Why Our Investment Thesis Hasn't Changed | Avichal Garg, Haseeb Qureshi

Transcript

this episode of Empire is brought to you by fails markets an options platform on arbitrum and optimism that gets you exposure to crypto in the simplest way possible they've made it as easy as simply choosing up or down you'll hear more about fails later in the show this episode is brought to you by carbon carbon is a new Dex on ethereum that makes concentrated liquidity super easy with carbon LPS can now automate their liquidity strategy with custom on-chain limits and range orders all from a beautiful UI check out carbon today for unprecedented control over your liquidity all right everyone welcome back to another episode of Empire we have uh

santinui today hosting and we have haseeb and eventual uh back for uh I think this is a three peep guys I think this might be the first uh three-peat of Empire oh yeah awesome I also appreciate that we've all ascended into uh first name only territory now look at that yeah I could call you Mr Garg would you mean well I feel like we had our in-person meeting in San Francisco now but we went on a nice like cozy walk around the city where it was awesome uh cozy yeah exactly I was like candle but notice we were all wearing black yeah this is uh is this like a crypto thing this is yeah this is technically blue so ah is that blue it's hard to tell with your lighting okay my lighting's pretty shitty but

what other color are you gonna wear it's the like word 18 months into a bear Market financing this is like grieving this is a funeral that's exactly the best thing yeah yeah you're not wearing yeah white to a funeral so um let's talk let's talk about like just how you two are feeling right now I mean we're so recording it I feel like it's important to time stamp these things because things are moving so quickly right now but uh yeah it's Wednesday afternoon it's noon Eastern on Wednesday um this week the two big things were obviously SEC coming down on coinbase and finance so let's see baby I can just start to you to be like high level framework how are you feeling about things how are you feeling about like just how bad this is the market interestingly enough like kind of bounced off the coinbase news which was

interesting so I just want to like get your high level framework right or think about things right now yeah I'd say the mood is stress eating uh it's been a pretty intense week I think for everybody in the markets uh I I was surprised that markets were bounded so strongly um it seems like largely what's happened is that we ripped the Band-Aid off everybody knew that this was coming everybody knew that one you know after the cftc lawsuit it's very clear that binance had been getting up to a lot of funky business and this was not the only thing there was going to be more uh in the pipeline after the bittrex case and the bxc case that the SEC brought they they developed a very clear legal theory of like hey

all exchanges are basically doing the same thing that these two exchanges are accused of doing which is uh operating without a BD license operating without an exchange license and operating without a clearing agency license so that's gonna be true of everybody right if it's true of bittrex it's true of coinbase it's true binance through everyone so uh in a way I think a lot a large part of what the market was relieved by was that the coinbase case didn't have anything else in it it was kind of a boring uh case right it basically said like look you're doing the same thing that that we accuse bitrex of doing your business is basically legal but there was nothing else there was no fraud there was no you guys did this you guys said you wouldn't do this and so you did that it was pretty clean regulatory violation and

that's that's as good as you can hope for um the the other element of it is that okay Gensler has publicly stated that he thought that everything in crypto was security basically besides Bitcoin and uh the the thing that spooked the markets I think especially when the binance lawsuit dropped was that he named almost everything in coin market cap in the top ten of security basically five of the top ten uh items on point Capital Securities now uh or alleged to be Securities I should say uh so the exceptions are Bitcoin ether the stable coins uscc and and tether and then Doge those are the only things that that you say they're not Securities everything else is security when you name individual coins as

Securities right if you remember when this all started with with naming Ripple as you know the first major security that was that was traded in the top ten um everybody was like oh my God Ripple is security well you know I look I don't know that much about Ripple maybe there's something going on behind the scenes they had this long uh SEC complaint and in the complaint there's a bunch of stuff like oh they were you know they were making markets in Ripple I didn't know that they were buying it at the at the bottom and then selling it at the top and blah blah blah they were doing all this stuff and he was like okay as the cop on the beat I think people deferred to the SEC and said okay the SEC they clearly know something we don't we're going to de-list xrp and and

you know okay understood then they started going after more stuff and you know then it was it was algorand and then it was Final coin people like huh really this are you sure this is a security and then all of a sudden you say everything is security and when you look in the complaint about like a Solana and cardano and near and you know all these things you look at the complaint and it says okay why is this thing in security because there's a team and the team has tokens and they talked in public ever and it's kind of like okay look I'm not going to de-list every single everything on coin like I'm not going to de-list everything and just become a Bitcoin brokerage like fine if you claim everything in security then go prove it in court and so I think what you've seen here now

is just the industry's fatigue they're not complying anymore you basically enforce non-compliance because you've told the entire town not just like hey this guy broke the law and he needs to go to jail it's like hey the entire town please report to jail tomorrow you're all arrested everything you're everything you're doing here is illegal and at a certain point you force the industry into a corner of just saying like Okay well we'll see how it plays out in court at this point I I can't just give a fig Leaf of compliance and and you know cut my business into a fourth of my of my business lines like I just can't do that well and there's there's a I think there's um there's sort of a philosophical thing here too which is really around credibility right so I think when when you bring something like you know and I

think there's a substantive difference between the binance thing and the coinbase thing around fraud incomingling of user assets and so on right I think if you're if you're on that end of the spectrum I think everybody's gonna step up and say okay great you should not be doing that like we don't want another FTX situation people should not be touching user funds like there's you know when there's fraud involved I think that's that's fine to receive someone I think once you start getting into this territory of well everything is a security but I'm not willing to go in front of Congress and tell you whether or not a particular thing is a security or you know why a thing might be security you start to you start to erode credibility and I think that's actually really bad I mean if you if you sort of step back for a second

even 100 000 foot view right like we we wrote this I've written about it before but we wrote this this uh We've created this deck back in 2016 like two years before we started electric and and Curtis and I looked at all of this data around uh trust and what you see is just trust has been eroding in society since the 1970s for for like every institution um yeah this is the government one there's Pew and Gallup data around um Trust in Media trust in public schools trust in the police trust in you know journalists trust in health care trust in doctors like you can find all sorts of slices of this and it's all just going down since the 70s right and so to me I think this is this is a an intonation of that problem which is over

over the last 50 or so Years A lot of these organizations and institutions that were created um that into which we imbued all this trust um have started a road they started a break because they're they're sort of structures of operating and and the Frameworks through which they operate are just not relevant the way that they were 50 or 70 years ago and so I think this is where it comes to a head which is like should we really be determining the rules of the road in 2025 with digital assets and a global market and you know AI that can control billions of dollars with you know precedence set in 1930 about like orange groves right it's just that that to me that they're sort of like that's the actual underlying tension here is that we're we're a

hundred years later and we probably need to update a bunch of the rules because there's no way people 100 years ago could have imagined all of the ways that this stuff is going to work today um but but if you sort of sort of if you don't acknowledge that and if you don't take the position of wanting to try to actually um work on your mandate and you sort of say like I'm not going to try to be helpful I'm not going to be collaborative I'm not going to make statements on the record like you know what you're really doing is eroding trust and to me that's actually the fundamental problem because I think there's actually a really important role for organizations like the SEC to play right I think you want to protect consumers you don't want fraud to happen you don't want people to lose money like

um there's a whole sort of questions of how you do that but to me that that's actually the thing I worry about here is that we're just this is like another instance of the system is broken and we're sort of like quibbling about like the the nuances of like some little stuff here but like the fundamental problem is like a lot of these Democratic institutions in society are they're pretty atrophied and we don't really as a society I work like the thing so I'm like it's funny like in a crypto sense I'm actually I love it when there's a bear Market because you know that who knows this he calls me a masochist because I'm just like happiest when there's a bear Market because it's like that's when the real Builders are here the noise goes away the grifters are doing AI like they're all gone it's

pretty awesome um but from like a from like a society perspective I'm I'm still pretty concerned right in some sense like the more crypto succeeds the more it's an indication that like all the old systems are atrophing the banks are atrophied that you know press and journalism is atrophied um you know there's questions around I mean police legitimacy there's questions around local government you know there's like all of these things are sort of I worry is like a citizen and as a human that like these systems of atrophied over the last 50 to 70 years and we don't really have concrete plans to fix them uh from an investment standpoint you know we've been as an industry looking for guidance since forever yeah and it seems like we're we're closer now as painful as it may seem at this moment in

time we are closer to getting some sort of guidance you know the what is it the Hinman documents are supposed to be revealed as a result of the Ripple case and coinbase is really pushing back ensuing the SEC to get guidance and um so I am curious does this give you pause when you're looking to invest um are you more inclined to invest perhaps outside of the U.S how does all of this compute in your investment decisions uh I I mean I I suspect I say it was the same which is it doesn't really change anything um you know I think that the founders we've invested in have always been technologists who see problems that this new technology can solve and and I think that's the right way to look at these

things is you know like fundamentally utility will win like you know at the end of the day I have enough faith in the US judicial system and kind of democracy that over a period of time like the good people tend to win out um and and utility tends to win over time um and so I think if you have well-intentioned technology solving real problems then then it'll be fine now it changes a bunch of the tactics so for example what we see more and more which is really unfortunate from a U.S perspective is that you'll see teams hiring Engineers overseas so they're kind of hedging they're like okay well maybe half my team should not be in the US um or increasingly um and I would say it's probably the the predominant approach now is you just shut off the US so U.S us consumers just

