The Pomp Podcast - 357: Yan Liberman on Liquidity and DeFi

Episode Date: August 8, 2020

Yan Liberman is Managing Partner at Delphi Digital. He focuses on the quantitative side of the business, including predictive on-chain metrics and automated market makers. Yan previously served as a Dividend Forecasting Analyst at Bloomberg, LP.  In this conversation, we discuss liquidity pools, decentralized finance, market makers, on-chain metrics, token economics, value accrual, and whether Yan thinks there will be another alt season. =============================== Athletic Greens is an all-in-one daily drink to support better health and peak performance. Even with a balanced diet, it’s difficult to cover all of your nutritional bases. That’s where Athletic Greens will help. Their daily drink is like nutritional insurance for your body that’s delivered straight to your door. You can get yours at https://athleticgreens.com/pomp =============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Jan Lieberman is Managing Partner at Delphi Digital. He focuses on the quantitative side of the business, including predictive on-chain metrics and automated market makers. Jan previously served as a Dividend Forecasting Analyst at Bloomberg LP. In this conversation, we discuss liquidity pools, decentralized finance, market makers, on-chain metrics, token economics, value accrual, and whether Jan thinks there will be another alt season or not. I really enjoyed this conversation with Jan, and I hope you do as well.

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and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with Jan. I hope you guys enjoy 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. Jan's here. What's up, man? How's it going? Appreciate you having me on. Of course. Jan works at Delphi Digital, where I sit on the board, which means automatically he has to be smart. But let's go through your background first, and then we can talk about Delphi and what you guys did there. Yeah, so after college, I worked in traditional finance. So initially, it was primarily equity research where you're publishing reports on a subset of coverage of companies that you have under you. And so the idea is you're constantly trying to produce actionable insights, understand where the space is going and understand how the companies fit in within the space. and as well as a strong understanding of just financial markets and financial modeling and kind of how that all comes together. And then from there, that was at Bloomberg. And then afterwards, I was at Deutsche Bank where I was in leveraged finance CRM. And so the idea there is we're providing debt to highly leveraged companies and really understanding these are the riskiest

companies and realistically, can they actually pay this back? And so you kind of start to see really ridiculous situations where you're you know you're providing loans in situations where you possibly shouldn't be but there's a lot of underlying relationships there that kind of have to be respected and so um that that was kind of my my traditional career and we i fell down the crypto rabbit hole uh i'd say very beginning of 2017 i obviously heard about bitcoin before and just kind of didn't really put the time in to to research it unfortunately and then so got into this space in early 2017, just as a casual investor. And just as you know, as most people tell you, you kind of just fall down the rabbit hole and it starts to take up more and more of

your time. And so I was working with three of my colleagues at the time, which was Anil, Medio and Kevin. And so we just noticed that we were spending more and more of our time trying to understand the space. And on one end, you wanted to do it because there were opportunities to make a lot of money quickly. And there's no better motivator than that sometimes. And so we really just spent all of our time on this. And after a while, we actually really appreciated what was going on

and then thought that this had a lot of potential and we really wanted to be a part of it professionally more than just casual investors. And so at that point, we started to think about how we could enter the space professionally. And so some of the ways to think about working with a specific project,

but that's tough just because at the time, you're learning so much in this space so quickly that what you thought you knew a few months ago is totally different than what you knew now. And so we kind of started to realize that the space was iterating very quickly and it didn't really make sense to commit to one project, but we wanted to be abreast of everything and really as involved as possible. And so from there, we thought about how can we leverage our existing skillset in the best way possible to kind of monetize it and create a business out of it. And so we thought at the time, the idea was institutional money is going to move in. And so everyone realized now that that process happens a little bit more slowly than expected.

And there are hurdles in the way. And so some of the hurdles are custody, regulatory, and you can kind of go down the laundry list. But one of them was understanding how value can accrue in the space, why I should invest. Like I need to be able to read an investment thesis that I can easily digest and understand and then bring to my board or to my CIO and take it to the next step. And so we thought, based on what we were doing at the time, based on our interests, we could provide that caliber of research and analysis into this space. And we didn't really see it existing in any real credible way.

I think some people were starting to do it, but we thought there was a lot of opportunity here. And so we started Delphi in August of 2018 and we were kind of, uh, building behind closed doors for a while, trying to figure out, um, how we were really going to build the business, what, what was really necessary. And so, um, we figured it would be a subscription business. And the idea was we would provide recurring research and, uh, that, that would be one way to really scale the businesses over time. You build a subscriber base and, and that's kind of how you build that business.

