Unchained - How to Figure Out Whether a Crypto Token Is Worth Its Trading Price - Ep. 667

Episode Date: July 2, 2024

The problem of low float, high fully diluted valuation (FDV) coins is one that is frequently discussed in crypto. But there’s another wrinkle: investors need to understand the unrealized gains of these coins to really understand the price.  In this episode, Jose Macedo of Delphi Digital and Ari Paul of Blocktower Capital explain the various metrics that reveal what a coin is really worth, why a wave of token unlocks that will be hitting the crypto markets in the next few years are not bullish, and whether there is a better way to design token unlocks for teams and insiders.  Plus, they cover whether venture capitalists are extractive to crypto, whether these games with circulating supply and FDV have caused investors to turn to memecoins, and why they believe the ICO era was better for retail investors.  Show highlights: 00:00 Intro 01:58 Why upcoming token unlocks are creating market jitters 10:22 How the ratio of unrealized gains to market cap influences token price movements  12:22 How some token projects manipulate their reported circulating supply 20:24 Whether and how everyday investors can uncover the truth about token projects 23:37 What secondary market trading says about the potential impact of upcoming token unlocks 34:50 Why Jose believes that the current token launch strategy, despite its flaws, is still favored by insiders and unlikely to change soon 41:02 Why some projects favor decisions that are more likely to result in short-term gains over long-term success 46:36 Why Jose believes that simple time-based token unlocks often work better than complex metrics, and how projects can balance funding with realistic success metrics 53:04 Why Ari believes the SEC's investigations into VCs for acting as securities dealers might be justified, and how these practices resemble pump-and-dump schemes 59:11 With numerous token unlocks looming, why the outlook is bearish for many projects, and what challenges they face in mitigating potential sell-offs 1:05:52 Why many crypto investors might end up holding the bag in the current cycle, despite plans to sell early and avoid losses 1:12:27 What the future role of VCs is in crypto, and how the influx of token unlocks and the rise of memecoins could shape the bull cycle Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! Polkadot Guests: Jose Macedo, founder at Delphi Labs Ari Paul, CIO of Blocktower Capital Previous appearances on Unchained: Ari Paul on Why Bitcoin Is a Good Value Buy Ari Paul of BlockTower Capital on the Crypto Downturn and Why It Could Change Direction Links High FDV and unlocks: Unchained: How ‘Fully Diluted Valuation’ Can Be a Very Dangerous Metric for Crypto Markets to Rely On Who’s to Blame for the Underperformance of Low Float, High FDV Tokens? 80% of Tokens on Binance Are Down Since Listing Date: SwissBorg Researcher Cobie newsletter: New launches (part 1) - private capture, phantom pricing Rocknblock: Token vesting explainer CoinDesk: 'Liquid Vesting' Is Oxymoronic Blockchain Feature That Lets Early Investors Sell Without Waiting Jose’s thread that inspired the episode Ari’s post responding to Jose’s thread Token.unlocks.app: Token vesting tracker Solutions: Hack VC: Potential Solutions to Crypto's Unlock Problem Colony Lab: Early-Stage Program & Liquid Vesting Imran Khan’s tweet on Blast https://x.com/lmrankhan/status/1806040646433522149  Learn more about your ad choices. Visit megaphone.fm/adchoices

In the modern air drop meta, it's just like civil farmers and like hyper sophisticated people who were looking to to just civil farm and then dump your token, right? And it's just a silly way to distribute your token. Like it's what we have because the SEC, it's funny. Like everything the SEC did made it worse for retail. Like made everything worse for retail. You know, like air drops isn't like moving everyone to this air drop meta as an example, right? I mean, I don't need to harp on that. I think everyone knows, knows that.

Wait, but just to make clear, so does that mean that you think ICOs were a better mechanism? Definitely. Yeah. I think that was definitely a better mechanism because, I mean, it was like, it wasn't better for us as venture investors, but I think it's better for the industry as a whole because, you know, it's very easy to look at the data and you see that the upside in these projects once the SEC came in and banned ICOs just moved private.

Like, you had the same level of upside and the new all ones is the, or similar, and the new all ones, the old ones, but the. The Alpside was all captured by venture investors rather than the public. Hi, everyone. Welcome to Unchained. You're a no high resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto nine years ago, and as his senior editor at Forbes, was the first major meter reporter to cover cryptocurrency full-time. This is the July 2nd, 2024 episode of Unchained. Pocodot is the original and leading layer zero blockchain with over 2,000-plus developers. and the Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem,

making it faster, more secure, and adaptable. Perfect for GameFi and Defi to build, grow, and scale. Join the community at Pocodot.network slash ecosystem slash community. When McDonald's partnered with Frank's Redhot, they said they could put that shit on everything. So that's exactly what McDonald's did. They put it on your McChrispy. They put it in your hot honey McNuggets dip.

They even put it in the creamy garlic sauce on your McMuffin. The McDonald's Frank's Red Hot menu. They put that shit on everything. Breakfast available until 11 a.m. At participating Canadian restaurants for a limited time. Franks Red Hot is a registered trademark of the French's food company LLC. Everyone needs help with something. If investing is your something, we get it.

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Investing is all about the future. So what do you think is going to happen? Bitcoin is sort of inevitable at this point. I think it would come down to precious metals. I hope we don't go cashless. I would say land is a safe investment. Technology companies, solar energy. Robotic pollinators might be a thing.

A wrestler to face a robot, that will have to happen. So whatever you think is going to happen in the future, you can invest in it at WealthSimple. Start now at WealthSimple.com. Today's topic is the true value of tokens. Here to discuss are Jose Moseytoe, founder at Delphi Labs, and Ari Paul, CIO of Block Tower Capital. Welcome to Jose and Ari. Hello. Thanks very much. So there have been a ton of token unlocks that have been hitting the market and there's more to come.

For instance, in July, we're going to see over about $750 million worth of tokens for 40 different projects that will be unlocked. And meanwhile, there's a lot of people sounding the alarm about how there's not quite enough demand for these tokens, not by a long shot. So say you were actually the inspiration for this podcast as you've been writing multiple tweet threads about this issue. There's also been just a lot of commentary on Twitter around a lot of related issues. But why don't you describe the problem as you see it? Yeah, for sure. So I first talked about this. And thanks very much for having me, by the way, a big fan of the pod.

So I first spoke about this a few months ago because in a bull market, people tend to discard fundamentals and the sort of FDV as a meme and bullish unlocks thing, which are kind of both offshoots of the same thing, come back. And obviously, like, fully diluted valuation, for those that don't know, that's like the total number of tokens times the price of the token. And then the market cap is just the circulating tokens times the price of the token. So obviously the market cap is always smaller than the fully diluted valuation. And you can think of the full that of the valuation, which I'll kind of reduce to FDV a lot

of the time, as just the total number of tokens that will ever. exist for this, so including unlocks, treasury tokens, all this kind of thing. And in a bull market, people kind of say, that's a meme. You know, those tokens aren't here now. Really, the market cap is what matters. And I've always disagreed with this pretty, pretty heavily. And I was trying to find a way to kind of phrase this and to compare different fluid out to evaluations, because they're not all built the same. And what I thought mattered the most really in comparing them is this idea of the unrealized gains. So how much of this valuation is unrealized gains for someone, right? Either the team, which obviously has a zero cost basis, so any gain is, is an, like, hopefully

an unrealized gain for them unless they somehow sold before. And then the investors who often come in very early, depending on the project raised, and, and have a lower cost basis than when the token launches. And so the way I think about a fully deluded evaluation is kind of like two metrics that I think about, which are just sort of like the inverse of each other. The first one is like what percentage of the token's fully diluted valuation is unrealized profits, unrealized gains for someone. And the second way to think about that is just the unrealized gains to market cap ratio. So how much is the ratio of like unrealized gains sitting in the token to the circulating market cap of the token? And what you want to see is always like as low as possible

a ratio, right? So you want the ratio of unrealized gains to market cap to sort of be as low as as possible. I don't think it's worth talking through an example because it's probably like, you know, talking through this stuff is a bit, is hard to follow. But the crux is that a lot of tokens are trading at sort of four to eight unrealized games to market cap ratios, which basically means there's four to eight times the project's entire circulating market cap sitting in in unrealized gains. So if you assume like a two year vest from from the cliff date, that means an entire market cap worth of token tokens unlocks every three to six months, which is like pretty heavy, right? And makes it very hard for for buyers to come in and really,

really absorb that, especially when right now their alternative beta exposure is something like meme coins or other projects that don't have these supply overhands. So part of what I wrote in the post is that one way to mitigate this and what you kind of want to see is, I mean, there's a lot of mitigants we can discuss later, but one easy one is to just have a lot of secondary trading, right? Similar to what happened with Solana before their 2020 unlock where multi-coin famously bought a lot of soul on secondary markets. And so what can happen there is, obviously that resets the sort of unrealized gains in that, you know, one investor, the early investors sort of realizes some gains and someone comes in with a higher cost basis, which then means

there's less unrealized gains when the token goes live. And this is actually like the origination of the bullish unlocks meme, right? Because this means that everyone thinks an unlock's going to be bearish because there's loads of those of tokens coming on the market. But actually, if most of those have already been sold to people with a cost basis very close to the market price, then it's very unlikely those tokens will be sold when the token goes live. And that can lead to this bullish unlock because people had expectations that there will be loads of dumping and there isn't, right? Which is which is sort of what happened with with Seoul. And I guess looking into the OTC market,

I don't really see that happening right now. Like a lot of the assets would really high FDVs don't have a lot of bids, even sort of 70% below market price, right? And this is for the saft, for the saffts of the early rounds, which are normally a one-year cliff in a two or three-year vest.

