The Breakdown - The Transformation of Everything, feat. Vance Spencer

Episode Date: May 7, 2022

This episode is sponsored by Nexo.io, NEAR and FTX US.  In today’s interview, NLW talks with Vance Spencer, co-founder of Framework Ventures and Framework Labs, about DeFi, crypto investing, the social disruption of play-to-earn, blockchain gaming and disruption everywhere.    Find our guest on Twitter: @pythianism  - Nexo is a secure crypto exchange and crypto lending platform. Buy 40+ hot coins with your bank card in seconds and swap between exclusive pairs for cashback. Earn up to 17% interest on your idle crypto assets and borrow against them for instant liquidity. Simple and secure. Head over to nexo.io and get started now.  - NEAR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NEAR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Find out more at NEAR.org. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, Texas. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “Catnip” by Famous Cats and “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: ChakisAtelier/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.   

A metaverse that offers finances of first principle, self-sovereignty, strong property rights and ownership and the ability to make money is going to be far more important and far more interesting than kind of what Mark Zuckerberg is doing, which is he's defining the metaverse as, you know, put on your Oculus and like go to your grandmother. Or like, you know, put on the Oculus and like go to a meeting. You know, that is certainly a technology. That is not the Metaverse. The Metaverse is a place where you can open your computer and you can just make money by participating in an open economy. That's how at least we think of it. Welcome back to The Breakdown with me, NLW.

It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, May 6th, and today I am joined by Vance Spencer of Framework Ventures. Before we get into that, however, if you are enjoying the breakdown, please go subscribe. subscribe to it, give it a rating, give it a review, and if you want to get into the conversation, and this is the type of chat today with Vance that is going to make you want to discuss these ideas, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.com slash breakdown pod. Lastly, as always, in addition to them being a sponsor of the show,

I also work with FTX. All right, so today's guest is Vance Spencer. As I said, he's the co-founder of Framework, which actually is a venture fund, Framework Ventures, as well as Framework Labs, which is a team of primarily engineers who effectively participate in the protocols, projects, and companies that Framework Ventures is investing in. These guys only started in 2019 technically, but were one of the earliest funds to get into Defi and have built from there to not only expand their theses around Web3, blockchain gaming, and more, but have just raised a new $400 million fund. In his announcement post about that fund, Vance wrote that the firm had developed several

what they call operating assumptions about what the world will look like in 2030. Things like crypto will financialize most existing Web2 use cases, replacing ad-based monetization with tokenized attention loops. In this conversation, we jump off from many of those questions to really discuss how the things being built now could reshape many of the different types of experiences that command our attention today. I really enjoyed this conversation and I think you're going to as well. So let's dive in. All right, Vance, welcome to the breakdowns. Great to have you here. Thanks for having me, buddy. So I want to start, I guess, for people who aren't that familiar

with you. You guys have had a very quick trajectory in the context of, you know, Defy and Crypto and Web3, although I guess it's kind of you just perfectly match the trajectory of the industry as a whole in terms of how long you've been here. But let's go back to 2019, you know, when you guys were starting. And, you know, part of what allowed you to skip some rungs on the ladder was how quickly and deeply you got into defy and how early to that thesis you were. So, you know, give us the origins of that interest, that, you know, the conviction, what got you initially excited and how the firm came to be. Yeah, so three and a half years ago,

you know, Michael and I had just sold a digital trading card company and it wasn't a gigantic exit, but it was enough to put some money in our pockets. And we hadn't lost any conviction in the blockchain thesis and we wanted to work together. And we spent about six months living in Michael's parents' basement thinking of the idea for framework. And really, this was in the debt of a winter market when, you know, really nothing was happening in crypto. People had come off tokens in terms of them being interesting at all. DFI didn't really exist at that point. But for us, we just knew that there wasn't really a perfect venture firm for the builders in this space. And we wanted to build that. And so, you know, we had the idea that blockchains were built

for financial services. And the likely first category of product market fit would be something financialized. And so, you know, we branded hard towards defy. We cut hard towards, you know, only leading deals in that arena. And really, you know, one thing led to another, you know, chain link, the graph, Ava, synthetics, Wi-Fi. A lot of the early DeFi projects, we were the largest token holders were led a significant round. And, you know, we were extremely aggressive with governance, extremely aggressive with just being on chain. And I think people kind of were rooting for us because we were, you know, the people who made it out of the kind of retail scene of crypto into the higher rungs of the institutional side. And, you know, one thing has led to another. And we've had a lot

of success. And the communities and the protocols and the founders that have been behind us have just been phenomenal. So we've been able to parlay from DFI. to middleware to social crypto to gaming. And now we reflect the breadth of crypto rather than one specific sector. And that's a lot of what our new funds about. So I think it's hard for people who weren't there to like imagine how deeply like nothing was going on

for big periods of time in 2018 and early in even early into 2019. There were still people who were obviously working and building. But like the fallout was immense. And one of the things that always struck me as super, interesting about, about Defi was there was a bit of this, maybe we had gotten distracted with some of the like broader ambitions of like ICO projects that were like tokenizing the world. And a whole bunch of like the smart thinkers that stuck around were like, you know what? Like working on money stuff, finance stuff.

Like there's a lot there that, you know, again, like it's, you know, maybe there's the tokenized social network or whatever will be something in the future. but there was just so much to dig into. And I think that's like kind of that insight and shift in behavior. To me, it felt like that was kind of the key catalyst for a lot of the defy stuff that was to come after that. I mean, absolutely. And most of the early kind of defy scene took place in these fringe discords or on 4chan or on these places where you wouldn't really expect people to be. And a lot of it was just driven by pragmatism.