And part of it was, so we bootstrapped the company. We started, we realized, all right, let's set aside some money. We know how much we have until we start really running low on funds. And so we sought out with that and realized that the subscription model takes some time to build up. And we knew that going into it. But one of the ways we kind of were able to almost bootstrap our own liquidity issues was through our consulting business. And so the consulting business initially started as funds used us for due diligence. And so they would almost treat us as an outsourced due diligence team where they would say, all right, we are interested in this sector. Come back with investments from an equity perspective, from a token perspective, and why. And so those were larger one ticket items that were great for providing capital to business. But the way that that business scales is with price, whereas the subscription business scales with users. And so we needed both to kind of happen in tandem. And so we kind of leveraged the consulting business to subsidize the research. and then we met you i believe it was in in late 2018 um and and through you and meeting tom at 51 and then we we merged with him at the beginning of february and that was kind of how this

relationship was born um since then the company has really grown we we've expanded just recently we're up to 10 employees now so that it's been great to see and i think the way that it's kind of evolved has been we've been able to iterate on the recurring bit a bit more in the sense that we understand what users want what they don't want and at the same time the space changes so quickly that we can't be very rigid with our structure we have to be a bit more nimble there and on the consulting end what's happened is we had so initially our skill set was understanding where to invest. And then from there, through our research and just our ability to look into as many tokens as possible and really understand why some are successful, why they're not. And kind of

going from there, the consulting business evolved from just looking into projects to invest to actually designing the token structures for these projects. And that's been great because we've been able to really contribute to the space in a meaningful and tangible way and kind of reuse as much of the IP that we've built up from the research side, from the consulting side to help design these projects. And then just recently, we announced that we were having a ventures arm as well. And we thought that that was the next natural process in our evolution to now we can not only we have the research side, but we can only we can design these tokens for projects and also provide them with capital assistance and actually become a real value provider in the

space beyond just any kind of research or analysis and really helping projects and investing and becoming more than just a capital provider to the project, but actually helping them with design and dashboards and kind of figuring out in what ways we can really be a value add to them. And so what does Delphi look like today in terms of you've got the research arm, you've got the consulting arm, you've got the ventures, what are the products that are in that research arm? Kind of what does people come to you for consulting for?

And then capital is pretty self-explanatory. Yeah. so the research um we have on a monthly basis we provide an in-depth token report and the goal there is to provide something as actionable as possible for clients um it's not always something that we're overly bullish on but there are situations where we can be bearish but we're not the way in which we are typically bearish is not in the sense of we're not going to tell you that a project that everyone knows is bad is bad and go into a lot of detail about it that's just useless so we'll kind of in those situations we'll typically be a bit against the grain where we

think that there's a misunderstanding between what people think is actually going to happen relative to what is actually happening and so um again that's something that we think is actionable but so the research side we have those types of reports um we have a lot more short form content we realize that we want to be high touch with our clients but still maintaining um a level of quality with the research. So it's always like finding that balance where we're making sure we're not bombarding you with, with too much, but that everything we are sending over is, has been filtered. Like we, we have our internal process that, you know, when a report is done, we go through a system of checks to make sure that everything is correct. And obviously there are

opinions where they're, where they're, where it's not necessarily going to be correct with its opinion, but as long as it's fact-based and the assumptions are logical. And so we have daily the reports that we send out about topics that we think are relevant thematic reports where we'll dive into a certain sector like defy or oracles and things like that where we'll break down the major players in the space and then kind of what they're doing and oftentimes our ideas really stem from those types of analyses where we're looking at a sector and we see the competitors and then we can quickly tell which should succeed and then kind of the reports evolve that way so there the idea is to make all of the research and and the internal process processes as as

efficient as possible so if we're doing research on something there's more than just we can apply it to more than just that report and so that's kind of where the the consulting and the venture arms come into place so for consulting we're we'll have um we'll help projects that are thinking about launching a token and so we'll build out how they should integrate it what the distribution schedule should be how each individual user should function within the ecosystem and that's kind of where we think our bread and butter really is is when you think about these these token structures is understanding it's not just so if you think about what tokens were in 2017 they started as a method of raising capital and that's what they were is an easy way to get around regulations to

raise a bunch of money and and which and you have no requirements it's not equity that you're bound by it's just free money then as the as that period slowed down it got to all right well now we kind to have to make these things have value somehow. So let's figure out how to tinker and change some things to actually have the value accrue as the project grows. And now we're at the phase where good projects are leveraging the token in a way that allows them to advance faster than they would have had they not used the token. And so that's kind of where we really come into play and what we've been trying to help projects with as much as possible. It's either bootstrapping adoption or bootstrapping some kind of incentive structure where you can bring users to your platform and

reward them for being early and being active, but in a way that can organically, you have these rewards that are basically token based. And the idea is that over time, as those rewards kind of diminish, the natural functionality of the project starts to take over. And it's kind of the same thing as Bitcoin, just to a different level in the sense that you have the block rewards are subsidy and over time the fee market is supposed to develop to offset the subsidy and then that's how the system can operate organically and so that's the same logic that we basically apply to a lot of these projects that we help out with and then what we've kind of had the luxury of doing recently is now certain projects that will help design we can also invest and it's just a

really great way for us to become you know one with the project at a really early level to to help them along the path. And it provides a great source of deal flow for us and really understanding. It's tough to think of a situation where somebody can understand investment better than we can at the time because we're the ones who designed it. And so there's a lot of benefit there that we kind of are looking forward to using as well. Makes a ton of sense. Everyone wants to know about DeFi. They see all kinds of crazy things on Twitter. You probably understand it better than most. What is DeFi and what's happening over the last 60 days in the DeFi market? Yeah, no, it's a great question. So DeFi is basically a way, it's trying to replicate

