Bankless - 183 - Why VCs Suck | 1confirmation's Nick Tomaino & Richard Chen

Episode Date: August 14, 2023

Today on the Pod, we're discussing Why VCs Suck. And who better to answer that question than VCs themselves? We're joined by Nick Tomaino and Richard Chen of 1Confirmation to discuss the role of VCs in crypto, the outlook on the markets, and how retail should prepare for the next cycle. ------ ✨ DEBRIEF | Unpacking the episode: https://www.bankless.com/debrief-1conf ----- 🏹 Airdrop Hunter is launching TOMORROW  https://bankless.cc/HuntersGonnaHunt  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2 ⁠  🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING ⁠https://bankless.cc/MetaMask  ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum ⁠  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle ⁠  👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap  🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku  ----- Timestamps 0:00 Intro 6:00 Nick and Richard from 1Conf 7:20 The Price Cycle 11:50 The Signal Cycle 15:55 Tourist vs Purist 20:00 Why Do VCs Suck? 28:15 Raising vs Returning 32:40 How Transparency Shapes Crypto 38:30 VC Report Card 43:45 Holding Retail Accountable 48:30 Advice for Retail 51:15 How to Not Be Exit Liquidity 59:00 Should We End VCs? 1:03:10 How 1Conf Works 1:07:40 Crypto Native VCs 1:12:30 Looking to the Next Cycle 1:17:08 Prediction Markets 1:20:00 Crypto is Ready 1:24:00 Actually Using Crypto 1:28:20 L2s vs Alt L1s ----- Resources Nick Tomaino https://twitter.com/NTmoney?s=20  Richard Chen https://twitter.com/richardchen39?s=20  1confirmation https://www.1confirmation.com/  Richard's Article https://showerthoughts.substack.com/p/thoughts-on-the-current-crypto-vc  ----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠ 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. The topic today, why VCs suck with some people who would actually know. We have crypto VCs Nick and Richard from one confirmation on the episode. You might ask, why would we have VCs on a podcast and then talk about why VCs suck? my answer would be, who better to tell us the shenanigans behind the scenes than the actual On the Inside.

That's right. And I think retail crypto investors and VCs have long had this adversarial relationship. And this episode gets into the why and how to protect yourself from becoming their exit liquidity. Lastly, in the final parts of the episode, we talk about the coming bull market. What theme are Nick and Richard most excited about? Are we finally going to build a crypto product that gets used by billions of users? This was just a no-b-s conversation that I thoroughly enjoy. David, what was the significance of this episode for you? We'll say this in the intro, but we had Nick and Richard from one confirmation on two and a half years ago.

I think they were some of our first VCs on bankless way back in early March 2021. And that episode was titled Authenticity in Crypto. And it was about a similar subject matter, like how to pierce through narratives. And Richard really took a front and center seat because he was at very early Doomboards, analytics wizard before Dune really even blew up into the thing that it is today. And so we were trying to unpack how to pierce through narratives with data, with on-chain data, which is this new tool that we have to navigate the crypto space. And now the crypto industry is two, three years more mature, has two to three years of experience behind it. And there's also been

two to three years of adversarial relationships between VCs and retail investors. And so there's been some shenanigans that have gone on, not. just with VCs, but people like hedge funds, like Three O's Capital and Traders. And so I think just going and getting a snapshot halfway through 2023 about how and why these incentives are created that separate retail from both founders and VCs and understanding why, what are the ingredients that caused this relationship to exist can help equip you, bankless listener, to help navigate this bull market and make sure that when you see some VCs on Twitter that have big prowesses and spin a bunch of narratives that you actually can start to pierce through what they are exactly doing and why they are doing it.

So I think this episode will be helpful for that. Yeah, I can't wait to talk to you more about that during the debrief, which, of course, is our episode after the episode. Begless citizens can access that now on the premium feed, David. And I forgot. So Richard reminded me that episode. His was one of the first tweets that actually lit the match for the downfall of SBF. And I have that tweet up. I want to talk to you more about that during the debrief because I remember it well.

So we're going to get to the guests in a second. But first, we disclose. We had VCs in the podcast, and as with any VC, I think you should expect that they have biases. A project called Polymarket was mentioned. They're investors. They also mentioned two projects, one called Pimlico, the other called Friends.

Both David and I have exposure to both of these. One is Angels and the other as Bankless Ventures. We're long-term investors, not journalists. We don't do paid content. A link to all bankless disclosures is always in the show notes. That's bankless.com slash disclosures. All right, guys, We're going to get right to the episode on why VCs suck.

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first Dow-ledd-Lay-2 ecosystem, check out Mantle at mantle.xy-Z and follow them on Twitter at Zerox Mantle. Bagless Nation, we are excited to introduce you once again to Richard Chen and Nick to may know they are GPs at one confirmation. A crypto-focused VC fund that's definitely seen a thing or two. If you're a dune board connoisseur, you might know Richard from his work on the many dune boards that he's created. We use them on the weekly roll-ups all of the time. And we've had Nick and Richard back on the show.

I think the last time was March 2021 during the heat of the bull run. And that was hot. Now we're bringing them back full circle to talk about maybe everything we learned or didn't learn. Richard, Nick, it's great to have you back. How you doing? I'm great. How are you guys?

Fantastic. Good. I think I'm good. Actually, I was just talking to David about this recently, and I feel like we are entering the Goldilocks zone of kind of the cycle. So let me just kind of like define that for you guys and see if it resonates or what you think, what part of the cycle we're in, which is my favorite part of the cycle is when we get through all of the dumpage and kind of like all of the pain. And we're out on the other side of that and we're heads down building. And you see kind of the fundamentals starting to stack up and kind of no market reaction to those fundamentals, but the builders are building. And it's still quiet. So the market hasn't yet gotten stupid. And the tourists have left. The settlers are here. And we're in kind of this like quiet

phase of growth. And I feel like that's what August of 2023 is for me. And I don't know, that's just a feeling. What do you guys think? What part of the cycle are we in? Does any of that resonate to you? What do you think, Nick? A little bit. Yeah, I mean, it's always hard. Timing is always hard for me. I mean, that's part of why we started one confirmation as a venture fund because I have a really high degree of conviction that in five years, you know, crypto is going to be broadly used

in the world and crypto prices are going to be much higher and crypto products are going to be widely used. But it's hard to time things. So one of the things I've been thinking about, I feel like we're playing a video game. game. I think a lot of crypto people this may resonate with. It's like we've been in a video game the past five years where you have these NPCs that are trying to suck us in and kill us, right? And you have SBF who's shilling, you know, mainstream crypto narrative, or you have three arrows capital showing alt-l-1s. You have doquins, shilling stable coins. You have all of these NPCs that are

trying to suck us in and kill us. And if you can manage your greed, you can stick to authentic products that are pushing the space forward in new ways, then you're going to be well positioned and you're going to win the game. So that's more the feeling I have. And I don't know if all of the NPCs of this cycle are necessarily dead, right? There might be, most of them are gone, right, and have blown up, which is a good thing. But I don't know, there's a few still out there. Do you have to wait until they all died, Nick? Or can we just, like, move on and just realize we're just going to stack some NPCs every cycle? No, I mean, I don't know. It depends how big of a bad guy they are, and sometimes it's hard to know. But I do think, you're right. A lot of the,

