Inside the mind of crypto’s top traders | Dan Matuszewski (CMS) & Avi Felman

Transcript

all right everyone welcome back to another episode of empire this is a little prelude we just had uh dan from cms on the show and avi feldman from golden tree this episode just leaks alpha these guys are so freaking smart some of the best traders in crypto unfortunately 45 minutes into the episode wi-fi craps out on us mike and i uh do a little bit of an outro afterwards just a little bit of commentary on the episode this was such a good app i think you guys will really enjoy it stay tuned for the for the director's cut uh if we shall say after the episode now let's get on with the show [Music] all right everyone we are back with another episode of empire today santi is sitting this one out mike was calendar stalking me he saw that we were

recording with the legends avi fellman head of crypto trading at golden tree and we got dan one of the co-founders of uh cms joining today mike i think uh because you're so excited about this episode you usually don't join me but you're subbing in for santi on this one i think i'm going to throw the first question over to you you want to do the honors my friend sure uh avi and dan sorry you guys are stuck with the b squad and uh santi couldn't be here but i'll i'll do my best um i want to start with like the most the most talked about thing in crypto which is just the interest this growing intersection between macro and crypto right so i think most of our industry crypto is kind of behind right on rising inflation and how the fed was going to respond and

just hiking rates i think people are very very aware on it right now and probably there's a concern that they're actually over indexing right like you got all these uh people in crypto talking about inflation and walmart earnings and stuff like that which is maybe made me think that we're over indexing on it i i'd be curious to get your guys take as kind of people who walk in in both realms like how much are uh you know central banks rising rates how much is that still driving price action in crypto and kind of have we seen the worst of the sell-off so far the the the second part of the question is a little bit of a sneaky one have we seen the worst of the sell-off the answer to that is yeah that's right absolutely i've got absolutely no clue and that's one that i read on this

tried to get you to walk right into like it's like i can yeah like i i i feel like all of all of my macro discussions have gone exactly the same way over the last six months which is hey it looks really bad and no i don't know how it ends up right i mean you kind of have these two pretty disparate schools of thought right now you've got one that basically says yeah like we're gonna we're gonna we're gonna stick a landing you know maybe maybe it'll be maybe it'll be painful for you know a year i think at this point basically everybody but the administration is admitting that our recession's on the horizon uh and i think that you know we're likely to see

uh probably the recession hit in the next in the next six six six months or so but then there's the other school of thought that's hey this thing's like a fundamental shift in the market right that this macro environment's actually complete change from everything that we've seen from the last 40 years and therefore we have to be braced for a completely new world and really that's kind of the crux of the issue and that's actually a very difficult issue to parse out and so when i look at when i look at crypto what i see actually right now happening is i see bitcoin is tied to macro more than ever i mean every single every single morning i wake up and you know joe joe nager is my partner here at

golden tree has been in in in trad five for you know 30 years at this point great macro guy we talk macro every morning even though we run the crypto team together right it's and and the reason the reason we do that is because if you look for it it's still tick for tick it's just basically there's no there's no differentiator on the beta component at this point it's just all the alpha component and sometimes the alpha is slightly higher and sometimes it's slightly lower right so sometimes crypto acts stronger than the direction of the s p sometimes it acts weaker than the direction of the s p but it's not you know it's not necessarily uh decoupled in any in any meaningful way and i think that's just a function of the amount of uncertainty uh you know that that that's that's currently out

there i think you know my my 6 to 12 month outlook on this is that broadly the crypto markets are going to be correlated with the macro markets and we're probably not going to be able to extract ourselves anytime soon but you're going to find pockets of dispersion and that's kind of where you probably want to be playing if you're a trader and if you're an investor you probably just want to close your eyes because this is a transformative tech but you know that's that that's my that's my high level view yeah look i mean like i kind of mirror what i'll be saying the back you have that question of like is it bottom like from a macro percentage like i had no idea and like i don't think anybody in crypto in particular has like any real idea um audrey probably has like great

color because at least it's in like a tradify institute a little bit yeah but like i mean like in general like i say this a lot where i'm like if you're like really good at like figuring out like where the macro components are gonna go then like just don't bother with crypto like that doesn't really make a ton of sense to me if like that is like really where your edge is um and i also just think like nobody really has like a ton of edge on these things or if they do it's like on minuscule sort of amounts so that sort of gets me to the whole thing of like what do you do in response to this is like really nothing like it or at least like we haven't like fundamentally like looked at any heuristics of like what any larger macro markets are doing and then like oh we're

going to trade according to this i mean like the other thing is what i'll be alluded to too is like bitcoin in particular being the largest and sort of most hooked into sort of chat by has like just really traded lockstep with the queues now and then like probably secondary maybe it has some like event stuff that like helps it disperse a little bit but like in general like the larger assets are just like really trading as like beta components to like equities and then specifically like tech equities um so that sucks because like that's like not really like fun um being in crypto and just like taking a ride in equities especially because you're like taking a lot of like other risks being in this industry um which are like not necessarily clear if you're just gonna like perform sort of as like the sort of

the existing like market um that's not like really worth it either so i don't know i like do i think this will last forever like now like i think this is like a period where like the look unlike the hierarchy of like things that matter like there's like real world things that are more important to people at certain times in their life and like you're seeing that now um and crypto is just like way down on the rank order of like things that matter um and that's like going to persist until things calm down and chill but like to get to the point of like oh we're going to a recession or not like the bigger thing is that like markets are forward-looking so like they'll bottom before things are the worst in the real world um which is like i think why you see a disconnect a lot of times on

twitter where like people are feeling peak shitty about the world when like that's already sort of behind us in the market side you definitely saw this when like three arrows was blowing up and like like the worst fears about contagion were like sort of like three or four days like after like their actual fears of contagion that sort of like played out so um that's like my thoughts on role which is like a really long-winded way of saying like i don't know strap in and just deal with it like it's not gonna last forever but like it we we are subject in crypto to a master like other than ourselves for a while um and i don't think that'll change like very very quickly hopefully after the midterms like i think that's like a good like line in the sand of like when we get like a regime change hopefully um

