On The Brink with Castle Island - Anton Katz and Ethan Feldman on Trading Infrastructure in Cryptoassets (EP.228)

Episode Date: July 5, 2021

Anton Katz and Ethan Feldman, the cofounders of Talos join the show. In this episode we discuss: Anton and Ethan's path from roles at AQR and Broadway Technologies and into the world of cryptoassets The problem they are seeking to solve for market participants How the exchange and OTC liquidity landscape is evolving How custodians and exchanges have evolved their offerings The challenges of capital efficiency in the cryptoasset markets What it was like to fundraise in a bear market What is ahead for Talos To learn more about Talos visit www.talos.com Sponsor notes: This episode is brought to you by Withum, a top 25 accounting firm with a cutting-edge Digital Currency and Blockchain Technology practice. Wherever your company is at, from pre-seed to IPO, we have tailored solutions just for you. To learn what our advisory, tax and audit services can do for you, visit withum.com/crypto.

Hi, everyone. This episode is brought to you by Witham. Witham is a top 25 accounting firm with a cutting edge digital currency and blockchain technology practice. Wherever your company is from a stage perspective, from Precede to IPO, they have tailored solutions just for you. Witham has helped some of the largest companies in the crypto asset industry with audit, tax, and advisory needs. And they've also helped a number of Castle Island portfolio companies. To learn more about their advisory, audit, and tax services, head over to on the brink.link.link forward slash with them. That's on the brink.com.

forward slash with them. Today on the show is very excited to sit down with two of my favorite people in the industry, Anton Katz and Ethan Feldman, the co-founders of Talos. Talos is a trade execution and settlement platform for crypto assets that is working with some of the biggest companies in the crypto industry. This was a fun conversation and we touched on a number of topics, including Anton and Ethan's pathway from big roles in the traditional market, at AQR and Broadway technology and into the crypto asset market.

We also talked about the state of trading and exchange infrastructure in the industry today and how that's evolving and also what it was like to fundraise in a bear market. I think you'll enjoy this chat. So without further ado, here's my conversation with Anton Katz and Nathan Feldman. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans, American International Group, AIG, $85 billion. This is a different. kind of market and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae

and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. And print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Anton and Ethan, welcome to On the Brink. It took me like two and a half years to get you guys to agree to do this. I'm really excited about it. Thanks on for having us. First of all, we're thrilled to be here. We're really, really honored to make this happen. And of course, you've been with us for two and a half years or one of our

very first investors. So thank you so much for having us. We're really, really excited to be here. Well, really excited to have you on and to talk about this. You actually started Talos in a bare market. So I don't know if we're going into another one here. But why don't we actually start it off with just a little bit of a personal introduction from both of you. And then maybe we can talk about what Talos is before we get into everything. else. Yeah, sure. I'll go first. So I'm Ethan. I'm the CTO. And I'm just to start off with a little bit of a background story about Matt. So when we were first raising our seed rounds, we're going around meeting investors. And literally every investor we talked to, they were like, have you met

Matt from Cass Island? And so that's how we came to met Matt. On like sentence three of the company's presentation, they're like, Matt, you should really talk to Matt Walsh. He likes financial plumbing. So I'm Ethan, on the CTO. My background is in computer science. I have a computer science degree. And before starting Talos, I worked at a company called Broadway Technology, where we also built front office trading systems, mostly for big banks and hedge funds.

So most of the top-tier banks in the world use Broadway to trade either fixed income, FX, futures, etc. And then Broadway is also where I met Anton, and co-founder, and we worked there for about six and a half years together. Yeah, and I meant to Kats and be co-founder and CEO of Dallas, prior to starting Talos, I was the head of trading technology for AQR Capital, which is one of the larger asset, quantitative asset managers in the world. And prior to that, I was working with Ethanis, the director of software for Broadway technology. So we spent a lot of time together

before this as well. Well, thanks for the quick introductions there. What was it that made you guys see the market opportunity here? I mean, what was it that led you to leave your, frankly, really good day jobs to start Talos? Yeah, well, first of all, Well, TALOS is a bilateral trading platform, right? So what we do is we provide institutions with a way to interact with the underlying assets. So in our case, digital assets, we connect institutions and facilitate trading and other operations on the trading lifecycle for that.

So that's kind of like the role that we play in the ecosystem. But actually, I think Ethan remembers his best because this was back in the day when I was still coding with him. We were thinking about launching a fund originally in crypto. Is that correct? Yeah. So what we initially did is we decided to leave our jobs, and we were experimenting with starting a fund.

So we started coding, we connected to all the exchanges, we started trading a little bit, and we ran into really three problems there. And the first thing that was challenging was just the amount of liquidity fragmentation. There's all these exchanges and liquidity providers that you connect to. They're all using different technology, different web protocols. The second is that all of the settlement that happens in crypto is very manual and accident prone. And finally, a lot of like the tools that we used to from institutional trading are just missing. So there's no post-trade reporting, the TCA, that those kinds of things just don't exist yet.