And then when you look at the volume in safts, if you sort of exclude Salana and Ton, which probably did a billion between both of them, you have like pretty low volume for these compared to the amount of unlocks that are hitting the market. And so yeah, my conclusion was kind of bearish that like a lot of these unlocks wouldn't be, wouldn't really be bullish. And then there's like an interesting market structure thing, but I've already ranted for a long time. So I'll let you jump in, Ari, if you want to, if you want to add anything there. Yeah. And right before I does it just to quickly explain staff is it stands for simple agreement for

future tokens. And this is just what it sounds like where, you know, VCs are seed investors or angels or whatever, get that kind of thing early for later when the token launches. Anyway, so go ahead, Ari. Yeah, fully, fully agree and nicely articulated. I think the Solana unlock is a great exception to riff on. Sometimes exceptions are like kind of prove the rule and are great case studies. So the Solana unlock, it was a massive unlock in January 2021. It increased the token supply by more than 200%. I think it was 213% of memory serves. And we were analyzing it in real time and came to the conclusion that it was a rare

bullish unlock. And the way we got to that conclusion was we basically talked to the entire cap table and got the impression that basically the bulk of the supply being unlocked we had spoken to and we believed they were bullish and they weren't looking to sell. We were at the right spot in a bull cycle to entice new buyers. The fundamentals of Solana were strong. So you had this massive supply hitting the market, but kind of air quotes, the fundamentals supported it.

By fundamentals, I mean that term very loosely. Basically, there was real organic buying. The holders were pretty happy to have the asset at that price. But a very rare exception. As Jose, as you articulated really nicely, to kind of riff on this idea. like why does the, I'm just agreeing, but just riffing, you know, why does this ratio of unrealized profit matter so much? Well, it ultimately comes down to human psychology and incentives. It's ultimately why do people hold the token and what are they looking for to sell? And so really what

this is getting at is the reality of that so many of these projects, so many of these ICU raises, people buy the token looking for a quick 10x. And that's why the 10x is bearish. It's because people are now sitting on this profit that they're desperate to capture. VCs are, some VCs are desperate to capture that 10x or 100x if it happens in a year. I mean, frankly, most people are eager to capture 100 X's. You have to be a real true believer to not want to take any profit there for the most part. To me, the core framing around all of this, all the discussion around points, ICOs, timeframes, everything, ultimately comes down to kind of a root issue around who's buying the token and why.

And everything's about aligning incentives or the behavior around Unlocks comes down to, well, who holds the token. If it's a VC that's really in it for seven years, like, let's say for the most, I don't know everything they've done, but A16Z for the most part seems to hold their tokens for a very long time. Well, if your cap table is made up of A16Zs, then an unlock in six months might not matter. Or if everyone who holds the token is a real believer and is looking for the next 100x, then it's not necessarily bearish. That's very rare in crypto, right? Because people are mostly putting their money in, hoping to get it out pretty quickly. Yeah, I actually want to zoom in on this notion about the unrealized profits to market cap ratio or unrealized gains to

market cap ratio because, Jose, in your tweet thread, you had a good example. And I think it helps listeners if we just like walk through it slowly. So you said, okay, you could have these two different projects that each had a $10 billion fully diluted valuation, which again is the total supply, not the circulating supply. But you said in token A, let's say they had raised $200 million at a $1 billion valuation and the team gets a 30% allocation. Then for token B, you said, what if they had raised only $5 million at $100 million valuation and the team has a 20% allocation? And basically, the conclusion that you reached was that token B is the more promising token because only 25% of their fully diluted valuation is unrealized profits, whereas it's 50% for token A.

Yeah, maybe to convert it to the sort of unrealized games to market cap, I'd have to add like a float to the example, like so we can calculate the market cap. So if you imagine that token A, both token A and token B have a 10% float, which would mean if their FDV is 10 billion, then their market cap is 1 billion, right? And then you keep the numbers the same for every thing. Then token A, investors have have like 4.8 billion in unrealized gains, right, to 1 billion in market cap. So it's like a 4.8 UG to MC ratio. And then token B, there's 500 million and unrealized profits from investors plus 2 billion from teams, so 2.5 billion. And then the market cap is one, so it's like 2.5. So it's like half roughly the unrealized gains to market cap.

And so, you know, you have to look at obviously other things to see whether it's going to be a good unlock or not. Like the fundamentals of the project really matter. But like all else equal, you'd definitely rather be invested in token B here because there's sort of two and a half billion less of unrealized gains that are sitting in that token. Yeah. And so essentially, basically, it's just, it's almost this is like such a weird comparison. but it actually does make me think of like the Bitcoin having if we're thinking about like new supply. Like, you know, if you have these token teams and investors that are sitting on these tokens, like the notion that they want to sell at some point, like if you have double amount of that

versus, you know, token B would sort of be like the post-having version where there's just like less new supply that you could expect to come onto the market. So one other thing that I wanted to ask about when we were talking about this is that like you also mentioned in here to be. wary because sometimes the numbers that these teams report to Coin Gecko, like the teams might play with those little bit. So do you have examples or like, you know, how exactly do they fudge those numbers? I do have examples. I don't know if I want to call out specific tokens without, I'd want to be really sure of, and I don't think I'm sure enough to do it. But basically teams will, it benefits teams

to optically have the highest market cap possible, right? Because because effectively it makes your unrealized gains to market cap ratio smaller artificially. Right. So in theory, if let's say you could say that you had a 10% float, but actually your float is 1%. You look like, you know, when people look at coin gecko, they think, oh, you know, maybe the unlocks only 10%. This, you know, they calculate the unrealized gains to market cap as a certain number,

but actually it's like 10x that, right? The real number is 10x that. And this also has the added thing that it's much easier to. manipulate a 1% float, especially if then market makers control over half of it, which is something that also happens that we could talk about, you know, where market makers often on launch day have like up to 50% or more of the float. And so it becomes much easier to sort of control price, which again is a benefit leading up to unlocks and stuff like that. So the best way to do this is really to look into like look at the primary data. So ether scan,

I mean, obviously the project's blogs, although those can sometimes be PEPFUCH too, but for quality projects, realistically, they won't be. And then just, just ETH scan itself, like look at where the token is sitting. A lot of projects manage to, like, issue some of their treasury and then get their treasury included in the circulating supply. That's a common sort of way that they do this. And the treasury is obviously tokens that are sitting there either in a multi-sig or in a Dow that aren't actually circulating. You know, no one holds them and can sell them, so they shouldn't be accounted for in circulating supply. But in general, the real circulating supply is whatever the project air dropped to their users, right? Like in these current cases, that's the best way to calculate it.

Everything else is either is sort of Fugazi or it's controlled by market makers, which isn't. I mean, it is circulating. It's just not, yeah, comparing those two is kind of harder. But I think that's the, that's how I think about it. I think what this highlights is the danger of. of kind of simple metrics, basically they will get gamed. When a fault leader like Jose, and I agree with all of his metrics and all of his quant measures, the danger is those get published. They become a North star intelligently because they're right fundamentally. But then projects game it. And they

find a way to game that number on Ether scan or Coin Gecko or in their press release or whatever. And so basically the casual investor or reader, you can't stop at just that simple metric or that simple screen. It's same in equities. It's like if you screen equities by price to earnings ratio, you don't win. You know, you'd sing with price to book value. Not that all else equal, a better, a lower price earnings ratio is better. The issue is if that's all you're doing, you're either going to get fooled by someone gaming those numbers or you're left with the exceptions. You're left with the dregs that why did all of the smart money pass over the projects that look good by these metrics. So yeah, fully agree. But it, it, and it's a moving target.