but who knows yeah i am i guess that that's really my i know it's really difficult to predict like i mean there are a lot of folks out there who try to like read the tea leaves of the fed and forecast what's going on with interest rates i think you can see by like the performance of analysts over the last six months like no one's particularly good at that like very few people actually anticipated this rate hike cycle i guess my question to you and dan you might have started to answer this so you cut out a little bit there but um this kind of correlation between let's say crypto and the nasdaq right where investors kind of globally view crypto as this you know we've kind of slotted neatly on the the last kind of part of the risk curve where bitcoin and the rest of crypto included is like

kind of the most risky of risky asset classes i mean do you think that that like how how long does that correlation last um so let me frame it like this is that the permanent slot for crypto it's a new frontier technology and until it becomes more commoditized and less frontier it's just going to trade basically like high beta you know qqq or do we like break that kind of correlation at some point and if so like why what like what would be the catalyst or some potential catalyst for that correlation breaking so there's two reasons like crypto or any asset in it is going to become more correlated to like the larger like sort of markets like one is size like as things just get to a certain size like they just become right like if you become more of the index like you

become like the index and like you were obviously going to like move more and lockstep with it like that's just like you see that with bitcoin in particular right but as these assets get larger they'll be tied to like other larger markets and the larger economy like that's just the natural evolution of it the second thing is like gonna be like you're gonna have regimes where what matters in the market is like independent of what's happening in like any individual components of the market right so like in generally this is on the way down like where everything like becomes beta one but the idea is that like there'll be periods where it doesn't matter the idiosyncrasies of like the risk asset like they're just gonna trade all lock in step and like those will come and go as like you have shots or like changes in regimes like in

larger markets so i don't know like this won't last forever and like it'll sort of change but there's also just an underlying sort of trend towards it becoming more correlated with larger markets as it gets bigger i mean like we shed two thirds of the market cap though so like it's like gone a little bit the other way um where like they'll probably be more idiosyncratic moves if we decorate from the larger risk side um in like the longer tail of assets in particular so that that would be sort of how i see that playing out over time yeah i think i think the most important thing for decoration in the markets and i'm going to talk x bitcoin right now but really it's adoption at the end of the day because if you think about it well what causes decoration it's the

presence of idiosyncratic flows and for bitcoin i actually don't necessarily think that they're going to be a tremendous amount of idiosyncratic flows x the risk markets i think that people generally tend to buy bitcoin when they're feeling bullish on risk markets or you know when when they think that global global liquidity is flush and that tends to correlate with the s p going up as well and they bet on bitcoin as sort of the you know fastest horse to move i think that's the current mindset of people that are buying that are buying bitcoin but the current mindset of people that are buying stuff like ethereum or maybe solana or you know avalanche or this other stuff is that hey we might actually be building an entirely separate financial system right now and if you if you start to see a real adoption then it's kind of hard

to fade that growth right so you look at you look at tech and you say well i'm not going to bet in 2010 you're not you're not going to bet against the growth of stuff like facebook you're not going to bet against the growth of stuff like uber just because it's like truly getting adopted right and so kind of the day-to-day of what the stock market did didn't really matter as much i mean obviously it mattered but like it just not going to matter for the for the one two three year trend just because the stuff was growing so massively and so i think if you want to see if you want to see decoration in the crypto markets you kind of need to see all of those ideas of what the crypto market should be in a couple years start to be fulfilled and

you got to see you got to see users coming in and you got to see that adoption curve really tick up and i think it's happening i actually do think like we're seeing we're seeing signs of that right now i mean i'm seeing it even you know in all my in all my conversations here people are really interested in actually going and building stuff in crypto right so like you know golden golden tree does a lot of a lot of credit they do do do a lot of debt i mean one thing that's always on the back of our mind is hey when are we going to find a loan that we can settle through a protocol right like like when it it's it's not it's actually it's actually not a matter of if it's just a matter of when this stuff happens from my

perspective because there are so many there are so many benefits to it and then once you start to get that happening then i think you start to see decoupling in the market but basically right now most people look at crypto and most people look at all the assets that are in existence right now as tools for speculation and tools for speculation they just they just generally follow liquidity so kind of i think the answer that you're looking for is really real adoption uh is gonna be is gonna lead to decoupling and i think if i were to take a guess where you look for that real adoption first based on you know what i understand about this market and what people are most interested in it's probably either a in gaming or b in moving traditional financial products onto crypto yeah i've got uh maybe like

a more immediate question just in terms of idiosyncratic flows around a big catalyst right which is the merge coming up um so i want to ask you about that but then i also want to kind of get your longer term perspective on like gaming versus d5 where you see mass adoption happening but like let me ask you about the merge right because on the one hand right there's been a really interesting topic because like obviously they're kind of like two schools of thought out there right which is um you know there's this enormous macro overhang and i think most people think that we haven't seen the last like leg down in equities so there's still some pain to be worked out maybe it's a recession maybe whatever it is it's difficult to forecast but there's a lot of worry that's out there but on the other hand you have this

incredibly powerful catalyst in the form of the merge right and what that's going to do for ethereum so i guess my my question to you is like sitting on both you guys like have some insight into flows and what's going on like do you see other is there any evidence that investors are kind of ignoring the macro and like taking a bet on ethereum the merge or is that not a powerful enough catalyst to drive those like idiosyncratic flows that you were talking about i mean i think you saw it off the bottom right like bounced a lot harder um like it had lost ground on the way down but i mean it just traded higher beta but it like i don't know i i think there's like a real argument that there's like flows that are looking to like just play that event like i mean we definitely talk to

people that are doing it like um so like there's some anecdotal evidence that people are putting on um so i don't know i think that like matters i think that's like a real risk but the question is like whether or not it's just gonna get faded and it's just some like sort of like shitty market like quick trade that everybody puts on because like everyone is dying to do something um but like the back path of it is like it is a material change and like supply yeah i'm actually curious what do you like if you had to if you had to take a take a steps like hey this is this is a move that's going to get reverted or this is like an actual trade that's gonna that's gonna keep going like curious what your take is dan yeah i look if you put a gun in

my head um like it trades like the headings right so like it runs up into it it gets sold back half a bit but then it just like slowly resets higher like so call it like into the event higher then call it loses maybe a quarter of that and then it just like grinds back up i mean this is like how we've seen the headings play on bitcoin which is like kind of my heuristic for this whole thing but like i i think like that imbalance like supply demand side on the back half of it will be like more than enough to take the speculators like supply out and then sort of grind it higher i think it should reset higher if not like there's a lot of other issues then in the supply side or like at least like the demand side for all

