Unchained - The Chopping Block: Why Gemini Users Are Mad at Genesis and DCG - Ep. 443

Episode Date: January 14, 2023

Welcome to “The Chopping Block!” – where crypto insiders Haseeb Qureshi, Robert Leshner, Tom Schmidt, and Tarun Chitra chop it up about the latest news. Show topics: Haseeb’s TL;DR of the ongoing situation between DCG, Genesis and Gemini whether DCG committed fraud because of a misrepresentation of its financials why DCG did Genesis a favor by absorbing the losses from exposure to Three Arrows Capital what's required to force an entity into bankruptcy  why Cameron Winklevoss would request Barry Silbert to step down as DCG CEO the SEC’s probe into the investors of FTX and whether the regulators will fine them whether there will be on-chain assets for trading FTX bankruptcy claims what Tarun thinks of the future of NFTs and what needs to be built for them to thrive why Robert thinks most NFTs are “hot garbage” what the value behind NFTs is and whether they need a utility  whether the massive layoffs are good for the industry and how many companies over-hired during the bull market Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Tarun Chitra, managing partner at Robot Ventures Robert Leshner, founder of Compound  Tom Schmidt, general partner at Dragonfly Capital Links DCG/Gemini: Unchained:  Gemini Ends Its Earn Program and Calls for Barry Silbert’s Ouster DCG Under Investigation by DOJ and SEC: Report Genesis CEO Says Firm Needs More Time to Find a Solution Previous coverage of Unchained on DCG and Genesis:  Gemini vs. DCG Is Heating Up. Could Gemini Force Genesis Into Bankruptcy? ‘The Last Big Whale’: Why the Crypto Contagion of 2022 Eventually Hit Genesis Adam Cochran on Why Crypto Prices Will Be Down Bad for the Next Six Months Is the Collapse of Crypto Lending Over, or Is It Just Starting? Genesis May Be Facing Bankruptcy. Could It Take DCG Down With It? Why Genesis Could Very Well Be Insolvent, Not Just Illiquid FTX: Unchained:  DOJ Seizes $450M in Robinhood Shares from FTX Sam Bankman-Fried Pleads Not Guilty to All Charges Decrypt: FTX Restructuring Team Has Clawed Back $5B in Lost Assets Previous episodes of The Chopping Block on FTX: The Chopping Block: Can Exchange CEOs Like SBF Be Crypto True Believers? The Chopping Block: FTX: The Biggest Collapse in the History of Crypto? The Chopping Block: Why Lenders Didn't Liquidate Alameda When It Was Underwater The Chopping Block on FTX/Alameda: Is Sam Bankman-Fried 'Crypto Kanye'? The Chopping Block: SBF Wants to Win in the Court of Public Opinion. Will He? The Chopping Block: Was FTX a Scam From the Very Beginning? Layoffs:  Unchained:  Coinbase Lays Off 950 Employees Amid Market Conditions Genesis Considers Bankruptcy and Cuts Another 30% of Staff: Report - Unchained Podcast Bloomberg: Silvergate (SI) Tumbles After FTX Implosion Prompts $8.1 Billion Bank Run Why We Missed On Inflation, and Implications for Monetary Policy Going Forward | by Neel Kashkari Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. D5.Eat is the ultimate pump. DFI protocols are the antidote to this problem. Hello, everybody.

Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. The quick intros. First, we've got Tom, the DFI Maven and Master of Memes. Next up, we've got Robert, crypto connoisseur, and Captain of Compound.

Then you've got Tarun, the Gigabrain, and Grand Puba at Gauntlet. And finally, got myself, I perceive, the head hype man at Dragonfly. The four of us are early stage investors in crypto, but I want to caveat that nothing we say here is an investment advice, legal advice, or even life advice. So we are back. It's the new year. Things are still happening. A lot of the real big dramas of the last, you know, call it December, November period

are in the process of unwinding. The biggest among them is the situation going on with our friends. friends at DCG. So for those of you who have been following along, there's a, there's a big spat between DCG, Gemini, and Genesis. Okay, so Genesis, if you recall, giant lender, they're going under, or at least are very close to going under if they don't manage to renegotiate things with some of their, with some of their creditors. So now one of their biggest creditors, or I think actually the biggest creditor, is a product called Gemini Earn. Gemini Earn is basically like a, you know, Coinbase Earn or Celsius type product where you, you know, retail users deposit capital.

And that capital was being lent through Genesis to, you know, generate yield. So the Gemini Earn was frozen because of the fact that Genesis was frozen. Genesis is no longer processing withdrawals. And Gemini, understandably, is very upset about this, as are, you know, there are hundreds of thousands of customers. So we've seen this big, very public back and forth now between the Gemini leadership and DCG, their leadership is namely Barry Silbert. And so we saw this, you know, sort of dueling public statements going back and forth. Genesis and DCG basically claiming that, hey, we've been responsive.

We're trying to negotiate, you know, the best solution for all the creditors. We're trying our best here. A few days ago, we saw the Gemini CEO, Cameron, come out and say, hey, we don't think that DCG, we don't think they're acting faithfully in good faith. We think that they are are screwing with us, they're kind of dodging our calls, they're not willing to actually negotiate. And most notably, in the most recent letter, so there was, I think, three rounds of back and forth, in the most recent letter, Cameron comes out and accuses DCG of fraud. Now, specifically what he says is that when DCG, when Genesis, rather, when Genesis trying to demonstrate to their counterparties that after the collapses of the summer and after the defaults

of three arrows, that they were still solvent and in a good financial position, They claimed that their current assets were, they basically claimed the promissory note that we discussed last time, the 1.1 billion, that GCG assumed of Genesis's liabilities from Three Arrow's Capital, that that was a current asset.