A lot of that just comes from the fact that, you know, crypto really came from the retail space, right? And it's just not ready for institutions yet. Yeah. So I think, you know, in white brushstrokes or in general, I think what we're trying to do, we're trying to connect the entire trade lifecycle and allow institutions to interact with digital assets, but really, you know, target the full end-to-end trade lifecycle. So going all the way from pre-trade into trade into post-trade and collect those kind of services into a familiar environment for institutions to be able to actually exercise and investment strategies with respect to crypto.

It's funny here you guys talk about the early days and starting a fund. We have a couple of other founders in the portfolio that had a similar path. Dave Balter at Flipside comes to mind as someone who had kind of started these passive funds and then realized that there was all sorts of data and analytics needs in the industry and decided to go build some of that infrastructure. You guys started in the space when it was just incredibly, incredibly nascent. I mean, and trade execution in particular was just complete headache for any participant, really. So maybe I want to start there a little bit and talk about why trade execution in crypto was a challenge, is a challenge,

and what is it about this market versus other markets that make it a particular challenge? Yeah, well, I mean, you know, first of all, the key things to remember here is that institutions, interact with the markets and trade in general very differently from how retail does it, right? So institutions don't just think of trading as, you know, if you really go and agree on a trade and execute that trade with an exchange or an OTC desk, really institutions think about this as end to end, right? For institutions, part of the trading lifecycle is you can start at pre-trade. And pre-trade really means onboarding. It means data. It means, you know, do I have real-term data? Do I have proper price discovery across multiple destinations? Can I determine the price?

of a particular product, right? Then you kind of go into the trade itself, and there's a little bit more complexity there, like Ethan mentioned, you know, fragmentation of liquidity. There's multiple exchanges, multiple DC desks. There's a notion of whether you can execute with a particular liquidity overall in the market. So do you trade immediately? Do you route across multiple destinations? Do you execute over time? And that kind of like changes the parameters of that particular execution. but also post-trade is another very, very important aspect of this entire trade life cycle, right? How do you clear? How do you settle? How do you generate transaction cost analysis for your trading? How do you really generate reporting? So all that kind of tool set is a part of the real trade execution.

And we've seen quite a lot of complexity and challenges around that when we are starting the firm. Are these kind of crypto-specific issues? I mean, when you guys looked at this, had it existed in other asset class, as a problem and were there analogous markets, I guess, that you could, you know, apply best practices from? Yeah, I mean, you know, the problems to an extent these kind of challenges do exist in other markets, but in many ways, in other acaclaces, a lot of them have been solved. And the solution there is slightly different than the solution that has been applied in crypto. You know, in capital markets, we're almost used to thinking of these as like very separate verticals. You worry about your data and you buy the data from a specific provider, right?

You worry about your execution, and even that is very different by asset class, how you're actually doing this, what kind of OMS or EMS systems you use. Settlement is done completely differently than in digital assets right now. You know, transaction cost analysis is yet another sometimes service that you attack on top of that. Really, one of the things actually, and it's cool that we get to talk about this kind of stuff. Crypto has some similarities with capital markets, with traditional assets, but also has a couple of really unique properties. So you can definitely equate some of the trading that's done here to something like effects. You know, it's global in nature. It's traded across multiple geographies.

Of course, it's traded electronically. A lot of it's traded in all kinds of hours, I would say. This element aspect of effects is also somewhat similar, although not exactly the same as crypto. There's also fixed income that, you know, from an OTC perspective, an RFQ perspective, looks like some portions of digital assets. But in digital assets, for the first time, you know, we have to connect. that's actually embedded in the asset class. And that gets us, we can do things here that we couldn't do in capital markets before.

We can really start thinking about how to coherently collect this entire trade lifecycle and allow the client to interact with it end to end, right? Not only can they get access to the right data, they can get access to the right trading, but it can also correctly settle and transfer the funds here. And transfer of funds is very, very unique to digital assets. So there's like, yeah, definitely some things that are similar to capital markets, but quite a lot of differences too that made this asset class very unique in its trade life cycle. And I think a lot of those things that Anton just mentioned, like the fact that the settlement is built into the asset class,

the transfer fund is built into the asset class. These are really innovations that are happening in crypto that we think are going to come back into traditional markets, right? So you think about being able to easily transfer, and that means that the settlement cycles can be shorter. also the fact that the markets are open 24-7. Crypto never goes down. There isn't like a 30-minute downtime when NASDA closes, right? And then the final thing that I think is a little bit of a unique challenge just because the asset class is so nascent.

It's just the instability of the ecosystem that we see from some provider sometimes. That's a really unique challenge that we've had to deal with as we build this into like a institutional trading platform. Yeah, I mean, certainly the kind of the first versions of exchanges in this industry were cobbled together by people that did not come from financial services backgrounds, right? There were kind of like web apps that were scraped together and they were, they were good for small kind of retail volume, but they were never going to scale. One of the things is you guys were kind of describing this is said another way.

The kind of bearer asset nature of this market is really unique in the sense, in a good and a bad way, I guess. I mean, the settlement is a lot quicker, but you also have this dynamic where you can accidentally send funds into a black hole and just completely vaporize them. and you have situations where you can have funds on exchanges that maybe get hacked or compromised or shut down by the government and your funds are completely at risk. So those dynamics don't really exist in an equity market context where the beneficial security is held at the DTCC or, you know, custodian bank or something.

