The State of Crypto: A Builder's Guide From Crypto Startup School
Crypto has gone through an eventful year. Decentralized exchanges and platforms that allow users to trade, loan, or borrow cryptocurrency have soared in volume. Developers are taking advantage of the flexible, interlocking nature of blockchains to create new applications that build on one another.
Prices — the aspect of crypto that tends to receive the most mainstream attention — have surged this year as well, with Bitcoin hitting its all-time high this month.
While price trends can and do change, such rallies do tend to bring in more users, more developers, more interest, and, as a result, more innovation (as we’ve previously written about in connection to crypto’s “price-innovation” cycle).
All this new interest and activity heightens the need to demystify crypto, so that all of us can better begin to piece together the implications of what is a complex new computing paradigm.
We’ve compiled fourteen videos from this year’s Crypto Startup School — along with summaries, show notes, and key quotes — to help in that effort. The collection offers not only a company-building playbook for entrepreneurs, but an overview for anyone interested in learning more about crypto. (And check out our bonus video — a documentary following the progress of several participants in Crypto Startup School — at the end of the course videos.)
We hope it’s a useful resource for people wishing to do a deep dive — or just to dip their toe in the crypto waters, in 2021 and beyond.
Crypto Networks and Why They Matter
See all the slides
This is an overview of the crypto space, the transformative implications of its technology, and the potential for crypto networks to lead a new wave of innovation. Blockchains are a new type of computer — a virtual computer that runs on a network of physical computers, with encoded guarantees that it will continue to operate as designed. Just as the rise of mobile phones enabled an explosion of innovation on top of that new computing platform, crypto presents an opportunity for the next such “idea maze.”
Crypto’s “price-innovation” loop: Crypto cycles seem chaotic but have an underlying order. Asset prices bring more people into the space, which leads to successive waves of innovation that build upon the previous ones.
Blockchain in a new type of computer: The hardware is governed by software instead of the software being governed by hardware. And that lets the software make guarantees that users and developers and other network participants can trust in a way that they couldn’t trust a traditional computer.
The idea maze: “Every once in a while, a new part of the maze just kind of opens up, like mobile phones. Our feeling is there’s just very rich, new maze, the blockchain maze. … What can you do in this design space? Our feeling is this is incredible new maze, and there’s very few people running around that maze right now.”
Scalability. “Moore’s law is, I think, better thought of more broadly as an economic principle that when a lot of really smart people who know computer science start thinking about computer science problems and have an economic incentive to do so, those computers tend to get a lot better. And I think we’re experiencing that right now around these kinds of blockchain designs. I think it’s gonna unlock all sorts of new things.”
The pattern of technological evolution: “Once you have the right killer platform, I think it takes three to five years for application-level entrepreneurs to fully explore the design space and figure out what is the best thing to do with GPS, what is the best thing to do with a camera in your pocket.”
The current landscape of crypto investing: “The video game world is a nice entry point. Historically, video games have been early adopters of new technology and new business models. …Youth gamers are just very familiar with kind of these concepts, like digital currency.”
Blockchain Primitives: Cryptography and Consensus
This lecture explains the layers of crypto, including the consensus layer, and how Satoshi Nakamoto’s bitcoin whitepaper proposed a system that enables an unlimited number of participants to contribute to a blockchain without authorization and still come to verifiable consensus. He also talks about cryptographic primitives, how mining works, how blocks are added to the blockchain, public and private keys, and zero-knowledge proofs. These unique features provide a fertile ground for open-source developers.
The four layers of the blockchain. “The consensus layer is getting pretty well understood. There’s still a lot of work here, but this is kind of not where the most exciting action is. Most of the exciting action actually is in building applications.”
The “state machine replication” problem. “There’s an impossibility proof that says you cannot achieve consensus if you don’t have authentication, or you don’t know how many participants are in the network. [This] innovation is a way to get around this impossibility result.”
How blocks get added to the blockchain.
Sybil attacks. “The impossibility result said, if you don’t have authentication, consensus is impossible because you’re going to be vulnerable to a Sybil attack. And the beauty of Nakamoto’s innovation is that we can prevent Sybil attacks by forcing some sort of commitments to resources.”
Running applications on the blockchain. “The beauty of running applications on the blockchain is all the code is open source. …And then we have also public verifiability, where I can look on the blockchain and see exactly that all the rules are being followed correctly, that the code is actually being executed the way it’s supposed to execute, and no one is deviating from the rules.”
