Crypto’s New Era: Regulation, Breakout Apps, and TradFi’s Impact | Jon Charbonneau

Transcript

I do not envy them. It is really hard to draw the line on these things like we I even as crypto people who like spend all of our time looking at the stuff. It's really hard to draw the line. Um it it really really is. Um but I I think that's where we need to go is like you need to set some reasonable bounds here so that people can start abiding by them because I I I don't think it is good for the space that you know you can just launch a like one ofone upgradable contract which is like it's decentralized but like I can take your money out of it. A quick shout out to today's sponsor Katana. We'll hear more about Katana and their ongoing pre-eposit campaign later today, but for now, let's get into the episode.

[Music] Nothing said on Xerox Research is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Pocachio, Ryan, and our guests may hold positions in the company's funds or projects discussed. Hey guys, welcome back to another episode of Zerx Research. We're here at Permissionless. I've got my co-host Picacio. We've got John Charbano and Carlos from the research team. How are you guys doing today? You enjoying the conference? Great. I'm doing great. How about you guys? It's like 20° cooler than yesterday. So, I'm doing way better than yesterday. Yeah, it was. We were We've been sweating out here past few days.

You didn't show up till today. Did you skip the past few days? You uh I didn't make it the first day. I was here yesterday when it was just like super super hot and then today, which is normal. Great. Sweltering. Any any big takeaways from from the other day or you know, just business as usual that everyone comes to New York, which is great for me. Uh that is my big takeaway from the conference is like New York conferences, which is great. I'm like, I mean, I'm super biased. I'm a New Yorker. Um but like just everyone was here. Like really good group of people yesterday. So it was just fun talking to people honestly just around the event was the best part for me. Definitely.

It's become I mean it's a bit of a crypto hotspot right now. So it makes sense. Um one of the big themes Bach, I know you've heard it. We had a panel earlier today with some of the other block works podcast hosts and uh regulatory arbitrage is a big theme in general you know treasury companies uh just generic you know onchain businesses uh the theme being that you know there's maybe inefficiencies in existing markets or just you know regulation that hamstring certain types of businesses or limit what they can do. curious your thoughts there like how is you know sort of regulatory arbitrage how companies are coming to market or onchain business is coming to market impacting how you're thinking about like navigating the markets a bit uh so it definitely impacts pretty much everything because like honestly most of the stuff in

crypto is like arguably all regulatory arbitrage um which I I I think there's like two ways to look at that one is a negative connotation of yeah we're just like you know what are the loopholes in the law and like let's get around it kind of thing. Uh and then I say the positive interpretation which I think is very often also true um is hey obviously these regulations are outdated and old and what if we can build a system which actually makes those regulations just not relevant anymore like with technology we actually solve the problem that those regulations were trying to address in the first place. So, if we just solve the problem in a different way of like, hey, no, like your funds are actually held in a non-custodial manner and like there isn't someone to steal them from me, um, well then it

makes sense that like a lot of the reporting and requirements that you would normally have around a custodian who's holding your funds, they just like they actually don't make sense anymore. Um, the the unfortunate reality is like we're somewhere in the middle and honestly often on the side of like there's a lot of arbitrage and people taking advantage of the lack of clarity. Um because obviously there are a lot of protocols that tow the line of in particular what is custodial versus non-custodial. Um and we I like the the places where that gets criticized say the most often is like all the L2s which people criticize. It's like oh these are just multisig upgrades. Um and then in practice what do you look at okay what are most of the applications on top of the like decentralized chains like Salana a lot of them are also just like

multisigs with like very strong upgradability. Yeah. Um and I think that's a problem. Um I I think that as a space people are definitely getting better about those things. Um the trend is definitely towards getting better but this is one of those areas where I I am very happy that regulators are actually going to set a good framework for us because this is one of the areas where I think that we need this. Um there needs to be someone who sets a line somewhere at like what is a reasonable point of this is considered a decentralized and mature system versus this is you just have you know Coinbase controlling your money on chain which is controlled by a contract by them on a server that they control as opposed to like on the Coinbase exchange server like the you there is a practical difference um and

we need to draw the line somewhere. Um it it's I mean the thing that I'm very very positive on which is still shocking to me from 6 months ago or whatever um is we've spoken to the regulators um like the the Treasury and the SEC and them and I I was genuinely blown away by their understanding like of these systems um and their like very positive intent to actually set the boundaries in a right place. I I was like genuinely very surprised the first time we talked to them. Like I knew that the administration was crypto friendly. they're putting smart people in. Um, but from talking to them like they genuinely are trying to set the lines in the right place and and really proactively engaging with the industry. Um, so I I am hopeful and then like hopefully this does get you know uh progressively

pushed forward a lot more with I mean one is just you know the SEC giving guidance on you know what is a security versus not what what are the bounds? Um but then getting some sort of market structure bill um passed this year would be like very very important for this kind of thing too. I'm happy you brought up decentralization. And I feel like we've kind of stopped being very interested in it over the past year, year and a half. Like it doesn't really matter that much anymore. But I guess like regulators I I don't have any insight into what the SEC banks so they are very much focused on these things need to be decentralized. Yeah. If you like if you look at the the language in some of the bills that are uh being contemplated right now like they're trying to basically define you know what

is considered a decentralized and m or a mature system versus not that is considered you know it gets a sufficiently different treatment from a completely centralized protocol where you know you're fully expected that you're custodying their funds and you need to engage in KYC and a lot of these things. What do we consider a decentralized system? Um and like politicians are trying to figure out like what what is the right line here and that's things like you know not more than 20 no individual entity has you know control in some sense of more than like 20% of like voting powder power for example you know you should have open source code um like like very specific and tangible things that actually do matter um it's I mean the thing that I do not envy them it is really hard to draw the line on these things like we I

