David Ding

Hi everybody I'm David Ding, business innovation advisor from Callaghan Innovation my guest today is James Bayly. He's the COO of Onfinality a really successful business in this space, so welcome James.

James Bayly

Thanks for having me, David.

David Ding

Pleasure. So, if we kick off with a bit of an intro about yourself and your journey so far.

James Bayly

Yeah sure, so let's go right back. I studied software engineering at University. I've kind of done a lot of different things in software. I've kind of been in business, business analysts, product management side of things. I've worked as a developer in the past, and kind of throughout that process, working at big companies and small, a lot of small startups but also some corporates in New Zealand. Yeah, and, I think as every young software developer, I've always looked at blockchain, web3, you know, as kind of on those next frontiers of software development, and that's kind of always pulled me towards it. I first kind of got involved in the space in 2018, where I worked for a company called Silo down here in Auckland as well. And I kind of worked as a software developer for them, helping them build a decentralized kind of communications wallet application. And from there, you know, 2018 was a big bull cycle, kind of went back at it for a little bit, and then have come back in and joined Onfinality probably about two years ago from now. and since then, haven't looked back.

I joined Onfinality at the start, kind of helped out with their business development side because it's a very technical product, we can talk about it later, a very technical product. And one thing that was interesting for me is I found that business development is very similar to product management, where product management is selling an idea internally to the company, as in, we should build this, we should build this because we think, well, I think it will solve these problems and achieve these goals of ours. External Business Development or sales is very similar just to an external party, right? You're trying to sell your product to a third party because it will solve their goals and their problems so I got involved with, Onfinality and its sister company Subquery over the past two years and haven't looked back, it's been a wild ride.

David Ding

Well, you know, talking about, you know, you say the appeal of web3 is that it's, you know, it's kind of on the frontier, and that's kind of where these projects are, so can you just talk us through the current state of those organizations and exactly what they do?

James Bayly

Yeah, sure. So, there's two businesses, Onfinality and Subquery. They're very kind of similar but quite different. Onfinality, let's start with that. Onfinality is a very straightforward, it's an infrastructure company. So, in web3, you need to be able to access the blockchain network to be able to do stuff. So, let's say you're opening your wallet in your pocket on your phone, that wallet has to talk to the blockchain network. Now, blockchain network is a really large thing, right? There's So, tens of millions of blocks on them, there's terabytes of storage required to run a full blockchain. So, the nodes that kind of confirm new blocks and keep track of what new blocks have been added to the chain, they are quite heavy-duty Computing applications, they kind of need a big computer to run on, and they're not yet at the point where they can run on your phone.

Your phone can't run a local blockchain node and sync to the blockchain and pull that information down onto your phone or your browser, for example. So, what you require is you require external third party to provide you reliable high-performance access to those blockchain networks, and that's what we're doing with Onfinality. We work with quite a few different networks to provide application developers, wallet developers, any other kind of customer that wants access to that blockchain network but doesn't want to run it themselves. Yeah, you know, running your own hardware and infrastructure is a bit of a pain in the ass.

David Ding

And so, what's the typical archetype of your customer that's utilizing that tech?

James Bayly

Yeah, a perfect example is someone developing a wallet. Yeah, so they would use us to access and save data as the blockchain. So, when someone in the wallet makes a transaction, they would send that to us, and we would say that's the blockchain. We run a lot of these different nodes across about 70 different networks right now. Yeah, we're adding more every week. We're kind of expanding to support as many different blockchain networks as possible. There are quite a few of them, which is surprising for a lot of people, and we deal with sometimes, you know, billions of requests every day. So that kind of throughput is pretty crazy. So, there's huge load balances. You know, we have a lot of monitoring in place. We're aiming for four nines of uptime, and four nines of uptime, 99.99 percent, that's, that's equivalent to you can only have 50 minutes of downtime every year. So, one bad meeting.

David Ding

That is amazing, especially in this space where most stacks are so interdependent.

James Bayly

Exactly right. And all this technology in blockchain is also quite new, right? So, these nodes are not well tested, you know, haven't been running for 10 years, these are kind of brand new, and we had to work very closely with infrastructure teams and the foundation teams that build these networks to diagnose issues when they come up. Yeah, so that's Onfinality. It's an infrastructure company. We work with teams to provide access to the blockchain networks.

James Bayly

Subquery, on the other hand, slightly different, but it's still kind of an infrastructure. So, one of the big challenges of blockchain is, it's kind of in the name, right? It's a chain of blocks, and the downside of blockchains, they're really great for being able to save data in a decentralized way, to be able to kind of shard the information around the world, so everyone can kind of have their own copy and can trustlessly verify and be completely certain that their copy is intact and perfect. but traversing the information and reading the information is quite difficult. Now, the reason why it's a blockchain, so it's a chain of blocks, every block, let's say every block, every two seconds, a new block is written for a chain. Every two seconds, that block includes every bit of information, all the transactions that happened in those past two seconds. So, if you want to, if you're, let's say, that wallet example that we had before, a simple use case for a wallet is, I want to open the wallet and I want to list all the past transactions I've made. I want to see all my tokens. I want to list all the past transactions I've made.

That's really hard to ask a blockchain, and the reason why is you can't really ask. You can ask blockchain what's the current state, but for a blockchain to tell you what are the last 10 transactions, they literally have to traverse this linked list, this chain of blocks all the way back to give you the last tier transactions. So, it doesn't work in real time. Yeah, Subquery is a company dedicated to indexing. Indexing is a process of kind of side by side following the blockchain and taking the right information off it and storing it in the format that's a lot more performant. When you want to ask that question about, well, the last 10 transactions that I've made, is it like caching? It's like caching exactly. It's a cache layer for blockchains, and so our customers are, again, like wallets, analytic providers, any kind of decentralised application that wants to be faster, more responsive, and provide more richer data sets to their to the end-users, which is what everyone wants to do, right? Yeah, you need to have a really snappy application in this ecosystem.

David Ding

And so how have you transcended the security issues of caching?

James Bayly

The security issue, so again, the data is public, right? Every bit of data on a blockchain is public. So, we don't really have to worry about security in terms of like, you know, this data is secure and we keep track of it and we keep it secure because the source of it is already public. Ah, it's the integrity of it. But we do a lot of work around ensuring that when we index information, we never skip a block, we never fail anything or if we fail, simply stop and we've fixed it because of the deterministicness of that data is important, never miss a transaction, that's the main thing. And is that infused into the tech or is that- it's infused into the tech. Nice, so we did a lot of work on that determinism of the indexing. So those are the two companies, Onfinality which is a pure infrastructure player, providing access to those networks, and Subquery which is providing access to the underlying data within those networks.

David Ding

Okay, and so that they're symbiotic, but they're also independent, correct?

James Bayly

Yeah. So, we kind of the origins of Subquery often started beforehand, but we, you know, we're talking to our customers, we're asking them what do they need, and it kept coming up that we need this indexing lab, we need some way to be able to access data better. And yes, they are symbiotic, right? Like being able to access reliable infrastructure is important for an indexer, totally. But being able to run production applications is important for an indexer, right? If it goes down, your app goes down. So, they're symbiotic in the sense of you know requiring access to nodes but also focus on uptime, a focus on performance and reliability.

