ETHMilan26 Dispersion of Return

Transcript

uh topic yesterday is why crypto VCs are becoming more like hedge funds. With us is the CEO also and co-founder of uh pure protocol AF. >> Thank you so much. Uh so let's talk about crypto VCs a dying breed. So cryptovcs you may have noticed there is this trend that they are becoming more like liquid token funds and within that some of those liquid token funds are starting to look a bit more like hedge funds. Now this is hardly surprising because cryptovc as you know is on hard mode both in terms of capital uh raising LP capital and then also in terms of

deploying that into deal flow. So what we've seen is despite a little postTrump election blip, both of those trends are reversing again. It's getting harder and harder for a crypto VC to raise money and it's getting harder and harder for them to find deals worthy of investing in. And I would say that on the whole, crypto VCs have a bit of an existential problem. Not only that, but about 20 firms, the big ones, A6Z, Dragonfly, Panta, they make up more than 60% of all the total capital deployed. So the real question is what happens to all these tier 2 and tier three crypto VC firms.

Well, we know the problem they have. The old venture model in crypto is broken. It used to be the case that you would invest early in a pre-token generation project. You would wait 3 to 5 years with some lockup and then you would monetize this through a sex listing. That unfortunately is gone. Momento researched they looked at 118 token launches in 2025 and they found of those nearly 85% of them were down on the year from after they launched. Not only were they down, they were down with a median FTV of negative 71%. So what's that story telling you? It's telling you that retail is gone. There's no marginal buyer for the next token event that

takes place in crypto. And so that raises the big question. Do we stop allocating long only to crypto as an asset class? Because that's what these people are asking themselves. I want to introduce the idea of the great dispersion. So it's not necessarily the case that you don't deploy to crypto. It's more the case that the good assets, the ones with product market fit, the ones with users, the one with revenue, things like Hyperlquid for instance, or even XRP or or things like this will continue to do well. Whereas the bad tokens with no usage and token unlocks are going to continue to do poorly. Now this dispersion is a feature of the market which if you're a fund, you kind of inherently know that this is going to

continue. We've started to see this in 2025. It's been playing out in 2026 and I think it will be a dominant theme for anyone allocating crypto over the next couple of couple of years. The question though is how do you then capture such dispersion in returns? Now, anyone who has worked in Tradfi will be familiar with the idea of pair trading. So, pair trading is this idea that you long one asset or a basket of assets and then short another asset against it at the same time. The reason why you would want to do this is because it works in different market scenarios. So, let's say you have a thesis. Hyperlid is going to go up, but at $60 it's a little bit expensive. You could take a view of longing Hyperlquid and maybe shorting Salana against it. Now, in a rising

market, which we're we're in right now, you make money when Hyperlquid goes up, even if Salana goes up. You make the spread or the difference. In a falling market, as an example, Hyperlquid could go down 5% and Salana would have to go down, say, 8% and you would still make that spread of 3%. And now we're about to approach the summer, which tends to be quite illquid and choppy. And in those kind of sideways markets, this pair trading really is a strategy to utilize uh when the markets trade like that. And not only is it something that works in different market conditions, but the math is undeniable. So this is independent research from Deli Digital and they took a look at being long hype and then they took a long look at being

long hype soul. And when I say it's mathematically superior, what I mean is if you take a look at things like the annualized volatility, the max draw down and the sharp ratio, which is a measure of returns divided by volatility, being in the pair trade of hype soul is significantly less risky than being outright long hype. Now these are people who have traditionally been long only. There's a compelling case to go back to their LPS and say, look, I'm doing these trades and they have a much better risk profile for the fund. that risk profile is significantly better when you trade a basket. So in that basket, you might want to be long hype, you might want to be long Bitcoin, you might want to be long ETH and a handful of other things that you think are producing revenue and

