The Pomp Podcast - #237 Alex Pack - Partner at Dragonfly Capital on Why ETH is Money

Episode Date: March 9, 2020

Alex Pack is a Managing Partner at Dragonfly Capital Partners, an asset management firm focused on investing in and supporting the most promising opportunities in the cryptoasset class. In this conversation, Alex and Anthony discuss his views of the Asian crypto markets, why the Dragonfly team is focused on investing in infrastructure, how he sees certain market narratives playing out, whether Ethereum (ETH) is money, and where Alex will be focused on investing in the coming 3-5 years. BLOCKFI-----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. UNSTOPPABLE DOMAINS-----Make your crypto currency payments simple and build censorship resistant websites. Visit unstoppabledomains.com and purchase your blockchain domains today!

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Alex Pak is a managing partner at Dragonfly Capital Partners, an asset management firm focused on investing in and supporting the most promising opportunities in the crypto asset class. In this conversation, we discussed his views of the Asian crypto markets, why the Dragonfly team is focused on investing in infrastructure, how he sees certain market narratives playing out, whether ETH is money, and where Alex will be focused on investing in the coming three to five years. I found Alex to be incredibly entertaining and informative,

so I highly suggest watching this episode. Also though, let's talk about the advertisers who made this episode possible before we get into it. The first is BlockFi. You guys know I'm a huge believer in what they're doing. I'm a user and an investor. They basically have three products today. They will give you a US dollar loan against your crypto. They will also pay you interest on your crypto deposits. And then they have a cryptocurrency exchange where you can buy and sell crypto. BlockFi recently announced to users that they're going to launch a credit card this year that pays rewards in Bitcoin rather than cash or loyalty points as well. So anything that you want to do with your crypto, BlockFi can help you. They basically are rebuilding many of the

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It's kind of a portal into this decentralized world that's super cool, very user-friendly, and dumb easy to use. So go check them out. BlockFi.com slash Pomp and UnstoppableDomains.com slash Browser. Now let's get into the episode with Alex. I really enjoyed this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion.

This podcast is for informational purposes only. All right, guys. Bang, bang. I'm here with Alex. Thanks so much for coming to do this, man. Thank you. Real pleasure. You've got a real unique view of the world, I think, because you spend about half the time looking at U.S.-based companies and then the other half the time looking in Asia and China specifically. So we've got a lot to talk about. Yeah, big world. Let's start with just your background. What did you do before you were investing in crypto?

Yeah, so I'm the managing and founding partner of Dragonfly Capital. We're a global crypto venture firm. I'm based in San Francisco. My partners are based in Beijing. and we try to cover the world. So before that, I've been a VC for about five or six years. I got started at a fintech fund in Hong Kong around 2014. Before that, I was actually a college professor in Hong Kong.

And basically, this was early days for crypto. And Hong Kong has a very sleepy startup ecosystem. But at the time, quite a huge Bitcoin, you know, wasn't crypto then, it was just Bitcoin ecosystem. A lot of libertarians and finance people like that in Hong Kong. So I sort of got into the ecosystem there, and I became the crypto guy. Then I moved to AngelList, which is where we first met each other, actually. And I was a partner there.

Then I joined Bain Capital Ventures, which is the venture arm of the $100 billion AUM asset management firm. And I did a lot of seed investing and specifically sort of kick-started their crypto investing program and left that. Two years ago, started Dragonfly, and we've been rocking and rolling ever since. Awesome. And then what's the mandate with Dragonfly? Yeah, word general is crypto fund. I think it's tough. A lot of our LPs, they just want sort of single exposure to crypto, right?

And they don't know whether it's tokens, whether it's equity, and even for us, whether it's US-based or Asia-based, because our main thesis really with our fund is that a crypto, very unique amongst all asset classes and even all tech trends, is truly global from day one. So we sort of give them that diversified exposure around the world. Maybe about half of our investments end up being in tokens. Could be liquid, it could be illiquid, things like SAFs. We do a ton of DeFi protocols and smart contract platforms and money protocols. And then about half of the investments are in infrastructure, venture, very traditional venture investments. Many of those tend to be in Asia, in fact.

Got it. And so maybe give us a breakdown of like what are some of those companies that you've actually invested in? And then I want to get into kind of a spirited debate about DeFi, ETH's money, et cetera. Totally. I love talking to more. Do you call yourself a Bitcoin maximalist? Not at all. Really? Not at all. OK, great. This will be good then. Yeah, so some of our sort of bigger investments are we led MakerDAO's last round, which is the largest DeFi project and the largest decentralized stablecoin.

And we specifically helped them with their go-to-market in Asia. And then we've invested in a whole bunch of other DeFi protocols like compound finance, DYDX. These are like money markets and decentralized derivative exchanges. We're investors in Ethereum and Bitcoin, too, of course, as well as on the infrastructure side. We're in deals like a lot of U.S. infrastructure, like Arisex and Tagomi and Anchorage. And a lot of their sort of equivalents in Asia, like a brokerage called Amber AI, which is growing like crazy. A whole lot of sort of exchanges, just the entire sort of market infrastructure stack that's growing in Asia. And why the focus on Asia or kind of give us an understanding of like what's actually going on there for the U.S.-based investor or Western world?

Like what do we not understand or what should we understand about that market? Yeah, so one of the biggest misconceptions about crypto is that it's happening in the U.S. to any extent really, which is totally different. I understand why because it's totally different from the internet and even biotech and SaaS. Basically, if you're an internet company, you don't think about China. You don't think about Asia at all because the U.S. market is so large. You have so many users here that you really don't have to have a China strategy until you're at a $10 billion plus market cap. There's plenty of room to grow. In crypto, that's not true.

Crypto, and this is actually sort of my origin story. When I was in the U.S., I really didn't like Bitcoin. I'm not sort of like an anti-Fed guy. I think the U.S. dollar is one of the greatest sort of technological and institutional inventions of all time. It creates stability and so forth. And so compared to that, compared to sort of the U.S. financial system, Bitcoin and the crypto financial system is not very great. So if you're an American, really the main use case of crypto today is just sort of like the Robin Hood use case. It's just speculation, whereas, you know, when I went to Asia and was a fintech investor, I saw that these were real users of crypto that desperately need it.

The financial system is completely significantly lacking compared to sort of the Western financial system. There's, you know, the largest groups of underbanked and unbanked are in Asia, you know, China and India. but even people like middle class people and so forth and people that have smartphones there's no credit system it's very hard if you're an smb to get credit it's very hard for individuals to get credit of course all of these currencies they're often under capital controls and they're much more volatile than the u.s dollar so crypto is a great use case for them this is empirically true too if you look um we uh we pulled the numbers basically there's 16 crypto unicorns, like venture and companies. And 12 of them are based in Asia. So 75% of all the

crypto unicorns are in Asia. And I mean, they have like 5 billion plus revenues, multi-billion dollars in profits, all coming from this region. It's crazy how large it is. Is this institutions? Is this retail? Where is that actually coming from? I hear you on, hey, the people need this. But those numbers are just so large. Can it be all retail? I think it's primarily retail. Generally in China, institutions as a concept of invest as a class of investor are more of a Western phenomenon because you kind of have to – it's sort of from endowments. It's from like 100 plus year – like families make their money in the Gilded Age and they pass it on and there's institutions.

Whereas in China and most of Asia, the money is more recent. So like, you know, most institutional money is just family offices, is just like public companies that are run by specific families. But yeah, generally most of the activity in crypto in Asia is retail. Yeah, it's I mean, there's grannies, you know, that are buying EOS and are buying Bitcoin. There is actually a significant amount of the mining industry is probably institutions because it's a little harder to buy significant amounts of crypto, like 10 million plus amounts of Bitcoin in most Asian countries than in the US. So one reason why the hash rate is so large

in China, it's like 65% of the entire hash rate is in China. It's actually not because energy costs are so low. It's because it's a way for institutions to get really significant amounts of coin and sort of virgin coins in one go. Got it. And so as you guys have started to invest, the teams that you're backing in the Asian market, are these kind of teams that are native to the Asian market? Do you see teams from other parts of the world kind of moving there to service this need? Kind of talk to me about the teams and what you found as you started to invest more and more in the region. Yeah, usually it's people who at least grew up in these countries. It's very, very – I mean, look at Uber or Facebook. It's very,

very hard for Westerners to penetrate China, less so India, but India is actually just, they just had a major Supreme Court ruling in India just yesterday. So it was sort of banned before that. But the other trend that's driving a lot of innovation to Asia is regulatory flexibility. The countries there are just much more flexible with what you can do with crypto. They sort of take a wait and see approach and sandbox approach as opposed to US regulators. And so what we've been seeing, the main term we've been seeing is that, you know, typically everyone flocks to Silicon Valley. Like YC is like the new American dream. Like, you know, over half of the YC class is international and it's people from India and China and Singapore and so forth.