That's a great point because that's a lot of the conversations that we have with our larger customers who are primarily, you know, banks or traditional asset expenditures. We talk about these kind of topics that you would never. ever covering capital markets. Nobody in capital markets is afraid that at some point they might by accident lose their money just by, you know, there's of course always a technology risk, but it's not to the extent that I just sent a billion dollars to an address that I can never access again. That is a very unique problem to crypto. And part of the challenge here is to address that and to make the organizations and the regulators as well and the auditors, but everybody

in this ecosystem, comfortable with the solutions, with the safety that we have in place. And that's been kind of like a big, big theme over the past, I would say, three years during this last cycle of institutional adoption. Yeah, I used to work with a guy who used to call this the black hole problem. It's sort of the imagine that we turn securities into digital bear assets and then you do a repo transaction. You just vaporize like a quarter of a trillion dollars overnight or something. So there's going to have to be some workarounds, I think, in the context of tokenizing, you know, real world assets. But, you know, maybe let's use that as a way to talk about some of the capital efficiencies. issues here. So one of the challenges to these being digital bearer instruments and the fact that

they're traded on so many venues with so many market participants is that capital efficiency just becomes a challenge. And so I guess talk about what that challenge is, why capital efficiency, you know, is a problem and how you guys are thinking about solving that. One of the things to understand here is how people are trading crypto right now. If you're trading on one of the crypto exchanges, like a coinbase, for example, you have to manage the treasury yourself. So if you want to trade, you have to take your assets and you have to transfer them to the exchange, and then you're allowed to trade them, and then you can withdraw those assets. So when people are trading crypto today, there are two types of liquidity providers.

The first is if you're trading at OTC, you have a credit agreement with the trading desk where you're allowed to trade up to some limit. And then once you're done trading at the end of the day, for example, you go through a post-trade settlement process. And Taurus integrates with platforms like fireblocks and Silvergate that allow you to actually transfer those funds and we operationalize that existing workflow. If you want to interact with the exchanges, though, you actually have to pre-fund all of your executions. So what Talos does this help you to manage your treasury and we're working to allow our clients

to trade on those exchanges actually without pre-funding the executions. Yeah. I think, you know, like it's worth mentioning, especially on the exchanges side, that for our largest institution clients, we were seeing predominantly those kind of clients face. the OTC market because of the refunded requirement, right, on the exchanges. And we really think that in the long term to be able to address the wider set of liquidity that's actually available in the market, we do need to provide a solution that will allow our institutional clients.

And those are, you know, some of the banks and some of the asset managers to be able to actually interact with liquidity across the board on exchanges and on OTC desks. Another thing to mention here is, of course, the lending and borrowing. So lending and borrowing is crucial to every asset class, every traditional asset class. And we are seeing the impact that lending and borrowing is having on crypto as well. But right now, lending and borrowing is still done somewhat isolated from trading. And everything that we try to do is we're really trying to put everything under this one umbrella into coherent end-to-end trade life cycle. So our plan is to allow that as well.

We really want to get, and we're going to be talking about this very soon, actually. we want to get to the point where our clients can compare, multiple providers can actually get access to those individuals that are lending assets, secure the borrow, and deploy that poor trading. And of course, the counter of that is we're also going to be providing an experience for the lenders to be able to provide that service to our clients in order for them to borrow the capital. So those are the kind of things that we're, you know, we think capital efficiency is extremely important. It's going to play a major, major role in this asset class. And so is that lending and borrowing that you're talking about primarily just working capital needs

in order to execute trades without having to wait? Is that basically the gist of it? The short answer is yes, but in part, right? There's quite a lot of different use cases why people exercise in lending and borrowing. You know, if you're a client that's borrowing asset, potentially you're looking to leverage, you have some sort of a short-term alpha that you want to execute on. So you do need working capital for that. That's one of the use cases, right? And there's a few others. On the lender side, Lenders are really looking to efficiently manage the loans, manage the collateral. So already today, we have quite a few lenders using our platform for, you know, liquidation of collateral with the market is kind of like trending low naturally.

But we really want to build that into a coherent experience where they can manage the entire loan lifecycle under this one umbrella. So yeah, so quite a lot of different use cases. But at its base, you know, we really just want to make sure that our clients can interact in a capital efficient way with the market. Got it. That makes sense. So you guys talked about the exchanges. I want to drill into that a little bit. So this has been a landscape that's been ever evolving, I would say. The dominant exchanges tend to change over time. Some of them, you know, come and go. They've been, you know, as we referenced earlier, catastrophic issues at various exchanges over the years as this industry has matured. So how do you guys stay up on the dominant exchanges? How do you prioritize your integrations in terms of which exchanges you'll connect to, which ones you don't?

