The Dark Side of Token Launches | Arthur0x & Sean Lippel

Transcript

hey everyone if you have been listening to Empire you know that Santi and I are fed up with unaffordable fees and frustrating transaction speeds that make the onchain experience basically unusable so the arbitrum team reached out and they showed us the platform they showed us what you can do on arbitrum whatever you're doing you can experience frictionless transactions at lightning speed on arbitrum so head over to portal. arbitrum doio and check it out scary stat for you the odds of falling victim to online crimes are one in for AA provides digital security protection to keep your personal information passwords online activity and Technology safe from online threats for Empire listeners Aura is offering 14 days free

plus up to 55% off an Ora subscription when you visit Aura a.com blockworks terms and conditions apply see site for details you'll hear more about Aura later in the show this episode is brought to you by Kinto the safety first layer 2 that features user own kyc and Native account abstraction to solve the two biggest roadblocks to mainstream adoption One Security and two user experience their founder Ramone sent me the onboarding flow it's engine gen. Kinto doxyz I would highly recommend becoming a founding member of their launch program you'll hear more about Kinto later in the show are you tired of high gas fees I'm

excited to let you know about scale a zero gas fee modular blockchain that's become a perfect fit for gaming and AI apps because of their instant finality and lack of me explore the scale ecosystem today at scale dospace ecosystem and stay up to date with the gasless blockchain on X at scale Network that's at scale Network big thanks to scale for sponsoring Empire everyone welcome back to another Empire episode we have uh Arthur zerox on Twitter uh but also founder of Defiance we have Shawn lapel GP of fintech collective also poker extraordinaire uh so yeah Shan Arthur uh

welcome to the show guys glad to be here yeah likewise thanks for having me here again yeah of course um Arthur I want to pick on you for so beginning of this episode I want to talk about this idea of like low float High fdv Venture Market seems like it's getting pretty out of whack at least in the later stages we saw like monad movement be chain like these the speed at which I'm seeing like you go raise a series a and then you turn around and raise your series b or you do a strategic round and then you do the series it's getting very very very fast um and I'd love to hear Arthur you had this tweet it said the model is breaking Merlin chain last Venture round was 800 million fdv trading it 1.9 billion now

for safe last VC round 1.2 billion FTV trading at 2.8 billion FTV now a 2 to 3x before any investors or team unlock tell tell me one more time that valuation doesn't matter what do you mean when you said the model is breaking I think um there was a lot of expectation among the crypto VC that uh as long as they get into any good deals and before the token unlock they will usually see at least a 10x on the investment compared to the last round uh for most of the infrastructure or layer one layer two project they're able to raise at between 300 to 700 million valuation they usually start trading at three or five billion valuation and then

if the market does well they will trade up to like 10 or 15 billion valuation in fact that have happened um during Q4 to q1 right we see St Network um went up to 10 billion we also see celester launch at two plus billion valuation and went up all the way to 20 billion valuation so that certainly set the expectation very high uh yeah but I don't think this is sustainable um there is more and more new project launching a lot of there are definitely high quality project but the money that is coming in to invest in these So-Cal altcoins are not keeping up with the pace of the project launching so I don't think we are going to see so many of

them launching and sustaining at between 10 to 15 billion fully on a fully DED basis going forward at least even if them some of them happen you will be more like outliers rather than nor yeah can you maybe explain for listeners maybe we can actually zoom out from that question which is for those unfamiliar with this idea of like low float High fdv what does that really mean I think it really refers to where for a project that have a pretty high valuation on a fully diluted basis usually refer to more than 5 billion at launch where the circulating Supply are less than 15 or 20% of the total Supply

uh so there will be five to six times more uh Supply they be coming into the market over the next two to four years yeah I think generally these are referred to the some of the low FL High fdv obviously we have seen some of the uh even more extreme ex example in the past I think some of these projects associated svf in the past they float even less than 5% or less than 2% when they launch so Serum at one point have 100 billion fdv and the market cap was like less than five billion yeah so Sean I throw this next one over to you which is do you think um so Arthur's saying that this kind of like high fdv low float model is kind of like breaking um do you think that the window for launching a token uh and seeing that

like instant 2 to 3x is now closed yeah it's a it's a it's a really interesting question um I don't think that's empirically been proven to be correct yet I still think um I mean expecting a launch out the gate at maybe 10x is probably a bit too ambitious um I still think you know some of these new token launches are still coming at a minimum of two to 3x a lot of it as Arthur alluded to is the fact that just a percentage of the circulating Supply um is actually out at launch which creates a whole bunch of perverse incentives that you know Arthur unpacked a bit um you know ultimately like let's actually

think about the incentives that are driving um these type of outcomes so for VCS super helpful for them for you know to get into a deal within a year have the the token launch the ability to mark up their book um and then Market LPS that you know they've you know got a 3X investment or maybe a 10x investment the problem is we've seen and you know this has been talked about you know at length on on Twitter you look at Wild uh a bunch of their names you know since then it's effectively been down only um and I think the perverse incentives here is if you're you're looking to actually you know decentralize the token put it in the hands of more people really tough

for a regular retail investor to buy into that project knowing that 80% plus of the supply uh is the overhang essentially and VCS will effectively be dumping on you so I think you know something about this needs to be fixed um so I I you know until the launches come at something less than 3x where VCS are entering I think the dynamic will remain um but but I'm with Arthur I'm as uh concerned about this dynamic as ever and it's why you've heard you know prolific you know chance of bring traditional icos back uh where you could get retail in at the at the same the same price um so I mean you know it's

