Crypto: The End of the Beginning

Transcript

Morning everyone. Guys, it's great to be here. None of you need an introduction, so we'll get straight to it. Uh the panel is the end of the beginning. Uh it's a great time to be in crypto yet again. We're still here. We've known each other for over 10 years. We've invested in so many different things. Uh I want to start with something that came out yesterday. Uh there's an interesting tweet about Justin Drake about crypto, you know, cryptography. Could that be broken? Has he Maybe starting with you, how do you think about that? Is that truly the beginning of the end or is the end of the beginning? >> Yeah, so maybe just to give a little bit of context. So, yesterday Justin Drake tweeted that he thinks it's time for the industry to go into bunker mode.

So, bunker mode means that uh for those of you who saw yesterday, OpenAI published a giant drop of new mathematical results. Uh some of them, one of them in particular, which was a uh a a solution to the quasi Riemann hypothesis, which many people consider to be one of the biggest mathematical results in a century. An enormous result. And uh all of this supposedly is only one of the three drops that OpenAI is going to do of a huge amount of new mathematical progress. And the weird thing about this drop is that there's nothing in there about cryptography.

They had something like 700 different results, no cryptography. Cryptography is probably the most economically significant part of mathematics, and yet OpenAI didn't release anything about cryptography. Many people conjecture, and this is what Justin Drake was hypothesizing, is that this is because maybe they're holding things back. That they have new cryptographic results. Some of them might be very bad in that they found vulnerabilities in cryptographic protocols, but they might be coordinating, they might be doing some kind of responsible disclosure, or they just genuinely might be so damaging that they're trying to figure out what to do. Um and so he basically claims, "Look, we're now speed running mathematics at a pace that we've never seen in human history, and that may mean that a lot of the cryptographic assumptions underlying blockchains and public key cryptography might be in

jeopardy. But that doesn't mean we know for certain that anything is the case, but we do know for a fact that we don't have proofs for almost anything that underlies our public key cryptography in blockchains. Uh we're pretty sure they're hard because, you know, the the the usual hardness assumptions in cryptography are that a lot of really really smart people have looked at this for decades and they haven't found anything. That's what we think of as, you know, very strong evidence that these cryptographic uh techniques are sound, but we have no proofs that ECDSA is sound and that it's cryptographically hard, meaning that you can't break it with a classical computer. Um we're pretty sure it is, but we don't know. Uh if God forbid a a a a a some kind of AI-accelerated mathematician figures out

that there's actually some way for a classical computer to break a ECDSA key, uh we're in a lot of trouble. And so his claim is that we need to go into bunker mode, which means stop signing transactions on addresses that are holding a lot of money. Uh if you never sign a transaction, almost certainly your stuff is safe because we know that hash functions are much more secure than public keys, and if you just send money to an address and you never move it, you're protected by by a a hash function as opposed to a an exposed public key. The question is what do we think about this? Um I tweeted uh last night upon reading this that it's it's a little bit of the doomer impulse that's now come into cryptography. Um I think it's reasonable.

Um look, the probability it's kind of like when people talk about existential risk from AI, the probabilities people are talking about are like, you know, 5% 10% um it's almost certainly not going to happen that ECDSA is going to be broken, but we have to take seriously that look um cryptography changes over time. You know, uh hash functions that we used 15 years ago we don't use anymore because actually we have found vulnerabilities against MD5, against SHA-2. Um and so there's always this migration that's happening in cryptography. It's why today, you know, Ethereum does not use SHA-2 anymore, it uses SHA-3 because it's considered to be more secure.