Right. Basically, any metric like this that becomes attractive and screened for, a year later, it gets gameed aggressively. And then we're on to kind of that next. Same. I know we're going to get to at some point during discussion talking about things like airdrop mechanics. Same issue there, right? So we've kind of gone through this cat and mouse cycles where first it's like, well, we don't want BCs to hold all the coins. How can we distribute them to users? And like the earliest 2017 airdrops kind of worked well because people mostly weren't gaming them yet. You know, like Cosmos's ICO in I think it was March 2017 where I think they I shouldn't use some example. I forget if it was to GitHub contributors or just like community members who would subscribe by email but it kind of worked because they weren't really civil attack

because no one cared yet. It wasn't obvious that you could make money doing that. Well then what happens? People see it. They start civil attacking it. A civil attack just where you find a way to be more than one person. So it could be if it's tied to cell phone numbers, it's you spin up a thousand cell phones. If it's tied to GitHub contributions, you spend up a

thousand fake accounts. And people get better and better at this pretty quickly till they can do it with a Python script and, you know, collect a thousand air drops. So then projects iterate and say, how do we block that? And you get this kind of cat and mouse game. That's kind of life. I'm not saying that dynamic is necessarily a terrible problem. Basically just that you as an investor need to be aware of that. And if you're, if you're kind of reading the history and learning what to do based on two, three years ago, you're probably going to get games. Yeah, you kind of have to be in the conversation flow. You have to be, basically, don't just read Jose's conclusions. Read his analysis. Read the essays. Make sure you actually understand the thought behind these metrics.

Yeah, Brian Pellegrino was on the show recently talking about the layer zero anti-civil campaign. And, you know, some of these farmers had tens of thousands of civils that they had spun up. So, yeah, it's definitely become an industrial operation. One quick thing I wanted to ask, though, RAU mentioned that sometimes even ether scan can be gamed. And I had taken that to me, like Jose was looking at the smart contract and kind of the, you know, what it says about that in ether scan. And so, like, how can that kind of thing be gamed in ether scan? I think it's around the characterization. So Jose is definitely far more expert than I am. But I think this example of the treasury allocation, basically, ether scan isn't really trying to differentiate like complex legal economic governance structures.

And so a project can lock a token up. up, but have it be unlockable by the team, let's say, and then present it to EtherScan as these tokens are locked. Okay, they're locked, but if two people can unlock them at any time, are they really locked, right? That kind of parsing is not really what EtherScan is made for. Jose, you may have a smarter answer on this than me. No, there's many ways you can do it. I mean, you could split also, like, a big founder allocation into 20 wallets, right? So it looks like 20 team members. That's pretty commonly done. But normally this, the way the gaming looks is just like, there should be a big wallet that has a bunch of tokens that's like treasury or something like that. But yeah,

there's definitely ways to game it. But I think if you go down to the chain level and then ask the team questions and stuff, you can almost always find the truth or the opposite, right? You can tell if, if they're. I think that team part is critical. As like, as one example where like just ether scan could mislead you. We can imagine a cap table where you have like the typical locked and unlocked, but maybe the team has contractually promised a huge amount of tokens in some other way, via a legal contract. That doesn't appear on chain. It doesn't appear in the smart contract, but it matters hugely for the project economics. So there, it's talking to the team. It's reading the detailed docs. And by talking to the team, you're trusting they're not misleading you. So you have to

do diligence around the team to dig into that. Yeah. Well, so I mean, both of you like have access to these people because you yourselves are VCs in this space. But like, I don't know, do you just feel like it is still possible for an everyday person also to find out these kinds of things or not? I think so. It's definitely useful to have like a group chat. Like I've always recommend if you're investing in crypto, like having a group chat of other people that are doing it to kind of like do this amongst yourselves. Good teams will be transparent around these things and they'll have to answer these questions in Discord and stuff. So I think between need to scan and then asking the team questions, you can generally do a reasonable job,

like getting to getting to the truth. Yeah. I agree it's possible, but I think it does require a certain degree of kind of, I'll call it wisdom. And I mean that lightly, um, experience with pattern matching. As an example, you can look at FTX equity. Forget about even tokens. Just FTCX equity, you look at the fundraising round that's a coy invested in. A lot of the value attributed to F.TX was based on the token supplies of the FtX token, serum, things like that. And the VCs were, from my perspective, fooled. And they had all the data, but they were kind of fooled in like a lack of wisdom kind of sense and that it was a pretty simple pattern matching kind of scenario. So on average, most people who try to invest in these kind of things will be fooled and will be

the suckers, like on average. And if you're a casual investor, then you're 99% to be that bucket. With that said, it is possible. It just, it takes a lot of work. It takes a lot of digging. It's not just, you know, reading one thought leadership essay and applying a metric and nor is it just having a call with the team and feeling like you did your diligence. Real diligence is, it's real work. It's, have you done background? It's not so much like the legal background checks, but like, okay, you had a call with the founder. Have you had a call with the founder's college roommate. Have you had a call with the three, the two prior employers of the founder? Have you had a call with other VCs on the cap table? Like one way we sometimes spot fraud is talking

other investors. And it's like, wait, the founder told U.X and told us why. Well, you only learn that if you're having a lot of conversations. And so basically, if someone's willing to put in a lot of work and talk to other kind of smart people in the space, yeah, I wouldn't discourage anyone from tackling it. Just kind of know what you're getting yourself into. and it's not worth doing casually. It's not, the analogy I always use, and I apply the same to trading to most things. It's not that, well, my favorite analogy is like maybe you could be a world class tennis player, a world class neurosurgeon, or world class architect.

But if you haven't spent 10 years training to do so with the best education, the best tools, the best whatever, why would you try to perform neurosurgery or build a building? Right. Like maybe in a different life, I could have been a good neurosurgeon. I'm not. I haven't done that training. If I need neurosurgery, I'm going to hire someone, you know? So same's true with both VC investing and trading.

I don't think you need formal education if you're, you know, auto-didactic really willing to put in the work, but you've got to be willing to put in the work. Otherwise, you're very likely to end up as a sucker. Yeah, yeah, totally agree. So let's dive a little bit deeper now into kind of the problem here with all these tokens that are going to be unlocking because, so we, you know, we started with kind of the first examples from the first tweet threads. but then Jose, you talked about how you, you know, and you touched on this briefly, but we can dive into it more about how you did some more research into, you know, what's happening with the over-the-counter

trades, these secondary markets. So what do you see kind of if you were to project out over the next, like, you know, year or a few years? Like, what do you think is going to be happening in the crypto markets? Yeah. And by the way, cheers to Taran from from Sticks who helped a lot with this, with this research and providing data on this. But I, basically I don't see that there has been enough secondary trading of these tokens to meaningfully alter the the sort of UG to MC. And like there's some exceptions like Tia has his has traded a lot. I think layer zero has traded a fair bit and the war both were, we're investors in those by the way, just for full disclosure. But most things, but even those I don't think have traded enough to really

make a dent in the in the unlocks that that we're seeing. So it's just like you just have to bear that in mind when you're investing, right? Like all of these, every project will have some unrealized gains in it because people need to be rewarded for creating the value, right? That gets the project to the point where it goes where it goes public. And many, many projects will still perform well through the unlocks because the team is bullish, the investors are bullish, and there's more people that are bullish, they want to buy it. And so, and so it performs well. But a lot of these won't, right? Like a lot of projects, like, and this is, I kind of say this in the, in the thread, People get really negative about crypto because of the price action and stuff.

But one thing to remember is like, this is exactly what you would expect in an asset class where you're giving a bunch of venture style investments liquidity, right? Like most venture style investments go to zero. That's just how venture works. And so if you, in traditional venture, only a minority of investments ever have liquidity, right, ever go public and become meaningfully liquid, while the long tail just sort of fail quietly. Maybe they return money to investors. Maybe they run out of money and can't raise.

They fell quietly. In crypto, there's a much higher percentage of venture projects that end up having not just spot liquidity, which is already like pretty unheard of, but even derivatives markets, like liquid derivatives markets where people can long and short these assets in size, sometimes before the project has even launched like a meaningful product. And so what I see is that there will be a long tail of projects for whom these unlocks will be pretty brutal, the market will have to kind of digest that. And then like a small amount of projects that will do really well and still either like manage to retain their value through the unlocks and

then and then sort of do well afterwards or even do well through their unlocks. I think we'll see we'll see that too. Yeah. And I do think you'll see people making money on because because of these liquid derivatives markets, which also have interesting dynamics sometimes. I kind of touch on this in the thread. But you have this. So obviously in perpetual perpetual. Perpetual. trading is the sort of main instrument that crypto people use to trade derivatives. And in perpetual trading, there's this mechanism called the funding rate, right, which effectively, if there's more lungs than shorts, there's a, the lungs pay the shorts a funding rate and vice versa, right? And a lot of these assets, which are trading at very high prices and have no bids in the OTC market, even 70% below

that price, are still trading with positive funding on centralized exchanges, which means that you can get paid to short them, which is a very bizarre dynamic and not something you'd expect because, you know, you'd expect if there's a lot of sellers, OTC and no buyers, then theoretically, the OTC seller could just short the perpetual. And vice versa, if you're buying it on the market and you're bullish on it, you could just buy it locked at a 70% discount or some discount and do that instead. And so I kind of like was, was wanting to understand why this is happening, because especially if you're trying to take a short, you kind of want to understand, like, am I the sucker here, or is there something going on?

