The Pomp Podcast - Dan Zuller, Partner at Vision Hill Advisors: How Fund of Funds Examine Crypto and Digital Assets

Episode Date: April 1, 2019

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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. Dan Zuller is a partner at Vision Hill. In this conversation, we talked about fund to funds in crypto, what investing strategies are enticing right now, how due diligence of asset managers works, and what institutions are thinking about their crypto allocations today i really enjoyed this conversation dan's super smart and i hope you enjoy it as well i'm sure a lot of you have used kayak to find the best flight total is kind of like kayak but it don't find you no flights it helps you find liquidity on decentralized exchanges and it

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This podcast is for informational purposes only. All right, guys, I got a special treat for you today we've got dan here who uh sits in a very unique aspect of the uh crypto ecosystem uh thank you so much for coming sir thank you pomp for having me excited to be here absolutely um let's do a little bit on your background and how you eventually uh discovered crypto and then we can get into what you're doing with the vision hill sure so um i started my career in valuation and transaction advisory i was adopting phelps for a few years focused on structured product evaluation So these are your credit derivatives, asset-backed securities, mortgage servicing rights, and other forms of capital structure solutions. So very deeply analytical.

And I navigated over to the buy side where I joined Citigroup a few years ago to manage pension assets on behalf of their pension fund. So there my focus was really the private equity, the venture capital, and the energy hedge fund markets, mostly manager due diligence and other buy side opportunities, where I was essentially trying to manage a portfolio to capitalize on the opportunities across those different marketplaces. So my crypto story really began in late 2016, early 2017. I had two college roommates that were computer science majors, but back in college, I totally ignored what they were focused on, as I imagine most people did. And then in 2016, 2017, I started to take another look at this asset class because i just saw so much buzz around it and i didn't know what words

like bitcoin and theory meant and i just started to do a deep dive because i always started to realize that technology was the future and i don't have at the time it didn't have that technology background so i really wanted to gravitate my career to learning and getting more involved with technology so that's really how my crypto journey began that's awesome and uh so you're you're at Citi, you're doing a ton of diligence on managers, right? And so it's kind of a natural extension to what you did with Vision Hill as a fund of funds. But maybe talk a little bit about just describing what a fund of fund is, how they normally work in traditional markets, and why you chose to go do fund of funds outside of Citi when you left.

Absolutely. So a fund of funds is exactly what it sounds like. It is a hedge fund that is comprised of individual investments in other hedge funds and the reason why we do this and we could talk about this later is uh no we want to capitalize on many different strategies in this asset class so uh in the traditional world you know with the equity markets you have a lot of long only equity managers have long short equity managers and all sorts of derivative strategy managers so in this crypto asset class where you know you're starting to see developments every single day and maturation in many cycles, you know, front of funds made sense to capitalize on all the different strategies offered. So Vision Hill essentially was founded by my partner, Scott Army, who comes from a high

yield credit trading background at J.P. Morgan. And he was in conversations with a lot of his peers to open up a direct fund strategy. And I met Scott through a mutual friend of mine who essentially introduced us because he thought our skill sets were very complementary. and the idea of a fund of funds was started because both of us realized that the opportunity in front of us is absolutely massive and we wanted to capitalize on all those different strategies so vision hill is very much a multi-strat digital asset investment firm that invests in other hedge funds to capitalize on different time horizons and the risk profiles associated with those time horizons and also different strategies got it and so as you start building vision hill um you two

come together and was there a thought process of there's three or four strategies that we're really excited about to begin with or was it we want to look at the entire landscape what is every single fund manager doing and then we're going to go pick the strategies that we think are interesting great question so um it was more the latter no we we did a very deep dive fund landscape review and And we do this about two times a year, so a semi-annual review. So in the summer of 2018, right after the second quarter ended, we basically did a deep screening across the entire landscape, trying to figure out who the investable funds were and what strategies they were executing.

So at the time, we had screened a little over 300 funds, and we identified five main strategies that we curated into our benchmarking work that we published. free and publicly available for all. And those five strategies are fundamental, opportunistic, quantitative, venture, and smart beta. And we can get into more detail there if you wish, but more or less starting in the summer of 2018, we realized that these are sort of like the five core strategies associated with this asset class. And each of those strategies can break down into different sub-strategies that we can get into. But that's really how this aggregation of data came to be and how Vision Hill was starting to be built.

Just to give you some context on our research, when we did our second deep dive fund landscape review as of the end of fourth quarter, we were tracking around 425 funds. Almost at the end of first quarter 2019, that number is now exceeding 500, but back to fourth quarter, the crypto native fund landscape aggregate assets under management, we estimated it to be about $4.5 billion. And the top 20 funds comprised approximately a little over 50% of that landscape assets under management. So, just to recap there, in the end of Q4 2018, there's about 420, 425 funds that were in existence. But out of the $4.8 billion or so that is in those funds, the top 20 manage over 50% of it.

