🦬 🦄 Buffaloes, Unicorns, Mountains, BTC & Eth: a crypto conversation with Russell Castagnaro Part 1

🎧 Listen to this conversation on the S3T Podcast!

Happy Friday! I am so excited about this week's special edition - we are fortunate to have with us Russell Castagnaro, the founder of Wampei, one of the first Bitcoin payments companies, as well as the founding partner of Bufficorn Ventures, a web3 venture portfolio.

Russell has a practical background in software, government, privacy, security and crypto...in that order. This gives him a unique clear-eyed ability to sort the wheat from the chaff in the emerging crypto and web3 industry.

Change Leadership Context:

• We are hurtling into new economic territory, as old financial approaches show their age, and new financial building blocks are being invented and tested.
• It is more important than ever for change leaders to be familiar with blockchain based architectures, crypto and web3 - and more importantly - and be able to discern between ideas that are outright scams vs well intention but doomed vs directionally correct and on track to bring beneficial change.

This 2 part crypto conversation with Russell Castagnaro offers the perfect practical learning opportunity for change leaders who need to understand how the financial architecture of the world is evolving.

To aid readability I've lightly edited the audio transcript and added topical headers. I've also added a handy "What you learned" recap at the end.

Welcome and initial remarks on Eth Denver the largest Web3 conference - a pulse on the web3 industry

Ralph: Great to see you again Russell! I was really bummed I wasn't able to go to the Eth Denver convention this year. Last year was really awesome, and so I'm just curious how it was. Any big themes?

Russell: The coolest part, which I think is seeing all the startups - and what comes out of the hackathon.

You know, Eth Denver started at its core as a hackathon, and then everything else built up around it, which is a little different than most of the other events. Last year was also our first year at the new venue. So this year, we understood the lay of the land a lot better.

We did, like, if you remember, the Buidl Hub, which is that Buidl Week that was going on. That was all in a separate location, and so we essentially had to move everything from that location to the main location at the National Western. Anyway, all that stuff was worked out.

We had around 22,000 people at Eth Denver, and the different associated side events were, I think, some ridiculous number, like over 400 side events!

Then we also ran the BuffiTank PitchFest, which was before the closing ceremonies. And that was really great. We had some freaking fantastic teams!

We went on to fund three of them, and we'll probably fund a few more from Bufficorn Ventures. And I think all around, it was just fantastic.

Ralph: If someone's never attended a crypto conference, is Eth Denver a good one for first-timers?

Russell: Almost half of our attendees every year are new! And so we have this thing called Camp Buidl, which allows you to get trained by some of the biggest names anywhere for free, three days of training, taking you from zero to one in either Dev or Design tracks.

And many people come back and say, oh yeah, I went on to get a new job, or I changed the way my job worked, or changed my life. So it's an inspiring thing.

Ralph: Yeah, and we want to talk a little bit about Bufficorn Ventures, too, in a second. The one thing I will say about, in 2023, when I was there, what really stood out to me was the teams that I talked to were all talking about the need for a good user experience and compliance.

So I was hearing compliance and UX, and user-friendly design, user-friendly payment experience - Not themes that I previously associated with the crypto space.

And so I'm wondering, were there other themes like that this year?

Russell: Yeah, I think that people were feeling pretty good on the heels of the Bitcoin ETF, FIT21, and some of the other legislation that had been going through, even though Gensler is against anything that's got a C and an O in it - I guess that means he's against me, too, yikes. [Like the word Crypto, Russell's last name Castagnaro also begins with a C and ends with an O].

Ralph: How are you feeling about the industry as a whole? Any kind of pulse that you were probably able to take there at the conference?

What's exciting and what's frustrating in crypto right now

Russell: Half of me was really excited, and half of me was really pissed, I'll be honest.

There was this energy and understanding from a lot of the people who have been in it for a while that, holy crap, the Web3 ecosystem has reached the point where we really can compete with Web2 to do a lot of things that Web2 can't do particularly well.

Ralph: Web3 can do it better.