David Ding

So, it's kind of solving that problem, here's my wallet, now people are using it, this is how they want to use it, that solves that problem.

James Bayly

And both of them provide these tools to these customers of ours, then we kind of are known as that infrastructure layer for a lot of these things, right? Exciting businesses, and that's kind of the difference between the main two.

David Ding

So, in terms of the tokenomics, how did you approach that, and what's your ethos?

James Bayly

So Onfinality is a traditional business, it doesn't have tokenomics, we don't plan to launch a token. Subquery on the other hand, we do have a plan to launch a token and build a decentralized network, and a lot of people unfamiliar with Web3 will ask me, "Why do you need a token? What's this whole... why do you need to launch a token? Why are there so many different crypto assets?"

James Bayly

And the reason why is really about decentralization. So, at the core of Web3 is a concept that we can decentralize this product so that anyone can run it. It can be democratized, and there's no single point of faith, there's no single business running it or organizing it or controlling it. Okay, it's about, you know, this anti-centralization approach that's called Web3, and so that's the token is a way that you do that. So, if you want to encourage something or a business or an idea to stay out there, you have to kind of incentivize people to keep perpetuating it. Yeah, now, blockchains and Web3, the token is the format for that.

So, Bitcoin is really simple. Bitcoin's been running largely unchanged since 2007, I believe, and the reason why is because the Bitcoin token itself has appreciated in value, and people that mine the Bitcoin network receive Bitcoin tokens. Yeah, it's the same thing with these more complex systems. So, for example, if we're providing a system, there's a simple example, UniSwap, where you can essentially. UniSwap is this decentralized exchange where you can exchange one token for another. Well, you need people to provide liquidity to that so you can easily have liquidity pool to make those exchanged transactions work, and those people are incentivized by earning UniSwap tokens. For Subquery, it'd be the same thing, right? We want to build a decentralized network where you can build your subgroup project, your kind of like recipe for hard index data, and you can give that to the network and say, "Can someone please run the infrastructure for this?" And the way that we incentivize people to run infrastructure is by the exchange of value of Subquery tokens. Now, the rewards that these indexes will earn, you know, this is all around the tokenomics design. And this is why the whole goal here is we build the system that our company can cease to exist. I can, you know, I one day I'll... I'll... I'll pass away, but the whole idea is that we build these systems that kind of outlive us all. And so, the tokenomics comes into that, and it's all an economic model, of how you maintain the value and the rewards and ecosystems so that people are incentivized to continue with that.

David Ding

And I think that's part of the appeal. There's an opportunity for legacy wealth generation. and but I think there's also a way for the founders to have a liquidity event, and I think this is a challenge I, for Founders, I'm working within this space, is the tokenomics. Yeah, it's a challenge. Am I going to have to get my token registered on an exchange in order for my Founders and the token holders to have the liquidity event? Can you just talk through that a little bit?

James Bayly

Yeah, so the normal life cycle of a Web3 project is, you know, you ideally first build a product, and it's useful, and that product might be free. You might charge customers in a normal traditional sense of fiat currencies, but at some point, you might decide, "Okay, we can build a token economy around this. We can build an alternative economy that's self-sustaining using a token”, and so you'll write a white paper. You'll take that out, you might get some investment into that based on that white paper. The white paper kind of outlines, it's a structure, it's a formal document that outlines exactly what problem you're solving, how you propose to solve it, and why are tokens important to that, how the value flows around that, using that token. How that value flows and that the main thing here, the really critical piece, is the token's got to have utility. There's got to be a reason why it exists, it's got to be useful in the actual Network here. You can't just launch a token to raise tons of money.

David Ding

Yeah, as a store of value alone.

James Bayly

As a store of value alone, that will get you into trouble in some jurisdictions. So, the main thing here is a token has a utility in the system. A token is a means of exchange of rewards or whatever, you know, like there's some value in the ecosystem, so it's a utility.

David Ding

And is a token of appreciation for a service rendered. Is that enough for it to have utility?

James Bayly

It's a bit of a grey area, right? So, there's an interesting part during that life cycle when you get investors. When they look at your white paper, a lot of investors will actually ask for legal opinions from kind of lawyers focusing in this space of, does this token, modelling that you've designed, or this token economic model, does this kind of satisfy the utility token question? Yeah, and that is actually a legal kind of process that a lot of teams will go through just to get that clarity around that. That's an important one. It's an important one.

James Bayly

So, you launch this, you build a test net, you test it out, you launch your main net. When you go and launch your main net, you probably will have to release or generate these tokens somehow. Some people call that token generation event, some people will call that an IDEO or an IEO, initial exchange offering, or initial decentralised exchange offering. But that's a kind of a liquidity event there,

David Ding

And is that like a dress rehearsal for an ICO?

James Bayly

An ICO is an old format for this, we've kind of moved away from an ICO. An ICO, these are kind of different names, but they're the same still, they're liquidity events. Okay, exchange listing probably comes a bit after that. Okay, so talking to an exchange, they'll want to see obviously that your token's not some kind of terrible business, they want to see some, you know, some utility in there, they want to see a huge community around it, before they list you on their exchange right, because they have some reputational risk. They list a, what we call in this ecosystem is a shit coin.

David Ding

Yeah totally, and are they concerned about the potential of the venture, like if it's small…

James Bayly

Of course. So, exchanges will look at you a very similar way to imagine what a stock exchange look at you right, like no small business can go to that Stock Exchange and say, 'I just want to go public'. It's like a stock exchange is going to say hang on, you know, you know, is the liquidity of you know the trading volume of a token high enough, is liquidity high enough, the value is kind of keeping up then stable,

David Ding

And the quality of the team?

James Bayly

The quality of the team, the finances, you know, all that stuff that's very important, same kind of way in web2.

David Ding

And so, what about in terms, because this is a big Horizon for you guys, in terms of recommendations for structuring entities, can we maybe touch on that a little bit?

James Bayly

Yeah, so the challenge about this is that it's a very new, process, right? Like, there's a lot of, and it's changing all the time. You know, you've mentioned in the past, we call them ICOs. You know, we don't really do that anymore. but this is constantly changing, and so one of the things you want to look at when you set up this model is, obviously, making sure it's a utility token, that's number one rule. Yeah, you know, get-rich-quick schemes, they're not going to go down well in any kind of jurisdiction. In terms of setting up a business, the one recommendation I have, is New Zealand is probably not the best place to launch a token business. Yeah, the taxation regime here is getting clearer in terms of basic stuff like if I send you some crypto assets, or if you earn them from staking revenue, those parts are kind of clear, but there's a lot of complex transactions that we're designing still, that it's unclear around how they'll be taxed. And when you want to set up a, and this is something that we've done and we're working through, so by all means, make sure you get some advice, don't listen to me, but this is something that we're kind of considering.

David Ding

This is story time.

