OLAF CARLSON-WEE rode 2017’s “initial coin offering” craze to become one of crypto’s top venture investors. Now he’s raking in hundreds of millions, from a blockchain rage called DeFi, which promotes the fantasy of democratized financial services.
On a frigid, windy day in January, Olaf Carlson-Wee is settling in for a long Zoom call from his $10 million Soho loft in Manhattan, reflecting on how far he has come in the four and a half years since Forbes featured him on its cover, labeling him the poster child for the cryptocurrency bubble of 2017.
Back then, a speculative frenzy of hundreds of initial coin offerings (ICOs) pushed the cryptocurrency market to well over $100 billion in value as greedy fools bid up junk tokens backed by little more than a white paper and some quirky computer code. Then 27, with three years of Coinbase work experience under his belt, Carlson-Wee was considered a sage. He had started a San Francisco–based hedge fund called Polychain Capital that was backed by Andreessen Horowitz, Union Square Ventures and Sequoia Capital, and his fund’s assets had swollen from $4 million in September 2016 to $200 million.
Today, despite recent turbulence that saw bitcoin and other cryptocurrencies fall 30% to 50% in a matter of weeks, the market for them is still close to $2 trillion, and Polychain’s assets are $5 billion—up 125,000% since inception. Carlson-Wee just closed a $750 million raise for his third venture fund, led by Tiger Global Management and Singapore’s Temasek Holdings, two of the smartest and most successful investment firms on the planet.
“We had a lot of interest. Many, many hundreds of millions in demand more than we raised,” boasts Carlson-Wee, now 32, clad in a lime-green tie-dyed T-shirt, running his fingers through his spiky, bleached blond hair.
“Whatever the ideal, in practice, DeFi is a speculator’s paradise…even after crypto’s recent correction, the amount at risk stands at nearly $80 billion.”
Carlson-Wee’s net worth has grown to an estimated $600 million because among crypto investors, he has an uncanny knack for deftly navigating a market chronically infected by hyperbole and assets without any discernible intrinsic value. Among the most profitable of his early investments was a major stake in ether, the token underpinning the Ethereum blockchain—now worth $2,700, but trading for less than $12 back in 2016 when Carlson-Wee’s Polychain went all in.
He is not shy about his new riches, quite literally created from ether. His 6,000-square-foot Soho digs, which he recently bought fully furnished, was once an art gallery owned by prominent NYC collectors. Its opulent interior design, described by its realtor as lower Manhattan’s “most Instagram-worthy” residence, was inspired by the luxury Hôtel Costes in Paris and features tin ceilings, gold columns, a cobra-shaped snakeskin chair and chandeliers fashioned from organ pipes and crystal. Its master bathroom is a study in gold, including a mirrored ceiling and a shimmering gold-plated bathtub with a large dollar sign hanging on the wall above it. A few months before he bought this New York party palace, when bitcoin was trading above $50,000, he closed on another trophy property in the Hollywood Hills. That $28.5 million, 12,000-square-foot mansion has breathtaking ocean and Los Angeles skyline views, an indoor pond, infinity pool, seven bedrooms and spaces for ten cars.
One of the keys to Carlson-Wee’s success has simply been being early. He met Ethereum founder Vitalik Buterin, for example, when the then-19-year-old briefly worked at Coinbase in 2013. That was just before Buterin wrote his revolutionary blockchain white paper, which one-upped bitcoin by creating a multipurpose computing platform based on so-called “smart contracts.” These agreements have no conventional legal standing, but because the terms are blindly enforced by computers, they are more immutable. Without smart contracts there could be no ICOs or NFTs.
In 2018, at the Web 3.0 conference in Berlin, Carlson-Wee met MIT research scientist Harry Halpin—the co-creator of a super-privacy protocol called Nym. Halpin was frustrated by traditional VCs’ reluctance to back him. Says Halpin, “This smartly dressed young fella came up to me and said, ‘We at Polychain are interested in funding subversive technology.’ ” Polychain led a $6.5 million round for Nym last July, just before the startup hired Chelsea Manning.
“I like being the first person to believe in someone,” says Carlson-Wee, just back from spending his New Year holiday with a dozen friends in a house he rented in St. Barts. “Our goal is to invest in breakthrough technologies that will enable new types of human organization and behavior.”
Polychain’s most ambitious investment foray to date has been its backing of 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, secure and accessible replacement for traditional financial institutions, including banks and exchanges. Carlson-Wee was an early investor in DeFi’s biggest winners, such as Uniswap, an exchange; lender Compound; MakerDAO, a lender and stablecoin creator; and DeFi exchange aggregator dYdX. Blockchain-traded DeFi tokens have had eye-popping returns. The total market now amounts to $78 billion, up from $10 billion in January 2020.