it's the it's the Market Dynamic we're we're living in today unfortunately so why is this why is this happening guys so and like the Paradigm we're talking about here is like okay you launch the token at a high FTV you've got like I don't know 10 to 20% of the token Supply circulating right out of the gate you have oftentimes no public sale and the the strategy right now is oftentimes big big airdrop in this cycle um and we can talk about the points meta in a little bit but yeah you saw um I don't know Arthur what's a or Sean what's a what's a good examp like Dimension Maybe was like eight billion FTV out of the gate 16% circulating no public sale um like over 100 I think it was like 100 million uh aird drop to folks um and I I don't

know what the price has done but I'm I'm I'm not sure what it's done but I would assume it's it's gone down why is this why is this happening like why is this the strategy what like what does this what does this accomplish for either the the VCS or what does this accomplished for the protocols like why is if it's such a bad model why is everyone doing it yeah I I think I think it's really a about the way that crypto does the anchoring which I think um that is you have a classic duration mismatch where you can't really just C liquid stuff immediately with private Market stuff I but I think that is something that a lot of projects have

done so that you look at okay let's say um some of the liquid stuff has been trading at 10 billion uh fully diluted basis but their circulating is way higher like seven or eight and you launch something like a competitor you think that you have they should have similar fdv uh but the circulating are way smaller um and I think the market just the um shouldn't work that way uh but unfortunately this is how comparison are being done because you have uh avalan EPs and S like a proper L1 are trading at 10 to 20 billion valuation and and it just lead to the anchoring of oh another very like high performance like good team like good project should

also trade similar to that valuation at launch with a way lower floow so I think that it doesn't really give that project uh enough chance to grow into that valuation which a lot of these older project have a chance to to get into and another thing is I think I think there's a lot of this like a private be uh bilateral agreement between the market makers and the project and probably with the exchange then we not previe to but in a lot of the Trad so like a listing of any token is very similar to IPO right from Market structure point of view but in traditional IPO the market makers are usually the investment Banks and the Investment Bank they usually to under write a certain amount of the um initial uh offering so they are taking some risk

with their balance sheet if they are pricing it too aggressively if it's down only they will be actually be forced to like buying back they actually getting dumb on if they are pricing the IPO incorrectly but uh in the crypto space I do not think the market maker have such a risk a lot of time they probably are kind of R either they do a pure servicing model where they're getting PA a retainer every month and they just provide liquidity or they get they get a token loan um to Market make but I don't think market makers suffer from financially from being pricing the anchoring the initial trading price too aggressively they don't take the downside but I Bank Arthur there are some incentives the way I understand it and I've never been a protocol pricing a token working with a market maker but the way I understand it is the market

makers do get incentives for being able to keep the token above a certain price can you can you explain that Dynamic yeah so this is uh this is something more wellknown which is like a token option so let's say a token launch that initial was like a $1 price they would give a the market maker like token option like a strike price of three or four dollar so if the token went above that the market maker are able to exercise the options um to buy certain token at $3 obviously it's like it's like a free call option to incentivize the market maker uh to contribute to the growth of the project but I don't think I've seen any kind of contract where the market maker actually being penalized if they are setting the price on the wrong because they they do play a pretty big

role in setting up the initial listing price and anchor price I think generally three parties play a role in this the projects the market maker and uh the exchanges and obiously the market demand but let's let's be honest like the first minute no retail is like setting the price for that it's obviously always Market maker yeah probably Sean have a different color to add on this no I think I think what you articulated is is pretty correct like I mean I want it not be as finger pointy as say it's all incentives and I think Arthur's right in saying sort of the the reference point when you launch like in building the imminence around the protocol attracting more Dev interest

retail interest like all that flywheel works much better with a with a higher token price like that that you know is indisputable um so you understand like incentives for both VCS to Mark Mark up their book at launch plus just attracting retail interest uh and and protocol devs to build on top of the project or or the layer one so you know it makes sense while while you're kind of setting the price Super High um you know you know you thinking through um sort of like the the second order effects they said about just you know retail effectively getting getting uh dumped on um I do think the market structure that that Arthur alluded to

also is is is part culprate I I think like regulatory as well I think you know most teams feel comfortable in the current regulatory apparatus especially in the US of doing an airdrop because there's not an actual exchange of monetary value for token and I think unless we see a you know a change in the that regime or a stance by the SEC where teams feel comfortable doing that public sale I continue to think like this Dynamic will will probably remain in place like we we've not entered like the mature Market structure with invest in Banks taking risk and underwriting market makers are very mercenary and projects want High token price to

attract interest so I think you combine all that in the Pod and we kind of where we are um yeah it's F that two really good points there one is um yeah I hadn't thought about the regulatory the regulatory reason so you used to go on like so it initially started with icos right um but icos obviously if you did an Ico today like SEC is knocking on your door tomorrow and then the other way was like I mean coin list like a lot of really good projects actually launched on coin list but I imagine maybe I don't know what's happened with coin list I think they're still around um I saw their CEO tweeting about hiring Crypt native folks or lack of it um but yeah like if you think of how if you

think about how a lot of the most like the best l1s launched it was like low FTV um like generally actually like a pretty fast unlock so you didn't have these uh Venture like token unlocks coming that people were worried about uh retail I remember like you could buy some of the best l1s at like 200 million FTV or 300 million FTV yeah Le less yeah and then um and then no air drop and you know pre pre- Unis swap I think there wasn't really like thing of an airdrop so what do you think the um what is the what is the better model here like if you were advising a protocol um what is the better is is an Ico the best model but just don't do it in the US like how