even as crypto people who like spend all of our time looking at the stuff it's really hard to draw the Um it it really really is. Um but I I think that's where we need to go is like you need to set some reasonable bounds here so that people can start abiding by them because I I I don't think it is good for the space that you know you can just launch a like one of one upgradable contract which is like it's decentralized but like I can take your money out of it. Um that like that and there's obviously again there's a full spectrum of these. Um but yeah and I I'm very hopeful that it will get better. Um but yeah know like people are really thinking about like what what are the exact bounds on this? Do you think L2s took have taken too long to

decentralize? Like I I remember Yeah. Yeah. I mean they they like they have I mean what has it what has it been at this point? Like how how long have they been around? Five years or whatever. Something like that. Um I mean L2B I remember is like changing their criteria recently where they're actually making it like a a little bit stricter on not like not giving a lot of leeway to the interpretation. They're think they're kicking out like I don't know 75% of all the rollups or whatever. They're like, "Yeah, you're not a real L2. Like you're you're just a chain with a multi-IG. Like you like you don't get by on this anymore." Um which I haven't looked at the details of like exactly what they're changing, but my guess is kudos to them because I mean that's my gut is like a lot of these chains really haven't

progressed as much as they should. Um and that's because there hasn't been a driving reason for them to do it. Um, most of them are going after fundamentally a a target market which is pretty just, you know, very risk-seeking, which is like, all right, like I like I got, hey, I'm farming an air drop buying a memecoin on this chain, you know, like, all right, if there's a 10% chance it gets rugged, it gets rugged. Like, whatever. I'm not putting my life savings on this thing. Like, that is in practice a lot of the target market that these people are going after. Um, like they're they're not getting the people who are depositing a billion dollars into an Alve pool. like those just aren't the people who are using this long tail of L2s right now. Um it's just like pretty DG users are like all right I'm willing

to take some risks. So they haven't really had a drive from the user perspective there um saying like hey I need a more decentralized more secure version and there obviously hasn't been a high level regulation saying like hey if you do this you know you're a money transmitter or something and so like there hasn't been a sufficient incentive. Um, I think you're starting to see a sufficient incentive for some of these larger ones. Like I I've seen people explicitly say this and I mean I feel this for chains like Bass chains even like Hyperlquid where I would put a different amount of money on those chains if I had a higher degree of confidence in the security of the bridge and their security model. Like I I don't want to have a meaningful chance that like whoops your money gets zeroed out.

Like I I will do that with like some sizable portion of trading capital. You can't do that with like your life savings. um you you don't treat, you know, a lending protocol on base the same way that you would treat, you know, a fiveyear, seven-year battle tested like off a contract on L1. You you just treat those differently to put a different amount of capital in them as a result. So, I I think we're finally starting to see a little more of a push at that front end. Um but I I think that we will need to see like more regulatory clarity too will honestly help. I think that's interesting like base as an example. I I feel like we're seeing more businesses in the space that are kind of getting into a blend of of CFI DeFi offerings. And so like the regulation point there is interesting, right?

Because obviously Coinbase, you know, the centralized exchange, they're, you know, they're open to certain regulations and how they manage customer funds. And then then when it comes to base, it's entirely different, right? I don't it's clear that there's not a framework in place yet. Um I I don't know. Are you thinking about these differently than maybe something like a hyperlquid or something that's onchain that's you know completely one way or the other where you know maybe there is like an existing business that falls within the regulatory framework and maybe you have some kind of expectation you know that that you know Brian Armstrong and his team won't rug you on base or is it really all the same to you? It's like we need more clarity to say one way or the other. I I mean I I think clarity will be good in general,

but I mean there's definitely going to be a spectrum of these uh types of centralized versus decentralized systems at the end of the day. Like one of the things I am super bullish on general is a lot of these you know DeFi mullet type of style things where like yeah CBTC in a more pool but like Coinbase abjects it away um and they take care of it. That like makes a ton of sense. I think we're going to see a ton of that from Robin Hood is obviously making the push on chain. All these chains are going to do stuff like that. In practice there's also very often a very clear desire for centralized products. Um the thing is when you have degrees of centralization on these products you need to expose them as that. Like the simple example right now it's like maple. Maple is

doing really really well as a borrow lend protocol where they very intentionally have multiple centralized aspects and if you go interface with the like centralized aspects of using the market like you are KYCing and going through documents with them like they they know who you are. You are using a qualified custodian and that's great. Um and you you treat it that way. you don't just like you know yolo people's money into like a one to one multisig like you know you know where the money is you know and it is treated in like a regulated way um and so when we have these borderline C5 D5 products and there are aspects that are centralized that's great like a lot of people prefer their money to be held in a qualified custodian because I will just trust that more than like most smart contracts in practice they're just like they're less

likely to lose my money and screw up which is great but like when you do that you obviously need to KYC customers and like tell them like hey your money is being held at this custodian as opposed opposed to just abstracting away like oh this is a decentralized system in the background like don't worry about it and meanwhile it's like you know it's a centralized system in the background um so I think people just need them very clearly spell out like what are the types of systems because there's definitely a a real place for centralized service providers like throughout all of these and I I think there's going to be that's going to be the case going forward like a lot of people very actively prefer that it's totally fine um and mixing the best of those parts together is again what makes sense like for Maple it makes sense that

a lot of it is centralized in some ways where like hey I to hold my money at a qualified custodian. Um, but it makes sense to also get the advantage of like, okay, but you have permissionless people can lend capital into that for the people who are willing to take that. So, like those blends are going to be super useful going forward. And just figuring out where to set the line is going to be good. This episode is sponsored by Katana. If your assets are sitting idly, they're dead. Katana is built from the ground up to bring your bags back to life. Get started with Katana by joining their pre-eposit campaign before mainet launches at the end of this month. Follow the links in today's show notes to get started. This episode is brought to you by Ledger, the global leader in digital asset security. Celebrating 10

years of innovation, Ledger remains the most secure hardware wallet for your crypto and login. Trusted by 7 million users and securing 20% of the world's digital assets. Follow the link in today's show notes to grab your Ledger now. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. Yeah, something that I've been thinking about recently is that objectively there are no switching costs in crypto. But like when you think about it, like protocols like A have been do so dominant like in recent years because they have like this battle tested aspect and people know that if they keep their money in a they're not going to get rocked and they're not like risking all of their capital, especially for applications that are very capital intensive. And so like even if you offer like higher rates in other like money

