Nick Tomaino (Yale SOM), Founder of 1confirmation, Crypto Fund Backed by Peter Thiel, Marc Andreessen, and Marc Cuban
Nick Tomaino is Founder and General Partner at 1confirmation, an early stage crypto fund focused on the decentralization of the web and society. 1confirmation is backed by prominent investors including Peter Thiel, Marc Andreessen, Mark Cuban, and others. They’re currently invested in 11 companies and 7 cryptonetworks. Previously, Mr. Tomaino worked as Principal at Runa Capital and led East Coast business development for Coinbase, which now brokers exchanges of Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, and Litecoin with fiat currencies in approximately 32 countries, and bitcoin transactions and storage in 190 countries worldwide. Mr. Tomaino attended the Yale School of Management in 2014.
How’d you get involved in crypto?
Like a lot of people, back in late-2011 to early-2012, I read a WIRED article that mentioned this magic internet money which was being used to buy guns and drugs on Silk Road. That was the early media narrative around Bitcoin, and being an online community person, the first thing I did was jump into a few of the online forums that Bitcoin enthusiasts were using to discuss the space. In the early days, that was BitcoinTalk, which still exists and was created by Satoshi, and /r/Bitcoin, which is the Bitcoin subreddit.
It was spending time in these online forums that got me really excited about Bitcoin. I saw that there was a certain media narrative about Bitcoin that was mainstream yet mostly inaccurate. What I really saw was this powerful social movement where people around the world, who weren’t aligned by physical location but a certain belief system and economic incentives, found Bitcoin really exciting. And that’s what got me really excited.
I decided I wanted to make a career out of Bitcoin and the underlying technology. At the time, I was actually working at a venture capital firm in Maine. The summer before going to Yale School of Management, I basically reached out to every single entrepreneur I could that was doing something in the space, and ultimately, I connected with Brian from Coinbase. At that time, there were a lot of interesting and forward-thinking founders, but Brian was the only one I met that I would’ve wanted to work with outside of the context of Bitcoin. So, I joined Coinbase really early on, and that was that.
The week before I was going to the School of Management, I flew out to California and met with Brian. At the time, it was just Brian Armstrong, Fred Ehrsam, and Olaf Carlson-Wee. They were the first three people at Coinbase. I had been reaching out to merchants, convincing them to use Coinbase, and I’d proven my value. The three told me not to go to business school. They said to just stay out there in San Francisco and work with them. They wanted me to just stay out in San Francisco and work with them.
I said that I couldn’t do that just then. My fiancé was moving to New Haven, and I couldn’t just bail on school. So, I told them I’d love to go to school and be the East Coast coinbase guy. I basically did that my first year: I was working pretty much full time for Coinbase on the East Coast, and also going to school. After my first year, I moved out to San Francisco.
Is that common for people to work a job while at business school? Did you enjoy that?
It’s not common. And you know, it was hard. I missed a lot of class. I didn’t immerse myself in the school as much as you really need to get a lot out of it. But it just so happened that I wanted to be spending time on Bitcoin and Coinbase. It was definitely tough to balance for that year.
How did you have the confidence to join them?
It was just a gut feeling more than anything else, and it turned out to be a good one. I’m sure there was a lot of luck along the way, but it just felt like there was a major paradigm shift beginning to happen, and there weren’t many people spending time to look underneath the surface of the mainstream perception and media narrative. I did that, and I was one of the few people that came from a more traditional, Yale-type pedigree, and that was actually spending time looking beneath the surface and trying to understand that fundamental paradigm shift.
By doing that, I think I gained an edge, and I was able to use my intuition to go all in on the space. To be honest, I think undertaking that process is something that more people, and more business school students, should do. The good thing about business school is that it gives you flexibility. I worked for a couple of years out of college, and business school gave me the flexibility to find out what I wanted to do next.
Going into business school, I thought I wanted to do something entrepreneurial: either my own thing or a startup. I’m guessing it’s a still environment, but at that time, most people going to business school, especially at Yale, were thinking about banking jobs or consulting jobs. There’s a financial reason for that, too. In most cases, you’re taking out big loans for business school which you’ll need to pay back, and those jobs give you the surest way of doing so. Anyways, to answer your question, I’d done a lot of work, a lot of research, and I’d spent a lot of time in the space. I had a gut feeling that it was the right thing to do.
How do you cut through the BS in the space? Would you still use Reddit if you were a beginner trying to learn more?
It continues to be the case, for the most part, that the mainstream media is not the best way to get info about the cryptocurrency space. It’s getting better, but it’s not there yet. CNBC is awful. They put people on there that are promoting different things. Frankly, it’s just low-quality coverage. If you want to get information and understand what’s happening in the space, I still think the best way is to dive into forums. Whatever the project is that you’re interested in, whether it’s Ethereum, MakerDow, or Bitcoin, you should dive into their subreddits. A lot of projects also have Slack or Discord communities that you can join.
By going into the primary source, you can really dive in and ask questions. You can immerse yourself in these communities. That’s definitely the best way to go about it, as opposed to reading the mainstream opinions by The New York Times or watching CNBC. It’s funny. I looked at a lot of the people you’ve talked to from Yale, and even a lot of those– the projects they’re involved in seem to me, in many cases, low quality. There’s just so much misinformation in this space, and it’s gotten so big, so quick that there’s a lot going on, and it’s hard to parse through what’s real and what’s fake. I always tell people that the best way to go about it, if you’re new to the space, is to do what I did before heading to Yale: talk to different entrepreneurs, spend time with the people behind the projects, ask critical questions, and gauge for yourself what’s real and what’s fake. Don’t just rely on someone’s pedigree or what they’ve done in the past or something like that.
