Empire Debates: Is Using Binance Negligence?

Transcript

anybody listening here if you have your money on binance and you don't have a hardware wallet you don't belong in the space get out shut it down sell it get it right you got you cannot be like you can be using Finance there's a lot of cool tools there and it's an interesting product but if you're storing your funds Capital your LPS capital on Finance in this moment considering the range of rumors uh circulating I would question the competency of that hey everyone welcome back to the podcast it's Tommy and I'm here with Ryan Zur and Santiago Santos we're back with another episode we're going to start off with the recent conferences we hit uh we

did permission lists we did token 2049 uh Senti why don't we start with you on uh conference you had I yeah I mean I went to permissionless um I was interesting I was in Austin I wanted to see I think the the attendee base is very probably the most Diversified you know you had people from government you had companies you had certainly crypto investors it was happening at the same time while token 2049. apparently it was uh you know 3000 or so attendees it didn't feel like that because the venue was so big but you know you and I were on the panel like who's still investing in crypto um you had some really interesting panels as well I think the if I were to say the biggest takeaway for me in that conference was that it

felt to me that non-crypto people particularly companies like you had JPMorgan there you had folks from on numerous corporations that have like you know been interested in in utilizing this PayPal and whatnot it felt like those people were more excited about crypto than crypto Natives and it just reminded me of this happens in every cycle like there is a time where the skepticism and the morale within crypto people is just so high is so low and volatile that you know it was just it was just really interesting because to see that and I think it it reflects the state of the market we're in and it also reflects the kind of that this technology has come a long way I don't think we're in that 2018 everyone is slapping blockchain to their

public uh you know public companies using blockchain and their reports the same way they're using AI right now to as a marketing kind of uh gimmick I think is the work is real the intent and the commitment is real uh you know we record a podcast with uh the head of JPMorgan crypto and they've been working on this for six years now and they have so many products under the hood that they can't talk about publicly um and so you know later on the Pod we can talk about things that that I those corporations kind of need to see like privacy is huge and until we have that it's going to be difficult to properly like have these folks operate in a public environment but they're doing a lot of work in anticipation that these

Solutions are going to be built so that was my biggest takeaway like you know the morale in crypto is very low people are fighting on Twitter all the time and but uh non-crypto people seem to be more optimistic about crypto which is an interesting uh I guess Point yeah I mean I was at permissionless with Santiago um as for takeaways I mean definitely saw a lot of good early stage companies a lot of a lot of AI focused ones a lot on eth I guess what what I did see was just glimmers of uh just a renewed focus on ethereum ZK Tech being built on ethereum and and the ecosystem around there like I mean we didn't didn't see a lot of other altel ones mentioned didn't

see a lot of a big ecosystem push there did see a big Push by ZK sync scroll Lineo which is the ZK UVM built by consensus it seemed like there was just a pretty strong renewed Focus there and that kind of bleeds into the the modular versus monolithic side I think one of my favorite takeaways was sriram from eigenlayer which we invested in we had a a bit of a side chat discussing module versus monolithic and he just continued to argue that you know you have to serve developers and take advantage of the largest ecosystem makes sense and technicals don't exist solely in a vacuum so he thinks that ethereum's not the fastest or the cheapest chain but it's at a maximization point where it's

good enough and improving technically coupled with the largest ecosystem of value in people and I thought that was a solid takeaway yeah so we had team members at 2049 and whenever team members go and do a conference we we try to institutionalize that that knowledge and get a report so the report uh indicated that a um some level of Surprise by all of us of how quickly this Singaporean Market has come back because Singapore um prohibited binance uh everybody had migrated to to FTX and some people got like really crushed and so Singapore was a mausoleum sort of last year at this

time um and so it seems to like be gaining Steam and coming back strongly there is you know just a thousand l2s flowering a lot in the optimism ecosystem uh and there seems to be just this like uh you know to to your point Tommy this threshold of developer mind share migrating back to to Heath saying hey it's you know this is good enough for for us to build on and and be here and lastly you know we continue to see value bleed from the alt layer ones sort of the like killer generation of late 2017 2018 while there are some really

interesting novel experiments popping up um and and so those were were two things combined with a very cautious fundraising environment where if you haven't if you're a capital allocator and you haven't delivered a DPI you know comfortably above two then you're really like you got a long road a tough road ahead of you and and so we're seeing um you know we're seeing this sort of like filtering of the real players in capital allocation from The Pretenders and we continue to see more and more funds um taking their their last breath of air

before shutting down um Ryan could you could you just get some color there like what how many funds are not at that Mark where they've at least returned 2x their initial investment like what percentage of funds just do not meet that Mark um I mean ultimately it's a vintage question right if you were around prior to September 2017 you basically got there if you launched like post that you'd be really you know you got some real challenge unless you hit some big Winners um yeah you know you and I have talked about this before on pods where I'm constantly reminded that you're not

that smart and luck plays such a an important role in this game because timing is often really can be expressed in terms of of luck and so really it's about timing I would say you know difficult to estimate across the approximately 750 funds globally that we've had but probably less than 50 uh are above a 2X DPI at this point um in fact I'd say confidently less than 50. I write LP checks into a lot of funds and and you know less than 10 percent uh you are even approaching that number yep I agree in terms of it's important distinction like Mom is not DPI right

because you know a lot of these things are liquid and get marked up you know to some sort of discount but DPI is like how much you've actually returned and it's easier to do for Venture funds which there are plenty in crypto there's also a liquid venture structures hedge funds they have a combination of liquid positions and early stage positions so it's it's difficult because DPI unless you've redeemed you're not getting that right unlike a venture and so a lot of funds um are structured as liquid as a hedge fund and so you know say that even you invested in like you had it's very