the cryptos but like that that really should be able to like keep it higher yeah that makes sense you know one thing that i was uh one thing that i was struggling with with each btc was uh it felt like almost everybody that i talked to and and this was voice in the options markets people were basically pricing this via options like a bunch of people came in and just started lifting topside uh and i think that actually was probably more prevalent than the actual spot buying that went through like if you ask me what led to the eth btc move i'd probably say a ton of short-term speculation lifting topside and then a bunch of liquidations and then then it leaves the question of oh well like are there actual spot buyers that

are gonna that are gonna come through on this thing and i think the answer is probably yes so i think we end up we end up in the same in the same spot because i do think that the crypto markets i mean just generally are very reflexive and and induce and induce fomo like that but i think uh you know on on on each btc i'm actually i'm actually a little bit scared to be long it here uh i'd say that like i would definitely be be worried over the next like month or two being long e btc here just because it feels like it's a super crowded trade but i do think like in three six months maybe it's higher um definitely definitely a tough spot though i think just more broadly the markets the markets are in a tough spot i think people are like kind of what you

said dan they're kind of just searching for something to do right it's like so like what's what's kind of what's kind of the next trade that they that that people can put on because honestly like if you look at it at a high level mark is kind of slow right now not not much going on right like oh it's so slow there's nothing going on it's it's why you gotta enjoy your summer yeah i mean look that's literally why i look well rusted [Laughter] there's nothing going on and like i think the bigger problem is like nobody wants to put risk on for a month out because like you can just get rugged and tradify any other week and like nobody wants like everything is getting pushed forward closer to the events i think because like nobody really feels comfortable sitting in any risk like through all the like

you have like all these like random macros sort of like prints that can just like body you like in the short term and i don't know like people are they can't handicap it or they they're bad at handicapping it and like why bother taking that unnecessary risk into it i mean like that was the right trait too right like if you like the earlier you would sort of put this merge trade on in q1 or even like most of q2 like you're dead like it just like really didn't like work out so i think people are like concerned about that still like into it so it feels like the bowl case right now for something like ethan you've got the merge the bare case is something like uh we haven't you know it doesn't feel like other cycles there's still too much leverage left in the

system uh maybe the bigger bear case is just the bigger macro right like recession and pending are you guys paying attention to or you trade these almost like what i would call sub narratives the like the new l1s coming up like suey and aptos like is that something that you guys pay attention to that you trade or you just think that this is the market like desperately searching for a narrative and you're like i'm not touching that thing with a 10-foot pole yeah i mean i trade it because i'm an addict and i've got nothing better to do so of course like of course of course i'm going to go out there and trade and trade this stuff i mean i actually on the on the l1 thing i'm not sure what there is to trade there yet but at least you know there are all sorts of like micro rotations

and and random things that happen there's like a a tiny little warm ball of capital that's moving around and so you know i i try to i try i try to follow that and make and make trades i mean like one example of this i think that's probably uh most prevalent is that l2s are are looking are looking pretty good recently and so i'm looking at things you know that are that are on arbitrary i'm looking at things that are that are on optimism i'm like hey maybe i should be deploying some capital here short sameth against it kind of play that play that trade but you know there's there's there's no there's not a ton i'll say but you know i'm i'm looking at it for sure there's like there's nothing to do right like aptos like raising a bunch of money like there i don't think there's like an

actionable market sort of trade that you put on like in any real time frame because like the trade there is just like invest in it it's like that's like really what you want to do um so and like try to play into that but like that's obviously like a different game um so that but as far as you're saying like the leverage in the system like i don't know how much leverage that really can be left in this thing like i mean we've kind of carted out almost everybody like i get that like yeah there's always somebody left to liquidate but um i i tend to be of the assumption that like the the most of that pain is like worked through i mean the fact that like we we haven't gone lower and like there hasn't been material liquidation still like for a bit now like helps sort of that argument

but yeah like i i'm i think we're we're fairly deliberate as far as history goes yeah can i ask you guys internally um you know without necessarily commenting on any one counterparty i mean how much were you guys paying attention to leverage in c5 you know in crypto before this you know was there kind of like an internal like yeah we like some of these firms but like we're not really sure we don't really understand the risk management or it doesn't seem like there's enough capital based to like support some of the risk that they're taking or was this like a huge surprise to you guys that kind of caught you off guard i mean we don't lend out like we're net borrowers um so like i i guess like i'm less concerned like like if i like looked at like i mean we were

investors in black flight so like we ate money there but like i wouldn't like and we we borrowed from them so i never like looked at them and i was like oh this is a credit concern because like the risk was the other way um so like that was like generally like my vantage point on it as far as like counterparties go though like i i didn't think that there was as much leverage being given to people in the market as there was which kind of to be honest leaves me to believe that there was some fraud going on in some of the like information that was like being given because like i just like i don't think people were that ridiculous on the lending side i i that's my take on the whole thing yeah i'm i'm with i'm with that i'm with dan there right then can you explain can

you expand on that or explain that which which part of it there was maybe like just not enough information in the system or what folks were saying isn't actually what was happening no i think they were i think they were lying i think there was information being provided it was just false yeah i think that was like i think that was like how it got so squirrely but yeah look i mean like either way it's two-sided like even even so with the information like maybe not like it's still like there's a diligence that has to be done um and like clearly like the amount of like leverage that was being extended was like too high at periods i mean like to be fair like when we're looking at leverage and like sort of market impact and like what it matters like we're looking at most of the like

liquid c5 instruments like the exchanges like that's like import perpetuals and futures and like that that's like generally like where we're looking for like the levels of fraud because like you don't have a ton of visibility into the otc markets on the landing side like you can get quoted on rates and stuff like that and like get an idea but like a lot of that's just being armed against what you're seeing on the exchange side anyway so like that like we were not surprised but like that was not something we were actively monitoring to like get an idea of like what the froth was in the market as opposed to like what you're seeing happen in perpetuals and like sort of fixed tenor futures like that like now it's more like the heuristic we look at yeah i think i think it's one of those

things that it basically it doesn't it doesn't matter as much until it really matters is is is what's happening i do think that the unwind from all these guys is definitely very detrimental in the sense that a ton of retail just got burned and so it's very unlikely to see them come back super quickly into the market uh you know i when i look at when i look at crypto market structure you know when i look at d5 and when i when i look at c5 right you look at a celsius a voyager all these guys that doled out these massive massive loans basically what they were what they were doing is because of their relationship with the people that they that they were