James Bayly

We've gone to a jurisdiction like Singapore to set up that token business, and your hope was to be able to do it in New Zealand, right? Our hope would be, but it's still not clear enough. Singapore has kind of gone ahead and said, "Look, we're going to provide some very kind of broad guidelines around how this will be treated," Singapore is a, you know, very forward-looking pro-business place, it's kind of close to us, you know, it's very similar in terms of legal systems, but also, you know, they've had a lot of crypto projects go through this already, so there's a bit of an ecosystem to Singapore of law firms and accountancy firms.

David Ding

Someone's already blazed that trail.

James Bayly

Exactly. In New Zealand, I don't know if there are many teams in New Zealand that have blazed that trail, I don't think there are many at all, so, if you are going to set up a token business, what we did is that we built a, I believe it's called public company in Singapore, which means it's like a not-for-profit, and that business, that sole entity, it's a foundation to, to that will generate these tokens under, and that foundation will be kind of community-controlled, and will, their main kind of job or direction is to encourage and foster the growth of the Subquery Network.

David Ding

Okay, I know Singapore is constituted in common law, is that Foundation, is it a common law Foundation or is it statutory in nature?

James Bayly

I think it's statutory in nature, I think Singapore just kind of pushed forward about this, but again, you know, there's…

I'm no expert in this space, so talk to someone there. There's other jurisdictions that are common, so Singapore's one, the British Virgin Islands are another common place where you see a lot of web3 projects incorporated, and same in the Cayman Islands. so those three are kind of the main three areas around the world where you see this.

David Ding

Yeah, I see in the Cayman Islands that a DAO can even be treated like a company.

James Bayly

Yeah, because these countries have basically said, 'Look, you know, here's the frameworks, the rules, you know, go crazy, just don't be silly.' We might see that change though, you know, we've been burnt in the past year or so with, you know, Terra collapse, and Do Kwon, and then FTX with Sam Bankman-Fried.

So, we might see some governments slow things down a little bit. Yeah, in the future, who knows, but at the moment, you know, we've gone to Singapore. Another benefit of a place like Singapore is that with Web3, when you're attracting investments, New Zealand investors aren't really in the same ballpark, and because it's such an international industry, you know, many Web3 companies actually hire purely overseas. We can talk about that later, but a lot of the investors are all overseas based. Yeah, and for them investing into a New Zealand limited liability company, okay, that's a brand-new concept that they don't want to deal with, right?

David Ding

Yeah, and the glazed overlook of a VC.

James Bayly

I have no idea how to do this. I'm some, you know, I'm some VC from Silicon Valley, and I don't really want to deal with New Zealand common law, you know, but Singaporeans have done that, right? They know the framework there for sure, so going where everyone else goes has some benefits from that, from an international investor perspective, which is a common investor that you find in Web3.

David Ding

Okay, and so you've got a foundation. It's based in Singapore, and what powers does it delegate to your New Zealand entities?

James Bayly

So, that's sort of to be determined, right? But so, we have this Subquery New Zealand entity which we're employed under and kind of pay the bills for us, it's likely going to be some kind of model where the foundation obviously will control the network, have the treasury, and the foundation will contract on the arm's length deal to our kind of New Zealand entity to kind of work as a contracted developer on the network for them. So, it's quite simple, really. It's quite simple, but like the main thing here is, you know, there's some aspects you just want to be very careful about and talking to a lawyer that specializes, which is very important, for sure, very important. Don't just kind of forge ahead and set up a company and launch a token and just start selling it willy-nilly because you're going to have the tax man talking to you about,

David Ding

For sure, and the landscape's changing all the time.

James Bayly

It's always changing. Exactly. So, for us, Singapore makes sense. you know, it's a shame, but it's that's the way it is, right? Yeah, and I do think, you know, the New Zealand tax regime is going forward quite fast. it's still slower than them, but you know, we're getting some clarity around some things here.

Just getting staking, understanding how staking revenue would be taxed has got a big step forward. I think a lot of people, and it's really good to see. There was last year a parliamentary inquiry into the nature of crypto assets, and so even just seeing this conversation happening, is really important for us as an industry.

David Ding

Yeah, and you know, it's worth noting that, you know, we, Callaghan Innovation, we've got no teeth. We represent the whole innovation ecosystem, and so the regulators, they're going to do no harm first and foremost. So, if there is someone who has blazed the trail and we know it's safe, you know, that's where we're always going to lean.

James Bayly

And that's one of the things about web3 is that it's such an international kind of industry that, you know, if we kind of stop it here, we'll just shift overseas. Yeah, there's no way to kind of, like, my personal view is that it's something that will just move around to like the easiest path. most, I kind of touched on this before, right, but when you're building a business, one of our challenges is obviously staffing. You know, we have made the rare decision in Web3 to actually have a lot of our developers and our core team in the same geographic proximity.

David Ding

That’s an incredible thing, you know, it's so rare. How did you manage that?

James Bayly

Well, we just made a conscious decision like two years ago that we think we work better kind of in the office together as a team, right? And, you know, this work from home situation that we've gone through for Covid is obviously changes for you a bit, but there's nothing like getting one whiteboard, especially when you're dealing with something kind of quite unclear and uncertain as a, you know, a decentralized network. Yeah, being able to, like, talk it out in a drawing form is quite helpful. Most companies though, in Web3, have just gone straight overseas, so it doesn't matter where in the world you're working, time zone proximity helps, but I know many companies that the headquarters are in France or Paris, and or Germany and Berlin, and there are people working in Auckland. Yeah, and we talked to them sometimes, like, oh they're like, you know, we're from Auckland, New Zealand, like okay, that's the other side of the world, but then like, oh we've got a person working developing for us in Auckland, and we're like who the hell, you know, who's that, give me their name. Yeah, probably, I probably know them, you know, exactly, two degrees of separation.

David Ding

And so, you've actually got close to 50 employees. That's an incredible accomplishment really.

James Bayly

Yeah, it is, and it was a bit of a challenge, but that's one of the things going back to the start when I said at the start, which is young people in this space, young software developers, especially, they look at Web3 and blockchain, and kind of, I like, I guess AI as well, there's two leading edges of software development. So, for us it's about, you know, starting, we kind of look for predominantly kind of really smart young people. Because there's not many people with years of experience in Web3, and if they are, you know they're priced out of the system. Yeah, there are some ridiculous salaries floating around during the Bull Cycle. So, for us, it's about getting young, smart people on board as early as possible that they can kind of learn on the fly and be a bit more adaptable, you know, like, okay, here's the constraints of what you can do because when you're developing things in web3, like the coding languages are off. Like, Solidity is a bit of a weird language, Rust is a bit of a weird language. but also, like, the ways that you develop them is quite strange.

For example, a simple funny one I like to say is for Loops are really dangerous in blockchain, so unbounded Loops because you don't know every iteration in that loop costs money to execute on a decentralized network, and if you don't know how, what the bound is, it could cost you infinite amounts of money. So, if someone manages to Unbound the system or kind of like you can bankrupt your treasury, so these are kind of examples where you have to design systems where you can't write a for Loop. Okay, you avoid writing a for Loop. Yeah, so you're coaching those into these young people, you just have to kind of you know, some best practices out there, but it's just about learning about all these kinds of complexities and kind of running with the times.

David Ding

And so, where's the hotbed for young, you know, up and coming developers?

