The Wolf Of All Streets - Why A Bear Market Is The Best Time To Invest | Haseeb Qureshi, Dragonfly Capital

Episode Date: July 5, 2022

A lot of things seem to be breaking in crypto, but is it as bad as it seems? Haseeb Qureshi, Managing Partner at Dragonfly, joined me on the show to discuss these growing pains. We had an honest conversation about how crypto can’t solve everything and why it’s so important to learn from our mistakes instead of criminalizing them. You don’t want to miss this conversation with one of the most brilliant minds in the space. JOIN THE FREE WOLF DEN NEWSLETTER 📩 https://www.getrevue.co/profile/TheWolfDen THANK YOU TO OUR SPONSOR ►► Ready to scale your big idea? Business banking with Mercury makes it easy. FDIC-insured bank accounts, unlimited virtual cards, free wire transfers, and more—all in one simple-to-use Interface. Sign up for a free Mercury account online in just minutes and get better business banking. Go to http://thewolfofallstreets.info/mercury to sign-up today. EPISODE LINKS Haseeb Qureshi: https://twitter.com/hosseeb Production & Marketing Team: https://penname.co/ FOLLOW SCOTT MELKER • Twitter: https://twitter.com/scottmelker • Facebook: https://www.facebook.com/wolfofallstreets • Web: https://www.thewolfofallstreets.io • Spotify: https://spoti.fi/30N5FDe • Apple Podcasts: https://apple.co/3FASB2c

If you're not actually solving a big problem, ultimately you're not going to be creating value in the long run. And so the question you have to ask yourself is, what are the big problems that are going to matter two to three years from now? And I think it's pretty obvious in my mind what some of those things are. Last time I spoke to Haseeb Qureshi on the show, he talked about how Ethereum was like Manhattan. Well, this time we started talking about what cities the other blockchains might be like. And when they were Denver and Houston and Los Angeles before, now it seems that some of them have become like lesser cities like Gary, Indiana and Flint, Michigan. We talked about how a lot of things seem to be breaking in crypto,

why that's not necessarily such a bad thing. It's just part of the growing pains of a new technology. This is a conversation that you don't want to miss with one of my favorite and one of the most brilliant minds in the space. So last time we spoke, you made an incredible comparison that Ethereum was like Manhattan, really talking about the network effects. And it was sort of refuting Michael Saylor's point on this show, where he said that Bitcoin was like Manhattan.

And we talked about how the other blockchains really couldn't compete with Ethereum, but they could still be wonderful cities themselves. Denver, Houston, I believe you said. Now it feels like we're maybe getting Flint, Michigan and Gary, Indiana and maybe moving into Detroit, which is growing. Right, right. It feels like we're breaking a lot of things right now

and a lot of people are losing a lot of money in the process. Do you think that these are fundamental problems or growing pains? Yeah, so I assume when you say that you're referring to Luna or maybe not just to Luna, but Luna being a primary example. So it was about a month ago that Luna broke. And of course, in Luna's case, it wasn't actually the blockchain that broke, but it was rather the core application on top of Luna, which is UST. And the core thing that the blockchain was

supposed to be doing was creating a stablecoin. So Luna, you might remember that I didn't actually have Luna in the list of layer ones that I was comparing in that analogy. And part of the reason why I didn't put Luna into that group, one, is that I always thought of Luna as more of an application-specific blockchain. Because the core thing that Luna really did was create USD. There were a few other applications on Luna, like there was Anchor, there was Nebula, there was a few other applications on Luna like there's Anchor, there was Nebula, there's a few other things on there. But the reality is that most people on Luna were just taking Luna, transmitting it into

