Unchained - How Crypto Tokens Get Launched and How That's Evolved Over Time - Ep. 691

Starting point is 00:00:00 If there is no interest in a particular project where there's no utility in that project or the market deems that project to be useless, there's really not much that a market maker can do to kind of revive that project. We can only do what we can do and that's to provide the service that we are in contract for. Hi, everyone. Welcome to Unchained. You're no hate resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started to share. coming crypto nine years ago and as a senior editor of Forbes was the first mainstream meter reporter took up for Cryptocurrency full-time. This is the August 20th, 2024 episode of Unchained.

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Starting point is 00:01:51 Hey, happy to be here. So this year, we've seen more new tokens that have been listed on digital asset exchanges, in the first half of this year, then in all of 2023. And I know this is sort of squarely in your line of business. So why don't we just start with your background and we can kind of get into all the details on this area of the market. So, Reed, why don't you start? No problem. So I spent the majority of my career in TradFi working for some large hedge funds, millennium partners in particular, always on the trading side. I was interested in crypto in 2016, 2017. I went full time into crypto in 2018 when I joined Genesis, and I started there running the APAC trading

Starting point is 00:02:38 desk. I left Genesis in 2022 as managing director and head of global spot trading. I joined Flowdesk about a year ago as US CEO to build out the team here and really focusing on our US and global expansion as it pertains to the market making and OTC side of the business. All right. And Hansen? Hey. Yeah, so similar background as Reid started my career here in New York in the traditional finance banking sector and then left that after two years stint to join Genesis on the

Starting point is 00:03:13 institutional sales team, which is where I was for three years. And then recently joined Flowdes this past year to, again, help build out our U.S. franchise, specifically on the market making an OTC side of the business. Okay. So, yeah, now let's talk about Flowdesk. You know, what is it? Why did you decide to launch it? What problems or issues in the industry were you trying to solve?

Starting point is 00:03:36 Yeah. So Flowdesk was actually founded in 2020. So we have been around for a while relatively under the radar. And we are a regulated, licensed, full service, digital asset trading technology firm. So we have 125-ish globally. We're headquartered in Paris, and we have offices in Singapore, the UK, the U.S. and Canada. And as I mentioned earlier, we focus on market making, OTC, high-frequency trading, venture, as it relates to our core businesses. And we have trading relationships with exchanges, token issuers, asset managers, hedge funds, VCs, ultra-high net worth, early adopters.

Starting point is 00:04:18 The list kind of goes on and on. Systematic market making is in our DNA. There were very obvious synergies and crossover to me, as I joined about a year ago, as it relates to principal bilateral OTC trading. And with connectivity to over 140 exchanges, I think now, it just made a lot of sense, both on the spot, derives, and credit side. So I would say our mission is to put forth innovative products and optionality for our on both the market-making side and the OTC side with a focus on trust and transparency

Starting point is 00:04:53 and best practices in pricing and execution. Well, so 2020 was obviously a really different time in the crypto markets. So what were some of the issues in the markets that you saw at that time that you felt that Flowdesk could make more efficient? So to be clear, I joined Flowdesk in September of last year. I've been in crypto since 2018. The market structure has certainly evolved. over time. That's been a product of the macro environment, the regulatory environment,

Starting point is 00:05:24 political environment, which we're certainly seeing a lot of now. But I would say generally speaking, as adoption continues to increase and more institutional players come into the space, there is always a need for sophisticated counterparts and OTC and liquidity providers to facilitate their business. And it kind of ranges from, you know, all the way from market making to block trading, programmatic trading, high-touch credit structures, etc. Okay. Now, why don't we just sort of talk about some of the core functionality that you're offering here? Let's start with market making. Why don't you describe exactly what market making is and why we need liquidity providers? Yeah, so I'll let Hansen kind of dive into this a bit

Starting point is 00:06:11 more, but essentially, as a market maker, we facilitate and provide liquidity for both token issuers and exchanges. And typically, a token issuer will provide capital to us, which we algorithmically and systematically manage the order book for. This can be as simple as one pair on one exchange, or it can be as complex as multiple pairs across multiple exchanges. It really depends on the client or the token issuer. Yeah, and I think just to expand upon that a little bit, the history of Flowdesk, we originally

Starting point is 00:06:44 started out doing this more retainer-based approach to market making, where the client themselves, whether it be the token project or the exchange is providing the capital, and Flowdesk is bringing our proprietary trading infrastructure to the equation and managing that on their behalf. And how we were compensated was with a monthly retainer fee over time, as well as our firm has evolved and our balance sheet has gotten bigger. We have also done more principle-based market-making or liquidity provisioning packages with clients, which is when we are bringing our balance sheet to the equation. Typically how this looks like in a token project deal is the project themselves is lending us some supply of their token. And then we are bringing our cash balance sheet

Starting point is 00:07:25 and using those two sides of the formula to market make on the various dexes or sexes that they are currently trading on live. Okay. And so how do you, to typically start working with a token issuer because, you know, there's there's so many different ones out there. So how, what is your own process for deciding to to work with one? And then, and then what happens once you decide to work together? Yeah, I can take this one read. So I would say the typical life cycle of one of our token project clients typically starts out with either an introduction from a venture capital firm that they're a portfolio company of, which we have a relationship with and or sales prospecting, you know, word of mouth in the industry.