Cryptographic primitives (digital signatures, Merkle commitments, zero-knowledge proof systems).
Looking to the future: Private data on a public blockchain. “Rather than writing the application code in the clear and the application state in the clear, what we can do is we can write commitments to the application code and commitments to the states onto the blockchain. So we’re committed to what the data is, to what the application code is, it’s just nobody knows what the application code is. It’s inside of a hiding commitment.”
A blockchain is not a database. “Centralized systems are a million times easier to build than decentralized ones. They’re a million times faster. If you can centralize, centralize. It’s just when you cannot centralize, that’s when you decentralize.”
Setting Up and Scaling a Crypto Company
Crypto can help startups raise money, acquire customers and build a global profile. The disadvantages of crypto that entrepreneurs must watch out for include regulatory uncertainty. On balance, crypto is where the internet was in the early days.
The advantages of a crypto startup: “[There] are actually three really big problems in traditional startups. A lot of traditional startups actually die encountering one of these problems, and I think crypto offers a unique and novel solution to each of these.”
The drawbacks of a crypto startup: “There certainly is a lot of legal risk. This is a new area where people are still trying to figure out how to work with securities laws.”
The steps to starting a crypto company: “[Crypto] can help you hopefully at some point raise money more easily, get your early customers, expand globally. But the hard thing in startups is you gotta make something people want. And that’s the part where you have to go actually and build your product.”
Case study of a company using crypto concepts: “There’s thousands of ideas like this out there. You can imagine any kind of startup where you’re trying to build some kind of community, have some kind of a marketplace.”
Secure Smart Contract Development
The advent of that open ecosystem of interdependent “smart contracts,” or self-executing design programs, opened a whole new attack surface that requires successful organizations to prioritize a security-minded culture. Potential coding risks include memory safety, input validation, privilege escalation flaws, fundamental design flaws, side channel attacks and cryptographic vulnerabilities such as insecure key storage. Security is not just code, however — it’s also people, operational procedures, and life cycle management of applications.
There is no single answer to any of these vulnerabilities. Mitigation relies on a range of measures that are not perfect but can be used to create an overall system that is very difficult to penetrate.
Security is not just code. “It’s the people in the organization. It’s the operational procedures. It’s the life cycle management of the application. But there’s also a lot of things that might be totally out of your control.”
Threat modeling. “Having a really thorough understanding of the potential threats, the actors, their motivations, all the different vectors and how you can attack. … That’s a very fundamental thing you should always do, and it’s actually quite fun to do when you start doing that.“
Smart contracts and inflexibility. “Smart contract development is the opposite from agile. It’s the opposite from how software development happens today. It’s very costly because the only way to get additional insurances is basically by contracting external consultants in the form of audits, and they are really costly.“
Best security practices. “So what you want to do is compartmentalize what you do and separate it from everything else that’s happening in your organization. … Embed all dependencies to ensure you’re always in control of what you’re doing.”
“Rolling your own crypto” — building your own chain. “If you start from scratch, not only is that costly, it’s also from a security perspective not a good idea.“
Sharing security among different chains. “When it comes to the interoperability between the chains, you get much stronger guarantees and you can actually rely on the messages, transactions that you receive from the different chains. And thus, get strong assurances around what you’re hearing from the other chains.“
Applications: Today and 2025
Srinivasan traces the history of crypto from Bitcoin and Ethereum to the present. He highlights the crypto applications that have already gotten traction — infrastructure providers such as exchanges, wallets and miners; decentralized finance (DeFi) apps; and stablecoins that eliminate the volatility of early cryptocurrencies — and looks ahead to the ones that are likely to emerge in the next five years. These include personal tokenization, new financial instruments, decentralized autonomous organizations and gaming.
Quick history — why Bitcoin was invented. “This is the magic of Bitcoin — it replaced the centralized actor, a bank, with a bunch of competing entities called miners that carry out the same transaction approval process and also the money generation process.”
Ethereum and smart-contract programming.
The ICO boom’s technological significance. “An ICO is like the simultaneous disruption of venture capital, SWIFT, crowdfunding, and cap tables … So it’s actually very important technologically, even if not all of these companies are successful.”
Crypto compared to internet. “II would compare the present moment to roughly 2000 in the internet. Because in the 90s, there was this infrastructure phase, and you had Yahoo, and you had AOL. And everybody had heard of the internet, but not everybody used the internet in, you know, 2000 on a daily basis. And that’s very similar to kind of where crypto is.”