Right now, I manage a venture fund, and we’ve raised over $75 million. We’re investing in early-stage cryptocurrency projects, both directly into cryptocurrencies and products that the crypto community wants and needs. We think it’s still pretty early in the growth of the space as a whole. In 2019, there’s one mainstream use case for cryptocurrencies, and that’s investment. There are now billion-dollar companies like Coinbase that are built on that use case. It’s become a mainstream use case, but the question many people ask is, “What other applications beyond just investment will bring utility.” I’d argue that investment is a very valuable and important use case that’s here to stay. That being said, I’m also excited about other use cases.
For the most part, we think there’s still a lot of infrastructure and middleware that needs to be built before we see mainstream applications beyond just investment. An example of middleware that we think is very important for the decentralized web, which we think will ultimately replace the internet, is a stablecoin. A stablecoin is a cryptocurrency that has price-stability characteristics similar to that of U.S. dollars– something like Bitcoin or Ethereum. MakerDao is an example of a decentralized stablecoin project that we’re really excited about. A stablecoin is important because right now cryptocurrencies are mostly an investment.
At Coinbase back in 2013, we thought that Bitcoin could become a medium of exchange. One of my roles in the early days was to convince merchants to accept Coinbase API and to accept Bitcoin. I actually purchased my wife’s engagement ring with Bitcoin, but that was the worst purchase of my life. Why? Because Bitcoin was $300 at the time, and now it’s up about 30 times; I could have bought a house with the Bitcoin I used to by an engagement ring.
Bitcoin is designed to be digitally scarce. I’m very much a believer in Bitcoin as “digital gold.” For a cryptocurrency that’s used as a medium of exchange, that cryptocurrency must be built as price-stable rather than digitally scarce. That’s what MakerDao is doing. There are other interesting stablecoin approaches, too. It’s a category that I think is one of the most interesting. Even at Facebook, they’re creating a centralized stablecoin. It’s a centralized version of what MakerDao is doing. So, that’s an example of one of my current projects.
How do you make a cryptocurrency price-stable?
There are different ways to achieve price-stability. The most basic stablecoin is what’s called a centralized, collateralized stablecoin. You have U.S. dollars in a bank account, and you say that at any time, one coin can be converted to one dollar. Tether is the most widely traded stablecoin today, and it’s a centralized, collateralized stablecoin where one Tether is one dollar.
Another way to achieve price-stability is what Facebook is doing, where instead of having one collateral, and that collateral being U.S. dollars, you have a basket of collateral with different fiat currencies or other assets like stocks.
The U.S. government has been all over Facebook’s cryptocurrency initiative, as evidenced by the Senate hearings and Trump’s tweets. One of the reasons that the government is all over them in that way is because Facebook’s approach could be threatening to the U.S. dollar. That’s because their cryptocurrency doesn’t just rely on the U.S. dollar as collateral, but on a basket of fiat currencies instead.
This type of approach is centralized in the sense that, by using this cryptocurrency, you’re really trusting a centralized entity that says they have these assets, have custody of these assets, and can allow you to redeem them. That’s another approach, but it’s more like a fiat currency in that you’re trusting a third party to use it.
Why I’m interested in Maker Dao is that it’s a decentralized, collateralized stablecoin. Rather than a centralized entity like Facebook holding collateral in a bank and making the cryptocurrency redeemable for that, there’s crypto collateral that’s locked up in a smart contract which exists on the blockchain. There’s no third party controlling the assets. They exist on a blockchain, and anyone can permissionlessly use a smart contract.
Now, these assets need to be crypto assets for this method to work. Right now, Ether is the collateral that backs the stablecoin, and Ether’s quite volatile, so you need the basket to be over-collateralized. You also need a mechanism by which the position gets closed if the collateral ratio gets too low or something like that. It gets complex, but at a high level, that’s an overview of different stablecoin approaches.
Now, these assets need to be crypto-assets for this to work. Right now, Ether is the collateral that backs the stable coin, and Ether’s quite volatile so you need to the basket to be overcollaterialized and there’s a mechanism by which the position gets closed if the collateral ratio gets too low or something like that. It gets complex, but at a high level that’s an overview of different stablecoin approaches. The collateral lives in the smart contract in this scenario, so there’s not a bank custodian, and there’s not the ability to earn interest, if you will, on the asset.
Most important message to the readers?
It’s important to recognize that the cryptocurrency movement is a grassroots, bottom-up movement that’s very disruptive to large institutions. I think it’s important for people that are interested, again, to think critically and to dive in and do a lot of primary research in understanding the space. If you’re relying on existing institutions or mainstream media for your understanding of this space, then you’re not going to be in a good spot.
I understand it because in a sense, I grew up on the East Coast, and I really valued institutions. I thought that Ivy League schools and big banks were as credible as you could get. But, I think there are deep flaws with large institutions that only slowly reveal themselves over time. In many ways, the cryptocurrency movement is about creating a better financial system. I just think that relying on existing institutions to understand the movement isn’t going to put you in a good spot.