Starting point is 00:08:07 We're a regulated, compliant market makers. A lot of, you know, very good projects like to work with a trusted counterpart that is transparent and has a good, you know, pulse on the market, introductions to exchanges, et cetera. I would say the typical questions we ask these projects is really threefold, is when are you going to launch, you know, market structure and environment and sentiment plays a big factor in their strategy of going to market with their total. token. Two, where do you want to launch? So are you doing a centralized exchange, a decentralized

Starting point is 00:08:36 exchange, a combination of both? Are you doing a centralized exchange token launch pad? And then three is how do you want to engage with the market maker, kind of going back to what I just spoke about, whether that's a loan call option structure or more retainer-based approach? And because there are so many potential tokens that are coming onto the market, Like, how do you also vet? Or is it just like because, you know, you're being introduced by a trusted entity? Is it simply that? There's definitely some qualifications that we look for as well.

Starting point is 00:09:10 Given we are a regulated firm, we have to, you know, we perform KYC and AML due diligence on everyone that we work with. And so, you know, a typical starting point is the token project has to have an entity. We, you know, we KIC all the team behind it. Also, you know, as we know, the market structure of bigger, projects this cycle has really transformed it to meme coins. You know, we work with a couple of the larger projects. We also work with a bit more, I would say traditional crypto projects right in defy lending platforms, perpetual dexes that have governance tokens, things of that nature.

Starting point is 00:09:43 So for us, we work with a broad, a wide spectrum of clients, I would say, but the typical qualifications to work with the firm such as Flowdesk is, you know, a certain amount of market cap. We want to make sure that we are actually adding value to you as a project in your journey. But with that in mind, we do work with projects right from 10 million market cap to 10 billion. I mean, we like to support them in those early stages so that we can be their trusted counterpart for many years to come. And then from their side, when they're choosing different market makers, like what are the kind of factors that they're using to make that decision? And what are you, you know, offering as a differentiator? Yeah.

Starting point is 00:10:24 So if I was to put myself in their seat, what I would be looking for in a market. is one, who am I doing business with? Are they a regulated counterparty or not? Two, do they have a well capitalized counterparty or not? Three, do they have the exchange connectivity that I need for my token? And I think, you know, Flowdes, we check all three of those boxes. We're regulated digital assets service provided by the AMF in Paris. We've raised over nine figures of venture funding.

Starting point is 00:10:53 And three, we have access to about 140 different exchanges that we work with both centralized and decentralized. So those three things is what I would be looking for in a project or in a market maker as a project. And I think that's how we've been able to grow our business so successfully on a global scale. So what is the volume that you are typically handling in a given month? Yeah, so we don't we don't typically disclose precise volume numbers, but we're trading billions of dollars a month in volume. Okay. And so now walk us through that. you know, kind of strategy that you talked about where it was like, do you launch into decentralized exchange or a centralized exchange, like which markets, you know, just like talk about

Starting point is 00:11:37 what, you know, what would make a token issue or decide one or the other, you know, both for decentralized, centralized, and then geographics and the other factors. Yeah, so what I've seen in conversations with projects, it definitely varies by region, right? So we have offices kind of east and west markets. We work with projects a bit differently. I would also say if they were a venture funded project or just kind of a more, you know, grassroots Dow, you know, community funded meme coin, if you will, their balance sheet as an entity looks very different. Typically, the venture funded clients have cash as well as their token on their balance sheet versus these more grassroots tokens are very token rich cash poor for better for worse. And so the type of structure and engagement with the market maker will look very different depending on their own balance sheet composition of assets that they can utilize for hiring and engaging with a market maker.

Starting point is 00:12:37 Okay. Well, but out of curiosity, like I feel like there's another piece of which I am very interested in, which is this geographical difference across the world, I guess. you know, what would you say are some of the characteristics of tokens that are choosing to launch, you know, yeah, sort of like in a Western type of market versus an Eastern type of market? Yeah, that's a great question. And I think also it's a bit nuanced because while we do see some of these entities domiciled, you know, offshore or internationally, a lot of the team might actually be, you know, in the West versus the entities out in the East. So they have part of the team half and half. Crypto is a very global industry, as we all know, which is a great thing. So it's really hard, I think, to pick, you know, a very specific type of project that will launch in this region versus this other region just because we are such a global industry.

Starting point is 00:13:29 And, you know, all of the cultures and different types of market narratives tend to bleed together over time. Oh, but you don't notice kind of any trends either way. But I had to, you know, think of some high-level narratives. Industry-wise, we definitely see the gaming sector very prevalent over in Asia. And I think we see a bit more capital markets, defy like lending protocols, dex is being built here in the West. Not to say that those types of teams don't exist in other parts of the world,

Starting point is 00:14:02 but I would say, holistically speaking, those two trends are fairly dominant in those two areas. All right. So obviously in recent years, we have seen that there have been some controversies with different market makers. Very obviously, there's the Alameda situation. There are multiple teams who sort of felt that through this investment, that they were going to get the support, and instead they found that upon launch,

Starting point is 00:14:28 the way Alameda handled it caused the price of their token to crash, and it sort of made it kind of really difficult for their project to get off the ground. We also saw these allegations that Jump helped Terraform Labs, manipulate the price of UST. And so I wondered, you know, just like given kind of this history, do you have advice for token teams for when it is that they are choosing a market maker? Yeah, I would say, you know, all the reasons that you just outlined is why Flowdesk was created to address those problems in the market making part of the crypto industry. You know, our motto is bringing transparency and trust to crypto markets.

