Fintech 3.0: Now Is The Best Time To Build In Crypto

0:00We've entered the golden age of crypto building where we finally have the tools and now it's about of entrepreneurs coming in and saying, how do we use these tools to make 10X impact for businesses or to build new consumer experiences that were previously completely impossible? And the moment is now to break through because we've done the infrastructure work. The tools are in place, the stable coins, the chain, and now it's about putting it together into that magical experience that grows like wildfire across the world.

0:34I'm really excited to be joined here today by Jesse Pollock. Jesse is the founder of Base, which started life as Coinbase's blockchain, but has since expanded into essentially the everything app for crypto, right? You can use Base to trade crypto, store your own crypto, and build community with other people in crypto. Thanks so much for being here, Jesse. Thanks for having me. The reason Jesse's here is that Y Combinator and Coinbase are together putting out a joint request for startups building in crypto. We both believe that there's never been a more exciting time than right now to build in the crypto world.

1:04And we're going to talk about some of the reasons we feel that way. And what are some of the specific ideas and areas that we think founders should be paying particular attention to as they go out and build really awesome crypto products and services. Okay, Jesse, in our request for startups blog post, we mentioned this progression from this idea of fintech 1.0 through to fintech 3.0. Maybe you could talk us through how you think about that. So I think about fintech 1.0 as the 90s, things like PayPal, where consumers for the first time got comfortable paying for things online. I think about fintech 2.0 as this wave of the last decade of startups that built on top of the existing legacy financial system to deliver friendlier consumer experiences with money.

1:43Now I think about fintech 3.0 as the opportunity to rewrite it all, to basically start from the ground up and say, how do we make the financial system work better for everyone by building it on top of the programmable software platform that includes money and is crypto. Okay, Jesse, so AI had its sort of magic moment with the ChatGPT launch. Do you feel like crypto is maybe going through its own ChatGPT moment right now? Candidly, no. And I think the reason I say no is because if you ask a friend or family member, I don't think they'd say, oh yeah, I have had a magic moment with crypto. I think instead they might be fearful.

2:17They might not actually know what crypto is doing on a day-to-day basis. And so the thing that's powerful about that is that that's the best time for us to be building and the best time for YC entrepreneurs to be trying to break through. And the moment is now to break through because we've done the infrastructure work. The tools are in place, the stable coins, the chain. And now it's about putting it together into that magical experience that grows like wildfire across the world. What exactly has changed? What exactly has developed that makes it feasible to build this technology today that wasn't possible even like five or six years ago?

2:48Yeah, so when we're thinking about building crypto apps, we're building on top of a stack. And that stack has a few different components, but the ones that I think have really progressed in the last few years are a few. So the first is chains have really matured. And you can kind of think about the chain as the programming environment where you're building all of these applications. So to AWS, the chain is kind of the next generation of that, where you can imagine you write code. It runs on this globally distributed computer. Anyone can access it and participate in it. And that's the substrate where you can build.

3:18And the problem that we had with the chains five years ago was you could do that, but it was slow and expensive. And so when you were trying to build an application and you wanted to maybe send a stable coin or you wanted to enable someone to create something, you'd have them try and send$5 and it would cost$5. It's like that doesn't work for building a consumer application. And the thing that has shifted over the last few years is that those costs have come massively down. And whether that's with Base or Solana, we actually have this scaling that's happening where now you can build those applications.

3:48And instead of it costing$5 to do something, it costs five tenths of a cent or five hundredths of a cent. And that opens up the aperture of what's possible. Yeah, I think this was like the classic criticism of crypto years ago was just, hey, like, okay, like it sounds cool, but actually it's like, it's like cheaper to send a wire transfer than like the gas fees on like certain chains when they're congested. A hundred percent. And we think about this as the broadband moment for crypto, where when we were in dial up of the internet, you couldn't have the applications that exist today. And then gradually we scaled the throughput, scaled the bandwidth, and that led to these new breakout experiences that really powered the growth of the internet over the last 20 years.