don't go get access to these products which is a real loss I think for from a U.S customer perspective um and so I think people are being smart about it like nobody's taking a bunch of regulatory risk that they don't need to take and I think ultimately the losses for the US consumer in the US economy um in U.S jobs um but it you know the Market's big now right like you know this isn't we're not we're not in 1950 where there's like one economy that wasn't destroyed by World War II we're in this global global economy now and so the the size of the market is sufficiently large that even if the U.S steps away for five years the markets will be fine like there's enough there's you know five billion people on the internet now and only 300 million of them live in the US like you know the

markets are large enough to sustain really large businesses globally but the capital markets so there are users outside of the US but the I mean the U.S capital markets are still overwhelmingly the biggest so like when you guys are investing in something like a let's say a D5 protocol um how do you think about investing in us-based D5 protocols where maybe like the the size of the potential like the Tam of the capital flowing into D5 could be a hundred X the size in the US that it is and I don't know somewhere in Europe or something like that however no one wants to be like the first guy through the door and get shot down so the D5 protocols in the states like don't actually take many risks um yeah how do you guys think about that well if you remember back before

defy summer before really before 2020 for coven um at that time it was considered to be kind of suicidal to start a crypto project in the US like basically the game plan was you go to Europe you go to Switzerland and that's where you build all your infrastructure that's where you do all your stuff and if you want to be risque maybe you have engineers in the U.S who are at some shell company that kind of provide services overseas but basically you never you don't want a Nexus in the US and then after 2020 that kind of went away covid made it really difficult for people to actually do those kinds of things because you know travel restrictions uh but also there was just so much positivity toward crypto in the US that people kind of assume that hey it's it's cool you can you can do you

can do more stuff in the US than we originally thought you could um but the Ico boom was the first thing that really turned people away from the US and said hey go overseas this kind of stuff it's not welcome here um I think it's likely that we're we're going to be going back to that um now that's not a death smell for crypto because crypto I mean we've been there before we can do that it's nothing hard people in crypto are very very mobile um the crypto in a way is in in a world that is moving away from globalization where we're seeing Supply chains being segregated out again and being deduplicated where we're seeing you know the U.S and China trying to segregate their economies and minimize trade relations uh where we have internets basically being cordoned off

from each other uh and you know the us trying to kick out Tick Tock and China kicking out all these U.S companies crypto is is in a way the only thing moving in the opposite direction it is the only thing that continues to be Global fundamentally in its nature and that's not just true in the blockchain itself but also the way that these companies are formed and the connections in the crypto Community right we all live on Twitter and on Twitter you don't know where what country somebody lives in you don't know you know just looking at a Twitter address or an etherscan address for that matter doesn't matter to you if this person lives in Germany or if they live in Hong Kong or they live in Singapore live in Dubai or live in Puerto Rico or they live in uh New York City it's all

it's all the same and the intellectual capital and even the the the companies themselves like the the uh the value of the organizations that we've created they're mobile they can stretch they can mutate they can move uh and so I think for us as investors it doesn't affect us that much in the sense that we can still you know the same organizations are going to persist they may have to you know get up and move but crypto companies uh they're they're they're not like super computers or servers where they're like you know stuck in one location and you know it's like oh okay you kind of [ __ ] if you're not allowed to operate there anymore it's more like a laptop if the cafe you're at is closing you just close the laptop you move over to the next one and you continue working

there yeah so I don't think that that's going to change well we also have a little bit of a cheat code which is um to use a video game term is um you know we primarily invest at the earliest stages and so when you're investing in two people in an idea or you know a five-person team and they're 18 months from launch and then you know it's gonna take like three to five years to really get any kind of Attraction and then really you're gonna hit scale in like seven or eight years you know like we're in 2023 now eth is seven years old like eth is now starting to realize some parts of the original Vision right like we have l2s like data availability splitting out D5 is actually working we have stable coins like so that's how long it takes and so

if you're investing at the earliest stages you kind of have to look these are short-term fluctuations right and so the question we really ask is in seven years when these things are really hitting scale will the US markets be opened up and I tend to think the answer is yes and between now and two or three years when you're getting off the ground you know going from zero to 500 million in tvl or a billion in tvl or a billion in transaction volume is there enough volume in the EU in Southeast Asia in the Gulf in Latin America to be able to get to you know a million customers and and a billion dollars in transaction volume yeah absolutely um and so the world is large enough to bootstrap off of even if the United States capital markets are going to be the deepest eventually and I tend to think in you

know five or seven years the us will have opened up anyway and so it sort of it changes your go to market it doesn't really change the terminal value of the thing and so as an early stage investor we kind of get to cheat a little bit in that sense right like now if we're like series D investors it'd be really tough yeah right if you're trying to look at a pre-ipo company like now is a pretty tough time I think what's your mental model for talk about timing and markets um what are what's your mental model to sizing these markets and you know because a lot of the discussion that I've been seeing recently of course is are we too early yeah and what is really the product Market fit and of course there's a whole host of things that we could dive into this

topic but I'm just as a starting point we'll have to understand kind of how you think about these markets and how big they are yeah I think they um there are a couple lessons here from the internet and I think from from Human psychology and so one of the things because you know I wasn't I was um my background as an entrepreneur on sort of web 2 and uh starting and selling two companies and then doing a bunch of Angel Investing into companies that have gone on to be worth you know 10 billion plus um to things like notion and figma and sort of you know more classic web 2 companies and um I think there are a couple lessons there so one really important lesson is humans are really bad humans have a set of cognitive biases and and there there are three or four that I

think are are uh very common one is we're really bad at large numbers right like as primates like you can tell this is five you can tell this is ten and if I show you a pile of bananas you're like I don't know that's a lot like it's more than 20. it's more than 50. but is it 123 and that's why like jelly bean contests work right a second cognitive bias is we don't really understand exponential growth um right because as like macrobiological entities you don't wake up one day and then there's just a tree outside your window that wasn't there yesterday like that you know bacteria works that way but that's not how how like the jungle works or the Savannah's work um three is we don't really understand low probability events like we don't have a good mental model for that so people worry about dying and plane

crashes or getting struck by lightning and they don't understand that you're more likely to die in a car and so you get really dumb questions like what do self-driving cars do for cities and you're like no no you don't understand like that's how people die and what self-priving car does is like as important as you you buying like home insurance or fire Insurance like people just don't understand low probability events so you put those three things together and you're like okay it's low probability events with really really large numbers and exponential growth and that's that's a startup right so like our intuitions around startups are just totally out of whack like they just don't map to how things actually work in reality and so what you tend to have to do is massively over correct for that bias and so if you kind of look at the

history of Technology like at every point along the curve with the PC revolution in the 80s with the internet in the 90s with mobile Cloud there's a moment in time where you stood there and you're like wow like look at all this exponential growth behind me that's crazy but we're probably at the top of the curve now and it's just going to be like linear from here and it's gonna be super boring but really at every single moment for the last 50 years what you should have been doing is extrapolating exponentially and it would have gotten to like really crazy effing numbers that would have sounded stupid at the time but it turns out that was exactly the right thing to do and so the way we do it is we try to build models that we project out and we're like let's be conservative let's assume these

things are like super linear but not necessarily exponential with the understanding that we're probably underestimating how big these things will get and if even with conservative models you can get to really large numbers then that starts to say well this might actually be a venture bet this might actually be a thing that could be huge um because even with our um our you know wild assumptions about how big things things can I suspect we're going to look around in 10 years and be like holy crap I can't believe this thing got this large because that's just kind of how those three biases when they intersect that's what you get like could you have a mat I mean it's only it's only been 15 years since like you know touch screen iPhone Android devices um you know 12 to 15 years we have 5 billion people with phones that's crazy

you know that's that's just like mind-blowing like think about the world's largest companies like 15 years ago these companies basically didn't exist um right it's just it's really crazy how much the world can change in seven to ten years sorry let's see before we go to you I want to ask just on on this point of each hole on when you say things get big yeah you can get scale but that doesn't necessarily mean with disruption you might get so might people say like okay this is the revenue of banks it's going to translate in flow 101 to D5 that may not be the case that value might flow to the consumer which may not necessarily translate to how yeah you monetize and and the monetization aspect is something that I want to touch on yeah um which you know we a lot of these

protocols get scale meaning tvl and they you know uniswap gets is cranking out more volume than coinbase and has like a fraction of the workforce and an overhead that doesn't necessarily mean that as an investor you're going to make money off of that because for a whole host of reasons so I'm curious how you think about the value translation in this disruption flow when you think about the you know nfts could be big that doesn't necessarily mean that your nft project is going to be profitable yeah they're sort of like um there's just like a really simple equation here I think which is how big can the thing get what's your take rate um which is essentially your revenue and then like what are your costs right you subtract out your costs and um what's interesting about technology is