Russell: Really really well, and really cost-effectively. And so there are teams that are going out trying to build that stuff, and at the same time, 95% of the projects that you see are scams - not necessarily at Eth Denver - but they're getting a lot of press, because they are making big promises.

There's a group of investors, developers and founders who are like 'lets take advantage of as many people as we can', which is, and this is my opinion, the memecoin bullshit that's out there, largely a pump-and-dump scheme that now allows VCs that are interested to do a pump-and-dump too.

In the old days, like two years ago and further, when you had a scammy coin or a meme coin, you put it out there, you got a bunch of value, the team itself had a bunch of the coins, they would sell, they would come off and make some money, and then they would dump and everybody would be screwed.

Ralph: Right.

Russell: And so now what's happened is that the VCs have realized that they can get in, they can put some money into a team that's going to do a bunch of meme coins, a lot of them work. They put a cliff so the team can't, it's a lockout period, so they can't sell their tokens during the pump, but the VCs can.

So they're going to triple their money in two months.

Ralph: Yep.

Russell: And then they're out. They've extracted the value from everyone. So I really am very frustrated with those actors who have been doing that.

And at the same time, I'm extremely excited about the teams that are making things that really, really work.

Payments + Identity = Superpower

Russell: You know me, I'm a payments guy. I think payments are kind of where it all starts and stops.

And then you combine it with identity and suddenly you've got like this huge new superpower.

In the past, you could do fully collateralized loans with crypto. Those are the things that automatically get called and everything. And one of the teams, OpenDollar, has come up with a way to resolve the past dilemma: in the past, if you wanted to sell that, you had to liquidate. You couldn't sell that position. You had to just liquidate it, and that was the only way out. Imagine if you had to do that when you get a house mortgage or a car mortgage or something. All the loans that you get, that are collateralized, are resold on a secondary market multiple times.

And so these guys basically made a vault that you now have that you can sell and you can transfer - leveraging smart contracts!

It's was like the 3M post-it note moment - the post-it note for investments!

And then like NFTs ...NFTs are cool, but don't people just like stickers? It doesn't need to be an investment. It can just be a cool thing that you get when you go see a band. But now if you get one of their stickers that's an NFT in the back end, it's not like it's going to go increase in value enormously. But now you've got a way of proving that you came to this event and bought the sticker there.

Ralph: Affinity play.

Russell: Yeah.

And then Smart Fund is doing this where in the space of minutes, you can set up an SPV, a special purpose vehicle for all sorts of different investments, whether they're crypto or real world, have an on-ramp for whether it's crypto or conventional. And it's totally compliant with investment rules. So those are really cool.

And then finally, the ticketing systems that are out there are really starting to look impressive enough.

Once crypto is out there and whether you're using it as a conventional token, the way most people think of it as an investment, as a security or using it as a utility or a function of patronage, there are really, really cool applications that are now coming out that I think make the world a better place.

Ralph: There's a distinction between the builders and the exploiters. People who are building things that represent an improved way of doing finance and making an economy work in the world. I've always had admiration for folks like yourself and many others who were just patiently building better ways to run the world.

AI was in a "percolating" stage for a long time before it took off...is crypto like this?

Ralph: You know, that was one question I was going to ask you too, Russell:

AI percolated sort of for a long, insanely long time. Like my father-in-law, I think you met him. He was working on something that was like, you know, AI driven models for, you know, how a battle would turn out or something for defense.

And all that stuff was going along for decades and then all of a sudden we have this sort of like explosion of functionality.

Is there something like that in crypto, that we need to be prepared to be patient for a while?

Because imagine the people who were in AI in 1993. If you could go back and pat them on the back and say, Look, be patient, okay? It's going to be another, like, 20 years but then it's just going to be amazing!

What do you think that's like for crypto? Are we in something like that or is it a little different?

Russell: I mean, first, I think it's a great study on human nature. When you look at things like AI, we'll see if fusion turns into this kind of thing, but AI was certainly this way, which is: the advances were relatively substantial, but tiny... until they weren't, right?

Exponential growth is like this and humans don't think in terms of exponential growth. It's not something that we are used to seeing and understanding.

