71. Blockchain Investing, Part 1 (William Mougayar)

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William Mougayar of Virtual Capital Ventures joins Nick to cover Blockchain Investing, Part 1. We will address questions including:

  • Mougayar Blockchain InvestingCan you start off by telling us about your background and how you became involved in both startup investing and studying the blockchain?
  • We hear investors talk about Bitcoin, crypotcurrencies and, of course blockchain. Can you begin by reviewing what each of these are and how they are inter-related?
  • Can you talk about why the blockchain extends well-beyond just crypto-currency applications?
  • How would you describe the blockchain stack?
  • What are some examples of the things that the blockchain can enable?
  • What are the key potential impacts the blockchain may have on the consumer-side?
  • And, how about for business? What are some of the impacts on the business, industry and/or gov’t side?

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FULL TRANSCRIPT
*Please excuse any errors in the below transcript

Today we’re talking Blockchain Investing with #William Mougayar. In part one, we will talk in detail about the blockchain itself and impacts it may have. Subsequently in part two we will focus more on the start-up investment side and Williams thoughts on ways investors should think about early stage companies with regard to the Blockchain.

Questions covered in this installment include:
1) The inter relationships between Bitcoin, Cryptocurrencies and the blockchain.
2) Why applications for the blockchain extend well beyond just cryptocurrencies.
3) The key elements of the blockchain stack.
4) Examples of things enabled by the blockchain.
5) Key impacts the blockchain may have on the consumer side.
6) The major potential impacts for businesses and how they will approach innovation around the blockchain.

Lots of information forthcoming in this episode. Here’s the interview on Blockchain Investing.

William Mougayar joins us from Toronto. He’s an entrepreneur turned investor, Start-up mentor, Advisor, Blogger and Analyst. William has emerged as a blockchain thought leader and is currently writing his new book The Business Blockchain due in April of 2016. William, welcome to the program.

William: Thanks Nick.

Nick: Yeah, can you start off by telling us about your background and how you became involved in both startup investing and also studying the blockchain?

William: Sure. I’ve been in technology for close to thirty-four years. So my first interaction with the Startup world was when the Internet came along in 1995 and that was after I had been out here at #Packard for fourteen years. So I left #H.P. in ’95 specifically because I saw the Internet as a big opportunity for change and for re-engineering for processes and for innovation. So then I proceeded to spend the next ten years as an Internet thought leader. I wrote two books at the time and I became involved with both Internet startups and big companies that were trying to figure it out. Then in 2008 I founded two Startups, one in 2008 called the #Equentia which was a content aggregation SaaS startup and then in 2011 end of that, I did another Startup called #Engagio which was a social media inbox and that was a quick one after about a year, we sold it to #Influitive and in 2013, then I found myself at a fork again and trying to decide what to do. At that time the blockchain Bitcoin started to appear on the scene. So then when I saw Bitcoin and then when I saw Blockchain Technology behind it, it dawned on me very, very quickly that this was really like the Internet all over again.
So I was like, “I’ve seen this movie before and I am seeing a potential in it.” And then I found myself meant to bring a lot of startups I as I was leaving Influitive. At the time I had a passion for helping others and I became involved with some accelerators and mentoring startups. I found myself seeing some deals that were quite attractive and the only missing from me getting more evolved was to invest. And that’s when I realized what I could become a major investor and I started to invest in 2014 and I’m currently raising a fund so I can invest even more in the early stages.

Nick: Yeah I think the first time we interacted was some time ago on #Fred Wilson’s blog in the comment section you know, I’ve noticed you’ve been a moderator on his blog for a while now. How did you get started working with Fred and moderating that blog?