James Bayly

There is no hotbed, I guess like the main thing I get, I think that we need to get better as an industry is kind of working with universities. Yeah, you know, we're all moving so fast, and we're kind of running so fast, because, you know, we've got our priorities of getting this product out and our industry works and moves very, very fast. crypto never sleeps, that we don't really stop and think enough about okay, how do we build that next generation of talent coming through, how do we kind of show them that hey, there's actually a web3 industry in New Zealand, you know, you know this right, there's actually a surprising number of companies in New Zealand that are building in web3, and so, they kind of keep their heads under the radar because, you know.

David Ding

Yeah. that's the nature of a web3 organization in that it's self-reliant and self-governed so they're good at bootstrapping,

James Bayly

Yeah. So I think we need to get better as an industry of kind of outreach to people, to for the staffing issues, but also just for you know understanding what we do right like the going back to that crypto inquiry from Parliament last year just like some of the basic submissions were just like it was clear that people only saw news headlines and didn't quite understand, you know, what actually happens or what it's used for, what we're doing in the industry, and that's on us, right, that's on us not kind of engaging with people in the language that they understand, because it's a very technical space, we're very nerdy software developers, you know, we just kind of make it too hard.

I think that's the next frontier for us as an industry. Is this making it easier to access? Yeah, make it easier for like, you know, if you're building a web2 business, how to get into web3. It's a perfect example.

David Ding

One of the things that fascinates me is that a lot of founders in this space, they tend to be, I wouldn't even say amateur economists, but they're very, very learned on currency.

James Bayly

Well, that's tokenomics, right? Everything is as, as that's one of the best things and the worst things about web3 is that because that token economic necessity, you get people just looking at the money, and the fiat value of these tokens, and it's all about just getting rich quick scheme, and the best thing about so it's quite cyclical, this industry. You have bull cycles when, in 2018, we won last year, and your bear cycles, bear markets where things are a bit depressed and the tokens kind of gone down and we're kind of in one now, but it's really good for us builders because it just means that we can focus less on this really loud community that's only focused about price go up and actually go on and continue building what we're building. for us as an industry, I feel like we're in, we're kind of like in '97, '98, you know, you've just had this massive .com boom and bust, and everyone, you know, everyone's saying, well, why don't we see this, you know, there's like four different pets websites and, you know, there's some shady businessmen selling snake oil online, but under the hood, there, there's still a lot of people working away, and you know, we looked back 20 years later, where are we without the internet?

David Ding

Well, you know, I would say it's a trend that I'm seeing in the portfolio founders I'm working with now, is that it's more of, they're more focused on commercially viable ventures, you know, stereotypical ventures.

James Bayly

Well, that's the focus now, right now that we're in this bear cycle, the question now goes towards fundamentals. So, it's less around, you know, it's everything's going up, so let's just go fast and get out there. It's now on fundamentals, do you have a sustainable business, is your token modelling correct and sustainable, what are the fundamentals of this, and that's kind of what we need.

David Ding

That's actually probably a good segue into, you know, just delving a bit deeper into what are the keys to success for you guys and, and what would you recommend to other people.

James Bayly

Yeah, it's a great question, so I think the keys to success are really just going back to basics, for us right now, it's about building the best product, getting it out there to as many customers as possible, and, and growing the customer base, growing the people using it, and then feeding that back into building a better product, okay, it's a, it's a cycle here.

David Ding

And that's quite a unique cycle specific to web3. You know, you've mentioned it before in other conversations about how proactive you have to be in making that work.

Well, that's one of the differences, with web3 in terms of, well, it's still, you know, you still need to have that cycle in the traditional world, but it's a lot faster in web3. Yeah, our customers are developers, and they don't, they're not afraid of telling us what doesn't work or what does. Yeah, so we kind of get directly from them. There's no, there's no barrier to kind of make contact with me or anyone else in this industry.

David Ding

So that stereotypical mindset of, you know, start Google advertising and advertise on Facebook and all these kinds of things, what are your thoughts on, you know, how effective that is, and what are some alternatives that are unique to web3?

James Bayly

Yeah, so the strategy around sales and marketing is completely different in web3 from web2. So, in web2, and it even goes back to investors, right, investment is very different in web3 versus web2. Yeah, but so the first one is, is, you know, it's the fundamentals are still important, and I think a lot of people miss that during the bull cycle because everything's going up.

David Ding

Yeah, fundamentals being community engagement?

James Bayly

The fundamental being the product, okay, you know, actual people using the product, and the product, you know, being sustainable. But when, you know, the tide goes out, you find out who's caught with their pants down. so, for us, it's about product market fit, and I think many products that are kind of going under now on web3 didn't have that product market fit. They kind of rushed ahead, they raised a ton of money to get that, but they've never quite made that so product market fit.

James Bayly

Yeah, but then in terms of the way that you structure things, so one thing about web3 is everyone's accessible. So, if you want to reach out to someone, it's very likely you can find their email, their telegram handle, the Discord handle, you know, that they have to be accessible.

It's a very public place. Yeah, and that's kind of interesting that, you know, we are constantly in communication with our customers, and there's no, like, we don't have to go through their representative to then talk to their developers. They're all on the same chat group with us. So, we use a few different tools in web3 that are different from normal. One of them is Discord. Discord started as a gaming service, a gaming communications platform, but it's been taken up by industry. it's a great way to engage your community. So, you can have all these different, a Discord server as a company, and then you can run all these different groups for different needs, different, like, language areas, different needs. So technical support group versus a kind of random discussion group or a meme channel, if you want. we also use Telegram a lot. Telegram is a kind of instant messaging application, and everyone uses it. I wake up in the morning to just hundreds of Telegram messages, and we use it to create groups of just on, you know, just bespoke groups of customers.

So, these two tools are completely different than Web2.

David Ding

And I would say that that methodology of, you know, spawning a community or a group, often starts with a brains-trust bouncing ideas in a telegram.

James Bayly

Exactly right, it starts with bouncing ideas, but then, okay, now you have to, because, because web3 requires a token economic model for a lot of these token businesses, to in order to kind of encourage that token to have some liquidity and have some trading volume which can help you with that exchange listing later on, you want to build a community that has a large size and a lot of holders. So, one of the big reasons for a liquidity event at the start, we're kind of going back to this point, is you distribute your token to as many different community members as possible. Yeah, the idea here is that rather than some investors having a ton of your tokens and just dumping them over time, you spread out your tokens to as many different community members as possible, to get them involved early.

David Ding

Yep, and that's all above board with the FMA and all that kind of stuff?

James Bayly

It's all fine, right, because it's direct, it's retail investors. you know, obviously you do some KYC and AML, you can't sell these tokens to someone from North Korea, but there's many, you know, KYC/AML platforms that come up specifically to kind of aid with this. So don't, don't do that, but you know, that liquidity event, spread your token out to as many people to involve as many people into that community as possible, then you've got to engage that community. So, it's constant communication. Web 2, you could go away and you could hide under a rock for a few months and build a really cool product and then just kind of like give it to your customers and not really talk to them, you know, you could do that in Web 2. Yeah, you can't do that in this space.