It's the same reason why if someone says, Hey, I will, I will pay you a hundred dollars a day for the next year OR I'll give you 1 cent and I'll double it every day, intuitively people think "I'm taking a hundred dollars a day", right?

But you're going to be a multimillionaire if you take the doubling.

Ralph: Yeah. In about 30 days or so.

Russell: Right. You know, so, so I think that this is a great example of how once you start noticing something that is growing exponentially, it's too late.

It's the same, you know, on the other opposite side of it, it's the same thing that, that, that everybody that's talking about the environment is saying, like once, once these changes hit that tipping point, we have to start to start the curve over at zero again, have this really slow growth in the solutions.

So, so I think the problem isn't that AI was slow, AI was doing what needed to be done. And it took time and it took computing power to evolve, to where it needed to be. Clearly it's a lot, it approximates something a lot closer to exponential growth than the kind of growth that we're used to. It's not linear for sure.

What is the anti-crypto crowd failing to understand about crypto?

The problem that Senator Warren's army and all miss: if you look at minerals, let's talk gold or silver or something like that. If you're only talking about the value of gold in terms of mining - I'm going to get gold and I'm going to sell gold...the truth of it is, is that gold and precious metals do a lot more...they're worth a lot more than what they're worth coming out of the ground, right? You can make high tech equipment, you can use them to make fuel cells happen. You can use them to be catalysts. They enable so many other things - their ecosystems and their actual value to society is much more than the value of digging those things out of the ground.

Ralph: It's so much more than just, "Oh, I have an Ethereum coin that's worth this much today." Let's think about this as a building block and what can I build with it?

Russell: Right.

The differences between Bitcoin and Ethereum

Ralph: If I recall, you started off with a payments company, it was Bitcoin based and now more recently, a lot of your work is focused in Ethereum.

How do you advise people to think about and understand those two?

Russell: Yeah, I think that there are some fundamental differences and, and some of the Bitcoin maxis might not, um, not necessarily agree with me on this, but Bitcoin is programmable money, right? Natively digital money.

So at no point are you required to do an analog off ramp or on ramp with Bitcoin, right?

It depends on cryptography and same kind of technology that the Ethereum does, but it's really trying to solve the problem of payments and that is an amazing thing in and of itself that you can send any amount of money anywhere in the world in seconds and they can spend it faster than anything that existed more than 10 years ago, right?

I think the big failing of Bitcoin is that we as technologists, we're so excited that we solved these previously, um, unsolvable problems, uh, that we talked about the technology instead of just getting people set up to do it.

And you know, with Wampei, I was going around giving people 50 cents in Bitcoin and showing them, Look, my kids can set you up with a wallet and you can be using it for payment purposes.

Ralph: Yeah

Russell: And what's enormously powerful now where Ethereum comes in is it's much more, a much more generic approach to solving these problems. It's not really meant to be just money.

It's meant to be a whole lot more, you know, it's programmable block space essentially and smart contract and these things that, that weren't, didn't, weren't a part of Bitcoin.

You had very limited ability and as Bitcoin has gotten older and older, they've actually taken functionality out of Bitcoin to make it easier to maintain.

And the kind of computing that you can do using Bitcoin, the virtual machine versus Ethereum and Ethereum virtual machines is, is, you can do much more complex work, um, that requires a lot more CPU in Ethereum.

So you can do much more complicated things. And that's why smart contracts are one of the things that you really talk about in a big way on for, for Ethereum.

One of the reasons I don't have as much of a problem with Bitcoin ETFs is because it is a payment method and in that respect, it makes more sense to me.

What would happen if you made a Wheat ETF? Well, the price of wheat would go way up and people would suffer because they couldn't get wheat. They'd have to go to alternatives.

[Note: We didn't go down this path in the conversation, but it feels like this Wheat ETF is an analogy to the housing affordability problem - when something is being used as a necessary good (food, shelter) AND as an investment at the same time, by people in different wealth classes, bad things happen. Another important conversation for another time.]

The 3 Golden Rules for evaluating crypto use cases for your company

Ralph: So for the companies thinking, should we budget something in 2025 to either have our team spend part of their time exploring this, or we should look at some vendors, what would you advise?