Um If if in fact AI is accelerating everything, if like we have 10 years or 20 years or 50 years of math research that's happening in the span of 6 months, then it probably is reasonable to start asking deeper questions about how much risk we should be taking during this critical period when math is accelerating so much faster than it has before. >> Karl, maybe over to you cuz you you've been very vocal about like blockchains are, you know, very good for financial applications in a world where other investors really have tried other things and you've really stuck to that over so many years. I want to get your perspective on, you know, if this is truly the end of the beginning. Like what what has ended in crypto as as you think about it? Um

and and what are we entering now? >> Yeah, so I I definitely sprayed a lot of money into non-finance things. Um uh some of them kind of worked, some some didn't work, but most most didn't. Um Web3 having been the the word du jour. Um at this point it's been very clear that these are financial systems and and not more than that. Um and uh you know, we're just modernizing finance. Um that that's fairly obvious. And then we've kind of found some interesting new forms of capital formation. You know, my favorite example that I'm partial to is DePIN, um which like didn't quite get as big as I was I was hoping it would get, but like there are some some success stories there.

you know, beyond that then we have just interesting social things happening, right? Pump, FOMO, Axiom, all all these things. Um when I think you know, the point of the panel was say the end of the beginning, I think it's kind of like a just a recognition that we're not throwing spaghetti at the wall like web 3 is dead. Um we understand that it's finance. You know, in in 2020 we we all thought, "Hey, maybe there's going to be 40 or 400 new standardized contracts for trading risk." Um and turns out no, we want spot, perps, options, borrow lend, like the CDS. Like they're like eight major financial

contracts that govern almost all risk transfer in the world are what the world wants. Um so I think you know, the end of the beginning to me just means like, "Hey, we we know what we're doing and we're going to stop wasting time on all these other things." >> A lot a lot is happening in crypto. I want to stick in this thread. You know, you left Multicoin, probably one of the most successful runs in crypto and venture at large. How how is your new role um allow you to kind of express your thesis >> Can we talk Can we talk about the Multicoin thesis?

>> I mean, I would love to hear it. >> I I don't think this is the right forum for that. >> [laughter] >> But um what has changed for you, I guess? >> Um you know, like I'm I'm building a new startup on Solana. I can't can't talk about it too much, but um you know, I I feel fortunate I was there early Solana and not just Solana core, but uh all the like important ecosystem teams around Solana. Jito and Camino and Marginfi and a bunch of other teams that were necessary to make this thing all work. Pyth and and all the trading firms and all these And um you know, like that that job is done as a venture capitalist. Like these guys needed to get off the ground, they needed money, they needed support, they

needed strategic help, whatever. They're they're all successful and making money and stuff. As a VC, I'm like no longer substantially moving the needle on like making Solana become the global permissionless financial layer to power global finance. so a lot of how I think about my time now is like well what can I do to uh like complete the job or finish the job. Uh and I think I can actually do that in an operating role now uh much more than I can as a as a VC. Um so that that's in my new startup certainly you can think of it through that lens.

Um and then I think there's opportunities in the kind of like the private equity side of the world takeovers side of the world um that you I can also use to like accelerate the mission. So via forward and via as an angel I've been doing some other stuff like that too. >> That's great. So see maybe turning it over to you I mean Dragonfly you guys raised a fund probably at the bottom of the market you know what was it like six nine months ago? >> Yep. >> Um again thematically you guys have invested in a lot of things over the years like what is something that you've really changed your mind on as it relates to crypto maybe the opportunities side um or what you're really focused on um that the Haseeb of five years ago wouldn't believe you talking about this today.

>> Yeah so I think like 2020 2021 was peak crypto psychosis for all of us where we were just totally convinced hook line and sinker that I think it's important to rewind the clock a little bit to like 2016 2017 um I remember Kyle I first met you I think in the the expo or the >> expo office? >> Yes. >> the the Nural Capital guys. >> And at that time you were still it was a fledgling fund you guys had just gotten off the ground you were like tweeting about publishing a bunch of you know posts about I think it was it was like a XRP fork or something. There was like all this crazy stuff and none of it was working it was all tiny and like we were all weirdos.