frustrating because I also talked to the largest fund of funds and they always struggle with so what's better should we invest in the next pure Venture fund 10-year commitment or a hedge fund and that is going to invariably do early stage stuff because you want to be doing that and the challenge there for for liquid is say that you invested in 2017 you would have been up at 1.30 X or more on some funds and now you're down considerably you're maybe still up 10x actually but that's not a DPI that's that's just Mark to Market to some sort of valuation framework for the illiquid stuff that can't be easily like liquidated a lot of it might be

locked so that's a challenge and both the opportunity and the challenge of crypto is that you have to kind of Hit the I want to redeem Now give me my money and they're not giving you all of it um some might have Gates so it's quite challenging I think still part of the opportunity in crypto is that but yeah it's it's uh it's difficult for those funds especially if they have clawbacks if you're down a lot more if you're up a lot one year and then you're down a lot the next year you need to make up to this high water mark to then begin to collect carry which really messes the incentives for an allocator some of them take excessive risk to get back to that you know above water if you will to start clipping carry and and that risk taking

uh is very challenging I don't know what the answer to that is other than if I'm investing my own money to a new manager I'd rather given the choice of investing in a liquid fund that has been around for a while but has a really high Watermark and a lot of the capital right versus a new manager or a new fund New Vintage might be pure Venture I would choose that category the new venture or The New Vintage because it's just a clean slate and a lot of times in liquid you don't have that clean slate and it a lot of the market also profit taking and Dynamics I think are informed by those type of funds that are trying to kind of make it all back or just um you know uh get above that high water mark which you have to really clean up a

lot of that stuff and it's probably going to take a couple of years to get there I think you saw that last cycle yeah yeah how do you look at this Tommy from an allocator's perspective as a GP yeah I mean the one point I'd want to hit on that that Sandy brought up is just like how funds react in Bull and Bear markets one of the worst things I think a fun to do in a bull market is to aggressively exit and reinvest capital I don't know Ryan if you would disagree with this but once a once yeah oh boy yeah yeah all right maybe I should have taken the other side but no no go ahead go ahead basically you're in a bull market you're making the already hard decision that most funds don't do which is to exit whether that be

OTC liquid reassignments things like that it's a it's a hard process it's annoying it takes a long time if you do go through that process to exit now you obviously have tax liabilities to your LPS right you sold an asset you have a gain a lot of funds or some funds will say hey you know what we're doing great let's reinvest that Capital so now we not only have a tax liability that we may or may not be able to pay out to LPS some are some have to some don't um but they're also investing at the height of valuations in a bubbleish market which means not only do you owe money to your LPS but now you're chasing a trend when you should be doing the opposite so yeah it's kind of tangential to what santi's saying but I think that there shouldn't be reinvesting funds I

think funds should just aggressively distributable markets and I think right now is the absolute perfect time to be aggressively investing in private deals or liquid opportunities that are that are great because you're not going to invest at these valuations or these non-torus teams in a bull market you have to do it now and you have to wait a couple years yeah so yeah so my view on this based on on the experience that I've had over the years is that the correct architecture is that you separate out the the types of Investments so you have Venture vehicle that invests Venture Style liquidates sometime between you know TG and TG plus 180 days we've done some

analysis internally that has shown that you know a basket of of any number one or any number of l1s that have come out underperform eth Beyond 180 day timeline on on the aggregate and that should be different than your liquid book and you get all these Venture funds that will liquidate a win hold it than an e-thorne Bitcoin and then hold it to the term of seven you know plus two plus two or or or or whatever the the length of the fund is and then you know their idea there is that they're going to catch the 20 on whatever appreciation in Bitcoin beef uh

they have I think that is you know that is not the Mandate of the early stage Venture vehicle and to then like hold you know take a win in year three and hold Bitcoin for for another five years um and you should prioritize Distributing because you have such high beta in this market the volatility is so expressive take the wins where you can and and like I can tell you that it feels really good once you get above a two DPI right then you kind of like made it you're playing with your yeah but the challenge without Ryan is I don't disagree with you I actually looked at that as well in terms of the trading Pro

the issue though is that your vesting schedule is you know when you say actually practically liquidate 180 days you can't do that practically unless you're selling means you guess you could oh easy you know hedge at OTC you could you know do some combination of perps yeah yeah you could do a number of strategies okay yeah I just wanted to clarify that because typically the best thing schedule is you know you gotta if if you're not doing that and some funds are not sophisticated enough to do that or there's it's not practically possible it takes two years to actually exit the position yeah look we invested early we backed you we loved you we helped you build but you know hey look I want to exit my entire position within 180 days like well maybe maybe not yeah you're not saying I want to exit my entire

position 180 days what I'm saying is that objectively the data shows that in infrastructure Investments the optimal uh exit window is within 180 days on the aggregate looking at we've looked at I think two dozen examples of of sort of the each killer generation and now looking at generation three and I'm not saying that that's what you do I'm just saying that like the data shows that that's the optimal investment strategy and and like you do then have to be pragmatic about yeah you know we'll take principle off table take principal plus acts off the table

because we you know we're pragmatic entrepreneurs and and often what I'll I'll I'll say is because we're the ones sitting liquid when you bottom out in year three we're the ones back buying right um and it's that's also useful for uh for an entrepreneur that like we won't totally get out of it but we but we will be pragmatic about cash management yeah I think there's two things there which is it's the hardest thing one of the hardest things you do right but you have to focus on risk management one what's the probability of something that's already up 50x100x in your book to do another that an inventure it's a power law so you need one or two if you don't have one or two or three hundred X you're probably

not going to make it to that to DPI so you go back to 100 and say I need to take chips off the table it's become such a large position of the portfolio it's proper risk management and I'm going to use that Capital to reinvest in folks as I did with you but no one would give you money and I need to find those or sometimes a combination without plus investing in the ecosystem in startups that are building on top of if it's an infrastructure investment um I generally tend to find that the best Founders have no problem with that they're like hey just do it in a graceful manner find a right a right home for that position and there's ways to do that uh difficult more now because there's very little liquidity but the OTC Market's thriving it's actually booming