you know, these NPCs have been fleshed out, and there is a lot of great stuff happening. And it's not happening on a mainstream level where everyone's paying attention. And that does tend to be a good time to lean in, right? Richard, what do you think about the cycle? I mean, do you resonate? Like, if we're playing a video game, what video game are we playing and, like, what part of the cycle are we in? Well, with the cycle, I'm not a trader myself, so, like, I really can't time markets and know when the next full market's going to start if we've bottomed or anything. I mean, the game I always compare crypto to is, like, Runecape. I mean, like, this was really, like, true when, you know, back in 2020, like, yield farming started. And, you know,

there's, like, so many parallels between, like, items, things you do in Runecape and things you do in crypto. And there's definitely a strong subculture community in crypto with Roonscape. And of course, you know, you have bad guys. I think long term in crypto, it's important to be Lindy and just like survive and like don't fly too close to the sun and feel like you're invincible and like use leverage and blow up, you know, fall for really aggressive marketing and like people who try to play God on Twitter. Just, you know, stay level-headed and, don't be too greedy. I think one part of the cycle

that you guys might be more tapped into more than the price cycle would be the signal cycle. Like Ryan said, I totally resonate with what Ryan saying we're in this like Goldilocks zone, Goldilocks era of crypto

where if you were going to leave, you would have left by now. And also the NPCs that Nick was talking about are all like in jail or have fled. And so we're in this like NPC free zone where all the homies are hanging out on crypto Twitter and we're all kind of just like in this calm before the storm. And I'm wondering how this Goldilocks era of crypto also relates to the signal that you guys are seeing in startups and what

they are building on and what they are focusing on. So like Nick, you said like five year time horizons, you start to have a pretty strong confidence. And, you know, that's what startups are building for. And the noise cycle of startups is also a cycle that exists inside the crypto space. Like people are building things in the top of the bull market that are kind of just make no sense, but only make no sense in hindsight. How would you describe maybe the last two years of noise to signal ratio in the startup landscape? And how do you see where we are now? Nick, I'll throw that one to you. Well, there's always a lot more noise. And this is not necessarily a bad thing. It's one of the beneficial things about crypto, but, you know, there's more noise in a bull market, of course,

which begets more noise, which begets more noise and things go crazy and get too overextended. And so that that's happened now five or so times that I've seen since I've been in crypto, where you have these extreme bull markets. And during those extreme bull markets, I mean, what we see is a lot of builders, right? But a lot of the builders are only there because of the money and because of the attention. And they don't really understand crypto deeply. We try to invest in things that are at the intersection of purist and tourist, right? So the purist is the person that's steeped in historical knowledge and context on like the history of the thing, the product.

The tourist is someone that doesn't give a shit about all that. They just want to build something that resonates with users. And so in kind of a bull market, you see tourists. And the tourists can look really, especially from a founder perspective, these tourists can look really good on paper, right? they've worked at Facebook or Google or whatever. They have really compelling resumes. They talk a really good game.

But they don't get the history. They don't get the context. They don't get crypto deeply. So, you know, those came out a lot in the past two years. And what we try to find, again, is the intersection of purists and tourists. And I think now the builders, you see more purists, right? And being too purists also isn't great, right? Because you're never going to connect with a mainstream audience.

So now I think, you know, we're seeing a lot of purists, which we'd rather, we tend to skew a little purist. Maybe too much so in some cases. But really, you know, in terms of the signal now, it's a lot of kind of purist founders that really appreciate and understand crypto and are building things for a crypto-native audience. And in those times, what we want to do is make sure that those types of founders have a little tourist in them, right? Because again, I think to really win big in crypto, you need to be at the intersection of Puris and Taurus. And I would argue that's what Ethereum has. That's what Coinbase has.

That's what OpenC has. And those are what we found to be the best investments. That's a really interesting mental model. So the intersection between tourists and purists and you can't have... By the way, that wasn't original for me. The creator of this idea is a designer who passed away in the past year and a half. His name's Virgil Ablo. and he's a very famous designer that worked for Louis Vuitton and a bunch of big designer brands.

He had a brand named Off White as well. And he, that was his mental model that he applied to how he designs clothing and furniture and things like that. And I got to meet him once and I basically watched all his YouTube content and everything. And I kind of found that. And I was like, wow, that's exactly kind of how we think about crypto investing. So in 2021, you know, kind of peak of the cycle, you saw a lot of tourist types of founders, and you wish they would maybe skew a bit more purist, right? And now, 2023, we only have kind of the tourists have left. So we only have what we call in Biglas, the settlers. And these would be sort of the purists. And now you're looking for kind of founders and builders who are purists, because they're still here, obviously, everyone who is still here is probably a purist at some level. But they have a bit of tourists in them in that they're not just building for the existing. crypto audience. They're building for like the next cohort that we want to bring into crypto. Is that sort of what you're saying, Nick?

Exactly. Richard, what would you add to that? What about that mental model speaks to you? Yeah. The terminology I like to use is missionary versus mercenary. And I think a lot of mistakes that VCs made during the bull market is they saw a lot of founders who have really polished resumes. Like they went to Stanford, worked at Google, Facebook, were like a founding engineer at a startup and then now there's going to be a great executor in crypto. And what ended happening is like when crypto prices drop 90%. I think the people who are the most talented are also the first people to fail and pivot to AI or something else because they have a lot of opportunities.

So there's nothing that's intrinsically motivating them to stick around in crypto if they could succeed just as well in AI. I think I really saw this a lot with the Solano ecosystem. So I think a lot of VCs made the mistake of like there's so much talent of developers going to Solana. But from talking to like a lot of these so-called blue chip teams in Solana, it just felt like a lot of mercenary founders that weren't going to stick around when crypto prices crashed. And, you know, fast forward like two years after the old L1, like the peak of the L1 cycle, like we're seeing a lot of big name Solana projects like wind down or pivot. So I just one other thing to add is Like while Silicon Valley archetype founders might be like the worst type of founders to Back in bull markets

I think they're probably some of the best type of founders to back in bear markets Because this is just kind of speaking in Generalization like Silicon Valley type founders are generally better executors than kind of your random open source Indie hacker from like someplace else in the world So you know in a bear market when there's sort of an emerging category, say, like account abstraction, I think the Silicon Valley founders that do have the conviction to build in the bare market are just going to out-execute, you know, all of their wallet competitors, other projects building in the AAS space as one example.

So the same founder archetype can provide two totally different signals to you, depending on when you meet them in the market cycle. Yeah, more or less. There's probably more to talk about with respect to kind of investing at this part of the cycle in different founders and teams, but also I'm very interested in theme. right? Because a big question I think for crypto right now is, hey, crypto, are you guys going to stay a niche? Or are you actually going to expand to like billions of users? And that has always been sort of the promise. Maybe we'll talk about that later. But I want to talk about this thing that Richard was talking about for a minute. It's like mistakes VCs make. Okay. So VCs, it turns out, make mistakes.

And I think I've seen you, Nick, be actually, you know, one of the most critical voices about VCs, specifically in crypto that I've seen, which is interesting because like, obviously, You guys are also VCs, right? So this is VCs talking about why VCs suck. I'll read out a few tweets, all right? Venture Capital is the dumb money in crypto, this from January of this year. That was a Nick tweet. NPCVCs are a vibe, so calling VCs as well. Good at raising money from hollow institutions and deploying it to hot trends,

never distributed cash to LPs. You go on, but I'll flip to another tweet. Venture Capital is the fakesest industry on the planet. In what other industry can you be objectively bad at your job, but create narratives that make you appear great to the outside world for years. So some harsh critiques. And before we get into this discussion of maybe why VC suck, let me frame this because I bet there are a lot of bankless listeners out there.