lending to and they were loaning to the person would come in and they'd say hey like give us a little bit more time to post up collateral you know give us like an extra two days give us an extra three days and you know i think the vast majority of time that's actually okay like 85 percent of the time that happens that's okay and then 15 of the time [ __ ] hits the fan and you get something like a like a three arrow situation you know and where stuff just completely completely unwinds and so i think you know one one big uh thing here is most people don't pay attention because it doesn't really necessarily matter day to day but it only matters it matters you know it has an outsized impact in short moments of time right and so when you have when you

have market stress is kind of when you need to be paying attention to that stuff and you know it's always you know it's it's it's uh i think crypto has a bunch of swords kind of hanging over a ted that was kind of one of them i think that a bunch of risk teams are probably they're probably going to have to be cleaned out and you're probably gonna see a lot a lot stricter uh you know a lot stricter limits on on what people and what people can take and what people can do so i think net net the ecosystem comes out fine but i do think one thing that i want to point out is that dfi did remarkably well during this downturn right it you didn't really have bad debt created and that's kind of that that's kind of the trade-off of defy in a

nutshell is you basically get slightly larger volatility day-to-day and then less crazy vol event happen right like you get more day-to-day liquidations because you can't call up ave and say hey don't liquidate me please give me another two days uh but you know you don't get those like ridiculous blow ups that leave holes because because of that right so there's kind of there's kind of a trade-off there you know one thing um and i bring it up for for one point and it's that that point has been resonating uh pretty heavily i think with a lot of people in the in the more traditional circles at least the ones that i've that i've talked to they seem to really like that point and i think it you know speaks to the robustness of what crypto can build and

then if you can have systems that do that and then also build out you know systems that look like the stuff that exists in tradify and you do it all in crypto suddenly have a pretty cool and robust ecosystem which you know i think i think is i think is dope but it's uh you know it's definitely the centralized stuff is definitely one big one big trade-off involved my opinion you think um you know this this kind of implosion of c5 i mean even right now there's like an scc probe being uh you know issued to coinbase right so there's like a lot of skepticism around c5 even like the biggest most blue chip um participants there do you think and and you know combining that with the fact that we know there's still a lot of capital sitting on the sidelines right now all right like andreessen raise

whatever their four billion dollar fund or whatever and i know they're deploying but there's no way they've had time to even do a meaningful dent right in in that amount of money um so do you you kind of see this uh narrative because i've been kind of hearing the same thing i'll be like all right like c5 kind of failed us now it's important to put some of this uh important financial infrastructure on chain so do you see kind of this next wave of investment or next we have institutional adoption kind of like investing in that kind of native on-chain infrastructure or do you see more limitation with what that can ultimately do because at the end of the day like one of one of the reasons these these uh protocols like the obvious and compounds perform is it was just over collateralized right now i still think

we do need to solve under collateralized lending here um in some sense even the d5 form so i guess that that's my question to do is you see a big catalyst kind of behind defense it's been at least from token price standpoint's been a poor performer for like over a year i mean even before this bear market started it's a good it's a good question i think the way that i would think about it is more that it provides a good base to jump off of but it's not necessarily a catalyst right now right like it's not it's not something that's going to bring in a ton of money right now but what it does is it it basically it validates the product so that when the market turns it it probably performs really well off the bottom this is kind of the way that i

would think about it but i don't necessarily think that it brings in a ton of capital right now because the people that are i'll tell you why the people that are impressed by that are pretty slow movers and the people that uh you know would want to take a look at d5 protocols because of all this stuff i think i think they're moving pretty slowly on the intrusion point i don't know man like where maybe maybe that's why uni's been out performing maybe maybe that's why lineup's going up maybe they're maybe they're buying their bags uh you know maybe uh maybe maybe the next maybe the next trade is just buy everything that andreessen has yet to buy and short heath against it i don't know uh you you you tell me dan you're you're the king of pair trades i mean those things against has been a

one-way trick it's a pain but uh i mean like the uni i did hear was like raising around so i think there's like some truth in that like leaking into the market um so that that could be like all that's going on there um but like it took the defense stuff like the problem you have like with c5 dying like you're performing well is like you're still just like looking out it's like a wasteland and it's like all right like sick so like you're standing but like there's like all your customers are effectively like dead from like other reasons so i think like the problem is like yeah like this will matter and it like will turn and it'll turn higher but like it's like all right you're standing in the best position in a great i mean the greatest position to be in for a

market that like is somewhat obliterated so i think that's like the bigger problem on it it'll be fine when it turns and like i think it helps there was like a real argument being thrown around of like d5 is useless because it's like over collateralized and like this will never catch on and i think that is getting put to bed a little bit because you're like no like there's like a there's a chunk of the market that wants this like this is that doesn't want the exposure that we just like went through right so like i think that's like what you're seeing like the market sort of justifying like its existence and like why this matters and like why this is like going to be a thing first just like oh this is like a shittier version of like what the bilateral lenders can do like i think

there's like a product market fit there that's like justified on the back of this or that people can like definitely see too so i i think the big thing you're gonna see on the c5 side is um like i i don't think like the bilateral lenders are going anywhere i think the ones that like remain will be like bigger and stronger and like yeah like we'll be at new levels and like call it two years or whatever it takes to like fill this back up i think like open term retail lending is dead and like probably should have never been a thing anyway because like you're just too subject to these bank run problems like i think you're gonna see only fixed term lending available to retail like going forward people will do it again but it won't work out again but i think like people

who are like smart and are like looking to like stick this thing out like i think that's the only way you're gonna be able to do it like the exchanges can do the open term thing because it's just a book that ends up matching up but like if you're trying to like really match like a lending book like you can't have the most skittish chunk of the market like the ability to withdraw all their money at any given time it just doesn't work so you dan you think this and just ends up as a consolidation of the big centralized exchanges yeah like finance and ftx and i think you tweeted this out coinbase and kraken they end up just absorbing all of these smaller c5 companies yeah but coinbase hasn't done anything which i find like super surprising like they have a ton they they should be