markets and stuff like that like people are not like the risk adjuster rate of like moving to a less battle tested money market and less battle tested exchange like all of these like claws that have been popping up like is so much higher than just like leaving your money in an application that you know is not going to like steal your capital or has no smart contract risk or has minimized that over time like yeah how do you think about like switching costs in crypto. I'm just curious about that. Switching costs are definitely structurally lower in general, I would say, across the board in crypto than in like most of the traditional world. And it it's it's always a difficult thing because I mean very often that's like the whole point of these systems. That's a really good thing. That also makes it

often difficult as an investor. Um because like all right, maybe we did build a really good system that's great for user surplus, but that does that doesn't mean there are any like necessarily good investments. Um, and I I mean this is the thing that I was like we I was at a dinner the other day and they asked you like what are things uh you had to give something that you're bullish on and something that you're fearful of. Um, and this is the thing that like people said this before, but I think it's very legit of like the thing I said I was bullish on was like a lot of this DeFi mullet kind of stuff. Um, and then the thing I would be fearful of is like that doesn't actually mean this is good for any of our investments. Uh it's very possible that like yeah all of

this stuff in the background is like super low switching costs and these you know centralized frontends like they don't care if they're using you know a morpho vault or an oiler vault or a or like whatever in the background like they're going to know the user they're going to capture all the value because it's really easy to like move the money around behind the scenes. Um and like there isn't really a strong structural mode for most decentralized protocols. Um so it's like totally possible that yeah I mean Coinbase and Robin Hood Black Rockck and JP Morgan Shaw like thanks for building all this open source tech guys this is sick. they just make a bunch of money on it. Um, and so I think I I think there are some areas where there there are better structural modes.

Um, but like most of crypto, yeah, I mean liquidity is pretty mercenary and will generally move around. Um, there there are areas where I mean it's just like tr things like trust in the smart contracts. Um, and where at some point liquidity begets liquidity where you know you just do default go to the most liquid markets. Um, but yeah, I mean, cap capital can move around and I mean I mean this is why I think most of the value in the long run, we're already seeing this happen, is going to trend closer and closer towards like who actually owns the user. Um, because most of the background tech can just be kind of swapped out. Like if this text is cheaper, great. I'm going to switch switch the back end over to there. Like the the thing that's going to make money is what is the user actually interacting

with for the most part. Do you think wallets this is what what you said makes a lot of sense to me like who owns the user. Do you think wallets do I feel like the wallets don't do enough in crypto? So they definitely don't right now. Um it's a thing which I like I I don't have high confidence on where this goes because it's like people have had this general idea of yeah you know the the thing that owns the user should capture the money for for like years and the thesis for years has been this is why wallets are going to be great. Um we just like we just haven't seen that happen for the most part. Um it's mostly these more unique frontends um that really like own an application that have been doing it. Uh, I mean the stuff that's like making a bunch of money like

it's Pump Fun, it's Axiom and stuff like that. It's not as much anymore. Like I mean like still like MetaMask and Phantom like they they do make a lot of money. Um, but if you have a killer app and you can just own them yourselves and you don't really need the wallet like my my gut is that's more of where towards it goes. Um, unless like someone like Apple makes a wallet then like and then they just like they own all the users and then that something like that would matter. But as of right now, yeah, I feel like you mentioned Axium. I think that might be because a lot of crypto users, the ones who spend money are like proumers versus like retail is they don't. First of all, there isn't that much retail. Well, there's we're all re not you. We're all retail. I'm retail.

We're retail. But you know what I mean? It's like I feel like we kind of always go towards the like the proumer crowd and then when people do go for the retail crowd, it kind of fails always. Like I remember unis swap added this weird loading mechanism. I was like I don't want to like I'm not 8 years old. don't do this to me. I want to do it properly. Um, yeah, not a huge take there, but I just wanted to say I think that's the I think it's a good point because I think, you know, you look at Axiom and they're doing very well and then you look back a few months to to Moonshot, for example, and that was meant to be a very like, you know, retail, you know, fresh to the scene, like make it, you know, just tap to buy and on your phone, uh,

experience. And yet that, you know, the sort of Trump token weekend was the perma top, it seems, so far. I mean that was they saw you know massive influx of users and have been nowhere near that activity since then and then you get like a more proumer oriented product like Axiom and they're setting all-time highs in you know activity and rent revenues. Um I don't know maybe it's just knowing what the market is right now and really catering your product to that today. I I mean I definitely think there's a place for really simple frontends. I I think it's just self- selecting for the stuff that is more on chain is inherently attracting the more proumer users. Like they're just not getting past the first stage of getting off of a sex. Like Coinbase still makes a ton of money on the very simple stupid

fact of they have two different views that you could use of advanced or simple and you pay higher fees if you're on the simple UI. And like people still do that which doesn't make any sense but like people do that. Um, but my gut is like most of the people who are doing that are not the people who are like that, you know, Axiom or whatever is trying to attract. Like they just did they're just not making it off Coinbase. They're going on there. They're they're buying Doge and like they're closing the gap and that's it. Um, and so once you're like inherently looking at, you know, these are the onchain DJ users, like they kind of know what they're doing and they actually want more like an active setup. Um, so it it makes sense that that is usually what's going to be catering towards them. I want to bring

up Monat and Mega. had the opportunity to talk to Lei and Ki and I think they're kind of I think they're competitors like very clearly I think they're competitors. Um they have very different approaches like one is let's make like let's use one machine but like a really big one versus I feel like a lot of people give crap to Mona but like they're doing a lot of I think more work I don't want I love Mega but I think they're they're rebuilding a whole lot more. Um, do you think that matters? Like the fact that they're building out a whole lot more if Megave can just go to market a lot quicker and have more apps and in general like how do you think about I guess those two specifically competing in the way that