right now um and so there's ways to execute these things and so at the end of the day I think the strongest Founders very you know most of the time don't react like negatively to that they they understand that it's there's time to exit a position and that doesn't mean you're not going to continue to help them by the way it's like it's Capital but my help I'm still here the other thing that I have often done over the years as well as do buy side OTC with the founder pre-launch often so like pre-launch they want some liquidity in my house so so on and so forth I'll be buy side on that and then like you know you have a transparent relationship with the founder where like hey you're being you know you're being real about your own

like portfolio balancing and and you know and and realizing the volatility of the of this so me six or 12 months later also being real with myself and with my investors about this is is just authentic right and and most of these Founders you know understand that uh and because now we've had enough years and enough stories of like you know the billionaire founder that wrote back to to nothing or the you know the guy who who like just never even looked at a pie chart of of their net worth to realize that 99.9 of their wealth was in a in a locked up token you

know um that people are more pragmatic about that in the space like if you look around the space the top Founders that people really respect from vitalik all the way down have been pragmatically taking chips off the table the whole way up yeah I would I think that's a hugely positive thing I mean it's less just they were going to be more focused and having taken chips off the table and and it's fairly common to venture too I mean you see some recent IPOs and you know it's fairly common for for Founders to take chips they should I mean I would encourage them all day long if a Founder comes to me and says I want to take chips off the table I say yeah of course you're going to be more motivated to then continue to build equity value on the position that you

have left now different story becomes to me as secondary just want to sell it wants to sell 90 of the book you're like well what's wrong here you know but yeah I'm with you guys on Founders exiting to get some Capital to not have to worry about bills and stuff the one tangential thing I do not like from Founders maybe this is a little spicier because you know it's it's happened over the past couple of months is Founders who realize that their projects aren't going well and decide to make a last minute pivot instead of returning Capital to venture funds that's something that I feel very strong I came here spicy spicy thirty percent of the what is it 30 of your of your portfolio companies are in that state

where you're like guys like stop going conferences keep like return the money well it's just the the thing that I don't understand is like you spend a really long time diligencing a Founder on a specific vertical right and you take a lot of risk with other people's money or your own money to back somebody and their vision and then they come to you six months later a year later 18 months later and they say hey you know what things aren't going well we decided we're going to do this totally new thing and we figured it out in the last two weeks like the thought process just doesn't really make a lot of sense and I frequently tell people like I mean obviously legally most funds again don't really have a say right if you're investing in a safe or a token or something you don't have any real

investor rights to to block or make any real decisions unless you're doing your own docs and legitimate diligence which you know doesn't isn't always the case with an early stage investment on the the documentation side but I always tell them like if it's not going well return Capital you know maintain your brand and your reputation and we're happy to back the next thing you do and go through the normal diligence process but it's just hard to get excited about a pivot when it has nothing to do with with your original investment and that is exactly the thing so if we gave you Capital at the peak and you have call 40 40 left over of the capital and you return the capital we're actually up if we could be up East

against say 21 or whatever it is you know that's a hug it out that's a that's a next time you come through the door we're probably writing you a check that's a that's a really positive high integrity situation whereas too many Founders look at this as their personal trust funds that they just want to bleed to zero but then what they don't understand is that is your last kick of the can ever at that so you better have enough money to live on forever because no one's ever written you a check for anything ever again not a Popsicle stand not not a crypto project not anything and you know one of the real issues that we face in the spaces especially when it's a token you

know a token driven investment there's a complete dearth of legal recourse right the number of Foundations sitting on Untold billions of dollars that have delivered no value whatsoever and these you know these Swiss stiff tongues or or Cayman foundations have just turned into glorified trust vehicles for the for the founders and the and the board is egregious you know I have really wanted somebody to do an activist um fund going to treasuries yeah I did this to some extent but not executed as an activist should I think it was you could could you know and the problem is there's no there isn't enough legal

recourse you don't have the same rights that you have as a shareholder and so you can't how big are the treasures block one Golem like these are billion dollar plus I mean so I think has more Bitcoin than microstrategy sailor like and that's including the Billy in this loss from the sale right I think a billion was a four billion it's a four billion dollar unregulated cyber security but I think they ended up only having access to three billion I have to check something something was weird nonetheless we look we we did an analysis on this because we thought about getting activists in 2020. and you know and I had

um I had participated in the conversations that that led to to the digic style uh wind out um and that was just like you go to the founders and you're like look you know you're the largest token holder if you return this treasury which is a multiple of your token you're actually the one who looked benefits the most from this right and and Sean was really pragmatic about that and he did it but we've had we then went and had like six other conversations and all these guys would dance around to not admit that this is just a trust fund to pay them out forever you can probably monitor this on chip like they're bar they're probably barring against that right to diversify they're not selling just because optically

they still hold that but they probably have a ton of like they're all just buyer buy T bills right now the number of T bills held by Swiss stiff tons right now would Boggle the mind yeah I mean billions of dollars yeah I mean get a hold of this uh and I have the number now block one has over 200 000 Bitcoin microstrategy given their latest purchase they bought like four thousand four hundred Bitcoin this this week yeah they have 167. they have like 158 000. yeah so are we sure we want them returning that Capital though like are we sure we want that Bitcoin in each cell pressure the yeah let it rip I mean get the Bandit

out and at the end of the day I mean this is going to be a conversation also for Mount gox if and when that happens all the other different creditors and also uh what's what's another big one I mean you have obviously yeah the conversion of grayscale products gbtc eth e like at the end of the day I mean if you have an ET like that that ultimately because in the market I'm always a proponent you just it's better to have more transparent and efficient price Discovery yeah 100 if you think that people are not looking at these things and doing some structure around it to hedge that risk you don't understand markets well enough because

sophisticated players are looking at that and already you know it's already kind of to some extent priced in and people are doing that on the margin so it's really in my mind a nothing burger like just this distribute it get it on the open market and let it let that you know run its course yeah yeah I I would say that in some cases like FTX it's probably overpriced then where like people are like ah you know all the salon is going to hit the market and like actually not because Sam was on a seven year vest with that Solana so it's going to be a long a long bleed of of shipping all that that Sol out the door um whereas other things are more

um you know just more unknown it could hit the market all at once you know whether you had legislation that allowed people to go after some of these egregious foundations that have delivered no value or whether you have you know something like Finance completely um completely blow up and get treated like uh you know like tornado cash so it's sanctioned not just you know in a legal process and everybody's got to get out out the door all at once um there are most of the most the time things are priced in but there are some events that are could be really dramatic for the space as well