Crypto idealists, including Carlson-Wee, believe DeFi is the future of finance, and just the thing to level off a lopsided financial playing field. For centuries middlemen bankers—from the Medicis of Florence to JPMorgan’s Jamie Dimon—have wielded great power and amassed huge fortunes. DeFi aims to cut them out.
All DeFi functions—payments, savings, trading, lending—are conducted on blockchain-based software. Changes are made by token holder vote. There is no central control.
Carlson-Wee’s success lies not only in his ability to find the most promising DeFi startups but in Polychain’s willingness to make outsize investments in them. Decentralization and democratization may be the DeFi ideal, but when it comes to decisions that might affect Polychain’s returns, Carlson-Wee is very much in charge. He doesn’t hesitate to use his firm’s formidable voting power to ensure that the interests of his partners come first.
“I’m very much a pragmatist,” he admits. “I don’t think crypto fixes wealth inequality or wealth concentration, but it does shake the snow globe.”
OLAF CARLSON-WEE’S crypto journey started in 2011, the summer after his junior year at Vassar College in upstate New York. An avid fan of role-playing video games, he had read about how the underground drug marketplace Silk Road was enabled by a virtual currency called bitcoin. His excitement over the new tech drove him to sink almost his entire life savings—about $700—into bitcoin at prices ranging from $2 to $16. He went on to write his senior thesis in sociology on the emerging cryptocurrency.
After graduating in 2012 and spending a few months working as a lumberjack while living in a yurt on a commune in Washington State, he blindly emailed his thesis to the Brian Armstrong and Fred Ehrsam, the cofounders of budding crypto exchange Coinbase. They hired him as their first employee and put him in charge of customer service. Carlson-Wee famously insisted that his entire $50,000 salary be paid in bitcoin.
Though he had little coding experience, he helped automate many of Coinbase’s routine customer-service responses. He was eventually put in charge of risk and lowered 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 were funded and rewarded most, rather than those who were reactive or fast followers.
“Coinbase had the architecture of a central custodian. It was very contrarian in crypto at the time. It was taking on the compliance and antifraud burdens of accepting bank payments,” he says. “This was something nobody had really been able to do.”
But as Coinbase expanded and became more mainstream, it was forced to pay greater attention to regulatory demands. It began to intentionally steer clear of crypto’s bleeding edge, where Carlson- Wee felt the most potential lay. He was most excited about Buterin’s new Ethereum blockchain, which unlike bitcoin could (theoretically) run virtually any type of digital platform, making possible decentralized versions of Uber, Facebook, Google or Dropbox.
Former Coinbase colleague Adam White, recently president of crypto wallet Bakkt, believes that as Coinbase added dozens of software engineers from top schools, Carlson-Wee had become pigeonholed as the “operations guy.”
“I started to realize that Olaf was more than just the guy who was going to work hard and answer [customer] support tickets,” says White, who recalls a holiday party in 2014 at which Carlson-Wee casually told him that bitcoin would never trade as low as $300 again.
In 2016, Carlson-Wee informed Armstrong and Ehrsam that he was quitting to form a crypto hedge fund. “I realized that [Coinbase] was going to broadly follow its path with or without me,” he says. “By founding something, I could regain that feeling of super-high leverage.”
LEVERAGE HAPPENS to be the fuel powering the current DeFi boom. From a capital-raising standpoint, DeFi is the successor to initial coin offerings. Most of the ICOs of 2016 and 2017 were junky digital IPOs in which speculators traded ether tokens to invest in hundreds of questionable projects. The majority were worse than even the shoddiest stocks. There was almost no disclosure, and investors had no real equity or voting power. Billions were lost.
DeFi is touted as an improvement because investors in these Ethereum-based platforms are merely lending their capital, usually in the form of ether or a stablecoin like USD Coin, to others in peer-to-peer networks. The rules are set out in smart contracts embedded in the Ethereum blockchain. By lending crypto, DeFi investors can make money—lots of it— through something called yield farming.
It works like this: Say you own $10,000 worth of ether. Rather than having it sit in your digital wallet on Coinbase earning zero interest, you could deposit it in a DeFi platform like Compound, making it available for somebody else to borrow for a set time. In exchange you’ll earn an annual yield as high as 30%. But that’s not all. You’ll also be rewarded with Compound’s own tokens, COMP, the platform’s native asset, which entitles you to vote and have a say in governing the network. COMP tokens also trade actively. Between their launch in June 2020 and mid-2021, they skyrocketed in value from about $65 each to more than $800. Even after the recent crypto crash they’re up about 90% since release.
