Genesis Meltdown Exposes DCG | Nic Carter

Transcript

foreign welcome back to another episode of Empire we've got the Thanksgiving Edition the turkey Edition here uh we're joined by per usual Santi and we are joined by special guest Mr Nick Carter Nick welcome to uh Empire my friend hello thanks for having me first time where are you celebrating uh Thanksgiving man in the DC area actually where I grew up so finally left Miami all right there you go yeah I feel like you've uh you've like you've become a real like Miami guy now so I'm surprised you left yeah I know I'm really kind of lamenting it because it's like 30 degrees here and it was 80 degrees and sunny in Miami but it happens here's what we're talking

about today folks we're talking about Genesis and dcg we're talking about uh Bitcoin miners we're talking about Ave and CRV stuff and we are talking about proof of reserves and proof of solvency so I think the best place to start is Genesis let me give the like as I know its situation so it looks like genesis um is kind of on the verge of bankruptcy I would call it here uh as reported over the weekend so Genesis was initially trying to raise a billion dollars to fill this big hole in their balance sheet I think they asked binance to invest Finance declined citing that it I think binance cited that it could lead to a conflict of interest down the road which I didn't fully understand Maya if I'm binance I'm like I don't want to touch that with a 10-foot pole because of U.S Regulators so then basically

they're trying to raise a billion that didn't work out they then cut the desired funding in half from a billion to 500 million um they not noted on Monday that they're at risk of bankruptcy without the new funding now there are fears that this like potential Genesis bankruptcy is spilling over to the parent company dcg um dcg has a has a liability I think out to Genesis of about like 550 or 575 million that's due May of 2023. um the loans as they said were those those loans were used to fund investment opportunities and to repurchase stock from non-employee shareholders Barry sent this letter to shareholders it was kind of this like basically just like

calming people's fears hey we're all good we don't need to raise Capital right now we might need to raise the future kind of this fluffy shareholder letter as you would expect so Nick I'm just curious to get your take on the unfolding Genesis dcg situation right now uh it's a scandal um I find I think this uh revelation of the 575 line of credit out to dcg from Genesis is pretty shocking actually it looks like they're just plundering Genesis dipping into the cookie jar to fund uh BuyBacks for dcg which uh seems pretty regular um unclear what's going to happen with Genesis obviously they've taken a number of different hits here starting with uh UST I think they did that disastrous

trade um then moving on to um you know kind of all the subsequent credit events that hurt them and now the question is does Barry have enough sort of family silver to sell off to keep the Empire afloat and I think it all comes down to the grayscale franchise whether they're able of course they own roughly 10 of gbdc are they able to restore that discount to something manageable um worst case do they have to liquidate the trust um or do they have to sell it off to another asset manager um he kind of struck a brave tone and defiant tone in the note but uh the

reality on the ground looks pretty bleak to be honest with you yeah yeah I don't understand I might be totally missing a capital allocation decision here but I feel like we keep seeing companies that are uh pulling out these massive amount of like Levering up basically to make these illiquid investment decisions so one of the reasons they said that they took the loans out were to fund investment opportunities when I think about an investment opportunity that's on a horizon of maybe I mean they have a huge portfolio of you know Venture portfolio like you don't you don't take out six-month loans or 12-month loans or 18 month loans to fund an illiquid three to ten year investment strategy they're like I I just feel like I'm missing something here or or maybe they're just incredibly optimistic they

thought the bull market continued but I mean what am I missing here Nick yeah it appears that that was kind of the case that you get now this maturity mismatch where you have potentially short-term liabilities with the withdrawals from Genesis as we've seen this Bank Run Like phenomena happening in the industry and now their asset portfolio is illiquid it's you know dcg equity and it's unclear how easy it is for them to um you know actually render that liquid or it might be the remainder of the dcg portfolio which is a lot of private Equity so it I'm not at all comparing it to FTX in terms of like fjx was clearly incredibly mismanaged I'm not saying that's the case with dcg but I agree

like Genesis has short-term obligations but unfortunately it appears that a lot of their liquid Capital was redeployed into illiquid long-term assets and now they're in this huge mess trying to raise capital in short notice which I think they probably will be able to do but it's not an unbeatable so you think they'll be able to raise the capital you're saying yeah I think they they have a number of avenues to do that um there's you know the dcg family has all sorts of different things they have the enormous Venture portfolio they've been among the most prolific Venture investors in the crypto space they have liquid crypto assets they hold gbdc of

course that is not at a valuation where you'd want to sell it right now and then you know they have this cash generative asset in the form of grayscale uh with the fee stream Associated so I don't know overall I think they do have sort of avenues here but yeah I mean kind of a tough situation they found themselves yeah I mean I guess you're if you're dcg they have a bunch of uh I mean they're basically sitting with a balance sheet they have debt that exceeds their assets right and they have limited liquidity but they also have grayscale which produces like you know spits off like 250 or 300 million a year in fees and their AUM is locked so I guess dcg the hold Co should be able to raise money