I think that's a good segue to finance Ryan you want to take that one away so you know there's a a lot of discussion in the space right now um uh you know there's been some a bunch of tweets out in Cochran put put one out yesterday of of speculation of just how deep this goes are you done writing that thread Ryan they take me a couple hours well here's the thing that thread paired with an immediate um immediate announcement of the unwinding of the the Russian Relationships by binance it seemed to me like an admission of guilt a public

admission of guilt and you know we know that the Wagner um group had was using binance for payment now like that's not a controversial thing so the depths of where this goes is what even more even more shocking than I think any of us understood we have to remember that six months ago binance represented about 50 of the the um like exchange off-chain volume and as they're you know tentacles and probably a thousand startups in space like this is not FTX this is not mail gox this is something that is like much much more significant if true um and I wanted to kind of unpack with

you guys what what are your thoughts on what the implication is if this is true because for me it's like it's a it could be something that we have never seen before and we've seen a lot you know in this space obviously yeah I I did a podcast with uh Travis recently on on binance my tldr it's not super long descriptive is playing from Ikea guy who lost all his money on FTX yeah exactly so he's he's been through this sadly um and you know clearly knows what to look for and and the signs he has a a great thread like bulleting out every single thing that binance has done that's a little sus and it's solid I my

take is that I think CZ is too rich and I think binance makes too much money for there to be any fraud I think it's just killing the Golden Goose on a scale that doesn't make any sense to me as for like the regulatory kyc o-fac violation stuff like that I think yeah they probably definitely get hit for stuff like that everybody and their mother was on binance the last couple of years until recently but I don't know I think that anything less than a full I think if there's no fraud the market may actually rally because I think people are pricing in a pretty disastrous unwind and I don't think that's the case but I know I might be the outlier here Santi any implications that you draw I'm not going to comment on on the rumors

which I think a lot of it is at this point that I think there is a bit of a dynamic where people want to find the next FTX um now I think we should always be incredibly skeptical and curious at the same time like in crypto it will always serve you well to be yes we're all Optimist but you have to remain highly skeptical this is the having those two is I think served me well I think will serve anyone well and you should always be wary of centralized institutions I mean that's why we're here yeah and so I don't I don't want to offer anything because I'm not close to it I I don't have a strong view I am

cautious as I am cautious with any centralized party because as I'm cautious of the financial and like system as a whole like it is not transparent all right here's here's a question it's more interesting to think about what will happen to your point Ryan if this goes down yeah it is it's a huge reset like like way more than FTX all right here's a question how much of the binance bullets that Travis shared these dozens of things that they've done wrong were supposedly done wrong how much of that is a hyper Growth Company which has scaled to the the largest crypto company we have in a matter of years versus actual fraud like every company has Growing Pains whether you're

a startup or whether you are the literal largest company in crypto so I'm not sure how much of it is actual deathly issues or more so you know a major company scaling in a new space that can't be domiciled in the US like do you know you know where I'm going with that or yeah no I I mean I think that's very valid right that like and also by some metrics till you know until chat GPT and open AI binance was the fastest growing company ever um and so clearly we're growing in an uncontrolled fashion and some of these things were probably more um carelessness rather than

maliciousness um however you know there are a number of data points that indicate um that carelessness descended into recklessness like if your financing if you're providing payment services directly in emailing back and forth from the Wagner group who are like slaughtering Africans all over the continent yeah you know that's a moment where you really got to look yourself in the mirror and ask yourself what you're doing here and if you need more money or if you need this type of business the the fact that they you know two days after a bunch of of rumored tweets um publicly announced unwinding of the

Russian operations for me looked like looked like admission of guilt um that was a bad look they probably should have have timed the pr on that a little bit better um but you know I think the important thing is anybody listening here if you have your money on binance and you don't have a hardware wallet you don't belong in the space get out shut it down sell it get it right you got you cannot be like you can be using Finance there's a lot of cool tools there and it's an interesting product but if you're storing your funds Capital your LPS capital on Finance in this moment considering the range of rumors uh circulating

right I mean I totally agree with you like I think that you just it's like you don't want to be a turkey Italian turkey like if there's a remote if there's a greater than x percent if there's a great thing that someone said while FTX was going down and says if there's a rumor act quickly then think and acting quickly here is not selling everything it's just there's an alternative get a hardware wallet store it there and then figure out how all these things shape up you're like you know I mean like the risk is just asymmetric and it is you never want to do anything that puts you out of business storing everything all your crypto and at any exchange or any single Hardware wallet is uh is negligent like

you have the horcrux model as a fan of Harry Potter that I am segregate into hundreds of wallets it it doesn't cost anything to set up a safe like a gnosis safe multi-sig sign two out of three it's free folks no go get a letter at 70 bucks a last item that I would say on this is I would say Travis's tweet storm or you know bullet points along with um you know a bunch of other people who who got really really uh badly hurt in the FTX uh debacle could possibly show a glimpse into what American politicians are thinking you see all these people

wanting to point at finance and hurt binance I would guess the hundreds of politicians that that took money from sandbank and freed probably told him and their last conversation don't worry CZ is going down two and it feels like there's a vendetta that anybody who is really badly hurt in that FDX uh Fiasco in some way shape or form blames finance and he is just you know CZ at this point has just made too many uh enemies with the Brazen you know very aggressive some would say arrogant approach that he took in the days following the FTX collapse and so it would not surprise me if behind