4:22One thing I think people hear about, but they might not always understand in detail is the difference between a layer one blockchain and a layer two blockchain. Do you give the audience a little bit of explanation? What exactly is the difference and what did layer two blockchains unlock? Yeah. So when you're thinking about a layer one blockchain uh what the way i think about this is is really that it's a a piece of infrastructure that sits at the bottom of the stack right and the the big ones that people talk about and and use and kind of are adopting today are bitcoin ethereum and solana and they all play different roles they're all complementary in different ways but they all play this role i think at the base layer of being maximally decentralized and trying to make it so that they are a global platform that's a piece of infrastructure that anyone can build on without being fearful of being censored.

5:07And that's this really important substrate because you need that decentralization to make it so that no one company or one country can kind of co-opt what's happening on that platform. Now, the thing that Ethereum pushed forward over the last five years was they said, hey, if we want to get to the sort of scale that can enable the next Google to grow, that serves billions of people, there's inevitably going to be some trade-offs around this decentralization and the security that it provides and then the scalability that actually lets you drive down those costs. And so what Ethereum said is we're going to think about how do we build an architecture where on top of that layer one, we can kind of create an ecosystem of what they call layer twos, which take that infrastructure, take that decentralization, and then bootstrap off it, build on top of it to scale while preserving decentralization as a core characteristic.

5:54And this is exactly what base does. So what base does is you can kind of think about it like an HOV lane. We sit on top of Ethereum, we take millions and millions of transactions, we compress them and we publish them to Ethereum. And that means that when we're compressing them, we can get a ton of efficiency, which lets us drive down costs a thousand percent. But because Ethereum is sitting at the base layer, it brings that decentralization, it brings that censorship resistance to make it so that base can stay this open global economy that anyone can participate on. Now, Solana, I think, has gone to the other side of the spectrum and they said, hey, we're going to do it all at the L1.

6:27And I think that that's a really cool and powerful design choice as well. And this is one of the things that I think is really exciting about where we are at crypto is that we're exploring a bunch of different paths. People are learning kind of in every single part of the world. And then we're all converging back those learnings to build out these products and this infrastructure that's going to enable that next wave of adoption. Engineers, maybe they're learning a new technology, like usually often have their own like go-to app that they try and build to learn it, right? Like, I mean, for me, it's usually trying to build like a simple blog, like engine or something like that.

6:56If someone wants to start building with crypto and sort of understand like what the power of like a layer two blockchain is or base is, what's your recommended like, you know, Hello World or blog engine app that they should? One app that I think will just be really powerful is building a interface that lets you interact with a swap, like an AMM or an exchange, right? So one of the really powerful things that crypto enables, enables you to seamlessly swap between assets. You can swap between Ethereum and a stablecoin or between multiple stablecoins. And the way that happens is through what's called an AMM or an automated market maker, which is kind of an exchange that's written in smart contracts.

7:32And those things are really simple, right? What previously was, you know, hundreds of thousands or millions of lines of code has been distilled down to a simple formula and then written into hundreds of lines of code that sits in a smart contract that lives on base. And I think one of the really kind of easy and cool hello worlds is building a UI that serves as an entry point into one of those exchanges. Because then you can see, oh, I can connect my wallet. I can build this little interface that lets me take an asset that's in my wallet and swap it to another asset in my wallet. And I don't need to sign up for an API key.

8:05I don't need to get permission from anyone. All I need is to write a little interface. And so I think that that's a really good hello world. Another thing that I think is a really good hello world is actually going in there and building your own AMF, right? It is literally just a function that's kind of defining the relationships between how one asset swaps to another. And it's on the order of hundreds or thousands of lines of code. And so that's a little bit more complex. Like you're getting into the smart contracts, you're figuring out like, how do I actually make these kind of swaps work? But I think that that learning experience of saying, hey, if you look at the New York Stock Exchange or any traditional exchange, This is huge amounts of infrastructure, huge amounts of overhead.

8:45And now that can be distilled into hundreds of lines of code. I think that that's kind of an aha moment for a lot of people. On the regulatory front, because that seems like it's a big catalyst for this particular moment in time for crypto. There's lots of news around like the Genius Act is going through and you've got various bills trying to regulate the crypto market. In what ways have you seen regulation hold people back from being able to like really innovate with crypto over the past few years? And how is that changing now? Yeah, well, I think this is something that really impacted startups of the type that are coming into YC and trying to be successful.

