Bybit hack insights and whether you are over-allocated to L1s

Transcript

GM good morning welcome to the milk Road Show today the crypto show that's more reliable than your can't lose meme coins I'm your host J Hamilton and it's Friday February 21st today we are joined by aicho gar investor and co-founder of Electric Capital a leading crypto VC firm with investments in Kraken bitwise near and many more projects that you guys would know also previously worked at Facebook and Google today we're going to talk about where are we in this cycle what is the VLC coming next meme coins are they good or are they bad why do we have so many l1s do we need this many l1s is there still value to ACR to l1s or is

the value going to start to shift to apps we're going to talk about fundamentals versus pumpamentals because we talk about that every day right now also at the end we're going to talk about AI is crypto and AI real use cases and real projects is it underhyped or overhyped is it all vaporware we're going to break that all down before we jump in guys I want to connect with you on a more day-to-day basis so we just started a telegram group where you can get direct access to me and the rest of our team so click the link in the show notes join the telegram group we love to hang out and spend more time with you guys today's episode is brought to you by crypto.com cards one of my favorite cards in the space check them out if you haven't already without further Ado

aichel welcome to the milk Road Show good to see you thanks for having me yeah great to see you too my man look at us both in the west coast Green in our backgrounds and it's a bit I don't know about you but it's a bit rainy up here today but uh you know where it is really raining today is on bybit let's let's start with that so news came out this morning that bybit was hacked for 1.4 billion one of their cold wallets their eth cold wallet was hacked 1.4 billion gone instantly holy I can't imagine being a founder and waking up to that what are you what are your initial reactions to this news uh a couple reactions one man it's uh the postmortem will be really

interesting to see how this kind of happened and I I've seen some early reports sort of streaming out this today about kind of how the they sort of somehow compromised multiple signers um devices and gave them a UI that sort of showed a a transaction IDE or a destination that was not the actual destination and then ended up taking the signature and sending it somewhere else um but it'll be sort of interesting to see kind of what what we can learn from like an perspective there I mean frankly I think the bit team is doing a pretty good job on the postmortem right now like they've been super responsive they're transparent they're sort of tracking it down they're sharing information I think they're doing about as about as good a job as they can and they're claiming um which I you know there's no reason to to doubt them it's

a phenomenal business I they're claiming that the they're solvent so you know if people want to do withdrawals that this this wasn't like user fund related y y so um but you know it's still 1.5 billion ho and and wouldn't be surprised if that results in some some degree of you have hackers already sort of dispos osing of the assets on dexas so I wouldn't be surprised if I create some some downward pressure on the price but um you know then byit probably has to buy it back so so need all the wash on that that's exactly yeah but yeah we've seen I think about 200 million has already been sold uh from from this from this hack well you about that too is um it's going through the dexes and it's going through all the decentralized infrastructure so they're not routing it

to Sexes like they have in the past so the centralized exchanges are are just sort of getting sidest stepped and it doesn't look like at least last time I was looking it's been uh maybe an hour and a half since I looked but um they weren't really touching the centralized stable coins either um because they didn't want to get shut off and so just parking assets and that so it's kind of like actually it's obviously very unfortunate but it's kind of an interesting stress test of all the decentralized infrastructure um and and the degree to which you can sort of maintain this volume or or you know sort of actually be permissionless um it's kind of interesting to see it sort of play out are you are you worried about byit are you worried about this causing larger Contagion not not yet you know I

think they they seem to be handling it well and professionally it doesn't seem to be a like House of card situation quite yet you know with these kinds of things you always I the thing that sort of can tip it is if everybody just end mass starts to withdraw and then you might have a problem um but it doesn't look like that's the case right now I mean they've SE seen some some net outflows but it doesn't look like they're it's not like an svb situation where sort of your assets and your your liabilities may not match up in the short term it doesn't seem to be the case yet and so I don't I'm not anticipating too much contagion here um and uh I mean I think that the fact that the market is is sort of not you know puking all over this right now it's

actually like it's it seems fine like there's a little bit of a reaction and it sort of bounced back and so yeah I think that the market is sort of will digest the eth as it as it gets sold and and um and by you bit's a really profitable business so I they'll be able to patch this whole soon Mo too that's that that's how I feel but bet a partner of ours so I feel feel for them it's just awful to go through something like this as you said also I'm very interested in the obsc side of this to see what actually happened hopefully everybody can learn and we can make sure this stuff doesn't happen again uh but I hope it feels like everything will be okay uh if you do hold money on buit not Financial advice don't want to tell you

to do with your money but uh don't don't don't go withdraw everything if everybody withdraws all at once then yeah what creat an issue right is actually that would that would create an issue yeah yeah yeah okay uh so hopefully we're all good and we all wake up tomorrow and throughout the next few weeks and this doesn't doesn't affect us at all let's talk about where where we are right now so we're we're seven weeks roughly into 2025 Trump's been in office for uh almost exactly 30 days what's your thoughts on where we are right now in the cycle and the market a couple ways to slice that I mean you mentioned uh Trump I mean from a regulatory perspective kind of uh doing exceptionally well I mean the news this morning morning if you were watching was um the SEC lawsuit against coinbase was