And my conclusion, which is just like, you know, speculation is that there's just idiosyncratic things that make it so that, like, sellers don't want to sell and sellers don't want to short the perk, which is, you know, most of these, you can think of, like, who are the sellers for these tokens? It's basically the team and the investors, right? The people that have unrealized gains. for the team, a lot of them will have like 90% plus of their net worth in the token, right? Like a lot of these founders aren't rich before. And so you just don't have enough collateral to short your token. And also you don't have the expertise to do it.

You're not a sophisticated financial market participant. And the same thing with venture investors. Like venture investors aren't set up to I speak for, you know, for ourselves and all the venture funds I know, none of them do active shorting. You know, only certain hedge funds do it. It's difficult. You can get blown out of your short. if the market and then liquidated as the market pumps and then you're no longer hedging anything.

So this dynamic means that the sellers don't want to sell. And at the same time, the buyers are probably unsophisticated retail on these centralized exchanges. You know, some of Binance is 200 million users. And they don't know about the OTC market or have access to it. So you have this dynamic where people can short these tokens in size and get paid for it while there's no bid for them OTC at the same time, you know, which seems like it shouldn't be happening. Does that make sense? Really well articulated. This is, Jose stealing my thunder here. I have more of the trading background. So this is an angle I think about a lot. I think,

Jose, I think you nailed it. So just a riff on that. And probably a lot of people didn't follow it. And that was like gold. So a lot of people, you see the token price, let's say, on finance perps, and you see the underlying asset. And it looks like a hedge. It's not for a VC fund for a lot of reasons, and Jose kind of quickly listed all of them, but they're all quite, quite substantive. So one, often this hedging has to be done on a pretty risky exchange, an exchange that might be a questionable legality, has a lot of counterparty risk. So one issue is if these exchanges would, for example, have to borrow at 15% annualized to borrow debt, then that means that when you put your capital on their platform, you should assume you're losing 15% a year because you're

effectively lending them that money. So add 15% a year minimum. And if it's exchanges, I mean, like we saw what happened with FTX, right? People who were hedging on FTX lost their entire hedge. So, so that's one issue. You also have kind of this compliance angle for a lot of VC funds. And then VC funds don't have working capital. For a VC fund to hedge a position, they have to call more cash from their investors, give that cash to finance. That's not really part of a VC business model. It adds a big, it hurts their performance, all else equal, because it means they have a big chunk of cash tied up as a loan to finance a 0% loan or a funding rates are a little positive. Maybe it's a 10% loan, but that's, again, a below market credit loan to finance. And then you have this issue that you're not locking

anything in. What happens if the next day the funding rate is negative 100%? So now you're paying 100% annualized to hedge. Presumably you're going to unwind your hedge, but what if the token price collapsed in that day? Maybe now you're unwinding your hedge taking a 50% loss on your hedge. So you didn't hedge anything. You just lost 50% of your money or you're stuck in this negative 100% funding rate hedge. So for this really longest of reasons, they're really not hedges. They're extremely risky basis trades that may or may not be attractive for a smart, active trader who can think about all of those risks, underwrite them thoughtfully. So the way this works in practice in the crypto industry is VCs will talk to OTC desks. OTC desks will basically do a

risk transfer. So you'll sell your forward agreement, your SAF or some type in some structure to lock in a price, the OTC desk is taking on that basis risk. They'll then hedge using Binance perks. They're taking all of the risks I just mentioned. But to do so, you're often looking at discounts of as much as 70%. So if you think about it, basically the fair price that you're seeing on Binance for, or let's say for a liquid for the small circulating liquid token can be three, five, even 10 times higher than the real price, the price that the actual team and investors are actively selling at. So you end up in this very weird scenario where the team and cap table might be selling a token at, let's say, a hundred million valuation. And it's being bought on Coinbase at the same time at a billion

dollar valuation. That would be a really extreme separation. Usually it's more like a 30% premium, 50%, 70% usually at the 10 to 1 has happened maybe a couple times in history. But you get the idea. It's really, there's almost two separate markets. And so how do people get hurt by this? well, the retail buyer is buying the Coinbase price. They're overpaying by, you know, 30% or 10x or whatever. But then there's a lot of more toxicity that comes from this. So people do bad comps. VCs will say, oh, this is trading at a billion dollar valuation on Coinbase. Therefore, I should invest in this next seed at a startup $100 million valuation, which is probably 10x overvalued. And then the worst is when people borrow against those assets. That has led to the tens of billions of dollars of wealth destruction on crypto. LockFi did it with GVTC, FTC, FTC did it, Celsius did it. Basically, most of the blowups in crypto have occurred when people misunderstood this and lent against these improperly marked assets. They lent against the lock tokens based on the Coinbase price or the finance price. And that led to the total destruction of these firms and the LP. They say it's hard to understate

how devastatingly costly this mistake has been in crypto. It's probably been responsible for more losses than everything else. Well, I was going to say everything else combined. I shouldn't say that. I don't know if that's true. The hacks have taken up a lot as well. Wow. Yeah. I mean, when you put it that way, it's very clear. Yeah, just everybody's looking at numbers that are not necessarily meaningful. All right. So in a moment, we're going to look at potential solutions to this issue. But first, a quick word from the sponsors who make this show possible. Pocod is the original and largest layer zero blockchain with over 2,000 plus developers. and the anticipated Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem,

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Choose news, not noise. CBC News. Back to my conversation with Ari and Jose. So there's like a ton, and I had actually written out a bunch of these to ask as individual questions, but I'm going to try to maybe just list a few because I think you guys could sort of riff. Let's see, there was a proposal by Roe Patel at HackVC

that proposed something called liquid liquidity-adjusted vesting, which had the vesting being multiplied by, you know, some kind of factor for liquidity. And then this would mean that like if liquidity was below a certain threshold, then vesting would only be a fraction rather than the full amount. there's another group out there that Colony Lab, they recently launched to enable something called Liquid Vesting, which enables early investors to sell their tokens before that vesting period's over. Let's see, there's so many of these.

Another one, Imron Khan of Alliance Dow tweeted about how Blast launched without doing all these different exchange listings and major announcements. And he said that he felt that this then meant that they didn't have. to like over time kind of justify a higher valuation. Like they sort of like, you know, and this is like a that that goes back to the unrealized gains to market cap issue of like, it looks like they were trying to launch at a lower valuation to prevent, you know, a gap there. But anyway, so I don't know what your thoughts. There's even more that I wrote, but we can sort of maybe discuss as they come up. Like what are some ideas that are interesting to you, what, you know,

what do you think won't work? And either of you can start. I'm happy to start and thanks for the color. That was awesome. All right. And I guess before going into solutions, one thing that's worth discussing is just that it's hard to solve this right now because the status quo is working for the people that it kind of needs to work for, which is the team and insiders at this point, right? And projects that try and do things differently haven't really struggle actually and like pay the price. Right. And so specifically, what happens? You launch with this low circulating supply. And then, you know, the market makers own a lot of the supply. It trades huge volume on the first day. So the price looks real. The mark looks real. And then even if you launch it a really inflated valuation, you're launching it to a centralized exchange, 200 million users. They get anchored. Like the psychological anchoring seems really strong, where if something launches at 10, even if that's 10 billion, it looks cheap at 5, right? Even if the real value was 100 or the seed was 100 or whatever a few months ago. So there's this psychological anchoring thing

that happens. And then also for the projects, they get to pay their employees and team members and do grants in this token that's now higher priced. So you can command, you can get way better talent, right? You can incentivize people to come work for you that makes it very hard to compete as a project that hasn't launched a token this way. Your team up, there's like retention benefits to it. There's benefits to everyone being sort of paper rich. And now they're really, really incentivized to make this work. And sometimes they can even cash out on secondaries and actually like realize some of that value. If you're doing a points campaign or a yield farming campaign, you can offer way higher APRs, right? The APRs nominally look way higher because your valuation is

is way higher. Kind of what we've seen with the whole LST stuff with eigen layer and etherfine and stuff like this. It's also just like more legit, right? If you're if you're a founder of a unicorn project, you sound super legit compared to someone that's like of a low cap. you know, you know, shit coin or whatever people would call it. And so there's loads of benefits to to this meta. And, and, and also you're not really seeing the, like the public complains a lot about it on crypto Twitter, but these things are still launching at like multiples of the last valuation, right? And if, if retail was truly oversaturated and there was no more, like markets are really good at revealing information, right? And if retail was really oversaturated and didn't want to buy

these anymore, then they should be launching below the last round and kind of punishing this meta. And that hasn't happened yet, which is why I think despite all the angst on Twitter, this isn't going to change yet because it's still. And like when you see projects, for example, one example was like friend tech, right? They did this like launch. I mean, there's other issues with that, but they did this, you know, fully diluted launch, fully on chain, no centralized exchanges. And like, look how that's gone for them. Right. And there's other. examples of projects trying to do it the right way, launching on chain. It's really tough because you can't fake volume on chain in the same way that you can. I say fake in like air quotes because

I'm not sort of alleging that anyone's doing committing fraud or anything. It's just like the way the incentives play out. Like on a centralized exchange, a lot of these market makers have zero fee tiers. So like trading this token back and forth has almost no cost to them. Whereas on a decks, everyone pays fees. And it's also they have way that. Dexes have way less users, way less, way less reach. And so projects that launch on chain first, then actually find it way harder to get listed on centralized exchanges. And centralized exchanges prioritize new tokens. They want the new chart, the new token. And also then you're like, if you launch on chain, your volume is being compared to a project that launches on a centralized exchange. And it looks like several orders of magnitude lower.

