The Breakdown - What Crypto Needs to Build Next, Feat. Qiao Wang

Episode Date: July 26, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   Qiao Wang is a creator of and core contributor to Alliance DAO, an accelerator for Web3 companies in decentralized finance (DeFi), infrastructure, distributed autonomous organizations (DAO), non-fungible tokens (NFT) and more. In this episode, he and NLW discuss the macro landscape, how this bear market is different and what he’d like to see entrepreneurs build during this quieter period.    - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - 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. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit:Westend61/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

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 nexus.com, and FTCS, and produced and distributed by CoinDes. What's going on, guys? It is Saturday, July 23rd. And instead of our normal weekly recap, we are rounding out midsummer macro with Chow Wang. Before we get into this conversation, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.le slash breakdown pod.

Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. So for this final episode of this mini-series on Midsummer Mechro, I am excited to welcome back returning guest Chow Wang. Chow has done a ton in the crypto space, with his most recent contributions focused around Alliance Dow. Alliance is an accelerator slash startup mentorship program that works with companies in defy, Dow's, NFT, infrastructure, and more. Full disclosure, I am also an investor in alliance, but much beyond his work in that front, I've just long found Chow to be one of the most insightful, clear-eyed thinkers and communicators in the crypto space. In this conversation, we talk about how this bear market is different, what he believes needs to get built,

and most of all, why he can't see any long-term reason to be bearish. Without any further ado, let's dive in. All right, welcome back to the show. So good to have you here again. How have you been? Good. What's the latest in your world? I see you kind of moving effortlessly in between big picture, kind of helping people ground themselves and where the market cycle we are all the way down to very specific specifics of what we need to build next. But is that where you're living right now? Yeah. We just wrapped up our latest demo day where 16 of our best teams graduated,

basically top 1% of all the teams we've seen. Work very closely with them, both on the big picture as well as the super detailed go to market strategy, token design, that kind of stuff. Amazing. So we're going to get into Alliance and some of the specifics that you guys are both seeing out there, but also what you're interested in seeing. But I want to kind of start on a slightly higher note, I think, first. And just get your sense of kind of how you see the setup right now, how you see this bear market,

what to you isn't different about it, as opposed to other market cycles crypto has gone through. I think this bear market is mostly different, actually, from previous bear markets in a sense that this is primarily a macro-driven bear market. And in fact, the rise in 2020, the outside of the. bull market was arguably also driven by macro, right? It was when COVID hit and then the Fed started easing, right? And now the exact opposite is happening. And so like, you know, I think right now the the most incorrect consensus view in crypto is that we're going to see a long bear market in the exact same way as all previous bear markets. But I think that the fact that this last bear market

lasted four years was more likely a coincidence because if the Fed did not actually tighten in the in November last year. We could have easily had a five-year or six-year ball market, in my opinion. So moving forward, we're going to be in a new regime. I think the regime of four-year crypto cycles is over. The new regime we're in is a three-way tug-of-war between growth, inflation, and macro. Basically, it all boils down to the Fed and the economy. Yeah. I mean, it's super interesting. I mean, this is a lot of what this shows about. So I'm very kind of aligned here. I want to actually kind of dig just a little bit deeper into this on a couple points because you had a great tweet recently about kind of why you can't find a good

reason to be bearish if you kind of zoom three-ish years out, right? And the three reasons that you mentioned roughly speaking in terms of why not or kind of things that people are bearish about that you're not so sure about are one contagion not being as bad as everyone thinks or not necessarily being as bad as everyone thinks. Two is the temporariness of this Fed tightening. And I want to dig into that a little bit more with you. And then third is sort of the inevitability of regulation. So I want to just kind of take a minute on each of those beats and just kind of talk about, you know, maybe we'll start with the contagion piece. So the contagion is obviously really, really, really, really bad. And it's actually a lot of worse than I had originally expected when,