Starting point is 00:15:10 and the really inception of the firm was this retainer model where clients get a 24-7 dashboard with full insight and data and analytics and reporting tools down to the tick data of how we as a market maker are utilizing their funds in a market-making strategy, which they also have insight and control over and can help dictate the strategy with our team's obviously advice and guidance of what we're seeing day-to-day. And I think this also ties back to what I was speaking about before, those three things that I would, you know, behoo products to look into is, you know, are you facing a regulated counterpart? Or is this just an entity on some island offshore with a website, which has, you know, trading algorithms built out and a good marketing team or Twitter presence? And then I would also, you know, another good kind of check the box thing is do they have a bank account or do they, can they only settle in stable coins in crypto? So it's just another very simple thing to ask a firm that you want to do business with to see

Starting point is 00:16:09 if they've been vetted by some other financial institution in the real world. And so all these things to say is, unfortunately, there are bad actors in the crypto space, specifically in the market making side of it. And that is really what Flotis was created to address and hopefully solve long term. And so then when the token issuers are deciding where to launch in terms of exchanges, like what should they be looking for when it comes to an exchange? This one is definitely a very popular question we get. I think it's a lot to do with the token project strategy.

Starting point is 00:16:42 There's obviously certain exchanges which charge more for listings versus some that charge less. There's certain exchanges which are primarily focused on a certain sector geographically of like retail users. You know, Coinbase kind of being predominantly in North America, finance by Bodokiax, predominantly being the APEC regions of world in Europe. And so you really have to understand who your underlying target market is as a project of who you are going to be getting access to when you get listed on this exchange and playing that into your broader strategy when you're going to market with your community in mind. Yeah, I think in addition to that, I mean, it's, I think optics are considered. I think volume is considered and liquidity is considered. You know, there are multiple tiers of exchanges.

Starting point is 00:17:28 And a lot of times these projects, you know, maybe they're North Stars to get a Binance or OKX listing, but that might not be possible. So it's kind of going down the ladder of optionality that they can list their tokens. But ultimately, I think that all token issuers are trying to construct the strongest messaging to the market. And the listing process is certainly a big part of that. And so when you say Binance and OKX are kind of more competitive, Like, you know, what are the exact features that people are interested in there? Is it simply volume or like, you know, how is it that people are sort of having this mental ranking of like which are more desirable than others? Yeah, I think it comes down to, you know, there's a branding exercise here. I think finance and OKX have done a very, very good job in sort of their optics and their presentation to the marketplace. And I think as such, you see volume follow that, listings follow that, and volume begets volume

Starting point is 00:18:30 in a lot of cases. And I think ultimately you want to be where the liquidity is. And usually those are the top tier exchanges that we've mentioned. And then have the launch of the Bitcoin and Ether ETFs changed that at all? I know it's only for those two coins, but because those are the most widely traded coins. I didn't know if that also affected even like how new token issuers were thinking about the exchanges. Yeah. So, I mean, Coinbase has obviously been the big winner with the ETF launches.

Starting point is 00:19:01 I think that NetNet is positive across the board for all of the top tier exchanges. But I think at the end of the day, from a ETF perspective, as a market maker, you know, we look to other exchanges to hedge and offset our risk. that is a exercise that can be done across a wide array of exchanges, not just Coinbase. So I think, you know, it's been good for the industry at large, but I think that the real beneficiary of the ETF launches has really been more Coinbase than anybody else. Okay. So for these new token launches, because it is so competitive and apparently is becoming even more competitive with, you know, as we said early on, more tokens launch. in the first half of this year, then in all of 2020.

Starting point is 00:19:50 What would you say are kind of like the characteristics of an ideal token launch? Like what are kind of the main points that these teams are trying to hit? I think to really drill into the answer to this question, we have to categorize the type of token launching. We've seen the emergence of launch pads like pump.fun, which anyone can create a token in a couple clicks of a button. And, you know, you have an instant access to a fun. of users who are trading all these very low market cap coins.

Starting point is 00:20:20 You then have a bit more what I would call like institutional grade projects, which have a proper VC funding round, you know, angel rounds in the space. Maybe some of the exchange VC funds are also invested in them for a pipeline to get listed. So it's a very different type of category of a launch. And so I think the qualifications of what those two different types of projects should be looking for is very different. I can't really like give a hard answer on what the best route is. I think it really depends on what type of project you're looking to build and type of community you're looking to, you know, attract to your coin. Yeah, but I mean, you could, if you want to give the characteristics for each of the two.

Starting point is 00:21:01 Yeah, I think, you know, on the community meme coin side, right, we're seeing a lot of traction in things that people think are funny, they're enjoyable, they have a fun message around it. They're obviously building and appealing to a large variety of investors or, you know, just market participants. And then they're looking to those coins typically stay on the decentralized exchanges. And then they eventually get onto some of these lower tier exchanges like Reed was mentioning with the goal, ultimately, to be enlisted on the finances of the world. On the flip side, you have these more institutional projects that have a real team behind them. You know, they've been building for a year or two. They're kind of very strategically planning their go-to-market strategy around. maybe potential other L1 ecosystem launches.