And so why would a centralized exchange list you if they can just list the hot new token? So there's like a bunch of dynamics in the market that together make it so that I don't think this thing is ready to be solved yet. But, but yeah, I'll let out. Well, the one thing I would point out is I think everything that you're saying applies for the short term. You know, it's like that saying, choose your hard, you know, like if you, you can do the short term easy thing, but then over the long term, it gives you a hard life or you can do the short term hard thing that over time gives do an easy life, which is the same thing I think applied to tokens. But I do think you're right that even when the tokens try to do the right thing, because all the other actors are in the

short-term game. Yeah. You have to make it to the long term, right? That's kind of the issue. And like a lot of these aren't just there, if they make these decisions, they don't make it to the long term, which is, which is really tough. Exactly. Yeah. It actually reminds you of something Olaf Carlson-Wee said earlier, which he was, you know, just talking. about like token distribution, tokenomics, and he was saying, in order to make a token really successful, you have to give it to as many people as possible. So that would then, you know, then, you know, kind of mean it would be better to have smaller allocations for the early team and the investors. But again, like you're saying, these are the people who are benefiting from the current

setup. And so, you know, they don't have that incentive to change. But it means they can have the nice and easy life now, but that might not mean that they end up building something that is successful long term. Yeah, and a lot aren't trying to. I think a lot of this comes down to kind of the core spirit. And then you, okay, so a lot of entrepreneurs and VCs are just trying to play the plump and dump game. And that's what they're optimizing for and everything follows from that. You do have a lot of kind of more gray area projects where maybe the founder is well-intentioned once the 10-year horizon wants to really build a, you know, real product. But there's some team members who want the quick buck, and then you have a lot of pressure from the cap table. So maybe you have

some A16 Z types on the cap table who want you to optimize for 10 years. But then you've got filling out the cap table, a lot of people who are then calling you every day saying, where's my liquidity? Where's my pump? I've talked to a lot of entrepreneurs who, that's the conversation. They say, Ari, I really want to build for seven years, but my phone's ringing off the hook. What do I do? All these LPs or investors are, you know, screaming at me for. And I'm like, wait, when do they give you money six months ago? And they're yelling at you for liquidity and their VCs. So I think as a founder, you really need to identify what are you optimizing for and try to as much as possible build alignment around that. And that means being very clear with early investors what your plan is. And either you can take the attitude of I'll take your money, but I'm optimizing for seven years. And if you, you know, try to annoy me for really liquidity, I'm going to tell you to. to, you know, bugger off. Or you carry your cap table and you explicitly exclude those people, kind of up to you as an entrepreneur to judge your own backbone. And if you're willing to take a

public tonalaching from those people and kind of still stand strong, I think so much of it comes down of those those kinds of dynamics and pressures in real time. You do have a competitive pressure to build a war chest to go big. There is a reality that if you try to just build in quiet and, you know, I'll build it, they'll come kind of mindset. That does often fail when you have these competitive network effects. It is often a race to establish network effects as the leading decks on Solana, as the leading whatever. So you do face that tradeoff, which complicates this. It's not, you can't just, hey, just bootstrap it quietly until you have a perfect product. That doesn't work. I think there is a middle ground. There is no simple right answer.

Like, I don't have a solution here. I don't have a single thing. I think Roe Patel's recommendation has some merit. Adding some more variables beyond just time divesting makes sense to me. But you have to be really careful to not introduce new gameable metrics. So if you use, for example, centralized exchange liquidity, that's super easy to game. Trivial. And so I'm very confident using that as a metric would do worse than nothing. Like it would just move more of your cap table into the hands of the worst people. Doing something like Roe mentioned time locked LP stakes, that is promising to me. Basically, you need the person to really have skin in the game. And so if it's a true time unlocked LLP stake, that could be real liquidity that someone is really committed to. It's ultimately

going to be case by case. I think I put a little thought ahead of this conversation into, like, do I have an opinion on the right answer? What's the best advice you can give a founder? And I don't think we're still an experimental mode with all of this, right? We're talking about brand new proposals by hack VC or other firms or other thought leaders that are untested. People will find ways to game everything in the first try. So I think the best advice I would have for founders today is keep it as simple as you can. So I like Rose idea of introducing another variable, but don't overcomplicate, don't add 30 variables. And then make your experiments as bite-sized as possible. Don't air drop 80% of your cap table with a brand new mechanism. There's just a really good chance

that kills your project, right? Someone finds a way to sibil it, bam, your project's dead. Instead, air-drop 5% of the cap table with your new experimental mechanism. Then if that works, six months later, you can do another 10 or 20 or 30 percent. Basically, be humble experiment, but be humble with those experiments and try to make them survivable mistakes because they probably will be mistakes, the first experiment or two or three. Well, yeah, actually, so I was going to, because, you know, we had started with this sort of general discussion, I was going to maybe do a lightning round where we actually went through kind of all these different proposals that I've seen floating around.

But it actually sounds like maybe the answer is to like switch it up or something. I don't know. You know, like some of the other ones that I saw were, well, first of all, I think this was Wasi lawyer. I don't remember. I unfortunately didn't write down who it was that said this, but they tweeted, investing may need to undergo a transformation from the typical one to four years to a longer span, says it's two to seven years or beyond. But hilariously, Kyle Simani tweeted back, one year cliff, no vest.

And then, yeah, there was another one. Someone said that low, float high, FTV coins should switch to price based on, This was Wasi lawyer versus time-based unlocks. We've now floated multiple ones, so I don't know if you have ideas on which ones work better or worse than others. Yeah. Personally, I'm not a huge fan of changing the unlock condition just because we've like, we have sort of 40 years of startup days on this. And like, it's very hard to define a North Star metric for success in a startup early on, you know, like it changes a lot over time. You pivot, you know, is it TVL? Is it users? Is it volume growth? Is it liquidity? There's like so many things you could list. And like, as exactly like Ari said, any metric will not only be game. It will also be like optimized for potentially at the expense of like actual success. You know, you optimize for liquidity and sending a bunch of incentives to get time locked LPs because that's how you can get exit liquidity even though that actually doesn't move the needle for your project being successful. You know, so.

I do think the simple time just works well. And at any time, you can just assess whether the metrics, as you see them as an investor, have been hit, right? That's kind of the nice thing about time. You can choose, or you know when the unlock is happening on a time basis. And you can just decide, well, I don't think they've reached success by the metrics that I define, so I will sell. Whereas in the other way, it's like you could have a lot of manipulation happening gaming.

So I'm not a huge fan. The things I'm most a fan of is, so if you're, If you think about it, the issue is like a high unrealized gains to market cap ratio, right? So there's kind of two ways to improve this ratio. You either lower the unrealized gains that exist or you increase the market cap or the float. And I think both of those have potential. For me, the easiest way to lower the unrealized gains that I see is just raising less money. There's a lot of projects raising way more than they need.

You know, like these are mainly software projects, which have inbuilt business development through token economic incentives and mechanisms, you don't need to raise like $200 million as an L1 to reach success. And when you see the successful L1s, none of them did. None of them did raise these massive rounds. And so I think that's a huge issue where these projects are just overfunded. And there's too much, too many gains for that reason. And the funds aren't being used productively to make the project succeed. And then the other side is, so that's, I think, a huge issue. the other side is like increasing the float and I don't think doing that by increasing the irdrops really makes sense like I think air drops are already in many cases way too big because

you're giving people tokens with a zero cost basis and often in the modern air drop meta it's just like civil farmers and like hyper sophisticated people we're looking to to just civil farm and then dump your token right and it's just a silly way to distribute your token like it's it's what we have because the SEC, it's funny, like everything the SEC did made it worse for retail, like made everything worse for retail. You know, like air drops isn't like moving everyone to this air drop meta as an example, right? I mean, I don't need to harp on that. I think everyone knows, knows that. Wait, but just to make clear, so does that mean that you think ICOs were a better mechanism? Definitely. Yeah. I think that was definitely a better mechanism because,

I mean, it was like it wasn't better for us as venture investors, but I think it's better for the industry as a whole because, you know, it's very easy to look at the data and you see that the upside in these projects, once the SEC came in and banned ICOs, just moved private. Like, you had the same level of upside and the new all ones as the, or similar, and the new all ones, the old ones, but the upside was all captured by venture investors rather than the public, right? The earlier project is able to go to go public, the earlier that retail can participate in their success. So ICOs is one I'm really excited about. Like, we're incubating a project internally and have been for two years. It's working on bringing ICOs back in a compliant way.