they're building different different things? Yeah. So I mean so I mean first we're small investors in Monad, but we've also invested in some stuff there um too. Um but yeah I mean like know both teams like they're both super smart teams. Um I I I would generally agree Monad is doing the like longer harder work. I mean you just like see that by I mean like what what they're doing is like a literally harder thing and it has taken them longer to do it as a result of it. Um it's unclear how much of a difference that will end up making. It will I there's a certain point where like performance and reliability certainly does make a difference. I just don't have any confidence in saying whether it makes a difference when we like we haven't neither of these chains are live. Yes. uh like I I like if the

benchmark is mega eth doesn't actually deliver on the performance that it's uh you know promising then then like yeah like that then the hardware does make a difference if like the chain is going down and it doesn't actually have nearly as much throughput as they promised because like they didn't put in the hard work. I just don't know because the chain's not live yet. Uh neither of these chains are on mainet. So we'll see. Um that that's the I mean the very simple test of like did the harder work pay off as we'll just need to see them when they're live. Um, but yeah, my my gut is that the what will matter for both of them more in the long run is probably less about performance, assuming they both reach the minimum viable level of high performance. It's going to be who wins the go to market.

It's going to be who wins the best applications. Um, and then you kind of snowball from there. Um, and I think both are very capable teams and they're both like trying their best obviously to attract a bunch of applications. It's just so hard to tell what what are the apps that are going to hit when the chains aren't even live. like like you could have one application on either chain take off that just becomes the thing. If one of those chains has the next pump fund, high degree of probability that that chain is going to be more successful in five years from now than the other one was. Um I don't I don't know which chain that's going to be right now. So I but I my gut is that's where the bigger fight for them is going to be is who is the first to

bring on just a lot of really good applications that really hit off. Um and you kind of snowball from there and then you just keep bringing in a bunch of users because I mean there's a million EVM chains. That's true. Like Mega ETH is also not the first, you know, centralized fast EVM chain like like I mean like Arbitum is doing like pretty much all the things that they're doing honestly. Uh like most of these chains are like you know base and all of them. They're moving towards faster and faster confirmations. Like I I Mega ETH has me'd the fast big box more than everyone else. But like empirically all the other L2s are like doing the same thing. Uh they're just like they're fast big boxes that they just like run faster than the L1 and like they're making them faster and bigger. So uh yeah, it's like re

realistically what Meg's advantage has been like they me'd it better uh honestly is is I think is more important than most of the performance incremental things that they've done um and like they're trying to you know get the applications that take advantage of that whereas if those applications just launched on base then then they go to base and that's that's what matters for them. So I yeah I think it's going to be just who wins the good applications like in the application layer like what sectors are you most excited about because it feels like whenever a new ecosystem launches you always see like the same forks all over again like I mean the money market fork like the DEX for like what sectors do you think like can bring new applications that can be the next pom fun or whatever it is. So yeah, I I mean the the vast majority of

things that I have seen on Mega E, Monad, and Hyper EVM as the like three big EVMs right now are mostly just new chain copy over the same things. It's like a bunch of LST protocols. We need a borrow protocol. We need a PES exchange. We need DE. Like yeah, it's it's mostly the same things. I mean, this is a really just hard problem that's not not unique to any chain. Um, my gut right now of what is the most likely is you need to hit something probably more in the like prediction market memecoiny type of area. I think there's just like naturally a lot more degrees uh where you can get creative and have like a more unique application there. Whereas I I I think it's going to

be really hard to basically just build like the I mean the big meme like ZK hyperl like whatever right now. I think it's I think someone's probably, if I had to bet, like going to build something better than them at like some point in the future on chain that like seems probable. I don't know. Maybe in a few years. I don't know. But like trying to differentiate on that, I I don't see any clear differentiation right now of like, hey, we're launching a pers exchange on mega or monad or whatever, then like it's a little bit faster. I I I don't think that's going to get most people. Um, I don't think most basic DeFi is going to get materially better on any of these chains versus, you know, Salana for if you just needed fast and access to a lot of consumers or with

your if you just want to max capital. I I don't see them materially beating them out there. Um, so I I think the areas that are like there's a proven market, but there are degrees where you can get creative um are probably around prediction markets and memecoins. um because those are both very real markets where I think degrees of creativity on the margin can actually get you you know a breakout application pretty quickly where I think there are areas to clearly improve on. I don't think anyone would tell you that poly market or pump phone are perfect. I think they're very clearly imperfect in a number of ways. And so those are more likely to be beatable to me than building, you know, the next hyperlquid, but it's a little bit faster or the next a but it's like a little faster or guess. I see a lot of

this is the next hyperlquid. And sometimes like their tech is genuinely better. Yeah, it is. But I mean the thing with hyperlquid is they have 270 markets versus these guys have like 10. Yeah. So it really that like people want to trade. They don't care if it's it's a little faster. I don't care. I can't belong dog on it. So, it's exactly I think the point about money markets is it hits pretty well here as well and and same with, you know, simple swaps and and just trading as well because it's like I don't know that you want to play funny games with money markets and lending and leverage. Um, you know, I think people putting their money out there and and generating yield with it, they want maybe certain guarantees or understanding of uh, you know, what's backing that and and other things related. But whereas, you know, you

mentioned meme coins and and prediction markets, like it's more about designing a fun game for consumers. And so naturally, yeah, you can do a little bit more experimentation playing around and and maybe that leads to something that's a new idea that that gets people excited, a new a new Tik Tok, a new Yeah. Looking at both of those, there's clearly just way more areas like the the I mean the specific example with hyperlquid is like I would say it's it's the exact opposite in prediction markets where no trader would look at poly market and tell you that like oh yeah this is like a good trading setup. Like the markets are super liquid like it's not there's not a candle chart on there, you know, like this is just not a trading site. Um I have been to Poly Market a million times. I don't know if