Yeah, so you need to be constantly communicating what you're building, why you're building, what your vision is, all that stuff with your community. It's kind of like politics in a way, it's constantly explaining the rationale behind some quite complex topics to people that aren't that technical, okay. Being able to stand up in a monthly Community call or even just office hours and get asked questions about, you know, when are we going to do this or are we going to add support for this, and being able to explain why, why not, you know in a very clear way. So, communication is very critical, and the best projects, you know, it goes back to that point, which is the best tech doesn't always succeed, the best tech is not always the best option, right? There's many examples of that in history, and for many different reasons, and one of the reasons in crypto or web 3 is the community engagement part. So how do you communicate what you're doing, what your vision is, what your 10-year goal is for this project, and how you're going to change the world? That's kind of one of the big challenges, is that communication piece.

David Ding

Absolutely. And I think that's as someone whose job it is to identify a potential emerging Frontier Venture, I see a lot of double ups, a lot of people doing very similar stuff, a lot of overlap. But I never base my judgement on the tech alone. It's often how effective are you going to be at establishing a community around this venture.

James Bayly

Yeah, it’s Community it’s customers, it's how good is internal business are you? How, how its good is your accounting? You know, FTX, that the bad way, you know. And then how good is your product as well? so there's all these things. So, it's always about building a community. The way that you advertise, you don't really do Google AdWords in crypto, you know? You don't really…you might do some Twitter advertising, a lot of people on Twitter, but the main thing is Word of Mouth referrals, getting people from different teams involved in your community, hearing about it online. So, one of the best things that we've found over the years in terms of expanding our community is partnership announcements.

James Bayly

So, we get a new customer, we do case studies with them always, we kind of go deep into how they're using it, why they're using it, what they're solving, we introduce them to our community, they introduce us to their community. Okay, partnership announcements is one of the best ways we've learned over time to build that up.

People kind of, people kind of smell in this industry a bit of a sale. there's still a lot of paid advertising. There's, there's a heck of a lot of key opinion leaders, KOLs we call them. YouTube stars that shill their latest coin. These are all terms that we use, um. But I think under the best, kind of the best way to do it is, is just a substance, you know? It's partnership announcements, it's putting out new things, it's putting new products, it's getting better, bigger at the organic way rather than paying your way through it.

James Bayly

Yeah, there's many, the number one mistake that we see a lot of Web3 projects go is they try to shortcut this, they buy a ton of followers from different providers, they pay for shilling from various YouTube stars, you know, and then some YouTuber hops on and says, "This token's going to the moon," and you know, and that just doesn't work well.

David Ding

And that's part of the issue with the volatility and the space.

James Bayly

Exactly right, it's trend following, it's get rich quick, and that's again one of the best token economics is the best and the worst issue with Web3.

Yeah, people kind of hijack it to get rich quick. Yeah, so for us, we don't really want that, we just want to build something sustainable. So, one option, I love token economics. If I could go back in my life and be in a different industry, I reckon I would have done token economic design because I love this economic side of stuff. I didn't do it at University. I wish I did. but I think back to my year 12, year 13 economics. you know, you're trying to design ways where you used to design situations to prevent people from... so let's say you're encouraging this behaviour. Okay, so you might, you might put a penalty on the opposite, but then people might design another way to get around that, right? That has a secondary outcome or a secondary... You kind of have to constantly think about how can someone mess with this, how can someone pervert what I'm trying to do into a sub-optimal position here?

James Bayly

Okay, how do we prevent sub-optimal things, and then you also have to design all these... so let's say, you know, example of, you're designing a limit or like a reward rate. So, how much tokens do you reward a user for something? You've designed that reward rate so it scales from like 10 people to 10 billion people? You know, but like, you want to avoid any kind of artificial caps on the number or the size of this community? And when you often do like economic design, you might say, "Oh, that the reward weight is 10 tokens, but hey, that once you get to 10 billion, that's like that's half your treasury?"

Yeah, you know, so it doesn't work, you know, so it's got to be everything's got to be variable, everything has got to be equation-based, based on some other metric that doesn't kind of reach a limit. Yeah, you have to avoid any outcomes that aren't right, and you have to... you want to encourage people, so rather than to avoid this volatility, you a common way people do that is by encouraging people to lock their tokens? So, you want to reduce the amount of tokens circulating in the supply, and the way you do this is by encouraging staking or some form of staking, or locking of assets. So, it's like the web3 equivalent of quantitative easing, you know, or just putting a bank account earning interest, right? Like, it's interest-bearing Bonds, you know, just remove liquidity from the market, encourage people to lock their spare tokens rather than trade them day to day because, you know, that's not what you want to see? so there's all these different things that you're just trying to encourage, and then I wish I did this back in the day because I reckon there's a lot of Consultants out there that charge an arm and a leg for token economic design?

David Ding

I know a lot of people who are in the market.

James Bayly

And frankly, they're not really that great in my views, so but you just have to really think creatively around all these different things around what you're trying to incentivize and what you're trying to incentivize not to happen.

David Ding

Very cool. Okay, so just talk us through the stereotypical day in the life of James Bailey.

James Bayly

Yeah, that's a great question. There's number not really one standard one. I think, a summation of what I'm going to say is like, I guess there's a lot of work, and I think that's one thing that drives a lot of young people to this industry. Is that you can really affect change quite quickly, and the industry moves so fast, and your businesses have moved so fast that you know, you can decide to do something that day and do it that day, you know, and release it that night if you want, if you're so inclined. So, day in the life, it's international business. We have our customers all over the world, and actually, frankly, where most of our customers are in this industry, web3 attracts people. New Zealand is a very small market for this, and the reason why is we're very safe. Corporate businesses are very safe, our government's very safe and stable. You and I, David, we have no fears that overnight the bank's going to go under. We have no fears that, well, we know that if we get screwed over by the big guy, there's so many avenues for us to receive recourse. You know, like we're pretty confident and comfortable in New Zealand that things will be done well. Yeah, and we're very privileged to have that for sure, but many countries don't have that. So, web3 is huge, and any territory that doesn't have that, which is unfortunately a lot more countries these days than they used to be, it's huge in Southeast Asia and China, and Eastern European countries, Russia, Middle East, Africa, are looking at it as an alternative to its broken system. Europeans are really big into it. I think they're just anarchistic in a way. Americans are probably quite similar. So, but any developing country that isn't being served well by the existing industries, you know, where banking isn't really accessible to the average person, they're seeing this as a true and, you know, proper alternative to what isn't working for them.

So, for us, that means a lot of our customers are overseas and waking up in the morning, you will just have to deal with all the overnight stuff that comes through and never sleeps. Okay, so wake up, see a lot of messages from different customers, you know, resolve all those issues if there are any issues. I'm quite lucky, I have quite a varied role. I do a lot of operation stuff but really, I also, I kind of talk every day about development, what we're doing, what we're building, quite closely connected to the sales and BD side. So, I quite enjoy it because I kind of have fingers in everything, which is not great in my I have my free time, but it means I get a lot of varied stuff. So, whether it's discussing around our launch roadmap for a decentralised network, whether it's talking about some roadblocks we've faced, some technical roadblocks we face with the technical design for our decentralised Network and how we might change some of that token modelling to make that work, whether it's about discussing what the next feature we're going to build for Onfinality for our customers or what net layer one we're going to support.

