Unchained - The Chopping Block: Why the Crypto Markets Have Been Down This Week - Ep.308

Episode Date: January 13, 2022

The Chopping Block is back! Crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra chop it up about the latest news in the digital asset industry. Show topics: why crypto assets experienced a drawdown after last week’s FOMC meeting that hinted at accelerated rate hikes which emerging assets Tarun, Haseeb, and Tom envision weathering a bear market which assets could be further hurt by a continued bear market the significance of Paradigm and Sequoia investing in Citadel Securities what aspects of Signal CEO Moxie Marlinspike’s web3 article Haseeb, Tom, and Tarun take umbrage with whether Cryptoland is crypto’s Fyre Festival or whether it’s the metaverse what the heck is going on with the Pudgy Penguins community the lessons from the CFTC’s fine of Polymarket (disclosure: a former sponsor of my shows)   Episode Links   Hosts Haseeb Qureshi, managing partner at Dragonfly Capital https://twitter.com/hosseeb Tom Schmidt, general partner at Dragonfly Capital https://twitter.com/tomhschmidt Tarun Chitra, managing partner at Robot Ventures https://twitter.com/tarunchitra    Topics   FOMC = Crypto assets dip https://www.ar.ca/blog/debunking-more-overreactions-to-macro-a-ronin-case-study Paradigm + Sequoia invest in Citadel Securities https://www.coindesk.com/business/2022/01/11/paradigm-sequoia-to-invest-115b-in-citadel-securities-bringing-trading-firm-closer-to-crypto/ Cryptoland https://thenextweb.com/news/welcome-to-cryptoland-real-island-cryptocurrency-fans-analysis Moxie Marlinspike’s first impressions of web3 https://moxie.org/2022/01/07/web3-first-impressions.html Pudgy Penguins drama https://thedefiant.io/fire-on-the-iceberg-pudgy-penguin-holders-eye-coup-amid-acquisition-talks/ Polymarket fined by CFTC ​​https://www.coindesk.com/policy/2022/01/03/cftc-fines-crypto-betting-service-polymarket-14m-for-unregistered-swaps/ Learn more about your ad choices. Visit megaphone.fm/adchoices

We have introduced a new show here called The Chopping Block, where insiders chop it up about the latest in crypto. And this show does not feature me, but it features four really interesting crypto investors who are Haseeb Qureshi, managing partner at Dragonfly capital, Tom Schmidt, partner at Dragonfly, Robert Leshner, who unfortunately is not here today, founder and CEO of Compound Labs and Managing Partner at Robot Ventures, and Turun Chitra, co-founder of Gotten, and managing partner at Robot Ventures. In each episode, Haseeb, Tom, Robert, and Turun, although not Robert today, will discuss recent events in crypto. We will also be releasing these conversations on the podcast so you can always tune in later, but the live streams will always be the earliest you can catch the shows. And in general, the videos will also have the visual content, whereas the podcast will be audio

only. We launched with a 2021 recap with a bunch of superlatives, and I think people really loved it. My favorite category was Best Mechanism, nominated by Tarun. And I am just here now to introduce these people and to explain why it is that there is a live stream on the channel and why I am not a part of it. With that all said, I will turn things over to your moderator to see. Okay, catch you later. Good luck. All right. Thanks, Laura. Okay, I'm taking over moderating duties from Tarun because I'm supposed to be the moderator, so I'll just take that. Hey, everybody. Welcome to the chopping block. Every couple weeks, the usually four, but currently three of us get together and give an industry insider's perspective on the critical topics of the day. So quick intros for everybody on the team. Tom is the Defy Maven and Master of Memes. Terun is the Gigabrein and Grand Puba at Conrad. And myself, Haseeb, I am the humble hype man.

at Dragonfly. All four of us are early stage investors in crypto, but I want to caveat that nothing we say here is investment advice or legal advice or even life advice. So with that being said, this is now currently, just a little behind the scenes. This is a second time of us recording this intro. So we started bantering a bunch about Omicron. And I'll summarize the previous discussion, which is basically that Omicron, very bad, lots of people are sick. So for those of you who have not had a run in with the Omi. Please stay safe, although at this point, most people we know, including possibly ourselves,

have gotten Omicron. Actually, have either of you, do you think you guys have gotten Omicron? Yeah, I had it over Christmas. Yeah. Oh, shoot. It was fine. It was literally a cold.

Honestly, I was just more annoyed about having to stay at home. Fair enough. Yeah, it's fine. I'm just staying at home anyway. Yeah, I got on a flight. And I think I mentioned this already for the last call. When I was on a flight, I was like, I'm pretty sure I'm going to get Omicron from this. I suspect, I mean, the Omicron rates of asymptomatic infection are still quite high, right?

Isn't it something like 50% I want to guess that are asymptomatic? Yeah, I think of a lot of the people I know more than half seem asymptomatic. They just happened to test because like someone made them test and then like to go to something and they're like, we're positive but like didn't know. Yeah, I strongly suspect that I'm probably asymptomatic because given how contagious this thing is, there's just no way that I haven't gotten at this point. It's good. Hopefully this is how it ends or ends, whatever ends, whatever you want to define the definition of the end. Yeah.

