it's got us to where we are today.

Bianca: Interesting. How did you organize your presence on Slack?

Jake: The way that we have organized that is that we have a couple of standard channels as any Slack user does. But the vast majority of our channels are separated by project or by vertical. Most of them are projects. So, every particular project gets its own space where the founders can go if they like and give updates to our community. Anyone who is interested in a particular project whether the founders are there or not can open up a channel and begin to cultivate like some researcher. Our community is not a decentralized system. It's also not a democracy. Digital communities are very hard to maintain as it is, especially at that size. It was very important to enforce a certain level of quality in our community, a certain set of standards, a certain set of values. And we do that we as administrators of the community, we will kick out people who are gratuitously advertising ICOs and not participating in research.

Bianca: How much importance do you think the social network is for the system.

Jake: Crucial importance whereas in the traditional financial context you know you have data providers and research houses and investment advisers and all kinds of firms and infrastructure for learning about those markets. In our market, you have Twitter and Reddit and Medium and Slack. So the vast majority of activity in the blockchain, especially in the research side happens on social media. That's very unusual.

Bianca: Do you think blockchain technology can be applied to social media?

Jake: Absolutely. STEAM would be a great example of that. It is a decentralized social network, similar to Reddit. People can come in and post content across different areas of interest. And then when people upvote your content you actually get paid in a cryptocurrency called Steam, exchangeable Bitcoin for U.S. dollars or other fiat currencies, real compensation that content creators receive on that platform for creating content.

Bianca: Interesting. So, for the content providers, a lot of original content, producers even songwriters do not really make that much money. It's all concentrated in the hands of the big players. Do you think blockchain can help solve that problem?

Jake: Absolutely. Just again taking STEAM as an example. The system works in such a way that it's based on the activities of the speculative market. When the price of STEAM becomes pretty high it raises the activity on the platform and people start making fair amounts of money. There was a case early on in the days of STEAM where a gentleman from a village in Africa was able to use his smartphone to get on STEAM and he wrote a bunch of very interesting articles about his life and in some received a compensation of something like forty thousand dollars all together and became the richest person in his village. This is a transformative global technology that's available to everybody in the world who is connected to the Internet at least through a phone. It is a very democratizing.

Bianca: I have been talking with a lot of people, I have been to different conferences. I feel like there are a lot of similar projects. And there are so many ICOs. What do you think of it? I remember last night when I attend the U-NOW event, we had a conference where nobody was allowed to talk about ICOs. What do you think about this crazy, rush in ICOs, all the sudden so many similar projects?

Jake: I think there are good and bad things about it. ICOs demonstrate an alternative model for financing early-stage technology startups, particularly in the blockchain area. And that's a fundamentally transformative technology. It disrupts how these kinds of companies are financed. It disrupts who their investors are. It disrupts the business of venture capitalists and other investor entities in the market. I think it's very interesting. On the other hand, it is an under-regulated space. We are still yet to get very strong guidance around how these kinds of offerings should be treated. I do think it is an area of technology that deserves its own kind of regulatory considerations not just to get fit into traditional securities frameworks or other frameworks. At times abusing it, going out and raising maybe too much money than they probably need. You see outright manipulation of markets and sometimes you see outright scams. But this is the case with all new technologies when the internet came about. It was also very nascent and a lot of people used it for illicit purposes. And as the technology matures and as the regulatory environment matures and as the participants themselves also mature, we can get to a place where the technology becomes really useful for everyday life.