And obviously, you know, we don't skew VC. We have VCs that listen to our podcast. But this is basically like we're all crypto investors on the journey, right, in bankless. So we're talking to like what people might call a bunch of retail users or actually actual crypto users, some of those crypto natives, some of those settlers who stayed. and they were hearing me read those tweets and they were like probably, you know, standing up and clapping, like standing ovation, like, go get him, Nick, right?

Like there's this battle or this dichotomy in crypto that I think is unique. It doesn't so much exist in other venture capital, right? Because the markets take longer to go public. It does exist to some extent. But not like crypto, where it's sort of like, yeah, the VCs are going to dump on retail. They're going to like invest in an asset,

take a position early. well, unaccredited investors don't get access to it, and then they're going to wait for it to release a token, and then they're going to dump their bags on you. And this has played out over and over and over again. So I think a lot of bankless listeners are probably standing up and cheering you on, and yet I think there's some subtlety here because you guys are obviously VCs. So I imagine you think you're doing the right thing here. But let's talk about this. Why do VCs suck? Why do you seem to hate VCs, Nick? Well, I obviously like some VCs, right? I don't hate all VCs or anything like that, but I do really dislike venture capital culture, particularly in Silicon Valley. And there's a few reasons why. The main one is just the lack of transparency on performance. So if you're an NBA shooting guard, right, you are objectively measured on your performance, right? Points per game. How many points did you score in a game? If you're a box, you're objectively measured on what's your win-loss record. And venture capital doesn't have that. You know, there is a metric, right, which is distributions to paid in capital, right? You take LP money and then you return it. And the job of a VC is to make good investments and generate a high

distributions to paid in capital, DPI. But it's not talked about publicly. So that aspect of venture capital culture and it's not just crypto, it's broad. I think really I don't like it and I don't think it's optimal for people, for the masses, right? It's almost more like an industry like politics, right, where you're competing on perception rather than how good you are at your actual job. And so that's what leads to things like, you know, threadboys on Twitter or, you know, these massive It's a thread boy. I think it explains itself. Yeah.

That's somebody there just publishes a bunch of threads, like for narrative's sake and exactly. Yeah, what's the implication there? No, you know exactly what it is. I'm sure most of your listeners do. So you have people that are competing for perception to be perceived as really smart or to, you know, be perceived as having a lot of money or something like that. When that shit doesn't really matter.

It's not part of the job. job. The job is to be a good investor in return funds. So I would really love to see a culture where just like, again, NBA, people are talking about DPI and IR and these metrics that really matter that, you know, behind the scenes, the LPs and these funds care about and are looking at. But that's not what's happening now. And I think that's a big part of why, you know, people, I think a lot of people, your listeners and others, can sense this and why there is this negative sentiment towards VCs because it does feel very fake. You have these people, you know, shilling fake narratives and, you know, trying to generate a lot of attention when that's actually not the name of the game.

So that's the first thing. The second thing is, and this isn't unique to venture, but there's a lot of greed in crypto, right? Everyone is greedy. That's human nature. But I think in crypto VC as well, there's a lot of short-term greed focus. And what I specifically mean, buy this is, you guys know this, probably most of your listeners do also, but as a venture fund, you make money two ways, right? You make it with management fees, and that's just an annual fee that you collect on funds raised, and you make it in carry. And that's a fee at the end when you return the money plus some, you get usually 20% of that, right? So typical fees for venture is two and 20. So, Nick, that means if you have a $100 million fund, right, and we're talking

management fees of 2%, then $2 million just for having the fund in existence goes to kind of management fees. That's the one part of it. Agnostic of performance. Yes. Agnostic of performance. Yep. And then the 20% is the performance kind of bonus.

Exactly. And so because of these incentive structures, most people are just trying to raise as much money as possible, right? So the example I like to use is you could have a $50 million fund that is 20x at the end the 10 years, right? That'd be one of the best venture funds of all time. And in that case, you'll make 200 million, right? You'll make roughly, you know, 190 million, if my math is right, on carry and 10 million on management fees. And your LPs are very happy. Exactly. So that's one example. The other example is you could have a billion dollar fund and you could lose everything

theoretically at the end of the fund, not return anything. And you could still make 200 million. You're collecting a 2% management fee annually. So that's the reason that you see these massive funds, right? Because if you're just looking at it from a pure, you know, how much money you're going to make perspective, the rational thing to do is just to raise as much as possible in a bull market. And so that's why you see so much, you know, capital and so many people that have no business raising billion dollar funds that have them. But doesn't that problem get fixed, Nick, because if I'm not returning capital to my LPs, and they're not going to give me capital the next go around when I try to raise the next fund.

But ventures along, that'll play out over a 10-year period. Yeah. So you're not like 13 years old. 10 years or more, right? So you're not, there's a long feedback cycle for venture to know if you're good or not. So that's a problem, right? The reason this is a problem, this explains FTX, right? Right. FTCS, you have prestige brand name funds that are giving FTCS hundreds of millions of dollars.

Right. Why? Well, because they have massive funds. They need to deploy it and what they see as big opportunities. And they don't do their homework and actually look at what's really going on. They look at it as a surface level and say, oh, SPF's a great executor. Right. He is getting all this media attention. He's, you know, working with regulators. He's such a good executor. That was the narrative from these funds that gave hundreds of millions to SBF. And it's soulless greed, right? They have these massive funds. They have huge management fees, and they invest in projects that make no sense that are either, you know, an aptos or a suey or something like that or an FTX. So either it's, you know, one of the worst frauds in history or it's a shit token that they then dump on retail, to your point. So that's, I guess,

that was long-winded. Richard probably has other thoughts, but those are two reasons why I take issue with a lot of what I see in venture capital today. Yeah, Richard, what do you want to add to here? Yeah, I guess on the topic of perception of VCs, do you guys remember back in 2021, there was that like spreadsheet floating around on crypto Twitter

of ranking all like the VCs by tiers? Oh, yeah, vaguely. I can't remember what the purpose of that spreadsheet was for. Yeah, what was the results? I think it goes around the time of the sushi treasury, diversityification. And then like there are all these like VCs proposing themselves is like, hey, we should buy some sushi tokens at a discount.

Like, the funniest thing about the spreadsheet is, like, you know, looking back in hindsight, two years later, is like, on every single ranking, like, Alameda, three arrows were, like, always at the top of the list. It's, like, pretty true that, like, there's a very strong inverse relationship between, like, who's killing it on crypto Twitter and, like, what their performance, like, what's actually going on behind the scenes. And it's almost like, if you're killing it on Twitter, it's because you have something bad you want to hide. So you try to create this narrative that other people think that you're still good when you're trying to mask some shitty stuff that you're doing. So like another thing that happened during the bull market is

you had all these trading shops that were starting to invest in like private deals. And they probably could like not give two shits about like what the founder is building. But like as soon as the founder mentions the word token, like they're just like in immediately. And it's clear because they want to get into the private sale and then dump as soon as the tokens live and like there's no lockup. So like with that said like you know not all VCs are created equal and you know a lot of founders mistakenly went with these trading shops when they were fundraising the bull market because you know it was like the easiest money to raise like you could go to three arrows have a 30 minute call almost no due diligence as long as you say the word token and like that's the easiest way to fundraise

But, you know, if you're thinking long term, obviously that money comes with strings attached. And, you know, a lot of those founders have left the space because they learned the hard way of, you know, getting dumped on by their quote-unquote VCs. I know Dave is going to jump in with something, but can I just say, I am loving this real talk. All right? This is so refreshing to my soul. Yes, these are the games that are being played, aren't they? And I want to try and unpack why crypto is conducive to these games. like there are some ingredients

and really to understand the dynamics about why these things are the way that they are, why the incentive structures are the way that they are, why there's this negative relationship between VC and retail. Because I think the more that we diagnose this stuff, the more we can actually be like navigated and understand it.