So that's when I really think the industry, because then you can actually issue a much larger float, and there's a cost basis on the flow. So you're not just giving away free tokens where you need to make up metrics that people are, that people are like then gaming. You can just actually let people buy tokens and potentially at a much earlier stage, right? Like a lot of these projects do around right before they go live from like the megafuns that that have lower like return expectations. And it's like, it's what Ari says. It's like, okay, this thing is going to go live at five bill. So we'll do a round at like two or two and a half, which gives sufficient upside.

And that gives us a war chest for post launch. Right. And I think that round could literally just be an ICO, you know, instead. And you'd probably get a better valuation. You get better outcomes because those investors generally aren't adding that much value. You already have your cap table. You're very close to launch. And so I think that could easily be replaced.

And then I think going even earlier could also make sense. Like I don't think ICOs make sense at the seed stage, like, because you just don't want to have 100,000 people screaming when moon, you know, at the seed stage. You're just trying to find product market fit. So I don't think that will ever be something that makes sense. But I do think as soon as you're just trying to find capital rather than optimizing for value ad, it makes sense to just go public. right to let people in give them a cost basis that you can then differentiate who actually values your project right that's what an auction does it's like very elegant economic mechanism that lets people that finds who values your project the most and gives the tokens to them and to me that's like a much

better status quo than the than the current one yeah and i want r to respond all of that but very quickly just you know when you talked about the difference between the iCO era versus now kobe did a really great substack where he talked about that. And the bottom line is he compared kind of the returns for different projects that had launched, you know, all the way back, obviously Ethereum in 2014 up to now. And the four examples that I gave were Ethereum, like I said, sale in 2014 has had a 7,500 X from the, I think it was the lowest public sale price. Salano was a 300X, OP, 6X, and Stark, he said, was negative for all the public market buyers. but all the VCs, you know, made more.

So anyway, that, you know, that's just an example. But, Ari, go ahead and react. There's a lot that Jose said there. I'll start by layering something on and then kind of trace back. So when I was trying to think about like zooming out, what are the meta questions that give rise to this that we're tackling? And it occurs to me really everything we're talking about is a function of the hyper-financialization. So Jose referenced like the 40 years equity history. And I think there's lots of historical parallels and learnings, but there are some differences.

So really everything we're discussing is about rent seeking middlemen and their manipulations tied to early liquidity. So, you know, we have these early seed stage or series A stage projects and they're getting liquidity in some form, even if it's just finance purse. And then everything else follows. It's, oh, well, we have retail pumping our coin. add price support. We don't want them to field to salute. We don't have control over that. So then we get market making or we don't want it to go crazy. So we need liquidity. Well, why isn't there sufficient liquidity? Because our token barely has a product and barely has users, but it's got hype and it's got speculation and it's got retail speculating on the coin, even though no one uses

it or uses the protocol or uses the product. So all of that is really a function of these early stage projects having kind of financialization far in advance of their fundamentals, whether their fundamentals are the product market fit, the usage, something like that. And we can't put that genie back in the bottle. Like, that's crypto. That's defy. That's partly why we're all in this industry that you can't just regulate that away. So acknowledging that we can't put the genie back in the bottle, you can kind of go in one

of two directions, I think. Either I think where this ultimately ends up is probably either you delay launching a token for a long time to prevent or from being a finance perp or OTC trading or anything like that. If you signal there is no token for three years, that kind of kills the secondary market, or at least makes it much, much, much smaller and less interesting. And then you say, you know, basically we're going to delay having this token to speculate on until we have a product, some usage, something to support it. Or you embrace the hyperfinancialization.

You eliminate all these rent-seeking intermediaries and you say, why are we having investing in unlocks at all if we know the team and the cap table are going to be selling tomorrow. That just sets up these games, this predatory. Basically, my argument is that we're creating this clear inefficiency that then ends up shifting a lot of the cap table in value to rent seeking intermediaries like market makers. Like, it's become common for a team with a token that, let's say it's a hundred million valuation, to give market makers, say, 3% of that entire supply with these crazy contracts that basically pays them to manipulate the market and gives them millions of dollars a value to do sell. It's an insane value transfer from a project to a market maker that,

like, why does that exist? Well, it exists because of this gap. So rather than, or same, same with the kind of corruption introduced by the short-term VC pump and dump dynamics where the VCs, not all VCs, of course, but some of them who are then, they become hype men and market manipulators in service of this. So the other way to go, rather than trying to be really smart about it is say, this is a losing battle. This is financialized. It's going to be speculated on. Let's embrace it. Let's eliminate the unlocks entirely. It's like, look, we know the team is going to be secretly selling anyway by a contractor of DC DES. Why play games with it? Why allow these market makers of DCs or our VCs to capture so much value kind of playing this almost arbitrage game? Another example,

the SEC has launched a bunch of investigations into VCs for acting as securities dealers. My own read and legal analysis is the SEC is absolutely right on that. Basically, you have some VCs who, this is the conversation with the team. It's, hey, the token unlock is happening in two months. We're going to give you, it's, it's, hey, brand name VC, we're going to give you tokens at a 50% discount to where we think this will trade in two months. In exchange, you will promote the token. That is hiring the VC as a marketer. The VC is acting as an investment banker in that scenario, right? They're getting paid a 100% markup to distribute the token. that is acting as a securities dealer.

And from an ethical perspective, you're acting as a pump and dumper very explicitly. Why? So we can't disallow that. I mean, unless we, you know, regulation in some places can.

But how does crypto deal with that? You deal with it by eliminating the lockup entirely, potentially, right? So you're still going to have games like that get played. But at least let's make, it's kind of like with MEV or, I mean, the spirit of defy generally is it's not the market manipulation won't happen.

It's a, let's at least make it not institutionalized. Let's at least have it be a, true competitive landscape, where we at least eliminate these kind of rent-seeking intermediaries and all of their value capture. So is that the Kausamani? So you'd want everything to unlock it once kind of thing? I don't think I'd compare my views to his.

And I think the spirit of it is almost opposite. I guess I am advocating in some cases for faster earlier unlocks. I really, all I'm trying to do is present kind of this metal model of a binary. It's like either have it be really long-term, liquidity, investing, and aligned interests to minimize these games. Or if the games are going to happen, if you're going to have people pumping and then dumping in a year, and that's their whole game, their whole game is just we're going to take this pre-product thing and get a trade deal of a billion valuation so we get to dump in a year. If you're going to have those people, how do you

prevent them from sucking so much value out of the ecosystem? It's don't give them the year. It's don't, don't let that insider have early access where they're then expecting a 3x markup just for holding your thing for a year. right, like make it a level playing field may go back to the early 2017 ICOs like Cosmos, where it's at least a level playing field in some form, which as we're discussing, is easier said than done, right? How do you make it a level playing field? Not an easy problem. But the current version or what Kyle's recommending is almost, I mean, I would say Kyle's recommendation is about as opposite of that as you get. It's give the insider special access and then let them

dump an ear. That's the, you know, so I'm trying to get as far from that as possible by going in either direction. Well, so here we are discussing all these potential solutions, but these would really apply to upcoming projects, whereas, as I mentioned earlier in the show, we have a whole bunch of token unlocks that are coming for existing projects, and, you know, people can look this up on apps or on sites like, I forget, one of them is called something literally like tokenunlocked on app or something.

We'll put the link in the show notes. But the point is, you know, just say, you mentioned, like, you know, looking at ways to reduce the unrealized gains to market cap. And initially when you said that, I thought you meant for existing coins. But I realized from the way you spoke, you meant for coins that are about to launch. But, you know, once the, the, the genie is out of the bottle, then is there a way to address that other than just inflating the fully diluted value at, you know, the, yeah, the fully diluted value at some point in the future? Or, yeah, what do you think we can do with these many projects that have, you know,

already launched this way and are going to be seeing their tokens unlock. I agree with Jose. I see a bearish landscape ahead. You even have VC stuck in stuff from 2017, 2018, where they're nearing the end of their VC fund. And right, they can say they want to hold forever as much as they want. You've been holding an asset for seven years. And on paper, it's up 30x or whatever. At some point, you have to sell. Right. I mean, these are professional investors who ultimately have, like, these are not people who can leave so long of their rank hits, right? They raise a VC fund. They own money to their LPs. So I think you have a lot of heavy bags, a lot. And people forget how hard it is to like a billion. A billion dollars is a lot of money. This idea that you're going to have

tens of billions of dollars to buy shit coins that you don't want and no one wants is far-fetched. I think it's going to be a hard battle for a few individual projects to successfully navigate that the way Salon did in January 2021. But those will be the exceptions. In terms of how to deal with it, I think it's probably like case by case, depending on what the problem is, but ultimately it's, you can survive it and succeed through it by just building a great product and accruing fundamental value and network effects. And then ultimately, this looks like a blit. I mean, you know, you look at Bitcoin. It's had its pumps and dumps.

