Episode 300

ShapeShift – There’s a New Fox in Town

Erik Voorhees

We’re joined by Erik Voorhees, Founder & CEO of Shapeshift. His third appearance on the podcast is timed nicely as July marked ShapeShift’s fifth anniversary. From its early days as the “Google Translate for cryptocurrencies”, it has grown into an organization of 75 people, and Erik talks about the learning curves he has endured on his journey. Our conversation also coincides with the launch of ShapeShift’s brand new V2 platform, which includes a self-custodial asset management dashboard, hardware wallet support, and many other new features. One notable change is that ShapeShift now requires users to create an account and perform KYC, something which very much pains Erik. We also discuss Bitcoin, Libra, and the future of money, topics which are always fascinating to approach from Erik’s Libertarian viewpoint.

Topics discussed in the episode

  • ShapeShift celebrating its 5th anniversary the lessons learned since launch
  • What is ShapeShift 2.0 and the problems addressed by this product
  • ShapeShift’s new features and what people can expect to come in the future
  • Why users now have to register and perform KYC
  • What is the FOX token and what is it’s utility
  • ShapeShift’s business model and target segment
  • Why the company chose to shut down Prism
  • Erik’s views on the Bitcoin and Ethereum ecosystems today
  • Speculations about Libra and the future of money

Sebastien Couture: Hi, so we’re here with Erik Voorhees. Erik is the CEO of ShapeShift and third time coming to the podcast. I was just checking before the show and actually it’s been two years last time was in July of 2017. So hi Erik, thanks for coming back on the show.

Erik Voorhees: Yeah. Thanks for having me on.

Sebastien: And so we’re going to talk about a lot of stuff today including ShapeShift’s brand new platform. But also as always think it’s interesting to get your thoughts and sort of your views on where the ecosystem is at at the moment and how things are progressing since you’ve been in this in this space for quite a while and so would love to get your thoughts on on that stuff as well. First let’s talk about ShapeShift. You guys celebrating your fifth anniversary this month. Congratulations.

Erik:  Yeah yesterday.

Sebastien: Okay. So ShapeShift is just over five years old. Let’s talk a little bit about the journey. How did you get here? And how do you feel about the last five years generally?

Erik: Yeah, well when we started I didn’t set about to create a company that would you know have 75 employees and you know be doing something important five years later. It was just really a simple tool that I felt needed to be built. And so, you know in the same way that the Satoshi dai back in the day got started as a side project ShapeShift started as a side project something that just seemed seemed useful and interesting to build and so we built it and then yeah, it was July 29th of 2014 that the first transaction occurred and ever since then it just, you know, just been growing organically and we’ve gone through all the you know ups and downs of multiple crypto cycles and through many different products and you know, we’ve now attached ourselves to the crazy rocket ship of the crypto industry and somewhere along the way it became a real business and so now I run every day as my as my job.

Sebastien: And looking back. What is it that you know has surprised you the most about how the company has evolved or how the product has evolved since the first transaction on July 29th.

Erik: I think like what was the big eye-opening thing for me was really that once you get past, you know, ten or fifteen or twenty employees. The company is really about building an organization of people and I kind of naively thought of it as product first like I see products I build products I like products but to do that at scale requires that the actual building of an organization of people not a product built on technology. And so that transition I think for me was very difficult and one that I’ve been learning and trying to grow into and I’ve never done this before at this scale and so just a lot of a lot of stressful learning of how to do these kinds of things and we have all the chaos of the crypto industry and also all the chaos a normal startup tied into one into one beast. So it’s been extremely fulfilling but you know a huge challenge.

Sebastien: Any interesting anecdotes to share here about this journey of learning lessons.

Erik: Yeah, like when you start a new project you you surround yourself with people who are you know, your friends, people that you know, and you can sort of implicitly trust them because you know them well and then as you grow you have this sense that like the people around you are always going to be trustworthy and good and and they’re not, you get to a certain size and you will inevitably bring into your organization people that are not good and this, you know, this can range from just someone who’s incompetent to someone who is to is a thief which we dealt with that, you know in 2016 when we had our internal guy steal a bunch of money from us and that you know, that’s been a challenge to realize that a lot of people, it sucks to have to put your guard up like that. but after you get to a certain point in a business, it happens kind of naturally.

Friederike: I understand. You just launched ShapeShift 2.0. What is it and what excites you most about this release?

Erik: I’ve kind of avoided calling it ShapeShift 2.0 because it’s so cliche. But really that is a good description of it is a brand-new version of our product and the the good way to describe it is that the ShapeShift 1.0 was a tool to convert one cryptocurrency into another and to make that fast and easy for people and to do so in a non-custodial way. The new ShapeShift allows that same thing. So people can still use the new ShapeShift to convert one crypto into another but it also brings that kind of self custody principle to the rest of someone’s crypto management. So it is a wallet. It is a Fiat on and off ramp you can buy and sell Bitcoin from your bank. You can store all your various cryptos safely. It integrates with Harbor wallet so you can keep them safely stored offline, but still use a normal web browser to interact with your portfolio. And so basically it’s meant to be you know a self custody alternative to something like Coinbase, a really simple and good UX that normal people can use to interact with crypto technologies, but done without us having control of users keys. So that’s kind of the theme that I’ve always wanted this company to build on was one in which people are sovereign over their own wealth and I think if if the crypto revolution happens and it just ends up with a bunch of custodians new custodians, you know, the coin basis instead of PayPal’s and banks before it then not really much has changed at all. And so we’re trying to take you know, a more difficult approach but one that I think is more valuable over the long term which is to build a highly performance great UX crypto platform in a way that people maintain control of their keys. So that’s the idea.

