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Polychain Interview: How to Grow a Fund from $4M to $5B in 6 Years

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「I like to be the first believer in someone, our goal is to invest in breakthrough technology to achieve new forms of human organization and behavior.」

By Steven Ehrlich and Forbes

Gu Yu, chain catcher

In a long Zoom call from his $10 million Soho loft in Manhattan on a cold, windy Day in January, Olaf Carson-Wee reflected on the four and a half years since Forbes put him on the cover with a poster of the 2017 cryptocurrency bubble, How much progress he has made.

Back then, a speculative frenzy of hundreds of initial Token offerings (IC0s) pushed the value of the cryptocurrency market to over $100 billion as greedy fools bid for junk tokens backed by white papers and some wacky computer code. Carlson-wee, 27, who has three years of Coinbase experience and started a SAN Francisco-based hedge fund called Polychain Capital, Backed by Andreessen Horowitz, Union Square Ventures and Sequoia Capital, his fund grew to $200 million in assets from $4 million in September 2016.

Today, despite recent turmoil that has caused Bitcoin and other cryptocurrencies to drop 30 to 50 percent in a matter of weeks, their market is still approaching $2 trillion, and Polychain has $5 billion in assets, up 125,000 percent since its inception. Carlson-wee has just raised $750 million for his third venture fund, led by Tiger Global Managpent and Singapore's Temasek Holdings, two of the smartest and most successful investment firms on the planet.

"We were very interested. The demand was much, much more than what we raised," boasts Carlson-Wee, 32.

Carlson-wee's net worth has grown to an estimated $600 million as he has an uncanny knack among cryptocurrency investors for navigating a market long plagued by hyperbole and assets without any discernible intrinsic value. One of his most lucrative early investments was holding Ethereum, whose underlying Token is now worth $2,700 but traded for less than $12 when Carlson-Wee's Polychain was fully invested in 2016.

He's not shy about his new wealth, which was created entirely with Ethereum. He recently purchased a fully furnished, 6,000-square-foot Soho home that was once an art gallery owned by prominent New York collectors. Its ornate interior, described by its real estate agent as the "most Instagram-worthy" home in Lower Manhattan, is inspired by Paris's luxury Hotel Costes and features tin ceilings, gold columns, cobra shaped snakeskin chairs and organ-controlled chandeliers and crystals. Its master bathroom is a gold study that includes a mirrored ceiling and a shimmering gold-plated tub with a large dollar sign hanging from the wall above.

Just months before he bought the New York party palace, he closed another property in the Hollywood Hills when Bitcoin was trading at more than $50,000. The $28.5 million 12,000-square-foot home boasts breathtaking ocean and Los Angeles skyline views, an indoor pond, infinity pool, space for seven bedrooms and 10 cars.

One of the keys to Carlson-Wee's success has been getting in early. For example, he met Ethereum founder Vitalik Buterin when the 19-year-old briefly worked at Coinbase in 2013. That was before Buterin wrote his revolutionary blockchain white paper by creating a base on so-called "smart contracts." These agreements have no traditional legal standing, but because the terms are automatically enforced by a computer, they are more immutable. You can't have IC0 or NFT without smart contracts.

专访 Polychain：如何用 6 年将基金从 400 万扩张至 50 亿美元

In 2018, at the Web 3.0 conference in Berlin, Carlson-Wee met Harry Halpin, a research scientist at THE Massachusetts Institute of Technology and co-creator of a super-privacy protocol called Nym. Halpin was frustrated by the unwillingness of traditional VCS to back him. "This well-dressed young man came up to me and said, 'We Polychain are interested in funding disruptive technology,'" Halpin said. Polychain led a $6.5 million funding round for Nym last July, just before the startup hired Chelsea Manning.

"I like being the first person to trust someone," said Carlson-Wee, who had just spent the New Year's holiday with a dozen friends at the house he rents in St. Barts. "Our goal is to invest in breakthrough technologies to enable new types of human organization and behavior."

Polychain's most ambitious investment attempt to date is supporting a phenomenon known as decentralized finance, or DeFi, which uses blockchain technology in peer-to-peer applications. The promise is that DeFi could eventually become a cheaper, more private, more secure and more accessible alternative to traditional financial institutions, including banks and trading platforms.

Carlson-wee was an early investor in some of DeFi's biggest winners, such as Uniswap, Compound, MakerDAO, dYdX. DeFi Token has been rewarded with jaw-dropping returns. The market now totals $78 billion, up from $10 billion in January 2020.

Crypto idealists, including Carlson-Wee, see DeFi as the future of finance and something to balance the uneven financial playing field. For centuries, middleman bankers - from the Medici family of Florence to Jamie Dimon of jpmorgan Chase - have wielded enormous power and amassed vast fortunes. DeFi aims to eliminate them.

All DeFi functions -- payments, savings, transactions, borrowing -- are performed on blockchain-based software. Changes are voted on by Token holders. There is no centralized control.

Carlson-wee's success lies not only in his ability to find the most promising DeFi startups, but Polychain's willingness to invest heavily in them. Decentralisation and democratisation may be ideal for DeFi, but Carlson-Wee is very responsible when it comes to decisions that could affect Polychain's returns. He did not hesitate to use the firm's powerful voting power to ensure that partners' interests were Paramount.

"I'm a very practical person," he admits. "I don't think encryption solves wealth inequality or wealth concentration, but it does shake the snowball."