It's had its, you know, 10x is 80% crashes. That can be good or bad. But ultimately, if there is that fundamental value in 10 years, it kind of doesn't matter. Right. So I would say if you're an entrepreneur, like really stressing about this, there are probably smart things to do to deal with a specific cap table overhang. You can try to negotiate. Like one way this gets dealt with are kind of big side deals where an OTC desk and the team work together to take, you know, 5% of the cap table away from an early investor and redistribute it in an orderly way that doesn't crash the market kind of thing. So case by case, but ultimately I'd say, hey, at the end of the day, if your goal is to build a great L1 or a great Dexon Solan or a great whatever, if you build a great product, things will probably work out ultimately, and so stay focused on that. Basically, the more you can shift time and attention away from this financialization, pump and dump game to actually building working stuff, the better.

Yeah, I agree. Yeah, I agree. I mean, for a lot of these, it's like you can't fight gravity, right? The ratio, like the market caps just have to come down because there isn't enough buying, there aren't enough buyers to support the fully billed evaluation once, more float unlocks, right? It was, it was a fake sort of valuation to begin with, and now that's going to come to light. I don't think there's really a way to fix that. Although one thing, I think that could help is just founders allowing secondaries or even like encouraging more

secondaries, particularly when they've, when they've finished raising, right? So because obviously you don't want to allow secondaries while you still might do another round because you don't want competition for your own fundraiser. But once you've finished raising, it just makes a lot of sense to to encourage and allow secondaries rather than making it really difficult, which is actually, right now it's a pretty difficult process. Some teams won't let investors do that at all. Others will have like approval clauses. You got to go back and forth with legal. And the contracts are designed in such a way that makes it difficult. And I think that is all for like regulatory reasons. But it does make the situation a lot worse because for instance, if let's say when,

if when T is a $20, there's a bunch of secondary transactions. actions that take place at $8 or $9, which is actually what happened, then suddenly you have a bunch of that supply, which had, you know, depending when they got in, like, you know, a thousand to sort of 20x unrealized gains. Now they're actually, you know, at the current price negative, right, the people who bought secondaries there. And so that completely changes the unrealized gains like maths. So I do think secondary trades kind of help. And then I think there's projects that will do like longer vests. I do think of all the solutions you mentioned, the longer vest makes the most sense to me. I think a two to seven year vest is pretty reasonable for a startup and, you know, especially for the

team, but also for the investors. They could think that's like a solution that makes more sense. It at least gives you more skin in the game long term. But for a lot of these, if you do that now, you're just like extending the pain. And to some extent, you just want to like rip off the bandaid and let people sell who want to sell rather than like extended for another few years of this. And for some of them, there won't be liquidity. And they'll just like go to, ask them to zero. Although tokens never seem to quite get there for some reason. Like even sort of abandoned tokens never seem to really go to zero.

But yeah, I think for existing projects, that's really all you can do. You kind of have to accept, you know, you benefited from the high FDV and now you have to you know, accept gravity to some extent. Yeah. And one other thing that I wanted to ask about was, you know, just looking at the list of all these tokens that are going to have these massive unlocks over the next few years, you know, some of them are ones that are successful by other measures. You know, maybe their token price has already started a flag because of these unlocks.

But I don't know if you, if you also are noticing that, that there are some projects that have real good traction, but because of the tokenomics that their tokens are performed, forming poorly. And if so, I don't know, you know, what your thoughts are on how to make those align better. You know, obviously we saw Ethereum did this huge shift in its tokenomics that did align usage better to the token price. But, yeah, I just wondered if you're either seeing things like that or if you have thoughts on how to make them align better. Yeah, I will open. I think very much varies by project. Like Ethereum, if you're referencing EIP 1559, which is, so for anyone listening, basically activity on Ethereum results in burning of EF because of this forky IP-159. That I was a supporter of that. I even tweeted at the Tollick that he should do that to produce

this clear direct fundamental linkage between activity on Ethereum and the token price. I think it, you know, what is a token economically? What does it represent? That really varies by project. In some cases, it's unclear if it represents anything. In other cases, it's clearly gas fees on the protocol, like for Bitcoin and or a store value asset. In other cases, it's a right to future services for a DAP or some service-based project. So it really varies by project. I think what we're highlighting, briefly with Jose, if you have something that fundamentally is worth less than 100 million, and it's trading at 10 billion, you can't fix that with a mechanism, right? And trying to just means you're saying, how do I manipulate this token price for an extra six months or a year? That's not a good goal.

The goal is you want to have a token that's worth a billion dollars, build something worth a billion dollars. And then, right, and maybe the token will collapse below that because of this cap table overhang. And then, you know, you need a little bit of PR, a little bit of messaging, a little whatever. But it will recover if the thing is fundamentally valuable, it might take a year or two, whatever. So at the end of the day, you want a high token price, build valuable stuff for usage, you know, the normal. And if you say, oh, I've got a protocol or a DAP that has tons of usage, it's a great product. But, investors are telling me it's unclear why the token should be worth anything, then, yeah, you have a token design problem, right? If you've actually built a great product with great usage, but there's nothing economically linking that to the value, then the token shouldn't be worth anything. And so you as an entrepreneur, if you want your token to have value, yeah, you need to change the mechanism. But again, I think it's hard to talk about in generalization. For an L1, I thought the IP159 mechanism seemed very smart to me. I'm not a protocol designer, not an engineer. So I say that in a general sense, directionally. I think zooming out a little bit, the whole ICO craze, I think, is kind of on, I want to say last legs, but we went through a cycle since 2017. We're like early 2017. Well, I mean, the Ethereum ICO, it wasn't obviously a huge winner for a few years. I mean, people, it went pretty quickly from, I forget what its lowest price was, like 14 cents or something. You know, it traded up to a few bucks pretty quickly. But it wasn't really until like 2016 that it really drew attention as like, oh, wow, maybe we should invest. in ICOs. And then you had the early 2017 ICOs like Cosmos that were immediately 10 plus X's.

That was all pretty organic. The people who invested in those things were mostly not speculators. They were people drawn to the tech or interest because it wasn't a truism that this is going to be an easy 10X. Then after people saw that in pattern mashed, it's, oh, I should just invest in every ICO. And so then you started getting ICOs. Like the Cosmos ICO, there was no competition. you could have manually gotten as much as you wanted if you acted within like 15 minutes of their ICO window. So you had act quickly, but a human could have gotten as much as they wanted

without competing against Algos or anything. Forget about civil attacks. But then six months later, everyone's playing the game. Everyone's sibling to get into every ICO. And then what happens is if the cat and mouse game moves earlier and earlier and earlier. So early 2017, it was you can buy this project at any stage. If you buy it on the exchange listing, it's still a good buy. But then it's, okay, no, no, no, no. The exchange listing is for dumping. But if you buy it in the Series B token raise, you're still good. Then it's no, no, no. People are already dumping into that. That's already too late. So then it's Series A, then it's C. Then it's Pre-C. Then it's advisor tokens.

Heading into this cycle, the general sentiment I saw was a lot of crypto people saying, I'm going to play the game one last time. Basically, I've learned from the 2017-2020 cycle. I've raised my ICO fund. I'm smarter this time. I won't be a bagholder. I'm going to invest. and get out a year. I'm going to dump before the music stops. When you see so many people talking that way, it's usually too late. Sometimes they get one more chance to sell before the music stops, but usually when that's the conventional wisdom, we're all smart, we're all going to sell, none of us will be left in that last chair. Usually those people are going to be left in that last chair. And so my base case is that we're already in that environment this cycle, that you're going to have to be very quick, very smart on the exit to do well. And if you're not, Basically, the smartest money is dumping pre-liquidity, pre-exchange listing.

They're dumping at 50% discounts to OTC. And the smartest ones, the fastest ones, you know, are getting good results. But on average, 90% will end up holding the back. Yeah. And sorry, Lori, did you want to move on something else? Go ahead. You can react to that. I do want to move on.

But, yeah, go ahead. Yeah, I mean, I think there's when I see this cycle a lot and just to riff on what already said is there's this underlying sort of implicit belief that yeah crypto is zero sum and for you to make money someone else has to lose it and you have to be kind of smart and get out early right and there's a lot of examples of this like meme coins i think are just like a financial like um sort of rep like exposition of that right and and just the way people talk about stuff like being bearish on venture funds you know arthur zero ex post where he was saying paradigm is going to be you know having $800 million to invest in apps is like extractive to the industry. And to some extent, that's

normal because all the people who are super high conviction megabolos just got blown up in 2022, right? Like either you, in one of the big blowups. Like it didn't pay to be like that. It paid to be like paranoid. But I do think like the reason I'm here is because I don't think this is zero sum. I think we're creating stuff. Like I think the most successful projects will be global scale, you know financial computing infrastructure that will that will be much more valuable than that it is now and I think a lot of people end up like missing the forest for the for the trees here a little bit and obviously like that's not your long tail of there's a lot of there's a lot of crap out there there don't get me wrong but I do think there's there's some stuff that that's really going to be

important and I think the returns on finding those early and holding them through cycles are much bigger than scalping, you know, two Xs on trying to game these, these financial metrics or whatever. All right. So we're running out of time. There's still a few topics I want to talk about, but I'm going to just put them all into one question and you can answer whatever part of it you want. So first of all, you know, throughout this whole discussion, I do think that one question that

we didn't really dive into. It's, we've discussed in various ways, but like I didn't ask it head on would just be like, what is the role of VCs kind of going forward? You know, as you just mentioned, there are people who feel like VCs are extractive to the spaces. There's been multiple posts about this in the last few months. But the other thing that I was wondering about is like when you're looking, when I think about the fact that, you know, we appear to have started to be in a bull cycle.