And then in the evening, I often find, it's kind of the quietest from like 3 PM to about 6 PM, and then everyone overseas starts waking up and, and so we start doing, most nights I probably have meetings from like 8 till 10 PM. Because it's all European customers, right? So, sales meetings and stuff. We try to, we're setting up an office in Singapore with the kind of one purpose of just being able to bridge that divide, yep, but it's just constant which is great, but it just means you don't really turn off. But our industry, right, like I'm quite comfortable, you know, going off at 3 PM and going out and enjoying the sunshine and then coming back and starting up again, which is that kind of flexibility that we have as an industry.

James Bayly

So that's kind of a day in the life, I think, you know, the main, the main thing here is that you just have to be quite flexible in terms of, you know, you don't go home at 5 PM and shut off, which I guess is like any kind of startup, right? Yeah, as kind of the industry that we live in and that we've tried to try to preserve that startup mentality, as we get bigger, which I think every company struggles with in terms of that transition from 10 people to 50 people to 100 people.

David Ding

Yeah, the one thing I would say, you know, as an observer of the behaviour in the web3 space is that it's a lot more collaborative and so it's actually a lot more fun.

James Bayly

It's a lot more open source as well, so everything you build with Web3 generally has to be open source. and you often find that you might, you know, if someone overnight, you might get someone make a pull request to your code base, you know, true. So, it's, you know, that's collaborative, it's very open, it's very closely accessible, which is kind of a pain in the ass Monday because you've got people messaging you about this random stuff like I can't deal with this right now. But it's very even though it's quite large. Still, it feels very small. Yeah, and you kind of know about everyone. And if you want to get in touch with someone, you kind of can find out a way to talk to them.

David Ding

Yeah, you know, I would say, people are a lot more generous with their time. You know, I think when you've got a nine-to-five job, you're a bit more precious with your time. But people readily invest it in the web3 space, their time. Just to explore possibilities.

James Bayly

And a lot of people will kind of like just tinker with stuff in the space because a lot of us came from a developer background. We still like to kind of pick up the tools every so often. So I like to tinker. We like to tear about new ideas, and we understand that, you know, it's a bit of a weird. There's no playbook for how to do this. So, this is kind of what I'm talking to you right is everyone has a different journey, but there are a lot of differences and weird kind of aspects of that journey that you understand, I think. I think making yourself accessible is really important though. It is, so being honest and being yourself, but also just being out there and saying, "This is who I am," and you know, feel free to contact me. One thing that you find a lot in the space is there are a lot of anonymous personas and I don't know why they want to be anonymous. I think some people have good reasons around, like they just don't want to link their family to this or their name to this, but I feel like if you are building something, you should be proud of it. Put your name on it, right? and that's one thing around the space.

James Bayly

So, with building a company, when you first start, there are different levels of kind of social credibility that's really important because there are a lot of scams in this industry. Yeah, your community will look at three different kinds of aspects of social credibility. So when you start, the first aspect is, what are your who are your partners or customers who are you working with? Because if they're working with you, then they probably have checked that you're not just a, you know, an anonymous, a shady anonymous, bot that's going to, you know, say they're going to do promise the world and not do it. You know, there's going to be some credibility that, oh, you're working with this other big player, okay, cool. The second round of social credibility is, who are your investors? Because if your investors are giving you money, they've obviously done some technical DD, there's some done some kind of DD on you, and then the third one is, you know, the social credibility is, how big is your community? So, how many other people are involved in this, you know, and how long have you been going for to that historic kind of credibility? Absolutely, so maintaining that's really important and, never, your reputation is everything. Yeah, so you know, your reputation can be destroyed in a minute, and there are, there are, you know, there are people out there that, you know, that have been part of a pump and dump scheme or some kind of other scam in the past that get uncovered and, that project just essentially sinks because why would I get involved with this project when that person's got this history of running away.

David Ding

And then if you have been involved, your judgment is questioned.

James Bayly

So be very careful for your reputation. Yeah, because it's so transparent, and everyone kind of knows the history of the stuff, and as you know, quite a young industry, right? Like four years is a long time, people don't really forget that much, four or five years, so, especially when they've lost money, man, be very careful about your reputation. It's very hard to earn but very easy to lose.

David Ding

For sure. So, in terms of, you know, what was your Capital raising Journey like, and you know, maybe some things to watch for?

James Bayly

So back in the day, you could write a white paper, and you could raise money off that? You could raise five million bucks off it. It's obscene, really, when you think about it, just on an idea, just on a well-written polished white paper, which is like a 10-page document, you know, an eight-page document. so thankfully, a bit past it, I think some investors now actually kind of want to see some product? They want to see at least a technical kind of demonstration.

So, raising money in web3, still very similar to web2, but it's a lot easier, we find? Because investors will find that, you know, in the traditional world, the liquidity events take a lot longer to get to, you know, you have to be very kind of careful about it, there's a long kind of process before investors earn revenue back, right? And back, it's complex, but web3, there's a lot faster path to liquidity? so people are more kind of willing to give away money in this industry, and that's why people, I think, have cut corners in the past, but I'm hopefully that hopefully it'll change.

So, as I said before, you write a white paper, and your white paper, you're, and you write it, and you create a demonstration and project, you might create a proof of concept, you might build the first iteration of your project, you might build a project that doesn't have any tokenomics in it, but it solves a problem, you know? And then you draw this white paper up, and the white paper shows the problem that you're trying to solve, what you're trying to solve, how you're going to do it, what the economic assessment of it is, how you're going to maintain the value of that token, how, and what are the tokens you're going to make when you go public, you know, how much goes to investors, how much goes to the team, how much you're going to give away to the community or sell to the community.

David Ding

And I think that's the distinction I want to make, is you know, in the stereotypically, you've got a pitch deck and then an IM.

James Bayly

It's kind of very similar. It's just a bit more written.

David Ding

It's more of an expression of intent, rather than having everything solved.

James Bayly

Exactly right. So, you don't need to have everything solved, but you just want to have this, this plan at least. you still want to have a pitch deck, right? So, we're having a very flash PowerPoint that summarizes is much better. You know, writing through a 10-page white paper is not the funnest thing to do in life. No, it's not. But you get that done. Investors are always, mostly overseas, so you don't really deal with any New Zealand-based groups or investors. We've talked to some, in New Zealand, some like traditional investment firms that a normal company will go to here. they've kind of looked at getting dipping their time to web3, but it's just a different kind of scale of risk, and, and the values that the sums involved are quite different, yep, and it's challenging to analyse the opportunity exactly right. You know you're not used this, you don't know the, you know, you're not, you don't live and breathe in this ecosystem. So, there's a different classification of investors, and most of them overseas. So, when you start, you probably decide, 'I'm going to, let's say I'm building a smart contract, and Ether or let's say Binance, Smart Chain or Polygon or Polka Dot or Cosmos or whatever, you know, you pick your ecosystem.' In there, you often find there are investors that focus entirely on the ecosystem, the first ones you're trying to talk to, okay. they often have launch pads as well, or they have like some kind of, developer support, so I work like, accelerators. They're quite useful to get involved with. Yeah, you often find a lot of grants money in the space as well because it's all open source. If you say, 'I'm going to build this to open source,' you often get a lot of grants as well.