Okay? We were weirdos crypto was weird nobody thought what we were doing was >> Haseeb I hate to tell you that you're still a >> Yeah I was going to [laughter] say >> Okay I'm I'm still weird. These guys are cool and you know, respectable now. Um but like at that time all of us were taking huge amounts of career risk. Like we were all people who could have had, you know, could have been in you know, natural prestigious uh uh industries, but instead we were crypto weirdos. And 2020 all of a sudden the entire world screamed at us, you were [ __ ] right. Everything you decided to do was absolutely right. Crypto's going to eat everything. Everybody in the world now agrees. And you know what? It's going to be even bigger than you thought. In fact, it's going to take over culture,

every celebrity in the world, NFTs, it's going to be on TV. Like you were more right than you ever thought you were. And it's going to eat every single industry. And we really wanted to believe it. We really wanted to believe it. Because of course, like why would we not want that to be true? And so, you know, I I I was probably among most of the big VCs, I was the most resistant to the idea that crypto was going to take over gaming, that NFTs weren't a bubble, that like and I fought it for months when this stuff really started exploding. I would get into big arguments with both my my team as well as a bunch of other VCs. Um and eventually I too was like, you know what? I'm probably just wrong.

I'm probably just like not young and cool enough to get it. And I just got to get with the picture that NFTs are going to eat the world and you know, we're all going to live on the blockchain and dials are going to take over everything. And turns out none of those things happened. Dials are a mess. Uh crypto games are all terrible. And um NFTs I mean, they kind of exist, but they're kind of this, you know, weird corner of the internet. >> call them RWAs now, Kyle. >> RWAs are now the successor, I guess. >> so much of investing is timing, right? What can be true what what can be considered wrong and you know, there's there's no difference between early too early and wrong.

>> Yeah. >> And some of these experiments take multiple decades, so to speak. If you look at the evolution of technology. Yeah, we're more connected. I heard you say backstage um roughly call it 15% of your fund is now investing in AI. How do you think about it? Is there a conversation there around just existential crisis as how we think about crypto? The opportunity you said, is this sufficiently interesting as a piece of technology? Versus versus something like AI that, you know, I I think we've all been in panels where we've said this is the most interesting thing that we could be doing and maybe it's this is where I have an edge.

But it's you know, there's people putting rockets in space and regaining speech for ALS patients. A lot of this accelerated by AI. Does that you look at yourself in the mirror you say, [ __ ] is this the industry I still want to be a part of? >> So, I mean, for me the answer is unequivocally yes. I I still think that crypto is one of the most sci-fi things that has happened in this in the last couple of decades. It's clear that AI is the most sci-fi thing that has happened in the last century. Um and it's going to continue to change the world and we're just, you know, the thing I was just talking about with cryptography is precisely because of what's happening in AI. Now, that said, um the reality is that AI is an everything technology.

And the way in which AI surfaces, okay, there's investments in labs and so on, but like we're probably going to be exiting that period relatively soon where there are AI investments. In the same way that, you know, crypto investments are becoming less and less of what we are investing in at any given time cuz like there's just not that much room for pure play layer ones or ZK networks or this kind of thing. The reality is that we've built most of the infra. And now, the infra does need to scale. There's a lot of, you know, we're we're talking right now about, you know, there obviously quantum is coming and all of these things will need to be improved, but they'll probably be improved in place rather than improved by a new startup that starts, you know, from from zero. So, I think for crypto, what we're also

starting to see is that crypto is becoming a little bit like this, too, is that crypto is just getting into the water supply and it's going everywhere. Where every single financial institution, every single fintech, like you look at a new fintech pitch and almost every single one has stablecoins somewhere in there. And it's not because they think they're going to raise more money with stablecoins, it's because that is actually what you do now in order to get a cost advantage or an execution advantage with a fintech. In the same way, if you're building any new startup, there better be some talk of AI in there, otherwise like what are you doing? If you're a brand new startup, you have the ability to build AI first and not have all the baggage of an old company, but that's not an AI company.