“You can now have lending agreements for millions of dollars between two people around the world who don’t know each other’s identities,” says Carlson- Wee, whose 2018 $2 million investment in Compound led its seed round at a $22 million valuation. Compound released its token in June 2020. Its market cap soared to $4 billion in 2021 and now hovers around $800 million.
“These loans can be an agreement between a person and a computer, or a corporation and a computer. There’s no concept of identity or legal contract. And yet [because of smart contracts] you can have literally billions of dollars [move] between these people,” Carlson-Wee says.
Whatever the ideal, in practice, DeFi is a speculator’s paradise. The COMP tokens you’re awarded for lending out your ether on Compound can then be deposited in any number of decentralized exchanges such as Uniswap (also a Polychain holding), where you can likewise earn interest and more free tokens. On Uniswap you earn UNIs. Then you can deposit your UNIs on SushiSwap and earn SUSHI. And so on.
It can seem like a self-perpetuating bubble. Over the last 12 months, DeFi platforms including Uniswap and SushiSwap have averaged over $50 billion in transaction volume per month, but there’s little evidence that any of this goes toward the things banks typically finance—say, company expansion or even buying a home.
“Polychain is among a handful of big hedge funds and VCs including Paradigm, Bain Capital Ventures and Pantera, which, behind the scenes, centrally control many of the biggest decentralized platforms.”
Things don’t always go smoothly, either. Chainalysis estimates that in 2021, 72% of $3.2 billion in crypto assets stolen came from DeFi sites. In early 2020, when the emerging pandemic caused markets to plummet, investors in a Polychain-backed DeFi platform called MakerDAO suffered $8 million in losses when its underlying software liquidated 1,200 collateral positions in response to a 55% drop in the price of ether. At one point the foundation that runs MakerDAO considered an emergency shutdown. The platform was saved in part because ether rebounded 80% in a few months. Much more is at risk now. In March 2020 the total value of digital assets “locked up” in DeFi platforms was about $10 billion; today, even after crypto’s recent correction, the amount at risk stands at nearly $80 billion. Little wonder that powerful opponents, such as Massachusetts Senator Elizabeth Warren, have called DeFi “the most dangerous part of the crypto world.”
IF THE NEW WORLD of decentralized finance is a democracy, then Olaf Carlson- Wee is a Tammany Hall boss. With large stakes in the biggest platforms including Compound, Uniswap and MakerDAO, Polychain’s analysts are actively involved in creating their architecture, known as “tokenomics,” as well as designing the incentive mechanisms that attract investors.
When it comes to Compound’s governance, for example, Polychain is the second-most-powerful voting bloc behind Andreessen Horowitz. It controls 306,000 of 2.8 million votes, roughly 11%. Andreessen has 321,000. Important votes on things like lowering loan collateral requirements require that only 400,000 votes be cast, so, as long as they agree, the venture firms can easily sway any vote their way. In fact, Polychain is among a handful of big hedge funds and VCs including Paradigm, Bain Capital Ventures and Pantera, which, behind the scenes, centrally control many of the biggest decentralized platforms.
Unlike voting for common stocks, there is no mandate to notify token holders of upcoming votes, and for those who store their DeFi tokens on exchanges like Coinbase there isn’t even a mechanism to allow voting.
“A decision does not pass on Uniswap, Aave or Compound unless it is approved by the founding team,” says Andre Cronje, founder of Yearn.Finance, a yield farming robo-advisor. Carlson-Wee openly admits that his team works with founders on all major proposals. Adds Cronje, “As much as there is talk of decentralization, unless it is back-channeled there will be no approval.”
Carlson-Wee prefers not to dwell on DeFi’s inherent contradictions. “I’ve never really viewed decentralization as an end goal or a feature that users want,” he says. “What people really want are security guarantees. And decentralization is usually the best way to get them.”
These days, he’s focused mostly on where to deploy his $750 million in fresh capital. Polychain takes a thematic approach to investing in early-stage startups (see table, page 65), something that the youthful money man says he gleaned from VC veteran Fred Wilson, of Union Square Ventures.
In the fast-moving cryptoverse, DeFi is yesterday’s bubble. NFTs and the metaverse are the next wave of froth Carlson- Wee wants to surf. “The internet generation cares about avatars and profile pictures more than clothing and cars. As we transition to digital lifestyles and, eventually, a fully internet-native metaverse, NFTs become the artifacts all around us,” he says, a glint in his blue eyes. “Imagine a game world where the price of a token going up would actually expand the size of the game.”