USD and then putting in an anchor. And that was about it. One of the saving graces ironically for Luna is that actually entrepreneurs were pretty smart about choosing which chains to build on. And very few people actually chose organically to build on top of Terra because of the fact that I think most people realize that UST was risky. And the entire enterprise of Luna was fundamentally tied to this single thing. And whether or not it was going to work meant that there was going to be some risk of impending

doom on your blockchain. And so when I spoke to entrepreneurs back even before the Terra downfall, part of the reason why a lot of the people didn't really consider Luna very seriously, beyond just the question of like, okay, what else is there on the Terra ecosystem? It was just a broader question of do I want to be tied to this thing? Do I know that it's going to succeed? And do I know that it really makes sense for me to live on this algorithmic stablecoin chain? So it was a brilliant move on the part of Terra to decide in the first place to brand themselves as a layer one, despite the fact that before they moved over

and integrated Cosmos, Terra was just a stablecoin platform. There was really nothing else happening on their blockchain. But I think most entrepreneurs didn't really see them as being on par with an Ethereum or a Solana or an Avalanche, which are, I think, what most people think of as the major L1 platforms to build on. So for that reason, a lot of people were worried when Terra collapsed that this was going to be like a systemic event, right? That like everything else in crypto is going to break once.

Even Janet Yellen was talking about, we are worried that this thing might have systemic consequences. And obviously, a lot of people lost money. It was a terrible calamity that it collapsed. But where were the systemic effects? Everything else was fine. Not only that, they had to sell 80,000 Bitcoin to attempt to repeg, which did not even happen. That was completely a wasted sale when you look back. And it didn't even really affect Bitcoin after a day or two. There was a crash and right back to home base, which is apparently

30,000 forever. It may not be by the time this comes out, but seemingly. At the end of the day, you have to come away with this sense that people who are building stuff, they kind of understood what Terra was. And despite the fact that Terra really tried to brand itself as like, hey, we are our own

city, really Terra was like this kind of strange financial experiment that was playing out in front of us. Now, that all being said, part of what I have taken issue with, so I've been very publicly critical of Terra and of UST. And we didn't have any exposure. We didn't invest directly into Terra or UST, although we did make a small investment into Anchor very early on before it kind of became what it eventually became, which is like this weird kind of 20% Ponzi thing. At the same time, I'll be the first to basically say that Terra was really

responsible for a lot of irresponsibility with people's money and the way in which they communicated the risks that were endemic to Terra. But at the same time, I think people now are starting to try to find ways to make it very, very...try to sort of paint Terra as a scam. And I think that's also going too far. Yeah, it's disingenuous. I think it's disingenuous. I think it's very clear that Terra was not a scam.

I think it's very clear that Terra was an honest attempt that failed. Everything about Terra was transparent. Everything about Terra was...it's on the white paper. It's on the website. You go in there and it says very clearly how it works. The fact that they went and raised the $4 billion of Bitcoin in LFG, like we knew where the addresses were. We could see the money moving.

The reason why they raised it, if you remember, was because people were worried about a DPEG. They were worried what happens if there's a negative cycle. And they said, look, here is the way that we are going to try to stem the risk of a negative feedback loop. And look, it's up to you whether or not you think that's enough. Should have they raised $5 billion? Should they raise $10 billion? Like, the fact that they're doing that shows that they knew it was possible that this thing could fail.

And they were trying to shore up confidence in its security. So in hindsight, people love to criminalize failure. And they love to sort of make it like, look, the guy who failed, he obviously had it coming. He was a bad person. They knew that blah, blah, blah. I think Terra had many, many faults. And they had many things they could have done better or smarter all along the way. But I don't think it's fruitful or fair to go look at Terra and say,

oh, Terra was Theranos and they were a bunch of liars and they should all deserve to go to jail, which is by and large the way that I think increasingly Terra is going to be treated in the coming months. And so I think the important thing for crypto is to learn from our mistakes, not to criminalize our mistakes. Because if you criminalize your mistakes,

then you come up with this feeling like, oh, the real lesson was don't be a bad person. Right, and there's a second level effect as well, which is that everybody fears they'll be treated as a criminal when they have an inevitable, or even if they just have inevitable stumbling blocks at scale.

Solana, right? I mean, Solana has been down five times in five months this year. I think people still are generally bullish on it and believe that it will work. But that was sort of, I don't know which city we're calling it now, but it's problematic when you're consistently down and people are trying to transact. Well, so I originally described Solana as LA. And I think it's maybe not unfair to say that it is LA, but we now have these like wildfires that just keep popping up and making life unlivable. And it really sucks.

And it is Solana's fault because these are fundamentally, they own their tech. This is not an exogenous shock. It's not like something that they can blame on somebody else. At the same time, these are growing pains for any new blockchain. Now, that being said, it's very clear that Solana is unique in having this many problems. So we're not seeing this many issues with Nier. We're not seeing this many issues with the CosmWasm chains.