Blockchain-first is the new mobile-first. “Blockchain competitors are rising for many legacy businesses … it’s a technology that gives you balances, it gives you encryption, it gives you a number of primitives to work with.”
How crypto boosts network effects. “Now you’ve got a new tool, which is you can issue your users tokens, and the tokens have upside, which declines as the network gets larger. So now you actually give a financial upside to early adopters.”
How crypto aligns currency holders’ incentives. “[This] turns us from the slippery slope, where one individual’s rights can be abrogated at a time, to the crypto cliff, where to seize one person’s crypto is to seize everybody’s. And that’s a pretty big deal.”
Blockchain monetary policies as experimental science. “With blockchains, any sufficiently large group of people can now choose a monetary policy, choose an economic policy that suits them. And so I think we’re seeing this really amazing thing where rule of law is being actually encoded.”
Crypto applications today — exchanges, miners, issuance, hardware wallets, stable coins, DeFi.
What applications could be big in 2025 — privacy coins, scaling tools, insurance apps, new financial instruments, gaming, automated market makers, decentralized identity, personal tokenization, DAOs (decentralized autonomous organizations).
Protocol to Product
Building products is different in blockchain versus more traditional centralized products. The key question for builders: What is the need I’m meeting, and who are the users?
For projects seeking control over the end-user experience, such as with cryptocurrency wallets, typically the goal is to build the full stack, so that every layer can be changed to meet new use cases and find product-market fit.
For products built for developers, such as decentralized lending protocols, the focus should be on identifying a range of objectives that will bring developers to your platform while giving them the flexibility to customize and innovate.
No matter the end user, the rigorous focus at all times should be on what will bring people to your product and avoiding a “build it and they will come” mentality.
What makes a good product.
Building in crypto: How it’s different. “Traditionally when you build for an end-user, you have maybe your own database. You have a back-end service or several services, and you have a front-end or you have an application layer, and you own all the layers of this stack. … What’s different about the blockchain space is that you may build a dApp on top of already existing infrastructure.”
Thinking about your users. “If there is one thing we know about devs, it’s that they have a great ability to take what is defined and really expand on it and push it forward. You don’t want to stop people from continuing to innovate on your platform. So, having the flexibility to do kind of more custom things with what you’re building is something that is also really important to consider.“
Opportunities for Crypto in Gaming
Blockchain technology could have an even bigger impact on gaming than the internet because it’s not just connecting people, but potentially changing business models by aligning the incentives of developers and players. It can do this by allowing players to truly own the assets in games and verify their provenance, and by enabling developers to code rich incentive systems and rewards into games.
Overview of how blockchain will change gaming. “It’s not just interconnecting people, but changing potentially the business model of games, and creating the potential for a lot better game economies that align developers and players and work much better for both of them.”
True ownership of in-game assets by gamers. “The thing about these assets being stored on blockchains is, no one can take the asset away from the player. The player truly owns it, and they don’t have to trust a third party, including the game developer themselves, that they truly own the asset.”
Provenance of digital assets. “If someone was trying to sell you a basketball jersey, and they said “Hey, this is the jersey that Steph Curry wore at the final game of the 2015 NBA championships when they won, and so it’s going to cost $1,000.” You would just have to trust them that that’s true. … If they’re stored on a blockchain, you don’t have to trust anyone.”
Creating new marketplaces in games. “The richness of the marketplaces can be not only enabling trading between players and the transfer of assets and value between players, but also pretty complex economic designs around how that value gets split up.”
Designing incentive structures in games. “As a developer, you can write smart contracts that essentially incentivize or reward players through grants of currencies, and assets, and items, when they do things that are helpful for the game and for other players.”
Aligning incentives between players and developers. “As a developer (you) can create a bigger economy without just having to create new content all the time. If you allow players to trade, just as a simple example, you can earn a revenue stream from those trades as they occur over time.”
Business Models and Value Capture
None of the factors that allow companies to build moats in traditional industries — trade secrets, intellectual property, or control of a scarce resource — apply in crypto. This leads to the “value-capture paradox” — how can easy-to-replicate, open-source code be defensible in a competitive landscape? The answer is that network effects are just as powerful, if not more so, in crypto than in traditional industries, due to the economic flywheel enabled by tokens.
The layers of the crypto stack. “There are various different challenges at each level. And there are multiple startups that have been started to address the various challenges at each subsequent level.”
