The Breakdown - Tom Shaughnessy on the Big Metaverse Bet

Episode Date: December 30, 2021

This episode is sponsored by NYDIG. On this episode of “The Breakdown’s” “End of Year Extravaganza,” NLW is joined by Tom Shaughnessy. Tom is a co-founder at Delphi Digital, where he invests in early-stage innovation in the crypto space.  Find our guest on Twitter: @Shaughnessy119 Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. - “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. Adam B. Levine is our executive producer and our holiday theme music is “Spike The Eggnog” by Two Dudes. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: tolgart/E+/Getty Images, modified by CoinDesk.

Crypto gaming is huge. I mean, it's like, it just works, it clicks, and it's easy. You have a zillion people around the world gaming. They understand the value of owning their assets. They will soon understand the value of being able to play and earn money and accrue value and to be able to take it with you project to project. And these are also gamers that are tech savvy and understand the flows and they could really pick this up quickly. 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 Nidig and produced and distributed by CoinDesk.

What's going on, guys? It is Thursday, December 30th, and it must be the section of the breakdowns end-of-year extravaganza where I focus on the crypto-VCs. Yesterday I had Catherine Wu from Coinbase Ventures, and today I'm delighted to welcome Tom Shaughnessy, one of the founders of Delphi Digital. Delphi is really notable because they got their start in this space as a research firm, as a consultancy, but they have become so much more. They still have those arms, they still have some of the best research and professional-level content out there, but they've jumped into the world of not only investing, but actually helping teams design their companies for a new way.

Web 3 world. Because of that, obviously Tom and I spend a lot of time on some of these frontier spaces, and I'm really excited to share that perspective. These are the types of projects that certainly aren't inevitably big-picture power shifts, but are also probing the ground for areas that could be ripe for disruption. These guys were early to Axi infinity and the whole play-to-earn movement, and so I'm thrilled to bring you Tom's perspective on some of the things going on in the crypto industry right now. All right. What is going on? Tom, welcome to the breakdown. Great to have you here, sir. Nathaniel, Matt,'s known you for a long time. I'm really excited to be on. In my head, I've had you on the show a bunch of times, but I haven't. Kevin's been on a couple times talking about macro stuff, but this is actually, I think, our first time, which is ludicrous and much overdue. But this is the perfect time to do it. Obviously, you in your role get to spend a lot of time looking at, you know, the industry as a whole, but I think some parts of the industry that other people might not have visibility into yet. So that'll be a cool, cool, cool.

perspective to share. Let's start with kind of the big get everyone going question, which is, what was the most important story in the crypto industry in 2021? And that could be a single event. It can be a trend. And it also can be just what you thought was most important. But maybe it's not sort of definitively so. Yeah, that's a good question. I mean, borrowing from from your line before we got started, there's a lot of obvious ones, right? You know, you have multi-chain adoption. with Solana and Terra and Pocod and others in Cosmos. You have NFTs and Dow's taking off. You have real utility, right, for NFTs and actual D5 projects.

I think L2s really hit their grind, right? Like you have real projects like DydX and immutable launch on Starkware. We have a bunch on Arbitrum. You have ZK synx. We're seeing that happen. I think one of the coolest things, though, not definitive or in absolute terms, is the biggest event, but I think the most interesting to me is that Dow's are really starting to take off, right?

I think we're a little short of Dow tooling, right? Like you can't log on to a Dow and do everything you want to do from one place yet. But I think we're seeing the cultural move over and I think it's starting to work, right? Like you had Meta Cartel Ventures, the Lao years ago. I think, yeah, they're all still running. But now you have things like Pleaser Dow, which is a collection of like an incredible group of people in crypto. And they're buying the most important pieces of art ever, right? like Wu-Tang album, Snowden, etc.