Starting point is 00:21:44 We have Monad coming out in Q3, Q4 this year, potentially. There's a lot of projects that are waiting because they're launching on that chain. So just a very different type of strategy of when they're going to market with their TGE. And how have air drops and points change that calculus? Points have been an interesting narrative, I would say, that the market really caught on to during the bare market when, you know, I think projects didn't have capital to reward users, but they needed to incentivize liquidity somehow. It's really got this grasp now on the industry of a way to attract either TVL or users or reoccurring activity on your platform in anticipation of a future air drop potentially.

Starting point is 00:22:24 So I would say points are here to stay, whether they evolve to be something different than what they currently are today is yet to be determined. However, I do see that trend continuing of there's a lot of liquidity in crypto that's very fragmented. And we kind of say here on the desk there's a hot ball of money that likes to rotate around different narratives in the space. So really capturing and holding the mind share of liquidity in the market is very important for projects today. Well, I mean, we've seen that multiple times after an air drop. Then, you know, so I should let people know this is coming out August 20th. But we are recording on the last day in July. And this is because I have a vacation coming up. So we're, you know, planning all these in advance. But the week that we're recording, we saw that I can't remember

Starting point is 00:23:13 the exact Starkware project it was. Was it Starknet that closed? But the point is, so, you know, this was kind of shocking. I guess this was, you know, just something where this chain kind of just died, like the activity just wasn't there where they could keep going. So yeah, if the way that, you know, you are involved as a marketmaker if that can, you know, help a project like that. Yeah. So I think you're referring to ZKX, right, the derivatives exchange. Yes. So I think, you know, I think that is a case, which we've seen, you know,

Starting point is 00:23:50 happen as what you're alluding to, right? As soon as the incentives dry up, capital rotates elsewhere and users change, whichever product they're using, which is, you know, the beauty of a free market, but also, you know, sometimes if you don't have, let's say, the best product in market, you know, users are free to leave and go elsewhere. And so we saw that, you know, in Defi summer a couple of years ago when these new projects were coming out and just incentivizing users with their token on a streaming basis or investing basis. And now it's kind of rotated to points or a combination of both. And so I think this trend will continue as long as there are still

Starting point is 00:24:24 new projects and forks popping up in the industry as they have, you know, really no other way to attract users unless they have a superior product. So the real winner in the space will have a good product and be a good user retention program, whether that be through token incentives and or points that can be utilized in some shape or fashion on the platform itself. I think, Laura, it's also important to kind of highlight what a market maker does or what they're supposed to be doing, right? And at the end of the day, it's our job to be posting liquidity and kind of actively managing the order book, both sides of the order book. So the goal is that we facilitate a more orderly market, we tighten the spreads, in theory, we should smooth

Starting point is 00:25:09 volatility, and ultimately this is better for the token issuer, but most importantly, it's better for the end user, which is the buyer of the seller, right? So if there is no interest in a particular project, or there's no utility in that project, or the market deems that project to be useless, there's really not much that a market maker can do to kind of revive that project. we can only do what we can do, and that's to provide the service that we are in contract for. Right. Yeah, that makes sense. And earlier when we were talking about, you know, when you are making a deal with a potential token issuer, obviously we have seen that there's a lot of controversy around these high, fully diluted value, low flow coins. So I wondered, is that

Starting point is 00:25:55 also a factor that you're looking at just like, you know, what is the distribution of this token? Absolutely. And that plays a much. much bigger parts of the initial, I would say, economic conversations when we are engaging with the project, if we are going with a loan call option route, which typically would have, you know, a couple strike prices of the call option embedded to that loan. And so when we take into account there, the calculus of the FDV of the project, which those strike prices are going to be pegged to. And so, you know, we look at past data, past funding rounds, anticipation of TGE valuation. All those things play a large part in high.

Starting point is 00:26:32 how we determine the feasibility of engaging with the project as well. Oh, interesting. And are there certain thresholds where you feel like, you know, the distribution is such that it's unfavorable, not even just to your business, but as we were talking about for the health of the token and for its ability to gain adoption in a community? I think the trend we've seen is a lot of the larger launches this cycle

Starting point is 00:26:59 have actually been the deals that were struck during the bear market. And so these vesting schedules look very different than I think projects raising today are able to, I guess, negotiate with their investors. And so that's also another thing to note, too, is we're seeing a lot of projects who have these old, you know, bear market legacy market making contracts come to expiry and looking to now reengage the market, speak with new market participants. And those sort of deals look very different than they did in 2022, 2023, even. And so, you know, the FDV and market cap of the token is certainly a big factor in those conversations when you are engaging in this loan call option route. And when you say that they look very different, what is it mean? Does it mean that they look less favorable to community members and more favorable to the token

Starting point is 00:27:52 teams and their investors? I would say a bit actually the opposite. Because of the market structure right now, The token issuers themselves have a, I would say, a lot more bargaining chips to use. Yeah, that's what I mean. Yeah, when they're engaging with the market maker. So because it is a bull market, there's a lot of firms out there to work with for a token's perspective. And so, you know, when we are competing in deals, some of these larger, larger launches can be quite competitive, which is good for the project because they should be getting a very competitive bid on the street.