Like what can we actually build on chain that would have use today? And a lot of the use cases were frankly, you know, due to the fact that people on chain didn't have any other financial services that they could access. And it was kind of this period where it was extremely idealistic. There was a ton of chaotic energy in these discords, like the sense that anything could happen in any given moment. And a lot of that initial energy, you know, resulted in the initial defy movement. And, you know, it started as kind of the purely crypto anarchist, you know, we're going to build sound money, you know, completely decentralized. No government will be able to touch this or mess with this. And I do think kind of the pragmatism over the years is kind of

one over where we want to meet consumers more than halfway. We want to build things for, you know, a common denominator of people that are not just crypto natives. And I think that's good. But, you know, frankly, the backlash was so bad after 2017 that, you know, tokens were just something that people didn't want to touch. DOWs were, you know, frankly, not even a state where we could consider them. There was embarrassing concepts like token curated registries that really never came back. But it was a period of time where we just had to shed a lot of those, you know, prior beliefs and really get back to the basics of what can we build now that would have some modicom of usership rather than trying to eat the whole elephant in one bite with, you know,

decentralized TV and decentralized social media networks. And even now, we're not sure that those will eventually exist. But it was certainly a about face at the time as well. Yeah. One of the other things that was really interesting about Defi is there were a lot of folks who really early were like, we have to make this more mainstream. And it felt to me like it actually hit this like perfect. Like it was almost protected by itself in that like the barriers to entry were so high that it like it contained the fallout of early experiments gone wrong and hacks and vulnerabilities. I mean, it feels to me like it continues to be kind of in that state today.

You know, like I think that the like the regulation, you know, investor protection you know, consumer protection sort of side of the governmental argument, it feels to me like it's likely coming for defy in some way, but at the same time, like, the counterweight of like the full, like the sophistication of this set of investors is like really high even if they are retail consumers because it's just so technologically, you know, required. But I don't know, what's your perception, I guess, maybe to try to turn this into a question of what is the state of defy now, you know, what is the kind of like if you had to characterize where in its cycle we are, not necessarily market cycle, but just in terms of sort of development cycle. What do you think?

I think, as you said, initially it was, it was kind of intentionally hard to use. It was super decentralized. The concepts were super complicated. And it kind of resulted in this area where, you know, you really had to self-select to be in defy. And there was so many hurdles to actually using this thing that, you know, the initial community was fervent. It was concentrated. There There was so much momentum and just chaotic energy where anything could happen at any point in time. That's kind of come off a little bit. I think the pragmatists have won over the past couple of years. And we've built things that are more akin to mainstream financial services than I.

And I think that's a great thing. In terms of where we are today, I would say it's very different in defy changes every year. And so nothing's constant. But I think about it in terms of verticals. So you have AMMs, you have derivatives, you have insurance, you have money markets. things that are very kind of, they can sit next to each other. They're not really competing, but they're all end user use cases. You know, Uniswap has 90% of AMM volume. Avay and compound are the dominant Barrelend platforms. Insurance is a little bit more of a horse race, but risk harbor seems to be

running away with it on the cross chain side. Nexus Mutual is probably best for Ethereum. I would go far as to say a lot of the winners of the verticals have already been crowned. And you see that in the private market funding landscape. You don't see people funding uniswap competitors anymore for a reason. It's just too hard of a race. and it's not really going to work. And so, you know, where is DFI going now? I think DFI now is more about, you know, a couple of things. The first one is like, where is the flow going?

And, you know, good examples of this are payment forwarder protocols that are being built out that are an alternative to the traditional AMM paradigm. MEV protocols that are being built out, which are kind of like the most complex transactions that are the most competed over by, you know, the most sophisticated actors determining where that flow goes. And then you have things like Tocomac, which. effectively decentralized versions of Citadel with a ton of capital on their balance sheet that can go off and market make and do different trades on any number of different vertical, decentralized finance primitives. And so it's like you have the verticals, but then the horizontal kind of overlay is now determining which one of those verticals gets the most flow.

And that's kind of like where we see the next year, year and a half of Defi going. The other thing I'll say is that, you know, the past six months, we've seen people from Jane Street, people from Citadel, people from DRW start to get into crypto. And they're building things that, you know, look and feel a lot like traditional finance, you know, platforms, they're higher fidelity, their lower latency. They're easier to use. And I think a big trend, what we're seeing is just like, you know, custodial experiences, custodial payments, custodial bridging. Like, that's the thing that's going to bring in the next billion users. And so there's going to be this kind of reworking of all the dominant platforms of all the dominant sources of flow to accommodate these new actors that are coming into the space.

and, you know, Defi will likely change more in the next 12 months that it has in the past year, just as it gets a lot more professionalized. How much do you think the long-term destiny of Defi is to totally change the guts of the financial system versus to offer an alternative that sits alongside that people can kind of decide where on the spectrum they want to be? I don't think it's either or. Like, there's things that are just going to live forever. that have very decentralized characteristics like MakerDAO, you know, those smart contracts will exist for as long as the Ethereum blockchain is running. It'll be a legitimate credit facility forever.