like, before three arrows. Like, I did not expect three hours to blow up at all. I knew that people who are close to three arrows also did not expect it. So the contagion was really, really bad. However, what's important here is that the contagion is not the cause, but the symptom of the bare market. What actually triggered the bear market was the tightening. And even if three hours did not blow up, the market would find another way to de leverage itself. And that is a symptom, not the cause. That's one thing that's very different from this bear market to the previous one. I'm going to ask, like, do you think also, you know, obviously we are kind of instill in the eye of that storm where it feels very present. But, you know, to the extent that there are a number of folks

out there who think that while there's still potential pain in the market themselves, you know, we don't necessarily have that much more contagion coming down the pipeline. Do you think that we might kind of reevaluate our assessment of even though Three Arrows was such a remarkable outlier, it will feel like an outlier looking backwards in terms of what could have been in terms of how much leverage there was in the system and how much could have blown up that actually didn't? A certain thing, three arrows is an outlier. Again, the fact of the matter is, Three hours is just one of the many ways in which the market could have delverage itself. I mean, it sounds like your thesis is kind of like there was going to be some amount of

deleveraging. It happened to come in this sort of cataclysmic feeling, you know, single implosion with a bunch of ripple effects kind of way instead of a number of smaller institutions kind of leveling up into something bigger, you know, however else it might have delveraged. That's right. So that was one piece of this kind of thesis was around the contagion not being as bad. The other kind of two parts that you mentioned, there might be more, but in that particular their tweet was the inevitability of regulations, what feels like sort of the inevitable temporariness of this tightening of monetary policy. Yeah.

I think the biggest problem that's happening in the U.S. right now is the level of national debt, both public and private. There's actually no way. I don't know the exact numbers, but there's no way to keep the interest rate at well above 5%. Like, there's no way for the debt to be sustainable. In the long run, the U.S. has to inflate the debt away via inflation. via negative real rates.

And real rates is basically the difference between inflation and nominal interest rate. So they can't keep the nominal interest rate very high or else the country is going to go bankrupt. And so this tightening right now that's happening right now cannot be sustainable. They have to keep the real rate of interest at a negative level. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side.

Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi,

gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk. The breakdown is sponsored by FTXUS. FDXUS 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 FTCX app today and use referral code breakdown to support the show. This is, I think, the place where short-term meets the long-term view, right, if you have it, the Fed seems very intent on not kind of, Jerome Powell keeps talking about how he's not going to be another Arthur Burns, right? He's not going to back off too soon with the, you know, like the Fed did in the 1970s. He's not going to let inflation become endemic. But is your base case then that, you know, maybe they stick with it. They kind of even drive the country into recession. But once this sort of 9% inflation starts to meaningfully come down, they just back.

off and we go back to the same sort of secular regime we were in before? I think the tightening is temporary. However, the secular regime is actually different. It's going to be a high inflation regime. So that's the extent to which things are different right now. But the point being, I think Jerome and the Fed is trying to pretend that they're fighting inflation. In actuality, they cannot fight it.

They have to pick between national bankruptcy and inflation in the long run. And they just can't pick inflation. One of the interesting things is they're going after the only lever they have, which is demand destruction. And to some extent, it feels like the play from almost an optic standpoint is just to push on the lever they have until hopefully, you know, people stop doing things enough that the things that they actually thought were causing inflation in the first place, i.e. supply chains can resolve themselves. It's almost like their assessment of transitory wasn't even necessarily wrong. It might have just been like four years transitory to get sorted. And so now they have to

kind of grind things to a screeching halt while it catches up or something like that. One interesting insight that I read is not my original thought, but I just want to share it because it's really interesting. The fact that in the 2010s, we've done a lot of QE. However, the QE did not generate any inflation. And that was, again, by and large a coincidence because the 2020s was a decade of very strong stock market and very weak commodity market. So the money that was printed went to the stock market reflexively. Whereas in this new decade, it's likely that the stock market is going to be weak because it was very overpriced, whereas the commodity market is in a secular bull market. So if we do QE now, that money will actually flow into commodity market,