So I think Dow's taking off mean a lot because they will completely replace the entire historical corporate structure we have. They'll lower the barriers of entry for anybody to get involved in a community, right? Whether that be for an investing standpoint or whether that be a club around something else. But I think once we build up the tooling, I think Dow's taking off next year will probably just be super obvious and super welcome by the space. what do you think is the thesis that's driving Dow's right now? And by that, I mean, is it just, you kind of intimated it when it comes to replacing the corporate structure. But I want to just

push on this for just a minute. Is it about cool people getting together to buy things? You know, what is the what is the kind of the driving force that's pushing people into that arena? Yeah, I think it's just a lower barrier of entry, right? Like, you could be in Africa, in China, in California. And if you have specific domain expertise for a particular group, so maybe for Pleasuredow, it's identifying artwork,

maybe for an investment of Dow, it's identifying projects, maybe for a D-5 project, it's doing the economic modeling for how that'll work. If you have those skills or any skills, you could join a group of people, a.k.a. Dow, and you could be involved,

you could have upside, you could be incentivized. It's just so easy for people to get involved and to work together. And frankly, I think that's super interesting because like that's the dream of crypto, right? Global access by anyone who has a great idea, full global meritocracy, anybody can get involved, anyone gets incentivized, and they could all build together. So I'm pretty excited for it. Dow's might come up again, but I want to kind of go a little bit more broad for another question. What's something that happened this year that you would never have predicted going into 2021? That's a good question. I feel like everything has happened.

right? Like, I could barely keep up with the news flow from projects. As for something that's happened that I couldn't imagine, I mean, I think the rise of art blocks was really awesome. I mean, they've obviously been around for a long time. But I mean, the rise of art blocks, and for those who don't know, it's just, you know, generative art and they curate it. There's three tiers. We don't have to go into it. But I think that means a lot for the space, right? Because you you have validation of NFTs, you have validation of real artwork and real curation, and people love it. And they're rallying around the whole idea of what it means to have digital art, the providence, the authenticity, everything online. You can create communities around it.

Squiggles is the first curated drop, I think, on our blocks, and you have squiggle down now, right? So that's interesting. You have projects like Gen Art that's flipping that model where it's membership and anyone gets involved, so you're already iterating a bunch. But I think the rise of NFTs on the art side have been quite interesting this year. If you remember at the beginning of the year, like, it really wasn't too important. But now you have NFTs with real utility. They've taken the artwork a step further. So with generative art, you know, you click mint, code runs and you get your output of what that art looks like. But now people are taking that a step further, right? You have altered state machine, which has insane utility with their NFTs, right? Like, these are going to be

NFTs that own a model that learns over time. And you can use that model for any AI use case you want. If Delphi wants a chat bot, Nathaniel, if you want a little companion to, you know, walk people through the initial sound checks on the podcast, or, you know, if I want a player in their first AFA game to learn over time and get skills, you can do that. You can train them. So long story short, I think we saw a rise in art-based NFTs, but now we're seeing real utility go into them. So that maybe gets into kind of a little bit of a next question, which is when the future looks back on NFTs in 2021, what are they going to think? I mean, it sounds like your answer is kind of step one of a much bigger process. Yeah, I think they're going to see a lot of garbage too, right?

Like there's a lot of these BFP projects that are like literally copy and pasting, you know, hurry up and mint. I think a lot of them are terrible, right? But the things that I would say shine are the real art that matters, like the art blocks, the gen arts of the world, like those collections that have real thought that really push the bounds on what you can do with generative art. I think that's super interesting. I think eventually on-chain art, digital art, just laps the traditional market. Like, there's no way traditional market could compete with this.

It's just straight up boring, right? The other thing I think is that projects launching NFTs that have real usage in something bigger down the line will be important, right? Crypto unicorns, an investment of ours, just like others I've mentioned on the pod so far, like they did land sale recently. That has real utility down the line. Like Embers sort, a major game, a AAA ready game, has a land sale recently. Those are all NFT drops that will mean a lot in the future. So I think people look back and they'll see a lot of garbage, but they'll also see a lot of NFTs that do or will represent real utility in the projects that they're for in the future.