um if it can kind of limit limit those Genesis liabilities um Santi where do you think we go from here yeah I've been thinking a lot about this um I don't disagree with what you guys have said like I think uh from the asset side of the house like I think all of it started here was certainly like Luna hour three hours blow up put them in a big hole um and also it sounds like they've been doing the same Degen trade that a lot of funds have like three arrows have done which is just doing this recursive leverage to are about gbtc right I mean they're the largest holder of gbtc they own like close to 10 of it you just assume that they're not going to be able

to touch that like there's some appetite in the market uh the the discount dipped all the way to kind of 50 47 50 and then it got bought back like Arc stepped in and bought a bunch but I just find I just just assume that that is not going to be liquid they're not going to want to touch it I think because then they would just crush the market um yeah okay you have two 300 million of ARR from you know the grayscale franchise but uh I don't know historically like they've at the peak like that was generating close to a billion right because asset prices were down like a

bunch and so the latest valuation was 10 billion so like on a p basis it didn't get much and it's kind of like uh uh Galaxy digital right it trades very close to book value um I think this is a better business I think just purely because of grayscale but the question that I have in my mind is if Barry is who I you know from a network standpoint I think you could probably like cover and and inject cap more Capital the question is really want to do it just like let Genesis fall like why why have we gone this far we could just have stepped in two weeks ago I know he's been like plugging the hole but the holes can we just also talk about the whole set of communications

has been very bizarre like in a in a time in a market where you don't want to do that time like every company in crypto now is just being really cautious with their communication it's like it never ends well when lawyers take over Communications because you know [ __ ] has really hit the fan and I'm wondering if that's the case here as well there is one suggestion that I have I don't know if they're taking feedback right now but I think one way to close substantially close the discount would be to commit not today but to some point in the future to winding up the trust um which they could do as the trustee

sort of unilateral and um I think if you create a just a market signal that at some point you intend to wind it down the trust in a year or two or three years you say there is going to be this event where it will convert it you know at par to the underlying I think that closes the discount substantially Nick is that the same overnight or is that right now yeah um this is just more messaging I would say I don't think you even need SEC approval to say you know put out a blog post saying we intend to actually at some point eventually wind it down

I believe regum um I think the discussion around that was could uh grayscale could dcg itself um just do a one-time Redemption of Their Own 10 of gbdc uh at par which I think would be um you know be met with allegations of unfairness because you know they would just be extricating their own shares and Retail wouldn't be able to get out um so this is more just a messaging thing which which I I don't know if you know that's feasible or not but that's sort of what I do in their shoes yeah but it's I struggle to to this is the proposal sulcus was

pushing for as well and even in like Barry in What scenario would he want to let go of a 200 if potentially a billion dollar AR business it's just the incentives are not there right if I mean if you expect that there'll be an ETF conversion in say 36 months um you could you might as well say okay well we're going to lose this the bulk of this fee stream anyway or it'll come down substantially so you might as well say it's a wash you know maybe we'll get that SEC the the ETF conversion eventually so we might as well just commit to this but uh or risk even if you don't do that though because my understanding is the plug is

roughly 2 billion right the mismatch is close to 2 billion and so if they were to sell all 10 of their stake assuming they're able to do that gracefully and maybe they're they've divest other assets like I struggled to see how they come up in a like a restructuring scenario and they've hired Mullis I think where Genesis has hired mullets or lizard I think to advise on the restructuring it's difficult to see how they kind of plug this Gap without an infusion

um and even if they were to try to fire sale some of these assets uh it probably wreaks a lot of havoc in the market but I think there's if if they don't go the reg M option which I don't think they'll do there's basically two options right like dcg either it comes down to what the if they can agree to a deal with the Genesis creditors like I think it was selfish who laid this out like option A dcg negotiates right resolution with Genesis creditors everyone avoids bankruptcy dcg survives it's option a option b is creditors reject a deal Genesis goes into bankruptcy years of Court battles likely the same bad result for dcg so it seems like those are the two options here and it really comes down to can they agree to a resolution with

Genesis creditors or not so Nick do you have a sense of where this plays out with uh with you you think Genesis excuse me you think dcg is gonna be fine here I mean the asset is pretty substantial and I'm not going to say Diversified but they have a bunch of different revenue streams um over the entire apparatus um Barry has been historically one of the best entrepreneurs in the space if there's anyone that can extricate themselves from this I think it's them and I do think they have the credibility to raise here of course capital is pretty tight right now and crypto looks toxic but uh if I were a betting man I would

say they're able to actually execute themselves from this I want to ask you Nick so the last valuation was a 10 billion that was like over a year ago um they raised from a few folks um um historically I think he's rovered a lot of the secondary um from employees and whatnot and that is the thing come to light here where they use some of the capital like they borrowed some capital from Genesis to buy out um you know other investors in the cap table I think Barry historically wanted to clean up the captive and just been very aggressive in buying back chairs at what valuation would you invest assuming that Barry opens up around for dcg now this is just purely speculative but is there a price here that you would feel really um interested in is it 1 billion is it 2