Correct, 4.5 billion is what we estimate. 4.5, okay. And to put that in context, as of the end of the second quarter, we estimated the fund landscape, the crypto native hedge fund and venture fund landscape AUM to be about 6 billion. So actually between Q2 in 2018 and Q4, there was almost a 30% drawdown in assets managed by these funds. That's what we estimate.

You know, capital raising has been tough across the board. How much of that is because the asset value drew down versus like redemptions? Do you know? So we don't have that data, but it is something that we very much hope to include in our future analyses. But as of the end of the second quarter, the top 20 funds comprised about 40% of the landscape AUM. And as of the end of the fourth quarter, that was just over 50%.

So we're starting to see wealth concentration shift upward towards top quality funds. Yeah, it's the concentration in quality, right? Where basically you see this in the liquid assets themselves, right? So when there's a bull market, kind of the amount of Bitcoin dominance goes down because everyone kind of goes into all these altcoins. And then when the bear market hits, that dominance goes back up because there's that flight to quality. And what you're saying is basically in the fund landscape, you're seeing the same thing, right? Those top 20 funds are really dominating in terms of AUM, especially during a bear market. That's correct.

And going back to your question about fund redemptions, the average lockup period for most hedge funds that we have seen has varied between one year and three years. Three years is on the longer end. So any redemptions that happened, you're still locked up for a prolonged period of time. So for redemptions to happen in the fourth quarter of 2018, you would have had to be in this asset class in 2017. And then even still, a lot of funds structure their redemption cycles so that it's staggered. So you can only withdraw up to a certain amount, and then you can go into, whether it's quarterly or semi-annually, and it can be deferred to withdraw until that staggered redemption schedule hits.

Got it. And so let's talk a little bit about the manager specialization, right? So you kind of named those five core strategies that you guys identified, but maybe talk a little bit about, you know, or let's do this first. Why don't you describe those five and give a little bit of more detail on what do you mean by each of the five categories? Sure. So we also describe those five in our quarterly benchmarking pieces. So for anyone listening, if you want to read more comprehensively, it is publicly available. Fundamental, I think, is pretty straightforward. You have, on one side, long-only managers that really do a deep value research, and these guys go granular to the protocol level to study the engineering trade-offs in the consensus algorithms. So certain examples of that would be, how do you reach distributed consensus, and what is the most secure or optimized way to do that without jeopardizing other factors, such as performance or decentralization?

So whether it's liveliness or safety managers, liveliness refers to finality. So finality is in the sense of like how do nodes communicate with each other to ensure that a state is reached so that consensus can be achieved and then move on to the next transaction, which would be a new state. So it's essentially a state transition function. So safety refers to protecting against double spends. So when you think about those trade-offs and Byzantine thought tolerance, which is essentially protecting against bad actors, these managers are really studying at the layer one level all the trade-offs that the engineers have made and then trying to figure out which one is poised for the largest upside potential and value capture therein. On the other side, you have long-short managers and tactical trading managers. These guys are essentially trading around the bid-ask spread that's offered by exchanges and other over-the-counter market participants. So that's obviously a traditional market strategy that is carried over into this asset class.

And then you have hybrid managers that are really doing a combination of those two and also long-tail venture at liquid risk. And those happen in side pockets, which are simply just carved out allocations for illiquid investments that are separated from the main fund, but are funded nonetheless by the existing limited partners. So that's sort of like how fundamental breaks down. If we turn to quantitative, you know, this is also continuing to be an interesting developing sub asset strategy. But you have your market neutral managers. So these guys could essentially be doing basis trading or could be doing exchange arbitrage. You also have your directional managers that could either be running some kind of risk model and a variety of factors therein. And so it could be, you know, factors like momentum, like, you know, sentiment.

And they trade based on those factors to determine the direction that an asset might be trading in to capitalize on any upside opportunities there. And then you have a developing strategy that we refer to as long volatility. And these guys are simply just trading the Greeks. So these are not just your delta and your gamma, but also your theta, your vega, and other forms of option derivative strategies. So that continues to develop, but I think the SASA class is still a bit young because there's not that much data to work with. The fund landscape didn't really take off until 2017 when we saw no significant volume come to the SASA class. The other strategy is smart beta is more or less active and passive indexing. venture is akin to traditional equity you have um you know your seed bounds you have your early

stages and the late stages and then the last strategy is opportunistic opportunistic we separate into two underlying sub strategies one of them is credit so credit also carries over from the traditional asset class it's just taking the existing legacy business model of lending and you just have a new form of crypto collateral um and then the last one is what we refer to as generalized mining and generalized mining is really just active network participation so if you think about you know blockchains really just are ways of coordinating human behavior so that you are either contributing a decentralized digital go to a service to a network and then either being remunerated for that contribution or paying for that specific

contribution on a given network so by essentially providing some kind of supply side service you're being rewarded coins by a native network as uh as as um a good faith of being a good actor so a really interesting way to look at this is sort of like the tax and medallion model it's the right to work in a given system and the tax and medallion could go up in value if there's demand for it but could also stay flat it doesn't necessarily mean that you can't generate positive returns because taxi drivers collect their you know compensation in u.s dollars for sure how do you think about the difference between public and private uh investing right kind of in the traditional markets it's very well articulated very well understood um in this market it's a little bit