That's just a company, you know? So, I think we're seeing that happening to crypto as well, that more and more the stuff that we invest in, we are not the only people who can invest in that company, right? You know, back in the back in the day, like three three four years ago, every single person on a crypto company's cap table was a crypto native VC. Today, that's actually not true. Um most of the good deals in crypto, other people can invest in it as well and are equipped to underwrite it. Maybe they don't only want generalists on their cap table, but most of these things are very legible to generalists because, you know, you look at some of the big outcomes like like Rain, um you look at something like Venice which we invested into, you look at something like uh you know, a Polymarket or a Coal

She. There's crypto investors, but there's also generalists because these things are very legible to regular investors, but crypto and all the concepts that we're talking about are part of that advantage that they have as as uh as uh challengers. >> Kyle, um say we're here 10 years from now. Hopefully that's the case. How will you know that this is the um the begin the beginning of the end? Like what is the end state for you that you could say not in the end of like crypto's going to die, but more so that crypto's truly kind of embedded, immersed, become truly the future of finance. You know, we talked about back back backstage and you're very involved there. Like what

how will you know that crypto's, you know, much farther along than it is >> Um I think probably the simple litmus test for that would be when the general public doesn't think it's a scam. Like that that's the simple litmus test. I think that point's probably 5 years away. Somewhere between 5 and 10. >> What needs to happen for that to >> Oh, I mean there's like this morning, right? Samsung announced they're building Solana wallets in the 82 million phones if the software update goes live in a week. Um I'm assuming the other Android manufacturers are all thinking about similar things. Apple's probably a year or two behind.

Right? Obviously we've got all of the the major, you know, CME is here literally a token. Um you've got hyperliquid backpack and Coinbase, all these guys, right? Like so all of this monetization of the financial system's happening. That process takes probably, you know, five-ish more years, roughly. >> I guess maybe as a follow-up to that, from your perspective, what is the most interesting interesting thing that has happened in crypto maybe over the last 2 years that has really accelerated either the perception of crypto or just the actual traction that um that has really surprised you. And you've seen a lot of stuff over the years.

I I'll say the thing I'm the most excited about is securities on chain. Um and since I'm on the board of Backpack, I'm obviously very partial towards securities. You know, to right, you've got call it 150 million Solana wallets out there, probably Phantom, MetaMask, Solflare, Backpack, Binance, OKX, etc. you know, a lot of those people either couldn't or wouldn't be able to buy US equities um uh via whatever other financial services they may have access to. In the last three or four months, they have access to now something like 60 or 70

backpack securities, and that number is going to increase pretty dramatically here in the not too distant future. Um, and I think that's very exciting that like you can unlock access to SpaceX, Amazon, what- whatever thing of choice. Um, I'm I've I've always hated Bitcoin, still hate Bitcoin, cuz it's not economically not economically and, um, you know, like I like productive assets. And then, you know, the economy at large and really specifically the American economy, especially in the AI era, is producing the most economically productive companies of all time. So, like I want people to access them.

>> I don't know how long it's going to take for that perception of crypto to change. Uh, I think I I do worry that there's a stink on crypto that's going to continue for quite some time because people are you know, the the the emotional valence that has attached to crypto over the last, call it, two, three, four years, um, is really strong. And I think for, especially for older folks, I think it's going to be very difficult for them to let go of it, especially in the US. Uh, and in large part, this is also because in the US and in a lot of the the really rich countries, um, most people don't use crypto.

You know, if they do use crypto, it's to own some in a, you know, Coinbase account or something like that, but, you know, Americans don't use stablecoins, obviously. I mean, 99.8% of stablecoins are US dollars. But they're not used by Americans. They're used overwhelmingly overseas. Um, and so as a result, it's kind of a, um, they don't really need to know, they don't really need to care about, you know, what crypto in the same way that like, you know, most people don't know what CME even is, even though it has a near monopoly on the trading of derivatives, which is the majority of how assets are traded in financial markets. So, the reality is most people don't need really to know, and it it kind of I don't know that it matters so much. Uh I think for Bitcoin it matters and for you know ETH and some of the