services in financial markets without the intermediary that's taking the rent or creating like some level of, it's like the centralized entity that's removing transparency. And so you have these issues that are kind of the similar ethos as Bitcoin. It's all under that idea. It's just more specific, more targeted. And so what's great is these aren't necessarily competing with Bitcoin. These DeFi projects aren't going to become stores of value. Their value is a function of the amount of fees and productive value they can provide. So you're starting to actually see some kind of fundamental way to think about these things. And DeFi has been around for quite some time. It hasn't really taken off until recently. It exists in 2018, 2019. Over time, it's just

become more complex in terms of what people are building. Initially, it was a lot of borrowing and lending. The idea was, I have this money, I can post as collateral, and I take a massively over-collateralized loan. Now, I have this capital that I can do things with. If you think about the smart contracts necessary to do something like that, they're a bit more simple because there's not a lot of interaction. The main interaction is provide collateral, withdraw other asset, and now you're out of the system. So as the development of these systems has kind of grown, the use cases have evolved with them. And so what we've seen recently was it was a combination of things. So after the large sell-off in March, everything kind of bounced back. And that's when

you really saw DeFi start to blow up a lot. And it was a combination of things. So on one end, you had several DeFi projects that were either launching, providing new products, V2s, updates, and trying to basically optimize their structure. And at the same time, and this side is a bit more anecdotal, where you had some institutions come into the space that were basically almost suppressing Bitcoin volatility. So they were coming in and their whole goal was to provide yields. So they were exercising cover call strategies where they would hold spot, sell calls, and they would just create a yield that way. And they were really agnostic to the price of Bitcoin, but more so just trying to generate a yield. And so what that would do is that would

flood the market with a lot of calls. And at the same time, you'd have some market neutral desks or others that would basically buy those calls on the cheap and then sell spot to kind of offset that to create that hedge. And so that kind of really dampened Bitcoin volatility where we saw Bitcoin is really flat from, you know, end of April or May until mid to late June. And during that time, we also saw DeFi start to pick up. And so it was a really interesting combination of the two where now you're starting like Bitcoin holders are, you know, a lot of them trade leverage and use options. And so when Bitcoin is just bouncing between 92 and 96 or 97 for a month and a half, they're losing their mind. And so at the same time, they're seeing

DeFi as gaining 100% a week in a bunch of these assets. And so their interests start to pour over as well. And so you started to see a lot more attention focused on the DeFi space because that's where the returns were. And to an extent, you can think of it, some people think of it as a bubble. But realistically, if you think about the size of DeFi right now, it's still less than Ripple or XRP. And so it's not a bubble in the same way that we saw 2017 where everything was running. And so you had billions and billions of artificial value created. Here, it's a very small set of a handful of names. And that's why at the same time, the amount of capital that flows into them causes their price to even to move up even even further and so what's been useful is it

has brought a lot of attention to the space and created um a lot of a lot of natural i guess demand and so what some of these d5 projects are creating are so it's it's intricate yield generating uh mechanism so you had the whole liquidity mining um fiasco that that will you know only continue but but like continue to improve and so initially liquidity mining is basically i need you to i want you to provide liquidity for this project and and or or basically post your assets and and generate a yield and normally the yield you'd get was a function of how much people wanted to borrow it but now it's we supplement it with our token and so the token now you know users aren't getting 70 they're getting 1500 or a thousand percent yield on

their assets and so how does that happen how does that happen i think that's what people are confused by right they hear a thousand percent yield on something and they're like this has got to be a scam right so like explain how like something like that happens and then we can talk about like yield farming and all that yeah absolutely so it's it's that value is annualized and the reason it ends up ballooning is you'll have these projects that they'll let's just say they have a thousand tokens they'll only distribute you know a small amount at first and it's kind of like a leaking faucet where they'll distribute that gradually and what happens is um as those tokens get get um distributed the the idea is at the same time they're looking to uh incorporate

ways that those tokens will have value in the future and so part of those is a function of governance and then within governance you can um structure it such that a certain amount of the fees from the entire protocol go to those tokens so the way what happens is they start to issue a few tokens but those tokens start to balloon in price and their schedule is still to distribute one token a day you know but just as a scale but that token initially started at 30 cents and now it's at 40 bucks and so the yield has just gone insane and like you're the capital you're providing is still the same and so what happens is a lot of money floods into there because you know these markets want to normalize that yield and say i'm going to take it and

eventually they kind of come down but for extended periods for weeks at a time you know there's people farming with like four digit yield which is absurd and obviously it's not going to be sustainable forever but the idea there in the long run is that so the fear is and and kind of the the way you can differentiate some good from some bad projects with yield farming is okay once that yield farming stops how what portion of these assets will actually remain with that project and how many will just you know opportunistically jump to the next situation where there's the most yield farming and it almost makes it tough because projects won't all debut at the same time so even if you're a project where you have a natural amount of yield that you can

generate the problem is if somebody else launches after you that can then just provide that yield it's like even if i like what i'm getting here and you know holding all else constant your project will generate me a higher yield it still makes sense for me to move my assets somewhere else and capture that and then eventually move back and so that's kind of where the the yield farming craze is happening but um it's it's just understanding yeah which projects will do the best job of retaining that capital? And then at the same time, how can they leverage that capital to generate actual fees? So not fees that are inflated by the, they're just issuance of the token, but from providing a product that's actually useful. And so that's where things