9:18And I've been working with builders over the last five, six years to try and figure out how can I help them be successful building on chain. And the thing that has been really consistent is that so many early stage builders and late stage builders ended up spending like equivalent or more money on lawyers than they were on engineers. and you know if you're coming into YC and you're interviewing and you're like hey we're going to be spending more money on lawyers than engineers like my gut is that the YC partners are going to say okay like maybe you're not building in the right business here like really are you as a three-person team going to be able to be successful?

9:51Yeah this was actually really what happened for us a lot of those application cycles in 2021, 2022 like we will look at it and feel like okay like what's the domain expertise you need to build something really good here and it was actually like if you're building a hardware company you're building robots you kind of need to have like some experience building hardware and robots. And we felt that with crypto, it was actually like you needed to really be paying attention to the regulatory aspects of it and understand securities law. And I know if you're putting like real estate on the blockchain, you need to understand what all the legal implications of that were.

10:20And a lot of the time we'd be in interviews and we just feel like the teams had no understanding of it all. And it was unclear how you would ever go to market or build any trust. Yeah. And the thing I would say is I don't even think that that's an indictment of those teams. That's an indictment of the fact that the regulation has been massively unclear. Yeah, right. Like there literally hasn't been rules of the road for entrepreneurs to build on this new platform and be successful. And so the impact that we've seen of that is that it's basically just chilled out people from being successful. Right.

10:46If you have to spend more money on lawyers than engineers, how can you apply the YC principles of being customer centric and doing things that don't scale? Like literally you're being forced to do things that much bigger companies should be doing instead. And so I think that that has been this massive kind of constraint on innovation for the last decade. And I think the thing that's just started to shift, we're still in the early days, but it's really happening, is that now that we're starting to have regulatory clarity, whether that's with stable coins from the Genius Act or potentially with all of crypto tokens with the Clarity Act, what's that leading to is it's leading to those entrepreneurs now having more certainty.

11:22They, oh, these are the rules of the road. And therefore that idea that previously I would have to go get a ton of legal opinions on, can I do this? They can now just go and do it. And that is such a lowering of the barrier to entry for the entrepreneur in the United States or outside of the United States that I think it's going to lead to a ton more innovation. And going back to kind of the scaling things that we talked about, you know, and kind of what's enabling this next chapter, we talked about scaling the chain. I think that's a huge part of it. I think the regulatory unlock is another huge part of it that's changed.

11:55I think stablecoins maturing is a third huge part of it that's changed, where you now have programmable money. That's the money that we're all used to, that we can all use. And then I also think that we've kind of had a bunch of breakthroughs on wallets and simplifying wallets and making it so that they can be integrated into the user experience in a way that's not scary. And so those four things, chain scaling, regulatory clarity, stablecoins emerging as a really powerful tool, and then wallets getting simpler and simpler, I think have matured to the point where we've entered the golden age of crypto building, the golden age of on-chain building, where we finally have the tools and now it's about entrepreneurs coming in and saying, how do we use these tools to make 10x impact for businesses or to build new consumer experiences that were previously completely impossible because we couldn't program things on a global stage, we couldn't move money at the speed of light, but are now possible.

12:49and how do we actually use that to create this value? I want to talk about stablecoins more. So like you mentioned though, is that so far it seems to be outside of trading like the killer use case, specifically within the Y Combinator community and our portfolio of companies. I was just looking at this, some of our fastest growing companies at the moment, the AI companies definitely get lots of attention, but we have companies like Dollar App in Latam, Aspora in India. These are essentially neobank services that are really built around stablecoins and their growth rates are incredible. I'm sure you guys have seen this at Coinbase too.

13:20Let's start with this. Why have stable coins taken off in this way? And actually I'm curious as someone who's been around crypto for so long, has it surprised you? Did you think it was going to be stable coins all along? I don't think we thought it was going to be stable coins all along. I mean, I remember when we launched USDC, I was in the war room at Coinbase. We launched it in collaboration with Circle. I think at the time we felt like we got to go do this, but we're not really sure what's going to come from it. And candidly, like the first two to three years of USDC, we had launched it, but it didn't grow that much.