different in that uh you've got public and market investing which is what most people think of crypto right and then the private market is really these credit or uh venture opportunities how do you think about that from a fund to fund perspective that's a great question so exactly like i said public crypto is really the crypto that most of the world sees so these are your liquid listed crypto assets like bitcoin like ether like litecoin and so on and so forth and then on the private side you have a lot of vc and hedge fund backed startups that have created special projects that are not publicly traded and we've seen that continue to develop so i think in the at the end of the second quarter we estimated the private market valuation to be anywhere

between $10 and $15 billion. And as of the end of fourth quarter, when we did our second deep dive landscape review, we estimated that to be about $15 to $20 billion. And a lot of that is really because if you look at 2017, you saw the potential for illegal securities offerings in the ICO boom. So that shifted a lot of capital formation

back to the private markets because a lot of entrepreneurs said, we want to build and also be regulatory compliant. So we want to raise capital to fund our startups but also we don't want to break on a loss. So the way we think about it is, you know, it goes back to side pockets and getting access to illiquid opportunities while also appropriately managing the assets and liabilities

inherent with fund structures, particularly as it relates to terms. But the private market valuation has, in our view, shifted upward because of the demand, because capital formation is starting to continue to flow back to, you know, those private opportunities. But that doesn't necessarily mean that the private market is going to trade for that $15, $20 billion estimate I just gave, because that is really based on post-money valuation, which is a paper valuation, and doesn't necessarily represent fair value. It's entirely possible that the private market could still trade a significant discount to those post-money valuations, because we're already starting to see that in secondary markets.

I think Coinbase was trading at about $0.60. We saw our circle trade at one point in time for about $0.25, and you see simplified agreements for future tokens, SAFs trade at discounts as well for other projects. So, no, there's a lot of opportunity there, and we're starting to see also a lot of those private projects come onto mainnet. So, Cosmos just launched last night into mainnet, which was a private project that's now live in public. So, we're going to see a lot more of those launches later this year. It's so interesting to watch the nuances of crypto from an investor's seat, right? Because there are some things that are very different. And the network launch is kind of similar to an IPO, right?

Like to some degree. And you've got the ICOs, which is another form of an IPO, right? And so you kind of have various applications of financing mechanisms or kind of networks going live, etc. It's pretty cool to watch. Definitely. Definitely. Definitely. Give us some insight into the institutional interest, right? So you guys, basically, your job is to go raise capital from institutions, family offices, high net worth, and then you go and you deploy it into all of these different funds. What are you seeing on

the institutional front? So I think sentiment is turning. I think the announcement of JPM Coin and what Cambridge Associates released, I think, are two positive catalysts to get people that sort of um were not excited about the asset class in 2018 given the public price drawdown because that's really how they look at the entire asset class i think those uh announcements got them back to the table to say you know wait a minute maybe maybe we should take another look at this and then um also you know the whole question about whether we have actually bottomed is um continues to float but i think the fact that sentiment is turning people are interested in trying to look beyond just the price of Bitcoin, look beyond just the public market valuation and look at the

private side as well, I think is a tremendous positive. Not to mention that February was the first monthly positive return since July 2018 and before that was April 2018. So the fact that we have seen upside volatility again and we see sentiment is sort of starting to pick up, sentiment's very hard to control, right? So I think institutional interest is growing again. Whether or not we have bottomed, I wish I could tell you. I think, though, that there are certain factors that we can get into that speak to the possibility that we have bottomed that weren't around a few months ago.

One of those factors is if you look at the futures markets, the backwardation curve has flattened. So the fact that futures prices are now more or less stable relative to spot price, I think, is an entirely bullish signal. And that wasn't the case just a few months back. And then also in the make a DAI ecosystem, this is a more granular example. But the fact that DAI is trading below a dollar suggests that a lot of users are leveraging long the price of ETH because they don't want to sell it. And we can get into the mechanics of that peg if you want. But I think that's also an incredibly bullish signal because people don't want to sell because

they believe that the drawdown has essentially, you know, it's over. Otherwise, they wouldn't be leveraging long. So I think, you know, there's a variety of quantitative and qualitative factors that could speak to the possibility we have about them. Again, I don't know. But that narrative was not the same just a few months back. And I think institutions are starting to consider that. I tend to agree that the sentiment is definitely changing.

and institutions are surprisingly very in line with retail sentiment, right? And what you've got to remember is, I don't care if you're a CIO at an endowment or you're an analyst at a public pension, you're still human and you're still feeding off of the same information, whether it's Reddit, Facebook, or I'm sorry, Twitter, Telegram, et cetera, that sentiment change is kind of happening across the landscape, which is important. Definitely. I mean, sentiment seems to be, you know, if you think about it like a boulder, it's very hard to control. It's very hard to control the direction.