kind of get interesting and really seeing how this whole space will shake out. So my two questions are like one, how sustainable are some of these organizations? And then two, how many are there right i keep hearing people talk about like how much value is locked in d5 and then when i go look and i literally can't find how many actual d5 projects there are there seems to be like more and more coming online every day and so is this a function of where there's like one or two big ones and then there's so many small ones that have a little bit of value locked up but when you kind of uh count it all up and total it it ends up being a big number or is this something where there's maybe 10 you know kind of winners or leaders in the space

and then everything else doesn't matter like how do you think about the market structure both in terms of sustainability and then also in just the aggregate number of things that actually are going on yeah sustainability is definitely an interesting one um i i think some will have slightly more sustainable models so the good thing is a lot of these projects are also at the i guess quote-unquote cutting edge of of token econ and token structures and they're also really looking to constantly improve them through a very public governance process as well as um outsourcing some of that to teams like us where we'll we'll try and help in any way we can and so um the sustainability is tough i i definitely think there there is a large level

of sustainability because there's there's the demand to borrow and the demand to to to find ways of figuring out the most efficient yield and what like some of these projects will really do is you provide assets and then they can search the market for basically all other yield providing products and optimize there and so like you'll I think you'll have a situation where the smartest and and the kind of the best ones win a lot of them work in in tandem and it's actually funny so the idea is with some of these you can effectively so let's say I want to take my assets and I place them into this pool to provide liquidity, the way that the value of your share of the pool is now a token technically. So if I put a hundred dollars, just thinking about it

easily, if I put a hundred dollars into this thousand dollar pool and now there's a thousand bucks, so I'm technically 10%. We'll just say each token represents a hundred bucks. So there's 10 tokens issued. And the idea is my token represents 10% of the pool. The pool grows as it accrues fees. And so now like this asset that I have, which represents my ownership in the pool is also valuable. Then I can take that asset and basically park it somewhere else. And you kind of get these interesting loops where that's where people can really start to blow up yield because you can keep earning yield on the assets that you're borrowing against. And so it's an interesting loop. One of the more interesting things to see is a lot of these projects were kind of developed

in silo in the sense that we understand what our risks are as a project we will develop these mechanisms to institute balances in there but the problem is they can't account for new products that come out and and create sources of demand and supply that completely throw their systems out of whack and and makers one of those where they're having a bit of trouble where they have there's because of another yield farming project that's rewarding you based on the amount of assets you provide, basically a lot of DAI gets stuck in compound. So it creates demand for DAI that isn't really programmed in. And then, sorry, the other question was? In terms of just like the aggregate number of these, is this like a winner take most and there's

two or three winners? Or is there literally over a thousand DeFi projects and each one has a little bit of capital or assets in it and that leads to this big DeFi number that everyone continues to kind of point to now it's definitely more of the former where you have a lot of these larger projects that are consuming a lot of the liquidity themselves and if they can differentiate enough there there is a world where they can all kind of coexist and so um what's good is they are iterating quickly and trying to figure out new ways to both incentivize users and efficiently use that capital but what the whole space is effectively doing is is basically trying to replace exposures that or replace products that exist in traditional finance and you know it

started with lending and borrowing and now it's the ability to kind of invest in synthetic assets that represent a certain exposure so you could effectively own an apple own apple stock exposure through using d5 but with an oracle that's pegged to um a certain amount of assets and so that's kind of where the space begins to evolve and and um part of the way that some of these projects really uh benefit is if they can provide if they can suck up enough liquidity then you as a trader as a user you can buy like trade in and out of assets through these projects rather than through a centralized exchange and so the idea is centralized exchanges make a lot of money and they make it on that fee so if you can now instead transfer the fee to the user providing the

liquidity and then and i as the user as a trader can don't have to deal with any kyc i don't have to register my account i don't have to um um store my assets with an exchange i can trade from my wallet effectively and assets never leave my custody and and so that's where you're kind of connecting two markets where one you have individuals with assets that are effectively idle and and they can't do anything with them with traders that want to buy in and out of positions but don't want to trust their assets to an exchange or or um register for kyc and and the difference is it needs to get to the point where it's competitive enough where all right if i'm still getting way better execution on an exchange i'm just going to use that but as that kind of

gradually there's like i guess a tipping point where over time execution will kind of expand and really get better on the decentralized side. And that's where I think you'll continue to see a lot of growth. And so as part of this, when the value gets locked, how much of that is net capital inflow versus it's kind of this synthetic asset that got created in the ecosystem, right? And an example would just be kind of is the interest compounding on itself from people who are already interested in DeFi,

Or is there a pretty significant net capital inflow into the space? And that's what's leading to a growing kind of value locked in DeFi number. Yeah, no, it's definitely the capital flowing into the space. And so the question becomes less so, is it that? But to what extent can incentives sustain that growth? And so that's where the question is, can we continue to figure out ways to incentivize additional users to bring capital to the space? And so far, you know, it's been going well and projects are getting very creative with how they think about the long term sustainability of these models. Because you do have to initially reward users more than they would normally receive for bringing their capital here.