Starting point is 00:28:27 Okay. But I guess what I'm asking is, does that mean then that I'm sure because of this sort of tension between retirement like a community coin versus like a VC coin, does this create a condition where the distribution is less favorable to the community? I don't think so. I think if anything with the, if the team is able to have better bargaining power, which I believe they do in this current market cycle, that that should be a good thing at the end of the day for the community because the product will be retaining more of the token. in supply as well as having typically like further out of the money call options on these strikes. Okay. Okay. But I guess then that would mean that that allows them to go more in the direction of doing

Starting point is 00:29:11 a low float and having a high FTV, which is, you know, what people are sort of objecting to. Oh, so I might have misunderstood your question. Yeah. So I think from a products are realizing today that it's better to have a higher float on TGE. I think you want to get more of the supply out. to the community. I think when you have these projects launching with one, two percent of, you know, supply and then 98 percent of the tokens locked, you have these vastly wild price fluctuations. And it's, in my opinion, it's always better, you know, this is crypto to get it out more to your

Starting point is 00:29:44 community and have a better diverse, you know, holder count and investor base versus having, you know, 95% of the tokens vesting in, you know, venture capital investment deals. Okay, but since they have the upper hand, they are what they are pushing to have more of the higher percentage circulating supply? Is that what you're saying? I would say, yeah, some product. It's really up to the project. You know, the market maker, we're not dictating their vesting schedule. But I will say that in our conversations with projects that are now raising money, they are typically doing or steering towards more higher initial supply online.

Starting point is 00:30:24 to use for air jobs to the community or things of that nature. Okay. All right. So in a moment, we're going to talk about some of the other parts of Floodesk business, but first a quick word from the sponsors who make this show possible. Join 20,000 attendees for the world's largest crypto event, token 2049 Singapore, September 18th to 19th. Anatoli from Solana, Kyle Samani, Imod Mostock, and 300 others will hit the stage for an immersive festival experience ahead of the Formula One Grand Prix weekend.

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Starting point is 00:33:04 fast with economics that work for you. Think big, bills bigger with Pocod. Join the community at Pocodot.network slash ecosystem slash community. Back to my conversation with Reed and Hanson. So we've been talking about the market making part of business, but obviously you also offer OTC over the counter trading. So just to level set for listeners who don't know, what is over the counter trading. Yeah. So, I mean, I think it's important to kind of note the difference between market making and OTC. And I think ultimately it's that it has a different clientele. As mentioned before and previously, I think the market making product is needed by token issuers and exchanges for a variety of reasons that we've discussed. OTC trading services or bilateral OTC trading caters more to

Starting point is 00:33:54 the institutional side of the business, whether that's asset managers, hedge funds, protocol treasury, minors, venture funds, early adopters, ultra high net worth, etc. So that's who I would say we kind of target with the OTC service. And at the end of the day, we are providing principal balance sheet to facilitate that liquidity and provide our clientele with risk pricing. on whatever it is that they are looking to express or hedge or reduce risk, etc. And so typically, like, how does that kind of trade occur? Like, what are all the different reasons why someone would turn to you rather than just doing a transaction on an exchange?

Starting point is 00:34:41 Yeah, I mean, I think that there's a lot of reasons why OTC desks benefit the end user. I think we offer tighter spreads. I think that we provide a scenario that that warrants less market impact. I think there's a component of anonymity. I think we can offer complex algorithmic strategies that they won't be able to do or execute just via decks or a sex. Certainly liquidity access to exchanges that they might not have access to. I think there's a risk management component to it as well.

Starting point is 00:35:13 You know, the client doesn't need that manage inventory in a bunch of different exchanges is when they can just go to one point of contact in an OTC desk and have a trusted partner there. So I think there's a lot of reasons why the institutional side of the house favors the OTC model. And we're pretty excited about what we've built over the past call it year as it relates to that. And so because you are trading in these large size transactions, what are some trends that you've been noticing in the markets, especially I would imagine they've changed quite a lot this test here, not just because of the ETFs, but it just feels like,

Starting point is 00:35:55 I mean, there's so many different factors here. It's like this proliferation of the meme coins. It also feels like there's sort of different narratives going around, you know, whereas before it was like a lot more simple with kind of like Bitcoin and ether. And now sometimes, yeah,

Starting point is 00:36:13 it feels like there's just so many, other types of directions that things could go. So what are some trends that you've been noticing? Yeah, I mean, I think we've seen a general maturation in the market. Certainly, if you're looking year over year, I mean, Bitcoin, I think was sub 30K last August and we're at roughly 66 right now. So I think with that comes quite a bit of sort of increased, you know, not only development, but also requirements from our counterparty base. You know, I think that our clients consider whether or not they want to trade principally or via an agency model. I think that licensure is a big consideration.

Starting point is 00:36:53 I think balance sheet is certainly in the forefront of everybody's mind. Liquidity access, even basic things like responsiveness and professionalism, I think, are very important and sometimes overlooked. So we really strive to put forth our best efforts there. Operational workflow is a huge thing too, right? I mean, in crypto, I think a huge component of the client experience lies with the operational workflow, with settlement, with banking rails, with custody, et cetera. So I think all these things are becoming more and more clear to the institutional market, if you want to call it that. And that's really what we've been focusing on here.