Do I think a government or a state regulator will ever embrace it? I don't think that's likely. But, you know, that's going to be an alternative for people who don't have, you know, any other financial services that they can rely on. And I'm personally a user of MakerDAO. I really appreciate the fact that I am at most two Ethereum transaction services away from any financial service that I need. And so that's, you know, how I find value in it. I'm sure a lot of other people will as well. On the other side, I think what we're seeing recently is people starting to make cuts into the traditional finance world saying, let's build KYCFI. Let's build KYCFI. Let's build ways to integrate the traditional finance system into defy.

But that is still hamstrung by regulations and frankly won't change until there's a new administration. And so that's going to be something that, you know, is going to be a lagging indicator of where the space goes. where we see the most heat, where we see the most momentum, where we see the most energy and chaotic good is in the core defy decentralized movement. And you're just going to see so many iterations and innovation on that side before you see regulated financial institutions get in here. So, you know, I think it's going to be both. Which one do I think will be bigger? Hard to tell. But if you put any fraction of an investment bank's balance sheet or business activity on chain, you're talking about trillions of dollars. And so there's going to be a lot of different

characteristics going forward of what Defi looks like. Super, super interesting. So is it fair to characterize sort of the, especially the latest fund raise as you guys expanding your, your field of vision to include sort of like a broader set of Web3 ideas? Like another way to put this is, you know, going back to the 2018, 2019, we used to talk about like money crypto versus like tech crypto. And it's kind of like you guys like, you get, we're going.

went deep on money crypto as money crypto was coming back into the focus and sort of having more emphasis. And alongside that, all of these sort of interesting tech crypto things started happening again in terms of other areas, let's say, where we're kind of blockchains and crypto might disrupt. But is that sort of how you guys see it? I think I do see it that way. I do think money crypto has laid out the infrastructure and the user experience for all technology crypto. And in many ways, tech crypto, you know, those are all financialized use cases. And so kind of everything is defy at the end of the day. It's just, you know, maybe you have better or worse graphics. It just depends on the user

experience. So that's kind of how we see it. In terms of, you know, our expansion, you know, we did defy at the start because it was the clearest use case, you know, and frankly, we had to find something that worked quickly to get us out of the bear market. But, you know, those are the ideas and the concepts that are leading to these bigger markets, gaming, content, commerce, you know, that's where the next billion people are going to come in from. And that's where we want to focus as a result. I do think defy will end up still being the biggest market in crypto, just because defy protocols will pivot to serve the billions of people who come in for gaming use cases. And they won't even know that they're using Un swaps, decks or obvious boroughlin facility.

But they're going to be there. And so a lot of this is an extension of kind of what we've been doing. But also, you know, I'm from Netflix. Michael's from Snapchat. We've built and sold the digital gaming company. Like this is very close to our DNA as well. And so, You know, we're definitely not, the other thing is like, you know, there's nobody doing these ideas right now. There's no, like, preeminent Web 3 gaming firm. There is no preeminent Web 3 content or commerce firm. Like, this is ours for the taking. And, you know, you have to reinvent yourself with every fund. And, you know, this is what we're doing as a result. Yeah, I mean, a lot of it is staying as nimble as the industry, right?

Like, it's like, what, like, one of the things that kills funds is if they try to apply the heuristics and interests of the space, you know, a year ago to what they're working on now. One of the things that I thought was most interesting about, you guys, so you did a great blog post. I think it was a blog post. There was right after the fund was announced. And you went through like a set of core beliefs. I think it's like 20 or 30. And I actually like kind of put them in order that I thought would be interesting to talk through. But the one that I wanted to kind of jump into first gets at something that you were just saying,

which is crypto will financialize most existing Web2 use cases, replacing ad-based monetization. with tokenized attention loops. So let's zoom out a little bit more broadly to, you know, at core your critique of Web2 or maybe even a better way to put it, just like the opportunity for something different, you know, where it lies. Yeah. So I think a lot of my thesis with Web 2 at the moment is that it's effectively being choked under the weight of its own network effects, search engine optimization, and a lot of

the bot problems that they have on these platforms. And so, you know, it used to be said that the bigger these platforms would get, the more valuable they would become. But I think it's fundamentally not that way. And you can see it with Twitter. You know, user growth has stalled out. You know, many of the SEO platforms are no longer servicing the most important Twitter posts in favor of other things. And just the network has failed to achieve the scale that it thought it would. And a result, it's declining in use and, you know, prosperity.

And so for us, like the financialized use cases that are important that are going to come out of this, are kind of as following. We see things like Twitter eventually existing on chain. The algorithm, the metadata, the posts, the profiles, everything will be on chain. And kind of what happens when you have that is you have the ability for client diversity. You can have a Republican front end for Twitter. You can have a Democratic front end for Twitter. You can have all these different user experiences that fundamentally help disaggregate, you know,

information that is in a silo that could become, you know, crushing under the weight of its own gravitas. us. And so that's the things that we become most passionate about, and we think will frankly be replaced. You know, when will this happen? Probably in the next 10 years, it's hard to pinpoint exactly when. We don't have blockchains that could service a billion people. We don't have blockchains that are cheap enough, fast enough. We don't have the custodial experiences that can onboard people, but we're getting very close. And so a lot of this fund is, you know, frankly, it's coming into its investable arc. And its investable arc is going to be three or five years before anybody actually uses it. And so we're going to be sitting on these things and

probably wrong for a long duration period of time. But that's okay. And that's frankly what the funds built for it. It's awesome. So I want to take a quick detour down social network lane, even though that's, you know, sort of only one piece of these theseses for a couple reasons. One, you wrote this before Elon, you know, decided to buy Twitter, or at least before it was actually happening. And I'm interested to see how, you know, how that, does that make you think that the timeline has changed and what your perception of that is? But then, two, how much of this is as simple as ads are the wrong model for these types of networks. So they were an extraordinarily powerful model, but they're a model with consequences that we now

are deciding are not worth it. So two very different questions. I mean, it's a very good question. And in any kind of existing web-based ad model, really kind of what you have is the advertiser is in charge with imbuing economic value to the entire system. You know, on one hand, you have all the users. On the other, you have the advertiser, and he's going to shove a bunch of money in the platform, and it'll make it economically viable. Obviously, the downside of that is that they bring all of their biases. There's a huge conflict of interest.