which by definition generates high inflation. It's a self-reinforcing loop. Super interesting. We can talk about this piece all day, but I want to get to the other piece, and then I want to kind of dig deeper into some of the industry stuff too, because you have so many interesting thoughts there. But I guess the last piece is just the sort of inevitability of regulations. Talk to us about that for just a moment. I mean, regulations were always going to come. It was very obvious in the 2018 cycle. Like after all that bull-ed with ICOs, all that stuff, it was inevitable. But I think right now it's possible, but it's very unlikely for G7 to improve. pose a full ban on crypto because of the amount of percentage of the population and politicians

who already own crypto. It's just very hard democratically to go against these people. So regulations are going to come, but it's very unlikely to be a full ban. I agree with that. I mean, I think that everything that we've seen in the U.S. this year is like broken to the upside. If the upside is more positive than we might have expected, you know, not that there aren't still like a lot of very specific, discrete, problematic battles that could be have in terms of the nature and shape of the industry. But by and large, you know, there's literal zero talk of U.S. bannings of the industry. And instead, a bipartisan group of senators proposing, you know, kind of this middle space between securities and commodities to define

these assets. It's just, I don't think anyone was kind of expecting it to be that level of discourse, you know, from the U.S. government this year. So the final part of that tweet was sort of more like the flip side, why not just why reasons not to be bearish, but reasons to be bullish. And what you specifically kind of pointed to was record number of founders applying to Alliance and your biggest, single most important metric of developers coming into the space in terms of its long-term health. So with that, let's segue to Alliance. And just give us a little bit of the backstory, how it's started, how it's evolved, and where it is today and what maybe the most recent class, shows in terms of what you're seeing builders be focused on out there.

Yeah. So Alliance started a little bit before Defy Summer in 2020. It was actually end of 2019, early 2020. So arguably, we played a role in the Defy Summer. But the way we did was we matched, you know, we brought a group of people, a group of founders, some of the best startups back then, Zero X synthetics, you know, Khyber, all these guys, alongside market makers from traditional finance, like John. Jump, like Jump actually got into Defi party because of us, jump and other market makers.

But over time, obviously, CryptoWeb3 expanded well beyond Defi. Last year, we had a boom in NFTs, in DOS, you know, so on and so forth. So Alliance ourselves, we expanded into all these different verticals. So we expanded in terms of verticals, in terms of the number of founders. You know, our first cohort was like five startups. Now we're around 20. And by the way, we're not going to go much beyond that because we want to make sure that every startup gets as much support from us as possible, but keeping the number low. Basically, the two main things that we do for our startups, one is we give them our time.

We really spend a lot of time for each and every one of our startups. Some of them talk to us almost on a database. And the other thing is the founders have access to each other, they support each other. We noticed over the years that, especially for like super low-level technical stuff or legal stuff or stuff like that, token design. that kind of stuff. Founders are actually able to help each other better than investors can help them. So we would provide a network, a platform for these founders to support each other. I mean, it's super cool. I've been watching for a long time. And, you know, I was watching the demo day yesterday and the presentations. I think the slide I saw from you was that there was like

25% infrastructure plays, 25% defy, 25% NFTs, and then the rest split between Dow's and gaming. Maybe let's expand this out from just this particular class of alliance, but just more broadly. You just published this epic crypto web three startup ideas that goes through a huge number of categories. How much has that been shaped by what you've seen, you know, people applying with or not applying with in Alliance? If you'd like, let's get into maybe a few of the things that you think are most important as we go into this bear market for areas for people to focus on. Yeah, there was certainly, by and large, a new group of people that formed the NFT community. Like, if you look at the quote-unquote crypto Twitter today, the NFT Twitter is actually very, like, excluded or mutually exclusive from the OG crypto Twitter. It almost does not understand that it exists.