It's very hard to move. But when it is moving in the right direction, it can work like a tail wound. And I think that's a positive catalyst for everybody. Yeah, for sure. You spend a lot of your days doing due diligence. Let's talk about that a little bit. So maybe, first of all, just explain how you think about your role in the due diligence process. Like, why do you guys spend so much time doing it?

And then we can get into what you actually do during the diligence process. Sure. So we think of our roles as two things. One, we want to be educational translators for institutions to come into the SASA class because the SASA class is very opaque. It's very complex. There's a lot of front end and back end complexities that may not necessarily be picked up by someone that's looking at the SASA class for the first time.

So from a strict risk management perspective, we want to be able to offer sophistication of diligence, both for ourselves and our investors, but also for all funds that we are diligence in so that they are employing what we believe are best practices for their investors. So it's really an alignment of incentives there to just be as professional as we possibly can to help this asset class mature. So the way we think about diligence is really akin to those five strategies that I just worked through. And we want to have exposure to all five of those strategies, whether directly or indirectly. And diligence happens when we roadmap a fund that looks institutionally investable and is transparent with their data, whether it's performance, whether it's how they think about their strategy whether it's uh you know just market sentiment and their own um narratives

but we want to diligence them from a framework that we have vision how that basically starts off by going deep into strategy and philosophy and then going granular into how do they think so it's quantitative and qualitative quantitative um kind of like a side note one of our advisors likes to say it takes three years to get a three-year track record so uh you know it takes time to build those track records and nonetheless while we do that benchmarking work that's publicly available every quarter you know the the snapshots of performance at a point in time and they shouldn't be indicative of longer-term performance of any given managers so as it stands today quantitative analysis for our due diligence is still relatively limited and on the private side

you know when you have private private networks that come public you know you don't have that many case studies of the value creation you know if i entered into um a private deal with the one times multiple capital and i was able to generate you know whatever the exit multiple is hopefully it's higher than one times what's that attribution what's the value creation attribution in between point a and point b when point b is public so uh given that there's not that much quantitative data to work with yet um a lot of it is very qualitative and qualitative refers to how do people think and And I usually refer to this as kind of like the talent stack. And I think there's three ways to really analyze this asset class.

There's, you know, from a financial perspective, how do you analyze token economics, which is a lot of it carries over from traditional finance 101. And that can help you understand how a network can behave economically. But then there's kind of two other layers, I think. One is what I refer to as technical from the outside. And then the second one I refer to as technical from the inside. Technical from the outside, I think, is looking at certain metrics that are available on things like GitHub to try to understand developer activity. So, for example, Electric Capital just posted this fantastic state of developers report.

It was amazing. Yeah, it was really, really robust. Shout out to Vito on that. It was so good. Yeah, that was really very impressive. And that really just painted a picture of the health of the development of all these networks, what the developers are working on, how many, what the trend of that developer growth is. And on GitHub, certain metrics like no commits

and stars and watches are great, but you still have to be careful that a lot of those can be gamed or manipulated. So that is all important from a technical analysis perspective. I refer to that as technical from the outside. And then technical from the inside is really, like I was saying before,

understanding granularly the engineering trade-offs that are made by the builders of these protocols and these projects. Now, from a security perspective, from a performance perspective. You know, if there are a lot of disparate applications that were in different programming languages, that were in different trade-offs and distributed consensus,

you know, all that calls from me when I said, you know, if you have an air traffic control system, if you have an accounting legend, if you have a social media platform, all three of those use cases aren't going to demand the same programming language and the same security and performance trade-offs. So I think that is one of the further technical from the inside, because you have to really

understand the decisions engineers are making and also the trade-offs that come from those decisions, what vulnerabilities are opened up, what potential attack factors are opened up because of some trade-off decision that you elected to make, not to mention governance. Now, coordinating human behavior in the division of labor is all extremely important because You need to think about what is sustainable in the long run and how humans are incentivized. So that is what I refer to as technical from the inside. So to wrap that up, that's really how we go deep with the manager on the qualitative aspects. And then last but not least in due diligence is operational due diligence.

So this is not just your custody and your security and your asset verification. This is also what's evaluation policy. How do you mark your liquid positions based on what you determine? So I want to get into a couple of things. So basically, you just described this as a qualitative and quantitative analysis of, you know, what's your philosophy? What's your strategy? How do you actually what are you going to do with the money that right if we give it to you? And how will you think about deploying it? And what type of return can we expect? Right. Or would we anticipate? Right. Correct. Then. And I think a lot of managers focus on that. Right. That that is what their business is, is I'm going to take money from my investors. I'm going to go and invest it. And that's the fun part of the job. The second part is this operational due diligence.

Usually most managers actually don't like the operational side of it because it's not investing. Right. It's the necessary evil to the business. And in this, there's all kinds of nuances. Right. And in my experience, the larger the asset manager and the longer they've been around, they just have muscle memory, right? They're able to say, this is how we've done this. We've gone through a lot of due diligence processes. We've learned where we've kind of, you know, we're a well-oiled machine. In crypto, most of these funds are very young, right?