dismissed and uh Brian Armstrong has a great tweet about kind of the the the history here and um and kind of how he feels and I think you know Brian deserves a ton of credit for for standing up for what was right you know they cost them tens of millions maybe hundred million dollars to to sort of fight here and they won and so you know if you don't follow Brian Armstrong go go read his post and and I think there's um I think the whole industry owes them a debt of gratitude for fighting I think Brian and Paul and EMily Paul G who their Chief legal officer there and Emily's their coo I mean they they decided to sort of double down and spend a lot of money for what they thought was right um and came out ahead and they won um but you know even even Beyond kind of

the SEC lawsuit kind of stuff if you look at the the Trump executive order um you know asking the agencies to um look at the rules that that um that uh you know impact crypto and come back with recommendations um you know getting rid of Sab 121 you know it looks like a stable coin bill you know Maxine Waters has drafted one now and it's it's ready um now to be discussed and that's that's actually a really big milestone for people that don't follow politics or policy very closely you know the Senate already had a draft version of the bill um with senators lumus and um Jill brand from New York and uh Senator Hagerty and and Tim Scott signed on to that and have a modified version of that so probably good momentum in the assignment for a stable coin Bill to get through and uh

on the house the the challenge I was getting out of committee and Patrick McKenry had done a really good job on this and had um had a bill uh proposed and and uh now that Maxine Waters who's the Democratic um lead on that committee has one too you know now you can actually start to make progress you can have a substantive conversation about kind of how how this is going to work um so kind of you know actually stepping back for a second right if you think about the state of crypto regulation um let's say as of December 24 you kind of segment it into the the world and the US and and actually for a lot of the world things have been trending quite positively for some time right it wasn't perfect but but a lot of jurisdictions um whether it it's in the Gulf in Asia

or Europe or latim they they basically looked at this and said you know what this is a technology stack that we we should put some rules around and ideally if we put in good rules then we'll have companies that want to want to be here and and our our businesses can do well and I think it was it was essentially a learning from for for for those jurisdictions from the internet where a lot of these countries effectively lost on the internet right if you just look at all the major companies whether it's Amazon Facebook Google Nvidia they're all American companies and so I think the these other jurisdictions sort of feel this pain very cutely they're like hey how do we how do we really have any leverage here how do we really get the CEOs to show up how do we exert influence it's and their hands are a

little bit tied right and so I think when they saw crypto they said oh this is an opportunity to try to figure out how to how to win here and I think they're trying to do this with AI as well though I think far less successfully because the the issue in AI is not regulatory Clarity it's it's other issues but in crypto the one of the blockers was was Regulatory and so by creating clear rules and having fast regulatory action I think um these other jurisdictions were out ahead and so if you go to the other part of the tree which is the US you kind of zoom in there you know the the blocker was really if you look at the three branches of government was not judicial like the the courts have actually been rolling ruling mostly Pro crypto if you look at

a lot of these cases it was really a combination of the the White House under President Biden and sort of the direction that they were getting from from um the left part of the democratic party that was creating a lot of issues in Congress and so you just had you know the the the process both on the legislative and the regulatory side was just really gummed up for the last four years so we just didn't make progress us for basically four years and we sort of had this like weird snapshot on time of what people were doing basically from like 2019 is kind of like where where crypto got frozen in Regulatory and now we've sort of unfrozen that right and so now now we've sort of made made a couple years worth of progress in basically a month in terms of clearing you know old

old Deadwood and clearing out old Croft and um cleaning up the SEC and I think we're now at the point where we we should have been frankly four years ago which was okay let's figure out what the rules are let's have that conversation let's decide what's in bounds and what's not in bounds let's decide what the rules are and let's decide how we figure out what is a security and what isn't a security and let's figure out how the banks can participate here and how what are the disclosure you know how do we protect consumers in the right way like we can actually start to have a productive discussion about this stuff is like finally where we are now and so I I think we've made actually a tremendous amount of progress in 30 days it's actually pretty remarkable how much progress we made in 30 days it's from

that lens it is is so true the thing is right now people aren't looking at that lens especially not retail and not a lot of our listeners the lens that they're looking at is I keep on grabbing meme coins and they keep on blowing up y uh there's a lot of negativity in the space salana is getting slammed as a result of all this meme coin action and it it's becoming there's a lot of noise there's a lot of noise and a lot of bearishness are are are these meme are meme coins good or bad let's just ask that direct question the short answer to that is they're bad but I think that they are are inevitable um and what I mean by that is I think I've come to believe