Now, a current asset in accounting terms means that this is something that, I believe it's like it can be liquidated within a year. Is that correct? I think that's usually what a current asset implies. Yeah. So claiming that this promissory note, which is supposed to be,

I think it's like 20, 20 years at 1.1% interest. 10 years. Do I have the details right? 10 years, sorry. It's a 10 year note that pays 1.1% interest over those 10 years, which is obviously very, very low, that this is a current asset. So if you're claiming that this is a current asset, that means that you can sell it

or you can get all the capital within a year. Now, on a previous show, I had heard, and I claimed on the show that this note was callable, which I think would have made sense if this was being treated as a current asset, that, okay, well, the reason why it's a current asset is that's callable. supposedly, so Cameron states in the letter that the note is not callable, meaning that there is no way to accelerate this note and say, hey, give me all the money now because, you know, I'm in liquidation or I needed to pay back my own creditors. So if that's true, it seems to imply that whatever Genesis did here is basically a misrepresentation

to their counterparties about their financial situation. And perhaps as a result of this, we've seen the DOJ and the SEC open investigations into DCG. And presumably what they're investigating is this relationship between DCG and Genesis and whether there were misrepresentations made to counterparties. So, you know, running out of money

or, you know, having to shut off withdrawals or having a bank run, that's not illegal. It's unfortunate, but it's not illegal. But if you misrepresent your financial situation to your counterparties, that is super illegal, that is fraud. So we now have a very public accusation by Gemini against DCG slash Genesis about,

making a financial misrepresentation. And we'll see now how this plays out. Robert, what's your view? You're close to this. You're one of the creditors of Genesis. What's your view in this whole situation? Well, as a refresher, as I've stated on multiple episodes of the chopping block, I am a creditor to Genesis because they have a portion of my assets that are currently

frozen. They will not return them to me. And I am stuck with many other creditors, hoping. that the situation results itself. So I may be biased in any of these takes as a result of that. My personal perspective is that this $1.1 billion note from DCG was them acting potentially in a good manner to absorb the liabilities of three hours capital. So Gemini makes a pretty bold claim like, oh, this note is the heart of a fraud. And that could be the case, right?

It could be the case that they were relying on this being a current asset when they were keeping their exchange users money in Genesis. However, this absorption of liabilities was in its own right, a good act from DCG. DCG literally said Genesis lost $1.1 billion. were going to take that loss. And they move that loss up the corporate hierarchy. So I don't perceive in and of itself this note as a bad thing. In reality, it was actually a good thing that DCG was willing and did assume the losses from three hours capital.

So in a sense, to boil it all down, DCG did Genesis and Genesis customers a favor by observation. absorbing this loss. So on his own, it was a good thing. It was a favor to the creditors of Genesis, which includes me, which includes Gemini, which includes every other customer. DG did Genesis a solid, right? Now, separate of that, you know, could this have been fraudulent, could they have portrayed it incorrectly? Could they have done some pretty shady things in their messaging and their marketing? Yes, absolutely. They were presented. themselves to the market as a sound business, a solvent business, and a healthy business. They communicated on Twitter and an email and like many times saying, we are a, you know,

solvent, sound business. We're operating business as usual. You know, nothing is the matter. And it was nothing is the matter until, you know, FTX went under, at which point they said, withdrawals are frozen. No one's getting anything back. We're sorry. You know, that's the reality of you're going to have to fight.

us in bankruptcy court if it ever gets there or fight us out of court, you know, prior to bankruptcy court. And that's where we're currently at. And when you look at it from a very simple lens, there's some degree of misrepresentation there. Now, what was the degree of misrepresentation? Is it, you know, a civil liability? Probably. Is it a criminal liability?

I have no idea, right? But that's the state that they're in. And there was clearly some level of misrepresentation because they were. were purporting to be a sound business right before they went under. Just like MTX. Can I ask maybe a more procedural question for someone who's never been involved as a creditor of a suit almost bankrupt or not bankrupt entity? How does the like information flow work?

Like do you get contacted by like the Genesis creditors class action suit or do you get contacted by Genesis directly or like do you have to just be like, oh, I heard this in the press or like I asked people who like tried to sue them or whatever like what's kind of the information flow. I just out of curiosity. So there are multiple creditor committees that have formed where everyone bundles their claims together and says we're working together as a squad. We want to negotiate directly with Genesis slash DCG. And I don't really think the entities are that unbundled between Genesis and DCG. So the creditor committees hire lawyers and those lawyers talk to the company and they share information. They trade plans and recovery scenarios and

all these things that they're alluding to on Twitter. And then they share them to their creditors in the creditor committees. And as I understand that there's like two committees that are negotiating with Genesis and DCG trying to restructure all of this in real time. One is Gemini and One is many of the larger creditors. I'm not a member of either creditor committee, so I get no information. Like, I literally just am, you know, getting things from Twitter when Barry and Cameron are tweeting mean things to each other. No matter how much I ask, they just refuse to provide any transparency or clarity. Like, I can ask them questions and they'll just say, we're working to resolve the situation.

So that's mechanically how it works. The creditor committees negotiate with them. but that's out of a, you know, mutual interest, which is hoping for a positive resolution. I don't think there's any legal requirement for Genesis to negotiate with anybody. It's just of their own volition to try to stave off a forced bankruptcy. They could at any time do a voluntary bankruptcy petition and put themselves into bankruptcy. They haven't done so, even though the entity is most likely insolvent. On the other side, in order to push an entity into bankruptcy in an involuntary way, it requires a number of creditors to file their debts with a court and say, I haven't been paid back.

And once, I don't know the number, I think it's like three, once three creditors have said this company refuses to pay me, they can be pushed into involuntary bankruptcy. And so, you know, that could happen at any point, as I understand it. So we'll see, you know, it's an incredible situation to be in the limbo. It's one of the largest businesses in the history of crypto. And, you know, it's teetering on the edge of... Does Genesis terminating their loan agreement as stated in either Cameron's letter or whatever they sent, kind of earned customers? Does that count as telling the court that, like, they're...

No, I think you actually have to file it with... Yeah, exactly. You can't, like, not just stating it publicly is not enough. I just meant like it could just be like one person who does file is like, hey, these other two people happen to also say the same thing. Or do they have to file separately? Because like I feel like the mechanics of this type of stuff seem to dominate like the payoff much more like understanding the mechanics more than the like showmanship nonsense.

Yeah, it's a complicated game theory to it. And I don't think anyone is going to walk away with more money. if Genesis files for bankruptcy. I think in general, people are going to walk away with the same or less money, drawn out over a much longer period of time. So I think what's happening behind the scenes is everyone saying, like, hey, hey, let's not push Genesis into bankruptcy unless we absolutely have to. And like all conversations and negotiations have just broken down.