Year or less old. And so they don't have that muscle memory. They don't have, you know, the 50 person staff. They're trying to build up for that, but it's going to take a couple of years. and it's going to take, they're going to have to sum profits to invest, to build that type of infrastructure. Let's go through a couple of the operational due diligence things, right? And so one thing that you mentioned that I don't think a lot of people understand the nuances of is like a valuation methodology, right? So in the public markets, pretty simple. We're going to pick

a date and time, and this is how we're always going to measure it. And what is the, you know, what do we own and what's the price on the exchange? Simple. Private market is very different. So maybe talk about, you know, what the challenges are on the private market and then how you guys think about and talk with managers about that valuation methodology of the private markets? So that's a great question. I agree with everything you were just saying. So on the private side, a lot of managers choose to hold their positions at cost, which could very well be the right way to go about it. What we advocate for is fair market value, and it's very possible that cost and fair market value could be the same number, but it's how you arrive there that

um can make auditors most comfortable that you are employing best practice so what we have seen some managers do is create a framework you know it's essentially a list of parameters and now if you think about it as a less now step one is gonna be if this asset is very thinly traded on a exchange whether it's centralized or decentralized you know can we exit in a timely fashion how would that be defined if we can't because there's not sufficient volume then step one cannot be completed let's move on to step two step two could be something else now can we derive a you know internal fair market value estimate based on some valuation methodology that we could also get into

if we wish um there's some challenges around that but if we can then maybe that's fair market value if we can't then let's move on to step three and it's possible that if all the above steps can't be met then step three could be cost and based on that defined methodology you're arriving at cost but cost could be equal to fair value so uh that is um something that we have seen some managers start to adapt and uh as well as we always recommend managers work with the auditors yeah and the part that's interesting i've even seen managers who say i'm going to market at the last valuation uh that was validated by a third party investment with a discount so i'm going to take 20% off whatever that is, right? And just they're being overly prudent in a way or conservative,

which I think is a really interesting way of approaching it as well. What are some of the other things that you see are really big points for you in the operational due diligence? So what we see as really big points are business risk mitigation. So that really means is, has your management company been separately capitalized to have sufficient runway to cover the cost of your operations if you didn't get another dollar in the door for a profit or a management fees. So in other words, are you separately and properly funded on your balance sheet to be able to cover the cost of operations?

And then a second point on that is what assets under management do you have to have so that the management fees generated from that assets under management can cover the cost of operations alone? That's basically a break-even point. So what really makes us comfortable is trying to see what managers have thought about this, what managers have checked those boxes. Because otherwise the business risk is too high. If you only have three months to fund your operation and not another dollar in the door,

you're either going to have to raise more capital for your management company or you're going to have to shut down. So that's one key thing. What percentage of funds do you think are making money right now? They actually are past break-even and profitable. So when you say make money, do you mean profit or do you mean that are having the management fees cover the cost of the operation? Let's go with management fees cover the cost of operations. So I think there's a healthy chunk.

I think there's absolutely a healthy chunk. The top 20 funds that we just mentioned, more or less, I think all of those are sufficiently covering the cost of the operation. And now managers that are, let's call it $5 million in assets under management or less, are still running incredibly lean operations. So the overhead costs are not that high, even though the AUM is very small. So I don't see that as a viable concern for the majority of funds in this asset class. Got it. Very interesting. But it's nonetheless a very important factor about due diligence. Yep. Okay. What else?

So we talked about valuation policy. So I think key person risk is also incredibly important because investment teams, given it's still extremely early days, investment teams are very small. And if you remove one person for whatever reason from the equation, now, what does that do to the investment strategy and the ability of the fund to execute that investment strategy? So how key person risk is handled, you know, is there a succession plan? Now, who is the most valuable team member and what happens if they are essentially no longer part of the team? I think it's really important to think through. And I would say that's another example. Got it.

And how do you see the best teams handling the key man risk? So I see a lot of succession plans. And also, it really depends on the chemistry between the investment team. Now, how do you guys come to consensus at your investment committee? Does everyone have an equal vote? Is it defined based on certain parameters? And if for whatever reason somebody were to depart from the investment team, we see enough talent in the other investment team members to continue to carry the fund forward.

We don't really see any one investment team member being so important to the operation of the business that if they're gone, then it's very unlikely. the investment operation was shut down. We don't see that often, but we have seen it in certain cases. And that is nonetheless a risk to be very cognizant of. Got it. Let's switch gears and talk about crypto and like kind of 2019 into 2020. What's your outlook in terms of sitting in that fund to fund seat, both from inflows, so institutional investors coming in, and then also from a strategy standpoint which strategies are you kind of most excited about uh um over the next year or so sure so i think from a inflows standpoint the institutional interest that we

just spoke about a few minutes ago i think is uh changing no i think it's skeptical but from a from a healthy perspective um and that that is very tough to control no it's not like it's like like a light switch so i think that is a very positive catalyst for 2019 2020 of course the global macro fears um based on the state of the global economy but nonetheless if you look at crypto in isolation of that now the fact that they'll come back to the table and reconsider and perform their construction and deploying funds into this asset class i think is um extremely positive and i i don't think many of us saw that in 2018 so uh that's from an influence perspective from an outflow perspective um right now we're excited about a lot of things um you know we're