And that's stopped happening in crypto, really. So what we're seeing now is like it used to be that everyone in tech like wants to do a tech startup and immigrate to the U.S. Now they're just sort of staying home or they're immigrating to Asia instead. I think maybe if the regulatory disparity continues to grow, we will start to see an actual migration of Americans moving to Singapore or Hong Kong. That would be pretty unprecedented, to be honest. But we'll see. Yeah. And so then walk me through kind of you guys have a big focus on DeFi.

What's the thesis there and kind of why are you guys so focused on that specific part of crypto? Yeah, I think DeFi is a great encapsulation of, I mean, it's a great example of why, of this story of like, why so much of the adoption is in Asia. Broadly, I think, sort of my thesis on crypto is that the very early use case, it's a, you know, it's a protocol for value. And the very simplest, like least computationally heavy form of value is just money, like Bitcoin, right? It's just like a line in a database. Very simple. You don't need massive scalability to make it happen. And then the other major applications of like internet of value is the entire financial system. So once you have money, you can make programmable money and you can make sort of smart contract platforms. And once you

have smart contract platforms, you can do all sorts of things with value. You can do ICOs, which is sort of like fundraising. And you can do decentralized lending, which is like MakerDAO. And you can do decentralized lending that collateral, you could use assets as collateral to basically create an entire financial ecosystem. Because, you know, today the major actually innovation of the financial innovation of the 19th and 18th century, which were to catalyze the Industrial Revolution, was the switch to basically turning property into capital. So before, in like the 15th century, if you owned a house, you couldn't do anything with that house. It was just idle capital just sitting there. And then you had property systems, you had municipal record keeping, you had this banking industry that allowed you to mortgage your house.

And so it was easy to buy a house and you could take loans on it and you could use that to start a business or whatever you like. And so capital that's just sitting idle under your bed, very little of the money in the world is just sitting idle. Most of it has to be used to create a financial system of derivatives and lending that's, you know, 100 to 1,000 times larger than the actual base money supply or gold supply, you know, whatever, collateral supply. And so I think that's what's happening with DeFi.

DeFi is basically that happening in a fully decentralized way. So you have decentralized lending and it has all the, well, most of the benefits. It's, you know, still early, but it has most of the benefits of cryptocurrencies, which is, you know, permissionless, censorship resistant, things like that. Anyone around the world can use it, global from day one. And that's big. That's big. Again, it's not big for Americans because pretty much everyone in America can just get a credit card. And it's probably too easy, to be honest, to get like a personal loan in America, but very hard in the rest of the world.

So the ability just instantly without knowing who you are, get a loan with putting in ETH as collateral today is really powerful in many parts of the world. And so if we are able to onboard all of these, you know, quote unquote, new users to a financial system, it happens to be this new financial system. To me, the most interesting part is the tertiary effects of that, right? If all of a sudden now people have access to credit, they have access to all sorts of different financial services that have previously been available in the developed world but not in many other regions, you can really kind of propel forward human production and human development to some degree. And I just don't think we've seen anything like this before at this scale this quickly. Do you agree or disagree with that? Yeah, I mean, it's remarkable. You can read a book of financial history over the last 5,000 years and you can trace like every thousand years was a major financial innovation. Like, you know, 4,000 years ago, we invented debt and then we invented gold and other precious – I mean, not invented, but, you know, we sort of did.

We invented gold as a precious metal that became like a financial asset and then we invented sort of a payment system that is on top of gold. And then in the 15th century, we invented like joint stock corporations and a way to, you know, sort of organize organizations and fundraise for them. And then we had stock exchanges and then we had massive derivatives markets. And it takes 4,000 years. And in crypto, we've literally built that in 10 years. So it's just like this hyper fast growth of a totally parallel decentralized at this point financial stack. Yeah, technology is great. I mean, the leverage afforded to everything being open source, everything being, you know, open APIs and so forth in crypto, the fact that it's all software leads to just tremendously fast innovation.

And I think we're getting to the point in a few years where it's going to be totally new. You know, right now we're like rebuilding existing institutions. MakerDAO is kind of like a decentralized central bank in one way. In another way, it's kind of like a decentralized pawn shop. But, you know, the most exciting things in a new technology innovation are when you get like totally new use cases that are not even sort of mirror images of what's – you know, it's when you get cars instead of just horse and buggies or whatever that are a little faster, you know. Yeah. Let's go right at it. ETH is money. This is a meme that has become very popular, especially in the Ethereum DeFi community. And really, the way that I've analyzed this or kind of evaluated it is basically what ETH is money is saying is ETH is good money, right? Because if we don't say ETH is good money, then I could say ROX are money, Cheetos are money, etc. But ETH is good money is really going at this idea of kind of what you talked about like collateral, right?

And in these DeFi systems, we're seeing Ether specifically being used for certain mechanisms or products and features, etc. Let's just start with agree or disagree ETH is money. Well, I would say – I think the sort of meme on Twitter is that ETH would like to be money. I don't think anything in crypto is money yet. I don't think Bitcoin is money. And in fact, I think MakerDAO, DAI, the stable coin is probably the closest thing to money in anything in crypto. But the market would disagree with that, meaning that Bitcoin – from a transaction standpoint, the on-chain adjusted transaction volume of Bitcoin last year was just under a trillion dollars, right? Yeah, totally.

And so Maker, I don't know what DAI specifically is. It's not zero. It's definitely popular. It's like 60%, I think, of the value locked in DeFi is DAI. And so that's a real amount, right? That's not anything to kind of thumb your nose at. But at the same time, we're talking about, I think there's a billion dollars locked in DeFi, right? So let's call it somewhere in the hundreds of millions of dollars versus hundreds of billions of dollars for Bitcoin.

I don't think anything's even close to Bitcoin, but I will say that I've got a strong opinion that's loosely held. So hopefully, for your sake, you can convince me differently. But that's just kind of the way I think about it. It's like the market almost doesn't care about our opinions. And if you look at the data, the markets determine Bitcoin to be more of money than anything else. What do you think about that? Agree, disagree? Well, I think they're all striving to be monetary assets, right? And so- The cryptocurrencies, not anything else, just the ones that want to be currencies, That's what they're striving to be.

Pretty much all of them. I think everything in crypto is locked in a battle to be a monetary asset with the exception of maybe some of these like buy and burn sort of dividend kind of tokens. Like MakerDAO, it's that Maker has a token that basically accrues value from DAI going up. It's called MKR and they have DAI. So maybe MKR isn't trying to be money. But DAI is trying to be money. ETH is trying to be money. TRON is trying to be money.

And they're all on a spectrum. TRON? Everything. All right, go ahead. Shoot your shot, you know? Do your thing. Shoot your shot. Everyone's shooting to be money.

I mean, that's the innovation, right? Like, this is the cool thing about crypto, which is why it's so exciting. You know, we came from the internet. My partner, too, he's a very famous VC in China who was one of the first VCs in the internet. The thing that's exciting about crypto is that it's permissionless innovation. And it used to be, like, no one could create their own TV network. That was just unbelievably... Like, nobody thought that was possible.

Look at us now today, right? Look, Ma, we did it. It used to be, I think, nobody could create your own money. It's insane. It's the province of 200 governments, even really more like 20. Now, anyone can create their own money. Good luck. It's not that easy.

But certainly, ETH is trying to be money. Bitcoin is trying to be money. They're still very far away from it. I think the market cap is just a sign that, like, it's the most valued digital asset, right? But an asset is different than money. I mean, it's not used every day as a means of exchange and so forth. Nothing really is. We shouldn't kid ourselves about that.

If anything, Tether is probably the most used as a medium of exchange asset in all of crypto. I don't know if it's a strong store of value as Bitcoin. The amount of turnover in Tether is incredibly high. But like, you know, so from the way economists think about it, the three things of, you know, aspects of money. In one sense, Bitcoin is much higher as a store of value. In another sense, dye and tether actually might be higher as a medium of exchange today. So my big argument this week was that ETH is no different than a fiat currency. Now –

That was controversial. And that's fine, right? I have no problem having different thoughts than people. But one thing to clarify here is I'm going to guess 50% of people who are yelling and screaming on the internet didn't read the article. which is like a problem in society in general. That's not a crypto thing. That's just like politics, social culture, all this kind of stuff. But what I said in the article was the monetary policy of ETH makes it no different than a fiat currency, right? Meaning that there's essentially groups of people who make decisions on the monetary policy of the asset periodically.