Starting point is 00:37:35 You know, obviously, I know that you have your own OTC desk, but when you look at kind of the different possibilities, for these different, you know, entities who use OTC services. Like, what are the different factors that they might think about when they're choosing the right OTC desk? Yeah, I think, I mean, as I mentioned earlier, I think it's a combination of a bunch of things. And I think the principal model versus agency model is a big consideration. I think that licensure and balance sheet are are big considerations. I think that communication channels and, you know, settlement process are are big considerations. Technology is certainly something in the forefront of everybody's mind, what we're capable of,

Starting point is 00:38:16 what we can do, how we can access that liquidity, reporting, internal tools that can be sort of used to improve the experience of the client. So I think that there are some major touch points and sort of considerations that all of our clients kind of go through. And we try and keep that, you know, in the forefront of our product as we roll that out to the market. And what are the differences between crypto OTC and TradFi OTC? I think there's a lot of similarity, to be honest. You know, I think TradFi has a tendency to be more of an agency model. You know, they certainly do trade principally. They certainly do facilitate block trading with their own

Starting point is 00:38:59 balance sheet. That's more or less how we run our business here. There are other OTC desks that operate on an agency basis. We do not do that. We utilize our own balance sheet and we, you know, warehouse and hedge risk accordingly. I think, you know, there are some big differences between crypto OTC and Tradfi OTC. And I think that revolves mostly around the settlement process and clearing houses, you know, what folks are used to. You know, with a Tradfai DTCC, we don't have that in crypto, right? there's no centralized clearing agency yet. I think that once you crack that.

Starting point is 00:39:43 I don't think that's going to happen. Yeah, listen, I think regulatory clarity and likely some sort of, you know, G. SIF's entry into the market will certainly change that. And so G.SIF is a global, systemically important financial institution type. Oh, right. So think like J.P. Morgan, right, or Goldman Sachs. I think when they choose to kind of formally step into this arena and offer, some sort of cross-margining custody platform that the largest asset managers and hedge funds in the world can tap into.

Starting point is 00:40:16 I think, you know, you will see this business look very different than what it does today. But in order for that to happen, you know, we need regulatory clarity. As I know you've had infinite discussions about on your shows, you know, I think the current macro and geopolitical landscape continues to evolve and seemingly in a positive way. so I can only hope that two years down the road or 10 years down the road things look much different than they do today, but we're still very bullish and excited about the future. Okay. So I did also want to ask just sort of like about some behind the scenes things because obviously we have seen, you know, security for crypto assets is obviously something that needs to be paid a lot of attention to. And we have even seen with market makers that sometimes they have had snafus. So what do you think are the best practices there or what are some of the ways that at least flow dust candles it? Yeah.

Starting point is 00:41:16 So, you know, we take security and custody very seriously here. And we're implementing MPC's technology to manage that process, you know, both from a fund's perspective, but also from a risk management perspective as it relates to exchanges. and other venues that, you know, we source liquidity from and we had liquidity too. So I think, you know, going forward, we continue to build out internal tools and utilize as many third-party tools as possible to provide the most efficient, streamlined, secure experience for our customer funds and internal funds, our own balance sheet as well. And then out of curiosity earlier, you mentioned banking, and I wondered, you know, obviously there was the operation show point 2.0 that people had seen in the industry where

Starting point is 00:42:09 both crypto companies but even banks that service crypto companies were being cut off or in the case of the banks they were being closed. So I was just curious to know how that has affected, you know, your ability to do business. It's certainly been challenging. It's been a challenging environment. You know, we've been, we've been lucky enough to have some very strong banking relationships with some top-tier institutions, you know, with an added layer of transparency that goes both ways. You know, we've gotten very comfortable with the way that they manage their risk and do their business. And I think the same could be said about us. You know, listen, you never know what can happen. And I guess at any point, you know, banking rails can be shut off. We try to mitigate that risk by having

Starting point is 00:42:58 multiple banking partners. But, you know, I think things have certainly loosened a bit in the last called six to 12 months, but they are still challenging to say the least. And we certainly know many of our counterparts that have had a lot more difficulty than we have had as far as their, you know, their rails are concerned, fiat rails specifically. All right. So now let's talk just a little bit more generally about the market, I would be interested to hear more of, you know, how business has changed for Flowdesk in the four years, especially this last year. It just feels like the market is probably moving to a new phase. Like how would you describe what the changes have been like? Yeah, I mean, as I mentioned earlier, you know, obviously the market has experienced some

Starting point is 00:43:51 broader tailwinds, I would say, over the last year, certainly from a price perspective. And I think that, you know, today there is quite a bit of positive data points to continue to sort of flow into the marketplace, usually around the regulatory picture, whether that's, you know, tied to the current political landscape or geopolitical landscape is debatable. But, you know, there's, I think in the past week or two, there have been endless headlong. lines at State of Michigan added the BTC ETF to its to its balance sheet. I think Jersey City made an announcement. There was the conference down in Nashville that hosted, you know, some very large political figureheads like Trump and RFK that had incredibly bullish visionary

Starting point is 00:44:40 speeches and addresses. Senator Columbus came out and proposed a new strategic reserve. I mean, all of these things I think are lending to a narrative that is certainly optimistic and positive. You know, we see it in our business and we see it in the volumes that we trade, the counterparts and clients that we interact with. And that only continues to scale. So upon joining Flowdesk about a year ago, it became very clear to me that a more sort of strategic OTC offering, targeting, you know, this particular clientele made all the sense in the world. And, you know, we've luckily been proven right. Hansen, do you have anything to add on that? I think just going off of what we just mentioned directly is we've been an LP, a liquidity provider for the Grayscale ETF products since their launch.