trying to gain exposure to those five strategies i mentioned before um and then personally i'm very very interested in defy or open finance as some people call it because i see that as you know, a very interesting use case to enable permissionless value transfer and all kinds of financial tools for anyone, anywhere in the world at any point in time. So I want to go deep with you on this because one framework that I've been using is institutional investors are still trying to underwrite fund managers. They're trying to meet due diligence and underwrite humans. defi a lot of it is actually the humans are taken out of the equation right there's kind of algorithms and more automated processes right if you look at like a cdp or anything like that

with maker how do you think that well first of all how do you guys think about the d5 versus like let's call human driven fund managers and then how do you think that the institutional investors is there a world where they eventually just start actually getting direct exposure to defy type instruments or do you think they'll still go through managers who then get the exposure for them so i think uh they'll still go through managers to get that exposure um at least in the short term because the the counterparty risk and the custodial risk of um how do you actually custody these assets and how do you trust the technology as opposed to a human i think is far too great right now so i think a lot of institutions would still go through managers

before they start to do it directly um that very well could change in a few years but right now i think the risk is too high. I actually respectfully disagree with the point about DeFi being mostly machine-driven algorithms. Okay, awesome. You don't even have to do it respectfully. You can disagree vehemently. I appreciate that. But the reason why is because of this hypothesis that the idea of programmable value networks generating monetary premiums is very much a function of social capital and social capital is really just human connection you know um you could have smart contracts execute all sorts of code to create financial instruments and derivative instruments and so on and so forth but how do you trust that where you actually executing the smart contract

on is secure and that i think is indirectly a function of the people that are working on maintaining the technology and also building the technology so uh when i was going back to the the The idea of a monetary premium, a lot of people that look at the Ethereum blockchain think that ETH is accruing a monetary premium because they see it be used as a value in certain things like Nolendarma or collateralized depositions maker. But if we take a step back and you think about the human aspect here, there are some programmable public chains out there that can compete with Ethereum as, if you want to call it, the winning public blockchain. I don't want to say that, really, because I think there's going to be many different blockchains in the future. But if you look at EOS, if you look at Tezos, if you look at Zillow, you know, there's a lot of similarities in the smart contract computing aspect. But ETH, as Electric Capitalist Data Developers Report has published, Ethereum has accrued the largest number of core developers and total developers. And that trend has been growing in a very steady pace throughout the last 12 months.

So the fact that those people want to build on Ethereum and the fact that they don't really have many choices yet because a lot of the private programmable value networks, you know, I'm talking like your NEO, your Divinity, your Oasis and so on. A lot of those teams are still very much operating in closed environments. So that talent is pretty much not necessarily able to go anywhere because they're very confined to their funding that is backed by venture funds or hedge funds. And the Ethereum community is building on a protocol that they have a community around. And just to give you some flavor of the strength of that community, DevCon, which was late last year, I think 3,000 tickets were sold out in just mere seconds. So it's a very strong community. And the developers that are building on that network, when I referred to social capital earlier, it removed that social capital.

If those developers were to go to a different project that was private that went public, or EOS or Zilliqa or Tezos, would people still have faith in the fact that ETH is a crude monetary premium because it's being used in all these different DeFi applications? My argument would be no, because unless the talent can be replenished, unless you can actually match that talent with equal or higher caliber, no, it's hard to justify assigning the same value to that same digital asset. So that's kind of a long answer to a question of why it's discreet. I think human connectivity is still a huge part of all these DeFi functions. It's just not the same as having a trusted counterparty. And so wrapping that up, institutions would still rather go the phone manager app to have a trusted counterparty. But then the DeFi applications could be very much automated, but the value ascribed to that is still a function of the human instead of working on it. For sure. How does crypto do during an economic turndown?

On the public side? Yeah, like so Bitcoin, Ethereum, kind of all the public crypto, because I think that's probably the most volatile and most likely to be affected. All of a sudden, there's some sort of global, you know, economic crisis or even just a drawback in the U.S. economy, etc. How do you think crypto does or what's the framework you use to think about it? Sure. That's a great question. I think on the public side, at least, these are still a risk on assets. So I think it's very possible that they would have high beta. And similar to public technology stocks, when there's a drawdown or concerns around the global macro environment, a lot of technology investors think that the ability to collect a claim on cash flow is distance because of operational challenges, because revenue is slowing down, whatever the reason for the drawdown is. And as a result, they lose confidence in their ability to collect cash flow from a particular stock in a short period of time. And I think that very much carries over into publicly traded digital assets because it's that same sentiment. If I'm losing confidence because of public market drawdowns, even though there's no revenue, there's no equity business model, networks and companies are very different.