And the goal is to retain them as long as possible. but um it's it's not so much like they're on the synthetic asset side the idea there is that a lot of them are are backed with real assets and so if i'm basically like it's the idea here basically synthetics where their platform allows users so i the two users that exist are the collateral providers and the traders so i as a collateral provider can post my collateral of assets into into into their product and they use snx tokens and the idea there is as a user um i can buy so on one if i'm providing the capital i need to receive something in return to to do that and so they receive a fee and where is this fee coming from it's coming from traders and so you have

this massive pool of assets that is is seven and a half times over collateralized but the idea there's so these assets sit as the backstop and you can issue synthetic products against them so If you have $750 worth of assets locked, you can create $100 worth of synthetic assets. Whatever that asset is, it can basically be anything. All you need is an oracle to price it. And so now somebody can come in and buy synthetic exposure to basically any asset that they can price and kind of have economic exposure to something that if they're living in another country, they wouldn't really be able to buy Apple stock or anything like that. And so there's a lot of value on the synthetic side, but they're not as much where they're kind of created out of thin air. It's what was probably the biggest hurdle for DeFi initially, where because you can't take credit risk against anyone, everything has to be over collateralized. And that kind of created a bit of a choke point. But as you create enough uses for the assets that are borrowed against them, it still makes over-collateralizing these positions a worthwhile, I guess, endeavor for the individuals providing that collateral.

Makes sense. And what's the impact on Bitcoin and Ether while this is going on? Yeah. So what's interesting is, you know, DeFi has ran from April, May, June, it's still into July. And what you started to see was Ethereum kind of wake up first at the end of June. And what was the initial thing was, if you look at the amount of gas spent. So a lot of these DeFi projects are built on Ethereum and the idea there is they can design these mechanisms in any way they want and they borrow the security of Ethereum. And by that, like the only way to really hack these projects from like a 51% type level is to actually control the Ethereum network, which is really difficult to do. So what happens is a lot as these projects are growing, gas, every time you interact with these contracts, you have to pay a gas. And gas is a function of two costs. One is the price of gas, which is just based on the supply and demand at the time. And then the other is the quantity of gas. And that's a function of the complexity of the contract. So a lot of these contracts are pretty complex. And when people were yield farming, you'd have to pay, you know, sometimes 50 bucks for a transaction. And the thing is, you were getting so much in yield that you didn't care. So everyone was just happily paying these huge gas prices and that started to kind of really kick off the demand for ETH. And I think it had enough of an effect to start moving price up like that demand for gas because it was almost 50% of issuance in terms of trying to think about how to proportionalize the amount of gas. so it definitely had somewhat of an impact on the price and then the narrative kind of started

coming about that if you know DeFi really thrives and ETH has to thrive as well which I agree with to an extent I still think these DeFi projects gain a lot more on their own than ETH kind of does but ETH by nature should kind of appreciate as well and so you start to see ETH started to really trend up first and then right afterwards Bitcoin came and at the same time we had spot volume really pick up. And that's when things started to really take off. And as soon as that happened, all of DeFi quickly pulled back. And so you started to see where some projects were slightly less sticky. They had some pullback. Some projects that weren't fully developed yet, they had big pullback. And whereas some of the projects that were a bit more ingrained had

actual use cases at the time, definitely pullback, but just not as much. And the pullback was natural So as you saw, the Bitcoin traders fly in the same way they come out. And so what's interesting, and these cycles have happened over time where alts really do well when Bitcoin's volatility is at all-time lows and that's just because of boredom and the search for returns, basically. And so I don't think we've had a time, though, where there have been this many alts that actually had real fundamental value or actual cash flows associated with them.

So we did see Bitcoin take off, alts pull back, but they didn't really fall as much as they normally would relative to previous scenarios. And so we actually started to see some of the ones that have adoption and some use case grow. I think that Bitcoin and DeFi can grow in tandem because in reality, DeFi is so small compared to Bitcoin, it really doesn't matter as much. And then if you think about the metrics for Bitcoin, a lot of the ones we like to look at are, aside from the normal ones, just looking at the distribution of the holder base and kind of like what the characteristics of supply and demand really are right now. And so you're seeing the amount of Bitcoin that's moved in the past year being at all time lows. So that's a lot of Bitcoin that's just sitting idle. One of the ways we like to look at the level of weak hands is so if you track volatility of Bitcoin relative to the percentage of its supply that's moved in the past three months. And so the idea is, if what you'd see before was when there was a big spike in volatility, whether it was up or down, you would see a spike in the percentage of supply that's moving the past three months. And that just means, you know, more people are reacting to the price change. And what we've seen with each subsequent spike is that the amount, the increase in three months in the supply that's moving less than three months has declined. so people are basically ignoring the spikes as much and they're just sitting on their bitcoin at the same time you're seeing you know basically near one year lows of bitcoin on exchanges which is which is really great to see because you know the only reason you'd really move it there is to

trade and some other interesting ones are you can track um basically the amount of whales that exist and so if you track that over time you can really see how whales accumulate so basically a whale being an entity that holds at least 1000 Bitcoin. And so you'll see the quantity of those guys increase as price really falls off, and then decrease as price picks up as they're kind of cashing out basically. And it's another way of just looking at like smart money, basically. And what you've seen right now is that number keeps growing in the sense that the quantity of whales has continued to pick up. And so realistically, that's what you want to see. if you think about like the most bullish case for Bitcoin,

you'd want price running right now on the least amount of outside demand possible, because that just means that that has yet to be satisfied. And so I think that's what we're really seeing where the existing user base is really dug in. People are trading bits here and there to try and scalp more, but there's not that much that's people are, are kind of numb to price changes and they're just waiting for the next leg up, I think.