I've ever placed a bet on Poly Market because like it's not it's like it's not fun. It's it's not very liquid. It's not a great trading site. Um, so I that that's an area where we've seen a lot of stuff lately. I'd say the area where we've seen the most uh startups definitely lately are a mix of purpose exchanges and then a mix around different flavors on prediction markets and memecoin stuff. For the most part, I would say the latter has interested me more that we've looked at more seriously because I to your point I've I've seen people who are like, "Yeah, really good tech, great people building per markets." It's just I I have a harder time seeing why it's going to take off and like beat out hyperlquid versus I think currently prediction markets meme coins and launchpads. I think there's more areas where you can pretty clearly

differentiate yourself um and where users will like go for a different product right now. Is there something of a a confirmation bias here, right? Like Poly Market, Kalchi, big announcements of raises, pump fund doing their sale. Like these things are hot. They're raising a bunch of money. They're at high valuations. Like I mean that's got to be playing into the the decision-m as well, right? Like we're seeing some excess of a few platforms. So you want to get in there and disintermediate them if you can or take their market share away. Are we are we missing out on what the real, you know, future wave actually looks like? So I I mean I think we know most of the things that crypto is really good at. Uh I like it's it's not that complicated. Like like I I think the underlying tools really are the same. I

mean people often treat those two categories that I talked about as like fundamentally completely different things of you know like memecoins uh prediction markets and perexes. Yeah. They're all just launching talk tokens and trading tokens. Like that's that's literally all any of them do. Like Poly Market is an exchange. That's all it is. It's it's the same underlying tech. Um what what's different is how do you expose them differently to consumers and try to like really capture very unique different markets. Um and that that's the areas where I think you can probably just differentiate yourself more. It's different flavors on prediction markets where there's different types of people who are trying to look at you know more short-term markets that you can take more leverage on um or like different

ways to get different payout structures on them. uh stuff like that where I think you actually can differentiate yourselves when you're just, you know, talking about like an asset like BTC and like I I want to go just extra long on this thing. Like there's not a lot of areas to differentiate yourself in liquid. Like it does what I want because it's really really simple. I want BTC but I want 50x instead of 1x like that like this there's no there's no differentiation. Like it it just does that for me. Yeah. Um versus prediction markets it's very clear. and memecoin launchpads. Memecoins are I mean just like fundamentally there's so many degrees of creativity because it's literally just like a consumer gambling fun experience. Um like just different interfaces and different ways to gamify it that you can differentiate. Um and same thing with prediction markets where

currently they're very just like shown as a news kind of thing. They're they're just not presented as a real item for you to go trade on. Um and just don't have the right markets and market structure for that. So I I just think there's a lot of areas to differentiate there. But yeah, I mean I'm I'm that it's definitely not a surprise that you know the biggest applications that we're seeing right now are per exchanges and prediction markets. So big surprise like what are a lot of people raising to do is like oh I'm gonna build the next prediction market or the next you know uh per market. Um what what we as early stage investors obviously have to do is just figure out like okay what is you know ju just purely beta chasing chasing versus hey I actually think an upstart can meaningfully disrupt the current

incumbents right now. Um, in general, I see that as materially easier in a lot of prediction market and kind of memecoin infrastructure areas compared to building the next DK hyper liquidity. It just seems super structurally really difficult to me to disrupt that. Shout out to today's sponsor, Katana. Katana is a DeFi first chain built for deep liquidity and high yield. No empty emissions, just real yield and sequencer fees routed back to DeFi users. Incubated by Polygon Labs and GSR. Katana is launching with a notable ecosystem of primitives, assets, and partners like Morpho, Chainlink, and more. Be early to Katana by joining the pre-eposit campaign before mainet opens at the end of this month. Follow the links in today's show notes to get started. Ledger is the global leader in digital asset security, trusted by 7

million users, and securing 20% of the world's digital assets. In recent years, Ledger has built a comprehensive ecosystem of products and services, making digital ownership more secure and accessible for everyone. Ledger's newest devices, Ledger Stacks and Ledger Flex, introduced the world's first secure touchcreens, making it easier and safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, they have also launched the Ledger Security Key app, offering a safer alternative to traditional passwords and enhancing your digital security. Follow the link into today's show notes to get started with Ledger today. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. Are you guys doing mostly app investment or infrastructure investment? Lately, it's definitely shifted more towards app uh

investment uh than infrastructure, which I'm like super happy with. Um I like I feel like I've been waiting for a while for that. I mean, like we're we're very intentionally uh generalist uh investors. So, we we've always done both. Um I I think people certainly think of us mostly as infrastructure, particularly because I am the the loud one of the two partners at DVA. Uh, and people just like really just want me to keep fighting about Ethan Soul and that gets the clicks, so like I keep doing it. Um, but yeah, definitely lately most of the stuff that we've been investing in is um, it's early stage application, which is just great because I mean we're just seeing a a higher I'd say quality hit rate of founder lately, which has been just like very positive. LA last year, parts of last year at the peak

hype were definitely the most deals that we were seeing. And then I would say lately is the probably the highest like hit rate of like quality founder with a unique good idea that's doing an early stage thing lately which is encouraging because I think that matters more than just raw um number of people who are going through. Um but yeah most of it's definitely app stuff now where there's more clarity on you know what what are the things that people really want to do on chain. We're getting better regulatory clarity. We're getting better infrastructure. We're just getting better much easier to build these things. Um and so you're in a pretty prime environment now for you to just go build you know early stage um new application that you can get off the ground like really really quickly which is really good on founders I feel like I

mean as a founder you can make a lot of money in crypto but I feel like we don't get that much talent do you think that's changed over like you just mentioned now we're getting more and more talent but it's historically been a problem right most of them uh I would say though are already crypton native people um they're they're they're very good people who were at previous projects who are at the stage of like, oh, I'm going to go build a new thing now instead of just like sitting in the place where I was before. We've been seeing a lot of that where it's it's the really good quality people who like you you've wanted the back and they're finally doing a thing now. Um, it is definitely I would say on the margin less of bringing in a bunch of net new people. Um, I I mean certainly