But then when I combine that with the fact that we are facing so many token unlocks, just relentlessly, you know, over the next however many years, like, I'm like, are we entering a whole cycle? And if so, what will it be about? And then the last thing I was just wondering also is about, we've heard people say, oh, because of these, you know, bad economics for these coins, that's why we're seeing meme coins take off because, you know, there aren't these sort of shenanigans with the valuations and, you know, the insiders. But, you know, as we've seen the meme coin market has dropped since that was a popular thing to say. So any in all of those topics you can

address and either one of you can go first. I'll start. First, to echo Jose's optimism, because I've been super negative throughout a lot of this, definitely there are growth areas with, I mean, the addressable market is gigantic. We're all believers in the tech and the fundamental value propositions, which are tremendous, which are trillions of dollars. So I'm a believer as well. and I think there are plenty of good VC investments. I think you have very different types of projects. There are some in the middle, but you have some that are truly trying to build good products,

then you have others that are kind of these financial games. Sometimes they can be a little hard to differentiate. There are some of my favorite themes that I think are just getting started. Things like RWA, real world assets tokenizing, things like real estate, things like art. I think there's going to be multiple billion-dollar startups created on that theme. maybe a couple have already been built, definitely more in the future. Social is another one, things, the crypto version of Cameo. I'm not, I feel that theme makes me feel very old. I feel like, like I'm fortunate that our VC team has some younger people who are, just have a

lot better feel for what social influencers will pay for and be able to tokenize and things like that. So, yeah, I don't mean to be super negative. I think there's plenty of great VC investments in crypto over the next decade, although still a problem. even in those good investments is valuations are still, from my view, pretty high and competitive. And that's tied to the good VC funds. Like Paradine, those are really smart guys, A16Z. They have a lot of money. And so when they find a good investment, they're driving valuations up. Right. It's like, man, you're an amazing entrepreneur. You want to raise two at 10? How about you raise five of 20? Have you raised 10 of 50? Because I've got 400 million to deploy. So the problem is when you have a good

project, a good investment, but you're investing at a starting point that's 5x where you should, it turns a great investment into potentially mediocre one, or just an okay one, or even a bad one, if it's extreme enough. I mean, ultimately investing is about price. It doesn't, this gets debated in VC. A lot of BCs will say if it's a great company ignore valuation because you don't want to miss the next Facebook. That might have been a decent truism like 10 years ago in equity investing, but when you're looking at a seed stage startup at a billion dollar valuation, I mean, there are not that many things in human history that sustain 10 billion plus at maturity, you know, you're really handicapping yourself being a VC investing at,

you know, these outrageous valuations. What else do you raise Laura to riff on? Oh, yeah, it's definitely true with the meme coins. It's basically if people are engaging in financial nihilism and pure speculation, they want, they don't want to be the supper. And I would actually recommend it. If you're a casual retail spec, you know, crypto retail speculator, better to casually, you're better off speculating on a coin flip or on craps in Vegas than you are trying to do fundamental investing in crypto if you're half-assing it. Because you're going to basically, if you go to Vegas, at least you know the odds. You know the odds of casino's favor, but it's not 99% in casinos favor. It's five or 10%. So similarly, you buy a mean coin,

you're probably going to lose all your money, but at least you'll know how. Whereas with some of these kind of shenanigans, you end up losing everything or 90%, you're not even sure who screwed you and So I definitely think retail's gravitated and mean coins because it's just the purest form of financial nihilism and speculation. For clarity, most of that money is lost and will be lost. So, you know, but if you're looking to gamble, gambling on that on a sex or a CX or a very simple decks, we're exposed to the minimal smart contract risk, hack risk, counter-party risk. At least don't pay more than you have to to gamble. Yeah.

Yeah, well, VCs. VCs seem to be blamed for like everything that happens in the, everything bad that happens in the space is the VCs. And I think part of it, and the role of VCs to me is the same as it's, it's always been, which is to find really high quality projects and bet on them early and then ride that out with the team and help them succeed. That's like the optimal scenario for VC. And I do think VCs get a lot of hate for like the high FDV low float. That really doesn't benefit VCs that much. Like VCs don't get liquidity until until a year, a year later. And also, like, the other issue is that people think VCs have, are, like, the ones making all the money. But the reality is when you see projects

launching on Binance, that's like the tiny minority of projects. Like, that's the top performer in the VC's portfolio that's made it to Binance. There's a lot of other bets that never see the light of day. And also, even when it makes it to Binance, realize that the VC is not selling until, until a year later, you know, when everyone's unlocking. So, their return is going to look a lot different. So I think a lot of it is sort of based on that, like, angst, which is not really reality. And also, like, in bear markets, everyone on crypto Twitter is, like, dancing on crypto and VCs' graves and declaring crypto dead. And the VCs are actually writing the checks that enable the next generation of infra to be built, right?

And it's really hard to do that in a bar market is a fund who's done it, like, twice. it's it's not easy to maintain conviction and figure out what to what to bet on and I think partly it's also like the feeling that the vCs are have have piled all this money into stuff and there still isn't a use case you know and a lot of people have gotten really really wealthy vCs and teams without there being a use case and and I think there's some jealousy there like some they haven't earned it they're not they're they're sort of lucky which honestly I think is fair like I think I would have expected when I started investing in crypto like eight years ago, I would have expected more use cases by now. I would, I mean, to some extent, like I would have been shocked with Uniswap and

some of these other things and how much volume they're doing. So to some extent, I would have expected more and to others less. But definitely three years ago, I would have expected more by now, you know, when Uniswap was already a thing and some of these defypire parameters had existed. And I think if you were early as if you see, you were lucky, like people who are who are, who who were in VC for the last, you know, since 2018 or whatever, we're very privileged. You had Gary Gensler made a soul, you know, protected a soul. He didn't protect retail. He protected VCs to some extent by not allowing retail in, right?

And so, yeah, I think that's part of it. I don't remember the meme coins. Yeah, I mean, meme coins are like a pure beta exposure to the crypto, right? I think they make they make some sense for that. I do think, again, like I said before, some of the really successful projects will outperform. And I think VCs, I think VC's, like, we're going to see very bad returns on a lot of the VC funds

that were started over the last few years. And I think potentially the industry will contract, especially if ICOs coming in a major way. Because like VCs are very helpful at the early stage. They get less helpful as you go on in general, as you get your own network in the space and stuff like this. So I think VCs will always be better for early stage projects than just like random ICO people.

But at the later stage when really you just need capital to scale up, I think if ICOs, if there's a real way to do ICOs, they will just become the preferred option because you can access everyone. And because of that, you can obviously get a cheaper valuation because there's a bigger supply of capital that can come in. And you can also get your community in, people that will add a lot more value than honestly a lot of VCs do.

So I see if that comes to play, I think the industry will contract, then that'll be a good thing. But as I said before, like we're still not at that point. Like VC is like the sort of launches are still showing that there's more demand for tokens, right? There's still more demand for tokens

from whoever's buying them. I don't know who it is on Binaz. or whatever that's buying all these tokens, but there's more demand. And so it's like with all asset cycles, people will create new assets to satisfy that demand. And then the best will rise to the top over time. And hopefully we can be the ones to find them and fund them early. Yeah, yeah. And hopefully they will benefit a wider swath of people than they appear to be doing now.

All right, you guys, this has been such a fun conversation. I could have kept going. But we're up at time. Where can people learn more about each of you? At Ari David Paul on Twitter. Yeah. At Z.E. Maria Mercedes-Di on Twitter. Complicated name.

Maybe you can put it in the show notes. And my team demands, I add this one sentence, annoying legal disclaimer, which is the views are mine, not block towers that I've expressed today. Yes. Same here. Yeah. And nothing here is financial advice. Just purely educational purposes.

All right, you guys, it has been a pleasure having you on Unchained. Thanks, Laura. Thanks very much. Pleasure. Did you know Unchained is much more than a podcast? Last year, we unveiled a completely redesigned website, enriching your experience for the latest news, insightful analysis, compelling op-eds, and comprehensive learning articles and guides for beginners.

Explore all this and more at Unchained Crypto.com. Thanks so much for joining us today to learn more about Ari and Jose and Delphi and Block Tower. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with Alfred Matt Pilcher, Juan Aranovich, Meckengavis, Pamu Jemdar, and Marga Curia. Thanks for listening. Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out markets daily five days a week with host Noel Atchison.

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