mega cap assets it matters because obviously retail predominantly are the owners of the margin of most of these these things. But for crypto for you know tokenized assets for stable coins and so on I I kind of I don't know that it's going to matter what most people think about it in the same way doesn't matter what most people think about DTCC doesn't matter what most people think about CME. Most people hate banks. They still [snorts] use banks you know and so I I think we we probably have to separate those two in our minds about you know right now people hate AI companies they hate AI CEOs but I think more than like any other category of anything and yet ChatGPT is the fastest growing commercial application. You've got you know this the App Store charts are all constantly topped by AI applications. So there's

always this two-mindedness to consumers and I think that's just part of the reality of of technology today. the the I guess the other the other element of it is that um you know I think as crypto fades into the background um there will always be a lot of work for us to do in improving the technology from a distribution perspective and probably also stop talking about it as crypto. I think crypto will be one of these things that like I suspect that people will stop talking about AI not because we rebranded it to SI but because like it's just going to fade into the background the way people don't really talk about you know the World Wide Web.

You know they just talk about oh they use this thing on my phone. You know people don't really talk that much about apps anymore they just talk about what the app is. And I think in the same way people probably will just not talk about crypto. Crypto will just be this kind of ugly word. It reminds us of the early days when there were a lot of scams and blow ups and political scandals and blah blah blah um but they'll just be like yeah when I send money overseas it's really cheap. And when I you know use this app to do this thing it's really fast and I never have to think about it. And I think that's probably more what it's going to feel like in 5 to 10 years. >> Yeah. Kyle, you just just come back to something you said earlier around you

think most of the core infrastructure has been built. Just double clicking on that. I mean, tokenize stocks, huge part of where I think we all agree is a lot of potential to talk about truly really reaching mainstream. Are we there yet? Like are we going to move to 24/7 365? And what needs to happen to get there? How quickly do you think we get there? What are the bottlenecks? >> I mean, look like on Solana today, Robin a chain today, people are trading equities 24/7. Now now the reality is that it's like pretty crappy cuz the liquidity's not there. You know, like no one expects to trade Amazon and to have 100 basis points of slippage on a $500,000 order.

That that doesn't it doesn't make any sense. I actually think there's only one path to get there. And that path is you have to bridge liquidity to NYSE and NASDAQ so that if you place a $10 million Amazon order, like it should be, you know, two bips, five bips, what whatever that that might be. and then once you do that, then I think it very quickly naturally spills over into 24/7 with still substantial liquidity. But you you have to piggyback off of of tradfi on this one. The notion that we're going to recreate, you know, Citadel, Jane Street, HRT level uh natively on any of these chains is is

pretty silly. Or even on that matter, on Binance or Coinbase or Backpack. That that's not going to happen. Um you got to piggyback off of those guys. And I think once that happens, the rate of growth of the 24/7 trading, it that's kind of a step function change. >> Sounds like you're bullish RFQ then? >> Uh I definitely like RFQs. >> Okay. >> I like Backpack Securities, too. >> Fair enough. Has Shiva maybe already you just uh when you think about the opportunity set in crypto deploying a fund of your size if a lot of this stuff is I think a lot of the returns for investors historically have come from infrastructure if a lot a lot of that has been built when you look towards the future of the next stage of crypto like

what are you most excited about I know you mentioned you know AI is a big part of that stuff like Venice but how do you think about the opportunity set what parts of the layer what is different perhaps in in this fund relative to all the rest? >> Yeah. So if you look at the big categories in which we've deployed dollars one of the really large and obvious categories has been the growth of stable coins and payments. So you know companies like Rain like Mesh um you know increasingly this is the thing that you can just see line is going up into the right for the entire industry. I mean anybody who's in the flow of this is just seeing numbers are exploding. Um so that's one that's one category and I think also FX is this growing category as well that's starting to be enabled by

by using stable coins. second category I'd say prediction markets obviously Polymarket and Kalshi have been the standout winners but I think it's still a lot of white space. Polymarket and Kalshi are going you know toe-to-toe in the US and even in the US they haven't saturated the market. There's still a lot of growth among both of them but the US is only one market. And it's a big world and I think it's very obvious that the ideas that work in the US are also going to work elsewhere. The idea of prediction markets are just right. It's like very clearly an idea that is going to replicate in other places. Now there's regulatory barriers there's going to be a lot of work to like build the the do the ground game in these different places but people want