So even blockchains that are rebuilt from scratch that are not pure EVM, Solana is unique in having this much instability. Now, at the same time, Solana is also the only one that really has this level of adoption and this level of usage. So it's very possible that if we saw the same level of adoption on Mir or on the Cosmos and Chains, that we would see similar amounts of instability. It's not just an average day that Solana goes down.

It's an issue of scale. It's an issue of enormous amounts of load or throughput causing, you know, like the car is moving too fast and, you know, pieces are rattling off and the engine is just starting to, you know, vomit along the street. And then people are like, oh, crap, this thing, this thing. We didn't realize this was an issue until just now. So that's what we keep seeing with Solana. There's all these folks now who are starting to say like, hey, we're going to be an even better, faster, smoother, more stable version of Solana. And the problem is that it's very easy to say that until you actually get load. And once you get load…

And they may never get it. And they may never get it. Never even have that. Most watches won't. The piece is tested. Exactly. And so I think, look, I give Solana credit for being, you know, doing the work. Because they're doing the work right now.

But it's also a bad look because it shows entrepreneurs like, hey, you have to expect this at this point. This is not an anomaly. You have to expect that Solana is going to have liveness failures. And there may be six, eight, 10 hours, maybe even 12 hours that your app is not being updated. And that means like liquidations might be happening. It means Oracle updates aren't coming through. It means that prices might be underwater.

It means that anything that you expect is happening on a regular basis. You can't assume that anymore. It's a different model. And I think now that entrepreneurs are starting to internalize that, there are some people who are turning away from Solana. Now, a lot of people are still sticking it out

and saying, look, Solana is my community. It's my home. And I believe in the long run of the performance that Solana is promising in the endgame. But it's going to take a while before the stability catches up.

Okay, but these were both darlings of VCs. Solana certainly still is. Some VCs. Right, I'm not making that sweeping. I'm just saying there was huge investment in these. There still is investment, certainly in the Solana ecosystem. You guys just raised another $600

million. We did. How do you deploy that now with a bit more context now of how things are happening at scale? Because like you said, you couldn't really know necessarily that this would be problematic for Solana until they actually got the adoption and were there. Right. So how do you now attempt to choose winners, especially in the context of this bear market?

Right. How do you deploy $650 million? The short answer is carefully. Very carefully. And, you know, in a... Well, there are a few things that I'd say. So first of all, for us at least, there's no mandate to ship out the money. Couldn't have to go today.

Our investment period is three years. So we can take as long as we want within those three years to deploy the fund. So basically, by 2025, the world is going to look very different. And there's going to be a lot of interesting opportunities to deploy between now and then. So it's more of a signal that people are still willing to invest in the space than an expectation that you're going to find a huge winner today. Well, I mean, we may find a huge winner today. And in fact, bear markets tend to be the best ventures because that's when prices come down.

That's when there's more focus, there's less noise, there's fewer tourists in the space. Almost all the great entrepreneurs in crypto built their stuff in bear markets. So, you know, if you look over the last year and a half, what are the great companies that were built in the last year and a half in crypto since like the bull market really was raging on? I don't know that there's a single one. Pretty much everything that is really great and powerful, even OpenSea. OpenSea was built during the last bear market.

People don't remember, but like they were doing NFT trading back when NFT, like after CryptoKitties died in 2019 when nothing much was going on, OpenSea was still there. Trading NFTs when nobody else cared. So great companies get built in times like this. And so I think it's probably a great time to deploy. Although right now,

I think there does feel like there's a little bit of a dearth of ideas. And part of the reason why I think there's that dearth of ideas is that it feels like we've kind of exhausted the narrative of the last cycle. So in the last cycle… DeFi, NFT, metaverse. Right. We need something new. Well, I don't know that we need something new.

But I do know that the credulity that we had in the last cycle is gone. Right. Now, it's no longer the case that you have a random metaverse project and you automatically raise $20 million in C. Unicorn. Yeah, exactly. That's done. Did you say metaverse? Yeah, exactly. I remember that in January and December last year, right after the meta rebrand, there was this crazy pace of metaverse things that were getting funded and everything was... VCs were just throwing money at all these things. I was like, what is going on?