Yeah, you're saying it's like a mutually assert. Yeah, you could almost perform like a bribery attack where you're like, hey, if you got, Like if the rest of the creditors don't give us some money, like me and two of my friends who are like small fry creditors are going to go push Genesis into bankruptcy and screw everyone else over. It does seem like an unstable equilibrium. Well, I think the reason why it's more stable than that, and this is, I'm not, you know, an expert in restructuring law for any of that. But what I think makes it a more stable situation that prevents that is that any resolution has to be. be done equally amongst the various creditors. So you can't have like three creditors who like threaten them with some ultimatum and say, give us all our money back. Or we,

Oh, no, no, I'm not saying, I'm not saying threaten the company. I'm saying threatened the other shareholders. Oh, oh, oh, that might be possible. That might be legal and plausible. Yes, yes, yes. I mean, I'm pretty sure that's extortion, but you know, there's maybe some way you could structure it. Yeah, but anything has to hold up. Right, right, right. The industry. thing is that, so when Cameron is, you know, Cameron was accusing DCG slash genesis of fraud, his specific request, like, so clearly, I mean, look, whether or not they're performing fraud, you still want to get your users paid back, right? So one way or another, you want to find a peaceful resolution that's still outside of bankruptcy. And so the remedy that Cameron proposes to make him

feel okay about the resolution here is for Barry to step down, which is a very interesting thing to ask for because one of course Barry is not the CEO of Genesis right so Barry's not involved in Genesis except as sort of you know distant owner or like an owner of the parent company but then second you know Barry kind of is DCG you know it's like asking Elon to step down from Tesla or from SpaceX right it's kind of he's so deeply intertwined with that company and he owns obviously the vast majority of it so it does I'm like I'm not really certain what Cameron is thinking and asking for Barry to step down. It could be that Barry has just been so, like, you know,

ostensibly what he's claiming is that Barry's been so difficult to work with. He's been dodging requests. He's been unresponsive. And that really is just, look, this guy's stonewalling me. And literally, if you don't put someone there who's not going to stonewall me, I am going to push you into bankruptcy because otherwise I don't have a choice. That could be the essence of what he's asking for. It could also just be a way of kind of grandstanding for earn users and show.

Like, look, I'm doing something. I'm asking for this, like, big kind of loud. request. I don't know. Yeah. I think I was that I think is actually kind of like the genius stroke here, which is basically Cameron getting in front of the story and deflecting blame on Gemini towards DCG. And that's kind of what I've been seeing on Twitter is like earn users are not pissed at Gemini. They're actually pissed at Genesis. If you think about it, it doesn't really make sense, right? Like if you deposit money into a bank and then your bank makes a bunch of banks and makes a bunch of or liquidity crunch, you know, you don't get mad at like your bank's counterparty. You get mad at the bank.

And yet, you know, Gemini has been able to basically get all of their users to be mad at Genesis instead of themselves. Well, one small clarification there. The Gemini earn users are in lending agreements directly with Genesis. So they're not they're not lending money to Gemini who lends money to Genesis. When they sign the PDF that's like the terms of service or whatever, it's like an agreement. between Genesis and the customer directly. And so they're directly providing the money to Genesis, not to Gemini in the middle. So that's the weird nuance there. And this has been front and center that, you know, Gemini Earn, it's not like Gemini is going out and managing like a portfolio to like generate a return.

It's Gemini Earn is a funnel into Genesis. Yeah, that makes sense. Yeah. So, I mean, we'll see what happens with this. drama. It's all, you know, it's, it's really difficult to see how this ends well besides people just kind of throwing up their arms and accepting a haircut. I don't really see any other way that this can resolve. But I think in the meantime, we're going to continue to see some theatrics and some chest beating. And I guess we'll see at the end of the day, you know, is, does this rise to the

level of fraud? You know, obviously, it's not difficult to understand why DCG slash Genesis might make a misrepresentation, or even if it's a subtle one. that, hey, we made everybody whole, we moved all this money around, like everything's okay now, when in reality they chose kind of the easy way out, which is not actually poning up any cash to bolster the balance sheet of Genesis. One way or another, we're going to learn the answer fairly soon. But this does seem to be the big domino that the industry is waiting on, just to see what's going to happen to Genesis and exactly how messy is the outcome going to be.

Of course, the other big drama that has been playing out for a while now is the FTX. debacle. So we've had a few new developments in the FTX side. We're going to be shorter today just because the last like 10 shows have all been about FTX. So we're going to go a little bit gentler today. So one of the really interesting developments with FTX has not been on the side actually of FTX itself, but on the investors into FTX. And this one really took me by surprise. I think it was, I think it was Reuters that broke the story that there's now an SEC probe into the investors of FTX. And what they're probing specifically is whether the investors, of FTX followed their own stated due diligence procedures when they invested into FTCX.

And this is something that Tarun has railed on a lot of the VCs for, is not doing sufficient diligence when they were investing into the company itself. And I was really looking into this because I was surprised that the SEC, I mean, one presumes that the, you know, at this point, we have pretty good reason to believe that FTCs is making misrepresentations to their investors, meaning that there was some degree of fraud from FTCX to the investors. That's exactly what the SEC and the CFTC have charged FTC with doing.

So you would think that, okay, well, then that means the investors are victims because they were made misrepresentations to. But the SEC is saying like, okay, well, whether or not you were a victim, you did not do everything you're supposed to do. You did not do everything you told your LPs, your own investors, that you were going to be doing

when you're investing into these kinds of companies. And if you didn't follow your own due diligence procedures, we may potentially fine you for basically having not followed your own rules and therefore having fallen short to your own investors. So this is kind of potentially going to be a double whammy. So if you think about the big investors into FTX like some Hoya, Black Rock, you know, these kind of guys who have their own LPs and are regulated by the SEC, you could end up seeing not only the write down in FTX, but also a fine from the SEC. And these fines, if you look historically at fines that the SEC has done for people who had these kinds of deficiencies where they didn't follow their own procedures in making an investment, these fines can be in the millions of dollars. So it's unclear whether they will actually bring any actions against these funds. But if so, it's kind of, like I found it personally quite surprising that after, you know, one of the biggest frauds in recent history that you would also go back and say, okay, great, well, the people who invested in, they also get a doubly punished. You know, I guess I've already said, I was hoping to not be so crass in 2023, so maybe I'll avoid my...