And so I think we're doing a great job and I want to continue it because I think there's one more part of this conversation. Nick, you alluded to it with your threadboy comment. So much of crypto lives in the future because so much of it is like, it's perceived. It's like we can imagine a crypto future. We can all like think about what this might be like in the future. But a lot of crypto is left to be built. And so that leaves a void there for imaginative threadboys, perhaps, to fill it with something.

And I think that's another component as to like why there is this weird toxic relationship between VCs who are quote unquote getting in early at cheap discount. and then the actual manifestation of things in market reality, which is the public markets, which is where retail plays in. So, Nick, maybe you can kind of like carry this conversation forward. What are the void of reality in crypto? Why is it so strong? Like, why does crypto allow for some of this stuff to manifest? Well, it's part of what makes it so fun, right?

And what makes us all love it and, you know, live it every day. It's like everything is happening in the open, you know, everything's open source. The culture of crypto does tend to. be very transparent where, you know, people are talking about stuff online. People are seeing things on chain. And that's why there's a kind of a culture class, right? You have like venture capital, which lacks a lot of transparency. And you have crypto, which actually does tend to be very transparent, right? And I always think, like, it was not regulators. It was not the media that took down FTX, right? It was crypto. It was the crypto community. It was,

actually Richard's tweet on October 13th was one of the things that really kicked it off. It was a whole bunch of other people as well, obviously. Richard, what did you tweet? Oh, it's about the DCCPA bill. Basically, SBF was lobbying behind the scenes to get the DCCPA bill passed. Yeah, I was a guy who whistleblower. Oh, my God. That's what happened.

I'm recalling. Okay, so I saw that. What about this, by the way? Oh, my God. You know why? It's because that whole period of time is a blur. David, that's the tweet I actually. saw. I think you

richly, yeah, you messaged me asking. And I messaged you about it, Richard, and I was like, are you serious? So the bill was called DCCPA, right? Digital commodities currency protection house or something like that. Yes. This is what led us to invite SBF and Eric Boyce. Yes, it was. So Richard

shot out this flare. A whole bunch of people across crypto Twitter, and as far as I knew, we're saying that, hey, this bill is okay for crypto, yeah, it's got some compromises, but like it's all going to be okay. And then you shot out this flare and you said, this is not okay. They're talking about banning D5 frontends in the United States, requiring like AMLKYC type of rules, money transmitter laws to apply to D5 front ends. That's not okay. And you said

something to the effect of like, an SBF is behind this. So I was like, what? That's not squaring with what I'm hearing. And then there was some debate. I think I participated in one of the tweet threads with SBF where he was kind of defending, we were attacking that. That led to a conversation with SBF and Eric Voorhe's on the bankless podcast, a whole debate. about this. And it kind of blew up from there. I've forgotten that you were the source of that, Richard. Yeah, it's pretty cool. And again, that's what's great about crypto is like just, you know, some random dude can tweet something, get it out in the open and the community reacts and it leads to a month later, FTX was dead. It's really crazy. And I think in a different

industry that wasn't as transparent and open, you know, FTX would have gone on to be the J.P. Morgan of the industry, right? And we don't know the true history of like how J.P. Morgan got to be that. But my guess is there's some shady shit there that the public doesn't know about, right? So to answer your question, this is kind of a tangent, David, I guess. But I mean, the reason why you have so much wild shit happening in crypto and anyone can, you know, tweet anything. And it's a really cool fun thing as well, because the culture of crypto is very open and transparent. But the problem is you know, everyone has their own bias. There's extreme greed. There's extreme bias. And, you know, what I always say is, I don't think it's a problem to be biased if you're biased and right.

Right. But the problem is there's a lot of people that are biased and badly wrong and loud about it. And that's where, you know, problems can arise from. But yeah, the kind of open nature of crypto culture, which you guys are obviously very well aware of and also have contributed a great deal to is one of the best things about it. If you had to give a sweeping grade to crypto VCs as a whole, good ones lumped in with the bad ones and the mid ones in there too, how would you audit crypto VCs? Maybe like a C. Oof. Okay. What's the main mark? What's the main curse that CryptoVCs have brought. Well, I just think what I've talked about, I think it's greed.

And I think particularly when it comes to like hurting retail, right? Like you have a lot of these coins that give 50% plus of their allocation to team investors and then dump on retail. And this is something that I can't believe it's not more talked about, right? But like the token distribution is something that everyone investing in a token should be well aware of. Right? So like what's Bitcoin?

What percentage of the coin did Satoshi give to team and investors? Zero, of course. Zero, of course. Zero. Well, it was Ethereum. Do you guys know Ethereum's?

12 and a half? That's close. I think it was like 9.9% in terms of team investors, early developers. Do you know Solanas? It's like 50 something. 62.

Ooh. Not great. It gets worse than that, I'm sure. You know, Suey, Apple, Cipoll. And it's, isn't this also partly a founder project issue as well, as in the founders create a deal that is highly conducive to VCs. And the founders VCs have like, okay, you build this project and you give me a large share in it, I'll promote it, and then we'll dump on retail, which in like a perfect

harmony world, it would be a three-way partnership between project VC and retail, where everyone feels good at the end of it. But there's like, founders can also be severely culpable about this, too. 100%. And again, this speaks to the culture clash between Silicon Valley Venture Capital and crypto, right? Because in traditional Silicon Valley venture capital, founders see the VCs

as like the kingmakers, right? And so famously, like, you know, there's massive products that, you know, people believe were king made because the VC gave one of them 100 million and not the other or something like that. And so I think a lot of the traditional

Silicon Valley founders see these VCs as kingmakers, and that's why they're willing to do these deals, when the truth in crypto is that VCs aren't kingmakers, right? Look at the top three cryptocurrencies, right? Which makes up about 70% of the total market cap of cryptocurrencies. Bitcoin, Eath, and Tether, they didn't raise venture capital, right? The idea that VCs are kingmakers in crypto, I think, is not accurate. But that's the reason that a lot of these founders, I think, do these deals. Would you say it's accurate that retail never had a voice in Silicon Valley Web2 startup founder VC relationships because they were stuck behind the walls of public listings on the NASAC and stock exchanges. And so now there's this

conflict because for the first time in crypto, retail actually does have a voice and all these players that, you know, founders and VCs that existed before crypto are now having to deal with this new variable, which are the voices of retail, who are ultimately the buyers of these tokens. And that's where a source of the conflict comes from. For the first time in crypto, retail actually has a voice and it can make demands and produce market pressures. Would you say that's a conclusion of this? Yeah, not just a voice, but I mean, retail is a direct competitor with the VCs, right? So certainly there's users of these products are owners and have a loud voice and also are direct competitors. So I think, you know, I gave a C grade. I'm obviously biased as well because we're doing

things a certain way, but the way we, you know, run a venture fund is to really act like users first and foremost and to be aligned with, you know, the users of products, because we are users ourselves. And so we generally aren't participating in any of these big, you know, pre-sales. And, you know, we have made exceptions, which I'm sure people will call out, like WorldCoin is the one that people like to call out the most. So we do make exceptions. But I mean, even WorldCoyne, do you know how much WorldCone obviously gets a ton of shit? Do you know the supply? 20%.