what what is the best model yeah so I I think it's a combination of both I think that the initial object uh reasons for doing an airdrop is actually very powerful you're rewarding the power users that uh were experimenting um like taking the risk of using the protocol before it become uh more like widely adopted but at this point it kind of become like a different game where it's industrial scale farming a highly anticipated protocol so it the point of being able to have a genuine air drop to early users has probably passed uh in many cases I think I think it still should it's still a very good

mechanism but um in many cases that um probably should not be the only way of Distributing token initially uh I think combining both is actually the best way um and I think that coinless is still a pretty good platform they are still uh conducting public sales um but obviously um The Exchange are also still doing it the binance launch pool and Launchpad um but obviously these are not enough to support the number of tokens they want to launch and and this is where we are ending up with right now Sean what's your best what's your best model I think we're still in the trial and error phase of this I think the

pendulum has definitely swung too far like think about all the um slack that you know we gave Sam about you know the salana launches with the same Dynamic and it feels like we've taken it and now repeating it at scale so I think decidedly we could say the pendulum swung too far we're currently in a paradigm um that isn't working for for really anyone um so I think I think it is probably right to think about a combination um that is both some sort of airdrop but I am actually a proponent of the points schemes and it's been pointed out like at least from the lever respect like you can you know certain type of

activity that is not beneficial to the protocol like in real time you could course correct for that right um and you know the type of activity you want to incentivize uh you could also incentivize it based on the point scheme so I think a point scheme but I don't think a a a one point in time air drop and that is it I think that leads to indust industrial air air farming um so you want to have an approach that kind of combines all these things maybe it's a coinless list and you know it's folks that have been involved in the community um have contributed to the protocol in some way that kind of like secures your seat in the coin list offering and maybe you do like five to 10 Perc that way you

do you know 5 to 10% upfront in an airdrop and you know Jason you also alluded to like what you're seeing is like these large unlocks that the market has pretty good visibility into that come over time and they're kind of like stair step functions and I think probably you know the deals that we've done that I probably feel most comfortable with are like you know almost like daily unest daily vesting over maybe like a four-year period of time it kind of Smooths out that curve uh in which you don't get this precipitous like you know drop in price and a huge you know unlock happening at specific point in time that can be gained in many respects which I think actually lead yeah to even you know bigger drops um so I think like aligning

both the team you know and investors which which usually you know are about you know 30% of the the total Supply having a more winnier uh Supply schedule plus uh an airdrop that's more you know points based uh that similarly like maybe doesn't unlock you know right away all up front I think some sort of combination of that you know like I said I think by trial and error I think we will arrive there um but unfortunately it's you know this mix of you know incentives and probably the regulatory side that that that kind of puts us in this current Paradigm yeah Sean the other thing you mentioned a few minutes ago was just that folks want to get the highest valuation possible and that'd be I don't know the what it feels like

what's happening right now is like whenever I see a Founder maybe raised like their series a at let's call it 10 billion or five billion or something like you got two things come to mind one is definity or ICP right and two is um some of the SAS multiples we saw in 2021 where they were where SAS companies were raising at 100x valuations which I don't know it feels really freaking good in the moment because you're like oh my God I just created this 10 billion dollar company but like it is a I don't know like nine in a half times out of 10 that's G to end horrendously so I'd be curious how you think about like maybe Arthur I could pick on you for this one like if a

Founder comes to you and it's like let's say they rais it 300 million valuation back in January they're like Arthur uh I've got a term sheet from Andre 5 billion um and it's like three months after they raised a 300 million what are you advising them to do there no I think from a Founder perspective they should definitely take it from from their perspective you know they can uh obviously there is always a a big risk of uh raising and the valuation you don't deserve I'm you know saying this as a from a perspective that the project probably are quite close to deserving that valuation they should definitely take it you give them more

cash to do this but it's really about um how they should manage to launch um like I don't think that they should raise uh at like five and then immediately start to launch at five as well I think at least the current market structure uh is not receptive to like the public and it's not happen in the stock market so the public market and the private Market pric things in a very different manner so if you decide to do that you are going to get a lot of issue in the in the public market so you the founder will need to pay attention to how do they balance the how the public market will price this versus how the private Market is pricing it right now because right now the Gap is Big all right guys maybe just continuing with the valuation conversation we uh we had Kyle from

multicoin on the podcast the other day and um he was we were talking about just like different ways to value a crypto asset and the way that they think about uh the the way that they think about this at multicoin is a lot of it is based around meev actually uh Kyle was on the podcast but tar had a great talk about how me is the only way or the best way to value a crypto Network which is kind of a controversial take I think um would be curious to get your guys's take on like just how you think about valuing a crypto asset like do you there's the DCF way there's like fundamentals with like fees and Emissions there's me there's like none of this matters and it's just what the narrative is there's like you could play it based on comps

you could play it based on like where we're at in the cycle there's like actually a lot of different ways that people think about valuation so would be would love both your takes on this yeah I'm happy happy to kick it off um I completely understand the logic um of thinking about me um and I I do think that squarely fits Yano into the capital asset way of valuing crypto assets I think it's correct if you play this out to its steady state and you believe that there's infinite block space and all block space is inherently created equal then probably at that State me is probably the only thing that matters I