It does seem like at this point, COVID is just going to be endemic. But, you know, I've said that enough times now that it does seem like this is the one saga that never wants to end. But, okay, well, let's move on, given the, that we are running a little bit behind today. So the big news of the week has naturally been the market drawdown. And it's been pretty brutal. It's not just been constrained to crypto. A lot of asset classes are getting hammered right now. But the broad drawdown in crypto has really been accelerated by, well, it was kind of kicked off by the FOMC meeting, basically the Fed getting together

and kind of signaling that they're going to be engaging in rate hikes earlier than it originally anticipated in large part due to the surprisingly large inflation that's been hitting consumer price indexes as of the last couple months. So it seems like markets across the board are pricing in faster rate hikes. And faster rate hikes generally what that means for those who don't pay much attention to macro, a rate hike basically means that interest rates are going up, which means that the opportunity cost of capital, you know, what you could be making if you're in a safe asset, is higher. And if it's more attractive now to invest in safe assets, that means that risky assets, assets, like growth stocks and like crypto, tend to go down in value because the relative value

of holding them in a portfolio goes down. So it's kind of unsurprising. I've been chatting with a lot of folks about this for a while that inflation in many ways is actually not going to be long-term great for crypto. In some sense, it's kind of good for Bitcoin because it's like, okay, Bitcoin, blah, blah, blah, inflation hedge. But in the other sense, look, if people raise rates, crypto is a growth asset and it's very risky and the demand for growth assets goes down when when rates are higher. Can we also just say that empirically, Bitcoin does not look like the inflation hedge in the last 12 months at all? Yes. Yes. Bitcoin doesn't really look like anything. It doesn't look like gold. It doesn't look like inflation hedge. It is pet rock. It started to look a little

like equities. It is pet rock this year. It truly is. I mean, it doesn't look like anything. That sounds like an uncorrelated asset to me. And that's something you want to provide, you know. It is funny how those are the two memes, right? One meme is that, oh, it's like, oh, it's like, gold. It's like an inflation hedge, which like gold is not that great of inflation hedge, but it's like an inflation hedge, but then also it's uncorrelated to other things in your portfolio. And obviously those two things cannot both be true. But it doesn't look uncorrelated is the best bet. I bet you could make a community out of like a like brownie in motion randomly moving like asset and just like, you know, it's, you know, going to be priced a different, you know,

thing every day. And I bet people would love that, you know, it's people love to sort of, you know, read the tea leaves and assign meaning to different assets. And this is this won't run out of meaning, right? Randomness will never run out of meaning for people. I like that I like that you've become the sun zoo of the casino. Me? Yeah, trying to draw, yeah, draw meaning from everything. I think I think the general consensus is, yeah, macro, macro sell-off.

But as I was noting on one of our many takes here, there is, you know, some, you know, secular outperformance, like NFTs have actually done really well. I think OpenC is like breaking all-time high volumes and like a lot of the floor prices and some of these entities keep moving up. So it almost sort of says that like the people have sort of suspected this for a long time. And you see this a little bit in the data when looking at addresses of people who are engaging with NFTs in crypto and people who are, you know, trading other types of assets. It's like the NFT community is almost sort of, it's overlapping, but a little bit separate from the people who are, you know, doing yield farming and buying Bitcoin

and stuff like that. So pretty interesting to see like that, like, that market, which people have always said is very representative of crazy froth and frenzy the markets actually do well as these other growth assets are sort of drying down. Well, I also think the emerging growth assets, like the assets that like didn't, that maybe didn't track beta relative to their sort of like they didn't track like the market expectation of the growth assets last year, but they are still growth assets. Some of those have done really well in crypto. I mean, I think the biggest examples of those are like everything in the

Cosmos ecosystem, like 10xing, like in the last two weeks, like, has been kind of wild, relative to Ethan Bitcoin. And then near, so like osmosis, near Adam, those are like all three insane winners. And like I've seen a lot of people talk about this like long, near short, Thalana trade based on open interest. And it does seem like the growth winners of last year are sort of like rolling into the growth winners of this year, which seem to be different layer ones. So I think within the drawdown, you'll find these kind of like separate things.

And of course, Ken Griffin gave us a present today, which I think like honestly move the crypto market. Everyone, everyone seeing like this. Yeah. So Citadel Securities, HFT firm, Prop Shop, not a hedge fund like Citadel like, you know, there are two separate entities. But Citadel Securities is the one that I would say most people who were GameStop connoisseurs are angry at because Citadel Securities is a market maker,

a designated market maker on a bunch of different exchanges, but also powers Robin Hood. And sort of when people couldn't get their orders in, they blame Robin Hood sort of was like Citadel didn't take our orders, and so people kind of hate them for them. But Citadel security is probably one of the most successful market makers of the last 30 years. I'd say jump Zedal Optiver probably are all in that echelon.