that that speculation is just a necessary part of markets like I think arguably you know what is Venture Capital venture capital is a lot of speculation right you're taking very far far ranging forward looking Bets with very limited information and and so speculation is actually an important part of bootstrapping the market and so I don't think you can you can really say that there they're sort of maybe maybe the question isn't are they good or bad but it's if if we know that that speculation is going to exist how do we contain the damage without losing the really good side effects of the speculation so I mean if you go back and you look at the railroads or you look at uh telecommunications you look at the internet I mean like all of these things had a lot of speculation in the

early days as people figured out how do we even value these things um and I would argue AI is started going through this right now too like a lot of companies that are AI companies are not going to be able to live up to the hype though you know and as Nvidia might be able to but I think a lot of other companies are going to struggle um you know how do you sustain these valuations with these Revenue numbers and and that's not universally true there are absolutely some phenomenal AI companies today doing real Revenue but there are a lot that are that are really overvalued and and there will be an implosion and so I think the question always is okay we know there's going to be speculation out of the speculation comes a lot of really useful infrastructure and Technology because you get an overinvestment into into

areas that otherwise would not have gotten that investment in the case of crypto this is distributed systems cryptography zero knowledge proofs trusted execution environments there's like real you know stuff that that's been built here that's really useful that that probably otherwise would not have received funding at the scale that it did um and so the question really is in my mind is not so much are the are mem coins good or bad but we know something like memecoins is going to exist has always existed whether it was defi summer or icos or or what you know Bitcoin Forks the question is how do we create an environment where the speculative stuff is sufficiently minimized and the really good stuff is maximized and I think the way you do that is you create an environment where people can make really really good decisions about what's happening and so

um uh you know information flow out to the people who need to make these decisions about where to put their money um so they can understand what's real what's not real which teams are committed and not um having industry Norms around you know which which of these businesses are real businesses versus which ones are just speculative which of these um Founders are here for the Long Haul if they're bad actors how do we call them out you know there are a lot of open questions about how to contain the damage I think that that we need to work through that we haven't been great at I think um either from the regulatory side or from inside the the industry that we could do a better job of but the the meme coin thing to me is like a little bit of a red herring it's

like they're going to exist if it's not mem coins it's going to be something else right and so the real question is how do we give people the right information how do we help them make good decisions how do we call out the Bad actors how do how do we prosecute the Bad actors and how do we make sure that the maximum amount of money flows to to well-intentioned builders who can really create real value over the long term of which there are plenty um they just get drowned out sort of in the noise um hard thing to do right I I agree I fully agree with what you're saying uh but very tough to do when the the nature of the the mem coin investor is a gambler and uh and a gambler doesn't the nature of gambling is not not having a lot of information and not doing a lot

of research it's you know it's it's making Bets with not a lot of information because you're trying to get rich quick right so you know that's that's also a really interesting point here too right I think there's sort of this notion of like people it's a z it's a zero game it's very PVP arguably it's even worse than a casino like a casino is really smart about bleeding you slowly um and having enough winners come out so you know you're talking like 49 51 odds whereas a lot of these meme coins are probably like you know 991 odds like there's just no way you're going to win you're going to lose most of the time and and almost certainly you're losing and even when you win there's no liquidity to get the money out so so on and so on but I I would sort of I think it's interesting to sort

of think of the the question here of do people understand what they're doing and I'm not deep enough in the mcoin ecosystems to really have an understanding of this but I don't think people think that memecoins are a good investment like I don't think people are going in and saying like oh this is the next Nvidia most of the time um now I think there were some of that with like the AI mcoin kind of hype but by and large I think people are saying like yeah I get what I'm buying I'm buying whiff or I'm buying Bon or like they kind of know that they're playing a game here and so I think in some sense it's it's actually it's okay right like if people understand what they're doing like the problem I would have is if what you have is a bunch of uninform

investors making or or retail it's hard you struggle even call them investors but uninformed retail buying stuff and they think that it's a good investment right if if what they have is a memec coin but what they think they're buying is an investment that's a problem if what they have is a meme coin and they know they're buying a meme coin and it's probably going to zero like that's kind of like buying lottery tickets right like it's it's people know what they're doing and there are reasons for them to do it which are you know somewhat rational um I think that's okay actually um like I had this great I had this great conversation with um I think I've told this story once before um somewhere but I had this great conversation with um this guy was stocking the shelves at uh at a grocery store and uh and uh he I

think I was wearing I think I was wearing like a zcash shirt or something that like Zuko gave me years ago and I was just like happen to have it on my gym shirt and uh and he saw he's like oh are you are you into zcash and I was like what like how did you recognize this logo and we started talking and um and he was actually very rational about it about this stuff he was like no I I get it it's just like look I make I don't make that much money I can't save that much money if I'm like really diligent and I don't like go out my friends and like if I just like don't buy any alcohol this year and like you know I just save save save maybe at the end of the year I have like a$1 thousand