And frankly, it's just kind of a shi model where you're focusing on just jamming as many ads into user experience as possible, and it runs in conflict of what the user ultimately wants. The new model that we're talking about is, and financialization gets a very bad rap because obviously bad things have happened when you financialize the wrong things. But you're talking about effectively people being able to speculate on the open economy of a social media network. And like, what does this look like? Axi Infinity obviously has had his ups and downs. But for re-usual video games, it's a PVP or multiplayer experience. You play, you leave, you have your fun.

With Axi, you actually have an economy that can contract. or expand, you can surface things, you can slow down things, you can ramp up certain initiatives, you can surface other posts. Those are the things which are very powerful with an Axy that we look forward to seeing applied to social networks. And how will that ultimately work? There's going to need to be some sort of blockchain primitive that can contain, you know, the atomic units of messaging posts, profile accounts.

And once you have those, you can start to build token incentives into the network where, you know, you're paid to comment, you're paid to like, you're paid to surface and curate posts that are important. And ultimately, the hope is that by having a user-owned economy where the advertiser is replaced by people who are financially, you know, driven to speculate on making the network better, that you'll have a better business model. Obviously, you know, there's a lot of downfalls with this potential model. You need to coordinate a lot of parties to actually make the monetization and the actual functionality of the social network usable. But it holds great promise. And I think with the right walled innovations and the right blockchain technology, you know, it can work.

And I think you're seeing, frankly, you know, pieces of this idea in the marketplace today where, you know, if you look at board apes, what happened is everyone got, you know, or whoever bought or minted a board ape has a one of one NFT profile of themselves on chain. Then they issued a bunch of social tokens to everyone. And they're effectively now sharing in the economics, the roadmap, the concerns of the ape coin roadmap. You know, that's a that's a very primitive version of a social network. And you have to squint to see the future always with these things. but someone's going to take this a step further and then a step further. And then it's going to be a fully fled social network. Do I think it will look exactly like the front end client of Twitter today?

Probably not. But it's going to be something that people have some nostalgia around and can reason through. And I think it's coming probably sooner than people expect, maybe not 10 years. Looking for ways to step up your crypto game, then go with NXO. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. Ideal for you hardcore hoddlers. You don't even need to sell. Instead, borrow instant cash against your assets.

Get the most out of your crypto with nexo at nexo.io. That's nexo.io. This episode is brought to you by NIR, a climate neutral, high speed, and low transaction fee, layer one blockchain platform. NIR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NIR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Reimagined your world today at NIR.org.

The breakdown is sponsored by FTXUS. FTXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show.

I think the idea that in five, ten years, the very terminology of social networks might be completely antiquated because like what the sort of propelling, this propelling force into the metaverse has done has just blended everything. Like what's a game versus what's a social network or a communications channel versus a whatever. So, you know, I want to come back to the metaverse stuff. I guess, you know, just to hang on the Elon thing for a second, is there any world in which you can see Twitter under a total autocrat who can decide how long he's willing to lose money for, like actually shift the model from underneath? Or is that like just a total fool's hope?

It's going to be difficult. And, you know, it's not going to be easier than Twitter is a public company, just given the recent scrutiny that we've seen. And, you know, on a personal level, it's kind of like disheartening for me to see Elon, the man who's like, you know, responsible for launching rockets and, you know, getting us to Mars. getting enmeshed in the current social, cultural debates of the day and having to, like, you know, moderate by comments on his own personal Twitter account as the owner of this platform. And so I hope he finds a way out of it, frankly.

Do I think it's feasible longer term? It's not. Like, if you look at what Elon is actually buying, he's buying a bunch of posts, he's buying some metadata, he's buying a network with a ton of bots and problems and moderation. Like, there's just so much movement of stuff that's going on chain right now, transactions, PFPs, people starting a message and build social primitives around it, that if you look five, 10 years in the future, like, look at the velocity of stuff that's being added on chain versus being added on Twitter.

You're eventually going to be able to build social networks on chain. And that's frankly where the entrepreneurs are going to go because you can't build a competitive social network in Web 2 anymore. It's just not feasible. And so, you know, I'm a big, you know, numbers game guy. If you have the certain set of conditions, you're going to have a bunch of entrepreneurs trying things. eventually one of them will be right, especially in an area with a lot of venture funding.

And so he's going to have a horse race in the future against these Web3 platforms. And I think Twitter is a core Web2 platform as it is today will look a little bit outdated at that time, especially when you have wallets and tokens and global distribution and composability. You can just build feature-rich things that you cannot do in a Web2 experience. All right. So let's go from there to the other side of this, pun intended. and let's talk about your interest as a firm in sort of the blockchain gaming space, whatever it ends up being called. So how did you guys start to think about that?