Now, what I will say is a positive for the ETH is money crowd is that every time that they have made the decision, they have made it in what many people would consider the quote unquote right direction, right? Meaning that they have decreased the supply of money. And so that is good in the sense of they're not going the opposite direction like a true fiat currency would. But structurally, the fact that this group of people can make that decision and it could go up or down, it's not kind of pre-programmatically decided, in my opinion, makes it no different than a fiat currency. Agree? Disagree? Think I'm an idiot? Yeah, disagree. Disagree. The reason is because –

Well, at least you didn't think I was an idiot. So that's a start. I read the article too. I did read it and I didn't trash talk you on Twitter yet. No. So disagree because I think, you know, certainly Bitcoin is ahead in that it has the most decentralized and sort of stable social consensus around its monetary policy. That's amazing. That's the best thing about Bitcoin today, probably by far. You know, it's not leading in like technology or scalability or privacy, but it's got maybe arguably the most important thing, which is sort of this inbuilt scarcity. It's hard to fork that out. The problem with that, though, is – and this becomes a bigger problem with sort of new consensus protocols and so forth – is ultimately these networks have to be secure, right? And the monetary policy is the security of the network, right?

And there's the biggest way that Bitcoin could fail today is if the, when the, basically Bitcoin is secured by two sort of cash flows, the security of it by mining. So the first is by block rewards. And the second is by a small fee that everyone pays to miners when they make a transaction. And a lot of the sort of simulations today of what happens if there are no block rewards, if it's zero, and if it's all just transaction fees, is that there will be serious security risks and it'll be much easier to attack the network and it'll be less stable. So if-

Well, just interrupt for a second. To be clear, that's expectations or predictions of what's going to happen in 100 years, 120 years, right? 2,140- It's more like 20 or 30. Oh, 2,140. That's the way the halving is going. 2,140 is when the last Bitcoin will be mined, right?

Give or take. Yeah, but it gets progressively – I mean as you get down to 3%, 2%, 1%. Where are we now? Two and a half or something? I don't know. Yeah, something. I mean the lower it goes, the sort of exponentially more difficult it gets. In fact, we wrote – my colleagues, we have like a fairly large research arm.

We did an analysis of how this relates to DeFi. And in fact, if you have this issue where if the lending rate, if basically the risk-free rate of lending out Bitcoin or Ethereum becomes significantly greater than the mining rate. This is actually a much bigger issue for proof of stake because there's no – you don't have to like buy mining equipment and it's just – it's a decision of whether you stake your asset or you lend your asset out. It leads to disastrous consequences because people won't stake and they'll mine and they'll lend it out instead. Actually, so that's not as applicable to Bitcoin, but it is applicable to Ethereum and any other proof-of-stake asset. So, like, I understand why Ethereum is doing this. They have to understand that, and they do understand that, especially if they move to proof-of-stake and new alternative mechanisms, the monetary policy has to be flexible for security reasons. I mean, what's going to happen if Bitcoin, even 20, 30 years from now, is, like, insecure and it doesn't – it's, like, easy to attack?

Like I – will the sort of social consensus of scarcity and the fixed monetary policy kill it? I don't know. I mean that will be a major decision for the Bitcoin community. For sure. So going back to the idea that ETH is money, right, and it's no different than a fiat currency, why do you believe it is different than the fiat currency, right? And really my thought process was when you outline how is the monetary policy decisions and structure of a fiat currency decided, ETH looks very, very similar to me. Yeah, I think we're all on a spectrum with fiat currencies because we're all creating our own central banks here. The main innovation in crypto where anyone can create their central bank is – crypto is all about incentives.

So the problem of central banking, the fundamental problem is there's two goals that the Fed and all Feds try to hit. One, reduce inflation to create a stable currency that, you know, increases economic output and so forth. But two, reduce unemployment. And those two things. And then also the third is that's sort of secret but is also important and is sort of tied to the second is you get access to seniorage and you get to basically – like you get an unlimited amount of spending if you're the government. You could sort of print your way to freedom at least for a few years in the short term.

And these tradeoffs – Don't tell them that. They know. You know? Oh, they know. Look at Trump's tweets. Look at how Powell is reacting to Trump. Like Powell was much more conservative before he became the Fed chair than after.

It's sort of inevitable. Like we try to create these mechanisms of church and state to separate the central bank from the government. And often they work for a few decades, but no currency has remained stable for more than a hundred years. So these basically, this is an incentive problem. Like these three things conflict with each other all the time. And there's governments have every incentive to sacrifice inflation for, to juice unemployment or to spend more money, especially in election years. Right. But Bitcoin and Ethereum don't have that. Okay. There's no like concept of unemployment rates that need to, you know, if like your monetary policy goes up and down

and it's minors that get the senior age and the minors today don't really have much influence or say in the sort of social consensus making these monetary policies. So in that sense, ETH is a great improvement. Really, the only thing ETH today is sort of the only lever, the decision that is affecting their monetary policy is one, everyone wants to be lower. And then two is security. And that's cool. I think the trade-off between we're incentive to increase security of the network in this cryptographic way, that's a much cooler trade-off than we're incentivized to juice the economy whenever there's an election year.

That's still a quantum leap ahead of all other fiat currencies. So just so people understand, Ethereum is obviously the network. There's Ether, the asset. And the monetary policy of Ether is something called a minimum issuance. And the minimum issuance is basically, is it every year? How often is the decision made? I don't know. Okay, so periodically they basically make a decision as to the rate of issuance that will occur until the next decision.

And so, again, kind of a positive argument for ETH is that they have decreased that every time. So it has acted similar to Bitcoin in that the Bitcoin halving. Yeah. The two fundamental issues that I have is, so fiat currencies, I basically outlaid three things. So there's no fixed supply, there's an inflationary supply schedule, and the monetary policy decisions are decided by a group of people, right? So no fixed supply, inflationary monetary schedule, and the decision as to that rate

is decided by a group of people. If you look at ETH, there's no fixed supply, it has an inflationary monetary supply or a schedule, and it is decided by a group of people. Now, when you use that framework, which is a framework that in full transparency I made up, then you can apply it to ETH and fiat, and they look exactly the same. In comparison, if you were to put Bitcoin into that, you would say that Bitcoin has a fixed supply, so it doesn't meet that first criteria. Now, it has a disinflationary supply schedule, meaning that there is an additional increase in supply every year, every day, etc. It is programmatically declining in time. Ethereum has done the exact same thing.

So it's been disinflationary over time. But the difference is that Bitcoin is programmed to continue to be disinflationary. Ethereum could step in and say, hey, there's security concerns. And so therefore, we are actually going to increase the rate rather than decrease it. And the third is that the monetary policy decisions are decided by a small group of individuals. The big difference between Bitcoin and Ethereum, for example, is that there is a preset monetary policy with Bitcoin that is programmatic. And there is the possibility that people could come together with majority and change that monetary policy, right? That's kind of the social consensus you're talking about, et cetera.

The difference is with Ethereum, that is not a preset programmatic monetary policy, right? And so there's kind of these periodic decisions that need to be made. Now, one, am I absolutely crazy for kind of evaluating it this way and using that framework? Or how do you kind of think through that framework as what's good, what's bad, and kind of what did I miss? No, I think it's good. I think the thing you're missing a little bit is that it's all a spectrum. there are it's like there are people at the end of everything turtles all the way down um so bitcoin is clearly optimizing for being as little controlled by people as possible this is

like nick sabo uh sort of inventor of smart contracts is this concept of like there's dry and like wet code you know and uh and wet code and is messy and involves people and lawyers and so forth dry code is automated and automation of like of decision making is the it's like the bedrock of of capitalism and our industrial engine um so it's great uh if you sort of automate away um the decision making about how you change the monetary policy uh if that's what you're optimizing for if that's what you think is the best um thing that creates the best money supply or the best store of value. I think that's possibly the case, probably.