Sebastien: So we’ll talk a bit about the features of this new ShapeShift. I guess, you know one of the things I think that people will notice and have been noticing for some time because this has been the case for as far as I know at least a year I think is that in the beginning you would go to ShapeShift, you would put an address and you would send money to the address that was provided by ShapeShift. And that was it a few minutes you you had your current, you know, the currency was exchanged. Now, you have to register and you have to do KYC. In fact, I registered for the new ShapeShift today and did the KYC and the process is great. It’s like really easy took five minutes and I was approved in like no time and talk about this shift from a service which in when ShapeShift used to be a sponsor of the show we used to say it was as easy as putting on your slippers. And now you need to tie the shoelaces as well. Yeah, which is a little bit harder. Why why did you go from a product where you didn’t have to restrict to now product where we have to register and do KYC and all this?

Erik: Yeah, it’s a great question. It’s obviously not because we wanted to so let’s start by saying that. ShapeShift was built really to to protect customers and you know in the beginning that meant to me two really important tenants one was not having any custody at all and allowing the user to hold their own keys. And the second was was not having personal information of the user and allowing people to keep that to themselves. I don’t want to know who someone is I don’t need to know who someone is in order to process a transaction for them and they don’t want me to have that information either. So that should be the end of it and when you take people’s information, you are inevitably endangering them because now your warehousing information that can be hacked and lost and companies large and small government’s large and small have problems with these kind of hacks where you know millions of records get lost and stolen it’s a huge problem. And so I never wanted to deal with that and when we started ShapeShift, it was comfortably enough in the gray area that it wasn’t clear whether certain Financial Regulators would require us to do that. There were arguments sort of on all sides of that question and we just figured we would continue forward and keep analyzing it as we grew and basically, you know in the 2017 bubble ShapeShift grew massively and we you know, we got to the size where we decided to invest, you know, I literally millions of dollars in further legal work to analyze every contour of these complicated Financial regulations. And basically from that what came out of it was that we felt it was too risky to continue that model without taking KYC from users. This was really like the most existential struggle I’ve ever dealt with in my life. It was probably six months of agony and and stress trying to figure out what were the rules exactly. What were the risks. How are they different in various places if we needed to collect information, what would it need to be and among all users are just certain ones and you know, every every aspect of this question we examined and ultimately came to the decision that we had to collect KYC information on all users that were trading one crypto for another. This was dismal news for me, you know a dismal realization and conclusion to come to because we knew that it would be bad for our customers. We knew it would be bad for us as a business, but we felt that we had to do it so that we wouldn’t get thrown in a cage and the whole company shut down and that wouldn’t be good for customers or employees or anyone and then the story would be over. So that was kind of the existential problem we faced and it was rough. Ultimately I decided we should play the long game and if I’m going to fight for financial privacy, I need to be able to do it from a company that is big and powerful and strong and has that voice rather than trying to do it, you know shut down and thrown in a cage somewhere, whether that strategy is the right one or not we will see, you know, check back in with us in five years or ten years to see what we’re doing and see what we’re advocating but that principle of of encouraging and enabling people to be private in their finances I think is an important one and the fact that we can’t allow that on our platform anymore is really unfortunate and we understand why customers don’t like that. We don’t like it either for now we have to do it.

Friederike: So, can you look beyond the regulation that you’re complying with? Do you see any good in doing KYC, or is it to you just  literally just a nuisance?

Erik: It’s not a nuisance. It’s worse than a nuisance. I think it’s unethical. I think is unethical to force people to give up their personal information when they don’t want to so, I have a moral problem with it and does good come of it. Maybe I mean, yeah once in a while once in a while by companies spying on everyone they can sometimes catch a bad guy a little more easily but to do that you basically endanger, you know, all the innocent people and you can go down a very orwellian road of trying to catch the bad guys and always then interfering and impeding on the freedoms of good people. This is kind of the lesson of tyranny broadly in history. So I don’t I don’t support that. I think I think most people are good. I think people have a default right to privacy and I think they should be left alone. If there is suspicion of a crime then trying to get information about that person is one thing but forcing you to get information about those people when there’s not even suspicion of a crime I think is highly unethical.

Sebastien: Yeah, this is a position that I wholeheartedly agree with and have become more and more aware of obviously like since being in the crypto space and I find it highly frustrating as well that you know, it seems to be that society is moving in this direction more generally. We had Jerry Brito on a few weeks ago who wrote this paper defending cash and the need for cash and you know, they’re doing great work in this field and his position is trying to educate lawmakers and law enforcement officers who he feels are mostly patriots and would defend the right to privacy and freedom, I guess in the American context makes a lot of sense, but also, you know, outside the American context we’re recording this from Germany at the moment where most places at least here in Berlin, you can only pay in cash, but I think that even though there’s this nice idea that people should be free and have have right to privacy that that is not the direction in which the world is going.

Erik: Definitely not

Sebastien: We look at Inter National financial regulation is not going in this direction, payment systems are not going in this direction. Do you feel that the future is a little bleak have you lost hope for a future in which people continue to have some form of financial freedom and more specifically privacy in their transactions?

Erik: Yeah, I think the world without cryptocurrencies would be very bleak and getting worse and worse. I mean certainly all governments around the world are unanimously in favor of greater surveillance and control of their people that’s kind of a truism and in a world where all money is controlled by central banks and the banking system which extends from it really the world’s financial system is simply a branch or a tentacle of the government itself. And I think that’s pretty frightening and dystopian and getting worse and then along comes this crazy crypto phenomenon, which which does two things one, it provides technology that allows privacy. So there are certain cryptos that are encrypted and even something like Bitcoin. Well, it’s not perfectly private brings privacy in ways that credit cards certainly do not have but more than that it also provides complete sovereignty over your assets meaning control over them. So when you can self custody your own assets, you are not dependent on anyone else to be able to send or receive that and regardless of whether you can do that privately those are kind of separate questions, but you always have the power to send Bitcoin you always have the power to receive Bitcoin and that’s incredibly inspiring and hopeful so I think the future of humanity is a good one, but as the world struggles with this question of moving from a Fiat and bank based financial system to a blockchain and crypto based financial system, which I think is inevitable, there’s going to be a lot of struggle along the way because that really changes how the world works in a lot of people are not going to be very happy about that.