dollars or $2,000 and like great I do that and then what like my life is not any different if I have ,000 in and and you know but maybe if I buy one of these things and it rips and and I get 10 or $20,000 out of it then that's worth it and so if I I either end up with zero and my life is exactly like it is if I have $1,000 or end up with a lot more money and that is actually a meaningful difference in my life and you're like well that you know that's kind of that's kind of rational like that he's not a dumb guy like he he gets what he's doing he he understands the game that he's playing so again sort of this like bad bad versus good I think is sort of like I don't I don't even I don't think of

that question I sort of the question I think about is like do people understand what they're doing and if people understand what they're doing um I think it's fine and I actually would argue if people understand what they're doing which is a big if I think you you could argue that a lot of these people don't understand what they're doing which I think is is a separate discussion but if you if you sort of say you know what people know what they're doing I actually think it's kind of good if you if you grant that and the reason is because what people are learning this is like it's it's a financial game right and so what are people learning they're learning about how to do self- custody they're learning how to use these wallets they're learning about cryptographic signatures they're learning about things like inflation and

like staking rewards and kind of like money doesn't come from thin air like if it's being stake Stak somebody's getting inflated away they you know if they get front run then they got to learn about like wait why why why did I get front run or you know what is what is Mev like it sort of open opens up all these questions and it's not to me that dissimilar from what happens with a lot of with every generation technology you sort of have games as the bootstrapping mechanism and so we've talked about crypto of like oh they're gonna be crypto games but I think people pattern match a little bit too much where they're like oh it's going to be a video game it's gonna have pixels and like a first-person shooter something like that and and actually the game is meme coins right like people are just burning money

on playing games but like what's happening as a result I think is they're actually getting way up to speed on this new Financial infrastructure and then what happens after they lose money is they sort of sit back and they say well what should I what should I have done to not lose all this money and very quickly they learned that there are these sort of pockets of fundamental usefulness um I I had a conversation actually once with um with the magic Eden guys and we were talking about this around nfts and um and I was I was noting you know what's what's interesting about core crypto like um defi or the Ico bubble was that even though people are doing very speculative things um and losing a bunch of money like 10 or 20 or 30% their assets ended up being in um in you know like Bitcoin or or eth

and and then they probably forgot about it and then a couple years later they came back and they actually in US dollar terms because Bitcoin went up 5x they were kind of like okay right so like the bootstrapping mechanism is everybody goes back and they think about it and they're like oh wait why did I waste all of my time to just underperform Bitcoin or eth like I should have just like bought the good stuff not done all the stupid stuff and wasted my time and I would have done better and so what you actually do is you like bootstrap an entire new gener a of people into oh I should just hold Bitcoin um or I should just like buy eth or I should like there are these a handful of things when I look back that are like were actually useful and the founders were smart and

well intentioned and good and I should have just bought those things and like not done all the other stuff or or I should have sized it appropriately I could have done that with like 10 or 20% of my stack I probably shouldn't have done it with 90% of my stack um so I I I think as long as people understand what they're doing it's actually can be like a phenomenal bootstrapping mechanism into into actually understanding the space and understanding like good investing yeah I hope I I hope it goes that way if it goes that way great if it's if it's a gateway drug or an entry point then then fantastic because it gets you in so long as people don't leave what I hate to see is people get wrecked and then they rage quit and they leave and they never come back that's

concerning obviously and then also so long as people as you said they are willing to take a step back and learn from their mistakes and say hey okay that didn't work out and and look to all the people who who invest mean coins and have done well like all the power to you great but there's a lot more losers than are winners and we all know that and if if you've lost and you take the time to say okay how can I do better because I gotta say that guy stalking shelves I want to say to him like put it in Bitcoin man and comp and learn compounding in Investments and and understand that and look maybe you're not gonna be rich tomorrow but 20 years from now 50 years from now you will have changed your life and and your family's

life and your kids life so that that would be anyway it's funny that's literally what I told him I was like dude what are you doing just like buy Bitcoin every week don't around or at least like take half of what you're doing and just like go buy some Bitcoin every week and you'll probably be way better off because there's a reason that that the lottery is the lottery and only one person wins not everybody can change their life overnight and so reset your expectations um okay I think the other thing that that doesn't get talked about here too which is why I think like the the meme coin stuff is a little bit of a red herring is like there's a reason people are doing this right like which is the system is fundamentally broken right and if we have entire generations of people feeling like they can't

participate in a system and and and that their lives will be better than their parents lives we kind of up somewhere right like something actually like meme coins are the symptom that's not the root cause the root cause is like the economy is and upward Mobility is and wealth inequality is a problem and like all of these other things are the actual problem and so we have this little bit of like a scapegoat but that's not really the that's not really the issue the issue is like why is our education system broken why can't people get good jobs you know why is wealth and quality the way that it is and like those are the things and we fix those things then I think like the meme coin stuff kind of like goes away on its own like we're just sort of we're talking about the symptom we're not