Yeah. Oh, my God. It's a great question. It's a question. that we literally tackle every single week when we talk to liquidity providers. Generally speaking, there's a couple of things that we look at, right? Honestly, the most important one is client demand. We want to make sure when we connect to a certain destination, that that destination is going to be used by our network of clients, right? So when we add that liquidity to the network, we want to make sure it's used. But really, we have a couple of different types of customers, right? So we, you know, between our systematic clients, between our service providers, they do have separate needs. So what we do is we usually try to keep in touch with a lot of the liquidity

providers and understand, you know, some parameters around that particular liquidity pool. For instance, what is the nature of the technology that they're using? What kind of protocols that use? How stable is that particular liquidity destination, right? We are looking at how deep the liquidity is on that destination. What is the, you know, like how tight the spreads are? Like, is it going to be competitive in terms of the spreads that they provide to our pool of liquidity, right? What is the coverage of tokens that they have? Because, again, some clients we have that focus primarily on the majors, but we also have quite a lot of clients that are trading, you know, detailed assets. And up until now, I think I checked probably yesterday. We traded

just in the past couple of months around 200. So side of less than I think about 180 different types of assets on the platform, which is, you know, pretty long tail. So we kind of want to make sure that the pool of liquidity that we provide our clients remains diversified with deep set of liquidity, but yet reliable for execution. That makes sense. And so, you know, when you think about the other side of the market on the OTC side, how do you see this evolving? I mean, it's been clear that there's a big value proposition here to just face off against

a known counterparty that you can trust and, you know, go out and have a coffee with and shake hands with as opposed to, you know, an exchange that might be in a region of the world that you're not familiar with, for instance. So, you know, it's no surprise that that's been a big part of this market. Do you imagine that will continue? Yeah, we think so. And one of the advantages of Talos is that we allow you to treat all liquidity providers the same. So whether you're trading on an exchange or you're trading with dealers, the platform will incorporate it all into one liquidity pool, will apply the fees on the exchanges when necessary and deal with the differences. And we see there being a lot of advantages to trading OTC still. So one is the capital efficiency

component that we've already mentioned. You don't need to pre-fund your execution. If you need to, there are some white glove use cases on the OTC. If you need to offload a big order immediately, like there's just not sufficient capacity on these exchanges right now. And finally, if you want to do some kind of more bespoke trade, like they have the services that can actually help you execute that. Yeah. And generally speaking, right, it's OTCs always play a very meaningful role in other assets as well, right? And so we definitely don't see OTCs disappearing. from this world, right? Even if the pre-funding aspect is involved in the changes and we're seeing substantial more volume on exchanges from an institutional side, ODCs are still able to run forward

way ahead of the purely electronic market and provide these kind of like a white glove, known service, provided the right credit agreements, you know, provide specific and custom prices to their clients. These kind of services, they don't disappear. We see ODCs playing a very major role of the asset classes as things for us. So when you think about it as an asset class, is this particularly some of the larger assets like Bitcoin and Ethereum become, I would say, they become assets that are considered on a global stage, you know, by large, large capital allocators. Does this market start to look like just an FX market? I mean, how do you think about this in terms of framing it as an asset class? I hope not. You know, our roots are actually

in FX and it's a really, really nice asset class. But generally speaking, we think that crypto has its own market structure. And the evolution is very unique. And while, you know, like I mentioned, there's some aspects of digital assets in crypto specifically that look like other markets. There's also some very, very specific things. So there are specific to crypto, right. Again, if you had to equate it to specific markets, you know, you're absolutely right. FX comes to mind. You know, fixed income comes to mind. There's probably components from other markets as well. But generally speaking, the transfer of assets here, the pairing of settlement, they're directly into trading the capital officials you can get.

As a result of that, I think, breeds a somewhat different asset class. But actually, what I think is going to happen is more of a combination. We don't think that this is going to evolve completely in its own separate domain. We think that digital assets are actually going to be evolving in parallel with capital assets. And I think there's also going to be innovation that comes from digital assets that is going to be ported to traditional assets. I also think that traditional assets are going to evolve a little bit closer to what we're seeing right now in digital assets. Ultimately, we're still seeing one market. We're seeing other asset classes move a lot closer to this.

And part of the reason why we're building what we're building is because we really think of this evolving domain as the evolution of the entire financial ecosystem, not just one small asset class, right? Yeah, that makes a ton of sense. I mean, I think a lot of people like to talk about institutional adoption and participation. I definitely want to get into a little bit more of that with you guys. But one just observation from my side is that the barriers to entry to starting a retail-focused brokerage have just come down tremendously over the years. And I want to talk a little bit about how you guys see that.

I mean, imagine starting Coinbase. You'd have to build trade execution. You'd have to build custody. You know, rewind the clock. You're building all sorts of pieces of the stack. It kind of reminds me of the early days of the web where you're doing everything. You're writing, you know, you have got the servers in the back. And now if you want to start a retail brokerage, it's a lot easy.