NIDIG, the sponsor of this podcast, provides banks, corporate treasuries, pensions, and hedge funds with ironclad Bitcoin custody and white glove service. Learn more at NIDIG.com slash NLW. That's nydig.com slash NLW. Let's talk about market cycles a little bit. And I know that obviously in your role kind of looking early stage, it's a bit different. But, you know, there's been a lot of debate this year around. whether the four-year halving-based cycle still is kind of the dominant force in crypto,

or whether there's a super cycle or whether there's micro-cycles. How do you think about that both in terms of just your observations on the space as a whole, but also in terms of how you operate or think about investments? Yeah, that's a good one. I mean, long-term, like up and to the right, like I think crypto eats the world, zero doubt, obviously stealing and adapting that quote. but yeah long-term crypto adoption is inevitable. I think it gets a little weird sometimes, right?

Like we see all this validation from like Adidas and major companies and we're like, oh, the top is in. But, you know, that's also like the concept of that is also adoption, right? Like we, the goal is for crypto, Web3 NFTs to be everywhere. So we're scared to see that adoption. But we're also, you know, that's also what we're looking for. Right. So I'm pretty interested kind of about that.

on market cycles, it's hard. I'm not a trader. Don't use leverage. Not smart enough. Don't watch my computer enough. But I guess what I could see from the early side is when valuations just get completely out of sync with the market are fundamentals, right? When we start seeing projects raising, you know, 100 mil, 150 mil rounds.

And when I say that number, I mean fully diluted value for the token because a lot of projects will have a multiple on the equity for the warrant or on the pro rata. Then it starts to get a little weird. and they're raising major rounds for a white paper or a demo gets tough. You know, marketing trailers for a game or one thing, you know, the multi-year timeline to build it out is very, very different. Super interesting. Let's talk about, I guess, sort of builds on your role and what you spend time on.

What's something that you're paying attention to, that you're surprised more people aren't, or that still seems kind of under the radar relative to how much of your brain space it picks up? Yeah, I mean, Dow tooling and Web3 have taken a pretty big window recently, right, past couple of weeks. I think people are still trying to figure out what Web3 is. You know, is this just that, you know, Nathaniel owns his data or is it something larger, right? Like where I have a social token with a market cap to it or, you know, is it basically Web 2.5 where Facebook or meta just adds custodial NFTs and good luck. I think we're still trying to figure that out and what Web3 actually means. What I will say is there's a lot of really smart founders who will figure it out,

and they'll get the feedback in their community, and they'll implement. And those are the founders we're looking for. So if you're raising for a Web3 project or frankly any project, that's super interesting. My DMs are always open, and we've invested in projects right off of DM intro. So always here. What's something that you expected to happen this year that didn't? That's a good one. I frankly expected a little more regulatory clarity.

I'm no lawyer. I think everyone in the government is doing a great job. And obviously, crypto is a brand new technology that is hard for even us to understand. And it flips a lot on its head. But I was expecting a little bit more clarity to make it easier for developers and builders. and those forming projects in the formation stage to comply with or to understand, right? I think everyone's doing a great job, but, you know, I think the U.S. wants to maintain its stance as the leading technology country in the world.

And I mean, if they want to do that, we're going to have to adapt a little bit to make sure that crypto can thrive here instead of fleet other countries. Do you think having kind of observed the nascent battles around regulatory, stuff. How relatively optimistic or pessimistic are you going into next year? Short term, probably more pessimistic. I don't think the government moves that fast. I think there's a lot of people trying to make a name for themselves on both sides and picking out the most gorgeous girl at the party and yelling at her as the stance that's probably current happening. I don't know if that's a great comparison, but kind of feels like

crypto is that girl at the party right now. But long term, I'm very bullish. I don't think that you can realistically put any of this back in the bottle, right? People all around the world are building these projects. They're all involved. They're all incentivized. It gives power back to the people on every dimension possible. So I don't think you can get this back in the bottle. So I think it will have to be accepted in some fashion.