Are you sort of like gamers by DNA? Was it more sort of like as part of, you know, you're constantly talking to entrepreneurs as a VC and that sort of, you know, you're noticing that people are building there. Like, tell me a little bit about what that sort of process was like and how you came to get, you know, particularly excited about it. Yeah, so I mean, I've been in Gamer my entire life, everything from Starcraft to League of Legends to Grand Theft Auto to, you know, random mobas on my PC. You know, that's just kind of been my experience. And Michael and I also built and sold a digital gaming startup before framework.

And so this is very core to kind of like what we have been doing and closer to my media and technology background than anything else. In terms of, you know, our, the original thesis on this, you know, we saw Axy kind of when it was outraising. And, you know, it didn't really seem like something that could be a game that would be super performant and interesting to a lot of people. And we were obviously very wrong about that. And so, you know, in January 2021, we backed our first, you know, precedency deal in the gaming space, a company called Alubium for people who are not familiar. And that, you know, obviously is done very well. But, you know, that's hard to build the idea of, you know, at a time when Defi was struggling to gain more users. And we saw the beginnings of the NFT craze where people were able to see a picture and reason through it and join a community that they can.

could visualize. There probably was something to be said about meeting the consumer more than halfway with a use case that wasn't entirely financialized, but at least had some fun, something they were used to, you know, to bring them on chain. And so a lot of this was the reflection of, you know, you hit these invisible ceilings every once in a while in crypto where you just say, okay, we've like topped out in the amount of users willing to do X, Y, or Z. And then you're forced to think, you know, where are the next billion people coming from? And for us, it's very clear. There's three billion people who play games. There's 1.5 billion with an internet connection that make less than $5 a day.

That is the type of people who are going to go off and play these play to earn games. And each of the gaming paradigms has looked very different from the last. We used to pay $50 to put a disc into a PS3. Then you had free to play, Candy Crush, you know, people considered that a total aberration of games, you know, for the people who are playing on consoles. And now we're moving to the other side of the spectrum where you're going to get paid to play. It's a better business model for developers.

And, you know, some of the games are going to be managed in this decentralized context. And so for us, you know, it's both a natural progression of the gaming industry that's been rife with consolidation and just a lack of new ideas for almost 20 years. At the same time where blockchains are finally ready to scale and users frankly have enough interest in crypto to try something new. And so, you know, I think gaming is going to be a lot different in this paradigm. It's going to involve a lot of emerging markets, building kind of the base layer of the player base for these games, Southeast Asia, Latin America. Those are places that are right for, you know, games to really explode. But, you know, it's going to be global. You know, once those plays take hold of it, I'm sure the U.S., I'm sure developed countries are going to take notice.

Like, there's going to be a different form factor of gaming. And, you know, it just seemed like the right time, you know, especially early in 2021 to start betting on this stuff. And, you know, now we want to be the most aggressive firm in the world going after these concepts. And it just feels like an area ripe for somebody to pick up the flag and run with it. How much do you think blockchain gaming is going to be in this sort of this business? The shift is going to be the business model paradigm versus different opportunities of financialization leading in lots of different paths all at once. So basically, is it like, is it just a P to E world or is there like a hundred different games that all challenge our priors for what games look like that might work in some different way? I think there's going to be a lot of different ones.

There's going to be major studios that spin off a game that only has NFTs in it. And that's like, you know, the only thing that they do. And I think what they're going to realize is that NFTs are just a better business model for their, for any game. Board Apes sold $7 billion in secondary markets over the past year. You know, Bort Ape Y'aBi Ack Club took 2% of that. They made $140 million, you know, off of 15,000 people holding these things. It's like a very, you know, compelling business model when you can get right down to it. So we're going to see that.

We're also going to see the indie game studios who have been so beleaguered over the past 20 years, you know, where they really don't have any exit potential for their games. They don't really have anything interesting that they can build just in this super competitive atmosphere of the gaming industry as it currently stands. They're going to look over the fence, see blockchain, see all the fun things going on, and see the unique superpowers of crypto,

which are wallets, global distribution, composability, anyone can build anything anywhere, tokens, which are a new design space for growth and community building, and then just fringe internet culture, which is currently living at blockchain, and they're going to run towards it. And so we're going to see a lot of indie studios really have a new lease on life and build a lot. And there's a ton of indie studios, especially in Europe.

So that's another category. And then the last category are things like dark forests. There are things like more universal basic income experiments that are more on the crypto-native side that are built by people who have less gaming experience. And I think if I were to pick a category where you would see, you know, like the most surprises, that's probably that one. You know, like step in. We pass on that because we thought it was crazy. But obviously, you know, there's an appetite for people who want to count their steps and be incentivized to go off and do healthy things. And I think that's wonderful.

Not something that's super straightforward to appear obvious in hindsight, but certainly retrospectively, it makes sense. How much is like one of the lessons of being a crypto VC in particular that you have to just constantly check your prior assumptions about everything, especially in terms of about what like people will or won't do? do. I mean, basically everything, and I've learned that more and more as my time in crypto has progressed. And I've been in crypto for almost a decade, but I still find myself holding onto theses as long as possible. And oftentimes things challenge those priors. And the multi-chain world is a good example for that. Michael and I were so convinced that Ethereum was going to be the only blockchain that ever mattered that, you know, we passed on Salon at, I think, $2 at $1.50. We passed on Avalanche. We pass on all these things. And, you know, in retrospect that obviously, you know, was a terrible financial decision and not something we should have done.