Nonetheless, I think that same investor profile is in the equation. And if I'm losing confidence, then I'm probably going to sell. So I think, no, I would expect digital assets on the public side to trade down, just like public tech stocks. On the private side, no, I think there's a lag. I think there's a three or six month, possibly more lag on private market valuations to the public market. And the reason why I say that is because public market valuations, in theory, should serve

as reference points for what private markets should be able to achieve in the future. And if public markets are drawn down, then it's only presumed that private markets should be able to follow suit. It just might take some time to get there. And how would private markets fare? I think the scarcity of funds in the private market could bring down those valuations. And if entrepreneurs are going to have to raise capital on less favorable terms, the cost of capital is going to increase. And as a result, that could put stress on their ability to grow their projects and their companies.

So I think you're going to see stress in both the public and the private side, but the private side would probably lag the public. Got it. Do you think that these institutional investors see Bitcoin as a non-correlated asset, or do you think that we're still so far in the early stages of the education cycle, they're not even thinking about Bitcoin by itself? They're just thinking of crypto as an entire asset class. How far are we on the separation of the different assets?

And then also, how do they look at it in those kind of global macro situations? Those are two great questions. I think I'm going to answer the second one first. I don't think that they separate the assets in this crypto industry because they very much look at the price of Bitcoin and think that's representative of the entire asset class. So unfortunately, I think it's early from an educational perspective. I think we're going to all collectively have to collaborate to get them to understand there's so

much more beyond just the price of Bitcoin in this asset class. And then to answer your second question, I think the answer is yes and no. It's yes to the sense that they do look at it from an uncorrelated asset perspective, because Bitcoin's history has largely been low correlated to traditional markets. But I also think that it's very early. Even though Bitcoin has been around for about 10 years now, it's still very early to have probable data because of the adoption curve. So 2017, I would say, is when crypto fell onto most people's radar, and then we had the run up and then the run down. So very much could still continue to be a very low correlated asset. But I think as we get more years under our belt, that's when you'll be able to trust that it will

remain a low correlated asset. Absolutely. Before I finish up, i always do rapid fire questions uh what do you think the most important company in crypto is that's a great question um i i think the most important company is i would say a company focused on education so uh so i think uh i would say the the answer to that question is very two companies that come to mind it's masai and i think it's the block And the reason why I mentioned those companies is because content curation and Coindesk, so let's say those three companies, it's really because content curation is so remarkably powerful for expanding this asset class from an educational perspective. And all three of those businesses focus on different kinds of content.

So it's really just trying to get people to read and any podcast or plus for anyone that loves podcasts such as myself over reading. But I think if you can continue to get information into the hands of non-crypto-natives and get that distribution out there, I think that is one of the most important things that we can ask for in this asset class, because otherwise we're not going to be able to spread the mission. Absolutely. If you could change any one regulation, what would it be? Change or improve? i would say i would this is my personal opinion of course i would change the tax impact around trading crypto assets as property because i think you know even if i think it's two layers of complexity here one i don't want to spend a deflationary or a disinflationary asset in an otherwise inflationary environment i'm much more incentivized to hold and collect the future rewards over time by doing some kind of active network participation but even if i had a stable

coin like we used to make a dial ecosystem even if i was able to take that deflationary disinflationary asset lock it into a smart contract extract stable coin and go out and spend that stable coin i'm still creating a taxable event and i think that is a headache for many people that is no in a way um it doesn't make sense yeah it's challenging adoption i think So if you could change that to enable people to be able to spend those stablecoins to facilitate points of sale and merchant adoption, I think that would be a positive catalyst for the entire asset class. But unfortunately, I don't control the tax law. What is the most important book you've ever read? Most important book I've ever read? How to Win Friends and Influence People by Dale Carnegie.

Really? Yeah. What was your takeaway from it other than how to win friends and influence people? Yeah, I think two takeaways. One is listen more, because when somebody's speaking, you're getting information. And, you know, some parallels to this from where we sit at Vision Hill, but getting information is one of the most powerful tools out there. You know, if you're collecting information from someone else, you know, life shouldn't be looked at this way, but that can open up a lot of different ways conversations can go. And in certain circumstances, it can also help you create leverage for yourself. So that could help with any kind of business negotiation, anything like that. So I think that was takeaway number one.

Takeaway number two is, you know, at the end of the day, it's funny because crypto is looked at as financial incentives first and foremost. But I think a really important second part is the idea of human connection. Now, it sounds a little cheesy, but the idea of looking for love, money can't buy love. People want to be connected to other people and have a sense of belonging, have a sense of purpose, have a sense of duty and mission. And I think people are always looking for that. So that book really helps you figure out how to connect with other humans that may come from different backgrounds and may come from different geographies and teaches you how to create a two way street in conversation that can make you a much better person if you have information that you can apply to your own life. Yeah, I love that answer. I usually end with you asking me one question, but before we do, aliens real or not?