on that first one it tends to make that number way way larger than people would expect so here's here's a concrete example back when Uber was doing the series a um you know the criticism was wait a second how could you be worth more than a couple billion dollars the entire tax industry is worth 10 or 12 billion dollars uh and here we are right and like every writer and Company is worth 10x what the entire taxi industry used to be worth because what happens is when you lower the friction of participation the size of the market explodes and often gets you know 10 20 50 100 x bigger uh because the ease of accessing that that utility is on your phone now right the second is your take rate and I think you're exactly right take rate goes way down um but the combination of those two

things often results in a much higher number uh because the size of the market just explodes and then also because of that same technology your cost of running that business often goes way way down so if you look at the the technology businesses of today how many people do they have to employ versus like shell or Exxon 50 years ago right like you can you can generate more net profit with fewer employees than you used to be able to and the net result of that equation at least for the last 100 years uh has been that actually these these entities will actually produce more net profit um because the way that equation works out now there's there's sort of a question here I think of how does that get propagated through does it go to the people who use the products does it go

to shareholders does that get captured by the government in some way like there's a sort of second second part of that of where does the where does the money actually flow and how does it flow um but but at least for the purposes of like an investor you know like those first three factors are the ones that really matter and historically it's actually worked out really really well like if you can get to scale it'll probably be great so I'll I'll take the opposite side of that is that I'm pretty sternly anti-tam I think Tam Tam calculations are total are massively overrated especially in crypto where all this stuff is just so nebulous that we're making it up as we go and people are kind of backboarding the answer once they figure out oh okay this is what the market actually is the the only thing for which I think a

tam calculation is maybe useful as Bitcoin because we have a pretty good idea for what Bitcoin is at this point which is that it's a store of value almost everything else in crypto we just have no idea we're making it up and the and the The Tam for ethereum is basically like you know the the way that people did Tam calculations for ethereum when I first started investing professionally in 2017 is so different than it is today which just tells you that nobody knew nobody knows at any given time and we're constantly stealing metaphors from other places to try to get a tam number that we like so I think where Tam that time to say Tam is completely useless as a concept I think the more legible an industry is the clearer it is to understand where it's providing value and what the metrics are

and what the inputs are and what the outputs are that's where tan becomes more useful as a concept um but the reality is like I feel like Tam for something like ethereum and it depends on what specifically you're referring to but the doing a time calculator for something like ethereum to me is the equivalent of like technical analysis for Traders which is that it's giving you the illusion that you're doing something and it feels numerical but in reality your bait you can you contort the concept to get any answer you want and I think usually the right way to analyze something is to think just more about value is how much value is this thing creating how big are the problems that this thing is solving but being able to point to like oh here is the market for all

computation or here's the market for all contracts so here's the market for all Computing or all you know whatever like when people try to describe what is the Tam for ethereum or the Tam for Solano or the tamper whatever you know I think doing it by analogy to ethereum when you're when you're doing things on a relative basis to each other I think that's that's more useful to say what percentage of ethereum is Solana today and can it grow okay that's a useful thing I think is this is so backwards this is so backwards bitcoin's like the only thing bitcoin's like literally the only thing you can't get a tam for because it's just like well how many people want the thing uh you know I mean

yeah it's like it's like totally like and you clearly disagree completely disagree an asset that stores wealth that is the only thing that we actually do understand we have a precedence for which is well no because the Tam is like everything that's like real estate that's like you know Rolexes that's gold it's like everything that's like the one thing you can't do a tan for in my opinion that's like totally backwards here okay here's the thing uh I would I don't so there's there's um the Bitcoin thing we got to talk about at some point by the way I can't believe that's the conclusion you came to okay but uh I think there's like this is a um it's sort of a straw man version of Tam like I think the like hey it's all computation is just kind of

intellectually lazy so to me that's not a real tan calculation that's like oh so how would you calculate the theory of that what's your yeah right so I think this this is like the Eisenhower quote right like the the plan is useless but planning is invaluable like the point is not the number that you get out the point is how did you think through what the number is and so if you just come up with like hey it's all computation then you're like okay well that's just a shitty plan like you didn't actually think through it properly the interesting thing is okay well like how many transactions are there really on Wall Street every day and like you know what kind of bit rate is there and like how many such companies are there and like what percentage of banks would actually move their assets over and what

percentage of retail would actually move their assets over and once you start doing it much more Bottoms Up way which is like who are my customers how many of them are there in the world what are the Alternatives what are the take raise what does it mean to be 10x better and you start thinking through all those things and you come up with something much more robust all of a sudden you can very quickly figure out like where is the money actually what you know what is the market structure like that thought process to me is the interesting thing and the number is kind of secondary back to this idea of like if things work they tend to be so much bigger then you your intuition would lead you to believe anyway you're agree with me that the tab number is worthless it's the useful

thing is thinking yeah how this Market works is useful because positive Tam is [ __ ] yeah I think the number is is useless but I think the like um the thought process of what is the market what is the market structure thinking is definitely we definitely agree with that thinking is important and you should do that and in that case then let's throw away the Tamp thing we don't need the output the inputs are what matter so so let me ask you what is what is the most valuable or the most valuable things in crypto today for consumers when you think about you know you guys invest across the Spectrum right D5 privacy preserving apps nft

infrastructure the full gamut across geographies what are the things that you think these are these are the things that are like here to stay and we're feel really confident that people are getting utility and value putting aside if this is going to be a massive Market but people getting a lot of value today and we'll go going forward I mean the two most valuable things by far in crypto are Bitcoin and stable coins like and you just see it in the numbers right there the most traded things in crypto by far they're the most held things in crypto by far they're the things that everybody in the world knows about and cares about and is fighting about um so those are the top two I think by a pretty large margin yeah I think um uh to take a little bit meta I mean I

agree those are those are two very large markets I think store value and um US dollar are two enormous markets the way I think about it is I think there's there's three critical pieces of infrastructure that are being laid here simultaneously so one is a computational infrastructure the ability to write code ship it it's non-jurisdictional it lives in the cloud you can buy some computational resources and execute some code and um and that touches on things like AI even right like AI has to use these distributed systems ultimately because it can't kyc itself to get an AWS account or a gcp account right so like these permissionless distributed and computational infrastructures Super Super Value it's valuable infrastructure the second roughly speaking is decentralized finance um of which stable coins are apart and I

think what's happening there is we're actually creating the infrastructure for a third space which is not a U.S space and not a Chinese space and I think a lot of the world actually wants that third space which is effectively a US dollar denominated system as a unit of account But A system that the US government can't unilaterally shut you out of uh and I think the market in the world actually wants that and that's what the US markets used to be that that was sort of credible neutrality such that people said okay I'll go to New York to do the thing because the rule of laws has Primacy and and I know that my money's just not going to get yanked and and I think we're sort of like because of that erosion of trust we sort of lost a lot of that and so people want that

second thing and the third is nfts as infrastructure essentially as digital property rights which allow you to do things like luxury goods and collectibles and video games and own those assets um and and sort of not get screwed by the platform so to me those are the three categories of infrastructure that we're creating and then there's this whole host of applications that are going to come out of it I totally agree I think you know Digital Store value digital dollars are two of the early use cases but like to me the underpinnings are all this infrastructure in these three categories that's getting created and there's going to be multiple one trillion dollar things that come out of that hmm so when you think about valuing something like uniswap or a default or just a protocol do you think that like addressing I don't know you invest in maybe not unit

swap because there's all this we can have a whole conversation about the fee switch right now uh especially with regulatory stuff right now but like when you try to value a derivatives protocol for example are you looking at the derivative space in capital markets or like you don't think that has it feels like eventually you would look at that and you're like all right there's maybe like a one-to-one there's like some model you can create in haseeb it feels like you're like that has no like the world is going to look completely different so why would I look at derivatives in traditional Capital markets to look at derivatives in D5 no what what to be clear what I would protest is somebody saying ah this is the size of all derivatives so therefore this is the tan this is how I should think about what you know what what is

the potential outcome for this investment um I don't think that's a that's a uh I I don't think it's useless to know how you should know how many drivers are out there traded but there's a lot more work to do after that right he's not just ah hey great here's the Tam and and we can all say great there's a hundred action here um I I think the the way that I think about valuing derivatives markets is thinking about what are the kinds of derivatives that would naturally suit themselves to being traded on a public blockchain this sort of you know as a visual describe to the sort of Switzerland of the sky how how what would they want to be traded in that in that venue right and there's a lot of stuff but it's not everything like I I don't think that every single type of

asset that people want to trade in the real world is going to be want to be traded in the blockchain there's going to be some Divergence and I think part of the the job of being a crypto investor is to understand that microstructure and those differences in preferences and the differences in users right it's it's very likely that BlackRock is not going to be executing on the blockchain um but there are a lot of people who will and you can see it already is that like you know who's who who's transacting in stable coins obviously it's not traditional financial institutions because they don't need stable coins they have dollars they have access to all the rails that we're trying to recreate in crypto and democratize so I think you're you're going to see a very different path of adoption a very different set of users and a very different set of