Friederike: So there’s an easy way to go about this in terms of ShapeShift. I mean easy in a theoretical sense not in a practical sense. So ShapeShift is halfway decentralized in the way that the settlement there is decentralized. But the architecture on top isn’t, how was this design decision made, do you think if you had gone all the way towards decentralization even for the architecture on top you could have forgone the KYC that you find so repugnant?

Erik: Yeah, great question. Yes a decentralization exists on a gradient. It’s not a binary thing where you’re either decentralized or not. There are degrees of decentralization. ShapeShift is more decentralized than something like Coinbase, but it’s less decentralized than a true DEX obviously and even among DEX’s you have degrees of decentralization. So yeah in the theoretically most decentralized design of a DEX where the individual contributors themselves are decentralized there’s no corporate entity, there’s no central party whatsoever. Yeah. I mean that’s software doesn’t comply with anything because it can’t so that’s that’s cool. And I’m very glad that there are projects like that out there that are working toward that end. And then on the full opposite side of the spectrum are centralized companies that especially once they grow past a certain scale have to be very careful about complying with laws because ultimately they can get shut down and thrown in cages. And there exists, you know kind of middle ground between those things where it’s a question of how much risk people want to take, over the last year we saw one or two or three DEX’s implement KYC and accounts on themselves, which people didn’t think would happen because the graters of the DEX’s were known some of them are actual corporate entities themselves. So even though the technology and the exchange was decentralized it was operated by a central company. So these are all these are all questions that I think every every entity in the crypto ecosystem struggles with and frankly I’m just glad that there are different models for people to try that’s one of the strengths of the crypto industries that people can try every model from the Coinbase model all the way to the most decentralized thing like a like a Bitcoin itself and everything in between. That’s what makes this so strong is that there’s no single model, no single weakness because it’s diverse.

Sebastien: Do you have plans in the future to further decentralize the underlying layers in the stag? I mean one thing that I think is an interesting thought experiment is to say that ShapeShift would integrate with something like you Uniswap or Compound or some of these decentralized equity pools that are fairly easy to I suppose I mean from a technical perspective fairly easy to integrate with, is this something that you feel will be valuable to your users or could be offered as a secondary product where KYC would be not as relevant or useful.

Erik: Yeah. It’s certainly something that we’re considering. In the new ShapeShift platform KYC is actually not required for everything you can use it without KYC, but to trade through our market making you need a KYC account. We need to do some further legal review on if and to what extent allowing users to directly interact with DEX’s through the platform would have KYC requirements, that is unclear at this point might be a question of risk tolerance. So yeah, it’s absolutely worth considering. It’s going to be a constant struggle for the coming years and it’s going to be hard for any company to allow people to be totally anonymous. And so you’re going to get this trade-off between companies that can build software that’s very useful and easy and convenient and can help grow and bring more people into the industry, but that may not themselves be able to be the ones who advanced privacy that might need to be done more on the protocol level.

Sebastien: Okay, so let’s talk about the product a little bit because we haven’t really touched on that so far, can you talk about what’s new in this new version of ShapeShift and what people can expect when they’ve created the account and passed this KYC.

Erik: Yeah. So again, you don’t need to do that in order to use it you only need to use the KYC if you want to be trading obviously a lot of people want to trade so they need to do the KYC then but a good way to think about it for people who haven’t tried it before is right now, it supports two different key storage mechanisms either a KeepKey or a treasure, later on we’ll add others like Ledger will add a software-only version we’ll add a mobile version. So we’ll keep adding more ways for users to hold their own keys. But we wanted to start with hardware both because that’s the best practice I think for people who want to get something that’s very easy to use and also very safe and also, it just seemed like a more stable foundation for us to build the first version of this platform. So right now if you have a KeepKey or a treasure you can use the ShapeShift platform and it basically becomes a much better interface for your hardware wallet holdings. So you can see your entire portfolio together. You can watch you know, the real time data of the various coins. You can send and receive the various cryptos. You can trade them, you know any crypto for any other crypto directly. So, you know thousands of pairs in that sense you can buy and sell Bitcoin with Fiat if you’re in the US right now from a bank account and we’ll add options for Europeans and other regions later on so really, you know, kind of think about what a coin base does trying to be a one-stop shop for all basic crypto, but to do it in a way that allows you to retain custody over your assets, that was really the key for us and then one, you know one important distinction is that there are a lot of wallets out there that are multi-asset but generally they are like only Ethereum in Ethereum tokens. So there are tons of those kind of wallets, the crypto platform works across most of the major blockchains and we’ll continue adding more into the future. So that’s kind of the current version V1 of this platform. And then over time we’ll add new coins we’ll add things like staking obviously we’ll add different key storage mechanisms, we’ll add other ways to interact with with the decentralized financial systems, you know, lending markets and money markets as those develop and so really this is meant to be like a b2c way for people to interact with the crypto world and to store their assets safely and retain self custody over them.

Friederike: And the FOX token. What is that used for?

Erik: Yes. So this has been like a two-year project at this point and we’ve had to be extremely careful about the FOX token for all the obvious regulatory reasons. So we’ve been taking baby steps with that. But we continue to move it forward. Right now that token exists. It’s an actual your ERC-20 token, but it’s not released yet and it’s not integrated into the platform yet, that will happen later this year. And basically what the FOX token does is anyone who holds them will get better rates on the trades that they have so you can think of it sort of like a loyalty program or a reward system where simply by possessing those tokens you get better and better rates on the trades, that will kind of be the V1 of the FOX token and people can earn that token on the trades they’re doing and then basically it’s just a good way if you’re actually doing trades to get better and better rates by holding that token you don’t have to burn it or spend it to get those rates.