Multi-sided platforms. “The multi-sided platform is the core template for value creation and value capture in crypto. The key is that this applies to both layer 1 and layer 2.“
The Layer 1 flywheel. “Once the token value exists, then that creates a powerful incentive for miners or validators to provide some of the computational resources and hardware that actually give the platform its security and its functionality.“
The value-capture paradox. “The fact that you’ve got these virtuous feedback loops, these network effects, the fact that you get defensibility from integration between a protocol, which is driven economically by the token at its heart and everything else outside of it, tends to result in winner-take-all dynamics which is the opposite of what you might think given that everything’s open-source and copyable.“
Smart contracts. “Smart contracts are able to get people to trust in one another, to be able to interact with one another in ways that they previously couldn’t. Because of their sovereignty, they’re able to kind of create this kind of common ground with enforceable rules that everyone can trust in.”
This is an overview of “Mechanism Design,” a field of study that has become newly relevant with the development of Bitcoin and subsequent blockchains that require carefully designed incentives for network participants. Economic incentives, when designed properly, can persuade self-interested people to exhibit useful behaviors at fair market value with minimal central planning. This provides a new tool to bootstrap decentralized networks. Poorly conceived incentive systems can overpower moral frameworks in ways that can be dangerous. This could be harmful, he says, in decentralized protocols, since self-executing code may not be easily altered to curtail unintended consequences.
The principles of mechanism design. “By designing … economic games appropriately, we can push selfish humans, who are essentially playing the strategy that is most effective inside the game you’ve created, to exhibit useful behaviors.“
Bitcoin’s incentive system. “We have proof of work as a mechanism to reward people for securing the network and also processing transactions. … just another simple mechanism design [that] was able to do something that was previously impossible.“
The moral hazard of incentive systems. “[They] can overpower the moral frameworks that most people live by in ways that are dangerous and fundamentally disconcerting.“
Case study: Decentralized storage.
How and Why to Decentralize Your Project: A Deep Dive
Progressive decentralization is the process by which crypto project creators build a useful product, create a community around that product, and then gradually hand over control of the maturing network to the community. This helps drive rapid, compounding innovation through better alignment of incentives and open participation.
Compound, one of the first crypto projects to move through the full progressive decentralization model, built a thriving community of third-party application developers, who have set up shop on top of Compound’s smart-contract protocol for lending and borrowing.
The typical pattern of internet platforms. “As platforms grow, they follow a predictable pattern where they slowly start to change their behavior. Instead of cooperating with their communities, they start to extract value from them.”
Crypto’s new model: Progressive decentralization. “It’s now possible to financially reward independent users all over the world for their contributions to a network. And the result is that crypto networks can have a more cooperative economic model.“
Step one: Finding product-market fit. “At this stage, there should be no pretense of decentralization since a core team is driving all product decisions by necessity. “
Step two: Bringing in the community. “It could make sense to start thinking about how to eliminate dependency on the core team in order to build more trust with the community.”
Step three: Distributing ownership of the community. “Crypto tokens are a new instrument for distributing value, including a fee stream to community and stakeholders. And what I mean by this is I mean actually giving that community tokens.”
Case study with Robert Leshner: Working with the developer community. “At this point, 100% of our effort is focused on enabling developers to build on top of Compound. For us, that means thinking about the product as being holistic and everything that developers need.”
Why community ownership is important. “Right now, our team is necessary to maintain the protocol. But if we can distribute the responsibility and the ownership of the protocol to a wide audience, there’s the expectation that it can run forever.”
Advice for founders. “Have a extreme laser focus and tunnel vision on the goal that you’re working towards. I’ve seen a lot of teams and a lot of founders try to do too many things, try to spread themselves in many different areas.“
Building a Community of Developers
In a chat with Chris Dixon, GitHub and Chatterbug Co-founder Tom Preston-Werner explains how the open-source ethos is a great way to build social virality among developers, and how the clean, developer-focused interface of GitHub led to its wide adoption and caused developers to demand it within their own organizations.
He also offers marketing lessons from the early days of GitHub, when the company used informal methods of building community in a bid to create “superfans.”
Appealing to the open-source community. “We wanted to give back to the open source universe. And so we thought, hey, what if we made this free for open source that would be great for community and also great for marketing.”
Simplicity as a community driver. “We were trying to reduce the barrier to entry as much as possible. Just strip every possible thing away that we could think of to make it easy for you to get code online. And the social elements came from that.“
The first big milestone. “It was only maybe six or eight months after we launched publicly that [Ruby on Rails] moved over. And that was amazing.“
How to market to developers. “We talked a lot about super fans, and how we create super fans, and how do we serve super fans. What can we do to surprise and delight our users and turn them into super fans?“
Managing a globally distributed team. “You have to be able to work asynchronously where they’re doing work, and then they’re putting it online, and then asking things or making comments. And then you come in and do the same thing asynchronously. Afterwards, once they’re done for the day…And so things like GitHub, things like Slack, things like Zoom become really critical.”