um and so i think we're at a situation where the amount of new demand really needed to move price up is at or near like all-time lows and and so i think you know combining that with the macro environment the the fact that you're seeing institutional investors warm up to it and like the whole idea of um the the reduced career risk associated with it and and all of those ideas um yeah i think it i think bitcoin uh defy affects bitcoin on on micro time frames but on a larger time scale. Bitcoin is just so much bigger that I think both can definitely do well. And the idea with DeFi is that as people get into Bitcoin, if even a small subset of them kind of make their way down the rabbit hole, that can be a huge boon for that space. So all these people keep tweeting

at me, alt season, when alt season, sir. That's basically what you're talking about here. What is likely to happen kind of how do you look at that yeah um no it's uh it's a good question so i think each time we'll see bitcoin run up it's it's fair to assume alts will pull back in terms of like sats and and so part of part of the reason that exists is a lot of these pairs only really like now that they trade on versus like so a lot of these bigger alts they trade versus dollar and versus um bitcoin and so when they trade versus bitcoin as bitcoin moved up they would it would be less likely that let me rephrase that so as because what now they have a dollar pair and there's a lot of volume there they can be more appropriately priced in the

dollar so when bitcoin runs up they don't necessarily have to pull back as much because they can sit flat versus the dollar they'll decline versus bitcoin but you don't really see a massive decline there to the same extent. I still think alts really need Bitcoin to be quiet for some time to do well. I think certain catalysts for individual projects can be strong enough to offset a strong Bitcoin move. But in the end, in aggregate, alts kind of need really muted volatility out of Bitcoin to get people comfortable enough and bored enough to start dabbling in them again. And so, yeah. And so, if Bitcoin rips, you know, between now and the end of 2021, like I think a lot of people, including myself, think, does that positive or

negative for the holds? I think for the majority of them, it'll probably be negative. And that's, I think, because of the fact that a lot of them don't really have any fundamental value. And And that's fair. I think with DeFi, the reason it has some is because there's immediate product market fit where you're just enabling speculation, you're enabling borrowing lending. And that's pretty much the biggest use case for crypto right now is speculation. And so if you can enable that with a project in a unique way, then you do have immediate product market fit. And so that's kind of what we also look for is understanding which projects don't require the crypto user base to expand massively in order to be successful. And so I think that removes a lot of execution risk

from our investment strategy and helps us on that front. But I think a lot of alts that don't have material adoption where the use case doesn't really justify the current price will definitely suffer with massive Bitcoin upside. But what you'll end up seeing is basically the alts bitcoin will rip also kind of stay flat or come down a little bit against they'll stay flattish against the dollar come down a little bit in and come down in terms of sats and then bitcoin pauses and then money floods back in and the idea there being that bitcoin pulling back you know one percent means that alts can really because that's a lot of capital leaving bitcoin flooding into alts and not that much is required to make these alts move up and so you'll see you'll

basically kind of start to see people performing that trade to an extent but i think with defy it's a little different where now that there is some actual cash flow associated with these projects it's not as momentum driven and there's more fundamentals associated with it and so what is like how does this play into the token economics and the value accrual work that you guys do right so people come to you and they basically say hey i want help with this stuff um i think that bitcoin is well understood, kind of off on its own and strong and not really going to change at all. When these other people come to you and they say, hey, we want help with the token economics

for the value of accrual, like what do you guys spend time talking to them about? How do you actually construct that? And maybe give me an example or something. Yeah. So it can really vary. If it's a live project, you're a little bit more boxed in depending on kind of how far long they are and what's going on there but um with with a completely new project you you kind of have you know a clean slate to work with and the idea that the thought process we go with is

you need to understand exactly all the users in your ecosystem um what their individual incentives are and then what is needed to bring additional users to the system and so we just kind of think about it on a on a micro level in terms of what are the individual how are these individual users going to act based on what is rational for them and so um i think one that we designed from we actually uh it was originally a consulting engagement with axi infinity it's a gaming project and then um over time uh so we initially kind of designed the the token to work with them on that and then they were launching we had the ability you know the timing worked out where we also able to invest and uh so in in this situation basically the game already exists they have

user base and in in layman's terms the games it's you can think of it as as as pokemon that are battling each other but the the monsters you have themselves are nfts so um non-fungible tokens that you own so you can buy and sell these these creatures you can breed them and and they all have a lot of characteristics um have a lot of um advantages disadvantages and so there's a lot of strategy involved and the idea there is it's not insanely complicated from a smart contract perspective because the game itself doesn't need doesn't run on smart contracts when you and i battle it doesn't it doesn't have to register to the blockchain it's only when we update stats or or buy and sell these nfts that that they hit the blockchain so from that perspective it's not as