billion is it five what's that magic number for you yeah good question I mean I'm not my expertise is certainly not investing distressed uh financials um but I mean just based on comparables I would say what I'm seeing in the market is anywhere from a 40 to 50 percent discount on those rounds that were done in 2021 is kind of where I'd expect this to trade yeah yeah because if you were to do with some of the parts like you have coindesk you have a pretty substantial Venture portfolio a liquid but there's some value there you have Foundry You could argue has some value or none

um then you have dcg uh sorry grayscale and so the the real prize here is I think grayscale um and then to your point I think the biggest question is how long can that stream of cash flow continue 200 300 400 500 it's fairly predictable other than this binary risk but you take a discount on that's a really attractive asset um so you know I do agree with you I think I think they'll be able to get the deal done the only thing that I'm like really kind of don't understand is Barry for someone that historically has been very aggressive in buying out existing shareholders has been a very silent the communication from Genesis has been very

cryptic and panel recognition like it has all the red flags and other you know folks recently have like FDX and throughout like you know I mean like in Luna like the communications there have been very erratic and inconsistent to the point where they like kept retracing right and so there's not much confidence I I think that we're operating here without with obviously imperfect information but yeah it's it's fairly concerning that he hasn't at this point stepped in and just like plug the Gap himself I think do you think it's concerned do you think it's uh concerning that grayscale won't share their proof of reserves due to like quote-unquote security concerns

well that's really on coinbase you know they custody the funds with coinbase um I'm not going to speak for coinbase but you know from what I understand they've historically resisted doing por due to the uh the view that it leaks too much privacy and it maybe requires them to reconfigure their setup uh which is pretty arcane actually coinbase doesn't just have everything in a couple cold wallets it's much more complex than that so that's sort of really in coinbase is you know the ball's in their Court um and it's just unfortunate that they can't provide the pass-through Assurance

but I don't have any doubts whatsoever that they have the funds I mean they're an audited public company and they did break out the user deposits on the platform in their last uh filing so um I consider that as good as a proof of Reserve is just the fact that they're a public company and they have their audited financials so that doesn't give me any concern really yeah you know nevertheless I would say disappointing especially as everybody else is doing proof Reserve now yeah well Nick I want to ask you a question obviously there's other creditors uh of Genesis you don't have to talk about your particular situation but uh is that something that you know of like how um flexible and willing are these creditors

um willing to like just buy more time um to play this out kind of this multiple scenarios and just because I think a lot of a lot of the liabilities were due now right as you as you want as you got withdrawals and they couldn't match them so I'm curious if you have had conversations with a lot of the creditors the positors of Genesis and what the thinking there is if there's a coordinated Action Group to figure out a situation yeah good question we're not ourselves creditors of Genesis um and that's actually maybe the biggest question mark hanging over this whole thing is who they are there's a distinct lack of clarity

um you know I've been trying to determine uh what that creditor based uh consists of and it's very hard to find out um I would guess that there's some other Gemini urn type platforms where you have white label platforms that are giving folks access to those yields via Genesis um but yeah we've we've been trying to figure that out ourselves and and have had very little luck so far I wonder if you could see a situation where Genesis creditors end up just basically rolling their claims into dcg uh dcg warrants basically that that actually feels like a potential potential situation here yeah

you have like a senior claim on like the stream of cash from grayscale right that seems to me like I'll take I would take that like basically refinance the debt into into dcg debt like like Gemini could probably also cooperate here they have like 350 to 300 350 I think is the aggregate uh of their program earned program and so I think they could probably like work something out um if you're not a large fund or what have you you might have redemptions which is probably tricky but yeah this is the biggest question mark and I I think I'd love to see more clarity if anyone has thoughts please post them or who can bring you on next week

yeah cool anything else on on dcg Genesis Nick any last thoughts here no all good cool um all right Nick throwing you into uh the fire for the next one it feels like it's a it's just like a continued Bitcoin minor bloodbath out there um I was trying to decipher some of this data it seems like the most aggressive minor selling that we've seen in like since I since I've that I've ever seen I think I'm there's probably been a worse time than this but from the data I was looking at it seems like the worst or the most aggressive minor selling that I've ever seen um and it just seems like if the prices it seems like right now if the prices don't go up we're going to see a lot of Bitcoin miners out of business we've I

think we've been saying this though for for months so and we haven't seen folks go out of the business maybe one of the reasons folks haven't gone out of business yet is because they had access to Capital through these lenders but now that the lenders don't exist uh or that they've kind of closed up shop for a little bit um maybe maybe that maybe that's like the the straw that breaks the camel's back so what's the kind of state of Bitcoin miners today yeah I was at the Texas blockchain Summit this week um which was always well attended by Miners and the atmosphere was pretty Grim I mean as I said on stage miners have faced a quadruple Whammy bitcoin price Has Fallen interest rates have risen so financing costs are up