products and a very different ordering to those products than you see in traditional markets because of that uh different set of strengths and different set of skills that crypto has right I think it's I think something that people forget when they're doing Tam is that when you when you improve an offering and create new features and functions and experiences and change the economic model so that you can change price points and even like enable new use cases right in the market you can really uh exponentially expand the market and you can look at like um taxis and Ubers for example like they introduce new economics so that you can do like surge pricing and like decrease pricing based on supply and demand and that actually

increase the market so because it made more uh efficient pricing and there's this um have you guys ever heard of the McKinsey ATT study the Tam study [Laughter] yeah this is uh this is an anti McKinsey case study and so in 1980 at T was trying to figure out if they should go into the cell phone space and uh so ATT hired McKinsey because that's what you do right to forecast cell phone penetration in the U.S by the year 2000 so they were trying to look 20 years out should we get into the cell phone space and McKinsey came back and they predicted that there would be 900 000 they called them subscribers 900 000 cell phone users which was less than one

percent of the actual figure which ended up being 109 Million by the year that they were trying to predict it by and based on that pretty like legendary McKinsey mistake at T actually decided that they would not invest in sale cell phones and they only joined the cell phone market uh went through a I think it was a 12 billion dollar acquisition of macaw cellular and by 2011 the number of cell phone users in in the world had had grown to 5 billion right so like you can I think this just points to eventually actually both of your points that like you can be so far my orders of magnitude yeah well like yeah let's move a bit away from from Tam here for a second because I'm really curious just get your thoughts around like

I I was just listening to uh Bloomberg now in the the CIO of Soros fund management said look crypto's here stay um and she plays her name's like Daniel fitzpatrism I think she's pretty smart she said listen I would bet on incumbents picking up a lot of the stuff that is broken in crypto and building stuff around it I'm curious to get your thoughts around there's been a lot of kind of Fallen Angels over the last two years uh people are dismissive of certain business models which may or may not be true but I'm curious like given the choice of investing in pure decentralized infrastructure or like another centralized exchange or service provider what would you choose and why because time and time again centralized

players like binance coinbase they were highly profitable entities and they candidly control most of the user experience because coinbase is not profitable at all has not been profitable for a very long time binance is extremely profitable Finance yes yes um look I think right now it's pretty clear that it's not a great time to be a centralized company in the US um you're facing a lot of headwinds and you're you're sort of born into those headwinds right as opposed to facing them when you're strong and robust and have the resources to be able to to defend yourself um outside the US is a very different story right you're seeing most countries besides the us moving the opposite direction which is trying to give more

clarity trying to attract the industry uh and trying to set sensible guardrails in concert with industry players that is going to benefit everybody right ultimately it's in our interests as an industry to make this stuff more trustworthy to make people be willing to use it to make it very clear that you know FTX and whatever shenanigans that uh different exchanges might be up to we don't tolerate that in this industry and we move away from it as fast as we can and that's why FTX collapses because people were withdrawing on mass because they were like hey I don't trust this thing and that um on on the on the decentralized side if you're a decentralized product decentralized founder um it's it's just such a um it's very clear that although

in a way Central Services are kind of zero-sum there's really room for one binance one coinbase and then after that it's just fighting for market share right it's it's trying to try to you know rest one uh uh one pair one order book or one pair away from binance or away from coinbase one at a time uh until you can build you know your liquidity mode against their liquidity vote on the technology side it's really not that Zero Sum like there are so many Green Field problems that are still massively massively massively unsolved where you know security sucks uh ux sucks scalability sucks like all these things that it's very very clear there there's a lot of new things that we don't know how to do yet that need to

get done for crypto to make it to the next level um that I in general unless there's there's you know some obvious angle that makes a Founder Well Suited towards starting a centralized company and going competing with with a coinbase or an Anchorage or whatever um right now most of the big problems I need to get solid on the technology side you know we're still as evicho said you know it's only been eight years since ethereum was founded um we're in the very early infancy of this technology that's also part of the reason again why I think Tamp calculations are so useless like imagine eight years into Microsoft Bill Gates saying like ah here's the Tam of of Microsoft well it turns out Microsoft became you know the trillion plus dollar company that was impossible to foresee at the Advent of all this

stuff and I think we're still in the same situation with respect to public blockchains well something I think there's there's an interesting um I like I like haseeb going first because it gives me a minute to think so yeah then I can tell somebody smarter so um I like the Crux of your question or thinking about the Soros um CIO comment here there's kind of two Dimensions right there's decentralized versus centralized and and these it's not binary there's a there's a spectrum there right you can have a off-chain order book that syncs on chain with you know you it's non-custodials you so and so you're like well is that decentralized is that centralized where is that right so there's a spectrum and then I think there is a spectrum of um startups to incumbents

um and so you know startups are people a couple people brand new you know you could argue Soros or Bank of America JP Morgan might be incumbents coinbase kind of somewhere in the middle like they've been around for a decade they have a bunch of licenses but they're still kind of Outsiders to the Legacy system or you might look at um uh Fidelity is interesting because like the same family has controlled it for so long and so you might argue that they're still they still sort of have like the moral Authority that a Founder does um right so Founders like Zuck can just choose to Pivot an entire organization and he just does it or Elon can just choose to do it because he said so and that's really hard for Jay you know Jamie Diamond to do okay so these are the two spectrums and um I tend to think

that it depends on the problem you're trying to solve but I think the least likely to succeed quadrant in some sense is the centralized Legacy quadrant and the more you get towards decentralized and the more you get towards startup the more likely you are to win uh as a as a as a business as a group of people producing a protocol or trying to solve a problem build a company and whatever whatever form the organization takes and the reason for that is that I think when you get new technologies and these are fundamentally new computational platforms every time you get a new technology you don't just get to take the technology and apply it inside an existing organization this is why for

example Walmart can't beat Amazon because really I don't understand you already have the warehouses you already have the footprint can't you just put up a website and take some orders like why is this so hard and the reason it's so hard is that you have to upend your entire human organization as well so like when the technology stack changes you have to change who understands the technology stack and put those people in power and so like in the e-commerce case for something like a Walmart they had all these people who understood Procter Gamble and they understood that relationship with Tide and and uh Oil of Olay and all these things and then they had people that understood these in-store shelf pricing they're like oh if we optimize it this way like here's where we put the stuff in the store and we'll make the most money and at Amazon

you didn't have those people you have people that understood software they understood how to like run a b tests and like throw it on the website and see what converted and build a better shopping cart and that's how they thought about the world and so those they put those engineers in charge meanwhile at Walmart it's like they call it a CIO even right I don't know if they have a chief product officer or chief technology officer these days but like a lot of Legacy businesses have like a Chief Information officer and they call those people I.T and like anybody who's written you know software and as a software engineer finds out an insulting term you're like I don't fix your effing Wi-Fi like I write code you know it's a different job but they don't understand that right so and and how do you fix

that well like can Walmart go well the Walmart CEO step aside and say I'm no longer the CEO I should actually be the CEO and that person who's running product is now the CEO and everybody that works in that person organization now makes twice the money and everybody that works in my organization makes half the money because that's how we're going to survive as a business like how do you do that um and so that's why the new organization can come in and somebody like a Bezos or a Zuck can come in and say I'm just going to re-tool the whole organization so I suspect what's going to happen with a lot of these Legacy Financial organizations is that the internals of the organization have to change so substantially you have to upend the existing political uh organization internally and put a totally different set of people in

charge and that tension does not get resolved by incumbents like you just can't right but like who's going to take a 50 pay cut to empower the other person for the benefit of the organization the only people are going to pull that off are essentially Founders because they're just gonna be like look the thing I care about is the organization surviving above all else is they're going to destroy the organization and rebuild it um or we're just going to start anew we're just going to create a new organization that has that baked in from the start um and so my bet is kind of on that Spectrum you want to skew a little bit more decentralized for most things even if it's sort of a hybrid solution and you ask you much more towards startups rather than incumbents and so I think like the soroses and the bank of

Americans of the world and the JP Morgan's of the world likely get way left behind and then they adopt it much later so today like Wall Street Journal or New York Times have managed to Pivot their entire businesses to be mostly digital but they did that in like 2020 they didn't do that in 2000 right it took them 25 years and so I do think these guys will survive I don't think they go to zero like I'm not short the banks in that way or anything um but I suspect they're going to be laggards just and for human reasons not technology reasons this episode is brought to you by Fales a new frontier in simple on-chain options here's what you do you choose an asset a strike price and the market you want to participate in and that's it with its powerful and capital efficient