David Ding

But do you find those grants, oblige you to that Network?

James Bayly

They can do, but I, I've never seen a grant say you can only adapt, you can only keep this as a network. You could adapt it to another Network as well. There's no harm with that. you drop your white paper, you drop your pitch deck, you talk to investors. Investors in this space, they will, say sounds good, look at the token modelling, look at how you plan to split up the tokens.

James Bayly

So, let's say you've got a supply of a billion tokens, and, eight percent go to series A or seed investors. You plan to give 40 percent of the tokens away in a public sale, 20 percent go to the team. The remainder is kept with the foundation for, you know, building and fostering the network as it grows. That's kind of an example of how that the high split. investors will use something called a SAFT. So, a16z kind of pioneered this back in the day. It's a U.S kind of investment process. In traditional world, it's called a SAFE, simple agreement for future equity. And so, basically, a document that allows you to kind of convert document investors and receive money without having to close the entire round at the same time.

So, the document will say that, at public, this investor receives this percentage or this amount of tokens, up to this cap, you know, based on how much you've raised. Yeah, we call them SAFT, simple agreements for future tokens. That's the same process: sign those up, investors are onboarded, they'll pay you. you build a product and then hopefully in a year's time or two years' time or five years' time, you launch your network, you have a liquidity event and everyone's happy.

David Ding

Yeah, and so if you were Googling for that kind of agreement, you'd Google for a SAFT template.

James Bayly

SAFT template. And, the other big challenge is designing around tokenomics. It's often conflated with the pie chart of how many tokens each party received. So, the foundation receives this much, public receives this much, the team receives this much, but it also includes investing schedules in each of those. Yeah, and the main thing to do here, the main approach you want to take, is try to minimize any sudden liquidity events. So, you have this public sale that's a liquidity event, but you want to minimize any sudden vesting of tokens because inevitably if tokens come on market, you know, investors have held those for four years or three years, you know, they want to probably sell those and get a return on investments. Yeah, so you want to minimize any sudden vesting schemes that happen. So, you want to build up to a main event. You want to have a very gradual vesting process so that there is a constant, a near-constant supply of tokens becoming available to be traded. Yeah. And would you agree, the mechanism for dilution? So, part of that SAFT will have the vesting, okay. a common one for investors, seed investors, might be from the public sale or from the liquidity event, they will vest for three years linearly. So, every month or so, you receive a certain proportion of tokens that will unlock.

David Ding

So, based on the achievement of a milestone or…?

James Bayly

No, just time-based. Time-based. Once you have that liquidity event, once you launch network, those tokens are ready to go.

David Ding

And so, imbued into this is, you know, the expectation that there's going to be a tradable token at some point.

James Bayly

That's always the goal here, right? Is you, in order for people to access your network, it's got to be tradable. They've got to be able to acquire that token somehow. They've got to be able to somehow secure an amount of tokens to participate in your network, to be able to use that utility in your network for whatever they want to use it for. So, it needs to be tradable. And whether that's on a decentralized exchange, so like a Uniswap pool or something, or that's on an exchange like Binance or Coinbase or Kraken or Huobi, you know, all these big exchanges, yep, you will try to make list that token somewhere. And that's one of the big challenges after you launch: where do you list those tokens? And we can talk about that briefly.

So, there are some big tier A exchanges, tier one exchanges, you know, and there are ones underneath that launching a token. They're always looking at, as I said before, looking at the reputation of the project, how much liquidity is in there, because you know, they earn their fees. They're in their income exchanges in their revenue of trading fees, so they want to list tokens that have a lot of trading action, and you know, the price stays pretty stable and high. so, it's an interesting kind of dance with these exchanges in terms of negotiating that listing. Yeah, I bet. because you kind of want to show the size of the community, show that the addressable market for them.

David Ding

And they actually want it to be volatile. At the end of the day?

James Bayly

They don't want the price to dive to zero, no, but at the end of the day, they do want some volatility, they want some trading action, they want to see a lot of people buying and selling that token. Yeah, so it's a bit of a dance you have to play with, minimizing that but also maximizing it for their benefits.

David Ding

So, a strategy that would demonstrate to them that there is going to be quite a fair bit of transacting based on the planned liquidity events.

James Bayly

So you don't demonstrate that, but you demonstrate there's a fair size of the community that would be interested in that, okay, you know, or you know, if you could show that, okay, our token generation event had, you know, 100,000 people signed up and bought assets at a capped amount, and that generation, that's 100,000 people that have indicated the willingness to buy and trade this token. Yeah, that's compelling, that's compelling to an exchange, yep.

David Ding

So that gives credence to the strategy of building up to a single, you know, push to the community.

James Bayly

It's always about building the community, everything's about the community, right,

David Ding

But in a single hit rather than a slow trickle, you know.

James Bayly

Yeah, well, you want to kind of have this, you know, linear build up to that point, and timing that is quite hard, I bet. but that's the challenge of exchanges, the big gorillas in the room, you kind of need them, but also, you know, the focus on different things than what you are.

David Ding

Yeah, is it viable for an everyday web3 entrepreneur to have a tradable token on a large exchange?

James Bayly

It would be hard to get there unless it's a big web3 project, so of course you can get there, but it's just you just have to demonstrate that there's those fundamentals, the number of the addressable markets. The exchange is large, the fees that they could earn could be large, that's what they want to see, so there's nothing stopping you from launching on a decentralized exchange, and putting your liquidity there, and everyone trading there, that's fine, but exchange listing kind of gives you back to that social credibility. There's another aspect of social credibility, what exchanges are you listed on.

David Ding

Yeah, runs on the board, you know, is going to help a lot. So, an emerging trend I'm noticing with the founders I'm working with is that there are a lot of web2 based ventures. When I say web 2, you know, a traditional company, but that are looking to leverage web3 technology. Do you have any advice for those kinds of people?

James Bayly

Yeah, it's a tricky one. I've got mixed feelings about it. I suspect a lot of the interests in the past five years was more around the investor hype than the actual need for it. There are certainly some benefits, but kind of a goal of a company is to, right? Every company wants to kind of build a moat around herself, right?

Yeah, in a way, like a successful web2 company is potentially a monopoly. You know, in their place, they kind of have a big market share and all kind of goes through their kind of gated system because they provide a lot more efficiently than everyone else. Yeah, web3 is kind of the opposite of that, right? You want to have an open system anyone kind of access, and the fees are very low and the value kind of goes straight back into itself, right? Yeah, reinvested into the system, or the fees are so low that you don't really earn much profits, no profit from it. So, they're kind of opposite, opposite outcomes or goals in a way.

That doesn't stop a lot of web2 companies looking at blockchain as a way to, as like a side thing. Okay, so blockchain's really good when you want to have complete transparency, and you want to have this trustless kind of system. So, let's take for example, I like supply chains. I think supply chains are a bigger issue that we have, for sure. Now, I want to be able to track, say, my honey from hive all the way to my toast in the morning. I want to know exactly what hive it came from, where that hive was, where the bees were, you know, foraging around. And a blockchain can allow you to kind of track that.