Russell: Well, I think you have to look at 1. the problems that you have, you know, as with any business and 2. what gives you an advantage over any of your competitors, and 3. what lowers the cost of doing business for you?

And so I think much like anything else, um, if you try to apply technology without thinking about those 3 golden rules, then you've, you've lost.

Ralph: Right.

Russell: So from a standpoint of like, do you accept payments or should you accept stable coins or something?

There are a few questions you can ask: like how much are you paying now to do payments? You know, how much do you pay for fraud? Well, it's actually costing us seven and a half percent to, um, to process payments. That means that your margins have to be more than seven and a half percent to break even.

So, so if you look at something like how much would it cost me to accept stable stable coins or Bitcoin?, well, you're not going to have fraud because the payment is going person to person.

Ralph: Right.

Russell: It's going from wallet to wallet. So it goes directly to you. So you don't ever have to ship anything until you know the money's in the bank. And it's coming from that person directly.

So, so that's like the first way I'd say, okay, should you be in on that? And that's the payment argument.

Um, another would be like, are you a company that is, you know, doing lots of international transfers where time is the issue?

Um, if you need to get money sooner, if you need to get assets sooner and confirm things sooner, well, blockchain is going to be your friend, whether it's payments or whether it's confirming things are going through because the real magic behind the blockchain chain is this consensus mechanism in when you're talking about Bitcoin, you're talking about Ethereum, the real magic here, the real thing that, you know, if you're at all technical gives you, like, it gives you a tingly sense in your spine is the nodes, the people who are running the software, right?

Within seconds, they have agreement with people who are running nodes on other parts of the, of the world.

Now, if you've ever been in a company that has something like, um, like an inventory management system, and it's got, sources all over the world, but they pay a lot of money to have replicated databases that keep everything in sync.

Instead, you can use this open source available method for maintaining the maintenance.

Ralph: I have heard IT leaders who felt like they got burned by some kind of misadventure with blockchain maybe back in the 2016, 2017 era.

Russell: Yeah. IBM selling the shit out of it when there was nothing,

Ralph: Yes so these folks are like, Oh, really, this is coming around again?? So I think it's important to explain what has changed.

Many of these [early blockchain ideas] were very data driven. It was all about, "this will solve all our data problems." And then of course, your data people would come in and go, "Wait a minute, where's the data going to be? And who's going to have access to it? And how do we know it's consistent? And are you sure that thing can hold all the data??"

So then it just sort of dissolved into like, Oh boy, we now have to go explain what we spent all this money on and we don't have anything to show for it.

You know, coming around again now, it feels - even just what you're sharing now - it feels much more finance driven.

Russell: So let me, so now I'm getting to the parts that you're, this is exactly what you're talking about.

I remember the enterprise blockchain space, which I do use those air quotes on purpose is that people would talk about putting their data on the blockchain, which is just fricking dumb. 'Let's use the slowest, most expensive possible database to store really important data.'

That doesn't make any sense, right? That's not what the blockchain is really there for. That's why there's not a lot of space allocated for that, right? So normally you store proofs.

One of the other, the other things that blockchain really enables that is remarkable is independent verification.

We all have, you know, we're all used to websites we go to HTTPS, so it's secured and all that technology is there. We're used to digital signing, digitally signing things and what an electronic signature is that those have been around for a long time. And when you need to prove a fact, you now no longer have to go back to the source to prove it.

So you can have a verifiable credential or an Ethereum attestation or even something more custom that stores up on the chain, just a hash or, you know, a proof of something that you can use to say, Oh yeah, this is the document that you present. This is a document that's been issued by the DMV that says that you are over 21 and it's been signed and it's proven.

This is like world changing technology to eliminate the need for manual verification or even that you as a verifier have to have 24 by seven software up and running to allow people to validate your, your information, right? The information that you've issued, right?

So the book that notary public has, that they store information in: an electronic version of that can be the blockchain.

Like, you know, you want to know whether or not this particular video clip is authentic. When was it generated?