I mean, you can use third-party custody. You can use trade execution platforms. You don't have to roll your own index if you're getting into lending or whatever. So how do you guys see that evolving? Is that a growing piece of the market, this retail channel? Oh, without a doubt. Yeah, I mean, we're seeing this firsthand, right? So, you know, when we first started Talos, we were focused on rolling out an execution platform

that was used primarily by by side institutions and really focused on, you know, systematic trading, trading through our API, you know, getting an access. to the entire wider liquidity network through a single API or single UI. Today, I think that the majority of our growth actually comes from service providers, and the big section of those are retail aggregators. And this is really, you know, we're seeing the same thing here that happened in capital markets. Initially, when something new emergence, like electronification of effects, right? People were building a lot of technology in-house, and they were building, just like you said,

the entire stack. You had to have your own data, your own execution, your own post-read, you're on everything. What's happening now and what we're doing a lot more increasingly with our clients now is that we let our clients focus on the things that are unique to them, right? What kind of service do they actually provide to the customers, right? How do they efficiently, even sometimes price the market? What kind of experience they have, right? What kind of marketing they do?

We take care of the rest. We take care of the connectivity to the market, the execution, the settlement. We partner with, like you can mention, we partner with fireblocks. We partner with Silvergate. And we really try to provide this kind of like all the commoditized stuff that you don't really have to worry about. We try to provide to our customers. So yes, we do quite a lot there. And I think we're seeing a lot of growth in that section.

And it's global in nature too because a lot of these platforms now are we're starting to see more and more of that. Like in the United States, of course, there's a huge, huge growth in those kind of platforms, right? But we're also starting to see this in Europe. We're seeing this in Asia. We're seeing in Latin America. So, yeah, we're pretty bullish on the entire sector of retail aggregators. We're hoping to play a pretty meaningful part there, too. I'm glad you brought up the international element of this, because that's such a huge part

of it, in my opinion, in terms of how big this market is versus, you know, a local equities market where you have bespoke trading venues and counterparties, and it's very jurisdiction by a jurisdiction basis. I mean, Bitcoin's Bitcoin everywhere. Ethereum's Ethereum everywhere. These markets are global in terms of the exchanges and the OTC desks. And so, you know, my observation is that it can just move a lot faster. And a lot of this infrastructure is just more composable across different categories.

It makes it easier to spin up a blockfi or a river style company in a different jurisdiction very quickly. Yeah, I think that's definitely the case. I mean, part of the appeal of working engineering in the sector is that the experimentation that happens here is very fast. And, you know, like we're seeing both from a market structure, we're seeing a lot of more maturation, but also from the vendor side. we're seeing a lot more maturity in solutions like custody and trading and settlement and data. We're seeing a lot of that come together much faster.

And we do, I completely agree with you, that it's a lot easier right now to kind of like use some of those tools and just being able to roll out similar solutions in those different jurisdictions. Let's talk about the institutional side of the market a little bit. And in particular, let's talk about what's holding back some of the institutional participants. Obviously, we've seen just a wave of, I mean, I remember. remember when I first met you guys, if you had told me that we'd have Drunken Miller and Paul Tudor Jones coming out publicly and being supportive of this asset class, by this point, I would have been, I'd say, pleasantly surprised. I definitely thought it was coming, but it's gone pretty quickly. But there's definitely issues that are holding back, you know, a bunch of participants.

So maybe talk about your view on some of these infrastructure barriers and what still needs to be solved. Sure. So it's really amazing to think about the, the fact that And it's been two and a half years since we started this and how our conversations have changed dramatically. Right. I mean, we used to, our thesis was for the longest time, institutions are coming, right? That was kind of like the tagline. And it was tagline for everybody. Everybody was like, yeah, there's a bunch of retail trading right now, but institutions are really coming, right?

But I mean, I have to say, and I think this is not a surprise for anybody, over the past year and a half of what we've seen, it's easy to say institutions are here. Right. But institutions are different animal than the retail investor, right? They think about investing in a different way. They need different things in the market. And they're also very, quite dramatically. Institutions are not one-size-fits-all. So what we're seeing is that institutions are somewhere on this kind of like curve of risk

tolerance. We have early adopters and risk-friendly institutions that are already trading in the space very actively. And then, of course, we have larger, more conservative institutions that are starting to, you know, to understand how to interact with this asset class. And some of the barriers that they are seeing for their risk tolerance level, you know, still revolving around the same things. They are thinking about custody, right?

Who should they custody? How can they ensure that, you know, to your earlier point, there is no loss of capital, right? And we're seeing a lot of different solutions now actually, you know, come to fruition. Over the past year, we've seen a lot of pretty good players entered the domain. You know, they are thinking about trading. And when they're thinking about trading again,

they're thinking about the entire landscape of trading. Not only how do they execute the trade, but how do they actually do reporting? How do they do transaction cost analysis? They need those kind of tools. Those are institutional tools. And more than anything, they need safety. And this is kind of like the major, major difference between retail and institutions. Institutions are thinking not of can we do something really well and really, really cool,

but can we do it in a safe and reliable in a compliant fashion. Those are kind of like the major things. I think that this is where we get a lot of the questions. Like, you know, when you read the typical de diligence questionnaire that we get from a large institution, 70% are around safety, about risk reduction, around, you know, like information security, about cyber, and those are the kind of cool. Because they understand that they will be able to do the execution. That's not the issue.