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performance of your strategies LPS it is time to take back control of your liquidity with carbon check out the link below and get started today now back to the show yeah I want to just touch on just get your general thoughts on like the state of the industry you know how macro if anything is Weighing on your decisions or your pace of deployment you know you guys to see but dragonfly have done a number of strategies uh both on early stage but also liquid avicho you guys are mostly super early stage kind of equity deals but you can do my understanding is you could kind of play in traffic in the liquid sphere as well just kind of curious how you guys are

thinking about like Capital deployment areas or sectors that you might be interested in now and uh where you're seeing kind of the most amount of opportunities in this market yeah I can go first to see I'll give you I'll give you time to think so I would just add a feature when you guys when you guys answer this I think like the more specifics you can add like the the more helpful I think the more helpful it is your price point your exact entry points this is a helpful helpful I will do this because your compliance teams will want me to do this is none of this is Legal Financial advice or any advice for that matter guys you should do your own thinking so yeah this is not Financial advice you shouldn't in general my rgc will tell you that you should never listen to

anything I have to say uh just ignore it um so okay so high level and then specific so high level the way I think about the the macro thing is you know I think they're they're sort of um two eyes that people are paying attention to a lot when from like everybody all of a sudden went from a pandemic expert to a macro expert uh and so you know people paying attention to inflation and interest rate that sort of like dominates the conversation right those are the two eyes that people care about I think there's a third eye that I think dominates both of those two which I care about which is innovation so like if we are not able to invest in startups that are innovating and can beat a five percent interest rate like what the f are we doing right like like

how badly did we waste our time that a startup can't grow 100 a year because they solved a real problem like who cares about a five percent base rate like it just doesn't matter relative to the degree of innovation that should be possible with this technology and if it's not then something else is screwed up um and so I kind of think like the macro is the macro like whatever it doesn't really matter because if you're innovating you're gonna out you're gonna outpace the macro headwinds no matter what now that's not to say you should ignore it because for example the availability of capital changes how you fundraise um and I tend to think next year is going to be a really rough time to fundraise for most people because all the funds that were raised in like 22 start to hit the end of the cycle they

start to run out of capital raising your next fund as a VC gets harder so if you're an entrepreneur uh like this year is probably a better year to raise than next year and so you probably want to try to get to 25 before you have to raise again right so there like it changes what you do but it doesn't fundamentally change whether or not startups you know need to innovate to succeed long term and our approach to it which is just keep investing in startups and over 10 years um you know the the sort of innovation is what will carry you anyway so sort of two in the rest of it out it's it's sort of noise it's like um I don't know it's like intellectual junk food it's like the equivalent of like like really smart people who studied math and economics and computer science

like to listen to Larry Summers the way that like you know they make fun of people for listening to like you know to watching like the Kardashians or something it's just like it's like the same thing over and over and over every week and you're like really why am I just like listening to the same thing over and over and over every week so uh we tend to ignore it now on specifics it goes back to those three areas like I still think layer ones super interesting I think like the design space is is underexplored still I think there's going to be some sort of power law there in terms of who wins um I don't think it's gonna be winner take all I don't think it should be winner take all if we go back to sort of the philosophical underpinnings here part of what we want to create are

systems that are much more resilient and so I think if we end up with only evm systems that's not great like I think that that creates a lot of of you know uh choke points like there's a lot of places where things could fall apart there are a lot of sort of surface areas for attack there that then everybody's potentially compromised um not to mention it it inhibits Innovation right like I think technical constraints you know the way the salon has approached it or the way that sui or Aptos have approached it or the cosmos approach like these open up the design surface area for application developers to explore and say oh actually over here I could do it this way and that produces a totally different user experience so I still think the layer ones are early l2s all this infrastructure so things like

eigenlayer espresso for decentralized sequencers like there's just a ton of infrastructure to build to make these things usable at scale that I think is pretty fascinating we spend a lot of time on that stuff I think we're starting to get into a world where some of the decentralized computation pieces are going to be really interesting so can I just buy GPU time somewhere can I buy file storage somewhere can I um you know how do I do that and I think this is where Ai and crypto will converge there will be a couple of surface areas but I think this is one of them and it goes back to this idea that AI can't kyc anywhere it doesn't have a Social Security number or a tin and so if the AI wants to buy resources it has to do it on these decentralized systems using decentralized currencies because I

can't get a bank account either um so I think that's super interesting continue to think D5 is interesting because I think ultimately what we're creating is this third space um for you know people to do transactions and businesses to be able to transact with each other and settle transactions but do it in a way that that a singular government can't just shut you off um and so I think we're going to basically recreate all of the financial instruments of the world inside inside the D5 ecosystem and to haseeb's point I think they will have a different path so you know we'll start with okay well maybe instead of U.S treasuries as the base rate maybe it's East State and what are the consequences of that right and so you're starting to see things like interest rate swap protocols where some people need like reliable interest rates

and some people are willing to to sort of you know take the variable and like the amount of staking um that's happening changes the rate and so people are sort of saying okay well I think there's you know that's going to go down or up and so I'll lock in it right now um or you know we um there's a really interesting protocol that we're State investors in that um just announced called hourglass and they're taking this idea of time locked tokens and allowing protocols to to introduce that as a as a primitive into their protocol I think this is fascinating this is something that people in the equities markets have talked about for a long time literally decades people have been talking about hey look if I if I buy shares in a company if I'm Warren Buffett I buy shares and I don't ever want to sell

them shouldn't I have more say over how the company runs than rather than some activist investor who's going to come in and dump the shares in six months because they're trying to like make the shares pump like why do we each get one vote we can actually do that in crypto now right we can actually say hey look if you're willing to commit on chain to locking these things up maybe you get more governance power or maybe you get preferential economic terms of some sort right like and we can actually do those kinds of experiments on chain now um so I think D5 continues to be super super interesting and then you know the nft side of it I think is um ultimately how this stuff is going to go really really mainstream like from a consumer perspective um and by the way it's not just me

saying that like you can go back to I think it's Hal Finney in the early 90s on The Cypher Punk forums was talking about you know because they've been talking about digital casting ecash and these kinds of things for The Cypher punks we're talking about these things in the early 90s and um yeah if I I think it was I think it was hellfini made a comment along the lines of hey you know I realized most people don't really understand money as a technology it's just too abstract it's like not a thing that people can really get their heads around very easily unless they really think about it but you know what they do understand is baseball cards and so maybe if you think about these things the way this stuff is really going to go mainstream is through something like baseball cards because it's sort of like

a really similar Tech but people kind of already have an analogy for that that they can kind of get their heads around much more easily and I think that's actually correct I think you know games and collectibles and luxury goods are a thing that everybody understands literally the richest man in the world runs lvmh and they traffic in luxury uh and so I think that's how this stuff will go really mainstream um and the platforms that enable that so I mean look at things like ordinals and you know like it's just so like amazing and and it's like even in a bear Market you can look at the traction on something like ordinals or nfts and and how active that space is and you can see that there's something happening there um so yeah those are those are still the three categories that we think about

um and I think it's just you know infrastructure defies sort of this new space and like what is that what is it was it an economy worth what is a digital economy worth that you know could be as big as the United States and what are all the pieces that need to exist for that to happen and um nfts essentially these property rights and luxury goods and collectibles and games I think is also going to be huge let's see what does uh a vitro get right and what does uh a virtual get wrong here boom well okay it was it was a little it was fast moving through a lot of different pieces that uh it's hard for me to touch on all of them I'll reflect on the question about okay I'll start from the beginning when we're talking about the kind of pace of investment and as an

investor looking at this market and as an entrepreneur thinking about raising money in this market how should you be thinking about things uh there's a lot of capital that's still kind of locked up for crypto right so there were all these Mega funds that were raised a year and a half ago and a lot of them are sitting on tons of dry powder including me including a virtual including you know all the big guys there's still a lot of money out there um but people are not deploying at the same Pace that they were last year for a couple reasons one is just that a lot of people got punched in the face and are trying to recalibrate of what exactly they should be doing and how they should be doing it uh the second there's some people who are apparently pivoting into AI so that maybe it's uh some Capital

flight out of crypto uh and then and then third is just that um I think people are just not seeing things that are uh galvanizing them in the same way or people people are not they're not in the same kind of up only mentality that they were a year and a half ago and there there's more of a sense around Capital preservation of like hey I want to make sure that I survive and get through to the next you know bull market the next promised land when I I know that there's going to be um a strong narrative that I can get my money behind that you know I'm not going to be embarrassed by uh backing the wrong thing or putting money in the wrong time so I think there's a lot of risk aversion right now among investors generally and that and that and that does mean

that I think it's a it's not an easy time to fundraise even though there is a lot of capital that's earmarked for the space that capital is probably going to get dribbled out more slowly than it is uh looking in years prior for the same same amount of money that said you know as an investor to me that actually makes me quite bullish on investing because ultimately the the thing that decides the return on on investment there's two things that decide to turn on investment one is the growth of the underlying asset class that you're investing into and then second is the supply and demand of capital itself so you want a high growth rate and not much Capital that's the best situation right second best is having a high growth rate and a lot of capital if there's a low growth rate there's almost

no way to make money it doesn't matter how much Capital there is or isn't it's very very difficult to make money in an asset that just grows too slowly there's just not enough to do there and of course if it's growing negatively and you're investing in something that's fundamentally going to fail doesn't matter how much or little Capital there is everybody who invests in it is going to be burning money and so to me you know the way I see crypto I I see it as a high growth area that now the amount of capital that's pursuing the space has has uh dramatically shrunk and so I to me this is now a time as an investor that I want to be aggressive and I want to be putting money to work again I'm not going to endorse any particular asset or say you should buy