uh hash rate has risen dramatically especially with the merge the merge had an effect on bitcoin hash rate as some mining Farms converted into mining Bitcoin and power prices have gone up obviously and uh so that basically put the whole mining sector out of business almost these miners have been operating unprofitably for the last few months they've just been mining in order to cover their interest payments for the most part so they're not making money on every unit of Bitcoin that they mine they're losing money uh what you'll see now will be continued consolidation continued collapse insolvencies in the mining sector

uh especially as so these minor financing businesses will start repossessing Asics that they're lending against that's happening right now you'll see some more bankruptcies um maybe a handful of well-capitalized miners Will Survive the ones without as much debt uh but yeah I mean really disastrous sector it's kind of been overlooked because of all the other issues we've seen in crypto but uh yeah one of the toughest corners of crypto right now most of those public miners have underperformed Bitcoin even this year so kind of a shocking space for uh maybe the less um or unfamiliar listener is can you explain this relationship between hash

rate and the adjustment there and the difficulty like you know because a lot of times people like maybe for an unsuspecting let's say wait a minute does this like put in Jeopardy does this risk the security of the Bitcoin network if a lot of these miners go offline and energy prices continue to persist and be high into next year like how does that work because I know there's some Nuance there that perhaps listeners might appreciate foreign yeah I would say the hash rate figure is pretty much arbitrary so I don't think there's a linear relationship between Bitcoin hash rate or difficulty and the security of Bitcoin really you know it's

just a function of the revenue um expended on or you know the revenue that validators can earn which is a function of the issuance rate which is fixed and obviously Falls every four years plus fees which fees are de minimis right now and so that's really your measure of security is kind of the cost in I guess dollar terms to gain sufficient share of hash rate to interfere with the protocol and you know minor economics are kind of exogenous I mean the miners go out of business and your new miners pop up you know that's just the normal churn I guess for the sake of decentralization

all of that said it's still not a great phenomenon that the miners are consolidating right now because it means there will be fewer miners coming out of this crisis it'll probably consolidate into few larger minors so you may not like that feature but overall um what I would expect to see here is uh hash rates start to come down I think miners will start to underclock their Asics so to economize on energy costs they'll run the A6 a little slower basically and of course some of these A6 will just end up being repossessed and there'll be some latency before they can

be turned back on again so I do think hash rate will come down here but there's no like level of hash rate where I consider Bitcoin secure or insecure so to speak the hash rate figure is kind of arbitrary me I what I look at more is like what's the aggregate level security spend on the network so I would worry if like in 10 years time fees don't materialize kind of thing but I wouldn't say it's it's insecure now you know even if mine has got a business on the fee side of things I mean there have been some fairly positive developments on the lightning Network I don't know if you want to touch on that in that context because I mean my understanding now is that this this question comes up over and over not as

fun but just as the what's the security budget of Bitcoin in perpetuity and a lot of people say wait and perpetuity is a tough question like things are going to change a lot we normally we know it's a problem that can be addressed in 30 years but it's something that I do think about a lot and I think there's others in the Bitcoin Community like James prestwich and others that have introduced this more of a debate of what happens and how do we kind of I'm curious if you have a view there you know this idea that there's 90 plus of fees are coming from block rewards um and at some point that's going to go away and you need to have more uh coming from transaction fees yeah I mean right now it's more like 99

plus the Bitcoin fees are at a in Bitcoin terms at like a decade low so either way the trend is not positive there you need fundamentally more on-chain utilization to backstop security especially as the issuance decays to zero and if we're not seeing that utilization it will soon be time to sound the alarm I think and you know I used to think you know you could have sufficient fees to support security um you know such that the fees would be the sole part of the security budget but it's clear the fees are cyclical whether it's Bitcoin or ethereum fees are just generally very cyclical and they

correspond to Market cycles and interests and activity and cyclical fees would mean that in a bear Market in the sort of distant future maybe 10 20 years from now that means your security budget goes to almost zero if the blockchain utilization goes down so it's not really a sufficient way to backstop security a fee only regime so I I that does concern me to be honest with you does that uh where does that leave you in terms of this desire to hold Bitcoin I mean you know I I'm still you know pretty content with holding Bitcoin um especially given this is a sort of medium long-term problem I do think

there is kind of solutions to that um but it's just that you were only going to be able to Galvanize political support when it becomes clearer to more folks that there's a problem and uh some people really don't like the proposed Solutions one of course is reinserting issuance that's the kind of like simple approach another one would be like recycling old utxos maybe decade old utxos back into the security budget another one would be kind of a de facto solution which is large exchanges and custodians to come like altruistic minors which basically backdoors the network into a de facto proof of stake Network and

people may not like that that's actually kind of where I see this going it's not like a formal switch to prove at stake but it just sort of happens over time yeah historically I've thought of you as some of that has been perhaps more on the Bitcoin camp and supporting a lot of the infrastructure there and um can you talk a little bit about I know this is a weekly round but I'm just very curious of your evolution of thinking in the space you've been around for a long time um particularly towards more recent developments like how have recent developments changed your Frameworks your mindset your thesis if you will I'm curious of you how you're processing all of the stuff that's going on recently and it's a lot yeah I mean obviously you know over the