closed doors in America and I don't have any privileged information on this I'm just speculating but it would not surprise me if if high-level politicians are looking at this from a vendetta perspective especially those in the Democrat side of the aisle Tommy you you obviously you're really close you've talked you've interviewed Travis and um I'm curious what you think in terms of the outcome here like there's there will be some enforcement action I mean there's just a body of evidence what I've seen is there probably was some wrongdoing particularly because the rules are not set in place so when the rules are not set then they can you know it's difficult you know but there are some things that I think are pretty damning

in that doj like when the doj brings an action against you it's different than the SEC like the doj the doj action is far meteor yeah yeah like when the doj comes to you and knocking on the doors because they have a body of evidence it's not like Hey we're probing we want information it's like no we know you're doing some wrong like just there's an action so my point to you is do you think it's a settlement a huge huge fine does that put Finance at risk of insolvency uh Ryan maybe that's your point you know maybe that's a way to take him down or do they I mean they're already out of the U.S pretty much I mean volume is zero all the execs have left

so they're out of the U.S mostly um so how do you think about like the second third order effects here what what's the viability of binance come forward I think Ryan you might have a better answer than me here oh what do you think the problem is like I think it's I think it's either two extremes right I think it's either they're like and one of the doj press release you're not a press release but on a news report I think somewhere along the lines it mentioned that either the doj or the SEC was worried about the solvency of Finance if they were to issue something that would cause a bank run right which kind of begs the question like one is that report accurate but two why would that ever happen if you have all the assets

then there's no possibility of that happening right because everyone could withdraw so either they know something that's a mess or they don't so I think it's either extreme bad case scenario where there is some sort of whole or some sort of fraud which I really don't understand how there could be unless CZ is funneling money out to support BNB price or something like that or there's you know kycofac violations which I don't know know what the penalty for that is in some sort of settlement and honestly I think people in the US have a fantastic alternative through coinbase and Kraken I mean so I think people will be pretty much okay like I don't know if you guys saw it today

but coinbase is on Capitol Hill with little beer cans of cold brew with uh stand with crypto and it's incredible marketing like they're doing all the lobbying super legitimately finally going on the offense yeah they're going on the offense but they're doing it in a super clean long-term View Way and it's it's really nice to see yeah one thing I would say that the concerns about finances solvency are definitely totally unfounded um Dean will shoot me for saying this but because we've been you know been analyzing nav in the space for now a couple of years we approximately know how much CZ has made um in Nev on his own chain and it's an

ungodly amount of money it is a staggering sum of capital so he has he's well capitalized he's he's fully capable of the largest one of the largest like top five Bitcoin holders as well for sure I mean I don't I don't know that like empirically but we know we've been able to reason through how much money he's made um in Mev and that's only one of his income streams and it's a lot of money where's he making the Mev from Brian like which which chains which well operations like binance they because binance is effectively POA right and I would assume that he probably knows a

decent number of the validators maybe is a validator himself there's a unique advantage in Mev on finance that that somebody in that power position would hold um that's a that's a whole other topic to unpack like I personally would think that the front running your own centralized exchange is maybe not even as egregious as as any being your own chain and even your own chain is like what the actual [ __ ] in my view um and I'm not saying that it's him uh but like our analytics show that there's certainly a big dog whale in the BSC chain that has made

an unfathomable amount of money over the last four years that actually is so messed up because you you convince people to come to your chain because of your exchange and your reach and then you turn around and you Mev the users that you convinced to bring over like that is as as Dean says he's just cocking him right you're just cocking all these users Santa you brought a good a good third topic idea to discuss kind of things that are flying under the radar a bit uh things that are like overlooked CK intense investing where do you want to start with there yeah well look I mean I think it's just general idea like I'm of the mind that look

irrespective of Market Cycles like you can be in a Raging Bull and you can find gems you could be in a raging like you can be in a terrible bear and you could do terrible Investments like there are some rounds right now that are raising a ton of money at pretty high valuations and I'm I'm a very much uh ascribed to the view of Howard Marks here founder oak tree says price is really the everything and that's where people really miss the mark right uh you could say oh ethereum is like you know is is the best you know it has the most developer mind share it has all this ecosystem but what about the price 42 is different than two than one um it's hard though for a asset class like crypto to think about well how do you value these things

is it how do you value a meme and attention versus you know at the end but also there's a ton of data that is produced by these blockchains which are data Rich so it's very interesting because you can do fundamental analysis like maker as an example you could do fundamental analysis maker you'd have done it three years ago and said wow they are spitting out cash flow it's trading at like sub 10pe which is distressed um it is an early stage company with a ton of potential You could argue if you believe in crypto and it is profitable like if you were gone down Silicon Valley say you're roon you have a pitch deck and pitchek doesn't have anything instead of you know control F blockchain and crypto and

swap it with um you know fintech Rune could have gone to Silicon Valley and says hey look we're a five six year old startup we have X amount of users these are our metrics super transparent dashboard this is a growing number of loans this is the cash flow that we're getting we're you know five six years in his journey and we're valued at X and we're earning y like immediately he would have it that is a unicorn like just does not exist like like and so but but of course you know we're talking about crypto so that's you know uninvestable but yeah crypto markets are behave really strangely right I mean it's sort of like can you be patient because at the end of the day I do believe fundamentals show

up and when you think about stuff that will endure the test of time like Legacy Defy is incredibly interesting to me because these are protocols that have withstood a very adversarial environment D5 has been the bear market like relative to eth every D5 protocol chart looks like crap and it looked like crap even before rates started making any moves uh and so the question is one second a turn and if it's going to turn and so what are the catalysts I I think you need to understand like what is the Catalyst because if there are no media catalysts just hold Heath candidly like like and that's always a default or go to treasuries in this environment so a bit of a ramble I do think that like D5 is a categories is overlooked