It was so random. And all that stuff. And throwing money at all these things. I was like, what is going on? Like, it was so random. And all that stuff. And the same thing with DeFi. There was a period of time when DeFi was super easy to get funded with. You know, there are a lot of these like very, very, there's a lot of cargo culting in crypto. And I mean, it happens in every industry, but crypto, it's so fast. You can see the iteration cycles in real time. You know, there was a period of time when it was like, OK, if you do liquidity mining, you're fundable and it's going to be great. That was like DeFi

summer. Liquidity mining was like automatic fundraising. And every project somehow rebranded to some DeFi iteration. Exactly. It had nothing to do with DeFi. And it was magic. It was magic that the thing just pumped. And then if you do an NFT drop, now suddenly you're going to have a much higher market cap. And then it's a metaverse. If you put metaverse in the name, it's going to be super valuable. And if you do it, there was a period of time when it was, if you do a 20% APY coin, you're going to pump really big. And all this stuff, the reality, the thing you eventually arrive at is that, look, there are no really simple get-rich-quick schemes, right?

It doesn't matter if you do an airdrop. It doesn't matter if you do a layer one. It doesn't matter, you know, whatever. If you're not actually solving a big problem, ultimately, you're not going to be creating value in the long run. And so the question you have to ask yourself is, what are the big problems that are going to matter two to three years from now? And I think it's pretty obvious in my mind what some of those things are. So one of them is identity. One of them is interoperability. One of them is, I mean, I think still the question of what is crypto gaming going to look like, still a big unsolved problem. And then of course

the question of scalability, right? Even with something like Solana, Solana can do probably less than a thousand TPS if you measure it correctly. And that is far better than anything else we have. But it's not at the scale that we need for really getting mass adoption. If you want tens of millions, hundreds of millions of users using blockchains, you need better than that. And so there are a lot of things that are really obvious.

If crypto is going to scale to the next level, and if the next cycle is going to be much bigger and more inclusive and more consumer oriented than the last cycle, we need a lot more than what we have today. So those are big problems. And whoever solves them

is going to become really, really valuable. But, you know, right now, obviously, there's not the same kind of frenzied appetite for these things. But as we see, that's what we look for.

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That is thewolfofallstreets.info slash Mercury for better business banking in minutes. Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank and Trust members FDIC. So we've clearly had the zero to one moment then. Right. Right.

And so now everybody's trying to go one to 10. But do you think all these problems actually can be solved? Or maybe blockchains and Bitcoin, you know, Bitcoin solves this. Maybe it doesn't solve everything. It's a good question. I mean, I do think there are a lot of things that crypto is not going to solve because they are fundamentally, you know, crypto is just the wrong plane on which to solve these things.

So there are a lot of people who are like, crypto is going to solve climate change. And I'm like, look, I love the spirit, but I think crypto is the wrong vehicle through which to solve climate change. Climate change does need to be solved. But there are, you know, crypto is not the same, it's not a single tool that's going to solve everything. The same way SaaS startups are not going to solve everything, right? So like the SaaS startup for climate change is also probably not going to be how climate change gets solved.

So, but that being said, I think in the long run, I do believe that technology, most of the core problems with crypto are going to get solved. And why do I believe this? I believe this because crypto is fundamentally software. And the thing about crypto is fundamentally software. And the thing about software is that software only ever gets better. It never gets worse. And we don't yet know what the limitations are of software.

But so far, almost everything that we believed was a limitation, like things about computation that we've seen with things like zero-knowledge proofs, things like the ability for moving from proof of work to proof of stake, which people originally didn't even think was possible. Literally, people thought, this is impossible. As of three years ago, I heard really serious, intelligent people claiming, this will not work. And even after Tezos, the first proof-of-stake blockchain, was live for over a year, people were still claiming to me, this is impossible.

It's not going to work. Well, we're here now. Most of the chains that we're seeing today, most of the transactions that are happening on blockchains are on proof-of-stake chains. It works, right? And the scale is much larger and faster than we've seen before. People used to believe that JavaScript was never going to work at scale. And now JavaScript is one of the fastest languages in the world, with the advent of V8 and Chromium and the enormous amount of intellectual work that's gone into making JavaScript so performant

that it can now run everything in your world. Almost everybody lives in browsers now. And almost all the software your computer runs is running in V8. And the same thing is going to happen to blockchains. Right now, they're not performant. Right now, they're super slow and they can only do so much TPS.