But Ethereum is optimizing for other things, which is that Ethereum is fast-moving relatively. I mean, it's taken a long time for ETH 2.0 to come, but it's fast-moving, it's dynamic, it's more, it's like, it's the other things that make something a good digital asset, money supply, like having built-in privacy

or having scalability, whether at the layer one or layer two, having programmability, like being able to allow a decentralized financial ecosystem to exist natively in a trustless way tied to your currency and in your ecosystem is very powerful. It's why, you know, almost all of the collateral behind decentralized finance is ETH. It's not Bitcoin yet because it's hard to do in a trustless way. So those things could make something a better money in a way. And having your monetary policy be decided by a group of people and be more flexible is a requirement if you want to optimize for that fast, you know, for moving fast and being dynamic. So it's tradeoffs, right?

Clearly, the market today values that the Bitcoin tradeoff is the best. But actually, like you and I, we're pretty sure like the crypto ecosystem will be in the trillions. in the next 10, whatever, how long it takes. So actually the market is really telling us that the real solution has not been found. Like there's something missing, you know? Like there's a, you could kind of think of it like 5 trillion is like at max capacity maybe, right?

Like when crypto becomes a true store of value. So Bitcoin is what, 200 billion? So it's like a 4% chance, or no, sorry, 40. Yeah, 40% chance, wait, hold on. Yeah, 4% chance that it becomes, that the Bitcoin of today is the store of value of the future, right? That leaves a lot of room for doubt. But you could also flip that and say Bitcoin's dominance is at 60%, 65%.

And therefore, the market determines there's a 65% chance that Bitcoin is the winner, right? Out of all of the options today, there's a 65% chance that Bitcoin is the winner versus everybody else. Yeah, but I mean, that's not the real – it's like the real market size of crypto isn't what crypto is today. it's cool like most people still think it's gold right okay yeah you know like 90 of the people still think it's gold yep so it's called seven trillion or so yeah yeah right so uh but yeah bitcoin is in the lead clearly the market determines these things so here's my other

argument is that and and to be very clear with folks i am actually a fan of what ethereum empowers people to do there's a lot of innovation that's going on a lot of experimentation i think that stuff is super important to kind of the health of an entire ecosystem, right? I am not, when you asked about the maximalism, I am not of the belief that Bitcoin is the only thing that will ever be valuable, you know, period in this entire world, mainly because I come at it from the sense of the entire financial system is going to get rebuilt in parallel. And therefore it would be like saying, you know, the US dollar is the only thing in the financial system. No, there's credit. There's all assets. There's all kinds of other stuff that goes on.

And they're mutually reinforcing. Yeah, exactly. But yeah, they make the dollar more important, more valuable, etc., right? Because we have such an advanced financial system. So if you think of the dollar as that base unit of account, I believe personally that Bitcoin will be the base unit of account of this future world. There'll be all kinds of other stuff that are built. But Bitcoin, because it's that base unit of account as money, it ends up being the most important, right? Because it's kind of the foundation. But there's a bunch of other stuff that is important that gets built. Ethereum today is helping to empower some of that to be built.

And let's take the DeFi sector, for example. When you have decentralized financial products, you need to have some form of money that is used in these products. The difference here is that while some people are using ETH, the most popular one in the Ethereum ecosystem is not ETH. It's actually DAI, right? And DAI is the ERC-20 token, you get through the whole thing, but it is fundamentally different. On top of that, what you're seeing is teams work to bring Bitcoin and its monetary policy properties to Ethereum with TBTC, et cetera. And so again, I go back, my opinion doesn't matter, your opinion doesn't matter. Frankly, the market's opinion is what matters. And the market is determining that in even just the DeFi world, there is something

better than ETH has money, right? Meaning DAI. And also there are teams that are going out to search, how do we bring the monetary policies of Bitcoin to this ecosystem? Let's stop there for a second. Agree, disagree. Is that the right way to look at it? Do you look at it a different way? Just walk me through that type of the analysis. No, totally. I think I would reframe DAI as money, not ETH as money. ETH is collateral. ETH is gold. Gold is not money. It's been many years since anyone's used gold as money, which is fine. Don't tell Peter Schiff. Go ahead. But again, I like the dollar. I like stability. I think the greatest crypto is about financial access, really. And the most wanted financial asset around the world is the dollar. I mean,

you have these stats where like 90% or like some massive percent of all $100 bills or all bills in general is outside the US. Like it's just so many percentage of countries are fully dollarized at this point. So just bringing the dollar to the world and bringing sort of the Fed's central banking policies to the world, that I think is where the next stage of growth in crypto is happening. Absolutely. You know, I don't think there's any doubt about that in my mind. So I'm sort of a stablecoin maximalist in a way when it comes to what is money. I think stablecoins will be money, at least for the next few decades. Stablecoin maximalist. I haven't heard that before. Heard it here first. No, I didn't invent it. And so what that means is the asset that

collateralizes the stablecoin is going to be very valuable too through a sort of weird chicken and egg loop though. And just like gold is very valuable because it's the largest, you know, it's one of the largest stores in central banks, you know, on balance sheets. So, you know, the problem with Bitcoin and DeFi is that it's not programmable. So you can't have DeFi on Bitcoin. You just, I mean, there's a few initiatives with sidechains. I disagree, but go ahead. Well, I mean, clearly that's true today. We'll talk. I disagree, but go ahead.

But today, okay. I mean, it's very, it'd be so impossible to remake MakerDAO. or compound or something on Bitcoin natively. There's no trustless way to put Bitcoin, port Bitcoin onto the DeFi ecosystem. There's trusted ways to do it. There's wrapped Bitcoin where some trusted entity, right? BitGo has one. Some other exchanges are thinking about doing one in the next few months. They basically just put Bitcoin in on chain and they show proof of reserves, and they issue like a synthetic Bitcoin that's backed, but just like Tether or something really, or USDC. And they have like no traction at all.

It's like a couple million dollars is in those assets. So clearly, I didn't like a priori, I wasn't sure that would be the case. It seemed like why would people use Tether? Why wouldn't they want to use a centralized wrapped Bitcoin? But the market's decided at this point. So we're waiting for a trustless Bitcoin. that's really really hard i've invested in a bunch of technology projects that will enable that like cosmos and you have polkadot interoperability chains you have what keep is doing which is

fantastic but there's trade-offs none of them are technically proven to be technically secure yet they're costly like they're not very capital efficient you have to like lock up i don't know what the latest is but you have to sort of over collateralize and keep your uh with both bitcoin and eth so that's kind of weird like why would you want to if you're using if you want to get a synthetic Bitcoin, that probably means you don't really want to hold ETH, but you have to hold both for security reasons anyway. There's a cost to that. So clearly today, that's sort of the ETH game, which is, can you be collateral for a financial system that is literally like a thousand to 10,000 times bigger than the base financial system? Like we know that from just looking at

the, you know, the ratio goal to derivative market cap or something like that. And that's ETH big play so there's this framework that i had and uh great we we will uh i'll describe it for those that are just listening or watching at home so basically on the left side you have um bitcoin on the right side you have ethereum right and around both uh bitcoin and ethereum is the infrastructure for those uh ecosystems and so the way i think about it is bitcoin is uh sound money right? And the principles that are around that. But all of the infrastructure historically has been centralized infrastructure. So this is when you see the Coinbase, the BlockFi, etc. of the world, right? So kind of sound money surrounded by centralized infrastructure. When you go to

the Ethereum side, what you get is decentralized infrastructure with an asset that is unproven to be sound money today, right? So kind of think of, I think the ideal world here is how do we have sound money with decentralized infrastructure, right? And so you had these two different worlds. Each piece has a part of that like utopia, and we've got to bring them together. Now, that brings the debate of do you bring Bitcoin to Ethereum, which you kind of just described with TBTC, et cetera, and these wrapped, et cetera? Or can you actually bring decentralized infrastructure to Bitcoin, right? I can't yet announce the name of the company, but I'm sure you've actually seen the company. We invested in a business that is essentially going to bring the lending capabilities

of DeFi to Bitcoin, right? There's other teams that are working on other aspects of it. Do you think that the obstacles today to having sound money in Bitcoin with truly decentralized infrastructure around it, are those technical challenges that can't be solved? Are those what I call time and attention, meaning that we haven't had enough teams working on them yet? It just hasn't for a long enough to actually get these solutions? Or is there something else that has prevented us from having that kind of full stack integration with sound money and decentralized infrastructure? Yeah, I mean, this is this is like the trillion dollar question. This is also the thing that makes most maximalists very uncomfortable to talk about, which is Bitcoin has not innovated

in a decade. And is that a bad thing? Depends what your perspective is. It's certainly a bad thing for developers and for app makers like imagine if uh i mean developing in the 1980s was way harder than being a developer now the languages were way more difficult to learn they were like assembly code um the developer toolkit was way more difficult um it was so imaginably more like more difficult to create um software and product you know software products uh in the early days of the of the internet when there was less tooling and libraries and so forth and that's where we are with bitcoin and we haven't moved so now it's way easier to do it on ethereum it will always be continually continuously way easier and in fact the spread will probably increase so you're

you kind of have to like i mean yes it's technically possible i think to do scalability And to create a pretty good, OK, programming environment that can maybe do like lending in Bitcoin. Maybe, you know, the project you backed is the one that's going to crack it. But ETH is flexible. It's moving. So it's always getting better and better. It's creating JavaScript when, you know, Bitcoin is still trying to get, I don't know, what's that old? C-sharp.