think empirically what we see is that block space is not created equal like block space on bitcoin is valued differently than block space on ethereum is valued differently than block space on cardano um so I think it's tough to sort of make that outstation that you know me is the only thing that matters um I think even with things like salana like the blocks are now almost you know completely full with you know increased activity um so things like priority fees and base fees like do get you squarely into you know a capital asset way of valuing things that are more DCF that take into account things other than just me um but more importantly I think like

the overarching point I would make is that I think the vast majority of value creation when you think about layer ones and even layer twos don't really come from just the capital asset way of valuing of just looking at like discounted cash flows of me and you know fees both priority fees and and base fees I think it really comes from the commodity way of looking at the asset um I think there'll be three to five you know big winners in the layer one space that get valued as money um and I think the Tam of just like M2 and money and even if you know you think about gold in that respect as well so M1 M2 like that Tam is much more sizable and looking at

it as sort of a store value and a commodity I think is probably the more correct way EV valuing this as long as like blockchains are not homogeneous and I think we're a long way from you know block space being homogenous so I think me you know is an input into the valuation model I just don't think it's the end all be all in its current state or or for a while for that matter and I think just one one point to add like just look at like in aggregate what the totality of me is across all blockchains like we're not even talking the tens of billions yet you know like the total value of layer ones is you know you know is many trillions right so like you can't apply a multiple to to me

today and kind of arrive at any sort of sensible valuation so that kind of indicates you there's at least one or two other factors at play uh that are commanding a a different valuation multiple yeah I think that's extremely good point and actually after spending close to seven years in crypto and in crypto investing I've come to realize that actually valuing crypto is actually an alpha in itself uh because there is no universally agree valuation framework so who whichever investor they able to best figure out the appropriate valuation

framework for different crypto assets will be able to generate excessive returns um because I think that is actually what happening to the market for the past six seven years is every different kind of cryptos are being valued in the different manners like Bitcoin obviously like you know a lot of the E Max always say you know ethereum generate more fees uh to the Token holder ultra sound money um you know like we have like negative inflation all those things all better than Bitcoin every maners so why is Bitcoin worth more four times more than um ethereum right now is so because the valuation framework people use to Value ether and Bitcoin are different people see Bitcoin

as largely a monetary asset people still do not bu ether that way yet can can if get there eventually very likely yes but it's not there yet so people are not applying the same valuation framework people used to Value Bitcoin to Ether yet and it's the same thing with D5 with layer one layer two uh and all s of other tokens so I think that we actually have gotten big enough as a space that different sector of crypto are being value in a in a different Manner and obviously unfortunately D5 is the easiest to Value because usually the protocol produce some sort of Revenue and cash flow to the protocol and is the easiest to apply kind of like a

traditional valuation multiple to def5 protocol and I think that actually unfortunately set a ceiling on uh on the valuation of most def5 protocol it's just because it's so it's it's the easiest to Value this also means that is the hardest to put like a extremely aggressive assumption on it um so I think that like for mean coin uh I I do subscribe the theory that is uh is really should be valued as so called attention theory of value like you you re value by attention ition it's really not about the cash flow or whatever um for layer one uh it's a combination of the uh the growth of the network in the future um and like how much user is the the user based you can use a combination of mapc Law plus the monetary premium the layer one token is gradually accur

for Bitcoin is probably 95% monetary premium um and then you have other governance token that like probably like the the value the cost of attack so I think different category of token you you need to use a different valuation framework at least for now all right I'm going to I'm going to play a little game here I'm going to make you guys do a I want to see how I'm gonna pull up two charts of one is ethery and one is Lio are either you guys investors neither we are invested Lido same here okay not not ethery but but Lio yeah no ether all right I mentioned them in the pre-roll now I'm going to bring them up again it's arbitrum Santi and I are really fed up with these high fees and

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Network that's at scale Network big thanks again to scale for sponsoring Empire okay so I'm going to pull up two charts I'd be curious for the maybe for the retail investor listening or or for the Venture investor whoever it is how would you think about so here's uh how would you think about like valuing these and comparing these so this is ethery FTV is 3.8 billion market cap is 4 40 million so this is maybe kind of what we were talking about earlier like very high fdv um but like a lower float to the market cap is 440 million um Lio on the other hand has a low a smaller fdv so their FTV is 1.9 billion and their market cap

is 1.7 billion so much tighter like market cap to FTV relative to Ether fi um Sean and oh I don't know who to pick on for this because you're both in Li but um yeah how like what do you guys see when you see these charts and these numbers and like think but then you have also have to consider the narrative and where we're on the cycle and the reaking narrative like how do you guys think about this yes I think I think there's multiple Parts this question that involve uh that that really you know Force us to kind of like look at to the sum of the parts and really break down like like first starting with like the business model before we even get into like a evaluation framework right I think you like I kind of push the team

and here internally like let's just like think about this as you would any other traditional SAS business before and like what does Lio do before we even get into like how to think about value it right so if I think about Lio like you know there's 30 billion total you know eth you know staked via Lio obviously there's 28 operators plus behind that um so think about it as like a $30 billion asset manager right right um and like to me as like a former fintech investor I look at like betterment wealth front as kind of like the parallels or cories to what Lio does um and think about like you know of that 30 billion right look at sort of like the eth staking yield

which like if you include me Priority fees call it you know somewhere between three and 5% so you know when I'm walking through effectively is you know the DCF calculation for for Lio um so you you at that you say about you know 5% times the you know 30 billion in total assets under management uh you arrive at you know maybe some somewhere like $150 million of total earnings that goes to Lio as we know because they take a 10% Fe right of that 10% fee only about 5% goes to actual the actual Dow right and in that like that goes to pay expenses effectively if there's more retain earnings that could go to