The issue is, can we do it in a safe way? Can we do it without blowing up the firm? Yeah, it's an existential risk in that way. to the firm, right? If you have a franchise that can be vaporized overnight, you pay attention to these type of things. Yeah, absolutely. You know, one thing that holds back a lot of institutions, I think back to, you know, think back to like 2014, obviously none of these things that you're talking about were solved problems. There weren't qualified custodians. You didn't have trade execution, and you had crappy market data. But the other thing you didn't have was like a dominant thesis on why

deploying capital to this made any sense whatsoever. You had a lot of, you know, you certainly had people that saw Bitcoin as digital gold, but you had a lot of other people that saw it as a competition to Visa and MasterCard as a payments technology. And so there wasn't really an overarching impetus to deploy capital. That has obviously changed. So I'm curious what your views are on what is actually driving capital to be deployed in this industry. What is the thesis that is driving most of the trading volume? Yeah, I mean, I think it really changes between the different types of customers that we see in the domain, right? We primarily from our CETC, two types of customers. We have the byside institutions that are, you know, primarily interacting for them. And the thesis there is primarily around, you know,

it's speculative. There's a varying terms of alpha. So they're thinking about it short term. They're thinking about it long term, but there's primarily speculation, right? And some of them are systematic. They're getting in and out of the market very, very quickly. We're seeing that and that's always been there and that's actually continuously growing. The interesting one is that over the past, I would say a year and a half to two years, we've seen a lot of service providers coming into this domain. And honestly, like, you know, it's a pseudo thesis because really what's happening with service providers is that clients are pushing them into this. Like we are, you know, the underlying clients are asking, so companies like insurance funds, for instance, that are

looking to diversify their treasuries, right? There's different cases, but they are the ones that are pushing the service providers to get into this domain, to understand how to trade this, to understand how to provide the services to their customers. So while, you know, the underlying thesis vary somewhere between speculation, you know, diversification of portfolio construction and a couple of others. Generally, we tend to see those kind of clients pushing really the service providers and other institutions into the domain. Got it. The reason I ask about the thesis question is I've had a really interesting past three months. I've had three unique conversations with retail people, individuals that are excited about crypto for totally different reasons than I've

ever heard before. So, you know, one example would be a guy that I met who had never been into Bitcoin or Ethereum and was a ham radio operator and got really into helium and it just clicked for him. And now he's super bullish about crypto. Another would be someone who's really into BitClout, who's kind of like an Instagram influencer type of person that never held any of these assets before, but BitClout made sense for them. And then the third one was around, you know, this NBA Topshots phenomenon. And so it's just fascinating. to see people entering this from different fields and just saying, you know, I'm really optimistic about the industry writ large, but for reasons that are very, very different than like where I started,

for instance. Right. I feel really bad about the boring thesis answer now, but it's, but it's such as the institutional world, it's amazing to see. And I'm guessing that that's going to continue happening, right? We are going to see more and more diversity in exactly those kind of thesis and what the clients are actually coming up with in terms of use cases. So for you guys, you originally were looking at doing a fund.

You obviously migrated to building a technology platform. But what was it personally for each of you that made you believe that this was an enduring market as opposed to just trading baseball cards back and forth and clipping a spread? I can kind of like maybe answer for me. And Ethan probably has a very, very different answer. But my background is actually in computer science and my concentration was in cryptography. So we kept an eye on the evolving Bitcoin and community at a time for quite some time and started actually, you know, trading Bitcoin pretty early. But then I think for me, when I was in my seat at the AQR, we started thinking of it and started looking at an actual evolution of the asset class.

And what solidified it for me is that it began to look like some of the earlier asset class that we participated with when, you know, Ethan and I were in Broadway technology. We played a meaningful part in adoption of the electronification of those kind of asset classes to the wider cell site sector. And so it started looking like, oh, we're just a few years back. And there was a considerable amount of years back in the evolution of other asset classes. So when you see that, you basically go like, you know, I kind of know here, you know, we don't know exactly what the future holds. We have a sense of how things will evolve. And we knew that, you know, like there's going to be some similarities with the evolution. And so for me, it became a question of, you know, you're seeing it as kind of like new evolution,

it has a bunch of new capabilities, a bunch of different technology, something that looks amazing. You either stay in your current seat and continue basically, you know, like we had awesome roles, of course, and I really love previous employers. But generally what we do is we tend to focus on optimization of existing asset classes, right? Can you make things faster? Can you find more edge, more out? right here we're literally building a brand new asset class like you are contributing to the evolution of what can change you know it changed it can effectively influence the entire evolution of

financial markets going forward so it became almost a honestly no-brainer like getting involved with something like that that's a phenomenal thing too it's from an engineering perspective especially if you're an engineer in financial markets it's an amazing challenge to be involved with. But that's, that's me. Yeah, it's pretty similar for me. It's really the, it's really like you could see even three, four, five years ago that the innovation in the financial system is all happening in crypto, right? And so you can really see this as the test bed for all, all the new ways we can gain efficiency by through trading. You know, you're sitting and you're trading these in traditional markets. You see banks with their huge back office teams that are worrying about

trade breaks, right? And you just know there has to be a better. way. And I think that crypto is the place where we're going to experiment and figure out what those mechanisms are. And the chance to work on that is obviously just extremely exciting. And Ethan, do you think that that, so I couldn't agree more on that innovation, do you think that some of the innovation that is truly crypto-native around, you know, DFI primitives? Is there a way to bring some of that into the other side of the market? Or will we see a merging of centralized finance and decentralized finance? How do you guys think about just the pace of innovation there? I think that we don't know yet.