using this as the same opportunity that like you're seeing the other like centralized venues i i think like there's certain people who are like really taking advantage of this like ftx being the obvious one and like i think like finance is probably doing the same thing just like closer to asia and i don't see it as much but like this should really be a time where you're like look like if you have a lot of cash sitting around and you like are in a strong position you should be using this to like expand because like the people that come out of the back side of this figure like there there's been a lack of consolidation in the market amongst the c5 participants for the last like two or three years because we had a raging bull market and like everybody was like doing okay and well like there

wasn't like a lot of impetus to like get like mergers and sort of companies sold like that should be happening really quickly now and you have a window and like i think there's certain exchanges of being very smart about it like i think the other ones will like catch up like i don't know i i expect there to be more consolidation coming out of the back of this and those players being stronger like i think this idea that like we just keep launching like new exchanges every six months and like they like go through phases like is somewhat getting behind us like i think you're gonna see some stickiness in it going forward unless like regulators come in and just like body everybody again or something like that but like absent like any like real regime change there like you you should see strength like consolidating almost

like the players that's like my opinion of it at least where do you see um okay so if there's consolidation and let's say increased regulation uh on like c5 players like what does the role of d5 look like uh in that environment how does that change because one thing that i mean i just like obviously kind of started to talk about this with like where's adoption gonna come from is it gonna come from like gaming and nfts or is it gonna come from d5 i feel like at least in my opinion like my working theory is that it's not gonna be d5 this like open permissionless like democratization of finance narrative like doesn't make a lot of sense to me like even if you look at even if you look at a simple like bar lend protocol like ave i bet like most of the retail participants like didn't

really fully understand um how it all worked and then if you looked at a lot of like the late stage of this bowl cycle like a lot of the d5 products that were getting launched these were like complicated products right like even like all the options vaults and everything i think they're super cool but i think uh probably a lot of retail like doesn't really understand like these feel like products that are made for institutions so i guess if like the working theory is that c5 is going to consolidate and get more regulated like who are the users of d5 in that scenario do you see it as this like this one narrative like people are going to adopt it and people are going to learn more about finance and it's going to be this way to provide access to financial products for people that

didn't have it before or do you see it as something else like another place in the market that feels more institutional but that should be an opportunity for somebody right like somebody should be able to skim these things and make them better retail products i mean they're open protocols that's the whole point so like if the ui and the experience is terrible like that's an opportunity for somebody to fix yeah i think one of the most interesting things about d5 honestly is the fact that it is all open source which i think inevitably means that you get better competitors out there right you just have if you have the ability to copy and fork and push a new company overnight then what you get is you get better products right and so i think uh i mean that's kind of the beauty of of defining me is somebody can go spin up

you know what is essentially competitor to the new york stock exchange in like 15 minutes by forking the uniswap code yeah that's that's that's kind of the sick part uh and i think you know we like ev every every day uh you know you you interact with money and i just think that in the future that's just gonna this is gonna be on d5 right and i do think that you're right that there's probably gonna be some sort of bifurcation uh in system at some point in the future i mean institutions are going to want kyc just because they have to they have to comply comply with regulation but that doesn't necessarily mean that everything has to be kyc right like you can have a version of ave that's kyc you can have a version above a that isn't that isn't kyc i think that what you're probably going to

see is you're probably going to see a little bit of a trojan horse effect where people come in under the under the kyc lens and then what ends up happening is that it actually just normalizes the use of d5 protocols in general and then it kind of it kind of just blows blows open but i think you know the crux of it is that from my perspective on defy at least defy is just a better version of the traditional financial rails and so you know it's it's more it's more modular it's easier it's easier to build it's easier to it's easier to compete in right i think you just end up you just end up with better products and so i think that what's going to end up happening is that you you will end up attracting the

institution through a bunch of different kyc kyc products but you know there's kind of no reason uh you know why an individual if they wanted a loan wouldn't go to ave i think at some point in the future you know you're going to have uh you're you're going to be able if you want to get an under collateralized loan to sign a legal contract using ave and get an under collateralized loan right like if like instead of instead of going to a sofi maybe maybe you're going to maybe you're going to a maple right in the future um you know and maybe that process is a little bit better right and so i think uh i think the d5 is just kind of like that the sexy thing was just was just the yields and i think you know

uh that definitely attracted a ton of people but the reality is that d5 is a deeply unsexy product it's just better financial rails uh but you know that is actually very valuable in my opinion so how do you guys think about one of the issues in d5 i'm not sure like you know just the fact that maybe some of these things are actually they provide good utility but they're difficult to invest in right like you need the token for instance um because you know my understanding is like there's a couple things going on there that are challenges there there's like a dao right that governs and there's like some questions like is that really the best way to um like build and ship a valuable product but then there's also a regulatory component right and you're kind of

seeing this materialize around like the the whole fee switch debate which is if you have this group of people like let's say uniswap labs and they're the sole contributors to like building you to swap the protocol and then revenue starts to occur there then that starts to accrue there that starts to look a lot like a security right so there's this like funny discussion going on right now around like are deep is defy like public goods um and we don't really care if the token price appreciates or do we want to find a way to like have revenue accrued to the to the protocol itself and then that revenue can get reinvested in better products and services in which case it starts to look more like a security right so like i guess that would be i feel like that's another bear case that the market needs to kind of work through

for d5 in general is like will revenue and and cash flows have recruited these things because right now it seems tricky from a regulatory standpoint i don't know if you guys have an opinion on that i mean the fact that the tokens have value at all means people like think it will inevitably happen right i think that's like the market sort of prediction on it that being said like they're incredibly risky because like there's there's really large unknowns beyond just like will this work and people want to use it and like there's a second layer of like well even if they do do you end up actually like accruing any value back to the token i i am long-term like bullish on the idea that they will um but i think we got a while till that becomes like okay or clear or like somebody's like

willing to take that risk um so like i i think you're not going to see it in the short term for sure like things also like they're getting like regulatory wise like they haven't gotten any clearer in a while and i don't think you'll see that until there's a regime change with the current like administration yeah i think uh i think to clarify uh we're not gonna get that any time soon in the us but it's like so obviously clearly happening elsewhere i mean there are there are protocols that currently give you you know rev access access to revenues they exist they're out there and you get you get you're getting paid for it just just so happens that in the u.s you can't really access them and so i think at some point regulators kind of get boxed into a corner if if it gets big enough