and Citadel Securities is a private company. Most market makers are proprietary trading companies. They trade their own capital. They don't raise money from outside investors like a hedge fund or a mutual fund. And the interesting thing today was that Citadel Securities decided to sell some of itself to Sequoia, famous VC, and Paradigm, sort of probably the most prominent crypto VC. And I think it's kind of interesting that because it's signaled a lot to the market. that Citadel, which is famous, Ken Griffin and CEO is famous for constantly, for lack of a better phrase, shitting on crypto repeatedly in many public settings, effectively sort of saying,

okay, okay, I saw everyone a jump get really rich, so now I'm finally FOMOing in. If I were to give you my rough assessment of that, what happened. It's hard to know exactly what it means. It was a very strange. headline because there was very little in there about crypto. I think I saw one vague illusion that Matt from Paradine basically said, like, yeah, they're going to get into other asset classes, including crypto. And that was it. And so there wasn't, I mean, the other thing, of course, they're a market maker, right? They're not a directional investor. And so it doesn't, to me, it kind of seemed a little strange. Obviously, I clearly don't know what the broader story

is behind this that makes it attractive because there's a pretty big financing. It was like a billion plus that totaled between Sequoia and Paradine. So I don't know, Tarun, what do you think is behind it? Well, a couple interesting things. One is, I feel like the deployment rate of venture funds has, so there's kind of been this weird compression between public market funds and venture funds over the last, I'd say, two to three years where there's a, there's starting to be blends of investment styles of people who are supposed to be doing these private investments for longer times, there's people who are doing public investments that are rotating their portfolios consistently. And that's come from the rise of crossover funds.

So crossover funds usually trade public equity books. So they trade stocks, you know, billions of dollars in stocks. But they also have private, you know, sort of venture style investing. And they are much more aggressive in their venture style investing, both on evaluation level, so they're willing to pay much higher prices than sort of traditional venture capitalists who are always trying to get a 10x return instead of a 3x return. In some ways, they started beating venture capitalists at their own game in a very large upswing bull market. And so what you've seen is like the biggest funds have just started raising even more money to deploy even faster to try to keep up with these crossover funds. And I feel like this

has got to be a big deployment for both of these funds. Even at their size, I think this is quite an extreme amount of management fees being earned. Tom, any take from your side? Yeah, I think a lot of people are obviously reading the crypto element here. We have a crypto circle and people read Paradine doing this deal. But I'm curious why Sequoia is doing this deal. I mean, they seem to be getting more into crypto. So I don't actually know how much crypto flavoring there is.

It seems like, as you said, maybe a testament to, like, you know, capital markets sort of merging across stages, across sectors. You know, I already was when there was the Andreessen restructuring last year to be able to trade liquid assets as well as Sequo looking to build whole assets post-IPO. So everything is everything, as they say. And maybe that's kind of what we're seeing in capital markets as well. Yeah, I mean, I'm entirely speculating, but I can imagine that now that Sequoia has entered into this evergreen structure, so people don't remember, I think it was earlier, or late last year, Sequoia announced that they were moving away

from the traditional fund LP model into one gigantic vehicle that every investor into Sequoia is just in the vehicle and they don't get any specific liquidity based on individual investments, but you're just like a long for the ride for everything that Sequoia does or something like that.

I don't know the exact details. But I can imagine that, look, if you're basically playing every single stage of the market beyond IPO even, then having a relationship with a market maker, especially, you know, one of the most dominant ones like Citadel, is going to be very strategic to you. Now, for paradigm, I'm not, again, I'm not entirely sure. Clearly there's some crypto component that's larger than what's being intimated in the press release, which was just, you know, one line about, A, getting into other

asset classes. I guess it'll be, I guess we'll know soon enough once we start seeing how Citadel gets into the fray. So, interesting story, one with tracking. I'm curious, do you guys know, what were the biggest drawdowns in? We mentioned some of the assets that didn't draw down, like NIR and Cosmos ecosystem. What got the brunt of it? I don't have the, I guess, actual rankings, but I think qualitatively, it seems like the assets

that really depended on sort of a lot of leverage or yield farming, either implicitly or explicitly. And so to mine, that kind of looks like OM and Spell, so Olympostow and Abercatabra, which basically, you know, basically relied on their communities or on the protocol to buy more assets at a discount in order to buy more of their own assets and sort of prop up these communities and sort of this spiral.

Naturally, when there's a large market drawdown, there are not a lot of buyers. We saw a lot of liquidations on the fuse, Olympistow lending pools where a lot of people were, you know, getting leverage on their own. And so naturally, I think those started to unwind and I think, you know, Ome is down. quite a bit like 50, 60% from the peak. But I don't know, actually, what the specifically the most damaged assets were. Yeah, I was just looking at Coin Gecko's, like,

category-based capitalization losses. And so, like, yeah, rebased tokens and OMForks were the top. But things that were kind of high up there were, like, GameFi prediction markets played earn. So I feel like a lot of the, like, very, and Metaverse. tokens. A lot of the things that were really, really hyped over the last six months is like, hey, like people are buying land and decentral land. I think a lot of those types of assets really took a big whopping. Yeah, I did see some big GameFi drawdowns. But yeah,

it makes sense to Tom's point is that a lot of these assets are implicitly leverage from the way that they're structured. And so if you basically have like a leverage system, then of course, when Marcus draw down, it's going to lose much more than everything else. Okay, so moving on in news, one interesting piece that got a lot of attention and conversation going was Moxie Marlin Spike's blog post about Web3. It was entitled Web3 First Impressions. And for those who did not read it, I can give you a very brief kind of TLDR. Basically, you know, Moxie, so Moxie was the creator of Signal Protocol. He's a very famous cryptographer. And he's been kind of roughly associated with a lot of the early cypheperpunk movement. movement, but has not been very involved in crypto, except for his involvement into mobile coin, which is a private cryptocurrency built on top of, not built on top of, but integrated into Signal the application. And so he was sort of reflecting on, you know, hey, I haven't spent a lot of time really using NFTs and what is now called Web3. I'm going to