But I think this is one of the key things, right? And this is where the Bitcoin crowd heavily, heavily disagrees with kind of the Ethereum crowd, I think. The Bitcoin crowd would argue all of that development and speed and experimentation, et cetera, are actually flaws, not advantages around one specific perspective. money you get one shot and so on a spectrum between like what i call like sexy innovation etc and confidence level of sustainable store value medium of exchange on that spectrum bitcoin is as far to the confidence side as you can get so it's very slow it's very intentional it's very much thinking through we have 200 billion dollars give or take in this asset we can't fuck this up all of the innovation experimentation etc that's all great but it can't happen at the expense of screwing up that core base unit of account now i think ethereum what ends up happening is the speed the innovation etc that crowd actually looks at that as an advantage right so they say look you've

got to move you got to innovate you got to do all this kind of stuff they're optimizing for two different things. And I think what ends up happening is if you wanted to compare ETH as money to Bitcoin as money, right? I think most people would argue the Bitcoin argument in that specific perspective is probably much stronger than the ETH one. Now, when you go to the infrastructure side, the innovation, the sexiness, all the shiny stuff, etc. The speed, innovation, you know, experimentation, all that is a much better way to look at infrastructure, right, than the actual base unit of account. And so that's where I actually think it makes sense to me, at least, and again, I'm hyper biased in all of this, that the developers would run into Ethereum

where there was the possibility and empowerment to do all that innovation around infrastructure, et cetera, leave Bitcoin to be built slow, methodically, intentionally, et cetera, how it's been built. And then eventually you'll see those developers migrate over and build that same infrastructure that they did all the testing and experimentation in ethereum to build that around what ends up being the sound money it's almost like the sound money is a magnet for the infrastructure but all of the experimentation is empowered on ethereum it just eventually like the things that work come to bitcoin yeah and i know all this is hyper hyper hyper controversial people will literally be freaking out that saying i'm an idiot etc well that's just my perspective i mean

these are complex systems and we're sort of like you've made like six assumptions you know that we I just don't know. It'll take a few years to figure out like technical risk, what – but yeah, look, I think it's possible. But clearly today, you know, the other story, let alone Bitcoin, DeFi hasn't moved to any other ecosystem. It hasn't moved to EOS. It hasn't moved to Tezos or Algorand or anything like that. ETH is just controlling the narrative and controlling the – like almost every good DeFi project we back, good team or even team that we look at is building on Ethereum. It'd be sort of nonsensical to not at this point in time from a business perspective.

So you have network effects there. So you have to think, are the network effects and developer community and so forth strong enough that you can sort of bootstrap ETH into a stable store of value? Stable is a rough word in all of crypto. So you're talking about almost like inversing it, whereas the Bitcoin argument would be you start with sound money, then you build all the infrastructure, the derivatives, other layers, et cetera. You start with sound money, but your infrastructure is always going to be significantly worse. I mean, at least 10 years behind, maybe more. Today, it's 10 years behind or five, I guess, since DeFi is sort of five years old. Hold on, though. Here's the difference, though. The infrastructure around Bitcoin is

1,000 times minimum more popular and more robust than ETH. The difference is that the ETH infrastructure is decentralized. If you compare decentralized infrastructure on ETH to decentralized infrastructure on Bitcoin, you're correct. If you compare just infrastructure, Bitcoin has a head start and won't get caught, right? Because all of the Ethereum infrastructure, the Ethereum specific infrastructure is specifically going after this decentralized opportunity. But like Coinbase is originally Bitcoin infrastructure, right? BitGo is Bitcoin infrastructure, right? But by the way, they've been co-opted. I mean, they expand. Yeah, The purest, the Bitcoin-only, I mean, the ecosystem you're talking about, exchanges, custodians, market infrastructure, on-off ramps, there's almost none of those that are just for Bitcoin yet.

Now, Bitcoin has much more liquidity, of course, much more pairs. But actually, ETH is doing a pretty good job. Even XRP is doing a pretty good job. Yeah. I'm not, again, I'm not a maximalist in the sense of like, there's just one. Like Zappo and the original companies that were only Bitcoin, they've lost in the market. I mean, Coinbase got a lot of flack for when it launched a bunch of additional coins, but they're the market leader and they're the monopolist at this point. That's the way to do it.

So, actually, a lot of that infrastructure is there. Obviously, more infrastructure is there for Bitcoin, of course. But my point is that you need to be decentralized, right? Because if you just – just because you have a decentralized store of value doesn't mean – like if you then give it to a lender or whatever, if you then lend it out in a centralized way, you lose 95% of the benefits of it. You lose a decentralized – you lose a lot of the privacy. You lose a lot of the censorship resistance. And that's important. I think that's important up the stack just like it is at the base.

So from a theoretical perspective, I agree with you. Yeah, yeah. Right? there's two points that come into play now do we go from a centralized infrastructure around bitcoin and those companies can decentralize over time maybe i don't think we know that answer yet right and there's plenty of people who will pontificate on whether that's true or not the bigger thing though is how much of the defy infrastructure do you actually think is decentralized yeah it's a good question i don't know i don't know the answer and i actually don't

even know if the answer is bad answer for the community i just like how do you even figure that out yeah right because it can't be a hundred percent but it's also not zero percent yeah absolutely not no it needs to become more decentralized uh there's a lot of sort of governance decentralization infrastructure that has to happen on the ethereum community in d5 right now um like how do you make a dow decentralized autonomous organization work at scale um which will which if those work those work in a decentralized way that's very difficult. Those are big challenges. They're technical risks. Like something like a DAO to me, if you can make it work in a secure, predictable way that people have confidence in, it would be

massive. It would be incredible. It's just, we got a lot of work to do to get there. And I think that you're saying the same thing, right? Of just like, this stuff is really, really hard. It's not going to happen overnight. And so that's why we need as many people working on it as we possibly can. Totally. But I do think there is benefits to centralization at the beginning. Significant. OK. Explain that. So you're building complex software. And the more complex it is, the more you need – like a corporation is the most authoritarian and centralized. Democracy or like a republic form of government for a corporation would be nonsensical.

Like you need to have an authoritarian top-down structure that's at least somewhat hierarchical. Silicon Valley is less hierarchical, whatever. But it needs to be pretty hierarchical in order to ship fast and have secure code and respond to customer demands and so forth. So, I think, you know, we've seen this trend where most of the DeFi projects, they start pretty centralized. And they're equity investments. And, you know, they have corporations or foundations that have sort of hierarchical. They build software the way that Microsoft builds software. And that's good because Microsoft builds good software.

But over time, they will decentralize. So Compound actually just released its token or announced it released its token a few weeks ago. It's just to existing shareholders like us. Compound is the second biggest or so. It's one of the biggest decentralized finance projects. It's basically a money market on Ethereum. It's actually one of the most sophisticated probably working dApps today. And yeah, they just released a token.

And so they're moving gradually towards decentralization. I think that's great. I mean, there might be a period where the company dissolves. There might be a period where the CEO is no longer involved with it. I think that's possible. It's hard, of course, but this is a community of decentralization. And like all things start, I mean, most things start centralized and decentralized over time, like Satoshi, very centralized at the beginning, of course.

And then, I mean, even I like to look at George Washington. You have to have a moment where George Washington leaves and sort of like gives it up to other people. But it's fine if it takes eight years to get there, right? Actually, that's probably the golden number. If you look historically of like how democracies form, which is a form of political decentralization, usually you have a ruler that rules for like 10, 20 years, sometimes less. Like George Washington, the first one is this guy Solon of Athens. We don't have to talk about that.

They all like institute democracies and they rule for 10 years to make sure things go OK and complex systems get adapted and institutionalized. Then they peace, you know, they leave, they travel the world, they go anonymous like Satoshi. I think that's probably a good model. It's like a 4,000-year-old model of decentralization. It probably applies here. I've never heard anyone describe it that way. I love that. Yeah.