Everything about them is going to get more and more optimized. Because the thing that human beings do Right now they're not performant, right now they're super slow and they can only do so much TPS. Everything about them is going to get more and more optimized because the thing that human beings do is we just make the things that we care about better and better and better, especially if they are in software. So I fundamentally think that most of the things that we're concerned about in crypto are going to get better. Now will everything be kumbaya? Will crypto eat every single aspect of the economy?

No. There will still be problems. There will still be issues. And I think the things that are probably going to be the most endemic problems will likely be political and diplomatic ones. Those are the problems that are hard to solve because they're not software. Those are human problems. Those are institutional problems.

And people have complained for a long time, like, hey, the Ethereum foundation is kind of slow and they don't really move that fast and they kind of have all these political issues. Those things will almost certainly persist, if not get worse. Because the thing that we do know about institutions and cultures

is that institutions and cultures decay with almost certainty, whereas the opposite happens to human innovation and human creation. And so that's my worldview when I think about what cryptos will look like over the next five years. So the technology advances but we're like Lord of the Flies. A little bit. But the advantage of it, right, is that where you see that renewal and that innovation is in new

institutions being popped up. And so what I would expect to see is like, OK, what's going to be the next Ethereum Foundation? Is it going to be DAO-based? Possibly. Possibly. It might be that Solana might become that, or Avalanche might become that. And we start looking toward them as being the next punitive leaders in where this technology is going. So I would say it's too early to rule anything out,

but it's very clear. I mean, it's kind of like, I mean, you can see it. After COVID, I think a lot of people saw it more starkly with the US, just to see how decrepit the US as a institution, as a government body is compared to what it was 50 years ago, right? The nimbleness, the speed of thinking and ingenuity, you just get older over time.

It's almost like a fundamental property of institutions and of organisms. And that will happen in crypto too, but it will happen on the organizational and institutional level. And that might be OK. The US is fundamentally fine. I'd rather be here than to be in another country that isn't as robust to this kind of moment as well. But it's certainly true that as you get older and as you get more decrepit, you slow down,

you become more bureaucratic, you become more sclerotic. And that's going to happen in crypto too. The moral of the story when I listen to it, consistently, even a year later, two years later, three years later, we're still so early. Right. When do we get to the point where, hey, we're not, and that's where the opportunity is, by the way. So I think for investors and for people in it,

if you're willing to sort of suffer this pain of these inevitable volatile swings, this is probably the moment of maximum opportunity. But at what point is this just working? You know, you talk about obviously JavaScript. Nobody thinks about how that works now if you just use the internet. You just use your mobile phone

and you don't think about what's underlying it. When are we at the everything's not breaking? We're not making the meme that it's too early and things are just operating and you're not thinking, wow, this is blockchain, it's just technology. Yeah. It's going to be a while before we get there. I think it's pretty clear that for a lot of folks who are in crypto gaming, a lot of those

folks had no idea what blockchains were. And I think that's probably going to be the first avenue where people really are interacting with this stuff on a mass scale. And they don't know what a blockchain is. They don't know what a private key is. They don't know what any of that stuff is. All they know is that they're playing this game and it's fun and they're making money. Or they're losing money.

Right. So it's something in between. So I think, now that being said, I think it's going to be a long time before somebody interacting with a core layer one is going to have that be opaque to them. And that being said, on the other side, the interesting thing about blockchains is that you don't actually have to have a MetaMask account to be a user. What is it to use Bitcoin?

A lot of it is using Bitcoin, just owning Bitcoin. That is the application. It's just owning it. And the same thing to some degree is true with Ether as well and with a lot of other assets in crypto. Owning DAI is using DAI. That's what it's for. So I think for a lot of the financial applications,

something like, what, 12% to 15% of Americans, American adults, own crypto now. That is massive. And most of those, of course, are not people who are on-chain. Most of those are people owning them through exchanges. They bought it on PayPal. Yeah. Or through a brokerage account.