something like you know distributions or dividends or effectively what maker does of buying back the token um so here you have like a pretty simple model as it exists today of what Lio does right you know it's the leading liquid staking um protocol you know of total liquid staking assets it's about got about a 70% market share it's something that we look to and you know are excited about because we think effectively what's happening within defi is what's emerging is effectively the magnant seven or you know monopolies with you know uh real Moes around their business around you know things like liquidity Etc and then so that's like the very straightforward way I just gave

you about about valuing whiteo I think that's one piece to the puzzle but as we know like you know market prices like that's what's priced into the market today um but like what effectively moves markets is you know inflection points or changes versus expectations and I think one of the things I I think about with Lio there's you know a lot of things happening under the surface that gets me excited about the next Catalyst for Lio to me I think you know you pull up the ethery chart um and you know you see something at five billion and how's that trading that way like we don't know what abss are live today we know there's some sort of Base staking yield that that

ether file will have and maybe on top of it there'll be some avss live and stakers will receive reive some percentage of of that security budget we're you're basically betting on the future right and the current price of this uh anticipates that like the shared security budget and the amount of rewards being generated by those uh abss will be large now let's go back to Lio I think it's pretty obvious to me that at some point in the future Lio well I don't think they will create a direct competitor to igen Li because I do think the projects are pretty close but I think it's pretty simple for them to turn on an LRT or three different types of lrts right so like you're taking on

much more risks maybe your medium-term risk your low risk depending on how much slashing risk you're willing to take or like what type of AVS is you feel comfortable getting involved with so to me like what excites me about Lio is they have a really dominant Market position at 70% and you know thinking about the inflection point like highly likely in the next year or two like they don't need to disrupt themselves they have a market dominant position but they will turn on an LRT in some form and you'll get this effective re reating that to me can move you know lto two to 3x higher from where we currently trade today so what you're seeing is a bit of like you know the fundamental analysis and like value like a you know a traditional asset uh but also like the expectations of the future

and what kind of moves prices on a go forward basis and the last thing I would say is just like also thinking about you know like Capital flows and you you know to me it's like fundamentals only matter to the extent in which they show up in capital flows right it's like you could talk about fundamentals all you want but until you know the protocol is effectively buying back its own token and it shows up in capital flows or other investors are you know also circling around your valuation methodology and start buying the token based on it it just doesn't matter um so you know I think that's one you've got to be like super super thoughtful on when when when thinking about entering

these positions Arthur before picking on you for the same question um Sean what is the Magnificent 7 that you mentioned yeah so thinking about just like when when I kind of zoom out and think about like businesses you know especially onchain businesses like I'm bias I run a def5 fund to me I think about you know businesses that have you know durability and defensibility around their business business model whether that's things like liquidity Moes like you know stake deth it's like the predominant pair uh it's kind of been accepted almost as much as eth itself um so we look at like companies that kind of mimic what you've seen in the magnific Magnificent 7 in the traditional Equity Market are companies

that like are high like have very high margins are very profitable and have big competitive modes around their business so I know it's been talked about before on on Empire uh and what's referenced as like smell I think we have a different variation of what we' put in that of like businesses onchain that have big competitive modes but you know I think about things like maker things like uni uh things like dydx things like Lio um which to me represent the web three versions of The Magnificent 7 uh in sort of the web two World smell being synthetics maker I think this was actually Vance maybe who coin this I think it was synthetics maker ethereum live and Link I want to

say yeah yes uh yeah it's a good it's a good narrative for the yeah um yeah I would just add like we we I kind of would say like we need you know that version of things to kind of work out for have to like arise under tray for fund managers to kind of exist because if not it's like why not just invest in Bitcoin like you've got a for factor in the ETF like effectively you know eventually the ethereum ETF will come as well like if there's not outperformance and you know Moes around some of these business models then it's it's super tough then we're just playing the like we just need to be early game um and just get an early launch at high

valuation get out I mean I've brought this up on uh Empire numerous times so listeners are gonna be sick of hearing me talk about this but like this is what we think about it so we have this like we have a blockworks research platform right so and you can see like these uh metrics that you can't find anywhere else in the industry like we have the full p&l of maker with like where all the revenue comes from like entire income statement and we're like oh my God this is like incredible information you can look at like di metrics you can look at like all the real you can look at like all the rwa information you can look at spark protocol like we've got all this amazing information the question is does it matter does it move so like maker today is doing something

like 40% of the feed in defi or going to makeer does that move the token Arthur what do you think about that yeah so um I I think that there's one unfortunate um big picture uh situation is the last 10 years the market as whole generally like growth a lot more than value and people see D5 especially the D5 so-call D5 Blue Chips as more of a value play than growth play I mean there are exception there are some D5 protocol that show a lot of growth but those are the

exception so I think for Lio um is most people see as a value play and the problem of value play is people do not assign a very high multiple to it while ether five because they are still at a relatively low um in terms of the the market share and everything else they they are perceived to have a higher growth potential so people are willing to assign a higher multiple to whatever Revenue um and the tvl they are having right now and obviously again we mentioned that the float is a lot lower so it's a lot easier for Market to support like a four to five billion valuation for ether five versus like a four to five billion valuation for Li where more than 90% of Lio Supply are