so i think basically they kind of have two choices one is they stop it now which is possible or two is in two years it's so big and so prevalent that they can't really do anything other than to create a regulatory sandbox for it and to like then take that sandbox and turn it into a real a real law that kind of protects these things because otherwise it'd be just probably harming a tremendous amount of consumers so i think uh i think that's kind of like a it's almost like a now or never in my in my opinion and every day that they wait makes it easier for crypto to survive which is i guess good for us right i mean as as long as i mean as long as it doesn't nuke another 70 in the next in the next year then maybe it's easier

i don't know do you think these protocols that spit off cash flow it's actually a detriment to them because um like basically everything encrypted obviously actually every every asset anywhere trades on narrative but when you don't have cash flows uh it's really just trading on a narrative when you do have cash flows you start trying to create models that value it it's almost like nfcs with utility right like the entities with utility are worse it's my favorite left curve argument i think it's i think it's a i think it's probably correct sadly so things with cash flows will be will do worse because they have no because you're trying to you can put them i'll tell you i'll tell you guys a funny funny story uh you know golden tree obviously you

know is a val a lot of the stuff that they do centers around value and fundamental value and so that lens has kind of creeped in to some of the stuff that we're that we're looking at at crypto where it's like okay like can we model this on cash flows or can we model this on values or on value or like revenues or like anything else active users all that kind of stuff and we kind of had a funny discussion the other day where i kind of both to myself and to the team uh reminded everybody that sometimes it just has absolutely nothing to do with price like zero like in fact it can it can often go the it can go the opposite direction you kind of just need to like remember what market you're trading and that

i mean have any of you guys looked at the market cap of celsius recently the sell token it's probably higher than it should be it's 400 million that's crazy well because it's all locked yeah it's like how many people went bankrupt shorting that thing too many like like way too many it's like absurd you're paying like 10 a day to be short this thing it goes it goes bankrupt and then it doubles like in what world in this in this one and in the crypto one right that's actually a great trade by the way you got the bad news behind you yeah it's like buying buying that was a great trade yeah and you got paid the whole way

through it to hold it it's totally totally absurd yeah i feel like these traditional models might actually they might bring in more institutions like the golden trees obviously like golden tree you know the managers of the managers love to put models around these things but in a funny way uh that kind of limits the reflexive upside of the assets that have the models on them so it actually hurts the assets that the institutions are investing in we'll see what how do you guys think about like um do you ever see anything that looks like a good product but bad token so maybe like an optimism or something like that where maybe you believe in like you were saying like there's some potential in layer twos but it's just super low flow really high you know fully diluted value and it just makes it more difficult to

invest like take a long-term view on it uh do you guys have thoughts on like you know any situations that kind of look like maybe like some of the the solana ecosystem tokens as well like there's that kind of same problem yeah dan you're actually talking about this in some uh yeah it's a chat that we were in about about the short hunting i think that was you right yeah so there's two problems um that come up with these like situations for most people um one is like oh like look like it's hard to like put them in for like long-term positions right because you're like this supply is just going to come online like this thing should like reset lower like it's it's like it's neutral rate of like if the supplier out there is like materially lower but the counter to that is like all

right because there's so low flow to it like it's super subject to like quick shocks to the upside right like there's just like not a lot of supply that's like out there so people find themselves a lot of times like caught in these things where like they go short them there's no supply and like people will just run it up for like whatever reason either it's organic or they're purposely just trying to like squeeze it and you just get bodied because they move so quickly because there's so little supply there's nothing to tether it back down to reality with any supply in any like short time frame that you end up getting caught so like it's one of these situations where i feel like people like look at this and they're like i have to do something and like the reality is you should just do

nothing like you shouldn't like sit there and be like oh it has to go down like i'm gonna be like a hero here and like sell it short or like you shouldn't look at it and be like well somebody might like run it up for a squeeze like you really should just leave it alone and you should just be like i'm gonna put a pin in this thing for the future like where the supply is much more like higher and like it's at a much more steady state and then i can make a decision like from there but like these really really low float like tokens out there super subject to these like shocks to the upside and you gotta like really i don't know i it's a way to get bodied very quickly that you probably don't even think about a lot of times or at least some people don't um

and you see a lot of times also when like new coins will get issued um and like either the supply is very hard to access or it's like on like a a fairly like quickly schedule but like it's not like sort of like out there for day one like selling assets like when like the perp just lists is like super dangerous like there's just like not as much of like this like even if the supply is like out there it's like not in the hands of people who could like readily like move it or act on it or anything like that so um i don't know i think this is like also where you see such crazy fireworks like on new listings and stuff like that too where people are like this is irrational and it's like who could possibly be buying this and it's like

well like the bigger issue is that like nobody can sell it so i think people forget that like on the very very low float stuff at times but yeah i don't know that's like sort of i i i think in general though like you just like don't want to do anything i think like there's enough like other stuff in the world that you don't have to like take a shot at that when you stop having these uh when you stop when when there's no retail to dump the low flow tokens on what happens to the low flow tokens uh like do vcs end up just scooping these up and at massive discounts in the in the in the heart of the bear or what happens with them i actually think vcs are kind of like the ones that are getting f in this in this transaction in a way like at this

point in the cycle because the private market valuations haven't actually caught up with the with the public market valuations and so i think that i'm seeing a lot i'm personally seeing a lot of rounds go through that i would price like at a 50 discount uh when they when they actually start trading just because there's nobody like nobody wants to buy this stuff uh i mean you look at you look at like all the recent listings other than this like tiny little [ __ ] coin that people have been talking about that's on arbor trump i guess it's like up 2x in the last day and everybody's really excited about it but uh like that's like the only thing that i've seen in the last three months it's up on listing um you know it's it's it's kind of it's like such a shitty environment i think

right now because you've got these mega funds that have a mandate to deploy and they're just gonna they're just gonna keep deploying but then there's there's nobody sell it to right and nobody wants to buy it because you've kind of overpaid for something that i mean it's funny i was um i was talking to a buddy who just does like normal vc investing not crypto vc investing and pre-product stuff generally goes for like three to five million and pre-product stuff in crypto goes for like 40. uh and uh and so it's actually people like me and dan who have like cash and are liquid and are hunting in the liquid markets that i think kind of make out like a bandit where i can buy stuff right like on binance after it lists at half the price of vc i mean if you look at like a ton of tokens out there they