And that it really is one of the advantages here is that because there's all this experimentation is happening, it's happening in a relatively small scale, right? You don't have enormous institution. Like the real money is not going into those yet. But it does give you a test bed to experiment with them and see if there is something there. Yeah. But I think, you know, like, defy market is exactly the right thing to ask about here, right? It's yet another experimentation that's happening in the market.

right now. So the question is, can the institutions get involved with defy market? And I think the answer is becoming that it's not a question of whether they can, it's a question of when. Because if you look at liquidity in the defy space, if you're looking at capital efficiency in the defy space, it's significant numbers already. Not as to Ethan's point, right, we're still talking about like fairly small markets, but as a general percentage of the global liquidity available in crypto, So we're seeing a huge adoption curve in D5. So for institutions, the purpose is to be able to execute in the best way possible. We need to consider those kind of liquidity pools as well.

And I think that for us, you know, the goal, when we see that it's safe and it's possible for institutions to interact with that world, we are hoping to be the first ones to welcome institutions into it and provide the technology for them to interact with it. Yeah. I mean, it's so much more attractive than some of these various enterprises. enterprise blockchain categories have been over the years because there's a natural customer acquisition engine there just in the form of yield. And so I'm sure you have a lot of participants in this market that are looking at just holding stable coins and the types of yields that you can make on

these. And so from my perspective, that's what's getting a lot of people to pay attention that maybe they don't want to be like yield farming a longer tail coin, but they want to understand how is it exactly that USDC I can get 8.6% annual interest rate. Yeah, that's exactly. And look, I mean, a lot of this stuff is coming from the fact that there is a new technology that's underlying it. It's powered by automated tools that are running in an environment that we never had before. And the cool thing about this is we can do this across the world. You can get access to decentralized finance protocols and products anywhere you have internet. And that's a game changer.

We never had this kind of like, you know, we always talk about like banking beyond banked. This is it. This is exactly that. It's providing people with access to the financial industry that notoriously has had some gaps in terms of its coverage. So yeah, it's pretty exciting. Yeah, and it's providing it in a way that is almost a unified login experience, right? There's no kind of setting up millions of different accounts. You have this composable, you know, metamask style experience.

It's getting a lot better, I'd say. Yeah, without a tons. So when you guys think about just the exciting things that you're seeing in the industry, obviously you guys are heads down building a business here, but what are you the most excited about in the years to come for this industry at large? Yeah, I mean, you know, DFI is definitely one of those, but we think that DFI is going to play, you know,

we don't know the future, of course, but we believe that DFI is going to play a meaningful role in the evolution of digital assets and potentially beyond that. But there's also a few other things. Like, honestly, we're seeing a whole evolution of the market structure, right? Ethan alluded earlier about the fact that experimentation happens very, very quickly here.

We're really excited about what this means for the wider financial ecosystem in the next few years. How does it actually impact? Already in effect, we're talking about 24-7, we're talking about real-time settlement cycles. Those are concepts that are native to the blockchain world, right? So I'm looking forward to evolution of digital assets and crypto in general, but I'm also looking forward to the evolution of traditional assets with respect to crypto and what we're going to see between those.

So, yeah, so quite a few interesting things there. So you guys had the kind of the luxury, I would say, although it probably didn't feel like a luxury at the time where you started Talos in a bare market. And so you didn't really have people tossing money at you in a big way and maybe a way that you would have in a bowl market, for instance. And so you're kind of heads down. I'm curious, just your perspectives on building a startup through various cycles in crypto. These are kind of brutal up and down cycles. And how have you guys found that from a capital raising perspective? Yeah, absolutely.

You know, I mean, honestly speaking, I do think it was a luxury. You know, we had the luxury of focusing on safety as much as we focused on features. And as a result of that, we were able to roll out a better polish product to the market, which is really crucial in our industry. You know, institutions have a really high bar. So this notion of, you know, release fast and break fast doesn't actually work in our world. So we totally view it as a luxury. We are not under the gun when we were developing.

But to your point, fundraising was definitely no picnic during that time. In retrospect, I think that it was actually better for us because we, effectively, you know, like the investors that we attracted at that point was a little bit of a self-selecting group. We heard a lot of knows. But ultimately, the people that we partnered, you know, we partnered with you guys, with Kessaland, right? We partnered with notation, with initialized, with autonomous, with funder collective. Those are all firms that at early stage from the very beginning.

and all the way through the bear market had strong conviction around how digital assets can impact the evolution of financial industry. So we're actually very happy and very lucky to have brought that team together at that stage of the company. This last round that we just raised, you know, we raised a $40 million series A, very, very different beast. But at the same time, our approach remains exactly the same. We chose to partner with the people that have strong conviction on this evolution, right?