Starting point is 00:45:30 And so this plays into our ability to be this what we kind of call sophisticated crypto-native firm where we're working with the grayskills of the world as well as some of these other, you know, very specific crypto-native projects in our market-making business. And so, you know, as a firm, we kind of sit in the middle of the two, you know, spheres, I would say. And that's really how we're positioning ourselves for the next several years to come as we see the space becoming more and more institutionalized long term. And what do you feel are still some of the issues or problems or areas of growth for these markets that, you know, you expect to see in the next year or a few years? I would answer that with one word, fragmentation. I think there is so many different product offerings, so many different ways to utilize their capital in crypto. We're seeing that come up time and time again with new projects launching, which are

Starting point is 00:46:26 looking for us as a firm to bring our balance sheets, to use their product, to make markets on their product. You know, we're active on 10 plus different L1s, L2s, ecosystems, trading hundreds of assets on hundreds of different venues. And so there's just so many different things to do in crypto, even for a full-time firm where this is all we do, it can be a bit overwhelming. And so if we are to really get to, I think, a steady state for the industry, you know, winners will win. And unfortunately, that means that some projects will no longer exist in several years. However, I see that liquidity concentrating into the winners that do.

Starting point is 00:47:04 And that will ultimately end up with a better user experience for all market participants. And, Reed, do you want to add on that? No, I think you said it pretty well. The next few months, I think, are going to be very interesting for the space. You know, to piggyback on the ETF narrative, you know, you've seen some of the largest asset managers and hedge funds in the world report, you know, their holdings in these products. And it's been nothing short of pretty amazing at this point.

Starting point is 00:47:32 So I think all signs are pointing to broader adoption. And I think you marry that with, you know, adieu. utility and use of custody and security and seems pretty clear to me. Okay. So obviously we're recording this three weeks before it comes out. So I'm going to ask a risky question here, which is because the election obviously is creating a very interesting scenario for crypto where suddenly it seems to be this sort of bell of the ball, which I don't know if anybody expected, at least when it comes to election politics. And I just wondered, you know, when you look ahead at what might happen, depending on who gets elected. And when I say that, I actually, who knows, because at this point that we're recording, Conla Harris's presumptive nomination has only been, she's only even been a candidate for like eight days or something like that. So I truly don't know when this comes out what the state of play will be. But my question for you is, when you look ahead,

Starting point is 00:48:40 to the various possibilities there. How do you think that change, you know, whatever it is, it's some amorphous but presumably positive change for the crypto industry? How will that affect your business? So, listen, I think that the narrative that's being put forth over the past, you know, a couple weeks or months, I think has been overwhelmingly positive. And here at Flowdesk, you know, we are skating to where we think the puck will be in every decision that we make as it relates to our products and what we put forth to the market. Going off of the current administration or historical data points, I think we can all agree on what their posture has been towards crypto in general. Whether or not that changes with her, I don't know. I think there were opportunities to maybe

Starting point is 00:49:28 throw their hat in the crypto ring with the Bitcoin conference down in Nashville and certain candidates, you know, took that opportunity and certain candidates didn't. If that's any sort of, you foreshadowing on what's to come, then you can kind of pull out from that what you will. But, you know, I'm going to operate under the assumption that things will continue to improve and that, you know, this, this narrative that's being put forth currently, I think can only be viewed in a positive way. Then Hansen, do you want to add on that? Yeah, I think just a, you know, a data point there, we're seeing the emergence of these, you know, prediction markets becoming very popular. I think that trend continues to, to move forward. But most notably the market, you know,

Starting point is 00:50:09 is typically a good indicator of sentiment of where people think that the coin will land. And, you know, for example, during Trump's speech down in Nashville, as soon as he kind of alluded to, you know, his first, you know, agenda would be to let go of Gary Gensler, coins like uniswap immediately rally. And so you start to see traders, you know, I would say like investing in an outcome of what they think the market will react to at a future date. And, you know, on the desk, we also see some of those flows as sentiment and narrative. changes around, especially the U.S. administration, just given our country's historical importance in the crypto ecosystem globally, last bare market, we saw many firms leave the U.S.

Starting point is 00:50:52 Flodas, we took a different approach. We stuck around and continued to invest and build in the U.S. as we see this market as being one of, if not the most important sectors geographically for crypto. And so we will operate how we think best we can in any, in any environment and political regime. And I think to echo read sentiment, you know, we do see things improving every day, regardless of, you know, kind of sensationalist headlines coming out of D.C. with the current administration. Yeah, actually, you know, because of the fact that you do have offices in Paris, Singapore,

Starting point is 00:51:28 London, Toronto, and the U.S., I was curious, well, I actually just have to ask you, I don't typically see Paris. I see that, like, for ledger maybe, but that's not a super common. a city that's named in Crypto Circle. So I was curious about that choice, but just generally also like, you know, what you see are the differences in terms of your business across the globe. So the reason for Paris is our CEO and founder, Gilam Chamon, is a Paris native, as well as some of the other founders. So we do have about 70 employees in Paris. We have about 30 in Singapore, a few in Canada, about 15 in the U.S. as we continue to grow on a scale.