AI is like what is pulling in the majority of those people right now. Like it's it's just it's simply not crypto. So, a lot of it is just who are the quality people that we have right now and just getting them to really build cool stuff now that they have all the tools and their exposure to do it. I think that makes a lot of sense. I mean, you see, you know, Meta and Mark Zuckerberg offering up$und00 million, you know, contracts to top AI researchers. So, it makes sense there's uh a lot of excitement for that and it's very barbell. I mean, like I guess the other point too is there there's a there's a lot of outside development in crypto from people like that. It's people like, you know, Stripe and Meta, you know, who and JP Morgan who like are going on chain. Uh it's less of like,

you know, that type of person or AI, you know, uh competitor person who like could go to AI or crypto like making a new startup. I got it's very much like the big boys over here are coming into crypto. Um and then the little guys uh that are doing startups are like mostly I would say cryptonnative people uh is like most of what we're seeing right now. I got you. So, you think the last few quarters like there was, you know, there was a ton of excitement then the a bunch of the new startups. It's not there hasn't really been a wave of of new people. It's really just, you know, they were maybe doing okay at their last, you know, project and they think there's less future here. I have I have a better idea. Let's let's get it out to market and see what happens. That's

definitely more of what we've been seeing lately as opposed to net new founders. For the quality projects that we've been seeing is it's really good people who are at a bigger project for a few years um and are at the stage where you know hey I've like seen this market play out. I understand what's wrong because I was on the front line of this like we see where you know real user demand is. I'm going to build the thing to fix this and we have all the clarity and the infrastructure to be do that now. It's definitely more of that is what we're seeing for like startups that we would fund like early on as opposed to Yeah. some like new guy who could go to crypto or AI and is like I want to go start something out of nowhere. It was pretty crypto native people for the most

part. I guess as a font, how are you navigating liquid markets versus more earlier venture capital stuff? Like where do you see the opportunity now? And like how do you know navigate like cycles where where do you think we are? Like where's the most opportunity right now? So where I mean we're intentionally generalist. We do we do both. Um, any any of the liquid stuff that we do though, we we always do with, I would say, a pretty venture-like mindset of like we're just like not short-term traders because I just I don't like drawing lines on charts and I don't understand it and I don't pretend to be good at it. Um, I don't think many people are good at it, even other people who think they're good at it. Um so yeah I mean like most of the even like liquid stuff that we're looking at we're

looking at at like venture- like opportunities um where I'm underwriting this for you know 12 months plus usually and like I think this is going to be you know this is going to compound over multiple years. So I mean we do both ends of that. Um right now I mean we we've started to see there's definitely been more of an uptick in like early stage privates that we have liked to do. Um so we've definitely been doing more of that lately. The problem unsurprisingly as usual is like really good stuff gets bit up pretty quickly usually in crypto on particularly on the private side where there's just like a lot of big funds that need to throw money at stuff. Um often the like really early formation stage is like where they don't get bit up sometimes because a lot of the big funds like they just can't

even bother to put money into there. Um and we're like we're not a huge fund so we can still play in those like early preede type um ideas. Um, but in I mean in liquid markets there's definitely areas that are interesting right now just as like everything has gotten I mean most stuff has gotten like pretty aggressively sold off pretty consistently over the last year. It's like really just like little pockets um that have done well. Um I mean like I mean the obvious stuff that I think is working is like I mean like obviously it's most obvious thing but like hyper liquid I mean like like we own said that before uh like as far as the like people who are looking at like fundamental projects um on like a cash flow basis kind of thing. It's it's been interesting this like I mean like people

uh are talking about like the revenue meta kind of thing and it was funny I was just talking about it someone else before this like I actually think there is like reality to the this is just a meta in that I don't think that people are like actually looking in a in a in a reasonable way at what are like the cash flows in most of these businesses like what what I mean by that is like most people when they're doing like oh yeah this is you know a good you know fundamental investment they're literally just like going to DeFi llama and like oh like what like what makes revenue and then just like put some silly multiple on this thing with one no real thought of like what are actually the expenses of this? Is this number even correct on revenue which is like very frequently

wrong and then like actually trying to project forward like like how much money is this actually going to make? Like I would say if you go actually look into the details of what most of the tokens that people are calling right now the like hot fundamental investments as like oh this lending protocol is making a bunch of money and you try to go put a p on that thing I it's going to look a lot more like circle right now than it's going to look like any like reasonable valuation. None of them are like very few of them are actually reasonable valuations. They're like you know this thing is actually making like a million dollars a year like maybe if you take out the val uh like the expenses and everything. Um which is fine. people just are going to start to again realize like this is just how investing early

stage works is like these things aren't expected to make a bunch of money yet. Um and people will like realize that there's not effectively that much difference if this thing is making $2 million a year or losing $2 million a year and with no revenue. You're you're fundamentally taking a bet that the thing is going to like 100x thousandx what it's making over the next few years. Um and so that applies to both of them. Hyper liquid is actually like one of the few um that like actually has a more I would say like actually more reasonable multiple on it. Like it's making almost like a billion dollars a year. It's just a lot of money. Um I mean we definitely own stuff like that like Sky um other there are a lot of other interesting lending protocols um that like actually do make money um that

we've held for quite a while. Um, so I mean like some of those, but I it's it's been tough because I think that people are starting to just like bid up pretty aggressively what are the things that they like see as you know revenue tokens when they're just like these actually aren't reasonable valuations when you value them on like actual fundamentals. Like if a tried person looked at this, the valuation wouldn't make sense. Yeah. I feel like a lot of times people forget that valuations are forwardlooking. So if you like like you would you would have missed you would have missed like the soul trade for instance if you would have like looked at like current revenue. Exactly. Like Yeah. I like I I literally replied to someone uh who tweeted that recently who I think they were trying to make the point of like