Sebastien: Okay, cool. The way I see this if you just think of this new platform as a place where one can manage his or her portfolio and set aside the training aspect for a moment. It’s like a great self custodial multi currency wallet where one can manage your portfolio, see how the portfolio is doing and to me it feels like an improvement on what like a Ledger Live could be like the Ledger Live products is great but I feel like it’s lacking a lot of the portfolio management features that I’d like to see in it. And this is where I see this new ShapeShift product positioning itself. And then in addition to that then you like, you know, you have all the trading aspect also which is really nice to have within your within your wallet. I’m really looking forward to the Ledger integration because I use Ledger and yeah, I’d love to use it with my Ledger, but for now so it works with with Treasure and KeepKey.

Erik: And over time the experience on the KeepKey will probably be the best one because we have full UX control over every layer of that stack from the hardware because we own KeepKey to the wallet and interface which is the platform to The Exchange so we run all of that and so we can make the UX between those things very very good. I think we’re the only company that sort of has kind of those three layers all under one house. So over time you’ll see that experience with KeepKey getting better and better. But we’re obviously going to support, you know, all the major key storage mechanisms that customers want.

Sebastien: And are there any criteria that you use to evaluate which tokens get listed? I mean, I know there’s some considerations. I know that like in the last version ShapeShift is a bunch of tokens that were delisted for various reasons. Can you walk us through some of this reasoning.

Erik: Yeah, I mean they’re delisted for one reason and one reason only which is because we felt that they were too close to the line from a securities perspective. I have my own history with the SEC and I’ve been watching them very closely about how they’ve interacted with the crypto world. So ever since the start of ShapeShift we’ve been very careful about which assets we would add and as the SEC has issued guidance we continually revise our own policies on this. Ultimately it’s a bad situation because all we have are a bunch of tea leaves and we have to try to interpret things. There’s there is zero clear guidance from the SEC on which tokens they deem securities and which they do not, they believe that it’s clear but it is it is not they have not released any list of the tokens that they think are securities in the tokens that are not so we continue in this gray area and we simply look at the various candidate tokens on it on a number of metrics. We have a very thorough process for this and any token we think is too close to that line we won’t add and in the case of the tokens we delisted, that happened after there was guidance from the SEC that made us change our assessment of those things. So something we constantly watch. Now that is for the tokens that are available for trading, tokens that are just held in a wallet we can list anything because it has nothing to do with with the SEC or securities rules at that point.

Friederike: Not listing securities is a prevalent problem for all crypto exchanges. Do you collaborate with other crypto exchanges on which tokens you’re going to delist or on the legal ground work that goes into this?

Erik: We don’t, we have an internal process that we use ourselves. We don’t talk about it with other exchanges.

friederike: Cool thanks, so what’s the business model of ShapeShift?

Erik: Yeah, it’s quite simple. I mean, we’re a market maker for the trading so unlike most exchanges where you know buyers and sellers are putting up their asks and then wherever those prices meet a trade happens and the exchange takes a commission from those two parties that traded together, we’re a market maker. So we are always the counterparty. So when someone sells Bitcoin for Litecoin, they’re selling the Bitcoin to us as ShapeShift and we’re selling the Litecoin to them and so in the pricing that we offer to people we build in a spread there. So we make roughly half a percent on the trades that go through us and that’s the business model. Interestingly while we’ve never really competed on price before as the ShapeShift from the past, we’re releasing new pricing engine in several weeks that ultimately will be able to beat most exchanges much of the time especially for larger orders because we are a market maker and we’re not limited to any specific order book. So that’s something that our platform users will be able to enjoy down the road a little bit. But you know at that point, they’re really we’re trying to pull people out of these centralized exchanges because they’re so dangerous for all the obvious reasons that people in crypto understand but they leave their assets at these exchanges because it’s convenient and ultimately because they get decent pricing on the trades. If we can make it as convenient to self custody and if we can even get in a relatively competitive on the pricing we think not only can we grow our business to be a huge size but we also will do a big service to the industry by pulling custody away from centralized places and allowing that to remain decentralized in the keys of actual users.

Friederike: So because you’re not bound to order books because you can pull the liquidity of the different order books together with it in order ring trades or how do you how do you create better liquidity?

Erik: So yeah, we watch all the order books of five different exchanges right now and over time, you know, we’ll add more and you know, let’s say someone is trying to sell 20,000 dollars of Bitcoin into Dogecoin, on any specific exchange there’s going to be an order book that might you know, the price may move by X percent on order that size. But if you spread that order out across all the exchanges the price would move less than that and so because we can theoretically do that by being the market maker ourselves we can give better pricing to users than they would get on any particular exchange and they never have to worry about the custody.

Friederike: When do you quote the customer the price, is it before you’ve actually earned the price or is it after and is there an element of risk analysis involved for you guys?

Erik: Yes, there is so ShapeShift’s always had to order types one’s called quick and one’s called precise, basically with a quick we show the user a price that’s updating all the time. And whenever they actually do the trade, they’ll get the price that’s offered at the time. The other way is that they can lock in a price for a window of time. And so in that case they might be getting a slightly worse rate. But at least they know what the price is, you know, exactly. On both of those we as ShapeShift bear some risk and we certainly lose money on some trade some of the time so we build that into our modeling and you know the better we get at that, you know, the lower we can tighten the spreads and that’s that’s sort of part of the business is that is doing that intelligently.

Friederike: Have people try to exploit that.

Erik: Oh, yeah, all the time.

Friederike: Because if you know how the algorithm is built you can always try to game it right.

Erik: For sure. And yeah, and it’s always a game of whack a mole and there have been people who have you know, successfully traded through us and made a bunch of money and we lost the money and we see what they do and we learn from it. And so yeah, you know markets can be thought of as everyone trying to game everyone else. And in that sense you just have to be careful and prudent in what you’re offering to people.

Sebastien: Can you give us a sense of the volume today on ShapeShift?