um and I think it's here to stay I think it has a lot of staying power and also Lindy to then the question really is what's the metric here what's the Catalyst TBL is it going to be another L2 is it going to be uh you know another flavor of stable coins like what is it going to take for D5 to to come back in the Limelight and I don't really know what are the metrics that you're using to to drive signal on that like you know something that we talk about is TDL to FTV but is FTV the correct metric or is it you know like five year token inflation device or multiplied by value um

like how are you looking through metrics that that drive you know to in a in a Howard marks um sort of school of thought you know having these these key metrics that that drive indicators of of value you know taking a value investing approach to crypto for the first time that's a great question I mean Tommy I don't know if you want to jump in here um but you know for instance I'll start with things that I've seen investors do probably wrong and we're talking about fully diluted versus circulating I think just looking at one or the other or the two can is is a bit misleading at times um I think you need to understand what the emission schedule looks like and

it's fairly common probably look at what is one like like emissions the year one year out two year out three years out ten years out five years out and then think about okay one of them might have like an emissions curve that looks like that which is you know in five years you're going to be reaching your total circulating Supply and so that has a lot of pressure in the market right those tokens coming live maybe investors are walking and their cell pressure might be a good opportunity to then time when you're going to want to build a position if you know people can unlock and the other times you could have Dynamic emission schedules like you know you're intimately familiar with file coin that are based on some sort of parameters as the network grows more tokens get emitted which makes sense right and it's

like up to like 100 years or like 40 years out right so at that point you don't want to be looking at fully diluted right um you you're better off understanding the emission curve right um and so in isolation you can look at file code when launch and the token hit a price where you're like oh this is like point three percent of all worlds GDP that's crazy in reality very little tokens there uh in circulation and so that's a big mistake I think um and the other really is you need to understand the type of business model an exchange like uniswap completely different than a money market like compound and Ave and maker totally different metrics right on the money market side what's the most important

thing how many loans are being emitted right what's the average duration of the loan because the protocol earns fees on that right and so yeah tvl directionally is very important right you want to see that number grow you also want to see the kind of the turnover of those loans um and the kind of the retention of the user right say what's the average you know for the user of of that is opening up a loan compound is he also using Ave and maker and what is that wallet share right if he has a like a hundred dollars of loans outstanding or supplying certain assets like how is that distributed across all the money markets uh for an exchange tvl is not really relevant at all it's really the utilization right like if you compare

uniswap to at practically every other amm out there uniswap is like orders of magnitude it's more efficient in that with that Capital meaning the turnover of that right there's liquidity pools and the trading volume of that like if you have a hundred dollar a hundred dollars in sort of the liquidity pool how much of that gets traded on a daily weekly monthly basis is vastly superior to any other amm out there and so that's really in my mind the most important metric right and so ultimately a combination of things you know you can I don't want to stop here but then you can look at all the on-chain analytics of you know maker for instance like the popular trade when you saw for selling you saw like on some of the largest holders on chain moving the

coins to an exchange to liquidate so you know you you it's super interesting right because you can do fundamental analysis you also need to have a bet on how big these markets are going to be and in what time frame um is it going to outperform the underlying Benchmark eth Bitcoin treasuries and then also understand what are other like large holders doing so you know in this asset class you guys have been around for a while but you you're like a a VC but you also are can be a hedge fund analyst and high frequency Trader if you can and I don't it's just intellectually super stimulating to kind of be able to do all of that yeah it kind of comes together in this

sort of emerging idea that I I think we're all playing around with and a whole bunch of people are are circling around in the space right now of this idea of liquid Venture right that the investment principles have have like venture-like components to it you know do we um you know do we believe in in the team behind it do we believe in and like really uncommon value that that this can unlock but because crypto is liquid effectively from like the series a um to compare it to traditional Venture you can take a better risk adjusted approach uh where again you can you know take some Capital off table or or or dial back into something when it's

getting to a point where purely on a PE basis it's making sense and that's really the that's one of the driving forces that I think we spend every day asking ourselves in in early stage products inside of of just core youth is what is the cash flow the thing is throwing off and then do they have the courage to accrue the cash flow to the Token holders so for example like a dydx you know throws off really really great cash it's trading at a a 6.5 times uh earnings but they don't have you know for one reason or another they have not

decided to accrue that value to the Token holders that combined with your previous point of massive jumps in inflation overnight I think we're like two months out from just a huge inflation Spike has left that you know from an outside perspective most people would say undervalue something trading at six 6.5 times like free cash flow you know with all the volume that it has all the great developers it has and Tony is a phenomenal CEO so on and so forth but then there are these other these other inputs that you have to consider like hey there's about to be a massive Spike and um and so on and so forth but I think it's just really

you know I'm really excited about the moment at hand to be able to finally bring value investing principles to crypto that it's not just like pie in the sky you know uh if if it could be some percentage of the total value of gold then it's worth you know a hundred billion trillion dollars that we can now actually look at these things from a cash flow perspective and maker is a great a great example of one of the first things you could look at from a cash flow perspective and D5 I think you know in a year or two maybe three tops all D5 will be priced based on cash flows once we're able to actually accrue the value to the Token holders and we can get away from this like oh it's not a security then then it'll just be

priced on cash flows Tommy let me ask you a question on this point because this is something that it gets commonly debated like sushi versus UNI one was Distributing the earnings back to stakeholders like people that were staking Sushi uni is not right it could be voted in but it's not and so For Better or Worse the kind of the regulatory environment and lack of clarity has handicapped our ability to design token structures that make sense I mean these protocols spit out cash but there's also this kind of debate like what do you do with that cash like it's very uncommon for an early stage Venture project to be spitting out cash and the question is should you reinvest that in the business

