Crypto with Chinese Characteristics

Eric Meltzer on The New New Thing

A Bitcoin mining rig.

Eric Meltzer is a Peking University dropout and a founding partner at Primitive Ventures, an Asian blockchain investment firm. He first acquired his extensive knowledge of the cryptocurrency world as a partner at INBlockchain, one of the world’s top blockchain and crypto funds. As a frequent trans-Pacific traveler, he’s embedded in both Chinese and US crypto scenes, and chronicles the bleeding edge of crypto development in his weekly newsletter Proof of Work.

Logic's Xiaowei R. Wang sat down with Eric Meltzer to discuss the past, present, and future of crypto  in China.

Could you start off by introducing yourself and what do you do?

I am a partner at Primitive Ventures where we do early-stage investment and interesting cryptocurrency stuff. Before that I was a partner INBlockchain, which is the largest crypto fund in China with a couple billion dollars under management, depending on the daily price of Bitcoin. I'm still a venture partner there but I focus full-time on Primitive.

How did you get into this space and into the Chinese crypto space specifically?

I got into Bitcoin fairly early on. I didn't buy very much of it because it was originally introduced to me by a friend who at the time was investing in a lot of weird stuff. He was really into weed stocks way back in the day—I think there was only one tradable stock in that sector at the time that was some company making a marijuana vending machine. It sounded totally ridiculous, but it became a proxy for Wall Street interest in marijuana.

This friend told me about this thing called Bitcoin that he was really into. He described it as a form of digital money that you could actually hold, unlike PayPal balances which are really just notional numbers in a database and at the end of the day are completely under the control of PayPal. I went on to read the Satoshi Nakamoto white paper and was instantly fascinated, especially because back then there was this narrative that it was going to an uncensorable payment system. That just seemed really exciting. So I bought a very small amount of Bitcoin with cash from some guy at a cafe in Soma.

I didn’t pay much more attention to the space until about 2015 or 2016, when there started to be a lot of interesting non-Bitcoin blockchain projects. Before that, it was basically Bitcoin and then a ton of scams. There was Megacoin and Feathercoin and all these things were just like... obvious scams. It didn't seem like it was going to be an industry so much as a ton of people trying to profit off of it by running their own hustle. But then it became apparent that there were some other uses for blockchain besides just Bitcoin. I think Bitcoin's the biggest, most interesting use case, but now there are a lot of other interesting smaller ones.

For instance?

The two things I think are most interesting are coins for payments which preserve privacy and Handshake, a coin that creates a separate DNS namespace for websites. On the privacy-coins, I think we’re on the verge of an explosive battle between Facebook, who have said they’re doing a coin that will probably be launched in WhatsApp; Telegram, which raised over one billion dollars to create a coin that can be used within their messaging app; and Signal, who are working to integrate a privacy-preserving coin called Mobilecoin. The messaging apps are a natural place for payments to occur, something which I became religiously convinced of after living in China for a while and using WeChat for absolutely everything. But WeChat, Paypal, Venmo, etc, are basically panoptic surveillance systems for governments, and if that’s the vision of digital payments we end up with, we’re in a pretty horrifying 1984-esque society that seems hard to get out of. Of the three messager-coins, I’m probably most excited about Mobilecoin because of Signal’s impeccable reputation for serious privacy and security—a coin by Facebook has serious trust issues to overcome.

Handshake, the other project I’m really excited about, uses a blockchain to auction off and then keep track of a bunch of new domain names. So for example you could bid on “.mango” and then have as your blog. Besides the obvious fun of having a bunch of new names to play around with, and not having to wait on a slow-moving bureaucracy to approve new TLDs, Handshake domains have the added advantage of being basically unseizable, so you can use them to host whatever content you want and not be worried that the government or a registrar will decide to stop you.

So when you started seeing more interesting non-Bitcoin projects, what did you do next?

I formed a startup with with my friend Ben Yu to do a live-streaming platform using blockchain for micropayments. The inspiration for this was that when I was in college in China, I saw these live-streaming platforms where people were making huge amounts of money, but the platform took a 50 percent cut.

I asked some friends in Beijing if they could introduce me to any Chinese investors who were interested in investing in blockchain ideas. At the time there were not very many. One friend mentioned that he knew the most famous Bitcoin blogger in China, Xiao Lai Li, and offered to introduce me to him; if he liked my project he might tell his investor friends about it. I tried to set up a meeting with this guy. He was not around but introduced me to his partner, Lao Mao. I ended up meeting with Lao Mao in this beautiful coworking space, and he showed up in a new Porsche. In my mind I was like, “Huh, being a blogger is really lucrative in China.”