this or buy that but the the concept I think is one that everybody can recognize right all these big guys who are allocating money to crypto whether it's the big institutions whether it's the Tigers the soft Banks the kotus all these guys are backing off now all the big funds are slowing down now all the stuff that we were talking about this frenzy of investing into crypto it stopped the music is off now it's like everybody's standing around a party thinking about man maybe I should go home maybe I should go to the AI party across the street um to me that's the that's the the best they're giving out free pizza and those parties you're not getting that's what I hear yeah exactly because I personally eat pizza but you know they have a mental image of haseeb at a party like relishing in the awkwardness of like the

lights coming on at the end of the day this is my favorite this is my favorite time of the night time it was so loud I could barely hear anything yeah there has been a lot of capital deployed over the last two years do you think that some of these projects ever recover to those valuations which were anchored on thin air this ample liquidity um you know of course we saw 2017 as an example a lot of projects did kind of see this Arc of Boom bust and then recovery and and then some kind of like land for instance or some of the D5 kind of old like Old Timers is that going to be the case this time or are you more excited about New Primitives new projects that are raising from scratch and

don't have this kind of overhead uh of of anchoring to evaluation that might not ever they might not ever recover from oh I think the the analogy to 2017 is apt because in 2017 what you saw was that a lot of the most high-flying things like obviously ethereum and then you know things like uh uh the you know the icos that that were circulating that time a lot of them just absolutely got killed and in a way that they were never going to come back like Iota has never gotten back um you know some of the some of the stuff that was there you know ride blocks Nano all that kind of stuff it's just dead it just never came back um but then there are other things they crested even higher than their previous highs right that obviously that

was true of ethereum is true of Z cash it's true of you know a lot of stuff from that generation that turned out that like yeah they were actually going out and solving real problems and building important technology and there was a lot of speculation going on at that time but that speculation turned out to be warranted in the same way that you know Amazon and the.com bubble was one of the most speculative Assets in the entire stock market turned out that they were right that this thing was going to end up becoming a trillion dollar plus company um so they were right to be speculating on it because if you'd held Amazon from the high of the the.com bubble you would have had a fantastic irr holding it until today and so the same thing I think is true is that a lot of the stuff that you know

there are a lot of things that are now down 90 plus from the highs of the market and most of those things are never going to recover and they're going to either just you know die in the vine basically or they're going to you know uh get to a very small fraction of the the the market or the the valuation that they they previously were at there are some things that are going to blow past what we saw of the highs of the previous Market but it's not going to be most of them it's going to be a very small fraction of them they're going to turn out to have Justified those valuations and exceeded them yeah I I would add um you know I think I don't worry it's interesting I don't worry about things coming back because I think the fundamental utility of these things is

so significant and that's what ultimately matters um and I do think most of the things that raised at crazy valuations um did not have enough fundamental utility to justify this valuation so like I think both statements can be true for what it's worth the thing I worry about is that thing things will come back to quickly and what has happened over the last two to four years in particular kind of this last cycle is that we laid down a lot of the rails for money to flow much more effectively so we now have wallets that work we have MPC Solutions all these institutions know about crypto you look at a company like bitwise and they just are chalking up win after win in terms of wealth managers understanding crypto and index funds and wanting to get them plugged into their like systems as the capital

is not flowing yet but all the pipes are there now for all the money and the users to flow and I worry that if the market comes back too quickly we might Poison the Well so in a bizarre way I actually hope things come back more slowly like I would rather us have an Up Cycle in like 2027 than in 2025 because I think that gives time for the builders to put their heads down and like build stuff um you are a masochist I was gonna say that I think it was 2027 we might just lose too many people today I know what you're saying here but that's a while you don't even have that kind of Runway Talent man yeah I think

yeah I think the um yeah I think a lot of people will not have that Runway I mean that's what happened between like 2000 and 2003 right if you got to like 2004 you won Amazon got to 2004 and I mean I think Amazon just IPL right barely and had it not iPad that's right well we're in that cycle of startups running out of uh Runway are we like are we have we seen the worst of it is it six months is there like a a time whenever I'm assuming everyone raised like what November fall of 2021 so 18 to 24 months after that you would have to assume that in the next six months it's going to start to get really ugly is that how you're gonna start hitting yeah I think we're gonna start just seeing people do layoffs I think you start

seeing people pivot people trying to sell their companies and that double whammy I think is going to hit is like startups hitting last six to 12 months of their Runway and realizing that they can't support a 10-person team anymore and they need to get to three people and so there's gonna be a wave of that and you know Upstream like in in our business um the LPS are looking around and they're like well do I want to put more money into crypto is now the time to be putting in and the Smart Ones are saying Hell yeah yeah like things were down 90 this is the time you double down but there's a lot of people that that are you know even up up the food chain and the capital markets are driven by fomo and that's just the reality of how money works right and so there can be some

people that pull back and so um you know I think for for firms like you know the top five seven eight firms in crypto right uh electric dragonfly Paradigm uh injury sin like I don't think there's gonna be any issues because the capital bases are really strong the LPS are committed they knew what they're getting into yada yada but what it does is it takes out the next 50. right it takes out the next group of capital and so Downstream too it's it's not just that starters start to run out of money you know this fall or next year it's well who do they go to to get that next round and is somebody willing to do it at that valuation and or do they have to do a massive down round or you know where is that Capital gonna come from um and so I think that double whammy is

going to hit in the next six to nine months another thing that makes us difficult in crypto is that we have all these all these Norms that I think are we're very path dependent they just kind of arose the way they did of like the team should really only have like 20 of the tokens apply right this is the kind of annoying that we've arrived at after just I don't know people copying each other effectively and uh 50 has to go to the community and this much can go to the investors and whatever and um that makes it very very difficult to make the math work for down rounds for a lot of these um protocols right because at a certain point it's just like okay if I if I need to raise two million dollars to pay my team and nobody's willing to give me

more than you know 20 million dollar valuation uh what do you do where do I fit that in the token supply all of a sudden I have you know 25 for the community or something and like the decentralization math stops working so there there's I think some real constraints that we're going to have to be revisiting because you know if you in in earlier markets it didn't work this way this was really kind of a 2020 um uh uh set of norms that were that were created when the bull market really kicked off and everybody could basically do it everybody could set aside half the tokens apply for the community and have you know this much for investors this much for team and blah blah um that's going to come under challenge where you're just gonna be like look we we have to start bumping up these

numbers because otherwise we don't have any money we can't build anything we can't you know we can't well actually I think what will happen is a bunch of people will just shut down I think I think you'll just see ghost protocols I think you'll think you see things abandoned yeah I mean that's certainly gonna happen too yeah there's a lot of folks right now that are six to 24 months away from shut down I think that's that's right they probably should shut down today because there's no problem is it the early stage companies is it series a running out of money or do you have like the some serious C Series D company everybody series B series C everybody is somewhere in six to 24 months okay so let's say you're a series go go ahead well I was going to ask a

question like would you say that in in this environment There's an opportunity for the more capitalized liquid protocol say you're like safe for instance it has the opportunity to really build an ecosystem on top of this multi-state kind of thing that is working fairly well it bodes well for non you know non-custodial yada yada they could be in a position to really go out there and acquire some of these teams or someone like a maker or synthetics or I don't know some of the more well capitalized that have a liquid currency would you be looking at perhaps investing in in those now ecosystems versus going out and trying to pick one particular startup uh you know I mean it's sort of the relative play or like at what point do you look more at the public markets that

are fairly depressed yeah versus doing the incremental early stage you know million dollar check yeah it's it's a it's a great thought it's something we talk about a lot and and there are a couple of flavors to that right so one is back to this idea in in this world of well it's not that I even have to necessarily put money towards an early stage startup it's like maybe I should just buy Bitcoin and eth right if like from a risk reward perspective you think those things have great return and they're through the regulatory Gauntlet and I have full liquidity on them and I think that's a thing that a lot of stars don't realize is that you're not competing against just you know other other startups it's actually the base rate of return is actually Bitcoin and eth and that's actually very hard

because those are those have huge you know outcome potential so um that's one observation two is you know you can't really predict when a great founder is going to show up as an early stage investor so to some degree it's like hey somebody showed up and they have this brilliant idea and I should probably just give them money because I can't give the money later and so part of the part of the calculus for us always is like when are people showing up and right now the number of people coming in has definitely gone down because all the grifters went to AI but I think the number of high quality people is really great um and so you know we kind of have to pay more attention to the founders that are that are coming in right now because there's some other reason that they're

coming in they're philosophically motivated they have a technical Insight there's some reason they're coming in and and so I think it's a really exciting time to do it to do the early stage stuff but it turns out by virtue of them being so early stage you're often talking like two four six million dollar kinds of raises you're not talking 20 30 40 million kind of raises and so Santi to your point I think the really interesting place right now is actually on the token side because there's so many things that have launched that are pretty decentralized we're actually doing this analysis right now internally of how decentralized are some of these things relative to ethereum in 2018 when Hinman said uh ethereum is not a security and actually when you look at some of these metrics like some of these things like Solana and Cosmos actually are like pretty