Hold on, hold on. Why change your character all of a sudden? You know, I feel like... I took a little break. I'm like, you know what, other than EA being a scam and that I'm willing to rail against. I feel like... I kind of feel a little bad for some of the people involved, because it will be a perpetual embarrassment that will be stained on their record

in a way that's impossible to remove, kind of like being like an Enron investor. I actually do really think, like for some people, like, especially if maybe they were like it was their first fund, and this is like their most prominent investment. It will probably be something that will be very hard for you, maybe if you're like raised money again. Then again, John Maryweather exists, so you know, who knows.

But I guess the main point I think here is just like, I think the fact that investors wrote so much that showed they did no diligence makes it a kind of slam dunk case in some ways. I mean, everything from the Sequoia blog post that was taken down to some of the things some of the other investors said in the media and the fact that they all went very, very quiet right after. So like for instance, I think there was an interview in the information with Toma Bravo and they talked a lot about everything. But when it came to FDX, you know, sort of they were sort of the first check into the B or B2. I think B because I guess Sam's dad was a professor who was taught Orlando Bravo, if I remember correctly. And that's like,

how the introduction happened. And they were extremely quiet about it in a way that was like, you know, kind of telling to some extent. And I suspect that there's just so much evidence that people didn't do diligence and people were almost bragging about it in a way that I kind of, yeah, like I said, I kind of feel bad that, you know, if you got caught up in it, because it might be like a very, very hard blemish to remove from a professional. record. But people made it easy for the SEC because they have so much public documentation of the

things they did and didn't do. You've never seen such a case that was such slam dunk for such a thing. So I feel like the SEC is already going after everything. This is just like the cherry on top because people kind of admitted to doing such things. If I had to guess, it's probably the larger outfits that are more likely to end up getting hit with this just because, you know, if you are a early stage VC fund or you're just, you know, most VCs, I think at least as far as I understand, your stated diligence processes are pretty vague, right? It's kind of like, oh, it depends on the deal, you know, sometimes we'll do this, sometimes we'll do that. It really kind of depends on the stage and the appropriateness of that diligence. You know, whereas if you were Black Rock or you're Toma

Bravo, you might have much more kind of predefined things that you always do at a certain stage. You know, you always check this, you check that, you look at the balance sheet, whatever, all this kind of stuff. So my intuition would be that this is more likely to hit the very large and kind of more stalwart institutional investors that were in FTX than sort of like

you mentioned to ruin the kind of the first time funds that ended up putting some money in and seemingly hit it big. I'd be very surprised if any of them were in violation of their own LPAs or their own stated procedures in, you know, like I mean, venture investors obviously all the time will phomo into deals and say, oh, crap,

you know, I didn't have time to do anything. we had a weekend to figure it out and so we just wrote the check whereas if you're Black Rock like you're not doing that yeah for sure I just meant like the evidence the public record evidence of people like sort of bragging about how they didn't do any checks and they still got in

is a little bit like bad you know I don't know if I've ever personally seen such a thing where people kind of like you know if you do it that's one thing but if you go and like write many things like sort of in the public record bragging about not doing diligence, it's like not a good look in the long run. I was talking to another friend who's a VC and he had a similar reaction. And, and yeah, I was going to say something very similar where it's like, you know, there's sort of this,

it's not as if they're being attacked for not meeting some sort of standard of diligence that like the SEC has in mind or for investing into a fraud. It's like sort of doing what you say you're going to do. And obviously, for an early stage VC, it might just be. you know, a vibe check or something. Obviously, more than that. But like, it's sort of a different standard. I was wondering, like, what are other examples when, when investors have been pursued busy on behalf of their LPs as like fiduciary duty?

I don't know specific examples. I was chatting with our compliance officer or chief compliance officer who was telling me about some cases that involve P.E funds that got sued for, I don't recall any of the details, to be honest. But they tend to be, like, Like, I don't know of any examples that are quite as high profile as FTX. I mean, again, we don't know if the SEC is actually going to bring any cases. It does feel a little bit like, you know, sort of don't just stand there to do something from the part of the SEC.

We're like, they kind of dogpiled onto FTX along with everybody else. You know, very unlikely that, you know, after Sam has given a cajillion years that he's going to have much cash to pay the SEC, if the SEC ends up, you know, successfully finding him in a civil suit. So it's kind of like, okay, well, we've done what we can to go after. Sam, let's like try to show we're also doing other stuff going after the investors. And I'm sure that part of this is connected to their LPs complaining and, you know, look, all around the investment industry, if you were, if you invested in FTX or you're invested in somebody who invests into FTX, like there's generally, people are, people are unhappy. So yes, he feels like it has to do so.

Yeah, I mean, there's also this, this sort of fact that like, I think even in 2021 and maybe late, 2020, the SEC was starting to get into trying to find ways to regulate or force private funds to have more just public disclosures, or at least they were like touting the horn of this because they were like all they were like SPACs were like sort of very unfair as like public companies that have these like huge discounts, whatever before. And then I think like 2021 happened and like they kind of forgot about that. But I feel like this is just like coming back around the circle to like trying to go after that and it's just a much stronger argument than the SPAC argument I suspect so yeah definitely it definitely feels like that's what they're going for but

also again like I said I if you have so much public documentation it's like very hard to to not attract this type of attention when it's such a large scandal yeah that's true so I mean the FTX drama is continuing. Sam recently pleaded not guilty as his initial plea. No, that doesn't necessarily mean that he is going to not eventually, you know, arrive at some guilty plea and, you know, that's some kind of deal. But right now, you know, the initial plea is not guilty. One of the big fights going on right now is over his Robin Hood shares. So this Robin Hood share, my understanding is that these Robin Hood shares are in some kind of SPV that's owned by both Sam and Ashad, I think. And these Robin Hood shares, they've been fought over now by the FTX bankruptcy, the Block

buy bankruptcy, and they were just recently seized by the DOJ, and Sam put in a claim basically saying that he needs these Robin Hood shares in order to pay for his legal defense. And apparently that claim was kind of smacked down. So they're like, no screw off. Well, didn't the U.S. government just seized the assets, like, more like... Yeah, yeah, the DOJ just seized them. That's right, that's right. It's unclear what they are being seized for, like to what they're going to be, like,