try it out. He did. And a lot of what he reflects on is the two main ideas I felt like in his post. One was that the notion of trying to create a totally decentralized web is maybe a flawed enterprise. And the original web tried to be fully decentralized, and they realized over time that this just wasn't realistic. One, because people don't run their own servers. And two, because there's a natural centralizing force to creating quality platforms that people want to spend time on. And then second is basically his critique that most of quote unquote web three and NFTs aren't even that decentralized to begin with, because there are a lot of lot of, you know, servers, there aren't really even, you know, hash pointers to content that's

supposed to be embedded in these NFTs. Basically, there's a lot of reliance on centralized parties like Infura, like, you know, like the, you know, IPFS nodes that are kind of freely running. And for a lot of these, they aren't even hosted on Infura or IPFS. They're just hosted on regular websites. And so that was the overall critique as I summarize it. Tom, Tarun, you guys have thoughts? I have many thoughts. Yeah, this is very annoying for me this week. I think I had maybe six or seven different people who are sort of crypto-adjacent,

send this to me and ask me my thoughts on it. And it's sort of similar when those Tether Truth or articles come out. And they're like, hey, have you heard about this? And it's like, yes, I have heard about this, actually. Yeah, I feel conflicted where I think, obviously for someone of, you know, with Moxie's background, he understands, I think, a lot of the, sort of, you know, concepts that are important to understand in crypto, which such as, your, difference between interface and an implementation and a client and a protocol that, and the client

that might implement that protocol. And so I think a lot of his critiques of Web3, A, are not new to anybody who works in crypto. I think we all know these things are happening. But in my mind, it's sort of a straw man argument where I don't think anybody in crypto actually thinks that every single layer of the stack is maximally decentralized. I think we've sort of said, you know, over the past few years, like what the meme has been decentralization is a spectrum. And that gets reflected not just in protocols, but in every layer of the stack. So, of course, when we say something like, oh, yeah, well, of course, you know, Metamask

is using infura to look something up or people are looking at OpenC to, like, as a shortcut to get the NFT data, you know, sure, those are choices that, you know, this particular client is making, but doesn't actually impact the underlying protocol choices. Like the image might still be stored on IPFS or like, you know, Ethereum is still going to be running. No one thinks that, you know, this thing is all going to be decentralized at every single layer. Of course, there's benefits to centralization. But I think it's sort of this weird critique where it's like, hey, crypto is not maximally

decentralized. Look at all these points of centralization. We know, and that's fine, but that doesn't really erode the value prop. I think the other element here is critiquing specific client implementation choices, right? I don't like the way that, you know, MetaMask is implemented. I don't like the way that OpenC is implemented. That's, that's fine. I think not everybody's in love with the way these things are built.

And, hey, maybe this could be more decentralized. Maybe this could be more centralized. Like there's a spectrum of choices. And we already see, you know, different types of websites and different types of wallets, choosing different points along that path. But I think to sort of say that, you know, because people are looking up their NFT data and OpenC, that's like an indictment of NFTs as a concept. It's just kind of ridiculous.

way I could say, well, I could build a really shitty signal implementation that, you know, maybe does actually do the end-dend encryption correctly or maybe like does stuff in clear text and therefore a signal the protocol is crappy. Like, clearly that's a bad argument. So I thought it was kind of absurd. A lot of it also kind of felt a little bit sour grapesy to me where mobile coin is, you know, this project that he's associated with has not really been caught up in any of the Web3 hype. It's just sort of this, I think it's just very recently been integrated into signal and

sort of, you know, taking baby steps. but it feels obviously, A, they will have to make some centralization choices at some point around, you know, building a block explore or maybe building other wallets. But it also feels like it's been kind of left a little bit out of the conversation. So I don't know. I overall was not a very big fan and felt like there's not a lot of new information. And the arguments were overall pretty bad in my opinion. To ruin your impressions? Yeah.

So, you know, I honestly, I think most of those criticism comes from the fact that developer tooling is kind of nascent and also like, a lot of the things that people really focus on, I guess, you know, have some warts under the covers. But the one thing I took a lot of offense with, especially given that he has mobile coin in Signal, was this claim that, hey, like, there's barely any cryptography used, which I agree for NFTs, no offense. The developers of NFTs are significantly shittier than those of DeFire layer ones. They're just not as good of developers. So, like, they're not going to be doing hard cryptography, right? This is not in their veins. And he was kind of comparing apples to oranges, I felt like, with that. But the other thing is, a lot of the

newest cryptography that has been created in the last 10 to 15 years, the way it went from academic research to production was via cryptocurrency. And that's, you know, a lot of those systems are still at the phase where the U.X hasn't been figured out, such that the average user can take advantage of things like zero knowledge proofs where you don't have to store. all your data and you can also do sort of private computations. And I think a lot of that stuff was really implemented in this space. It's just like it's just slower to kind of get to adoption sort of in the same way that like RSA and ECDSA weren't instantly adopted in the 80s when they were created, right? It took like almost 10 years for e-commerce sites to actually kind of