William: Yeah, that’s another story and that story made a lot of headlines in 2012 when I started Engagio because the story was that it started in the comments space of Fred’s blog. The story goes is, back in 2008 I listened to #Howard Lindzon and Howard is a Canadian but he’s now living in the US. and he is a Investor and Founder of #Stocktwits but his story was very similar to mine a few years before. He met Fred on Fred’s blog perhaps a few years before me in 2005 or 2006 and they became good friends from that perspective by just having Howard comment on his blog and saying smart things and funny things and it went from there. That wasn’t my intention initially. I just thought that #AVC was a very insightful blog and this since I was getting into the stock world again and I wanted to learn about it so I became involved in a AVC in the fall of 2008 just a couple days after hearing Howard’s story and then one thing led to another. I took pleasure in commenting and in interacting with other commenters and with Fred and then one thing led to another. We became more closely associated up until a time where you have my involvement and my interest in the commenting space and one time, I think it was in the summer of 2011 he surprised me out of the blue he asked me if I wanted to moderate his blog; and at that time I said, “Okay, for sure. Yes!” and that’s when it dawned on me that it was very difficult to manage the influx of so many comments coming and then what if somebody was active on discuss on #Facebook, on #LinkedIn on #Google and all of the social media places and then it becomes very daunting to manage everything. And that’s when the idea for Engagio came to my mind, after I got an appreciation of the of the volume of commenting that that Fred was getting on his blog and me as a recipient as a moderator it was a bit daunting. So I wanted a better way to manage that and that’s when Engagio came along and we’ve made it as a plugin that looks like a Gmail tab basically; and we made answering social media comments as easy as as an email and that’s kind of where the idea came about and Fred was one of the first Investors in that their company Engagio that I founded it at the end of 2011.

Nick: Wow. That’s a crazy story. Very cool but transitioning over to the topic today., we hear investors talk about Bitcoin, cryptocurrencies and of course the blockchain. Can you begin by reviewing each of these and how they’re interrelated?

William: sure. Well Bitcoin is the first marketing arm of the blockchain. Is the visible thing that we all or know about and hear about and that’s the first thing that I heard in 2013? It was Bitcoin, it wasn’t the blogging and do it to a layman, to an average consumer, they will likely hear about Bitcoin before they are about the blockchain. It happens that the blockchain is the underlying technology that’s behind bitcoin. It’s what enables Bitcoin to do alive as a cryptocurrency. So Bitcoin is maybe the first application of a blockchain and it’s one of the many cryptocurrency is that could be living on a blockchain.
So the inner vision of the blockchain is that you can send money back and forth between people that don’t know each other without anybody in the middle. So that money, we call it cryptocurrency instead of money but because there’s a lot of cryptography science that is built into it the mechanism for sending that money back and forth so that there is no fraud. So that if I send you a dollar, then I don’t own that dollar anymore because the analogy today is, if I take a photo and if I send you that photo from my smartphone, I still own the photo. It didn’t take it out and this is what is called the double spend problem. So the blockchain solve is the double spend problem which means that if I send you a dollar, I don’t own that dollar anymore and if I send you a photo that is worth money then I don’t own it anymore; and then you can apply that to any asset and it we’ll get into this you know, as we talk further.
So in today we’re saying blockchain but it’s possible that in the not too distant future we may not even say the word blockchain. It’s like the Internet. We talk in terms of websites, we talk in terms of online shopping, we talk in terms of social media, we talk in terms of the applications that are on top of the Internet but we don’t say the Internet every time we refer to an application. So I think I predict that in the not too distant future, perhaps the blockchain term will gradually be less prevalent in our vocabulary because we will have a lot of blockchains. We will have millions of blockchains and I would predict that the blockchain is probably going to be growing faster than the Internet did back in ’95.
So in the same way that today billions of people around the world are connected to the Internet, in the not too distant future millions if not billions of people will be connected to the blockchain as well.

Nick: Is it fair to say that the block chain enables the removal of fiat currency and one embodiment of that is Bitcoin?

William: Well, let me not go as far as saying that it’s going to removed fiat currency. I mean there are some people that are on each side of society that would love to see that but a more pragmatic and realistic view is that Bitcoin or the currencies as a whole are just another type of currency. I put them in the bucket of alternative currencies.

Nick: Okay.