this is a knock against like the revenue meta like whatever kind of thing of like oh if you if you were looking at uh if you know if you just worried about like projects that going to make money you would have missed soul. And it's like, no, what you had to do is be forwardlooking because it's like always what matters. It's like it's not what they are doing today. It's like, what do I think they're going to do tomorrow? Um, like we bought Soul in what was it like mid 2023 or whatever. Um, when it was making like no money at the time, I had an expectation that like the chain's going to work and they're like it's actually going to make a bunch of money. Um, and that goes along with um performing much better. So you you do have to be forwardlooking and yeah

that's what way too many people are just getting wrong today is it's like crypto people just all like all of a sudden just discovered that like making money is a thing. Uh and then so now like everyone just hyperfixated on like how much money is everyone making today and that's all that matters. Um and they're just like forgetting about this just like not how investing works particularly in super volatile markets where like you have super low uh quality of earnings for a lot of these so much of it is incentivized. You just look at the topline numbers on these, like you're going to draw the wrong conclusion like nine times out of 10 in crypto. Um, it's not simple. Yeah, we overcorrect a lot. Yep. Yeah, I think so. This episode is brought to you by Marinade. Marinade is focused on developing staking technology that

strengthens the Salana network and connects soulholders with the best staking rates available. With solutions for both DeFi and Trady, including liquid and native staking, as well as direct enterprise integrations, Marinade's high performance staking delegation platform brings billions in liquidity and security to the sole market. To learn more, follow the link in today's show notes, and thanks again to Marinade for sponsoring today's episode. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. I wanted to ask about, you mentioned Stripe, Facebook, Meta Meta coming in. Um, where do you see the value go from there? Like let's say I'm Robin Hood. Um, I'm coming into crypto.

What I My idea is that apps don't benefit. It's mostly the chains that do, but I'm curious how you think for as far as who benefits from them coming on the Well, how would the chains benefit at least for those examples? I mean, for like for Coinbase coming on, I mean, they just have their own chain. Um and Robin Hood I mean there's a pretty good chance that they will just do the same thing. Uh so in those cases def I mean definitely like there is no other chain. Um my guess is the applications benefit more but I don't know that that's really a fundamental thing versus I just think applications going forward will benefit more from more activity just pretty

structurally. Um because I mean like one of the simple examples would be um I mean they have their own chain so it messes it up but like Coinbase announcing like that they were going to put uh dexes into their uh their their main exchange like wallet uh interface that users have not into like Coinbase wallet like into the main Coinbase exchange where you know I can go buy like virtuals or whatever on uh their exchanges. Um just using dexes in the background. My gut is like most of that is just going to be like super useful for the applications that like actually get sticky in there. Um, but that that assumes that these uh uh like centralized front ends won't also just like make those applications which is increasingly looking like that's probably not going to happen. Like we've

seen I forget which one one of the Asian exchanges I was buy or OKX or one of them like aren't they making like a Dexon like I would imagine plenty of them that particularly the more cryptonative sophisticated ones like they're just going to make their own app um and like direct people there and then they can monetize that too. Yeah. I um I wonder because they see that apps make more like previously you made a lot more money doing infrastructure stuff but now apps are actually making some money. So that's why I'm wondering if like like if I'm Robin Hood, I would just I wouldn't want to build out my own infrastructure and I would just build out apps on pick whatever and then that's why I think yeah like if you look at it from the perspective of centralized exchanges

like be like look at Binance they launched their like own L1 like 2017 look at Coinbase they launched like an L2 like like one level above and now by bits launching like an application they're not even like bothering like with the infrastructure layer. So, I think like that's like one of the trends we're seeing where you're seeing like it's actually possible to be very profitable on a chain. You don't need to worry about the infrastructure anymore. But yeah, like things like Robin Hood have a like pretty high incentives on like owning like the whole stack, I feel. Yeah. So, I mean some areas where it'll be different too is like for borrow lend. I mean the trend that we're definitely seeing is more towards these kind of like modular lending platforms

where if you're uh Coinbase or JP Morgan or whoever and you you're deploying like a morpho or or oiler vault um in that case like you do still have a use for the application um itself it's but in that case it's much more of these applications that understand that that's where these institutions are going um and cater towards being more of an application platform style um as opposed to like the like obviously like the a model where it's like just the application. It's the ones that let the the centralized exchanges take, you know, the centralized institutions in general take even more control and like they just make their own fault. Um, and you you get you can get some monetization on there. Um, but but that's one of the areas that is unclear to me is okay, this seems to be the

direction that a lot of these module platforms are going. You know, let Coinbase deploy a vault on you. You know, whoever deploy a vault on you, but like who's actually going to monetize that at the end of the day? Is it is it going to be Morphos or is it going to be Coinbase? My my bet is that that you know that vault at the end of the day is going to be much more money for Coinbase than it's gonna be for Morpho who is like paying for Coinbase to go there and then Coinbase is going to own the users and probably monetize it a lot better. That's the tough part. Morpho charges no fees today. So exactly and like and yeah and it's the same for Oiler. I like I don't think that they actually generate much today and like both are like very

good designs and like this is the direction I think lending is going. It's just not super clear to me that there's going to be a lot of monetization there in the long run. Um if like all the flow is coming from you know these people who really have a hold on these vaults like you know if Morpho is super you know dependent on like yeah Coinbase is here bringing a bunch of business morpho probably can't like jack up the fees pretty structurally on them right now uh because like they'll dip like Coinbase actually owns the users there um and brings the flow. I think a good a good point also to consider with like transitioning from chains to apps is that you know back in 2017 or you know maybe if we think more of like 2020 or 2021 you know it it made more sense that

you know Binance B&B had their own chain because asking your users to go pay $100 for a swap and then also trying to monetize them on top of that like it feels almost impossible but to go and build your own chain you know lower the costs either by just having your own separate state or whatever you want to do beef up a machine make it a little more centralized Um that made sense I think for Coinbase as well, right? They launched in 2023 I want to say with Bass. So um same kind of thing but now with like Salana for example being more ubiquitous and more chains kind of pushing in this direction of it should be relatively low cost high throughput for the average user. Uh it seems like it's just it's far more feasible for an exchange to plop something down. On top

of that it's it's relatively low cost. they could they could subsidize it that you know the transaction cost themselves uh and then monetize their users with that application layer on top whereas that might not have been possible in the past. It was just too it would have been far too burdensome. Yeah. Yeah. I I definitely think the trend is going to be in that direction of if you if you can do a thing without deploying a new chain as one of these kind of like web two adjacent type of people coming in they're going to do it without deploying a new chain. And there's plenty of things where they will still want it today for whatever reason of control. Um, but if you don't need that, like you, they just don't do it anymore.