Yes. yes absolutely why i think that the probability that we are the only species in this entire universe is incredibly low i wouldn't necessarily say it's uh non-zero but i think it's incredibly low and i think it's only normal to be open-minded to the fact that there are other forms of life out there um i don't necessarily envision aliens as your cartoon character with no big eyes and big head and like that uh very well could be a possibility but i i think that there are other people out there and it's very possible that they have tried to communicate with us already and we just not advanced enough as a society right um but i i very much do think they're aliens out there

would you rather go to space or to the depths of the ocean depths of the ocean really wait why i am terrified of space oh man i'm the opposite i'm terrified of the depths of the ocean like yeah just like i don't know what's down there well the way i work on it is if i'm scuba diving down there no um if something goes wrong my chances of getting to the shore are higher than if i'm in space and something goes wrong getting back to earth okay that's fair that's how i look at it so you're looking at the downside protection downside protection exactly yeah exactly uh all right what uh what one question do you have for me so one question i have for you is really you know obviously you built quite a brand for yourself and a following and you know all your podcasts

which i'm very grateful to be here you know your twitter following you're on your newsletter How do you balance your social life with what is a 24-7 asset class and also trying to maintain the status that you have achieved? I guess one follow-up question is if you could look back, would you do anything differently? That's a good question. I think one, definitely don't have any status. Right. I'm a big believer that I look at it as I put my ideas out there and I wish that other people actually did that more often. And I'm doing it from a selfish perspective, because when I put those ideas out there, I get lots of feedback very quickly on whether, OK, am I on track? Am I missing something? Did I actually take data that was accurate and applicable, but I applied it in the wrong way?

You just get feedback. And so it's really from a learning perspective. Two is how do I balance it all? One, I have an incredible girlfriend who is super patient and she probably wishes I was on my phone a little bit less. But other than that, I'm pretty intentional. So I wake up early. I know that I kind of I write the newsletter every morning before pretty much anyone else is awake. I'm able to do a bunch of calls and stuff, you know, with other time zones. And then I schedule my calendar in a way where I actually leave early. Right. So I don't stay in the office till seven, eight o'clock at night. It's very important to me to kind of get out of the office, go spend time with her, really do things other than work. uh even if it's for just you know an hour or two every day um and then uh it's also the ability for me to seem like i'm always on uh i engage with a lot of people and all stuff but there's

times during the day where i'll go three four five hours and i won't be on twitter right but then when i come back on i will go through and it'll take me 20 30 minutes but i'll respond to everybody and so yeah there was a three or four hour lull where i didn't respond to them but i responded and so they feel like i'm oh he's always there he's always responsive and and it's kind of the uh the perception is the reality to some degree um and then would i do anything differently uh i'm a big believer in doing what you want to do like there's a sense of freedom to that there's probably some things where people have said something online and i've just you know i i gave the example the other day somebody like brought a little like water gun and i came with

like a flamethrower over the top right it was just like that was just my reaction in the moment and there's probably some of that stuff where uh you know when you look at it six months later like that wasn't necessary or wasn't helpful um but then there's an element of me that says well that's how i felt at the moment and i said what i meant right and i don't apologize for it so i think that there's a balance there that uh that sometimes there's probably i probably shouldn't have said that um but also at the same time would i do things differently i think i would probably uh i wish that earlier in my life i would have learned uh the secret of i don't care what people think and i'm actually willing to uh lose quote-unquote friends or acquaintances who don't

want to be in my life for the right reasons so um that is a really unique way of looking at the world where i think a lot of people are like oh i don't want to like you know lose that friend i don't want to lose connection with that person. I'm much more of the mindset of like, I'm going to do the things that I want to do. And the people who want to be in your life will be there. Um, the friends that you have are the friends who want to be there, right. That you find yourself talking to. Uh, and so I'm less intentional about like, Oh, I haven't talked to this person in three months. Like I should go talk to them. Uh, and more of like, do I want to talk to that person? Right. And so that, uh, learning all of that, um, I still learned it pretty early in life,

but you know, the earlier I would have learned it, I think that the more I would have benefited from it that's great i'm really glad that you are finding ways to have fun outside of our what is incredibly busy environment this is uh i am super transparent the day that none of this is fun anymore i'm done like if i wake up one morning and i'm like i don't want to write this newsletter i i promise you i will stop writing it that day i won't write it again right if i walk in here to record one of these and i'm dreading it i'll i literally won't record that one i won't record another one. Um, and so, uh, there's a lot of things in my life where I've done it that way. And it's just, let's all enjoy it while I can, while we can, cause I'm enjoying it. And then

when I'm done, I'm done and I'll move on to something else. Great. Yeah. Thank you so much for coming, man. I'll have to do this again. Definitely. Another word from our sponsors at total. They're kind of like kayak, which helps you find the best flights, but total helps you find liquidity by aggregating decentralized exchanges and optimally routing trades for execution. Remember, that's Total.com slash Pomp. T-O-T-L-E.com slash Pomp. Go check it out. Let me know what you think. Tweet at me. I'll drop you some fire emojis. Total.com slash Pomp. One more word from our sponsor, BlockFi. Their new interest account allows you to securely deposit your Bitcoin or Ether at BlockFi and receive 6% annual interest paid monthly in cryptocurrency.

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