summer the Bitcoin has all became very upset with me because it became clear that we invest all over the crypto space and not just Bitcoin but that's always been the case since we started our firm in 2018 so there's no nothing new there I think the intellectual dynamism in the Bitcoin Community has decreased uh some bitcoiners have just defected or become more pluralistic in their Outlook and um you know this is this the trend of sort of Bitcoin fundamentalism which is really unhelpful overall I know a lot of bitcoiners are like claiming Vindication with the credit crisis uh because they tend to be averse to credit and with the FTX crisis but no

one really saw FTX coming to be honest with you so I don't see that as a win for bitcoiners I think it sets back the whole Space Bitcoin included and uh there are a lot of Bitcoin businesses that used FTX as a custodian so it's not good for Bitcoin either um so I don't see like the Bitcoin Community is having like experience to win throughout this crisis like it's just an unmitigated bad situation for everyone in crypto um and I don't see it as pushing newcomers towards Bitcoin it's just going to push people away from crypto if they trusted FTX and their savings evaporated so yeah I'd like to see more debate in the Bitcoin space more openness to new

ideas um and you know maybe more creative ways to insert Bitcoin on other blockchains to make it more synergistic with the broader crypto space such that Bitcoin can benefit from you know interesting new developments that are happening elsewhere whether that's new models for l1s or interesting Altus roll ups Etc that's kind of what I'd be pushing for right in many ways that could but then she also alleviate this fee problem right because if Bitcoin becomes a security budget shared security budget for some of these other blockchains then perhaps they could share some of the fees of other networks but you know you have issues of around like Rob Bitcoin and other instances I mean at some point Bitcoin you know became a fairly interesting

collateral type in D5 and ethereum at its peak I mean it was like small numbers like less than five percent I think like certainly you know not where you'd potentially want it to be but it was interesting that there were some bitcoiners that started to want to get more utility out of their Bitcoin as opposed to just holding it but you know just lending it in a decentralized manner that was in accordance with their ethos because if you're lending it to Genesis well you know that's a problem if you're lending it to FTX it's a problem right I think the core values of the Bitcoin Community are very much decentralization and uh you know I was excited I'm still am about what you just said which is allowing Bitcoin to be used in some of these other networks whether it's security or just to give

more consumer preference to a Bitcoin holder it's kind of my current priority is well a reforming the exchange space so proof of Reserve is part of that because I don't think we're going to get away from centralized exchanges anytime soon and then B finding ways to allow Bitcoin the collateral type to be utilized elsewhere because I do think it has good properties and the challenges are there trustless ways to bridge it over to other chains obviously we saw the failure of a certain kind of wrapped Bitcoin around the FTX issue um so that's just I think the challenge there is plenty of basically the desire of Bitcoin is to get yield on their Bitcoin through things like I won't actually name names but like

yeah basically centralized decentralized uh lending platforms you know the idea I brought up the idea uh to a group of bitcoiners uh of of basically bridging over to Avalanche and getting some yield you can do like btcb uh through through the core wallet on on Avalanche and it was like this Preposterous idea uh the idea of bridging over to Avalanche was like the most ridiculous thing in the world but giving your assets to FTX Voyager Genesis block five was like this totally normal like yeah that's that's a safe thing to do so it just yeah just struck me as funny yeah I mean it just reinforces the need for actual meaningful D5 lenders here whether it's the over collab Orthodox defy approach or the new breed of under collat D5

lenders uh where there's some you know portions of centralization but still things are much more transparent than these black box centralized lenders so you know there's a path forward here which is just returning to the sort of core values um of like actual decentralization like decentralized Finance yeah that's the way Nick now that we've been running proof of uh now that the merge has happened we've been running proof of stake for a little while now do you have thoughts on just I mean that's a really big question here I'd say but just proof of stake versus proof of work and like the two just the two different systems I guess now that now that we've seen proof of stake in action for a couple of months yeah I mean I was concerned about the

um not even strictly a proof of stake problem but like the influence of Mev in terms of possible sensorability um and the trend there for a while was really concerning um with the I consider over compliance not just ofac compliance but over compliance as in proactively filtering out transactions um obviously it never reached iteration on ethereum so it wasn't like transactions were never included but the trend was worrisome there I think just in the last couple days we've seen a real commitment from the flashbots side of the house to reversing that so I have seen a reaction in the ethereum community which was encouraging which is

really pushing back at that Trend uh but that's like my main like concern or worry about proof of stake is is that it you know does vast a lot of power in the exchanges custodians the larger institutions that ended up being intermediaries in that system and I don't think I think the jury's still out is like I want to see how proof of work reacts to a similar um challenge of I think Mev will emerge even in Bitcoin uh if especially if it gets more expressive I would like to see how Bitcoin would react to that that might be sometime in the future but yeah that was kind of my main thing is one is Mev uh tends to be a centralizing force

and then two underproof at stake are you vesting too much power in the intermediaries and you know we've learned obviously in the last few months here that the intermediaries are kind of not to be trusted how is um how are you positioned um you know as an Institutional Investor into space given everything that's going on like Curious um maybe you do this maybe you don't but like at the beginning of the year kind of going into the year uh we were coming off the high and now where we are now I'm curious um how you think about the current landscape and where you see um example the most amount of opportunities yeah I mean we're kind of just still doing the same thing that we always do I