We ended up getting along. He was really smart, and we had the same outlook on the future of the space. At the end of it, he said that he was interested in investing in what we were doing. I was surprised because I didn’t know they invested. When I asked about it, he gave me this weird look and said, “Yeah, we run this fund called INBlockchain. It's a fairly large fund in China.”  When I got home and read up on them, I found out they had the biggest Bitcoin holdings of anyone in China, maybe the world. I'm glad I went into the meeting feeling low-stress, thinking I was just going to talk to a blogger—it probably made the pitch a lot better. They ended up inviting me to this crazy meeting in Shanghai that they were having. INBlockchain was running the biggest crypto exchange in China at the time, called Yunbi. They took the hundred biggest Yunbi customers and all their portfolio companies to a secret summit at the Park Hyatt in Shanghai. They also asked if we wanted to adjourn afterwards to a secret boat meeting, and I was like, “Definitely.”

Ben and I thought, well, it’ll be expensive to fly back to China and we don’t have any funding, but let’s do it. Then when we got home, they had already bought us tickets and reserved a room at the Hyatt. My cofounder and I were kind of stunned.

When we got to the meeting, I gave the pitch for Stream, the project we were working on. I gave it in Chinese, which totally freaked everyone out. My partner Ben is Chinese-American, but he doesn't speak Mandarin very well. It was funny; I was this white kid on stage giving our pitch in Chinese, and my Chinese partner was putting on headphones to hear the English translation. All the people around him are looking at him like, "What is wrong with you?"

I gave the pitch and people got excited about it and we ended up moving forward with it. I started helping Xiao Lai and Lao Mao with some of the platform stuff they were doing, and helped them localize their initial coin offering (ICO) platform to the US. I also sent over some suggestions for Yunbi and gave some advice on some of their companies. Eventually Xiaolai proposed that I come onboard as a partner and invest with them, rather than just run one of their startups.

I ended up taking him up on the offer, since I liked that group of people so much. They're all just really conscientious, smart people. Before I left, we figured out some people that could replace us at that startup, and I officially joined INBlockchain.

One of the things I noticed with your newsletter is that you actually take things for a test drive, like spinning up a Handshake node. Would you say that’s rare for an investor?

Yes, and it blows my mind. When you invest in something, you’re putting such a huge amount of money in it. You would imagine that part of your due diligence would be to go and actually use the thing.

But no! Many of these funds have no real-world interaction with the technology they’re investing in. So they often have these bizarre opinions about what it does. In my mind I would be wondering, “How can you actually believe that?” And the answer is that they have literally never used the technology.

The technical barrier is really not that high. I'm far from a programmer—I can write some vim scripts and stuff—but even I can spin up a Handshake node and make some bids, and get a feel for how it actually works, and get a sense for whether it is so hard that no one is ever going to use it, or if it is right on the brink of being usable. I think that insight is valuable, and it's not hard to get. So it blows my mind that so few investors in the space actually use the stuff.

Unevenly Distributed Futures

From your experience, do you feel like the Chinese crypto scene is pretty globalized, or is there “crypto with Chinese characteristics”?

I feel very adamantly that crypto is a global phenomenon, and that there's no such thing as Chinese Ethereum or Korean Bitcoin or whatever—I think that’s ridiculous. However, from an investment perspective, there are definitely localized scenes. I don't think highly of most of the Chinese crypto projects, but the Chinese crypto infrastructure is way better than the US. If you look at the Chinese exchanges like Yunbi, Binance, Huobi, OKEx, they're just killing it. There is no comparison to the US exchanges.

It’s funny: Mike Moritz, who is a partner at Sequoia, wrote an article speaking favorably about the crazy pace of Chinese startup culture and got crucified for it. People thought he was racist and was glorifying overwork. But all of my Chinese friends who read that article were like, “Right on, that’s 100 percent accurate.” The culture at these Chinese startups is incredibly high-paced and it makes Silicon Valley look relaxed in comparison. To my mind, that’s why they're dominating. As someone who invests in crypto infrastructure, my perspective is that if there's a Chinese company and a US company that are both working in the same niche, the Chinese company is just going to wreck it.

What is the average profile of a crypto trader or buyer in China?

It's middle to upper class, both male and female. There are lots of people from business school, people with both finance and tech backgrounds. One thing I found interesting is that people in China understood Bitcoin on a more intuitive level very quickly, whereas in the US, people's reactions were way slower.