Now, if a web2 company tried to do that, then you might kind of claim, why is this web2 company kind of controlling all of this, right? Why would I give this web2 company that's going to profit off this data, the information about where I put my hives, what are the analogue touch points, why would I do that, and but web3, you can kind of have this trustless way where a beekeeper could register their hives to this network, they could verify that they were there, then you know, the transportation could verify that it was transported here, processed here by this, you know, provider, and then you know, I can check at home that where that honey came from. So, there's kind of like, I think that's kind of a situation where we might find this overlap where a web 2 can't do that without people kind of saying, well hang on, why do you want that information, why am I giving you that, kind of freely, and systems where you know, like that's kind of given to everyone because there's a benefit of that.

You know, a beekeeper can start seeing, you know, beekeepers might be incentivized to give their upload the information because they can get more visibility in terms of the demand that down the downstream. Yeah, downstream. It's a bit tricky. I kind of, I got a part of me just says, you know, the different stars and kind of keep them separate. Yeah, but a part of me does see there's some benefit of working together.

David Ding

Yeah, and I think there's a distinction between the culture of Web3 filtering into Web2. You know, in terms of how do I form a company? Yeah, do it more collaboratively.

James Bayly

Do it more collaboratively, and even just like the information and the product you're building, how do you build this in a collaborative way? Yeah. Web3 kind of sources itself a lot from this open-source culture, so there's a lot of traditional businesses that are open source, right? Yeah, they build this product, they give it away for free, but they run a managed service or some kind of like, you know, you can pay us and we'll run it for you, and that's what we've got Subquery, for example. We build a tool, we give it away for free, but we run a managed service where we do the infrastructure hosting for you. Brilliant business model, scalable, and that was kind of, that's very similar to what Web3 is like. So, I think that's where the overlap will be most likely to happen, as these open source businesses that see, I can, you know, people find a lot more there's a lot more value if I build a blockchain-based business here, where I put blockchain on the side because it's trustless and you know, everyone else can run it and it's all verifiable, and people can trust it, you know, absolutely because they can verify themselves.

David Ding

And that's, it's helped solve the problem in the New Zealand Innovation ecosystem of scaling production, you know, we can scale intangible stuff, tangible assets, and you can scale a business model.

James Bayly

I think the best option for it is really like, I think one of the big areas where it hasn't been picked up where it should be picked up is public good services, so just a simple like, again KYC, you know, that this is one area where there's a lot of teams building stuff in it, decentralized identity is a big market, but the fact that every time I open a bank account for different bank or a financial service account, they say with a stockbroker or something, I have to re-verify my proof of address, my proof of identity, my proof of funds, the source of funds, all that kind of stuff, you know, and there's a huge amount of paperwork, there's some very private information that I'm giving willy and nilly away to these different companies, now you know, why can't these companies trust, you know, like okay, the bank is verified years ago, the bank knows all my source of funds, you know, they'll verify my identity, my address, okay, why can't I just say, you know, to this company, you know, can you ask the bank that this is correct and the bank can say yes it's correct without giving them any of the information away

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They don't need to know the information; they don't want to hold it. This information is toxic from a data privacy point of view. Having you know that kind of KYC AML information is toxic. Yeah, it's a dangerous thing to hold on storage. so that's something that decentralised identity can really help with. And I'd like to see, you know, the government doing a bit more in that space. Yeah, you know, private companies like Banks aren't really incentivized to rock the boat too much here. Yeah, but you know, if I can verify my identity with IRD, you know, I have Realme account, you know, I can log into all my government institutions stuff with real me in New Zealand. Yeah, why can't I use that to verify everything else, you know? And if we don't trust the government holding that, why don't we put on a blockchain, encrypt it cryptographically, and then we can very, like, then we can be very clear with everyone that, okay, this is securely hard and cryptographically no one else can touch it unless you give them permission to, because at the moment it's sitting in some database somewhere in the department of internal affairs, and I hope that they've got their data privacy stuff intact, absolutely. Hope they've got the best people on it. I don't know though that's true. You know we have faith; we have faith.

David Ding

So, I think you've touched on one of the latent superpowers of distributed Networks, and that is the ability to create a single trusted source for something by Distributing it across the network. So, it's almost paradoxical.

James Bayly

It is paradoxical. It's a cryptographic, you know, cryptographic, systems. And I think that if you look at one of the best inventions of the 20th century, I think cryptography is asymmetric cryptography is So, the best invention in the 20th century for sure because it just literally Powers everything we do, under the hood on the internet. But so, things like identity, things like you know just like the Reserve Bank are looking at this right like because you know there's only one form of official cash and that is Fiat money paper cash that we have right the credit cards that we pay with and the money in the bank account that's not official cash that's kind of just numbers on the screen, a database somewhere. So the Reserve Bank you know looking at issuing a central bank digital currency that could encourage a whole lot of new payment mechanisms and rails that we don't have right now, if I want to you know just a simple example I want to buy airline ticket you know I want to buy a flight down to so, Wellington this weekend, you know I can pay their credit card and pay a five dollar surcharge per flight, I can pay the inefficient kind of account to account thing, it is actually kind of not really safe and secure, you know why can't I why isn't there a better form of payment here. So public good services I think the next big frontier for these blockchain kind of web 3 projects because the incentives are aligned. It's not about making money; it's about providing public good in the most efficient way possible. Yep, and I think that's the next big Frontier for this industry.

James Bayly

Yeah, you know, we get a lot of people, the last bull cycle for example, NFTs. Everyone looked at NFTs as a big thing. Yeah, okay, NFTs. A lot of people conflate them with artwork. You know, how do we tokenize an artwork and sell some artwork? Yeah, you know, it's a digital copy of something great, but there's so many better things that you can do with NFTs, right? Like anything that there's only one of them, you want to only have one of them should be an NFT. So, a good example is an airline ticket. There's only one seat on that plane. Yeah, okay, why can't I buy that and give that to you? Yeah, I can't make that flight, but do you want to go to Wellington this weekend? Yeah, here's my…and you trust it, right? There, I trust it like that, or my concert ticket. Yeah, but also like, let's talk about this system where we encrypt all the information about, source of funds and source of income and my proof of address, and I own an NFT that I can give to you for a short period that allows you to verify and view that, and there's only one of those, you know, I have to give it to you, and it comes back to me at the end of the day, you know, like that, that NFTs could represent a key for something, a symbol of like access.

David Ding

Absolutely. And even for, you know, like the New Zealand treasury who guarantor a lot of export-based massive deals, perfect use case. There's no actual money moving around, just a token of representing and representing that where I can back this transaction.

James Bayly

Exactly right. So that's one of the, and it goes back to the challenge of industry, is explaining all these outcomes of we're building this technology that could solve these problems. It's now about actually solving them and building a system that works well with the current systems, that is understandable by most people and accessible to most people. and I think over the next five years, the one thing we should focus on is working closer with Public Services, Public institutions.

David Ding

Couldn't agree more. Awesome, well, it's been a pleasure mate, thank you so much, appreciate your time.

James Bayly

No worries, thanks for having me.