already circulating and another things that I think is also like I think um Matt LaVine uh in his newsletter have also mentioned that we kind of enter into a situation where fundamentals set the floor for evaluation but that actually doesn't set a ceiling so that create a situation where for certain asset that the market is super excited about the people are willing the the ceiling will go up um yeah so you we can argue that The Ether five will have a lower flaw in terms of valuation than Li but people are not looking at the floor right now people are looking at the ceiling of ether F so in the short term until more and more

supply of ether f is being released to the market you might see this so-call mispricing sustain for a pretty long period yeah um and also I I think that in general this Market doesn't have that much liquidity um to support um more than 50 assets to trade at more than 10 bli ion uh circulating market cap I think this at least this is an empirical observation the market simply doesn't have the liquidity to support that so I think that one month ago somebody also pointed out observation that the peak of the valuation ceiling even including the new launch can go recently uh it's like 25 billion excluding World coin because of the

floow is even like less than 5% like two 3% kind Flo um yeah I think that at least empirically uh we the market right now beside Bitcoin ethereum Solana and probably some of the Legacy dinosaur coin xrp we do not have the liquidity to support any new coin to go above 10 billion in circulating Market C and above 25 billion in fully D valuation you agree with that Sean I think I I think that's probably right um I am worried about the amount of unlocks and inherent like token emissions coming into the market over the next year to two years because of this Dynamic that we're talking about

where only 20% of Supply is being released and I do think just given like if you look at the total aggregate amount of institutional capital in crypto um you know I I would say it's 10% or less um of like proper institutionally organized capital and you could argue like retail and crypto is generally smarter than retail and other markets which I think is correct uh but it's tends to be more mercenary not long long-term capital um so I think it's really tough in that backdrop to support valuations north of what Arthur alluded to so I I I would say like Loosely that's probably correct and it's a you know a function of one just how

early we are in this spacee and you know people are still filling out you know figuring out what valuation methodologies to be using and it you know as we talked about varies depending on the asset we're talking about like whether it's a layer one a defi protocol or you know an application um so there's just confusion around that but just the you know more retail capital and then just like fragmentation of just interest um and it's really tough like when you're seeing the proliferation of more and more projects launching like how many lrts do we have like I've probably seen a ve very similar pitch you know uh uh between Kel puffer ethery uh swell like we have 10 plus lrts that are launching to the market can the market

support like 10 plus5 billion ether F that feels like very ambitious to me um so I I I think it's tough um so I am worried about not just like the the launch Dynamic but like kind of the emissions that are coming to the market over the next one to two years because it just doesn't feel like there's enough New Capital coming in to support it yeah and and also I want to add that uh I actually pointed out this issue two years ago and unfortunately have hasn't changed uh is the crypto Capital Market have actually uh front run the the phase of De Market development what I refer to this in a

traditional Financial Market um we the private the emergence of a private Capital came pretty late actually it was the last bunch of player you actually started with um obviously every Market started a heavily retail dominated Market as is US Stock markets 70 years ago 50 years ago then what happened you have the professional investor that come in the place who are they they are the mutual funds um they were very active in the public market they were doing the stock picking if you look at the legendary investor 30 years ago 40 years ago they are all that the public market Legends like Warren Buffett uh Franklin uh there's a few others as well they're all stock Pickers and the V the success of VC and private Equity came last and obviously you also have hedge fund that

were like um came after the the mutual fund become successful but in crypto we actually completely skip over the formation of mutual funds so there was a very uh underallocation into public market uh investor pure Public Market investor except for retails um you you obviously have a couple of hedge fund here and there but hedge fund are not long-term holders they usually trade in and out the average holding periods are like weeks to months nobody's holding a position on like a months to year I would say yes there is we are seeing more of more of them coming out but if you talk to any Institutional Investor they all overwhelmingly invest into Venture fund than to like um a public fund like more like what us and Sean are doing like

more medium-term kind of like a public market Focus fund it is uh I would say that spit of allocation of capital is probably 8020 80% are going into VC and 20% are going into public market Focus fund like us and even I mean granted we know that some of the big VC they all they also buy from the private Market but they do not look at it from like a public market guy lers they they do as on a deal by deal basis okay I like X6 Z they bought a tons of Li in 2022 but they they don't really like you know actively manage a position they they just done the deal put it I'll look at it three years later five years later whether I should sell or not so you you don't have it doesn't help to encourage this kind of efficient price Discovery

in the public market you have retails versus the hedge funds some smart Monies and the VCS selling on the market to cash in their 10 to 50x returns that's it and the founders yeah yeah um so I do think we need more and more of these Public Market focused professional investor so that market can become more efficient I think it is happening but I think the ratio is still not at the level where we can catch up yeah compared to compared to private Capital yeah I mean I just think it's a sign of a growing industry like there are a lot I'm seeing a lot of uh Market neutral or delta neutral hedge funds launching in the industry where their traditional Capital markets guys

coming in just saying this isn't inefficient Market I don't give a damn about crypto assets like I'm just goingon to try to launch like a market neutral fund and at first I was like man that is like about as left curve as you can get like that is just come on guys but and it and I still actually kind of believe that but also um it's a really good thing for the industry um to have folks like that coming in trying to help the help the market find like more of a equilibrium price so now would I be in crypto trying to make like 15% a year probably not but uh yeah um what else what I don't know can you guys share with what else you're invested in right now is that like a thing that you can

talk about publicly or no I'll take the deafening silences a no no no we can't talk about it yeah Sean you probably yeah you can go for this we we we can talk about it with the caveat obviously that you always put in every show Yano like nothing nothing here is is financial advice um uh because we are a registered SEC investment adviser here here in the US so obviously my compliance officer uh heavy heavy uh disclaimers on seing so well on that podcast until you just had to go pump makers bags just kidding none of this is financial advice you know the deal yeah all right how how how do you know about the the position I was about