the evolution of digital assets, the evolution of financial infrastructure with respect to digital assets. So we chose A16Z, we partnered with Fidelity, with PayPal, with Galaxy. Again, like the same kind of thing, right? People that have long-term condition, unwavering approach to these assets and people that we found to be great partners and we think they're going to be very instrumental in our path going forward. Yeah, building trading systems is always hard. Building any financial system is always hard. We might have made light of some of the exchanges that go down when there's volatility, but you can't blame them. They were built under pressure. And so we've been really lucky in the timing that by the time the market is picked up, we've had a really robust system already that

is a lot of miles on it. Yeah, that makes total sense. To add to Ethan's point, you know, you can't really stress this enough. It's easy to look back and say, hey, you should have built it this way, you should have built it that way. But overall, you know, players that came before us and exchanges are a perfect example, provided exactly the right type of service that needed to be provided at that time. They were building an environment where they had unlimited demands. People were constantly lining up. And this is retail sector.

This is people that can switch in the heartbeat. So a lot of these kind of players build platforms effectively under this enormous enormous pressure to scale, to still build something that is operationally coherent. It's a very, very tough environment. So we had the luxury of being heads down under the radar building for about a year before we launched anything to production and test things extensively and being able to do this, we know that others didn't have that kind of luxury. So, yeah, it's definitely interesting experience.

Yeah, that's definitely the tricky thing is, you know, you can build a product for the market as it is today, or you can build a product for the market as you believe the market needs to be. And obviously, you guys did the latter. Well, it literally does the point, right? When we also, we thought that the market is going to evolve in a certain way, and we were building towards it, but we also made a few. if you miss calculations and misjudgments like you do in the beginning, right?

We really started as an API first platform by side. The kind of thing that we see today around the service providers that are using some of our weight label capabilities and some of our dealer capabilities, that already came along while we were in the market. But we were definitely thinking, okay, this is the platform that people will need. And even for us, despite the fact that we built it a bunch of times before, we still had to adjust our course quite a few times. That makes sense. So you guys went out and raised a great series A round here with some terrific partners recently. Talk a little bit about that round, what it was like to pull it together, and then what this means for the product roadmap for Talos over the next few years.

Yeah. I mean, we're naturally very, very fortunate and super excited about this round. Came together pretty quickly, honestly. I think that at this point, especially even the last year and a half, we've seen quite a lot of traction. And especially in the United States, we were able to. to, you know, with data cement the thesis. It's easier right now to show that this is what the market actually needs. The market needs a reliable institutional-grade trading platform. And so for us, we were able to partner with quite a lot of really meaningful players in the ecosystem to continue expanding the vision that we have for the platform. So for example, you know, we partner with large organizations like Fidelity, like PayPal, like Galaxy and a few others.

And really, those are some of the players that are also. looking forward and building the ecosystem. So we're very fortunate to be on the same path with them. We think that those are really great relationships that allow us to actually build the right ecosystem for the emerging institutional market. So now what's that mean in terms of the product going forward? How do you guys think about scaling that up? And what are people asking for?

What are you going to build? Yeah, the first thing that we really want to do is solidify the liquidity network. So really continue growing out the foundation. that we've started. So that means adding more exchanges, adding more equity providers, adding more product types, getting further into derivatives and options. And we really want to be the best tool out there for crypto trade execution. And kind of on top of that, we're doing global expansion.

So that's moving into the other regions that we mentioned earlier. And along with that is more exchanges and more liquidity providers and more client types. The other thing is really extending our full trade lifecycle support. So I think we're one of the best providers on trade. execution, but as we've talked about the whole time, institutional demand goes beyond just execution. It's on the pre-trade side. It's on the post-trade side. We want to enable our clients to borrow, lend, and settle all within the same telus platform. And so as you guys scale this up, what are the roles that you guys are looking to hire? Where can we send people to learn about the recs?

Oh, my God, everything. So virtually unlimited in terms of, you know, engineering hires. generally when we hire engineers, we primarily focus on individuals that come from capital markets and have built similar systems, whether it's more complex quantitative trade or algorithmic trading systems or risk systems. But at this point, we are kind of like opening up wider and wider because there's quite a lot of roles inside the company that don't have necessarily strong interaction with the financial domain. But aside of that, we're standing up quite a few quite a few different roles and we're opening up offices and other jurisdictions right now. So on our website, tellos.com, we have an updated list of roles and we are constantly going to

be updating those and speaking to candidates as we go. Awesome. Well, guys, this has been a real pleasure. Thank you for finally agreeing to come on the podcast. Took two and a half years. It's finally getting to come on, but appreciate it. Looking forward to seeing you guys both in person sometime soon here. Thanks a lot, man.

Thank you so much. And once again, thanks for all the support of this. the years. It's a cliche thing to say, but you and our earlier investors, without you guys, we wouldn't be able to make it this far. And I'm definitely not saying that we've done anything unbelievable. I think that there's quite a lot of things ahead. We're really, really excited the path ahead in it. But at the same time, quite a lot of things goes to be aligned with us on this vertical to help us out this entire time and to, yeah, just being a good partner. So thank you very much. Well, thank you. It's great to be invested with people that you're friends with. So really excited

about the road ahead with you guys. Thanks, man. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.Vicc. To listen to all of our podcast episodes, please go to on the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.