force HTTPS to modify itself and have this kind of SSL trigger, which is like, to take advantage of this cryptography that every time you buy something on Amazon, encrypts your password, encrypts your credit card number, et cetera. And I think that component is very much missing. And to one of the comments in the chat, with regard to kind of this idea that like most of the metadata is not on a decentralized file system or it's on a file system, or it's on a file system that requires pinning, is that a lot of the stuff for actual data availability,

which is the access to data like NFT metadata, is still kind of, a lot of the cryptography for making that actually feasible, is still just getting to production right now. And so I think things like Celestia, which is this really awesome data availability protocol where, you know, effectively, you can kind of get some of the guarantees you expect of a normal file system

while also having thousands of validators. Things like these are actually coming into production this year. I think a lot of the things come down to the fact that there are a lot of quote-unquote web two developers. I hate the phrase to start with. But who like look at crypto and they're like, oh, I see an API. I'm just going to like make a little website and like connect to API. and, you know, obviously people who've been in crypto want new users,

so they put out these APIs. But a lot of the new developers don't try to go run their own nodes. They don't try to go do a lot of this stuff. And I think a lot of his frustration also comes to the fact that he didn't even go one layer deeper into how these systems work, some of the newest systems, what kind of things are kind of on the frontier. He instead went to kind of like, oh, that's almost like saying, oh, Coinbase, so centralized. I just don't believe this uniswap thing exists.

And it did remind me a little bit of when SBF kind of was like Dex's can never work and whatever, you know, in 2019 in case anyone forgets that. I had a somewhat different reaction to the piece. I mean, I see the points that you guys are making. The central thrust of his piece, as far as I saw it, were kind of two points that he was making. So one, I think it was kind of like, okay, look, I don't know much about NFTs. I'm going to figure out how they work. and like, yeah, he's right. You know, he sort of pull back the mask.

And like, yeah, there's a lot of kind of bad design decisions and a lot of NFTs. Say, yeah, okay, cool. Good point. Well taken. The second and broader point, I think, is more about the Web3 meme than it is about any specific indictment of a specific protocol, right? So there are kind of two points, I think, that are important that he's making.

One is that, look, the Web3 story is this broad story that we're going to remake the Internet to become this new decentralized version of itself. And he basically claims that, like, look, this meta-narrative about the Internet is poorly founded and bullshit and it's just not going to work. And to be honest, I kind of agree with him. I don't believe in this kind of broader Web 3 thesis that everything on the web is going to become re-decentralized or whatever, whatever, whatever. I think a lot of things on the web just actually work. They actually work quite well. And we figured out ways to make them work. And putting everything within the context of a decentralized blockchain doesn't really make sense. And I don't think

is economical. And I don't think that's how the Internet's going to evolve. So now that's okay. Then he further goes on to indict, you know, a lot of the services that people use. and say, look, this thing is not really decentralized. And you guys are making a lot of centralizing, a lot of assumptions of trust that reintroduce centralization, and this is the natural way that things go. It's just like, it's sort of the lowest energy level state that a system is always going to fall back to.

Is it going to find centralized actors and rely on them? And I think about that, he's also right. And I think his indictment of saying, look, if OpenC APIs stop showing a particular NFT, it's almost like having that NFT not exists anymore. And it's true. I think it is the case. that we do overly rely on open C within the NFT world,

which does weaken the value proposition for NFTs as being these sort of like, well, look, it's only on the blockchain. As long as it's on the blockchain it still exists. Well, for all practical purposes, it's like saying, look, just because I deleted your bank account and like, say, you're blacklisted from holding a bank account doesn't mean that you can't have money anymore.

You can still hold around cash and, you know, buy things at grocery stores. But for all practical purposes, it does efface a lot of the value proposition. So I think he has good points. but I also think that they don't go quite as far as actually indicting the entire enterprise of like, okay, are NFTs valuable? Do they make sense?

Are they a kind of unique innovation? One thing he never talks to is like, okay, what is the point of NFTs? And to my mind, I think the point of NFTs is to have a digital system of property rights for non-fungible assets. That's the point of NFTs. It's not anything more magical than that. It's just like a titling system for assets that we think should be titled in a neutral, credibly neutral, global, permissionless, enforceable way. And I think it's a good idea.

I think we found at least a small set of use cases so far for which that makes sense. And I feel like his piece doesn't really tackle that, which I feel like is the core of why NFTs matter, not because their metadata is decentralized. I agree. I also think you obviously didn't talk about any of the financial stuff, which in my mind is what makes us way more interesting than like, you know, slinging NFTs around or making like decentralized Twitter. Maybe that will happen.

Maybe it won't. I also agree there's a lot of issues with, I think, that sort of concept. But clearly there's like product market fit for decentralized financial services that are in many ways superior to the centralized versions that we have today. I agree. I don't think he was trying to talk about that, right? Like specifically it's about Web3. And I think that's sort of why I found the argument a little weird was that, you know,

Web3 does feel like a little bit of this marketing thing meant to ensnare Fang engineers to work in crypto-manga engineers. nearest to work at crypto companies, which is fine. That's, it's fair. It's a marketing campaign. But I do think, like, if you ignore stable coins and you're talking about anything in crypto, then, like, what are you doing? Like, that's the biggest used product, period.