William: It is just another… Think of it as a foreign currency. I mean, there’s no currency in the world that dominates another except maybe for the dollar that seems to be a common accepted currency that by default. If you say, “Okay, let’s trade in dollars” more people than less would be accepting of that. So in the cryptocurrency world, it is very conceivable that Bitcoin becomes the facto standard currency of choice and then all of the other cryptocurrencies going to converge towards Bitcoin and there’s nothing wrong with that. It’s good to have one strong currency in a space becoming like a backbone currency.

Nick: Right. Can you talk a little more about why the blockchain extends well beyond just cryptocurrency applications?

William: Sure. Think of cryptocurrency as just being an asset. It’s just an asset. An asset, I mean… What’s an asset? It’s value. What is money? Money is valued but that value could be not represented as a digital asset and cryptocurrency is the digital money that can move but then… Now think about the fact that an asset could be just be old money. It could be a bond. It could be a stock. It could be a derivative or a financial instrument. It could be a specific, a certificate or a title. Anything can be represented in a digital manner by the value that is underlying it. So now, think about the fact that the same way that I can move money so quickly between one person and another, what if I can transfer any asset now between one person to another?
So if I’m selling you some rights to a particular stock or instruments, why not have you receive it in ten minutes instead of three days? So that’s where we talk about the fact that the blockchain extends well beyond cryptocurrencies . Cryptocurrencies are just one application and are one type of an asset that the blockchain is very good at transporting. So the blockchain as it is a value exchange network and that value could be money and that it could be another type of asset. You have to think that there’s no previous paradigms for the blockchain. Some people are saying, “Well it’s like a new version of the C.P.I.P.” It’s not even another Internet. It’s a new network that is on top of the Internet and it’s many things. It’s not just one thing. So it’s an overlay but it takes many forms when you try to implement it. So you can see it as a trust layer, as an exchange medium, as a secure pipe, as a set of decentralized capabilities or even as a development… as a software development platform and there’s more that maybe we haven’t even thought about.

Nick: Yeah. How. Would you describe the blockchain stack and could you also help frame it for some of the lay people in the audience?

William: Sure. So I mean, if you talk about the blockchain stack then you have to talk about it from a software development point of view because the blockchain is a, I’ve said it before, is another type of that a base and I said a year ago that if you’re a developer, get ready to rewrite everything pretty much. So everything that you’ve written on the database, you may have to rewrite it. Of course I was exaggerating a little bit but there are new ways of writing applications now where a slice of what you would have written on a data base now can go on the blockchain because a blockchain is also a thin database. Is a thin layer where you can store data on it.
So the different layers might be… There is identity at one level, there are the private keys, public and private keys which are the ways that you encrypt the data. So typically you hold the private key but you could make the public key, public but you need the combination of the two of them to unlock the data. Thirdly, you have a storage. There is a storage mechanism that exists in the blockchain. There is messaging, so you want to be able to send messages. There are the development languages and many of them, some of them are inspired by existing languages that we know. Some of them are inspired by Java or by C++ or by Python and others. So these are not very foreign languages. They are languages that a developer would be familiar with but they have to learn some additional aspects of it if they want to program the blockchain. And then there is the transaction ledger, what is called also the distributive ledger and that is what records all of these transactions one after the other and the way to think of it is like an accounting ledger basically. Where once you make an entry, you cannot erase it and the next entry comes below it.
Then there’s a consensus method which is… The consensus method is the logic that allows the different computers that are validating those transactions to agree on the validity of those transactions. So I’ll just simplify it as that and there are a few methods are different from each other.
Then there is the tokens. The tokens are the, in the case of Bitcoin, Bitcoin is the cryptocurrency token that has value. So that token is like the economic unit of the blockchain that travel around on the network of computers that make up the blockchain.
Then there’s mining and mining is only a vetted  construct in the context of the public blockchain because the miners are those that on those very high speed computers that are specialized and that can’t compute the mathematical equations which validate the data’s actions. The underlying 17:14 (unclear) underneath the blockchain is mathematics. It is gaming theory and mathematics. So if you solve an equation after so many computations, then you can validate the transaction.