And I think that the government is willing to do that eventually. So I don't think there's a major rift, but I think eventually everyone will kind of fall in line and we could help build crypto a little bit faster. What do you think are the biggest risks to the industry going into next year? That's a tough one. I mean, bugs and hacks are always one. You know, you have a lot of new projects on new chains, which I love. We're a huge fan and investors in a multi-chain world. Those are projects on Ethereum, Terra, Solana, Pocodot, Cosmos, specific chains.

Like, take your pick. So we're all excited. But that introduces new risks. You know, everything has to be audited. out in the wild. Everything's constantly changing. So I think hacks, bugs are big. The other thing is just the market being completely disconnected with reality, right? Like valuation is getting too insane where, you know, the fundamentals or adoption just frankly just can't keep up. I'll preface it with, I think, that crypto eats the world. But, you know, that's a long term, you know, decades long view,

not a six-month view. So I am a little scared when I see my friends who aren't totally with it, making tons of money usually scares me. Coinbase being a number one app usually scares me and various indicators like my Uber driver pitching me NFTs or specific coins. Those three things are usually what I look for to see if the top is on. How mainstream did crypto get this year? I mean, is this mainstream now? Are we just scratching the surface? It feels to a lot of people like there was a big shift, but how pronounced was it, do you think? I think it was big from a press, perspective, you know, companies partnering, press releases, we're going to do NFTs here. This is why we love Web3, whatever. Like, I think that was big. I think actual adoption by their end users has been small. So I don't think like those seeing the Adidas drop are like now crypto bulls, right? But like it's a process. It'll take time. So I think from a exposure perspective high, I think from an adoption perspective by the broader world a little bit, a little bit less. I mean, I guess that would make sense, right?

Just in the sense that there is a natural media halo that's differentiated from how many kind of people come in. But it's interesting. So one of the questions or one of the discussions that I've had with a lot of folks on these end of year shows has to do with sort of the changing sophistication of more institutional investors coming in this space. have you guys seen a shift in terms of the type of people you co-invest with or the type of questions that people who are in, you know, kind of coming from an institutional background, the type of questions they ask, basically just want to understand from your kind of insider view that you have relative to what you guys do, what you've noticed or observed on that front. Yeah, it's a great question.

I mean, we absolutely have. I mean, you have mega firms, traditional firms entering the space that are leading deals, building projects, Tiger Global, jump, take your pick, major banks. I think the stuff out of the major banks is still cringe as hell, you know, these permission chains for clients, like, you know, go back to 2016, 2017. Like, that's all a joke. But I think the level of, the level of intellect and depth and thought from people in the space, especially the traditional investors, has gotten really big. It's funny. I think Suu tweeted out the other day, like, what's the real risk asset? like it's like traditional equities, right?

Not being crypto, but it's true. Like people are starting to understand that, you know, just from a returns perspective, it's more interesting, but also just from a, you know, where do you want to spend your time and who do you want to interact with? Like, this is the place to be, right? Like the smartest people are in crypto, they get all their smartest friends. They all learn from each other. And the traditional world can't compete.

So it's a one way street to crypto from Tradify. No one goes back. If they go back, I don't know. Eventually, they'll be replaced by crypto, I guess. Yeah, the class of people we're dealing with has gone way up. What is something you're pessimistic about for next year? And what's something you're optimistic about for next year? That's a good question.

I mean, I'll take the optimistic side. I mean, I'm really optimistic about L2s on Ethereum growing in a big way, right? We've already seen Starkware take off from being really complicated. code in a multi-year process to trustlessly scaling Ethereum in a real way, right? Like immutable X, D-YD-X. These are projects people are actually using for a real use case, right? Mutable, you could trade NFTs for nothing. D-Y-D-X is a real exchange.

Like, this stuff really works, right? It's no longer, you know, marketing or hype or white papers. And I think it's early, so people might be missing a little bit, but like that's how you get real adoption. And if not on Ethereum with L2s, you have stuff like Terra and Solana and others really iterating and really capturing a lot of the market. So pretty optimistic on L2s and other L1s going into the nearer. Is there anything that you're pessimistic about?