And somehow that had, his whole thing about writing this derivatives exchange ignored the existence of stable coins, which is why he could do it in the first place. And there was a lot of, I felt like there was a lot of kind of half-truths sitting there. And that was sort of my, like, oh, well, maybe. maybe you should have actually gone like one step further, especially if you have signal integrating, like a lot of very low-level cryptography. Yeah, no, I think all good points.

Okay, let's move on. There was a really interesting, a couple interesting pieces of drama this week. Otherwise, a relatively slow newsweek, so I think is worth throwing into the mix. Cryptoland. So Cryptoland, for those who are not familiar, It kind of popped up on the scene in the last week.

Basically, I'm going to butcher this. So Tom, please correct me if I'm wrong. A bunch of guys got together, and it's definitely guys, got together and decided that they were going to crowdsource buying an island. And I think it's like in Fiji or something near Fiji. They're going to buy an island. And it's going to be all crypto people.

And they made a video. So they made a video. It's like apparently you spent a lot of money to finance this video. I feel like you know the details of the story better than I do. Yeah, the video's not loading, unfortunately. But yes. So they have spent $500,000 of their own money to acquire the rights or the permits or something to build this sort of crypto-themed island in Fiji. And people are obviously comparing it to Fire Festival in the sense that it seems like they have this insane idea for building some over-the-top island paradise.

But they really do not have the background or it seems to the legislature. to make this happen. So there's this insane video, which is not loading, which apparently spent a million dollars in a year on. I think people have their own different objections to the video. The animation is super creepy. But I think the main thing is that it's almost like an alien landed and, you know, sucked up all like the top 50 memes about cryptocurrency,

like, you know, buying Lambo's and going to the moon and Satoshi or whatever and tried to stick them into this video with no context. And so it's just jam-packed with a lot of very cringy cryptocurrency references. And frankly, it does not like any place I would like to visit. Yeah, it's just a bit disturbing, I would say, overall. And so now they're trying to raise more money to actually build this thing out. They're selling these homes, which are being represented as NFTs. Again, kind of questionable for like $1.2 million.

dollars. So overall, it feels very fire festively of having this big promise and raising a lot of money, kind of unclear if they were able to deliver on it. But I think really the video and the cringiness of it and the musical number kind of threw people off. So to be clear, that is really where the story begins, is with this crazy crowdfunding video and whatever. Then my understanding is that they got into some Twitter tussles with people who did not respond as positively as they were hoping they would to this entire enterprise. So apparently there's one person on Twitter who they hit with a cease and desist letter and they started sending out a bunch of these cease and desist letters to people for making fun of them on Twitter and supposedly for spreading

misinformation about the island. So the whole thing just seems like just a complete shit show. And overall, nobody ends up looking good at the end of this, especially not crypto as a culture. I only have one thing to comment about this, which is my mom sent me that video and said, is this what the metaverse is? I would prefer going there in the metaverse rather than trying to fly out to this most likely doomed, doomed island. I think going there for kicks would be kind of funny. But it was very 2017-y in my mind, which was like kind of crypto-adjacent, but not like really. and people raising money on these big promises

and there's like no accountability. And I just had kind of 2017 flashbacks when I was watching the video. Yeah, there was something, I think Tom, you were telling me something about like trying to get plumbing onto the island or something. Yes, yes.

In the Discord, people were asking very simple questions, such as, how are you going to get utilities on the island? And apparently they have a plan to route all of the water and sewage electricity in a pipe under the ocean to the mainland of Fiji. and that's going to be the utility solution.

So you know, you kind of want to vet the team's background when you're backing someone. Make sure it's the right team for the right, you know, project. So yeah, good luck to crypto land backers, I guess. No, good for them. Well, you know, obviously we don't give investment advice on the show, but I would encourage you to do your own research before you invest into a crypto land parcel because there may not be utilities when you get there. I mean, I do love just like the,

the hotspot of doing like, you know what, Fire Festival didn't do it because they didn't own the island. You know, let's like try to own the island, bro. Like that's like basically the attitude. It does seem like, look, that's the other thing is these investment dows are getting bigger and bigger. This is kind of an extension of an investment down effectively. And, you know, we started with Constitution, then we're moving on to Blockbuster. Pretty soon. I mean, now effectively we're trying to buy an island.

And it doesn't seem like the end is in sight for what these, uh, investment downs are going to try to go for it. Yeah. I actually love this whole investment down thing. There's links out now, which is trying to buy a golf course. There's Kraushouse, which is going to buy an NBA team. I'm trying to think what else. There's a couple other, like, let's pool together money and then go buy a real world asset.

And it's very sort of sloppy. It's sort of like early ICU. It's like no one really knows how to do it or like what the oversight should be. But I love the energy. And hopefully we'll see like, you know, Kickstarter or Indiegogo on steroids in the next year. but yeah, not holding my breath. Yeah, interesting. None of these are very close, though,

to actually purchasing their targets, right? I don't believe so. They can raise a lot of money, as you sort of saw with Constitution Dow, but I think the actual execution of, how do we buy this thing, who owns it, how does the Dow actually interact with it?

How do we make sure we're not creating a security, I think, is kind of the tricky bit. Not to show the Dow that all three of us are in, but Pleaser Dow has successfully been able to purchase off-chain items like, from the Department of Justice. So it is possible to avoid kind of these things. It just takes a long time.