dependent on that um what we basically designed was a token that the goal was all right how do we reward existing users keep them sticky but also provide a lot of incentives for new users to come to play and so um on one end we structured we added a token aspect that basically rewards new users for playing if you play a certain amount of games a week you you receive a certain amount of tokens the other reward is if you play a certain amount of games and you stake the tokens you can receive a certain amount of rewards from this centralized pool of assets all in-game spend goes so if if you and i if i if i buy something from you and uh a certain percentage of that just goes into this pool so none of the value accrues to the company every time there's in-game spend

want to buy an item want to do anything it goes to this pool and the idea is you can leverage this pool and and so what we've instituted is this this this pool will will eventually be a dow that the token holders can govern but the idea is if you're you're much more likely to spend a couple hundred dollars in this game knowing i can just sell these later on and and recoup like potentially more of more than i paid just because you know the expansion of the game relative to a game like fortnite where i paid 50 bucks on some aesthetic gear and it's stuck and so the the fluidity of that value i think enables a lot more in-game spend because it's not a sunk cost and what we're trying to do is is further encourage that with the idea that the fees aren't going to the company

So now it's all going into this pool with the goal of redistributing it to users based on incentives and how can we leverage this pool to basically grow the game. And so within the pool, there was a lot of individual dynamics where we built in a score

that you'd get for holding a certain amount of tokens and then the score would enter you into a lottery that you could win a prize. And so you kind of create a lot of these supply sinks that actually provide value to the users and at the same time, so the only way you can get access to these individual prizes

is by buying and staking tokens. The only way you can get these tokens are by playing or by buying them in the open market. And so there's a lot of value in having these tokens and it kind of makes you part of the game and kind of distributes the value to the users and encourages them to actively participate, to figure out how to leverage this pool,

to drive more users. And so it's one of these situations where decentralization is definitely a spectrum. And I think the further out you go, the harder it gets, especially to direct a ship. And so with this structure, the centralized aspect is still the game maker and they're building all these products and you want them incentivized because they need to keep expanding with the game. But at the same time, the value accrual and where all the capital flows goes to everyone. And so these kind of structures that can be sustainable for a long period of time and the goal is, you know, we'll have those rewards that will last for years.

But over time, the rewards should be a function of just redistribution from the pool to new users. And that way, the kind of game keeps expanding. And that was the incentive model we kind of built there. and one other one that i want to talk about because uh pretty much everyone at delphi won't leave me alone about it my partner jason literally texts me like once a week about it is uh thor chain and rune right i think are the two names yeah what that what the hell is this so thor chain is the name rune is the token um so the idea there is who came up did you guys come up with the name or did they no no it's uh the the the team is big fans of norse mythology

and so uh you you understand how ridiculous it sounds when jason is texting me thor chain and i'm i can't tell if he's joking or not but all right good what is this no but we we we we mentioned them like oh we love the project have you ever thought about potentially changing the name because you you know the the the first step of every discussion we have with anyone about this project right it's it's and so um the idea there is so liquidity pools are so uniswap is a liquidity pool and others exist now where the idea is, in layman's terms, it's two assets and the pool is 50% of one asset, 50% of another. And if I want to buy asset A, I sell asset B, receive asset A. And the execution I get is a function of the size of these pools. So as more people add assets to

these pools, I can trade in and out of those two pairs with less slippage. And in return, i pay a fee and the fee accrues to the pool so the users who provide their liquidity get a fee and so this isn't the idea of you have idle assets now you can generate some kind of a yield on them by providing a service to somebody else and this is kind of how you you move out of the centralized exchange space um uniswap was primarily focused on ethereum whereas the idea with thor chain is the all right so even taking a step back one of the bigger issues with with defy and bitcoin is it's very hard to bring native bitcoin to defy because native bitcoin exists on its own blockchain and with defy you either there's wrap situations where somebody now has custody of the

original bitcoin and you have like a wrap bitcoin and the whole idea with wrap bitcoin or all these like um comparisons are that you wrap it in something that makes it erc20 compact like erc20 assets so it's much more compatible with the within the ethereum ecosystem and it still has the same um economic representation of an original bitcoin um but the idea there then you have to create incentive structure for the people that are protecting the the original portion and so it adds a layer of fees what thor chain is trying to do is all assets will effectively stay on their native chains um what they are they what happens is they go into wallets that are controlled by nodes and so these nodes are run by users who hold rune token and you have to

stake a certain amount of this token and in return you operate a node and you're basically what's securing the assets in these products and then for the individuals who want to provide liquidity now i can take my asset so whether it be bitcoin and i can place it into this liquidity pool it's still native bitcoin and in return i can generate a yield on these products the one of the unique things that they do i guess is so each each pool is is rune and rune and whatever other asset and what what helps there is since the liquidity is a function of the size of the pool if you fractionalize the pools into a lot of smaller pairs you hurt like so if you had you know if if there were if eth was in a few different pools i would get worse execution on that eth relative

to it just being in one large pool and so by by establishing a common asset that's in every pool which is rune like if i wanted to trade bitcoin for eth basically i take my bitcoin and sell it what it goes into the bitcoin rune pool and then rune sells into the other rune pool for ethereum and like out comes ETH. And the idea that the way that they're kind of building that is now, so you have a lot of individuals, a lot of idle assets, and now I can actually generate a yield on them