mean we don't really try and pick Market Cycles uh we don't really trade a liquid book it's really just deploying progressively into startups so you know we do ease off the gas when we see valuations getting extreme and then we put our foot on the accelerator so we try and be counter-cyclable put our foot on the accelerator in a time like this so overall the strategy is pretty much unchanged I would say for us right now big focus on defy I think D5 is really distressed you know it's really out of favor overall people are kind of really questioning it so I like that space right now in particular I like the new breed of lenders that are trying to rebuild crypto credit from scratch in a

more trusted way in a more accountable way and then you know we're looking a lot of tools to promote you know crypto dollarization uh you know safe and responsible wallet non-custodial wallet usage especially as you know these currency crises occur so kind of the same strategy as ever for us and now valuations start to look more reasonable founder expectations more reasonable so um you know we're glad that we have a lot of dry powder to deploy do you do you think that crypto has a ux problem I was it's I don't know if I characterize it as ux problem it's sort of like an inherent issue is that like we're talking about digital Bearer assets so

you know if you want someone to really own these things they have to be comfortable with like the opsec challenges of holding information which is tied to value and I don't know if I want that to be solved with slick uis or anything we I think we need to you know develop better tools such as you know regular users unsophisticated users can safely transact and I think a lot of that involves MPC you know more sophisticated schemes that look like web 2 authentication schemes um you know better wallet recovery such that you're not just writing down 24 words on a piece of paper I don't think

if this ever goes mainstream if we're writing down uh you know seed phrases on paper so yeah I I am really optimistic about what I'm seeing right now Mika had like Solutions like social recovery urgent and what have you which I thought would have gained way more traction by now but you know I think these things take time um you're someone that is close to you know traditional institutional players like fidelities of the world I think they you know you have a strong voice in the space and I'm curious like what you're hearing out there in terms of um you know how much of the current development slow down institutional adoption and this is something that we talk about over the years and do you a believe that institutional adoption uh how you

characterize it as as the importance of it and two like how much of the current developments like what is going through the minds of fidelity Schwab JP Morgan now that given everything that's going on I mean the FTX crisis might change some things because it has shaken confidence in the industry so we'll see but aside from that I would say this year overall has been positive institutionally Fidelity finally went live with their retail crypto product after you know sitting on that for years and years BlackRock has finally begun to you know actually dive into the space you're seeing custodians like bny Mellon finally make a play and

the major investment Banks I would say have also shown a Resurgence of Interest so those kinds of Institutions the kind of asset managers I think they've finally actually made their way into crypto the institutions that might step back would be like the allocators Pension funds endowments yeah like you know large pools of private Equity maybe that were allocated encrypted directly or through Venture funds yeah so I think think institutional allocators might take a breather for sure on this point um you know macro aside but you know if and when allocators are more risk on and they come to crypto

um what do you think the allocation looks like in terms of historically it's been very Centric and weighted towards Bitcoin whereas some allocators like if expressly not touched anything other than Bitcoin maybe it's because of a number of reasons um regulation being one of them but how do you see that ratio and dynamic in the next cycle or when I say the next cycle is when allocators are on a risk-on mode and come back to allocate to to the asset class yeah I mean for the first time for these like non-crypto larger allocators I'm seeing it more of a preference for ethereum as like their first foray into the into the crypto space into spot exposure I think Bitcoin

still is a role to play and then I think you know the L1 the new L1 trade that's a little bit played out I don't know if people necessarily trust those after we saw what happened to Tara and Solana to a certain degree I don't know if there's going to be faith in the emergence of these new l1s and this constant L1 churn anymore so I think it's going to be more of a function of what's robust what has meaningful security and staying power and liquidity in developers and applications and I think it's just going to be a preference towards just the more developed larger established chains I guess the last question for me is on this point uh there's a lot of

discussion around the future of Solana we're going to have an episode next week or in the next in the coming weeks with Anatolian Ben who runs BD there what has been your observation how have you been involved or not in the Solana ecosystem certainly FTX and Sam played a big role from a BD standpoint of putting it on the map of of institutions in the default ecosystem there um what do you think is the the future of Solana and is that an ecosystem that you're looking at have been investing in yeah we've we've allocated to the Solana space um for sure that's probably the third uh the third ecosystem for us um