talking about the root cause in the first place this is this is why we need the other show that we were talking about before we started recording uh addressing the symptoms and getting to the root causes and talking more about the ethos of technology and how technology fits with humanity and the differences that can make uh but we won't go there today that's for for another time uh I want to I want to talk I want to shift gear slightly so um a lot of our listeners and and a lot of people who invest in crypto other than those in the mecoin side are have been focused on the the protocols the blockchains the l1s that is where a lot of the opportunity has come from um lot lot of the best gains have come from and

that's still where most of the the market holds their assets and is invested in um my question is do we need this many l1s how many l1s will there be longterm and where will value acrew we we had a conversation in an episode that comes out tomorrow about the fat protocol thesis versus the fat app thesis um so I know I asked you a whole bunch of questions there uh but would love to get your thoughts on where this goes long term yeah so I've actually been meeing to I wrote a um a paper about this like four years ago at this point almost five years ago uh for our LPS back in 2020 um which I can walk you through and I I

should really put it up as like a blog post and a tweet thread um that explains this so maybe maybe this is a good Catalyst to do that um great and so uh yeah thanks for the nudge so uh you know maybe I can walk through kind of like how we think about the market structure and then that also touches on kind of like um l1s um so okay so imagine like left to right left is um where the user is right and so there's like an interface and some application that they that that the user needs to use and below that is you know like the the some sdks and and you know some some way to wire around smart contracts and um you know maybe some like uh custody infrastructure um and then you know some di5 protocols to move assets around and

do swaps and whatever whether it's lending or unit swap or whatever and then on the other side is maybe well you know where is the liquidity spitting it's like on on like multi-chain infrastructure um in some may that's like you know you're sitting on an L2 or something or Bridges and then below that uh is sort of the l1s and then below that is like the the physical Hardware you know like um AWS or whatever data centers and below that is like the Nvidia chips or the Qualcomm chips or whatever that that the stuff runs on right so that's like the full in sense of value chain and even maybe beyond the the chips or like the Fabs right like that make the chips right so that's that's kind of like your whole value chain of like how does how does an app actually interact with a user on one end

all the way to like the chips getting made on the other so that's your x-axis now think about your y- axis which is who captures all the value right and what you really is if you sort of take that line and you start to put the value on it that you get sort of a u- shape right like the the NS sort of come up to max value and and Min value is sort of in the middle somewhere and what that means is um if you have the end user relationship and you have the brand and you have something that that people think of and associate with value directly um there's a real moat there and if you're all the way on the other end of it like the closer you can get to Nvidia and tsmc or like running the hardware these are like really really

really heavy capex businesses that's a massive Mo like like building something like that requires at this point you know tens of billions hundreds of billions of dollars tremendous engineering years and years of expertise and that's a real Moe and and the sort of Mo that you have in your business and value capture sort of goes down the closer you get to the middle and if you get like a smart contract protocol that two people can build and it just routes money around and doesn't really hold any money or assets or have any brand that sort of Min value and and what you realize and this happens in every industry right so like you have um let's say Facebook Tik Tok you know on one end they own the end user relationships and and sort of like you know um there's some defensibility with some of the sdks

in the middle and when you get you know to like true like I don't know who's making Android headset you know um phones I don't know like who these people are that are like assembling stuff and most of them probably are not that valuable and then all the way on the other end you have you know like apple making silicon and tsmc and Qualcomm and arm um you see it with like you know Tesla on one end and like you know mobile eye on the other end and like people who assemble cars in the middle probably don't capture a lot of value so you see it in a lot of Industries and so in crypto the far left end which is like who owns the user relationship are folks like coinbase and binance right you have kyc you have a real user relationship you have Fiat on

ramps and off ramps it's like a grind of a business to build but if you have that business that's you have a real customer relationship and all the way on the other end in my opinion are the l1s and so like l2s are slightly less valuable than the l1s and have less of a Moe and like you know sort of dumb defi apps that don't really have any sort of network effects or sort of even lower and so if you take some sort of protocol like in the middle let's say something like Unis swap yeah there's a little bit of OTE and a little bit of network p and if you're an early Venture investor you can still make money there but you know like once it's a listed token how how much that you really have from there and what you realize very quickly is that

that the incentive for these companies is to kind of go up both sides of the curve right and so Unis swap Labs which owns the interface to Unis swap the protocol has an incentive to go up the left and start to look more and more like coinbase right like they really need to own the end user relationship and have a mo there um so there's a natural incentive for them to to list more more assets and and eventually potentially like try to you know do kyc and and sort of have these sorts of relationships with the customer and that that's sort of where they want to go and and at the same time there's also an incentive for unisoft the protocol to to move up the right side of the curve right to become an L2 and maybe eventually to become an L1 capture all

that sequence or revenue or that Mev maybe you pass it back to the users maybe you keep some of it but that's their natural incentive structure and so you can see actually and we wrote this like five years ago and I think it's been actually pretty accurate at sort of calling what the incentive structures are for all these different protocols when you look at it through that lens you realize that actually it's not just a fat protocol thesis it's actually a fat L1 thesis and a fat app thesis which is like if you have the end user relationship you can capture of value and if you have an L1 like an ethereum or a salana you or a near you can capture a lot of value and a lot of the stuff in the middle just will get squeezed and a lot and at over time