What are other areas that you guys are excited about looking for investments and think are going to be big over the next kind of three to five years? I think outside of DeFi, which is – it's kind of cool now. We were in it before. It was cool. You know, we've been doing it for five years. It's great that, like, there's a – when you see, like, people on LinkedIn have in their bios, like, DeFi influencer or, like, then you – it's kind of like – it's a good – it's like, okay, this is a thing now, which is starting to happen. But it doesn't matter. It's still very early, I think, when you think about the market size or, like, store of value and so forth.

Other things, we love looking at the Asia centralized infrastructure. I think that's fascinating, too. you touched on this point of actually maybe decentralized infrastructure can become decentralized. You're seeing amazing business model innovation around that happening in greater China, Asia, with, for instance, the things Binance is doing with Binance Chain, Binance Dex, Binance Token. Now the other big exchanges like OK and Huobi also have their tokens and their chains as well. That is very cool. That you're starting from the most centralized thing. I mean, an exchange, it's a company, right? It's the most centralized thing possible in the crypto ecosystem.

And they're trying to decentralize over time. And that is a very cool product. I think it'll take years and years, but watching that happen is fantastic sort of application level innovation. And the coolest, I mean, a lot of what we do here is very infrastructure, you know, but this is the coolest like application level infrastructure or application level innovation happening in crypto right now. How have you historically split dollars between Asia and non-Asia? And then will that, those percentages change, you think, over the next couple of years? Yeah, the way we think about it is less Asia versus non-Asia. We think crypto is global, global from day one, global user base. The big trend is the best technology, sort of tech

infrastructure is in the West by far. And then the best business model innovation, the best centralized infrastructure, at least by fastest growing, and I think sort of qualitative factors like most innovative designs and so forth. The best business model elevation is in the east. This is broadly true outside of crypto too, by the way. I mean, all the AI and sort of like semiconductors and low-level technology, they're all happening in the US. There's a push for that to change, of course. A lot of Chinese dollars going towards changing that. But they almost all start in the US or, you know, Israel, other like sort of very tech hubs. But the best business model innovation happens in Asia.

Like WeChat is vastly superior as a messaging and sort of social media and like all purpose app than the American apps. It just blows it out of the water. And so, yeah, and even like you even see this in other like in the O2O industry, marketplace businesses, you know, Uber and Lyft, they still have not figured out unit economics. They lose billions of dollars. The only profitable at scale marketplace business, this is like a $250 billion, it's the size of crypto industry, is Meituan, which is like an $80 billion company and they're very profitable.

They sort of do food sharing and ride sharing in Asia. So it just blows it away. Anyway, so I got a little diverted, but generally that's kind of how we think about it. Almost all of our venture investments at this point are in Asia, backing these sort of centralized companies. And most of our technology investments and core protocols are in the West. Yeah. It's fascinating to kind of hear you break down, not by geography, but also by what type of investment per geography. What is an area that you think people are excited about right now that they are actually shouldn't be, or they're missing the boat? Like there's something

that's driving attention, capital excitement, but maybe isn't as, there's not as much meat there as people want there to be. Yeah, the big thing, I don't know how popular this is anymore, but I know you liked it a lot, so I'm going to say it, is security tokens, I think are sort of missed the mark. I think we're sort of starting to see that. I'd be curious what you think. But, you know, the idea of tokenizing everything is something that I actually do agree with. I think synthetic assets will be, like I said, I said, you know, the biggest impact of crypto over the next decade, the next group of crypto users will be people that are using it to get access to the dollar. So that is a synthetic asset, stable coins. But I think security tokens doing it in

a centralized way, doing it for real estate and even for dollars. I mean, stable coins is that there's security tokens, which are centralized and they're fully backed reserves and they're centralized custody. And then there's decentralized stable coins like DAI. And I think the latter group will blow the former group out and um and so yeah does that count that's my mig i'm pretty negative on security tokens i would argue that um i would argue that some forms of security tokens are bigger than all of defy combined already so like take figure right which company that we've invested a bunch of capital on the board of they've done over a billion dollars in digital uh helox what what is helox a home equity line of credit okay oh yeah then they've moved into

student loan refinancing mortgage refinancing etc they don't use the name security tokens right they don't talk about blockchain this or blockchain that that often but what they've essentially done is they've digitized or tokenized a mortgage right and then what the in order to transact those assets with other parties on wall street they had to basically rebuild the settlement layer right so dtcc settles traditional assets in um kind of legacy world they rebuilt dtcc on a blockchain they call provenance and now they take these digitized or tokenized assets and they sell them through this new blockchain-based settlement system they've actually done more Helox than all the value locked in DeFi today. Right? So here's the difference.

I agree with you on the people who run around and kind of pound the table and say, like, we're a security token company. That's going to be really hard business, right? Doesn't mean that they can't be successful, but it's going to be really hard business. The people who instead say, I'm going to help you buy the same asset from the same counterparty in a digital format, much easier business and much more likely to be successful. And so where I've come out on this is I believe that every asset, every stock bond currency commodity will be digitized in the future or tokenized. The difference is one, it's not going to happen overnight, obviously. But two is we're not going to talk about them as tokens like crypto tokens, et cetera, because the

social ramifications of doing that in conversation with the legacy world, they just, that they're like uh what is it repealed right they just like they just shudder the second that they hear tokens if you go to a wall street bank etc so instead now what you're seeing is people just describe them as something else you know digital helox digital mortgages etc and that's actually really really big and getting bigger and so to me like that's where we end up but it's the same end game of every stock bond currency and commodities digitized your point about stablecoin And it's just the digitization or tokenization of cash, right, is a good example. And I think we're going to see that across real estate and everything else.

Yeah, I think we should step back a little bit and say, what are blockchains useful in the early days? And I think there's some uses where generally I also – so let me – this reminded me. I would also add the entire category of enterprise blockchain are things that totally overhyped and don't make any sense for the next 10 years or so. And the reason I say this is because generally with new technologies, they're not very scalable. I mean, crypto is where it's like pre-DSL, pre-modem era levels of scalability. So they're not very scalable. They don't work very well. They're not very secure.

um and so generally they work best when they enable you new use cases as opposed to when they enable operational efficiencies like you look just yesterday uh atrium um uh went you know closed up atrium was they raised 75 million dollars from all the best vcs to and their thesis was let's use software to make a law firm much more efficient turn tech tech first law yeah yeah And you said that was a bad idea. Turns out, actually, even where like 30 years after like soft or whatever software revolution started, we're still not at the point where a tech first law firm is that like unlocks that much more operational efficiencies than just the normal law firm that has a bunch of old people that are using like 20 year old Microsoft Word or whatever. um so that's that's 30 years in right so i think the idea that um but but let me just clarify one thing those law firms only exist still today because they do use technology they do use that software now they may not do it in the the silicon valley like hyper hyper cutting edge way but they

still use computers they still use all sorts of different software they still have sas licenses of of different technologies etc so it's not that it's binary like they don't use technology they do use technology i agree with you that it's not what you and i would consider like the latest and greatest technology but they might be 10 years behind five years behind i don't know i would guess the zero to one wasn't that important either i mean when i like you do you hear none of them exist though no the ones who didn't make the lead don't exist but do you hear did you hear stories about in the 90s or 80s all these law firms that just refused to adapt to tech that refused to buy computers going out of business like yeah you know the ones services businesses

are a little bit different than kind of maybe other businesses i mean it's an extremity to prove a point you know um uh but still 30 years long time uh so i think that the operational benefit to using blockchain is sort of like to smooth back office solutions and so forth are just so minute. Like, I think they might be negative, actually, depending on regulatory compliance. Like, some people tell me that, you would know more

because I don't invest in this category, but that actually custodying tokenized assets sometimes is more expensive because there's like this regulatory uncertainty and ambiguity, and so you have to cover. We haven't invested there, yes. I agree with you. So in some ways, it's actually worse.

And even if it's like 1% or 2% better, which I think is probably the best case scenario, I'm willing to bet, I don't know much about figures business, I'm willing to bet that the fact that they're doing so well probably has more to do with the fact that they have a rock star founder who's like a legend in his industry and has created an amazing team, whether or not they were really using that much blockchain technology. There's a little bit of confounding of variables here. So the only thing that I will say is – And the other – by the way, the other comparison would be like do you think companies that had intranets in the 90s – that's probably the closest comp actually more than the law firm.