I think the FTX influence was meaningful but if anything jumped crypto was more the steward of that ecosystem um I do perceive that it has exit velocity in its own right I think they can survive the loss of confidence here it's obviously painful in terms of the very rapid liquidation of the Solana held by Alameda FTX Etc but I in terms of sort of like the Grassroots enthusiasm for Solana Dev and applications and like their own little defy ecosystem I definitely see that as sticking around no question about it

yeah um as a cat you know maybe as a casual Observer that comes into the space like we're talking about Solana and sometimes we over intellectualize things you know as it stands Solana is you know on a circulating basis you know like the 17th largest network but ahead of that you have stuff like Shiba Inu you have polka dot you have Dogecoin cardano Ripple like these are some of the names that if you were asking like two years ago I would have said like I think we would have come farther in the in the market cap tables where you know you would have seen networks that are seeing much more applications and developers kind of move up the ranks but somehow

somehow mean power has staying power and and Legacy networks that have kind of failed to really ship much of continue to hold their ground like do you see that as like a bit demoralizing and this goes to the heart of the question that I think a lot of us ask us ask ourselves in in current market environment which is like where are we going as an industry like and and this is just sort of like a 24 7 stock market and people like to speculate and has meme entertainment value and maybe that's okay and we should be more transparent and like honest about that I'm curious like as you listen to you're

saying you're saying you don't like the fact that Litecoin is uh has a higher Market Captain Solana right now like litecoin's ripping now because it's happening next year or something like it I'm just saying like it sometimes can be a bit frustrating to see that for some folks like if you're a network that is like all of defy has super powerful properties that I think are not fully understood like but it's been in a bear Market for the last two years and I understand this recursive leverage has gone away and yield farming is is not a thing anymore but but it has real value and some core like use cases yet collectively what like I don't know

Ripple is probably worth more than 80 of D5 um which pretends to be like a you know the app of the future for for defy cardano like cardano and ripple combine and Litecoin probably are worth more than all of defy I just I just look at that and I get excited because I think that's the r that you believe in today that others will believe in over time but man it's just been taking a while to like rinse off a lot of the crap that continues to exist yeah I mean as as an allocator I think that works to our advantage really if we see something that the market doesn't right and so I don't worry too much about the relative valuation against the more like retail focused like coins which are solely their

valuation is solely derived from like the their Founders ability to you know attract uh you know new retail investors or anything for me it's just a question of you know can these all ones Define you know serious accretion mechanics you know like I would say that's the big one of ethereum is they were able to create this actual meaningful narrative as well as to why the coin should have value and build those into the protocol directly the question is can the other l1s do that if you have a vibrant defy ecosystem I think your prospects are a lot better but we still need to work out

a good theory of evaluation here um so that's kind of the challenge I'd put in Solana's core is can you take advantage of like the momentum and traction you have and actually convert that into sort of enduring value this will be my last question I promise which is um how do you think about like what were some of the perhaps come it could be a company or a thesis that you had you know call it two years ago the beginning of the bowl that has taken longer the you'd have thought would like be a killer use case or would materialize gain much more traction that it hasn't today yeah I mean it's funny

um when we we looked at the early FTX rounds and we didn't do it actually um I'm not going to beat my chest or anything but basically we thought starting a new offshore exchange was too sketchy and too difficult from like 2018 onwards and we did uh an air we did the RSX deal which was a bet on onshore highly regulated crypto exchanges and for a long time that looked like totally the wrong call I don't know if it was or wasn't but uh that was kind of our bet is we were betting on the regulated crypto onshore Market out competing the offshore Market for a while that went the other way now

I think you could make the case that the there will be this meaningful distinction between the onshore lit market and the offshore Market so that was one where we kind of beat ourselves up over it for a long time but I think probably now it's the case that it's going to be really hard to build a new offshore Exchange post FTX collapse so yeah I would say that's the thesis that I always thought would play out would be you know the crypto industry would just become more accountable more surveilled not in the bad way but just you know more meaningfully Incorporated with the with the like domestic financial industry I think maybe that's you know hopefully that's sort of like the path forward do you think that given recent events

compress the timeline to get more regulatory clarity which has been kind of non-existent in the space for a long time yeah undoubtedly I but it's on us to like advocate for ourselves in Washington make sure that the clarity is you know actually helpful to the industry and you know helps for Consumer production things like that as opposed to just being super burdensome and forcing the industry out of the US further Nick I want to rap um I'm just talking about reserves for a second you had this line I think you said it on Twitter you said if there's a if there's a single thing I could do better I think that this industry could do better it would be to convince every custodial service provider in the space

to adopt a routine proof of Reserve program can you just explain your rationale behind that I remember you writing about proof of reserves back in like 2019 or 2018 so I'd love to just hear you expand on that yeah and the real benefit and so when I talk about proof reserves I am referring to both sides so I'm talking about proving your ownership of crypto assets plus liabilities I think it's incomplete without the liabilities and most people note that maybe we need to Rebrand it to PRL proof of reserves and liabilities because there's a lot of confusion or solvency solvency is also hard though because that requires a full audit of all the possible liabilities there may be additional encumbrances but yeah I mean I think proof of

reserves really shines when you don't have strong legal assurances like with coinbase for instance we can kind of know based on their audits the fact that they're publicly traded they have a big four auditor Deloitte so we kind of know that what they're saying is legit even if they're not doing in a cryptographic way River reserves shines where you don't have those legal assurances where you would prefer a cryptographic attestation over nothing and so I think it's really relevant for the offshore exchanges of which there are still many and encouragingly we just saw okay coin release approved Reserve