Similar to the five stages of grief, you can see the five stages of Bitcoin denialism: first people think it’s a toy, then they think it’s a scam, then eventually they come to the conclusion that it’s a useful thing. Whereas in China, it seemed like people skipped through a lot of that—they just immediately got it.

And their reaction, which I think is the correct reaction, was, “I'm not going to put my life savings in this right now, but I'm going buy a little bit in case this becomes a thing.” I think owning something like 0.87 Bitcoin puts you in the top 1 percent of Bitcoin holders. A very small amount of Bitcoin hedges the risk that Bitcoin becomes the world currency. Chinese people intuitively got that, whereas in America, people didn’t. I would tell Americans over and over again, just buy a thousand bucks of Bitcoin and forget about it. If it loses all of its value, whatever. Just have that hedge.

Yeah, I remember that even my aunt, who is a typical southern Chinese housewife, was super into crypto. She talked about it in terms of diversifying, and it made a lot of sense to me.

Totally. They’re willing to make small bets on risky things.

I think China also has some amount of “neophilia” that contributes to it. People in China are excited about new technology. Even older people in China use WeChat Pay for mobile payments, whereas in the US there's a stronger Luddite strain in our culture. I have a friend who was born in China and moved to the US when she was really young. When I talk to her, she’s like, “The reason I want to go back to China to work is that no one ever goes to the US and thinks, ‘I felt like I was in the future.’”

Proof of Work

How much of the discussion about crypto in the US makes its way to China?

There's a robust flow of translated articles about crypto from English to Chinese, so the Chinese scene is relatively in sync with the US one. If people start thinking about something in the US, within a week or two it will get translated into Chinese and there will be a lot of discussion about it.

Do you feel like the converse is also true, that the English-speaking scene in the US is synced up with the Chinese one?

No, that direction is very poor. We occasionally try to help with that a bit, but to be honest, it's kind of an advantage for us that most US funds have such a bad understanding of China. I almost have an incentive to not translate much of what’s being discussed, because it’s good for me that we get it and they don’t.

We've definitely seen fund managers who don’t understand why we care so much about Asia, because they don’t have access to the exchanges and because of this perception that there are so many scams. Our perspective is, you have to care, because it's half the crypto volume.

As an example, we know some people who shorted Ripple. And don’t get me wrong, I hate Ripple, I think it’s a scam. However, I would never short it, because I know it’s popular in Korea and Japan, so I know that if I shorted it, there would be a bunch of organic demand in Japan or Korea and I would get liquidated. That's exactly what happened to a fund manager we know, twice actually.

What are some of the more interesting blockchain projects in China that you've come across recently?

There are a few areas that I think are exciting. One is that there are a lot of Chinese people making games on EOS, a delegated proof-of-stake blockchain project (Ed.: For an explanation of building games on the blockchain see Singularity Hub’s “How Blockchain Is Changing Computer Gaming). EOS originally did a massive ICO and got tons of flack for it. A lot of my hardcore Bitcoiner friends think EOS was a big scam because of the ICO, and because it uses twenty-one validators to validate transactions rather than a massive number of miners and so it's much more easily censored. (Ed.: In cryptocurrencies such as Bitcoin, the validation of transactions into the canonical blockchain ledger happens through a large number of distributed “miners” competing to solve a computationally difficult validation algorithm, which imposes a strong barrier against someone who wishes to manipulate the ledger. “Delegated proof-of-stake” is a consensus-based algorithm where people who hold the most tokens vote to nominate a small number of delegates who can validate the network’s transactions. Because there are a smaller number of entities who validate the ledger, this algorithm is in theory easier for a state adversary to compromise, if the delegate validators end up being centralized in one geographical area.)

My take was, well, I don't want to use EOS if my adversary is a government trying to censor my billion-dollar capital flight out of some nasty jurisdiction, but it’s fine if all I'm doing is making some game that the Apple App Store won’t approve. It's not that easy to censor; you still have to go track down not only twenty-one validators but I think something like a hundred back-up validators... It’s actually pretty hard. I think for stuff like games this is going to be huge—this thesis was confirmed for me when I started seeing people in China making games like EOSbet, DaFuWeng (Monopoly), Fomo3D. I’m convinced that Fomo3D is made by a Chinese team. I've read their code comments—like, it's got to be.