But that specifically helped me learn a lot about, you know, when it comes to going after GameFi aggressively, the future is not going to wait. Somebody's going to go after that. You know, it just has to be us. And so, you know, being agile, checking your priors and just having a business partner that can, you know, kind of play, you know, the devil on your shoulder, just keep you honest is the most important thing. You know, I find that usually the best crypto investors come in twos, you have Fred Matt. You have Chris and Joel. You have Colin Tushar. I would say Michael and myself.

But that is such an important dynamic of having someone who's able to challenge what you're thinking in a very different way than you currently think about it. I'd love to go back and just have you double click for a minute on indie studios and the model that they have, why it isn't working for them and their motivation to move in the space. The typical indie studio exit is kind of as follows. You know, some major studio projects that you're going to make $5 million from this game. They will pay you an earn out of $5 million, but you have to recoup all of that money before you actually get it when you're in the company. And, you know, after you earn yourself out, there's no incentive to keep building the game. And so you kind of have this like M&A model that's fundamentally misaligned between Indies and majors. And that's really the only exit because these things don't really go public because venture capitalists and public markets just frankly have not been interested.

in them over the past 20 years. And so as much as anything, you know, this is going to be driven by the developers not having any other alternatives. They have to build blockchain games. There is no really other alternative for them to make money. And, you know, at the end of the day, their desire to have a financial outcome will outweigh their hate for crypto and NFTs, as we've seen on all these gaming websites. And I also love when we hit a, when we hit a nerve or, you know, we find a taboo that we shouldn't be investing in. That to me is just a massive flag to we should be putting as much money is humanly possible into these things. Another question about the game space is, where do you differ, I guess, if anywhere,

from other folks looking at the blockchain game space in terms of assumptions, what you think is going to work, challenges? I don't know. Do you have any heterodox opinions, I guess, on this game space? I think the biggest one is that there's going to be far more users of the average crypto game than there is the average traditional game. And the reason that you'll have that is just because of the potential financial incentives. And, you know, the MoBA, the League of Legends-style games, you know, there's a pretty rich Western players who have a very specific idea of what a video game should be.

And they've been conditioned for this over the past 15, 20 years. When you think about the people playing AXI, you know, these are people from the Philippines who may not have played a different video game in their whole lives. They're people who are playing this for the financial incentives. There are people who are in this open economy and building this kind of weird intersection between labor and capital that builds this interesting neo economy. And so for us, you know, at a base level, if you think about AXE and how good that game is, that game should not have had two to three, you know, million peak active users at its peak. It should have had far, far less than that. And so, you know, in our mind, these things and their ability to become these open economies lends themselves to just this ability to bring in people, incentivize, them to stay, incentivize them to retain, and nobody's nailed that model yet. But at a base case,

we assume that there's going to be a lot more players of your average successful crypto game than there is on a Steam marketplace. If you look at Steam's marketplace, which is the largest marketplace for games in the Western world, there's 12 million monthly active users. It's actually pretty small. And to think that Axi could be, you know, a six of that size with the pretty crude game that it had, it gives you an idea of where the world is going. How much do you think about, like, where does, where does blockchain gaming and the Metaverse, like, intersect for you? Is it actually part of the same thing? Is it sort of separate?

You know, and in particular, like, I'm thinking about this, you know, we just had the other side sale. We were talking about board apes and stuff. But, you know, talk to me about that. Yeah, I mean, I think the Metaverse. you know, for, for me, is basically the open economies of these games, of these brands, of these projects that you see in crypto. And I think, you know, the open economy part is the most important part because, you know, people are interested in, you know, effectively making money, employment. And, you know, a metaverse that offers, you know, finances of first principle,

self-sovereignty, strong property rights and ownership, and the ability to make money is going to be far more important and far more interesting than kind of what Mark Zuckerberg, is doing, which is he's defining the Metaverse as, you know, put on your Oculus and like, go to your grandmother. Like, or like, you know, put on the Oculus and like go to a meeting. You know, that is certainly a technology. That is not the Metaverse. The Metaverse is a place where you can open your computer and you can just make money

by participating in an open economy. That's how at least we think of it. And so, you know, for us, the only place a Metaverse can really exist is on a blockchain as a result. And so all roads kind of lead to blockchain when you think about Metaverse and all roads lead to just, you know, finance. and employment and the ability to make money as kind of, you know, that may sound bad, but those are the things that people really want.

And that's why Axi was able to grow its game or whatever you want to call it, you know, it's Metaverse to the size that it was. It's because they have finances of first principle and it's built on a blockchain. Where are the dividing lines going to fall in your estimation between I'm here because of the game or what I get to do here or existing network effects? versus the financial incentive. Let me reframe what you said about Axy. You basically came into that, probably drawing that line somewhere differently than you

would now because you're like, the game isn't fun enough. It's not going to work that well. And then it did work that well. I think this is particularly an interesting question in the context of, you know, we talk a lot about the meta entrance into the metaverse or whatever. But the one that's more interesting for me from like a if I'm competing from a decentralized is Web 3 modality is definitely Fortnite, you know, getting $2 billion

from Sony and Lego coming in, given that they have arguably the biggest metaversy experiences in the Travis Scott concert and the marshmallow concert and these things where, you know, they totally laid their hand out with those, you know, in my estimation.