at a station today including the liabilities so they'd be a prime example I would say binance is also in this Camp the prime example of a firm where the end users gain a ton of confidence in their solvency if they can carry out this out of station especially if they're not ever going to be a U.S publicly traded company or anything like that so I you know for all of those offshore ones I think they really don't have a choice they probably have to do this now uh for the onshore ones I would say it's less urgent but yeah I'm really excited I've heard that there's you know at least two dozen exchanges they're looking at doing a proof Reserve now I don't think that does go a long way

towards winning back confidence especially as it's been shot but this will work do you need to use do you need both users to verify their individual balances in some way like like this herd immunity and a third-party auditor or like what is the mechanism by that like how that works yeah there's a bunch of different schemes so bitmex and OK coin those were users could verify them but they didn't bring in a third-party auditor for Kraken they did bring in a third party auditor but just to make sure that the liability extraction was complete but yeah in theory if you're doing the procedure right you don't actually need an auditor but you know I if you're up to me if I

were defining like a ideal proof of reserve it certainly would include an auditor just to make sure that you're not playing any games with the liability side you know I guess on this point uh do you think I mean you had like Enron like you have Arthur Anderson like I think like to me it's a bit shocking how much I guess without introducing my bias I guess how much do you buy this by do by having this attestation it's like a security concern seems to be like the excuse of why they're not doing um this authorization like to me that is a bit of [ __ ] but I'm curious to get your opinion I mean I do totally acknowledge that the current

localized way exchanges do the liability side leaks some information not necessarily personal identification information not pii but it does leak info as to the relative ownership and the different kind of assets people have and then the change over time if you're doing on an ongoing basis if your leak if you're releasing a huge data set of a 100 million entries there will be some ability to do some forensic accounting and find interesting info and that I'm bullish on like ZK proofs for liabilities vitalik had a good post on it recently there have been papers on it I think that should be the path forward

um in terms of the you know does it um you know trade off against existing custodial setups I think that's true um it's just that we're in this transitional phase people didn't configure their custody such that they'd be able to easily export the liabilities and the assets and so it may well be the case that they feel that there's an issue or possibly a slight risk with signing transactions frequently and things like that so I get that but I think exchanges are just gonna have to reconfigure their back end such that they could more easily do these procedures in the future just feels like we're playing all the doing all these like work around

um solutions for these centralized exchanges when we have the solution with decentralized exchanges and and I think it was vitalik in his post at the end and the conclusion he's like I could see a world where we basically end up having dexes and then centralized exchanges that are like half custodial where maybe we trust them with our Fiat but with their but then the crypto is held in the smart contract or something feels like a good solution yeah I do sort of agree with Nick though I think that we should just assume and build with the assumption that centralized exchanges are always going to play a role in this industry for on-ramp off ramp kyc AML a number of reasons and so I think we should just hold them to the same standard uh that

we know and canned with the tools that we have like you know there should be no excuse for any exchange not to have proof of reserves and liability and it's not that hard or costly to do to be honest so it's a small thing and it does win a lot of user trust so not a lot of downside I want to wrap with one question here Nick which is uh first I want to give a plug to your essence podcast because on on the brink is uh folks don't listen on the break people should listen to it um but you and Matt tend to agree on most things but sometimes I hear in your guys's voice that maybe you're disagreeing on something so I'm just I

want to just ask it as a question which is what what's the big thing that you and Matt disagree on these days as you think about investing in the spare Market yeah good question I mean I'm sorry but I won't uh I won't surface those here um I would say probably disagreements in terms of the relative Pace we should go in we should be going so like do we think things are fairly valued now or should we sort of wait longer to have you know founder expectations come back to reality um which uh L1 we should be spending more time on

um but yeah you're right we we agree on a lot Matt's Focus tends to be more on the sort of uh intersection of traditional finance and crypto and mine tends to be more sort of on pure crypto I would say but um yeah that's why we've been able to stay in business together for four years I guess the disagreements aren't too no and disagreements are good why can't I just disagree all the time what uh who wants to go faster right now what's the you want to be allocating he doesn't want to be allocating you got what's the disagreement I would say yeah I'm generally on the side of taking on more risk and uh and right now I see a ton of opportunity in the market both liquid crypto and you

know Venture Capital private Equity so it reminds me of 2018 which was an incredible time to deploy so nice oh we're rooting for you um any last thoughts here before we wrap no I mean uh I will be writing more in proof of reserves stay tuned I know there's a ton of new attestations coming out it's not a Panacea I do want to combine it with other like legal assurances so you know segregating client assets from operating Capital maintaining the seniority of depositors in the liquidation situation so it alone isn't sufficient it's kind of part of a payload of things but yeah stay tuned on the proof of Reserve fund lots of exciting stuff happening there cool Nick thanks for joining us man hope you have

a good Thanksgiving hope you have uh enjoyed the the bird clock that's chirping in the background and uh yeah and we'll talk to you soon thanks for the time guys good chatting thanks so much for coming on Nick Happy Thanksgiving everyone [Music]