Cash app or through a brokerage. Exactly. Exactly. But that's also using crypto. And to them, I mean, they probably don't know how blockchains work. They probably don't know anything about private keys. That's okay. They don't need to. So it's for the people who need it. And it doesn't need to be for everyone. It recently came out 57% of wealthy Asians, I think from Accenture, have exposure to crypto. Oh, wow. I didn't know that.

57%. Yeah. I mean, that's real. That's serious adoption. I think in the average was about 7% of their portfolios. It was more than commodities, more than currency, anything. I mean, it's obviously, I think we all know that there's a greater adoption in Asia than in the United States. You talk about the human problem. That's not a software problem.

Yeah. Is the biggest threat, the biggest human problem, regulators and legislators at this point? It is one of the biggest human problems. I don't know if it's the biggest. Certainly, circling back to our conversation about Terra, Terra has accelerated a lot of the hand-wringing. And it becomes harder to say with a straight face that this stuff, you should leave us alone. I agree. When retail loses a lot of money and institutions make a lot of money,

that's when heads gotta roll. And we kind of got a bailout with Luna 2.0 for those institutions and not necessarily for the USD people, but I guess that's a separate... Well, I don't know if I'd agree with that. I don't know if I'd agree with that. I'd say the market cap of Luna 2 is much lower than what they would need for it to be a bailout. So it's more like a consolation prize. Oh, yeah. Yeah. I'll give it a light bailout.

Yeah. Yeah. Yeah. Bailout. Bailout. I'd be very impressed if they were able to do a bailout. Yeah. They're certainly not getting their money back. Yeah. Yeah. They need a lot more market cap for them to get bailout. So I'd say, overall, I think my picture is that, again, I'm concerned a little bit about whether they're going to be too punitive and kind of looking for a way to make Terra into a Theranos and to paint Doquan as being a fraudster or being some kind of fundamentally being engaged in an enterprise that is that dissimilar from what most of the people in crypto are doing, which

is trying for a big experiment. That just broke. It didn't work. Exactly. It didn't work. And I think, look, there are a lot of people who are responsible for irresponsibly portraying what Terra was and selling it to retail under the idea that there's no way it can break. Very clear that nobody in the Terra Foundation believed that there's no way it can break.

They knew how it could break. Right. But 20% yield was presented to most people as totally safe. Right, right. And so I think the right way to look at Terra is that Terra was not Theranos. Terra was WeWork.

It was a lot of hubris, a lot of miscalculation, a lot of investors propped it up. It didn't work out. It still was a very serious attempt to solve a very serious problem, which is to try to build a non-US dollar-backed stablecoin that could exist completely independent from the US banking system. And that will be tried again. People will keep trying to do it. It's one of the holy grails of crypto. But I'm afraid that seeing what catastrophic failure looks like at a scale that we've never seen before, to be clear, there's going to be too much desire to protect consumers from this

kind of thing ever happening again. And so look, I think that it's pretty clear consumers do need protection in crypto. Because there are too many hucksters and too many bullshit artists in the space that you do need some regime of consumer protection. But I believe, personally I think that that should be more around information. It should be more around making sure that people are educated and people are knowledgeable about the things that they're interacting with. But not to make it so that people who want to go and solve big problems on a global scale don't feel like it's personally safe for them to do so.

And if what we see from the terror story is that everybody who gets associated with this kind of thing is ultimately punished, thrown in jail, fined huge amounts of money, I think that will end up being the net result. It's not that people won't try to do this anymore. People will still try to do this. Because the desire to build a decentralized stablecoin is never going to go away, even if it's a doomed task, which I'm concerned it may be. What will happen is that they'll go overseas.

They'll go anonymous. They'll go underground. And that, I think, will not be better for consumers for that to hopefully happen. Perfect. Well, I thank you for sort of painting this honest, I think,

vision of maybe what we can expect moving forward. I really do think we're exceptionally early, but that's a good thing. Yeah, I agree with that. Thank you so much.

I'm excited. Thanks for having me, man. Thank you so much for listening to this episode. If you haven't already left a rating or a review on Apple Podcasts or Spotify, please do that now. Spotify just added ratings, so please go ahead and click that five star. I'll see you guys next time.