So anyways, I, you know, I would love your thoughts on just, you know, what that, like, is it as simple as it's going to matter for different classes, you know, like based on different people's sort of, you know, financial, state in the world. I think that's exactly right. And fun is a very subjective term. You know, like the people who play League of Legends probably would never ever play Candy Crush. And the people

who play Candy Crush would never ever play Axi Infinity. And so, you know, the question is, is can you build, you know, something that's compelling enough to generate, you know, call it three to five to 10 million monthly active users? Once you have that, you have a platform, you have a lot of optionality. You can get people to think this is cool. You can get people to think the game is fun, and they may not even realize it. And, you know, it may be less about play to earn. It may be play and earn. Like, the earning component is a subset of your activity on the game. And maybe it isn't super meaningful. But even then, you know, if you go into the Top Shot Discords, if you go into, you know, any of the Wall Street bets, these are people who are trying to turn

$5 into $25. And, you know, there's a surprisingly large subset of consumers who probably would enjoy a game that is built to a certain level of fidelity that had financial incentives in it. And so, you know, I think people will draw the lines very starkly between, you know, the game that they would play and the game that they would not play. But in reality, I don't think it's that simple. I think you can blur the lines of what is a crypto game and what is just a normal game if you build the game in a way that is super high fidelity and super focused on the consumer. So I don't think it's mutually exclusive at all. I do think that, you know, the first 10 million players of a lot of these games are going to be from these emerging markets in Southeast Asia and Latin

America. But I think that's a great thing. That's where a lot of the world's culture actually comes from. And if you can embed that culture into your game, you have a really strong shout at making something very successful. Does that make you interested in going and trying to seed or find entrepreneurs who are from those places who have a better understanding of the audience that they're likely to have? Yeah, I mean, we were just at E3O last month and like the energy down there is unbelievable. You know, everyone loves crypto. Everyone's trying to figure out, you know, a way to use crypto in a way that isn't just trading or swapping or, you know, hedging their local currency risk. And I can't highlight this enough. There's only one game that's live. It's axi. And like,

it's had kind of a rough go over the past few months. And so nobody really wants to play it right now as a result. But like those economies, those developers, those entrepreneurs, they are going to be just absolutely swept up by the next cohort of games that launch. And you're going to see those markets, specifically Latin America take off. And, you know, Latin America's home to some of the world's largest gaming guild. It's home to some of the world's most successful gaming companies as well. And so there's a lot of the prerequisites that you need for these things to really become quite popular. Super interesting. I want to zoom out a little bit into your thoughts on kind of crypto from both a market and sort of a larger mainstreaming cycle. What is your perception of where the market

it is right now kind of cyclically? Is it just sort of, you know, short term, we're all going to be connected to macro and that's just the way that it is? Is it this thing where there's sort of like, you know, always something that's hitting in crypto and then a bunch of things that aren't hitting? Like, you know, just as an investor, how do you assess where we are at this moment? Yeah. So I think, you know, we're probably correlated to macro until, you know, we see either rate hike stop. We see the war on Ukraine resolve. We see. inflation calm down. But I think that's okay. You know, frankly, a lot of the things over the last cycle, we're getting a lot, a lot frothy. And unwinding some of those is very important. And I think

that work is being done right now. And you see kind of the different verticals of crypto in different, you know, kind of states right now. So you see, you know, Defi, who's really been in a bear market since, you know, May 2021. And a lot of that bear market was because, you know, frankly, these DeFi projects had made a lot of progress, but they couldn't possibly deliver on the Lafay expectations that the retail market had of them. They've had almost a year and a half to think about, or a year to think about how they scale their projects, you know, migrating a layer two is building things that people actually want to use.

And a lot of the copy paste, you know, frankly, projects in Defi have died off as a result. And so the market's just less competitive. Entrepreneurs don't have to look over their shoulder as much, you know, for people that are coming right after them after their big success. And I think Defi is going to hopefully lead us out of a lot of. of this market because those projects are going to be the first ones that are ready. So that's kind of Defy. Game five, you know, super bullish on it, obviously. The first cohort of GameFi projects were funded in January 2021 at the very earliest.

And these things are going to take two, two and a half years to be fully launched. And so you've seen GameFi ride the peak of expectations and hype and euphoria. And I think we're going to see probably a mini Game 5 bear market before these things launch. You know, right as retail loses confidence that these things could ever, you know, launch a compelling game. you're going to launch it right after that. That's usually how these things happen. And so GameFi is kind of like where Defi was probably in like May of 2021. And then you have the whole other part of the market.

You have interesting social crypto experiments, which are just frankly getting off the ground and starting to iterate as to what they might actually look like in the future. You have a lot of infrastructure, custodial wallets, custodial bridging, custodial payments being built out. I would say at a high level, you have kind of all of these little themes that are kind of going in and out of fashion as they steadily build towards product market fit. And you have all of the infrastructure being laid for a billion plus people to be on blockchains in the near future. So, I mean, obviously, like, I am very, very bullish on crypto and, you know, I'm going

to be in this industry for 40, 50 years. I'm a crypto lifer. If you don't have that perspective, I could see how it would be challenging to, you know, pick your spots. But it's just so important with crypto to just, you know, when things are going poorly, just sit on your hands, keep building, keep investing, keep planting seeds. And that's where our perspective is right now. You know, it might be a challenging year.