And I feel like right now there are a lot of people who maybe made a little money on NFTs. And they're like, well, I want to do something with it. And I don't necessarily want to, and I want to keep it on chain. And so a Dow is a natural place to park that capital. Of course, you know, figuring out how to get the Dow to purchase. things means you now have to go to the real world. And I think a lot of people are learning once they collect the money, then it's actually the hard part. Collecting the money is the easy part. The hard part's actually like the, you know. I feel like the lesson people have learned is that

spectacle pays. And the bigger spectacle and the more outlandish and the more crazy, the more eyeballs it's going to get and therefore the better it's going to do. And that feels like, in a way, a kind of broad lesson that crypto teaches you, which I don't know is the right lesson to take away, but it's like, look, if Elon Musk just tweets out a bunch of crazy stuff about Dogecoin, it's like, oh, okay, that's how, that's how you win, is you just go bigger and louder and more crazy. And, you know, Constitution Dow is a perfect example of that, but I think it, I think you're right, is that like the logic of it just keeps ratcheting up until eventually it hits a wall. So strange times that we are living in.

Speaking of other controversial NFTs. Yes. Speaking of other controversial NFTs, so there's been. been some drama in the last week about a pudgy penguin NFT, which those of you who are not familiar, it's one of the top NFT collections on Ethereum and OpenC. As you can imagine, there are these kind of fat, chubby penguins. It's just a general profile picture. So, you know, there's 10,000, 20, whatever, some number of them. And basically what has happened, so the one thing I noticed about this story. So essentially what happened was that the NFT project has not been doing

amazingly since it initially launched. And the, um, the NFT project has not been doing amazingly since it initially launched. And the community has gotten very frustrated at the initial founder and founding team of the Pagy Penguins. And there's been a takeover bid an attempt to basically cut out the original founding team from the future transaction fees that are generated. So in a lot of these NFTs, not all of them, but certain NFTs, when a transaction is made, a transfer is made of the of the NFT, part of the purchase price goes to the original founding team as like a tax on future transactions. So a group of creators have decided to go in and wrap the Pudgy Penguins in a proxy contract that basically makes it that when you transfer the Pudgy Penguins via this proxy contract, the creators don't get a cut anymore. So they basically cut out the creators of this of this NFT project from any future revenue

is essentially like a kind of revolt against the original creators. And there's now all these talks about how to redo the, okay, Okay, it's called the huddle, how the huddle can sort of redo and kind of reformulate how the penguin community is going to be put together. And the other thing I will say I saw is a lot of great puns in the headlines for this. So one of them was the, what is it, pudgy penguins cools off as the community gets upset. Another one is, what was the one that I saw in the FT? Oh, no, it was Coin desk. Coin desk's headline was pudgy penguins, NFT project, oust founders as mood turn.

it's icy. The mood did turn icy. I think that the part that you missed, which I like the most is, it's not just wrapping and sticking the penguins in this proxy contract to get rid of the fees, but in theory, it's to introduce their own fee, which is going to go to this like NFT governed Dow, which they can use to do, you know, fund the things that they wanted from the original debt. So it's sort of like a unionization where it's like, you know, they're overthrowing the penguin overlords and all the penguins are, you know, coming together to start their own Dow that isn't, isn't, isn't, you know, responsible to probably the creator's royalties. So pretty interesting. I mean, I think it's like, there's a lot of NFTs that have been started where the idea is, hey, we're going to have our own treasury from the start and we're going to use that to fund things for these NFTs going forward, like Nouns Dow, for example. And they have sort of their own, you know, community and culture around it. And then there's obviously NFTs on the other end of the spectrum, like, you know, Bored Apes. or Cryptopunks where it's like, no, there's no DAO, there's no, like, there's no fees. It's just like, you guys do it, whatever, and we'll make some stuff.

And it's almost sort of like separate. I haven't, I think this is the first like grassroots NFT DAO, as far as I know of where it's like, there's been a revolt of the initial sort of royalty and the initial DAO and the community sort of formed their own. So I actually like the Pengoos. I think they're like, they take themselves very not seriously, which I appreciate in the in the NFT world. People just like the penguins and think that they're cute.

And so, yeah, it's been pretty interesting to see. It reminds me actually of what happened with a lot of the sort of Justin Son and Eos communities in that we're starting to see some of these like, you know, revolt against the original creator slash founder where basically it's like, look, you haven't held up your end of the bargain. You have some kind of block reward or some kind of perpetual reward. I mean, we just talked about this a couple weeks ago with Eos, when Eos basically ousted Block 1 for their block reward and said, look, you guys made play play. money, screw off, you guys aren't supporting us, we're going to go our own way and take those funds that we're otherwise paying you and actually use it to further the protocol. And it seems like this is the first time that we're seeing the same thing happen in NFTs. And I guess the thing that is interesting about this as a meta phenomenon is, are we going

to see more of this? Is this like now suddenly we're normalizing this idea that you can start kicking out the founder? it's almost like the analogy of, you know, in traditional companies, when a founder stops doing their job, you kick them out and you've hired a professional CEO. And you like say, look, you're got us to where we are, but you're not going to take us the distance. And we might start seeing that as the equivalent of a community

going and basically kicking a founder out and saying like, look, yeah, you started this, but we don't owe you anything anymore. You already got paid. Screw off. We're going to find the right kind of leadership to take over this project. In a way, it's almost a sign of governance growing up. Yeah, I think, the issue has always been with DeFi protocols.