Erik: Today’s volume like ever since we implemented KYC last fall volumes have been pretty dismal. And so we’ve been in this phase of rebuilding the new ShapeShift and then kind of rebuilding a whole new business on that new platform. So today, I think we do an average of like two hundred thousand dollars a day in trades which you know for a year or two ago is is really low and that was like the thing that we knew would be really painful when we implemented KYC is because we essentially gutted the entire customer base that we’ve been building for several years, all the wallet partners that used us dropped us because they didn’t want their customers to have to deal with KYC. So yeah, that’s been that’s been difficult and we just have to rebuild and a new company with the new model.

Friederike: With a half a percent margin that’s obviously not enough to support a company. How are you planning on getting that up in the near future or how is this going to improve.

Erik:  Yeah by bringing customers into the platform and with enough customers comes enough trade volume and with enough trade volume, we get back to profitability. So it’s really just a question of trade volumes and to do that we need to build a product that people like using that they feel safe using and that is distinct from the other competitors in the market.

Friederike: Do you see yourself trying to attract larger players or institutional investors?

Sebastien: Maybe we’re the only company in the world right now that’s not trying to go after institutional investors. I’m sure a lot of companies will make a lot of money with that. But our expertise is in B2C and actually catering to end users of crypto and I think our role will be to help the world, you know of actual end users transition from a Fiat and bank system into a blockchain cryptosystem. And so we’re building a product that will be useful for for normal people. You know, everyone who is just getting into crypto to people who have a lot of crypto but themselves are are individuals. So we’re not going after businesses really we’re definitely not going after institutions and I think there would be kind of a culture mismatch if we as ShapeShift went after Wall Street institutions, that just wouldn’t fit. So it’s not us we’ll leave that field to other companies.

Sebastien: I can’t see you going down that path, but you know since the volume has gone down quite dramatically and as you mentioned that has the effect of your revenues are there are other business models that you’re pursuing even in those sort of B2C market.

Erik: Nothing that we’re trying to replace our core business model with I mean, ultimately we make money as a market maker for people that are trading between digital assets. And so that fundamental premise hasn’t changed. We’ve just had to change the products that we offer that service through. So yeah, it’s going to take time to rebuild a customer base and get those volumes back up, but we’re a business and so that’s what we do.

Sebastien: One last thing that we want to ask is so last time you were on two years ago was to talk about Prism which was a portfolio management platform. Yes, you shut that product down recently about a year ago in October last year. Why did you shut that down? What was the experience there?

Erik: Prism was super cool, but it was basically a way, it was built on Ethereum and it was one of us not the first commercially available smart contract financial applications built on Ethereum. Basically what it did was allow people to put up collateral in Ethereum and then create a portfolio essentially a derivative portfolio of various assets. It was all held in a smart contract so it was trustless and then the performance of the portfolio, you know, you make money or lose money over time. And then when you close the portfolio you you either get back less or more collateral than you put in based on the performance of that. It was very cool because it was essentially an easy way to get exposure to digital assets without having to set up a whole bunch of different key storage. It had one significant problem sort of that didn’t exist when we first fathomed it because it was all on chain the Ethereum gas costs became prohibitive so that it only made sense to create fairly large portfolios. Which was a little different than its target market, That you know over time we could have solved and there were some ways around it and I think Ethreum has to figure that challenge out in other ways already but also we have been working on this new ShapeShift platform for about a year and a half and it became clear to us that the overlap between the two products was too great. And so it didn’t make sense to be building both of them. And so even though we didn’t mention this at the time that we closed Prism, part of the reason that we closed it was that a lot of its features will end up being built into the new ShapeShift platform and we felt we needed to focus on that. So yeah, it was certainly sad to close that product a year ago. It was a very interesting kind of pioneering project to build financial derivatives in a trustless way we thought there was some real real value and interest there, but we just had to make a difficult decision to not continue that at this time.

Friederike: Super interesting. Let’s switch gears a little bit and talk about the ecosystem a little bit more. So you’ve been in this ecosystem for a very long time. You spent a lot of time in Bitcoin and some time in Ethereum, how do you see both of them from the outside from the perspective of the others? And how do you see this in the face of challenger chains and protocols, so Cosmos, Definity, Polka Dot and so on.

Erik: Well, so when I got into crypto it was May of 2011, Bitcoin was really the only thing there and the entire crypto community was the Bitcoin Community they were synonymous. As this technology grew and as people started building different kinds of blockchains and experimenting with different ways of using this technology, different use cases different types of assets, the community has obviously fragmented and split into many different pieces. I see myself as part of the entire cryptocurrency ecosystem. Not just the Bitcoin ecosystem and not just the Ethereum ecosystem but really a holistic approach to realize that this is an entirely new set of technologies and asset classes. I think they’re mutually beneficial to each other. I think Ethereum’s strength helps Bitcoin and vice versa and it’s been really tragic for me to see that there are a lot of people that don’t feel that way. And this is particularly apparent within the Bitcoin community. There are a lot of Bitcoiners who have utter hatred for every other crypto project out there. I think it’s really sad and unfortunate and a lot of them spend their time on Twitter, you know kind of shitting on every other project and finding problems with every other project because they want to just protect Bitcoin, it’s very tribalist. It’s the same kind of thing you see among, you know fans of sports teams. It’s the same kind of thing you see among political parties or religions. It’s kind of a phenomenon of humans that they will fall into this tribalism sometimes and it’s been sad to see that in the crypto world, but you know, maybe that was inevitable as you move from a community that was you know, ten or twenty thousand people around the world to one that is now 10 or 20 million.

Sebastien: So looking at both the tribalism in Bitcoin and Ethereum, even like there’s tribalism even between like within those communities not only among like between themselves, do you think there’s a way out of this, what will be the great unifier to cause some of the tribalism to go away?