that I wouldn't really be able to do elsewhere. And the way that the token comes into play is it's used to secure the platform. It's used as the counterpart to every liquidity pool. And at the same time, they have a subset of it that's set aside for issuance, basically to reward users for placing their assets in the pool. So the way that this project actually works is you need enough liquidity to be put into these pools so that the execution

becomes comparable. But it's tough for people to provide liquidity initially, because if no one's trading on it, then I don't really want to provide liquidity because I'm not going to get any fees. So that's like the kind of the bootstrapping mechanism where, okay, if you provide liquidity, we'll pay you in extra tokens. And so now everyone's going to kind of come in and flood and place their assets into these pools because they can earn yield on otherwise IL assets. which would ideally create enough depth where transactions can actually be competitive with other venues. And then as you bring in more users, then the fees kind of go up because they just accrue as a function of volume and then more users kind of bring in. And that's kind of the

positive reflexivity that they're hoping to achieve. I'm going to stick with my Bitcoin, but at least I understand it now. And look, I think, you know, before we go to finish up, a lot of what's happening in DeFi and with the token economics and a lot of this stuff is trying to recreate, you said at the beginning, recreate what already happens in the legacy finance world, but do it without a centralized authority, with more transparency, with more automation, with a different kind of ownership structure. And so this is really just kind of recreating things that already exist, but just in a new kind of souped up, improved digital version. Yeah. And the value accruing to users that are providing the other end of the product versus the centralized entity. That's a company, basically.

Yeah, I mean, like, you know, from a high level, just like that as a thesis, like that makes a lot of sense. I think the big question is, you know, obviously, which ones are going to be successful first? What's the timing? You know, what are the legacy players do in response? Like, there's so many moving parts here. But I think just at a high level, that thesis of like, hey, there's kind of like analog or very bureaucratic and centralized existing examples in the legacy finance system. they're super profitable businesses that are very powerful uh if you can disrupt them with decentralized digital versions of their own business and help the market participants accrue value like that should be a valuable thing and people would want to use it and you know so i think it generally makes sense yeah yeah and the idea is you you have some existing users that already want to speculate and kind of participate and it achieves product market fit a lot easier so it's kind of that whole reduction of execution risk in terms of an investment yeah it makes sense. I asked same two questions to wrap up. Favorite book or most important book. What is it?

Most important book. That's tough. Let me think about that. And what's the other one? Aliens, believer or non-believer? Definitely a believer. Why? I think there's just, especially this year, I mean, if it wasn't for COVID, there's so much evidence that's kind of come out and has been swept under the rug that's been huge for us. Like, I think if COVID wasn't around, people would be losing their mind. But there's just too much other shit going on that people don't even realize that there's videos. I'm waiting for Trump to drop it in an interview by accident. Like, just be like, oh, yeah, the aliens.

I mean, like, just literally accidentally drop the fact that there's aliens. Like he, I feel like he's the president. If anyone's going to accidentally let that information out, it's him. Yeah. Or through a tweet when he's on Ambien or something accidentally. Yeah. Literally might just tweet and say confirmed video and just leak it himself. Right. Like something crazy. All right. What book you got for us? And then, yeah, book just cause it's, it's very timely now. So Anil's CEO has been and Kev,

they both read his book called Traction and they've used that to really kind of help shape how um the company has been developing and and i think you know they they really read it about like two or three months ago and um we've definitely been making a lot of internal changes just to optimize and really like create efficient processes and really build the company in a way that's that's scalable and making sure that everyone kind of is directionally aware of what we want to do and so i think yeah that's probably the most important book for us right now if i had pick? I never heard of that one. I have to read that. You could ask me one question. What you got for me? Who's been your least favorite pot? No, no. Who do you think you've learned the most from?

What guest do you think you learned the most from? That would have been an epic question. I don't want to put you on the spot there. I don't even know who it would be. I have to actually think about that um whoever i learned the most i can't pick one person uh people off the top of my head um you know there's all like the the well-known people that everyone would assume like the you know the chamas the raul pauls the cat coals all those types of people um i think that uh somebody who was uh really interesting uh was ben mesrick uh so he wrote bitcoin billionaires he also did um social network movie um and has written like 25 books or something he wrote a book about aliens like all kinds of stuff uh but he was fascinating to talk

to because he basically flipped the publishing world on its head so what he does is he basically writes a manuscript he then goes sells the book rights or sells the movie rights and once the movie rights are bought then he writes the actual book so he goes like complete reverse um and then he also was like super uh forthcoming and transparent about like what he got right and wrong in the social network and and that whole story and then why he did the bitcoin billionaire book and i don't know he was just like the most like or one of the most fascinating people i think that i've had on which is probably not the one that people would assume yeah it's really interesting i'll definitely check that one out yeah it's great um all right where can people find you

and where can they find out more about Delphi? Yeah, so our website is www.delphidigital.io and you can find me on Twitter at Jan Lieberman. Delphidigital.io? Whose idea was it to use the IO? Well, .com was taken at the time. We're actually in conversations trying to buy it. Somebody had it from a while back.

You can't tell people that. Jason Kalkanis is the one who told me this. He goes, no, dude, I never talk about URLs I'm trying to buy on the podcast because everyone's going to go and bid it up. we can delete that yeah we'll just cut that part out guys all right man listen thank you so much for doing this i'll do it again in the future yeah thank you really appreciate your time it was a pleasure