are they going to be pledged over to the BlockFi bankruptcy? Are they going to go to the FTX bankruptcy? Like, it's very unclear where it's going. But we just got a statement, I think, yesterday from the FTX or bankruptcy proceedings that they've recovered now $5 billion between cash and crypto assets for FTX. Now, we don't actually know what the liabilities are yet. So it's unclear what that translates. into is that, okay, is that going to be a 20% recovery, 25%, 30%, 40%, we actually still don't

know. I don't know. Does anyone know, like, is there a ballpark number floating out there about what the total liabilities are? Does anyone know? I think we could find this relatively easily. The weird thing, though, is that, like, the, I think it was someone from Sullivan and Pramol who, like, made this statement about the $4.6 billion, but they also said they don't

know the total outstanding liabilities in the same state. Yeah, yeah. That was what I read is that nobody has the number of it. There was a while where everyone was saying it was like 8 to 9.6 billion, like they had some range, something like that. And then all of a sudden now people are saying they don't know how much because 5 billion out of 8 is a ridiculously good recovery rate. Like if that's true. That's very good. I thought the whole was 8 billion. Right. Right. Yeah, that that, even if it's 13 billion total, like let's say it's five, five out of 13 is not, as horrible as I was assuming it was much more wiped out than that based on the way people

Yeah, definitely. I mean, claims, if you go in secondary markets, claims are going for like 10 to 15 cents, or at least they were before this. I think they jumped a lot today. Actually, I made a prediction on Twitter that there'll be an on-chain asset for trading the claims soon because this is just too juicy. I mean, there should at least be a prediction market, right? There are predicting markets, but I kind of feel like.

like the claims. Where are the prediction markets? I think Polymarka has one market, but it's a very weird settlement thing. They're basically just like if the, you know, if it resolves like by a certain date, which is like a lot weaker

than trading the claims like an instant based on event-driven stuff, which is why I think it's sort of going to maybe be more like someone will make a synthetic asset than like a prediction market. Because the prediction markets need to specify this like terminal event whereas I think these synthetic assets don't need to tell you

what the resolution event is. They just sort of like, yeah, you're trading this. It's an IOU. Who knows if you'll ever get the other side. Right. The irony is that it's like people who would have lost money on those claims would trade that. So I could see that.

Right. The next thing about bankruptcy claims is that technically they're not securities. So you don't really run afoul of securities laws even if you do tokenize them and start shipping them around. Yeah. I mean, I just like people will just cash settle them or something. Like I kind of feel like they're going to do some hacky thing and like someone is going to do it and it will be on chain and a big product. Yeah.

I think no one's going to do it. The reason why it's tricky. Well, there are some off chain. There's this one startup that was back. Ex claim. Ex claim. Ex claim. So there's a startup called X claim that people actually do trade bankruptcy assets, like bankruptcy claims.

And I think Celsius is one of the big things that people are trading on there. as well as, what's the other one? Well, they have 82 mil and FTX claims. Oh, they already have XTF, okay, interesting. Yeah. Well, that's what people were talking about is like, until the court, I guess, recognizes like the transferability of these claims.

It's a little janky where it's like people can sort of double promise or like the contract that you might be signing might not hold up. So it's like, it feels a little bit like funny money right now. At the same time, the prediction markets have this problem of they have to choose like a resolution time scale or event. and like that's still very hard to do right now. So I feel like people are, you know, in some ways this is just like trading an NFT collection

that maybe will deliver on its roadmap. And you know, people trade those. It's more that it is certain that it will deliver us roadmap, but it's unclear when, right? So it's like a... You know, I can say it out of every NFD project still, technically. I don't know about you, but, you know, some of them could deliver in 10 years.

Yeah. Yeah, yeah. That's fine. Actually, Tarun, I'm just remembering now when we were doing our end of year kind of review show, you were talking a lot of shit about NFTs. And I kind of want to get, one thing I'd like to get from you is like, what is your thesis about NFTs in 2020? Where do you think NFTs is a category? Do you think it's dead? Do you think like this was all a giant scam? It's all awash. Or do you think that NFTs will continue to be a thing and that they will find new relevance? I think NFTs that have like use cases and revenue like a uniswap l-te-share. It's a great. Okay, so you're all about utility. You're like NFTs plus utility is where the future is. Yeah, the art representation stuff, I just feel like it's very unclear to me if that's like a sticky thing. It does feel like being babies, not really like you're not going to get the fine art stuff.

Like no matter how much, how close you were in 2021, I feel like it's still. a little bit distant. But I think the utility of the representation is really interesting. And yeah, on this other podcast, I co-host called the Zero Knowledge Podcasts, we were talking about like, you know, at some point there will be some type of on-chain trading mechanism that won't look like the current AMMs and it won't look like the current NFT auctions, but such that you can trade NFTs and fungible tokens in sort of like as if they were in the same environment, in the same sort of manner.

like same mechanism. I think the day that happens, I'm much more bullish on NFTs. Because I feel like that's like, you know, there are obviously many ways people have tried to do that. You know, fractionalization, like securitizing in different ways. But I think the moment you actually are able to have transfers feel like using uniswap is sort of like one of those days where like NFTs might might make me have to reconsider my past. think AMMs like pseudoswap or Hadeswit fit that bill? No, they're not homogenous across tokens and NFTs. I actually think there will be one day at one-size-fits-all.

Homogenous across NFT? Isn't the idea of NFTs and they're not homogenous? No, no, no, homogenous in the sense of like, you know, the, maybe this is too down the round of level for this podcast. But there's, you know, there have been a bunch of people who've done these kind of sequences of auctions. I think this may be now seemingly ill-fated collection called Art Gobblers. You used sort of sequence of Dutch auctions.