The other area that is interesting is the exchanges. A lot of our LPs (Ed.: Limited Partners, or investors who contribute capital to venture funds.) are the bigger Chinese exchanges, so we have a lot of insight into how they operate. Binance, one of the largest Chinese exchanges, has a massive amount of actual trading volume compared to the US exchanges, and they seem to have an absolutely laserlike focus on growth. And the other Chinese exchanges (I’m including Hong Kong-based but mostly American-run Bitmex here too) seem to be more willing to ship regulatorily risky features that the market likes, including super high leverage margin trading.

In terms of popularity, it feels like Bitcoin is pretty big in the US now, and fairly mainstream. Celebrities like Jamie Foxx and 50 Cent have even hyped it. Is that similar in China?

Celebrities are afraid to touch it. In China being a celebrity is very risky—look what happened to Fan Bingbing. (Ed.: Fan Bingbing is a famous Chinese actress who disappeared suddenly for three months in 2018 following allegations of tax evasion.) Celebrities in China have to walk a pretty thin line. None of them want to talk about Bitcoin, but I can tell you they are for sure using Bitcoin, big time.

There's a lot of confusion in the American media around whether Bitcoin or even crypto is legal in China. Can you clear up the legal landscape?

Bitcoin is definitely not illegal in China; that's ridiculous. It's perfectly legal to own and sell Bitcoin to people if you want to. There's even case law confirming that now. What is not legal is to operate a fiat bitcoin exchange in China, which means that while I could sell you Bitcoin and that would be fine, it would be illegal to set up a website where you can use a bank account to buy Bitcoin. It's also dubious whether ICOs are allowed in China—it might fall under some sort of illegal fundraising regulations.

Do you see the government crackdown on things like ICOs as an attempt to prevent scams?

I largely do. Most of the ICOs that they've cracked down on have in fact been quite scammy. The Chinese government is much less worried about Bitcoin itself than they are worried about scams and highly leveraging people's assets into risky asset categories. If you look at the big crackdown, it didn't happen to crypto—it happened to the peer-to-peer lending stuff, which was really bad. The peer-to-peer stuff was super scammy and people were killing themselves over it.

I remember talking to a blockchain engineer this summer in China, and he told me that some of the vocabulary surrounding blockchain has changed in China, for political reasons. For example, “decentralized’ gets turned into “distributed.” Do you see that happening in the investing space as well?

No one ever really talks about the political aspects of the blockchain in China, except maybe occasionally talking about capital control evasion. Everyone just talks about the benefits of decentralization for minimizing trust among counterparties. I think even in the US, people in the investment community don't talk about this stuff in political terms.

I get it: crypto isn't quite ready to fight the final boss of big government yet. We're pretty good, but it’s not that robust yet. I want another ten years before the government really tries to crack down on the space, and the best way for that to happen is to pretend that we're working on this cute little tech that's just for minimizing trust. Of course, it’s really a complete revolution that eliminates the government's power to print money.

How do you see crypto mediating trust in China?

In China, crypto provides two things that are really nice. The first is to provide automatic transactions that denies parties the opportunity to cheat. I can swap thing Y for thing X, and it just happens, with no counterparty risk. The second is that crypto transactions happen on a transparent ledger, so you can audit what's going on. To the extent that you could move some organization entirely onto a blockchain, you'd have perfectly auditable books forever.

The Chinese government is excited about blockchains, and that’s part of the reason why. There is a huge problem in China with corruption, and blockchains bring increased transparency.

What’s your take on all the big companies like Alibaba getting into the blockchain space?

It strikes me as a classic innovator's dilemma. I’m a little skeptical because I don't know if they're actually going to be willing to cannibalize their main businesses to fully embrace this new thing. There are a lot of smart engineers working at those companies, so I can see them coming up with something interesting. That’s a good sign—the more smart programmers you have looking at the problem space, the better. That's why I write my Proof of Work newsletter. Every week companies will send us two to three lines about what they're working on, and every week I am amazed at how much is getting done.

Ultimately, what makes me obnoxiously bullish about this space is that so many insanely smart people are attracted to it. With all the brainpower of the people thinking about this stuff, there's going to be a lot of advances. If you look at it over the course of a week or two, it may seem slow. But if you look at it over the course of two or three months, it’s like, “Wow, this field is progressing fast!” And if you look at it over the course of two or three years, you'll be blown away.

Eric Meltzer is a founding partner at Primitive Ventures, an Asian blockchain investment firm, and editor of Proof of Work, a cryptocurrency newsletter.

This piece appears in Logic's seventh issue, "China." To order the issue, head on over to our store. To receive future issues, subscribe.

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