Like did the first companies that developed intranets, did they do significantly better than the companies that didn't have intranets? I don't think so. I mean most companies don't even use intranets today. Yeah, the place where we've come out on this is like figuring – probably not the perfect example. If a company wants to use the blockchain internally to like do the operational efficiency stuff of their own operations, not very exciting. I agree with you there. where we see the application uh being super valuable and this is what figure is doing is they've built a blockchain that is going to replace the infrastructure of a marketplace so

it's a bunch of people in an industry all have to go to one location to trade so for them take helox for example kind of asset-backed securities etc two to three day transaction time uh settlement times right you get high cost uh and then the rating agencies a lot of people don't realize the rating agencies are overly conservative because they have latency of information they only get reports every 30, 60, 90 days. So when Provident steps in and all of a sudden says, hey, look, you can transact here, same assets, same counterparties, but it's just in a digital format, same day settlement. If you think about it as a counterparty on that trade, my capital is actually at risk for a shorter period of time, right? I can drive some cost

efficiency, which again happens, but isn't the sexy part of it. And then even if you look at the rating agencies, all of a sudden they start saying, wait a minute, we have better access to information. Therefore we can more accurately rate these securities. And therefore it is likely that we'll get an actual increase in rating not because we're changing the rating rubric but it's just that we have better access to information now those marketplaces you know asset-backed securities for example dtcc last year did two quadrillion dollars worth of trades which fucking like i don't even know how to write that number right it's just an incredible number if only they had the fees of coinbase taking two percent on each exactly you have a trillion dollar the reason why

I talk about this is if somebody was like, hey, I'm going to use the blockchain internally or just with one other customer, et cetera, I agree with you. The operational efficiencies there don't matter. Where it does become interesting, at least to me, is when you say, here's probably one of the largest markets in the world. We're going to replace the market infrastructure with a better way of doing that. It all goes back to this theory that I have. So the whole value chain of what's going to get created here goes back to one single innovation that no one ever talks about in the space, which is triple entry accounting. So if you go back to 1400s, right, double entry accounting gets created. And there's a whole wild story about how that happened, where literally

Leonardo da Vinci is responsible for like driving the adoption of double entry accounting, simply because he was friends with the Medici's. But in 1989, triple entry accounting is invented by this Japanese researcher, then you end up getting 2005, somebody writes a white paper about how do we do triple entry accounting with uh digital receipts in a cryptographic way uh and then what year was that 2005 took a while okay so 1989 to 2005 but again nobody really cared about 1989 the original white paper around this or uh the second one 2005 because they're all academic theoretical what the hell is triple entry accounting etc 2009 comes around satoshi nakamoto releases a white paper but also releases an application of triple entry accounting right and

all of a sudden what happens is we get Bitcoin grows into this, you know, 150, $200 billion asset. If you take triple entry accounting and you look at how are we going to apply that to every single financial service, I think that will create more value than anything else. And what you're talking about around decentralized finance, that's what it is. It's taking triple entry accounting and it's providing connectivity to balance sheets, assets, et cetera, the same way that the internet connected humans and devices so we could communicate. Now you're just applying that to value financial assets, et cetera. The day that I realized that framework, it completely changed the way that I looked at a lot of this stuff. And it really came down to

forget quote unquote blockchain. Where is an automated application of triple entry accounting going to create value? Because ultimately that's what a blockchain is, right? It's just an automated version of triple entry accounting and to me that's super super exciting and very very disruptive but we're not going to understand that for a long time like it's going to be one of those things you know 20 years from now people like oh that triple entry accounting thing was really important right yeah um you're thinking really hard no i i i think it's possible that's the case um i just i generally like this is taking taking our investor hat on for a moment i mean you know there's important things outside of what makes what makes us money um but generally when you have a new

technology they're sort of it comes in this is a chris dixon talked about this from andreessen recently there's strong forms and there's weak forms of technology and uh internet was a classic case strong form was the internet intranet was the weak form similar enabling technology like similar protocols um that went underneath both of them one was totally global and open one was just for corporations and for productivity gains and uh you know there's probably some pretty good internet companies they do fine um but they're a little more incremental they're quite a bit more incremental and i think that's the case with a lot of the stuff in security token enterprise blockchain land it's disconcerting to me that many pipe many i mean i started in crypto in 2014

and uh that was when goldman and and city and all these banks nasdaq were getting started with these programs. So it's like, why has it taken five years for them to develop and to show many significant gains? My thinking is just also, as well as a strong and weak form framework, it's also a question of timing. Like there will be more operational efficiencies of blockchains as the technology matures. And there will be more enterprise use cases over the next few decades. But I think we're still super, super early. And so for me, I like looking at the But we try to chase super unicorns. We try to think of things that will be trillion-dollar protocols, hundred-billion-dollar companies.

And that's what we're seeing in this sort of – the crypto-native financial system is spawning those. Do you think that there's a world where regulators ever allow, let's say, equities, for example, to trade on an open, permissionless, decentralized protocol where they have no ability to step in? I don't think they really have a choice if the DeFi movement keeps going. I mean, the next thing will be synthetic assets. Well, they absolutely can, right? Because they can just tell the companies you can't list your asset there. On DEXs, though, I mean, DEXs are just code. You know, the founders might leave.

So, you know, the technology behind MakerDAO is fairly trivial to add S&P 500, you know, over collateralized by ETH, etc. are the same escrow system, collateralization system, smart contracts, oracles that support creating a stable U.S. dollar allows you to create a stable Tesla stock, Apple stock, and give that to the entire world. There's many people around the world that just cannot access those stocks. They can't access them on leverage either, of course, but they just can't buy Tesla stock for various capital control or unbanked reasons. Yeah, but the point being that those people who are doing that, they have to go buy the

Apple stock, right? Well, they'll buy a synthetic. No, I mean, they buy a synthetic Apple stock. No, no, no. Whoever's creating that, though. Somebody has to get the Apple stock to put under as the collateral. You could have – it could be cash settled, so to speak. Okay, explain that.

Like you could have an oracle that tracks the price of Apple stock and as long as you have like 150% of the value of Ethereum of that Apple locked up, then that's like a cash settled derivatives contract. It's a physically settled one, right? So you have the, they're truly synthetic assets, right? So you're basically saying you don't even, you're seeing a world where you don't even have to go buy the Apple stock. It's just like a price tracker. Yeah. You just, I mean, one person is locking up a sufficient amount of Ethereum or Bitcoin

worth of Apple stock and that simulate Apple, just the price, right? As long as the price is very obvious and clear and there's an Oracle that can track it, you're good to go. Now, I mean, there are some, there are some, like, if you really want to be market neutral, You need a market maker who sort of hedges their Apple stock. Do you actually want to own the asset or just have the price exposure to the asset? Yeah, because someone has to be short if someone's long. So maybe you have to access Apple.

But that's great. I mean that's like what the internet is – that's what the internet is all about. Like some people have access allowing it to people that don't have access. I mean the really – one thing that's sort of surprising about the internet is if you look like on a market cap and revenue perspective, Really, the greatest benefit from a consumer surplus is basically it used to be that if you were an upper middle class New Yorker, you had access to all this stuff that you could buy. And the rest of the world didn't. And the internet allows anyone around the world to have access to that, the same stuff. But not for the financial system, right?

If you're here, if you're a New York-based hedge fund or you have a brokerage account, you have access to all these sophisticated financial products that most of the rest of the world doesn't have. And once that's unlocked, I think the sky is the limit. Where can people go find out more if they want to learn about this stuff? Where do you suggest they go read, whether it's books, blogs, information sources, et cetera? Yeah. I like the old histories of how the financial system developed. I mean, they're not going to talk about Bitcoin. The writers are sometimes dead or they're old professors.

But they're fascinating to get this sort of 4,000 year history and then sort of compare and contrast. So Graber's book called Debt, the First 5,000 Years, it's like a classic. It's the book that most of the early, like Wences and most of the early sort of crypto influencers who got everyone else into it read and got them into it. Same with me. There's a book called Money Changes Everything, which is by Yale professor, which is great. For the modern day stuff, we have a research – we have a Dragonfly research.

It's our Medium page where we blog and write articles about a lot of this stuff. That would be a great resource. It's a little techy, but we have some stuff that's more general. Dragonfly research on Medium? Yeah. Yeah. All right. Before we wrap up, most important book you've ever read?