to bet on culture they want to bet on politics they want to bet on the big questions of the day and they also want to look to markets to give them information that experts and talking heads can't. And so I think we're still in the early stages of that global go-to-market. And And that's a place where we're paying a lot of attention of people taking different angles of attack on that problem globally. Um and then the third thing I'd say a lot happening at the intersection of crypto and AI. Um we're still you know, I I gave a talk yesterday about AI agents and crypto.

People used to talk about, you know, even just beginning of this year, the idea that AI agents are going to use crypto. I was one of the people talking about that. We now have AI agents. We've got Muse and Instinct and Hermes Agent and all this stuff and it's now going extremely mainstream very rapidly and very clearly we were wrong. They're not using crypto, they're using credit cards and it's totally fine. It's working very well and in almost every single country the traditional payments players have realized that this is really big. They've basically cleared the boards and figured out how are we going to do this in a way that is robust and they've done a pretty good job. Now, I I do think AI agents will use crypto where humans use crypto. But if you want

to move money cross-border as an AI agent, you will do it the same way we do it which is it's the fastest way to do it is using crypto and you're going to get better pricing on a lot of FX orders doing it that way than doing it with a bank. But this idea that AI agents just have to use USDC or you have to use stablecoins, this was wrong and we should realize that this is wrong. So, I do think that AI is going to change the interface of crypto. Is it the way in which we use crypto and all the foot guns that attend to crypto in that it's easy to get hacked, it's easy to make mistakes, it's easy to end up getting scammed or fished or whatever.

AI being this intelligence layer that's going to sit in between you and your own stupidity and making a lot of the UX challenges of crypto much simpler. That is something that I think is going to totally change the way in which we interact with crypto. The and clicking experience of okay, I'm going to go shop around for the best way to bridge assets over here and I've got to figure out, you know, where is the best place to get yield and which protocols have been hacked and I got to read the Twitter and make sure that nothing bad happened this week and that there's no weird stream finance. This thing is like randomly in debt and I didn't know about it. All that stuff, AI will do it for you.

Like there's no it's like you everyone will have their own crypto guy and their crypto guy will do all the annoying stuff for you and you just bark orders at it. That's going to change a lot about how we experience crypto. It's going to change a lot about the the sense that we have the chains have users with lock-in with commitments to that chain. You already see it with FOMO. You see it with near intense is that the sense that you know, people live on a chain and they'll use the apps on that chain. That experience is already gone for people who are living on FOMO. People living on FOMO, if your if your new coins on Robinhood, if it's on base, if it's on BNB chain, who cares, right? You just click the button and you buy the asset. Um, that is coming to all of crypto and I think

it is going to really change a lot of the assumptions we have about where value flows and I suspect many startups are going to end up being very pivotal in how that transition takes place. >> Kyle, last question to you. What are you most excited about? I mean, you've always been unafraid to be vocal and perhaps non-consensus. What is perhaps your most non-consensus view at the moment that you're either investing in or or idea? >> Um, you know, crypto is always a lot of the most popular crypto apps have always been kind of very short horizon in nature. Um, that you you see all the trading terminals and then the axioms and and the and the FOMOs and the pumps, but then even the like a lot of the newer

ones that are built on the earth and hyperliquid or elsewhere or or tend to be like I'm a swing trader, momentum trader, I'm looking at RSIs and and these other kinds of technical indicators. Um, and I think there's going to be an opportunity to build businesses that leverage crypto rails focused on slow twitch finance instead of fast twitch finance. Um, so I'm I'm pretty excited about that and and what I'm building is in that in that direction. >> Great. Gentlemen, hope to see you here in 10 years and we should be talking hopefully not about the end the beginning of the end, but just more of a continuation of the industry. And so thanks thanks very much.