And this kind of, it sort of acts as like an intermediate state between like, you know, an RFQ, like a OTC type of trade for an NFT and something that's like trading a liquid token because there's like many of these auctions continuously. And it's there, there is sort of some notion of continuous. trading unlike normal NFT trading. So these types of mechanisms could theoretically sort of bridge

the gap, like sequences of like auctions that are guaranteed repeatedly and that you have, you could do both large liquid token transfers on NFTs in the same way. And I think like there's going to be, whatever is the standardization of that like Uniswap

will make the interface in UX like 20 times better because people only have to build things to one standard. So, okay. Bottom line, though, you believe that for NFTs to really work, not only do, okay, not only does there need to be some sort of better market infrastructure built that makes it much easier to trade these things, kind of uniswap style. But more importantly, you think that without utility, NFTs are kind of doomed to be this sort of niche,

Beanie Baby-like thing. I mean, I guess the Chinese government did make that weird, like, centralized NFT market. They did. like last week. Robert, okay, Robert, you declared NFT bankruptcy last year. What's your view? Do you think like it's over or do you think, do you agree with Tarun, we need utility?

You know, I don't think there needs to be utility per se. Like, look at the art market in general, okay? No one's like saying, oh, this piece of art on the wall needs utility. The utility is its beauty. The utility is its scarcity. The utility is, you know, it's provenance and the story and the history and everything that goes into it, right? Like, art is not valuable because of any utility besides, like, enjoying it and looking at it and, like, you know, viving with it. So I don't think that NFTs, you know, in an artistic sense, need any utility.

I don't think, you know, an NFT has to get you into a members club or some, you know, different event or whatever it is. I think if you look at the entire market for art in aggregate, 99% of its absolute hot garbage that's worth zero. Right. And almost there's like, you know, 500,000 struggling artists in America who are all making crap art and like one or two that are really successful and famous, like at any given time. And I think NFTs are just going to play out like that in that people are going to realize that most of this is absolute garbage and that most people are not good artists and almost

all of this, you know, is not enjoyable. And there will be things that stand the test of time and are amazing and people really, like, genuinely love and, you know, have a lot going for it. But I think, you know, we're at the phase of NFTs where we're still increasing the saturation and quantity of it, where every single day there's more and more projects, most of which are just hot garbage and worthless. And I think this increasing saturation. is going to keep on occurring until as a society, people just get burned out on it.

And I'm personally burned out on NFTs, but, you know, I don't think society is yet. And I think they will be burned out on NFTs. And then I think, you know, they're probably just like people got burned out on regular art. You know, like good artists are going to keep on producing and making new things and experimenting. And I think that's when we'll see like, you know, a Renaissance for NFTs again, where it's like, you know, once people stop trying to do the same thing for the 2000 time and they start like actually experimenting and like taking risks and trying new things and being creative, then there's going to be some great NFTs.

But like right now, almost every single NFT out there follows the same stupid formula. So you think we need to move past like the 10K monkey collection in order for NFTs to have a resurgence. Absolutely. I like can't even imagine how people keep falling for the same. Oh, it's 10K. It's scarce. It's like, yeah, great. Artificial Scarcely of a thing you made up last week.

Like, it's just like, if anyone remembers the old crypto cycles of your where it was like Bitcoin and the 37,000 rebrands and like forks of Bitcoin. How many rare pepets do you own? I don't own any rare pepets. My point is like, you know, they were a cycle on their own. Yeah, but even before that, like, do you know, how many like things took the Bitcoin, you know, code repo. Bitcoin,

Bitcoin private, Bitcoin God, Bitcoin Unlimited. And yeah. And like back in the day, you just changed like one little thing. You're like, oh,

it's a new coin, right? Like, please mind my coin. There was thousands of coins that were all stupid, right? Every single one of them is zero and gone today. Because they all did the same cookie cutter formula and like hope that by changing this one tiny parameter,

like made it special or whatever. And like, none of those exist today in any sense. Coin market cap, even from like 2013, you know, if you went to coin marketcap.com and look at it now, the top hundred, like four are still around, right? So that's the way I see NFTs. It's all cookie cutter formulaic nonsense that will not stand the test of time.

But like there will be artists who do really cool, really experimental, creative things that don't just try to say like, oh, crypto punks worked and like board apes kind of works. Like, therefore my 99,000 generative art projects is going to work as well. Yeah, and for the record, I'm more speaking of NFTs as a data structure, not really like the art is horrible. But like, can I get that like on a cup? Like, I'm just speaking about NFTs as a data structure. Yeah. To run is the only person I know.

He talks about NFTs as a data structure. Oh, I need that. I need that on a mug or a T-shirt. I want to buy this podcast. a gift. Clearly, you've just learned what you can buy us. Yeah, we need some merch like a t-shirt. Talk to me about NFTs as a data structure. Talk to me about it. Or Tarun can make his own NFT project where every NFT is a new data structure. Very good. Tom, Tom, what's your take? NFTs?

Yeah, I mean, I'm inclined to agree with Robert here. Like, there's clearly something very compelling about like, sort of a few trends, one being everything increasingly digital and online, and I don't see that going away and people needing a way to express themselves. And I agree, the 10K PF being is kind of bizarre to me. It's like, even board apes, frankly, are in this bucket to me where they kind of just took crypto punks and like tweaked it. And I don't really find it very impressive. But there are people doing really novel things on chain. And so I don't think, though, having the whole utility thing is kind of a meme, like, sure, you can represent a Uniswop LP shares in NFT, but that's not like really what we're talking about when we're talking about, you know, NFTs. Yeah, I'm actually,

I'm quite bearish on utility. I think utility in many ways it kind of bounds how valuable something can be because if something doesn't have utility, then really the only utility can have a status. And status is probably the most valuable thing that people pay for in basically the world. Right. Like people don't buy a, you know, 100,000 foot yacht versus a 50,000 foot yacht because they need more room to walk around. Right. They buy it because they want to impress somebody. And so the ways that the reason why NFTs have become so incredibly, incredibly valuable is not because a $50,000 NFT versus $100,000 NFT bring somebody twice the joy or is twice as well drawn or is twice as much utility. Like if you're actually measuring these things in terms of utility, how much utility, like it's pretty hard to give you somebody $50,000 worth of utility. To give somebody $50,000 worth of status is actually surprisingly doable. And so that, that I think ultimately is where NFTs, if LMTs are going to continue to be valuable, I mean, I can believe that there's going to be Starbucks NFTs and, you know, loyalty programs and this and that. But these things are all going to be super, super low value because how valuable is the Starbucks, you know, loyalty program?