I studied social theory in college. No finance or anything like that or CS. And I loved like just sort of the early canon, like Foucault, like the works of Foucault. It's a postmodernist French philosopher. Very profound impact on me. It makes me think. I mean, it's he has all sorts of politics, but the most important sort of impact of what he says is like you need to question institutions very closely and sort of layers of trust are everywhere. like implicit trust in like the psychology like in academics and credentials and in the media

and of course in the government but we all we all know that um but there's like layers of trust and in institutions everywhere and sort of how the system works and it's how the system fails aliens believer non-believer yeah i studied up on this one i think obviously how many no's do you get you know like i've got just two or three the all time is still josh i'm bringing josh brown actually back we're gonna figure this out because he claims that ghosts are more real than aliens which just sounds like that you're just going for the hot take love the science behind that one but uh law law of large numbers my biggest thing i used to be very like i love sci-fi love et i used to be very like hell yeah we're gonna see

some aliens it's gonna be cool new adventure for mankind star trek now i recently read uh the three body problem this three-part huge science fiction novel um it's like the most famous one in china and uh it is a much darker take on aliens i have you read it i have not you i mean if you're the second person to tell me this i gotta go read it wow only number two it's uh basically it's sort of this logical um it it does a thought exercise of what happens if we actually contact aliens and in fact the most likely outcome is these aliens will kill us uh because they have significantly greater technology than we do. So they'll view us like ants or people on a farm and probably they'll be super predators just like us. Spray some water. Just spray some water on the

ants, right? Yeah. Yeah. Or put a few in a zoo, whatever. Or the second problem, and this is actually the real, like you never know, they might be nice. They might be not nice, but the coin. The real problem though is sort of like, it's called dark forest theory, which is that they won't know much about us and it's possible that like their rate of technology will grow less fast slower than ours like you never know like there's periods in time where our tech developed like millions of years where we develop faster and slower and in sort of race to race to being able to like i don't know kill other species right so uh they just can't take the risk that even if we're like weaker than them that will become stronger than them over time and yeah it's a great game

theory application of aliens and it makes me feel very sad now because i think if we do encounter aliens it will probably be very bad um but yeah they're they've got to be there somewhere i generally agree that if we come in contact in a material way uh we probably have a much more positive view of them than we than we should yeah yeah doesn't release from humans you know we have a pretty bad track record what um what's the one question you got for me to finish up oh i didn't prep a question i know i don't know it's even better how's it how's it going are you uh no no it's coronavirus you gotta have a real question that's my big thing i i uh my my half my team was in china they've been quarantined the last month or two um what is that like uh it's

there's never nothing has happened like this in all of history um basically a billion people or more are quarantined. And what it means to be quarantined is you can't leave your house. There's an intricate system of government oversight where there's basically like neighborhood watches in most Chinese cities. And the neighborhood watches are empowered. They give you like a hall pass. You get one hall pass per family per day. And that's it. You get like an hour period where you can leave your house to go buy groceries. I mean, there's situations where like a husband and wife the husband chokes you know on something has just a totally or breaks their leg and how they have to go ask their uh neighbor to oh what do we joe's pulled up a meme

of uh the different plagues and it's plague plague plague from 17 20 18 20 19 20 2020 coronavirus yeah yeah the corona plague um so it's uh it amazes me actually how uh little people are paying attention to it in the US because China is our number one trade partner, whatever. It's one of our largest trade partners. Even the place where it started in Wuhan, there's study abroad programs there. It's like, it's this manufacturing hub of the world. So, you know, it's very, very weird times there. And yeah, it doesn't seem to be affecting New York yet, yet though. uh the joke that i um i heard is uh polina one of her friends um was texting her and she's going on an international trip and polina's like you're gonna wear a mask on the flight and she said

quote i'm gonna free face it and uh when polina asked her why she said i ride the j train every day what are you talking about there's all kinds of weird shit down there and i think that's the you know while while she was yeah that's saying that's more of an indictment about the j train though then yeah oh for sure for sure like but you're right it's very rational actually for for people to not take the subway as much undoubtedly or to take ubers less or not to go to i don't know why people are still going to sports games and massive crap that's the other thing the first thing that happened in china i mean now people are in their homes but the first thing is no public events no all concerts all like restaurants even are closed throughout china

you know china you can say what you want about them they're pretty rational you know um and do you feel like that's where we're going to get to in the US? Yeah, certainly. I mean, at least, I don't know about quarantines. You never know. Again, it was unprecedented in China too. That's never happened in a modern country before. But yeah, I advise, I tell my girlfriend and my employees and my family, don't go to a major sporting event. Don't go to a, I mean, the odds, it's very hard to account for exponential growth and viral growth in the human head. It's very non-humanist so for instance you can have a couple hundred cases in an entire state and uh and that means that if there's an event over 10 000 people the odds are there's going to be at least one

person with the virus there and these things also are not linear one person often can infect 70 200 you know 200 people right do we know if you get it and you don't die after like two or three weeks are you then like immune to it in in the sense of uh you're kind of a carrier but you're not contagious anymore and also uh you're going to be fine um probably i think i would think but i don't know for sure well here's the here's the issues which is um uh any virus like this mutates very often actually there are some cases where they test you and your symptoms have gone away and then it reoccurs okay i think there's some debate between whether you actually caught it again or it was just the sort of pattern of the virus is such that it it ebbs and flows

um it's hard to say uh but um uh yeah the thing is you know the most likely outcome is this will be just one of there's four or five strains of flu every year that we get vaccinated for and they just reoccur every every year or two or you know um and uh because frequently so this would just be another strain yeah i mean you can get the flu two years in a row even if you get the vaccine right uh because of how quickly they meet it's unlikely like it's more likely that it'll take a few years but if that's the case if we're not able to eliminate it then yeah yeah every few years maybe which brave new world it's fucking crazy man yeah yeah all right well where can people find you uh you on the internet uh we i'm on twitter it's uh i actually always have to look

this up it's like alpaca p-a-l-p-a-c-k-a-p like a llama or actually like a like alpaca um but uh but really you should dragonfly uh research and dragonfly capital if you go it's like dcp.capital is our website and we have a medium page. That's where most of my more thought provoking comments are as opposed to on Twitter. I'm not as, I'm not as a, as Twitter native as you are, unfortunately. I, uh, I love Twitter just because I just let it flow, man. Whatever ideas I got there, you're going to know what I'm thinking. Cause I'm, I'm posting them. Yeah. The post Trump world. Yeah. Yeah. Let it go. Yeah. And part of it is, um, it's a filter, right? Like I, there's people who I followed for years

and i know whether i agree with them or not whether i like their thought process or not etc and i think that people just enjoy the authenticity of it versus um if i was more of a person that just like hey i'm gonna write one blog post a month i would never write i just would procrastinate right so instead it's like hey i'm gonna tweet every day i'm gonna write morning a letter but like it's just that repetition and consistency actually forces me to do it versus the opposite, which would just be like, eh, I'll get to it tomorrow. Eh, I'll get to it the next day. Then next thing you know, it's six months later and you haven't done anything.

And from the other perspective, just more me, like the information junkie perspective, you know, we're in the venture industry. We love being on top of new things. Twitter, a lot of misinformation, obviously. We don't need to talk about that, of course, fake news and so forth. But the other fascinating thing about Twitter is like the citizen journalism aspect of it because there's this like framework uh biology uh talks about it um and he's big on he's uh he's killing it right now on he's a vc but he was a he started a biotech company and he's a phd as

well um and he's just been going on about coronavirus uh lately and uh you know there's this concept of uh there's like pre there always has to be pre-news and post-news because that's where journalists journalists get it from somewhere right and they find sources and that's their specialty but now sources are online you know and it's you know journalists let in theory are better at finding like you know they're evaluating they're trained and they can tell the story by stitching them together except yeah but there's a delay clearly coronavirus was probably weeks delayed for how long it took the media to figure it out um for government reasons all sorts of reasons you know how many people does the new york times or cnn have in wuhan right

so you get to sort of be now probably a ton they i mean those those are some brave journalists yeah i mean going into a quarantine where the entire health care industry has collapsed i'm sure they're gunning for pulitzers i don't mean that in a negative way i hope they get it i know a bloomberg uh reporter who moved to beijing um i don't know maybe a year year and a half ago maybe even two years ago i don't know but but like relatively recently um and uh i've seen her post a bunch online about like life in beijing with the coronavirus and i'm just like holy shit like what you know do you leave do you stay i mean there's just what do you do right um so it's uh it's pretty interesting a lot of tough choices all right man thank you so

much for coming to do this thank you we're gonna have to do this again and uh you know we'll see how all these different narratives play out. But I appreciate you just being thoughtful and taking time to share it with us. Absolutely. Thanks so much. Hey, everyone. Pop here. If you like this episode of Off The Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off The Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate

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