to talk about uh so what's what's most interesting because like we we kind of straddle Both Worlds like I do do some early stage pre-t toen launches um which I would say today are mostly focused on burgeoning defi ecosystems outside of ethereum because when I think about ethereum in defi the core building blocks of stable coins baring lending per um decentralized exchange like to me like there are aifi winners within those spaces and like yes we're invested in many of them like like Unis Swap and Lio uh and I could give you our our maker thesis um I would say on the pre- token launch side um I am a believer despite

everything we talked about of you know there will be I I think it's indisputable we're in a a multi-chain future and you know defi is sort of the life blood um or lubricant you know behind all these other ecosystems and I think about just like more types of assets coming on chain on other layer ones so you know I am excited actually about the Bitcoin Layer Two space um I do think you know that will Usher in new defi protocols like things like Bitcoin potentially having a stable coin on its rails uh things like native yield on bitcoin the ability to Bor and lend you know in the absence and collapse of Genesis like there's still a big gap to

be filled that was a hundred billion doll Plus Market and I I think we could do it better using the power of smart contracts and and what ethereum has done and we're way further in the you know scaling roadmap um and being able to import um some of the learnings around DK proofs and optimistic rollups into the Bitcoin ecosystem is very real and I think you know there is actually tremendous demand you're seeing with ordinals and runes um to have activity on on bitcoin um so I think about a robust defi ecosystem developing on bitcoin as some of the earlier stage stuff I'm I'm interested in uh yeah know I've talked to you at length also about the filecoin ecosystem um when I think about like probably one of the leading deepin uh

architectures um supply side for storage has been built out with the Advent of the FM the ability to actually have Smart contracts on top of filecoin um we're investors in something called glyph with with multicoin um and I'm very excited about the ability to sort of connect storage providers uh with idle filecoin holders who are looking for yield on their assets so very efficient Capital markets in filecoin so we think about like basically solving first order problems of these new ecosystems um similarly on Avalanche right um I I personally the belief that Avalanche is a more actionable uh you know uh version of what Cosmos is trying

to implement uh so we're investors in something called goo pool which launch which is another liquid staking primitive which just makes it much easier to spin up your own Sovereign um uh subnet uh without the same level of uh Capital cost up front um and like I said liquid staking is is proven like it's just you know a much more efficient use of your Capital it allows you to then do more with it after um so kind of replicating that Playbook of liquid staking across a bunch of different ecosystems um has been something that's very interesting to us so I would say on the like I said on the you know earlier stage front very interested in the buron ecosystem of of Define other ecosystems um I am actually like I know

this is something that's been talked about at length but also we haven't seen demonstrable evidence of it working but I don't think it means it won't work I do think there'll be permissioned versions whether that's Layer Two permission versions or permission Protocols of the same things we see work in permissionless open source defi um you know yes a had a r run at it compan had a run at it but I'm actually The View was probably pretty early like a lot of the tooling was not yet in place um and I do think you know um even like it maybe like heresy to say this but things like roll backs on on a layer or two in a more institutional version of a D5 protocol like actually might be the right way of doing things so a

permission kyc uh version of of of a lay or two and why now to me it's like we didn't have the building block of stable coins here before like the proliferation of stable coins how widely they're used in 12 trillion in settlement and we just have way more yield bearing Stables we have more real old assets coming on chain with with things like Biddle and what centrifuge is doing with some of the private credit so there's just more assets to trade today that potentially could be traded on a on a lay or two and I do think um at least if there's kyc AML in place for the vast majority of Institutions they will actually be able to you know play in that sandbox or begin to explore today without you know some version of kyc ml super tough for

definitely no bank is going to get compliance approval to to to participate in Defi and only those who are like playing on the forward end of the risk curve uh in more you know some of the more Chicago trading shops are willing to experiment with defi so I do think that that is a narrative that will come back uh despite people having to run at it to to varying degrees of success yeah Arthur I'm going to adjust the question a little bit for you so when I think of Defan is like actually when I think about the wealth of a lot of the Venture firms in the industry a lot of them were made on the back of like two to three bets like there's I don't you know there's one or two Venture firms that made most of their money on near there's a few that made a lot of their money on

synthetics and chain link there's a few and when I think of defiance it's probably a just correct me if I'm wrong a synthetics and axi would have to be my like the overwhelming portion of defiance's wealth um and AUM at one point in time came from those three bets so a I mean correct me if I'm wrong but B uh when you like what what maybe two to three Public Market Investments do you think could have that same impact for you in this cycle yeah that that's that's a tough question uh we we we we've been we we've been thinking very hard as well and I think you're you're larly correct I think that that tree investment was uh

one of our uh best uh investment uh in the previous cycle in the previous fun and I think this cycle is harder and I think that's honest answer um I think that the market have got a lot more efficient during the 2021 cycle we attracted a lot of the smart and bright people in other space uh there is a lot more every different sector there are very smart people paying very close attention to it right now so I think it it is a lot harder to find like a 100 X like a 50x kind of public liquid play right now so we actually a lot of our time right now we are actually spent on