Erik: I mean one potential unifier is when there is a common enemy. And so that would generally be Fiat currencies and banks and governments Fiat currencies and banks and governments have not taken a hard-line antagonistic approach to crypto. So it’s not a clear and present danger in a clear enemy. I think if like the G20 Nations started trying to outright ban cryptocurrency some of the tribalism might go away because then at that point the tribe is all of crypto versus, you know, the Fiat world, but that’s not a guarantee that that would would solve it either. I don’t know. I mean maybe it doesn’t get solved. Maybe you just kind of withers away 10 or 20 or 30 years from now when this technology isn’t new anymore and people see what Bitcoin’s place is and they see what Ethereum’s place is and they see how these things interact in the use cases that they all fill, I think some some of it results from Bitcoiners being unable to realize that there are more use cases than just money. They seem stuck in this idea that like cryptocurrency digital blockchain assets can only be used as money and because Bitcoin is the most popular and because they believe it’s the most secure in the most decentralized etc that it should be the only one and that any other competing money, you know will ultimately fail just based on the laws of economics. I would tend to agree with that in some ways if the only use case was money, but even in that case there is value in the experimentation on other blockchains. It is not clear that Bitcoins blockchain and its structure is the optimal way to do money, the world deserves a period of experimentation of 10 or 20 or 30 years to vet that out. But more importantly money is only one of the use cases of digital assets and I think digital assets there will be millions of them. I think there will be one to a hundred major blockchains something like that. There’s not going to be a million popular blockchains because that doesn’t make sense. But there’s definitely going to be millions of different digital assets on these major block chains and they optimized for different things. You know Ethereum has features the Bitcoin can’t do today and Bitcoin has structural reasons why it is more secure and safe than Ethereum right now. Both of those are useful and I think the market is better off by having both of them. At the same time you have new coins like, you know, the EOS’s and the Cosmos’s of the world that are operating on a proof of stake model and those have advantages. They’re extremely fast very high throughput, that doesn’t mean that they should replace Bitcoin or that they would be a better form of money, but they are certainly better in some use cases than Bitcoin is and certainly better in some use cases than Ethereum is and I think that’s okay. I think it’s a healthier industry when you have multiple technologies providing multiple products for people and so I you know, I just see all that as good stuff. A the same time there’s a lot of total crap projects that are either scams or totally pointless. So this doesn’t mean that every crypto project deserves recognition or respect, but I think a lot of them do and so I don’t know how the tribalism ends but it’s been it’s been kind of disappointing.

Friederike: We often talk about Ethereum more than Bitcoin. This is why I’m asking for Bitcoin this time. What’s your vision for Bitcoin at this point? And where do you think it’s going and how has this changed over the last couple of years?

Erik: So my fundamental view of Bitcoin has not changed ever since I got involved many years ago. And that is that I believe it has a good chance of ultimately replacing by outcompeting Fiat currencies around the world and becoming a new monetary standard for the whole world. I think that was its initial promise and I think it is with each day that goes by it gets closer and closer to that. I am one of the people that believes that Fiat currencies will go away. I think that over time when people realize they can have money that cannot be created out of thin air or they can have money that can be created out of thin air by politicians over time they will they will choose the former but it’s going to take a long time and at least a generational shift if not two. So one thing that has changed though with Bitcoin is also early on it was seen as a really good payment system like a very easy quick way to pay people around the world that was fast and cheap. It’s still quite fast. Obviously, it’s the same speed it used to be and for international transfers or for anything that is, you know, call it high value which means you know, a few hundred dollars or more, it’s still a great payment system, but obviously as it gets bigger and bigger the fees are going to get worse and worse than it’s going to be useful for fewer and fewer payment use cases. Maybe that’s okay or maybe things like Lightning network will really take off and handle those smaller transactions and that would be okay too. But that’s something that’s definitely different from when I first got involved to see kind of something that used to be, you know, send money for essentially nothing to now, you know, it doesn’t make sense to send a $10 Bitcoin transaction ever and in the worst case, you know back in the last bubble the average fee on Bitcoin transactions was $50 we had customers sending us $100 trade, you know of Litecoin into Bitcoin and they would end up with with $50 on the other side and think that we scammed them and you know, someone who’s new and is like why that why in the world did you take $50 of my transaction that was an uncomfortable conversation to have with thousands of different people. So that’s certainly not ideal for payments. But payments is just one of many things that crypto can be used for and if Bitcoin does not become the widespread payment network that people thought at first that might be okay, too.

Sebastien: My view is that if Bitcoin is money and is meant to be money that the ecosystem should really be working hard to make it money. I feel like Lightning network is a good step in this direction. But do you see anything that the Bitcoin ecosystem specifically could be doing better to move closer to this goal of being a replacement for Fiat?

Erik: I think you have to separate the money from the payment system. Obviously a money that has easy payment systems attached to it is better than one that doesn’t but it’s not clear that if Bitcoin is going to be money it needs to be able to have cheap $5 transactions. Maybe it does not that’s that’s unclear. It is also very possible that a different crypto starts emerging that is simply because it is faster and cheaper it ultimately takes more economic activity and it becomes money and it’s totally possible that Bitcoin fails because it did not optimize for speed and transaction throughput. I don’t know. I don’t know where that will come out. But again, that’s why all this experimentation is really important.

Friederike: What are your thoughts on Libra. So you had a tweetstorm in which you welcomed Libra.

Erik: My first tweetstorm.

Friederike: Yeah. I know I saw, can you explain your reasoning behind why you think it’s good for the ecosystem?