Where we're going to be focusing as investors and where the numbers are going to remain eye-popping in the future are in the status game of NFTs. And that will continue to evolve. in my defense of myself, I guess. I would say that I was just more focusing on the idea of like the actual NFT needs to have something more than the current representation. Right. Like the Uniswop version has like some other functionality that might, it might not even have to be utility, but some other functionality that like gives you whatever this thing you're

talking about is rather than just the current iteration, right? I kind of expect there to be another standard that takes it over. And I spent a lot of the holiday in Switzerland, and I, you know, one thing that was repeated to me more than three times, which should tell you more about Swiss people than anything else, was people mentioning the fact that the Rolex CEO has said the following statement, which is like, if I wanted to know the time, I would just see to look at my iPhone.

Like, I feel like it's hilarious that the Rolex CEO said that. So to you, it... That is true. When I'm wearing a watch, I use my phone more as an actual timepiece than I use my, that I use my watch. Can you imagine the Rolex CEO saying that to me is like... It means he understands his business. Good for him, you know?

Like, imagine the board ape guy being like, look, the problem with board apes is that the art isn't good enough. we got a we got to hire better artists like it's like no dude what you don't understand your business if that's what you think you're selling and so it i i i you know i i understand the articulation you're making true but i i would honestly still be bearish on like finding new i don't know exactly the way you put it something like finding new ways to new standards new ways to engage with these things i think clearly there does need to be you know something you can do other than just post about it on twitter like i do think that you know having to you know

more forms of engagement, more ways to show off your NFT, whatever. I think that is going to be important for NFTs to continue to grow. But fundamentally, like, if you think about like games, right, probably the single digital products that monetize the most are games, where you have these whales who will spend hundreds of thousands, even millions of dollars in a single game. There's no game that has millions of dollars worth of content or hundreds of thousand worth of utility for anyone to even get in the game, right? You sort of, you get so supercharged, you max out all your stats, you get the coolest

robe or the coolest wand or the coolest whatever the hell it is. The only thing you can be buying at that point is status. That's where all the excess money gets spent in these games. I think that is a preview of what NFTs are ultimately going to be about in the end is about finding more and more ways to create richer status games in digital spaces. Like that, I am very long. I think that will continue to. That's going to look more like a social network.

And that means you're going to actually have to be able to have some things. or not like some animal whatever this future version of a social network looks like and it's going to have to have some notion of utility in that thing for you to express this status and I don't think that is the word you're looking for metaverse no but I mean like if you look at the farcats and then versions of the world right in my mind they're actually the farthest along on this experiment of like trying to really deeply integrate NFTs into social media style experience and look whether they work or not they are still novel experiments that actually do try to like use this status thing as a fundamental data structure.

Remember that throughout the entire experience of using the social network. And it changes the candor of how people are communicating, what they're talking about, how they're like giving each other sort of trinkets, like the notion of a like changes in some ways when there's sort of some other type of game around it. And so I think that's what I guess would be more positive on than anything else. And that, to me, requires some other form of utility as in the data structure better be richer. When you say the data structure is richer, what do you mean in the context of like lens or farcaster? Because like, okay, NFTs are first class citizens there. But I mean, on Twitter, like you can set a special PFP. You can have a PFP be your Twitter thing.

And it demonstrates that, hey, you verify that you own this thing on OpenC. Like what's the difference in kind that you're pointing to? Like you can basically make FTs out of content you generate or NFTs are automatically minuted when you reach certain thresholds like oh like you got like 10,000 likes on something.

You know, they're experimenting with a lot of these types of like NFT reward in social network type of thing which makes way more sense to me than like Starbucks whatever because it's like, hey, it actually does involve you engaging and like you are sort of

playing this game, but it's not like a video game. It's like you have to earn your stripe in this social network type of game. And I think those are the interesting experiments, right? Because those look totally different than art. They look totally different. But they do involve the data structure, holding more metadata, and being able to kind of like mutate itself and like do all the other stuff that the current versions don't.

You heard it here. NFTs are about data structures. I am actually going to get this mug made. Yeah, and just to state the obvious, since we're coming up on the end of the show, if you're looking to communicate status in a way that's free without spending a lot of money on an NFT, tell people that you listen to the chopping block. That is the fastest and cheapest way to increase your status in the crypto community. But we're so exclusive, we don't mean NFTs.

Only data structures. We don't do NFTs. We only do data structures. That's our thing here at the chopping block. Okay, well, last thing that I wanted to cover today on the show, was layoffs. So we've had a slew of layoffs lately. I mean, it's no surprise, I think, for most people watching the industry. We've gotten battered over the last, you know, three months. We just had a huge announcement of a 20% layoff at Coinbase, which is another 950 people.

They already performed layoffs late last year. Continuing that trend now, actually, Wall Street seemed to like the fact that Coinbase let go up some people. Genesis, unsurprisingly, laid off 30% of their staff. Silvergate, the embattled bank has laid off 40% of their staff. So it's been a very, very rough, you know, a couple months for crypto companies. And I think startups are starting to see the same story coming to hit them. What are you guys seeing out there right now? Does it seem healthy?

Does it seem worrying? Is this not enough in terms of layoffs? Do you expect there to be more? How are you guys seeing the situation going on right now? I'll jump in first. I mean, I think I haven't started seeing too many layoffs on the earlier stage of the market in the startups and the seed stage and series A. I mean, really, you know, I think layoffs have really come so far from the largest organizations, you know, the ones that need to preserve cash. And the only sane way of doing that is to reduce headcount.

