Blockchain’s Massive Potential: A Conversation with Joey Krug
Blockchain, or some derivation of it, figures to play a major role in the future of many of the most consequential industries. From land and real estate titles, to stock, options and derivatives trading and clearing, to perhaps even some sweeping decentralized currency that isn’t governed by a single country, state or body.
The beauty of the Blockchain is that it offers an accounting and tracking system that's nearly impossible to game. Every computer or entity plugged into this decentralized ledger holds the same information, so corrupting the chain—without overwhelming control of the network—is a non-starter.
It's a technology solution that neatly blunts threats from fraud, forgery and corruption. Blockchain does not, however, guarantee a system or individual against theft, as illustrated by the Mt. Gox hacking and heist.
Bitcoins can be tracked through the blockchain, of course, but because their owners are pseudonymous, catching hacker thieves is quite difficult, if not impossible.
Blockchain's promise comes through its offer of transparency, and its global accessibility.
It's this promise that inspired Joey Krug to found Augur, which seeks to create prediction markets supported by a decentralized network via blockchain. Krug, who is the lead backend developer for the project, has been working feverishly on it from his hometown of Knoxville, IL, since leaving Pomona College in 2014.
Krug was awarded a $100,000 Thiel Fellowship last year, in support of his work on Augur, and he has been a FundersClub member and investor since March, 2015.
FundersClub's Christine Georghiou shared a conversation with Krug recently, which covered his own evolution as a programmer and technology maven, as well as how he was struck by the potential of blockchain—something that convinced him to drop out of Pomona and pursue Augur full time.
The following conversation has been edited for clarity and brevity - Georghiou’s questions in bold:
I noticed that you became interested in software development and technology at a very young age. How did your early experiences with programming lead to founding Augur?
I’ve always found computers interesting and fun to play around with. I started working on Augur, while studying computer science at Pomona College. I'd been at Pomona about a year and got very interested in Bitcoin and blockchain. I wrote a point of sale app that would allow merchants to accept bitcoin in stores. I ended up open-sourcing that code and then shelving the project to work on Augur.
Why did you decide to shelve your first company?
Transactions are built on trust. If you’re using bitcoin for financial trades, there are security properties that make bitcoin a safe, cheap option. I realized that, when using bitcoin in ‘real world’ commerce transactions, there’s no way to guarantee that the merchant will follow through and give you what you paid for.
How did you first get interested in Bitcoin?
There was this post on a forum I used to go on, called overclock.net. It said you can earn money with your graphics card. I kind of ignored it because it seemed too good to be true. Six weeks later, it was still the top post on the forum, so I decided to look into it. I mined some Bitcoin, and then read the whitepaper and thought the whole concept of Bitcoin and the blockchain seemed like a very cool idea.
Nobody had really created a currency outside of a government before, that you could use on the internet. Bitcoin was very interesting to me because it was the first time somebody in modern times had created a currency outside of a government that became well-used, all while solving a cool computer science problem. The Byzantine General's problem. Kind of interesting for that as well.
Could you explain “The Byzantine General’s problem?”
Sure. One variation is that you have two generals, on opposing sides of a war, who are exchanging letters via messenger. Now let’s say that one of the generals wants to surrender, so he sends a messenger. How do you know that the messenger hasn't been intercepted?
So say I'm one of the generals and you're the other general, and I'm surrendering to you. I send a messenger your way. Now the question is, when you receive the messenger, how do you know that I didn't just send you someone who is actually going to initiate an act of war but it was intercepted, and the message was replaced by some third actor?
It's this weird problem that's kind of fun to grapple with. It's supposed to be impossible to solve in theory, but Bitcoin solved it in practice, which was an amazing thing.
How does Bitcoin solve the problem?
Bitcoin solves it with "proof of work" and "mining." With Bitcoin, basically everyone spends a bunch of computational power. They're running their computers very hot, spending a lot of electricity. Using mining operations. Everyone is monitoring and verifying something that is called the blockchain.
Everyone sees what all the generals are doing, I guess you could say. If someone were to try to falsify something, or “intercept the messenger”, the blockchain would show that. It would be like double sending, where I send the same money to two people at the same time. If that were to happen, the network would detect it—the blockchain would show that.
The only way you can cheat the system is if you have more than a half of the mining of the network. The idea, of course, is that's very difficult to do. It's been a while since I checked, but I remember at one point, the Bitcoin network had more computing power than the top 100 supercomputers in the world, combined.
FC Note: The distributed nature of the Bitcoin blockchain is seen as challenged by some, as more than half of the transactions in the Bitcoin market now flow through just four Chinese companies.