trade it at vc price like vc rounds uh so it's like actually great and there's no lock up on it so you get to you get to just go out there go out there and buy it uh which is which is kind of it's kind of fun one thing that you generally see just in terms of investing in general is that you get a lot of different types of products at the absolute worst time and what do i mean by that well in 2019 every 2019 2020 like everybody launched a market neutral fund because that's what worked in 2018 that was like kind of the worst time to do that because then crypto went up massively uh and now i think everybody's launching a vc fund because that's what worked in the previous cycle and so that the private markets are getting crowded out and so i actually

think now is like the right time for liquid funds finally uh you know so i think uh and yes i am talking my book massively but it's uh you know i i do i also think it's true so it's like the the people who made it the most money in like i mean like the last bear market whatever like 2019 period where like people who put really large liquid positions on for things that they like had some thesis on and just like sat on it right like there were a lot of people that did this like multi-core probably the most like famous a right like they just like bought all the solana because they just like decided that they were like and helium too and like they were buying other people's staffs they were buying all the liquid stuff like like if the bear markets give you the

opportunity to basically put like a tremendous amount of size on something that you might not have would have otherwise um that you like probably have a thesis on or like you should if you're gonna do it but like there so there is you do get like this like pocket to like do activity that you like might not have otherwise the thing is that you just gotta like accept that you're gonna be like in pain for a while like on this especially if you're going to like warehouse that risk um so yeah like there there definitely is like that upside to it is like you get the ability to buy things in size like discounted um and wait on it so like that does like that is the good thing but and hopefully when it turns like it turns materially for you but i think that was like the

people who really like made all the real money in the last cycle where people would put the stuff on earlier i've uh did you guys see i mean we were kind of chatting about this uh before we got on but the uh the lido sale right this was dragonfly uh dragonfly leading like uh there's like a 20 million dollar sale or something like that they were going to take 10 of it down um i mean one thing that uh like you know the downside right of these these liquid markets for even even like pretty large cap tokens relatively is that there's just a really low amount of liquidity for these things so even like a relatively small buy i can move the price pretty materially and then if you combine that with like dow treasuries they didn't move fast enough to move into stables and it's like 83 of assets

and dow treasuries are still in their native token or they have like one asset like they're these crazy statistics like do you guys see that it's like a big opportunity for vc going forward because on the one hand these like dows they need to diversify their treasury they want to get out of their native token um and to your point like they're pretty attractive like liquid valuations out there for like you know like the lido's or dydxes or maples or whatever it is like do you guys see that as a big opportunity for vc's going forward hey can you hear me i can hear you it's just us now i think she's doing me just yeah just just the psychos now inmates are running the place

now we can talk about whatever we want i think they have to remember they won't even know he said it yeah all right what are we punting you see that helium hit piece this morning no i didn't what was it yeah it's it's i this this guy who like just hates crypto and writes threads but the odd lots guys like we're talking about it he like basically was like helium collected six thousand dollars in fees last year like why is it worth anything and like went on this whole like it's very it's a very long thread oh wow yeah i got i got to read that i mean if it actually only collected six thousand dollars in fees i mean that's like kind of kind of bad you'd expect it to do more i guess i haven't actually looked at it in a while it's like it's funny helium is kind of

that thing that's like catnip it's like catnip for people like people people yeah like they're people love that you get a physical thing like seriously everyone that i know that's like a normal person that i like talk to them about it they're like oh i gotta get one of those like and they like set it up in their house they're like i'm telling you like people love that idea that's probably i mean that's honestly probably why solana came out with their phone right yeah people love physical things we both yeah i told dan i told you we just moved into this office uh we got completely rugged by our wi-fi both it's still [ __ ] in the bed so we can we can wrap this one up um no worries we were just jamming it you can you can take this you can take this recording

exactly perfect perfect this is the highlight it's probably you guys talking anyways guys we'll wrap it because my wi-fi is totally [ __ ] but dan and uh avi this is great appreciate the time guys and uh yeah we'll have you guys on soon again all right take care all right the outtakes the outro here man we got rugged well director's cut edition here yeah we did we got really good i know what are you gonna do yeah all right well the people are just gonna have to make do with the two of us i guess then real unfortunate for the people then so anyways what do you think any uh what stood out to you in the episode yeah i thought it was great i love talking to those guys they're so measured uh i almost wish they'd come out and been like this is what's happening but

they're too smart to do that they didn't fall for my trick in the beginning i've never seen the worst of it yet neither one of them answered the bottom where's the bottle where's the bottom yeah we're like yeah i know i know but like where is it like come on uh i no i really like their both their frameworks uh i you know i think to call out two things in the beginning um i thought avi's point where the the large caps were extremely correlated with basically the nasdaq so that's bitcoin especially just trades in lockstep with qqq uh that was well taken uh so basically i thought his advice was really good if you're a long-term investor just kind of sit on your hands and and close your eyes if you're a trader you're going to have to move out into some uh you know you know some of the further

out reaches of crypto where there's some dispersion right so i think that was good advice for both folks i really like uh dan's framework for the merge in general um and you know the reason that i like and he's the heuristic that he's kind of using is how bitcoin trades around happenings and the reason i like it is because it i think a lot of people will lose money on it and that's what markets like to do right it's like it kind of runs up right everyone says buy the room or sell the news but it runs up people lose their conviction they buy the top then it sells off then they're like [ __ ] and then it will finally steadily turn up and people won't believe it so if your framework is markets will do the thing that causes the most people to lose the

most money then i'd say dan's pretty spot on and that's probably what's going to happen with the merge um what did you think about that point that he made too where it's like markets are for more forward-looking and they'll they they react before you see pain in the real economy yeah that was one of my favorite points that he said it's um it's it's really interesting because when you go on on twitter not just crypto twitter you go on twitter there's like doom and gloom it feels like the last like two months there's been so much pain but then you look out into the real world you hang out with non-crypto friends you like look out into the into just different companies what's going on you're like just starting to see pain like you're just starting to see layoffs you're starting to see like people maybe take a couple