13:50Like it took us a while to get to a billion dollars of issuance. It took us a while for people to be like, oh, this is a meaningful thing. Now, you know, there's almost$200 billion of stable coins in the market. So I think it's kind of feels obvious. But even in 2017, 2018, 2019, when we were just getting started here, I don't think it felt obvious at all. Now, I think the thing that stable coins unlock, which has been the primary thing that's driving this, is they enable programmable money to come into the existing financial system and give, in particular, programmable dollars to anyone in the world.

14:21And this is a big unlock because previously, prior to stable coins, if you were an entrepreneur outside of the U.S. or if you were just an everyday person outside of the U.S., you actually didn't really have a way to access dollars. You couldn't open a dollar account. You couldn't get a dollar savings account. You couldn't get a dollar business account. And that meant that whether you were trying to transact with other businesses or consumers in dollars, or you were just in an economic local environment where your currency wasn't really working for you, maybe because it's massively inflating or maybe because it is unstable in other ways, you were cut out of accessing the dollar system that actually did work pretty well.

14:57And so I think the first big unlock that Stablecoins has done is basically said, okay, now everyone in the world can access dollars. And not just can they access it, they can build with dollars. And they can build with dollars on this new programmable platform where their dollars can move instantly, globally, and basically for free. And so that for me, I think was the first thing. Now, there's a ton of other things that Stablecoins are going to unlock. But that alone was a 10x, 100x improvement for hundreds of millions of people around the world. And I think it's the thing that's led to this growth of from zero to almost$200 billion of stable coins in the world today.

15:31And it seems that, I mean, that maps up pretty well with what we're seeing, which is where, like, in particular, these sort of like the neobanks, the dollar app and Aspora, like the killer use case really seems to be remittances and sending money internationally, like instantly cheaply. Yes. What are some of the other, like, applications of stable coins that you're personally really excited about or do you think builders might not recognize as great opportunities? Well, this is one where I think that there's an opportunity that runs counter to the narrative because there's a ton of excitement about dollar stable coins.

15:56And I'm really excited about dollar stable coins. I think there's so much more that we can do with them. But at the same time, you know, as I've talked to builders and as I've talked to regulators and businesses in countries around the world, so many of them have excitement about dollar stable coins because they solve an immediate need. You know, if I have inflation in my country, I can now save in dollars. And that helps me, you know, have a more stable savings account or more stable business account. At the same time, when I talk to those folks, I think that there is an intuitive feeling of, oh, man, we have our own local economy and we don't want that economy to be dollarized.

16:29Right. Like if I'm in Kenya or Brazil or Nigeria or Indonesia, we have excitement about building our own local economy on the Brazilian real or the Nigerian Naira or, you know, that, you know, kind of excitement about investing in one's local economy. and then the, I think, kind of intuitive feeling of, ooh, there's this tension between getting the value from dollars but also not having dollars dominate in a way where they crowd out the local economy. I think, to me, that is one of the most exciting opportunities to kind of lean into. And what we're seeing start to be that opportunity is that now, alongside the dollar stablecoins, you actually have entrepreneurs in all those countries who are creating stablecoins for their currencies.

17:15So you have a Brazilian real currency, you have a Nigerian Naira currency, you have an Indonesia rupee currency, you have a stablecoin for every country. And what that means is that you can take all of the innovation that has kind of been built on top of dollar stablecoins, whether that's, you know, easy to send or it's easy to borrow and lend with, or it's easy to swap to other things and apply them to your local economy. So now you want to do business loans in your local currency. Great. Take a bunch of the stuff that's already been built and apply it to your local stablecoin. And that opportunity to take this technology and make it so that it's actually an empowering technology for local economies.