25. So it's not close to some of these others. So yeah. I want to come back to that idea in a little bit because another mental model unlock, I think for us, you know, the first was like an intersection between purists and tourist. Another is this idea. I've heard you guys talk about the idea of user capital versus venture capital and how you want to be more on the kind of the user capital side of things, which is,

actually using the tools and being kind of informed at that level. I think that's important. But before we do, still on this topic of like VC sharks versus retail. One second, I don't want to let retail completely off the hook here. Okay. And here's kind of why. So the expected value, the EV game that you're talking about where like founder and VC conspire in kind of a dark room and like they're going to release this token and they construct a narrative and they, you know, push it out on the world. And they sell it to kind of hapless VC. I want to say, yeah, like, that's the story here. Except, except that that play has been played so many freaking times.

And it seems like retail never learns. And so the reason they keep running the play back is because it works every damn time. And I want it to stop working. I want retail to, like, wake up and be like, huh, why am I buying the latest threadboy a shill of this new token. And guess what? They're going to do it again next cycle. And like, we know they're going to do it again next cycle. And that's why venture capitalists and founders come up with these new tokens and these new pushes where they keep 50% because it works. It's because they see a high expected value return. If it stopped working, then it would no longer

be profitable. Like, first of all, let me just say, I totally, I know we're slamming VCs here and like as well we should. We're Slam in the Natives. What rule does retail play in this and actually like being smart? Should we expect them to be smarter than this? Or is this just like what retail is? You're right.

I mean, you're 100% right. And I think, you know, the great thing about a free market is that, you know, you can get hurt and then hopefully learn. And I do think as time has gone on, people are getting smarter, but obviously not as quickly as we'd hope.

And I think you're absolutely right. It's going to happen again. And, you know, new people will get hurt. But I think the overall trend is probably a good one in terms of learning and people getting smarter. But I do think VCs, you know, the ones that are raising the money, there is a responsibility as well. And the answer, oh, you know, these people, retail needs to smarten up. It feels like a weak one to me, but that's my approach. And again, they're free to do what they want.

Richard, what do you think about this convo? I mean, like, to be honest, like, retail, all they can do is, like, dollar cost average into ETH. And then, like, the dirty secret of that is if you were to DCA into ETH, like, you would outperform the vast majority of VC funds. Wait, really? Yeah, this is, like, looking at VC performance data. Oh. And, like, the cool thing about institutional LPs is, like, they, like, survey, like, 150-so-funds. and then they create cohorts of like fund performance data.

So it's broken down by vintage. So like if you were started in 2017, 18, 19, so on so forth, and then you see like the quartile. So like what the return is for the top quartile, the second quartile third, fourth, and also the top performing fund. And it's really fascinating, like going through that data, then benchmarking that to DCA and to Bitcoin or Eath. And like quite honestly, like a lot of retail, like if you were just disciplined and patient

and DCA into ETH, you would have done pretty well. Yeah, that's a good point. The other thing, Ryan, you went hard on retail. There's also a lot of smart retail out there that, you know, the SEC deemed not smart enough to invest in a startup, but they participated in the Ethereum ICO, right, and outperformed the best brand name venture funds, right? So there's a lot of smart retail out there, too, but I do think, of course, there's a lot of dumb retail that needs to learn also. Yeah, I totally agree. And what better way to

learn than crypto markets. Ideally, you're learning on a smaller amount and you're learning young. I mean, I'm just trying to get, and I think we have many getting smarter retail investors like listening to the bankless podcast, right? And so certainly we encourage responsible behavior dollar cost averaging into like, you know, assets that you have fundamental conviction on. I'm wondering if we could kind of summarize because you guys see behind the scenes at the, let's call them the VC games, right? The VC shenanigans that are going on. I'm trying to draw out kind of a list of things that retail investors can really look out for or be cautious of. So one is, you've mentioned it earlier, the thread boys, that kind of like the narrative VCs are always like

pumping the narrative. And I think we've seen many main characters kind of like be written out of the show in the 2022 cycle and that's a red flag. And so bankless listener, I hope you heard that. Watch out for that. Watch out for that kind of token populism out there. I just want to add to that. I call it a counter signal. It's like when I think the people with the deepest conviction in crypto often aren't loud about their conviction. I think being really loud about your conviction is actually compensation should be recognized by the public as a counter signal where you don't actually have that conviction. You're trying to convince others. And especially when you see when you see projects in crypto that are, you know, consistently trying to get validation from institutions or celebrities.

It's like the thing that comes to mind for me was like the FTX Bahamas conference, right, where he had Bill Clinton and Tom Brady and, you know, people like that. It's like, that's a counter signal. That actually, to me, signals a lack of conviction about what you're actually doing. So that should be one of the big lessons and I hope it is of, you know, the last bull market. Yeah, marvelously well put, counter signal. run in the other direction. Don't just avoid just, it means run in the other direction. Yeah. It's like the archetype of the driver who drives a big, big hummer, but they've got a small

peepee. Yeah. Yeah, and all of these, I mean, crypto is a microcosm for life, right? I think there's so many lessons within crypto that apply to, you know, everything in life. Well, you know, that's the quality content, bankless subscribers, subscribe to you. Thanks for that analogy, David. Psychological projection, man. It's called compensation. Are you a MetaMask user? Well, you're listening to Bankless, so of course you are. The wallet you know and love just got a whole lot better. Metamask portfolio is the ultimate one-stop shop for all of your crypto needs.

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and is drawing more attention from global regulators and governments. Toku makes it simple for leading companies in the space, Protocol Labs, Hedera, Gitcoin, and many more. So if you want some help navigating the complex world of token compliance, go to Toku.com, class bankless, or click the link in the description below. The other piece here is token distribution, right? So you said that that can be a red flag. And so one thing I don't think enough crypto investors look at is like, um, you know, kind of total market cap, right? So, like, they look at liquid market cap, you know, instead of like total. Fully diluted.

Yes, thank you for the words, Richard. Fully diluted market cap, which is what they should be looking at in this market. And, you know, maybe you could say a few more words about distribution. Like, what does a good distribution, like, look like? Is there a threshold where it's a certain number and that's like, that should be a red flag for anyone in retail? Or, like, what are your further takes on distribution? here. Oh, yeah. I mean, maybe we could talk about the market structure bill that just passed through

the committees in the House where they kind of specifically outline like what's the threshold for a token to be a commodity, not a security. And there's things like no individual or entity can own more than 20% of the fully diluted supply. No one can have more than 20% voting power. There's things about like how much control do developers have over the project. So like the good thing about the bill is like for the first time there's like very tangible like metrics for when is a project considered sufficiently decentralized that it's a commodity versus like still seeing more as like a like insider VC founder type token. Interesting. Wow. So I actually, you know, I knew that bill was in progress, but it sounds like you're familiar with kind of the details of it. So could we take a quick side quest here?

So like what is that bill that you're talking about? And you're saying there's some concrete definition of the difference between a commodity and a security. And it goes to actually define your token supply in the hands of a small group versus, you know, distributed. Give us some more context here. Yeah, it's called the FIT Act. It's basically the market structure bill that concretely, like, settles the turf war between the SEC and the CFTC and just defines what's a security, what's a commodity, when can a security become a commodity when the network is decentralized. So it kind of outlines all of this regulatory clarity that, you know, we as the industry has been asking for over the last few years. And by the way, under that bill as written, Richard, I don't know if you've looked at like besides Bitcoin and Ether and, you know, like, staple coins, that kind of thing.

What other token assets actually fall under the definition of kind of a commodity per that bill? I mean, well, I have to look at like different tokens and like see what their current distribution is. But like, you know, quite a lot of tokens. I think it's still unclear whether or not existing tokens will get grandfathered in. I mean, the build is still very much a work in progress.

