Sarah Tavel, one of just five general partners at the legendary early-stage venture company Benchmark, maybe the one who is most interested in cryptocurrency, but it doesn’t imply she is actively involved in the cryptocurrency market. On the other hand, Tavel has been at the forefront of one of the few crypto-related bets that Benchmark has made in recent years, placing an early investment in the blockchain research business Chainalysis after it assisted in the investigation of the infamous Mt. Gox case.
Only Sorare, a Paris-based company that uses non-fungible tokens (NFTs) to power its fantasy soccer game, has received funding from Benchmark in recent years. The first round of funding, led by Benchmark, raised $730 million in two rounds last year, with the second round led by Benchmark and the third round led by Benchmark. Tambel also claims that Benchmark has made an undisclosed investment in a firm operating in the “gaming area with some cryptocurrency or web3 flare.”
According to Tavel, there hasn’t been a shortage of interest, who has long been intrigued by the concept of blockchain-based smart contracts and has hosted “white paper reading parties.” She also credits Katie Haun, a former federal prosecutor who is now an investor, with introducing her to Chainalysis. (When Haun explained to Tavel that she utilized the company’s technology in her government position, Tavel immediately cold-emailed the company’s founder, Michael Gronager, to express his gratitude.)
The firm, according to Tavel, prefers its age-old practice of making concentrated bets in all areas with each general partner leading only one to two new deals per year, which appears to be aggressively slow when compared with other top-tier firms, some of which have entirely restructured to shift their crypto investments into overdrive. Indeed, Tavel may argue that Benchmark’s methodical approach provides the team more time to reflect on the shifting situation. Her thoughts on decentralization, web3, and so-called decentralized autonomous organizations, or DAOs, were evident during a chat we had with her last week about decentralization, web3, and so-called decentralized autonomous organizations. (We threw in as many keywords as we could think of.) Here’s a portion of the conversation, modified for brevity.
TC: In the current climate, there is considerable disagreement around Web3 and if we are genuinely entering a new internet age with more decentralized organizations or whether this is just a branding exercise with many of the same power actors still holding sway. What are your thoughts?
ST: Going back to Bitcoin, it was first seen as a kind of resistance to centralized institutions [such as] significant banks that were being bailed out [during the financial crisis of 2008] by the public. Now, a large portion of the dialogue you hear on Twitter is individuals waving their fists against our centralized rulers at Facebook, which has become more common. [At some point] the concept of decentralization became inextricably intertwined with the concept of creating value for users, resulting in the crypto ecosystem that we have today, which includes an incredible breadth and diversity of Layer 1 solutions such as Bitcoin, Ethereum, and Solana, on top of which protocols are built. And the whole goal of this crypto infrastructure is to be decentralized in order to reap the [additional] advantages that come with it.
However, this is distinct from what I consider to be web3. When people speak about web3, it almost seems like they’re using the term [as a synonym for] cryptography, but that’s not true. They’re pretty different in my opinion. Then there’s a cryptocurrency, which [involves a focus on] decentralized infrastructure and the financial incentives, tokens, and tokenomics that you’ll need to organize all of the decentralized entities and individuals who will be behind them.
However, decentralization is no longer an aim in and of itself. Decentralization, in my opinion, is like a new palette for developers to use to create new user experiences, with the decentralized infrastructure serving as a means to an end. You are indeed creating value for a customer, but it does not imply that you want to do so in the most decentralized manner possible. Consider some of the consumer names that have been mentioned: Sorare, Axie Infinity, and OpenSea, for example. These are centralized companies built on a decentralized infrastructure to take advantage of the decentralized infrastructure to generate more value for their customers.
TC: When considered from a historical perspective…
Similar to when the iPhone first came out — this new infrastructure, this new hardware device that had itself been built by people with highly specialized skills who built the chips and systems architecture as well as all of the parts that combined to make the iPhone such a remarkable piece of technological innovation Finally, we have a whole new category of builders, led by individuals like as Kevin Systems and Mark Zuckerberg. They created the consumer user interface [on top of the iPhone] with various skill sets.
For better or worse, to build these consumer companies, you must embrace something much broader than tokenomics. One of my predictions for the future is that we will see a growing bifurcation of web3 from crypto, with web3 serving as a revolution of web 2.0 rather than merely an evolution of cryptocurrency.
What role do decentralized autonomous organizations (DAOs) play in this picture? What do you believe their function is?
Like so many other cryptographic notions, it’s one of those concepts that can be both vast and provocative in its possibilities. However, I believe that the use cases for which a DAO makes the most sense should be narrowed down a little bit more than where people are already employing them [in certain circumstances right now].