I mean, your job is kind of not to be pessimistic by disposition, but. On the inside, pessimistic, outside optimistic, right? I mean, I'm definitely pessimistic on short-term regulations. I don't think COVID's fantastic, obviously. I actually feel really bad for all of the money printing going on in the world. I think for people that don't own assets, it's really going to, you know, really negatively impact them because inflation is just going to run rapid. It already is. I mean, I just saw a tweet that like housing rents up like 20% or something like that's insane.

So, yeah, I think people are getting like, traditional media is trying to say there's no inflation. but meanwhile, I think people are really going to feel it in the coming months. So I just feel bad about that. There really is no solution other than potentially get involved in crypto or real assets if you can. What was the story of Defi in 2021? It feels kind of like it, I mean, obviously TVL grew hugely, but at the same time, it feels also like people expected it to have a bigger footprint this year than it did.

What's your take? Obviously, you spend a lot of time more deep in that than certainly I do. Yeah, I mean, look, defy is hard to understand, right? For the normal person, they have to understand incentives and token econ and economic attack vectors and risk and modeling. What pushed it to the side was NFTs and Dow's and communities, right? People could buy a squiggle or, you know, a punk or something and it's easy. They could show it off. They get involved with their friends. They join a community on Discord. Like, it's just easier to do stuff that wasn't defy this year. And the other thing is defy this year got super complicated, right? Like the L2 adoption, uniswap v3, like the drama around

certain protocols, like it was complicated. And the other thing that fact that is defy was happening on other chains, right? Like avalanche and Solana and others. So I think defy went horizontal to other chains a bit and people on, say, Ethereum focused a bit more on NFTs and Dow's and stuff like that. So a bit of a jump into the shiny new thing. What's one prediction you have for next year? I'm not totally sure. I think one prediction would be a lot of clarity from regulators on what we can and can't do. I think we'll have to level the playing field.

I think we'll have to make it available for people to actually build here in a real way while knowing what they can and can't do. And I think that will unlock a lot of growth. Kind of a non-answer, both. No, no, it's totally reasonable. Last one, because I want to actually extract a prediction from you, regardless to some extent, is you guys were obviously some of the earliest to crypto-powered gaming and play-to-earn and sort of these phenomena. There's something that you guys formed an early conviction around. You had a hand in helping shape a bunch of different ways that people were thinking about those systems. How big a deal is that sector going to be next year in the crypto space or even beyond the crypto space. Oh, crypto gaming is huge. I mean, it's like, it's just works. It clicks and it's easy, right? You have a zillion people around the world gaming. They understand the value of owning their

assets. They will soon understand the value of being able to play and earn money and accrue value and to be able to take it with you project to project. And these are also gamers that are tech savvy and understand the flows and they could really pick this up quickly. I mean, we're extremely active on the gaming side. I mean, we did Axi years ago at this point, but I mean, I wish I could share all the deals in our pipeline on the gaming side, but I can't right now. But I mean, if you're following along at home, there's a bunch we released like crypto unicorns to Embersword to Alluvium and a bunch in between. We're really excited to share. But yeah, we think that gaming will be obviously massive.

We think it's going to happen on chain for settlement. chain for obviously the compute and the gameplay. And we think it's going to be a really big deal in the coming year. So yeah, if I had a prediction, it would be bullish gaming, but obviously not financial advice. Awesome, man. Well, listen, been super fun to have you here. Appreciate what you do for the space and all the thoughts. And I hope you have a great holiday season. Yeah, Nathaniel, I love coming on, man. You're one of the best hosts in crypto, just a normal dude. And I love talking to you. So I really appreciate you have me on. And I always love listening to your episode. Cheers, bud.

By way of wrapping up, I just want to thank Tom again for joining the show. It is always great to have anyone from the Delphi team here, and Tom is no exception. I appreciate you guys listening, and until tomorrow, be safe and take care of each other. Peace.