And the final draft that goes through the house might be very different than what the text is right now. I think just to really nail this point home, what we're really talking about are like a legitimacy threshold for centralized ownership

of a token creation event. And so I think Richard, why you brought this up is that this bill is actually putting in a number a ratio of distributed to privately owned, like publicly held versus privately held, that is actually going to give like a legal thumbs up, as in like if you give away at least this much of your network, you are legitimate from the eyes of this bill from this nation state that perhaps

Congress approves. I don't know if you know what those numbers are, Richard, but, you know, Ryan asked you the question, like, what are the red flags? And then you bring up this bill who's literally trying to draw a line in the sand as like, what's a red flag versus what's not a red flag. Do you know the numbers off the top of your head? I think it's like 20%. 20%. Does that feel right to you? Yeah, reasonably so. Okay. I mean, like, it's still like very much like a draft of work in progress. So like all these exact terminologies are still being negotiated. I would say, yeah, it's hard to define exactly what the number should be. But to me, like, anything over 30% should be a major red flag to retail investors. And

part of being an investor is you know you have rules but you can break them and so even that i would say you know you can break that rule if there's a really strong reason to but generally i think that's a good rule to have all right so those are some of the ways that retail investors listening right now can avoid becoming VC exit liquidity and becoming victims of that exit liquidity let me just ask you this just kind of your personal thoughts should we kill the idea of vcqs all together, or should we kind of restructure it? Or like, what even is a VC? I feel like part of this gets into accredited investor laws, and then other, you know, parts

of this just get into like pools of capital that are, like, very informed about kind of founder risk in particular markets and making bets that way. I remember there was a narrative once upon a time. This is harkening back to like the 2016-2017 Ethereum ICO days that there's no more need for VCs. everybody can be a VC. It hasn't quite played out like that. And a lot of people called BS on that from the very beginnings.

But what's your take on this? Eliminating the idea of VCs. Do we not need it in a fully democratized finance type of world? No, we obviously don't think that because we are them. I mean, when we launched one confirmation in 2017 as one of the first crypto venture funds, that was kind of, we were able to raise money because we were saying there's this huge ICO boom

happening. We think it's mostly bullshit. We're not really participating, but there are really good founders that are thinking long term about building useful products. And so I think, you know, a good VC in crypto is making non-obvious bets in early stage products that may not exist otherwise. Like, that's what venture capital, if you look at the, you know, the history of venture capital, you know, the early VCs were kind of the renegades that were crazy and investing in wild ideas that wouldn't have gotten funded otherwise. And also being a good partner to the founders, you know, after your backing. So, you know, working closely and helping them with whatever they need. And to me, that's what a good VC is. And I think there still is a need for that. Like you could raise an ICO and get, you know, a thousand people that have, a small skin in the game, but then none of them are really helping you. And none of them are really, and really, you know, this is a totally different direction. But if you look at DAWS, you know, a big problem with DAOs is you have, you know, these DAWS that have a lot of participants,

but no one that's really focused on driving the thing. And so I think a good VC is someone that has a large ownership and actually skin in the game and cares about helping. So I do think they're, you know, founder, there's a need. for that still. I think there's way too much capital and a lot of VCs that don't do that. But I think there are a number of them that do that and that's helpful for crypto. If a VC can fund a product that maybe doesn't have a token, so it isn't getting the love on crypto Twitter or whatever, but is actually bringing millions of new people to crypto, I think that's a net positive for both crypto and the world. That's what we try to do. Yeah, I think that's a pretty clear

articulation as to why even in the absence of investor accreditation laws, you will still have venture capitalists because some venture capitalists will, A, like you said, have enough skin in the game and also the skills and means to actually meaningfully move the needle for a startup or actually truly help a founder. And if you just bought a token on uniswap and it's, you know, half a percent to five percent of your total portfolio, maybe you just don't feel that same sort of like skin in the game if you're a retail investor with like one to ten thousand invested. But then, Nick, that kind of brings me to what I want to unpack with One Confirmation. So we've talked about the archetype for like a toxic negative crypto VC. We've talked about like

the game that they play to make their returns, which were perhaps the illegitimate, like I said, toxic games. But what games does One Confirmation play? How does OneConf actually win the deal for a startup where inside of the startup landscape you have a litany of other VCs in the space who they could take a checks from? What's your pitch for why they would take one confirmation? check and like what does one confirmation, what game do you guys play in contrast all the toxic VCs out there? Yeah, I say one thing that differentiates us from other VCs the most is we make very few concentrated investments. And as a result of having a small portfolio, we're able to spend a lot of time with founders post-investment. And like, say a founder wants to chat about

something, like I can hop on a call in five minutes and like have a conversation with them, just kind of walking through like ideas with them. And, like, one thing that we do really well is for, like, new founders that want to work with us, we ask them to, like, reference check our existing founders and ask them, like, rank all the investors on your cap table. Like, where would you rank one confirmation? And, like, not only that for our existing portfolio, but also, this is funny. It's actually one founder did this to us recently, where he wanted to chat with projects that, like, didn't work out that failed. because oftentimes when the project is not going well,

then the VC founder relationship truly gets tested. And even in the cases where the project ended up not working out, we still had a very good relationship with the founder. And those are also good reference checks to have, not just the curated references that like every VC will provide, but also kind of the spicier ones where the project didn't succeed, but you want to see if the VC behaved badly and did stuff. So what does it take for you to be on the good side of one of your guys' startups?

Like what are the things that you think you can really help them with? It's for me personally, like building Dune dashboards. That's like that's a really obvious one. And like founders always like appreciate it when like the product goes live. They deploy their contract on Mainnet. And then like a day later like a Dune dashboard exists. And it's like tracking all their top KPI's. Obviously, you know, making intros to like potential customers.

both Nick and I were big users of like all these crypto products. So just like something as simple as using the product and like offering feedback is like, you'd be surprised by the number of VCs who don't do that. They're busy running friends. Yeah, exactly. Like one example that comes to mind is like when we invest in super rare, like we just like interviewed the top super rare artists and collectors, like ask them like, what are your feedback on the product?

What are the things that could be better? And then like compiled like a Google Docs sheet and then send it to the superer founders. And like something as simple as that was like super valuable to the founders when maybe they couldn't as candidly ask like their users, like their honest opinion of the product. That actually sounds like you're doing labor, which is interesting because VC is of course on the labor to capital spectrum. It's capital. But it sounds like what you're doing is just like, well, we'll actually like do some actual lift work, some labor for our portfolio companies. Yeah, which I think is like back to the original point.

it's only possible when you have a small concentrated portfolio. And like you're making, you know, at most a dozen investments a year, a dozen new investments a year. And like you see VCs, there are a lot of VCs that like spray and prey. And we'll just like write over 100 checks like 0.5% of the fund each, like into each company. And like obviously when you have like that big of a portfolio, like, you know, I have trouble like managing like, I don't know, 30 different names. And like imagine having to manage like,

100, 200 different companies and what's going on. So those are kind of the telltale signs that founders could use if a VC's just like larping about being a value ad or do they actually have the resources for it? One thing I'm continually blown away by is the amount of VCs who aren't actually crypto users, like defy users, right? And this was even worse previously, but it's still kind of bad now. It's just like they've never actually run an Ethereum like node or, they don't have custody of some of their own personal assets on an actual bankless wallet.

They barely know how to use Metamask. They don't do much with Uniswap or any of the kind of the DFI protocols out there. And yet, these are the VCs that are deploying cash and like investing these products. That never see to amaze me. And I actually think there's a lesson for our listeners here and for retailists here. Spend less time reading threads and absorbing narratives. and spend more time using products. That will already put you ahead of a lot of the VCs deploying capital in the game, and that will help teach you what's real and what's not.