Reducing headcount is one of like the last options in the latter of preserving cash generally. It's like because it hurts your future prospects. And so most self-interested corporations don't want to sacrifice future prospects to survive in the short term. And so the reason I think it's less of an issue for startups in general is it's 100% about future prospects. It's like you use that cash until it's all gone, you know, for the most part. But if you're publicly traded, like you just mentioned Coinbase and Silvergate, you know, you have to. your financials are being scrutinized in real time. And, you know, those organizations have, from an equity perspective, benefited from

layoffs. Coinbase is up a whole bunch since announcing they were reducing their force. So I don't see it impacting the earlier stage of the market personally. I think, you know, it's probably extremely necessary for the larger market participants that are losing cash. If you have negative cash flow and you're a mature business and you're not able to rely on venture for funding, you have to get things in order. Otherwise, you're gone. And it's existential. So I think in some cases, they probably have to go further. There's the old saying, like,

don't cut twice, cut once. It's better to have one big round of layoffs from two medium ones. You get the pain over faster and everyone who's left can get back to work and grind it out. So hopefully this is, you know, got around the corner at some point. And, And, you know, but I don't think it's going to stop for late stage companies that can't access venture funding that are cash flow negative. I don't know that I agree with that, Robert, because a lot of these later stage companies, even the ones that are so private, a lot of them are really going to have trouble access in capital at this point. Like, I mean, venture funding in crypto has massively slowed down. And I think a lot of people got, you know, they raised, they raised quite a lot of capital in 2021 and 2022. And they're blowing through that capital at a very aggressive pace because they assume.

that, hey, I'm always going to be able to get this awesome valuation. I'm always going to be able to raise cash really easily. And so I think people lost a lot of discipline over the last couple of years. And it's very hard to find that discipline when the market environment shifts so rapidly. So now I think there are some companies, you know, a lot of these protocols that raise like 400, 500, 500 million, even if they're burning, you know, 60, 70 million a year, which is a lot of money. That still gives them, you know, five, six years of runway before they have to really start making tough decisions. But for a lot of money, but for a lot of money, you know, a lot, especially for, you know, more, you know, more cash flow oriented businesses that,

you know, maybe had three years of runway, for a lot of them because their revenues have collapsed, right? Their runways have significantly shrunk. The other thing, too, I mean, I was commenting about this a lot over the last couple of years. Like, there's so many companies that overhired. And, you know, they grew their workforce by like 50, 70 percent in a year. And so many of those people, like, you know, you have entire teams being managed by somebody who was hired seven months ago and doesn't really know that much of the product very, very much yet. And all the VCs, especially the growth stage guys, were shoveling money into companies and just telling them look higher, you know, grow more, burn, burn cash, like whatever, just do something with this.

And naturally, the efficiency of malinvestment just went way, way down. So I think it's somewhat healthy. You know, I, even Coinbase, like, I suspect that what they're at now, like, 3,000 employees or something. I think it's 4,000, but still huge. Yeah. It's 4,000, yeah. You said 50 or 70%, but a lot of it times it's like 3X, right? I think for a lot of these, you know, kind of this size of company. So even if you do 220 cuts, you're still up, you know, over 100% of where you were, you know, at the beginning of 2020. So, yeah, these companies have expanded pretty rapidly.

But good news is that it's more talent for startups, right? That's how these kind of firms should operate. And yeah, I'm excited to see, you know, some of those folks land at early-stage companies and build those. Yeah, I mean, I also think a lot of the glut of her hiring was probably mainly on the exchange and C-Fi side in general, right? Like, I mean, if you look at the number of employees of, like, Coinbase or Babel or Amber or any of those things, right?

Like, they're like an order or two hours of magnitude more than the, you know, the layer ones or things like that, right? So like there is a sense in which it was they kind of just grew too fast because in some sense, if you're an exchange or a lender or something where there's like kind of no moat, not like a super strong moat in some sense, like people undercut you at any time, like you know, kind of cap your market share, you end up having to be basically being like leverage long beta to the market because like anytime things are going up, a lot, you have to spend, you have to increase your spend at like some fraction because like

everyone else is increasing their spend, right? It's like it's very like market share competitive game. And then when everything crashes, it's the same thing. It's like, so like I think there's a sense in which if you try to like map which companies in the field are like really long data to whatever index you should measure them against, then like those are all always going to have these like hard unwinds at every cycle. Whereas I think like, the ones that are like less immediately tied to market data don't have to, they don't grow as aggressively for sure. And I think the VCs and growth investors are kind of lost sight of that. But they also don't have to hemorrhage in the same way. Yeah, it's certainly true that most

people who are being laid off at this point are people who probably just came into the industry. So I suspect that there's, you know, the folks who are kind of more committed, more die-hard you know, we're kind of in it from the very beginning, those people are likely still staying around, especially because they just have more responsibility, right? So they're more central to the company. So usually when these layoffs happen, it's like, okay, we hired 3,000 people in the last year or 2,000 people in the last year, and we let go of, you know, like 40% of them because we got to make a big mistake there. You know, it's tough. Although, you know, seeing the, the, labor market numbers on the whole, for the U.S., at least,

labor market is still very strong, but we're seeing the entire tech sector correct, and a lot of these are very high-end firms. Like, it was just announced today. BlackRock is doing some significant layoffs as well. Goldman was doing layoffs. And so we've seen just across the finance sector and across the tech sector,

layoffs hit almost every single company, which is a sign of the times, right? Just bell tightening and saying, hey, we have to get costs under control when the market isn't rewarding growth at all costs anymore. Yeah, I mean, actually a very good, blog posts that I think she covers this is Neil Koshkari, who's one of the Fed governors. You may remember him from a lot being involved in the financial crisis in weird ways.

He wrote a very interesting medium post. First of all, I didn't even realize the Fed wrote medium post. This was not like on their blog that looks like it's from the 1990s, but it's actually like in medium. And it was an interesting question about like how monetary policy like messes. messed up in the first place because they were like overly reliant on kind of like models that were very linear in in labor participation and labor force and the thing is the quality of the labor force was actually going down like the the real wages per unit labor

and so they like under they kind of like were like basic hoping that the zero percent interest rate would like have a wealth effect to like the bottom 50 percent and didn't it actually had the exact opposite and so then the response once they really realize that their model labor participation was so skewed in that way. They went really hard the other way. And he had a kind of interesting perspective on it, which is like they're basically really focused on like wage growth. And there is some irony in that the wage growth might actually be stunted by this level of cutting in general, because like the top end of the distribution is probably just getting completely cut. And the bottom end is not like growing faster than

inflation. So anyway, there's a very good blog post called why we missed on inflation and implications for monetary policy. That kind of does, I thought, did a very good job of illustrating kind of where they messed up and why they're like going hard the other way and why they did this really hard U-turn to like, miss, you know, misunderstanding of like why why unemployment's so low yet wages are shrinking nominally or like inflation adjusted. Yeah, interesting.

Well, we've now got some homework for next week. I'll dig into that. It sounds interesting. We are up on time, so we got to wrap. But thanks, everybody, and we're going to try to be back next week. See, everyone. Yeah.