what is that reinvesting actually mean as a protocol what is that like tydx and unit swap doing without treasury that admin contract or do you distribute it back to stakeholders if and when you know you have Clarity so I don't know what the right answer is I think it depends but I'm curious to get your thoughts on that and it factors into your investment decisions just to build on that for you Tommy how do you look at it when in the case of say a dydxn and a uni swap they've done massive successive rounds of equity raises and token raises and they have two sets of constituents who by the way are not the same people how do they like is it a regular or is it sometimes yeah yeah or is it just a

question of what constituent they're trying to appease right yeah disclosure where investors in DUI DX and I just had um Antonio on the podcast this week and it's it's ridiculous they've done a trillion dollars in volume right like it's crazy and his confidence yeah since Inception and his confidence as a Founder is is hard to beat he uh he is really dedicated and just really dialed in um as for the value flows I think Sushi added the fee as a differentiator versus uniswap during the vampire attack just something that they can do differently that uniswap didn't have so I'm not sure if you know we could make like a long-term view of that I also think dydx is moving to a cosmos chain for for obvious reasons to control their stack

and they have a use case where they need to do that and edit a lot of the technicals but I also think it's pretty clearly an unspoken regulatory reason like let's drive actual value to the token because you'll need it for nodes you'll need it for other reasons and it's easier to for the community to make changes as for the breakup between equity and tokens Ryan answer your question I don't think there's any good way to do it I think it has to be hotly debated and somewhat decided before you make the investment right because if you're going to invest in a 25 million dollar token that has an equity component and 50 of the values flowing to the equity you're not investing a 25 mil on the token you're investing at 50 mil in the token I think

in my mind or even there's usually two to one relationship right two to one but that makes it even worse because now if you're two to one you're 25 mil Equity 50 mil token and now half the value flow flowing to the equity now you're at 100 Mil on the token in my mind on the valuation so it gets even worse there we're running low on time guys what should we pivot to for our last topic well Tommy you you've been under uh in terms of the audio Ryan I've been talking a lot I know you want it's good no well yeah but you have a lot I I I'd love for you to share your thoughts on zero knowledge proofs because this is a topic going back to the opening that was it is hot in these conferences you have multiple different flavors as far as I

can remember zero knowledge proofs have been like one of the Holy Grails of crypto it offers so much potential it's been slow though uh and this might be one of the things that gets overlooked like the amount of progress that is now being made in an exponential Manner and these unlocks in terms of the tech the cost of viability of it I think it's come a long way and it's something that perhaps crypto as a whole is a bit skeptic like if you've been around for seven years like don't talk to me about homomorphic encryption zero knowledge proofs and you know there's other categories right um that just are uh you know feels like the folks are fatigued but let's talk about that and I want you to give us your take Tommy with the the with the the sort of lens of explain to people why

zero zero knowledge which has not had commercial success in the space and crude value why is that changing now yeah it's a good question um I'll preface it with I'm not a developer or ZK coder there's only a couple in the world that actually really understand the math at play here like the Ellies of Star Wars of the world but the the way that I've my mental model for ZK is that it is the end game technology for scalability and privacy right like being able to use math in a way where you can do massive amounts of transactions or indoor privacy and have privacy and roll that down to an L1 or a settlement layer without any guesses to its accuracy right it's all proven Through Math which

is different from optimistic roles right where you have to hope and you do a fraud proof If not is pretty much the end game for me I think I think it is for everybody right so the way I'm breaking it down is into three buckets you have ZK EVMS ZK VMS and full-fledged Standalone layer 1 ZK blockchains right a ZK evm is something that's very compatible with ethereum right you have the polygons of the world Scrolls Lineas through consensus ZK sync kakarot's those that work directly with the evm uh it's easy to bring users easy to bring liquidity um and you could work with it right but you're limited right you can't do as much because you're limited by the evm

things like that then you have things like ZK VMS things that are like purpose built for proof um proving proofs right like starkware the stuff that's a hundred to a thousand times more efficient at proving proof since the language is purpose built for doing that right you know the constraints of the evm that's like Aztec for privacy or like starkware for scalability um and you can do that and then you have layer one so Standalone blockchains like Leo and Mina and things like that you lose all the liquidity users and ecosystem ethereum but you could do hopefully much more unique things so that's the breakdown where I'm at right now um and I'm really struggling to figure out why most alt L1 chains Will Survive the Wrath of the best magic math in the

world with the best ecosystem in the world being ethereum right now obviously I love the salons of the world like that's the best bet on a the fastest shared Global State Bar None like that's the goal right um but yeah I'm struggling with how alt ecosystems will survive as EK Tech comes in line and we're a venture fund we have to invest two to five years out so it's tough to not get around that look I think it's a great Point let me ask you a question say that one of these like deeply research based kind of like startups unlocks something huge in the zero knowledge space what is stopping an existing L2 to Fork

that and deploy it because they have the distribution skill and like look when I when I invested in scroll uh it was just like you know they were the Pioneers within zik ABM and and then I but I'm also my best friend like arbitrum and I would have guessed like you know I'm talking here but I if I'm in the arbitrum camp I'm saying okay I've already raised all this money I clearly believe optimistic Roll-Ups are in the near to medium term really viable to fill a lot of the demand uh and that's good enough and if for whatever reason a team like scroll or someone else really develops something

that can unlock like at one point you're gonna reach a limitation in terms of optimistic World capacity right maybe ZK you know Tech allows for the next wave but maybe that's seven ten years out what's stopping arbitrine from just using that Tech and integrating it and like you know they have the distribution like I'm just kind of how you think the question really is how you think about like the moat here if someone develops something like gets fork and gets implemented and optimism could just deploy their own right like I'm just kind of curious no it's a good question I don't I don't have a great answer on the optimistic side I actually have Steven and Ed from arbitrum coming

on the Pod next week to discuss the counter view but the thing that I I kind of laugh at is and this is like an irrational take on my part but you know we're human we're allowed to have two sets of beliefs here I love things like bass because you have the you know you have the might of coinbase 150 million 150 billion in liquidity and 100 million users and you have zero fraud proofs right like you're optimistic you don't even have fraud proofs but then you have something like ZK with the starkware where you don't even need those things because everything is always proven by math right so it is kind of a weird dichotomy as for can other projects copy ZK Tech sure I think they can but two things I think one after you build