Well, you could actually use blockchain to prove the, prove the actual validity that this was actually up, you know, somebody uploaded a signature of the, you know, a signature that proves this document was public and owned by the, whoever owns that wallet, right?

But there's another part that I think is even more exciting and it's something that's leverageable with digital identity. I launched and ran the the digital driver's license program in Colorado called My Colorado.

The last, last thing I'll mention on this is what is the real game changer is that right now, if you, and this is typical of a web two platform, you want to use Amazon, you log in, you have a login with them. All your information is stored there, your credit card information, they have custody of everything about you.

And then they make payments on your behalf and all that stuff that's happening. There is no data that you have that Amazon does not, it is all, you know, it is all there. And, and there are, you know, lots and lots of examples of where there was no trusted way to get information from one place to another.

So let's say you go and you go to an insurance company and you want to get car insurance. Well, in order to get that quote, you're going to probably have to send them a picture of your driver's license front and back. They're going to get that. You're going to sign something that says you give them permission to do it.

They're going to go with to a data aggregator, like a LexisNexis or somebody and say, okay, we need a record for this. They're going to go to a third party who represents the states, and then they're going to process that.

Then they're going to pull the record from the DMV and they're going to transfer it back all through that chain, finally, to where it goes to the insurance company.

You can imagine how many honeypots of data that's just dying to be stolen and just how inefficient it is.

Ralph: I'm sure you're hearing about the ransomware attacks, right? There's this sense that we can't keep storing data in these centralized buckets where it just sits there begging for somebody to come and steal it, right?

Russell: But now, that all changes. You no longer need to do that. So I can have information that's stored. Let's say it's my credentials from the DMV, to keep it nice and simple. I can then find that, put a proof up on the chain with some software, and then share that over to the insurance company directly.

Now, they got it a lot faster. They got it directly from me, and they can prove that it's been signed by the DMV. And there's nobody in between that's going to take money out of the thing, and there's no hacking option.

Ralph: Right - I think about the healthcare event where we had a middleman player that paralyzed the whole industry because of that. And so this is helping reduce that.

Russell: Yeah. And everything, like when you think about getting, you know, how you work with Amazon, how you work with any platform that you use, all that, like, okay, well, what if I didn't, what if Amazon didn't have all my payment information?

I could just send them the payment directly, right? How would that change the way I do things?

CONTINUED NEXT WEEK!

This has been the first segment of the Crypto Conversation with Russell Castagnaro. The next segment will be published in the next edition of S3T.

What You Learned: Key Takeaways from this first segment

1. Eth Denver Overview: Eth Denver is a unique crypto conference that started as a hackathon and has grown to attract around 22,000 attendees with over 400 side events. The conference highlights innovation, with major themes including user experience, compliance, and the evolution of Web3.
2. Industry Pulse: There is a growing recognition that the Web3 ecosystem is maturing and can now compete with Web2, particularly in areas where Web2 falls short. However, there is also frustration with the proliferation of scams and pump-and-dump schemes in the crypto space.
3. Emerging Innovations: The conference showcased innovative solutions, such as OpenDollar's approach to collateralized loans, Smart Fund's SPV setup, and new ticketing systems, all leveraging blockchain technology for practical, real-world applications.
4. Bitcoin vs. Ethereum: Bitcoin is primarily focused on payments and is seen as "programmable money," while Ethereum offers a more versatile platform for complex applications, particularly through smart contracts.
5. Blockchain Beyond Payments: Blockchain's real potential lies in independent verification, reducing the need for centralized data storage, and enhancing digital identity. This can revolutionize industries like insurance and healthcare by providing faster, more secure transactions without intermediaries.
6. Exponential Growth: Just as AI saw exponential growth after years of development, the crypto industry might be on the cusp of a similar breakthrough, where the true potential of blockchain technology becomes widely recognized and adopted.

Opinions expressed are those of the individuals and do not reflect the official positions of companies or organizations those individuals may be affiliated with. Not financial, investment or legal advice, and no offers for securities or investment opportunities are intended. Authors or guests may hold assets discussed or may have interests in companies mentioned.