What's a narrative, what's a story, and what's an actual product that has some functional utility. Probably give you some air drops, too. Yeah. And that's really the core thesis of what we do, right? We only make, as Richard said, a concentrate number four to six investments a year, call it, and we're only investing in products that we understand deeply from a user perspective.

And that's my crypto journey. I mean, how I got involved in Coinbase, so I was one of the first 100 users of Coinbase. Back in 2012, I was trying to buy Bitcoin. I was living in Portland, Maine. And back then, to do that, you had to go to an ATM, take out cash, money gram it over to Mount Gawks. And it was just a bad U.X. And Coinbase, I saw Brian launched Coinbase on Hacker News. And it just solved a very simple problem for me, like buy Bitcoin with a bank account online.

So that's kind of, you know, that's how we invested in OpenCy. We were buying CryptoKitties on the CryptoKitties website. And they were charging 5%. And what's the true value of an NFT, right? It's true ownership. And you could, you know, you should be able to trade it on many different, you know, venues for cheaper. And then we used OpenCe early and then we invested. So we're very much product for.

and really only investing in products that we understand deeply from a user perspective. And that actually allows us to do what I personally feel is like the most important role of a VC. VCs talk about, you know, all the different value add, you know, whether it's hiring or, you know, whatever it is. And some of them oversell it. Some of them really deliver on that. I mean, Richard, like, has built many different products for actual portfolio founders. So I think we've done a good job there. But at the end of the day, I think the truth is, and I know this from my own personal experience,

the most important thing an investor and a founder can do is instill belief in that founder. And that's what I feel like we're now in a positive position to do because we've had success in the past. We've seen a lot. We know what works. It doesn't. And just being there as a positive light to a founder and help them instill belief, can do wonders to a founder's success. So that's really what we try to do as well.

And it's kind of this maybe soft, not super tangible thing, but I do really think it's the truth. And again, I know that from my own personal experience. When I got investors in my fund that I really respected and that really helped propel my belief in what I was doing. And I think that is a really important thing that any investor can do. And I think it's hard to do that if you don't really understand the product and have conviction on like the product in the market. Okay.

So that's what we really focus on. And I've personally focused on more recently as well. It's something you don't really realize early on, at least I did in starting one confirmation. But you can, and I've been guilty of this too, you know, project your own insecurities on a founder and bring like negativity to them, which doesn't help at all. right that's a net negative and so really doing anything you can to not do that and be kind of a positive light and project a belief is i think that really important role of an investor yeah you know forget the work of being a founder is very very very very freaking difficult for sure and shout out to all the builders and founders out there who are making crypto what it is and what it should be and you

mentioned nick this idea of kind of product first and i want to broaden this out so we talked about You know, like what we did wrong in 2022 and some of the lessons learned, we talked about why VCs suck and how to do it well. I feel like we need to now think about preparing for the next cycle or the next wave of adoption or the next wave of building, whatever we want to call it. And the truth is, crypto still hasn't gotten to a billion people yet, a billion users. And isn't that why we're here? Isn't that the promise of crypto? And so I want to ask you guys what themes that you're looking at, like going into 2023 to onboard the next cohort of crypto users. Like, where are you looking for the alpha?

Where are the one billion users going to actually come from? Nick, I saw a tweet from you that said this, crypto-native products that will reach one billion users in the next 10 years. And you said, prediction markets, Dow tools, on-chain messengers, decentralized social media, decentralized identity. I feel like we haven't really seen much uptick in any of those things yet. And I'm wondering, is that your answer for like where the next billion comes from? It's one of those categories or do you think it's something else?

Why don't we start with you, Nick? I think that's where I have the highest conviction, right? The beautiful thing about crypto is there's, you know, a million different projects being worked on. And it's really hard to predict what is going to really hit, right? I mean, we nailed NFTs. I don't think many did, right? And for a long time, most in crypto, I think we're too big-brained for NFTs. right and they were focused on you know the deep tech or the defy or something and really dismissed

NFTs even though there was a small community that was using it you know the products they were you know dismissed as either Dgen or stupid or something I just thought they were like jpegs right click save jpegs first honestly yeah so that was obviously a surprising one and NFTs arguably have gone more mainstream than anything so far so we very much look for products that are serving a small niche of really passionate users that have, you know, mainstream potential. That's what we do as kind of early stage VCs. And yeah, I mean, if I had to pick one right now, I would say prediction markets. I think prediction markets, they capture the essence of crypto, right, which crypto is all about speculation and

memes. If you had to right now define, and I think it's going to be much more than that, but Still, in 2023, if you had to define the essence of crypto, I think it's speculation and memes. And I think prediction markets bring speculation and memes to more people. It's not just about shit coin speculation. It's about speculation on whether the room temperature superconductor paper is real or whether Trump is going to be the Republican nominee or whatever. The submarine, the recent story of the submarine, that brought in, like, like a million dollars of volume inside of like two or three days to polymarket. Yep. So I really like prediction markets as a use case.

I think it has a lot of the features that really requires a mainstream use case. I mean, one of the things that I think is unappreciated about prediction markets is it could also be a new business model for creators. So I think one of the big reasons NFTs broke out, right, is they made it easy for any creator to make money. And I think soon we're going to see create your own market type products that allow like any influencer to basically create their own market and then make fees off that. So I think prediction markets, if I were to pick one right now, would be the category that I pick.

Can I ask you on that really quick, Nick? Because so much about kind of investing is timing, right? And so it's like, you know, eventually the idea of the food delivery service worked, internet food delivery service. But it wasn't web van back in like, you know, 1999 or 2000 or whatever that was, right? It was something later. It was like an Uber manifestation of this. Prediction markets have been a crypto use case for like ever. One of the first Ethereum ICOs was Auger. I'm sure you guys remember that, right? Which is what was it? A decentralized prediction market. Why now? So why have the previous attempts of prediction markets in crypto failed? And like, why is the timing right now in your mind? Yeah. And again, I'm not sure it is, but, you know, we've been watching this space closely from the beginning. I mean, we invested in auger. We participated in early auger markets. We were investors in Vail, which was a more centralized version of a prediction market that didn't end up working. And I mean, prediction markets are tough because there's a regulatory

component that makes it hard, particularly in the U.S., for centralized companies to operate and offer the service to U.S. consumers. And Auger tried it in a decentralized way, but as you guys know, there's often a tradeoff between a decentralization and U.X. So Auger went decentralized, wasn't able to get a great U.X. Vail went more centralized, couldn't figure out how to operate a centralized business within the regulatory framework. And look, I think you need to tip your cap to Shane and Polly Market because they've kind of grinded through, dealt with some challenges in terms of regulatory, but have figured out a way to offer a product outside the U.S. And really, you know, gain traction. So the honest answer is I don't know for sure that the time

is right. But it just feels like the way things are going with everyone is becoming an investor, the trend, the way that regulation is going, more people coming online globally, memes going more viral, there's just a lot of indications that it could be a good time to build a prediction market business. One of the takes that I've been giving out recently is that a lot of the underlying infrastructure of crypto is ready. It is effectively done. There's still plenty of domains, part of this deep tech stack that crypto Web3 is built on that definitely we can't improve. But I don't think that there are any applications that are not accessible

to the crypto tech stack because of how I feel like finished some of our protocols are. Maybe we're like one to two years out for this really being true. And I'm wondering if that take resonates with you. As in our protocols, data availability, layer two speed and latency and U.X, all of these things like cross-chain composability could definitely get improved, but it's on the horizon. And I'm just wondering about your take, about this take, Nick and Richard, I think that the full spectrum of user applications is going to be available to crypto, to Web3, like basically now-ish, one to two years, like where protocols are ready to support whatever app that we can develop.