decentralized relative to eth 2018. now it depends on which metrics you look at and how you slice it and stuff but you look at those things you're like oh that's interesting actually and like they work like Cosmos you know like tenderbend SDK Works people build stuff on it like there's real users there's usdc you look at that you're like wow that's pretty interesting um but you know because of the way that market dynamics work those those things have really gotten beaten up that's not no advice on buying Cosmos we don't hold any atoms so I'm not like trying to show anything like I actually think there's some serious issues there with our ecosystem token but um the point being like it's interesting that there are these Pockets where there's real technical development that the use cases are real people are like thousands of developers are building

um but they've gotten kind of beaten up the way we always describe it in sort of an eth context since that's um it's commodity is we're kind of at like 2017 prices if you go back there's this moment you know ethos hovering on 1400 except all of the stuff that was vaporware in 2017 is real now like l2s exist we moved to proof of stake um like ZK stuff is a thousand X more performant usdc you know there's stable coins like D5 works there's lending protocol like everything that was theoretical in 2017 is actually a real name but like the price but the thing costs the same amount and that's that to me is like a perfect example of what you're doing if you were buying if you were excited about eth back then buying a 1400 then yeah it's massive to your point you should love it there's no

reason why you shouldn't be allocating you should love it at 1500 five years later when all the stuff that was vaporware is actually real and this this also speaks sorry for the rant but this this speaks also to this thing we always talk about which is there's this recurring human pattern that I think AI is going to go through too which is that humans really overestimate what's possible in two years and really underestimate what's possible in 10 years this is that sort of like the reason for that is that exponential growth thing and so literally it's all the stuff in 2018 that everybody's like oh like this is you know we're gonna have decentralized whatever in two years and none have happened so the whole thing crashed out and the technologist just tuned all that out and they just kept building and we're now about five years after the Ico

boom and so in my opinion we're like roughly on track like about halfway into that 10-year cycle you would expect the tech is now real and so that's this like the next five years now or about how do we get these things in the hands of users and and scale them up like crazy um and so I think we're actually roughly on track for a lot of that stuff from 2018 it's like I think we're gonna I think people will sit up in 2017 2027 2028 and look around and say holy crap a lot of that stuff that people are talking about in the Ico boom it actually happened [Music] it's fine to your point around non-linearity I think more people increasingly there's two Trends one I think technology is moving faster you have like this everyone's more connected now technology moves faster especially in open source context on the other hand

people are more impatient like the average holding of stocks has gone from like a year it keeps going down yeah so has he I want to ask you first like what do you what is it that you think that the crypto Market is getting wrong or has gotten wrong where you've been fairly contrarian or are being contrarian right now and are willing to kind of hold that line a lot of things uh I mean one of the most obvious ones from this previous cycle was play to earn uh played earn was kind of the most obvious big [ __ ] up in terms of narrative that we had as an industry that um you know there's certain people who are pushing it more than others but I think it was pretty public in saying that play to earned was nonsense and that it was it was

basically doomed in bad economics turned out to be correct is that yeah paying people in the third world to play a game is not value creating it's value destructive and in retrospect like yeah nothing that was played earned seems to really have legs and have uh intrinsic sustainability and these games aren't good which is the main thing that you care about for games like if you sort of lose sight of the the main thing you're trying to do which is entertainment if these things are not entertaining something is very deeply wrong and right now that's kind of the state that we have with crypto games there are a few that are okay um but most of them are awful most of them are basically Financial engineering and financial engineering when when you're calling a financial a financial instrument a game something has gone wrong right you've missed the plot

somehow like you've gone you've gone too deep um so that's one area that I think uh that's not to say that I'm bearish on the whole on crypto gaming I think the crypto gaming is going to be an interesting infernal area I'm I reserved judgment about how large it's going to be uh because I think it suits certain kinds of games better than others and I don't think it's the case that every single game is going to be a crypto power game because a lot of things that are fun are not Financial in nature at all um but uh clearly played Iron was the wrong path to go down I think we ended up looking very stupid on a very large stage because of our um the industry's Embrace of play to earn as a an important uh mechanic to defend I think the Dow craziness ended up

looking really bad in retrospect uh of this idea the story that like oh everything's going to be a Dao normal people are gonna participate in Dows and Dows are the best structure for everything I think in retrospect now people that view has been tempered quite a lot of like hey Dows have problems uh governance is kind of a mess we don't really know how to do any of this um this bit we basically just gave lots and lots of money to children and told them hey I'm sure this will all be fine like you guys figure this out uh and we didn't we did a terrible job uh with all these Styles uh and so that's a place I think where I I I don't think I was quite as outspoken on Dows although I've talked a lot of [ __ ] about Dao's in the

past but I've been uh you know I think they're going to be important and they're clearly going somewhere people care about these things um but the down Mania in retrospect was you know very very off and made us look very foolish for endorsing this view of the world um those I think are the big are the big ones I can think of that crypto really got wrong um but crypto also got a lot of stuff right I think the the idea that more and more value is going to be tokenized and brought on chain and that it is actually more efficient to have these things in a decentralized network rather than in the traditional Financial system that turned out to be right and I think it's been Vindicated by the the the the really incredibly efficient system that we've built that's garnered a lot of sympathy

it's why we've got central banks LARPing as blockchains because they see wow what you guys have built is so much better and more streamlined and more efficient than what we've built over the last 75 years that we'd love to borrow some of these Concepts and use them in the systems that we already have same reason why you've got all these financial services companies trying to incorporate blockchain technology into traditional uh Financial Services even in governments trying to trying to find ways that they can shoehorn blockchain into various services at the same time so I I um I think it's definitely a mixed record and it's true of every cycle right in the 2017 bull market we have this whole thing about icos where everybody in the country industry myself included was talking about icos are going to decentralize Capital formation and this is the perfect like why are

there all these laws around disclosures investing and all this you know stupid stuff you Boomers do in terms of we learned a good lesson of why these things are important like yeah vesting matters it's really important that we have vesting and you know a lot of these things around Capital formation are there for a reason because when people lose trust in the legitimacy of capital markets and they're like oh if I put money this Ico I don't know if I'm ever going to see it again if these guys are going to build what they say they're going to build um and what's going to happen to them if they don't the answer is nothing um that's that's a shitty Market structure turns out it sucks there's some markets that do need to resolve information asymmetries and do need strong commitment mechanisms in order for the the capital markets to be strong

and we didn't have that and we didn't have a good solution for it we're building those over time but without having those there um you end up looking stupid and you end up losing credibility so I think the the industry it's kind of the same thing as the internet right the internet got a lot of stuff wrong in the early days and gradually figured out like hey yeah maybe we shouldn't do all the stuff over plain text because randos can just you know sit in a coffee shop and and figure out everything you're doing and steal your accounts and we learned ah okay over time you figure out some best practices you figure out what you should do and you shouldn't do and you mess a lot of stuff up and you end up looking really stupid along the way but over time you iterate your way into best

practices and I feel like that's what crypto has done over the last couple years guys you got you you both use a lot of anecdotes from 20 years ago from like you know early days of the web and 30 years ago 20 years ago um the one like you know let's see if you brought up Microsoft and Tam and someone brought up Amazon um the one difference between then and now is that the uh value accrual mechanism like how these things will actually capture the value is hamstrung by Regulators right now and you see it with I like really I'm thinking about the fee switch and within the fee switch conversation I'm thinking about uniswap so I'm curious how you guys think about these protocols capturing value I think there's a couple questions here like should they be doing

there's like a user acquisition conversation about like and like just a capital allocation conversation about like should they be doing it right now and then there's the second conversation about well if they decide they should do it from a business perspective should they do it from a legal perspective so I don't know who wants to take that one first but I'm curious how you both think about it well we're not investors in uniswab but I'll take a shot at it because I think is the most instructive example of this the the unit swap story is one where it's it's always going to be the case that business models and strategic decisions are bounded by uh the law and by regulations right in a state of nature you might prefer it that unit swap had the fee switch on from the very beginning or at least have the ability

to modulate the fee in response to you know maximizing revenue or maximizing market share whatever it is they're trying to maximize uh right now you can't you can't do that for a few reasons one is that people are scared uh they're scared that if we turn this thing on the SEC has made very clear that this thing is going to be security that's going to harm the adoption of this of this product you know harm the adoption of the token blah blah blah blah you know a lot of the US uh a lot of the holders of unisoft token are Americans and they'll have to potentially disgorge the token if it's it's deemed to be a security there are a lot of things in the real world that are affecting the uh kind of economically optimal choice for how uniswab ought to be governed and how it

ought to operate as as an as a decentralized Exchange that said at the end of the day there is really only one fundamental way that these things are valuable is that they create more value than they pay in costs if that doesn't happen this thing cannot be valuable right um and that difference is a very clear and objective measure of the value that something is creating now it doesn't necessarily capture all that value how you capture that value is there you know there are a few different ways to do it and the most obvious way that you know Sushi swap kind of showed that there was a path tool that and curve also does the same thing and then both of them have uh take fees on the underlying Market you know swap now sees ah okay there's a fee Market uh there's there's a fee model