those those things in between we realize they need to sort of move up either either the left or the right part of the curve and so if you look at it through that lens I think it's it's not a fat protocol thesis per se it's it's more of a fat L1 thesis and a fat app thesis and then when you zoom into the l1s or the apps I think you realize that in different markets you have different needs so like coinbase can't serve everybody in the world or every type of user and so if you're going to have have billions and billions of users you're going to have to have multiple kinds of apps and and same thing for the l1s like I don't think there's going to be one L1 that solves all the problems and I think the different technical constraints of the l1s will lead there to be massive

fragmentation um and and even though these are like very Network effect driven things like an L1 has a lot of network effects around it if you look at the most Network effect driven things like payment networks or um social networks literally they have the word network built in right even there you see tremendous fragmentation right like had Facebook not bought Instagram and WhatsApp you would have Facebook you have Instagram you have WhatsApp Tik Tok telegram Twitter LinkedIn um then you start going internationally you have caca talk um you know vont like you know you realize that at scale snap like you at scale you get segmentation by user types and you get Regional and Community Based um segmentation and so I tend to think that obviously not Financial advice but I tend to think you're

actually going to have a lot of L ones because um the the the technical constraints will lead people in different directions and different communities will will sort of want to make different tradeoffs in a technology and they therefore they will Embrace these things and at at two to five billion people using these things I think it's very unlikely you have only one network you probably have some something more that looks like a power law where there is obviously a big one but there are probably a dozen others that are really really useful and so what what we're often looking for when we're looking at these things is like is there sufficient differentiation like are is the technology sufficiently differentiated that lets you do different things or is the community so differentiated that over time they're just going to make really really different tradeoffs about what they they

want the technology to do or what kind of applications are possible and that will lead to sort of fragmentation over time so let's talk about how this could play out on either side and I and I love the way you've you've taken us through this on the on the fat L1 side we have a lot of general purpose l1's right now is is it going to be the general purpose L ones that maybe become find their Niche and Target a specific segment is that what how we'll have these l1s will continue because it can't it doesn't feel like we can just keep on putting out general purpose l1s and they'll all succeed right and then on the on the app

side is it is it going to be a a a web 2 app like a like a a Robin Hood that already has the user relationships and they start to and they'll be the ones that control most of the users or is it going to or maybe is it going to be new new apps that we just don't know yet how do you see it playing out long term or I guess the other question is or is it more like Hypes model hyper liquid which you know was an app and had the users and then went and built the L1 uh because that was the the they had the ability to build a specific L1 for their users yeah the short answer is it could be any of

those and it's really it's you know in startups and in technology um success is an anti- pattern right like the default case is actually failure and so basically all of those paths will fail will fail but at the same time all of those paths are potentially successful paths um and so it's really more a function in my opinion of rather than um at least the way we think about it is rather than saying this particular path is the right path or that you know you have to do a specific application and then grow into an L2 and then grow into an L1 or oh no there's no way that an L1 that tries to be a platform from the get-go cap possibly win and therefore like you know Manet doesn't have a shot you know we're investors in Manet we think they certainly have a shot they're

doing a phenomenal job you know like all of these are viable paths what what really matters is are the people that are building it capable of of executing on that and do they have a reason to believe that that is the right way to go and do they have a plan to execute against that and so you know in the hey I have a specific app and I'm going to make that an app and killer app yeah that's great if you can build a killer app and you're really good at that and then the risk becomes well can you generalize that is that is the type of team that's building a very specific app also really good at building a generalized platform often that's not been the case you could see Facebook tried to do this many many times for example and they failed whereas

Microsoft did build an operating system and then they also built things like word right uh in the office suite and so they were able to build specific applications and platforms Amazon was able to build a specific uh app and then they turned it into a giant platform and so you know it could it could work both ways and I think with the web 2 versus web 3 kind of same thought you know like there will be some businesses that uh you know take like a Fidel which is a which is a family-owned business it's an old Legacy business that is actually transitioning into this world quite well or you know look at Black Rock and what Larry fin has done and is actually sort of transitioning into this world remarkably well many other businesses will not be able to do that and there will be some businesses that are like a