Erik: So I’ve been interested in this mysterious Facebook cryptocurrency, you know kind of ever since the news about it started leaking kind of mid late last year. I assumed that it would be kind of some watered-down centralized coin that was not very interesting really just like $1 pegged centralized, you know, “digital currency”. That’s what I assumed would happen. But when the actual details of Libra were revealed I was quite enthusiastic about it. Certainly it is not a censorship resistant self sovereign crypto currency like Bitcoin, but it’s also something that is much more interesting much more decentralized and much less, you know tied to government policy than Fiat. So they did to kind of really important design decisions, one was that it is actually built on a blockchain sort of a you know, an open-source permission lists ledger that people can be building on, that was a big design decision that was important and two it’s backed by not, it’s not a one-to-one peg with the dollar which would have been there easy way to do it. It’s actually backed by a basket of Fiat and bonds and what that means is that it is sort of above or greater than any specific national currency. And because Facebook has two billion users it’s really the first credible near-term competitor to something like the US dollar. I found that to be extremely exciting. I think a world based on, you know, large companies issuing their own currencies would be much better than one where governments are issuing their own currencies and something even better than that is where is a purely decentralized cryptocurrency like Bitcoin, but I see Libra has a really good stepping stone between those two worlds and then I was pleased to see but maybe pleased is the wrong word entertained to see how quickly the governments of the world came out against Libra, they were very uncomfortable about what Libra was doing, and this was largely because they saw it as a threat to their monopoly over money creation. And now we have hearings in the major branches of government in the US and elsewhere where they’re actually talking publicly about the qualities of money the attributes of money and whether you know central banks to create money or private markets you create money these kind of discussions never happened 10 years ago. They haven’t even really happened within the Bitcoin world because the politicians haven’t taken Bitcoin seriously as an existential threat to Dollars. I’m glad they’re not taking it as a threat even though it absolutely is that threat but when Facebook comes out and does it they see that immediately as an existential threat to dollars in another Fiat and that’s just fascinating. I mean at this point Facebook has become the lightning rod to which all the ire of these various politicians is going to be drawn. I don’t know that Libra will actually ever launch because I think the government is going to be so upset with them that they can’t actually get it out the door, that demonstrates yet again, why decentralization is so valuable and ultimately I think that’s good for Bitcoin. And I think if Libra launches it’s good for Bitcoin because it pulls people further out of the Fiat world and into a more digital currency world. So I’m excited about the whole thing. I applaud Facebook for making some design decisions that would be obviously controversial and really push the envelope. I think you know, whenever I see bravery from a company that large I think that’s very respectable. So yeah, we’ll see how this goes.

Sebastien: I think I agree with you on the the interesting design aspects of Libra. I think that we probably weren’t expecting that to emerge out of this project and it has been entertaining as well to see regulators and lawmakers and politicians throw their arms up at this project and it’s sort of like, you know, we’re scoring points like cryptocurrency the group is scoring some good points in this in this fight. On the other hand to be a critic of Facebook or its numerous privacy transgressions over the years and you know, we’re learning more details now about some of the things that are to come and like sort of thing, it’s Messaging App Suite etc I think it’s absolutely inevitable that if Libra ever launches that Facebook would use the data to fulfill his mission which is to sell advertising to its advertisers and exploit people’s financial data. What are you thoughts on that? Like, where do you sit in between these sort of this is great because it goes against government and national currencies and on the other hand, you know the risk to users.

Erik: Yeah I’m not one of most people who thinks Facebook is evil because they use people’s data. I think people that use Facebook as customers and they want a free service and then expect the company to just build them a free service without taking their data and selling it are naive and frankly unfair. I think any private business that you can opt out from you can opt out from so if you don’t like what Facebook does with privacy don’t use it if you don’t like what Libra does with privacy don’t use it and that’s the marketplace at work. I would much rather have a world where Facebook has the predominant currency and takes information from it to sell you advertising versus a world in which the Federal Reserve issues the main currency and they’re able to debase it and print it at the whim of politicians which impoverishes the entire world slowly over time. I think that’s a huge improvement over the status quo. Better than both of those of course would be a world in which a properly decentralized cryptocurrency like Bitcoin exists and is the dominant money, but it really kind of depends on what you’re comparing it to.

Friederike: So in fact that Libra is a currency that’s that’s issued by a non-state actor that is nevertheless extremely powerful in the legacy world. So something that can’t be said of Bitcoin and the like so even if you just look at the total market cap of Bitcoin and Ethereum that is completely dwarfed by Facebook and all the other companies that are attached to Libra now, do you think this is going to change how we think about State and non-state actors? And do you think this is going to blur the line because in effect so far money issuance has been a monopoly for you know nation states and I mean just counting Bitcoin but I mean basically it in the grand scheme of things Bitcoin and Ethereum they’re really a small phenomena. So they’re not going to throw off entire government’s yet, but do you think in hindsight will see this as a pivotal moment?

Erik: Yes, I think it’s definitely a pivotal moment. I think there’s generally an impression that governments have always managed money. And thus the fact that Bitcoin is this new thing and or Libra’s this new thing is something entirely different from history. The reality is that governments have only really been issuing money at the base layer for a few decades. I mean basically since 1971 when the dollar went off the gold standard we’ve had a purely Fiat system, prior to that it was really a gold and commodity money system and in an imperfect one, but one that was still at the foundational layer built on gold. So this isn’t something entirely new at all. It’s really a return or let’s say it’s really the world leaving the context of governments being responsible for money and going back to something that is that is outside of the control of any politician or any government. Now obviously something like Bitcoin is far more powerful than gold because it can move around the world so easily and it works in a digital economy, gold doesn’t really work that way unless you centralize it and issue electronic notes for that which has its own problems. So there’s definitely like newness to this whole phenomenon, but I think a world where government wasn’t behind money would actually be back to normal. It would not be something.

Sebastien: Interesting.. I think that there is a contextual aspect that comes to play here that needs to be considered as well as that the world of a hundred or two hundred years ago and the economy of a three hundred years ago, it was far less complex than what we have today in terms of market activity, the population, supply chains etc. Do you feel that it makes sense in today’s massively complex economy to go back to a fully unregulated money system as was the case may be like 200 years ago.