Or like, hey, isn't the labs team or the foundation team really just developing everything? How much of this is dependent on third party developers? And like, this is kind of what people always wanted to see, right? Which is like competing teams, you know, competing for some sort of, you know, treasury grants to develop stuff. And it's like, I guess it's happening in NFTs instead of in DFI first. Forked base democracy at the application layer. Exactly. Well, NFTs are a weird place for it to happen given that there's not supposed to be.

any more development from there, but I guess, you know, licensing and creating partnerships and all that stuff, I guess that is still work. And if no one's doing the work, then the community isn't going to succeed. So it's an interesting development, and I'm curious what's going to come from that. So last piece of news, and then we'll wrap things up. So Polymarket, which I believe, Tarun, you're an investor in, if I'm correct. Correct. So I don't know, I don't know how much you can speak. I don't know how much you can speak to it. Maybe Tom and I can do some of the talking if you prefer. But Polymarket, which is a prediction market that I believe is built on Maddox slash Polygon.

Polymarket got hit with a fine by the CFTC for basically running an unlicensed prediction market. You're not allowed to run prediction markets generally in the U.S. They had to pay a $1.4 million fine and then cease and desist offering these products any further in places where they're not allowed to. So the word on the street. is that polymarket, so supposedly they need to shut down by January 14th in offering these products to U.S. customers, I assume, and, you know, go elsewhere. Word on the street is that

their plan is to potentially go overseas and continue offering the product, but just geo-block American customers. Overall thoughts on this. Terun, I don't know if you can say anything. If not, just wing twice and then I'll ask Tom. The only thing I will say is They are alive and kicking. Their fine was quite de minimis. You know, I think fines of this form previously scared protocols into folding like veil. I don't know if you remember there was this kind of somewhat more similar to polymarket, like somewhat more centralized prediction market that was built on top of Auger.

Of course, pre-automated market makers, so it was much more complicated. and veil folded at and because they were worried about a much bigger fine and perhaps would have actually been alive had they gotten a similar deal as the polymarket. So I think they'll be, they'll be alive and kicking, figuring out a new way of moving on. Yeah, I think the spirit and the strategy for a lot of different D5 protocols has been start somewhat centralized, moved really fast, and then decentralized over time as you get big. And that way, by the time you have a target on your back, you know, there's nothing really

for regulators to go after. And we see a number of different defyre protocols, you know, pursue this pretty well. I think Polymarket was trying to do the same thing where starting out, okay, you know, we're going to be the ones resolving markets and we're going to be selecting the markets and we're going to sort of help be providing liquidity and just use that to sort of get the wheels turning and then decentralize over time. And I think, unfortunately, you know, you do have to decentralize over time. And there is a bit of a ticking time bomb there.

And so it sounds like that is the pan going forward is just like move up that part of the red map and, you know, decentralized the resolver for the different prediction markets, decentralized, you know, the actual liquidity provision, et cetera. But you're just a reminder that even if you do take the strategy, you know, there are people watching, especially if you go around, you know, advertising in Brooklyn and stuff like that. Yeah, Polly Market was always on the aggressive side, especially seeing advertising campaigns. in New York, of all places where, you know, it's one of the most restrictive places to be building a decentralized product. I do think that, as you said, Tom, it's a good reminder that obviously regulators are watching, but it's also, in some sense, like,

there are some cases that are easier than others. So the question of like, okay, what is Uniswap? Is Uniswap liable for this or that? Is it an unregistered exchange, blah, blah, blah. It's a really hard question to answer. And I imagine the SEC or even the CFTC, they're probably fairly averse to entering into that fight because it's going to be a really hard one

to establish what exactly is the nature of defy and how does it fall under a regulatory regime. Something like Polly Market was just a slam dock, great. Obviously, these guys are running a kind of semi-centralized prediction market, offering it to people in the U.S., advertising in the U.S. That's not kosher, and so they got slapped on the wrist. The big story, really, in my mind,

is that, like, look, the fine was so small. It's almost a reminder to people who are building in D. I think, look, obviously follow the law and build things that are, build things that are ultimately good for the world and kind of, you know, follow the guidelines that regulators have set out for you. But, you know, at the end of the day, we're not trying to punish innovators. We're trying to help them to, you know, you know, cue more closely to the regulatory frameworks as they currently exist.

But it's very clear that crypto is trying to build something new. They're trying to create new kinds of things. And so if you're building in a way that you're trying to move towards the right to direction of saying, look, I'm billing for the right reasons. I really want to make something truly decentralized, but I'm not there yet. There's probably going to be a lot more leniency for you than for somebody who says, like, look, I'm just going to go pocket a bunch of ICO money. You're going to have a very different outcome. So it's a good sign that the CFTC kind of approached it with that level of finesse. And I hope that we're going to see the same thing through the end of the

cycle with other regulators as well. With that being said, I think we're at the end of the We're slightly past the end of the hour, but we started a little bit late. So that's it for this week. We'll be back again two weeks from now to chop it up again on the news of the day. Thanks, everybody, for listening, and we'll see you all soon.