that's that's very easy to understand these other exchanges Do It um and we can almost do like a sensitivity analysis and see when you increase the fees what does that do to trading volume what does it do to market share and how should we think about you know the point that maximizes revenue for the protocol now the other side of it is that unit swap is also saying like look it's super early we're in the very very beginning of D5 this stuff is going to exist for you know decades into the future so in the same way that you know Amazon in the early days didn't worry about profit margin because they're like look where you guys don't understand this thing is going to be so big e-commerce is going to eat everything so whether or not we have profit now in 2005 or 2007 or 2010 just doesn't matter

given how big the Tam is that we're going after and a lot of people doubted Amazon they thought that was a ridiculous claim to make um they turned out Amazon was right that it was a trillion dollar Plus Market and they proved it and now they are extracting that Revenue at the end of that cycle um uniswap is making fundamentally You could argue yourself as making fundamentally the same argument that you guys don't realize how big this Tam is and for us to start extracting right now is stupid we should be growing The Pie as big as we can because we you know uniswap is the market uniswap is defy almost at all the volume trading on going on chain is uniswap so in the same way that Amazon's been saying look our job is just to increase the the market of e-commerce yeah but

there's a whole but there's a but there's a whole generation there's a whole generation of startups that was built on the that thesis was in their pitch deck right like Amazon didn't make any money we're not going to make any money for a decade therefore like just give us a bunch of money we'll get profitable eventually there's a whole generation of startups that that was the idea and it didn't really work out we're seeing as we're on the other side of this piece I'd like the environment changed yeah but I think the point has she you're making is sure like startups should reinvest in growth to the extent there is and it makes sense and there are opportunities now uniswap is rolled out made some Acquisitions right of like what is it they acquired this nft kind

of marketplace um the question is like still how many people are actually showing up to to vote on where that Capital gets allocated and do you believe to your point on Dows do you actually believe that who's going to make that decision is it uniswap Labs is it the uniswap holders now of course if they're then it becomes a question you know there is value action holding uni tokens because you can allocate a huge like treasure chest of capital forget about VCS I mean these guys are going to be the biggest investors in the space because they have so much Capital right to allocate but I I I still I'm not sure where I stand in terms of can these people be good stewards of capital and

can they allocate it correctly or should they just give it back to token holders to do whatever the hell they want with it for what it's worth I think it's tough to be a good Steward to for all the reasons this even mentioned like I think it's not a decision by committee situation and so you have to create structures that allow for well-informed people to make those decisions I mean it's kind of um for for the record and let the record State I was always very provesting I was always very Pro disclosure I've had like tweets you can go back to like 2017 or 2018 and I was making tweets about how we're just Reinventing the capital markets and people are going to figure out that like investing structures for teams and Founders are are like a necessary thing and yada yada and I think one of the

things that um Capital markets and that democracy has figured out is that like direct democracy is not tenable like you just you end up with worse outcomes what you need is some well-informed group of people that are elected by that group of people whether it's a you know a board of directors or you know some sort of bicameral legislative body with an executive branch yada yada and that's how stuff can actually get done because there are there are Specialists that understand these things um I suspect we will reinvent those things on chain and we'll just say look this group of four or ten people really understands how to deploy capital and maximize that value and we're going to elect those people and then I don't have to think about it I suspect it's how this will ultimately need to go um there's a there's a threat I think

haseeb was pulling on which I think he sort of said but I don't know if he exactly said uh that I think he just touched on two centi is like is the value in these tokens ultimately going to be because you control some large pool of capital and can direct that Capital around or is the value going to be in the cash flow that comes out of the thing and I tend to be in the ladder camp like I think at the end of the day assets are valuable because of the cash flow that they can produce like all assets ultimately boil down to some sort of you know cash flow discounted cash flow rate with you know the base rate of inflation and uh and I think that's where these things have to go uh ultimately and so even if uniswap ends up being a giant

pile of capital or liquidity gun that you can point around I think Downstream of that then there is something that will produce cash flow and that thing will also be very very valuable um and I think what people will really be doing is using this as a means to an end in that case and and to the original question like I think the statement around like tokens value capture I think is actually a U.S Centric question like I think the rest of the world is going to figure this out before the U.S because the rest of the world has in many cases been shot out of the US capital markets like if you're a retail person in Southeast Asia can you buy Tesla or Apple stock have you you know has most of the world been able to invest in private companies where if you

look for the last 15 years post 2008 arguably post 2001 or post you know sarbanes-oxley have people been able to participate in the private markets where all the wealth generation has really happened um short of thing stocks you know for the last 10 years um and so I think there's actually a huge demand in the world especially xus to be able to have access to financial opportunities that they've been blocked out of and that's actually most of the world uh and so I suspect most of the world and and those people in those markets both the elected officials but the sort of the retail markets there understand this viscerally and they understand the opportunity of this viscerally as a new thing and it's hard for for income it kind of goes back to the incumbent question too like the United States is the incumbent here you

know we kind of we kind of got this right with the Telco Act of 96 if anybody wants to go back and read that it's like probably one of the most important things that happened over the last 30 years that like like few people in Tech actually understand it's like the internet would not be the internet without the Telco Act of 96 which laid the rules for things like hey platforms are not liable for what the users of the platform say on the platform like as long as you take it down um and those rules of the road like unlocked the internet and made the internet what it is today in many ways and and actually essentially cemented U.S dominance of the internet and I think the rest of the world kind of understood that lesson because it's been hanging over them since 1996 and they

look back the EU looks back at that Japan looks back at that Korea looks back at that Singapore looks back at that the Gulf States look back at that and they're like oh look at where we are today and it's all American companies like do we want to be in that place again or is this an opportunity for us to not have that happen and and so I think that's why the rest of world is getting this so I suspect what's going to happen is the the EU with Mika you know the Gulf States like Dubai opening up free zones Singapore like you just look at the way people are in Hong Kong like doing a 180 like everybody gets this um in a way that I think the US doesn't and I think it's sort of a classic innovators dilemma situation um I hope the US figures it out but I

suspect everybody else is going to figure out tokens as cash flow is a thing it's a new Financial instrument we need to regulate it we need to have disclosures but this is an awesome opportunity for economic empowerment for people who have been left out historically um and I think a lot of other places they've been left out those governments are going to seize that opportunity yeah I wish in many ways like we can get to Clarity with all of these regulatory actions to finally be able to reopen the design space in a more trans maybe like open way because I think that will really get us back to spending you know because we've been dancing around this we call them governance tokens but the reality is there is underlying value and cash that is being generated by these protocols in a very meaningful way like

these things are highly more efficient than centralized players yeah let's uh yeah it's a huge it's a huge it's a huge waste and it's a huge missed opportunity too because it's like I I think it's interesting because you know at least in the US kind of the on the right these things have been picked up because they they do sort of embody some of these more open free market kinds of ideas right like let the technology be more efficient and create more value and Global markets and yada yada um and I just it makes me a little sad because like that's all true but it's also the case that like the origins of this stuff are wait a second the Legacy system is broken like the banks keep screwing us like the Legacy Financial system like

where do these guys make money they make it off the backs of poor people like they find the crap out of those people you know I'm not getting charged for wires I call Schwab and I do whatever I want and like they refund me those fees and um you know it's like these are very exploitive institutions like if you look at how much money have these guys been fined over the last 15 years the big banks of the world it's hundreds of billions of dollars in fines um and and that was kind of the idea here and we kind of have like lost the plot a little bit in that it's like we're just sort of arguing over these technicalities when it's like hey look there's like you know 100 million poor people getting screwed every year in the United States by these fees and like we

have we can actually solve this problem like we can move money around for way faster way cheaper on your phone and you don't have to have a bank in your local area that is extractive or you don't have to go to like the check cashing place or you don't have to take a payday loan against your car like the money can show up instantly and you can send money to your family overseas and like all of these problems like technically we can solve now um and so it's just it's sort of sad right and it's it's but I think that's why the rest of the world gets it because they don't have some of these Legacy institutions standing in the way um they don't they don't have the innovator's Dilemma problem actually so anyway I think it'll happen I think it'll happen globally and then I think

the to be clear I think the US will figure it out there's a there's uh I think it's a Churchill quote that's something along the lines of you can always count on the Americans to do the right thing after they do all the other things basically uh I mean you know I'm not as eloquent as Churchill but like I think the American government will eventually do the right thing here but it's not I think the rest of the world will figure it out first and then the Americans hands will be forced well I know you guys got to jump um this has been a fascinating discussion I think you guys are the two one of the two more favorite guests on on the Pod we would love to continue this conversation soon around later talk about catalysts what you guys are looking for in the next cycle and and

kind of there's a lot that is is happening in the crypto space right now so you know you guys are welcome anytime so let's definitely schedule something in the books uh because I think the audience really love it so there's a whole conversation around like monolithic first modular that yeah I was about to ask you guys but I was like that's the whole we didn't even get to any of that yeah two hour long conversation here yeah this is part one of many so uh guys a pleasure having you on by the way I think I see and I will disagree a lot on monolithic versus modular 2. we'll run it back soon then guys we'll start there uh on the part two guys thanks so much for coming on yeah take care thanks for having us [Music]

thank you foreign