Did you find that being a fairly early adopter of Bitcoin was a big advantage to you as you were developing Augur?
I don't think so. I wasn't super involved in the community at first. I started mining in 2011, which I guess was fairly early, since Bitcoin came out in 2009, but I wasn't an early adopter in the sense of someone who pays super close attention all those years. I lost touch with it a bit. I got back into Bitcoin in 2013-2014, when I started working on Augur.
I think the advantage was that I understood the concept of putting prediction markets on blockchains.
The solution for the volatility issue associated with using currencies like Bitcoin on Augur will be to trade in these markets with stable crypto currencies. They're a couple years off, I think, but I think that's where everything will go.
What initially inspired you to found Augur?
Augur is essentially a platform for prediction markets. The idea of prediction markets was first popularized by the economist Friedrich Hayek, in his paper, "The Use of Knowledge in Society". It’s based off of the idea that the best way to predict an event is by assigning a price to the possible outcomes.
For example, someone on Augur could create a prediction market around the odds that Russia will invade Estonia within the next three years. According to Hayek, the most reliable way to predict the odds would be to let the market determine the price for it.
The cool part is that there's never really been a good prediction market before. For them to work, they need to have global liquidity – all people, all over the world, would have to have access to them. Blockchain is a new piece of technology that allows this very old idea to finally flourish.
Could you share an example of an event that Augur predicted correctly?
Sure. One example that stands out is when Augur predicted that Dilma Rousseff, the former Brazilian president, would be impeached. At the time, all the pundits predicted that there was a 20 – 25% chance that it would happen. Rousseff was impeached in 2016. It was pretty cool to see Augur predict that accurately.
Do you anticipate any roadblocks along the way, due to the similarities between prediction markets and online gambling?
Yeah, prediction markets have historically been regulated. In Europe, they've mostly fallen under gambling law. In the US, they're regulated under the CFTC. Almost all of these regulations apply to those operating prediction markets.
Augur is a protocol. It's like a platform for prediction markets – other people can use Augur to operate prediction markets. We’re writing open source software and we're saying, "It's a tool. You can use it how you like." And that usage is subject to regulation. There are trades that users could make on Augur today that would be 100% legal.
A good example of that would be a bounty market, where companies or developers can incentivize people to find bugs in your software.
How does all of your technical knowledge and your experience founding Augur and impact your investment decisions when you’re choosing startups to invest in?
It makes it much easier to assess the technology that companies are building.
Many founders will center their presentation around a pitch deck. As an investor, you don't really know whether the tech actually works or not. I like to invest in companies where I can understand the technology and could conceive of a way to solve the problem they’re working on myself, but I think the team that I'm investing would execute on it better than I could.
How did you get interested in startup investing at such a young age? What made you decide to pull the trigger for the first time?
Let's see. I first got interested in it about a year or so after starting Augur. I had some bitcoin that I had saved up. I wanted to diversify my investment portfolio, and I thought that the experiences with Augur and my technical background could be useful when determining which startups to invest it in.
Are there any particular trends in technology, outside of Bitcoin, that have caught your attention?
Yeah. I really like the idea of crowdsourcing things. CrowdMed is pretty cool. It’s a company that crowdsources predictions for what diagnosis someone has. It diagnoses people who have been to a bunch of doctors and don't know what's wrong with them. They have a pretty high success rate.
I saw that you recently received a Thiel Fellowship. Congratulations!
How has that impacted your ability to work on Augur since you received it?
There are a lot of people there who are also working on startups and run into similar problems. It's great to be part of the community. When I run into a problem, I can always usually email the foundation, and someone will usually be able to offer helpful advice. When I first started Augur, I didn’t have that support network.
Did you always intend on applying for the Thiel Fellowship when you left college, or was that just like a, "I'm gonna do it and see what happens," kind of thing?
I left college in 2014, and didn't get the fellowship until this year. I hadn't even really thought of it until maybe last summer. I was sitting down and I remember one of my friends was like, "You should apply for the Theil fellowship." I go, "How long does it take to apply?" If it takes more than an hour, I'd rather just work on Augur. I looked at the application, it wasn't too long, so I decided to go ahead and fill it out. Then I ended up getting accepted, but no, it wasn't anything I planned on.
That's definitely a fortuitous event. For fun, can you tell us about when you were a kid, what did you want to be when you grew up?
When I was in elementary school, I wanted to be one of two things. I wanted to be either a veterinarian, or a computer engineer, but not what I do now. I was thinking more in the hardware sense. Designing processors, like some of the work that Intel does. I thought that would be cool.