And I'm wondering if that resonates with you. Richard, how do you feel about that? Yeah, I agree with that. I actually have a pretty similar hot take. We're recording this August 2023. So, like, right now, at least in the VC world, like, there's just so much money that's being poured into new infra projects. And I think the reason is because there aren't really net new users in crypto and like people just want to bury their head in the sand and like punt

the question of like, how are we going to get users in adoption down the road? So meanwhile, no one wants to do the hard thing. No one wants to do the hard thing about getting users. So meanwhile, just build infra and then kind of punt that question later. But the problem is then you become one of 50 different infra providers that an application can build on. So, like, we as a fund, we generally skew more, like, consumer application heavy because, like, I think in the next bull run or two, like, that's where the next million billion users are going to come from, some killer app. Nick talks about prediction markets. One thing I've been thinking a lot about is Web3 messaging. So, you know, historically, like, wallets have been the gatekeeper, the front end to crypto.

It's like, whenever you want to do some crypto interaction, you have to go through a wallet first. But like, if you think about it, like, if you look at like your transaction history on EtherScan, like, almost all of those were probably triggered because a friend told you to go mint this NFT or like go do this action. So like what if you have messaging like the social layer as the product and the wallet becomes the feature, not the product? I think that is like one potential area where the next wave of crypto users that onboard won't have the bias of like existing. like wallet products, but onboard through a messaging app that just has like the wallet built in as a feature, not the product. Do you think part of the reason for that prediction is that we're making progress on account abstraction and, you know, layer two is, you know, gasless or very low fee block space, that kind of thing? Is that why? Or like, why now? Yeah. I think AA is like a big

unlocker. You know, like account abstraction is the idea we've been really bullish on for a long time. We actually invested in one of the first AA wallets called Ethereum back in 2019. which they ended up pivoting to Hot Protocol. I remember Ethereum. I think with like 4337 going live, the entry point contract going live on Mainnet March of this year, I think that's 4337, the spec is specifically what makes the timing now different and better for account abstraction. And we've actually made a bet.

We invested in a founder. His name is Kriestov. He's actually one of the co-authors of 4337, which is really cool. And he went from co-authoring the spec. to now building Pimlico, which is the company that's building out the bundlers and paymasters for account abstraction. So since you guys are users first, what do you guys do? When you guys are going to go do and make a transaction on Ethereum or a layer or two,

what kind of activities do you guys like to do? What's your maybe not the DGEN activity? But if you guys are users, how often do you see yourself or what activities do you guys see yourself doing the most inside of crypto? I guess for me it's like minting NFTs. Like, for example, with the base L2 launch yesterday, like, I minted like DKMotions NFT and it's cool. I mean, I'm a big fan of DKMotion's art, so it's cool that it was one of the first

NFTs on base. Nick, what about you? I'm increasingly excited by non-financial activity. So, Farcaster is one. I use Farcaster quite a bit. I really like the community they have. and they recently added a ENS, which I thought was cool. So I added my ENS name and made some posts on Farcaster.

Messaging is another one. I mean, I'm increasingly using crypto, like, on-chain messengers. So Converse is one that I use pretty regularly. Have you guys used any on-chain messaging products? Oh, I've used, like, EtherScan chat. I've used XMTP, yes. The EtherScan chat, yeah. XMTP is a protocol that is pretty cool.

And by the way, we're actually not investors in that one, so we're not just showing our bags. But they built kind of an on-chain messaging protocol that a bunch of products have used. And so one of the cool things about like Converse and Coinbase wallet has it as well is you can connect your wallet, write a message to someone. Say you, you know, someone owns an ENS name that you want. You could message them. And the message persists across, you know, the different messaging applications, which is kind of like a crypto-native behavior that I think is pretty cool. We all know, you know, juggling telegram and Discord and email, WhatsApp and everything else. So that's an example. Another one is we recently invested in a messenger called Friends, which is taking a different approach.

But that's an area that I'm increasingly excited about. Like, I do think it's likely that a speculation-related application is going to be the next breakout, something like prediction markets. But we're also closer than ever to kind of these non-speculation-related use case. Nick, the non-speculation stuff. Is that Web 3? Is that what we're talking about? I haven't heard you guys say the term Web 3 this entire episode. Web 3 is like a made-up Silicon Valley. That's what like Silicon Valley VCs love using the term like Web 3 and then like

Cryptonatives use crypto. But I mean we're effectively talking about some of that, right? Decentralized social networks. Yeah, but I mean. Yeah, truthfully, it's like Web 3 was a made up term to appeal to people in Silicon Valley that looked at crypto and said, oh, that's scammy, that's D-Gen or something. So it was basically, I don't know, I don't love the term.

It's like digital assets versus cryptocurrencies. Yeah, yeah. No, I did. Appeal to this. I will say, there was a conversation I had with my father sometime in like 2019 where he was like, crypto, y'all really need a rebrand because crypto is such a, he's a dad's a boomer, of course. Like, crypto is just such a negative connotation word.

And then as soon as Web 3 came around, I was like, oh, okay, great, we did it. And then we kind of ruined it. Well, guys, this has been a lot of fun. So thank you for your guiding us to the world. I think bankless listeners should come away with this with a lot of lessons. I guess one last question I have to ask you. So L2s, let's talk about this, L2s versus alternative layer ones. You guys have any hot takes?

I know that's not that player. This is infrastructure. But, you know, what are you betting on? I would say my on-chain, and we let products guide us, and L-2s have been really hot from a narrative perspective, and I've tried a bunch of them to try them and stuff like that. But the vast majority of my activity is still on Ethereum. Layer one. Layer one, exactly. So we haven't done a ton in the L2 space.

I mean, a lot of them were, again, these kind of big VC round. that we generally don't participate in. It's a super hot narrative that I generally like it, right? Because it's good for Ethereum overall. We're, you know, our largest position as a fund is still ETH. But in terms of just activity, like I'm still mostly on mainnet and we haven't done a ton. We've done some, right? Like, Hop, I think is a great product that bridges assets from Mainnet to L2s.

And I've used Hop quite a bit. again, just to experiment, but there's no product yet on an L2 that I'm using consistently. What about you guys? Well, on layer 2's? NFT minting is the main activity. Really cheap NFT minting. Yeah. And then there are some layer 2 native defy apps, which I've touched maybe a few times.

Yeah, I think both Dave and I probably ski pretty bullish on layer 2's overall. How about you, Richard? It has one hot take for L2s. I think a lot of projects will launch their own roll-up on the OP stack. because there's a better argument for having a token. Rather than kind of this pseudo equity governance fee token is like you're building your own chain and you have a token that secures the sequencer

and kind of manages the L2. So I think we'll probably see a lot of app-specific roll-ups in the next year or two. That is a thesis that you and I share, Richard. And if I said anything more bullish about the OP stack would be like the fifth time this week. on bankless. Well, guys, thank you so much for joining us on bankless. It's been a lot of fun.

Yeah, great to see you guys. Thanks, guys. Bankless Nation, hope you enjoyed that episode. One action item for you today, Richard actually wrote a fantastic post on the current VC landscape. We'll include that in the show notes. We're not done slamming VCs, of course. Go read up on that some more. Risk and disclaimers, got to end with this. As always, crypto is risky. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. but we're glad you're with us on the bankless journey. Thanks a lot.