then short Cardano, OP and the long tail of crypto assets against that. And so those kind of sharp ratios are are almost four times better when it comes to pair and basket trading. these longshot strategies which our users have been doing on pair protocol continue to perform very well. So there's hype soul which that's an outdated chart now you could have you'd have to take the axis and and kind of uh to see where that chart would go and the same applies even if you diversified your short legs into soul sui avac uh say and atom for instance what we're seeing on the platform is proliferation of equities and commodities on chain means that people are doing unique combinations of long shorts one of the trades on the platform right now is

people going long anthropic and short open AI and you can do that on on pair We've also seen people do trades like being long uh monad and short salana as like a thematic long short and then we've seen people take these kind of more statistical based long shorts where something decouples and they think that is a mean reversion opportunity as well. The challenge however for all these people so we're talking about crypto VCs we're talking about their existential problem we've talked about the fact that they can't necessarily allocate long only like they used to and the big problem for them is moving to longshore in a safe manner because they have legal teams they have compliance teams they have a mandate they have LPs and the minute you say short people get scared and rightly so you have to pay funding

you have the chance of potentially being short squeezed you have the potential to to be liquidated maybe even on that short leg and so that short leg becomes really scary for a lot of people. So, let's talk about how to address some of those concerns. Based on all the feedback and the crypto VCs we spoke to on the east coast of America, European based VCs and then once in Asia, they wanted a dedicated platform for pair and basket trading. And so, we built it. It's pair. It's called Pair Pro. It's been live for just the best part of a month now. And this platform essentially is you trading the spread. So you're no longer just clicking a whole bunch of longs and shorts and then seeing how the individual P&L on them. You're trading the spread between them. And at the heart of Pair Pro is risk management. So

when you trade a basket trade, you have one entry level. Let's say that entry level is at 95, right? You can set a takerit or stop loss on the basket level itself. So if the basket goes down 2%, you're stopped out of the trade. You can set a trailing stop. If the basket is doing well, start to take profit, etc. You could also do things like rebalance that trade fair frequently because that's what people do in in active management as well. The other thing I hear a lot is okay I can pair trade. I can go on hyperlquid or or somewhere like this and I can click a long and a short and if voila I'm pair trading and we can tell you from experience pair trading is so much more than that. You need to consider correlation between the assets. You need to consider things like

the beta and how to size those trades. You might naturally think, oh, okay, hype soul, I'm going to do $50 long, $50 short, but that doesn't give you that market neutral exposure you want because you might need to be 40 long, 60 short to kind of neutralize the beta in that case. And the platform will show you the suggested beta neutral waiting. The thing that I'm most proud of is we built something called agent pair, a dedicated agent to help people on their journey to do more pair and basket trading. So for the for instance somebody that wants to say long bitcoin and short some stuff against it which makes sense they could ask agent pair hey look I want to long bitcoin suggest me five shorts against it and how to weight it. That AI agent then will crunch all the data which is

available on our platform about correlation zed scores betas etc. And it will suggest you a basket trade based on your risk profile. You can then have a continuous conversation with that LLM and say okay this trade is doing really well. How do you suggest I rebalance this trade? and it will run those numbers for you as well. This is the world we've moved to. These strategies which were exclusive to hedge funds, you can now do onchain at a fraction of the cost. And so we've also reduced the friction to do these things because we know a lot of these cryptovcs, they use Binance, they use Bybit, they use Coinbase, they use Kraken. So to get started on this is super simple. You just add uh connect via API keys to your existing KYC venues and it opens up the entire portal.

Why are we the team to launch an institutional pair trading platform? We've been doing this since 2023. There's been over $1.6 billion dollars of volume executed on pair protocol. And we're a team of 14 people, mostly developer base, solving a very niche use case in crypto, which is cryptov is dying. There's lots of money there. They want to do more long shore positioning. How can I build it for them? And that's that's essentially how we've come to this kind of place. I want to double tap about the agent. There are lots of agents in trading in crypto. They're generalized. There's lots of AI slop.