专访 Polychain：如何用 6 年将基金从 400 万扩张至 50 亿美元

Carlson-wee's crypto journey began in 2011, the summer after his junior year at Vassar College in upstate New York. An avid fan of role-playing video games, he read about how silk Road, an underground drug market, was enabled by a virtual currency called Bitcoin. His excitement about the new technology drove him to put almost his life savings -- about $700 -- into Bitcoins, which range in price from $2 to $16. He continues to write sociological papers on emerging cryptocurrencies.

After graduating in 2012, he emailed his thesis to Brian Armstrong and Fred Ehrsam, co-founders of start-up cryptocurrency trading platform Coinbase. They hired him as their first employee and put him in charge of customer service. Carlson-wee famously insisted on paying his entire $50,000 salary in bitcoin.

Although he had little coding experience, he helped automate many of Coinbase's day-to-day customer service responses. He was eventually named head of risk and reduced Coinbase's fraud rate by 75%.

Early in his crypto career, Carlson-Wee says he realized that entrepreneurs with a strong vision for the future got the most money and rewards, rather than those who responded quickly or followed quickly.

"Coinbase had a central custodian structure. Cryptocurrencies at the time were very contrarian. It had the compliance and anti-fraud burden of accepting bank payments," he said. "It's something that no one can really do."

But as Coinbase expanded and became more mainstream, it was forced to pay more attention to regulatory requirements. It has deliberately avoided the cutting edge of encryption, where Carlson-Wee sees the most potential. He's most excited about Buterin's Ethereum, which, unlike Bitcoin, can (in theory) run almost any kind of digital platform, making possible decentralized versions of Uber, Facebook, Google or Dropbox.

As Coinbase added dozens of software engineers from top schools, Carlson-Wee was classified as an "operational person," according to Adam White, a former Coinbase colleague who recently served as president of Bakkt, a crypto wallet.

"I began to realize that Carlson-Wee wasn't just someone who worked hard and answered customer support work orders," White said, recalling a 2014 holiday party where Carlson-Wee casually told him bitcoin would never trade as low as $300 again.

In 2016, Carlson-Wee informed Armstrong and Ehrsam that he was quitting and starting a crypto hedge fund. "I realized Coinbase was broadly following its path with or without me," he said. "By building something, I can regain that sense of hyper-leverage."

Leverage happens to be the fuel that drives the current DeFi boom. From a financing point of view, DeFi is the successor to the IPO. Most IC0s in 2016 and 2017 were junk digital ipos, with speculators trading ETH to invest in hundreds of questionable projects. Most are worse than even the worst stocks. There was little disclosure, investors had no real equity or voting rights, and losses ran into billions of dollars.

DeFi is considered an improvement because investors in these Ethereum-based platforms simply lend their money (usually in the form of stablecoins like ETH or USD Coin) to others in the peer-to-peer network. These rules are laid down in smart contracts embedded in Ethereum. By lending out cryptocurrencies, DeFi investors can make money -- lots of money -- in what's called liquidity mining.

But it looks like a self-perpetuating bubble. DeFi platforms, including Uniswap and SushiSwap, have averaged more than $50 billion in monthly transactions over the past 12 months, but there is little evidence that any of this is related to things banks typically finance -- like company expansion or even buying homes.

If the new world of decentralised finance is a democracy, Then Olaf Carlson-Wee is Tammany Hall's boss. With large stakes in some of the biggest platforms, such as Compound, Uniswap and MakerDAO, Polychain analysts were heavily involved in creating what it called "Token economics" and designing incentives to attract investors.

For example, in terms of Compound governance, Polychain is the second largest voting entity after A16Z. It controls 306,000 of the 2.8m votes cast, or about 11%. A16z has 321,000 votes. Important votes such as reducing mortgage requirements require only 400,000 votes, so as long as they agree, vc firms can easily sway any vote. In fact, Polychain is one of a handful of large hedge funds and venture Capital firms, including Paradigm, Bain Capital Ventures and Pantera, that centrally control many of the largest decentralized platforms behind the scenes.

Unlike ordinary share voting, there is no authority to notify Token holders of upcoming votes, and for those who store DeFiToken on trading platforms like Coinbase, there is no mechanism to even allow voting.

"A Uniswap, Aave or Compound decision won't go through unless it's approved by the founding team," says Andre Cronje, founder of Yearyearn.Finance, a revenue aggregation agreement. Carlson-wee publicly admits that his team has worked with the founders on all major proposals. Cronje added, "Although there is talk of decentralization, it will not be approved unless it is reversed."

Carlson-wee is reluctant to dwell on DeFi's internal contradictions. "I've never really seen decentralization as an end goal or a feature that users want," he says. "What people really want is security. Decentralization is often the best way to get them."

These days, he is mainly focused on where to deploy his $750 million in new capital. Polychain takes a thematic approach to investing in early-stage startups, something the rich young man says he gleaned from Fred Wilson, a veteran venture capitalist at Union Square Ventures.

In the fast-moving crypto world, DeFi is yesterday's bubble. NFT and the Metadverse are the next bubbles carlson-Wee wants to surf. "The Internet generation cares more about avatars and avatars than clothes and cars. NFT becomes an artifact around us as we transition to a digital lifestyle and eventually to a fully Internet-native metasverse," he says, his blue eyes twinkling. "Imagine a game world where Token price increases actually increase the size of the game."