Starting point is 00:52:10 So, you know, I think geographically, the sentiment remains relatively constant. We're not really seeing anything different as far as narratives go coming out of Paris or Singapore versus the U.S. You know, I think the beauty of digital assets in crypto is just that it is decentralized and spread out. And we're all rowing the boat in the same direction, so to speak. So I find it to be refreshing that we have a very diverse corporate makeup and geolocation structure. And I think it's helping us, you know, manage the business and put forth, you know, new and exciting products. And in terms of your clientele, have you seen the launch of the ETFs change the makeup of that

Starting point is 00:52:56 significantly? So I think that the launch of the ETFs have more generally speaking put forward. worth a more institutional friendly and accepted narrative. And I think that there are counterparts and clients of ours that we're engaging with or transacting with that might have entered the space upon those approvals. I think that where we focus most here, or at least where most of our, I think our differentiation or our edge capture lies from a client perspective is that we can facilitate liquidity way out the risk curve. Some of our competitors do not. They kind of focus on the top 10 or 20 assets or whatnot. We have the ability and the flexibility to trade a wide array

Starting point is 00:53:42 of assets. I think by and large the ETF have enabled some of these larger institutions that were apprehensive to touch the space. They've sort of enabled them, giving them the green light to trade Bitcoin and ETH, certainly in the form of a listed, you know, ETP, but, you know, that doesn't trickle down into all corners and facets of the business. And then I did have to also ask because miners are some of your clientele, you know, how do you perceive that their business, I guess, has changed given both the launch of the ETFs as well as the having this year? Yeah, I think, you know, the very direct answer is with the having their revenue is cut

Starting point is 00:54:22 in half overnight, you know, top line. So that's a very, it's a very difficult business. And we saw a lot of shakeup in that industry last. cycle, I think partly due to over leveraged, which was definitely a theme across the space. But when you have your borrowing dollars against A6 and then the, you know, tarahash per dollar value, those A6 plummets when Bitcoin mining difficulty goes higher. And Bitcoin price obviously crashed at the same time. It's a very reflexive sort of LTV for that, you know, credit structure.

Starting point is 00:54:53 This cycle, we're seeing a bit less of that. I think we're seeing the emergence of more and more public miners. So they have access to different types of financing directly with somebody's larger like private credit or investment banks here in the U.S. Which also which gives them flexibility of how they manage their business. Additionally, I would say we're seeing more institutionalized hedging and treasury management programs at these public mining companies where they're actually employing, you know, call overriding or buying puts and just general options hedging with their mining production. And that could also look like, you know, the emergence of Bitcoin denominated debt where they borrow Bitcoin. They sell that Bitcoin for $30 today to fund their operations and they pay off that Bitcoin denominated debt now with their daily rewards going forward.

Starting point is 00:55:39 So that industry is always changing. It's always very highly competitive. And so, you know, we have a pretty good pulse on that just given our conversations and interactions with those clients. And I personally find it a very, you know, fascinating part of the bigger puzzle that is crypto. So there's another issue that has been flagged recently on crypto Twitter, which is where everything happens, about a difference between the price of tokens on public markets versus private markets for tokens that are locked up. And I wondered if that comes into playing your business at all and if so, how that does. So I think we're fairly active in derivatives. And we certainly do facilitate

Starting point is 00:56:24 transactions that are more focused on, you know, locked tokens in the form of, you know, forwards. It's certainly a very large market, you know, with vesting schedules coming out of the last bowl, a lot of these vesting schedules are quite long. And there are investors that are looking to de-risk or to capture some portion of P&L. You know, they're unable to do that, obviously, in the liquid market. So it requires, you know, a more complex. structure to realize those gains or to transfer that risk. So it's certainly something that we do and that we're fairly active in today and we're seeing an uptick in that product as well. Yeah, the only other thing I would mention kind of along this line is flow desk also,

Starting point is 00:57:12 we do venture investing ourselves. And so as that part of our business has grown and expanded, we are also, you know, a bit more in tune with these private markets as they're coming to the public markets and the discrepancies and the valuations of both. And so, you know, we utilize those investments on our business, A, to help founders and protocols, which we can then work with later on in either our OTC or marketmaking business, but also B, to, you know, get that insight into the private markets that we would otherwise not have access to. All right. Well, then, where can people learn more about you and your work? Um, so you can go, uh, to our website, which is flowdesk.co.

Starting point is 00:57:53 And we're also on Twitter as well and other social media, LinkedIn, etc. Okay, great. Well, thank you so much for coming on Unchained. Thank you. Thank you. Thanks so much for joining us today to learn more about Reed and Hansen and Flodesk

Starting point is 00:58:07 and the strategies around market making and OTC. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with all from Matt Pilcher, Juanio Manovich, Megyn Gavis, Pamma Jimdar, and Marka Curia. Thanks for listening. Unchained is now a part of the Coin Desk Podcast Network.

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Unchained - How Crypto Tokens Get Launched and How That's Evolved Over Time - Ep. 691

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