Then two more on that stack, there’s denotes. Denotes are the actual computers that are a networked together in a distributive manner and underneath that at the very lowest level, is the actual peer to peer network which is really the basis of the blockchain.
So first you erect the peer to peer network and everything goes on top of it.

Nick: Can you talk about some examples of things that the blockchain can enable?

William: Sure. So one of the applications that is getting a lot of attention right now is the exchange of assets… of digital assets. So the banks are very interested in that because today there is a delay between the clearing and the settlement of digital assets. There is something called T+3 or T+5. It means transaction date plus three days or plus five days for the actual settlement to happen between the two banks or the two financial institutions and that’s a long time. And what happens in the meantime, somebody has to hold those assets in custody and that costs a lot of money. So the blockchain can speed up the transfer, the real transfer of assets between the parties. So that would be the first one.
Second, is the verification of assets. So the blockchain can be used as a way to timestamp the actual ownership of a particular asset and then once you timestamp it on the blockchain, you cannot change it. It’s totally irrefutable. So it becomes an ownership proof or it could become a rights proof. Could be a an identity, representation that is totally locked on the blockchain. It’s like having a seal that cannot break but you can verify it. So that’s another important application that the watch can enable; and another one is something called Smart Contracts and smart contracts is another fancy way of saying business logic or business terms. So you and I can agree on some terms. Let’s say we can have a wager or we can bet that they’ve given sports team is going to win next week, let’s say The Raptors versus The Bulls and then we can include that into a smart card and maybe that would be two lines on our blockchain, the language and then that’s it. That comparable one on his own and the minute the game is played and the score is known then suppose we are we were betting on the wrong Bitcoin, so automatically whoever wins is going to receive one Bitcoin, one dollar or ten dollars whatever the asset was that we agreed upon and it will be automatically taken from the account of the person who lost but imagine now, if it doesn’t have to be just a wager or bet. It could be all kinds of rules. It could be, if I deliver this to you on next Monday then you can get paid the $1000 and if I deliver it on Tuesday then you get paid another X and so on.
So you can build all kinds of this logic and rules on the blockchain and then a bind as the execution of those rules between two parties or multiple parties.
So maybe you and I could put a third party between us that has to authenticate the fact that I sent you something and that you’ve received it. So almost like an escrow service and that service is called Multi signature but it all happens very quickly on the Internet. So the third person could just say, “Yes, that person has received the merchandize” and automatically trigger statement. So these are the kinds of examples that we can demonstrate with the blockchain going forward.
Nick: Is it primarily for transactional things between two entities.?

William: That’s how the businesses see it at this point but there’s another world out there for consumers.

Nick: Yeah, if you could talk about some of the impacts on the consumer side, that would be great.

William: Yes, so one of them is identity for example. So if you think about who controls our identity today online, it’s mostly Google and Facebook. They own our identity but why can’t we have our own identity ourselves and then make it portable? So that’s one application on the consumer side and then another one is, back to the previous example I was telling you about verification of assets; Today we Google everything for information, right? When we Google, mostly it’s for getting information and checking information but what if we could Google in the future and maybe it’s not going to be Google. Maybe it’s not a company that does this but if you can Google to verify records, to verify identities, to verify rights? How do I know that I’m speaking to you directly? I mean, somebody could have impersonated you potentially. I don’t know. I mean, I’m just trusting you because we’ve had some interactions but what if I could just be sure that you are who you say you are or that if you own something and you want to prove it to me, I don’t have to go to City Hall to check the archives? What if all of those ways to be verified could be done now, remotely?
So in the same way that today we Google for everything, I think in the future we’re going to be able to search blockchains but it may not be called that way but the analogy is to search databases of trust., to search for records, to verify the authenticity, to verify the truthfulness of records of Titles, of ownerships. So it goes beyond information access. We want to trust access. Access to trust based purposes. So that’s how I would have vision this to unravel in the future.

Nick: So certain pieces of information tied to individuals would be publicly available and others I would have to assume would be private?