Which is why like BIP is doing what they're doing. They're like, why would we launch a new chain and try to get people to move over to this thing? Like we're just going to monetize them on the app anyway. We don't need to deal with the rest of this infrastructure. Like it just works, right? Um I my gut is that's where more of the trend is going to go towards the top. John, would you say Bass is or has been successful? Yes. Okay. very um I mean it like for for themselves. Um I I mean like people people just like always I feel like have different you know uh like what their goals are for there like how how helpful has it been to Ethereum is like the other thing that obviously people like talked about all the time. Um but like I I don't know that it's helped Ethereum a

bunch but like I I think that Bass has been very successful for Coinbase as a project. I mean what are they generating like 100 mil a year or something like that in profits. Um, it's definitely been worth it for them as at minimum a like very cryptonnative team who's capable of building out your own chain. Um, and did it at at least a bit earlier stage where the infrastructure was generally worse and you have more areas to differentiate yourself on building a new chain. It's just that like as we go along and you get even more web two like companies um where like they just have less of the capability or care to go build a chain for themselves and you know the existing chains are often going to be better than like what they would build anyway. Like there's just like not a reason for them to go make the chain.

But for Coinbase, I I think that they made the right decision um for where they were in time to like own the platform um because they they have the capability and the opportunity to go win as a general purpose platform and like if you could also win that sure why not. Um yeah, I I mean I guess you said you were pretty bullish on the DeFi mullet kind of design and it seems like you know so far I don't think that they're still they're still growing that right. I think the Morpho partnership that's it's very early stages it seems. I think it's they they limit the amount of borrow that can be done with that. But uh it does seem like that is sort of a design that they can continue to expand and and the potential revenues from that seem fairly meaningful on top of what is

relatively low cost. Yeah. And even the like the DEX example is is the exact same bucket to me where they announced like a couple weeks ago that they're going to start having the Dexes in their main application. That's the exact same thing to me where Yeah. I mean, they're not going to have always the most liquid markets or the fastest to list things permissionlessly. So, it's very often going to make sense, I think, for centralized front ends to just be a front end on top of some decentralized exchange. Macron, we've talked about this for a long time, but like sexes who finally just give up on some markets and start putting like hyper liquid in the background. Like, that probably will happen. Um, because it will just be easier and faster for them to list new markets and get more liquidity and they may monetize that even more than the

exchange underneath. Um, like just like that will make sense at a certain point for some of them to do. Gotcha. I think we'll start to see the power. I I think that makes a lot of sense. Any other big takes there. I know you just mentioned Hyperlid and I don't want to get too excited. Go ahead. Um I actually was going to ask something um semi-related to Hyperlid, but first I'll um the exchange background thing. I don't think a lot of people realize that a lot of regional exchanges are Binance Binance order books. Um but more specifically I think last year it's like at least every time somebody from I we we know public markets but semi-lo private we don't really have as much insight obviously as you do. Um I feel like a lot of investments were in base and Salana. Are

you seeing other ecosystem like I'm curious if you're getting a lot of like hyperlquid apps or not or is that something that you guys aren't seeing yet? I'd say I mean we're definitely seeing some for hyperlquid like broad brushstrokes I would say most net new interesting things are going to salana and most of the hyperlquid stuff is pretty like mostly doing a thing that exists but like on hyperlquid um which is a lot of the same that we've seen for most new chains um because that's the easy thing to forks yeah it's like monadat's going to exist meg is going to exist hypervm is going to exist like it needs the basics. So, it makes sense that people there's just like a pretty

high payoff to going to be the thing if this chain works. So, that's what most of it's been. Um, for most things that are I would say net new interesting things, it's Salana um is still definitely where we're seeing most of that go right now because it's just the rational choice. If I have like a random, you know, prediction market, memecoin thing like those types of things that I was talking about, um, and you don't need your own chain, you just need a general purpose platform that works and has a bunch of users, the infrastructure is generally there, Solano is usually the place to do it. Um, base is, I would say, definitely very secondary in that. Like most of the stuff that I think they appeal for is the institutional stuff. Um, is they're clearly doing a good job of getting like JP Morgan um, on boarded. Um, and when

you see stuff like the Stripe stable coin accounts, um, stable coin financial accounts, I don't know what they were calling them that like is letting businesses have stable coin accounts, like the first two chains that they integrated, if I remember correctly, were solicially as a very institutional focus, but yeah, most of the early stage building an interesting new application we're seeing on Salana. I feel like Bass kind of shifted their narrative a bit. They were very focused on consumer stuff. Um, I think institutional fits them a little bit better. My gut is that's what will be successful for them. If we like looking a few years forward, I don't think that they're going to win the types of things that we're mostly seeing going to Salana. Now, I think their success is going to come from the JP Morgans, the Stripes, those big use cases, the big corporate partners that

just want a safe like, hey, Coinbase, like, yeah, we're going to do it with you guys. Um, I just want a partner to hold their hands. And I'm sure they're doing a good job with that. My Yeah, my g my guess is that's what will continue to be the case is like they're probably going to win more of that stuff going forward. I don't have any You don't have anything else? No. Okay, we brought up Hyper Liquid. Like I said, I didn't want He was going to get excited. I knew you mentioned Hyper Liquid, so he had one more. Well, uh, it was great to have you, John. Great to hear your thoughts. Uh, I think we can close it out there. I'm excited to enjoy the nice weather. It's not 100° today. Uh, a good last day of Permissionless. And, uh, it was great

to have all of you guys on for a local live oak, at least for us. Uh, thanks for coming on. Awesome. [Music]