Erik: Yeah, I think the more complex a system the less able to properly handle a decentralized structure becomes, so when a simpler system centralization can work really well as you add complexity centralization causes all sorts of all sorts of problems. A great example of this is politics and governance. The biggest problems in politics are the ones in which you have the most people involved. So a Town Council never commits like genocide or crazy global issues and most people feel reasonably okay about their Town Council. When you get up to like a city or a state level there’s more controversy and more problems, but still nothing like which you get it national governments, especially when it comes to markets which are incredibly complicated and there are no people on Earth who are smart enough to really understand them, that that kind of that humility is completely lost within politicians, they all believe that if you get a few economists in the room, you can understand something as complex as the global economy. I think because something is that complex it has to have a decentralized structure and when you have Central Banking where they are literally controlling the price of money, they’re essentially planning the price of money for the entire world, that is the same kind of central planning that took down Soviet Russia the same kind of central planning that’s taken down Venezuela. That kind of thing is really dangerous. And so I think the world would be much better off to the degree of this complex. It is much better off with a decentralized system in which no central party is trying to have all the information because it certainly cannot have it even if it wants to.

Sebastien: I’d like to touch on something you said there was I think it’s relevant here. And obviously I agree that central planning to the extent that we saw in Soviet Russia or that we see in Venezuela is an extreme that at some point does collapse and you know, we can see what’s going on in Venezuela now and we’ve seen this in the last 50 years in many places, but you said something about people not being smart enough to understand what’s going on in their in their own market and and I’d like to tie that back to Facebook and the unchecked aggressions and transgressions on people’s privacy and the fact that sure like people can use Facebook if they like or they can stop using it. I think that in the aggregate people don’t really understand or appreciate the risks of such an unchecked power that is governed only by markets such as Facebook and we’ve seen that in the last couple of years with what happened in the US elections. And I think that is just at the tip of the iceberg because in reality I think you know, there wasn’t really that much AI or machine learning behind that, you know, do you think that companies like Facebook should be, and this is sort of off topic, do you think the companies like Facebook should be allowed to just do as they please and grow to nearly like too-big-to-fail size and not be regulated at all.

Erik: I mean my general moral philosophy is that anything peaceful should be permitted and I can always walk away from Facebook. I cannot walk away from the US federal government. I am taxed and stolen from by them regardless of what I want to do. I just see them as completely different threats in their character. I mean, I don’t see Facebook as a problem because people can stop they can opt out of that. If I could turn off my support of the federal government that would be incredible, but you know, I can’t I’m trapped and not only that but Facebook does not have a military that goes around the world killing hundreds of thousands of people. So yeah, is it bad that they use your data to sell to advertisers? Sure. I guess that’s bad and people should certainly be more cognizant that that’s happening. I agree with that. But they’re not killing people, Facebook isn’t killing people, the US federal government is literally killing hundreds of thousands of people. To even put them in the same boat I think is unfair and I would much rather have large peaceful corporations like Facebook that are market-based and regulated by markets running money systems versus large governments that literally kill people and have the legal protection of theft and murder. I think that is that is the great Injustice of the world. And so the more that the control over money moves out of that world and into into the private marketplace the better.

Sebastien: Well, I would say that once Facebook has its own money and control over money it can definitely add that point start going around and killing people.

Erik: Then my opinion will change.

Sebastien: Facebook is not an elected body of people.

Erik: Totally disagree. So you have more control in your election of Facebook then you do in the election of US politicians. If you don’t like Facebook, you can sell their shares, they can close our account, that is democracy that is opting out of something and that is much more powerful than the charade of political votes that elects the stupidest people among the population to lead them. I mean, I don’t understand how anyone can possibly advocate for a system like democracy when it leads to people like Hillary Clinton and Donald Trump being the two greatest candidates that the country is able to choose from. I mean, that’s just totally preposterous that whole system is I think worthy of being shut down immediately.

Sebastien: Totally agree. I completely agree with that with that premise.

Friederike: So what do you think about the future of money Erik? So basically in principle blockchains enables tokenization, so basically as it’s become easily transferable do you think we will actually still need Fiat money or even company issued money in the future?

Erik: No, we don’t need Fiat money now, Fiat money is a scam. It’s the greatest scam ever perpetrated on mankind, the sooner people abandon it and moved to private market based money the better. Bitcoin obviously kicked off a phenomenon that I think is unstoppable at this point. It is a phenomenon of this decentralized trustless technology, which is really well suited for something like money that needs to be global and which no one should have the power to control. I think it’s inevitable at this point and that you know, I don’t know if it takes five years or 50 years for this all play out. But I think you know two generations from now people will look back and see how obvious it was that a group calling themselves the Federal Reserve should not have been trying to control the price of money for god sakes like that’ll be something that’s laughed at by people in the future as something preposterous just like bleeding people to rid them of the plague was preposterous and we see that now, so this will this will take some time to change but I think a seismic shift in how money works has occurred and while we might be participating in this, we’re all just kind of along for the ride at this point.

Friederike: I think this kind of leads us to our last question. So looking back at the last five years that ShapeShift has existed is there anything that you would have done differently in hindsight?

Erik: Yeah. I mean, there’s always a million mistakes that any entrepreneur makes and I am certainly of that, probably our biggest strategic mistake was simply building too many different products at the same time. We’ve seen so many opportunities in crypto that we kind of pursued too many of them too early on instead of focusing just on our core business. So that was a lesson I’ve learned and we’ve corrected that now by by building this platform that is the entire company all of our energy now goes into this platform. So that’s something that I’ve learned and something I would change, you know regarding the the whole KYC question, I think that was the right decision for us to take it’s been immensely painful in the short and medium term but I think it was the only way for us to keep building a company over the long term. So I will have to you know assess whether that was really the right decision 5 or 10 years from now, but right now it’s I think too early to say.

Sebastien: Great. Well, I would love to be able to talk more and debate more. I agree with you on some levels, but I also think that like, you know Soviet Russia or Venezuela and all the transgressions there and the extremes there is sort of extreme libertarian viewpoint also has its flaws and so on.

Erik: Certainly not perfect. Certainly not perfect.

Sebastien: But we’ll have to leave it there because we’re running out of time here. But thank you so much for coming on the show again Erik and look forward to having you back on again in the future.

Erik: Yeah, great discussion, really really enjoyed it and for anyone that wants to check out the new ShapeShift we look forward to working with you. So, thanks a lot.


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