I think a lot of startups are going to be pivoting and doing soul searching. But that's also healthy. It's part of the game. Yeah, I think that's an often overlooked point. I mean, we'll see how it all resolves and plays out. But one of the things that I think will have been good about this cycle is that we didn't have a repeat of 2017's, you know, parabolic move up and then blow off top into, you know, chaos and freefall, right? It's like, like wind has been let out of the sales of a lot of these

sub areas. Even NFTs at the beginning of this year seemed like they were defying that for a while, but then it finally hit, right? And there's, you're actually seeing differentiation between the things that people are most excited about and what they're not. And that's sort of just enormously healthy in a market. If for no other reason, then there's only so many people to go around and you want them working on things that are, you know, that not going to actually work, you know, within reason. Exactly. And entrepreneurs have a hard time focusing during bull runs. And, you know, it's hard when you're supposed to be at the birth of an industry, but everyone's getting super rich. And like, it's hard to buckle down and focus on the things that actually matter. And that's what we've been able to do with people over the past, you know, six months is really kind of focus on, you know, what are we actually building? Do you have product market fit at what level? Like, do you need to pivot? Do you need to refocus the company? Do you need to shut it down? Those are the really difficult conversations that are going to be happening over the next six or 12 months. But it's all in service of getting to a better place for crypto, and it's going to happen. You know, if you stay in this industry, if you build the right things and if you're early to the specific themes that end up mattering, it's hard to go wrong.

Yeah. I mean, the other interesting dimension of this, too, again, not to beleager the 2018 comparisons or lack there of is there's so much, there's so many firms both from a project perspective as well as from a venture perspective who are really well capital. who can continue to deploy against building the things that are going to go out and be successful and get the next thing. It's a very pernicious cycle. When capital drives up and people stop building, it's going to take longer and longer and longer to get out of the bottom of something because there's nothing interesting to bring people back in, right? I guess the dimension of this that I wanted to ask, though, is so Barry Silver tweeted the other day, things have gotten mighty quiet on the venture side of things in crypto land. Yet valuations are still insane and I'm not seeing companies yet try to

slow their burn. Feels like the calm before the storm. I just wanted to gut check and see, like, is that your experience? Are you seeing similar things? Like, you know, are you noticing projects and startups sort of respond to this market? I think over the past, I don't know when very tweeted that, but over the past, you know, probably month is where we've seen startups really just readjust their expectations. You know, it used to be them setting the prices in a very competitive process and you were either in or you were out. And, you know, It's tough to operate an environment when you're doing venture that way. It feels like gambling. You don't have all the information. They may have some asymmetrics on their side. And you have to make a decision in two days. It's gone from that to them being price takers. Valuations coming down. Reassessing what's burn relative to profitability. Where are we going? What do we expect our next round to be at? And I think that's also healthy. It's been probably too accommodative to entrepreneurs over the past two years. But it's all again part of the game. You know, our entry prices don't really change much, frankly.

Like, we're a seed firm. And, you know, things don't really, you know, get cut by 90% at the seed level. You might see some movement. The things that change are our exit prices. And, you know, we're a long-term venture fund. And so we're not really selling, not doing anything of that sort. And I can see if you were, you know, holding on some positions over the past five years and we're looking for the second half of this bull market to really sell into. You might be disappointed, but it happens.

So this has been an awesome conversation. And by way of wrapping up, I guess I just want to ask, you know, do you look out over the rest of 2023? What's the one thing you are most nervous about? And that can be as sort of like big picture or small picture detail as you want. And what's the thing that you are most excited about? In terms of, you know, a couple of years or probably a year ago, the thing that I was most nervous of was just the regulatory and the political posturing. around crypto. And, you know, there was a period of time where if people wanted to kill crypto, they very much could have. And I think fortunately that time has come and passed. And the industry has really, you know, come together to lobby to, you know, support midterm candidates that are very pro crypto. And I think that you're going to see in the midterms of this year that crypto is one of the defining issues that really pushes the midterms one way or the other. And I think that's fundamentally positive. So not nervous about that anymore. You know, I would say that, um,

The things that make me nervous are just, you know, companies are building in this space. There's new themes. The technological and infrastructure side is shifting under their feet, which chain do you build on? Building some cohesiveness within crypto with regards to, you know, limiting the fragmentation, improving the consumer experience, not making consumers have to go a million different places to try a million different things in a really hard UI environment. You know, that's kind of what I would love the industry to focus on and some sort of standards around that. So that's kind of one thing. But the thing I'm most excited about is just the perpetual

optimism, the interesting entrepreneurs that come to the space, the new themes and the new just mediums that people are building on. Like, it's hard to be bearish on this space over a medium or long-term time horizon when all that's happening. And so, you know, with me always like the optimistic and the, you know, the potential for this industry become something that's systematically important always outweighs the potential downsides. And, you know, this will be a year of building. It'll be a year of soul searching for a lot of people. But I think that's good. Awesome. Well, Vance, so great to have you on the show. Really good stuff. Let's definitely do this again soon. Thank you, Nathan. Appreciate it.

Reflecting on that conversation, one of the things that stands out most strongly to me is this gnawing sense I had while talking to Vance that even the terms that we were using to discuss things. Social network, gaming, felt sort of inadequate, almost pre-outdated. And I think what's underlying is, that is there's a convergence of all of these things that are competing for human attention in such a way that it's not going to just be which games do people like better than other games, but how do the social networks of the future that people spend their time on compete with every other type of experience that people spend their time on? I haven't had the chance to fully bake this out yet, but I think it's at core why I find the discussion of the quote-unquote metaverse so interesting.

What's clear is it is going to be an interesting few years, and I'm excited to be here along for that ride with you guys. Thanks again to Vance for joining the show, and thanks to my sponsors for supporting this show, nexo.io, near an FTX. Finally, thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesks Consensus 2020, the festival for the Decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for

crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coin desk.com slash consensus 2022.