Managing a Distributed Workforce
Because of the decentralized mindset and evolving business models at the heart of crypto, founders and managers face unique challenges. In such a fast-moving space, for example, it’s important to hire someone who has the right skills now and will also adapt to what’s required in 12-18 months. This also makes it crucial that companies create processes to onboard and support their teams.
Case study: Growing from 5 to 20 employees. “When you’re building an organization or thinking about building networks, people are your most important resource … it’s about hiring the right people at the right time at the right place.”
The importance of onboarding. “It’s really important to help people understand what other teams are working on, not just for them to be performing well at their job. It’s really instrumental for the trust you’re building in your organization.“
Clarifying job roles and structure. “We wanted to understand what motivated people in their roles so that we could embed that as they were working on their teams but also thinking of it from [the perspective] of their development.“
Tips for success. Commit to providing (and receiving) real feedback; define the decision-making process; establish systems of disseminating information; build processes to support structure
Crypto Regulators and Token Securities
Crypto is the “most perfect intersection of tech and finance,” but crypto builders must navigate traditional financial-services regulatory structures. This takes on special importance because tokens, the native assets of crypto networks, can be deemed securities by regulators, making them illegal to list on exchanges and subject to disclosures and other legal requirements. Because crypto is still relatively new, the path to legality is still developing.
In the meantime, the crypto industry has created the Crypto Rating Council, a new tool to objectively rate tokens and gauge their risk of being deemed securities. Promising new regulatory paths for crypto including membership models — similar to cooperatives or mutuals — in which token holders agree to only sell the token to other members of the network, avoiding a secondary sales market and thus steering clear of securities issues.
Digital asset regulation: What the agencies do. Treasury (FinCEN, OFAC, and IRS); Securities and Exchange Commission; Commodity Futures Trading Commission; international jurisdictions
Securities law. “It’s the most overweight part of any legal analysis you’re going to do because it affects both the nature of the token you’re allowed to offer and the manner in which you distribute that token.”
The “Howey” test. “[It] imposed a four-part test. Each of these parts must be satisfied in order for something to be a security.“
The Crypto Rating Council. “We built an objective, numerically based ratings scale that can be applied to any token to tell you where you are in terms of your risk of an SEC investigation.“
Assessing risk based on company’s goals/stage. “Many of you have great ideas and you’ve written compelling white papers, but the network is not yet live. You’re still in testnet mode or maybe you haven’t even built the network. That is a little riskier. And you have to be a little bit more careful if you’re going to be raising money.”
The membership model. “The most obvious example of a membership model that isn’t violating securities laws would be mutual insurance companies … [this model] hasn’t been tested with the SEC in our industry but has long-enough track record elsewhere that we feel comfortable exploring it.”
Hot-button topics. Gambling tokens, privacy tokens, Financial Action Task Force (FATF) regulations, tax reporting
Fundraising and Deal Structure
During early product development, crypto startups can raise traditional venture capital through equity, which allows for the most alignment between founders and investors. Then, unlike a traditional startup, a crypto startup can invite its user base to participate in ownership and operation via the disbursement of tokens, once the core founding team has found product-market fit and established a viable network. This aligns incentives among the network, its users, the core team, and venture investors.
How fundraising is different in crypto. “In the early stages they look similar [to traditional startups] — build a product, build a community — but at the point you’ve done that, you start to move into community ownership and operation mode.“
Tokens as an equity instrument. “Especially in the earliest stages of a startup, equity is the best way to achieve that alignment and flexibility that founders need. But if the goal of a crypto startup is to produce a network that’s owned and operated by a large community of users all over the world, then the token being natively digital is likely the best instrument to coordinate it once a team is ready.“
Dilution in crypto deals. “By giving community members a stake in the network, early founders and investors have a new tool to fuel growth and network effects that grow the pie.“
Monetary policy for crypto networks. “There’s no one-size-fits-all monetary policy in crypto networks that dictates what the supply of tokens or ownership stakes will be.”
The evolution of financial capital for crypto. “Specialization goes a long way to figuring out the appropriate valuation methodology, the appropriate deal structure to structure the unique sort of equity deal with token rights.”