17:54I think that that is one of the most exciting things. And it's still early. It's still small. But for builders like the builders coming through YC who are coming from all around the world and who are excited about taking on those hard challenges, I think that that's going to be a place where there's massive amount of opportunity for impact. So for those founders and those builders in those countries, it maybe isn't clear in each of those markets which the winning stablecoin, like in the US, it's USDC, but in those markets, it might not be clear. So do you think those builders should go out and try and like, should they start their own sort of circle coin based consortium and launch a stablecoin?

18:26Or should they try and pick which they think is the winner and build around that? I think both, right? And you're going to have entrepreneurs that want to pursue different things, right? If you're starting a local stablecoin, it's going to look like working with the government and working with banks and figuring out how do you do custody in a secure way. I think that's a massive opportunity. And we actually just put out a request for builders for base where it's like, we want to talk to entrepreneurs in every single country in the world who are doing that work because it's so, so important and we want to support them and help them be successful.

18:53Now, at the same time, a lot of builders might not be excited about that, right? They want to be building product instead of building the relationships with banks and figuring out how to custody. And I think one of the really, really powerful things about crypto is that it's built in such a way where it's composable, right? And so if you build around one stablecoin and then another stablecoin starts growing really quickly and you think it's actually going to be better for your business, it's not going to be that hard or that expensive to say, OK, great, now let's support that other one, too. Because, again, they're all running in the same computer and they're all programmable.

19:26And so you really can build systems in such a way where both can plug in. And so I'd say if I'm an entrepreneur who maybe isn't interested in starting the local stablecoin, but does want to be building solutions that use local stablecoins, I'd think about, you know, how do I build my solution in a way that works with all of these stablecoins? How do I make it so it works with dollar stablecoins too? Because I think that kind of flexibility, that's actually what consumers and businesses are going to want. They're going to want the ability to have my payments app and be able to save in dollars, save in my local stablecoin, swap between them, earn interest on both, borrow with both of them.

20:00And I think really for the first time that's actually possible with crypto because it's all running on this programmable platform. YC's next batch is now taking applications. Got a startup in you? Apply at ycombinator.com slash apply. It's never too early and filling out the app will level up your idea. Okay, back to the video. How about for like US centric builders? How should they think about the opportunities to build in stable coins right now? And maybe a bit of a segue here, but I know that Coinbase just launched like a commerce payments protocol with Shopify. How does that tie into this and how does that create opportunities for founders in the space?

20:37Now that we have the fast chains, we have the scaled stable coins, we have the mature regulatory environment, we have the easy to use wallets. I think the opportunity is basically looking at every single part of the financial system that exists today and figuring out how do we turn that from legacy systems that in many cases are 50 to 100 years old into programmable smart contracts that live on chain. And you can look at every part of the world and be like, wow, look at this system that is written in cobalt that, you know, has millions of lines of code that has all of this cruft that has massive fees.

21:10Can we write that into a smart contract that's 500 lines of code? And the answer is yes. It's literally yes. And this is exactly what we saw with Shopify. You're talking about, you know, this commerce payments protocol that we built that lets any Shopify store in the world accept USDC on base from anyone else in the world. And the thing that we did to unlock that was we embedded with the Shopify team. And, you know, shout out to Toby and Shopify. They came to us and said, we think the moment is now for us to look at all of our existing acceptance systems and figure out how can they be rewritten in smart contracts.

21:42And what we did over a nine month period was exactly that. We went into their systems, which are literally millions of lines of code, where they're doing things like escrow, they're taking taxes, they're doing, you know, fees, tariffs, refunds, chargebacks, like all of this business logic around accepting money for a good, which, you know, for most of us, I think is kind of behind the scenes. But for a business like Shopify, like it is the scene, it's the thing that you're doing. And they said, Okay, how do we now translate that into a smart contract? And the crazy thing is that after nine months of work, we translated into smart contract and that smart contract ended up being about a thousand lines of code.

22:21Interesting. So literally like stuff that previously was a million plus lines of code, now a thousand lines of code because it's a thousand lines of code running in this open platform computer where you have money built in, you have stable coins built in, you have the ability to do escrow, you have the ability to do fee splits and value splits between all these different parties, all natively in the code. And I think, you know, still a ton more work to do there. But the mental model that entrepreneurs should be taking is there are opportunities like that in every single part of the United States in global economy.