Getting back to the concept of bifurcation, with cryptocurrency firms, you have already decentralized companies that, almost as a matter of regulatory necessity, must proceed along the road of decentralization. A decentralized autonomous organization (DAO) further embodies that decentralized ethos, and there’s no doubt that there’s huge value [behind the notion] of these organizations that are aligned in their economic interests. Even though the Constitution DAO did not achieve the aim that it sought, it was an excellent example of how a DAO may be used to accomplish a very particular goal, in this instance, purchasing an item from a physical store. These are excellent methods of bringing together on-chain money and making choices as a group.
It’s going to take a long time to construct the things that you need to build if you’ve placed everything via a process in your DAO. The benefit of having a centralized company is that it allows you to rush and make tough choices, allowing you to create consumer goods that are both distinctive and challenging to develop.
What are your thoughts on the disadvantages? Proof-of-work blockchains have environmental consequences, while proof-of-stake blockchains have their own set of issues to address.
There’s a lot of chatter going on right now. The folks working on these multiple blockchains are making great strides, and it’s just going to get better from here.
What about non-ferrous transitions (NFTs)? Many people now think of them as digital works of art or media, which is correct. Do you think we’ll see a lot of new use cases in the future, such as monitoring fine art and real estate instead of cartoon monkeys, as the technology matures?
I believe that we are in the midst of a skeuomorphic period in non-financial technologies [based on the concept of digital scarcity]. Because of this, stuff like these treasures is commonplace. While first doubtful, I recall thinking that I didn’t just want an image of a CryptoPunk; I wanted to be able to hold it in my hands; there was an emotional connection to the concept.
However, the current generation of NFTs, mostly comprised of these collections or profile images, is a little excessive. There’s a buzz around it right now, but I believe it will fade down soon. And I’m looking forward to it since these digital tokens have the potential to have a plethora of characteristics. There are a few distinct types of NFTs that we’re already beginning to see emerge in the marketplace. One is gaming, in which you may either create or earn money via participation in a game. Additionally, beyond the concept of an NFT inside a closed environment, with decentralized infrastructures, you will begin to have the ability to see the things you’ve earned, to have your wallet, and to buy or sell those items on [the NFT marketplace] OpenSea.
The second thing you’ll see is firms like [NFT right music startup] Royal, who are pushing the boundaries of what’s possible with non-ferrous transitions. Consider the following question: Does an NFT provide you access to future cash flow for a song? Is it possible to interact with the artists using this platform? Does it give you access to a social network? There are many other things that we will begin to see develop shortly.
Before I let you go, I’d want to know what you think about the emergence of specialized cryptocurrency funds. Pantera Capital, Polychain Capital, Paradigm, Andreessen Horowitz, Sequoia Capital, and now Katie Haun has her venture capital firm. Consider the following: Do you believe it makes sense to continue merging these sorts of investments with more conventional venture investments, as Benchmark is currently doing?
First and foremost, I am delighted for Katie.
Look, I believe that has something to do with the bifurcation that I described. These protocols and blockchains were where the first generation of investors in space put their money. Furthermore, it is a specialist domain. Investing in protocols and DeFi is a highly specialized field that requires specialist knowledge.
In addition, I believe that investing in consumer-facing products and entrepreneurs is a distinct specialty in and of itself. In addition, it is vital to understand the underlying infrastructure, how individuals in the network are rewarded and driven, as well the advantages and disadvantages of the different alternatives that consumer builders must sort through to figure out what is best for them. The expertise of a business that has established durable consumer enterprises, on the other hand, is its specialized discipline, and I believe that it will become more critical in this new web3 environment as time goes on. That is why, even though I am primarily concerned with web3, I must admit that I am not very concerned about cryptography at the protocol level.
So you’re not quitting to start your own business after all? I’m just half-joking, of course. Three weeks after meeting Katie for the first time at an event in November, she announced that she was opening her own business. I don’t want to pass up this occasion to inquire as to whether or not you have any additional plans in the works.
The fact that people have to launch crypto-focused funds is partly due to the fact that when they are investing at the protocol level and purchasing tokens, my understanding is that those are technically considered passive investments, which is why you have to register [as a registered investment advisor]. Traditional venture funds are restricted in the amount of money they may put into passive investments of this kind, and if they reach a certain proportion of their fund, they must register with the Securities and Exchange Commission.
Our business strategy at Benchmark is that we consider the work that we perform with businesses to be our product. As a result, we focus on the sorts of firms that must develop organizations, recruit people, and create experiences.
Would Benchmark be able to reorganize as an RIA if more of these firms began dealing in the realm of tokens in the near future?
Those are the kinds of bridges we’ll cross if we’re ever forced to go over them. There is no religious prohibition against it. However, it is not apparent to me whether or not this is a bridge that we will have to cross.