days less on their vacation because they don't want to spend as much like the you don't spend as much money on like birthday gifts like you're like just starting to see that and people are just i think waking up to the fact that a recession is coming whereas on crypto twitter and just like stock twitter uh and like finn twit i feel like people have been talking about that for for months right and so dan's point about like there's this three to six month lag between the bottom of markets and then like when it hits the real world i like that that was a really good way to um uh to just to put a framework around that i like that what'd you think yeah i i had the exact same thought because yeah if you just tuned in and paid attention to media or looked at crypto

twitter in general you would see that there was a lot of a lot of pain uh and prices have responded to that but i haven't really seen that in my real life you know so to speak um like there hasn't been an enormous amount of pain and obviously at the end of the day no one has a macro crystal ball right i would say you know we talked about this at the off side like a lot of people talk with a lot of authority like either this is all going to be fine or you know we're headed to the next great depression i just you know just plus one the idea that nobody knows for sure despite how authoritatively people talk about it but yeah i haven't really seen any kind of response about that out in the real world so i like the framework that they

laid out there but which is interesting so what's happening right now is like the you know we've been at this like the market's been tanking for months you're just starting to see it in the real world what if you like extend this out maybe four or five months from now what you're gonna have is like maybe the market's coming back but the but but you're in like max payne in the real world it's an interesting uh like lag time i think i haven't done it like that here's another one that i um i probably should just do more homework in and it's it's it's hard to figure out how to get involved here to play this like if you think about because i'm not a trader right i love listening to traders but i don't trade because i get my face ripped off don't say i don't care i don't have the

disposition for it i don't have the disposition you know i prefer to lose money the old-fashioned way just holding it all the way to zero um but i thought the the emphasis that they they had on the l2s as an ecosystem i thought was was cool um because there is a lot of work being done there right um and i haven't worked out my own mental framework with do i think apps are gonna launch on l2s in general or do i think they're gonna launch their own app specific chains yeah i thought i don't know if you have a thoughts about that but probably both i guess would be the answer and it seems like there's a lot of there are some games being played maybe at the i don't know if y'all follow sisyphus the account but he's he's pretty good and he's called out

some some funny games or shenanigans that are happening in those l2 ecosystems but um i don't know what you think well i mean speaking of sisyphus i think sisyphus has some points that also dan and avi made similar points about like if people previously like let's say a year ago were under indexed on the macro now they're probably over indexed on the macro like everybody cares about the macro right now and if you write uh and and you're probably like a little too over indexed on it actually like every crypto podcast you get on there it's like first couple questions like all right like how does the macro tie into crypto i think pro people are probably a little too over indexed on it and also probably a little too like short term uh you know short-term thinking and like howard mark's just had this piece and in

the roundup we talked about it with santiago but uh how you know marx is basically says like there's there's really no point thinking about the short term because even if you can even if you can nail the short term you can't adjust your portfolio fast enough to to actually make an impact so he's like there's no point thinking about three months from now you really need to think about like six to 12 months from now so um yeah there was something else in there that i thought was interesting which was open um like i think it was dan who said open term retail lending is dead and and should be dead and i thought that was a really interesting point and i think what he said is uh only fixed term lending only fixed term retail lending will exist and that it'll kind of get

gobbled up by the big exchanges like the coin bases ftx's um and so it's like i don't know it's it's a it's an interesting way to think about it like the block fish and celsius of the world like there aren't going to be there's not going to be another block fi really there it's just gonna be like because that model was broken because as dan said it it causes these bank runs uh that was a good point i would agree with you i think overall one of the biggest things that doesn't exist yet and this is actually happening so maybe there is a the c5 component to this and the the coinbase of the ftx is off for this this is also being worked on on the d5 side of things with um fixed interest rate protocols like volts if you've heard of them uh

they you know if you look at in tradfi one of the largest markets that exist is interest rate swaps um and those are those are fixed interest rate swaps typically and it's a i mean depending on where you look at the size of the market it's like a 400 billion dollar to a one quadrillion dollar uh your market is otc derivatives what is a quadrillion it's a it's enormous it's it's really it's very i mean institutional it's it's basically i mean you can think about it as um there's like a couple of different things that happen there which is one there's risk management and i would assume that's largely like corporates not like trying to hedge out fx risk there's speculators and then there's and this is the this is the point that

builds on what dan was saying is there's like structured retail products that get built on the the underlying right so if you think about a like if you ask the average uh person who walks on the street like oh what's a 30-year swap they have no idea what that means but everyone knows what a 30-year mortgage is right so there are these kind of like base building blocks that get that get built and then um that that ladders up to these more structured retail products so i agree with you i mean i i think like you and i talked about this too i think one of the the way that c5 versus defy ends up going is there's consolidation in the c5 space and they end up getting more regulated and they kind of end up looking something like banks yeah probably i think the i mean

just the last closing thought and then we can wrap this up is um i forget if that this was actually during the recording or before we hit record but dan you know we're like how you doing what are you what are you doing these days dan's like uh we're we're building better tech we're like fixing things internally and i just like uh empathize with that so much um and and people people always say it's like when we're going into this bear market it's like oh you you know you you buy in the bowl you like building the bear or whatever it is and like the best things get built in these bear markets these like one liners that it's like okay but like what does that really mean and through some of these conversations and again i forget if this was on the recording or before if we hit record but

it's like that's literally what people do in these markets it's like all right we finally have time to slow down dan's like we're not as active right now we're slowing things down and we're and we're actually getting our systems right so that we can spend 12 months prepping getting our systems right for the next bull market which will be colossally bigger than the last one so yeah if folks haven't um you know if you're listening to this maybe if you're not actually in crypto but you're just kind of watching i mean it's really difficult to lay the good foundation of good business practices when you're hiring as quickly as you as you do when you're growing right like when revenue is growing you know 10x and you're trying to hire you know for more people than you currently have no one's like really kind of laser focused on those things

like building good business processes like talking to your customers and understanding value propositions and like actually shipping good products and services because everything's just kind of working you need to grow so fast then we've all just like hit a wall and now this is when um this is when most of the innovation happens i think across yeah all industries i'd venture but certainly in crypto so i agree with that i agree with that takeaway yeah very good should we wrap it i think this director's cut has been a uh let's wrap it let's read it yeah i think that was good yeah all right we'll see we'll see how what the audience thinks that was a good summation all right buddy all right well uh enjoy enjoy the rest of your day and we will uh we'll see you on friday for the next weekly roundup

thanks for listening to empire see you on the other side cheers [Music] you