Robin Hood you know if you look at what vad has done in the last couple of years and sort of transforming that business from a from a web two to sort of like a hybrid Web Two web 3 business and and so much of their volume now comes through through crypto and crypto adjacent things to coinbase which is starting sort of you know more web web 3ish and sort of you know moving more traditional to I think the nextg um Dex is you know it's it's entirely possible I think if you look at like a magic Eden or a slingshot and you look under the hood they're built on a lot of decentralized protocols right so like the way that the the technology stack looks looks a lot more like a web 3 business it's just sort of packaged up in a way that web

two people can understand all of those are viable paths and a lot of it depends on the founders a lot of it depends on execution a lot of it depends on Market timing and kind of what's shaking out market so um rather being strongly opinionate about which of those it's going to be well what we tend to do is try to look at it Case by case and say like are is this group of people that's pursuing this path capable of executing on this plan do they have a credible plan and are they capable executing on that plan and then I think any of those are viable paths depending on on who's on your team and and the way the world sort of stacks out over the next couple years are are L1 are we overallocated to l1s right now that's an interesting question you know I think for a lot of

things whether you're talking l1s or you're talking about like the AI vaporware meme coins um you could have made this argument about defi a few years ago and potentially even today I think there's a Time Horizon question and so the way that there's this um there's this saying I I think it might be a Bill Gates quote I don't remember um which is effectively people dramatically overestimate what's possible in two years and dramatically underestimate what's possible in 10 years and so when I think you look at things like l1's you might argue that like there's no way if you look at the cash flows of some of these things that they should be worth what they're worth today I think that's the wrong lens right I think it's what what's really happening is the Market is saying I think this is going to take off in two

years or I think in two years it'll be huge I'm projecting some some growth curve and that's probably too optimistic but if you're willing to hold for five or 10 years maybe that's actually a great investment um maybe that there's a real opportunity there because on a on a two to five year time rizon people are actually not optimistic enough um I I tend to think similarly about a lot of this AI stuff you know I think people probably in the short term are too optimistic about what these AI tools can do like if you if you've written code with cursor or you know 01 or Claude Sonet or whatever um you get 80% of the way there and then you start hitting the the sort of the fringes of it and you're like oh actually it's really it's got It's got some ways to go but you can see

that over seven to 10 years it's going to be amazing right and so I think we're we're kind of the l1s are sort of in that spot right now which is like probably a lot of people are expecting them to do things that they just won't be able to do in the next two to three years but over 10 years I I think a lot of these things are you know if the teams are committed and they keep grinding I think these things could be huge and again you could have said the same thing about mobile phones you could have said the same thing about self-driving cars like I was an investor in a company called Cruz which unfortunately GM shut down after acquiring them and that one point was worth like $30 billion but when we invested in in um cruise and self-driving cars uh in like 2014 you

know people are like oh we're going to have self-driving cars in two or three years right and like Cru could get on the highway and was 80% of the way there in like 18 months and then it took another eight years for for them to get the rest of the 20% right but now literally you can take a wayo in San Francisco a self-driving car that gets around the city and is better than an Uber um and they're Now Beta uh you know uh beta getting down to SFO uh from you know to the airport and that's remarkable and it's it was just about 10 years right so like the adage played out almost perfectly in that case if if you know the history of self-driving right and so I think we're just kind of in the middle of that with the old ones right

now people people have been like way too optimistic about how big these things can get and then a bunch of them don't have any usage but now the infrastructure is real and so I would not be surprised to see these things actually end up being much bigger than people expect over the next seven to 10 years okay let's you bring up crypto and AI I want to touch on that before we let you go is it all vaporware is right now right now like not not long term I I know long term you can't predict the future but it's clear that there's something there long term but right now is it all vaporware is it completely overhyped I think it's like 98% vaporware um so almost entirely vaporware I think there's some Pockets that are definitely not vaporware I think um a lot of the stuff that like

the the near ecosystem is building if anybody knows that ecosystem um Ilia poluka not ilas SG but um Ilia from near was also one of the authors on the Transformer paper from Google the attention is all you need paper that created you know um modern Transformers and LMS and they built phenomenal infrastructure that basically makes it really really easy for um any smart contract to write you know control assets across chains and and they just did a bunch of launches yesterday which I haven't had a chance to dig into but um they're really marching towards this this idea that like the ultimate consumer of blockchain infrastructure is AI um like what you really you know like a AI is not going to use Visa it's not going to use Swift um it doesn't that just doesn't make sense you need a 247 realtime payment system that can handle

micro payments and it has smart contracts built in so that that AI agents can talk to each other and make commitments to each other you know if you look at igen laay um and and just for uh disclosure we're investors in both near and igen lay but if you look at what tram has has built you know he has this very strong thesis and the IG crew does around um the ability to have trust and the ability to make cryptographic commitments is even more important for AI agents than it is for humans because AI agents don't have an alternative like you and I can create a contract in the state of Delaware we can both sign it AI agents can't do that and so software that needs to make commitments to each other um needs something like an igen layer to be able to make these kind of cryptographic

commitments and have them backed by trust and so you know if you look at I think there's um there's some really interesting stuff happening around um te networks um and trusted execution environments um there's really interesting stuff and so things like uh PHA or um succinct Tonk like there are these really interesting sort of networks of of computational hardware and I think proof generation is going to be a thing that that all software needs to do um including AI software so if you assume all software becomes AI software the ability to tap into a compute Network and generate zero knowledge proofs or to use trusted execution environments to to perform transactions I think it's just like a basic building block that all software will need so so there I think there are like pockets of