It's like a totally separate phenomenon. Yeah. Yeah. So the NFT stuff is net new, new set of founders. and new set of communities and users for sure. The Dell stuff is, I feel like it's primarily crypto-native. Infra is cryptonative. Defi is crypto-native.

The NFT people aren't that new to our community. Do you think that that brings actually like a positive energy in the sense of it being sort of not constrained by the same set of expectations, of, I don't know, old battles? Like, it certainly seems like nice to not have the same kind of you know, holy wars that crypto Twitter has had for the last five years or whatever. The NIT community is certainly something that really inspired a lot of new founders from Web2 and a lot of investors from Web2.

Like most of the Web2 people, Web2 native people, they don't get Defi. They don't get like the super hardcore tech, but they get NFTs. You know, NFTs touch a bunch of different things. They touch, you know, fashion, art, music, games. Games for me is probably the biggest category. of NFTs. So it really inspires a lot of new people. Definitely a huge net positive for the industry. One of the things that DeFi did that was so important in 2018, and obviously a lot of those projects had started even before that, but in 2018, after the ICO kind of tokenized all

the things narrative had imploded on itself, DeFi really returned the whole industry to its roots of money Legos and finance and kind of bringing composability to actual, I mean, decentralized finance, right? It's right there in the name. The kind of money. A lot of the Web2 folks that hadn't gotten into crypto, it was because they're not inherently or natively kind of, they don't think in money terms in the sense of financial infrastructure. And it kind of tracks that it would take something that was really outside of that moneyness milieu for them to kind of grok the Web3 idea. One of the main differences between the OG Defi stuff and the new wave of NFT stuff is

the OG Defi people, they really understand. the Lego component of the money like they really understand composability like the all basically all the the majority of defy projects that that that we see they think about how they can compose with the rest of the community on the other hand the nfti projects that started uh last year or earlier this year the vast majority of them think in terms from a web two perspective like they tried to build like an nfti Twitter or nfti Reddit or whatever they don't think they don't put a lot of emphasis on the protocol side of things. And the protocols is really what makes Web3 social or messaging interesting,

because for the first time, you're able to build multiple clients permissionally on top of the same protocol, right? The protocol can compose with other stuff in Web 3, including Defi and, you know, games and whatever, right? this fundamental nature about composability is something that that differentiates the defy OGs with the Web2 people that got into this industry last year. Super interesting observation. So what do you think, kind of broadly speaking, NFTs have had now, I mean, they had their very first gas before we were calling them NFTs with CryptoKitties and, you know, the first set of people who were kind of writing about them. And then they had their real kind of gasp, obviously, from NBA top shots all the way through the PFP projects, you know, to where we are now. What do you think is important in this sort of, you know, this bear cycle in terms of the evolution of that space?

What's important to be built or kind of ways to consider the industry that are maybe different than people are looking at it now? For me personally, the most exciting thing is gaming. I haven't seen a ton of really exciting gaming thesis, but the thesis that we have is, fully on-chain games. By fully on-chain games, I mean not just the NFTs and the currencies that are put on-chain, but also the entire game logic and the game states. So if you take a game of chess, for example,

all the rules are coded on-chain, and each and every one of the moves would be coded on-chain as well. So that's what I mean by fully on-chain games. I think 99% of games I've seen so far are sort of, you know, taking a very popular genre from traditional gaming, like first person shooters or real-time strategies and then add some NFTs into it. You could work, but that's not really what crypto is all about. What crypto is about is the ability for third-party developers to build on top of your

game. One of the best analogs for that is if you think of Defi, the truly OG Defi from Defi Summer 2020, you can think of that as a game. It's a multiplayer, online game. And MVV is one of the main game loops. And then you have a bunch of players playing that MVP game. You have real human players, right, that are trading in DFI. But you also have third-party developers building a bunch of bots on top of these DFI protocols. And they play this game of MV against each other, but also against humans, right? And this is what excites me about fully on-chain games is you allow any person around the world. to build extensions to the game, to build mods on the game,