William: Yes or maybe it could be unlocked with a private key.

Nick: Ah! Right.

William: The key is there is a major aspect here and the way to use those keys will I have to to come a few notches down from the technical realm because right now it’s not very easy to manage a wallet with multiple keys. There’s a lot of technicalities into it but it should be as easy as, suppose I gave you access to my house? Like when you rent the house on 24:15 (unclear), they give you the key and then you can go into the house and it’s easy but it should be the same way. So I could say to you, “I want to check something about?” and you say, “Okay, can you give me the key?” and I’ll give you a key and then you can check it; and maybe I can say you have access for twenty minutes maybe. So all of these could be a embedded in the blockchain.

Nick: It’s interesting. I use a program called Lastpass that manages all my passwords and when I outsource various things to virtual assistant or a personal assistant, I will give them rights to very specific passwords but not others, right? I’m not giving them my password to  my email account for example.

William: Yeah. So you’ll be able to do some of that a little bit more broadly and with more interesting scenarios and maybe I can give you access to maybe one piece of data and not the rest of it. So these scenarios will be possible in the future.

Nick: Anything else you want to say about impacts on the consumer side or anything with regards to your comment about Google and Facebook owning the majority of personal information out there?

William: Yeah, I mean ideally I’d like us to to have more ownership of our own data and the idea is that we can make it available to whoever you’re interacting with but it sure data and then there’s this thinking that, if they can aggregate there that is coming from me and let’s say others but give me back something of more value. Then I’ll be very happy. For example in the healthcare side. I don’t think we’ve done enough in terms of using data, patient data or people data or health care data in an aggregate fashion. There are lots of islands out there. typically the data belongs to the provider that you are dealing with or whether it’s a physician or with the insurance or with a group that you’re with but there might be somebody else in another state or another place that has similar conditions and it would be great to break all these silos and have people share more data but the problem was that there’s no trust and maybe the blocking could be that trust component that allows everybody to share in a trustworthy manner and without fear and the same time be able to get something back in return and there’s more valuable.

Nick: So we talked about the consumer side a bit. How about for business? What are some of the impacts on the business industry and/or Government side?

William: Sure. Well the businesses are struggling. Many of them are struggling. I would say the larger the business the larger the struggle because there’s complexity in implementing the blockchain.
First of all, they have to understand it and if you don’t understand something, you’re not going to be able to take advantage of it to the fullest extent that it’s possible.

Nick: Sure.

William: So, there are two sides of the blockchain when you look at it from a company perspective: There’s a disruption side and there is a construction side. A construct or strengthening side. So either it disrupts my Business or I can use it to strengthen my business and the natural reaction for big companies is to only use the blockchain or even the technology to strengthen what they already have because everything falls back to their existing models. The companies are not… don’t have a lot of flexibility innovating outside of the business model because everything has to tie back to their business model. So there’s some limitation there as to what they can do. So what they end up doing is using new technology to innovate within the walls of a regulation or within the walls of their existing systems.
I’m not saying this is bad. I mean, it’s a great first that because there are lots of cost savings that could happen there. There are lots of business process improvements that could happen. Blockchain is perhaps 80% business process and twenty percent technology and some people might even say it’s even more. It’s maybe 90% business process and 10% technology. That’s when you think about it from a big company point of view because everything is a process in a big company as you know. I mean, they have big machines that have processes that work and then they become operationally good at executing those processes and the minute you want to change something then, “Aha!” They have to think about it and it takes. It takes to re-engineer processes. It takes time to rethink old ways of doing things. So they will take some time to figure out how to insert the blockchain into their own processes. Only when they’ve done that, that they’ll be able to innovate. So it’s almost like they have to do crawl and walk before they can run.
So I don’t have a lot of hope for or expectations foreseeing totally out of the box blockchain applications inside big companies. I think the innovation will come on the outside in terms of totally new fields but on the inside it’s really at the beginning about cost savings efficiencies, perhaps speed, perhaps more transparency. Those types of benefits and not the ones that are totally innovative and new like opening new markets type innovations.