really interesting infrastructure that have been built um that will get used by by AI um infrastructure over time but a lot of the AI mcoin stuff if it's like an llm that's wired up to Twitter and it's like tweeting out I think is is um it's it's a super interesting experiment but I think it's probably worth a lot less in like pure financial terms than than most people think it is um and with no real value capture in the short term right now does that mean that uh when we look at the rest of this year as if if you're an investor in the space not a you know not from a VC perspective where I know your time Horizons are much longer but a a retail investor if you're the guy at the grocery store yeah uh is there is there still opportunity for

these AI tokens to do very well well not not Financial advice obviously everybody should do their own research um but you know I I kind of I kind of think of it slightly differently almost which is I don't think of these things as Investments at all like I think the right way to think about this stuff is kind of like we're talking about the guy stalking the shelves is like probably people are under allocated to bitcoin probably people you know you could reasonably make an argument that um having some like eth and soul and near like really high quality stuff is is um is like reasonable with some very very very small percentage of your net worth and anything beyond that really should be seen as a tuition check right like for most people you're not if you're just starting from like a low

Capital base the odds that you're going to be able to compound that in a short term into a meaningful Capital amount just very very very small you're basically playing the lottery and if you're going to play the lottery you should size your your tickets assuming you're going to lose it all and you're playing the loty but I think if you think of it slightly differently which is not that it's lottery tickets or not that it's an investment but that it's a tuition check I think again it can actually be quite lucrative over time because back to this idea that like if you are trying these Technologies if you're learning about them if you're learning about how to use them you're actually investing in yourself right you're learning how to use these Technologies and being prepared for the future so the analogy here might be you know if you were in

the mid 90s and you saw Amazon happening or Ebay happening like the move was not to try to like speculate on internet stocks like maybe you could have done that but odds are you probably would have lost money I think the move was wait how does the internet work how does email get routed um how does e-commerce actually work can I sell some stuff on eBay and build an intuition for how this e-commerce Marketplace kind of stuff is going to work can I go and and buy a subscription to something oh wow payments are really broken on the internet what does that mean right and and once you start using it you start realizing all the places that it's broken um and and and then you're sort of living in the future by 10 years um and I think that makes you more employable that means you're earning

potential goes up and so now you actually have a shot at at sort of you know uh having a positive Roi I think if you look at it as sort of like an investment uh of your time into learning rather than like a a monetary investment I think for most people I mean you know if you have less than like a million dollars disposable like you probably should not be trying to like allocate checks into into these like longer tale tokens I think it's just you're you're more likely than not you're going to lose your money but I think think yeah I think I think looking at as like an investment I think is is the right way to look at it of your time right like can you can you can you learn a bunch and be 10 years ahead of everybody else which from like a job and earning

potentials perspective might actually make you more money and then and then once you have enough disposable income you can start to invest it sounds so simple like I want to I want to clip that wisdom right there and put it out to everybody but people won't do it human behavior will not lead people to do that yeah yeah I think it's it's either um it's either a Charlie merer quote or a Warren Buffett quote but it's it's effectively like nobody wants to get rich slowly like everybody can get rich it's just like getting rich slowly is really really hard everybody wants to get rich fast and I think that's true I also think that's there's a meta lesson in there which is like you know I'm I'm a venture investor and we do crypto which is like you know the the highest all stuff and if like a crypto Venture

investor uh or a venture investor is saying the same thing as like a value investor like a 95-year-old Warren Buffett and they're saying the same thing there's probably some ground truth there right and so like I always that's what I really like about reading Munger or Buffett or stuff it's just like they're in a totally different um ecosystem but like if they say if they sort of have like converged on something that I also think is true that's like the stuff that I really highlight and I think this is one of them is I think most people should not be speculating with dollars that they have they should be using the dollars as leverage on learning and that learning is more likely to yield more dollars in the future than than the actual dollars that they could invest today and in probably like 98% of cases damn I think I think

we got another show here like a tuition check show right something about something about how to pay for your education with experience right and finance Financial education is so important and most people don't get it in an adequate way I me let alone in the developed world like and the undeveloped world I mean gosh so it's uh yeah wow well said AEL it's been an absolute pleasure to have you on the show today thank you so much for all your wisdom uh we really appreciate it my pleasure good to see you thanks for listening in everybody have a wicked awesome day as always if you liked today's episode please hit subscribe and make sure you follow us if you don't miss out on the

next one there's also a link in the description to our free 5 minute daily newsletter where we simplify crypto for you while making you laugh and if you're willing to step up your crypto investing game we're going to also leave a link for milk Road Pro you get access to our portfolio where you can see exactly what we are buying this is your number one resource to help you invest successfully in crypto one final note this show is for educational purposes only and nothing we say is financial advice investing in crypto or any asset is risky and you should never invest more than you can afford to lose thanks so much for listening in my friends have a wicked awesome day