an ecosystem it's hard two I don't think it's easy to copy ZK it's really really really hard math and code and I don't think in the world I can do this stuff yeah so copying it'll be really really hard um and honestly I think the eventually the the tech will commoditize so what Ryan said earlier on on other things right and eventually it'll just become a Biz Dev game and a community game and whoever wins that is going to have already started I mean play uh sort of polygon or what do they Rebrand who's like already kind of executed on the strategy right they acquired Hermes uh and and one of those 10

you know one of those 10 people that can that can actually do this you know but that's a really interesting thing I I look at this example really closely because because we share an office with Jordy and the tech is very impressive and I think this is true broadly of a number of things with polygon um but I would I would guess that they're disappointed in the amount of of users and traction that the network has today which causes me as an investor in this to question like is it that people don't care about it right now because it's kind of like literally you know single digit thousands transactions per day on on the ckbm and or is it just that like we

haven't hit any of the curve and it's coming because you know some catalysts will bring it and then what is that Catalyst and that's the question I I suppose I have I have for both of you is that is it a UI thing is it a people don't actually care about privacy in the current context or is it something else that has caused things like ckvm to not have the traction that we all expected and hoped for that's a loaded question my friend and I think I always go back to the example of what happened with BM binance chain when it launched you know pancake swap in the first month uh acquired more users and was seeing

more transactions than uniswap at that moment in time you would have said and looked at that yeah no one really cares about security people are just chasing the next farm and this is when you know D5 was kind of hot and but now the staying power you got to think of look at these not in isolation on a three-month window but like over multiple years at the end of the day everyone that is in crypto today is a beta tester beta user given the number of risks and the number of users like it's a very small crowd that uses these things um I think I wouldn't take too much stock that it doesn't care I do think that the best tech will win

not just the best marketer for this type of Technology like when things break in crypto it's not like when things break in web 2. like like it is fundamentally like you don't mess around with you I mean like there's no one to call There's No 1 800 number you can't peel back stuff and if you do like compromises trust like ultimately you want to be building crypto products because security is the most important thing security is a is a very Broad and I think it can Encompass many things and is different for folks but fundamentally there's a reason why ethereum is a theorem where it is today and Bitcoin and is this idea of Lindy effect and I ultimately think that like when you do hit and there's a killer game there's a

killer application which we haven't really seen yet then you have to think about well what's that flow going to be where's that wallet where's that exchange or aggregator if you will that might come from web 2. right because the retail demand is going to come and they're going to go through an aggregator I think and ultimately that aggregator will whether it's PayPal Visa whoever it is JP Morgan will fundamentally care about security and understand it well and that's where I think they will evaluate these l2s they will evaluate these l1s and say yeah we're going to make the decision to push our users to this particular chain because it's the most secure and security begets liquidity and that you

know increases security I think and so it's that flywheel that ethereum is on maybe Solana that it will be hard to overlook if you're not as secure as another L2 Ryan just to go back to your your question originally like why hasn't this stuff really taken off I think that I just had Ellie from starkware on the podcast this week and spoke to him or last week and one of the things that I thought was super interesting that he brought up was I asked him the question Point Blank I said how do you as a ZK VM compete with the ZK evm right like a polygon or something because they have easy to Port apps users they have liquidity it's a pretty straightforower

question right in a competition and he said look you know it's going to be hard but you just cannot build the stuff that you can on a ZK evm that you can with the flexibility the low cost the speed and the customizability of what we're doing with Cairo and we with ckvms and honestly it made a lot of sense but it also pointed to your question on timelines why hasn't the stuff taken off I think it's just really early for really hard tech right we've just started to get like mainnet's launch we just started to get languages solidified like I think that the The Arc of technology is in the ZK favor but I do think it's quite early yeah you're right I mean zkevm only came out in in February or sorry in March on

on polygon and so it's far to far too early to um to judge uh I would you know I would challenge the starkware guys a on the computational density of the Stark proof and it remains you know I it will create quite quite the blockchain bloke um and uh in in its current format but there are smart guys and hopefully they they continue to work on it and then you know what is this magical thing that you can't do on ethereum and polygon that you can magically do on these other things like is there a is there a hard example of of something because the more and more we look about across the space

the more I think we all see the aggregation of Mind share and probably over time of capital um consolidating around the East and the e flare two ecosystems right and that's why I continue to be a really strong believer in polygon because even though GK VM doesn't have traction it's really like once we hit me in a curve on that use case it's probably polygon that's that's in the pole position um but I don't know I think it's an interesting thing for listeners to just go home and and just comment you know feel free to comment on on how you think and whether it's marketing or Tech that will prevail I think it's quite early I think we can

all agree on that there's so many risks and so I think you also have to think about are you being compensated well enough uh to take themselves at risk certainly you know a yield of sub five percent on defy ain't gonna cut it folks because you can just park in treasuries uh but look I think there's been a fantastic episode uh we'll leave it there I think that we've we've obviously identified a thing of in a bear Market things are overlooked more so probably than well generally speaking markets Overlook things they're not efficient certainly not in an early stages crypto um there's so many things that we can continue to talk about so in the next episode I I would love to just go deeper on things that we think are being overlooked um because I'm of the mind that you can find fantastic opportunities in any

Market cycle in any Market environment and and it's quite early asset class and so I think there's so many good things here uh just retail has access to these incredibly young startups not all of which are good but the fascinating thing here is data is produced in real time and you can have you have so many tools at your disposal and so many people a lot of it's open source so you can learn about this stuff not just with podcasts but just going on chain and using tools and analytics so it's just an incredibly exciting asset class um so I want to just leave it there folks there's always a great discussion Tommy and Ryan awesome time guys thanks guys [Music]