help thinking that something that we think that is actually undervalue by a factor of five to 10 times I think that is a lot more achievable and I think this is really where our liquid Venture thesis come in that we we are actually there the thing a lot of VC they they probably wouldn't really care if they can only get like a 5 to 10 L return from the point of investment unless you like a big fund because like it's not enough to carry the the loser you have on other investment and go to zero or just like break even basis but as a liquid fund because we are able to turn over the investment within like less than two years or even less than a year we are happy with like a three to five times or even like between a five to 10 times

return is actually good enough for us to underwrite the risk um so we are a lot more focused on these return sector where we get like a 5 to 10x within a one to two year time frame those opportunity I think is a lot more available in the market right now and in that sense right now I think there a the two sector that we think that will continue to surprise to the upside uh one is uh web Tre gaming uh the second one is uh dpin decentralized physical infrastructure Network gaming because is oh is still controversial I I think that there was a lot of information asymmetry

a lot of misunderstanding but it is also has been proven to be the sector that can generate one of the most cash flow and also are able to bring some of the the best onboarding tools for Masters into crypto um but I think the game that take off probably will not be what uh we have imagined in the past I'm I'm leaning more and more toward that you cannot be skill morphic in um in in your product design principle in crypto like you can't just because I think that that historically have worked very well in in in the web two world uh like okay whatever works in the West in

Silicon Valley you copy paste it put it into India put it into China it all works right they all make a tons of money but in in crypto a lot of very bright uh people have have attempted that and somehow most of them actually it doesn't work I mean just to give an example no finger pointings or whatever but I think that we have seen actually at least five extremely high-profile successful web through entrepreneur trying to um do a web tree startup crypto startup uh in a schill morphic way and it doesn't work and you know it end up in a disappointment like for example one of the pretty um high-profile Solana nft Marketplace I shall not name it I don't think anyone is talking about them anymore and it was

the co-founder was one very famous uh we entrepreneur that exited a billion dollar startup um and obviously that's not the only example you also have moonbird I don't want to go into the details as well entral right there's so many of them so I am getting more and more bullish on web tree gaming that is a nonk moric in terms of the design like something like a pumb fun fantasy top this kind of thing that's really apply to um the small group of of of extremely enthusiastic players and user and expand from there I I think that is something that will create more success in the medium term um but most of these are still in the private Market side we we are not seeing

enough of that in the public market but um on the public market side uh we we see some games that have I think have proper traction are actually playing out exactly like uh what we have described in our web Tre gaming thesis described two years ago I think pixel is actually doing very well I'm not sure why Market is not paying enough attention to them they have consistent 700 to 800,000 daily active users um there's some incentive component but it's not like actually cycle you can't really make a living out of just playing the game uh and I've known a lot of the non- Crypton native people playing the game just for the sake of playing the game as well um yeah so um these are the seor we continue to be excited on and I think this something from a non- US perspective that there's a huge push

factor in Asia right now to uh Asian gaming entrepreneur to build on crypto because uh for example China site uh is outra competitive they are they're restricting from publishing a lot of the game for various reason they cannot get the license or like the content censorship Etc so to them um coming into web tree where such restriction doesn't exist might actually be a a better better um area for them to focus on um and actually this is like a a thesis of Fus Ventures a very good friend of M uh Jason from Fus that is most of his thesis bright Asian entrepreneur are going to build something three because they can't do it in VAP to space um I think this something that a US Centric

Guy usually would't observe because you don't really have that issue there um another side I think dpin is um I think when you come down to First principle um this is actually what crypto economic incentive are best fitter that to bootstrap a network that would otherwise not exist because of the existing uh incentive structure or Market structure like like what helim does I think is like been well popularize you use like a decentralized peer-to-peer Network to boost infrastructure that would otherwise be too expensive for many centralized single party to STP but you use token where everyone can participate in the upside so most of the dpin uh are using the same principle to bootstrap

certain Network that would otherwise not exist just because the incentive structure um doesn't make sense um but obviously we are going to see a lot of failure there but I think some of the winner there are going to bring like aund billion doll outcome y Arthur I have a game pitch for you here's the game I want to see built which is um I I I like like old games like like chess and like I'm not a big player of like Call of Duty or anything like that I like like you know Tetris and chess and games like that um what I want to do is be what I want to do is be able to wait to play a friend online like I want to be like Sean like I'm challenging you to chess and be able to bet like I bet one of my pudgy Penguins he bets one of

his pudgy penguins and then you let everyone on crypto Twitter watch that game and the crypto Twitter crowd can bet on us they're like they can bet on like me winning the chess game they can bet bet on Sean winning the chess game whoever wins that game wins the nft um that's my that's my pitch for you that I I honestly if anyone's listening and wants to go build that I would probably fund that I really like that idea so it fits in it not skoric Arthur I think that's quite quite novel for for what yeah I know I think that actually um instead of betting just create a meme coin because me why why mem coin take off is you have limited downside you lose all your money but you have unlimited upsides they actually better than count like a like a stct count

betting game when your pay off is actually limited so meme coin take off because there no limit to the offside yeah all right guys I got to jump this has been awesome this is I feel like there's a lot that we didn't I wanted to talk about didn't get to talk about so we'll have to have you guys back on for round two um but this has been awesome Arthur Sean appreciate the time nice everyone Jason here thank you so much for watching today's episode wanted to take a quick second to thank today's title sponsor arbitrum we know you are tired of onchain experiences that have unaffordable fees and frustrating transaction speeds and that's why we partnered with arbitrum you can experience frictionless trades lightning speed and LaGree transactions all for

pennies per transaction explore arbitrum expanding ecosystem at portal. arbitrum doio that's portal. arbitrum doio see you for the next episode [Music]