to build their guilds of automated players on top of these games. This is what I think is going to make crypto gaming really interesting. Yeah, the way that you put it, I think, in this long note about ideas or things that you'd like to see in terms of startups was, I mean, it's a really simple way to put it, but weird behaviors that weren't possible before. And it's really hard if you're deep in the game space to sufficiently rip yourself out of what is or isn't a game

to like kind of reimagine from the ground. up. In fact, I wouldn't be surprised if in some ways, you know, interesting crypto games come out of like collaborations between non-traditional people and gamers, you know, so there's kind of not just repeating the logic of games that we have. Maybe along that, because I actually really like this, Defi as game mental model. I mean, one of the things that I thought was so interesting watching, you know, Defi summer the first time around. And even that I think has been hugely to Defi's benefit is that in many ways, it was a game where the rules and, tools of the game were sophisticated enough that it was like a very enfranchised set of players.

And I think that's been to its great benefit in terms of like things like exploits are shaken off like, oops, I lost the level, you know, then like, okay, now this is like a thing that we shouldn't do anymore and we should have investor protections because it was simply the barriers to entry are so high at this early stage that it was sort of self-selecting for people who kind of knew the stakes. Look at another area, Dow's. Like, you've had some great tweets about skepticism, not of DAO's in principle, but in terms of like what people kind of try to lump into the category of Dow's. I think you said something to the effect of, you've always thought shoehorning crypto into their business idea just for the sake of it was super cringe. So I guess how do you see,

you know, do you see Dow's as a part of this? You know, because in some ways it feels like a lot of the Dow's that people love being a part of that are super simple like we pool resources towards the things we're excited about, do have that game feel to them, you know? Like Constitution Dow was, if you reframe it in some ways, a time-limited game where it was like, can we race to get as many resources in to actually buy this real-world artifact, right? You know, what are the tools that we have available to us? It's like, okay, I don't know, who can get in touch with Nick Cage? Who can, you know what I mean? Like, how do you see Dow's in this framework of games and social experiences, but more broadly just how you see the evolution, you know, over the next couple years as well?

Yeah, I mean, the biggest problem with DOWS is the decision by committee. It's never going to work. For me, what decentralization means is checks and balances. It's not decision by committee. So the governance models will evolve a lot over time. And there's not going to be one model that fits all. It's going to be whatever model that works very well for this specific product that are trying to build. So we're going to see a lot of different models. I think that's probably the most important thing that's going to happen.

So I know we have to wrap this up. I could jam with you on this stuff for quite some time. And at some point, I want to come back and talk about bigger MacRID is. You had a great tweet coming off of listening to Abology podcast about the year 2030. But I guess to wrap up, as we dig or settle into maybe this bear market, what are you kind of most nervous about? And what are you most excited about? I'm not really nervous about anything.

This is like the first time in almost two years, I feel at peace. I feel like it's finally contrarian to be in crypto again. Last year, it was extremely stressful for me. I feel like you've come back to Twitter. It's been very nice for me as someone who watches Twitter. because of the bear market. Yeah. But excited about everything that's happening, like from gaming to infra.

We're going to build more infra because obviously last cycle proved that infrared is not good enough. We're going to build more scalability stuff, more games messaging, web-tree native messaging. I think that's going to be something I've been thinking about a lot lately. Defi is making a comeback recently, it feels like. People are getting some sort of hungover from the other stuff that happened during the bear market. And Defi did not participate in the bull market at all. But now founders are thinking about Defi again. Awesome.

Well, I'm excited to have you back, even if it's just for while, things are quiet. It's a nice counter-cyclical upside for those of us who like your thoughts. And so thanks as always for coming on the show. Likewise. Thank you. Hey, guys, back to NLW here. Just want to give one more big thank you to my guest, Chow Wang. My sponsors, nexus.com.

Chainalysis and FTX for supporting the show. And to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.