They're all using the same kind of thing, right? They're they're querying chat GPT or they're querying Twitter or something. Our agent is hyper specialized for you and your trades for pair and basket trading alone. And I think if I look at the way that trading is going, you're just going to have hundreds of specialized agents who are good at one very niche thing. And then those agents are going to speak to each other. And so this agent for instance has an MCP where other agents can speak to that agent as well and you can tap that into your agentic workflows too. So let's recap a bit. We're seeing more of these traditional VC funds pivot to a liquid mandate. Within that liquid mandate, there's only seven or eight tokens they can realistically buy. And so some of those are becoming more like hedge funds. They're using platforms

like pair pro. The bottleneck is risk and compliance with this. And I think the way that we have seen people come to the platform is it's not about long short trading. Longshot trading feels very much like changing the mandate. What they're doing with the fund is that moving to a fund that is doing long short positioning and they put those trades on. They might look at them once a week, once a month, discuss them at a high level and then rebalance if they want to. And there's lots of tier one terminals, right? There's Talos, there's Coinroot, there's incilico, there's a lot of institutional terminals. We're solving one very spec specific use case, which is fundamentalbased basket trading with this platform with risk management at

the key of all of this. So in 2026 and 2027, I think the message is clear. You either pivot or you die. that old model that unfortunately some of us are married to with three or five year lockups directionally long with high draw down risk we saw in that first slide and hoping for some marginal buyer to come that model is dead and let's accept that that's dead and move towards a much more liquid pivot by using a platform like pair protocol or even pair pro you can lower the entire portfolio volatility you can have hedged exposure irregardless of if the market is going down sideways or up and most importantly you can leverage the skills of the investment team because these teams at cryptovc funds and liquid token funds

they have incredible analysts. These are the same people that can look at analysis and revenue numbers and trends and say okay I want to be long morpho and actually it's going to outperform a and I need to be able to put that trade on in a riskmanaged way. I need to be able to chart it. I need to be able to have risk management tooling around it. I need to be able to rebalance that trade. I want to chat to this agent about it and I want to put that trade on. And that's what we're really seeing. These fundamental analysts are empowered by a platform like pair. It doesn't detract and take away from their day-to-day job. They have a thesis on say being long hype, but they build conviction on how best to build a short basket against that hype long. And then they go back to their LPs and they say,

"Hey, I can provide much better risk adjusted returns." So a little bit about myself and why I I'm so passionate about this is I spent seven years of my career as a trader for Deutsche Bank in London. I was trading equity derivatives and then I spent the last three years of my career actually speaking to institutions and building longshot portfolios. So when a UK pension scheme wanted to build and implement a longshot strategy, they would call me and my team and we would work with every team internally from structuring to research to finance legal compliance and then the traders to implement those long short strategies. I got bored of that uh in in kind of 2019 2020 and I ran a long short book in crypto. So I'm acutely aware of all

these concerns of rebalancing and all of that when you're running a crypto book yourself. So if you want to start exploring more of this type of trading and you want to incorporate it into your workflow, whether it's via API, whether it's uh via coming to the UI, that's my uh email address. We have a booth here till Friday, but yeah, I'm happy to take any questions. I'm happy to have the opportunity to talk to people about a much different way of trading these crypto markets. Thank you.

Any question guys? I can go for one. Actually, it's funny enough. I I used to work at Bloomberg and one of my largest clients was Dutch Bank. So, I was in that exact trading floor in London like almost every afternoon. And I had to say those guys are animals. They're not people. Now, what what do you miss most about that life? actually if you miss any >> uh I think it's changed over time but like it's a very cerebral place right so the trading floor in an investment bank in London just like it would be in New

York is full of people from all over the world and they're the best at what they do and that kind of excels you to be better yourself. So in crypto like there's pockets of this right and you've just got to find them whereas in banking everyone is of that high caliber. It's it's insane. It's crazy. Yeah. But the world is completely different. I mean it's interesting because what a lot of the people come here on the panel and then they talk about you know traditional finance and how they are changing some bits of it but it's very cool the experience and then went on to actually go and change it. Brilliant stuff. Any other question? No. Then uh another big round of applause for our guest AF.

Thank you. >> All right. Uh